Silicom Ltd 20-F for FY2025
Silicom Ltd. (SILC)
20-F
2026-04-28
For: 2025-12-31
View Original
Added on
April 28, 2026
About this 20-F
Silicom Ltd filed this 20-F on April 28, 2026, covering the fiscal year ended December 31, 2025 (FY2025).
Headline figures
Fiscal year ended December 31, 2025, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $61.93M
- up 6.6% from $58.11M a year earlier
- Net loss
- $11.48M
- compared with a net loss of $13.71M a year earlier
- Diluted EPS
- -$2.01
- compared with -$2.28 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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Or
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
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Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report………………..
For the transition period from to
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Commission File number: 000-23288
(Exact name of Registrant as specified in its charter and as translated into English)
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(Jurisdiction of incorporation
or organization)
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(Address of principal executive offices)
Mr. Eran Gilad , CFO and Company Secretary
Telephone: +972 -9-764-4555
E-mail: erang@silicom.co.il
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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None
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None
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Title of each class
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Name of each exchange on which registered
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Trading Symbol(s)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☐
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Non-accelerated filer ☐
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Emerging growth company
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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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☒
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International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ |
Other ☐
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If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
This annual report on Form 20-F includes certain "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The use of the words "projects", "expects", "may", "plans", or "intends", or words of similar import, identifies a statement as "forward-looking." There can be no assurance, however, that actual results will not differ materially from our expectations or projections. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this report at Item 3 titled "Risk Factors."
As used herein or in any document incorporated by reference hereto, the "Company", "Silicom Ltd.", "Silicom", "Registrant", "we", "us", or "our" refers to Silicom Ltd. and its subsidiaries.
We have prepared our consolidated financial statements in United States dollars and in accordance with accounting principles generally accepted in the United States. All references herein to "dollars", "US$", or "$" are to United States dollars, and all references to "Shekels" or "NIS" are to New Israeli Shekels.
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Table of Contents |
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| Part I. | 3 | |
| 3 | ||
| 3 | ||
| 3 | ||
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A. |
[Reserved] | 3 |
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B. |
Capitalization and Indebtedness |
3 |
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C. |
Reason for the Offer and Use of Proceeds |
3 |
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D. |
Risk Factors |
3 |
| INFORMATION ON THE COMPANY. | 32 | |
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A. |
History and Development of the Company |
32 |
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B. |
Business Overview |
33 |
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Principal Markets |
35 | |
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Manufacturing and Suppliers |
35 | |
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Marketing Channels |
37 | |
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Patents and Licenses |
39 | |
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Competition |
40 | |
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Governmental Regulation Affecting the Company |
42 | |
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C. |
Organizational Structure |
44 |
| UNRESOLVED STAFF COMMENTS | 45 | |
| OPERATING AND FINANCIAL REVIEW AND PROSPECTS | 45 | |
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Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities
and Assets |
50 | |
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C. |
Research and Development, Patents and Licenses, etc. |
51 |
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E. |
Critical Accounting Estimates |
55 |
| DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES | 56 | |
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A. |
Directors and Senior Management |
56 |
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B. |
Compensation |
58 |
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Board of Directors |
63 | |
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External Directors |
64 | |
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Audit Committee |
68 | |
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Compensation Committee |
70 | |
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D. |
Employees |
76 |
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E. |
Share Ownership |
78 |
| MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | 78 | |
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A. |
Major Shareholders |
78 |
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B. |
Related Party Transactions |
80 |
1
| THE OFFER AND LISTING | 84 | |
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A. |
Offer and Listing Details |
84 |
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Markets and Share Price History |
84 | |
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 107 | |
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Interest Rate Risk |
107 | |
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Foreign Currency Exchange Risk |
108 | |
| DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES | 109 | |
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PART II. |
110 | |
| DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES | 110 | |
| MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 110 | |
| 110 | ||
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Disclosure Controls and Procedures |
110 | |
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Management's Annual Report on Internal Control over Financial Reporting |
110 | |
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Inherent Limitations on Effectiveness of Controls |
111 | |
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Changes in Internal Control over Financial Reporting |
111 | |
| 111 | ||
| 111 | ||
| 111 | ||
| 111 | ||
| 112 | ||
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Audit committee's pre-approval policies and procedures |
112 | |
| 113 | ||
| 113 | ||
| 114 | ||
| 114 | ||
| 116 | ||
| 116 | ||
| 117 | ||
| 117 | ||
| 119 | ||
| 119 | ||
| 119 | ||
| 119 | ||
2
Part
I.
Item 1. IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS
Not Applicable.
Item 2. OFFER
STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3. KEY
INFORMATION
A. [Reserved]
B. Capitalization
and Indebtedness
Not Applicable.
C. Reason
for the Offer and Use of Proceeds
Not Applicable.
D. Risk
Factors
This annual report and statements that we may make from time to
time may contain forward-looking information. There can be no assurance that actual results will not differ materially from our expectations,
statements or projections. Factors that could cause actual results to differ from our expectations, statements or projections include
the risks and uncertainties relating to our business described below.
3
Summary of Risk Factors
An investment in our ordinary shares is subject to a number of
risks. The following summarizes some, but not all, of these risks. Please carefully consider all of the information discussed in “Item
3. Key Information—D. Risk Factors” in this annual report for a more thorough description of these and other risks.
Risks Related to Our Business and Industry
| • |
We may not be able to capitalize, as planned, on our Design Wins. |
| • |
The market for Cloud-based and Cloud-focused solutions is rapidly developing, and if it develops in ways that differ from our expectations,
our business could be harmed. |
| • |
The market for Edge Networking Devices to Telcos and service providers for NFV or SD-WAN deployments is rapidly developing, and if
it develops in ways that differ from our expectations, our business could be harmed. |
| • |
Rapid development of our business in the Cloud-based, Telco and service providers' markets may require us to offer our potential
customers with longer payment terms to better position ourselves in these markets, to hold higher inventory levels and to significantly
increase our need for working capital. |
| • |
Our networking and data infrastructure solution products which are targeted by us mainly to customers in the OEM, Cloud, Telco, Mobile
and related service providers' markets, are characterized by long sales cycles. |
| • |
The loss of Design Wins from customers in the Cloud, Telco, Mobile and related service providers' markets may result in significant
quarterly and even annual fluctuations in our revenues. |
| • |
Rapid development of our business in the Cloud, Telco, Mobile and related service providers' markets may lead to a decrease in our
gross margins which may result in a decrease in our profitability. |
| • |
Should some of our customers explore various technologies during their development process in ways which are not compatible with
our solutions, this may result in them deciding to pursue different solutions even after we secured Design Wins with such customers, which
may impair our financial results. |
| • |
A loss of a material Design Win may lead to a decrease in the volume of orders placed in relation to such Design Win, which would
impair our financial results. |
| • |
Difficulties in the fulfillment of financial obligations of one or more of our customers may have an adverse effect on our ability
to collect consideration payable under purchase orders placed by such customers. |
| • |
We may not be successful in achieving and consummating Design Wins for our products for the Cloud, Telco, Mobile and the service
providers markets, which constitute a main source of growth. |
4
| • |
Significant growth in markets demanding functionality similar to the functionality offered by certain of our products may cause manufacturers
to integrate such characteristics into server motherboards or increase the market share of servers and appliances that already have such
functionality in-built, eliminating the need for our products. |
| • |
Our customers may replace the servers and appliances they currently use, use or sell servers and appliances that do not require our
cards, and/or incorporate cards other than ours. |
| • |
We may experience difficulty in developing solutions for servers and appliances with proprietary interfaces, which may be used by
some of our potential customers. |
| • |
The short lead time of customer orders versus the long lead time of our component suppliers could result
in either a surplus or lack of sufficient supplies. |
Risks Related to Operations
in Israel and Internationally
| • |
The dollar cost of our operations in Israel may increase to the extent the results of inflation in Israel are not offset by a devaluation
of the NIS against the dollar. |
| • |
The tax benefits available to us under Israeli law require us to meet several conditions and may be terminated or reduced in the
future, which would increase our taxes. |
| • |
The government programs and benefits, which we previously received, require us to meet several conditions in order to transfer intellectual
property and know-how developed using government funding abroad, or in order to consummate a change of control. |
| • |
The political environment and hostilities in Israel could harm our business. |
| • |
Many of our employees in Israel are required to perform military reserve duty. |
| • |
The U.S. trade tariffs implemented by President Trump may increase the costs of importing our products into the U.S, which could
potentially reduce profit margins and affect our competitive position. |
Risks Related to our Ordinary
Shares
| • |
We may experience a decline in our share price, including during periods of uncertainty in global economic conditions, and there
is no guarantee that our share price will remain stable or not decline. |
| • |
If we are characterized as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer
adverse tax consequences. |
General Risk Factors
| • |
Unfavorable or unstable economic conditions in the markets in which we operate could have a material adverse effect on our business,
financial condition, or operating results. |
| • |
Loss of our sources for certain key components could harm our operations. |
5
| • |
The markets for our products change rapidly and demand for new products is difficult to predict. |
| • |
We may need to invest significantly in research and development and business development in order to diversify our product offering
and enter new markets. |
| • |
Our short lead time of customer orders introduces uncertainty into our revenues and severely limits our ability to accurately forecast
future sales. |
| • |
The fluctuations in components' lead time and price may adversely affect our business. |
| • |
The decrease in demand for basic/standard server adapters may adversely affect our business. |
| • |
The loss or ineffectiveness of any of our key customer relationships or a reduction of purchase orders by such customers may have
a material adverse effect on our operations and financial results. |
| • |
We are dependent on key personnel. |
| • |
We may not be able to protect our intellectual proprietary rights. |
| • |
Inability to cooperate with and receive information from our key component manufacturers could affect our ability to develop new
products. |
| • |
We may make acquisitions or pursue mergers that could disrupt our business and harm our financial condition. |
| • |
We may be subject to risks associated with laws, regulations, economic sanctions and customer initiatives, which may force us to
incur additional expenses and add complexities to our supply chain and operations. |
| • |
We depend on governmental licenses for our exports. |
| • |
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
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Risks Related to Our Business and Industry
We may not be able to capitalize,
as planned, on our Design Wins.
Once we secure a Design Win, we may not be able to properly capitalize
on such Design Win. For example, we may not receive revenues from a Design Win due to the customer deciding to hold back the introduction
of its product or service, of which our Design Win product is a component, to the market. Additionally, the Design Win client may decide
to abandon the use of our product or use an alternate source. For instance, a client may alter their operations processes, so that even
after we have achieved a Design Win with that client, it will outsource certain parts of its purchasing decision-making to third-parties.
Such changes in operations processes would require us to seek an additional Design Win with the third-party provider in addition to the
Design Win we already achieved in the past with that client, rather than continue selling the products per the initial Design Win, and
if we are unsuccessful in achieving such additional Design Win, our sales would be negatively affected. Additionally, the Design Win client
could shift its business focus away from the solutions that we had previously sold towards solutions in areas in which we do not operate.
Alternatively, we may experience delays in receiving revenues from a Design Win due to circumstances unrelated to us, such delays may
stem from delays in the deployment of the customer's product/service in the market. Delays may also lead to a request by the customer
to change the specifications of our product due to changes in industry standards and/or market requirements. There is no assurance that
we will be able to secure a Design Win for the product with the new specifications. A customer may also experience a lower demand than
forecasted by the customer at the time of securing the Design Win for its product/service, which will accordingly affect its demand for
our Design Win product. In addition, capitalization of Design Wins might be affected by supply chain disruptions. Our supply chain might
be affected by the current conflicts in the Middle East, including the wars between Israel and Hamas in Gaza, Hezbollah in Lebanon and
Iran, and the wider consequences, such as extensive cancellation and disruption of flights and shipments to and from Israel. Our Supply
chain might also be affected by other factors, such as any hostilities which could break out between China and Taiwan in the future, or
new restrictions relating to the spread of pandemics in various geographies globally. Extended delays in materialization of revenue from
Design Wins, as mentioned above, might be caused by the war in Ukraine and related business disruptions and sanctions, as well as U.S.
restrictions on certain trade with China.
6
The market for Cloud-based
and Cloud-focused solutions is rapidly developing, and if it develops in ways that are different from what we anticipate or expect, our
business could be harmed.
In recent years, the Cloud-based market has rapidly developed,
and the demand for Cloud-based data centers utilizing virtualization and SDN has increased. We expect that this increase in demand will
lead to increased demand for our CPE/EDGE products as well as for our networking, offloading and acceleration related Field Programmable
Gate Array (or FPGA) products. We also expect the Cloud-based data centers to be increasingly based on generic server platforms. These
platforms will require offload capabilities in order to address the performance challenges resulting from enormous volume of traffic,
the high volume of data, the need to encrypt such data, the need to run in virtualized environment, which by itself is a challenge for
the server CPU, and the need to include switching within the server for high efficiency SDN. We anticipate the demand for add-on adapters
which address these challenges will grow. Power, heat and space limitations in such environments increase the need for hardware accelerators.
Such systems will require essential building blocks in their own generic severs, which can be served by our products.
While we believe that we address the above needs with a comprehensive
suite of products, many factors may affect the market acceptance of cloud-based and cloud-focused solutions, the achievement of Design
Wins relating to such solutions, the consummation of Design Wins achieved by us and/or the acceptance of products incorporated into such
solutions. Some of these factors include the possibility of seeing a reduction in the number of physical servers and appliances required
by the providers of cloud based or virtualized solutions, or the evolving of different architecture designs which provide for functionality
which our products offer without the need for our products or the failure of the market to adopt technologies which had previously been
expected to be widely adopted by the market. While we have recently announced a 6-year plan under which we have, among other things, ceased
certain non-core product lines, and are expanding into a more diversified scale of accounts, there is no guarantee that we have
accurately predicted, or will continue to accurately predict, anticipated revenues which may be generated, our growth potential, our operations,
including our inventory levels, and our financial results as a result of the factors mentioned above.
In addition, we believe that the market’s demand for our products and solutions
in the Cloud demonstrates that the ongoing industry transition to the Cloud continues to represent a growth opportunity for us. Nonetheless,
if significant organizations providing Cloud based solutions or other virtualized networks do not perceive the benefits of our cloud-focused
and/or virtualized network based solutions, or if our competitors or new market entrants are able to develop solutions for this market
that do not require products such as ours, or offer features that are, or are perceived to be, more effective than our solutions, this
would have a material adverse effect on our ability to achieve and/or consummate Design Wins, on our business, and on our results of operations
and financial condition.
7
The market for Edge Networking
Devices to Telcos and service providers for NFV or SD-WAN deployments is rapidly developing, and if it develops in ways that are different
from what we anticipate or expect, our business could be harmed.
With the evolution of the NFV and SD-WAN, most Telcos and service
providers have begun seeking solutions which utilize CPEs for the deployment of SD-WAN or other applications within an NFV architecture.
We believe that our CPE products address the requirements of such Telcos and service providers’ needs and requirements, and in recent
years we secured several Design Wins for such products.
While we believe that we address the above needs with a comprehensive
suite of products, many factors may affect the market acceptance of such solutions and our ability to secure Design Wins and/or awards
in this market. Some of these factors include our relatively limited experience in transacting with such Telcos and service providers,
the possible offering of a wider selection of products by some of our competitors, or the possible offering by our competitors of products
which include wider, better suited or more advanced features than the ones included in our products. Additional factors may also include
the development of technologies with which our current products may not be compatible, and the price expectations of such Telcos and service
providers which may require us to offer our products for lower prices in order to better position ourselves in the market, or remain competitive,
thus leading to lower gross profit, which in turn may have an adverse effect on our financial results. Additionally, we cannot provide
any assurance that our 6-year plan will successfully address these, or other changes in the market.
We believe that the market’s demand for our products and
solutions in the NFV and SD-WAN era demonstrate that the Telcos’ and service providers’ related industry is transitioning
into CPEs which represent a growth opportunity for us. Nonetheless, if such Telcos and service providers do not perceive the benefits
of our Edge Networking CPEs, or if our competitors or new market entrants are able to develop solutions for this market that are better
suited to the market demand, offer their solutions at lower prices, or offer features that are, or are perceived to be, more effective
than ours, this would have a material adverse effect on our business, results of operations and financial condition.
8
Rapid development of our
business in the Cloud-based, Telco and service providers’ markets may require us to offer our potential customers with longer payment
terms in order to better position ourselves in these markets, to hold higher inventory levels and to increase our need for working capital
significantly.
Rapid development of our business in the Cloud-based, Telco, and
service providers’ markets, which we consider major sources of growth in the future, may require us to offer longer payment terms
to our targeted customers in the Cloud, Telco and service providers markets as customary in these markets, in order to establish and maintain
relationships with such targeted customers and strengthen our competitive position in such markets. In addition, we may be required by
such customers to hold higher inventory levels in order to meet their expectations for on-demand deliveries, making the higher available
inventory pivotal to our ability to position ourselves and compete in such markets. These factors may significantly increase our need
for working capital in order to support our activities in these markets.
Our networking
and data infrastructure solution products which are targeted by us mainly at customers in the OEM, Cloud, Telco, Mobile and related service
providers’ markets, are characterized by long sales cycles.
We target and sell our networking and data infrastructure solution
products to customers mainly in the original equipment manufacturing (“OEMs”), Cloud, Telco Mobile and related service providers
markets. We usually sell our products to such customers after achieving Design Wins, which are secured after a process which ends with
the implementation of our products in our customers’ systems or their deployment within the relevant customer’s network. Securing
Design Wins is a lengthy, time-consuming process, which involves the decision-making process of our customers, which usually includes
several time-consuming processes as well, resulting from the critical importance of our products in our customers’ systems or networks.
Our customers usually need to define the required configuration of their server system, appliance or network, define the needed solution
and the type of products that will address their need, evaluate our products, test and qualify our products for their use and then (or
in parallel) negotiate the terms for a purchase. This process is lengthy and may result in investing twelve months or more from the time
we first contact a prospective customer before such customer implements our products in its system, appliance or network, constituting
what is known as a Design Win. The decision-making process may further be impacted by macro-economic factors such as high interest rates
and global economic slowdown, which may put pressure on companies seeking to make significant investments in infrastructure. Additionally,
once a Design Win for one of our products is secured, our sales of these products typically involve significant capital investment decisions
by the customer or its prospective end customers, as well as a significant amount of time to educate such end customers as to the benefits
of systems and appliances that include our products. As a result, before initiating the deployment of our products within their infrastructure,
and before purchasing systems and appliances, which include our products (and consequently facilitating sales of our products), our potential
customers usually invest a substantial amount of time performing internal reviews and obtaining capital expenditure approvals, thereby
lengthening the period of time required for a Design Win to mature into consistent sales. These long sale cycles make it difficult to
predict when and to what extent, discussions with potential customers will materialize into sales and could cause our revenue and operating
results to fluctuate widely from period to period. Furthermore, once a Design Win has been secured, the ramp-up of sales under the Design
Win is dependent on various factors which are not under our control and which may result in significant quarterly, or even annual, fluctuations
in the sale rates of our products. These, together with the macro-economic factors described earlier, may have an adverse impact on our
ability to accurately predict the ramp-up of sales of our products, and may have an adverse effect on our backlog estimates, actual sales
and results of operations.
9
In addition, we are required to allocate significant resources
in order to compete for the achievement of Design Wins, since there is no guarantee that we will be successful in achieving such Design
Wins or that secured Design Wins will materialize into consistent sales in the competitive and rapidly evolving market in which we operate.
Unsuccessful efforts to secure or materialize Design Wins may lead to substantial increases in our expenditures, cause impairment of intangible
assets and related write-offs, divert the attention of our sales force and management from other business opportunities, and could ultimately
have a material adverse effect on our business, results of operations and financial condition.
The loss of Design Wins
from customers in the Cloud, Telco, Mobile and related service providers’ markets may result in significant quarterly and even annual
fluctuations in our revenues.
The Cloud, Telco, Mobile and related service providers’ markets
constitute major sources of potential growth. We anticipate that Design Wins secured from customers in these markets would be significantly
larger in size than our Design Wins from other customers. In light of the risk factors related to our operations in the Cloud, Telco,
Mobile and related service providers’ markets as detailed elsewhere in this Annual Report, we may experience losses of Design Wins
in such markets, for which we may not be able to compensate in a timely manner. The losses of such Design Wins may result in significant
quarterly or even annual fluctuations in our revenues and results of operations.
Rapid development of our
business in the Cloud, Telco, Mobile and related service providers’ markets may lead to a decrease in our gross margins which may
result in a decrease in our profitability.
Rapid development of our business in the Cloud, Telco, Mobile and
related service providers’ markets, and our increasing operations and efforts in these markets, require us to adopt a lower gross
margin strategy relative to our gross margins in past years, in order to take advantage of increased revenue potential and opportunities
in these markets. While in the past we were able to increase our profitability while operating under such lower gross margins, there can
be no assurance that we will be able to maintain or increase our profitability and/or earnings per share in the future and we may not
be successful in maintaining or increasing our profitability and/or earnings per share while operating under such lower gross margins
in the future.
10
The rapid development
of the Cloud, Telco, Mobile and related service providers’ markets may lead certain of our customers to explore various technologies
at different points in time during their development process, which are not necessarily compatible with our solutions, or for which our
solutions are not designed, for their own internal reasons, even after we secured Design Wins with such customers, and may ultimately
decide to pursue different solutions than ours, which may impact our ability to fully consummate our sales under such secured Design Wins
and impair our financial results.
The rapid development of the Cloud, Telco, Mobile and related service
providers’ markets may lead some of the players in these markets to explore different technologies in the course of their internal
development process. Even if we secure Design Wins with some of these players, there is no guarantee that such players will ultimately
decide to develop or commercialize their products for which our solutions were selected, for reasons which are not related to us and which
are not under our control. If such players decide to pursue other paths than the ones for which we secured Design Wins, we may be unable
to consummate such Design Wins, which may lead to excess inventory levels and write-offs, that may increase our costs. These factors may
increase our operational efforts and expenses. We may also be required to find alternative use for any unused inventory relating to such
Design Wins, and if we are unable to find such alternative use or sell such inventory to other customers, we may experience write-offs.
All of these factors may have a material adverse effect on our financial condition and results of operation. While we focus our efforts
on securing Design Wins in these markets, our share price may decline as a result of cancellation of such Design Wins in these markets,
if they occur.
A loss of a material Design
Win may lead to a decrease in the volume of orders placed in relation to such Design Win by a few of our customers, which would be harmful
for our business and impair our financial results.
In some cases, one of our Design Wins may lead to the placement
of purchase orders for our products by several of our customers for the purpose of integrating our products into other systems, as part
of the assembly process relating to the said Design Win. The loss of such material Design Win may lead to a decrease in the purchase orders
placed by such customers, impair our revenues generated from such customers and have a material adverse effect on our business and financial
results.
Difficulties in the fulfillment
of financial obligations of one or more of our customers may have an adverse effect on our ability to consummate the collection of consideration
payable under purchase orders placed by, or invoiced to, such customers under one or more Design Wins in relation to which such customers
operate.
Certain customers may become significant to us. In some cases,
a customer will place orders for our products under several Design Wins for the purpose of integrating our products into other systems.
In other cases, a customer, especially, but not limited to, those active in the Cloud, Telco, Mobile and related markets, will place very
significant orders for a single Design Win with us. Difficulties in the fulfillment of such customers’ financial obligations towards
us may expose us to credit risks, may have a material adverse effect on our business, including on our ability to consummate the collection
of consideration payable by, or invoiced to, such customer in connection with the Design Wins under which such customer placed orders,
may lead to financial losses, may increase our collection expenses, may lead to excess inventory levels, may lead to significant write-offs,
may cause legal disputes, may delay the consummation of the relevant Design Win and may ultimately lead to the reduction in the volume
of orders placed under such Design Win, or even lead to the cancellation thereof. This may have a material adverse effect on our business,
financial condition, and results of operations.
11
We may not be successful
in achieving and consummating Design Wins for our products for the Cloud, Telco, Mobile and the service providers markets, which have
constituted a main source of growth.
Our ability to achieve Design Wins for our products for the Cloud,
Telco, Mobile and related service providers’ markets, and to consummate the sales of our products under Design Wins achieved, is
dependent on a large number of factors, many of which are out of our control. These factors include the highly competitive nature of the
markets in which we operate, including the Cloud, Telco, Mobile and service providers’ markets, the long sale cycles of our products
to our OEMs, Cloud, Telco and Mobile customers, as well as other factors detailed in this Item 3.D. In addition, the loss, ineffectiveness
or inability to maintain our customer relationships or our inability to develop new customer relationships, may have an adverse effect
on our ability to achieve, secure or consummate Design Wins for our Cloud, Telco, Mobile and service providers’ related products.
Significant growth in
markets demanding functionality similar to the functionality offered by certain of our products may cause manufacturers to integrate such
characteristics into server motherboards or increase the market share of servers and appliances that already have such functionality in-built,
eliminating the need for our products.
A significant portion of our products are add-on adapters that
are added to existing servers in order to improve their functionality. If demand for improved functionality similar to that of our add-on
adapters increases significantly, server manufacturers may begin incorporating such functionality as a part of the basic design of their
servers, thereby eliminating the need to achieve such functionality through add-on adapters. Furthermore, the market-share of special
purpose servers and appliances that already have such functionality built-in may increase, consequently reducing the market share of solutions
based on servers with add-on adapters. We cannot provide assurance that such a trend will
not occur in connection with our add-on adapters or any of our other products. Such a trend would have a material adverse effect on our
business, results of operations and financial condition.
Our customers may replace
the servers and appliances they currently use, use or sell servers and appliances that do not require our cards, and/or incorporate cards
other than ours.
Many of our customers that use and/or sell servers and appliances
which include our cards do so for a few years, and then consider migration to a newer generation. We cannot guarantee that our cards will
be needed or selected for such new generation or be compatible with it. A decision by a current customer to select a new server and/or
appliance without including our cards in such new server and/or appliance may have a significant adverse effect on our results of operations
and financial condition.
12
We may experience difficulty
in developing solutions for servers and appliances with proprietary interfaces, which may be used by some of our potential customers.
The market for networking and data infrastructure includes servers
and appliances that make use of proprietary interfaces. These servers and appliances are offered to our potential customers in addition
to the customary servers and appliances which use standard interfaces. Our potential customers may decide to use servers and appliances
with such proprietary interfaces instead of the customary standard interfaces for which several manufacturers may provide add-on cards.
There can be no assurance that we would be able to develop non-standard add-on cards for servers and appliances with proprietary interfaces
or, if we are successful in developing such cards, that manufacturers of the proprietary interfaces or the customers electing to use these
interfaces will make use of our cards in such non-standard environments.
The short lead time of
customer orders combined with the long lead time of our suppliers when ordering certain components for our products could result in either
a surplus or lack of sufficient supplies and may negatively impact on our financial results.
While we are generally required to fill orders for our products
within one or two weeks following the receipt of a firm purchase order, we are usually required to place orders of certain components
for our products within sixteen to twenty weeks prior to delivery, and more recently, in many cases, even earlier, where the global supply
chains are affected by external disruptions, such as global shortage of certain components essential for our products, or by the recent
attacks by the Houthi militia on Red Sea shipping lanes, other global supply routes disruptions affected by the recent war with Iran and
the blockade of the Straits of Hormuz, and this could be further exacerbated should hostilities break out in the future, between China
and Taiwan. As a result, we must have a significant amount of components in our inventory to be able to meet our best forecasts of projected
purchase orders as opposed to on the basis of firm purchase orders. In the event that firm purchase orders are significantly lower than
such forecasts, a significant part of our inventory will not be used and we may be unable to adjust costs in a timely manner to compensate
for revenue shortfalls and in the event that firm purchase orders exceed such forecasts, we will not be able to fulfill such purchase
orders which may lead to the loss of business.
Risks Related to Operations in Israel and Internationally
The dollar cost of our
operations in Israel may increase to the extent the rate of inflation in Israel is not offset by a devaluation of the NIS in relation
to the dollar.
Inflation in Israel during 2025 was 2.6 % on an annualized basis.
Inflation in Israel, unless offset on a timely basis by a devaluation of the NIS in relation to the dollar, may increase labor and other
costs, such as our property lease agreements, which will increase the dollar cost of our operations in Israel and may harm our results
of operations.
13
The tax benefits available
to us under Israeli law require us to meet several conditions and may be terminated or reduced in the future, which would increase our
taxes.
Our production facilities have been granted “Approved Enterprise”
or “Benefited Enterprise” or “Preferred Enterprise” status in past years and we currently report as a “Preferred
Technological Enterprise”, under the Encouragement of Capital Investments Law, 5719-1959 (the “Law”), and as such, we
are entitled to certain tax benefits. In order to be eligible for these tax benefits, we must meet certain conditions. If we fail to meet
these conditions in the future, the tax benefits could be reduced or canceled. These tax benefits may not be continued in the future at
their current levels, or at any level. The termination or reduction of these benefits may increase our income tax expense in the future.
To the best of our knowledge, to date we have met the conditions for benefits under our “Preferred Technological Enterprise”
status in all material respects. There can be no assurance, however, that we will continue to meet such conditions in the future. If these
tax benefits are reduced, cancelled, or discontinued, our Israeli taxable income would be subject to “regular” Israeli corporate
tax rate of 23%. See “Item 10 – Additional Information – Taxation – the Encouragement of Capital Investments Law,
1959” for more information about our “Preferred Technological Enterprise” status.
The government programs
and benefits, which we previously received, require us to meet several conditions in order to transfer intellectual property and know-how
developed using government funding abroad, or in order to consummate a change of control.
We received grants from the Government of Israel through programs
with the former Office of the Chief Scientist of the Israeli Ministry of Economy and Industry (currently known as the Israel Innovation
Authority, or the “IIA”) under the Israeli Law for the Encouragement of Industrial Research, Development and Technological
Innovation, 1984, and related regulations (the “R&D Law”).
The R&D Law and the IIA impose certain limitations with respect
to transfer of manufacturing rights and license or transfer of IIA funded know-how, as well as to change of control in companies which
receive government funding from the IIA. Under the IIA rules, the IIA needs to be notified of any offering and the IIA grants and attendant
restrictions need to be disclosed in any applicable prospectus. Companies which received governmental funding from the IIA are also subject
to obligations to receive approval and in certain situations to increased payment obligations with respect to outsourcing or transferring
development or manufacturing activities with respect to any product or technology developed using IIA funding outside of Israel, or with
respect to transferring or licensing IIA funded know-how, which may impair our ability to sell or license such technology assets outside
or inside of Israel or to outsource, transfer development, or manufacturing activities with respect to any such product or technology
outside of Israel, or impose difficulties in consummation of a change of control in the Company.
The political environment
and hostilities in Israel could harm our business.
Since the establishment of the State of Israel in 1948, a state
of hostility has existed between Israel and the Arab countries in the region. This state of hostility has varied in degree and intensity
over time. There has also been conflict and unrest between Israel, the Palestinian Authority and certain terrorist groups operating within
the Palestinian Authority and Lebanon.
14
Also, Israel has been engaged, from time to time, in armed conflicts
with terror groups Hamas and Hezbollah, as well as Iranian-backed militias in Syria and Yemen. These conflicts involve missile strikes
against civilian targets in the southern and northern parts of Israel in particular and have also involved such missile strikes against
central parts of Israel.
On October 7, 2023, an unprecedented attack was launched against
Israel by terrorists from the Hamas terrorist organization that infiltrated Israel’s southern border from the Gaza Strip and in
other areas within the state of Israel attacking civilians and military targets while simultaneously launching extensive rocket attacks
on the Israeli population. In response, the Security Cabinet of the State of Israel declared war against Hamas.
Following the attack by Hamas on Israel’s southern border,
Hezbollah, a terrorist organization in Lebanon also launched missile, rocket, and shooting attacks against Israeli military sites, troops,
and Israeli towns in northern Israel. In response to these attacks, the Israeli army has carried out a number of targeted strikes on sites
belonging to Hezbollah in southern Lebanon and in October 2024, the Israeli military initiated a ground operation in Lebanon, primarily
near the Israel-Lebanon border. As of the end of November 2024, Israel entered into a ceasefire agreement with Hezbollah, but there are
no guarantees as to whether the agreement will hold or whether further hostilities will resume.
In April and October 2024, Iran launched missile and unmanned aerial
vehicle, or UAV, attacks on Israel. Most of the missiles and UAVs were intercepted by Israel’s defense systems, with support from
the United States, United Kingdom and other countries, including regional allies, preventing significant damage and resulting in no casualties.
Despite the successful interceptions, the attacks posed an elevated threat to Israel’s security.
In December 2024, Ba’athist Syria, led by President Bashar
al-Assad, collapsed during a major offensive by opposition forces made up of several competing rebel groups. In response, the Israeli
Defense Forces took control over a United Nations-designated buffer zone over Mount Hermon that separates Israel and Syria. Simultaneously,
Israel conducted targeted military strikes against military assets in Syria, aiming to eliminate any chemical weapons storage sites that
could be used by rebel groups and further weaken Iran’s operational capabilities in the region. While the transitional government
of Syria has indicated that it is interested in reconstruction and stability rather than a continuation of conflicts with Israel, there
are no guarantees that there will be no future escalation of hostilities or that Syria will not permit other neighboring countries to
launch attacks at Israel from its territory.
On June 13, 2025, Israel launched a preemptive strike targeting
military and nuclear infrastructure within Iran, aiming to disrupt Iran’s ability to coordinate or initiate further hostilities
against Israel and to impede its nuclear program. Over the following 12 days, both countries exchanged attacks, with Iran specifically
targeting civilian infrastructure. In response to the escalation, Israel temporarily closed its airspace and suspended all commercial
port activities. On June 22, 2025, the U.S. military joined Israel in conducting strikes against Iran's nuclear infrastructure. On June
24, 2025, Israel and Iran entered into a ceasefire agreement.
15
As of October 9, 2025, a ceasefire agreement was reached between
Israel and Hamas, which remains in effect to date, aiming for a permanent cessation of the conflict. However, tensions persist and isolated
incidents have occurred.
On February 28, 2026, Israel, together with the United States,
conducted a major joint military campaign of air and missile strikes against targets in Iran, which triggered a broad Iranian response,
including retaliatory missile and drone attacks toward Israel. In early March 2026, hostilities also intensified on Israel’s northern
border, including attacks launched by Hezbollah from Lebanon and responsive Israeli strikes. On April 8, 2026, a two-week ceasefire between
Iran and Israel and the United States began, which has since been extended. In addition, on April 16, 2026, a separate ten-day ceasefire
in Lebanon began which has since been extended. However, the security situation remains highly fluid, and there can be no assurance that
hostilities will not resume or further escalate.
It is possible that other terrorist organizations, including Palestinian
military organizations in the West Bank, as well as other hostile countries, such as Iran, will join the hostilities. Such hostilities
may include terror and missile attacks. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and
its trading partners could adversely affect our operations and results of operations.
Our insurance policies do not cover losses that may occur as a
result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of direct
damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or
that it will sufficiently cover its potential damages. Any losses or damages incurred by us could have a material adverse effect on our
business.
Any armed conflicts or political instability in the region would
likely negatively affect business conditions and could harm our results of operations. Further, in the past, the State of Israel and Israeli
companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli
companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion
of our business. A campaign of boycotts, divestment and sanctions has been undertaken against Israel, which could also adversely impact
our business.
Prior to the Hamas attack in October 2023, the Israeli government
pursued extensive changes to Israel’s judicial system. In response to the foregoing developments, individuals, organizations and
institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment
in Israel, including due to reluctance of foreign investors to invest or conduct business in Israel, as well as to increased currency
fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities markets, and other changes in
macroeconomic conditions. To the extent that any of these negative developments do occur, they may have an adverse effect on our business,
our results of operations and our ability to raise additional funds, if deemed necessary by our management and board of directors.
16
Many of our employees in
Israel are required to perform military reserve duty.
All non-exempt male adult citizens and permanent residents of Israel
under the age of 40, or older for reserves officers or citizens with certain occupations, as well as certain female adult citizens and
permanent residents of Israel, are obligated to perform military reserve duty and may be called to active duty under emergency circumstances.
In recent years, there have been significant call-ups of military reservists, and it is possible that there will be additional call-ups
in the future.
In connection with the Israeli security cabinet’s declaration
of war against Hamas, in October 2023, the war with Hezbollah in Lebanon, the wars with Iran, and possible hostilities with other organizations,
several hundred thousand Israeli military reservists have been drafted to perform immediate and extended periods of military service.
To date, a small number of our employees have been called for extended periods of active military duty. In addition, we rely on
service providers located in Israel and has entered into certain agreements with Israeli counterparties. Employees of such service providers
or contractual counterparties may be called for service in the current or future wars or other armed conflicts with Hamas with Hezbollah,
with Iran, and with possible other organizations and such persons may be absent from their positions for a period of time. To date, we
have not been significantly impacted by any absences of our personnel or by absences of personnel of any of our service providers or counterparties
located in Israel. However, military service call ups that result in absences of a significant number of our personnel or of those of
our service providers or contractual counterparties in Israel, may disrupt our operations, and absences for an extended period of time,
may materially and adversely affect our business, prospects, financial condition and results of operations.
Exchange rate fluctuations
and international risks could increase the cost of our operations.
Approximately 95% of our international sales are denominated in
U.S. Dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions
on export, currency fluctuations, armed conflict, political instability, trade restrictions, and changes in tariffs and freight rates.
Our U.S. dollar costs in Israel and Denmark will increase further to the extent that inflation in Israel and/or Denmark exceeds the devaluation
of the NIS and/or Danish Krone ("DKK"), respectively, against the dollar, if the timing of such devaluation lags behind inflation in Israel
and/or Denmark, or if the dollar devalues against the NIS and/or DKK.
Israeli courts might not
enforce judgments rendered outside of Israel.
We are incorporated in Israel. All our executive officers and directors
are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the
United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any such persons. It may
also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel. However, subject
to certain time limitations, Israeli courts may enforce U.S. final executory judgments for liquidated amounts in civil matters obtained
after due trial before a court of competent jurisdiction (according to the rules of private international law currently prevailing in
Israel) which enforces similar Israeli judgments, provided that the requisite procedural and legal requirements are adhered to.
17
If a foreign judgment is enforced by an Israeli court, it generally
will be payable in NIS, which can then be converted into foreign currency at the rate of exchange of such foreign currency on the date
of payment. Pending collection, the amount of the judgment of an Israeli court stated in NIS (without any linkage to a foreign currency)
ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate prevailing at such time. Judgment
creditors bear the risk of unfavorable exchange rates.
The U.S. trade tariffs implemented
by President Trump may increase the costs of importing our products into the U.S, which could potentially reduce profit margins and affect
our competitive position.
The U.S. trade tariffs implemented by President Trump may challenge
us, particularly concerning the increased costs associated with importing our finished products into the U.S. Initially set at 17%, these
tariffs have been temporarily reduced to 10% during a 90-day pause announced on April 9, 2025. However, effective as of August 8, 2025,
the U.S. announced the imposition of 15% tariffs on Israel, and tariffs, in excess of the blanket 10% tariff threshold previously announced,
on numerous countries and specific goods. We believe certain of our products such as NICs, Edge devices, acceleration cards, FPGA cards
and others are covered by one of the classifications as products exempted from tariffs.
On February 20, 2026, the U.S. Supreme Court held that the International
Emergency Economic Powers Act (IEEPA) does not authorize the President to impose tariffs, and affirmed a judgment invalidating tariffs
imposed under that statute. As a result, the legal status and ongoing applicability of certain tariffs reportedly imposed under IEEPA
are subject to significant uncertainty, including with respect to potential suspension, modification, or refunds of amounts previously
paid. At the same time, the U.S. government may seek to impose or maintain tariffs under other statutory authorities, and we cannot predict
the scope, timing, or outcome of these developments.
However, to the extent the tariffs apply to some or all of our
products, the additional cost on goods imported to the US, may affect our profit margins, and would effectively lead to a higher purchase
price for our customers. Such an increase could drive our customers to seek local alternatives that do not carry the tariff burden, potentially
decreasing the demand for our products and affecting our market share. Furthermore, the uncertainty and volatility introduced by these
tariffs complicate decision making, planning and forecasting for our customers as well as for us, making it difficult to predict future
costs and financial outcomes accurately.
Risks Related to our Ordinary Shares
We may experience a decline
in our share price, including during periods of uncertainty in global economic conditions, and there is no guarantee that our share price
will remain stable or not decline.
In
the past, our share price has declined, including during periods of uncertainty in global economic conditions, and we may be affected
by, among others, downturn in economic conditions. We cannot assure you that our share price will remain stable or not decline in the
future.
18
We may not be able to distribute
dividends in the future.
On January 14, 2013, we announced a dividend policy for distributing
up to 50% of our annual distributable profits as a dividend. As part of the stated dividend policy the Company's Board of Directors reserved
the right to declare additional dividend distributions, to change the rate of dividend distributions (either as a policy or on a one-time
basis), to cancel a specific distribution or to cancel the policy as a whole at any time, at its sole discretion. On March 15, 2018, our
Board of Directors adopted a resolution to suspend until further notice the said dividend policy.
Our ability to distribute dividends in the future may be adversely
affected by the risk factors described in this report. Any dividend will depend on our earnings, capital requirements, financial condition
and other business and economic factors affecting us at the time as our board of directors may consider relevant. Our ability to pay cash
dividends may be restricted by instruments governing any of our obligations. We are restricted by Israeli law to pay dividends in any
fiscal year only out of "profits", as defined by the Companies Law, unless otherwise authorized by an Israeli court, and provided that
the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. There is no assurance
that we will be able to pay dividends or increase our payment of dividends in the future, nor is there any assurance that our Board of
Directors will not further change or cancel our dividend policy in the future. If we are unable to pay dividends at levels anticipated
by investors in our shares, the market price of our shares may be negatively affected and the value of our shareholders' investment may
be reduced. See "Item 8.A. – Consolidated Statements and Other Financial Information", under the caption "A8. – Dividend Policy"
for additional information regarding the payment of dividends.
If we fail
to meet continued listing standards of NASDAQ, our shares may be delisted, which could have a material adverse effect on the liquidity
of our shares.
Our ordinary shares are currently traded on the NASDAQ Global Select
Market. The NASDAQ has requirements that a company must meet in order to remain listed on NASDAQ. In particular, NASDAQ rules require
us to maintain a minimum bid price of US$ 1.00 per share of our ordinary shares. If the closing bid price of our common stock were to
fall below US$ 1.00 per share for 30 consecutive trading days or we do not meet other listing requirements, we would fail to be in compliance
with NASDAQ's listing standards. There can be no assurance that we will continue to meet the minimum bid price requirement, or any other
requirement in the future. If we fail to meet the minimum bid price requirement, the NASDAQ Stock Market may initiate the delisting
process with a notification letter. If our ordinary shares were to be delisted, our liquidity would be adversely affected and our market
price could decrease.
The trading volume of our
shares has been low in the past and may be low in the future, resulting in lower than expected market prices for our shares.
Our shares have been traded at low volumes in the past and may
be traded at low volumes in the future for reasons related or unrelated to our performance. This low trading volume may result in lower
than expected market prices for our ordinary shares and our shareholders may not be able to resell their shares for prices equal to or
higher than the price for which they were purchased.
19
If we are characterized
as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer adverse tax consequences.
We will be a passive foreign investment company, or PFIC, if 75%
or more of our gross income in a taxable year, including our pro-rata share of the gross income of any company, U.S. or foreign, in which
we are considered to own, directly or indirectly, 25% or more of the shares by value, is passive income. Alternatively, we will be considered
a PFIC if at least 50% of the value of our assets in a taxable year, quarterly averaged over the year and determined either based on fair
market value or adjusted bases and including our pro-rata share of the assets of any company in which we are considered to own,
directly or indirectly, 25% or more of the shares by value, is attributable to assets that produce or are held for the production
of passive income. If we were to be a PFIC, and a U.S. Holder does not make an election to treat us as a "qualified electing fund", or
QEF, or a "mark-to-market" election, "excess distributions" to a U.S. Holder, and any gain recognized by a U.S. Holder on a disposition
or our ordinary shares, would be taxed in an unfavorable way. Among other consequences, gains recognized by the U.S. Holder on the sale
of our shares would be allocated pro-rata over the U.S. Holder’s holding period for the shares. The amounts allocated to the taxable
year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated
to each other taxable year would be subject to tax at the highest rate in effect for individuals or the highest rate in effect for corporations,
as appropriate for that taxable year, and certain "interest" charges may apply. In addition, our dividends, to the extent that they constitute
"excess distributions", would be taxed in the same manner as gain on the sale or other disposition of our shares, rather than the 20%
maximum rate applicable to certain dividends received by an individual from a "qualified foreign corporation". The tests for determining
PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to the
determination of PFIC status. In addition, under the applicable statutory and regulatory provisions, it is unclear whether we would be
permitted to use a gross loss from sales (sales less cost of goods sold) to offset our passive income in the calculation of gross income.
As a result of our substantial cash position, there is a substantial
risk that we will be classified as a PFIC under the asset test described above. There can be no assurance that we will not be classified
as a PFIC by the U.S. Internal Revenue Service. In light of the uncertainties described above, no assurance can be given that we will
not be a PFIC in any year. A U.S. Holder who makes a QEF election is taxed currently on such holder's proportionate share of our earnings,
including both ordinary income and net capital gain. If the IRS determines that we are a PFIC for a year with respect to which we have
determined that we were not a PFIC, however, it might be too late for a U.S. Holder to make a timely QEF election, unless the U.S. Holder
qualifies under the applicable Treasury regulations to make a retroactive (late) election. U.S. Holders who hold ordinary shares during
a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to exceptions for U.S. Holders
who made a timely QEF or mark-to-market election, or certain other elections. We do not currently intend to prepare or provide the information
that would enable you to make a Qualified Electing Fund election. Accordingly, our shareholders are urged to consult their tax advisors
regarding the application of PFIC rules.
20
General Risk Factors
We may be affected by global
economic trends such as recession, rising inflation, rising interest rates, economic slowdown, etc.
Recent inflation, geopolitical
issues, including hostilities which could break out between China and Taiwan in the future, the war in Gaza, with Hezbollah in Lebanon,
the wars with Iran, and possible hostilities with other organizations such as the Houthis in Yemen, increases in energy costs, high interest
rates, unstable global conditions and changes in currency exchange rates have led to global economic instability. Such changes, and their
impact on the global macro-economic environment, may adversely affect our business, operating results, and financial condition.
Despite the recent steady decrease, inflation rates remain high
relative to previous years in the markets in which we operate which may lead us to experience higher operating costs, as well as a decrease
in demand. Our suppliers may raise their prices and, in the competitive markets in which we operate, we may not be able to make corresponding
price increases to preserve our gross margins and profitability due to market conditions and competitive dynamics. Additionally, should
we attempt to increase the price of any of our products, such increase may not be accepted by our customers. Further, high interest rates,
and any increases in interest rates, may lead our customers, to experience higher financing costs, which may, in turn, negatively impact
on investment decisions relating to networking infrastructures, thereby adversely affecting our business, financial condition and results
of operations. In the event of a global recession or certain other economic conditions we may be forced to materially reduce our expenses.
As a result, we may have difficulty achieving continued profitability during a protracted slowdown.
It is difficult to make accurate forecasts regarding our revenues
for the near term. This is due to a challenging mixed-signal environment that is impacted by global geopolitical instability, global economic
slowdown and the continuing effects of the loosening and tightening of the supply chains (which followed long periods of global component
shortages, and which resulted in customers building up significant inventories to cope with such constraints). Such tightening may result
in increased ordered volumes that may not materialize if and when such tightening is loosened. Whereas, the reversal of supply chain tightness,
has on occasion and may continue to result in customers drawing on their existing inventory stock and cancelling or postponing purchase
orders, which could negatively affect our revenues. In addition, the negative effects of such trends could be exacerbated, for example,
if we are unable to sell parts of our inventory, and/or in the event that component market prices fall below book value of inventories
we hold, resulting in losses, due to devaluation of such held inventories. This could have an adverse effect on our costs and results
of operations.
21
Environmental, social and
governance matters may impact our business and reputation.
Customers and potential customers are increasingly using ESG screening
criteria in making their business decisions, to provide information relating to our environmental, social and governance, or ESG, practices.
Our failure, or perceived failure, to pursue or fulfill ESG goals, targets and objectives, or to satisfy various ESG reporting standards,
may harm our reputation, impact our relationships with our customers and could adversely affect our business.
Additionally, as ESG best practices, reporting standards and disclosure
requirements continue to develop, we may incur increasing costs related to ESG monitoring and reporting.
Loss of our sources for
certain key components could harm our operations.
Although we generally use standard parts and components for our
products, certain key components used in our products are currently available from only one source, and others are available from a limited
number of sources, on which we depend. Nevertheless, we believe that we maintain a sufficient inventory of these components to protect
against delays in deliveries. However, we cannot guarantee that we will not experience delays in the supply of critical components in
the future or that we will have a sufficient inventory of critical components at such time to produce products at full capacity, especially
due to disruptions to global supply chains, including those related to certain critical components relating to the production of our products,
as detailed above. For example, a key component in many of our cards is manufactured by Intel. While we have not encountered difficulties
in purchasing such components from Intel's distributors, we cannot guarantee that we will continue to be able to purchase such components
without delays or at reasonable prices. In the event that we are not able to purchase key components from our limited sources, or can
only purchase these key components under unreasonable terms, we may need to redesign certain products. We cannot guarantee that we will
have adequate resources for such a redesign or that such a redesign will be successful. Such inability to obtain alternative resources
or to successfully redesign our products could have a material adverse effect on our business, results of operations, and financial condition.
The markets for our products
change rapidly and demand for new products is difficult to predict and may affect our ability to commercialize our solutions.
The markets for our products are characterized by rapidly changing
technology and evolving industry standards. For example, the migration to higher line rate Ethernet solutions, the adaptation of new bus
interfaces and increased use of emerging technologies such as Cloud, Virtualization, NFV, SD-WAN, 5G and others, may cause some of our
customers to demand such new products and technologies. In the event that such customers decide to begin using new technologies, we may
not be able to develop products for the new technologies in a timely manner. Such customers may also select competing products despite
our ability to develop products incorporating new technologies. For example, while we have in the past announced the securing of
several Design Wins for our solutions, there is no assurance that our customers will continue to buy such solutions from us or that we
will be able to generate significant sales in these areas in the long run. If we do not generate significant sales in these areas
we may accumulate unusable inventory which can be used only with older technologies. We intend to continue investing in product and technology
development, however there can be no assurance that we will be successful in the marketing of our current products and in developing,
manufacturing and marketing enhanced and new products in a timely manner. Additionally, any decrease in the price of, or demand for, any
of our products or solutions could have a material adverse effect on our business, results of operations and financial condition.
22
The market for our products
is highly competitive and some of our competitors may be better positioned than us.
The market for our products is highly competitive. We face competition
from numerous companies, some of whom are more established, benefit from greater market recognition and have greater financial, production
and marketing resources than we do. For example, as further detailed in "Item 4.B – Business Overview – Competition", with
respect to Server Adapters, our main competitors are Nvidia, Intel, and Broadcom. However, we believe these companies are targeting mostly
major accounts and we believe rarely offer customized solutions, while we target accounts of all sizes, with a broader product offering
and with various interfaces and form factors.
In the Smart Cards products sector, our competition is fragmented
and differs with respect to the specific solution being offered by us. In this sector, Marvell, Nvidia, Netronome, Napatech, BittWare,
Lanner and Caswell compete with certain of our Smart Cards. In some cases of FPGA based cards, AMD also compete with our Smart Cards,
however, similarly to the Server Adapters space, they target mostly the larger accounts and only with mainstream products, while for other
accounts they cooperate with us.
In the Smart Platforms products sector, our main competitors are
Caswell, Lanner, Advantech and Nexcom.
As we expand into additional growth markets, we face distinct competitive
landscapes. In the AI Inference market, we compete with specialized hardware platform vendors such as Napatech and BittWare, as well as
with the internal engineering teams of our potential customers who may opt for in-house designs. In the emerging Post-Quantum Cryptography
(PQC) market, we face competition from established hardware security vendors and from alternative software-based acceleration methods
utilizing high-performance CPUs. In the White-Label Switching market, we compete with established Original Design Manufacturers (ODMs)
such as Edgecore and Quanta, as well as facing indirect competition from traditional proprietary networking incumbents.
There may be other solutions which might also compete with our
products. We cannot guarantee that our present or contemplated products will continue to be distinguishable from those of our competitors
or that the marketplace will find our products preferable to those of our competitors. Furthermore, there can be no assurance that competitive
pressures will not result in price reductions that could materially adversely affect our business, results of our operations and financial
condition.
23
We may need to invest significantly
in research and development and business development in order to diversify our product offering and enter new markets.
Most of our revenues are generated from the sale of our networking
and data infrastructure solution products. The technology industry in which we operate is characterized by rapid technological changes,
frequent new product introductions, changes in customer requirements and evolving industry standards. While these changes could lead to
a reduction in the demand for our existing products, they could also create an opportunity for us to expand our product offering to our
existing customers and to new customers. Accordingly, our future success may depend on our ability to diversify our product offering and
enter new markets, which could involve numerous risks, including:
| • |
Substantial research and development and business development expenditures, which could divert funds from other corporate uses and/or
have a significant negative effect on our short-term results; |
| • |
Diversion of management's attention from our core business; and |
| • |
Entrance into markets in which we have little or no experience. |
There can be no assurance that we will be able to successfully
complete the development and market introduction of new products and no assurance that we will be able to successfully enter new markets.
This could have a material adverse effect on our business, results of operations and financial condition.
We may experience difficulty
in developing new and commercially successful products at acceptable release times.
We conduct extensive research, development and engineering activities.
Our efforts emphasize our view of the importance of and the need for the development of new products, cost reduction of current products,
and enhancement of existing products in response to rapidly changing customer preferences, technologies, and industry standards. We cannot
guarantee (i) the continued success of our efforts, (ii) that our products will continue to be widely accepted by the marketplace, (iii)
that any of our ongoing development efforts will result in other commercially successful products, (iv) that such products will be released
in a timely manner or at a competitive price, (v) that we will be able to respond effectively to technological changes or new product
announcements by others, or (vi) that we will not be adversely affected by other external factors over which we have no control. Such
difficulties may have a material adverse effect on our business, results of operations and financial condition.
Our short lead time of
customer orders introduces uncertainty into our revenues and severely limits our ability to accurately forecast future sales.
Our sales are made on the basis of purchase orders placed from
time-to-time pursuant to Design Wins which create long-term pressures on us to prepare sufficient inventory to meet purchase orders for
which our customers typically require a short lead time. The unpredictability of whether customers will place the expected volume of purchase
orders, or whether they will defer previously made purchase orders, creates uncertainty. The tension between the long lead time required
for us to prepare our inventory and production facilities and the short lead time typically required in firm purchase orders introduces
uncertainty into our revenue and production forecasts and business planning, and leads to our inability to accurately forecast future
revenues from product sales. As a result, even dramatic fluctuation in revenue (whether an increase or decrease) might not be detected
until the very end of a financial quarter, which may not enable us to monitor and mitigate costs in a timely manner in order to compensate
for such fluctuation.
24
The fluctuations in components'
lead time and price may adversely affect our business.
In recent years, the market for electronic components, which
we typically use in our products, has been demonstrating fluctuations in lead time and prices. Such fluctuations are led by some of the
world’s leading vendors for such components and there is a risk that such fluctuations will impact our ability to deliver products
to our customers or to maintain our margins on such products, should they affect components for which we cannot find a replacement in
a timely manner or at a competitive price, and this may have an adverse effect on our business. Delays in lead time and fluctuations in
price, may be further exacerbated by the periodic effects of other events over which we have no control, such as any hostilities which
could break out between China and Taiwan in the future, or military conflicts involving or in proximity to, Israel.
The decrease in demand
for basic/standard server adapters may adversely affect our business.
Over the past few years, we have seen a gradual decrease in
demand for our basic server adapters. There is a risk that the actual decrease in demand would be faster than that projected by us. In
addition, in case of a decrease in sales, we may accumulate unusable inventory. Any such decrease in the demand for our basic server adapters
could have a material adverse effect on our business, results of operations and financial condition.
The possible cancellation
and write-off of capitalized development projects may adversely affect our business.
Capitalized development projects may be cancelled and written-off
due to a change in our strategy (such as that which occurred in 2023 where we discontinued two non-core programs as part of our new 6-year
strategic plan), or due to our being unsuccessful in the market, or to other related triggers. Such cancellations may result in a significant
one-time adverse effect on our results of operation.
The loss of a significant
customer may have a material adverse effect on us.
We depend on a small number of customers for our products. Our
top 3 ultimate customers in 2025 accounted for approximately 28% of our revenues in 2025 (out of which our top ultimate customer accounted
for approximately 14% of our revenues in 2025). We expect that a small number of customers will continue to account for a significant
portion of our revenues for the foreseeable future. Loss or cancellation of business from, significant changes in deliveries to, or decreases
in the prices of products sold to, one or more of our key customers has, in the past, significantly reduced our revenues for a reporting
period and could, in the future, harm our business, margins, results of operations, and financial condition.
The loss or ineffectiveness
of any of our key customer relationships or a reduction of purchase orders by such customers may have a material adverse effect on our
operations and financial results.
Our sales and marketing strategy includes development and maintenance
of strategic relationships with leading OEMs in the server industry and server-based systems industry, as well as with leading Cloud,
Telco and service provider customers, which integrate our products into their own systems, or deploy our products in their network. These
customers are not within our control, are not obligated to purchase our products, and may select other products that may compete with
our lines of products or shift their focus towards other product lines altogether. A reduction in sales efforts or discontinuance of sales
of our products by our OEM customers, and/or the reduction in or discontinuance of deployments by our Cloud, Telco, or service provider
customers, could lead to reduced sales and could materially adversely affect our operating results. In addition, there is the risk that
our customers would build up inventories in anticipation of a growth in sales or deployments. If such growth does not occur as anticipated,
such customers may draw down heavily on such built-up inventories, rather than continuing to purchase from us at previous rates, resulting
in a substantial decrease in the number of products ordered in subsequent quarters or potentially the discontinuance of product orders
altogether. The termination or loss of either one or more of our key customer relationships at approximately the same time, without being
able to compensate this loss with sales to other customers, may have a material adverse effect on our operations and financial results.
25
Our business may be adversely
impacted by risks arising from a widespread outbreak of an illness or any other communicable disease, or any public perception of the
risks, related to a pandemic or other health crisis, similar to the COVID-19 pandemic.
The extent to which a pandemic, similar to COVID-19 and its variants,
may ultimately impact our business will depend on future developments, which are highly uncertain and cannot be predicted, such as the
geographical spread, duration of the outbreak, and the effectiveness of actions taken in Israel, the United States and other countries,
to contain and treat the disease and address its impact. We, our suppliers and other business partners may experience significant impairment
of business activities due to operational shutdowns or suspensions that may be requested or mandated by national or local governmental
authorities or self-imposed by us, our suppliers or other business partners. We cannot predict whether, for how long, or the extent to
which a pandemic and pandemic containment efforts may disrupt our supply chain and/or operations.
We are dependent on key
personnel.
Our success has been, and will continue to be, dependent to a large
degree on our ability to retain the services of key personnel and to attract additional qualified personnel in the future. Competition
for such personnel is intense. There can be no assurance that we will be able to attract, assimilate, or retain key personnel in the future
and our failure to do so would have a material adverse effect on our business, financial condition and results of operations.
We may not be able to prevent
others from claiming that we have infringed their proprietary rights.
We cannot guarantee that one or more parties will not assert infringement
claims against us. The cost of responding to claims could be significant, regardless of whether the claims have merit. Significant
and protracted litigation may be necessary to determine the scope of the proprietary rights of others or to defend against claims of infringement,
regardless of whether the claims have merit. Although we believe that all our products use only our intellectual property, or intellectual
property which is properly licensed to us, and we are working to ensure that all our employees are properly assigning or licensing to
us all rights to the intellectual property we use in our products on a regular basis, in the event that any infringement claim is brought
against us and infringement is proven, we could be required to discontinue the use of the relevant technology, to cease the manufacture,
use and sale of infringing products, to incur significant litigation damages, costs and expenses, to develop non-infringing technology
or to obtain licenses to the alleged infringing technology and to pay royalties to use such licenses. There can be no assurance that we
would be able to develop any such alternative technologies or obtain any such licenses on terms commercially acceptable to us.
26
Although in the past we have resolved a claim of infringement through
a license agreement, the terms of which did not have a material effect on our business, any infringement claim or other litigation against
us could seriously harm our business, operating results and financial condition. While there are no other lawsuits or other claims currently
pending against us or our subsidiaries regarding the infringement of patents or intellectual property rights of others, we have been a
party to such claims in the past and may be party to such claims in the future.
We may not be able to protect
our intellectual proprietary rights.
Our success, ability to compete, and future revenue growth are
dependent and will depend, in part, on our ability to protect our intellectual property. It is possible that competitors or other unauthorized
third parties may obtain, copy, use, or disclose our technologies and processes. Any of our existing, acquired, or future patents or other
rights to our intellectual property may be challenged, invalidated, or circumvented. If our intellectual property rights do not adequately
protect our technology, our competitors may be able to offer products similar to ours.
In order to establish and protect the technology we use in our
products, we primarily rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patents. We
enter into confidentiality arrangements with our employees, key consultants and other third parties with whom we conduct business. In
addition, our employees and key consultants involved in the development of our technologies are required to sign non-compete and invention
assignment agreements. We also control access to and distribution of our technologies, documentation and other proprietary information.
Despite these efforts, internal or external parties may attempt to copy, disclose, obtain, or use our products, services, or technology
without our authorization.
Despite perceived exclusive access to any intellectual property
rights obtained via acquisition, and our best efforts during any such acquisition process to secure such rights, internal or external
parties may attempt to copy, disclose, obtain, or use our products, services, or technology without our authorization, or others may assert
infringement claims against us with respect to a product of ours which utilizes such acquired intellectual property rights.
We believe that the measures we take afford only limited protection,
and accordingly, there can be no assurance that the steps we take will be adequate to prevent the challenging of our rights in our technology,
or misappropriation of our technology or the independent development of similar technologies by others.
In addition, the process of seeking patent protection to our technology
may take a long time and be expensive. We cannot assure that pending or future patent applications will result in the issuance of patents
or that, if patents are issued, they will not be challenged, invalidated, or circumvented or that the rights granted under the patents
will provide us with meaningful protection or any commercial advantage.
27
In addition, we cannot assure you that other countries in which
we market our services and products will protect our intellectual property rights to the same extent as the United States. Effective intellectual
property enforcement may be unavailable or limited in some countries. It may be difficult for us to protect our intellectual property
from misuse or infringement by other companies in these countries. Our inability to enforce our intellectual property rights in some countries
may harm our business and results of operations. Litigation, which could result in substantial costs to us and diversion of our resources,
may also be necessary to enforce our patents or other intellectual property rights.
Further, we cannot assure you that we will at all times enforce
our patents or other intellectual property rights or that courts will uphold our intellectual property rights, or enforce the contractual
arrangements that we have entered into to protect our proprietary technology, which could reduce our opportunities to generate revenues. Our
intellectual property assignment, confidentiality and non-competition agreements may not be enforceable and our proprietary technology
may not remain a secret. Others may develop similar technology and use it to compete with us. Despite our efforts to protect our proprietary
rights, former employees and other unauthorized parties may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary.
Inability to cooperate with
and receive information from our key component manufacturers could affect our ability to develop new products required by our customers
and by the industry in which we operate.
Our products are based on silicon which is mostly manufactured
by Intel and a few other leading components manufacturers. In order to design our products, we need to receive information that enables
us to design products with the use of such silicon. There can be no assurance that we will continue to receive all the information required
for designing products with the use of new silicons continuously released by such manufacturers. The reduction in the level of cooperation
with our manufacturers, including as a result of such manufacturers' decision to compete with our products, or our inability to obtain
information from our manufacturers relating to their products used by us, may adversely affect our ability to develop new products required
by customers and by the industry in which we operate.
Our investment portfolio
may be impaired by disruptions in the financial and credit markets.
Our investment portfolio currently consists of debt securities
which the Company classified on December 31, 2025, as "held-to-maturity." As of December 31, 2025, we hold approximately US$ 32.5 million
in corporate debt securities and government debt securities.
Due to possible significant disruptions in the financial and credit
markets, the debt securities in our portfolio are subject to a possible increased risk of default due to bankruptcy, lack of liquidity,
operational failure, or other factors affecting the issuers of those securities. In addition, securities in our portfolio are subject
to other risks, such as credit, liquidity, market and interest rate risks, which may be exacerbated by market disruptions, and which may
impair the assets. We may be required to adjust the carrying value of our investment securities due to a default, lack of liquidity or
other event. For that matter we are required to use of forward-looking information to calculate credit loss estimates.
28
As of December 31, 2025, we were not required to adjust the
carrying value of our investment securities. If we do experience such a loss, it will be recorded in our consolidated statement of operations,
which could materially adversely impact our consolidated results of operations and financial condition.
We may make acquisitions
or pursue mergers that could disrupt our business and harm our financial condition.
As part of our business strategy, we have sought and may continue
to seek to invest in or acquire other businesses, technologies, or assets, and we may enter into joint ventures or other strategic
relationships with third parties.
We may assume liabilities, incur amortization expenses related
to intangible assets, or realize large and immediate write-offs in connection with future acquisitions. In addition, the future valuation
of these acquisitions may decrease from the market price paid by us, which may result in the writing-off or impairing, of the relevant
assets. In addition, our operation of any acquired or merged businesses, technologies, or
assets could involve numerous risks, including:
| • |
Post-merger integration problems resulting from the combination of any acquired operations with our own operations or from the combination
of two or more operations into a new merged entity; |
| • |
Diversion of management's attention from our core business; |
| • |
Substantial expenditures, which could divert funds from other corporate uses; |
| • |
Entering markets in which we have little or no experience; and |
| • |
Loss of key employees of the acquired operations. |
We cannot assure you that any acquisition or merger will be
successful. If the operation of the business of any acquisition or merger disrupts our operations, our business may suffer. In addition,
even if we successfully integrate the acquired business with our own, we may not receive the intended benefits of the acquisition.
We may be subject to
risks associated with laws, regulations, economic sanctions and customer initiatives, including such that relate to the environment, conflict
minerals, privacy or other issues, which may force us to incur additional expenses, may make our supply chain and operations more complex
and may result in damage to our reputation with customers.
Our business, results of operations and financial condition
could be adversely affected if new laws, regulations, or standards relating to our business and products, us or our employees (including
labor laws and regulations) are implemented or existing laws, regulations or standards changed. Such laws and regulations include requirements
in the United States, Europe, Israel and other territories, in relation to data privacy and protection, anti-bribery and anti-corruption,
import and export, labor, tax and environmental and social issues. From time to time, we may also operate pursuant to specific authorizations
of, and commitments towards, U.S., Israeli, E.U., or other governmental authorities and agencies. While we make every effort to comply
with such requirements, we cannot assure you that we will be fully successful in our efforts, and that our business will not be harmed.
Failure to comply with such laws, regulations, authorizations and commitments could result in fines, damages, civil liability and criminal
sanctions against us, our officers and our employees, prohibitions on the conduct of our business and damage to our reputation.
29
The long-term consequences of the war between Israel and Hamas
in Gaza, Hezbollah in Lebanon, wars with Iran, and possible hostilities with other organizations, are currently unknown but may also impact
our supply chain and expenses due to, for example, the possibility of certain countries severing diplomatic relations or imposing trade
boycotts on Israel. We may incur additional expenses, adverse effects on sales, or experience delays in our supply chain and operations,
as a result.
The impact of the current war in Ukraine and sanctions on Russia
and Belarus is that we have ceased to do business with such sanctioned countries.
Such laws and regulations include the EU's General Data Protection
Regulation ("GDPR") and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The GDPR provides that companies must comply with certain standards
regarding the protection of the personal data or risk significant financial penalties. Regulations or interpretive positions may
be enforced specifically with respect to the use of outsourced services, such as SaaS, hosting and cloud-based services. Compliance with
such legislation and regulations may require that we invest in the modification of our operations to comply with such legislation and
regulations, or subject ourselves to liability resulting from a breach of such regulations. Failure to comply with privacy legislation
or procedures may cause us to incur civil liability to government agencies, customers, shareholders and individuals whose privacy may
have been compromised.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
includes disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries
("DRC") and procedures regarding a manufacturer's efforts to prevent the sourcing of such "conflict" minerals. These requirements require
companies to undertake due diligence, disclose and report whether or not such "conflict" minerals originate from the DRC. Because our
supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders if we are unable
to sufficiently verify the origins for the minerals used in our products. In such event, we may also face difficulties in satisfying
customers who require that all of the components of our products are certified as conflict mineral free. For additional information see
"Item 4 – Information on the Company – Business Overview."
We depend on governmental
licenses for our exports.
Our international sales depend largely on export licenses from
the government of Israel in relation to products which contain encryption capabilities, which we are currently required to hold. As of
the date of this annual report, we have obtained all such licenses necessary to carry out our international sales. If we fail to obtain
a material license in the future, or if a material license previously obtained is revoked or expires and is not renewed, our ability to
sell our products to overseas customers could be interrupted, resulting in a material adverse effect on our business, results of operations
and financial condition.
30
Significant disruptions
of our information technology systems or breaches of our data security could adversely affect our business.
In November 2024, we were the subject of a cyberattack originating
from Iran. We took immediate action and activated the Company’s IT professionals and a third-party incident response team to evaluate
and monitor the situation. We took all appropriate measures to ensure and successfully maintain the continued smooth operation of the
company and its systems. While we do not currently believe that any damage to our systems or operations was caused by this attack, a significant
invasion, interruption, destruction, or breakdown of our information technology systems and/or infrastructure by persons with authorized
or unauthorized access could negatively impact our business and operations. Our systems may be the target of cyber-attacks in the future,
a risk that may be exacerbated to the extent our employees work from home and remotely access our IT networks. Future cyberattacks may
result in business interruption, information theft, legal claims and liability, regulatory penalties and/or reputational damage from cyber-attacks,
which may compromise our systems and lead to data leakage either internally or at our third-party providers. To the extent that
any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential
or proprietary information, we could incur material legal claims and liability, including under data privacy laws such as the GDPR. Although
we have invested in measures to reduce these risks, we cannot assure you that these measures will be successful in preventing the compromise
and/or disruption of our information technology systems and related data.
We are affected by worldwide
downturns in industries based on technology.
The volatility in the securities markets and its effect on high-technology
companies may have a ripple effect on our performance. For example, we were affected by the downturn in the economic markets which began
in 2008, posing a risk to industries based on technology as well as the overall economy. There can be no assurance that our results will
not be affected on a going forward basis by any economic downturns, including any downturn to the global economy resulting from
the current geopolitical volatility.
General economic conditions
may adversely affect the Company's results.
Uncertainty in global economic conditions, including any disruption
in financial and credit markets, pose a risk to the overall economy that could impact demand for our and our customers' products, as well
as our ability to manage commercial relationships with our customers and suppliers. If the global economic situation worsens, our business
could be negatively impacted, including such areas as reduced demand for our products and services, or supplier or customer disruptions,
which could reduce our revenues or our ability to collect our accounts receivable and could have a material adverse effect on our financial
condition and results of operations.
31
Item 4.
INFORMATION ON THE COMPANY.
A. History
and Development of the Company
Our legal and commercial name is Silicom Ltd. We were incorporated
under the laws of the State of Israel in 1987, and we operate under Israeli law and legislation. Our registered and principal executive
offices are located in Israel at 14 Atir Yeda Street, Kfar Sava, Israel 4464323, and our telephone number is +972-(0)9-764-4555.
Our shares have been listed on the NASDAQ Global Select Market
since January 2, 2014 under the ticker symbol "SILC." Prior thereto our shares were listed on the NASDAQ Global Market (previously known
as the NASDAQ National Market) under the ticker symbol "SILC" (and previously "SILCF") from February 11, 2008. Prior thereto, our shares
were listed on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap). On December 20, 2005, we obtained the approval of
the Tel Aviv Stock Exchange, or TASE, for the listing of our shares on TASE. Trading of our shares on TASE commenced on December 27, 2005.
On October 26, 2015, our Board of Directors resolved to act to delist the Company's shares from trading on the TASE. Consequently, we
applied to the TASE and requested that TASE initiate the delisting process. On October 29, 2015, the TASE announced to the TASE members
on the TASE electronic filing site, the MAYA, and on the ISA electronic filing site, the MAGNA, that the last trading day in the Company's
shares on the TASE shall be January 26, 2016 and that on January 28, 2016, the Company's shares shall be delisted from trading on the
TASE. Accordingly, the last trading day in our shares on the TASE was January 26, 2016, and on January 28, 2016, our shares were delisted
from trading on the TASE. Our shares are currently listed only on the NASDAQ Global Select Market. See "Item 9 – The Offer and Listing
– Markets and Share Price History."
In December 2014, we purchased all of the share capital of Fiberblaze
A/S (now Silicom Denmark (Fiberblaze A/S)), a provider of high-performance application acceleration solutions for the mobile, telecommunication,
network monitoring, cyber security, financial and related industries ("Fiberblaze").
In September 2015, we, together with our wholly owned subsidiary,
Silicom Connectivity Solutions, Inc., purchased the assets of ADI Engineering, Inc. ("ADI"), a US company which provides Intel®-based
products targeted at SDN, NFV, IoT ('Internet of Things'), Cloud computing and Virtualization.
On July 1st,
2022, Mr. Shaike Orbach, the Company's President and Chief Executive Officer for the past 21 years, became Executive Vice Chairman of
the Board of Directors, and Liron Eizenman, who served as the Company's Chief Operating Officer, took over as the Company's new President
and Chief Executive Officer.
Principal capital expenditures and divestitures
From January 1, 2025, to December 31, 2025, our capital expenditures
totaled to approximately US$ 1,334 thousand (compared to US$ 1,395 thousand during 2024 and US$ 1,276 thousand during 2023), of
which approximately US$ 1,325 thousand (compared to US$ 1,379 thousand during 2024 and US$ 1,162 thousand during 2023) can be attributed
to machinery and equipment, and approximately US$ 26 thousand (compared to US$ 16 thousand during 2024 and US$ 114 thousand during 2023)
can be attributed to office furniture and equipment and leasehold improvements. We have financed our capital expenditures from our available
internal resources and expect to continue to finance our capital expenditures in a similar manner in 2025.
32
B. Business
Overview
Overview
We are an industry-leading provider of high-performance networking
and data infrastructure solutions. Designed to optimize performance and efficiency in Cloud, Data Center and Edge environments,
our solutions increase throughput and minimize latency, serving as the infrastructure backbone for today’s most critical technologies.
Our innovations empower high-demand workloads across Artificial Intelligence (AI) inference, SD-WAN, SASE, cyber security, fabric switching,
NFV, and more.
Our comprehensive portfolio, including high-speed server adapters,
advanced hardware offloading and acceleration engines, AI NICs, FPGA-based smart cards, Post Quantum Cryptography (PQC) hardware accelerators,
white label switches and Edge CPEs, is used by Tier-1 customers throughout the world, including cloud players, service providers and OEMs,
to enable their networks to scale efficiently. With engineering excellence, a strong financial position and a legacy of over 400 active
Design Wins, we serve as the "go-to" connectivity and performance partner for technology leaders around the globe, and drive the next
generation of infrastructure.
Strategic Growth Initiatives
We have identified three structural shifts in technology infrastructure
that we believe serve as incremental growth engines for the Company.
1. AI Inference Solutions
We are actively addressing the shift in AI economics from training-centric to inference-driven models. As the market focus moves to deployment,
we believe that fragmented inference deployments create a critical demand for specialized solutions to resolve latency bottlenecks between
chipsets, cards, and servers, and to overcome the "hardware lottery" imposed by rigid compute architectures. We offer inference-optimized
FPGA-based solutions that provide reconfigurable hardware adaptability, and are currently designing inference-specific Network Interface
Cards (NICs) based on a leading high-performance networking chip. Our approach leverages deep IP and know-how to deliver the ultra-low
latency and architectural flexibility required for efficient inference infrastructure.
2. Post-Quantum Cryptography (PQC)
Cybersecurity We view the transition to PQC as a mandatory global upgrade driven by the security risks quantum computing poses
to existing public-key cryptography. We believe governments and enterprises will be required to transition to quantum-resistant standards
to mitigate potential threats. We provide hardware-based accelerator solutions for PQC. Building on our legacy as an established supplier
of hardware accelerators for encryption, our FPGA-based solutions are designed to allow for flexible updates as cryptographic standards
evolve, offering backward compatibility and what we believe to be clear economic advantages over alternative approaches.
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3. White-Label Switching (WLS)
The networking market is experiencing a structural shift toward disaggregation, where we see network operators transitioning from proprietary
hardware to flexible, white-label solutions. This trend is expanding beyond hyperscalers to enterprise and service providers driven by
demand for flexibility and cost efficiency. Leveraging our established expertise in Edge servers, SD-WAN, and SASE platforms, we are delivering
White-Label Switching platforms designed for modularity and cost-efficiency.
Core Business Portfolio
Our growth initiatives are supported by our core business operations.
Our products are used by major Cloud players, service providers, telecommunications companies ("Telcos"), and Original Equipment Manufacturers
(OEMs) as components of their infrastructure offerings.
Server Network Interface Cards
(Server Adapters): We have developed a comprehensive line of Server Adapters that facilitate interaction between servers and switches,
enabling communication with high performance. These products allow server-based systems to exploit the potential of high speed, high throughput,
high bandwidth Ethernet networking. Some of these products include bypass functionality to ensure traffic continuity during server
failure.
Smart Cards: Our Smart Cards
are intelligent, programmable adapters designed to offload tasks from the server CPU.
| • |
Offload & Acceleration: We offer high-performance cards that independently execute encryption and data compression tasks, which
are increasingly important in the cyber security and storage markets. |
| • |
FPGA-Based Solutions: Utilizing components from the leading FPGA providers Altera and AMD, our FPGA-based solutions address specialized
markets including Packet Capturing, AI Inference, and High Frequency Trading (HFT). For HFT, we provide super low latency networking products,
and allow our customers to embed proprietary code, while our "Packet Mover" framework enables customers to integrate applications with
optimized interfaces. |
Smart Platforms (Edge Products):
Our Smart Platforms function as full computing platforms within networking-intensive environments, primarily serving as Customer-Premises
Equipment (CPE) and Edge devices. These devices are deployed for SD-WAN, SASE, NFV, and Telco-dedicated routers. The portfolio ranges
from entry-level devices to rack-mounted units for large-scale branches, offering modular designs and secured management features.
Integrated Solutions: We
also market hybrid platforms that combine functionalities from our Server Adapters, Smart Cards, and Smart Platforms, such as our Intelligent
Bypass Switches (IBS).
On May 28, 2025, we issued a press release on Form 6-K regarding
a new Fortune 500 cloud-based service provider awarding us a Design Win for an FPGA Smart NIC.
34
On July 7, 2025, we issued a press release on Form 6-K regarding
our first Design Win with a new U.S.-based provider of Edge-based networking solutions for multi-site businesses, for an advanced Edge
device.
On September 4, 2025, we issued a press release on Form 6-K regarding
a long-term network optimization customer selecting our Edge systems as its next-generation platforms.
On September 29, 2025, we issued a press release on Form 6-K regarding
an application delivery market leader awarding us a Design Win for an advanced FPGA Smart Card for cryptography hardware acceleration.
On October 28, 2025, we issued a press release on Form 6-K regarding
a leading provider of Secure Access Service Edge (SASE) solutions awarding us a Design Win for our Edge Networking system combined with
a Silicom Network Interface Card (NIC).
On January 5, 2026, we issued a press release on Form 6-K regarding
global networking and security-as-a-service leader expanding its deployment of our Edge systems across multiple additional use cases.
On February 9, 2026, we issued a press release on Form 6-K regarding
an existing customer, a Tier-1 cyber security leader, selecting one of our Edge systems as the platform for its next generation of a high-end
product line.
On March 12, 2026, we issued a press release on Form 6-K regarding
one of the world’s largest streaming service providers selecting a high-speed Silicom network adapter for deployment in its proprietary
streaming infrastructure.
On April 15, 2026, we issued a press release on Form 6-K regarding
securing a Design Win with a European provider of advanced encryption and secure communication solutions for organizations requiring the
highest level of protection for sensitive information.
Principal Markets
The principal markets in which we compete are set forth more particularly
in, and are incorporated by reference to Note 14A to the consolidated financial statements set forth in Item 18 of this annual report.
In 2023, 2024 and 2025 approximately, 85%, 76% and 74% of our sales, respectively, were in North America, 13%, 16% and 18% of our sales,
respectively, were in Europe, and 2%, 8% and 8% of our sales, respectively, were in Asia-Pacific. Our main business is not seasonal, and
we believe that there are sufficient sources and raw materials available to sustain it.
Manufacturing and Suppliers
Our manufacturing operations consist primarily of producing finished
goods on our own, with assistance from sub-contractors, from (i) components purchased from third parties, and (ii) sub-assemblies manufactured
by sub-contractors. In addition, we perform testing and quality assurance procedures with respect to the components and sub-assemblies
which are incorporated into our final products and to the final products themselves.
35
We seek to monitor quality with respect to each stage of the production
process including, but not limited to, the selection of component suppliers, warehouse procedures and final testing, packaging, and shipping.
We have been certified as complying with "ISO-28001:2022", "ISO 9001:2015", "ISO 27001:2013", and "ISO 14001:2015", which are the standards
used in our industry. We believe that our quality assurance procedures have been instrumental in achieving a high degree of reliability
for our products. We intend to continue to maintain and improve the efficiency of such procedures.
Although we generally use standard parts and components for our
products, certain key components used in our products are currently available from only one source, and others are available from a limited
number of sources, on which we are dependent. For example, some key components in many of our products are manufactured by Intel®
and Broadcom. We believe that during regular supply periods we maintain a sufficient inventory of these components to protect against
delays in deliveries. For additional information see the risk factor entitled "Loss of our sources for certain key components could harm
our operations" under Item 3.D – "Risk Factors."
Firm purchase orders for our products generally include an agreed
supply date for the supply of our products. In addition, we may agree to fill orders for our products within short periods of time after
receipt of a firm purchase order based on the immediate availability of our products and/or components in our inventory. Consequently,
we need to maintain inventory at levels that are in accordance with our forecasts and those of our customers. There can be no assurance
that such forecasts will indeed materialize into firm purchase orders and consequently we cannot guarantee that the full volume of such
inventory will be delivered against firm purchase orders and not remain unused.
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes
disclosure requirements regarding the use of "conflict" minerals mined from the DRC and procedures regarding a manufacturer's efforts
to prevent the sourcing of such "conflict" minerals. These requirements will require companies to undertake due diligence, disclose and
report on whether or not such "conflict" minerals originate from the DRC. This implementation of these requirements could adversely affect
the sourcing, availability and pricing of minerals such as cassiterite, wolframite, columbite-tantalite (coltan), gold and/or their derivatives
(tantalum, tin, and tungsten) which are used in the manufacture of certain components used in our products, as well as affect the companies
we use to manufacture components of our products. As a result, this could limit the pool of suppliers who can provide us DRC "conflict
free" components and parts, and we may not be able to obtain DRC "conflict free" products or supplies in sufficient quantities for our
operations. In circumstances where conflict minerals in our products are found to be sourced from the DRC, we may take actions to change
materials or designs to reduce the possibility that our purchase of conflict minerals may fund armed groups in the region. These actions
could add engineering and other costs to the manufacture of our products, and we may not be able to obtain "conflict free" products or
supplies in sufficient quantities for our operations. In addition, we incur additional costs to comply with the disclosure requirements,
including costs related to determining the source of any of the relevant minerals and metals used in our products, as further elaborated
below. Also, because our supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders
if we are unable to sufficiently verify the origins for the minerals used in our products. In such event, we may also face difficulties
in satisfying customers who require that all of the components of our products are certified as conflict mineral free. There can be no
assurance that we will not experience delays in the supply of critical components in the future or that we will have a sufficient inventory
of critical components at such time to produce products at full capacity. If we do experience such delays and there is an insufficient
inventory of critical components at that time, our operations and financial results would be adversely affected.
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Marketing Channels
The principal market sectors for our products are:
| (i) |
Providers of applications on Network appliances, including mostly SD-WAN, SASE, Cyber Security (including Post-Quantum Cryptography),
and Application Delivery applications; |
| (ii) |
Service providers and Telcos deploying CPEs/Edge for SD-WAN, SASE and NFV, as well as disaggregated networking solutions such as
White-Label Switches; |
| (iii) |
"Cloud"service providers; and |
| (iv) |
Emerging AI chip companies and infrastructure providers requiring specialized hardware acceleration for AI Inference. |
Our main business model for our line of products is called the
Design Win Model. The following are the main aspects of this model:
| • |
We approach a potential customer or are approached by such customer. |
| • |
If the potential customer shows interest in the products and we believe that achievement of a business relationship with the potential
customer is possible, we ship products for such potential customer's evaluation. |
| • |
During the evaluation process the potential customer receives a few units of the relevant product for initial basic testing. If the
evaluation process is successful, we ship products for qualification. |
| • |
During the qualification process the potential customer usually purchases a larger amount of our products for more specific testing,
which may include certain adaptations of our products to its needs. |
| • |
If the qualification process is successful, we enter into negotiations regarding the terms of a business relationship. |
| • |
In some cases, typically with the larger customers and with respect to Smart Cards and Smart Platforms, the evaluation and qualification
process may take 12 months or more. |
Once all phases mentioned above are successfully concluded, the
customer will purchase products from us by placing purchase orders (under which our products are to be sold to such customer) in order
to either (i) incorporate such products within its systems, and thereafter sell or deploy such systems with our cards embedded in them,
or, (ii) deploy our Smart Platform products within a network.
37
The sale or deployment of our products within such systems or network,
as applicable, is the objective of our Design Win Model. In most cases, once we secure a Design Win, our customer will continue to buy
our products for as long as it (i) continues to sell or deploy its system in which our products are incorporated, or (ii) continues to
deploy our Smart Platform as part of its network.
For all of our Server Adapters and for some of our Smart Cards
and Smart Platforms, our sales and marketing have been mostly carried out through a network of strategic relationships with leading OEMs
that sell our products, generally as a part of their systems and sometimes under their own private labels.
Our current OEM customers are mostly active in the SD-WAN market,
Cyber Security market (including addressing the Post-Quantum Cryptography transition), AI Inference infrastructure market, Data Storage
market, Application Delivery market, Traffic Management market, Network Monitoring market, WAN Optimization market and other server-based
applications markets.
Our OEM customers sell their products to Service providers, Telcos,
Governments, Enterprises (headquarter and branch) and to Data Centers (regular and virtualized, including to the Cloud).
Our strategy of carrying out strategic relationships with OEM customers
continues to be a significant part of our strategy. We believe that these relationships enable us to take advantage of the superior financial
resources and market presence of these companies to increase our sales and establish, maintain and strengthen our position and reputation
in the market. In addition, we believe that relationships with OEMs improve access to new technologies developed by such OEMs, thereby
ensuring smooth integration of our products and technology with those of the OEMs.
In addition, due to the trends that we see in our industry, including
primarily the shift to the Cloud and the trend of Disaggregation (non-proprietary standards that allow separate parts of the network to
be purchased separately) and Decoupling of Hardware and Software, we are also implementing an additional marketing strategy which involves
our direct sales to major Service providers, Telcos, and Cloud players. This direct sales channel is becoming increasingly relevant
for our strategic growth engines, specifically for White-Label Switching opportunities and large-scale deployments of AI Inference and
PQC solutions, where direct engagement with the infrastructure operator is often required.
In some cases, such sales involve a relationship with an independent
software vendor, which is the case in some of our SD-WAN Edge Platforms and PQC related sales.
The main aspects of the OEM business model, by which in most cases
our customer will continue to buy our cards for as long as it continues to sell or deploy its system, are similar in our business model
when we sell directly to Telcos or other service providers.
Our cooperation with Intel and Altera has resulted in material
benefits to our selling process. Due to these close relationships, they provide us with assistance in the sales process, mostly with Smart
Cards and Smart Platforms, and FPGA-based solutions for AI and PQC.
38
The loss of some of our customers, or any single key customer,
may have a material adverse effect on our operations and financial results and we cannot assure you that we will be able to enter into
strategic relationships with any such customer in the future.
Payment terms of our customers are, on average, approximately 60
days net. Approximately 95% of our international sales are denominated in U.S. Dollars and may be subject to government controls and other
risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, political instability, trade
restrictions and changes in tariffs and freight rates. We have experienced no material difficulties to date as a result of these factors.
Our arrangements with our customers (and distributors and resellers
when applicable) are generally non-exclusive. We have generally experienced good relations with our customers and are not aware of any
pending material terminations other than with respect to products that newer technologies have eliminated the need for.
Our customers, distributors and resellers are not under our control.
They are not obligated to purchase products from us and may use or represent other lines of products. A reduction in sales effort or discontinuance
of sales of our products by our customers could lead to reduced sales and could materially adversely affect our operating results. In
addition, our business model also entails the risk that our customers will build up inventories, either in anticipation of a growth in
deployments or sales, or as a result of a tighter global supply chain incentivizing customers to build up significant inventories. If
such growth does not occur as anticipated, or if customers have built up significant inventories, these customers may substantially decrease
the number of products ordered from us in subsequent quarters, as they draw down on accrued inventories, discontinue product orders, or
even attempt to return unused or unsold products. The loss of a major or key customer or group of customers, a loss or ineffectiveness
of some of our relationships at approximately the same time, or a customer’s shift of its business focus away from the solutions
that we had previously sold towards solutions in areas in which we do not operate, may have a material adverse effect on us.
Patents and Licenses
Our success and ability to compete are dependent to a significant
degree on our technology. In order to establish and protect the technology we develop and/or acquire to use in our products, we primarily
rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patents. These measures afford only
limited protection, and accordingly, there can be no assurance that the steps we take will be adequate to prevent misappropriation of
our technology or the independent development of similar technologies by others. Despite our efforts to protect our technology, unauthorized
parties may attempt to copy aspects of our products and develop similar hardware or software or to obtain and use information that we
regard as proprietary. In addition, there can be no assurance that one or more parties will not assert infringement claims against us.
The cost of responding to claims could be significant, regardless of whether the claims are valid. We cannot assure that the scope of
any issued patent will adequately protect our intellectual property rights, or that patents will not be challenged, invalidated, or circumvented,
or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.
39
On April 8, 2010, we filed a patent application with the United
States Patents and Trademarks Office, or the USPTO, for the ‘Server-Based Network Appliance’. On June 12, 2012 we were issued
patent No. 8,199,523 entitled ‘Server-Based Network Appliance’ from the United States Patent and Trademark Office, which relates
to a server-based network appliance in which a computer motherboard is mounted in a case with the bus slots of the motherboard adjacent
to the rear side of the case.
On September 16, 2013, we acquired all of the intellectual property
related to the unique Virtualization Off-Load Engine developed by Net Perform Technology, Ltd., a privately held company registered in
Hong Kong, China. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure the
same, internal or external parties may assert a claim of infringement regarding such intellectual property. We do not consider this intellectual
property to be material for our operations.
On February 8, 2015, we filed a patent application in the USPTO
with respect to Hybrid Networking Application Switch. On January 2, 2018, we were issued patent No. 9,858,227 entitled ‘Hybrid Networking
Application Switch’ from the United States Patent and Trademark Office. The patent relates to a unique solution for combining functionalities
of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application
switch or an accelerated hybrid networking application switch.
For additional information regarding the risks to the Company with
respect to patents and other intellectual property rights see the risk factor entitled “We may not be able to protect our intellectual
proprietary rights” under Item 3.D. – “Risk Factors.”
Competition
The networking and data infrastructure solutions industry is highly
competitive. We face competition from numerous companies, some of which are more established, benefit from greater market recognition,
and have greater financial, production, and marketing resources than we do. We cannot guarantee that our present or any contemplated products
will continue to be distinguishable from those of our competitors or that the marketplace will find our products preferable to those of
our competitors. Furthermore, there can be no assurance that competitive pressures will not result in price reductions that could materially
adversely affect our business and financial condition and the results of our operations.
We believe that our expanded feature set, coupled with our customization
capabilities and the general wide spectrum of solutions we offer, give us a competitive edge.
Core Business Competition
Server Adapters: Our main
competitors are Nvidia, Intel, and Broadcom. However, these companies seem to be targeting mostly major accounts with their somewhat limited
offering of standard cards and rarely offer customized solutions. We target accounts of all sizes with a broader product offering with
various interfaces and form factors while providing a very fast and efficient path to customized solutions required by customers. Although
the situation may change in the future, we believe that our competition in areas which are not being pursued by the large companies is
less significant.
40
Smart Cards: In the Smart
Cards products sector, our competition is fragmented and differs with respect to the specific solution being offered by us. In this sector,
Marvell, Nvidia, Netronome, Napatech, BittWare, Lanner, and Caswell compete with certain of our Smart Cards. In some cases of FPGA-based
cards, AMD also compete with our Smart Cards; however, as with the Server Adapters space, they target mostly the biggest accounts and
only with mainstream products, while for other accounts they cooperate with us.
Smart Platforms: In the
Smart Platforms products sector, our main competitors are Caswell, Lanner, Advantech, and Nexcom. We believe that we provide a fast and
efficient path to customized Smart Platforms frequently required by customers, which, coupled with our well-established technical and
business relationships with Intel (the major supplier of the main building block of these Smart Platforms’ x86-based CPUs), provides
us with an advantage over our main competitors in this area.
Strategic Growth Markets Competition
As we expand into additional strategic markets, namely AI Inference,
Post-Quantum Cryptography (PQC), and White-Label Switching markets, we face distinct competitive landscapes populated by both established
incumbents and specialized emerging players.
AI Inference Solutions: In
the AI inference market, we do not primarily compete against AI chip makers; rather, we position ourselves as a key infrastructure partner
to them. We primarily offer our products to emerging AI chip companies who require specialized hardware to deploy their proprietary acceleration
technologies. For some customers, we provide the FPGA platform necessary to load and execute their hardware code, enabling them to circumvent
the "hardware lottery" by adapting their physical computing infrastructure to novel machine learning algorithms in near real-time; for
others, we provide high-speed, high-bandwidth, and low-latency networking solutions to resolve critical connectivity bottlenecks. In this
specific capacity, our main competitors are specialized hardware platform vendors and SmartNIC providers such as Napatech and BittWare.
We also compete with the internal hardware engineering teams of our potential customers (the AI chip startups), who may decide to design
and build their own network interface cards or acceleration platforms in-house rather than outsourcing to a specialized partner like Silicom.
While the broader AI market is dominated by giants like Nvidia and AMD, our strategy is to enable the ecosystem of challengers emerging
to compete with these incumbents.
We believe our ability to provide a "production-ready" platform
that solves both the "latency wall" and the "hardware lottery"—specifically tailored for the high-bandwidth and reconfigurable needs
of inference clusters—allows our customers to focus on their core silicon differentiation rather than networking and hardware complexity.
Post-Quantum Cryptography (PQC):
In the emerging market for Post-Quantum Cryptography, we face competition from two primary sources.
41
Hardware Competitors: We
compete with other hardware vendors who offer hardware-based acceleration cards, Hardware Security Modules (HSMs), and cryptographic offload
solutions. Key competitors in this space include large security and semiconductor vendors that may design and offer PQC hardware accelerators,
as well as specialized FPGA-based accelerator providers like BittWare and Napatech.
Software/CPU Alternatives:
We also face competition from an alternative architectural approach: the use of higher-power Central Processing Units (CPUs) with significantly
increased core counts to perform PQC acceleration entirely in software.
While the software-only alternative eliminates the need for specialized
add-on hardware, it places a heavy computational load on the server. We believe our hardware-based FPGA solutions offer a distinct cost
and efficiency advantage over the high-core-count CPU alternative. By offloading these intensive mathematical operations from the host
CPU, our solutions free up expensive core resources for primary applications and offer superior performance-per-watt efficiency, resulting
in a lower Total Cost of Ownership (TCO). Furthermore, our FPGA-based approach allows for "crypto-agility" -the ability to update cryptographic
algorithms in hardware as standards evolve - which differentiates us from fixed-function hardware competitors.
White-Label Switching (WLS):
In the White-Label Switching market, we compete against established Original Design Manufacturers (ODMs) such as Edgecore Networks, Quanta
Cloud Technology (QCT), Celestica, and Delta Electronics. We also face indirect competition from traditional proprietary networking incumbents
like Cisco, Juniper, and Arista, who are increasingly challenged by the disaggregation trend.
Governmental Regulation Affecting the Company
We are affected by the terms of research and development grants
we have received from the IIA.
Under the R&D Law, research and development programs approved
by the Research Committee of the IIA (the “Research Committee”) are eligible for “Benefits” which include grants,
loans, exemptions, discounts, guarantees and additional means of assistance, but with the exclusion of purchase of shares, provided under
various tracks promulgated by the Council body (the “Tracks”). Most Tracks require the repayment of the Benefits in the form
of the payment of royalties from the sale of the product developed or provision of related services, in accordance with the published
Track guidelines and subject to other restrictions. Once a project is approved, the IIA awards grants generally of up to 50% of the project’s
expenditures in return for royalties, usually at the rate of 3% of sales of products developed with such grants. For projects approved
after January 1, 1999, the amount of royalties payable was up to a dollar-linked amount equal to 100% of such grants plus interest at
LIBOR or other applicable interest rate, such as the 12 month Secured Overnight Financing Rate (SOFR) rates, as published on the first
trading day of the year by the CME Group (or any other institution authorized by the Federal Reserve), or in alternative publication by
the Bank of Israel, with certain adjustments.
42
The terms of these grants prohibit the manufacture outside of Israel
of the product developed in accordance with the program without the prior consent of the Research Committee. Such approval is generally
subject to an increase in royalty rates, as well as in the total amount to be repaid to the IIA to between 120% and 150% (and in some
cases 300%) of the amount granted, depending on the extent of the manufacturing that is conducted outside of Israel.
The R&D Law also provides that know-how from the research and
development and any derivatives thereof, cannot be transferred or licensed to Israeli third parties without the approval of the Research
Committee. The R&D Law stresses that it is not just transfer of know-how that is prohibited, but also transfer of any rights in such
know-how. Approval of the transfer and/or license could be granted only if the Israeli transferee or licensee undertook to abide by all
of the provisions of the R&D Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and
the obligation to pay royalties, if applicable. Generally, royalty payments by the transferor are required in connection with the transfer
to an Israeli third party.
The know-how from the research and development and any derivatives
thereof cannot be transferred to non-Israeli third parties without the approval of the Research Committee, whose approval is generally
contingent on payment of a significant penalty of up to six times the dollar-linked grant amount plus LIBOR or other applicable interest
rate (such as the SOFR with certain adjustments) and minus any royalties paid, subject to depreciation in accordance with the published
rules. Such restriction does not apply to exports from Israel of final products developed with such technologies.
The approval of out-licensing arrangements and other arrangements
for granting of an authorization to an entity outside of Israel to use know-how developed under research and development programs funded
by the IIA and any derivatives thereof is generally subject to payment of a “License Fee” to the IIA, at a rate that will
be determined by the IIA in accordance with the IIA’s licensing rules, of up to six times the dollar-linked amount plus LIBOR or
other applicable interest rate (such as the SOFR with certain adjustments) and minus any royalties paid, subject to depreciation.
In addition, we receive certain tax benefits and reduced tax rates
from the Israeli government due to our status as a “Preferred Technological Enterprise” under the Law for the Encouragement
of Capital Investments-1959, as amended. See “Item 10.E. – Additional Information – Taxation.” The entitlement
to these benefits is conditional upon our fulfillment of the conditions stipulated by the law and the regulations promulgated thereunder.
In the event of failure to comply with these conditions, the benefits could be canceled, and we would be required to refund the amount
of the benefits, in whole or in part, with the addition of linkage differences and interest.
Our total outstanding contingencies in respect of IIA or IIA royalty-bearing
participations received or accrued, net of royalties paid or accrued before interest, amounted to approximately US$ 2,960 thousand as
of December 31, 2025, which are attributable to sales of certain discontinued products. As of the date of this annual report, all
of our IIA programs have been closed per our request. We are not anticipating any sales of our products developed with IIA funding and
accordingly do not expect to be required to pay any royalties to the IIA. In the unlikely event we do sell products developed using IIA
funding, we will be required to pay royalties to the IIA as set forth in the R&D Law and directives published by the IIA.
43
C. Organizational
Structure
We have the following two wholly owned subsidiaries:
| • |
Silicom Connectivity Solutions, Inc. – a private company incorporated in the United States; and |
| • |
Silicom Denmark (Fiberblaze A/S) – a private company incorporated in Denmark. |
D. Property,
Plant and Equipment
We do not own any real property, but we lease property at five
locations. Our manufacturing plant and additional storage space are located in in Yokne’am, Israel, our executive offices are located
in Kfar Sava, Israel, our marketing and sales offices are located in our Kfar Sava, Israel, in Søborg, Denmark, and in Paramus, New
Jersey, the United States, and our research and development facilities are located in Kfar Sava, Israel, in Søborg, Denmark, and
in Charlottesville, Virginia, the United States.
Our executive offices in Kfar Sava are approximately 2,000 square
meters in size. The remaining lease period is approximately four years, ending February 28, 2030. Our monthly rental payments for this
office space (which include various maintenance services) are equal to approximately US$ 62,150.
We have conducted our manufacturing in Yokne’am, Israel since
2000.
In March 2020, we entered into a lease agreement for the lease
of an approximately 4,000 square meter manufacturing facility, as well as an approximately 360 square meters of storage space, in Yokne’am,
Israel, for a period of up to 120 months. The monthly rental payments (which include various payments including maintenance services)
will vary during the remaining lease period from between approximately US$ 91,000 to approximately US$ 92,300.
In October 2019, we entered into a commercial lease agreement to
lease office space in Charlottesville, Virginia, in the United States for a 37-month period commencing on December 1, 2019. The lease
agreement includes two options for the extension of the lease for 24-months each. In July 2022, we exercised the first option to extend
the lease agreement for a period of 24 months, commencing on January 1, 2023. In May 2024, we exercised the second option to extend the
lease agreement for a period of 24 months, commencing on January 1, 2025. The facility is approximately 606 square meters in size and
the monthly payments are approximately US$ 9,300 per month in the first 12 months and approximately US$ 9,500 per month in the following
12 months. In February 2026, we entered into an addendum to the lease agreement to further extend the lease for an additional period of
24 months, commencing on January 1, 2027 and ending on December 31, 2028. The monthly lease payments under this extension are approximately
US$ 9,675 for the first 12 months and approximately US$ 9,868 for the following 12 months. The lease agreement also includes additional
renewal options beyond this period, subject to certain conditions.
44
Since April 2017, we have leased office space of approximately
2,500 square feet in Paramus, New Jersey. Our current lease is until June 2027. Currently, the monthly rental payments (including utilities)
for this space are US$ 4,820.
In addition, we lease office space in Søborg, Denmark. In
February 2025, we entered into an amendment to the lease agreement, pursuant to which the leased premises were reduced in size from approximately
1,800 square meters to approximately 1,400 square meters, including the vacation of one floor. While the term of the initial lease period
expired on November 1, 2025, the lease continues in effect, subject to standard termination provisions, including a six-month prior notice
period. The monthly rental payment (including maintenance services) for this space is approximately US$ 20,600.
We believe that our facilities in Israel, the United States and
Denmark are suitable and adequate for our operations as currently conducted. In the event that additional facilities are required, or
we need to seek alternative rental properties, we believe that we could obtain such additional or alternative facilities at commercially
reasonable prices.
Item 4A.
UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
Item 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
General
Overview
Silicom was incorporated in Israel and commenced operations in
1987. We are currently engaged in the design, manufacture, marketing and support of high-performance networking and data infrastructure
solutions. Designed to optimize performance and efficiency in Cloud, Data Center and Edge environments, our solutions increase throughput
and minimize latency, serving as the infrastructure backbone for today’s most critical technologies. Our innovations empower high-demand
workloads across Artificial Intelligence (AI) inference, SD-WAN, SASE, cyber security, fabric switching, NFV, and more. Our comprehensive
portfolio, including high-speed server adapters, advanced hardware offloading and acceleration engines, AI NICs, FPGA-based smart cards,
Post Quantum Cryptography (PQC) hardware accelerators, white label switches and Edge CPEs, is used by Tier-1 customers throughout the
world, including cloud players, service providers and OEMs, to enable their networks to scale efficiently.
We primarily sell our products to major Cloud players, service
providers, telcos and OEMs and, to a lesser extent, through independent distributors (on a non-exclusive basis). In 2023, 2024 and
2025 we recorded sales from all of our networking and data infrastructure solutions of approximately, US$ 124.1million, US$ 58.1 million
and US$ 61.9 million respectively.
45
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09 “Income Taxes
(Topic 740): Improvements to Income Tax Disclosures”. The standard requires entities to disclose specific categories in the rate
reconciliation and to provide additional information for reconciling items that meet a quantitative threshold. It also requires entities
to disclose certain information about income taxes paid and other disclosures related to income and income tax expense from continuing
operations. The standard is effective for fiscal years beginning after December 15, 2024 for public business entities. We adopted this
ASU on a prospective basis effective January 1, 2025.
In November 2024, the FASB issued ASU 2024-03 “Income Statement:
Reporting Comprehensive Income - Expense Disaggregation Disclosures,” The standard requires more detailed information about specified
categories of expenses (purchases of inventory, employee compensation, depreciation, amortization, and depletion) included in certain
expense captions presented on the face of the income statement, as well as disclosures about selling expenses. The standard is effective
for fiscal years beginning after December 15, 2026. We are currently evaluating the impact of ASU 2024-03 on our consolidated financial
statements.
In July 2025, the FASB issued ASU 2025-05, Financial Instruments—Credit
Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which provides a practical expedient when
estimating credit losses on accounts receivable and contract assets arising from transactions accounted for under ASC 606, Revenue from
Contracts with Customers. Under this practical expedient, an entity is allowed to assume that the current conditions it has applied in
determining credit loss allowances for current accounts receivable and current contract assets remain unchanged for the remaining life
of those assets. The ASU is effective for annual periods beginning after December 15, 2025, and interim periods within those annual reporting
periods. Effective January 1, 2025, we early adopted ASU 2025-05 on a prospective basis. The adoption of this guidance did not have a
material impact on our consolidated financial statements and related disclosures.
A. Operating Results
You should read the following management’s discussion and
analysis of our financial condition and operating results in conjunction with the consolidated financial statements and the related notes
thereto included in this annual report. The following table sets forth, for the periods indicated, the relationship (in percentages) of
items from our Consolidated Statement of Operations Data to our total sales:
|
Year Ended December 31,
|
2023 |
2024 |
2025 |
|
Sales |
100% |
100% |
100% |
|
Cost of sales |
76.9 |
71.4 |
69.4 |
|
Gross profit |
23.1 |
28.6 |
30.6 |
|
Research and development expenses |
16.6 |
33.6 |
32.4 |
|
Sales and marketing expenses |
5.6 |
10.3 |
10.5 |
|
General and administrative expenses |
3.4 |
7.5 |
7.4 |
|
Impairment of goodwill |
20.6 |
- |
- |
|
Operating Loss |
(23.1) |
(22.8) |
(19.8) |
|
Financial income, net |
1.1 |
3.4 |
2.7 |
|
Loss before income taxes |
(22.0) |
(19.5) |
(17.1) |
|
Income tax expenses (benefit) |
(0.7) |
4.1 |
1.4 |
|
Net Loss |
(21.3) |
(23.6) |
(18.5) |
46
Sales in 2025 increased by 6.6% to US$ 61,926 thousand compared
to US$ 58,114 thousand in 2024, reflecting mainly resilient core business demand and the initial ramp-up of a few of the design wins achieved
during 2025. Sales in 2024 decreased by 53.2% to US$ 58,114 thousand compared to US$ 124,131 thousand in 2023, reflecting mainly the continued
negative impact of the excess inventories built by many of our customers in previous years, whether in reaction to supply chain disruptions
only, or in combination with slower-than-expected sales of their new products and services.
Gross profit in 2025 was US$ 18,926 thousand compared to US$ 16,598
thousand in 2024. Gross profit as a percentage of sales in 2025 was 30.6%, compared to 28.6% in 2024. The increase in the gross profit
percentage in 2025 compared to 2024 was mainly attributed to changes in the mix of products that we sold in 2025, on which our gross profit
is largely dependent. Gross profit was also affected by write-downs of inventory made with respect to any slow moving or obsolete inventory
we can no longer use. Inventory write-downs as a percentage of sales in 2025 decreased to 4.5%, compared to 6.3% in 2024.
Gross profit in 2024 was US$ 16,598 thousand compared to US$ 28,689
thousand in 2023. Gross profit as a percentage of sales in 2024 was 28.6%, compared to 23.1% in 2023. The change in the gross profit percentage
in 2024 compared to 2023, when neutralizing the one-time effect of impairment of intangible assets as well as the related write-down of
inventory in 2023, was mainly attributed to the mix of products that we sold in 2024, on which our gross profit is largely dependent.
Gross profit was also affected by, among other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory
we can no longer use. The inventory write-downs as a percentage of sales in 2024 increased to 6.3%, compared to 5.2% (of which 3.5% is
attributed to a one-time write-down of inventory related to an impairment of intangible assets) in 2023.
Research and development expenses in 2025 increased by 2.8% to
US$ 20,054 thousand compared to US$ 19,508 thousand in 2024. This increase was mainly attributed to an increase of approximately US$ 1,621
thousand in payroll and related expenses resulting from the depreciation of the U.S. Dollar against the New Israeli Shekel and the Danish
Krone (since a significant portion of our research and development payroll expenses are incurred in New Israeli Shekels and Danish Krone),
offset by (i) a decrease in the use of subcontracted work of approximately US$ 520 thousand, (ii) a decrease in depreciation expenses
of approximately US$ 465 thousand and (iii) a decrease in various research and development costs accumulating to approximately US$ 90
thousand.
47
Research and development expenses in 2024 decreased by 5.5% to
US$ 19,508 thousand compared to US$ 20,638 thousand in 2023. This decrease was mainly attributed to (i) a decrease in payroll and related
expenses due to a reduction in the number of employees which amounted to approximately US$ 925 thousand, (ii) a strengthening of the US
Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred
in New Israeli Shekels and Danish Krone), which reduced expenses by approximately US$ 209 thousand, (iii) a decrease in the use of subcontracted
work of approximately US$ 444 thousand, as well as a decrease in various research and development costs of approximately US$ 276 thousand,
offset by a decrease of capitalization of internal software development costs of approximately US$ 365 thousand in 2024, compared to US$
1,092 thousand in 2023.
Sales and marketing expenses in 2025 increased by 8.5% to US$ 6,528
thousand compared to US$ 6,014 thousand in 2024. This increase was mainly attributed to an increase of approximately US$ 379 thousand
in payroll and related expenses resulting from the depreciation of the U.S. Dollar against the New Israeli Shekel and the Danish Krone
(since a significant portion of our sales and marketing payroll expenses are incurred in New Israeli Shekels and Danish Krone), as well
as an increase of approximately US$ 135 thousand, attributed to various sales and marketing costs.
Sales and marketing expenses in 2024 decreased by 13.3% to US$
6,014 thousand compared to US$ 6,935 thousand in 2023. This decrease was mainly attributed to a decrease in payroll and related expenses
due to a reduction in the number of employees of approximately US$ 651 thousand, as well as a decrease of approximately US$ 270 thousand,
attributed to various sales and marketing costs.
General and administrative expenses in 2025 increased by 5.8% to
US$ 4,605 thousand compared to US$ 4,354 thousand in 2024. This increase was mainly attributed to an increase of approximately US$ 357
thousand in payroll and related expenses resulting from the depreciation of the U.S. Dollar against the New Israeli Shekel and the Danish
Krone (since a significant portion of our general and administrative payroll expenses are incurred in New Israeli Shekels and Danish Krone),
offset by a decrease of approximately US$ 96 in share-based compensation expenses.
General and administrative expenses in 2024 increased by 3% to
US$ 4,354 thousand compared to US$ 4,229 thousand in 2023. This increase was mainly attributed to various general and administrative costs
of approximately US$ 190 thousand, offset by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since
a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone), which reduced expenses
by approximately US$ 65 thousand.
48
Financial income, net in 2025 amounted to US$ 1,653 thousand compared
to financial income, net of US$ 1,961 thousand in 2024. The change is mainly attributed to a depreciation of the U.S. Dollar against the
New Israeli Shekel and the Danish Krone, which created net financial expenses in U.S. Dollars from exchange rate differences (a portion
of our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Kroner) of US$ 918 thousand in 2025
compared to financial expenses from exchange rate differences of US$ 625 thousand in 2024.
Financial income, net in 2024 amounted to US$ 1,961 thousand compared
to financial income, net in 2023 of US$ 1,372 thousand. The change is mainly attributed to an increase in income from investment in marketable
securities and bank deposits, which was attributed to an increase in funds available for investment, and which amounted to US$ 2,597 thousand
in 2024 compared to US$ 1,254 thousand in 2023, offset by financial expense in US Dollars from exchange rate differences (a portion of
our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Krone) of US$ 625 thousand in 2024 compared
to financial income of US$ 163 thousand in 2023.
In 2025 we recorded current income tax expenses of US$ 772 thousand
and deferred income tax expenses of US$ 82 thousand compared to current income tax expenses of US$ 692 thousand and deferred income tax
benefit of US$ 2,345 thousand in 2024. The increase in our current income tax expenses was mainly attributed to an increase in our taxable
income. The change in the deferred income taxes was mainly attributed to valuation allowance in relation to loss carry forwards in the
amount of US$ 2,918 thousand in 2024, compared to an increase in loss carry forwards in the amount of US$ 896 thousand in 2025.
In 2024 we recorded current income tax expenses of US$ 692 thousand
and deferred income tax expenses of US$ 2,345 thousand compared to current income tax expenses of US$ 1,122 thousand and deferred income
tax benefit of US$ 1,885 thousand in 2023. The decrease in our current income tax expenses was mainly attributed to a decrease in our
income and the resulting taxable income. The change in the deferred income taxes was mainly attributed to a deferred income tax benefit
relating to tax loss carryforwards, which amounted to US$ 1,064 thousand in 2024 compared to deferred income tax benefit which amounted
to US$ 306 thousand in 2023, offset by: (i) a valuation allowance which amounted to US$ 2,918 thousand compared to US$ 0 in 2023, (ii)
deferred income tax expenses related to acquired goodwill, which amounted to US$ 327 thousand in 2024 compared to deferred income tax
benefit in the amount of US$ 1,893 thousand in 2023. In addition, in 2024 we recorded an income tax benefit relating to prior years in
the amount of US$ 646 thousand, compared to an income tax benefit relating to prior years in the amount of US$ 126 thousand in 2023.
In 2025 we recorded net loss of US$ 11,479 thousand compared to
net loss of US$ 13,708 thousand in 2024. The decrease in net loss was mainly attributed to a decrease in our operating loss as well as
to a decrease in our tax expenses.
In 2024 we recorded net loss of US$ 13,708 thousand compared to
net loss of US$ 26,413 thousand in 2023. The loss in 2024 was mainly attributed to a decrease in our activity.
49
Impact of Inflation and Currency Fluctuations
on Results of Operations, Liabilities and Assets
Since the majority of our revenues are denominated and paid in
U.S. Dollars, we believe that inflation in Israel and in Denmark and fluctuations in the U.S. dollar exchange rates do not have any material
effect on our revenue. Inflation in Israel or Denmark and the Israeli and Danish currency as well as U.S. dollar exchange rate fluctuations,
may however, have an effect on our expenses and, as a result, on our net income/loss. The cost of our Israeli and Danish operations, as
expressed in U.S. Dollars, is influenced by the extent to which any change in the rates of inflation in Israel or Denmark are not offset
(or are offset on a lagging basis) by a change in valuation of the NIS or DKK in relation to the U.S. dollar.
We do not presently engage in any hedging or other transactions
intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake
such transactions, if management determines that it is necessary to offset such risks.
B. Liquidity and Capital
Resources
As of December 31, 2025, we had working capital of US$ 85,862 thousand
and our current ratio (current assets to current liabilities) was 4.15. Cash and cash equivalents as of December 31, 2025 decreased by
US$ 16,127 thousand to US$ 35,156 thousand, compared to US$ 51,283 thousand as of December 31, 2024. Short-term bank deposits increased
by US$ 6,000 thousand to US$ 6,000 as of December 31, 2025, compared to US$ 0 as of December 31, 2024. Short-term marketable securities
decreased by US$ 13,902 thousand to US$ 6,958 thousand, compared to US$ 20,860 thousand as of December 31, 2024, and long-term marketable
securities increased by US$ 18,679 thousand to US$ 25,518 thousand, compared to US$ 6,839 thousand as of December 31, 2024. The net decrease
of US$ 5,350 thousand in these four balance sheet items in 2025 was mainly attributed to the following factors: (i) negative cash used
in operating activities in the amount of US$ 2,160 thousand, (ii) payments in relation to purchase of property, plant and equipment which
amounted to US$ 1,189 thousand, and (iii) purchase of treasury shares in the amount of approximately US$ 1,659 thousand.
Trade receivables decreased to US$ 9,194 thousand as of December
31, 2025, compared to US$ 11,748 thousand as of December 31, 2024. This decrease was mainly attributed to shorter customer payment cycles,
as averaged out. Other receivables decreased to US$ 3,155 thousand as of December 31, 2025, compared to US$ 4,839 thousand as of December
31, 2024.
Trade payables increased to US$ 11,116 thousand as of December
31, 2025, compared to US$ 6,477 thousand as of December 31, 2024. This increase was mainly attributed to the increase in our purchasing
of inventory. Other payables and accrued liabilities increased to US$ 14,116 thousand as of December 31, 2025, compared to US$ 6,945 thousand
as of December 31, 2024. This increase was mainly attributed to an increase in our accrued expenses as well as to an increase in our Advances
from customers.
50
Inventories increased to US$ 52,650 thousand as of December 31,
2025, compared to US$ 41,060 thousand as of December 31, 2024. This increase was mainly attributed to an increase in our inventory level
needed to support our customers' orders.
Cash used in operating activities in 2025 amounted to US$ 2,160
thousand compared to cash provided by operating activities in the amount of US$ 18,288 thousand in 2024. The cash used in operating activities
was mainly attributed to an increase in our inventory, offset by an increase in our trade accounts payable and other accounts payable.
Capital expenditures on property and equipment for the year ended
December 31, 2025 were US$ 1,334 thousand, compared to US$ 1,395 thousand as of December 31, 2024.
We have cash and cash equivalents that we believe are sufficient
for our present requirements. Furthermore, our cash resources are sufficient to fund our operating needs for at least the next twelve
months.
Other Long-Term Liabilities Reflected on the Company's Balance
Sheet:
The liability for employee’s severance benefits amounted
to approximately US$ 3,049 thousand as of December 31, 2025.
The liability for employees’ severance benefits is calculated
on the basis of the latest monthly salary paid to each employee multiplied by the number of years of employment. The liability is covered
by the amounts deposited by us into employee ’'manager’' insurance and/or pension fund accounts in respect of severance obligations
to such employees, including accumulated income thereon as well as by the unfunded provision reflected on the balance sheet.
While the timing of such obligations cannot be pre-determined,
such liability will be removed, either by termination of employment or retirement.
C. Research
and Development, Patents and Licenses, etc.
Since we commenced operations, we have conducted extensive research,
development and engineering activities. Our efforts emphasize the development of new products, cost reduction of current products, and
the enhancement of existing products, generally in response to rapidly changing customer preferences, technologies and industry standards.
Because the market for our products is characterized by rapidly
changing technology and evolving industry standards, our success depends upon our ability to select, develop, manufacture and market new
and enhanced products in a timely manner to meet changing market needs. As such, we invest significant resources in research and new product
development, enhancements to existing products, and the development of new networking and connectivity technologies, and we expect to
continue to do so.
As of June 2012, we have a patent No. 8,199,523 entitled 'Server-Based
Network Appliance' from the United States Patent and Trademark Office, which relates to a server-based network appliance in which a computer
motherboard is mounted in a case with the bus slots of the motherboard adjacent to the rear side of the case.
51
On September 16, 2013, we acquired all of the intellectual property
related to the unique Virtualization Off-Load Engine developed during the last two years by Net Perform Technology, Ltd., a privately
held company registered in Hong Kong, China.
As of December 2014, we own or have licenses or similar rights
with respect to Silicom Denmark (Fiberblaze A/S), including Silicom Denmark (Fiberblaze A/S’'s high performance OEM hardware platform
for Ethernet and network interface product family, registered names and domain name.
As of October 2015, we own all intellectual property and intellectual
property rights in which ADI has an ownership interest or have licenses or similar right where ADI has such licenses or rights, including
with respect to custom embedded, communications and networking products based on the latest Intel® silicon, registered names and
domain name.
As of January 2018, we have a patent No. 9,858,227 entitled 'Hybrid
Networking Application Switch' from the United States Patent and Trademark Office, which relates to a unique solution for combining functionalities
of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application
switch or an accelerated hybrid networking application switch.
We cannot assure you that the scope of any issued patent will adequately
protect our intellectual property rights, or that patents will not be challenged, invalidated, or circumvented or that the rights granted
under the patents will provide us with meaningful protection or any commercial advantage.
For additional information regarding the risks to the Company with
respect to patents and other intellectual property rights see the risk factor entitled “We may not be able to protect our intellectual
proprietary right” under Item 3.D. –“Risk Factors”
The Government of Israel encourages research and development projects
oriented towards products for export or projects which will otherwise benefit the Israeli economy. In each of the three fiscal years from
1999 to 2001, we received grants from the Office of the Chief Scientist, replaced by the IIA, for the development of systems and products.
We have received from the IIA up to 30% of certain research and development expenditures for particular projects. Under the terms of Israeli
Government participation, a royalty usually at the rate of 3% of sales of products developed from a project funded by the IIA must be
paid, beginning with the commencement of sales of products developed with grant funds and ending when a dollar-linked amount generally
equal to 100% of such grants without interest, for projects approved prior to January 1999, and plus interest at LIBOR or other applicable
interest rate, for amounts received after that date, is repaid. The terms of Israeli Government participation also place restrictions
on the location of the manufacturing of products developed with government grants, which, in general, must be performed in Israel, and
on the transfer or license to third parties of technologies developed through projects in which the government participates. The IIA has
previously provided funding in relation to our research and development efforts. As of the date hereof, we have received funding from
the IIA in the aggregate amount of approximately US$ 4,388,000 and have paid the IIA an aggregate amount of approximately US$ 1,428,000
in royalties in relation thereto. See “Item 4.B. – Information on the Company – Business Overview – Governmental
Regulation Affecting the Company”
52
In August 2005, we received approval for a US$54 thousand-dollar
grant from the Korea-Israel Industrial Research and Development Foundation, or Koril-RDF, in connection with the joint development of
a certain product with a Korean company. Under the terms of this grant we are required to repay the amounts received at a rate of 2.5%
per year of our gross sales of the product developed with the grant in each such year, until 100% of the grant (and any other sums received
from Koril-RDF) are repaid. We received approximately 20%-30% of certain research and development expenditures for two projects in 2003
and 2004. As of January 2006, and to date, our research and development activities have been sponsored and funded by us, and we did not
participate in any new encouragement programs or received any additional grants from the IIA or Koril-RDF. We have closed all our IIA
funded programs, and do not anticipate having any sales of products funded by IIA grants or be required to pay any royalties to the IIA
with respect thereto.
We expect that we will continue to commit resources to research
and development in the future. As of March 31, 2026, we had 123 employees engaged primarily in research and development and design activities
of which 69 employees were based in Israel, 28 in Denmark and 26 in the U.S. In 2023, 2024 and 2025 our research and development expenses
were US$ 20,638 thousand, US$ 19,508 thousand and US$ 20,054 thousand respectively, constituting approximately 16.63%, 33.57% and
32.38% respectively, of our sales.
The increase in our research and development expenses in 2025 compared
to 2024 was mainly attributed to an increase of approximately US$ 1,621 thousand in payroll and related expenses resulting from the depreciation
of the U.S. Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development payroll
expenses are incurred in New Israeli Shekels and Danish Krone), offset by (i) a decrease in the use of subcontracted work of approximately
US$ 520 thousand, (ii) a decrease in depreciation expenses of approximately US$ 465 thousand and (iii) a decrease in various research
and development costs accumulating to approximately US$ 90 thousand.
D. Trend
Information
Overview of Industry Trends
In today's network-based environment, the rate at which traffic is generated is continuously
growing, creating a continuous demand for network scalability. This demand drives several trends that have a significant impact on our
business.
Trends Impacting Core Business: Cloud Shift, Disaggregation, and
Decoupling
The primary trend reshaping our industry is the shift to the Cloud, encompassing both
public and private cloud infrastructures. A key driver of this shift is the requirement for standardization, which is essential for achieving
scalability. Standardization has catalyzed two critical structural changes: Disaggregation and Decoupling.
| • |
Disaggregation involves disconnecting proprietary interfaces between
various network components, allowing them to be procured separately from different vendors. |
53
| • |
Decoupling refers to the separation of Hardware from Software, enabling
distinct procurement efforts for each and fostering a multi-vendor ecosystem. |
These trends have expanded beyond the Cloud into the Service Provider and Telecommunications
("Telco") sectors, where operators increasingly purchase Hardware platforms separately from the Software. This transition began with SD-WAN
applications and has extended to Network Function Virtualization (NFV), both of which increasingly utilize standard Hardware platforms
for deployment.
These trends impact our product lines differently:
| • |
Server Adapters: The Cloud trend has created a gradual shift in
demand for our Server Adapters, as traditional appliance vendors—our historical channel—face pressure to sell to Cloud players
who often prefer purchasing Software-only solutions. Even in private or On-Premise Cloud environments, the reliance on standard components
creates headwinds for specialized Server Adapters. |
| • |
Smart Cards: Conversely, standardization increases demand for our
Smart Cards. Standard servers, which constitute the Cloud infrastructure, require acceleration and offloading capabilities to enhance
performance, driving the need for our intelligent adapter solutions. |
| • |
Edge Devices: The Disaggregation and Decoupling trends have generated
significant demand from Service Providers and Telcos for Customer Premises Equipment (CPE) devices used in SD-WAN, SASE, Telco-dedicated
Routers, and NFV deployments. During the last few years we witness increasing demand for our CPE devices resulting from these market shifts.
|
Emerging Structural Trends: Strategic Growth Markets
Beyond our core business, we see three specific technological shifts that we believe
represent significant emerging opportunities: Artificial Intelligence (AI), Post-Quantum Cryptography (PQC), and White-Label Switching.
1. The Shift to AI Inference, the "Latency Wall",
and the “Hardware Lottery”: We observe a fundamental structural shift in the Artificial Intelligence market as
the industry transitions from an initial focus on model training toward an "inference-first" economy, where the deployment and day-to-day
operation of AI models generate the majority of computing demand. This transition to inference at scale exposes two critical, parallel
infrastructure challenges: the "latency wall" and the "hardware lottery." Unlike centralized training, inference is highly distributed
and sensitive to latency, causing standard networking infrastructure to hit a latency wall that creates bottlenecks between chipsets,
accelerator cards, and servers. Simultaneously, the rapid evolution of AI algorithms is increasingly constrained by the “hardware
lottery”, a phenomenon where the success of novel machine learning models is limited by rigid, standard computing architectures.
We believe these dual dynamics drive a critical and growing need for our specialized solutions—specifically ultra-low-latency Network
Interface Cards (NICs) and FPGA-based acceleration. By utilizing our FPGAs as a reconfigurable extension of software rather than a fixed
hardware constraint, we allow our customers to bypass the “hardware lottery”, enabling them to co-design their software stack,
implement novel ML optimizations, and adapt the underlying computing hardware in near real-time. We view the combined mitigation of the
latency wall and the circumvention of the “hardware lottery” as a durable, long-term trend that significantly expands the
addressable market for our high-performance connectivity solutions.
54
2. The Transition to Post-Quantum Cryptography (PQC):
The cybersecurity landscape is undergoing a mandatory evolution driven by the advent of quantum computing. The potential for quantum computers
to break existing public-key encryption standards has catalyzed a global regulatory push toward Post-Quantum Cryptography (PQC).
We are witnessing governments and regulatory bodies planning the process towards
mandating the migration to quantum-resistant standards to mitigate "harvest now, decrypt later" threats. This regulatory pressure is forcing
enterprises and public sector entities to initiate long-term infrastructure upgrade cycles. We believe this trend necessitates hardware-based
cryptographic accelerators that offer not only performance but also the flexibility to adapt to evolving cryptographic standards - a requirement
that favors programmable FPGA-based solutions over fixed-function hardware.
3. The Extension of Disaggregation to Switching: The
trend of Disaggregation, which has already reshaped the server and edge markets, is now extending into the switching layer. We see a growing
trend of "White-Label Switching," where network operators seek to replace proprietary, closed switching systems with open, disaggregated
hardware platforms. This shift is driven by the same economic and operational factors, namely cost efficiency, vendor independence, and
flexibility, that drove the commoditization of servers, providing an opportunity for hardware-neutral vendors to capture market share
from incumbent proprietary providers.
E.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and
conditions. We believe that our critical accounting policies are limited to those described below.
Capitalization of software development costs (mainly salary) related
to programmable components incorporated into our products, are charged to expense until technological feasibility has been established
for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for
general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have
determined that technological feasibility for our software components of hardware products is reached after all high-risk development
issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based
on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the
estimated life of the products. Other costs incurred in the research and development of our products are expensed as incurred.
We are not a party to any other material off-balance sheet arrangements
or contingent obligations.
55
Item 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors
and Senior Management
The following table and notes thereto set forth information regarding
our directors and senior management as of March 31, 2026:
|
Name |
Age |
Position with Company |
|
Avi Eizenman(1) |
68 |
Active Chairman of the Board |
|
Shaike Orbach(2)
|
74 |
Executive Vice Chairman of the Board |
|
Ayelet Aya Hayak(3)
|
56 |
Director |
|
Ilan Erez(3) |
58 |
Director |
|
Eli Doron(4) |
73 |
Director |
|
Liron Eizenman(5)
|
40 |
President, Chief Executive Officer |
|
Eran Gilad |
58 |
Chief Financial Officer and Company Secretary |
| (1) |
Serving an additional three-year term, commencing as of June 26, 2024. |
| (2) |
Serving an additional three-year term, commencing as of June 14, 2023. |
| (3) |
Serving an additional three-year term, commencing as of June 18, 2025. |
| (4) |
Serving an additional three-year term, commencing as of June 26, 2024. |
| (5) |
Liron Eizenman, who is the son of the active chairman of our board, Avi Eizenman, commenced serving as our President and Chief Executive
Officer, on July 1, 2022. |
56
Avi Eizenman
co-founded the Company in 1987 and has served as a Director since its inception. Mr. Eizenman also served as our President and Chief Executive
Officer from the Company's inception until April 1, 2001, and on such date, he resigned from his positions as President and Chief Executive
Officer and was appointed Active Chairman of the Board of Directors. Before the incorporation of Silicom, Mr. Eizenman held various engineering
and management positions at Scitex Ltd. and at the Electronic Research & Development Department of the Israeli Ministry of Defense.
Mr. Eizenman holds a B.Sc. degree, with honors, in Electrical Engineering from the Technion, and an M.B.A. from Tel Aviv University.
Shaike Orbach
was our President and Chief Executive Officer from April 2001 until June 30, 2022 and has been a director on our Board since December
2001. On July 1, 2022, Mr. Orbach was appointed Executive Vice Chairman of the Board. Prior to joining our Company, Mr. Orbach was President
and CEO of Opgal Ltd., a high-tech subsidiary of Israel's Rafael and El-Op corporations, for a period of four and a half years. Previously,
he was General Manager of Edusoft, an Israeli company the shares of which were traded on the NASDAQ National Market (now, the NASDAQ Global
Market), and Managing Director of Tecsys Ltd. He holds a B.Sc degree in Mechanical Engineering from the Technion.
Ayelet Aya
Hayak has served as a director since July 1, 2013. Ms. Hayak provides financial consulting services to corporations. Hayak Ayelet
was the CEO of an Automation company, and also serves as a director in several companies. Ms. Hayek holds a BA degree in accounting and
business administration from the Tel Aviv College of Management and is also a Certified Public Accountant.
Ilan Erez has
served as a director since July 2010. Mr. Erez has been CFO and General Manager of AlgoSec Inc. since October 2019. Algosec is a global
leader in securing application connectivity across the hybrid environment. Its Horizon software platform is the industry's first application-centric
security management platform for the hybrid network environment, enabling the world's most complex organizations to gain
deep visibility, automate security changes and ensure continuous compliance in their datacenters and multi-cloud networks. Prior to that,
Mr. Erez had been General Manager of 3D Systems Corporation's (NYSE: DDD) Software Business Unit from September 2016 to March 2019 and
co-managed that business unit from May 2015 to September 2016. 3D Systems provides comprehensive 3D products and services, including 3D
printers, print materials, on-demand manufacturing services and digital design and manufacturing tools. From 2005 to 2015, Mr. Erez served
as Chief Financial Officer of Cimatron Ltd. (NASDAQ: CIMT) engaged in the design and sale of CAD/CAM software for the tool-making and
discrete manufacturing industries. From 1998 to 2005 Mr. Erez served as the Chief Financial Officer of the Company. He also served as
VP Operations of the Company from May 2001 to 2005. From 1996 to 1998 Mr. Erez served as Controller and Assistant to the Chief Executive
Officer of Bio-Dar Ltd. From 1994 to 1996 Mr. Erez served as an auditor at Kesselman & Kesselman, a PWC member firm. Mr. Erez is a
Certified Public Accountant in Israel and holds a B.A in Accounting and Economics from the Hebrew University and an LL.M. in Business
Law from Bar-Ilan University.
57
Eli Doron
has served as a director since July 2015. Mr. Doron is the Co-founder and CTO of Carteav, that develops and manufactures an autonomous
low speed vehicle. Eli Doron is also the founder of Connesta Ltd. ("Connesta"), an Israeli high-tech company engaged in developing and
providing SaaS virtual control room solutions, founded in 2011. From inception, Mr. Doron serves as the Chief Executive Officer of Connesta.
Prior thereto and during 2010, Mr. Doron was the Chief Executive Officer of Computerized Electricity Systems ("CES"). Prior to joining
CES, Mr. Doron was the co-founder of Radvision Ltd. (formerly NASDAQ: RVSN. Acquired by Avaya Ltd. in 2011; "Radvision"). From 1992 and
until 2009 Mr. Doron served as the Chief Technology Officer of Radvision, and from 2006 and until 2009 he served as President of Radvision.
Prior to founding Radvision and from 1983, Mr. Doron served at SIMTECH Advanced Training and Simulation Systems Ltd., initially as hardware
manager and from 1988 as Chief Technology Officer. Prior thereto and from 1977, Mr. Doron served as an electronic engineer at MBT Israel
Aircraft Industries Ltd. Mr. Doron holds a B.Sc degree in electronics and computer science from Ben-Gurion University and an M.B.A. degree
from the University of Bradford in the United Kingdom.
Liron Eizenman
joined the company in 2015 as Chief Executive Officer of Silicom’s North American subsidiary and led the Edge Networking Solutions
strategy to its leadership position in the SD-WAN/Edge platforms market. In July 2022, Mr. Eizenman was named President and Chief Executive
Officer, after spending two and a half years as the Company's Chief Operating Officer. Prior to joining Silicom, Mr. Eizenman held engineering
and management roles at Microsoft and two early-stage startups. Mr. Eizenman holds a B.Sc. degree in Computer Science from the Academic
College of Tel Aviv.
Eran Gilad
has served as our Chief Financial Officer from May 2005 and the Secretary of the Company from 2012. From 1995 to 2005, Mr. Gilad held
senior financial and operational positions in various public and private companies operating in the high-tech field. He is a Certified
Public Accountant in Israel and holds an M.A in Economics from Tel-Aviv University and a B.A in Accounting and Economics from Tel-Aviv
University.
B. Compensation
In accordance with the Companies Law, the following table presents
information regarding compensation actually received by our five most highly paid office holders during the year ended December 31, 2025.
All amounts are in USD, based on the following components:
“Salary and Benefits” include annual
salary or service fees paid, payments to the National Insurance Institute, manager’s insurance and pension funds, severance, advanced
education funds, basic health insurance, vacation pay, recuperation pay, tax gross-up payments, automobile-related expenses, telephone
expenses and benefits and perquisites as mandated by Israeli or applicable law.
“Cash Bonus” includes bonus payments
as recorded in our financial statements for the year ended December 31, 2025.
58
“Equity-based Compensation” includes
the expense recorded in our financial statements for the year ended December 31, 2025, with respect to equity-based compensation granted
to the executive officers detailed above.
Liron Eizenman – President and CEO. Salary and Benefits $507,622; Equity-based
Compensation $686,523.
Avi Eizenman – Active Chairman. Salary and Benefits $764,790; Equity-based
Compensation $578,123.
Eran Gilad – CFO and Company Secretary. Salary and Benefits $286,116; Equity-based
Compensation $91,600.
David Castiel – VP Engineering. Salary and Benefits $274,322; Equity-based Compensation
$96,662.
David Hendel - VP R&D. Salary and Benefits $259,298; Equity-based Compensation
$96,662.
The aggregate direct remuneration paid to all persons as a group
who served in the capacity of director or office holder during the year ended December 31, 2025, was US$ 3,075 thousand. The aggregate
amount accrued to provide for severance payments to all persons as a group who served in the capacity of director or executive officer
as of the year ended December 31, 2025, was US$ 1,209 thousand. The severance terms of our Chief Executive Officer and Chairman of the
Board, as previously approved by the audit committee, board of directors and shareholders of the Company, and in accordance with the Amended
Executive Compensation Policy of the Company, may entitle them, in certain circumstances, to additional payments.
Mr. Liron Eizenman and Mr. Avi Eizenman may also be entitled to
cash bonuses by meeting some pre-determined thresholds, and as calculated based on a pre-determined formula set by our Board of Directors,
as approved by the annual general meeting of our shareholders for the years commencing in 2017 on June 8, 2016. Mr. Liron Eizenman, Mr.
Avi Eizenman annual cash bonuses may not exceed the value of 18 times their monthly salaries, respectively. Mr. Liron Eizenman's and Mr.
Avi Eizenman's annual cash bonus formulas were based on achieving one or more of the following thresholds: (i) the Company’s actual
annual revenue for each applicable year is 80% or more of the pre-determined budget target for the relevant year; and (ii) the Company’s
actual annual operating profit for each applicable year is 65% or more of the pre-determined budget target for the relevant year. The
Board of Directors may, in its sole discretion, lower such annual cash bonuses or not pay them in their entirety, if it determines that
such a decision is in the best interests of the Company. Furthermore, in accordance with the Company’s recoupment policy, Mr. Liron
Eizenman and Mr. Avi Eizenman may be required to reimburse the Company for the cash bonuses (or any part thereof) paid in the previous
3 years, in the event such cash bonuses were based on financial data included in the Company’s financial statements that were found
to be inaccurate and were subsequently restated.
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Non-employee directors, including External Directors within the
meaning of the Companies Law, are entitled to be paid cash compensation for board and any committee member services, as applicable,
in accordance with the amounts which are permitted under the Companies Regulations (Rules Regarding Compensation and Expenses of External
Directors) – 2000 enacted pursuant to the Companies Law. Office holders, including External Directors or Independent Directors,
may waive their entitlement to their compensation, subject to applicable law. All our office holders other than Mr. Eli Doron and our
independent directors are employed or otherwise engaged by us. We do not currently grant any variable bonus or equity-based compensation,
nor any separation payments to such of our directors who are not employed or do not provide additional services to the Company. We have
and may continue to grant options and RSU’s under the Silicom Ltd. – Global Share Incentive Plan (2013), to those of our directors
who are employed or provide us with other services as described below.
On October 21, 2013, our board of directors adopted our Global
Share Incentive Plan (2013) (the “Plan”). On April 30, 2014, the annual general meeting of our shareholders approved the Plan
to qualify for incentive stock options for U.S. tax purposes. The Plan is administered by the board of directors, which determines the
number of our ordinary shares available for issuance under the plan, designates the award recipients and types of awards, dates of grant,
vesting periods and the exercise price of awards. Under the Global Share Incentive Plan (2013) the Company may grant awards of options,
restricted shares, restricted share units (“RSUs”) or other equity-based awards. The board of directors has determined that
initially up to a maximum of 500,000 of our ordinary shares are reserved for issuance, subject to certain adjustments, upon the exercise
of equity-based awards granted to employees, directors, office holders, consultants and service providers. On January 29, 2018, our board
of directors increased the number of our ordinary shares available for issuance under the Plan by 600,000 Ordinary Shares, and on January
27, 2022, our board of directors increased the number of our ordinary shares available for issuance by an additional 750,000 Ordinary.
In October 2023, our board of directors approved the extension of our Plan by a further ten years, and increased the number of our Ordinary
Shares available for issuance by additional 375,000 ordinary shares. The awards are non-assignable except by the laws of descent. Certain
tax advantages apply to certain of our directors, office holders and employees with respect to equity-based awards granted to them under
Plan.
As of December 31, 2016, our compensation committee and board of
directors, respectively, approved the grant of a total of 82,000 RSUs and 209,963 options under the Plan, of which the following were
granted to directors and office holders: (a) in 2014 a total of 54,000 RSUs were granted, (b) in 2015 a total of 29,999 options were granted
with an exercise price of US$ 26.91, and with an expiration date upon the earlier to occur of: (i) July 28, 2023; and (ii) the closing
price of the shares falling below US$ 13.46 at any time after the date of grant (and accordingly all of the unexercised options granted,
have expired), (c) in 2016 a total of 29,999 options were granted with an exercise price of US$ 28.38, and with an expiration date upon
the earlier to occur of: (i) June 8, 2024, or (ii) the closing price of the shares falling below US$ 14.19 at any time after the date
of grant.
In January 2022, our compensation committee and board of directors,
respectively, approved the grant of a total of 121,508 options and 16,000 RSUs under the Plan, of which 3,333 options were granted to
an office holder. The exercise price for the options (per ordinary share) was US$ 47.98. Such options were to expire, by their terms,
on the earlier to occur of: (a) January 27, 2030, and (b) the closing price of the shares falling below US$ 23.99 at any time after the
date of grant and remains at such price or at a lower price for a period of at least 30 days. Accordingly all of the unexercised options
granted, have expired.
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In March 2022, our compensation committee and board of directors,
respectively, approved the grant of a total of 26,666 options under the Plan, of which 26,666 options were granted to directors and office
holders. The exercise price for the options (per ordinary share) was US$ 35.69. Such options were to expire, by their terms, on the earlier
to occur of: (a) June 7, 2030, and (b) the closing price of the shares falling below US$ 17.85 at any time after the date of grant and
remains in such price or at a lower price for a period of at least 30 days. Accordingly all of the unexercised options granted, have expired.
In April 2022, our compensation committee and board of directors,
respectively, approved the grant of a total of 50,000 options under the Plan, of which 50,000 options were granted to an office holder.
The exercise price for the options (per ordinary share) was US$ 34.90. Such options were to expire, by their terms, on the earlier to
occur of: (a) July 1, 2030, and (b) the closing price of the shares falling below US$ 17.45 at any time after the date of grant and remains
at such price or at a lower price for a period of at least 30 days. Accordingly all of the unexercised options granted, have expired.
In March 2023, our compensation committee and board of directors,
respectively, approved the grant of a total of 137,911 options and 86,000 RSUs under the Plan, of which 29,999 options and 54,000 RSUs
were granted to directors and office holders. The exercise price for the options was US$ 35.12. Such options were to expire, by
their terms, on the earlier to occur of: (a) June 14, 2031, and (b) the closing price of the shares falling below US$ 17.56 at any
time after the date of grant and remains at such price or at a lower price for a period of at least 30 days. Accordingly, all of the unexercised
options granted, have expired. The Annual General Meeting of our shareholders approved such grant of options in their meeting on June
14, 2023.
In March 2024, our compensation committee and board of directors,
respectively, approved the grant of a total of 410,714 options and 2,969 RSUs under the Plan as extended. Of these, 2,969 RSUs and
170,000 options with a per option exercise price of US$ 16.42 and an expiry date of June 18, 2032, were granted to directors and office
holders, of which 160,000 options and 2,969 RSUs were subject to the approval of our 2024 Annual General Meeting, which convened in June
2024. All of the grants were approved at the Annual General Meeting, other than the grant of 100,000 options to our President and CEO,
Liron Eizenman. At meetings of our compensation committee and board of directors held on June 26, 2024, each of our compensation committee
and board overrode the rejection of our shareholders and approved the grant, in accordance with the “override” provisions
of the Companies Law.
In March 2025, our compensation committee and board of directors,
respectively, approved the grant of a total of 311,001 options and 29,642 RSUs under the Plan as extended. Of these, 5,642 RSUs as well
as 83,333 options with a per option exercise price of US$ 15.01 and an expiry date of June 18, 2033, were granted to directors and office
holders, of which 73,333 options were also approved at our 2025 Annual General Meeting convened in June 2025.
61
In January 2026, our compensation committee and board of directors,
respectively, approved the grant of a total of 232,934 RSUs under the Plan as extended, of which 91,321 RSUs were granted to directors
and office holders, and of which 80,333 RSUs are subject to the approval of our 2026 Annual General Meeting, which is expected to convene
in June 2026.
As of March 31, 2026, a total of 928,308 of the options granted
under the Plan were returned to the company after having expired or not being exercised, and 11,500 of the RSUs granted under the Plan,
were returned to the company after not being vested following the cessation of employment of certain employees, as set forth in the terms
of grant of such options or RSUs.
C. Board
Practices
Avi Eizenman was re-elected to the Board of Directors on June 26,
2024, to serve until the Annual General Meeting to be held in the year 2027, and until his successor has been duly elected, subject to
the Companies Law and our Articles. Avi Eizenman is a founder of the Company and has served as a director since our inception in 1987.
Shaike Orbach was re-elected to hold office as a director most recently on June 14, 2023, to serve until the Annual General Meeting which
will take place in 2026. Eli Doron was re-elected to the board of directors most recently in June 26, 2024, to serve until the Annual
General Meeting to be held in 2027. Mr. Ilan Erez and Ms. Ayelet Aya Hayak were elected as directors to the board of directors on June
18, 2025, to serve until the Annual General Meeting held in 2028.
None of the members of the Board of Directors is entitled to receive
any severance or similar benefits upon termination of his or her service with the Board of Directors, except for Avi Eizenman, who also
serves as the active Chairman of the Board, Shaike Orbach, who until the Annual General Meeting held on June 7, 2022 served as President
and Chief Executive Officer (and currently serves as the Executive Vice Chairman of our Board), and Liron Eizenman, who serves as our
President and Chief Executive Officer (See “Item 6.B. – Directors and Senior Management – Compensation” above).
Notice of Termination
In December 2007, our audit committee and Board of Directors approved
severance arrangements for Mr. Avi Eizenman which provide for extended notice provisions and severance payments in the event of termination.
The arrangements were approved by our shareholders in January 2008. On April 28, 2022, Our Compensation Committee and Board of Directors
approved severance arrangements for Mr. Liron Eizenman. Mr. Liron Eizenman's severance arrangements were then approved by our shareholders
at the most recent Annual General Meeting, held on June 7, 2022. The severance arrangements include the following main terms and conditions
(identical with respect to each of Mr. Avi Eizenman, and Mr. Liron Eizenman):
The termination of employment of Mr. Avi Eizenman or Mr. Liron
Eizenman by him or by us, for any reason other than cause (which is generally defined as willful conduct or omission materially injurious
to the company), death or disability, shall require 12 months advance written notice. If, however, following a change of control transaction,
either: (i) he shall give notice of termination of his employment for good reason (which is generally defined as an adverse change to
the status, responsibilities, salary or other material terms of his employment); or (ii) we shall give notice of termination of his employment
for any reason other than cause or disability, 18 months advance written notice shall be required. A change of control transaction includes
transactions such as sale of all or substantially all of the company’s shares or assets, or a merger, acquisition, or other reorganization
in which control of our company changes following such transaction.
62
Severance Payments
If the employment of Mr. Avi Eizenman, or Mr. Liron Eizenman shall
be terminated for any reason other than cause, he shall be entitled to receive his last full monthly salary multiplied by the number of
years (or portions thereof) that he was employed by us (i.e. the severance amount he would be entitled to receive under the Israeli law,
had we terminated his employment for any reason other than cause) (the “Severance Law Amount”). If, however, his employment
shall be terminated: (i) by the company for any reason other than cause or disability; or (ii) by him for a good reason following a change
of control, he shall be entitled to receive one and half times the Severance Law Amount. If his employment under the arrangement is terminated
by reason of death or disability, then, in addition to the above, he shall be entitled to receive a lump sum severance payment equal to
his last full monthly salary multiplied by twelve 12 months.
The Extraordinary General Meeting of the Shareholders on July 31,
2013, approved the adoption of the Executive Compensation Policy of the Company, which included the above referenced extended notice provisions,
and severance payments in the event of termination, with respect to each of Mr. Avi Eizenman and Mr. Liron Eizenman. The Amended Executive
Compensation Policy was approved by our Annual General Meeting convened in June 2019. At the Annual General Meeting, held on June 7, 2022,
an Amended Executive Compensation Policy was rejected by our shareholders but following the Meeting it was approved by our compensation
committee and the Board of Directors on June 12, 2022, in accordance with the Companies Law in Israel and after determining that the approval
of the Amended Compensation Policy was for the benefit of the Company.
Board of Directors
Our Articles provide for a Board of Directors of not less than
two and not more than eight members. At the Annual General Meeting of the Shareholders on June 8, 2016, it was decided to adopt a new
Directors Voting Mechanism, and to amend the Articles accordingly. Under the new Directors Voting Mechanism, Directors are divided into
three groups, Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that
at each Annual General Meeting of the shareholders a given group of Directors is brought for election, to serve on a continuous basis
for a three-year term, until the Annual General Meeting in three years’ time and until their respective successors are duly elected,
at which point their term in office shall expire. At each Annual General Meeting, the Annual General Meeting shall be entitled to elect
Directors to replace the Directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in
office of one group of directors shall expire. Other office holders serve at the discretion of the Board of Directors. The amended and
restated Articles of Association of the Company provide that any director may, subject to the provisions of the Companies Law and the
approval by the Board of Directors, appoint another person to serve as an Alternate Director and may cancel such appointment. Under the
Companies Law, a person who is already serving as a director will not be permitted to act as an Alternate Director. Additionally, the
Companies Law prohibits a person from serving as an Alternate Director for more than one Director. Appointment of an Alternate Director
for a member of a board committee is only permitted if the alternate is a member of the Board of Directors and does not already serve
as a member of such committee. If the committee member being substituted is an External Director, the alternate may only be another External
Director who possesses the same expertise as the External Director being substituted. The term of appointment of an Alternate Director
may be for one meeting of the Board of Directors or for a specified period or until notice is given of the cancellation of the appointment.
To our knowledge, no Director currently intends to appoint any other person as an Alternate Director, except if the Director is unable
to attend a meeting of the Board of Directors.
63
External Directors
Under the Companies Law, companies registered under the laws of
Israel, the shares of which have been offered to the public in or outside of Israel, are required to appoint no less than two external
directors. No person may be appointed as an external director if such person is a relative (as defined in the Companies Law) of a “controlling
shareholder” or if such person, or the person’s relative, partner, employer or any entity under the person’s control,
has or had, on or within the two years preceding the date of the person’s appointment to serve as External Director, any affiliation
with any of either the company, any entity or person controlling, controlled by or under common control with the company” or relatives
of such person. The term “affiliation” includes:
| • |
An employment relationship; |
| • |
A business or professional relationship maintained on a regular basis; |
| • |
Control; and |
| • |
Service as an office holder. |
The Israeli Minister of Justice, in consultation with the ISA,
may determine that certain matters will not constitute an affiliation, and has issued certain regulations with respect thereof.
If the company does not have a “controlling shareholder”
or a shareholder who holds company shares entitling him to vote at least 25% of the votes in a shareholders meeting, then the company
may not appoint as an external director any person or such person’s relative, partner, employer or any entity under the person’s
control, who has or had, on or within the two years preceding the date of the person’s appointment to serve as external director,
any affiliation with the Chairman of the Board, Chief Executive Officer, a substantial shareholder who holds at least 5% of the issued
and outstanding shares of the company or voting rights which entitle him to vote at least 5% of the votes in a shareholders meeting, or
the Chief Financial Officer.
64
A person shall be qualified to serve as an external director only
if he or she possesses “expertise in finance and accounting” or “professional qualifications.” At least one external
director must possess “expertise in finance and accounting.”
A director can satisfy the requirements of having “expertise
in finance and accounting” if due to his or her education, experience and qualifications he or she has acquired expertise and understanding
in business and accounting matters and financial statements, in a manner that allows him or her to understand, in depth, the company’s
financial statements and to spur a discussion regarding the manner in which the financial data is presented.
A public company’s board of directors must evaluate the proposed
external director’s “expertise in finance and accounting”, by considering, among other things, such candidate’s
education, experience and knowledge in the following: (i) accounting and auditing issues typical to the field in which the company operates
and to companies of a size and complexity similar to such company; (ii) the company’s independent public accountant’s duties
and obligations; (iii) preparation of the company’s consolidated financial statements and their approval in accordance with the
Companies Law and the Israeli Securities Law.
A director is deemed to be ”professionally qualified”
if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business
administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a
field that is the company’s main field of operations, or a field relevant to his or her position; or (iii) has at least five years’
experience in any of the following, or has at least a cumulative total of at least five years’ experience in any two of the following:
(A) a senior position in the business management of a corporation with a significant extent of business, (B) a senior public position
or a senior position in public service, or (C) a senior position in the company’s main field of operations. As with a candidate’s
“expertise in finance and accounting”, the board of directors here too must evaluate the proposed external director’s
“professional qualification” in accordance with the criteria set forth above.
The declaration required by law to be signed by a candidate to
serve as an external director must include a statement by such candidate concerning his or her education and experience, if relevant,
in order that the board of directors may properly evaluate whether such candidate meets the requirements of having “expertise in
finance and accounting” or being “professionally qualified” as set forth in the regulations. Additionally, the candidate
should submit documents and certificates that support the statements set forth in the declaration.
No person may serve as an external director if the person’s
position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an external
director or may otherwise interfere with the person’s ability to serve as an external director. Additionally, no person may serve
as an external director if the person, the person’s relative, spouse, employer or any entity controlling or controlled by the person,
has a business or professional relationship with someone with whom affiliation is prohibited, even if such relationship is not maintained
on a regular basis, excepting negligible relationships, or if such person received from the company any compensation as an external director
in excess of what is permitted by the Companies Law. Pursuant to the recently enacted amendment to the Companies Regulations (Matters
Which do not Constitute Affiliation), 2006, effective as of April 3, 2016 (the “Amendment to the Affiliation Regulations”),
business or professional relationship maintained on a regular basis between the company and the external director will not constitute
affiliation if the relationship commenced after the appointment of the external director for office, the company and the external director
consider the relationship to be negligible and the audit committee approved, based on information presented to it, that the relationship
is negligible, and the external director declared that he or she did not know and could not have reasonably know about the formation of
the relationship and has no control over its existence or termination. If, at the time external directors are to be appointed, all current
members of the board of directors who are not controlling shareholders or relatives of such shareholders are of the same gender, then
at least one external director must be of the other gender.
65
External directors are to be elected for a term of three years
by a majority vote at a shareholders’ meeting, provided that either:
| • |
the majority includes at least a majority of the shares held by non-controlling and disinterested shareholders who are present and
voting at the meeting; or |
| • |
the total number of shares held by non-controlling and disinterested shareholders that voted against the election of the director
does not exceed two percent of the aggregate voting rights in the company. |
External directors may be re-elected for two additional terms of
three years each, provided that with respect to the appointment for each such additional three-year term, one of the following has occurred:
(i) the reappointment of the external director has been proposed by one or more shareholders holding together 1% or more of the aggregate
voting rights in the company and the appointment was approved at the general meeting of the shareholders by the requisite majority, provided
that: (1) in calculating the majority, votes of controlling shareholders or shareholders having a personal interest in the appointment
as a result of an affiliation with a controlling shareholder and abstentions are disregarded, (2) the total number of shares of shareholders
who do not have a personal interest in the appointment as a result of an affiliation with a controlling shareholder and/or who are not
controlling shareholders, present and voting in favor of the appointment exceed 2% of the aggregate voting rights in the company, and
the external director who has been nominated in such fashion is not a “linked or competing shareholder”, and does not have
or has not had, on or within the two years preceding the date of such person’s appointment to serve for another term as external
director, any affiliation with a linked or competing shareholder. The term “linked or competing shareholder” means the shareholder(s)
who nominated the external director for reappointment or a material shareholder of the company holding more than 5% of the shares in the
company, provided that at the time of the reappointment, such shareholder(s) of the company, the controlling shareholder of such shareholder(s)
of the company, or a company under such shareholder(s) of the company’s control, has a business relationship with the company or
are competitors of the company; the Israeli Minister of Justice, in consultation with the ISA, may determine that certain matters will
not constitute a business relationship or competition with the company; (ii) the reappointment of the external director has been proposed
by the board of directors and the appointment was approved by the majority of shareholders required for the initial appointment of an
external director; or (iii) the external director has proposed himself for reappointment and the reappointment was approved in accordance
with Sub-section (i) above.
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However, under regulations promulgated pursuant to the Companies
Law, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global
and Capital Markets, may elect external directors for additional terms that do not exceed three years each, beyond the three three-year
terms generally applicable, provided that, if an external director is being re-elected for an additional term or terms beyond three three-year
terms: (i) the audit committee and board of directors must determine that, in light of the external director’s expertise and special
contribution to the board of directors and its committees, the re-election for an additional term is to the company’s benefit; (ii)
the external director must be re-elected by the required majority of shareholders and subject to the terms specified in the Companies
Law; and (iii) the term during which the nominee has served as an external director and the reasons given by the audit committee and board
of directors for extending his or her term of office must be presented to the shareholders prior to their approval.
Further to these regulations, an amendment to the Companies Regulations
(Relief for Companies Whose Shares are Registered for Trading Outside of Israel) – 2000, (the “Amendment to the Relief Regulations”),
provides additional exemptions for such companies whose shares are listed for trading on specified exchanges outside of Israel, including
the NASDAQ Global Select, Global and Capital Markets, provided that: (i) such company does not have a controlling shareholder; and (ii)
the company complies with the requirements of the foreign securities laws and stock exchange regulations applicable to companies which
are incorporated under the laws of such foreign countries with regard to appointing independent directors and composition of the compensation
and audit committees. Any company that satisfies the above criteria and elects to comply with the applicable foreign securities laws and
stock exchange regulations, shall be exempt from the following rules under the Companies Law: (i) to have at least 2 external directors
appointed to serve in a public company; (ii) at least one of the external directors is required to have financial and accounting expertise
and the rest are required to have professional expertise; (iii) the external directors shall be appointed by the general meeting and subject
to certain voting thresholds; (iv) if all of the board members who are not controlling shareholders are of one sex, the appointed external
director shall be of the other sex; (v) all of the board committees which are empowered and authorized to exercise any of the board’s
authorities must consist of at least one external director. The exemption from these rules under Amendment 1 requires that the board be
composed of both male and female directors.
External directors may be removed only by the same percentage of
shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications
for their appointment, violate their duty of loyalty to the company or are found by a court to be unable to perform their duties on a
full-time basis. External directors may also be removed by an Israeli court if they are found guilty of bribery, fraud, administrative
offenses in a company or use of inside information. Each committee of a company’s board of directors which has been granted any
authority normally reserved for the board of directors must include at least one external director; provided, however, that the audit
committee and compensation committee must each include all external directors then serving on the board of directors.
67
Following termination of service as an external director, a public
company, a controlling shareholder thereof and any entity controlled by a controlling shareholder, may not grant any benefit, directly
or indirectly, to any person who served as an external director of such public company, or to his or her spouse or child, including, not
appointing such person, or his or her spouse or child, as an office holder of such public company or of any entity controlled by a controlling
shareholder of such public company, not employing such person or his or her spouse or child and not receiving professional services for
pay from such person, either directly or indirectly, including through a corporation controlled by such person, all until the lapse of
two years from termination of office with respect to the external director, his or her spouse or child; and with respect to other relatives
of the former external director – until the lapse of one year from termination of office.
An external director is entitled to compensation as provided in
regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly,
in connection with service provided as an external director.
In accordance with the Amendment to the Relief Regulations and
in compliance with the terms described above in connection therewith, in July 2020, the Company elected to take advantage of the aforementioned
exception and has chosen to opt out of the requirement to appoint external directors and regarding the composition of the audit committee
and compensation committee, subject to the following conditions: (i) none of the Company's shareholders is a controlling shareholder;
(ii) the Company complies with NASDAQ rules and regulations with respect to the composition of the Company’s audit and compensation
committees; (iii) the Company complies with NASDAQ rules and regulations with respect to the requirements of independent directors. For
so long as the Company meets the requisite requirements, the Company intends to apply the exemption from appointing at least two external
directors under the Companies Law. Accordingly, Mr. Ilan Erez and Ms. Ayelet Aya Hayak who were originally elected by our shareholders
as external directors under the Companies Law, are no longer classified as external directors, but have continued to serve on the Company’s
board of directors as independent directors under the NASDAQ rules.
Audit Committee
The Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee pursuant to the Companies Law include identifying irregularities in the management
of our business and approving related party transactions as required by law, classifying company transactions as extraordinary transactions
or non-extraordinary transactions and as material or non-material transactions in which an office holder has an interest (which will have
the effect of determining the kind of corporate approvals required for such transaction), assessing the proper function of the company’s
internal audit regime and determining whether its internal auditor has the requisite tools and resources required to perform his or her
role and to regulate the company’s rules on employee complaints, reviewing the scope of work of the company’s independent
accountants and their fees, and implementing a whistleblower protection plan with respect to employee complaints of business irregularities.
In addition, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) to establish
procedures to be followed in respect of related party transactions with a controlling shareholder (where such are not extraordinary transactions),
which may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit
committee, or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit
committee; and (ii) to determine procedures for approving certain related party transactions with a controlling shareholder, which were
determined by the audit committee not to be extraordinary transactions, but which were also determined by the audit committee not to be
negligible transactions.
68
Under the Companies Law, an audit committee must consist of at
least three directors, including all the external directors of the company, and a majority of the members of the audit committee must
be independent or external directors. The Companies Law defines independent directors as either external directors or directors who: (1)
meet the requirements of an external director, other than the requirement to possess accounting and financial expertise or “professional
qualifications”, with audit committee confirmation of such; (2) have been directors in the company for an uninterrupted duration
of less than 9 years (and any interim period during which such person was not a director which is less than 2 years shall not be deemed
to interrupt the duration); and, (3) were classified as such by the company.
The following persons may not be a member of the audit committee:
| • |
The chairman of the board of directors; |
| • |
Any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling
shareholder’s control; |
| • |
Any director who derives his salary primarily from a controlling shareholder; |
| • |
A controlling shareholder; or |
| • |
Any relative of a controlling shareholder. |
According to the Companies Law, (1) the chairman of the audit committee
must be an external director, (2) the required quorum for audit committee meetings and decisions is a majority of the committee members,
of which the majority of members present must be independent and external directors, and (3) any person who is not eligible to serve on
the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines
that such person’s presence is necessary in order to present a certain matter, provided however, that company employees who are
not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise,
company counsel and company secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings
and for the decisions if such presence is requested by the audit committee.
69
Pursuant to the Amendment to the Relief Regulations, companies
whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets,
and which satisfy the criteria detailed above, are exempt from the following rules regarding the audit committee under the Companies Law:
(i) the committee shall be comprised of at least 3 members, who shall include all of the external directors, and the majority of the members
shall be independent; (ii) the audit committee may not include the chairman of the board, or any director employed by the Company, by
a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling
shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose income is primarily dependent
on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder; (iii) the controlling
shareholder or his relatives shall not be members of the audit committee; (iv) the chairman of the audit committee shall be an external
director; (v) a person who is prohibited from being a member of the audit committee shall not be present at the committee’s meetings;
(vi) if the committee also serves as a financials committee, the rules applicable to the financials committee shall apply; (vii) the legal
quorum shall be the majority of the committee members, provided that the majority of directors present are independent, at least one of
whom is an external director.
Currently, Ms. Ayelet Aya Hayak, Mr. Ilan Erez and Mr. Eli Doron
serve as members of our audit committee, and Mr. Ilan Erez serves as the chairperson.
Compensation Committee
Pursuant to the Companies Law, the Board of Directors of Israeli
publicly traded companies are required to appoint a compensation committee comprised of at least three members, including all external
directors, who must also comprise a majority of the members of the compensation committee. In addition, the chairman of the compensation
committee must be an external director. Following the compensation committee’s recommendations, the Board of Directors is required
to establish a compensation policy, which includes a framework for establishing the terms of office and employment of the office holders
and guidelines with respect to the structure of the variable pay of office holders. Such guidelines are the basis for adequate balance
between the components of compensation, which exists when a linkage is maintained between compensation and performance and the creation
of value for shareholders in the Company, while maintaining the Company’s ability to recruit and maintain talented officeholders
and incentivizing them to pursue the Company’s objectives. In particular, an appropriate balance between the fixed component (base
salary and additional benefits) and the variable component and capital compensation avoids placing an exaggerated emphasis on one component.
The following persons may not be a member of the compensation committee:
| • |
The chairman of the board of directors; |
70
| • |
Any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling
shareholder’s control; |
| • |
Any director who derives his salary primarily from a controlling shareholder; |
| • |
A controlling shareholder; or |
| • |
Any relative of a controlling shareholder. |
The responsibilities of the compensation committee include the
following:
| 1. |
To recommend to the Board of Directors as to a compensation policy for office holders of the company, as well as to recommend, once
every three years to extend the compensation policy subject to receipt of the required corporate approvals; |
| 2. |
To recommend to the Board of Directors as to any updates to the compensation policy which may be required; |
| 3. |
To review the implementation of the compensation policy by the company; |
| 4. |
To approve transactions relating to terms of office and employment of certain company office holders, which require the approval
of the compensation committee pursuant to the Companies Law; and |
| 5. |
To exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval
of the shareholders meeting. |
In December 2012, our Board of Directors changed the composition
of the members of our compensation committee by appointing Mr. Ilan Erez as chairman of our compensation committee. On July 1, 2013, following
the election of Ms. Ayelet Aya Hayak as an external director, Ms. Ayelet Hayak replaced was appointed to our compensation committee. Following
the election of Mr. Eli Doron as a member of our board of directors in July 2015, Mr. Eli Doron was appointed to our compensation committee.
Our compensation committee has been nominated and empowered by the Board of Directors to act in accordance with the powers and prerogatives
delegated to it by the Companies Law and take any decisions and make any recommendations to the Board all as set forth in the Companies
Law.
Pursuant to Amendment 27 to the Companies Law, effective as of
April 3, 2016 (“Amendment 27”), the audit committee may serve as the company’s compensation committee, provided that
it meets the composition requirements of the compensation committee.
Pursuant to the Amendment to the Relief Regulations, companies
whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets,
and satisfying the criteria detailed above, are exempt from the following rules regarding the Compensation Committee under the Companies
Law: (i) the board of a public company is required to appoint a compensation committee; (ii) the compensation committee shall be comprised
of at least 3 members, all of the external directors shall be members and shall constitute the majority of its members and the rest of
the members shall be members whose terms of service are as required under the Companies Law.
71
Under Section 267B(a) and Parts A and B of Annex 1A of the Companies
Law, which were legislated as part of Amendment 20, a company’s compensation policy shall be determined based on, and take into
account, the following parameters:
| a. |
Advancement of the goals of the company, its working plan and its long term policy; |
| b. |
The creation of proper incentives for the office holders while taking into consideration, inter alia, the company’s risk management
policies; |
| c. |
The company’s size and nature of its operations; |
| d. |
The contributions of the relevant office holders in achieving the goals of the company and profit in the long term in light of their
positions; |
| e. |
The education, skills, expertise and achievements of the relevant office holders; |
| f. |
The role of the office holders, areas of their responsibilities and previous agreements with them; |
| g. |
The correlation of the proposed compensation with the compensation of other employees of the company, and the effect of such differences
in compensation on the employment relations in the company; and |
| h. |
The long term performance of the office holder. |
In addition, the compensation policy should take into account that
in the event the compensation paid to office holders shall include variable components – it should address the ability of the board
of directors to reduce the value of the variable component from time to time or to set a cap on the exercise value of convertible securities
components that are not paid out in cash. Additionally, in the event that the terms of office and employment include grants or payments
made upon termination – such grants should take into consideration the length of the term of office or period of employment, the
terms of employment of the office holder during such period, the company’s success during said period and the office holder’s
contribution to obtaining the company’s goals and maximizing its profits as well as the circumstances and context of the termination.
In addition, the compensation policy must set forth standards and
rules on the following issues: (a) with respect to variable components of compensation – basing the compensation on long term performance
and measurable criteria (though a non-material portion of the variable components can be discretionary awards taking into account the
contribution of the office holder to the company. Pursuant to Amendment 27, variable components in the amount of up to a three month salary
of the relevant office holder, on an annual basis, shall be considered a non-material portion of the variable components); (b) establishing
the appropriate ratio between variable components and fixed components and placing a cap on such variable components (including a cap
on the grant date value of convertible securities components that are not paid out in cash); (c) setting forth a rule requiring an office
holder to return amounts paid, in the event that it is later revealed that such amounts were paid on the basis of data which prove to
be erroneous and resulted in an amendment and restatement of the company‘s financial statements; (d) determining minimum holding
or vesting periods for equity based variable components of compensation, while taking into consideration appropriate long term incentives;
and (e) setting a cap on grants or benefits paid upon termination.
72
The board of directors of a company is obligated to adopt a compensation
policy after considering the recommendations of the compensation committee. The final adoption of the compensation committee is subject
to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth
in the Companies Law, pursuant to which one of the following must be met:
| (i) |
the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the
company or who do not have a personal interest in the compensation policy and participating in the vote; abstentions shall not be included
in the total of the votes of the aforesaid shareholders; or |
| (ii) |
the total of opposing votes from among the shareholders described in Sub-section (i) above does not exceed 2% of all the voting rights
in the company. |
Nonetheless, even if the shareholders of the company do not approve
the compensation policy, the board of directors of a company may approve the compensation policy, provided that the compensation committee
and, thereafter, the board of directors determined, based on detailed, documented, reasons and after a second review of the compensation
policy, that the approval of the compensation policy is for the benefit of the company.
Executive Compensation Policy
On July 31, 2013, an Extraordinary General Meeting of the Shareholders
of the Company took place, approving the Executive Compensation Policy as later amended at the Annual General Meeting of the Shareholders
held on June 5, 2019 (the “Policy”), which had been recommended by the Compensation Committee and approved by the Board of
Directors, for the Company's directors and office holders, in accordance with the requirements of the Companies Law. The Policy was approved
by our shareholders at the Annual General Meeting of our shareholders which took place on June 5, 2019 and was amended in June 2022. At
the Annual General Meeting, held on June 18, 2025, our shareholders approved a new Amended Executive Compensation Policy (the “Amended
Policy”).
The Amended Policy includes, among other issues prescribed by the
Companies Law, a framework for establishing the terms of office and employment of the office holders, a recoupment policy, and guidelines
with respect to the structure of the variable pay of office holders. Each of our compensation committee and board of directors may engage
compensation advisors and other professionals to assist in formulating compensation packages in line with the Policy, including, without
limitation, to assist in collecting relevant data, framing the appropriate factors to be considered and evaluating the different factors
being considered.
73
All compensation arrangements of office holders are to be approved
in the manner prescribed by applicable law. Our office holders, including External Directors or Independent Directors, may waive their
entitlement to their compensation, subject to applicable law.
The Amended Policy also includes a refence to our newly adopted
Clawback Policy, adopted in accordance with applicable SEC and Nasdaq requirements, which allows for the recovery of all or a portion
of any compensation paid to our office holders during the previous three fiscal years, in accordance with its terms. The compensation
committee is responsible for approving the amounts to be recovered and for setting the terms of such recovery. The Clawback Policy prevails
over any conflicting provision in the Policy and does not derogate from any applicable legal or regulatory clawback requirements.
All of our office holders may be incentivized through cash bonuses
and long-term equity-based incentives to provide the office holder with a stake in our success – thus linking the office holder's
long-term financial interests with the interests of our shareholders. In accordance with the Amended Policy, the incentives are developed
through a program that sets performance targets based on each office holder's role and scope. Actual payments are driven by the business
and individual performance vis-à-vis the performance targets set at the beginning of the year. The formula for the performance targets
and the maximum variable components payable to each office holder (other than directors) shall be presented and recommended by our Chief
Executive Officer and reviewed and approved by our compensation committee and our board of directors. The formula for the performance
targets and the maximum variable components payable to any employee office holders who are also directors shall be presented and recommended
by our compensation committee and reviewed and approved by our board of directors and our shareholders. Our Board of Directors may reduce
or resolve not to award any officeholder’s performance based cash bonuses, even where performance targets have been met, provided
such reduction or cancellation is in the best interests of the Company. The maximum value of the variable compensation components for
an office holder at the Company shall not exceed eighty eight percent of such office holder's total compensation package on an annual
basis. Equity based compensation may be granted in any form permitted under our equity incentive plans, as in effect from time to time
(collectively, the "Equity Incentive Plans"), including stock options, restricted share units and restricted stock. Equity grants
to office holders shall be made in accordance with the terms of the Equity Incentive Plans. All equity-based incentives granted to our
office holders shall be subject to vesting periods in order to promote long-term retention of the awarded office holders. Unless determined
otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to our office holders
other than directors shall vest gradually over a period of between two to four years. We do not have any equity ownership guidelines
that require any of our office holders to hold a stated number or fixed percentage of our ordinary shares, nor do they have to continue
to hold for any period of time shares in the Company which they acquired as a result of the exercise of fully vested equity grants. The
value of the equity-based compensation shall be calculated on the grant date, according to acceptable valuation practices at the time
of grant. The board of directors shall not have discretion to limit the value of the equity-based compensation at the time of exercise. The
board of directors may, following approval by our compensation committee, extend the period of time for which an award to an office holder
is to remain exercisable, or make provisions with respect to the acceleration of the vesting period of any office holder's awards, including,
without limitation, in connection with a corporate transaction involving a change of control.
74
Under the Amended Policy, non-employee directors may also be compensated
for non-board or committee services in cash or equity, subject to the limitations set forth in the Amended Policy.
Our compensation committee will periodically review the Amended
Policy and monitor its implementation, and recommend to our board of directors and shareholders to amend it as the committee deems
necessary from time to time. The term of the Amended Policy shall be three years as of the date of its re-adoption on June 18, 2025, during
which, the Board of Directors is required to examine it and revise it from time to time, if the circumstances under which it had been
adopted have materially changed.
Following such three-year term, the Amended Policy, including any
revisions recommended by our compensation committee and approved by our board of directors, as applicable, shall be brought once again
to the shareholders for approval.
Internal Auditor
Under the Companies Law, the board of directors of a public company
must appoint an internal auditor, who is nominated by the audit committee. The role of the internal auditor is to examine, among other
matters, whether our actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be
an employee of the company but not an office holder (as defined in Item 10 below), nor an affiliate, nor a relative of an office holder
or affiliate, and he or she may not be our independent accountant or its representative. Yisrael Gewirtz of Fahn Kaneh Control Management
Ltd. (a subsidiary of Fahn Kanne & Co. - Grant Thornton Israel) serves as our internal auditor.
Board Diversity
Board Diversity Matrix (as of December 31,
2025)
Nasdaq’s recently adopted Board Diversity Rule is a disclosure
standard designed to encourage a minimum board diversity objective for companies and provide stakeholders with consistent, comparable
disclosures concerning a listed company’s current board composition. A company that has five or fewer directors is required to have,
or explain why it does not have, at least one director who self-identifies as female, an underrepresented minority, or LGBTQ+. Our current
board composition is in compliance with these requirements. Each term used above and in the matrix below has the meaning given to it in
Nasdaq Listing Rule 5605(f). The matrix below provides certain highlights of the composition of our Board members based on self-identification.
Country of Principal Executive Office - Israel
Foreign Private Issuer - Yes
75
Disclosure Prohibited under Home Country Law - No
Total Number of Directors – 5
Part I: Gender Identity
|
|
Female |
Male |
Non-Binary |
Did Not Disclose Gender |
|
Directors |
1 |
4 |
0 |
0 |
Part II: Demographic Background
|
Underrepresented Individual in Home Country Jurisdiction |
0 |
|
LGBTQ+ |
0 |
|
Did Not Disclose Demographic Background |
0 |
D. Employees
The number of employees over the last three financial years is
set forth in the table below.
|
As of December 31, |
2023 |
2024 |
2025 |
|||||||||
|
Total Employees |
246 |
229 |
236 |
|||||||||
|
Marketing, Sales, Customer Services |
25 |
21 |
22 |
|||||||||
|
Research & Development |
125 |
118 |
123 |
|||||||||
|
Manufacturing |
80 |
76 |
77 |
|||||||||
|
Corporate Operations and Administration |
16 |
14 |
14 |
|||||||||
As of March 31, 2026, we had 234 employees, including 22 in marketing,
sales and customer services, 123 in research and development, 75 in manufacturing, and 14 in corporate operations and administration.
All such employees, except for 32 employees of our subsidiary in the United States and 38 employees of our subsidiary in Denmark, are
based in Israel. We consider our relations with our employees excellent and have never experienced a labor dispute, strike or work stoppage.
None of our employees are represented by a labor union. We do not employ a significant number of temporary employees, but we do use temporary
employees from time to time, as necessary.
76
In Israel we are subject to certain labor statutes and national
labor court precedent rulings, as well as to certain provisions of the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations including the Industrialists' Associations. These
provisions of collective bargaining agreements are applicable to our Israeli employees by virtue of expansion orders issued in accordance
with relevant labor laws by the Israeli Ministry of Labor and Welfare, and which apply such agreement provisions to our employees even
though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that
apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance pay,
leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which
apply to our employees principally concern the requirement for length of the work day and workweek, mandatory contributions to a pension
fund, annual recreation allowance, travel expenses payment and other conditions of employment. We generally provide our employees with
benefits and working conditions beyond the required minimums.
Israeli law generally requires severance pay, which may be funded
by managers' insurance and/or a pension fund described below, upon the retirement or death of an employee or termination of employment
without cause (as defined in the law). The payments to the managers' insurance and/or pension fund in respect of severance pay amount
to approximately 8.33% of an employee's wages, in the aggregate. Furthermore, Israeli employees and employers are required to pay predetermined
sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include
payments for national health insurance.
As required by applicable law, we contribute to either a fund known
as managers' insurance or to a pension fund, or to a combination of both. Such practice was further reinforced in July 1, 2008, when we
entered into agreements with a majority of our employees in order to implement Section 14 to the Severance Pay Law ("Section 14"), according
to which the payment of monthly deposits by us into managers' insurance and/or pension fund are in respect of severance obligation to
such employees. See Note 11 of our consolidated financial statements. These funds provide a combination of savings plan, insurance and
severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay or part
of it, if legally entitled, upon termination of employment. For employees based in Israel without a Section 14 arrangement as of their
commencement date, the Company designates a separate portion of its funds and attributes them to its severance payment obligations. Additionally,
the Company makes provisions in its books concerning any additional severance payments liability.
77
E. Share
Ownership
The following table sets forth, as of March 31, 2026, the number
of shares owned by our office holders, directors and senior management. The percentages shown are based on 5,706,142 ordinary shares outstanding
as of March 31, 2026:
|
Name |
Number of Shares and Options Owned1
|
Percent of Outstanding Shares
|
||||||
|
Avi Eizenman |
285,059 |
4.89 |
% | |||||
|
Shaike Orbach |
* |
* |
||||||
|
Eli Doron |
* |
* |
||||||
|
Ayelet Aya Hayak |
* |
* |
||||||
|
Ilan Erez |
* |
* |
||||||
|
Liron Eizenman |
* |
* |
||||||
|
Eran Gilad |
* |
* |
||||||
|
All directors and office holders as a group |
315,459 |
5.42 |
% | |||||
| * |
Denotes ownership of less than 1% of the outstanding shares. |
| (1) |
The table above includes the number of shares and options that are exercisable within 60 days of March 31, 2026. Ordinary shares
subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding
these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. Except where otherwise
indicated, and subject to applicable community property laws, based on information furnished to us by such owners or otherwise disclosed
in any public filings, to our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect
to all shares shown as beneficially owned by them. |
See also "Item 6 – Directors and Senior Management – Compensation."
Item 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major
Shareholders
The following table sets forth, as of March 31, 2026, the number
of Ordinary Shares, including options and warrants to purchase Ordinary Shares exercisable within 60 days, owned by all shareholders known
to the Company to own more than five percent (5%) of the Company's Ordinary Shares (based on 5,706,142 Ordinary Shares outstanding
on that date). Each of our shareholders has identical voting rights with respect to its shares. All of the information with respect to
beneficial ownership of the Ordinary Shares is given to the best of our knowledge. Except where otherwise indicated, and subject to applicable
community property laws, we believe, based on information furnished to us by such owners or otherwise disclosed in any public filings,
that the beneficial owners of the Ordinary Shares listed below have sole dispositive and voting power with respect to such Ordinary Shares.
78
|
Name of Shareholder
|
Number of
Shares and Options Owned(1) |
Percentage of Outstanding
Shares |
|
Systematic Financial Management, LP (2)
|
553,619 |
9.70% |
|
First Wilshire Securities Management, Inc. (3)
|
304,808 |
5.34% |
| (1) |
The table above includes the number of shares and options that are exercisable within 60 days of March 31, 2026. Ordinary shares
subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding
these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. Except where otherwise
indicated, and subject to applicable community property laws, based on information furnished to us by such owners or otherwise disclosed
in any public filings, to our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect
to all shares shown as beneficially owned by them. All the information detailed in this table is as set forth in major shareholders' public
filings, unless stated otherwise. |
| (2) |
As reported on Schedule 13G/A filed by Systematic Financial Management, LP with the SEC on February 10, 2026. |
| (3) |
As reported on Schedules 13G/A filed by First Wilshire Securities Management, Inc. with the SEC on February 11, 2026. |
The Company's major shareholders do not have different voting rights.
As of March 31, 2026, there were five record holders of ordinary
shares, including three record holders in the United States. Collectively, these three record holders in the United States held less than
1% of the outstanding ordinary shares.
79
B. Related
Party Transactions
All related party transactions and arrangements (or modifications
of existing ones) with our related parties, transactions in which office holders of the Company have a personal interest, or transactions
which raise issues of such office holders' fiduciary duties, are subject to the applicable corporate approvals under the Companies Law.
Without giving effect to the buyback purchases described at Item 16E, the following transactions are considered "related party transactions"
for this Item 7B:
In January 2004, Our shareholders approved an Indemnification Agreement
with our directors and office holders, which has since been amended on a number of occasions.
The Indemnification Agreement provides that our directors and office
holders will be exempt from liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by
the Company for certain obligations and expenses imposed on the office holder in connection with acts performed in his or her capacity
as an office holder of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an office
holder's duty of loyalty, a willful breach of an office holder's duty of care, or a reckless disregard for the circumstances or consequences
of a breach of a duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize
personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an office
holder or a director in favor of another person by a judgment is currently US$ 3,000,000 for each instance of a covered scenario. In addition,
we would be liable to indemnify the office holder or director for all reasonable litigation expenses with respect to certain proceedings.
We have maintained liability insurance for our directors and office holders. On September 23, 2007, our shareholders approved the procurement
of a policy, which provides for total coverage of up to US$ 4,000,000. All of our directors are parties to our Indemnification Agreements
and are covered by our directors and office holders' insurance policy.
Under our Executive Compensation Policy, any change to the Indemnification
Agreement or the insurance policy, including the cost and/or any changes which materially depart from the key terms of the current agreement
and/or insurance policy (provided that such changes apply equally to all executives of the Company, including directors) will be submitted
to the Company's compensation committee and the Board of Directors for their approval but shall not, unless required by law or the Company's
Articles of Association, be presented at a General Meeting of the Shareholders.
Compensation Package for Liron Eizenman, the
Company's President and Chief Executive Officer
In June 2022, following the approval of the Company's Compensation
Committee and Board of Directors, the Company's shareholders approved a compensation package for Liron Eizenman. The approved Compensation
Package consists of (i) an amendment to Liron Eizenman's compensation structure and (ii) a severance agreement, identical to the previous
CEO severance agreement. The principal terms of the compensation package, which commenced on July 1, 2022, are as follows:
| • |
Gross monthly base salary of NIS 70,000. In January 2026, our compensation committee and board of directors, respectively, approved
an increase in Liron Eizenman’s monthly base salary to NIS 73,850, effective January 1, 2026. This increase is subject to the approval
of annual general meeting, which is expected to be held in June 2026. |
80
| • |
Entitlement to the Chief Executive Officer annual bonus upon the terms and in accordance with the formula approved by the Company’s
shareholders at the Annual General Meeting held on June 8, 2016 (the “CEO Bonus”),
|
| • |
Standard social benefits package applicable to all full-time employees of the Company. |
| • |
Severance/Termination provisions. |
In addition, at the June 2022 General Meeting, our shareholders
approved a grant to Liron Eizenman of 50,000 options to purchase Ordinary Shares of the Company, pursuant to the Plan. Pursuant to the
terms of their grant, all of these options expired following the closing price of our shares falling below US$ 17.45 and remaining at
or below such price for a period of at least 30 days.
In light of the automatic expiration of all of the options granted
to Mr. Liron Eizenman, in March 2024, our Compensation Committee and Board of Directors approved the grant of 100,000 options under the
Plan as extended, to purchase our Ordinary Shares at an exercise price equal to the average closing price of our Ordinary Shares on the
thirty (30) trading days preceding the date of the approval of such grant by our shareholders. 50% of the options will vest on the second
anniversary of the date of shareholder approval (the “Grant Date”), and 50% will vest on the third anniversary of the Grant
Date, and which Plan Options (vested and unvested) shall expire, by their terms, upon the eighth anniversary of the Grant Date. Following
the rejection by our shareholders of the option grant at their meeting in June 2024, our compensation committee and board of directors
reconsidered the grant, and pursuant to Israeli law, based on detailed reasoning overrode the rejection and approved the grant.
At the Annual General Meeting held on June 18, 2025, our shareholders
approved an additional grant to Liron Eizenman of 13,333 options to purchase Ordinary Shares of the Company, pursuant to the Plan. The
exercise price of the options equals the average closing price of our Ordinary Shares on the 30 trading days preceding the date of the
meeting, with 50% vesting on the second anniversary of the grant date and 50% vesting on the third anniversary of the grant date. The
options (vested and unvested) will expire on the eighth anniversary of the grant date.
Additionally, on January 26, 2026 the Compensation Committee and
Board of Directors approved the grant of 38,333 RSUs to Liron Eizenman. One third of which will vest on the first anniversary following
the date of approval by the Board of Directors, or the Grant Date, one third will vest on the second anniversary of the Grant Date, and
one third will vest on the third anniversary of the Grant Date. The grant is subject to the approval of our annual general meeting, which
is expected to be held in June 2026.
Grants of Options and RSUs to Avi Eizenman
In light of the automatic expiration of all of the options granted
to Mr. Avi Eizenman, in March 2024, our Compensation Committee and Board of Directors approved the grant of 60,000 options under the Plan,
as extended to purchase our Ordinary Shares at an exercise price equal to the average closing price of our Ordinary Shares on the thirty
(30) trading days preceding the date of the approval of such grant by our shareholders. 50% of the options will vest on the second anniversary
of the date of shareholder approval (the “Grant Date”), and 50% will vest on the third anniversary of the Grant Date, and
which Plan Options (vested and unvested) shall expire, by their terms, upon the eighth anniversary of the Grant Date.
81
At the Annual General Meeting held on June 18, 2025, our shareholders
approved a new grant to Avi Eizenman of 60,000 options to purchase Ordinary Shares of the Company pursuant to the Plan. The exercise price
of the options equals the average closing price of our Ordinary Shares on the 30 trading days preceding the date of the meeting, with
50% vesting on the second anniversary of the grant date and 50% vesting on the third anniversary of the grant date. The options (vested
and unvested) will expire on the eighth anniversary of the grant date.
Additionally, on January 26, 2026 the Compensation Committee and
Board of Directors approved the grant of 42,000 RSUs to Avi Eizenman. One third of the RSUs will vest on the first anniversary following
the date of approval by the Board of Directors, or the Grant Date, one third will vest on the second anniversary of the Grant Date, and
one third will vest on the third anniversary of the Grant Date. The grant is subject to the approval of our annual general meeting, which
is expected to be held in June 2026.
Compensation for Shaike
Orbach
Mr Shaike Orbach has served as the Executive Vice Chairman of the
Board since July 1, 2022 following him stepping down as the Company’s President, CEO and head of sales and marketing. In March 2024,
our Compensation Committee and Board of Directors approved, subject to shareholder approval, a framework for granting RSUs to Mr. Orbach
under the Plan, as extended in consideration for his agreeing to spend 25% of his time assisting the company with its sales activities,
or Services. Pursuant to this framework, as approved by our shareholders at our annual general meeting in June 2024, Mr. Orbach was granted
from time to time (i) an aggregate of up to 5,000 RSUs under the Plan (the “Year 1 Framework”), in consideration for his assisting
the company with its sales activities, during the period commencing November 1, 2023 and ending October 31, 2024, and (ii) an aggregate
of up to a further 5,000 RSUs under the Plan, in consideration for his providing such services during the period commencing November 1,
2024 and ending October 31, 2025 (the “Year 2 Framework” and together with the Year 1 Framework, the “RSU Framework”).
Pursuant to the approval of the shareholders, our Compensation Committee and Board of Directors approved the grant to Mr. Orbach of 2,969
RSUs, all of which shall vest on June 18, 2026, and a further 5,642 RSUs where the exact number of RSUs which shall vest, shall be pro-rated
to correspond with the number of months Mr. Orbach will have provided the Services over the period between July 1, 2024 and October 31,
2025.
At their meetings in March 2025, our Compensation Committee and
Board of Directors, approved and at our annual general meeting of our shareholders in June 2025, our shareholders approved extending the
RSU Framework for an additional two years, such that the Compensation Committee and the Board of Directors shall be authorized to grant
Mr. Orbach from time to time (i) an aggregate of up to 5,000 RSUs, upon terms to be determined by the Compensation Committee and the Board
of Directors, in consideration for his providing Services during the period from November 1, 2025 until October 31, 2026, and (ii) an
aggregate of up to a further 5,000 RSUs, upon terms to be determined by the Compensation Committee and the Board of Directors, in consideration
for his providing Services during the period from November 1, 2026 until October 31, 2027.
82
Additionally, at their meetings in January 2026, our Compensation
Committee and the Board of Directors determined that Mr. Orbach should be entitled to annual bonuses in line with bonuses paid to the
Company’s C-Level officers, and approved a framework for awarding annual bonuses to Mr. Orbach. Pursuant to that framework, our
Compensation Committee and the Board of Directors shall be authorized to award Mr. Orbach an annual bonus, commencing for the year 2025,
equal to a multiple of his monthly fee, corresponding to the average monthly-salary multiple paid as a bonus for that year to the Company's
C-Level officers. The bonus shall be paid in RSUs up to a maximum of 1,500 RSUs per year; with the value of such RSUs equal to the average
closing price of the Company’s ordinary shares over the thirty (30) trading-day period immediately preceding the award of bonuses
to the C-Level officers for that year.
The framework is subject to the approval of our annual general
meeting, which is expected to be held in June 2026.
See also "Item 6 – Directors and Senior Management –
Compensation."
Item 8.
FINANCIAL INFORMATION
A. Consolidated Statements and Other
Financial Information
Our consolidated financial statements and other financial
information are included herein on pages F-1 through F-54.
A1. See Item 18 for our consolidated financial
statements.
A2. See Item 18 for our consolidated financial
statements, which cover the last three financial years.
A3. See page F-3 for the audit report of
our accountants, entitled "Report of Independent Registered Public Accounting Firm."
A4. Not applicable.
A5. Not applicable.
A6. See Note __ to our audited consolidated
financial statements included in Item 18 of this annual report for the geographic distribution of our sales based on the location of the
customer.
A7. Litigation
As of the date of this Annual Report, we are not a party to any material litigation and we
are not aware of any pending or threatened litigation that would have a material adverse effect on us or our business.
A8. Dividend Policy
On January 14, 2013, we announced that our Board of Directors has
adopted a policy for distributing dividends, subject to all applicable laws. According to this policy, each year we will distribute a
dividend of up to 50% of our annual distributable profits. Our Board of Directors reserves the right to declare additional dividend distributions,
to change the rate of dividend distributions (either as a policy or on a one-time basis), to cancel a specific distribution or to cancel
the policy as a whole at any time, at its sole discretion. According to the said policy, the actual distribution of a dividend will be
subject to meeting the conditions required by applicable law, including the distribution tests set forth in Section 302 of the Companies
Law, and to the specific decision of the Company's Board of Directors for each distribution. On March 15, 2018, our Board of Directors
adopted a resolution to suspend the dividend policy until further notice.
83
B. Significant
Changes
Since the date of the annual financial statements included in this
Annual Report, no significant changes have occurred.
Item 9.
THE OFFER AND LISTING
A. Offer
and Listing Details
Markets and Share Price History
Following our delisting from trading on the TASE, the only trading
market for our ordinary shares is the NASDAQ Global Select Market, where our shares have been listed and traded under the symbol SILC
since January 2, 2014. Prior thereto, our shares were listed and traded on the NASDAQ Global Market (previously NASDAQ National Market)
under the symbol SILC (previously SILCF) from February 11, 2008. Prior thereto, our shares were listed and traded on the NASDAQ Capital
Market (previously known as the NASDAQ Small-Cap).
The table below sets forth the high and low reported sales prices
in Dollars of our ordinary shares, as reported by NASDAQ during the indicated periods:
|
PERIOD |
LOW |
HIGH |
||||||
|
March 2026 |
17.82 |
23.1 |
||||||
|
February 2026 |
17.91 |
21.7 |
||||||
|
January 2026 |
14.21 |
23 |
||||||
|
December 2025 |
13.34 |
15.57 |
||||||
|
November 2025 |
13.46 |
16.80 |
||||||
|
October 2025 |
15.19 |
18.9 |
||||||
|
FINANCIAL QUARTERS DURING THE PAST TWO YEARS |
||||||||
|
First Quarter 2026 |
14.21 |
23.1 |
||||||
|
Fourth Quarter 2025 |
13.34 |
18.9 |
||||||
|
Third Quarter 2025 |
14.93 |
19.36 |
||||||
|
Second Quarter 2025 |
12.44 |
16 |
||||||
|
First Quarter 2025 |
14.27 |
18.24 |
||||||
|
Fourth Quarter 2024 |
12.29 |
17.30 |
||||||
|
Third Quarter 2024 |
11.35 |
16.41 |
||||||
|
Second Quarter 2024 |
14.4 |
18.00 |
||||||
|
First Quarter 2024 |
14.80 |
19.04 |
||||||
|
FIVE MOST RECENT FULL FINANCIAL YEARS |
||||||||
|
2025 |
12.44 |
19.36 |
||||||
|
2024 |
11.35 |
19.04 |
||||||
|
2023 |
13.75 |
50.00 |
||||||
|
2022 |
31.30 |
51.66 |
||||||
|
2021 |
36.02 |
59.27 |
||||||
On December 27, 2005, our shares commenced trading on the TASE in Israel under the symbol "SILC." On October
26, 2015, our Board of Directors resolved to act to delist the Company's shares from trading on the TASE. The last trading day in our
shares on the TASE was January 26, 2016, and on January 28, 2016, our shares were delisted from trading on the TASE.
84
Item 10.
ADDITIONAL INFORMATION
A. Share
Capital
Not applicable.
B. Memorandum
and Articles of Association
Articles of Association
Our shareholders approved our amended and restated Articles of
Association on January 24, 2008, as well as certain additional amendments to the Articles of Association on April 11, 2012, June 8, 2016
and June 7, 2022. Our objective as stated in the Articles of Association is to carry on any business and perform any act which is not
prohibited by law.
We currently have only one class of outstanding shares, our Ordinary
Shares, having a nominal value of NIS 0.01 per share. Holders of Ordinary Shares have one vote per share, and are entitled to participate
equally in the payment of dividends and share distributions and, in the event of a liquidation of the Company, in the distribution of
assets after satisfaction of liabilities to creditors. No preferred shares are currently authorized.
Our Articles of Association require that we hold our annual general
meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place, either within or without
the State of Israel, determined by the board of directors, upon 21 days' prior notice to our shareholders or 35 days' prior notice to
the extent required with respect to certain matters as required under the regulations to the Companies Law. In general, no business may
be commenced at a general meeting until a quorum of two or more shareholders holding at least 33 1/3% of the voting rights is present
in person or by proxy. Shareholders may vote in person or by proxy.
In general, a simple majority is required to amend our Articles
of Association.
Pursuant
to the Companies Law, resolutions regarding the following matters must be passed at a general meeting of shareholders:
| • |
Appointment or termination of our auditors; |
| • |
Appointment and dismissal of external directors, unless the company elects to opt-in to the exemptions promulgated under the Amendment
to the Relief Regulations as detailed above, under which there is no requirement to appoint external directors; |
| • |
Approval of interested party acts and transactions requiring general meeting approval as provided in Sections 255 and 268 to 275
of the Companies Law; |
| • |
A merger as provided in Section 320(a) of the Companies Law; |
| • |
The exercise of the powers of the board of directors, if the board of directors is unable to exercise its powers and the exercise
of any of its powers is vital for our proper management, as provided in Section 52(a) of the Companies Law; |
| • |
Amendments to our Articles of Association; and |
| • |
Approval of an increase or decrease of the registered share capital. |
An extraordinary general meeting may be convened by demand of two
directors or by written request of one or more shareholders holding at least 5% of our issued share capital and 1% of the voting rights
or one or more shareholders holding at least 5% of the voting rights. Shareholders requesting a special meeting must include in their
request all relevant information, including the reason that such subject is proposed to be brought before the special meeting.
Our ordinary shares may generally be freely transferred under our
amended and restated Articles of Association, unless the transfer is restricted or prohibited by applicable law or the rules of the stock
exchange on which the shares are traded. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in
any way by our amended and restated Articles of Association or the laws of the State of Israel, except under certain circumstances for
ownership by nationals of certain countries that are, or have been, in a state of war with Israel.
85
The Companies Law
We are subject to the provisions of the Companies Law. The Companies
Law codifies the fiduciary duties that "office holders", including directors and executive office holders, owe to a company. An office
holder, as defined in the Companies Law, is a general manager (also referred to as the "chief executive officer"), chief business manager,
deputy general manager, vice general manager, executive Vice-President, Vice-President, any other person assuming the responsibilities
of any of the foregoing positions without regard to such person's title, as well as a director, or another manager directly subordinate
to the general manager. Each person listed in the table in "Item 6 – Directors, Senior Management and Employees" above is an office
holder of Silicom.
The Companies Law requires that an office holder of a company promptly
disclose, no later than the first board meeting in which such transaction is discussed, any personal interest that he or she may have
and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition,
if the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by the office holder's
relative (which includes for these purposes any members of his/her (or his/her spouse's) immediate family or the spouses of any such members
of his or her (or his/her spouse's) immediate family), or by any corporation in which the office holder or the office holder's relative
is a 5% or greater shareholder, holder of 5% or more of the voting power, director or general manager or in which he or she has the right
to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary
course of business, not on market terms, or that is likely to have a material impact on the company's profitability, assets or liabilities.
In the case of a transaction in which an office holder of the company
has a personal interest and which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement,
board approval is required unless the articles of association of the company provide otherwise. The transaction must be for the benefit
of the company. If the transaction is an extraordinary transaction, then, in addition to any approval required by the articles of association,
it must also be approved by the audit committee and by the board of directors, and, under specified circumstances, by a meeting of the
shareholders, as well.
Subject to certain exceptions provided for in the regulations to
the Companies Law, agreements regarding directors' terms of compensation require the approval of the compensation committee, board of
directors and the shareholders of the company. The transaction must be for the benefit of the company.
86
In matters concerning an extraordinary transaction in which a person
has a personal interest, as well as matters concerning his or her terms of compensation, he or she shall not be permitted to vote on the
matter or be present in the audit committee or board of directors meeting in which the matter is considered, however, with respect to
an office holder, he/she may be present at the meeting discussions if the chairman determines that the presence of the office holder is
necessary in order to present the matter. However, if a majority of the audit committee or of the board of directors has a personal interest
in the matter then:
| • |
All of the directors are permitted to vote on the matter and attend the meeting in which the matter is considered; and |
| • |
The matter requires approval of the shareholders at a general meeting. |
According to the Companies Law, the personal interest disclosure
requirements discussed above also apply to a "controlling shareholder" of a public company. Such requirements also apply to certain shareholders
of a public company who have a personal interest in the adoption by the shareholders of certain proposals with respect to (i) certain
private placements that will increase their relative holdings in the company, (ii) certain special tender offers or forced bring along
share purchase transactions, (iii) election of external directors, (iv) approval of a compensation policy governing the terms of employment
and compensation of office holders, (v) approval of the terms of employment and compensation of the general manager, (vi) approval of
the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously
approved by the company's shareholders, and (vii) approving the appointment of either (1) the chairman of the board or his/her relative
as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of
directors of the company. If any shareholder casting a vote at a shareholders meeting in connection with such proposals as aforesaid does
not notify the company if he, she or it has a personal interest with respect to such proposal, his, her or its vote with respect to the
proposal will be disqualified.
The term "controlling shareholder" is defined as a shareholder
who has the ability to direct the activities of a company, other than if this power derives solely from the shareholder's position on
the board of directors or any other position with the company, and the definition of "controlling shareholder" in connection with matters
governing: (i) extraordinary transactions with a "controlling shareholder" or in which a "controlling shareholder" has a personal interest,
(ii) certain private placements in which the "controlling shareholder" has a personal interest, (iii) certain transactions with a "controlling
shareholder" or relative with respect to services provided to or employment by the company, (iv) the terms of employment and compensation
of the general manager, and (v) the terms of employment and compensation of office holders of the company when such terms deviate from
the compensation policy previously approved by the company's shareholders, also includes shareholders that hold 25% or more of the voting
rights if no other shareholder owns more than 50% of the voting rights in the company (and the holdings of two or more shareholders which
each have a personal interest in such matter will be aggregated for the purposes of determining such threshold).
In general, extraordinary transactions with a "controlling shareholder"
or in which a "controlling shareholder" has a personal interest, and agreements relating to non-office holder employment and compensation
terms of a "controlling shareholder" (or a relative of such) or to the provision of services to the company by such "controlling shareholder"
(or relative of such), require the approval of the audit committee, the board of directors and the shareholders of the company. Agreements
relating to the terms of office and employment of a "controlling shareholder" (or relative of such) as an office holder in the company
require the approval of the compensation committee, the board of directors and the shareholders of the company.
87
The shareholder approval for such matters requiring shareholder
disclosure of a personal interest as noted above, generally must either include at least a majority of the shares held by non-controlling
and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively,
the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more
than two percent of the voting rights in the company. The shareholder approval for approving the appointment of either (1) the chairman
of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative
as the chairman of the board of directors of the company, must either include at least two-thirds of the shares held by non-controlling
and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively,
the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more
than two percent of the voting rights in the company. Agreements and extraordinary transactions with a "controlling shareholder" or in
which a "controlling shareholder" has a personal interest, or agreements relating to any employment terms of a "controlling shareholder"
(or relative if such) or to the provision of services to the company by such "controlling shareholder" (or relative if such), as aforesaid,
with duration exceeding three years, are subject to re-approval once every three years by the audit committee (or compensation committee,
as applicable), the board of directors and the shareholders of the company. Extraordinary transactions with a "controlling shareholder"
or in which a "controlling shareholder" has a personal interest may be approved in advance for a period exceeding three years if the audit
committee determines such approval reasonable under the circumstances. In addition, agreements and extraordinary transactions with duration
exceeding three years which were approved prior to Amendment 16 to the Companies Law, which was passed by the Israeli legislature, the
Knesset, in March 2011, and which came into effect gradually during the year 2011 ("Amendment 16"), will need to be re-approved by the
proper corporate actions at the later of (i) the first general meeting held after May 14, 2011, (ii) November 14, 2011, or (iii) the expiration
of three years from the date on which they were originally approved, even though they were properly approved prior to the passing of the
Amendment 16.
The board of directors of an Israeli company whose shares or debentures
are publicly traded is obligated to adopt a compensation policy governing the terms of office and employment of office holders, after
considering the recommendations of the compensation committee. The final adoption of the compensation policy is subject to the approval
of the shareholders of the company. Such shareholder approval is subject to certain special majority requirements, as set forth in the
Companies Law, pursuant to which the shareholder majority approval must also either include at least a majority of the shares held by
non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account),
or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who voted against the transaction must
not represent more than two percent of the voting rights in the company.
88
Nonetheless, even if the shareholders of the company do not approve
the proposed compensation policy, the board of directors of a company may approve the proposed compensation policy, provided that the
compensation committee and, thereafter, the board of directors resolved, based on detailed, documented, reasons and after a second review
of the compensation policy, that the approval of such compensation policy is for the benefit of the company.
Pursuant to the Companies Law, the terms of office and employment
of an office holder in a public company should be in accordance with the company's compensation policy. Nonetheless, provisions were established
in the Companies Law that allow a company, under special circumstances, to approve terms of office and employment that are not in line
with the approved compensation policy.
Terms of office and employment of office holders who are neither
directors nor the general manager and which comply with the company's compensation policy require approval by the (i) compensation committee;
and (ii) the board of directors. Approval of terms of office and employment for such office holders which do not comply with the compensation
policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors,
approved the terms after having taken into account the various policy considerations and mandatory requirements set forth in the Companies
Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for
such office holders by means of the special majority required for approving the compensation policy (as detailed above). Following the
Amendment to the Affiliation Regulations, non-material changes to the terms of compensation of office holders who are subordinated to
the company general manager will require only general manager approval, provided that the company's compensation policy includes a reasonable
range for such non-material changes.
Terms of office and employment of the general manager which comply
with the company's compensation policy require approval by the (i) compensation committee; (ii) the board of directors; and (iii) the
shareholders of the company by means of the special majority required for approving the compensation policy (as detailed above). Approval
of terms of office and employment for the general manager which do not comply with the compensation policy may nonetheless be approved
subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having
taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office
holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for the general manager which
deviate from the compensation policy by means of the special majority required for approving the compensation policy (as detailed above).
Notwithstanding the foregoing, a company may be exempted from receiving shareholder approval with respect to the terms of office and employment
of a proposed candidate for general manager if such candidate meets certain independence criteria, the terms of office and employment
are in line with the compensation policy, and the compensation committee has determined for specified reasons that presenting the matter
for shareholder approval would thwart the proposed engagement. In addition, following the Amendment to the Affiliation Regulations, the
terms of compensation of the general manager will not require shareholders' approval when extending or re-approving the company's engagement
with its general manager, provided that such terms are not more beneficial compared to his previous compensation terms approved by the
shareholders pursuant to the Companies Law and provided that such terms comply with the company's compensation policy.
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Terms of office and employment of office holders (including the
general manager) that are not directors may nonetheless be approved by the company despite shareholder rejection, provided that a company's
compensation committee and thereafter the board of directors have determined to approve such terms of office and employment based on detailed
reasoning, after having re-examined the proposed terms of office and employment, and having taken the shareholder rejection into consideration.
Terms of office and employment of directors which comply with the
company's compensation policy require approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders
of the company. Approval of terms of office and employment for directors of a company which do not comply with the compensation policy
may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors,
approved the terms after having taken into account the various policy considerations and mandatory requirements set forth in the Companies
Law with respect to office holder compensation, and (ii) the shareholders of the company have approved the terms by means of the special
majority required for approving the compensation policy (as detailed above).
Private placements in a public company require approval by a company's
board of directors and shareholders in the following cases:
| 1. |
A private placement that meets all of the following conditions: |
| • |
The private placement will increase the relative holdings of a shareholder that holds five percent or more of the company's outstanding
share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person
to become, as a result of the issuance, a holder of more than five percent of the company's outstanding share capital. |
| • |
20 percent or more of the voting rights in the company prior to such issuance are being offered. |
| • |
All or part of the consideration for the offering is not cash or registered securities, or the private placement is not being offered
at market terms. |
| 2. |
A private placement which results in anyone becoming a "controlling shareholder" of the public company. |
In addition, under the Companies Law, certain transactions or
a series of transactions are considered to be one private placement. A private placement that meets all of the above conditions, and which
must be approved by the shareholders, must also be for the benefit of the company.
Any placement of securities that does not fit the above description
may be issued at the discretion of the board of directors.
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Under the Companies Law, a shareholder has a duty to act in
good faith towards the company and other shareholders when exercising his or her rights and refrain from abusing his power in the company,
including, among other things, voting in the general meeting of shareholders on the following matters:
| • |
Any amendment to the articles of association; |
| • |
An increase of the company's authorized share capital; |
| • |
A merger; or |
| • |
Approval of interested party acts and transactions that require general meeting approval as provided in Sections 255 and 268 to 275
of the Companies Law. |
Furthermore, the Companies Law requires that a shareholder refrain
from acting in a discriminatory manner towards other shareholders.
The Companies Law does not describe the substance of the aforementioned
duties of shareholders, but provides that laws applicable to a breach of contract, adjusted according to the circumstances shall apply
to a breach of such duties. With respect to the obligation to refrain from acting discriminatorily, a shareholder that is discriminated
against can petition the court to instruct the company to remove or prevent the discrimination, as well as provide instructions with respect
to future actions.
In addition, any "controlling shareholder", any shareholder who
knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a
company's articles of association, has the power to appoint or prevent the appointment of an office holder in the company is under a duty
to act with fairness towards the company. The breach of such duty is governed by Israeli contract laws. The Companies Law does not describe
the substance of this duty to act with fairness, but provides that laws applicable to a breach of contract, adjusted according to the
circumstances, and taking into account the status within the company of such shareholder, shall apply to a breach of such duty.
The Companies Law requires that specified types of transactions,
actions and arrangements be approved as provided for in a company's articles of association and in some circumstances by the audit committee
or compensation committee, by the board of directors and by the general meeting of the shareholders.
In addition, the Companies Law includes a code of recommended corporate
governance practices, which was added to the Companies Law following the enactment of Amendment 16. In the explanatory notes to Amendment
16, the Knesset noted that an "adopt or disclose non-adoption" regulation would be issued by the ISA with respect to such code. As of
the date of this Annual Report, the ISA has issued reporting instructions with respect to this code which are applicable only to publicly
traded companies whose securities are traded solely on the Tel Aviv Stock Exchange and which report solely to the ISA.
The ISA is authorized to impose fines on any person or company
performing a violation, in connection with a publicly traded company which reports to the ISA, and specifically designated as a violation
under Amendment 16.
Although we expect to be in compliance with the Companies Law,
there is no assurance that we will not be required to adjust our current corporate governance practices, as discussed in this annual report,
pursuant to the provisions of the Companies Law.
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The Israeli Securities Law
The Israeli Securities Law includes provisions relating to administrative
enforcement procedure which are applicable to Israeli public companies, including companies which are listed for trading on the NASDAQ
Global Market, which are designated to enable the ISA to enhance the efficacy of enforcement in the securities market in Israel. The administrative
enforcement procedure may be applied to any company or person (including director, office holder or shareholder of a company) performing
any of the actions specifically designated as breaches of law under the Securities Law.
Furthermore, the Securities Law requires that the chief executive
officer of a company supervise and take all reasonable measures to prevent the company or any of its employees from breaching the Securities
Law.
Under the Securities Law, a company cannot obtain insurance against
or indemnify a third party (including its office holders and/or employees) for any administrative procedure and/or monetary fine (other
than for certain legal expenses and payments of damages to an injured party). The Securities Law permits insurance and/or indemnification
for expenses related to an administrative procedure, such as reasonable legal fees, provided that it is permitted under the company's
articles of association. In January 2012, each of our audit committee and Board of Directors approved a new form of Indemnification Agreement
with our directors and office holders serving in such positions from time to time so as to reflect this amendment, subject to approval
of our shareholders to the relevant changes required to our Articles. Our shareholders approved these amendments to the Articles of Association
and a revised form of Indemnification Agreement for directors serving in such capacity from time to time, at the Annual General Meeting
of the Shareholders held on April 11, 2012. As per Amendment 20, it was decided on July 31, 2013, at the Extraordinary General Meeting
of the Shareholders to adopt the Executive Compensation Policy of the Company, which had been recommended by our Compensation Committee
and approved by our Board of Directors. The Policy was re-approved by our shareholders at the Annual General Meeting which took place
on June 8, 2016. Our approved Executive Compensation Policy includes the above referenced form of Indemnification Agreement to be entered
into by the Company with our directors and office holders serving in such capacities from time to time.
We periodically review all of our internal policies and procedures
in order to ensure compliance with all the securities laws to which we are subject. There is no assurance that we will not be required
to take certain actions in order to enhance our compliance with the securities laws to which we are subject, such as adopting and implementing
an internal enforcement plan as well as additional internal policies and procedures in order to reduce our exposure to potential breaches
of the Securities Law.
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NASDAQ Listing Rules and Home Country Practices
Below is a concise summary of the significant ways in which our
corporate practices, which are in accordance with Israeli law and practice, including the provisions of the Companies Law, differ from
the requirements which may be applicable to domestic U.S. listed companies:
| • |
Distribution of annual and quarterly reports to shareholders –
Under Israeli law we are not required to distribute annual and quarterly reports directly to shareholders and the generally accepted business
practice in Israel is not to distribute such reports to shareholders. We do however make our audited financial statements available to
our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the SEC on Form 6-K.
|
| • |
Independence, Nomination and Compensation of Directors –
A majority of our board of directors may not necessarily be comprised of independent directors as defined in NASDAQ Listing Rule 5605(a)(2).
Our board of directors contains two external directors in accordance with the provisions of the Companies Law. Israeli law does not require,
nor do our external directors conduct, regularly scheduled meetings at which only they are present. In addition, with the exception of
our external directors, our directors are elected to our board of directors in accordance with the provisions set forth in our amended
and restated Articles of Association, as approved by our shareholders on the Annual General Meeting which took place on June 8, 2016.
According to our amended and restated Articles of Association, directors are divided into three groups, Group A, Group B and Group C.
Each group is brought for re-election once every three years, on a rotating basis, such that at each annual general meeting of the shareholders
a given group of directors is brought for election, to serve on a continuous basis for a three-year term, until the third annual general
meeting following the meeting on which such group was elected for service and until their respective successors are duly elected, at which
point their term in office shall expire. At each annual general meeting, the annual general meeting shall be entitled to elect directors
to replace the directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in office of
one group of directors shall expire. The nominations for director which are presented to our shareholders are generally made by our board
of directors. One or more shareholders of a company holding at least one percent of the voting power of the company may nominate a currently
serving external director for an additional three-year term. Israeli law does not require the adoption of, and our board has not adopted,
a formal written charter or board resolution addressing the nomination process and related matters. Compensation of our directors and
other office holders of the Company is determined in accordance with Israeli law. |
| • |
Audit Committee – Our audit committee
does not meet with all the requirements of NASDAQ Listing Rule 5605. We are of the opinion that the members of our audit committee comply
with the requirements of NASDAQ Listing Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities
Act of 1933 and all requirements under Israeli law. Our audit committee has not adopted a formal written audit committee charter specifying
the items enumerated in NASDAQ Listing Rule 5605(c)(1). |
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| • |
Compensation Committee – We follow
the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our compensation
committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law, and our amended
and restated Articles of Association, do not require that a compensation committee composed solely of independent members of our board
of directors determine (or recommend to the board of directors for determination) an executive officer's compensation, as required under
NASDAQ's listing standards related to compensation committee independence and responsibilities; nor do they require that the Company adopt
and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself in accordance
with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies Law. Furthermore,
the compensation of office holders is determined and approved by our compensation committee and our Board of Directors, and in certain
circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or, in special circumstances
in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements for shareholder approval
of any office holder compensation, and the relevant majority or special majority for such approval, are all as set forth in the Companies
Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder compensation requiring such approval
under the requirements of the Companies Law, including seeking prior approval of the shareholders for the Executive Compensation Policy
and for certain office holder compensation, rather than seeking approval for such corporate actions in accordance with NASDAQ Listing
Rules. |
| • |
Quorum – Under Israeli law a company
is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at
a shareholders meeting. Our Articles of Association provide that a quorum of two or more shareholders, present in person or by proxy,
holding shares conferring in the aggregate more than thirty-three and a third (33 1/3 %) percent of the voting power of the Company is
required for commencement of business at a general meeting. |
| • |
Approval of Related Party Transactions –
All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and
transactions, set forth in Sections 268 to 275 of the Companies Law. |
| • |
Shareholder Approval – We seek
shareholder approval for all corporate action requiring such approval, in accordance with the requirements of the Companies Law.
|
| • |
Equity Compensation Plans – We
do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans (as
set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will attempt
to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required
in order to ensure they are tax qualified for our employees in the United States. However, even if such approval is not received, then
the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S.
employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are
also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws. |
94
C. Material
Contracts
All of our commercial contracts over the past two years have been
entered into in the ordinary course of business.
Information regarding our real property leases is provided in "Item
4.D. – Information on the Company – Property, Plant and Equipment" and "Item 19 – Exhibits."
For information on the engagement terms of our new President and
CEO, see Item 7B “Related Party Transactions.”
D. Exchange
Controls
Under current Israeli laws and regulations, any dividends or other
distributions paid in respect of our ordinary shares purchased by nonresidents of Israel with certain non-Israeli currencies (including
U.S. Dollars) and any amounts payable upon the dissolution, liquidation or winding up of our affairs, as well as the proceeds of any sale
in Israel of our securities to an Israeli resident, will be freely repatriable in such non-Israeli currencies, provided that Israeli income
tax has been paid on (or withheld from) such payments.
There are currently no Israeli currency control restrictions on
remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of
Israel, except under certain circumstances, for shareholders who are subjects of countries that are, or have been, in a state of war with
Israel.
E. Taxation
The following is a summary of some of the current tax law applicable
to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli tax
consequences to our shareholders and government programs from which we benefit. To the extent that the discussion is based on tax legislation
(including the legislation passed as part of the recent tax reform in Israel) that has not been subject to judicial or administrative
interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities or courts.
The discussion is not intended, and should not be construed, as
legal or professional tax advice and is not exhaustive of all possible tax considerations.
Holders of our ordinary shares should consult
their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary
shares, or receipt of any dividend distributions made to our shareholders, including, in particular, the effect of any foreign, state
or local taxes, including pursuant to the Tax Act (as defined below), and of any taxes withheld at source by the Company.
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General Corporate Tax
Israeli companies are subject to corporate tax at the rate of 25%
as of 2016, 24% as of 2017, and 23% as from 2018. However, the effective tax rate payable by a company which derives income from a "Benefited
Enterprise", or from a "Preferred Enterprise" or from "Preferred Technological Enterprise" (as further discussed below) may be considerably
less.
In 2006, Income Tax Regulations (Market Value Determination), 5676-2006
came into force, following the introduction of Section 85A of the Israeli Income Tax Ordinance (New Version), 5721-1961, referred
to herein as the Israeli Tax Ordinance, under Amendment 132. In principal, the transfer pricing rules require that cross-border transactions
between related parties be carried out implementing an arms' length principle and reported and taxed accordingly.
In 2008, the Income Tax Law (Inflationary Adjustments), (20th Amendment)
5768-2008 (the “Amendment”) was enacted, amending the provisions of the Income Tax Law (Inflationary Adjustments) 5745-1985.
The Amendment’s provisions limit the scope of the law starting in 2008 and thereafter. Starting in 2008, the revenues for tax purposes
are measured in nominal values, excluding certain adjustments for changes in the Israeli Consumer Price Index carried out in the period
up to December 31, 2007. The amended law includes, among other provisions, the elimination of the inflationary additions and deductions
and the additional deduction for depreciation for the period starting in 2008.
The Encouragement of Capital Investments Law, 5719-1959 (the
"Investment Law")
Pursuant to the Investment Law, a "Preferred Enterprise" is entitled
to a reduced corporate flat tax rate of 16% with respect to income that qualifies as “Preferred Income” as defined in the
Investment Law, unless the "Preferred Enterprise" is located in a certain development zone, in which case the tax rate will be 7.5%. Such
corporate tax rates are 12% and 7.5% with respect to Preferred Technological Income. Income derived by a "Special Preferred Enterprise"
(as such term is defined in the Investment Law) are entitled, during a benefits period of 10 years, to further reduced tax rates of 8%,
or to 5% if the "Special Preferred Enterprise" is located in a certain development zone. Under the Investment Law, most of the tax incentives
offered are not dependent on minimum qualified investments or on foreign ownership. Companies may be able to enjoy both government grants
and tax benefits concurrently.
"Preferred Enterprise" is
defined as an Industrial Enterprise (including, inter alia, an enterprise which develops software, an enterprise which provides approved
R&D services to foreign residents and an enterprise which the IIA confirmed is carrying out R&D in the field of alternative energy),
which inter-alia, generally more than 25% of its business income is generated from export to market consisting more than 14 million residents.
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Chapter B2 of the Investment Law determines the conditions and
limitations applying to the tax benefits offered to a "Special Preferred Enterprise." Chapter B2 determines that a "Special Preferred
Enterprise" is entitled to benefited corporate income tax rate: of 5% if located in a preferred zone and 8% if not.
"Special Preferred Enterprise"
is defined as a "Preferred Enterprise" which meets all of the following conditions: (a) its Preferred Income is equal to or exceeds NIS
1 billion; (b) the total income of the company which owns the "Preferred Enterprise" or which operates in the same field of the "Preferred
Enterprise" and which consolidates in its financial reports the company that owns the "Preferred Enterprise" equals or exceeds NIS 10
billion; and (c) its business plan was approved by the authorities as significantly benefitting the Israeli economy, either by an investment
of at least NIS 400 - 800 million in assets; Annual growth of 100 - 150 million NIS in R&D (or half of this amount if the average
annual R&D is above NIS 500 million) compared to the average R&D in the three tax years prior to the year of approval; or the
employment of at least 250 to 500 new employees, for preferred zones and regular zones, respectively.
Dividends paid out of income attributed to a "Preferred Enterprise"
are generally subject to withholding tax at source at a rate of 20% (15% until 2014) or such lower rate as may be provided in an applicable
tax treaty, subject to the submission and approval of a request submitted on behalf of the recipient of such dividends to the Israel Tax
Authority. However, if such dividends are paid to an Israeli company no tax will be withheld.
The Company elected in 2014 to be taxed as a "Preferred Enterprise"
under the Investment Law, commencing with the 2014 fiscal year.
There can be no assurance that we will comply with the conditions
of the Investment Law in the future or that we will be entitled to any additional benefits under the Investment Law and whether the influence
of any changes to the Investment Law will be beneficial to the Company or not.
On January 6, 2011 the Israeli Parliament (the "Knesset") enacted
the Economic Policy Law for 2011 and 2012 (legislative amendments), 2011 in which the Investment Law was also amended (the “2011
Amendment”). The 2011 Amendment introduced new benefits for income generated by a “Preferred Company” through its “Preferred
Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011.
The definition of a “Preferred Company” includes a
company incorporated in Israel that is not fully owned by a governmental entity, and that has, among other things, a “Preferred
Enterprise” and is controlled and managed from Israel. Pursuant to the 2011 Amendment, beginning in 2014 and in each year thereafter
until 2016, a Preferred Company may only be entitled to a reduced corporate tax rate of 16% with respect to its preferred income derived
by its Preferred Enterprise, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be
9%.
97
On December 29, 2016 the Knesset enacted the "Economic Efficiency
Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016" in which the Investment Law was
amended again (hereinafter: “the 2017 Amendment”). The 2017 Amendment added new tax benefit tracks for a “preferred
technological enterprise” and a “special preferred technological enterprise” which award reduced tax rates to a technological
industrial enterprise for the purpose of encouraging activity relating to the development of qualifying intangible assets. In addition,
the corporate tax rate for Preferred Enterprise which is located in a specified development zone will be 7.5%.
The benefits will be awarded to a “preferred company”
that has a “preferred technological enterprise” or a “special preferred technological enterprise” with respect
to taxable “preferred technological income” per its definition in the Investment Law.
Preferred technological income that meets the conditions required
in the law, will be subject to a reduced corporate tax rate of 12%, and if the preferred technological enterprise is located in "Development
Area A" in Israel - to a reduced tax rate of 7.5%. A company that owns a special preferred technological enterprise will be subject to
a reduced corporate tax rate of 6% regardless of the development area in which the enterprise is located. The 2017 Amendment is effective
as from January 1, 2017.
Income derived by a Preferred Company from a “Special Preferred
Enterprise” (as such term is defined in the Investment Law) would be entitled, during a benefit period of ten years, to further
reduced tax rates of 8%, or 5% if the Special Preferred Enterprise is located in a certain development zone.
On June 14, 2017 the Knesset Finance Committee approved "Encouragement
of Capital Investment Regulations (Preferred Technological Income and Capital Gain of Technological Enterprise) – 2017" (hereinafter:
“the Regulations”), which provides rules for applying the “preferred technological enterprise” and “special
preferred technological enterprise” tax benefit tracks, including the Nexus formula that provides the mechanism for allocating the
technological income eligible for the benefits.
Should the Company derive income from sources other than the “preferred
technological enterprise”, such income will be taxable at the "Preferred Company" tax rate (for manufacturing activity in Israel)
or regular corporate tax rates for the applicable year.
On November 15, 2021, the Knesset Finance approved Economic Efficiency
Law (Legislative Amendments for Achieving Budget Objectives in the Years 2021 and 2022) – 2021 (“the 2021 Amendment”).
The 2021 Amendment stipulated rules with respect to “Accumulated income” which was generated by a company until December 31,
2020.
“Accumulated Income” is defined as an income including
capitalized income that was exempt from corporation tax on the year in which it was generated, according to the Investment Law provisions,
and the company did not pay any corporation tax except for tax payments made regarding a distribution made to a subsidiary or which was
attributed to the subsidiary directly or indirectly.
The tax rate that will be imposed on the Selected Accumulated Income
shall be at the corporation tax rate which would have applied to that income under section 47 provisions, in the year it was generated,
multiplied by the tax coefficient (according to the definition of this term under the Investment Law provisions), and not less than 6%.
The company shall pay the tax within 30 days and will not be able to regret it. The rest of the Accumulated Income which is not the Selected
Accumulated Income will be taxed according to the provisions of the Investment Law.
98
The company shall be entitled to pay tax regarding its Accumulated
Income, in whole or in part, in accordance with its choice by written notice to the ITA (“Selected Accumulated Income” and
“Selection Date” respectively). After paying the corporate tax, the Investment Law provisions stipulate that the company shall
invest in its Industrial Enterprise, during the 5 years starting on the Selection Date for at least one of the following: (1) purchase
of productive assets according to the definition of this term and excluding buildings; (2) investment in research and development in Israel;
or (3) payment of salaries to new employees in the company compared to the employees employed by the company at the end of the tax year
2020, and excluding salaries to company’s officers (as defined under the Investment Law). The investment amount will be calculated
according to the Investment Law Provisions. Subject to additional conditions stipulated by the Investment Law provisions, the company
will be able to distribute Its Selected Accumulated income as a dividend, after withholding 15% tax from the distributed amount. The 2021
Amendment is effective as from January 1, 2022.
As a result of the aforesaid legislation, starting 2021 the Company
has implemented the “preferred technological enterprise” tax benefit track.
Law for the Encouragement of Research, Development and Technological
Innovation in Industry, 5744-1984 (the “R&D Law”)
Programs approved by the Research Committee of the IIA are eligible
for grants or loans if they meet certain criteria, generally in return for the payment of royalties from the sale of the product or services
developed in accordance with the program and subject to other restrictions. Once a project is approved, the IIA awards grants generally
of up to 50% of the project's expenditures in return for royalties, usually at the rate of 3% of sales of products developed with such
grants. For projects approved after January 1, 1999, the amount of royalties payable is up to a dollar-linked amount equal to 100% of
such grants plus interest at LIBOR or other applicable interest rate.
The terms of these grants prohibit the manufacture outside of Israel
of the product developed in accordance with the program without the prior consent of the Research Committee of the IIA. Such approval,
if granted, is generally subject to an increase in royalty rates, as well as in the total amount to be repaid to the IIA to between 120%
and 300% of the amount granted, depending on the extent of the manufacturing to be conducted outside of Israel.
The R&D Law also provides that know-how from the research and
development, which is used to develop or produce the product, may not be transferred or licensed to Israeli third parties without the
approval of the Research Committee. The R&D Law stresses that it is not just transfer of know-how that is prohibited, but also transfer
of any rights in such know-how. Such restriction does not apply to exports from Israel of final products developed with such technologies.
It is possible to receive approval of the transfer or license only if the transferee or licensee undertakes to abide by all of the provisions
of the R&D Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to
pay royalties. Generally, royalty payments by the transferor are required in connection with the transfer to an Israeli third party. There
is no assurance that such consent, if requested, would be granted. For additional information regarding the R&D Law, see "Item 4.B.
– Information on the Company – Business Overview – Governmental Regulation Affecting the Company."
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Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction
in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures
are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for
the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. Such expenditures not so approved
are required to be deducted over a three-year period.
Law for the Encouragement of Industry (Taxes), 5729-1969
Under the Law for the Encouragement of Industry (Taxes), 5729-1969
(the "Industry Encouragement Law"), Industrial Companies (as defined below) are entitled to the following tax benefits:
| (a) |
Amortization of expenses incurred in connection with certain public securities issuances over a three-year period; and |
| (b) |
Accelerated depreciation rates on know-how, patents and/or right to use a patent or certain other intangible property rights.
|
Eligibility for benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an "Industrial Company"
is defined as a company which is an Israeli resident and incorporated in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency, exclusive of income from government loans, is derived from an "Industrial Enterprise" owned by it and
located in Israel or in the “Area” as defined in the Israeli Tax Ordinance. An "Industrial Enterprise" is defined as an enterprise
whose major activity in a given tax year is industrial production activity.
We believe that we currently qualify as an "Industrial Company"
within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an "Industrial
Company" or that the benefits described above will be available in the future.
Calculation of Results for Tax Purposes
The Israeli Income Tax Regulations (Rules for Maintaining Accounting
Records of Foreign Investors' Companies and Certain Partnerships and Determining Their Taxable Income), 1986, provide that as a "Foreign
Investors' Company" (as defined in the Investment Law described above) is eligible to calculate its taxable income in accordance with
these regulations, and therefore, if we elect to follow such regulations, our taxable income or loss is to be calculated in US Dollars.
We have elected to apply these regulations and accordingly our taxable income or loss is calculated in US Dollars in the manner set forth
in such regulations.
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Taxation of our Shareholders
Capital Gains Taxes Applicable to Israeli Resident
Shareholders.
In general, an individual is subject to a 25% tax rate on real
capital gains derived from the sale of shares, as long as the individual is not a "substantial shareholder" in the company issuing the
shares. A "substantial shareholder" is generally a person who alone, or together with his relative or another person who collaborates
with him on a permanent basis, holds, directly or indirectly, at least 10% of any of the "Means of control" of the corporation. "Means
of control" generally include the right to vote at the company’s general meeting or equivalent, receive profits, nominate a director,
general manager or office holder, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act,
and all regardless of the source of such right.
A "substantial shareholder" will be subject to a withholding tax
rate of 30% in respect of real capital gains derived from the sale of shares issued by a company in which he or she is a "substantial
shareholder." The determination of whether the individual is a "substantial shareholder" will be made on the date on which the securities
are sold. In addition, the individual will be deemed to be a "substantial shareholder" if at any time during the 12 months preceding the
date of sale, he or she was a "substantial shareholder."
Capital Gains Taxes Applicable to Non-Israeli Resident
Shareholders.
Shareholders that are not Israeli residents are generally exempt
from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our shares, provided that such share is
not traded on the TASE on the day of the sale and such gains were not derived from a permanent establishment or business activity of such
shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident(s) (i)
have a controlling interest of more than 25% in such non-Israeli corporation; or (ii) are the beneficiaries of or are entitled to 25%
or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In addition, under the Convention Between the Government Of The
United States Of America And The Government Of Israel With Respect To Taxes On Income(the “U.S.-Israel Tax Treaty”), the sale,
exchange or disposition of our shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the
shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly or indirectly, shares
representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition; or
(ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel; or (iii)
the shareholder, being an individual, was present in Israel for a period of time or several periods of time, which aggregate to a total
of 183 days or more, during a single taxable year. In either case, the sale, exchange, or disposition of the shares would be subject to
Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the U.S. resident would be permitted to claim a credit
for the tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations
in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
101
Shareholders may be required to demonstrate that they are exempt
from tax on their capital gains in order to avoid withholding of tax at source at the time of sale.
Taxation of Israeli Shareholders on Receipt of Dividends.
Residents of Israel who are individuals are generally subject to
Israeli income tax on the receipt of dividends paid on our shares at the rate of 25%, which tax will be withheld at the source. With respect
to a person who is a "substantial shareholder" at the time of receiving the dividend or on any date within the 12 months preceding such
date, the applicable tax rate is 30%.
Israeli resident corporations are generally exempt from Israeli
tax for dividends paid on our shares.
In case of dividends paid out of the profits of a "Preferred Enterprise"
or "Preferred Technological Enterprise", the applicable tax rate is 20% for an individual and 0% for an Israeli corporation.
Taxation of Non-Israeli Shareholders on Receipt of
Dividends.
Non-residents of Israel are generally subject to Israeli income
tax on the receipt of dividends paid on our shares at the rate of 25% or 30%, if such person (including a non-Israeli corporation) is
a "substantial shareholder" at the time of recipient of the dividend or on any date in the 12 months preceding such date, which tax will
be withheld at the source, unless a different rate is provided in a tax treaty between Israel and the shareholder's country of residence.
Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who
is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25% or 15% for a US corporation in the case of dividends paid out of
the profits of an "Approved Enterprise" (as such term is defined in the Investment Law), subject to certain conditions. However, generally,
the maximum rate of withholding tax on dividends that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital
throughout the tax year in which the dividend is distributed as well as the previous tax year and the dividend is not paid from the profits
of an "Approved Enterprise", the Israeli tax withheld may not exceed 12.5%, subject to certain conditions. A non-resident of Israel who
receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income,
provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources
of income in Israel.
In case of dividends paid out of the profits of a "Preferred Enterprise"
or "Preferred Technological Enterprise", the applicable tax rate is 20% for individuals and 15% for US corporations holding 10% or more
of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year, subject
to certain conditions.
Residents of the United States will generally have taxes in Israel
withheld at source.
102
Surtax.
Individuals who are subject to tax in Israel are also subject to
an additional tax at a rate of 3% on annual income exceeding NIS 721,560 (for 2025), including, but not limited to, dividends, interest
and capital gains.
In addition to the existing surtax at a rate of 3%, effective as
of January 1, 2025, an additional surtax at a rate of 2% will be imposed specifically on capital-source income in excess of the threshold
amount (the threshold has been frozen and will remain unchanged for the years 2025–2027). The surtax will apply to all income not
classified as “business/employment income.” Such income includes capital gains from the sale of securities, dividends, interest,
and similar income.
The surtax applies only to taxable income, after deductions, offsets,
and exemptions permitted by law, and not to the taxpayer’s total gross receipts.
Passive Foreign Investment Company Status under U.S. Federal Income
Tax Law
In general, a non-U.S. corporation will be classified for U.S.
tax purposes as a passive foreign investment company (hereafter also referred to as a "PFIC") in any taxable year in which either (i)
75% or more of its gross income (including the pro-rata gross income of any company (U.S. or foreign) in which it is considered to own
25% or more of the ordinary shares by value) for the taxable year is passive income, or (ii) at least 50% of the average value of all
of its gross assets (including the pro-rata fair market value of the assets of any company in which it is considered to own 25% or more
of the ordinary shares by value) during the taxable year, calculated quarterly by value, produce, or are held for the production of, passive
income. Passive income for these purposes includes items such as dividends, interest, royalties, rents and gains from commodities and
securities transactions.
If we are classified as a passive foreign investment
company, highly complex rules will apply to our U.S. shareholders. Accordingly, U.S. shareholders are urged to consult their tax advisors
regarding the application of such rules.
If a corporation is a passive foreign investment company, a U.S.
shareholder will be subject to one of three alternative taxing regimes:
"QEF" regime - If the shareholder elects to treat the PFIC as a
QEF, then each year the shareholder includes in its gross income a proportionate share of the PFIC's ordinary income and net capital gain.
We do not currently intend to prepare or provide the information that would enable you to make a Qualified Election Fund election. A second
regime may be elected if the PFIC stock is "marketable." The U.S. shareholder may elect to "mark the stock to market" each year. At the
end of each taxable year, the shareholder recognizes gain equal to the excess of the fair market value of the PFIC stock over the shareholder's
tax basis in the stock. Losses may also be recognized to the extent of previously recognized gains.
A U.S. shareholder making neither of these elections is subject
to the "excess distribution" regime. The tax is triggered when the shareholder receives an "excess distribution" from the PFIC. An "excess
distribution" is either (1) a distribution with respect to stock that is greater than 125% of the average of such distributions over the
preceding three years, or (2) 100% of the gain from the disposition of shares in the PFIC.
103
An "excess distribution" is subject to special tax rules. In most
cases, only a portion of it is included in the gross income of the U.S. shareholder and taxed at normal rates. The remainder is never
so included, but is used as the basis for calculating a "deferred tax amount", which is simply added to the shareholder's tax liability.
The deferred tax amount is computed as follows. The "excess distribution"
is first ratably allocated, share by share, to each day of the shareholder's holding period. Portions allocated to the current year, and
to any pre-PFIC years (that is, years before 1987, when there were no PFICs, or years before the first year in which the company was a
PFIC with respect to that shareholder), are included in ordinary income for the current year. Portions allocated to prior PFIC years are
hypothetically taxed at the highest marginal rate in effect for those years (without regard to the shareholder's actual rate or to any
deductions or credits for those years). To this hypothetical tax is added the interest that the shareholder would have paid if it were
simply paying that tax late for that year. The sum of the tax and the interest charge is the deferred tax amount, which cannot be offset
or otherwise affected by current net operating losses or other deductions.
A U.S. person who inherits shares in a foreign corporation that
was a PFIC in the hands of the decedent (other than a decedent who was a nonresident alien at all times during his holding period in the
shares) who did not make either of the elections described above, is denied the otherwise available step-up in the tax basis of such shares
to fair market value at the date of death. The U.S. person steps into the shoes of the decedent and will be subject to the rules described
above.
Although a determination as to a corporation's PFIC status is made
annually, an initial determination that a corporation is a PFIC for any taxable year generally will cause the above-described consequences
to apply for all future years as to U.S. shareholders who held shares in the corporation at any time during the PFIC taxable year and
who made neither a valid QEF election with respect to such shares nor a valid election to mark such shares to market. This will be true
even if the corporation loses its PFIC status in later years, unless certain elections are made. However, with respect to a PFIC that
does not make any distributions or deemed distributions, the above tax treatment would apply only to gains realized on the disposition
of such shares by a U.S. shareholder.
If we are classified as a PFIC, complicated rules will apply to
our U.S. shareholders. Our status in future years will depend on our assets and activities in those years, although shareholders will
be treated as continuing to own an interest in a passive foreign investment company if we are a passive foreign investment company in
any year in which a shareholder owns our shares, unless certain elections are made.
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to a U.S. shareholder in light of his or her particular circumstances or to a U.S. shareholder subject to
special treatment under U.S. federal income tax law. We do not currently intend to prepare or provide the information that would enable
you to make a Qualified Election Fund election. U.S. shareholders are urged to consult their tax advisors about the U.S. federal income
taxation rules to which they will be subject, as well as the PFIC rules, including the advisability, procedure and timing of making a
mark-to-market election, in connection with their holding of our shares, including warrants or rights to acquire our shares.
104
Update Regarding Recent U.S. Tax Legislation
In July 2025, the United States enacted the One Big Beautiful Bill Act (“OBBBA”),
a broad tax and budget law that focuses primarily on U.S. corporate tax measures, international tax rules, and adjustments to various
incentives and deductions. OBBBA does not have a material effect on our tax expenses or net income.
Certain Reporting Requirements
Certain U.S. investors are required to file IRS Form 926, Return
by U.S. Transferor of Property to a Foreign Corporation, and certain U.S. Investors may be required to file IRS Form 5471, Information
Return of U.S. Persons with Respect to Certain Foreign Corporations, reporting transfers of cash or other property to us and information
relating to the U.S. investor and us. Substantial penalties may be imposed upon a U.S. investor that fails to comply. Each U.S. investor
should consult its own tax advisor regarding these requirements.
In addition, legislation imposes reporting requirements for the
holder of certain foreign financial assets, including equity of foreign entities, if the aggregate value of all of these assets exceeds
certain thresholds. Our shares are expected to be subject to these new reporting requirements unless the shares are held in an account
at a domestic financial institution. Penalties may apply to any failure to comply with such reporting requirements. U.S. investors should
consult their own tax advisors regarding the application of this legislation.
Backup Withholding Tax and Information Reporting Requirements
Generally, information reporting requirements will apply to distributions
with respect to our shares or proceeds on the disposition of our shares paid within the United States (and, in certain cases, outside
the United States) to U.S. investors other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently
at 24%) may apply to such amounts if the U.S. investor fails to (i) provide a correct taxpayer identification number, (ii) report interest
and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required
manner. U.S. investors who are required to establish their exempt status generally must provide such certification on IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld as
backup withholding from a payment may be credited against a U.S. investor's U.S. federal income tax liability and such U.S. investor may
obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information
in a timely manner.
105
Tax Assessment
The company and its subsidiaries file income tax returns in Israel,
U.S.A and Denmark.
The Israeli tax returns of the Company are open for examination
by the Israeli Tax Authority for tax years beginning in 2021.
The Federal tax returns of our U.S. subsidiary are open for examination
by the Federal Tax Authorities for tax years beginning in 2022. The New Jersey state tax returns of our U.S. subsidiary are open for examination
by the New Jersey State Tax Authority for the tax years beginning in 2021. The California State Tax returns of our U.S. subsidiary are
open for examination by the California State Tax Authority for tax years beginning in 2021. The New York, Texas and Illinois State Tax
returns of our U.S. subsidiary are open for examination by the respective jurisdiction tax authorities for tax periods beginning in 2022.
The Virginia, Tennessee, and New Mexico State Tax returns of our U.S. subsidiary are open for examination by the respective jurisdiction
State Tax Authorities for tax periods beginning in 2023.
The Danish tax returns of our Danish subsidiary are open for examination
by the Danish Tax Authority for tax years beginning on January 1, 2022.
F.
Dividends and Paying Agents
Not applicable.
G. Statement
by experts
Not applicable.
H. Documents
on Display
We are required to file reports and other information with the
SEC under the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations thereunder applicable to foreign private issuers.
Although as a foreign private issuer we are not required to file periodic information as frequently or as promptly as United States companies,
we generally do publicly announce our quarterly and year-end results promptly and file periodic information with the SEC under cover of
Form 6-K. We are also exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and our
office holders, directors and principal shareholders are exempt from the reporting and other provisions in Section 16 of the Exchange
Act.
You may review a copy of our filings with the SEC, including any
exhibits and schedules, at the SEC's public reference room at 100 F Street N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330
for further information on the public reference room. As a foreign private issuer, all documents which were filed after November 4, 2002
on the SEC's EDGAR system will be available for retrieval on the SEC's website at www.sec.gov. The documents referred to in this document
may be inspected at the Company's offices, located at 14 Atir Yeda Street, Kfar Sava, Israel 4464323.
106
Any statement in this annual report about any of our contracts
or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the annual report the contract or
document is deemed to modify the description contained in this annual report. We urge you to review the exhibits themselves for a complete
description of the contract or document.
Our website is http://www.silicom.co.il.
We do not intend for any information contained on our internet website to be considered part of this annual report, and we have included
our website address in this annual report solely as an inactive textual reference. We will post on our website any materials required
to be posted on such website under applicable corporate or securities laws and regulations, including posting any XBRL interactive financial
data required to be filed with the SEC, and any notices of general meetings of our shareholders.
I. Subsidiary
information
Not applicable.
Item 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss related to changes in market prices,
including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position,
results of operations or cash flows. Our primary market risk exposures relate to our investment portfolio and fluctuation of the exchange
rate of the US Dollar, which is the primary currency in which we conduct our operations, against the NIS with respect to the Company's
Israeli operations, and against the DKK and Euro with respect to Danish operations.
Interest Rate Risk
As of December 31, 2025, our investment portfolio consisted of
approximately US$ 32.5 million invested in corporate and government debt securities. These securities are classified as "held to
maturity." All of the Company's investments are in fixed-rate instruments.
We may be required to adjust the carrying value of our investment
securities due to a default, lack of liquidity or other event. For that matter we are required to use of forward-looking information to
calculate credit loss estimates
As of December 31, 2025, we were not required to adjust the carrying
value of our investment securities.
For quantitative information on the Company's marketable securities,
please see Note 5 to our consolidated financial statements included elsewhere in this annual report.
As of December 31, 2025, we did not have any short or long term
interest bearing loans or debts, hence with respect to the Company's business operations, we do not have any exposure to interest rate
risk.
107
Foreign Currency Exchange Risk
Most of our revenues are generated in U.S. Dollars. In addition,
most of our costs are denominated and determined in U.S. Dollars and NIS. According to the salient economic factors indicated in ASC 830
"Foreign Currency Matters" (formerly SFAS No. 52), "Foreign Currency Translation", our cash flow, sale price, sales market, expense, financing
and inter-company transactions, and arrangement indicators, are predominantly denominated in U.S. Dollars, and so, the U.S. dollar is
the primary currency of the economic environment in which we operate. Thus, the U.S. dollar is our functional and reporting currency.
In our balance sheet, we re-measure into U.S. Dollars all monetary accounts (principally cash and cash equivalents and liabilities) that
are maintained in other currencies. For this re-measurement, we use the relevant foreign exchange rate at the balance sheet date. Any
gain or loss that results from this re-measurement is reflected in the statement of operations as appropriate. We measure and record non-monetary
accounts in our balance sheet in U.S. Dollars. For this measurement, we use the U.S. dollar value in effect at the date that the asset
or liability was initially recorded in our balance sheet (the date of the transaction).
As of December 31, 2025, we had accounts receivable in NIS or in
funds linked thereto in the amount of US$ 2,573 thousand. Market risk was estimated as the potential decrease in balance resulting
from a hypothetical 10% increase in the year-end Dollar exchange rate. Assuming such increase in the Dollar exchange rate, the balance
of our accounts receivable would decrease by US$ 234 thousand. As of December 31, 2025, we had accounts payable in NIS or linked thereto
in the amount of US$ 9,246 thousand. Market risk was estimated as the potential increase in balance resulting from a hypothetical
10% decrease in the year-end Dollar exchange rate. Assuming such decrease in the Dollar exchange rate, the balance of our accounts payable
would increase by US$ 1,027 thousand.
In 2025, there was a decrease of 12.53% in the Dollar exchange
rate to the NIS which resulted in an aggregate increase in the fair value of our assets of US$ 841 thousand and an aggregate increase
in the fair value of our liabilities of US$ 1,422 thousand.
Inflation in Israel and the Israeli currency as well as U.S. Dollar
exchange rate fluctuations may have only a limited effect on our accounts payable as well as on our accounts receivable, as described
above.
Inflation in Denmark and the Danish currency as well as U.S. Dollar
exchange rate fluctuations do not have a significant effect on our accounts receivable as well as on our accounts payable.
Our operating expenses may be affected by fluctuations in the value
of the U.S. dollar as it relates to the NIS. By way of example, a hypothetical 10% weakening in the value of the U.S. Dollar relative
to the NIS in 2025 would have resulted in an increase in operating expenses of approximately US$ 1,378 thousand for the year ended
December 31, 2025. In addition, our operating expenses may be affected by fluctuations in the value of the U.S. Dollar as it relates to
the DKK. By way of example, a hypothetical 10% weakening in the value of the U.S. dollar relative to the DKK in 2025, would have resulted
in an increase in operating expenses of approximately US$ 604 thousand for the year ended December 31, 2025.
108
As of December 31, 2025, all of our investments, other than a portion
of our cash and cash equivalents comprising a small portion of our overall investment portfolio, consisted of investments denominated
in U.S. Dollars, and our portfolio is therefore not subject to significant exposure to foreign currency exchange risk.
As of December 31, 2025, we were not engaged in any hedging or
other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations.
Credit Risk
Our investment portfolio includes "held to maturity" marketable
securities. These securities include investments issued by highly rated issuers. As of December 31, 2025, the rating of the securities
in our portfolio was at least BBB. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the
counterparty to a financial instrument fails to meet its contractual obligations), which may be exacerbated by economic turmoil that may
affect the financial markets and the global economy and cause credit issues, including for reputable financial institutions. Any changes
in fair value of our investment securities due to credit risk do not affect our profit or loss unless there is other than temporary impairment
(see Note 2W to our financial statements for the year ended December 31, 2025). For additional information see "Item 3.D. Key Information
– Risk Factors."
As of December 31, 2025, we were not required to adjust the carrying
value of our investment securities.
Our top three ultimate customers accounted for approximately 28%
of our revenues in 2025. We expect that a small number of customers will continue to account for a significant portion of our revenues
for the foreseeable future. Difficulties in the fulfillment of the financial obligations of one or more of such customers may expose us
to credit risk and may have a material adverse effect on our business and our financial condition and results. For additional information
see "Item 3.D. Key Information – Risk Factors". Difficulties in the fulfillment of financial obligations of one or more of our customers
may have an adverse effect on our ability to consummate the collection of consideration payable under purchase orders placed by, or invoiced
to, such customers under one or more Design Wins in relation to which such customers operate. See Note 2 W. (2) of our consolidated financial
statements.
Item 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
109
PART
II.
Item 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
Item 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
Item 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our Chief Executive
Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. Our management, including our Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act
Rule 13a-15(e) and Rule 15d-15(e), as of the end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were
effective.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
Management assessed our internal control over financial reporting
as of December 31, 2025, the end of our fiscal year. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control — Integrated Framework (2013)."
Based on our assessment, management has concluded that our internal
control over financial reporting was effective as of December 31, 2025, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted
accounting principles. We reviewed the results of management's assessment with the audit committee of our Board of Directors.
This annual report includes, on page F-4 of this form 20-F, an
attestation report of the Company's registered public accounting firm on management's assessment of the Company's internal control over
financial reporting.
110
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations.
Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper
management override. Because of such limitation, there is a risk that material misstatements will not be prevented or detected on a timely
basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Changes in Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting
that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.
Item 15A.
CONTROLS AND PROCEDURES
Not Applicable.
Item 16.
Reserved.
Item 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors had determined that both Ms. Ayelet Aya
Hayak and Mr. Ilan Erez were our audit committee financial experts.
Item 16B.
CODE OF ETHICS
Our company has adopted a code of ethics, which applies to all
our employees, office holders and directors, including our Chief Executive Officer, our Chief Financial Officer, our VP Finance, Director
of Finance and our Corporate Controller.
111
Item 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services for
the audit of the Company's consolidated annual financial statements for the years ended December 31, 2025 and 2024, audit-related
services and tax services rendered by Kesselman & Kesselman Certified Public Accountants (Isr.) PwC Israel.
|
2025 |
2024 |
|||||||
|
Audit Fees(1)
|
$ |
120,000 |
$ |
120,000 |
||||
|
Audit-Related Fees(2)
|
$ |
- |
$ |
7,630 |
||||
|
Tax Fees(3)
|
$ |
49,806 |
$ |
44,500 |
||||
| (1) |
Audit Fees consist of fees for professional services rendered for the audit of the Company's annual consolidated financial statements
and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements. |
| (2) |
Audit-Related Fees consist of accounting consultation and consultation on financial accounting standards, not arising as part of
the audit, audit related expenses, as well as procedures performed over registration statements. |
| (3) |
Tax Fees are the aggregate fees billed for professional services rendered for tax compliance, transfer pricing studies, and tax advice
other than in connection with the Audit. Tax compliance involves audit of original and amended tax returns, tax planning and tax advice.
|
Audit committee's pre-approval policies and procedures
We are required to obtain the approval of our audit committee (and
subsequently the consent of the Board of Directors and shareholders) before engaging our independent auditors, Kesselman & Kesselman
Certified Public Accountants (Isr.) PwC Israel, to audit our consolidated financial statements, as well as to provide other audit or permitted
non-audit services to us. This policy, which is designed to assure that such engagements do not impair the independence of our auditors,
requires pre-approval from the audit committee on an annual basis for the various audit and non-audit services that may be performed by
our auditors. Our audit committee is not permitted to approve the engagement of our auditors for any services that would be inconsistent
with maintaining the auditor's independence or that are not permitted by applicable law.
112
Item 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
Item 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
Period |
Total Number of Shares Purchased (1) |
Average Price Paid per Share (US$) |
Total Number of Shares Purchased as Part of Publicly Announced
Plan |
Approximate Dollar Value that May Yet Be Purchased Under the Plan
(US$) |
||||||||||||
|
January 1, 2025 - January 31, 2025 |
25,940 |
17.098 |
379,270 |
9,417,629 |
||||||||||||
|
February 1, 2025 - February 28, 2025 |
20,253 |
16.870 |
399,523 |
9,075,969 |
||||||||||||
|
March 1, 2025 - March 31, 2025 |
31,028 |
15.115 |
430,551 |
8,606,988 |
||||||||||||
|
April 1, 2025 - April 30, 2025 |
22,768 |
13.691 |
453,319 |
8,295,278 |
||||||||||||
|
May 1, 2025 - May 7, 2025 |
6,155 |
15.110 |
459,474 |
8,202,278 |
||||||||||||
|
May 1, 2025 - May 31, 2025 |
6,155 |
15.110 |
459,474 |
8,202,278 |
||||||||||||
113
Item 16F.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
Item 16G.
CORPORATE GOVERNANCE
Our corporate governance practices differ from those followed by
domestic companies as required under the listing standards of the NASDAQ Global Market, due to an exemption that we obtained from NASDAQ
as foreign private issuer which enables us to comply with our home country laws of the State of Israel, including the provisions of the
Companies Law, in lieu of NASDAQ Listing Rules. Below is a concise summary of the significant ways in which our corporate governance practices
differ from the corporate governance requirements of NASDAQ applicable to domestic U.S. listed companies:
| • |
We are not required to distribute annual and quarterly reports directly to shareholders, but we do make our audited financial statements
available to our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the SEC
on Form 6-K; |
| • |
A majority of our Board of Directors may not necessarily be comprised of independent directors as defined in the NASDAQ Listing Rules,
however, a majority of our audit committee are independent directors in accordance with NASDAQ Listing Rule 5605(a)(2). Our directors
are elected to our Board of Directors in accordance with the new directors voting mechanism approved by our shareholders on the Annual
General Meeting which took place on June 8, 2016. According to said directors voting mechanism, directors are divided into three groups,
Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that at each annual
general meeting of the shareholders a given group of directors is brought for election, to serve on a continuous basis for a three-year
term, until the third annual general meeting following the meeting on which such group was elected for service and until their respective
successors are duly elected, at which point their term in office shall expire. At each annual general meeting, the annual general meeting
shall be entitled to elect directors to replace the directors whose three-year term in office has expired, and so on ad infinitum, so
that each year, the term in office of one group of directors shall expire. The nominations for director which are presented to our shareholders
are generally made by our board of directors. Pursuant to the Companies Law, one or more shareholders of a company holding at least one
percent of the voting power of the company may nominate a currently serving external director for an additional three-year term. Israeli
law does not require the adoption of, and our board has not adopted, a formal written charter or board resolution addressing the nomination
process and related matters. Compensation of our directors and other office holders of the Company is determined in accordance with Israeli
law; |
114
| • |
Our audit committee has not adopted a formal written audit committee charter specifying the items enumerated in NASDAQ Listing Rule
5605(c)(1). We believe that the members of our audit committee comply with the requirements of the Israeli law, as well as NASDAQ Listing
Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities Act of 1933. For a detailed discussion
please refer to "Item 6 – Directors, Senior Management and Employees – Audit Committee"; |
| • |
As opposed to NASDAQ Listing Rule 5620(c)(3), which sets forth a minimum quorum for a shareholders meeting, under Israeli law a company
is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at
a shareholders meeting. Our current Articles of Association provide that a quorum of two or more shareholders, present in person or by
proxy, holding shares conferring in the aggregate more than thirty-three and a third (33 1/3 %) percent of the voting power of the Company
is required; |
| • |
All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts
and transactions set forth in the Companies Law, and are not subject to the review process set forth in NASDAQ Listing Rule 5630. For
a detailed discussion please refer to "Item 10 – Additional Information – the Companies Law"; |
| • |
We seek shareholder approval for all corporate action requiring such approval in accordance with the requirements of the Companies
Law rather than under the requirements of the NASDAQ Marketplace Rules, including (but not limited to) the appointment or termination
of auditors, appointment and dismissal of directors, approval of interested party acts and transactions requiring general meeting approval
as discussed above and a merger; |
| • |
We follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of
our compensation committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law,
and our amended and restated Articles of Association, do not require that a compensation committee composed solely of independent members
of our board of directors determine (or recommend to the board of directors for determination) an executive officer's compensation, as
required under NASDAQ listing standards related to compensation committee independence and responsibilities; nor do they require that
the Company adopt and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself
in accordance with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies
Law. Furthermore, the compensation of office holders is determined and approved by our compensation committee and our board of directors,
and in certain circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or,
in special circumstances in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements
for approval by the shareholders for any office holder compensation, and the relevant majority or special majority for such approval,
are all as set forth in the Companies Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder
compensation requiring such approval under the requirements of the Companies Law, including seeking prior approval of the shareholders
for the Executive Compensation Policy and for certain office holder compensation, rather than seeking approval for such corporate actions
in accordance with NASDAQ Listing Rules; and |
115
| • |
We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation
plans (as set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will
attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent
required in order to ensure they are tax qualified for our employees in the United States. However, if such approval is not received,
then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its
U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans
are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws. |
| • |
Our Board of Directors determined that the Company meets all of the requirements of the Israeli Companies Regulations (Relief for
Companies Whose Shares Are Registered for Trading Outside of Israel), 2000 (the "Regulations"),
pursuant to which Israeli companies which meet all of the following conditions may opt-out of certain Israeli regulations governing the
appointment of external directors and the composition of the audit and compensation committees (the "Israeli
Dahatz Rules"): (1) the Company's shares are listed on a foreign stock exchange which is referenced in Section 5A(c) of the Regulations,
which includes, among others, the New York Stock Exchange (NYSE); NASDAQ Global Select Market; and NASDAQ Global Market; (2) the Company
does not have a controlling shareholder; and (3) the Company complies with the requirements of the foreign securities laws and stock exchange
regulations relating to appointment of independent directors and composition of the audit and compensation committees as applicable to
companies which are incorporated under the laws of such foreign countries. The Board of Directors approved the opt-out of the Israeli
Dahatz Rules and follow the requirements of the NASDAQ Listing Rules and the rules under the Securities Act relating to appointment of
independent directors and composition of the audit and compensation committees which are applicable to companies which are incorporated
under the laws of the United States, effective July 29, 2020. |
Item 16H.
MINE SAFETY DISCLOSURE
Not Applicable.
Item 16I.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT
PREVENT INSPECTIONS
Not Applicable.
116
Item 16J. INSIDER TRADING POLICIES
We have adopted an insider trading policy, or the Policy, governing the purchase, sale and other transactions in our securities that applies to our directors, officers, employees, consultants and other covered persons, including immediate family members and entities controlled by any of the foregoing persons.
The Policy prohibits, among other things, insider trading and certain speculative transactions in our securities (including short sales, buying put and selling call options and other hedging or derivative transactions in our securities) and establishes a regular blackout period schedule during which directors, officers, employees, consultants and other covered persons may not trade in the Company’s securities, as well as certain pre-clearance procedures that directors and officers must observe prior to effecting any transaction in our securities.
The Company believes that the Policy is reasonably designed to promote compliance with applicable insider trading laws, rules and regulations, and listing standards applicable to the Company. A copy of the Policy is filed as Exhibit 11.2 to this Form 20-F.
Item 16K. DISCLOSURE REGARDING ANNUAL REPORTING: RISK MANAGEMENT, STRATEGY, AND GOVERNANCE DISCLOSURE.
Risk Management and Strategy
In addition, as part of the Company’s cybersecurity governance framework, the Company also assesses potential cybersecurity threats related to third-party providers and counterparties and ensures that such providers use appropriate protection measures, such as virtual private networks and two-factor authentication.
To enhance our cybersecurity capabilities, we're actively investing in IT security measures. This includes identifying and safeguarding critical assets, fortifying our security infrastructure, and implementing robust monitoring and alert systems. We're collaborating with cybersecurity experts and external consultants to assess our information security landscape, identify vulnerabilities, and adopt industry-best practices. This involves leveraging a range of third-party tools and technologies to improve our overall cybersecurity.
117
Cybersecurity Threats
In November 2024, we were the subject of a cyberattack originating in Iran. See "Item 3.D. – Risk Factors", under the caption "Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business" for additional information regarding the November 2024 cyberattack.
Governance
In 2021, our Audit Committee held a meeting and reviewed a presentation regarding our cybersecurity processes. In January 2024, considering the rapid changes in cybersecurity and the emergence of new cybersecurity threats, our Board of Directors determined that the Company should take steps to ensure that the Company is able to meet the new challenges in this area, and commissioned a new internal audit for 2024 relating to the Company’s cybersecurity measures.
The Audit concerning cyber security measures was conducted throughout 2024. In October 2024 the members of the Board were provided with the Audit Report. The Board of Directors held a discussion concerning the Report and its evaluation. The Board resolved to adopt the measures recommended by management, including with respect to the appointment of a Steering Committee for Implementing Data Protection Measures. The committee has convened periodically since its inception.
In addition, the company's cybersecurity procedures were revised to include additional requirements for board involvement. These revisions outline, among other things, specific circumstances where the board's acknowledgement, or actual involvement, is necessary on cybersecurity matters.
118
PART III.
Item 17. FINANCIAL STATEMENTS
Not Applicable.
Item 18. FINANCIAL STATEMENTS
See pages F-1 to F-54
Item 19. EXHIBITS
| 1.1 |
| 4.1 |
| 4.2 |
| 4.3 |
| 4.5 |
| 4.6 |
| 4.7 |
119
| 4.8 |
| 4.9 |
| 4.10 |
| 4.11 |
| 4.12 |
| 4.13 |
| 8.1 |
| 11.1 |
| 11.2 |
| 12.1 |
| 12.2 |
| 13.1 |
| 13.2 |
| 15.1 |
| 97.1 |
| (*) |
Filed herewith.
|
120
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
|
SILICOM LIMITED
By: /s/ Liron Eizenman
Liron Eizenman
Chief Executive Officer
|
April 28, 2026
121
Silicom Ltd.
and its Subsidiaries
Consolidated
Financial Statements
As of and for the year ended
December 31, 2025
Silicom Ltd. and its Subsidiaries
Consolidated Financial Statements as of December 31, 2025
Contents
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm (PCAOB ID:
|
F - 3
|
|
F - 6
|
|
|
F - 8
|
|
|
F - 9
|
|
|
F - 10
|
|
|
F - 12
|
F - 2
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Silicom Ltd.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Silicom Ltd. and its subsidiaries (the “Company”) as of December 31, 2025 and 2024, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2025, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and 2024, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2025 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Form 6-K. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
F - 3
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F - 4
Capitalized internally developed software costs
As described in Note 2O to the consolidated financial statements, the Company has internally developed software costs of $2.6 million as of December 31, 2025. Management applied significant judgment in determining which software projects and activities within those projects qualify for capitalization, and the timing of establishing technological feasibility. In addition, management applied judgment in determining when to cease the capitalization of costs.
The principal considerations for our determination that performing procedures relating to capitalized internally developed software costs is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to capitalized internally developed software costs due to the significant amount of judgment by management when developing the estimates; (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimates, such as the software projects qualification for capitalization, timing of establishing technological feasibility and time to cease capitalization;
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to capitalized internally developed software costs, including controls over the software projects qualification for capitalization, timing of establishing technological feasibility and time to cease capitalization. These procedures also included, among others, (i) inspection of the products documentation; (ii) testing management’s process for estimating the capitalized internally developed software costs; and (iii) testing management’s identification of accumulated time and costs, both internal and external, associated with internal software development activities and the Company's controls over when amortization started.
|
/s/
|
|
Certified Public Accountants (Isr.)
|
|
A member firm of PricewaterhouseCoopers International Limited
|
|
|
March 16, 2026
We have served as the Company’s auditor since 2021.
F - 5
Silicom Ltd. and its Subsidiaries
Consolidated Balance Sheets as of December 31
|
2024
|
2025
|
|||||||||||
|
Note
|
US$ thousands
|
US$ thousands
|
||||||||||
|
Assets
|
||||||||||||
|
Current assets
|
||||||||||||
|
Cash and cash equivalents
|
3
|
|
|
|||||||||
|
Short-term bank deposits
|
4
|
|
|
|||||||||
|
Marketable securities
|
2E, 5
|
|
|
|||||||||
|
Accounts receivable:
|
||||||||||||
|
Trade, net
|
2F
|
|
|
|
||||||||
|
Other
|
6
|
|
|
|||||||||
|
Inventories
|
7
|
|
|
|||||||||
|
Total current assets
|
|
|
||||||||||
|
Marketable securities
|
2E, 5
|
|
|
|||||||||
|
Assets held for employees' severance benefits
|
12
|
|
|
|||||||||
|
Property, plant and equipment, net
|
8
|
|
|
|||||||||
|
Intangible assets, net
|
9
|
|
|
|||||||||
|
Operating leases right-of-use, net
|
10
|
|
|
|||||||||
|
Total assets
|
|
|
||||||||||
|
Avi Eizenman
|
Liron Eizenman
|
Eran Gilad
|
||
|
Chairman of the Board of Directors
|
Chief Executive Officer
|
Chief Financial Officer
|
Kfar-Saba, Israel
March 16, 2026
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
Silicom Ltd. and its Subsidiaries
Consolidated Balance Sheets as of December 31
|
2024
|
2025
|
|||||||||||
|
Note
|
US$ thousands
|
US$ thousands
|
||||||||||
|
Liabilities and shareholders' equity
|
||||||||||||
|
Current liabilities
|
||||||||||||
|
Trade accounts payable
|
|
|
||||||||||
|
Other accounts payable and accrued expenses
|
11
|
|
|
|||||||||
|
Operating lease liabilities
|
10
|
|
|
|||||||||
|
Total current liabilities
|
|
|
||||||||||
|
Long-term liabilities
|
||||||||||||
|
Operating lease liabilities
|
10
|
|
|
|||||||||
|
Liability for employees' severance benefits
|
12
|
|
|
|||||||||
|
Deferred tax liabilities
|
16G
|
|
|
|
||||||||
|
Total liabilities
|
|
|
||||||||||
|
Shareholders' equity
|
13
|
|||||||||||
|
Ordinary shares, ILS
|
||||||||||||
|
|
||||||||||||
|
Additional paid-in capital
|
|
|
||||||||||
|
Treasury shares (at cost)
|
||||||||||||
|
shares as at December 31, 2024 and 2025, respectively
|
(
|
)
|
(
|
)
|
||||||||
|
Retained earnings
|
|
|
||||||||||
|
Total shareholders' equity
|
|
|
||||||||||
|
Total liabilities and shareholders’ equity
|
|
|
||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 7
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Operations for the Year Ended December 31
|
2023
|
2024
|
2025
|
||||||||||||||
|
US$ thousands
|
||||||||||||||||
|
Note
|
Except for share and per share data
|
|||||||||||||||
|
Sales
|
2M, 14
|
|
|
|
||||||||||||
|
Cost of sales
|
|
|
|
|||||||||||||
|
Gross profit
|
|
|
|
|||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Research and development
|
|
|
|
|||||||||||||
|
Sales and marketing
|
|
|
|
|||||||||||||
|
General and administrative
|
|
|
|
|||||||||||||
|
Impairment of goodwill
|
|
|
|
|||||||||||||
|
Total operating expenses
|
|
|
|
|||||||||||||
|
Operating loss
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||
|
Financial income ,net
|
15
|
|
|
|
||||||||||||
|
Loss before income taxes
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||
|
Income taxes
|
16
|
(
|
)
|
|
|
|||||||||||
|
Net loss
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||
|
Loss per share:
|
||||||||||||||||
|
Basic and diluted loss per ordinary share (US$)
|
2T
|
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Weighted average number of ordinary
|
||||||||||||||||
|
shares used to compute basic and diluted loss
|
||||||||||||||||
|
per share (in thousands)
|
|
|
|
|||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 8
Silicom Ltd. and its Subsidiaries
|
Ordinary shares
|
Additional paid-in capital
|
Treasury shares(3)
|
Retained earnings
|
Total shareholders’ equity
|
||||||||||||||||||||
|
Number
of shares(1)
|
US$ thousands
|
|||||||||||||||||||||||
|
Balance at
|
||||||||||||||||||||||||
|
January 1, 2023
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
Exercise of options and RSUs(2)
|
|
|
|
|
|
|
||||||||||||||||||
|
Purchase of treasury shares
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||
|
Reissuance of treasury shares under
share-based compensation plan
|
|
*
|
|
|
|
|
||||||||||||||||||
|
Share-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Net loss
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Balance at
|
||||||||||||||||||||||||
|
December 31, 2023
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
Exercise of RSUs(2)
|
|
*
|
|
|
|
|
||||||||||||||||||
|
Purchase of treasury shares
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||
|
Share-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Net loss
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Balance at
|
||||||||||||||||||||||||
|
December 31, 2024
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
Exercise of RSUs(2)
|
|
*
|
|
|
|
|
||||||||||||||||||
|
Purchase of treasury shares
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||
|
Share-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Net loss
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Balance at
|
||||||||||||||||||||||||
|
December 31, 2025
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
| * |
Less than 1 thousand.
|
| 1 |
Net of shares held by Silicom Inc. and Silicom Ltd.
|
| 2 |
Restricted share units (hereinafter - "RSUs").
|
| 3 |
Company shares held by the Company - presented as a reduction of equity at their cost to the Company.
|
The accompanying notes are an integral part of these consolidated financial statements.
F - 9
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net loss
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Adjustments required to reconcile net loss to net cash provided by (used in) operating activities:
|
||||||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Impairment of intangible assets
|
|
|
|
|||||||||
|
Impairment of goodwill
|
|
|
|
|||||||||
|
Write-down of obsolete inventory
|
|
|
|
|||||||||
|
Changes in marketable securities and exchange rate differences
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Share-based compensation expense
|
|
|
|
|||||||||
|
Deferred taxes, net
|
(
|
)
|
|
|
||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Accounts receivable - trade
|
|
|
|
|||||||||
|
Accounts receivable - other
|
(
|
)
|
(
|
)
|
|
|||||||
|
Change in liability for employees' severance benefits, net
|
(
|
)
|
(
|
)
|
|
|||||||
|
Inventories
|
|
|
(
|
)
|
||||||||
|
Trade accounts payable
|
(
|
)
|
|
|
||||||||
|
Other accounts payable and accrued expenses
|
(
|
)
|
|
|
||||||||
|
Net cash provided by (used in) operating activities
|
|
|
(
|
)
|
||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Investment in short-term bank deposits
|
|
|
(
|
)
|
||||||||
|
Investment in property, plant and equipment
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Investment in intangible assets
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Proceeds from maturity of marketable securities
|
|
|
|
|||||||||
|
Purchases of marketable securities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net cash used in investing activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Cash flows from financing activities
|
||||||||||||
|
Exercise of options and RSUs
|
|
|
|
|||||||||
|
Purchase of treasury shares
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Proceeds from reissuance of treasury shares upon exercise of options
|
|
|
|
|||||||||
|
Net cash used in financing activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Effect of exchange rate changes on cash balances held
|
(
|
)
|
|
|
||||||||
|
Increase (decrease) in cash and cash equivalents
|
|
|
(
|
)
|
||||||||
|
Cash and cash equivalents at beginning of year
|
|
|
|
|||||||||
|
Cash and cash equivalents at end of year
|
|
|
|
|||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 10
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Supplementary cash flow information
|
||||||||||||
|
Non-cash transactions:
|
||||||||||||
|
Additions of right of use assets and lease liabilities
|
|
|
|
|||||||||
|
Termination of lease agreements
|
(
|
)
|
|
(
|
)
|
|||||||
|
Investments in property, plant and equipment
|
|
|
|
|||||||||
|
(
|
)
|
|
|
|||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 11
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1 - General
Silicom Ltd. is an Israeli corporation engaged in designing, manufacturing, marketing and supporting high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices.
The Company's shares have been traded in the United States on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") since February 1994. Since January 2, 2014 the Company's shares have been traded on the NASDAQ Global Select Market (prior thereto they were traded on the NASDAQ Global Market).
In these financial statements the terms "Company" or "Silicom" refer to Silicom Ltd. and its wholly owned subsidiaries, Silicom Connectivity Solutions, Inc. (hereinafter - "Silicom Inc.") and Silicom Denmark A/S (Fiberblaze A/S) (hereinafter – "Silicom Denmark"), whereas the term "subsidiaries" refers to Silicom Inc. and Silicom Denmark.
Note 2 - Summary of Significant Accounting Policies
The significant accounting policies, which are applied consistently throughout the periods presented, are as follows:
| A. |
Financial statements in US dollars
|
Substantially all sales of the Company are made outside of Israel (see Note 14A regarding geographical distribution), in US dollars ("dollars"). Most purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the dollar is the currency that represents the principal economic environment in which the Company operates and is thus its functional currency.
Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions reflected in the statements of operations, the transaction date exchange rates are used. Depreciation, amortization and other changes derived from non-monetary items are based on historical exchange rates. The resulting transaction gains or losses are recorded as net financial income or expenses.
F - 12
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| B. |
Basis of presentation
|
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company. All intercompany balances and transactions have been eliminated in consolidation.
| C. |
Estimates and assumptions
|
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include credit loss, income taxes, impairment of inventories, impairment of goodwill, capitalized software costs and the assumptions used to estimate the fair value of share-based compensation.
| D. |
Cash and cash equivalents
|
The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.
| E. |
Marketable securities
|
The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts.
Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Such amortization and accretion are included in the "Financial income, net" line item in the consolidated statements of operations.
The Company recognizes current expected credit losses for financial assets held at amortized cost. The Company uses forward-looking information to calculate credit loss estimates. As of December 2024 and 2025 the allowance for credit losses is immaterial.
| F. |
Trade accounts receivable, net
|
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company presents accounts receivable in the consolidated balance sheets net of allowance for expected credit losses for potential uncollectible amounts. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable based on current conditions as of the balance sheet date in accordance with ASC 326-20-30-10C and ASC 326-20-30-10D. The estimate is a result of the Company’s ongoing evaluation of collectability, including factors such as past due status, creditworthiness of the specific customer and payment history. The Company elected to apply the practical expedient provided in ASU 2025-05.
As of December 31, 2024 and 2025, allowance for credit losses amounted to US$ 20
F - 13
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| G. |
Inventories
|
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the "weighted average-cost" method.
The Company writes down obsolete or slow moving inventory to its net realizable value.
| H. |
Assets held for employees’ severance benefits
|
Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets are recorded at their current cash redemption value.
| I. |
Property, plant and equipment
|
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets at the following annual rates:
| % | ||||
|
Machinery and equipment
|
|
|||
|
Office furniture and equipment
|
|
|||
|
Leasehold improvements
|
|
|||
* Over the shorter term of the lease or the useful life of the asset
F - 14
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| J. |
Goodwill and other intangible assets
|
Goodwill reflected the excess of the purchase price of a business acquired over the fair value of net assets acquired. Goodwill has been tested for impairment at least annually.
The Company operates in one operating segment and this segment comprises one reporting unit.
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company performs a qualitative assessment and concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the impairment test is not required. However, if the Company concludes otherwise, it is then required to perform a quantitative assessment for goodwill impairment.
The Company performed its quantitative goodwill impairment test by comparing the fair value of its reporting unit with its carrying value. When the reporting unit’s carrying value was determined to be greater than its fair value, an impairment charge was recognized for the amount by which the carrying value exceeded the reporting unit’s fair value.
The Company recorded a goodwill impairment loss of US$ 25,561 thousand in the year ended December 31, 2023. See note 17.
Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in the amortization of such intangible assets in the straight-line method.
The Company recorded an impairment loss of US$ 5,264 thousand in the year ended December 31, 2023, for two capitalization of software development costs projects, that will no longer be utilized by the Company. See note 9.
| K. |
Impairment of long-lived assets
|
In accordance with Impairment or Disposal of long-lived assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment – Overall, Long-lived assets, such as property, plant, equipment and definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or an asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.
F - 15
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| L. |
Leases
|
The Company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, the Company does not recognize right-of-use ("ROU") assets or lease liabilities but recognizes lease expenses over the lease term on a straight-line basis.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
As of December 31, 2025, all of the Company's leases are operating leases.
On the commencement date, the lease payments shall include variable lease payments that depend on an index (such as the Consumer Price Index), initially measured using the index at the commencement date. The Company does not remeasure the lease liability for changes in future lease payments arising from changes in an index unless the lease liability is remeasured for another reason. Therefore, after initial recognition, such variable lease payments are recognized in profit or loss as they are incurred.
Variable payments that depend on the use of the underlying asset are not included in the lease payments. Such variable payments are recognized in profit or loss in the period in which the event or condition that triggers the payment occurs.
The Company’s incremental borrowing rate for a lease is the rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
After lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the discount rate hasn’t been updated as a result of a reassessment event). The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term.
The Company’s lease agreements have remaining lease terms of 1 to 6 years. Some of these agreements include options to terminate the leases immediately. During the year ended December 31, 2023, the Company reached agreements with the lessors to terminate two leases, and accordingly the Company derecognized right of use assets and lease liabilities in the amount of US$ 620 thousand.
In August 2024 the company entered into a new lease agreement for its existing executive offices in Kfar Sava. Accordingly, the Company recognized a right of use asset and a lease liability in the amount of US$ 1,651 thousand.
Some of our vehicle lease agreements include rental payments based on the actual usage of the vehicles and other lease agreements include rental payments adjusted periodically for inflation. The agreements related to leases in Israel are in Israeli Shekel ("ILS") or in ILS linked to the Israeli Consumer Price Index or to the US Dollars. The agreements related to leases in the USA are in US Dollars and the agreements related to leases in Denmark are in Danish Krone ("DKK"). The Company’s lease agreements do not contain any residual value guarantees. See Note 10.
F - 16
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| M. |
Revenue recognition
|
The Company derives revenues primarily from the sale of networking and data infrastructure solutions.
The Company recognizes revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss are transferred to the customer. The Company accounts for a contract with a customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Each of the Company's contracts includes one type of performance obligation. The Company evaluates each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time. Most of the Company's revenues are recognized at a point in time. Revenue is recognized over time for sales of goods manufactured to unique customer specifications, in which the Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date if the customer were to terminate the contract. Revenue recognized over time is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials and overhead.
| N. |
Cost of sales
|
Cost of sales consist primarily of production costs of finished goods manufactured by the Company, with assistance of sub-contractors, from (i) components purchased from third parties, and (ii) sub-assemblies manufactured by sub-contractors under the Company’s directions and supervision as well as employee-related expenses and overhead expenses of the Company’s production lines.
| O. |
Research and development costs and capitalized software development costs
|
Software development costs (mainly salary) related to programmable components incorporated into the Company's products, are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. The Company has determined that technological feasibility for its software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. In addition, management applied judgment in determining when to cease the capitalization of costs.
Amortization begins when the product is available for general release to customers, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. Other costs incurred in the research and development of the Company’s products are expensed as incurred.
F - 17
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| P. |
Allowance for product warranty
|
The Company grants assurance-type warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience.
| Q. |
Treasury shares
|
Treasury shares are recorded at cost and presented as a reduction of shareholders' equity. The Company reissues treasury shares under the Global Share Incentive Plan (2013), upon exercise of options and upon vesting of restricted stock units ("RSU"). Reissuance of treasury shares, based on the Company's policy of first-in, first-out (FIFO), is accounted for in accordance with ASC 505-30 whereby gains are credited to additional paid-in capital and losses are charged to additional paid-in capital to the extent that previous net gains are included therein and otherwise to retained earnings.
| R. |
Income taxes
|
Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are presented as non-current assets and liabilities and measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. A valuation allowance is provided if, based upon the weight of available evidence, the Company cannot assume that it is more likely than not that a portion of the deferred income tax assets will be realized. The Company recognizes the effect of uncertain tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured as the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Taxes which would apply in the event of disposal of investments in foreign subsidiaries have not been taken into account in computing the deferred taxes, as the Company's intention is to hold, and not to realize the investments.
| S. |
Share-based compensation
|
The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:
When portions of an award granted to employees vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the requisite service period for each separately vesting portion of the award.
F - 18
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| S. |
Share-based compensation (cont’d)
|
Equity awards granted to employees are accounted for using the grant date fair value method. The grant date fair value is determined as follows: for stock options using the Binomial option-pricing model and for restricted stock units (“RSUs”) based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting. The fair value of share based payment awards is recognized as an expense over the vesting period. The expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market. For awards with market conditions, compensation expense is not reversed if the market conditions are not satisfied. The Company accounts for forfeitures of share-based awards at the time they occur. If an employee forfeits an award due to not completing the required service period, the Company reverses any previously recognized compensation expense in the same period the forfeiture takes place.
| T. |
Basic earnings (loss) and diluted earnings (loss) per share
|
Basic earnings (loss) per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding and vested RSU’s (net of treasury shares). Diluted earnings (loss) per ordinary share calculation is similar to basic earnings (loss) per ordinary share except that the weighted average of ordinary shares outstanding is increased to include outstanding potential ordinary shares during the period if dilutive. Potential ordinary shares arise from stock options and unvested RSUs, and the dilutive effect is reflected by the application of the treasury stock method.
The following table summarizes information related to the computation of basic and diluted earnings (loss) per ordinary share for the years indicated.
|
Year ended December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
Net loss attributable to ordinary shares
|
||||||||||||
|
(US$ thousands)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Weighted average number of ordinary shares outstanding
|
||||||||||||
|
used in basic and diluted loss per ordinary share calculation
|
|
|
|
|||||||||
|
Basic and diluted loss per ordinary shares (US$)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Weighted average number of shares related to options
|
||||||||||||
|
and RSUs excluded from the diluted loss per share
|
||||||||||||
|
calculation because of anti-dilutive effect
|
|
|
|
|||||||||
F - 19
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| U. |
Comprehensive Income
|
For the years ended December 31, 2023, 2024 and 2025, comprehensive income equals net income.
| V. |
Fair Value Measurements
|
The Company's financial instruments consist mainly of cash and cash equivalents, bank deposit, marketable securities, trade and other receivables and trade accounts payable and other payable. The carrying amounts of these financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these instruments. The fair value of marketable securities is presented in Note 5 to these consolidated financial statements. Assets held for severance benefits are recorded at their current cash redemption value.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
| W. |
Concentrations of risks
|
| (1) |
Credit risk
|
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial institutions. Marketable securities consist of held to maturity marketable securities issued by highly rated corporations. As of December 31, 2024 and 2025, the ratings of the securities in the Company's portfolio was at least BBB. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations). The Company closely monitors extensions of credit and has never experienced significant credit losses.
| (2) |
Significant customers
|
The Company's top three ultimate customers accounted for approximately 28 % of its revenues in 2025. The Company expects that a small number of customers will continue to account for a significant portion of its revenues for the foreseeable future. See Note 14.
F - 20
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| X. |
Liabilities for loss contingencies
|
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
| Y. |
New accounting pronouncements
|
Recently adopted accounting pronouncements
In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The standard requires entities to disclose specific categories in the rate reconciliation and to provide additional information for reconciling items that meet a quantitative threshold. It also requires entities to disclose certain information about income taxes paid and other disclosures related to income and income tax expense from continuing operations. The standard is effective for fiscal years beginning after December 15, 2024 for public business entities. The Company adopted this ASU on a prospective basis effective January 1, 2025.
In July 2025, the FASB issued ASU 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which provides a practical expedient when estimating credit losses on accounts receivable and contract assets arising from transactions accounted for under ASC 606, Revenue from Contracts with Customers. Under this practical expedient, an entity is allowed to assume that the current conditions it has applied in determining credit loss allowances for current accounts receivable and current contract assets remain unchanged for the remaining life of those assets. The ASU is effective for annual periods beginning after December 15, 2025, and interim periods within those annual reporting periods. Effective January 1, 2025, the company early adopted ASU 2025-05 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Recently issued accounting pronouncements, not yet adopted.
In November 2024, the FASB issued ASU 2024-03 “Income Statement: Reporting Comprehensive Income— Expense Disaggregation Disclosures,” The standard requires more detailed information about specified categories of expenses (purchases of inventory, employee compensation, depreciation, amortization, and depletion) included in certain expense captions presented on the face of the income statement, as well as disclosures about selling expenses. The standard is effective for fiscal years beginning after December 15, 2026. The Company is currently evaluating the impact of ASU 2024-03 on its consolidated financial statements.
F - 21
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 3 - Cash and Cash Equivalents
|
December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
Cash
|
|
|
||||||
|
Cash equivalents *
|
|
|
||||||
|
|
|
|||||||
| * |
Comprised mainly of bank deposits in USD as at December 31, 2024 carrying a weighted average interest rate of
|
F - 22
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 4 - Short-term bank deposits
|
December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
Short-term bank deposits
|
|
|
||||||
|
Annual interest rate
|
|
|
% | |||||
F - 23
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 5 - Marketable Securities
The Company's investments in marketable securities as of December 31, 2024 and 2025 are classified as ''held-to-maturity'' and consist of the following:
|
Gross
|
Gross
|
|||||||||||||||
|
unrealized
|
unrealized
|
|||||||||||||||
|
Amortized
|
holding
|
holding
|
Aggregate
|
|||||||||||||
|
cost basis**
|
gains
|
(losses)
|
fair value*
|
|||||||||||||
|
US$ thousands
|
||||||||||||||||
|
At December 31, 2025
|
||||||||||||||||
|
Held to maturity:
|
||||||||||||||||
|
Corporate debt securities and government debt securities
|
||||||||||||||||
|
Current
|
|
|
(
|
)
|
|
|||||||||||
|
Non-Current (1 to 4 years)
|
|
|
(
|
)
|
|
|||||||||||
|
|
|
(
|
)
|
|
||||||||||||
|
At December 31, 2024
|
||||||||||||||||
|
Held to maturity:
|
||||||||||||||||
|
Corporate debt securities and government debt securities
|
||||||||||||||||
|
Current
|
|
|
(
|
)
|
|
|||||||||||
|
Non-Current (1 to 3 years)
|
|
|
(
|
)
|
|
|||||||||||
|
|
|
(
|
)
|
|
||||||||||||
| * |
Fair value is being determined using Level 2 inputs.
|
| ** |
Including accrued interest in the amount of US$
|
| The accrued interest is presented as part of other receivables on the balance sheet. |
F - 24
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 5 - Marketable Securities (Cont’d)
|
Activity in marketable securities in 2024 and 2025:
|
US$ thousands
|
|||
|
Balance at January 1, 2024
|
|
|||
|
Purchases of marketable securities
|
|
|||
|
Amortization of discount on marketable securities |
|
|
||
|
Proceeds from maturity of marketable securities
|
(
|
)
|
||
|
Balance at January 1, 2025
|
|
|||
|
Purchases of marketable securities
|
|
|||
|
Amortization of discount on marketable securities |
|
|||
|
Proceeds from maturity of marketable securities
|
(
|
)
|
||
|
Balance at December 31, 2025
|
|
|||
F - 25
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 5 - Marketable Securities (Cont’d)
The following table summarizes the gross unrealized losses or gains on investment securities and the fair value of those securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss or gain position, at December 31, 2025:
|
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||
|
Held to maturity:
|
Unrealized Losses
|
Fair value
|
Unrealized Losses
|
Fair value
|
Unrealized Losses
|
Fair value
|
||||||||||||||||||
|
Corporate debt securities and government debt securities
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
|
|||||||||||||||
|
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||
|
Held to maturity:
|
Unrealized Gains
|
Fair value
|
Unrealized Gains
|
Fair value
|
Unrealized Gains
|
Fair value
|
||||||||||||||||||
|
Corporate debt securities and government debt securities
|
|
|
|
|
|
|
||||||||||||||||||
The unrealized losses or gains on the investments were caused by changes in interest rate. The Company has the ability and intent to hold these investments until maturity and it is more likely than not that the Company will not be required to sell any of the securities before recovery.
Note 6 - Other Receivables
|
December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
Advances to suppliers
|
|
|
||||||
|
Government authorities
|
|
|
||||||
|
Prepaid expense
|
|
|
||||||
|
Other receivables
|
|
|
||||||
|
|
|
|||||||
F - 26
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 7 - Inventories
|
December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
Raw materials and components
|
|
|
||||||
|
Products in process
|
|
|
||||||
|
Finished products
|
|
|
||||||
|
|
|
|||||||
In the years ended December 31, 2023, 2024 and 2025, the Company recorded inventory write-downs in the amount of US$ 6,433 thousand, US$ 3,682 thousand and US$ 2,817 thousand, respectively.
Note 8 - Property, Plant and Equipment, Net
|
December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
Machinery and equipment
|
|
|
||||||
|
Office furniture and equipment
|
|
|
||||||
|
Leasehold improvements
|
|
|
||||||
|
Property, plant and equipment
|
|
|
||||||
|
Accumulated depreciation
|
(
|
)
|
(
|
)
|
||||
|
Property, Plant and equipment, net
|
|
|
||||||
Depreciation expenses for the years ended December 31, 2023, 2024 and 2025 were US$ 2,212 thousand, US$ 1,891 thousand and US$ 1,249 thousand, respectively.
F - 27
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 9 - Intangible Assets
|
December 31
|
||||||||||||
|
2024
|
2025
|
|||||||||||
|
Useful life
|
US$ thousands
|
|||||||||||
|
Original cost:
|
||||||||||||
|
Capitalization of software development costs
|
|
|
|
|||||||||
|
Licenses
|
|
|
|
|||||||||
|
|
|
|||||||||||
|
Accumulated amortization:
|
||||||||||||
|
Capitalization of software development costs
|
|
|
||||||||||
|
Licenses
|
|
|
||||||||||
|
|
|
|||||||||||
|
Intangible assets, net:
|
||||||||||||
|
Capitalization of software development costs
|
|
|
||||||||||
|
Licenses
|
|
|
||||||||||
|
|
|
|||||||||||
Amortization expense for the years ended December 31, 2023, 2024 and 2025 were US$ 285 thousand, US$ 318 thousand and US$ 338 thousand, respectively. The estimates amortization of capitalized software development costs in relation to developments that were available for general release to customers, as of December 31, 2025, are US$ 305 thousand in each of the years 2026 through 2029, US$ 239 thousand in 2030, US$ 58 thousand in 2031, US$ 39 thousand in 2032. The Company recorded an impairment loss of US$ 5,264 thousand in the year ended December 31, 2023, for two capitalization of software development costs projects, that will no longer be utilized by the Company. The impairment was recorded in cost of sales.
F - 28
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 10 - Leases
| A. |
The components of operating lease cost for the year ended December 31, 2023, 2024 and 2025 were as follows:
|
|
Year ended
December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Operating lease costs (mainly plant and offices)
|
|
|
|
|||||||||
|
Variable lease payments not included in the lease liability
|
|
|
|
|||||||||
|
Short-term lease cost
|
|
|
|
|||||||||
|
Total operating lease cost
|
|
|
|
|||||||||
| B. |
Supplemental cash flow information related to operating leases was as follows:
|
|
Year ended
December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Cash paid for amounts included in the measurement of lease liabilities:
|
||||||||||||
|
Operating cash flows from operating leases
|
|
|
|
|||||||||
|
Right-of-use assets obtained in exchange for lease
liabilities (non-cash):
|
||||||||||||
|
Additions of operating leases
|
|
|
|
|||||||||
|
Termination of operating leases
|
(
|
)
|
|
(
|
)
|
|||||||
F - 29
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 10 - Leases (cont’d)
| C. |
Supplemental balance sheet information related to operating leases was as follows:
|
|
December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
Operating leases:
|
||||||||
|
Operating leases right-of-use
|
|
|
||||||
|
Current operating lease liabilities
|
|
|
||||||
|
Non-current operating lease liabilities
|
|
|
||||||
|
Total operating lease liabilities
|
|
|
||||||
| D. |
Supplemental balance sheet information related to operating leases was as follows:
|
|
December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
Weighted average remaining lease term (years)
|
|
|
||||||
|
Weighted average discount rate
|
|
%
|
|
%
|
||||
| E. |
Future lease payments under non-cancellable leases as of December 31, 2025 were as follows:
|
|
December 31, 2025
|
||||
|
US$ thousands
|
||||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
2029
|
|
|||
|
2030
|
|
|||
|
After 2030
|
|
|||
|
Total operating lease payments
|
|
|||
|
Less: imputed interest
|
(
|
)
|
||
|
Present value of lease liabilities
|
|
|||
F - 30
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 11 - Other accounts payable and accrued expenses
|
December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
Accrued expenses
|
|
|
||||||
|
Employee benefits
|
|
|
||||||
|
Government authorities
|
|
|
||||||
|
Advances from customers
|
|
|
||||||
|
Other payables
|
|
|
||||||
|
|
|
|||||||
F - 31
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Assets Held and Liability for Employees' Severance Benefits
| A. |
Under Israeli law and labor agreements, Silicom is required to make severance payments to retired or dismissed employees and to employees leaving employment in certain other circumstances.
|
In respect of the liability to the employees, individual insurance policies are purchased and deposits are made with recognized severance pay funds.
The liability for severance pay is calculated on the basis of the latest salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited including accumulated income thereon as well as by the unfunded provision.
| B. |
According to Section 14 to the Severance Pay Law ("Section 14") the payment of monthly deposits by a Company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the Company pursuant to such Section 14. Commencing July 1, 2008, the Company has entered into agreements with a majority of its employees in order to implement Section 14. Therefore, as of that date, the payment of monthly deposits by the Company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to those employees that have entered into such agreements and therefore the Company incurs no additional liability since that date with respect to such employees. Amounts accumulated in the pension funds or insurance policies pursuant to Section 14 are not supervised or administrated by the Company and therefore neither such amounts nor the corresponding accrual are reflected in the balance sheet.
|
| C. |
Consequently, the assets held for employees' severance benefits reported on the balance sheet, in respect of deposits for those employees who have signed agreements pursuant to Section 14, represent the redemption value of deposits made through June 30, 2008. The liability for employee severance benefits, with respect to those employees, represents the liability of the Company for employees' severance benefits as of June 30, 2008.
|
As a result of the implementation of Section 14, as described above, the liability with respect to those employees is calculated on the basis of number of years of employment as of June 30, 2008, multiplied by the latest salary paid. The liability is covered by the amounts deposited, including accumulated income thereon, as well as by the unfunded provision. Such liability will be removed, either upon termination of employment or retirement.
| D. |
Expenses recorded with respect to employees' severance payments for the years ended December 31, 2023, 2024 and 2025, mainly attributed to Section 14, were US$
|
F - 32
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity
Capital and reserves
On May 2, 2019, the Company's Board of Directors authorized and began implementation of a one-year share repurchase plan to repurchase up to $15 million of the Company's ordinary shares. On April 30, 2020 the Company's Board of Directors authorized another one-year share repurchase plan allowing the Company to invest up to $15 million to repurchase its ordinary shares. This plan has begun as the previously announced $15 million one-year share repurchase plan was completed. On April 29, 2021 the Company's Board of Directors authorized another one-year share repurchase plan allowing the Company to invest up to $15 million to repurchase its ordinary shares. This plan has begun as the previously announced $15 million one-year share repurchase plan was completed. On May 1, 2023, the Company's Board of Directors authorized another one-year share repurchase plan allowing the Company to invest up to $15 million to repurchase its ordinary shares. This plan began on May 8, 2023. On May 2, 2024, the Company's Board of Directors authorized another one-year share repurchase plan allowing the Company to invest up to $15 million to repurchase its ordinary shares. This plan began on May 8, 2024. Repurchases may be made in the open market and will be in accordance with applicable securities laws and regulations. The timing and amount of each repurchase transaction may depend on a variety of factors. The share repurchase plan does not obligate the Company to acquire any specific number of ordinary shares and may be suspended or terminated at any time at management’s discretion.
Share based compensation
| A. |
On October 21, 2013, the Board resolved to adopt the Global Share Incentive Plan (2013) (the "2013 Plan") and to reserve up to
|
F - 33
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| B. |
Options or RSUs granted to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards of options, or the ordinary shares issued upon their exercise, must be deposited with a trustee for at least two years following the date of grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares.
|
Capital gains on awards granted under the plans are subjected to tax of 25 % to be paid by the employee, and the Company is not entitled to a tax deduction.
Gains which are not capital gains on awards under the plans are subjected to regular tax rates on individuals, and the Company is entitled to a tax deduction for such gains.
| C. |
During 2023, 2024 and 2025, the Company granted
|
| 1. |
The vesting period of the RSUs ranges between
|
| 2. |
The fair value of RSUs is estimated based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.
|
| 3. |
The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, assuming that no dividend yield is expected in any of the years.
|
F - 34
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| D. |
On June 14, 2023, the Company granted, in aggregate,
|
| 1. |
The exercise price for the options (per ordinary share) was US$
|
| 2. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Monte Carlo option-pricing model with the following assumptions:
|
|
Average Risk-free interest rate (a)
|
|
%
|
||
|
Expected dividend yield
|
|
%
|
||
|
Average expected volatility (b)
|
|
%
|
||
|
Termination rate
|
|
%
|
||
|
Suboptimal factor (c)
|
|
| (a) |
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
| (b) |
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
| (c) |
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 35
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| E. |
On June 18, 2024, the Company granted, in aggregate,
|
| 1. |
The exercise price for the options (per ordinary share) was US$
|
| 2. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
|
|
Average Risk-free interest rate (a)
|
|
%
|
||
|
Expected dividend yield
|
|
%
|
||
|
Average expected volatility (b)
|
|
%
|
||
|
Post-vesting termination rate
|
|
%
|
||
|
Suboptimal factor (c)
|
|
|
(a)
|
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
|
(b)
|
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
|
(c)
|
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 36
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| F. |
On June 18, 2025, the Company granted, in aggregate,
|
| 3. |
The exercise price for the options (per ordinary share) was US$
|
| 4. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
|
|
Average Risk-free interest rate (a)
|
|
%
|
||
|
Expected dividend yield
|
|
%
|
||
|
Average expected volatility (b)
|
|
%
|
||
|
Post-vesting termination rate
|
|
%
|
||
|
Suboptimal factor (c)
|
|
|
(a)
|
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
|
(b)
|
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
|
(c)
|
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 37
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| G. |
The following table summarizes information regarding stock options as at December 31, 2025:
|
|
Options outstanding
|
Options exercisable
|
|||||||||||||||
|
Weighted average
|
Weighted average
|
|||||||||||||||
|
remaining
|
remaining
|
|||||||||||||||
|
Exercise price
|
Number
|
contractual
life
|
Number
|
contractual
life
|
||||||||||||
|
US$
|
of options
|
(in years)
|
of options
|
(in years)
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
|
|
|||||||||||||||
The aggregate intrinsic value of options outstanding as of December 31, 2024 and 2025 is US$ 0 thousand and US$ 0 thousand, respectively.
The aggregate intrinsic value of options exercisable as of December 31, 2024 and 2025 is US$ 0 thousand and US$ 0 thousand, respectively.
The total intrinsic value of options exercised during the year ended December 31, 2024 and 2025, is US$ 0 thousand and US$ 0 thousand, respectively.
F - 38
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| H. |
The stock option activity under the abovementioned plans is as follows:
|
|
Weighted
|
||||||||||||
|
Weighted
|
average
|
|||||||||||
|
Number
|
average
|
grant date
|
||||||||||
|
of options
|
exercise price
|
fair value
|
||||||||||
|
US$
|
US$
|
|||||||||||
|
Balance at January 1, 2023
|
|
|||||||||||
|
Granted
|
|
|
|
|||||||||
|
Exercised
|
(
|
)
|
|
|
||||||||
|
Forfeited
|
(
|
)
|
|
|
||||||||
|
Expired
|
(
|
)
|
|
|
||||||||
|
Balance at December 31, 2023
|
|
|||||||||||
|
Granted
|
|
|
|
|||||||||
|
Forfeited
|
(
|
)
|
|
|
||||||||
|
Balance at December 31, 2024
|
|
|||||||||||
|
Granted
|
|
|
|
|||||||||
|
Forfeited
|
(
|
)
|
|
|
||||||||
|
Balance at December 31, 2025
|
|
|||||||||||
|
Exercisable at December 31, 2025
|
|
|||||||||||
F - 39
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| I. |
The Restricted Share Units activity under the abovementioned plans is as follows:
|
|
Weighted
|
||||||||
|
Number of
|
average
|
|||||||
|
Restricted
|
grant date
|
|||||||
|
Share Units
|
fair value
|
|||||||
|
US$
|
||||||||
|
Balance at January 1, 2023
|
|
|||||||
|
Granted
|
|
|
||||||
|
Forfeited
|
(
|
)
|
|
|||||
|
Vested
|
(
|
)
|
|
|||||
|
Balance at January 1, 2024
|
|
|||||||
|
Granted
|
|
|
||||||
|
Forfeited
|
(
|
)
|
|
|||||
|
Vested
|
(
|
)
|
|
|||||
|
Balance at December 31, 2024
|
|
|||||||
|
Granted
|
|
|
||||||
|
Forfeited
|
(
|
)
|
|
|||||
|
Vested
|
(
|
)
|
|
|||||
|
Balance at December 31, 2025
|
|
|||||||
The aggregate intrinsic value of RSUs outstanding as of December 31, 2024 and December 31, 2025 is US$ 1,443 thousand and US$ 1,045 thousand, respectively.
F - 40
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| J. |
During 2023, 2024 and 2025, the Company recorded share-based compensation expenses. The following summarizes the allocation of the stock-based compensation expenses:
|
|
Year ended December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Cost of sales
|
|
|
|
|||||||||
|
Research and development costs
|
|
|
|
|||||||||
|
Selling and marketing expenses
|
|
|
|
|||||||||
|
General and administrative expenses
|
|
|
|
|||||||||
|
|
|
|
||||||||||
As of December 31, 2025, there were US$ 2,906 thousand of unrecognized compensation costs related to stock options and RSUs to be recognized over a weighted average period of 1.62 years.
The total tax benefit recognized (before consideration of valuation allowances) in the consolidated statements of operations related to share based compensation expenses amounted to US$ 2 thousand and US$ 1 thousand for the year ended December 31, 2024 and December 31, 2025.
F - 41
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 14 - Segment Reporting
| A. |
Information on sales by geographic distribution:
|
Sales are attributed to geographic distribution based on the location of the ultimate customer:
|
Year ended December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
USA
|
|
|
|
|||||||||
|
North America - other
|
|
|
|
|||||||||
|
Israel
|
|
|
|
|||||||||
|
Europe
|
|
|
|
|||||||||
|
Asia-Pacific
|
|
|
|
|||||||||
|
|
|
|
||||||||||
| B. |
Sales to single ultimate customers exceeding 10% of sales (US$ thousands):
|
|
Year ended December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Customer "A"
|
|
|
|
|||||||||
|
Customer "B"
|
|
|
|
|||||||||
|
Customer "C"
|
|
|
|
|||||||||
| C. |
Information on Long-Lived Assets - Property, Plant and Equipment and ROU assets by geographic areas:
|
The following table presents the locations of the Company’s long-lived assets as of December 31, 2024 and 2025:
|
Year ended December 31
|
||||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
||||||||
|
North America
|
|
|
||||||
|
Europe
|
|
|
||||||
|
Israel
|
|
|
||||||
|
|
|
|||||||
F - 42
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 14 - Segment Reporting (cont’d)
| D. |
Segment information:
|
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”). The Company has one operating segment.
The Company’s operations are managed and reported to its Chief Executive Officer (“CEO”), the Company’s chief operating decision maker ("CODM").
The CODM uses operating and net income to allocate resources during the Company’s annual planning process and throughout the year, as well as to assess the performance of the Company’s operations. Operating income serves as a key financial metric used by the CODM to evaluate operating results and support strategic and operational decision making.
The following table provides the significant expense (income) categories and amounts align with the segment-level information that is regularly provided to the CODM:
|
Year ended December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Sales
|
|
|
|
|||||||||
|
Raw material and subcontracted manufacturing costs
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Write-down of obsolete inventory
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Payroll & related expenses
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Share-based compensation expenses
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Subcontractor work
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Depreciation costs
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Rent
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Impairment of goodwill
|
(
|
)
|
|
|
||||||||
|
Other segment items *
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Amortization expense
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Operating loss
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Financial income, net
|
|
|
|
|||||||||
|
Income taxes
|
|
(
|
)
|
(
|
)
|
|||||||
|
Segment net loss
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
* |
Other segment items included in Segment net loss includes professional services, consulting and other outside services expenses, travel expenses, insurance, facilities, and other overhead items. |
F - 43
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Financial Income , Net
|
Year ended December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Interest income
|
|
|
|
|||||||||
|
Exchange rate differences, net
|
|
(
|
)
|
(
|
)
|
|||||||
|
Bank charges
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
|
|
|
||||||||||
F - 44
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income
| A. |
Measurement of results for tax purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986
|
As a "foreign invested Company" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the taxable income or loss and the tax basis of assets and liabilities of the Company’s Israeli operations are denominated in US Dollars.
| B. |
Corporate tax rate in Israel
|
The regular corporate tax rate applied to taxable income of Israeli companies is 23 % (as from 2018 onwards).
| C. |
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law")
|
| 1. |
On December 29, 2010, the Knesset approved the Economic Policy Law for 2011-2012, which includes an amendment to the Law for the Encouragement of Capital Investments – 1959 (hereinafter – "the Amendment to the Law"). The Amendment to the Law is effective from January 1, 2011, and its provisions will apply to preferred income derived or accrued in 2011 and thereafter by a Preferred Company, per the definition of these terms in the Amendment to the Law.
|
Companies can choose to not be included in the scope of the Amendment to the Law and to stay in the scope of the law before its amendment until the end of the benefits period.
Under the Amendment to the Law, upon an irrevocable election made by a Company, a uniform corporate tax rate will apply to all preferred income of such Company. The Company elected to apply the uniform corporate tax rate as of 2014. From 2017 onwards, the uniform tax rate is to be 7.5 % in areas in Israel designated as Development Zone A and 16 % elsewhere in Israel. The Company has two facilities in Israel of which one of them is located in Development Zone A. The profits of these Preferred Companies will be freely distributable as dividends, subject to a withholding tax of 20 % (or a lower rate under an applicable tax treaty).
Should the Company derive income from sources other than the Preferred Company, such income will be taxable at the regular corporate tax rates for the applicable year.
F - 45
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income (cont’d)
| C. |
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law") (cont'd)
|
|
On December 29, 2016, the Israeli Parliament (the "Knesset") enacted the "Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016" in which the Law was also amended (hereinafter: “the Amendment”). The Amendment added new tax benefit tracks for a “preferred technological enterprise” and a “special preferred technological enterprise” which award reduced tax rates to a technological industrial enterprise for the purpose of encouraging activity relating to the development of qualifying intangible assets.
The benefits will be awarded to a “preferred Company” that has a “preferred technological enterprise” or a “special preferred technological enterprise” with respect to taxable “preferred technological income” per its definition in the Law.
Preferred technological income that meets the conditions required in the law, will be subject to a reduced corporate tax rate of 12 %, and if the preferred technological enterprise is located in "Development Area A" in Israel - to a reduced tax rate of 7.5 %. A Company that owns a special preferred technological enterprise will be subject to a reduced corporate tax rate of 6 % regardless of the development area in which the enterprise is located. The Amendment is effective as from January 1, 2017.
On June 14, 2017, the Knesset Finance Committee approved "Encouragement of Capital Investment Regulations (Preferred Technological Income and Capital Gain of Technological Enterprise) – 2017" (hereinafter: “the Regulations”), which provides rules for applying the “preferred technological enterprise” and “special preferred technological enterprise” tax benefit tracks, including the Nexus formula that provides the mechanism for allocating the technological income eligible for the benefits.
Should the Company derive income from sources other than the “preferred technological enterprise”, such income will be taxable at the "Preferred Company" tax rate (for manufacturing activity in Israel) or regular corporate tax rates for the applicable year.
As a result of the aforesaid legislation, starting 2021 the Company implement the “preferred technological enterprise” tax benefit track.
F - 46
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income (cont’d)
| C. |
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law") (cont'd)
|
|
| 2. |
In the event of distribution by the Company of dividends out of its retained earnings that were generated prior to the 2014 tax year and were tax exempt under the "Approved Enterprise" or "Benefited Enterprise" status, the Company would be subjected to a maximum of
|
Out of the Company’s retained earnings as of December 31, 2025, approximately US$ 54,729 thousand are tax-exempt, under our previous "Approved Enterprise" and "Benefited Enterprise" status. If such tax-exempt income is distributed as a dividend (including a liquidation dividend), it would be taxed at the regular corporate tax rate applicable to such profits (subject to a maximum rate of 25 %) and an income tax liability of up to approximately US$ 11,968 thousand would be incurred as of December 31, 2025. The Company intends to reinvest its tax-exempt income. Accordingly, no deferred tax liability has been recognized for income attributable to the Company’s previous "Approved Enterprise" or "Benefited Enterprise" status. If the Company was to declare a dividend from its tax-exempt income, an income tax expense would be recognized in the period a dividend is declared.
On November 15, 2021, the Israeli Parliament released its 2021-2022 Budget Law (“2021 Budget Law”). The 2021 Budget Law introduces a new dividend ordering rule that apportions every dividend between previously tax-exempt and previously taxed income. Consequently, distributions (including deemed distributions as per Section 51(h)/51B of the Investment Law) may entail additional corporate tax liability to the distributing Company. Effective August 15, 2021, dividend distributions will be treated as if made on a pro-rata basis from all types of earnings, including Exempt Profits. If such tax-exempt income is distributed, it would be taxed at the reduced corporate tax rate applicable to such income.
F - 47
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income (cont’d)
| D. |
Taxation of the subsidiaries
|
| 1. |
The subsidiary Silicom Inc. files tax returns with US federal tax authorities and with state tax authorities in the states of New Jersey, California, Virginia, New York, New Mexico, Tennessee, Texas and Illinois.
|
The federal corporate income tax rate is 21 % and the state corporate tax is approximately 8 % in average.
| 2. |
The subsidiary Silicom Denmark is taxed according to the tax laws in Denmark, subject to corporate tax of
|
| 3. |
The Company has not provided for Israeli income tax and foreign withholding taxes on US$
|
The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The unrecognized deferred tax liability associated with these temporary differences was approximately US$ 2,398 thousand at December 31, 2025.
| E. |
Tax assessments
|
| 1. |
For the Israeli jurisdiction the Company has final tax assessments for all years up to and including the tax year ended December 31, 2020.
|
| 2. |
For the US federal jurisdiction, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2021. For the New Jersey and California state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2020. For the New York, Texas and Illinois state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2021. For the Virginia, Tennessee, and New Mexico state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2022.
|
| 3. |
For the Danish jurisdiction, Silicom Denmark has final tax assessments for all years up to and including the tax year ended December 31, 2021.
|
| 4. |
The balance of the operating loss carryforwards in the Israeli tax jurisdiction as of December 31, 2025, is US$
|
|
F - 48
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income (cont'd)
| F. |
Income (loss) before income taxes and income taxes expense (benefit) included in the consolidated statements of operations
|
|
Year ended December 31
|
||||||||||||
|
2023
|
2024
|
2025
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Loss before income taxes:
|
||||||||||||
|
Israel
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Foreign jurisdictions
|
|
|
|
|||||||||
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||
|
Current taxes:
|
||||||||||||
|
Israel
|
|
|
|
|||||||||
|
Foreign jurisdictions
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Current tax (benefits) expenses relating to prior years:
|
||||||||||||
|
Israel
|
(
|
)
|
(
|
)
|
|
|||||||
|
Foreign jurisdictions
|
(
|
)
|
|
|
||||||||
|
(
|
)
|
(
|
)
|
|
||||||||
|
Deferred taxes:
|
||||||||||||
|
Israel
|
(
|
)
|
|
|
||||||||
|
Foreign jurisdictions
|
(
|
)
|
(
|
)
|
|
|||||||
|
(
|
)
|
|
|
|||||||||
|
Income tax expense (benefit)
|
(
|
)
|
|
|
||||||||
F - 49
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income (cont'd)
| G. |
Deferred tax assets and liabilities
|
The tax effects of significant items comprising the Company’s deferred tax assets and liabilities are as follows:
|
December 31
|
December 31
|
|||||||
|
2024
|
2025
|
|||||||
|
US$ thousands
|
US$ thousands
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Accrued employee benefits
|
|
|
||||||
|
Research and development costs
|
|
|
||||||
|
Operating loss carryforwards
|
|
|
||||||
|
Property, plant and equipment
|
|
|
||||||
|
Share based compensation
|
|
|
||||||
|
Intangible assets
|
|
|
||||||
|
Operating lease liabilities
|
|
|
||||||
|
Goodwill*
|
|
|
||||||
|
Other
|
|
|
||||||
|
Gross deferred tax assets, before valuation allowances
|
|
|
||||||
|
Less: valuation allowance
|
(
|
)
|
(
|
)
|
||||
|
Total deferred tax assets:
|
|
|
||||||
|
Deferred tax liabilities:
|
||||||||
|
Intangible assets
|
(
|
)
|
(
|
)
|
||||
|
Property, plant and equipment
|
(
|
)
|
||||||
|
Operating leases right-of-use, net
|
(
|
)
|
(
|
)
|
||||
|
Other
|
|
(
|
)
|
|||||
|
Total deferred tax liabilities
|
(
|
)
|
(
|
)
|
||||
|
Net deferred tax liabilities
|
(
|
)
|
(
|
)
|
||||
|
Foreign jurisdictions
|
(
|
)
|
(
|
)
|
||||
|
(
|
)
|
(
|
)
|
|||||
|
Non-current deferred tax liabilities
|
(
|
)
|
(
|
)
|
||||
|
(
|
)
|
(
|
)
|
|||||
* The recognized goodwill is deductible for income tax purposes for 10 years .
F - 50
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income (cont’d)
| H. |
Reconciliation of the statutory tax expense to actual tax expense
|
Upon adoption of ASU 2023-09, Improvements to Income Tax Disclosures, as described in Note 2Y, the reconciliation of the statutory tax expense to actual tax expense for the year ended December 31, 2025 was as follows:
|
Year ended
December 31,
2025
|
||||||||
|
US$ thousands
|
Percent
|
|||||||
|
Loss before income taxes
|
(
|
)
|
||||||
|
Statutory tax rate in Israel
|
|
%
|
||||||
|
(
|
)
|
|||||||
|
Foreign tax effects
|
||||||||
|
US federal jurisdiction
|
||||||||
|
Statutory rate differential
|
(
|
)
|
|
%
|
||||
|
State and local tax
|
|
(
|
)%
|
|||||
|
Other
|
|
(
|
)%
|
|||||
|
Other foreign jurisdiction
|
(
|
)
|
|
%
|
||||
|
Non-taxable or Non-deductible items
|
||||||||
|
Shared based compensation
|
|
(
|
)%
|
|||||
|
Other
|
|
|
%
|
|||||
|
Tax effect due to "Preferred Enterprise" status
|
|
(
|
)%
|
|||||
|
Changes in valuation allowance
|
|
(
|
)%
|
|||||
|
Other |
( |
) | % | |||||
|
Income tax expense
|
|
(
|
)%
|
|||||
The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence during the year ended December 31, 2025, we cannot assume that it is more likely than not that the tax benefits relating to carry forward losses and deductible temporary differences for the Israeli jurisdiction will be realized. Accordingly, we have maintained a valuation allowance against the deferred tax assets and intend to maintain the applicable valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance.
F - 51
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income (cont’d)
| H. |
Reconciliation of the statutory tax expense to actual tax expense (cont’d)
|
|
The reconciliation of the statutory tax expense to actual tax expense for the years ended December 31, 2024 and 2023 in accordance with the guidance prior to the adoption of ASU 2023-09 was as follows:
|
Year ended December 31
|
||||||||
|
2023
|
2024
|
|||||||
|
US$ thousands
|
||||||||
|
Income (loss) before income taxes
|
(
|
)
|
(
|
)
|
||||
|
Statutory tax rate in Israel
|
|
%
|
|
%
|
||||
|
(
|
)
|
(
|
)
|
|||||
|
Increase (decrease) in taxes resulting from:
|
||||||||
|
Non-deductible operating expenses
|
|
|
||||||
|
Non-taxable income
|
|
(
|
)
|
|||||
|
Prior years adjustments
|
(
|
)
|
(
|
)
|
||||
|
Tax effect due to "Preferred Enterprise" status
|
|
|
||||||
|
Statutory rate differential
|
|
|
||||||
|
Valuation Allowance
|
|
|
||||||
|
Other
|
|
|
||||||
|
Income tax expense (benefit)
|
(
|
)
|
|
|||||
F - 52
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Taxes on Income (cont’d)
| I. |
Cash paid for income taxes, net of refunds, during the year ended December 31, 2025 was
|
|
December 31,
|
||||
|
2025
|
||||
|
US$ thousands
|
||||
|
Israel
|
|
|||
|
Foreign
|
|
|||
|
U.S. Federal
|
||||
|
U.S. State
|
||||
|
New Jersey
|
|
|||
|
Virginia
|
|
|||
|
Other states
|
|
|||
|
Other foreign
|
|
|||
|
|
||||
Cash paid for income taxes, net of refunds, during the years ended December 31, 2024. and 2023. was US$917 thousand and US$301 thousand, respectively.
| J. |
Accounting for uncertainty in income taxes
|
The accounting literature clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.
During 2023, 2024 and 2025 the Company and its subsidiaries did not have any significant unrecognized tax benefits and thus, no related interest and penalties were accrued.
In addition, the Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
F - 53
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 17 - Goodwill
The Company operates as one reporting unit. Goodwill assigned to the Company's reporting unit is tested for impairment at least annually, and whenever there are triggering events that create a situation where goodwill is more likely than not impaired.
As of December 31, 2023, the annual impairment test indicated that the carrying amount of the Company's reporting unit exceeded the Company's market capitalization, which was primarily due to the significant decline in the Company's stock price during the fourth quarter of 2023. The assessment of goodwill impairment is based on the market capitalization of the Company, using quoted market prices of the Company’s stock.
Consequently, in the year ended December 31, 2023, the Company deemed its entire goodwill of US$ 25,561 thousand impaired and recorded an impairment charge of US$ 25,561 thousand.
Note 18 - Subsequent Events
In January 2026, the Company’s compensation committee and board of directors, has approved the grant of a total of 232,934 RSUs under the Global Share Incentive Plan (2013) (as extended on October 26, 2023), of which RSUs granted to directors and CEO are subject to the approval of the Annual General Meeting, which is currently scheduled to convene no later than June 2026, as prescribed under the Israeli Companies Law, 1999 and the Company's Amended and Restated Articles of Association.
F - 54
Exhibit 4.8
English Summary of Danish Lease Addendum
Addendum No. 6 to Lease Agreement (the “Lease Agreemet”), dated February 3,
2025, between Silicom Denmark A/S (the "Company") and Svanestræde 2 ApS
(the " Addendum")
Note: this Summary does not contain a full or direct translation of the terms of the original Danish language agreement and is intended solely as a general presentation of the agreement.
Reduced Premises
The parties agreed that the Company vacated the entire first floor of the leased premises, comprising 388 square meters, including 8 square meters of common area. Following such reduction, the
Company’s leased premises consist of the basement, ground floor, second floor and third floor, with a total area of 1,412 square meters, or 1,024 square meters excluding the basement.
Reduced Rent
Effective as of January 1, 2025, the annual rent payable by the Company was adjusted to DKK 1,118,148.80, exclusive of VAT.
Deposit
| 1. |
The Company vacated the first floor effective December 31, 2024, and the deposit relating thereto is to be refunded in full pursuant to a separate move-out settlement.
|
| 2. |
In addition, the Addendum provides that the deposit under the Lease Agreement is adjusted to equal four months’ rent and shall thereafter total DKK 372,716.27, exclusive of VAT.
|
Common Expenses and Heating
| 1. |
The Addendum provides that the Company’s allocation key for common expenses and heating shall be 1024/1552.
|
| 2. |
The revised 2025 budget for common expenses is attached to the Addendum as Annex 1, and the revised 2025 budget for heating expenses is attached to the Addendum as Annex 2.
|
| 3. |
The Company’s monthly on-account payment for common expenses is DKK 30,130.58, exclusive of VAT, and its monthly on-account payment for heating expenses is DKK 7,026.80, exclusive of VAT.
|
General
It is clarified that apart from what is written in the Addendum, the Lease Agreement and any and all prior addenda shall continue to bind the parties
Exhibit 4.12
February 26, 2026
ADDENDUM TO LEASE
BETWEEN
YORK PROPERTY, LLC
AND
Silicom Connectivity Solutions
This addendum between York Property, LLC (Landlord) and Silicom Connectivity Solutions (Tenant), located at 1439 Timberwood Blvd. suites
105 & 106, Charlottesville, Va., 22911, is to extend the lease now existing, dated October 29, 2019, for Two (2) years. The new terms will be the following:
|
1.
|
1/1/2027 - 12/31/2027 at the rate of $9,674.70 per month.
|
|
2.
|
1/1/2028 - 12/31/2028 at the rate of $9,868.19 per month.
|
Tenant will also be required to deposit an additional $189.70 for the security deposit increase starting the first year and $193.49 in the
second year.
Option 3 to Renew
Landlord hereby grants to Tenant the option to extend the term of this lease renewal for a two-year period commencing when the original
term expires and terminating 12/31/30, upon each and all of the following terms and conditions:
|
1.
|
Tenant shall not be in default at the time Tenant delivers notice of their election to extend the term.
|
|
2.
|
Tenant shall have given Landlord written notice of its election to extend the term not less than One Hundred Eighty (180) days
prior to 12/31/2028, time being of the essence. If the notification is not so given, this option shall automatically expire.
|
|
3.
|
Security Deposit: to increase with each rent increase to equal one month's rent.
|
|
1.
|
1/1/2029 - 12/31/2029 at the rate of $10,037.46 per month.
|
|
2.
|
1/1/2030 - 12/31/2030 at the rate of $10,238.20 per month.
|
Option 4 to Renew
Landlord hereby grants to Tenant the option to extend the term of this lease renewal for a two-year period commencing when the original
term expires and terminating 12/31/30, upon each and all of the following terms and conditions:
|
1.
|
Tenant shall not be in default at the time Tenant delivers notice of their election to extend the term.
|
|
2.
|
Tenant shall have given Landlord written notice of its election to extend the term not less than One Hundred Eighty (180) days
prior to 12/31/2030, time being of the essence. If the notification is not so given, this option shall automatically expire.
|
|
3.
|
Security Deposit: to increase with each rent increase to equal one month's rent.
|
|
1.
|
1/1/2031 - 12/31/2031 at the rate of $10,442.96 per month.
|
|
2.
|
1/1/2032 - 12/31/2032 at the rate of $10,651.81 per month.
|
This addendum will be added to the previous lease. Everything else in the lease will remain the same.
 |
|
3/10/2026 |
|
 |
|
3/10/2026 | |
| Paul McFall |
|
Date |
|
Charles Lewis |
|
Date | |
|
Silicom Connectivity Solutions
|
|
|
|
York Property, LLC
|
|
|
Exhibit 8.1
List of Subsidiaries
|
Company Name
|
Country of Incorporation
|
|
|
Silicom Connectivity Solutions, Inc.
|
The United States
|
|
|
Silicom Denmark A/S (Fiberblaze A/S)
|
Denmark
|
Exhibit 12.1
CERTIFICATION
|
I, Liron Eizenman, certify that:
|
| 1. |
I have reviewed this annual report on Form 20-F of Silicom Ltd.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this report;
|
| 4. |
The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Company and have:
|
| (a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| (b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| (c) |
evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
|
| (d) |
disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting; and
|
| 5. |
The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of Company's
board of directors:
|
| (a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report
financial information; and
|
| (b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
|
Date: April 28, 2026
|
/s/ Liron Eizenman
Liron Eizenman
Chief Executive Officer
|
Exhibit 12.2
CERTIFICATION
|
I, Eran Gilad, certify that:
|
| 1. |
I have reviewed this annual report on Form 20-F of Silicom Ltd.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this report;
|
| 4. |
The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Company and have:
|
| (a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| (b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| (c) |
evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
|
| (d) |
disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting; and
|
| 5. |
The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of Company's
board of directors:
|
| (a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report
financial information; and
|
| (b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
|
Date: April 28, 2026
|
|
/s/ Eran Gilad
Eran Gilad
Chief Financial Officer
|
Exhibit 13.1
Certification Pursuant to 18.U.S.C. Section 1350,
As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Silicom Ltd. (the "Company") on Form 20-F for the period ending December 31, 2025 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I the undersigned, being the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to my knowledge:
|
1)
|
The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
|
Date: April 28, 2026
|
/s/ Liron Eizenman
Liron Eizenman
Chief Executive Officer
|
Exhibit 13.2
Certification Pursuant to 18.U.S.C. Section 1350,
As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Silicom Ltd. (the "Company") on Form 20-F for the period ending December 31, 2025 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I the undersigned, being the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
|
1)
|
The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: April 28, 2026
|
/s/ Eran Gilad
Eran Gilad
Chief Financial Officer
|
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos.
333-193034, 333-249717 and 333-267488, and 333-276451) of Silicom Ltd. of our report dated March 16, 2026 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 20-F.
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member of PricewaterhouseCoopers International Limited
Haifa, Israel
April 28, 2026