A.
|
Selected Financial Data
|
The selected financial data, set forth in the table below, have been derived from our audited historical financial statements for the five years ended
December 31, 2019. The selected consolidated financial data as of December 31, 2019 and 2018 and for each of the three years ended December 31, 2018 have been prepared in accordance with U.S. GAAP, and are derived from our audited consolidated
financial statements and accompanying notes included in Item 18, “Financial Statements.” Our selected consolidated financial data as of December 31, 2015, 2016 and 2017 and for the years ended December 31, 2015 and 2016 have been derived from
audited consolidated financial statements not included in this annual report. The selected financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and Financial Review and
Prospects” and our consolidated financial statements and notes thereto included elsewhere in this annual report.
Year ended December 31,
|
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2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
($ and share data in thousands, except per share data)
|
|
Revenues
|
|
|
34,794
|
|
|
|
33,939
|
|
|
|
32,754
|
|
|
|
37,065
|
|
|
|
41,350
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,007
|
|
|
|
2,597
|
|
|
|
1,327
|
|
|
|
2,817
|
|
|
|
6,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D expenses
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
(41
|
)
|
|
|
(117
|
)
|
|
|
(90
|
)
|
Selling, general and administrative expenses
|
|
|
(4,604
|
)
|
|
|
(4,669
|
)
|
|
|
(4,704
|
)
|
|
|
(4,699
|
)
|
|
|
(4,961
|
)
|
Total operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
1,387
|
|
|
|
(2,072
|
)
|
|
|
(3,418
|
)
|
|
|
(1,999
|
)
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses, net
|
|
|
(440
|
)
|
|
|
(475
|
)
|
|
|
(298
|
)
|
|
|
(309
|
)
|
|
|
(259
|
)
|
Other income (loss), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before income tax expense
|
|
|
1,870
|
|
|
|
(2,544
|
)
|
|
|
(3,701
|
)
|
|
|
(2,567
|
)
|
|
|
1,244
|
|
Income tax (expense) benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss)
|
|
|
1,793
|
|
|
|
(2,607
|
)
|
|
|
(3,775
|
)
|
|
|
(3,725
|
)
|
|
|
1,026
|
|
Net profit (loss) attributable to non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss) attributable to Eltek Ltd. shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net profit (loss) per ordinary share attributable to Eltek Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares used to compute basic and diluted net profit (loss) per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ and share data in thousands)
|
|
|
|
|
Working capital (deficit)
|
|
|
(1,248
|
)
|
|
|
(5,314
|
)
|
|
|
(4,565
|
)
|
|
|
(93
|
)
|
|
|
1,982
|
|
Total assets
|
|
|
22,829
|
|
|
|
18,160
|
|
|
|
22,145
|
|
|
|
20,145
|
|
|
|
25,419
|
|
Long-term liabilities
|
|
|
1,794
|
|
|
|
519
|
|
|
|
911
|
|
|
|
2,098
|
|
|
|
3,194
|
|
Total shareholders’ equity
|
|
|
6,269
|
|
|
|
882
|
|
|
|
3,459
|
|
|
|
6,634
|
|
|
|
10,335
|
|
Number of issued and outstanding shares
|
|
|
4,380
|
|
|
|
2,029
|
|
|
|
2,029
|
|
|
|
2,029
|
|
|
|
2,029
|
|
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Investing in our ordinary shares involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below before investing in our
ordinary shares. Our business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks. In that case, the value of our ordinary shares could decline, and you could lose all or part of
your investment.
Risks Related to Our Business and Our Industry
We have a history of operating losses and may not be able to achieve and sustain long term profitable operations. We may not have sufficient resources to fund our operations in
the future.
While we achieved a net profit of $1.8 million in the year ended December 31, 2019, we incurred net losses of $2.6 million, $3.8 million and
$3.6 million in the three years ended December 31, 2018 and have not maintained consistent profitable operations in the past. We have incurred an accumulated deficit of approximately $19.7 million since inception and our working capital
deficiency amounted to $1.2 million as of December 31, 2019. There can be no assurance that we will be able to operate profitably in the future. To the extent that we incur operating losses in the future, we may have insufficient working capital
to fund our operations. If we do not generate sufficient cash from operations, we will be required to obtain additional financing or reduce our level of expenditure. Such financing may not be available in the future, or, if available, may not
be on terms favorable to us. If adequate funds are not available to us, our business, and results of operations and financial condition will be materially and adversely affected.
We will require additional capital in the future, which may not be available to us.
As of December 31, 2019, we had $1.6 million in cash and cash equivalents and had a working capital deficit of $1.3 million. The lack of sufficient working capital could negatively impact our ability
to compete effectively in the future. On April 2019, we concluded a rights offering, in which we raised net proceeds of approximately $3.2 million. Out of this amount, approximately $1.7 million was used to repay debt and the remainder is being
used for working capital and other general corporate purposes, including possible investments in plant and equipment. To the extent that we incur operating losses in the future or are unable to generate free cash flows from our business, we may
not have sufficient working capital to fund our operations and will be required to obtain additional financing. Our working capital requirements and cash flow provided by our operating and financing activities are likely to vary greatly from
quarter to quarter, depending on the following factors: (i) the timing of orders and deliveries; (ii) net profit in the period; (iii) the purchase of new equipment; (iv) the build‑up of inventories; (v) the payment terms offered to our customers;
(vi) the payment terms offered by our suppliers; and (vii) approval of the current or additional lines of credit and long-term loans from banks.
As of December 31, 2019, we had revolving lines of credit aggregating NIS 14.2 million (approximately $4.1 million) with our banks and from a non-banking financial institution, of which $1.9 million
was utilized as of such date, and $1.0 million of long-term loans (including current maturities) from banks and fixed assets suppliers. As of December 31, 2019, we were in compliance with our banks’ covenants. These credit facilities may not remain
available to us in the future. Furthermore, under certain circumstances the banks may require us to accelerate or make immediate payment in full of our credit facilities. All of our assets are pledged as security for our liabilities to our banks,
whose consents are required for any future pledge of such assets.
In addition, as of December 31, 2019 we had shareholders’ loans in the amount of NIS 12 million ($3.5 million) not including accrued interest, from entities within the Nistec group controlled by the
Chairman of our Board of Directors, Yitzhak Nissan. Out of this amount, NIS 2 million (approximately $580,000) will become due on May 1, 2020, subject to the existence of sufficient capital for the repayment of this amount, and the remaining loans
aggregating NIS 10 million (approximately $2.9 million) will become due on or after October 1, 2020, subject to the company’s ability to raise additional funds. In April 2020, Nistec provided us with a letter of commitment that in event that our
company will not be able to obtain sufficient capital for the repayment of the loans, these loans’ repayment will be extended and the loans will become due on or after May 1, 2021. Nistec has also agreed that in the event that the guarantees that
it provided to a non-banking financial institution, or NBFI, will be exercised, the amount due by our company shall be paid by May 1, 2021. Nistec also provided a guarantee on our behalf for an existing line of credit dedicated to a specific
project of up to NIS 2.25 million (approximately $650,000) received from Bank Hapoalim and provided a guarantee for a NIS 6.0 million loan (approximately $ 1.7 million) from an NBFI. In March 2020, the NBFI
informed us that due to the coronavirus outbreak, its insurance carrier put on hold any future activity until further notice and therefore this facility may not be available to us going forward.
The lack of sufficient working capital could negatively impact our ability to compete effectively in the future. To the extent that we incur operating losses in the future or are unable to generate
free cash flows from our business, we may not have sufficient working capital to fund our operations and will be required to obtain additional financing.
Non-compliance with financial covenants in our loan agreements.
We are subject to financial covenants in our loan agreements with the banks that provide us with our credit facilities and long-term loans. Our compliance with the financial covenants is measured
annually based on our annual audited financial statements. As of December 31 of each of the three years ended December 31, 2018, we were not in compliance with these covenants; however, one bank granted us a waiver for such non-compliance until the
publication of financial statements as of December 31, 2018. As of December 31, 2018, we were not in compliance with our bank covenants. As a result, long term bank loans in the amount of $34,000 were reclassified from long term to short term. On
February 2019, the banks granted us a waiver from such non-compliance. We are compliant with our covenants to the banks with respect to our financial statements for December 31, 2019.These credit facilities may not remain available to us in the
future. Furthermore, under certain circumstances the banks may require us to accelerate or make immediate payment in full of our credit facilities. All of our assets are encumbered as security for our liabilities to our banks, whose consents are
required for any future pledge of such assets. The borrowings from our banks are secured by specific liens on certain assets, by a first priority charge on the rest of our now-owned or after-acquired assets and by a fixed lien on goodwill
(intangible assets) and insurance rights (rights to proceeds on insured assets in the event of damage). In addition, the agreements prohibit us from selling or otherwise transferring any assets except in the ordinary course of business or from
placing a lien on our assets without the banks’ consent.
Both banks have the right to demand immediate repayment of the loans and lines of credit in the event of non-compliance with the financial
covenants or a change of control in our company, if such a change occurred without their prior approval. Our failure to remain in compliance with each of the banks’ covenants, obtain waivers, negotiate agreements with new covenant terms, or
obtain additional financing, if required, may adversely affect our business, results of operations and financial position.
The spread of novel strain of coronavirus, COVID-19, may adversely affect our business operations and financial condition.
In December 2019, an outbreak of COVID-19 was reported in Wuhan, China. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. This highly contagious disease has
spread to over 180 countries in the world and throughout both Israel and the United States, creating a serious impact on our customers, workforces, and suppliers, disrupting economies and financial markets, and potentially leading to a world-wide
economic downturn. It has caused a disruption of the normal operations of many businesses, including the temporary closure or scale-back of business operations and the imposition of either quarantine or remote work or meeting requirements for
employees, either by government order or on a voluntary basis. The pandemic may adversely affect our customers’ ability to perform their missions and is in many cases disrupting their operations. It may also impact the ability of our
subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an increase in their costs and cause delays in performance. These supply chain effects, and the direct effect of the virus and the
disruption on our operations, may negatively impact both our ability to meet customer demand and our revenue and profit margins. Both Israel and the United States have imposed quarantines and restrictions on travel and mass gatherings and
curtailed and limited non-essential works in an attempt to slow the spread of the virus. Some of our employees are quarantined and in some cases, are working remotely and using various technologies to perform their functions. We may encounter
delays or changes in customer demand, particularly if government funding priorities change. Additionally, the disruption and volatility in the global and domestic capital markets may increase the cost of capital and limit our ability to access
capital. While the ultimate impact of the spread of COVID-19 is highly uncertain and subject to change, if protective or preventative measures expand, we may experience a material adverse effect on our business operations, revenues and financial
condition.
We are dependent on one-of-a-kind machinery that may malfunction and may not be easily replaced.
The proper function of our manufacturing equipment is an important element in our effectively operating our business. We own and use several unique manufacturing machines, some of which are aging and
sometimes malfunction, causing disruptions and occasionally even cessation of our manufacturing activities, which adversely affects our business. It is possible that substantial funds may be required to repair or replace our unique machinery, which
may not be available to us. Further, the repair or replacement of certain machinery could be a long process. In some cases, machinery suppliers stop supporting and repairing such manufacturing equipment. Machinery failure could cause a cessation of
our manufacturing activities for a significant period of time, which may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Key customers account for a significant portion of our revenues. The loss of a key customer would have an adverse impact on our business results.
In the years ended December 31, 2019, 2018 and 2017, a group of affiliated companies accounted for 19.5%, 12.0% and 14.6% of our total
revenues, respectively and another group of affiliated companies accounted for 11.5%, 9.3% and 10.2%of our total revenue, respectively. We expect that a significant portion of our future revenues will continue to be dependent on a small number of
customers. If we are unable to retain our key customers, or maintain our level of business with such customers, or, if we are unable to attract sufficient new business to compensate for the loss of or reduction in business from any of our key
customers, our results of operations and financial condition would be adversely affected.
Our results of operations may be adversely affected by currency fluctuations.
Our revenues and expenses are denominated in NIS, dollars and euros. Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange
between NIS and other currencies may affect our operating results and financial condition. The NIS value of our dollar and euro denominated revenues are negatively impacted by the depreciation of the dollar and the Euro against the NIS. The average
exchange rate for the NIS against the dollar was approximately 0.8% lower in 2019 than in 2018, which had a negative impact on our operating results in 2019. In the past, the NIS exchange rate against the dollar and other foreign currencies
fluctuated, generally reflecting inflation rate differentials. We cannot predict any future trends in the rate of inflation in Israel or the rate of depreciation or appreciation of the NIS against the dollar. If NIS value of our dollar or Euro
denominated revenues decreases, our results of operations will be adversely affected.
We are currently not engaged in hedging transactions. If we were to decide to enter into any hedging transactions in the future in order to
protect ourselves in part from currency fluctuations, we may not be successful in our hedging efforts, or such transactions, if entered into, may not materially reduce the effect of fluctuations in foreign currency exchange rates on our results
of operations. Such hedging transactions may not necessarily mitigate the longer-term impact of currency fluctuations on the operating costs of our business operations, and may result in additional expenses.
Unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
During periods of slowing economic activity, our customers may reduce their demand for our products, technology and professional services,
which would reduce our sales, and our business, operating results and financial condition may be adversely affected. The global and domestic economies continue to face a number of economic challenges, including threatened sovereign defaults,
credit downgrades, restricted credit for businesses and consumers and potentially falling demand for a variety of products and services. These developments, or the perception that any of them could occur, could result in longer sales cycles,
slower adoption of new technologies and increased price competition for our products and services. We could also be exposed to credit risk and payment delinquencies on our accounts receivable, which are not covered by collateral.
Significant portions of our business are conducted outside the markets in which our products and solutions are manufactured or generally
sold, and accordingly, we often export a substantial number of products into such markets. We may, therefore, be denied access to potential customers or suppliers or denied the ability to ship products from any of our subsidiaries into the
countries in which we currently operate or wish to operate, as a result of economic, legislative, political and military conditions, including hostilities and acts of terrorism, in such countries.
In particular, there is currently significant uncertainty about the future relationship between the U.S. and various other countries, with respect to trade
policies, treaties, government regulations, and tariffs. For example, the recent imposition of tariffs and/or changes in tariffs on various products by the U.S. and other countries, including China and Canada, have introduced greater uncertainty
with respect to trade policies and government regulations affecting trade between the U.S. and other countries, and new and/or increased tariffs have subjected, and may in the future subject, us to additional costs and expenditure of resources.
Major developments in trade relations, including the imposition of new or increased tariffs by the U.S. and/or other countries, and any emerging nationalist trends in specific countries could alter the trade environment and consumer purchasing
behavior which, in turn, could have a material effect on our financial condition and results of operations. While the U.S. and China recently signed a “phase one” trade deal on January 15, 2020 to reduce planned increases to tariffs, concerns
over the stability of bilateral trade relations remain. In addition, the UK’s exit from the European Union on January 31, 2020, known as Brexit, and the ongoing negotiations of the future trading relationship between the UK and the European Union
during the transition period set to end December 31, 2020 have yet to provide clarity on what the outcome will be for the UK or Europe. Changes related to Brexit could subject us to heightened risks in that region, including disruptions to trade
and free movement of goods, services and people to and from the UK, disruptions to the workforce of our business partners, increased foreign exchange volatility with respect to the British pound and additional legal, political and economic
uncertainty. If these actions impacting our international distribution and sales channels result in increased costs for us or our international partners, such changes could result in higher costs to us, adversely affecting our operations,
particularly as we expand our international presence.
We may also be required in the future to increase our reserves for doubtful accounts. In addition, the fair value of some of our assets may
decrease as a result of an uncertain economy and as a result, we may be required to record impairment charges in the future. If global economic and market conditions or economic conditions in key markets remain uncertain or weaken further, our
financial condition and operating results may be materially adversely affected.
The spread of novel strain of coronavirus, COVID-19, may adversely affect our business operations and financial condition.
In December 2019, an outbreak of COVID-19 was reported in Wuhan, China. On March 11, 2020, the World Health Organization declared COVID-19 a global
pandemic. This highly contagious disease has spread to most of the countries in the world and throughout both Israel and the United States, creating a serious impact on our customers, workforces, and suppliers, disrupting economies and financial
markets, and potentially leading to a world-wide economic downturn. It has caused a disruption of the normal operations of many businesses, including the temporary closure or scale-back of business operations and the imposition of either
quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis. The pandemic may adversely affect our customers’ ability to perform their missions and is in many cases disrupting their
operations. It may also impact the ability of our subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an increase in their costs and cause delays in performance. These supply chain effects,
and the direct effect of the virus and the disruption on our operations, may negatively impact both our ability to meet customer demand and our revenue and profit margins. Both Israel and the United States have imposed quarantines and
restrictions on travel and mass gatherings and curtailed and limited non-essential works in an attempt to slow the spread of the virus. Some of our employees are quarantined and in some cases, are working remotely due either to safety concerns
and using various technologies to perform their functions. We may encounter delays or changes in customer demand, particularly if government funding priorities change. Additionally, the disruption and volatility in the global and domestic capital
markets may increase the cost of capital and limit our ability to access capital. While the ultimate impact of the spread of COVID-19 is highly uncertain and subject to change, if protective or preventative measures expand, we may experience a
material adverse effect on our business operations, revenues and financial condition.
We are subject to environmental laws and regulations. Compliance with those laws and regulations requires us to incur costs and we are subject to fines or other sanctions for
non-compliance.
Our operations are regulated under various environmental laws and regulations that govern, among other things, the discharge of hazardous
materials into the air and water, as well as the handling, storage and disposal of such materials. Compliance with these laws and regulations is a major consideration for PCB manufacturers because metals and chemicals classified as hazardous
substances are used in the manufacturing process. Since May 2003, our environmental management system has been ISO 14001 certified. This certification was based on successful implementation of environmental management requirements and includes
ongoing monitoring of our processes, raw materials and products. The certification is subject to periodic compliance audits conducted by the Standards Institution of Israel. If, in the future, we are found to be in violation of environmental
laws or regulations, we could be liable for damages, costs of remedial actions, may be subject to criminal prosecution including a range of potential penalties, and could also be subject to revocation of permits necessary to conduct our business
or any part thereof. Any such liability or revocation could have a material adverse effect on our business, financial condition and results of operations. Environmental laws could become more stringent over time, imposing greater compliance
costs and increasing risks and penalties associated with a violation. A shortage of water in Israel may reduce the allocation of water available to manufacturing plants, including ours, which could affect the concentrations of pollutants in our
wastewater, making it harder to comply with the foregoing regulations, in which event we would be required to invest additional funds to improve our wastewater treatment systems.
The cost of compliance with environmental laws and regulations depends in part on the requirements in such laws and regulations and on the
method selected to implement them. If new or more restrictive standards are imposed, the cost of compliance could be very high and have an adverse impact on our revenues and results of operations if we cannot recover those costs through the
rates that we charge our customers.
Our customers are also required to comply with various government regulations, legal requirements and industry standards, including many of
the industry-specific regulations discussed above. Our customers’ failure to comply could affect their businesses, which in turn would affect our sales to them. In addition, if our customers are required by regulation or other requirements to
make changes in their product lines, these changes could significantly disrupt particular programs for these customers and create inefficiencies in our business.
We have in the past been, and currently are, subject to claims and litigation relating to environmental matters. If we are found to be in violation of environmental laws, we
could be liable for damages and costs of remediation and may be subject to a halt in production, which may adversely affect our business, operating results and financial condition.
We have in the past been, and currently are, subject to claims and litigation relating to environmental matters. We may be subject to
further environmental claims alleging that we are in violation of environmental laws. If we are unsuccessful in such claims and other future claims and litigations or if actual results are not consistent with our assumptions and judgments, we may
be exposed to losses that could be material to our company.
During 2014, 2015 and 2016, we received notices from Meitav, the water company of the Petach Tikva municipality, requiring payment of fees
totaling NIS 3.8 million ($980,000) excluding VAT, for discharges of industrial wastewater allegedly not meeting the applicable standards into the municipal sewage system. The payment demands were made on the basis of several samplings conducted
by Meitav in our premises during 2013-2015. In December 2015, we completed the construction of a new wastewater treatment facility. In 2016, six wastewater samples were inspected by Meitav and were found to be in compliance with applicable
standards. We reached a settlement with Meitav in July 2016.
In October 2015, we filed an application for an emissions permit with the Israeli Ministry of Environmental Protection, or the Ministry. In
January 2016, we received a notice of non-compliance from the Ministry stating that the application was incomplete and that we are in breach of the Clean Air Law, 5768-2008, or the Clean Air Law, and the Licensing of Businesses Law, 5728-1968, or
the Licensing of Businesses Law. We submitted amended applications and conducted several discussions with the Ministry in 2016 and 2017 and received the emissions permit in July 2017.
In March 2019, representatives of the Ministry inspected our premises and issued a warning related to an alleged breach of the Clean Air Law
and a warning related to the Hazardous Materials Law (1993). Management believes that our company is not in violation of these laws. Following a hearing at the Ministry in August 2019, we believe that this matter will ultimately be resolved but
there can be no assurance that our view will be accepted by the Ministry.
If we are found to be in violation of environmental laws, then in addition to fines, we could be liable for damages, costs of remedial actions and a range of potential penalties, and could also be
subject to a shutdown of our factory. Such sanctions could have a material adverse effect on our business, financial condition and results of operations.
Rapid changes in the Israeli and international electronics industries and recessionary pressures may adversely affect our business.
Our principal customers include manufacturers of defense and aerospace, medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers. The electronics industry
is subject to rapid technological changes and products obsolescence. Discontinuance or modification of products containing PCBs manufactured by our company could have a material adverse effect on us. In addition, the electronics industry is subject
to sharp economic cycles. Increased or excess production capacity by our competitors in the PCB industry and recessionary pressure in major electronics industry segments may result in intensified price competition and reduced margins. As a
result, our financial condition and results of operations may be adversely affected. A decline in the Israeli and international electronic markets may cause a decline in our revenues and adversely affect our operating results and financial
condition in the future.
Because competition in the PCB market is intense, our business, operating results and financial condition may be adversely affected.
The global PCB industry is highly fragmented and intensely competitive. It is characterized by rapidly changing technology, frequent new product introductions and rapidly changing customer
requirements. We compete principally in the market for complex, flex-rigid and rigid multi-layer PCBs. In the Israeli market we mainly compete with PCB Technologies Ltd. and major international PCB exporters, mainly from South East Asia, Europe
and North America. In March 2018 it was published that PCB Technologies signed an agreement for a significant investment of NIS 124.2 million (approximately $35 million) investment in the company, which could improve its competitiveness.
In the European market we mainly compete with Advanced Circuit Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG
(Austria), Dyconex and Cicor (Switzerland), Graphics, Exception PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy), Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies. In the North
American market we mainly compete with TTM, Inc. (previously known as DDi Corp. and Viasystems), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne and certain other American companies. Many of these competitors have
significantly greater financial and marketing resources than us. Our current competition in the rigid PCB segment is mainly from PCB manufacturers in Southeast Asia (mainly in China), which have substantially lower production costs than us.
Continued competitive pressures could cause us to lose significant market share.
In addition, these competitors may respond more quickly to new or emerging technologies
or adapt more quickly to changes in customer requirements than we do. We must continually develop improved manufacturing processes to meet our customers’ needs for complex products, and our manufacturing process technology is generally not
subject to significant proprietary protection. During recessionary periods in the electronics industry, our strategy of providing quick-turn services, an integrated manufacturing
solution, and responsive customer service may take on reduced importance to our customers. As a result, we may need to compete more on the basis of price, which would cause our gross
margins to decline.
We are dependent upon a select number of suppliers for timely delivery of key raw materials and the loss of one or more of these suppliers would adversely affect our manufacturing
ability. If these suppliers delay or discontinue the manufacture or supply of these raw materials, we may experience delays in production and shipments, increased costs and cancellation of orders for our products.
We currently obtain our key raw materials from a select number of suppliers. We do not have long-term supply contracts with our suppliers and our principal suppliers may not continue to supply raw
materials to us at current levels or at all. Any delays in delivery of or shortages in these raw materials could interrupt and delay manufacturing of our products and may result in the cancellation of orders for our products.
As the majority of PCB manufacturing is centered in South East Asia, raw material suppliers may focus their attention and give higher priority to manufacturers in those areas, which may interrupt the
supply of raw materials to us. In addition, these suppliers could discontinue the manufacture or supply of these raw materials at any time. During the year ended December 31, 2017 our purchases from one supplier accounted for 22.6% of our total
consolidated raw material costs. During the year ended December 31, 2018, our purchases from two (2) suppliers accounted for 24.7% and 19.4% of our total of consolidated raw material costs, respectively. During the year ended December 31, 2019, our
purchases from two (2) suppliers accounted for 26.5% and 23.5% of our total of consolidated raw material costs, respectively. We may not be able to identify and integrate alternative sources of supply in a timely fashion. Any transition to
alternate suppliers may result in delays in production and shipment and increased expenses and may limit our ability to deliver products to our customers.
If a raw material or component supplier fails to satisfy our product quality standards, including standards relating to “conflict minerals” it could harm our customer relationships. Furthermore, if
we are unable to identify an alternative source of supply, we may have to modify our products or a large portion of our production process to use a substitute raw material, which may cause delays in production and shipments, increased design and
manufacturing costs and increased prices for our products.
We may not succeed in our efforts to expand into the U.S. market. If we are unsuccessful, our future revenues and profitability would be adversely affected.
Our business plan assumes an increase in revenues to the U.S. market. However, our efforts to increase sales to the U.S. market may not succeed and sales to the medical, defense and aerospace
industries may be affected by several factors, including cutbacks in U.S. government spending, and this may not become a substantial market for us. If we are unsuccessful in such efforts, our future revenues and profitability would be adversely
affected. In order to sell PCBs to the U.S. defense market we were required to obtain International Traffic in Arms Regulations (ITAR) registration from the U.S. Department of State, which is subject to periodic extension. There can be no assurance
that we will be able to retain our ITAR certification. In the event of a change in control of our company, the U.S. Department of State may investigate the transfer of control and oppose the transaction. The loss of our ITAR certification could
adversely affect our future revenues and profitability.
While prior government shutdowns did not have a significant impact on our business, a future government shutdown could result in the suspension of work on contracts in progress or in payment delays
which would adversely affect our future revenue and cash flow.
We may be subject to the requirements of the National Industrial Security Program Operating Manual for our facility security clearance,
which is a prerequisite to our ability to work on classified contracts for the U.S. government.
A facility security clearance is required in order to be awarded and perform classified contracts for the U.S. Department of Defense, or the
DoD, and certain other agencies of the U.S. government. To become a cleared entity, we must comply with the requirements of the National Industrial Security Program Operating Manual, or the NISPOM, and any other applicable U.S. government
industrial security regulations. Further, due to the fact that a significant portion of our voting equity is owned by a non-U.S. entity, we are required to be governed by and operate in accordance with the terms and requirements of a Special
Security Agreement, or the SSA.
If we were to violate the terms and requirements of the SSA, the NISPOM, or any other applicable U.S. government industrial security
regulations (which may apply to us under the terms of classified contracts), we could lose our security clearance. We cannot be certain that we will be able to maintain our security clearance. If for some reason our security clearance is
invalidated or terminated, we may not be able to continue to perform on classified contracts and would not be able to enter into new classified contracts, which could materially adversely affect our business, financial condition, and results of
operations.
We may encounter difficulties with our international operations and sales that may have a material adverse effect on our sales and profitability.
Contracts with U.S. military agencies, as well as military equipment manufacturers in Europe, are subject to certain regulatory restrictions
and approvals, which we may not be able to comply with or obtain. We may not be able to maintain or increase international market demand for our products. To the extent that we cannot do so, our business, operating results and financial
condition may be adversely affected.
International operations are subject to inherent risks, including the following:
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the impact of possible recessionary environments or economic instability in multiple foreign markets;
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changes in regulatory requirements and complying with a wide variety of foreign laws;
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tariffs and other trade barriers;
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the imposition of exchange or price controls or other restrictions on the conversion of foreign currencies; and
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difficulties and costs of staffing and managing foreign operations.
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Significant political developments could also have a materially adverse effect on us. In the United States, potential or actual changes in
fiscal, defense appropriations, tax and labor policies could have uncertain and unexpected consequences that materially impact our business, results of operations and financial condition.
Compliance with the conditions of a new business permit issued in 2018 or a new business permit, if required, may be costly. We may become subject to certain sanctions, including
significant fines, criminal proceedings and in an unlikely event an order shutting down our factory.
Israeli law required us to obtain a business permit in order to continue operating our business. Obtaining such business permit is a long and
expensive process. We received a new permit in 2018 for the period ending December 31, 2099. However, as a result of a new regulation, we expect to receive a notice that the term of the new permit will be for only 10 years. The permit contains
certain conditions, including conditions imposed by the Israeli Ministry for Environmental Protection, and a building permit, which includes additional conditions, which we are required to comply with. According to applicable regulation, the
authorities may impose new conditions to our existing permit. Compliance with the present and future conditions, if any, may be costly. If we are unable to comply with such requirements, certain sanctions may be imposed, including significant
fines, criminal proceedings and in an unlikely event an order shutting down our factory.
We are currently in discussions with the municipality in which our plant is located to review the necessity of obtaining a new business permit as a result of the transfer of shares from Nistec Ltd.
to Nistec Golan in December 2018. In the event we will be required to obtain a new business permit, we may be required to comply with new conditions imposed by the authorities, and our compliance with all the existing conditions in the permit may
be reexamined. Obtaining a new business permit, if required, will expose us to the above risks and substantial costs.
Our quarterly operating results fluctuate significantly. Results of operations in any period should not be considered indicative of the results to be expected for any future
period.
Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate significantly in the future. Our
future operating results will depend on many factors, including (but not limited to) the following:
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the size and timing of significant orders and their fulfillment;
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demand for our products and the mix of products purchased by our customers;
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competition from lower priced manufacturers;
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fluctuations in foreign currency exchange rates, primarily the NIS against the Dollar and the Euro;
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availability of raw materials;
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plant or line shutdowns to repair or replace malfunctioning manufacturing equipment;
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the length of our sales cycles;
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changes in our strategy;
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the number of working days in the quarter;
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changes in seasonal trends; and
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general domestic and international economic and political conditions.
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Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and it is likely that there will be significant differences between the results of one quarter to another.
Quarterly sales and operating results are also difficult to forecast because they are dependent almost exclusively on the volume and timing
of orders during the quarter and our customers generally operate with a short delivery cycle and expect delivery of a significant portion of the order within 30 working days. The delivery of such orders is subject to the number of available
working days during the quarter, which can fluctuate significantly from quarter to quarter due to holidays and vacations. Certain prototype and pre-production runs require even shorter turn-around times stemming from customers’ product launches
and design changes. In addition, there might be sudden increases, decreases or cancellations of orders for which there are commitments, which further characterize the electronics industry and the companies that operate in it. The industry
practice is to make such changes without any penalties, except for the time and materials expended on the order.
Our expenses are, in significant part, relatively fixed in the short-term. If revenue levels fall below expectations, our net income is
likely to be disproportionately adversely affected because a proportionately smaller amount of the expenses varies with our revenues. We may not be able to be profitable on a quarterly or annual basis in the future. An ongoing pattern of
cancellations, reductions in orders and delays could have a material adverse effect on our results of operations. Due to all of the foregoing, it is very difficult to predict revenues for any future quarter with any significant degree of
accuracy. Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.
Our products and related manufacturing processes are often highly complex and therefore we may be delayed in product shipment. Also our products may at times contain manufacturing
defects, which may subject us to product liability and warranty claims.
Our business involves highly complex manufacturing processes that are subject to periodic failure. Process failures have occurred in the
past and have resulted in delays in product shipments, and process failures may occur in the future. Furthermore, we face an inherent business risk of exposure to warranty and product liability claims, which are likely to be substantial in light
of the use of our products in business-critical applications. Our products may fail to perform as expected or may be alleged to result in bodily injury or property damage. If we were to manufacture and deliver products to our customers that
contain defects, whether caused by a design, manufacturing or component failure, or by deficiencies in the manufacturing processes, it may result in delayed shipments to customers and reduced or cancelled customer orders. In addition, if any of
our products are or are alleged to be defective, we may be required to participate in a recall of such products. Over the years we have been involved in claims or litigation relating to allegedly defective products. A successful warranty or
product liability claim against us in excess of our established warranty and legal reserves or available insurance coverage, or a requirement that we participate in a product recall may have a material adverse effect on our business, financial
condition, results of operations or cash flows and may harm our business reputation, which could lead to customer cancellations or non-renewals.
Our operating margins may be affected as a result of price increases for our principal raw materials.
In recent years, our suppliers have increased their prices for most of our principal raw materials. We have faced pressure to raise our
prices for our products to compensate for supplier price increases in order to maintain our operating margins, which we may not be able to achieve due to the competitive market. Furthermore,
our existing suppliers or new suppliers or sources of materials may pass the increase in sourcing costs due to the coronavirus outbreak to us through price increases, thereby impacting our margins. Material changes in the pricing practices of
our suppliers could negatively impact our profitability. We have been taking steps to increase our prices since the third quarter of 2018, however, such price increases may result in reduced orders for our products. Additional price
increases for our principal raw materials may materially affect our operating margins and future profitability.
Obstacles in our transition to a new enterprise resource planning system may adversely affect our business and results of operations and the effectiveness of our internal control
over financial reporting.
We have engaged in a multi-year process of conforming the majority of our operations onto one global enterprise resource planning system, or
ERP. The ERP is designed to improve the efficiency of our supply chain and financial transaction processes, accurately maintain our books and records, and provide information important to the operation of the business to our management team. In
the third quarter of 2017 we decided, due to lack of human and financial resources and unfavorable cost-benefits, to withhold implementation of our ERP system. The ERP system was then fully amortized and is not fully supported. In addition, we
were notified that the hardware that the ERP runs on and the operating system of the hardware are at high risk of not being supported in the near future. The implementation of the ERP may continue in the future, which will require significant
investment of human and financial resources, and we may experience significant delays, increased costs and other difficulties as a result. Any significant disruption or deficiency in the design and implementation of the ERP could have a material
adverse effect on our ability to fulfill and invoice customer orders, apply receipts, place purchase orders with suppliers, and make disbursements, and could negatively impact data processing and electronic communications among business
locations, which may have a material adverse effect on our business, consolidated financial condition or results of operations. While we have invested significant resources in planning and project management, significant implementation issues may
arise.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Breaches of network or information technology (IT) security, natural disasters, pandemics, terrorist acts or acts of war may cause equipment
failures or disrupt our systems and operations. Although we have not become aware of any of these events as of the date of this annual report, we expect that our inability to operate our facilities as a result of such events, even for a limited
period of time, may result in significant expenses and/or loss of market share to other competitors in the global PCB industry. While we maintain insurance coverage for some of these events, the potential liabilities associated with these events
could exceed the insurance coverage we maintain. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation. Any of these
occurrences could adversely affect our results of operations and financial condition.
In particular, both unsuccessful and successful cyber-attacks on companies have increased in frequency, scope and potential harm in recent
years. We have been subject, and will likely continue to be subject, to attempts to breach the security of our networks and IT infrastructure through cyber-attack, malware, computer viruses and other means of unauthorized access. However, to
date, we have not been become aware that we were subject to cyber-attacks or other cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial condition. While we use firewall and
anti-virus systems, there is no assurance that cyber-attacks will always be blocked or discovered, and as a result, we may encounter damages to our computer network servers, manipulation of our data (including production, financial and other
information).
If our workforce will be represented by a labor union we could incur additional costs or experience work stoppages as a result of the renegotiation of our labor contracts.
In November 2011, we were notified by the General Federation of Labor in Israel, or the Histadrut, that more than one-third of our employees
in Israel had decided to join the Histadrut and that they established an employees’ union committee. In 2012, a significant portion of our employees decided to resign their membership in the Histadrut, which then ceased to represent our
employees. If our employees are represented by a union in the future, we could incur additional costs, experience work stoppages, either of which could adversely affect our business operations, including through a loss of revenue and strained
relationships with customers.
We are required to comply with “conflict minerals” rules which impose costs on us, may make our supply chain more complex, and could adversely impact our business.
We are subject to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that will
require us to perform due diligence, disclose and report whether our products contain conflict minerals. President Trump’s administration has indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the
Dodd-Frank Act may be revised, repealed or amended. In April 2017, the U.S. Securities and Exchange Commission, or the SEC, announced that it was suspending enforcement of portions of the conflict minerals regulations enacted under the Dodd-Frank
Act following a ruling by the U.S. Court of Appeals for the District of Columbia Circuit. The implementation of these requirements and any changes effected by the Trump administration could adversely affect the sourcing, availability and pricing
of the materials used in the manufacture of components used in our products. In addition, we will likely incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine
the sources of conflict minerals that may be used in or necessary to the production of our products and, if applicable, potential changes to our products, processes or sources of supply as a consequence of such verification activities. It is also
possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to alter our products, processes or sources of supply to avoid use of such materials.
Furthermore, we may encounter challenges in satisfying those customers that require that all of the components of our products be certified as conflict free, and if we cannot satisfy these customers, they may choose a competitor’s products.
Increased regulation associated with climate change and greenhouse gas emissions could impose significant additional costs on operations.
Various governments and governmental agencies have adopted or are contemplating statutory and regulatory changes in response to the potential
impacts of climate change and emissions of greenhouse gases. International treaties or agreements may also result in increasing regulation of climate change and greenhouse gas emissions, including the introduction of greenhouse gas emissions
trading mechanisms. Any such law or regulation regarding climate change and greenhouse gas emissions could impose significant costs on our operations and on the operations of our customers and suppliers, including increased energy, capital
equipment, environmental monitoring, reporting and other compliance costs. The potential costs of “allowances,” “offsets” or “credits” that may be part of potential cap-and-trade programs or similar proposed regulatory measures are still
uncertain. Any adopted future climate change and greenhouse gas laws or regulations could negatively impact our ability, and that of our customers and suppliers, to compete with companies situated in areas not subject to such laws or
regulations. These statutory and regulatory initiatives, if enacted, may impact our operations directly or indirectly through our suppliers or customers. Until the timing, scope and extent of any future law or regulation becomes known, we cannot
predict the effect on our business, financial condition, results of operations or cash flows.
We depend on key personnel for the success of our business.
Our success depends, to a significant extent, on the continued active participation of our executive officers and other key personnel. In
addition, there is significant competition for employees with technical expertise in our industry. In order to succeed we would need to be able to:
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retain our executive officers and key technical personnel;
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attract and retain additional qualified personnel to provide technological depth and support to enhance existing products and develop new products; and
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attract and retain highly skilled operations, marketing and financial personnel.
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We cannot make assurances that we will be successful in attracting, integrating, motivating and retaining key personnel. If we are unable to
retain our key personnel and attract additional qualified personnel as and when needed, our business may be adversely affected.
We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could have a material adverse
effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, governing internal control and procedures for
financial reporting have resulted in increased general and administrative expenses and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources. We may identify
material weaknesses or significant deficiencies in our assessments of our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigations or sanctions by
regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
Technological change may adversely affect the market acceptance of our products.
Technological change in the PCB industry is rapid and continual. To satisfy customers’ needs for increasingly complex products, PCB
manufacturers must continue to develop improved manufacturing processes, provide innovative solutions and invest in new facilities and equipment. To the extent we determine that new technologies and equipment are required to remain competitive,
the acquisition and implementation of such technologies and equipment are likely to require significant capital investment. We expect that we will need to invest large amounts in the next few years to replace or refurbish old equipment and to
remain competitive in the market. This capital may not be available to us in the future for such purposes and any new manufacturing processes developed by us may not become or remain commercially viable. As a result, we may not be able to
maintain our current technological position. Furthermore, the PCB industry may in the future encounter competition from new technologies that may reduce demand for PCBs or may render existing technology less competitive or obsolete. Our future
process development efforts may not be successful or the emergence of new technologies, industry standards or customer requirements may render our technology, equipment or processes obsolete or uncompetitive.
We compete with PCB manufacturers in Asia whose manufacturing costs are lower than ours.
In recent years, many electronics manufacturers have moved their commercial production to Asia to take advantage of its exceptionally large,
relatively low-cost labor pool. The continued outsourcing of production to the Far-East is likely to result in additional commercial market share potential for PCB manufacturers with a strong presence and reputation in such markets. Accordingly,
we will need to compete with PCB manufacturers whose costs of production may be substantially lower than ours. This competition may limit our ability to price our products profitably, which could significantly harm our financial condition and
results of operations. In addition, we distinguish ourselves by focusing on developing cutting edge technologies for high-end products, in order to serve our sophisticated defense, aerospace and medical customers. This may limit our ability to
reach certain clientele, which demands lower-end products in order to reduce its costs.
The measures we take in order to protect our intellectual property may not be effective or sufficient.
Our success depends in part on our proprietary techniques and manufacturing expertise, particularly in the area of complex multi-layer and
flex-rigid PCBs. We currently rely on a combination of trade secrets, copyright and trademark law, together with non-disclosure and invention assignment agreements, to establish and protect the proprietary rights and technology used in our
products. Like many companies in the PCB industry, we do not hold any patents. We believe that, because of the rapid pace of technological change in the electronics industry, the legal protections for our products are less significant factors
in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality of support services that we provide.
We generally enter into confidentiality agreements with our employees, consultants, customers and potential customers and limit the access to and the
distribution of our proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, or to develop similar technology independently. Further,
the laws of certain countries in which we sell our products do not protect our intellectual property rights to the same extent as do the laws of the United States. Substantial unauthorized use of our products could have a material adverse
effect on our business. We cannot make assurances that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.
Claims that our products infringe upon the intellectual property of third parties may require us to incur significant costs.
While we do not believe that our products and proprietary rights infringe upon the proprietary rights of others, third parties may assert
infringement claims against us or claims that we have violated a patent or infringed on a copyright, trademark or other proprietary right belonging to them. Any infringement claim, even one without merit, could result in the expenditure of
significant financial and managerial resources to defend against the claim. Moreover, a successful claim of product infringement against us or a settlement could require us to pay substantial amounts or obtain a license to continue to use the
technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. We might not be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all. We also may
not be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering the product. Infringement claims asserted against us could have a material adverse effect on our business, operating
results and financial condition.
During the last several years, a supplier of one of our software packages has requested to conduct an audit of our operations to verify that
we do not breach any intellectual property rights it allegedly owns. We believe that we have fully, diligently and timely complied with our obligation toward the supplier. We also believe that the supplier has no right to conduct any audit of
our products or services and such audit may cause us to breach confidentiality obligations to other entities, and therefore replied that there were no grounds for his request. If we are found to be in violation of such supplier’s intellectual
property rights, we could be liable for compensation and costs of an unknown amount. Such liability could have a material adverse effect on our business, financial condition and results of operations.
Our products and product components need to meet certain industry standards.
Our products and product components need to meet certain standards for the aerospace, defense, and other industries to which we market our products. In addition, new industry standards in the
aviation and defense industries could cause some or all of our products and services to become obsolete and unmarketable, which would adversely affect our results of operations. Noncompliance with any of these standards could limit our sales and
adversely affect our business, financial condition, and results of operations.
We may be required to make payments to satisfy our indemnification obligations.
We have agreements with our directors and senior officers which may require us, subject to Israeli law and certain limitations in the
agreements, to indemnify our directors and senior officers for certain liabilities and expenses that may be imposed on them due to acts performed, or failures to act, in their capacity as office holders as defined in the Israeli Companies Law,
5759-1999, or the Israeli Companies Law. These liabilities may include financial liabilities imposed by judgments or settlements in favor of third parties, and reasonable litigation expenses imposed by a court in relation to criminal charges
from which the indemnitee was acquitted or criminal proceedings in which the indemnitee was convicted of an offense that does not require proof of criminal intent. Furthermore, we agreed to exculpate our directors and officers with respect to a
breach of their duty of care towards our company. On October 17, 2017, our shareholders approved an updated indemnification agreement to be entered to with our directors and officers, and our shareholders approved an amendment thereto on December
5, 2019.
In addition, as part of the transaction in which Nistec acquired a controlling stake in our company, we agreed to indemnify Nistec for any
losses or liabilities occasioned by the breach of any representations or warranties that we made in the investment agreement. If we are found to have breached any of these representations or warranties, we could be required to expend significant
amounts of cash to meet our indemnification obligations. Payments made pursuant to such indemnification obligations may materially adversely affect our financial condition.
Risks Related to Our Ordinary Shares
Our share price has been volatile in the past and may continue to be susceptible to significant market price and volume fluctuations in the future.
Our ordinary shares have experienced significant market price and volume fluctuations in the past and may experience significant market price
and volume fluctuations in the future in response to factors such as the following, some of which are beyond our control:
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quarterly variations in our operating results;
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operating results that vary from the expectations of securities analysts and investors;
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changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
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announcements of technological innovations or new products by us or our competitors;
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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changes in the status of our intellectual property rights;
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announcements by third parties of significant claims or proceedings against us;
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announcements by governmental or regulatory authorities of significant investigations or proceedings against us;
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additions or departures of key personnel;
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changes in our cost structure due to factors beyond our control, such as new laws or regulations relating to environmental matters and employment;
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future sales of our ordinary shares;
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our involvement in litigation;
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general stock market price and volume fluctuations;
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changes in the prices of our products and services; and
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devaluation of the dollar against the NIS.
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Domestic and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession,
interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our ordinary shares.
Low trading volume may also increase the price volatility of our ordinary shares. A thin trading market could cause the price of our ordinary
shares to fluctuate significantly more than the stock market as a whole.
The voting interest of Mr. Nissan, individually and through Nistec Golan, our controlling shareholder, may conflict with the interests of other shareholders.
Mr. Yitzhak Nissan, our Chairman of the Board, beneficially owns 65.4 % of our outstanding ordinary shares. Accordingly,
Mr. Nissan and Nistec Golan have the ability to exercise a significant influence over our business and affairs and generally have the power to determine all matters submitted to a vote of our shareholders where our shares vote together as a
single class, including the election of directors and approval of significant corporate transactions. Mr. Nissan and Nistec Golan may make decisions regarding Eltek and our business that
are opposed to other shareholders’ interests or with which other shareholders may disagree. Nistec Golan’s and Mr. Nissan’s voting power could have the effect of deterring or preventing a change in control of our Company that might otherwise be
beneficial to our other shareholders.
We were not in compliance with NASDAQ’s continued listing requirements until recently, and if we fail to maintain compliance with NASDAQ’s continued listing requirements our
shares may be delisted from the NASDAQ Capital Market.
Our ordinary shares are listed on the NASDAQ Capital Market under the symbol “ELTK.” To continue to be listed on NASDAQ, we need to satisfy
a number of requirements, including a minimum bid price for our ordinary shares of $1.00 per share for 30 consecutive business days and shareholders’ equity of at least $2.5 million, or $35 million market value of listed securities or $500,000 of
net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.
Our ordinary shares have experienced significant market price and volume fluctuations in the past and for certain periods have traded below
the $1.00 threshold requirement for continued trading. On June 23, 2015 we received notification from Nasdaq advising us that we were not in compliance with the $1.00 threshold requirement for continued trading. On August 26, 2015, we regained
compliance with the listing rules, and the matter was then closed. On December 28, 2016, for the second time, we received notification from Nasdaq advising us that we were not in compliance with the $1.00 threshold requirement for continued
trading. Following a reverse split of our ordinary shares, on November 22, 2017, we regained compliance with Listing Rule 5550(a)(2) and our shares continue to be listed on the NASDAQ
Capital Market.
On October 2, 2018, we received notification from Nasdaq advising us that as of October 1, 2018, we
did not maintain stockholders’ equity of $2.5 million, nor did we meet the alternatives of market value of listed securities or net income from continuing operations, and therefore were not in compliance with the stockholders’ equity listing
rule. On December 7, 2018, we received a notice from Nasdaq advising that we were granted an extension of time to regain compliance with the shareholders’ equity requirement until March 31, 2019. With the proceeds of approximately $3.4 million
from our rights offering in March 2019, we regained compliance with Listing Rule 5550(b)(1) and our shares continue to be listed on the NASDAQ Capital Market. Nasdaq has advised us that it will continue to monitor our ongoing compliance with the
shareholders’ equity requirement and, if at the time of our next periodic report we do not evidence compliance, we may be subject to delisting. If we are ultimately delisted from NASDAQ, trading in our ordinary shares would be conducted on a
market where an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of, our ordinary shares.
Penny stock rules may limit the ability of our stockholders to sell their stock.
The SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. If we lose our listing on NASDAQ Capital Market our securities will be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than
established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which
provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers
to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a shareholder’s ability to buy and sell our stock.
In addition to the penny stock rules described above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low-priced securities will not be suitable for at least some
customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our ordinary shares, which may limit their ability to buy and sell our shares and have an adverse effect on the market for our shares.
We may in the future be classified as a passive foreign investment company, or PFIC, which would subject our U.S. investors to adverse tax rules.
U.S. holders of our ordinary shares may face income tax risks. There is a risk that we will be treated as a “passive foreign investment
company” (“PFIC”). Our treatment as a PFIC could result in a reduction in the after-tax return to U.S. Holders (as defined below in “Material U.S. Federal Income Tax Considerations”) of our ordinary shares and would likely cause a reduction in
the value of such shares. A foreign corporation will be treated as a PFIC for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income,” or (2) at least 50%
of the average value of the corporation’s gross assets produce, or are held for the production of, such “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment
property and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services
does not constitute “passive income.” If we are treated as a PFIC, U.S. Holders of ordinary shares would be subject to a special adverse U.S. federal income tax regime with respect to the income derived by us, the distributions they receive from
us, and the gain, if any, they derive from the sale or other disposition of their ordinary shares. In particular, dividends paid by us, if any, would not be treated as “qualified dividend income,” eligible for preferential tax rates in the hands
of non-corporate U.S. shareholders. We believe that we were not a PFIC for the 2019 tax year. However, since PFIC status depends upon the composition of our income and the market value of our assets from time to time, there can be no assurance
that we will not become a PFIC in any future taxable year. U.S. Holders should carefully read “Material U.S. Federal Income Tax Considerations” for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of
our ordinary shares.
We do not expect to distribute dividends in the foreseeable future.
We have never declared or paid any cash dividends on our ordinary shares. We currently intend to retain our current and any future earnings to finance
operations and expand our business and, therefore, do not expect to pay any dividends in the foreseeable future. According to the Israeli Companies Law, a company may distribute dividends out of its profits, provided that there is no reasonable
concern that such dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due, or otherwise upon the permission of the court. In the event cash dividends are declared, such dividends will be paid in NIS. The declaration of dividends is subject to the discretion of our board of
directors and would depend on various factors, including our operating results, financial condition, future prospects and any other factors deemed relevant by our board of directors. You should not rely on an investment in our company if
you require dividend income from your investment.
Risks Related to Our Incorporation and Location in Israel
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations and adversely affect
our share price.
We are incorporated under the laws of, and our principal executive offices, production, manufacturing and research and development facilities are located in,
the State of Israel. As a result, political, economic and military conditions affecting Israel directly influence us. Conflicts in North Africa and the Middle East, including Syria which border Israel, have resulted in continued political uncertainty and violence in the region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed to result in a permanent solution, and there have been numerous periods of hostility in recent years. In addition,
relations between Israel and Iran continue to be seriously strained, especially with regard to Iran’s nuclear program. Such instability may
affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. To date, these matters have not had any material effect on our business and results of operations; however, the
regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle
East. Although the Israeli government has in the past covered the reinstatement value of certain damages that were caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our operations.
Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to
make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel
claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements. Furthermore, several countries and companies restrict business with Israel and Israeli companies,
and additional countries may impose restrictions on doing business with Israel and Israeli companies. Restrictive laws or policies directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results
or the expansion of our business.
In addition, Israel faces political instability and a period of political deadlock that led up to 3 elections during the last 12 months. In such circumstances, there is a “transitional government”
with limited capabilities and authority which may lead to economic instability.
To date, these matters have not had any material effect on our business and results of operations; however, the internal political situation,
the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
Our results of operations may be negatively affected by the obligation of our personnel to perform military reserve service.
Some of our employees, directors and officers in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be
called for active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence
for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service. Any disruption in our operations could adversely affect our business.
From time to time, we may be named as a defendant in actions involving the alleged violation of labor laws related to employment practices, wages and benefits.
From time to time we are involved in labor related legal proceedings arising from the operation of our business. During the last year we
recruited a new management team and reduced our overall headcount, which actions may expose our company to increased labor related legal proceedings.
Our operations may be affected by negative labor conditions in Israel.
Strikes and work stoppages occur relatively frequently in Israel. If Israeli trade unions threaten additional strikes or work stoppages and
such strikes or work stoppages occur, these may, if prolonged, have a material adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers in a timely manner.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
Service of process upon our directors and officers and the Israeli experts named herein, all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, since substantially all of our assets, all of our directors and officers and the Israeli experts named in this annual report are located outside the United States, any judgment obtained
in the United States against us or these individuals or entities may not be collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the Securities Act and the Exchange Act in original actions instituted in
Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions
of those and similar acts.
Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some
of our former employees.
We currently have non-competition clauses in the employment agreements of most of our employees. The provisions of such clauses prohibit our
employees, if they cease working for us, from directly competing with us or working for our competitors. Recently, Israeli labor courts have required employers, seeking to enforce non-compete undertakings against former employees, to demonstrate
that the competitive activities of the former employee will cause harm to one of a limited number of material interests of the employer recognized by the courts (for example, the confidentiality of certain commercial information or a company’s
intellectual property). In the event that any of our employees chooses to leave and work for one of our competitors, we may be unable to prevent our competitors from benefiting from the expertise our former employee obtained from us, if we
cannot demonstrate to the court that we would be harmed.
Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore impact the price of our shares.
Provisions of Israeli corporate and tax laws may have the effect of delaying, preventing
or making more difficult a merger with, or other acquisition of, us or all or a significant portion of our assets. Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for
transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it
more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions may limit the price that investors may be willing to pay in
the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders.
These laws may have the effect of delaying or deterring a change in control of our
company, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for our
company’s securities. This could cause our ordinary shares to trade at prices below the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and
responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our
ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.
corporations. In particular, each shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and
to refrain from abusing his or her power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes on, among
other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval. In addition, a controlling shareholder of an Israeli
company, or a shareholder who knows that he or she possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, has a duty of fairness
toward the company. Currently there is not a clear definition of the duty of fairness under Israeli law. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These
provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance
practices instead of certain NASDAQ requirements. We follow Israeli law and practice instead of NASDAQ rules regarding the composition of the board of directors, director nomination process and quorum at shareholders’ meetings.
As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the NASDAQ Stock Market Rules. We follow Israeli law and practice instead of the NASDAQ Stock Market Rules regarding the composition of the board of directors, director nomination process
and quorum at shareholders’ meetings. As a foreign private issuer listed on the NASDAQ Capital Market, we may also follow home country practice regarding, for example, the requirement to obtain shareholder approval for certain dilutive events
(such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more
interest in the company and certain acquisitions of the stock or assets of another company). A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written
statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the
SEC, or on its website, each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as
provided under NASDAQ’s corporate governance rules.
The termination or reduction of tax and other incentives that the Israeli government provides to domestic companies may increase the costs involved in operating a company in
Israel.
The Israeli government currently provides tax and capital investment incentives to domestic companies, as well as grant and loan programs
relating to research and development and marketing and export activities. In recent years, the Israeli government has reduced the benefits available under these programs and the Israeli governmental authorities have indicated that the government
may in the future further reduce or eliminate the benefits of those programs. We have taken in the past and may take advantage of these benefits and programs again in the future, however, there is no assurance that such benefits and programs will
continue to be available to us in the future. If such benefits and programs were terminated or further reduced, it could have an adverse effect on our business, operating results and financial condition. The government tax benefits that we
currently are entitled to receive require us to meet several conditions and may be terminated or reduced in the future.
Some of our operations in Israel may entitle us to certain tax benefits under the Law for the Encouragement of Capital Investments,
5719-1959, or the Investment Law, once we are profitable. If we do not meet the requirements for maintaining these benefits, they may be reduced or canceled and the relevant operations would be subject to Israeli corporate tax at the standard
rate, which is set at 23% in 2018 and thereafter. In addition to being subject to the standard corporate tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties thereon. Even if we
continue to meet the relevant requirements, the tax benefits that our current “Benefited Enterprise” is entitled to may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount
of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if we increase our activities outside
of Israel, for example, by way of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefits programs.
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INFORMATION ON THE COMPANY
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A. History and Development of the Company
We were incorporated under the laws of the State of Israel on January 1, 1970. We are a public limited liability company under the Israeli Companies Law,
and operate under that law and associated legislation. Our registered offices and principal place of business are located at 20 Ben Zion Gelis Street, Sgoola Industrial Zone, Petach Tikva 4927920, Israel and our telephone number is
+972-3-9395025. Our website is www.nisteceltek.com. The information on our website is not incorporated by reference into this annual report.
We manufacture and supply technologically advanced custom made circuitry solutions for use in sophisticated and compact electronic products. We provide
specialized services and are a solution provider in the PCB business, mainly in Israel, Europe, North America and Asia. PCBs are platforms that conduct an electric current among active and passive microelectronics components, microprocessors,
memories, resistors and capacitors and are integral parts of the products produced by high‑technology industries. Our focus is on short run quick-turnaround, prototype, pre-production and low to medium volume runs of high-end PCB products for high
growth, advanced electronics applications, mainly flex-rigid PCBs.
We design and develop innovative manufacturing solutions pursuant to complex interconnect requirements of original equipment manufacturers, and provide our
customers with a wide range of custom designed PCBs, including complex rigid, double-sided and multi-layer PCBs as well as flexible circuitry (flex and flex-rigid boards) made of several types of high-performance base material. To complement our
quick-turnaround, prototype, pre-production and low to medium volume production capability and provide our customers with single source service, we also act as an agent for the importation of PCBs from South East Asia when customers require high
volume production runs, although such activity was not significant in recent years.
In June 2002, we acquired a majority ownership interest in Kubatronik-Leiterplatten GmbH (“Kubatronik”), a European manufacturing and marketing company located in Geislingen, Germany. In December 2016, we sold all our shares of Kubatronik to Kubatronik’s only other shareholder and founder. For additional information see Item 4C “Organizational
Structure”.
In July 2007, we established Eltek USA Inc. (“Eltek USA”), a wholly-owned subsidiary incorporated in Delaware, to manage our sales and marketing in the
North American market. In June 2015, we relocated Eltek USA into a new and better-located facility. In December 2008, we established Eltek Europe GmbH, a wholly-owned subsidiary organized in Germany, to manage our sales and marketing activities
for certain European customers.
In November 2013, Nistec acquired 50.5% of our issued share capital and gained control of our company.
In June 2016, Mr. Nissan, the controlling shareholder of Nistec, and our Chairman and CEO, acquired in the market 124,028 ordinary shares of our company, increasing his direct and indirect voting interest from 50.5% to 56.6%.
In December 2018, Nistec Ltd., transferred its ownership interest in our company to Nistec
Golan Ltd. Nistec Golan and Nistec Ltd. are privately held companies indirectly controlled by Mr. Nissan, through Nistec Holdings Ltd.
In March 2019, we issued at no charge to the holders of our ordinary shares subscription rights to
purchase up to an aggregate of 3,380,920 shares, such that each shareholder received five (5) subscription rights for every three (3) ordinary shares owned on the record date, at a price of $1.464 per share. Our shareholders purchased
2,351,701 ordinary shares, for an aggregate of $3.4 million. Of such shares, Nistec acquired 1,707,364 shares and Mr. Nissan individually acquired 206,712 of our ordinary shares, increasing his direct and indirect voting interest from 56.6% to 69.9%.
During the three years ended December 31, 2019, we invested approximately $1.7 in new equipment and the expansion of our facilities and infrastructure.
Subject to availability of financial resources, we expect to invest approximately $2.0 million in capital expenditures in 2020, mainly for manufacturing equipment to expand our manufacturing capacity and to upgrade our technological capabilities.
We intend to finance these expenditures with suppliers’ credit, cash flow from operations and bank loans; however, external financing may not be available, or, if available, may not be on terms favorable to us.
B. Business Overview
Industry Overview
PCBs are constructed from a variety of base raw materials. PCBs can be double-sided or multi-layered and made of rigid, flexible, flex-rigid or
high-frequency materials. In essence, they are platforms that conduct electrical signals among active and passive microelectronics components, microprocessors, memories, resistors and capacitors. Photolithographic type processes transfer the
images of the electrical circuit onto the layers, and chemical processes etch these lines on the boards. There are several broad categories of PCBs:
Rigid PCBs. Rigid PCBs are the core product of the industry and can be found in virtually every electronics
device. The layer count of these products generally ranges from two to 30 layers, although some PCBs are composed of 42 layers.
Flexible and flex‑rigid PCBs. Flexible boards are thin, light-weight circuits used to interconnect other circuit
boards and electronic devices within electronic equipment. Flex-rigid boards are composed of rigid parts and flexible layers. They generally range from two to 30 layers. Flex-rigid boards provide solutions
for electronic systems that impose space and shape restrictions and for systems in which reliability of connectivity is crucial. These products are often found in military applications (primarily avionics),
medical and measurement equipment and the automotive industry, among other uses.
Backplanes. Backplanes are large, high-density circuit boards with design features such as tight tolerance
finished hole sizes that require precise process controls. These products are commonly known as “motherboards” on which connectors are mounted to receive and interconnect other PCBs and can be found primarily in telecommunications applications.
PCB manufacturers can generally be classified based on two parameters, product sophistication and service sophistication. Product sophistication is
evident in the capability of a PCB manufacturer to offer products with higher layer counts and more complex construction, as well as in the line width and the spacing of lines on the circuit boards. The state-of-the-art HDI technology enables
manufacturers to produce PCBs with line width and spaces as narrow as 2-3 mils and hole diameters of 4 to 6 mils.
Industry Trends
We believe that several trends are impacting the PCB manufacturing industry. These trends include:
Shorter electronic product life cycles. Continual advances in technology have shortened the life cycles of complex
commercial electronic products, placing greater pressure on manufacturers to quickly bring new products to market. The accelerated time-to-market and ramp-to-volume needs of manufacturers for high-end commercial equipment create opportunities for
PCB manufacturers that can offer engineering support in the prototype stage and manufacturing scalability throughout the production life cycle.
Increasing complexity of electronic products. Manufacturers continue to design higher performance electronic
products which take advantage of advances in semiconductor technology. This in turn requires technologically complex PCBs that can accommodate higher speeds and component densities, including HDI, flexible and substrate PCBs. These complex PCBs
can require very high layer counts, miniaturized circuit connections, advanced manufacturing processes and materials, and high-mix production capabilities, which involve processing small lots in a flexible manufacturing environment. Manufacturers
increasingly rely upon larger PCB manufacturers, which possess the financial resources necessary to invest in advanced manufacturing process technologies and sophisticated engineering staff, often to the exclusion of smaller PCB manufacturers that
do not possess such technologies or resources.
Increasing concentration of global PCB production in Asia. In recent years, many electronics manufacturers have
moved their commercial production to Asia to take advantage of its exceptionally large, relatively low-cost labor pool. In particular, the trend has favored China, which according to industry sources has the largest PCB market in terms of both
revenue and number of suppliers. The overall technical capability of suppliers in China has improved dramatically in recent years, and China has emerged as a global production center for cellular phones, smartphones, tablet PCs, computers and
computer peripherals, and high-end consumer electronics. The continued outsourcing of production to China should result in additional commercial market share potential for PCB manufacturers with a strong presence and reputation in China.
Decreased reliance on multiple PCB manufacturers. Manufacturers traditionally have relied on multiple PCB
manufacturers to provide different services as an electronic product moves through its life cycle. The transfer of a product among different PCB manufacturers often results in increased costs and inefficiencies due to incompatible technologies and
manufacturing processes and production delays. In addition, manufacturers generally find it easier and less costly to manage fewer PCB manufacturers. As a result, manufacturers are reducing the number of PCB manufacturers and backplane assembly
service providers on which they rely, presenting an opportunity for those that can offer one-stop manufacturing capabilities — from prototype to volume production.
Increased requirements for aerospace and defense products. The aerospace and defense market is characterized by
increasingly time-consuming and complex certification processes, long product life cycles, and a demand for leading-edge technology with extremely high reliability and durability. While the DoD budget faces increasing scrutiny as part of overall
U.S. budget deficit reduction efforts, we anticipate that a continued DoD commitment to new product development and upgrades — incorporating leading-edge PCB technology in products for intelligence, surveillance and reconnaissance, communications
and weapon systems — combined with Foreign Military Sales (the “FMS”) programs and a recovering global commercial aerospace industry will support a significant long-term market for these products.
Reduction in backlog. Due to the costs involved, our customers are increasingly reluctant to maintain inventory
and refrain from placing orders significantly in advance. As a result, we have experienced a reduction in order backlog and uncertainty in respect of future orders.
Introduction of new disruptive technologies. Semi-additive and fully-additive technologies are arising and are
expected to affect conventional industries in the future.
Manufacturing and Engineering Processes
Continued significant investments in equipment are necessary in order to maintain technological competitiveness in the PCB industry. During the three
years ended December 31, 2019, we invested approximately $1.7 million in machinery and equipment for that purpose.
Manufacturing Capabilities. We have the capability to manufacture PCBs having in excess of 36 layers, flex-rigid
boards, blind and buried vias and designs using materials as thin as 1 mil. We receive orders for production with turnaround times of generally between several days to two months. We are able to produce short runs of five to 30 units of simple
type PCBs within four to five working days, and a few hundred units within ten working days, and are capable of producing such number of boards within five working days when production line scheduling permits. During 2007, we applied new
technologies to enable us to manufacture “via-in-pad” multilayer PCBs, microvia filling, through hole via filling and copper overplating. In July 2012, we purchased a new Orbotech Paragon™ Laser Direct Imaging, or LDI, system for increasing
capacity and shortening production time and improving product time-to-market. In 2012, we also acquired and installed a new Hakuto Cut-Sheet-Laminator and the latest Chemplate Indubond model. In 2014 and in the beginning of 2015 we acquired a
complete set of two Lauffer hot presses and one cold press, a line for outer layer surface preparation, a laser router and a second Hakuto cut-sheet-laminator (refurbished). These machines improve the outer layer accuracy and the registration
between the inner-layers. During 2015, we installed the new Orbotech Diamond DI for solder mask imaging, which improves the solder mask registration and accuracy.
During 2018 we incurred water damage to a major piece of equipment in our production facility. We replaced the damaged machine with a new Nuvogo™ LDI
machine shortly thereafter, utilizing $500,000 received from our insurance company as an advance payment. The advance payment was recorded as a deduction in the cost of acquiring the new machine and to offset some of the loss incurred as a result
of the damage. In May 2019, we received an additional payment of approximately $1.0 million associated with the damage incurred and the resulting losses arising from this event.
In addition, during 2018 we incurred water damage to two electrical testing systems in our production facility. We are negotiating a final resolution with
the insurance company. So far we were not able to reach an agreement for the damage and the payment from the insurance company on our claims, and we cannot be sure that such negotiations or legal proceedings in this matter will be successfully
completed.
Our new equipment enables us to offer our customers solutions and participate in bids in which we were not able to participate in the past. We continue to
utilize advanced registration technologies and to improve the copper etching accuracy to comply with new specifications and requirements of our customers and potential customers.
Computer Aided Design/Computer Aided Manufacturing (CAD/CAM). We utilize a state-of-the-art CAD system developed
by Frontline PCB Solutions Ltd., an Israeli-based company, and can receive CAD data by electronic data transmission. Our CAD workstations perform design rule checks on transmitted designs, incorporate any customer-specific design modifications and
perform manufacturability enhancements that increase PCB quality.
Advanced Finishing Capabilities for Dense Packaging Designs. We provide a wide assortment of alternative surface
finishes, including hot air solder leveling, electroless gold over nickel, immersion silver, outsource nickel/palladium/gold and immersion tin, for the attachment of components to PCBs.
Other Advanced Process Capabilities. We provide fabrication of dense multi-layer PCBs. We use an advanced
inner-layer production line, a laser direct imaging system, mechanical and laser drilling equipment and clean room environments (ISO-7) to produce technologically advanced products.
Quality, Environmental and Safety Standards. Our quality management system has been ISO 9001:2008 certified since
July 2002. Such certification is based on successful implementation of quality assurance requirements and includes ongoing monitoring of our business and periodic compliance audits conducted by the Israeli Institute of Standards. We have obtained
United States Department of Defense Qualified Product List approval (MIL-PRF-55110G and MIL-P-50884E) for our products. Since 1976, our rigid glass epoxy (FR4 and FR5) and flex-rigid boards have been UL 94V-0 certified by Underwriters Laboratories
Inc. (a standards organization that offers product safety testing and certification of product safety). Our environmental management system has been ISO 14001:2004 certified since 2005 (and prior to such date was ISO 14001 certified from 2003).
We are OHSAS 18001:2007 certified for occupation health and safety management systems since December 2007. In November 2009, we became certified to the AS 9100B quality management standard for the aerospace industry and in August 2012 we were
upgraded to AS 9100C.
Enterprise Resources Planning (ERP) Software. During 2017 we withheld the implementation process of the enterprise resource planning
system ("ERP") which we previously had been engaged in. In 2014 we acquired a new ERP system dedicated to the PCB industry from Proms. In the third quarter of 2017 we decided, due to lack of human and financial resources and unfavorable
cost-benefit, to withhold implementation of ERP system. The ERP system was then fully amortized.
Sales, Customers and Marketing
Sales. In the years ended December 31, 2019, 2018 and 2017, the primary industries for which we produced PCBs
were defense and aerospace equipment (55.2%, 43.1% and 48.0% of production, respectively), medical equipment (9.5%, 9.5% and
14.3% of production, respectively), industrial equipment (2.1%, 6.0% and 4.2% of production, respectively), distributors, contract electronic manufacturers and others (33.2%, 41.4% and 33.6% of production, respectively).
Customers. During the year ended December 31, 2019, we provided PCBs to approximately 110 customers in
Israel and approximately 89 customers outside of Israel. Our customers outside of Israel are located primarily in North America, the Netherlands, India,
Italy, Romania, Uruguay, China, and South Africa. Sales to non-Israeli customers were $15.1 million (43.5% of revenues) for the year ended
December 31, 2019, $15.0 million (44.2% of revenues) for the year ended December 31, 2018 and $13 million (39.8% of revenues) for the year ended
December 31, 2017. In the years ended December 31, 2019, 2018 and 2017, a group of affiliated companies accounted for 19.5%, 12.0% and 14.6%, of our total revenues, respectively, and another group of
affiliated companies accounted for 11.5%, 9.3% and 10.2% of our total revenue, respectively.
Marketing. We market and sell our products primarily through our direct sales personnel, sales representatives
and through PCB trading and manufacturing companies. We currently have nine persons involved in sales, of which six persons are located in Israel and three persons are located in the United States. In North America, we market and sell our products through Eltek USA as well as through independent local sales representatives. We also have sales representatives in
Germany, Finland and Spain. PCB trading and manufacturing companies act as distributors of our products in the Netherlands, Italy, and South Africa. In India, we market our products through a local sales representative. We maintain technical
support services for our customers worldwide. We also maintain customer service support centers that handle all logistical matters relating to the delivery of our products and receive and handle complaints relating to delivered products. Our
customer service personnel currently consist of seven persons.
Our strategy is to focus on the high end of the PCB market, mainly in flex-rigid PCBs, in which margins are better. We are currently focusing our
marketing efforts on the defense and medical industries. To penetrate the U.S. defense market, we applied for ITAR registration from the U.S. Department of State, Bureau of Political-Military Affairs, which we received in January 2009. ITAR
regulates the manufacture, export and transfer of defense articles, information and services. ITAR is a set of U.S. government regulations that controls the export and import of certain defense-related articles and services. The regulations
restrict sensitive information and technologies only to be shared with U.S. persons, unless special approval is acquired. To qualify for ITAR registration, we met strict requirements for corporate structure, security, record keeping and procedures
to allow us to sell our PCBs for use in U.S. defense products. In November 2009, we became certified to the AS 9100B quality management standard for the avionic industry in order to strengthen our position in the avionic and aerospace market in
North America and Europe. In January 2014, we received accreditation from Nadcap, a global cooperative accreditation program for aerospace engineering and related industries, for our advanced circuitry solutions, including rigid and flex-rigid
printed circuit boards.
We have ongoing programs to upgrade our processes by implementing high-quality standards, employee training and special training activities for clients.
Marketing efforts include recruiting independent sales representatives in various geographic areas, the distribution of promotional materials, seminars for engineers, and the supply of technical information to business publications.
Materials and Supplies
The materials used in the manufacture of PCBs are primarily laminates (copper clad, with an isolating core separating them), prepreg composite materials,
photo-chemical films, chemicals and inks. The materials we use are manufactured in Europe, North America and South East Asia. Some of the materials are purchased directly from the manufacturer, while others are purchased from local distributors.
During recent years, price negotiations with our suppliers resulted in lower price increases than requested by our suppliers; however, we may not continue
to be successful in such negotiations in the future. We have also faced pressure to raise our prices for our products to compensate for these price increases and although we have managed to date to maintain our sales prices with moderate price
increases, we may not be able to so in the future. During recent years the price for raw materials increased due to the Copper demand in the world and the price rise for resin and glass.
Competition
The global PCB industry is highly fragmented and intensely competitive, trends that we believe will continue. The global PCB industry is characterized by
rapidly changing technology, frequent new product introductions and rapidly changing customer requirements. We compete principally in the market for complex, flex-rigid multi-layer PCBs. In the Israeli market, we mainly compete with major PCB
exporters, mainly from South East Asia, North America and Europe, and the Israeli firm PCB Technologies Ltd. In March 2018, it was reported that PCB Technologies signed an agreement with a local fund for significant investment in PCB Technologies
Ltd. which could improve its competitiveness. In the European market we mainly compete with Advanced Circuit Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex and Cicor (Switzerland), Graphics, Exception
PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy), Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies. In the North American market, we mainly compete with TTM, Inc. (previously
known as DDi Corp and Viasystems), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne. Many of these competitors have significantly greater financial, technical and marketing resources than us. Although capital
requirements are a significant barrier to entry for manufacturing complex PCBs, the basic interconnect technology is generally not protected by patents or copyrights. Our current competition in the rigid PCB segment is mainly from PCB
manufacturers in the Far-East (mainly in China), which have substantially lower production costs than us. Continued competitive pressures could cause us to lose market share and reduce prices.
Backlog
We estimate that our backlog of unfilled orders as of December 31, 2019, was approximately $9.1 million compared to a backlog of approximately $7 million at December 31, 2018. We include in our backlog all purchase orders scheduled for delivery within the next 12 months. The backlog
outstanding at any point in time is not necessarily indicative of the level of business to be expected in the ensuing period.
Environmental Matters
Our environmental management system has been ISO 14001 certified since May 2003. This certification was based on successful implementation of
environmental management requirements and includes ongoing monitoring of our processes, raw materials and products. The certification is subject to periodic compliance audits conducted by the Israeli Institute of Standards.
PCB manufacturing requires the use of metals and chemicals classified as hazardous substances. Water used in the manufacturing process must be treated to
remove metal particles and other contaminates before it can be discharged into the local sewer systems. We operate and maintain effluent water treatment systems and use approved testing procedures at our manufacturing facilities. There is no
assurance, however, that violations will not occur in the future. We are also subject to environmental laws and regulations relating to the storage, use and disposal of chemicals, solid waste and other hazardous materials, as well as air quality
regulations. Environmental laws and regulations could become more stringent over time, and the costs of compliance with more stringent laws could be substantial. Environmental regulations enacted in Israel in September 2000 provide that a company
that is found to have discharged water containing contaminates will be liable for quadruple the amount normally charged for its water consumption. Over the years, we have undertaken various actions to reduce the use of water in our manufacturing
facilities, and invested in improving our effluent wastewater treatment system to lower the amounts of inorganic salts and copper concentration in the discharged water.
In January 2014, July 2014 and September 2015, we received notices from Meitav, the water company of the Petach Tikva municipality, requiring payment of
fees totaling NIS 3.8 million ($980,000) excluding VAT, for discharges of industrial wastewater allegedly not meeting the applicable standards into the municipal sewage system. The payment demands were made on the basis of several samplings
conducted by Meitav on our premises during 2013-2015. We presented plans for a new wastewater treatment facility to Meitav in an effort to have Meitav rescind or reduce its demand for payment.
In December 2015, we completed the construction of a new wastewater treatment facility. In 2016, six wastewater samples were inspected by Meitav and were
found to be in compliance with applicable standards. In July 2016, we reached a settlement agreement with Meitav, according to which we paid them NIS 200,000 ($50,000).
A shortage of water in Israel may reduce the allocation of water available to manufacturing plants, including ours, which could affect the concentrations
of pollutants in our wastewater, making it harder to comply with the foregoing regulations, in which event we would be required to invest additional funds to improve our wastewater treatment systems.
In October 2015, we filed an application for an emissions permit with the Ministry. In January 2016, we received notice of non-compliance from the
Ministry, stating that the application was incomplete and that we were in breach of the Clean Air Law and the Licensing of Businesses Law. Following communications with the Ministry, we submitted
an amended application and received our emissions permit in July 2017.
In March 2019, representatives of the Ministry inspected our premises and issued a warning related to an alleged breach of the Clean Air Law and a warning related to the Hazardous Materials Law
(1993). Management believes that our company is not in violation of these laws. Following a hearing at the Ministry in August 2019, we believe that this matter will ultimately be resolved but there can be no assurance that our view will be
accepted by the Ministry.
If we are found to be in violation of environmental laws in the future, we could be liable for fees, damages, costs of remedial actions and a range of
potential penalties, and could also be subject to revocation of permits necessary to conduct our business or any part thereof. Any such liability or revocation could have a material adverse effect on our business, financial condition and results
of operations.
Intellectual Property Rights
Our success depends in part on our proprietary techniques and manufacturing expertise, particularly in the area of manufacturing complex multi-layer and
flex-rigid PCBs. Like many companies in the PCB industry, we do not hold any patents and rely principally on trade secret protection of our intellectual property. We believe that, because of the rapid pace of technological change in the
electronics industry, the legal protections for our products are less significant factors in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality of support
services that we provide.
C. Organizational Structure
In June 2002, we acquired a 76% interest in Kubatronik, a PCB manufacturer that specializes in short run and prototype boards, including multi-layer,
flex-rigid and HDI boards. The founder held the remaining 21% interest in Kubatronik (after we acquired an additional 3% of shares of Kubatronik from him in May 2012). The founder had the right to require us to purchase, and we had the right to
require him (or his permitted transferee) to sell to us, his remaining interest in Kubatronik. In May 2012, the founder exercised his option with respect to 3% of the shares for approximately Euro 69,000 and reduced his ownership percentage from
24% to 21%. The price for the remaining holdings in Kubatronik under the put option was Euro 483,000, while the price for such holdings under the call option was Euro 513,000. Subsequently, Kubatronik incurred losses which were financed by us.
Although we took measures to improve Kubatronik’s results, we were not successful in our efforts. Therefore, on December 19, 2016, we sold all of the Kubatronik shares held by us to the founder. As part of the transaction, we paid him Euro 483,000
on account of his option and provided Kubatronik with an Euro 110,000 advance, to support its cash flow. This advance, together with Kubatronik’s debt to us in the amount of Euro 1,031,000, was forgiven as part of the transaction. In
consideration for the sale, we are entitled to certain contingent consideration. Kubatronik will continue to manage Eltek Europe GmbH.
In July 2007, we established Eltek USA Inc., a wholly-owned subsidiary incorporated in Delaware, to manage our sales and marketing activities in the North
American market. Eltek USA Inc. commenced operations in 2008.
In December 2008, we established Eltek Europe GmbH, a wholly-owned subsidiary organized in Germany, to manage our sales and marketing activities for
certain European customers.
In November 2013, Nistec acquired a controlling 50.5% stake in our company. In June 2016, Mr. Nissan,
our Chairman and CEO and the controlling shareholder of Nistec, acquired 124,028 additional ordinary shares of our company, increasing his direct and indirect voting interest from 50.5% to 56.6%.
In December 2018, Nistec Ltd. transferred its ownership interest in our company to Nistec Golan
Ltd. Nistec Golan and Nistec Ltd., are privately held companies indirectly controlled by Mr. Nissan, through Nistec Holdings Ltd.
In March 2019, we distributed at no charge to the holders of our ordinary shares subscription rights to
purchase up to an aggregate of 3,380,920 shares, such that each shareholder received five (5) subscription rights for every three (3) ordinary shares owned on the record date, at a price of $1.464 per share. Nistec acquired 1,707,364
additional ordinary shares and Mr. Nissan directly acquired 206,712 additional ordinary shares, increasing his beneficial ownership
from 56.6% to 69.9%. On May 31, 2019 Mr. Nissan sold 200,000 shares, decreasing his beneficial ownership to 65.4%.
D. Property, Plants and Equipment
Leased Facilities
Our executive offices, as well as our design, production, storage and shipping facilities, aggregating approximately 90,000 square feet, are located in an
industrial building in the Sgoola Industrial Zone of Petach Tikva, Israel. In 2017, we exercised our option to extend the lease for an additional five years period, which will expire in February 2022. In the year ended December 31, 2019, we
incurred $922,000 of leasing expenses for these premises.
Our U.S. subsidiary, Eltek USA Inc., leases approximately 1,682 square feet of office space in New Hampshire under a lease that expires in February 2020.
During February 2019 we entered into amendment to the lease contract in which we reduced the lease space to 938 square feet of office space commencing March 1,2019 through February 2024. In the year ended December 31, 2019, we paid an aggregate
of $15,000 in lease payments for these premises.
Leased Equipment
We leased manufacturing equipment until September 2019. We have no further obligations under lease of manufacturing equipment agreements. Our lease
expense in 2019 under this agreement was $69,000.
ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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A. Operating Results
The following discussion of our results of operations should be read together with our consolidated financial statements and the
related notes, which appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ
materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.
Overview
We were incorporated under the laws of the State of Israel in 1970. Following our initial public offering in January 1997, our ordinary shares were listed
on the NASDAQ Stock Market (symbol: ELTK) and are presently listed on the NASDAQ Capital Market. We develop, manufacture, market and sell PCBs, including HDI multi-layered and flex-rigid boards for electronic devices. Our principal customers
include manufacturers of medical equipment, defense and aerospace equipment, industrial equipment, and telecom and networking equipment, as well as contract electronic manufacturers. We have production facilities in Israel and marketing
subsidiaries in the United States and Germany.
In November 2013, Nistec Ltd. acquired 50.5% of our issued share capital and gained control of our company. In June 2016, Mr. Nissan, our Chairman and CEO and the controlling shareholder of Nistec, acquired 124,028 additional ordinary shares of our company in the open market, increasing his direct and indirect voting interest from 50.5% to
56.6%. In December 2018, Nistec Ltd. transferred its ownership interest in our company to Nistec Golan Ltd. Nistec Golan and Nistec Ltd. are privately held
companies indirectly controlled by Mr. Nissan, through Nistec Holdings Ltd.
In March 2019, we distributed, at no charge, to the holders of our ordinary shares, subscription rights
to purchase up to an aggregate of 3,380,920 shares, such that each shareholder received five (5) subscription rights for every three (3) ordinary shares owned on the record date, at a price of $1.464 per share. Nistec acquired 1,707,364 additional ordinary shares and Mr. Nissan directly acquired 206,712 additional ordinary shares, increasing his beneficial ownership interest from 56.6% to 69.9%. On May 31, 2019 Mr. Nissan sold 200,000 shares, decreasing his beneficial ownership to 65.4%.
Our consolidated financial statements appearing in this annual report are prepared in dollars in accordance with U.S. GAAP. Our functional currency is the
NIS. The consolidated financial statements appearing in this annual report are translated into dollars at the representative rate of exchange under the current rate method. Under such method, the income statement and cash flows statement items
for each year (or period) stated in this report are translated into dollars using the average exchange rates in effect at each period presented, and assets and liabilities for each year (or period) are translated using the exchange rate as of the
balance sheet date (as published by the Bank of Israel), except for equity accounts, which are translated using the rates in effect at the date of the transactions. All resulting exchange differences that do not affect our earnings are reported in
the accumulated other comprehensive income as a separate component of shareholders’ equity.
Critical Accounting Policies
We have identified the policies below as critical to the understanding of our consolidated financial statements. The application of these policies
requires management to make estimates and assumptions that affect the valuation of assets and expenses during the reporting period. There can be no assurance that actual results will not differ from these estimates.
The significant accounting policies described in Note 1 of our consolidated financial statements, which we believe to be most important to fully understand
and evaluate our financial condition and results of operation under U.S. GAAP, are discussed below.
Revenue Recognition. We recognize revenues when products are shipped and the customer takes ownership and assumes
risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sale price is fixable or determinable.
Inventories. Inventories are recorded at the lower of cost or market value. Cost is determined on the weighted
average basis for raw materials. For work in progress and finished goods, the cost is determined based on calculation of accumulated actual direct and indirect costs.
Allowance for doubtful accounts receivable. The allowance for doubtful accounts receivable is calculated on the basis of specific identification of customer balances. The allowance is determined based on management’s estimate of the aged receivable balance considered uncollectible,
based on historical experience, aging of the receivable and information available about specific customers, including their financial condition and the volume of their operations.
Fixed assets. Assets are recorded at cost. Depreciation on property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets. Machinery and equipment purchased under capital lease arrangements are recorded at the present value of the minimum lease payments at lease inception. Such assets and leasehold
improvements are depreciated and amortized respectively, using the straight-line method over the shorter of the lease term or estimated useful life of the asset.
Impairment in Value of Assets. Long-lived assets and certain identifiable intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset or asset
group to the undiscounted future net cash flows expected to be generated by the asset or the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
Use of estimates. The preparation of the consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual
results could differ from these estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowance for doubtful accounts, valuation of derivatives, deferred tax assets, inventory, goodwill,
put/call option, income tax uncertainties and other contingencies.
Commitments and 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. Recoveries of environmental remediation costs from
third parties that are probable of realization are separately recorded as assets, and are not offset against the related environmental liability.
Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further
information develops or circumstances change. Costs of expected future expenditures for environment remediation obligations are not discounted to their present value.
Recent Developments
An outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now spread globally. This outbreak has resulted in
travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, cancellations, supply chain disruptions,
and lower consumer demand, layoffs, defaults and other significant economic impacts, as well as general concern and uncertainty. The impact of this outbreak has adversely affected the economies of many nations and the entire global economy and may
impact our company in ways that cannot necessarily be foreseen.
The current severity of the pandemic and the uncertainty regarding the length of its effects could have negative consequences for our company. To date, the effects of the pandemic have not
materially affected our company’s operations, which have been deemed an “essential enterprise” by the Israeli government and we are making efforts to operate as normal.
Some of our employees are quarantined and in some cases, are working remotely due to safety concerns, but most of the work is still preformed from our production facility. Our ability to collect
money, pay bills, handle customer and consumer communications, schedule production and order raw materials necessary for our production has not been materially impacted. To date, we have not experienced a significant change in our sales or in the
timeliness of payments of our invoices and our cash position remains stable with approximately $2.2 million of cash and cash equivalents as of March 31, 2020.
Results of Operations
The following table sets forth, for the periods indicated, selected financial information expressed as a percentage of our total revenues:
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Revenues
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100
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%
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100
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%
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100
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%
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Cost of revenues
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Gross profit
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17.3
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7.7
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4.1
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R&D expenses
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*
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-
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(0.1
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)
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Selling, general and administrative expenses
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(13.3
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)
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(13.8
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)
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(14.4
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Operating profit (loss)
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4.0
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(6.1
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)
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(10.4
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Financial expenses, net
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(1.3
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(1.4
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)
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(0.1
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)
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Other income (loss), net
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Profit (loss) before income tax expense
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5.4
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(7.5
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)
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(11.3
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)
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Income tax (expense)
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Net profit (loss)
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___________________
* Less than 0.1%
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
Revenues. Revenues increased by 2.7% to $34.8 million
in the year ended December 31, 2019, from $33.9 million in the year ended December 31, 2018. The increase in revenues is primarily attributable to increased prices of our products.
Cost of Revenues. Cost of revenues decreased by 8.0%
to $28.8 million for the year ended December 31, 2019, from $31.3 million for the year ended December 31, 2018. The decrease in cost of revenues is primarily attributable to cost savings measures we made during the year. Cost of revenues as a
percentage of revenues decreased to 82.8% for the year ended December 31, 2019, from 92.3% for the year ended December 31, 2018. The decrease in cost of revenues as a percentage of revenues is primarily attributable to our efforts to reduce fixed
and variable costs.
Gross Profit. Gross profit increased by 131% to $6.0
million for the year ended December 31, 2018, from $2.6 million for the year ended December 31, 2018. Gross profit as a percentage of revenues increased to 17.2% for the year ended December 31, 2019, from 7.7% for the year ended December 31,
2018. The increase in gross profit is primarily due to the reduction of fixed and variable costs and a slight increase in revenues.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.6 million in
the year ended December 31, 2019 as compared to $4.7 million in the year ended December 31, 2018. Selling, general and administrative expenses primarily consist of labor-related costs, marketing and sales activities and other consulting and
administrative expenses.
R&D Expenses. In 2019, we recorded R&D expenses of $16,000 in connection with our participation in a
consortium within the framework of the MAGNET program of the Israeli National Authority for Technological Innovation (previously known as the Office of the Chief Scientist in the Israeli Ministry of Economy and Industry of the State of Israel) (the
“NATI”). We did not incur R&D expenses in 2018.
Operating Profit (Loss). We recorded an operating profit of $1.4 million in the year ended December 31, 2019
compared to an operating loss of $2.1 million in the year ended December 31, 2018. The improvement in our operating profit is primarily attributable to our cost savings efforts.
Financial Expenses, Net. Financial expenses, net decreased to $440,000 in the year ended December 31, 2019, from
$475,000 in the year ended December 31, 2018. The decrease in financial expenses in 2019 compared to 2018 is primarily attributable to the decrease in our financial liabilities and the impact of such decrease on interest expenses, offset by an
increase of expenses attributable to the NIS exchange rate on outstanding dollar and Euro denominated balances of our receivables from customers and debts to our suppliers.
Other Income, Net. We had other income, net of $923,000 in the year ended December 31, 2019, mainly attributable
to receipt of payment on an insurance claim made in 2018 for damage to one of our manufacturing machines and the resulting losses that occurred as a result of this event. We had other income, net of $3,000 in the year ended December 31, 2018.
Income Tax Expense. During the year ended December 31, 2019 we recorded a tax expense of $77,000 compared to a tax
expense of $63,000 in 2018. Tax expenses in 2019 and 2018 were mainly attributable to the increase in deferred tax liability and tax related to our subsidiary in the United States.
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Revenues. Revenues increased by 3.4% to $33.9 million
in the year ended December 31, 2018, from $32.8 million in the year ended December 31, 2017. The increase in revenues is primarily attributable to increased demand for our products, mainly from international customers.
Cost of Revenues. Cost of revenues decreased by 0.3%
to $31.3 million for the year ended December 31, 2018, from $31.4 million for the year ended December 31, 2017. The decrease in cost of revenues is primarily attributable to cost savings measures we made during the second half of the year. Cost
of revenues as a percentage of revenues decreased to 92.3% for the year ended December 31, 2018, from 95.9% for the year ended December 31, 2017. The decrease in cost of revenues as a percentage of revenues is primarily attributable to the
increase in revenues and our efforts to reduce fixed costs.
Gross Profit. Gross profit increased by 100% to $2.6
million for the year ended December 31, 2018, from $1.3 million for the year ended December 31, 2017. Gross profit as a percentage of revenues increased to 7.7% for the year ended December 31, 2018, from 4.1% for the year ended December 31, 2017.
The increase in gross profit is primarily due to the increase in revenues and reduction in fixed costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.7 million in
the year ended December 31, 2018 and 2017. Selling, general and administrative expenses primarily consist of labor-related costs, marketing and sales activities and other consulting and administrative expenses.
R&D Expenses. We did not incur R&D expenses in 2018. In 2017, we recorded R&D expenses of $41,000
in connection with our participation in the Printel program, a consortium within the framework of the MAGNET program of the Israeli National Authority for Technological Innovation (previously known as the Office of the Chief Scientist in the
Israeli Ministry of Economy and Industry of the State of Israel) (the “NATI”).
Operating Loss. We recorded an operating loss of $2.1 million in the year ended December 31, 2018 compared to an
operating loss of $3.4 million in the year ended December 31, 2017. The decrease in our operating loss is primarily attributable to the increase in revenues and cost savings in our operations.
Financial Expenses, Net. Financial expenses, net increased by $177,000 to $475,000 in the year ended December 31,
2018, from $298,000 in the year ended December 31, 2017. The increase in financial expenses in 2018 compared to 2017 is primarily attributable to the increase in our financial liabilities and the impact of the NIS exchange rate on outstanding
dollar and Euro denominated balances of our receivables from customers and debts to our suppliers.
Other Income, Net. We had other income, net of $3,000 in the year ended December 31, 2018, compared to other
income, net of $15,000 in the year ended December 31, 2017.
Income Tax Expense. During the year ended December 31, 2018 we recorded a tax expense of $63,000 compared to a
tax expense of $74,000 in 2017. Tax expenses in 2018 were mainly attributable to our subsidiary in the United States.
Impact of Currency Fluctuations and Inflation
Our revenues and expenses are denominated in the NIS, dollars and Euros. Due to the different proportions of currencies our revenues and expenses are
denominated in, fluctuations in rates of exchange between NIS and other currencies may affect our operating results and financial condition. For example, the NIS value of our dollar or Euro denominated revenues are negatively impacted in case of a
devaluation of the dollar and the Euro against the NIS. The average exchange rate for the NIS against the dollar was approximately 0.8% lower in 2019 than 2018 and the average exchange rate of the NIS against the Euro was 6.0% lower in 2019 than
2018, and in total, these changes had a negative impact on our operating results in 2019. The average exchange rate for the NIS against the dollar was 0.1% lower in 2018 than 2017 and the average exchange rate of the NIS against the Euro was 4.5%
higher in 2018 than 2017, and in total, these changes had a minor positive impact on our operating results in 2018.
The following table sets forth, for the periods indicated, (i) depreciation or appreciation of the NIS against the most important currencies for our
business, the dollar and Euro, between December 31 each year and December 31 of the year before, and (ii) inflation as reflected in changes in the Israeli consumer price index, or the CPI.
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|
|
|
|
|
|
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|
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|
Dollar
|
|
|
(7.8
|
)%
|
|
|
8.1
|
%
|
|
|
(9.8
|
)%
|
|
|
(1.5
|
)%
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|
|
0.3
|
%
|
Euro
|
|
|
(9.6
|
)%
|
|
|
3.3
|
%
|
|
|
2.7
|
%
|
|
|
(4.8
|
)%
|
|
|
(10.1
|
)%
|
Israeli CPI
|
|
|
0.6
|
%
|
|
|
0.8
|
%
|
|
|
0.4
|
%
|
|
|
(0.2
|
)%
|
|
|
(1.0
|
)%
|
From time to time in the past we have used currency hedging instruments in order to partially protect ourselves from currency fluctuation and may use
hedging instruments from time to time in the future.
Because exchange rates between the NIS and the dollar and Euro fluctuate continuously, exchange rate fluctuations, particularly larger periodic
devaluations, may have an impact on our profitability and period-to-period comparisons of our results. We cannot assure you that in the future our results of operations may not be materially adversely affected by currency fluctuations.
Conditions in Israel
We are incorporated under the laws of, and our executive offices, principal production facilities and research and development facilities are located in,
the State of Israel. See Item 3D. “Key Information – Risk Factors – Risks Relating to Our Operations in Israel” for a description of governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could
materially affect our operations.
Trade Relations
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade. In addition, Israel has been granted preferences under the Generalized System of Preferences from Australia
and Canada. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel is also a member of the Organization for Economic Co-operation and Development, or the OECD, an
international organization whose members are governments of mostly developed economies. The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around the world.
Israel and the E.U. concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries
and obligated Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all
tariff and some non-tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the EFTA, established a free-trade zone between Israel and the EFTA
nations. In November 1995, Israel entered into a new agreement with the E.U., which includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the E.U.
In June 2014, Israel joined the E.U.’s Horizon 2020 Research and Innovation program. In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other nations in
Eastern Europe and Asia.
Effective Corporate Tax Rate
Israeli companies are generally subject to income tax on their taxable income under the Income Tax Ordinance, 5721-1961. The regular corporate tax rate in
Israel for 2018 and 2019 is 23% and for the years 2016 and 2017 was 25% and 24%, respectively. However, one of our production facilities qualifies as a “benefited enterprise” under the Law for the Encouragement of Capital Investments, 5719-1959, as
amended. Subject to certain time limitations, a certain portion of our income derived from such benefited enterprise will be subject to a zero tax rate, while the remainder will be taxed at a rate of up to 23%. Alternatively we may select a
“preferred enterprise” status, which will allow us to be taxed at a rate of 16% on all of our income. For additional information see Item 10E. “Additional Information – Taxation - Tax Benefits Under the Law for the Encouragement of Capital
Investments, 5719-1959” and Note 14 to our consolidated financial statements.
As of December 31, 2019, we had approximately $24.1 million in tax operating loss carryforwards and $9.0 million in capital loss carry forwards in Israel,
which can be offset against future income in Israel without time limitation. In Israel, we have received final tax assessments through the 1995 tax year and the tax assessments we received for the 1996-2008 tax years are considered final due to
the statute of limitations. Our European subsidiary, Eltek Europe, has received final tax assessments through the 2010 tax year. Our U.S. subsidiary has not yet received any final tax assessments since its incorporation.
During 2019, we recorded tax expenses of $77,000. In 2018, we recorded tax expenses of $63,000, mainly in respect of our subsidiary in the United States.
In 2016, we wrote-off the entire amount of our deferred tax assets based on uncertainty about our ability to realize it in the foreseeable future. Such uncertainty resulted from a reduced demand for our products, a change in the PCB buying patterns
of our domestic military customers, which shifted some PCB acquisitions overseas, increased competition coupled with reduced prices in the local market, on-going manufacturing challenges, and possible devaluation of the U.S. dollar against the NIS,
all of which may adversely affect our future profitability.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standard Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). The standard requires lessees to recognize almost all leases on the balance sheet as a
right-of-use asset and a lease liability and requires leases to be classified as either an operating or a finance type lease. The standard excludes leases of intangible assets or inventory. In July 2018, the FASB issued amendments in ASU 2018-11,
which provide another transition method in addition to the existing transition method, by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption, and to not apply the new guidance in the comparative periods they present in the financial statements. We adopted the standard as of January 1, 2019, using a modified retrospective transition approach
and elected to use the effective date as the date of initial application. As a result of the adoption of Topic 842 on January 1, 2019, we recorded operating lease right of use (“ROU”) assets of $3.26 million and operating lease liabilities of $3.25
million. The ROU assets include adjustments for prepayments and accrued lease payments. The adoption did not impact the Company’s beginning retained earnings, or its prior year consolidated statements of income and statements of cash flows.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which
requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely
recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. We do not expect this standard to have a material effect on its consolidated financial
statements.
B. Liquidity and Capital Resources
Historically, we have financed our operations through cash generated by operations, shareholder loans, long-term and short-term bank loans, borrowings
under available credit facilities and the proceeds from our initial public offering in 1997 (approximately $5.8 million). In August 2013, we entered into a definitive investment agreement with Nistec pursuant to which Nistec purchased 706,531 of
our ordinary shares (approximately 34.8% of our issued share capital on a fully diluted basis) in consideration of $4.2 million.
As of December 31, 2019, we had $1.6 million in cash and cash equivalents and a working capital deficit of $1.2 million compared to $992,000 in cash and
cash equivalents and a working capital deficit of $5.3 million at December 31, 2018.
In March 2019, we distributed at no charge to the holders of our ordinary shares subscription rights to purchase up to an aggregate of 3,380,920 shares,
such that each shareholders received five (5) subscription rights for every three (3) ordinary shares owned on the record date at a price of $1.464 per share. Our shareholders purchased 2,351,701 ordinary shares, for aggregate gross proceeds of
$3.4 million received from this offering.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Net cash provided by (used in) operating activities
|
|
|
2,578
|
|
|
|
(813
|
)
|
|
|
(3,444
|
)
|
Net cash used in investing activities
|
|
|
(806
|
)
|
|
|
(619
|
)
|
|
|
(275
|
)
|
Net cash provided by financing activities
|
|
|
(1,132
|
)
|
|
|
1,527
|
|
|
|
3,244
|
|
Effect of translation adjustments
|
|
|
(4
|
)
|
|
|
10
|
|
|
|
128
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
636
|
|
|
|
105
|
|
|
|
(347
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
992
|
|
|
|
887
|
|
|
|
1,234
|
|
Cash and cash equivalents at end of year
|
|
|
1,628
|
|
|
|
992
|
|
|
|
887
|
|