Silicom - 20-F annual report 2023

Part I.

Not Applicable.

Not Applicable.

A. [Reserved]

Inflation in Israel decreased steadily during 2023 and was 3% on an annualized basis. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis by a devaluation of the NIS in relation to the dollar, may increase labor and other costs, such as our property lease agreements, which will increase the dollar cost of our operations in Israel and may harm our results of operations.

Approximately 95% of our international sales are denominated in U.S. Dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, armed conflict, political instability, trade restrictions, and changes in tariffs and freight rates. Our U.S. dollar costs in Israel and Denmark will increase further to the extent that inflation in Israel and/or Denmark exceeds the devaluation of the NIS and/or Danish Krone ("DKK"), respectively, against the dollar, if the timing of such devaluation lags behind inflation in Israel and/or Denmark, or if the dollar devalues against the NIS and/or DKK.

If we fail to meet continued listing standards of NASDAQ, our shares may be delisted, which could have a material adverse effect on the liquidity of our shares.

Our ordinary shares are currently traded on the NASDAQ Global Select Market. The NASDAQ has requirements that a company must meet in order to remain listed on NASDAQ. In particular, NASDAQ rules require us to maintain a minimum bid price of US$ 1.00 per share of our ordinary shares. If the closing bid price of our common stock were to fall below US$ 1.00 per share for 30 consecutive trading days or we do not meet other listing requirements, we would fail to be in compliance with NASDAQ's listing standards. There can be no assurance that we will continue to meet the minimum bid price requirement, or any other requirement in the future. If we fail to meet the minimum bid price requirement, the NASDAQ Stock Market may initiate the delisting process with a notification letter. If our ordinary shares were to be delisted, our liquidity would be adversely affected and our market price could decrease.

It is difficult to make accurate forecasts regarding our revenues for the near term. This is due to a challenging mixed-signal environment that is impacted both by the global economic slowdown and the continuing effects of the loosening of the supply chain (which has followed a long period of global component shortages, which resulted in customers building up significant inventories). The reversal of supply chain tightness, has resulted on occasion and may continue to result in customers drawing on their existing inventory stock and cancelling or postponing open purchase orders, which could negatively affect our revenues. In addition, the negative effects of such trends could be exacerbated, for example, if we are unable to sell parts of our inventory, and/or in the event that component market prices fall below book value of inventories we hold, resulting in losses, due to devaluation of such held inventories. This could have an adverse effect on our costs and results of operations.

Item 4.          INFORMATION ON THE COMPANY.

Our legal and commercial name is Silicom Ltd. We were incorporated under the laws of the State of Israel in 1987, and we operate under Israeli law and legislation. Our registered and principal executive offices are located in Israel at 14 Atir Yeda Street, Kfar Sava, Israel 4464323, and our telephone number is +972-(0)9-764-4555.

Our shares have been listed on the NASDAQ Global Select Market since January 2, 2014 under the ticker symbol "SILC." Prior thereto our shares were listed on the NASDAQ Global Market (previously known as the NASDAQ National Market) under the ticker symbol "SILC" (and previously "SILCF") from February 11, 2008. Prior thereto, our shares were listed on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap). On December 20, 2005, we obtained the approval of the Tel Aviv Stock Exchange, or TASE, for the listing of our shares on TASE. Trading of our shares on TASE commenced on December 27, 2005. On October 26, 2015, our Board of Directors resolved to act to delist the Company's shares from trading on the TASE. Consequently, we applied to the TASE and requested that TASE initiate the delisting process. On October 29, 2015, the TASE announced to the TASE members on the TASE electronic filing site, the MAYA, and on the ISA electronic filing site, the MAGNA, that the last trading day in the Company's shares on the TASE shall be January 26, 2016 and that on January 28, 2016, the Company's shares shall be delisted from trading on the TASE. Accordingly, the last trading day in our shares on the TASE was January 26, 2016, and on January 28, 2016, our shares were delisted from trading on the TASE. Our shares are currently listed only on the NASDAQ Global Select Market. See "Item 9 – The Offer and Listing – Markets and Share Price History."

\In December 2014, we purchased all of the share capital of Fiberblaze A/S (now Silicom Denmark (Fiberblaze A/S)), a provider of high-performance application acceleration solutions for the mobile, telecommunication, network monitoring, cyber security, financial and related industries ("Fiberblaze").

In September 2015, we, together with our wholly owned subsidiary, Silicom Connectivity Solutions, Inc., purchased the assets of ADI Engineering, Inc. ("ADI"), a US company which provides Intel®-based products targeted at SDN, NFV, IoT ('Internet of Things'), Cloud computing and Virtualization.

On July 1^st, 2022, Mr. Shaike Orbach, the Company's President and Chief Executive Officer for the past 21 years, became Executive Vice Chairman of the Board of Directors, and Liron Eizenman, who served as the Company's Chief Operating Officer, took over as the Company's new President and Chief Executive Officer.

From January 1, 2023, to December 31, 2023, our capital expenditures totaled to approximately US$ 1,276  thousand (compared to US$ 2,120 thousand during 2022 and US$ 2,475 thousand during 2021), of which approximately US$ 1,162  thousand (compared to US$ 1,993 thousand during 2022 and US$ 1,811 thousand during 2021) can be attributed to machinery and equipment, and approximately US$ 114 thousand (compared to US$ 127 thousand during 2022 and US$ 664 thousand during 2021) can be attributed to office furniture and equipment and leasehold improvements. We have financed our capital expenditures from our available internal resources and expect to continue to finance our capital expenditures in a similar manner in 2024.

We are an industry-leading provider of high-performance networking and data infrastructure solutions. Designed primarily to improve performance and efficiency in Cloud and Data Center environments, our solutions increase throughput, decrease latency and boost the performance of servers and networking appliances, the infrastructure backbone that enables advanced Cloud architectures and leading technologies like NFV, SD-WAN and Cyber Security. Our innovative solutions for high-density networking, high-speed fabric switching, offloading and acceleration, which utilize a range of cutting-edge silicon technologies as well as FPGA-based solutions, are ideal for scaling-up and scaling-out cloud infrastructures.

Our products are used by major Cloud players, service providers, telcos and OEMs as components of their infrastructure offerings including both add-on adapters in the Data Center and stand-alone virtualized/universal CPE devices at the edge.

We have developed a line of products for the server networking industry, which facilitates interaction between servers and switches, allowing them to communicate with each other through a larger number of ports and with higher performance than their original manufacturer designed capabilities. Our designs have resulted in powerful products that allow server-based systems to fully exploit the high-speed potential of 1/10/25/40/100/200/400 Gigabit Ethernet. The products have either one, two, four, six, or eight ports, which plug into servers which need to have such capabilities. Some of these products include bypass functionality which allows continuation of traffic even when the server carrying the card is failing.

Our Smart Card products include smart server adapters such as: (a) redirector and switching cards, with and without x86 CPU (b) encryption and data compression hardware acceleration cards, (c) FEC (Forward Error Correction) acceleration and offloading cards, and (d) FPGA based cards.

Our redirector and switching cards improve performance by: (a) enabling switching fabric on a network interface card ("NIC") while (in some cases) providing separate data path and management path for the switching fabric and sometimes eliminating the need for a Top Of Rack switch within the Cloud, (b) enabling traffic filtering in order to reduce the amount of traffic received by the server, limiting it to only essential traffic for the server CPU, and consequently improving server performance, (c) load-balancing between external servers and/or CPUs and/or CPU cores increasing the efficiency of the server, and (d) offloading some of the server CPU tasks to the CPU and/or the switch on the NIC.

Our product line of high-performance encryption cards is designed to improve the throughput of servers with respect to which the traffic into and from them requires encryption or decryption. The products improve the performance of such servers by independently executing encryption tasks, thereby accelerating the encryption process and freeing the CPUs of such servers for other activities. This product line can off-load not only encryption functionality, but compression functionality as well. The market need for compression off-load was previously limited to some content delivery and WAN optimization networking applications; however, such compression off-load is now becoming increasingly important in the storage market especially within the Big-Data area, which is the market sector that is the primary target of this functionality.

Our FEC cards offload the Forward Error Correction tasks that are supposed to be carried out by the CPU of the Distributed Unit within 4G/5G mobile deployments, in order to allow for better performance. Such performance is more necessary in the 5G space, due to the higher bandwidth, and additional calculations and processing that need to occur at the edge, while at the same time more Radio Units are required to be attached to each DU. Therefore, it is essential to offload the FEC task from the main CPU onto a card.

Our FPGA based cards are divided between two families of cards, based on the world’s largest providers of such FPGA components: AMD and Intel. Our AMD based cards are sold mostly in the Packet Capturing market and towards the High Frequency Trading market, or HFT market. For the Packet Capture market, we sell cards which include our IP for Packet Capturing. For the HFT market we sell mostly “naked” cards which do not include any software code other than the code which is required by our customers in order to add their own code to the cards. For some of our AMD based cards, we provide a framework which we call Packet Mover. Such framework allows the customer to add to the FPGA its own application, while the various interfaces are already a part of the framework, providing optimized solutions for low latency, throughput and speed. Our Intel based FPGA cards are a result of a close relationship with Intel over the past few years, during which we have engaged in co-development and co-marketing activities with Intel. As a result of such cooperation, we now have a variety of Intel based FPGA Smart Cards addressing mostly the cloud and data center infrastructure market. Such cards include Standard NIC on top of the FPGA making them especially suitable for these markets.

Our Smart Platform products are used at the Edge as CPEs (including also uCPEs and vCPEs) which are used by Telcos, Cloud Players, service providers and Application vendors (OEMs) to provide a variety of services to their customers. These are full computing platforms in a networking intensive environment and many of the technologies incorporated into these platforms are similar to those incorporated into our Server adapters and Smart cards products.

Our products include an entry level of very low end IoT devices, going through typical branch/CPE units and up to rack mounted devices targeting large scale branches.

The main application for which our CPE/Edge devices are used is SD-WAN, for which most of our systems have been deployed. The devices are also frequently used to provide SASE, NFV, Telco dedicated routers and other such services. Our capabilities within the Edge world include modular approach and secured management features, as well as customized designs, to help the customer achieve its required challenging performance, data volume and infrastructure-scale-up goals. Our Smart Platforms products offer reliability and robust performance, addressing challenges of SD-WAN and other network functions integration and deployment.

We also sell Smart Platforms which consist of a combination of all product families in a single product. An example of such integration is our IBS (Intelligent Bypass Switches), which combine functionalities as well as design elements from each of our Server Adapters, our Smart Cards and our Smart Platforms.

On February 1, 2024, we issued a press release on form 6-K announcing our 2023 results and that the Board had approved a strategic 5-year plan.

On August 16, 2023, we issued a press release on form 6-K announcing that we launched a new line of advanced high-end Edge platforms together with a major design win and initial US$ 3.5 million order.

On July 6, 2023, we issued a press release on form 6-K announcing that we launched a new product line of Edge AI products in partnership with Hailo, a leading artificial intelligence chipmaker.

On May 15, 2023, we issued a press release on form 6-K announcing that we were selected to develop an innovative Edge Networking product by a leading US-based provider of enterprise telecommunications services and that the customer has already placed initial orders totaling approximately US$ 5 million.

On April 24, 2023, we issued a press release on form 6-K announcing that we secured two NIC Design Wins, one for an advanced encryption offload acceleration card, and the other for an FPGA-based SmartNIC, from a Tier 1, US-based cybersecurity vendor. Both Design Wins will be ramping up during the second half of 2023, and mass deployment will begin in 2024.

The principal markets in which we compete are set forth more particularly in, and are incorporated by reference to Note 13A to the consolidated financial statements set forth in Item 18 of this annual report. In 2021, 2022 and 2023 approximately, 70%, 72% and 85%  of our sales, respectively, were in North America, 23%, 23% and 13% of our sales, respectively, were in Europe, and 7%, 5% and 2% of our sales, respectively, were in Asia-Pacific. Our main business is not seasonal, and we believe that there are sufficient sources and raw materials available to sustain it.

Our manufacturing operations consist primarily of producing finished goods on our own, with assistance from sub-contractors, from (i) components purchased from third parties, and (ii) sub-assemblies manufactured by sub-contractors. In addition, we perform testing and quality assurance procedures with respect to the components and sub-assemblies which are incorporated into our final products and to the final products themselves.

We seek to monitor quality with respect to each stage of the production process including, but not limited to, the selection of component suppliers, warehouse procedures and final testing, packaging, and shipping. We have been certified as complying with "ISO-28001:2022", "ISO 9001:2015", "ISO 27001:2013", and "ISO 14001:2015", which are the standards used in our industry. We believe that our quality assurance procedures have been instrumental in achieving a high degree of reliability for our products. We intend to continue to maintain and improve the efficiency of such procedures.

Although we generally use standard parts and components for our products, certain key components used in our products are currently available from only one source, and others are available from a limited number of sources, on which we are dependent. For example, some key components in many of our products are manufactured by Intel^®and Broadcom. We believe that during regular supply periods we maintain a sufficient inventory of these components to protect against delays in deliveries. For additional information see the risk factor entitled "Loss of our sources for certain key components could harm our operations" under Item 3.D – "Risk Factors."

Firm purchase orders for our products generally include an agreed supply date for the supply of our products. In addition, we may agree to fill orders for our products within short periods of time after receipt of a firm purchase order based on the immediate availability of our products and/or components in our inventory. Consequently, we need to maintain inventory at levels that are in accordance with our forecasts and those of our customers. There can be no assurance that such forecasts will indeed materialize into firm purchase orders and consequently we cannot guarantee that the full volume of such inventory will be delivered against firm purchase orders and not remain unused.

The Dodd-Frank Wall Street Reform and Consumer Protection Act includes disclosure requirements regarding the use of "conflict" minerals mined from the DRC and procedures regarding a manufacturer's efforts to prevent the sourcing of such "conflict" minerals. These requirements will require companies to undertake due diligence, disclose and report on whether or not such "conflict" minerals originate from the DRC. This implementation of these requirements could adversely affect the sourcing, availability and pricing of minerals such as cassiterite, wolframite, columbite-tantalite (coltan), gold and/or their derivatives (tantalum, tin, and tungsten) which are used in the manufacture of certain components used in our products, as well as affect the companies we use to manufacture components of our products. As a result, this could limit the pool of suppliers who can provide us DRC "conflict free" components and parts, and we may not be able to obtain DRC "conflict free" products or supplies in sufficient quantities for our operations. In circumstances where conflict minerals in our products are found to be sourced from the DRC, we may take actions to change materials or designs to reduce the possibility that our purchase of conflict minerals may fund armed groups in the region. These actions could add engineering and other costs to the manufacture of our products, and we may not be able to obtain "conflict free" products or supplies in sufficient quantities for our operations. In addition, we incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products, as further elaborated below. Also, because our supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders if we are unable to sufficiently verify the origins for the minerals used in our products. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. There can be no assurance that we will not experience delays in the supply of critical components in the future or that we will have a sufficient inventory of critical components at such time to produce products at full capacity. If we do experience such delays and there is an insufficient inventory of critical components at that time, our operations and financial results would be adversely affected.

Marketing Channels

The principal market sectors for our products are:

Our main business model for our line of products is called the Design Win Model. The following are the main aspects of this model:

Once all phases mentioned above are successfully concluded, the customer will purchase products from us by placing purchase orders (under which our products are to be sold to such customer) in order to either (i) incorporate such products within its systems, and thereafter sell or deploy such systems with our cards embedded in them, or, (ii) deploy our Smart Platform products within a network. The sale or deployment of our products within such systems or network, as applicable, is the objective of our Design Win Model. In most cases, once we secure a Design Win, our customer will continue to buy our products for as long as it (i) continues to sell or deploy its system in which our products are incorporated, or (ii) continues to deploy our Smart Platform as part of its network.

For all of our Server Adapters and for some of our Smart Cards and Smart Platforms, our sales and marketing have been mostly carried out through a network of strategic relationships with leading OEMs that sell our products, generally as a part of their systems and sometimes under their own private labels. Our current OEM customers are mostly active in the SD-WAN market, Cyber Security market, Data Storage market, Application Delivery market, Traffic Management market, Network Monitoring market, WAN Optimization market and other server-based applications markets. Our OEM customers sell their products to Telcos, Governments, Enterprises (headquarter and branch) and to Data Centers (regular and virtualized, including to the Cloud). Our strategy of carrying out strategic relationships with OEM customers continues to be a significant part of our strategy. We believe that these relationships enable us to take advantage of the superior financial resources and market presence of these companies to increase our sales and establish, maintain and strengthen our position and reputation in the market. In addition, we believe that relationships with OEMs improve access to new technologies developed by such OEMs, thereby ensuring smooth integration of our products and technology with those of the OEMs.

In addition, due to the trends that we see in our industry, including primarily the shift to the Cloud and the trend of Disaggregation (non-proprietary standards that allow separate parts of the network to be purchased separately) and Decoupling of Hardware and Software, we are now implementing an additional marketing strategy which involves our direct sales to major Telcos, Cloud players, and service providers. In some cases, such sales involve a relationship with an independent software vendor, which is the case in most of our SD-WAN Edge Platforms sales.

The main aspects of the OEM business model, by which in most cases our customer will continue to buy our cards for as long as it continues to sell or deploy its system, are similar in our business model when we sell directly to Telcos or other service providers.

Our cooperation with Intel has resulted in material benefits to our selling process. Due to our close relationship with Intel, we mostly use their components in our products, and as such they provide us with assistance in the sales process, mostly with Smart Cards and Smart Platforms.

The loss of some of our customers, or any single key customer, may have a material adverse effect on our operations and financial results and we cannot assure you that we will be able to enter into strategic relationships with any such customer in the future. Payment terms of our customers are, on average, approximately 90 days net. Approximately 95% of our international sales are denominated in U.S. Dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, political instability, trade restrictions and changes in tariffs and freight rates. We have experienced no material difficulties to date as a result of these factors.

Our arrangements with our customers (and distributors and resellers when applicable) are generally non-exclusive. We have generally experienced good relations with our customers and are not aware of any pending material terminations other than with respect to products that newer technologies have eliminated the need for.

Our customers, distributors and resellers are not under our control. They are not obligated to purchase products from us and may use or represent other lines of products. A reduction in sales effort or discontinuance of sales of our products by our customers could lead to reduced sales and could materially adversely affect our operating results. In addition, our business model also entails the risk that our customers will build up inventories, either in anticipation of a growth in deployments or sales, or as a result of a tighter global supply chain incentivizing customers to build up significant inventories. If such growth does not occur as anticipated, or if customers have built up significant inventories, these customers may substantially decrease the number of products ordered from us in subsequent quarters, as they draw down on accrued inventories, discontinue product orders, or even attempt to return unused or unsold products. The loss of a major or key customer or group of customers, a loss or ineffectiveness of some of our relationships at approximately the same time, or a customer’s shift of its business focus away from the solutions that we had previously sold towards solutions in areas in which we do not operate, may have a material adverse effect on us.

Our success and ability to compete are dependent to a significant degree on our technology. In order to establish and protect the technology we develop and/or acquire to use in our products, we primarily rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patents. These measures afford only limited protection, and accordingly, there can be no assurance that the steps we take will be adequate to prevent misappropriation of our technology or the independent development of similar technologies by others. Despite our efforts to protect our technology, unauthorized parties may attempt to copy aspects of our products and develop similar hardware or software or to obtain and use information that we regard as proprietary. In addition, there can be no assurance that one or more parties will not assert infringement claims against us. The cost of responding to claims could be significant, regardless of whether the claims are valid. We cannot assure that the scope of any issued patent will adequately protect our intellectual property rights, or that patents will not be challenged, invalidated, or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.

On April 8, 2010, we filed a patent application with the United States Patents and Trademarks Office, or the USPTO, for the ‘Server-Based Network Appliance’. On June 12, 2012 we were issued patent No. 8,199,523 entitled ‘Server-Based Network Appliance’ from the United States Patent and Trademark Office, which relates to a server-based network appliance in which a computer motherboard is mounted in a case with the bus slots of the motherboard adjacent to the rear side of the case.

On September 16, 2013, we acquired all of the intellectual property related to the unique Virtualization Off-Load Engine developed by Net Perform Technology, Ltd., a privately held company registered in Hong Kong, China. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure the same, internal or external parties may assert a claim of infringement regarding such intellectual property. We do not consider this intellectual property to be material for our operations.

On February 8, 2015, we filed a patent application in the USPTO with respect to Hybrid Networking Application Switch. On January 2, 2018, we were issued patent No. 9,858,227 entitled ‘Hybrid Networking Application Switch’ from the United States Patent and Trademark Office. The patent relates to a unique solution for combining functionalities of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application switch or an accelerated hybrid networking application switch.

For additional information regarding the risks to the Company with respect to patents and other intellectual property rights see the risk factor entitled “We may not be able to protect our intellectual proprietary rights” under Item 3.D. – “Risk Factors.”

The networking and data infrastructure solutions industry is highly competitive. We face competition from numerous companies, some of which are more established, benefit from greater market recognition and have greater financial, production and marketing resources than we do. We cannot guarantee that our present or any contemplated products will continue to be distinguishable from those of our competitors or that the marketplace will find our products preferable to those of our competitors. Furthermore, there can be no assurance that competitive pressures will not result in price reductions that could materially adversely affect our business and financial condition and the results of our operations.

We believe that our expanded feature set coupled with our customization capabilities and the general wide spectrum of solutions we offer give us a competitive edge.

With respect to Server Adapters, our main competitors are Nvidia, Intel, and Broadcom. However, these companies seem to be targeting mostly major accounts with their somewhat limited offering of standard cards and rarely offer customized solutions. We target accounts of all sizes with a broader product offering with various interfaces and form factors while providing very fast and efficient path to customized solutions required by customers. Although the situation may change in the future, we believe that our competition in areas which are not being pursued by the large companies, is less significant.

In the Smart Cards products sector, our competition is fragmented, and differs with respect to the specific solution being offered by us. In this sector, Marvel, Nvidia, Netronome, Napatech, Molex, Lanner and Caswell compete with certain of our Smart Cards. In some cases of FPGA based cards, Intel and AMD also compete with our Smart Cards, however, as with the Server Adapters space, they target mostly the biggest accounts and only with mainstream products while for other accounts they cooperate with us.

In the Smart Platforms products sector, our main competitors are Caswell, Lanner, Advantech and Nexcom. We believe that we provide a fast and efficient path to customized Smart Platforms frequently required by customers, which coupled with our well established technical and business relationships with Intel (the major supplier of the main building block of these Smart Platforms’ X86-based CPUs), provides us with an advantage over our main competitors in this area.

We are affected by the terms of research and development grants we have received from the IIA.

Under the R&D Law, research and development programs approved by the Research Committee of the IIA (the “Research Committee”) are eligible for “Benefits” which include grants, loans, exemptions, discounts, guarantees and additional means of assistance, but with the exclusion of purchase of shares, provided under various tracks promulgated by the Council body (the “Tracks”). Most Tracks require the repayment of the Benefits in the form of the payment of royalties from the sale of the product developed or provision of related services, in accordance with the published Track guidelines and subject to other restrictions. Once a project is approved, the IIA awards grants generally of up to 50% of the project’s expenditures in return for royalties, usually at the rate of 3% of sales of products developed with such grants. For projects approved after January 1, 1999, the amount of royalties payable was up to a dollar-linked amount equal to 100% of such grants plus interest at LIBOR or other applicable interest rate, such as the 12 month Secured Overnight Financing Rate (SOFR) rates, as published on the first trading day of the year by the CME Group (or any other institution authorized by the Federal Reserve).

The terms of these grants prohibit the manufacture outside of Israel of the product developed in accordance with the program without the prior consent of the Research Committee. Such approval is generally subject to an increase in royalty rates, as well as in the total amount to be repaid to the IIA to between 120% and 150% of the amount granted, depending on the extent of the manufacturing that is conducted outside of Israel.

The R&D Law, also provides that know-how from the research and development and any derivatives thereof, cannot be transferred or licensed to Israeli third parties without the approval of the Research Committee. The R&D Law stresses that it is not just transfer of know-how that was prohibited, but also transfer of any rights in such know-how. Approval of the transfer and/or license could be granted only if the Israeli transferee undertook to abide by all of the provisions of the R&D Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to pay royalties, if applicable. Generally, royalty payments by the transferor are required in connection with the transfer to an Israeli third party.

The know-how from the research and development and any derivatives thereof cannot be transferred to non-Israeli third parties without the approval of the Research Committee, whose approval is generally contingent on payment of a significant penalty of up to six times the dollar-linked grant amount plus LIBOR or other applicable interest rate (such as the SOFR) and minus any royalties paid, subject to depreciation in accordance with the published rules. Such restriction does not apply to exports from Israel of final products developed with such technologies.

The approval of out-licensing arrangements and other arrangements for granting of an authorization to an entity outside of Israel to use know-how developed under research and development programs funded by the IIA and any derivatives thereof is generally subject to payment of a “License Fee” to the IIA, at a rate that will be determined by the IIA in accordance with the IIA’s Licensing its rules, of up to six times the dollar-linked amount plus LIBOR or other applicable interest rate (such as the SOFR) and minus any royalties paid, subject to depreciation.

In addition, we receive certain tax benefits and reduced tax rates from the Israeli government due to our status as a “Preferred Technological Enterprise” under the Law for the Encouragement of Capital Investments-1959, as amended. See “Item 10.E. – Additional Information – Taxation.” The entitlement to these benefits is conditional upon our fulfillment of the conditions stipulated by the law and the regulations promulgated thereunder. In the event of failure to comply with these conditions, the benefits could be canceled, and we would be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences and interest.

Our total outstanding contingencies in respect of IIA or IIA royalty-bearing participations received or accrued, net of royalties paid or accrued before interest, amounted to approximately US$ 2,960 thousand as of December 31, 2023, which are attributable to sales of certain discontinued products. As of the date of this annual report, all of our IIA programs have been closed per our request. We are not anticipating any sales of our products developed with IIA funding and accordingly do not expect to be required to pay any royalties to the IIA. In the unlikely event we do sell products developed using IIA funding, we will be required to pay royalties to the IIA as set forth in the R&D Law and directives published by the IIA.

We have the following two wholly owned subsidiaries:

We do not own any real property, but we lease property at six locations. Our manufacturing plant and additional storage space are located in two locations in Yokne’am, Israel, , our executive offices are located in Kfar Sava, Israel, our marketing and sales offices are located in our Kfar Sava, Israel, in Søborg, Denmark, and in Paramus, New Jersey, the United States, and our research and development facilities are located in Kfar Sava, Israel, in Søborg, Denmark, and in Charlottesville, Virginia, the United States.

Our executive offices in Kfar Sava are approximately 2,000 square meters in size. The remaining lease period is approximately one year, ending February 28, 2025. Our monthly rental payments for this office space (which include various maintenance services) are equal to approximately US$ 51,100.

We have conducted our manufacturing in Yokne’am, Israel since 2000.

In March 2020, we entered into a lease agreement for the lease of an approximately 4,000 square meter manufacturing facility, as well as an approximately 360 square meters of storage space, in Yokne’am, Israel, for a period of up to 120 months. The monthly rental payments (which include various payments including maintenance services) will vary during the remaining lease period from between approximately US$ 71,300 to approximately US$ 79,400

In September 2022, we entered into a lease agreement for the lease of approximately 670 square meters of storage space in Migdal Ha’emek, Israel, for a period of 60 months. This agreement was terminated effective as of February 29, 2024.

In October 2019, we entered into a commercial lease agreement to lease office space in Charlottesville, Virginia, in the United States for a 37-month period commencing on December 1, 2019. The lease agreement includes two options for the extension of the lease for 24-months each. In July 2022, we exercised the first option to extend the lease agreement for a period of 24 months, commencing on January 1, 2023. The facility is approximately 606 square meters in size and the monthly payments are approximately US$ 8,900 per month in the first 12 months and approximately US$ 9,100 per month in the following 12 months.

Since April 2017, we have leased office space of approximately 2,500 square feet in Paramus, New Jersey. Our current lease is until June 2027. Currently, the monthly rental payments (including utilities) for this space are US$ 4,820.

In addition, we lease office space of approximately 1,800 square meters in Søborg, Denmark. The term of the lease agreement expires on November 1, 2025. The lease can be terminated by a six-month advanced notice to the landlord. The monthly rental payment (including maintenance services) for this space is approximately US$ 20,000.

We believe that our facilities in Israel, the United States and Denmark are suitable and adequate for our operations as currently conducted. In the event that additional facilities are required, or we need to seek alternative rental properties, we believe that we could obtain such additional or alternative facilities at commercially reasonable prices.

Item 4A.          UNRESOLVED STAFF COMMENTS

Item 5.          OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

Silicom was incorporated in Israel and commenced operations in 1987. We are currently engaged in the design, manufacture, marketing and support of high-performance networking and data infrastructure solutions. Designed primarily to improve performance and efficiency in Cloud and Data Center environments, our solutions increase throughput, decrease latency and boost the performance of servers and networking appliances, the infrastructure backbone that enables advanced Cloud architectures and leading technologies like NFV, SD-WAN and Cyber Security. Our products are used by major Cloud players, service providers, telcos and OEMs as components of their infrastructure offerings, including both add-on adapters in the Data Center and stand-alone virtualized/universal CPE devices at the edge. In 2021,2022 and 2023 we recorded sales from all of our networking and data infrastructure solutions of approximately,  US$ 128.5 million, US$ 150.6 million and US$ 124.1 million respectively. We primarily sell our products to major Cloud players, service providers, telcos and OEMs and, to a lesser extent, through independent distributors (on a non-exclusive basis).

Not applicable.

You should read the following management’s discussion and analysis of our financial condition and operating results in conjunction with the consolidated financial statements and the related notes thereto included in this annual report. The following table sets forth, for the periods indicated, the relationship (in percentages) of items from our Consolidated Statement of Operations Data to our total sales:

Sales in 2023 decreased by 17.6% to US$ 124,131 thousand compared to US$ 150,582 thousand in 2022, reflecting mainly two major headwinds that impacted our business during the second half of the year. The first one is a result of customers’ excess inventories built up during a period of supply chain uncertainty that started with Covid and continued with a long period of electronic component shortages. The second one is the global economic slowdown and high interest rates leading to longer decision-making processes on new projects and slower investment and implementation of existing infrastructure projects.

Sales in 2022 increased by 17.2% to US$ 150,582 thousand compared to US$ 128,460 thousand in 2021, reflecting the continued high demand for our products and our success in mitigating the impacts of the global component shortage crisis. The increase in sales was mainly attributed to the success of our Smart Edge products, expanding our total addressable market for these products beyond SD-WAN to markets such as SASE, Dedicated Internet, as well as other markets.

Gross profit in 2023 was US$ 28,689 thousand compared to US$ 51,956 thousand in 2022. Gross profit as a percentage of sales in 2023 was 23.1%, compared to 34.5% in 2022. The lower gross profit percentage in 2023 compared to 2022 was mainly attributed to: (i) a US$ 5.3 million impairment of intangible assets, (ii) changes in the mix of products that we sold in 2023, on which our gross profit is largely dependent. Gross profit was also affected by, among other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory that we can no longer use; the inventory write-downs as a percentage of sales in 2023 increased to 5.2% (of which 3.5% (US$ 4.3 million) is attributed to a one-time write-down of inventory related to an impairment of intangible assets), compared to 2.0% in 2022.

Gross profit in 2022 was US$ 51,956 thousand compared to US$ 44,388 thousand in 2021. Gross profit as a percentage of sales in 2022 was 34.5%, compared to 34.6% in 2021. The change in the gross profit percentage in 2022 compared to 2021 was mainly attributed to the mix of products that we sold in 2022, on which our gross profit is largely dependent. Gross profit was also affected by, among other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory we can no longer use; the inventory write-downs as a percentage of sales in 2022 decreased to 2.0%, compared to 4.1% in 2021.

Research and development expenses in 2023 increased by 0.4% to US$ 20,638 thousand compared to US$ 20,563 thousand in 2022. This increase was mainly attributed to a decrease in the capitalization of internal software development costs which amounted to US$ 1,092 thousand in 2023, compared to US$ 2,547 thousand in 2022, as offset by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 1,118 thousand.

Research and development expenses in 2022 increased by 2.3% to US$ 20,563 thousand compared to US$ 20,091 thousand in 2021. This increase was mainly attributed to a decrease in capitalization of internal software development costs in the amount of US$ 2,547 thousand in 2022, compared to US$ 3,562 thousand in 2021, as well as an increase in the share-based compensation which amounted to approximately US$ 1,454 thousand in 2022, compared to US$ 1,011 thousand in 2021, as offset by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 1,018 thousand.

Sales and marketing expenses in 2023 decreased by 0.8% to US$ 6,935 thousand compared to US$ 6,990 thousand in 2022. This decrease was mainly attributed to a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$ 329 thousand, as offset by our continued investment in the promotion of our networking and data infrastructure solutions, expanding our customer base and product offering, which contributed approximately US$ 301 thousand.

Sales and marketing expenses in 2022 increased by 5.9% to US$ 6,990 thousand compared to US$ 6,599 thousand in 2021. This increase was mainly attributed to our continued investment in the promotion of our networking and data infrastructure solutions, expanding our customer base and product offering, which contributed approximately US$ 484 thousand, as well as to an increase in the share-based compensation which amounted to approximately US$ 774 thousand in 2022, compared to US$ 697 thousand in 2021, as offset by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 170 thousand.

General and administrative expenses in 2023 decreased by 5.5% to US$ 4,229 thousand compared to US$ 4,477 thousand in 2022. This decrease was mainly attributed to a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our general and administrative expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$ 652 thousand, as offset by an increase in payroll related expenses attributed to general and administrative activity, which amounted to approximately US$ 359 thousand.

General and administrative expenses in 2022 decreased by 3.5% to US$ 4,477 thousand compared to US$ 4,641 thousand in 2021. This decrease was mainly attributed to a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our general and administrative expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$ 228 thousand, as offset by an increase in payroll related expenses attributed to general and administrative activity which amounted to approximately US$ 28 thousand,  as well as to an increase in the share-based compensation, which amounted to approximately US$ 710 thousand in 2022, compared to US$ 674 thousand in 2021.

Impairment of goodwill - as of the end of 2023 we deemed our entire goodwill in the amount of US$ 25,561 thousand impaired, and recorded an impairment charge of US$ 25,561 thousand, compared to no impairment of goodwill in 2022.

Financial income, net in 2023 amounted to US$ 1,372 thousand compared to financial income, net of US$ 2,464 thousand in 2022. The change is mainly attributed to a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone, which created net financial income in US Dollars from exchange rate differences (a portion of our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Krone) of US$ 163 thousand in 2023 compared to financial income of  US$ 2,308 thousand in 2022, as offset by an increase in income from investment in marketable securities and bank deposits, which was attributed to an increase in funds available for investment, and which amounted to US$ 1,254 thousand in 2023 compared to US$ 230 thousand in 2022.

Financial income, net in 2022 amounted to US$ 2,464 thousand compared to financial expenses, net of US$ 152 thousand in 2021. The change is mainly attributed to a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone, which created net financial income in US Dollars from exchange rate differences (a portion of our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Krone) of US$ 2,308 thousand in 2022 compared to financial expenses of US$ 1,031 thousand in 2021, as offset by a decrease in income from investment in marketable securities and bank deposits, which was attributed to a decrease in funds available for investment, and which amounted to US$ 230 thousand in 2022 compared to US$ 927 thousand in 2021.

In 2023 we recorded current income tax expenses of US$ 1,122 thousand and deferred income tax benefit of US$ 1,885 thousand compared to current income tax expenses of US$ 2,963 thousand and deferred income tax expenses of US$ 1,178 thousand in 2022. The decrease in our current income tax expenses was mainly attributed to a decrease in our income and the resulting taxable income. The change in the deferred income taxes was mainly attributed to the following factors:  (i) deferred income tax benefit related to acquired goodwill, which amounted to US$ 382 thousand in 2023 compared to deferred income tax expenses in the amount of  US$ 1,511 thousand in 2022, (ii) deferred income tax benefit relating to intangible assets, which amounted to US$ 150 thousand in 2023 compared to deferred income tax expenses in the amount of US$ 253 thousand in 2022, (iii) an increase in income tax benefit relating to tax loss carryforwards, which amounted to US$ 306 thousand in 2023 compared to 0 thousand in 2022, (iv) deferred income tax expenses relating to research and development costs, which amounted to US$ 315 thousand in 2023 compared to deferred income tax expenses in the amount of US$ 620 thousand in 2022, offset by (v) deferred income tax expenses relating to share-based compensation provided by us to our employees and directors, which amounted to US$ 53 thousand in 2023 compared to deferred income tax expenses in the amount of US$ 36 thousand in 2022. In addition, in 2023 we recorded an income tax benefit relating to prior years in the amount of US$ 126 thousand, compared to an income tax benefit relating to prior years in the amount of US$ 57 thousand in 2022.

In 2022 we recorded current income tax expenses of US$ 2,963 thousand and deferred income tax expenses of US$ 1,178 thousand compared to current income tax expenses of US$ 2,473 thousand and deferred income tax expenses of US$ 48 thousand in 2021. The increase in our current income tax expenses was mainly attributed to an increase in our income and the resulting taxable income. The increase in the deferred income tax expenses was mainly attributed to the following factors: (i) deferred income tax expenses relating to research and development costs, which amounted to US$ 620 thousand in 2022 compared to deferred income tax benefit in the amount of US$ 141 thousand in 2021, (ii)  deferred tax expenses relating to intangible assets, which amounted to US$ 253 thousand in 2022 compared to deferred income tax expenses in the amount of US$ 25 thousand in 2021, (iii)  deferred income tax expenses relating to share-based compensation provided to our employees and directors, which amounted to US$ 36 thousand in 2022 compared to deferred income tax benefit in the amount of US$ 62 thousand in 2021, offset by (iv) a decrease in income tax expenses relating to tax loss carryforwards, which amounted to US$ 0 thousand in 2022 compared to income tax expenses which amounted to US$ 66 thousand in 2021. In addition, in 2022 we recorded an income tax benefit relating to prior years in the amount of US$ 57 thousand, compared to an income tax benefit relating to prior years In the amount of US$ 157 thousand in 2021.

In 2023 we recorded net loss of US$ 26,413 thousand compared to net income of US$ 18,306 thousand in 2022. The loss was mainly attributed to: (i) US$ 25.6 million impairment of goodwill, (ii) US$ 5.3 million impairment of intangible assets, (iii) a one-time US$ 4.3 million inventory write-off related to impairment of intangible assets, and (iv) a decrease in our activity and sales.

In 2022 we recorded net income of US$ 18,306 thousand compared to net income of US$ 10,541 thousand in 2021, an increase of 73.7%. The increase was mainly attributed to the increase in our activity and sales.

Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets

Since the majority of our revenues are denominated and paid in U.S. Dollars, we believe that inflation in Israel and in Denmark and fluctuations in the U.S. dollar exchange rates do not have any material effect on our revenue. Inflation in Israel or Denmark and the Israeli and Danish currency as well as U.S. dollar exchange rate fluctuations, may however, have an effect on our expenses and, as a result, on our net income/loss. The cost of our Israeli and Danish operations, as expressed in U.S. Dollars, is influenced by the extent to which any change in the rates of inflation in Israel or Denmark are not offset (or are offset on a lagging basis) by a change in valuation of the NIS or DKK in relation to the U.S. dollar.

We do not presently engage in any hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake such transactions, if management determines that it is necessary to offset such risks.

As of December 31, 2023, we had working capital of US$ 122,251 thousand and our current ratio (current assets to current liabilities) was 10.49. Cash and cash equivalents as of December 31, 2023 increased by US$ 16,238 thousand to US$ 46,972 thousand, compared to US$ 30,734 thousand as of December 31, 2022. Short-term marketable securities increased by US$ 3,937 thousand to US$ 7,957 thousand, compared to US$ 4,020 thousand as of December 31, 2022, and long-term marketable securities increased by US$ 1,456 thousand to US$ 16,619 thousand, compared to US$ 15,163 thousand as of December 31, 2022. The net increase of US$ 21,631 thousand in these three balance sheet items in 2023 was mainly attributed to the following: positive net cash provided by operating activities in the amount of US$ 31,924 thousand,  as offset by (i) purchase of treasury shares in the amount of approximately US$ 9,320 thousand, (ii) payments in relation to purchase of property, plant and equipment which amounted to US$ 1,122 thousand, and (iii) investment in intangible assets which amounted to US$ 1,092 thousand.

Trade receivables decreased to US$ 25,004 thousand as of December 31, 2023, compared to US$ 27,258 thousand as of December 31, 2022. This decrease was mainly attributed to the decrease in our sales. Other receivables increased to US$ 3,688 thousand as of December 31, 2023, compared to US$ 3,620 thousand as of December 31, 2022.

Trade payables decreased to US$ 4,139 thousand as of December 31, 2023, compared to US$ 15,922 thousand as of December 31, 2022. This decrease was mainly attributed to the decrease in our purchasing of inventory. Other payables and accrued liabilities decreased to US$ 6,668 thousand as of December 31, 2023, compared to US$ 9,641 thousand as of December 31, 2022. This decrease was mainly attributed to a decrease in our employee-related payable benefits.

Inventories decreased to US$ 51,507 thousand as of December 31, 2023, compared to US$ 87,985 thousand as of December 31, 2022. This decrease was primarily the result of a decrease in our inventory purchasing, and a decrease in our inventory level needed to support our customers' orders.

Cash provided by operating activities in 2023 amounted to US$ 31,924 thousand compared to cash used in operating activities in the amount of US$ 4,090 thousand in 2022. The cash provided by operating activities in 2023 was mainly attributed to a decrease in our inventory.

Capital expenditures on property and equipment for the year ended December 31, 2023 were US$ 1,275 thousand, compared to US$ 2,121 thousand as of December 31, 2022.

We have cash and cash equivalents that we believe are sufficient for our present requirements. Furthermore, our cash resources are sufficient to fund our operating needs for at least the next twelve months.

The liability for employee’' severance benefits amounted to approximately US$ 2,672  thousand as of December 31, 2023.

The liability for employee’' severance benefits is calculated on the basis of the latest monthly salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited by us into employee’' manager’' insurance and/or pension fund accounts in respect of severance obligations to such employees, including accumulated income thereon as well as by the unfunded provision reflected on the balance sheet.

While the timing of such obligations cannot be pre-determined, such liability will be removed, either by termination of employment or retirement.

Since we commenced operations, we have conducted extensive research, development and engineering activities. Our efforts emphasize the development of new products, cost reduction of current products, and the enhancement of existing products, generally in response to rapidly changing customer preferences, technologies and industry standards.

Because the market for our products is characterized by rapidly changing technology and evolving industry standards, our success depends upon our ability to select, develop, manufacture and market new and enhanced products in a timely manner to meet changing market needs. As such, we invest significant resources in research and new product development, enhancements to existing products, and the development of new networking and connectivity technologies, and we expect to continue to do so.

As of June 2012, we have a patent No. 8,199,523 entitled 'Server-Based Network Appliance' from the United States Patent and Trademark Office, which relates to a server-based network appliance in which a computer motherboard is mounted in a case with the bus slots of the motherboard adjacent to the rear side of the case.

On September 16, 2013, we acquired all of the intellectual property related to the unique Virtualization Off-Load Engine developed during the last two years by Net Perform Technology, Ltd., a privately held company registered in Hong Kong, China.

As of December 2014, we own or have licenses or similar rights with respect to Silicom Denmark (Fiberblaze A/S), including Silicom Denmark (Fiberblaze A/S’'s high performance OEM hardware platform for Ethernet and network interface product family, registered names and domain name.

As of October 2015, we own all intellectual property and intellectual property rights in which ADI has an ownership interest or have licenses or similar right where ADI has such licenses or rights, including with respect to custom embedded, communications and networking products based on the latest Intel® silicon, registered names and domain name.

As of January 2018, we have a patent No. 9,858,227 entitled 'Hybrid Networking Application Switch' from the United States Patent and Trademark Office, which relates to a unique solution for combining functionalities of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application switch or an accelerated hybrid networking application switch.

We cannot assure you that the scope of any issued patent will adequately protect our intellectual property rights, or that patents will not be challenged, invalidated, or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.

For additional information regarding the risks to the Company with respect to patents and other intellectual property rights see the risk factor entitled “We may not be able to protect our intellectual proprietary right” under Item 3.D. –“Risk Factors”

The Government of Israel encourages research and development projects oriented towards products for export or projects which will otherwise benefit the Israeli economy. In each of the three fiscal years from 1999 to 2001, we received grants from the Office of the Chief Scientist, replaced by the IIA, for the development of systems and products. We have received from the IIA up to 30% of certain research and development expenditures for particular projects. Under the terms of Israeli Government participation, a royalty usually at the rate of 3% of sales of products developed from a project funded by the IIA must be paid, beginning with the commencement of sales of products developed with grant funds and ending when a dollar-linked amount equal to 100% of such grants without interest, for projects approved prior to December 2000, and plus interest at LIBOR or other applicable interest rate, for amounts received after that date, is repaid. The terms of Israeli Government participation also place restrictions on the location of the manufacturing of products developed with government grants, which, in general, must be performed in Israel, and on the transfer to third parties of technologies developed through projects in which the government participates. The IIA has previously provided funding in relation to our research and development efforts. As of the date hereof, we have received funding from the IIA in the aggregate amount of approximately US$ 4,388,000 and have paid the IIA an aggregate amount of approximately US$ 1,428,000 in royalties in relation thereto. See “Item 4.B. – Information on the Company – Business Overview – Governmental Regulation Affecting the Company”

In August 2005, we received approval for a US$54 thousand-dollar grant from the Korea-Israel Industrial Research and Development Foundation, or Koril-RDF, in connection with the joint development of a certain product with a Korean company. Under the terms of this grant we are required to repay the amounts received at a rate of 2.5% per year of our gross sales of the product developed with the grant in each such year, until 100% of the grant (and any other sums received from Koril-RDF) are repaid. We received approximately 20%-30% of certain research and development expenditures for two projects in 2003 and 2004. As of January 2006, and to date, our research and development activities have been sponsored and funded by us, and we did not participate in any new encouragement programs or received any additional grants from the IIA or Koril-RDF. We have closed all our IIA funded programs, and do not anticipate having any sales of products funded by IIA grants or be required to pay any royalties to the IIA with respect thereto.

We expect that we will continue to commit resources to research and development in the future. As of March 31, 2024, we had 120 employees engaged primarily in research and development and design activities of which 71 employees were based in Israel, 27 in Denmark and 22 in the U.S. In 2021, 2022 and 2023 our research and development expenses were US$ 20,091 thousand, US$ 20,563 thousand and US$ 20,638 thousand respectively, constituting approximately 15.64%, 13.66% and 16.63% respectively, of our sales.

The increase in our research and development expenses in 2023 compared to 2022 was mainly attributed to a decrease in capitalization of internal software development costs, and amounted to US$ 1,092 thousand in 2023, compared to US$ 2,547 thousand in 2022, offset by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 1,118 thousand.

In today's network-based environment, the rate at which traffic is generated is continuously growing and as such there is a continuous demand for scalability of the networks. This demand is behind some of the trends that have a significant impact on us.

The first and obvious trend is the shift to the Cloud, whether it is a public cloud or a private cloud. One of the main messages of the Cloud shift is the call for standardization, which is key for scalability. Standardization has created two important trends, which are Disaggregation and Decoupling. Disaggregation calls for disconnecting the proprietary interfaces between the various parts of the network and allowing various parts to be procured separately from different vendors. Decoupling is the decoupling of the Hardware from the Software also allowing for separate procurement efforts for the Software and the Hardware and also resulting in the ability to purchase from different vendors.

The Disaggregation and Decoupling trends, which started at the Cloud level, continued into the service provider and Telco worlds, where service providers and Telcos have moved towards buying Hardware platforms separately from the Software running on such Hardware platforms, each of which came from a different vendor. This process started with SD-WAN applications, then moved into additional applications through NFV, both of which increasingly utilize Hardware platforms for deployment.

These trends are having a significant impact on us.

The basic Cloud trend is creating a gradual decrease in demand for our Server Adapters as these are sold mostly through appliance vendors which have less need for our products. Such vendors are now forced to sell to the Cloud players, rather than to their traditional end customers, and such Cloud players are now buying from them Software only, rather than a full system comprised of Hardware and Software. Even when the Cloud is a private or On Premise, it is based on standard components with decreasing demand for specialized and customized Server Adapters.

On the other hand, having such standardization increases the demand for our Smart Cards as the standard servers, which constitute the Cloud, need acceleration and offloading in order to increase their performance.

Furthermore, the Disaggregation and Decoupling trends have created significant demand by Service Providers and Telcos for CPE devices used in connection with SD-WAN, SASE, Telco dedicated Routers and NFV, and we are currently seeing the increasing demand for our CPE devices due to that trend.

The sales cycles in the markets for our products are long. Continuous achievement of Design Wins according to the process described above and obtaining new customers is time consuming. However, each Design Win we have achieved and will continue to achieve, may represent an opportunity for sustained long-term revenues once we establish a relationship with a customer.

While we expect our business and products to further develop in the coming years in light of these trends, we are also experiencing other trends which are creating significant headwinds for our business: After several years of supply chain tightness, where demand for our products increased as customers built up inventories, the current loosening of the supply chain has resulted in customers drawing down on accumulated inventory thereby decreasing the level of their purchases from previous years. This inventory depletion process by many of our customers started in 2023 and there is no assurance as to how long it will continue to impact our revenues. Additionally, high global interest rates have disincentivized customers and potential customers from investing in new infrastructure solutions, and as a result, we experience longer than usual sales cycles and slower crystallization of existing Design Wins into hard orders and sales.

As part of our efforts to address these challenges and to take advantage of the cloud, disaggregation and decoupling trends, we have recently announced a 5-year plan in which we have, among other things, ceased certain non-core product lines and are now focusing on our Server Adapter and Edge solution portfolios, along with expanding our sales efforts into a more diversified scale of accounts.

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below.

Revenue recognition – We recognize revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration we expect to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. We account for a contract with customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Each of our contracts includes one type of performance obligation. We evaluate each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time. Most of our revenues are recognized at a point in time. Revenue is recognized over time for sales of goods manufactured to unique customer specifications, in which our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date if the customer were to terminate the contract. Revenue recognized over time is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials and overhead.

Capitalization of software development costs (mainly salary) related to programmable components incorporated into our products, are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. Other costs incurred in the research and development of our products are expensed as incurred.

Item 6.          DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

The following table and notes thereto set forth information regarding our directors and senior management as of March 31, 2024:

Avi Eizenmanco-founded the Company in 1987 and has served as a Director since its inception. Mr. Eizenman also served as our President and Chief Executive Officer from the Company's inception until April 1, 2001, and on such date, he resigned from his positions as President and Chief Executive Officer and was appointed Active Chairman of the Board of Directors. Before the incorporation of Silicom, Mr. Eizenman held various engineering and management positions at Scitex Ltd. and at the Electronic Research & Development Department of the Israeli Ministry of Defense. Mr. Eizenman holds a B.Sc. degree, with honors, in Electrical Engineering from the Technion, and an M.B.A. from Tel Aviv University.

Shaike Orbachwas our President and Chief Executive Officer from April 2001 until June 30, 2022 and has been a director on our Board since December 2001. On July 1, 2022, Mr. Orbach was appointed Executive Vice Chairman of the Board. Prior to joining our Company, Mr. Orbach was President and CEO of Opgal Ltd., a high-tech subsidiary of Israel's Rafael and El-Op corporations, for a period of four and a half years. Previously, he was General Manager of Edusoft, an Israeli company the shares of which were traded on the NASDAQ National Market (now, the NASDAQ Global Market), and Managing Director of Tecsys Ltd. He holds a B.Sc degree in Mechanical Engineering from the Technion.

Ayelet Aya Hayak has served as a director since July 1, 2013. Ms. Hayak provides financial consulting services to corporations. Hayak Ayelet was the CEO of an Automation company, and also serves as a director in several companies. Ms. Hayek holds a BA degree in accounting and business administration from the Tel Aviv College of Management and is also a Certified Public Accountant.

Ilan Erez has served as a director since July 2010. Mr. Erez has been CFO and General Manager of AlgoSec Inc. since October 2019. Algosec is a global leader in securing application connectivity anywhere. Its software platform enables the world's most complex organizations to gain visibility, reduce risk and process changes at zero-touch across the hybrid network. Prior to that, Mr. Erez had been General Manager of 3D Systems Corporation's (NYSE: DDD) Software Business Unit from September 2016 to March 2019 and co-managed that business unit from May 2015 to September 2016. 3D Systems provides comprehensive 3D products and services, including 3D printers, print materials, on-demand manufacturing services and digital design and manufacturing tools. From 2005 to 2015, Mr. Erez served as Chief Financial Officer of Cimatron Ltd. (NASDAQ: CIMT) engaged in the design and sale of CAD/CAM software for the tool-making and discrete manufacturing industries. From 1998 to 2005 Mr. Erez served as the Chief Financial Officer of the Company. He also served as VP Operations of the Company from May 2001 to 2005. From 1996 to 1998 Mr. Erez served as Controller and Assistant to the Chief Executive Officer of Bio-Dar Ltd. From 1994 to 1996 Mr. Erez served as an auditor at Kesselman & Kesselman, a PWC member firm. Mr. Erez is a Certified Public Accountant in Israel and holds a B.A in Accounting and Economics from the Hebrew University and an LL.M. in Business Law from Bar-Ilan University. 

Eli Doronis the Co-founder and CTO of Carteav, that develops and manufactures an autonomous low speed vehicle. Eli Doron is also the founder of Connesta Ltd. ("Connesta"), an Israeli high-tech company engaged in developing and providing SaaS virtual control room solutions, founded in 2011. From inception, Mr. Doron serves as the Chief Executive Officer of Connesta. Prior thereto and during 2010, Mr. Doron was the Chief Executive Officer of Computerized Electricity Systems ("CES"). Prior to joining CES, Mr. Doron was the co-founder of Radvision Ltd. (formerly NASDAQ: RVSN. Acquired by Avaya Ltd. in 2011; "Radvision"). From 1992 and until 2009 Mr. Doron served as the Chief Technology Officer of Radvision, and from 2006 and until 2009 he served as President of Radvision. Prior to founding Radvision and from 1983, Mr. Doron served at SIMTECH Advanced Training and Simulation Systems Ltd., initially as hardware manager and from 1988 as Chief Technology Officer. Prior thereto and from 1977, Mr. Doron served as an electronic engineer at MBT Israel Aircraft Industries Ltd. Mr. Doron holds a B.Sc degree in electronics and computer science from Ben-Gurion University and an M.B.A. degree from the University of Bradford in the United Kingdom.

Liron Eizenmanjoined the company in 2015 as Chief Executive Officer of Silicom’s North American subsidiary and led the Edge Networking Solutions strategy to its leadership position in the SD-WAN/Edge platforms market. In July 2022, Mr. Eizenman was named President and Chief Executive Officer, after spending two and a half years as the Company's Chief Operating Officer. Prior to joining Silicom, Mr. Eizenman held engineering and management roles at Microsoft and two early-stage startups. Mr. Eizenman holds a B.Sc. degree in Computer Science from the Academic College of Tel Aviv.

Eran Giladhas served as our Chief Financial Officer from May 2005 and the Secretary of the Company from 2012. From 1995 to 2005, Mr. Gilad held senior financial and operational positions in various public and private companies operating in the high-tech field. He is a Certified Public Accountant in Israel and holds an M.A in Economics from Tel-Aviv University and a B.A in Accounting and Economics from Tel-Aviv University.

In accordance with the Companies Law, the following table presents information regarding compensation actually received by our five most highly paid office holders during the year ended December 31, 2023. All amounts are in USD, based on the following components:

The aggregate direct remuneration paid to all persons as a group who served in the capacity of director or office holder during the year ended December 31, 2023, was US$ 2,871 thousand. The aggregate amount accrued to provide for severance payments to all persons as a group who served in the capacity of director or executive officer as of the year ended December 31, 2023, was US$ 1,040 thousand. The severance terms of our Chief Executive Officer and Chairman of the Board, as previously approved by the audit committee, board of directors and shareholders of the Company, and in accordance with the Amended Executive Compensation Policy of the Company, may entitle them, in certain circumstances, to additional payments. of the

Mr. Liron Eizenman and Mr. Avi Eizenman may also be entitled to cash bonuses by meeting some pre-determined thresholds, and as calculated based on a pre-determined formula set by our Board of Directors, as approved by the annual general meeting of our shareholders for the years commencing in 2017 on June 8, 2016. Mr. Liron Eizenman, Mr. Avi Eizenman annual cash bonuses may not exceed the value of 18 times their monthly salaries, respectively. Mr. Liron Eizenman's and Mr. Avi Eizenman's annual cash bonus formulas were based on achieving one or more of the following thresholds: (i) the Company’s actual annual revenue for each applicable year is 80% or more of the pre-determined budget target for the relevant year; and (ii) the Company’s actual annual operating profit for each applicable year is 65% or more of the pre-determined budget target for the relevant year. The Board of Directors may, in its sole discretion, lower such annual cash bonuses or not pay them in their entirety, if it determines that such a decision is in the best interests of the Company. Furthermore, in accordance with the Company’s recoupment policy, Mr. Liron Eizenman, Mr. Avi Eizenman and Mr. Orbach (in relation to compensation received for his service as the CEO of the company) may be required to reimburse the Company for the cash bonuses (or any part thereof) paid in the previous 3 years, in the event such cash bonuses were based on financial data included in the Company’s financial statements that were found to be inaccurate and were subsequently restated.

Non-employee directors, including External Directors within the meaning of the Companies Law, are entitled to be paid cash compensation for board and any committee member services, as applicable, in accordance with the amounts which are permitted under the Companies Regulations (Rules Regarding Compensation and Expenses of External Directors) – 2000 enacted pursuant to the Companies Law. Office holders, including External Directors or Independent Directors, may waive their entitlement to their compensation, subject to applicable law. All our office holders other than Mr. Eli Doron and our independent directors are employed by us. We do not currently grant any variable bonus or equity-based compensation, nor any separation payments to our non-employee directors. Certain of the compensation previously paid to our directors was paid in the form of options which were granted under share option plans which have expired (including under the Share Option Plan (2004)), or options and RSU’s which were and may be granted under the Silicom Ltd. – Global Share Incentive Plan (2013), as described below.

On December 30, 2004, our shareholders adopted our Share Option Plan (2004), which expired at the end of 2014. As of March 31, 2019, there were no outstanding options under the Share Option Plan (2004) which were granted to directors and office holders.

On October 21, 2013, our board of directors adopted our Global Share Incentive Plan (2013) (the “Plan”). On April 30, 2014, the annual general meeting of our shareholders approved the Plan to qualify for incentive stock options for U.S. tax purposes. The Plan is administered by the board of directors, which determines the number of our ordinary shares available for issuance under the plan, designates the award recipients and types of awards, dates of grant, vesting periods and the exercise price of awards. Under the Global Share Incentive Plan (2013) the Company may grant awards of options, restricted shares, restricted share units (“RSUs”) or other equity-based awards. The board of directors has determined that initially up to a maximum of 500,000 of our ordinary shares are reserved for issuance, subject to certain adjustments, upon the exercise of equity-based awards granted to employees, directors, office holders, consultants and service providers. On January 29, 2018, our board of directors increased the number of our ordinary shares available for issuance under the Plan by 600,000 Ordinary Shares, and on January 27, 2022, our board of directors increased the number of our ordinary shares available for issuance by an additional 750,000 Ordinary. In October 2023, our board of directors approved the extension of our Plan by a further ten years, and increased the number of our ordinary shares available for issuance by additional 375,000 ordinary shares. The awards are non-assignable except by the laws of descent. Certain tax advantages apply to certain of our directors, office holders and employees with respect to equity-based awards granted to them under Plan .

As of December 31, 2016, our compensation committee and board of directors, respectively, have approved the grant of a total of 82,000 RSUs and 209,963 options under the Plan, of which the following were granted to directors and office holders: (a) in 2014 a total of 54,000 RSUs were granted, (b) in 2015 a total of 29,999 options were granted with an exercise price of US$ 26.91, and with an expiration date upon the earlier to occur of: (i) July 28, 2023; and (ii) the closing price of the shares falling below US$ 13.46 at any time after the date of grant (and accordingly all of the unexercised options granted, have expired), (c) in 2016 a total of 29,999 options were granted with an exercise price of US$ 28.38, and with an expiration date upon the earlier to occur of: (i) June 8, 2024, or (ii) the closing price of the shares falling below US$ 14.19 at any time after the date of grant.

In January 2017, our compensation committee and board of directors, respectively, approved a grant under the Plan of a total of (a) 119,925 options and (b) 78,000 RSUs, of which a total of 29,999 options and  54,000 RSUs, were granted to directors and office holders. The options were granted with an exercise price of US$ 39.62, and an expiration date upon the earlier to occur of: (i) January 30, 2025, or (ii) the closing price of the shares falling below US$ 19.81 at any time after the date of grant. Accordingly all of the unexercised options granted, have expired). annual general meeting of our shareholders approved such grants of options and of RSUs granted to directors in their meeting on June 5, 2017.

In April, 2018, our compensation committee and board of directors, respectively, approved the grant under the Plan of a total of 137,010 options under the Global Share Incentive Plan (2013), of which 29,999 options were granted to directors and office holders, with an exercise price of US$ 36.11. Such options were to expire, by their terms, on the earlier to occur of: (a) April 30, 2026, and (b) the closing price of the shares falling below US$ 18.06 at any time after the date of grant. Accordingly all of the unexercised options granted, have expired.

In January 2019, our compensation committee and board of directors, respectively, approved the grant under the Plan of a total of 141,928 options under the Plan, of which 29,999 options were granted to directors and office holders with an exercise price of US$ 33.83. Such options were to expire, by their terms, on the earlier to occur of: (a) January 31, 2027, and (b) the closing price of the shares falling below US$ 16.92 at any time after the date of grant. Accordingly all of the unexercised options granted, have expired.

In January 2020, our compensation committee and board of directors, respectively, approved the grant of a total of 148,426 options and a total of 86,000 RSUs under the Plan, of which 29,999 options and 54,000 RSUs were granted to directors and office holders. The exercise price for the options (per ordinary share) was US$ 32.54. Such options were to expire, by their terms, on the earlier to occur of: (a) June 8, 2028, and (b) the closing price of the shares falling below US$ 16.27 at any time after the date of grant. Accordingly all of the unexercised options granted, have expired. The annual general meeting of our shareholders approved such grants of options and of RSUs granted to directors in their meeting on June 8, 2020.

In January 2021, our compensation committee and board of directors, respectively, approved the grant of a total of 137,759 options under the Plan, of which 29,999 options were granted to directors and office holders. The exercise price for the options (per ordinary share) was US$ 41.84. Such options were to expire, by their terms, on the earlier to occur of: (a) June 3, 2029, and (b) the closing price of the shares falling below US$ 20.92 at any time after the date of grant. Accordingly, all of the unexercised options granted, have expired.

In January 2022, our compensation committee and board of directors, respectively, approved the grant of a total of 121,508 options and 16,000 RSUs under the Plan, of which 3,333 options were granted to an office holder. The exercise price for the options (per ordinary share) was US$ 47.98. Such options were to expire, by their terms, on the earlier to occur of: (a) January 27, 2030, and (b) the closing price of the shares falling below US$ 23.99 at any time after the date of grant and remains at such price or at a lower price for a period of at least 30 days. Accordingly all of the unexercised options granted, have expired.

In March 2022, our compensation committee and board of directors, respectively, approved the grant of a total of 26,666 options under the Plan, of which 26,666 options were granted to directors and office holders. The exercise price for the options (per ordinary share) was US$ 35.69. Such options were to expire, by their terms, on the earlier to occur of: (a) June 7, 2030, and (b) the closing price of the shares falling below US$ 17.85 at any time after the date of grant and remains in such price or at a lower price for a period of at least 30 days. Accordingly all of the unexercised options granted, have expired).

In April 2022, our compensation committee and board of directors, respectively, approved the grant of a total of 50,000 options under the Plan, of which 50,000 options were granted to an office holder. The exercise price for the options (per ordinary share) was US$ 34.90. Such options were to expire, by their terms, on the earlier to occur of: (a) July 1, 2030, and (b) the closing price of the shares falling below US$ 17.45 at any time after the date of grant and remains at such price or at a lower price for a period of at least 30 days. Accordingly all of the unexercised options granted, have expired).

In March 2023, our compensation committee and board of directors, respectively, approved the grant of a total of 137,911 options and 86,000 RSUs under the Plan, of which 29,999 options and 54,000 RSUs were granted to directors and office holders. The exercise price for the options was  US$ 35.12. Such options were to expire, by their terms, on the earlier to occur of: (a) June 14, 2031, and (b) the closing price of the shares falling below US$ 17.56 at any time after the date of grant and remains at such price or at a lower price for a period of at least 30 days. Accordingly, all of the unexercised options granted, have expired. The Annual General Meeting of our shareholders approved such grant of options in their meeting on June 14, 2023.

In March 2024, our compensation committee and board of directors, respectively, approved the grant of a total of 410,714 options and 2,969 RSUs under the Plan as extended, of which 170,000 options and 2,969 RSUs were granted to directors and office holders, and of which 160,000 options and 2,969 RSUs grants to directors and office holders are subject to the approval of our 2024 Annual General Meeting, which is expected to convene in June 2024.

As of March 31, 2024, a total of 157,706 of the options granted under the Plan were returned to the company after not being exercised, and 10,000 of the RSUs granted under the Plan were returned to the company after not being vested following the cessation of employment of certain employees, as set forth in the terms of grant of such options or RSUs.

Avi Eizenman was re-elected to the Board of Directors on June 7, 2022, to serve until the Annual General Meeting to be held in the year 2024, and until his successor has been duly elected, subject to the Companies Law and our Articles. Avi Eizenman is a founder of the Company and has served as a director since our inception in 1987. Shaike Orbach was re-elected to hold office as a director most recently on June 14, 2023, to serve until the Annual General Meeting which will take place in 2026. Eli Doron was re-elected to the board of directors most recently in June 3, 2021, to serve until the Annual General Meeting to be held in 2024. On July 1, 2010, Mr. Ilan Erez was elected as an External Director for an initial term of three years in accordance with Section 245(a) of the Companies Law, with such term ending as of July 1, 2013. At the Annual General Meeting of our shareholders held on April 14, 2013, the shareholders re-elected Mr. Ilan Erez as an External Director for a second three-year term, and elected Ms. Ayelet Aya Hayak as an External Director for an initial three-year term, with such terms of office for the external directors commencing as of July 1, 2013. Mr. Ilan Erez and Ms. Ayelet Aya Hayak were re-elected as External Directors for a fourth three-year term and third three-year term, respectively, at the Annual General Meeting of our shareholders, which took place on June 5, 2019. Mr. Ilan Erez and Ms. Ayelet Aya Hayak were elected as directors to the board of directors on June 7, 2022, to serve until the Annual General Meeting to be held in 2025.

None of the members of the Board of Directors is entitled to receive any severance or similar benefits upon termination of his or her service with the Board of Directors, except for Avi Eizenman, who also serves as the active Chairman of the Board, Shaike Orbach, who until the Annual General Meeting held on June 7, 2022 served as President and Chief Executive Officer (and currently serves as the Executive Vice Chairman of our Board), and Liron Eizenman, who serves as our President and Chief Executive Officer (See “Item 6.B. – Directors and Senior Management – Compensation” above).

In December 2007, our audit committee and Board of Directors approved severance arrangements for Mr. Avi Eizenman  which provide for extended notice provisions and severance payments in the event of termination. The arrangements were approved by our shareholders in January 2008. On April 28, 2022, Our Compensation Committee and Board of Directors approved severance arrangements for Mr. Liron Eizenman. Mr. Liron Eizenman's severance arrangements were then approved by our shareholders at the most recent Annual General Meeting, held on June 7, 2022. The severance arrangements include the following main terms and conditions (identical with respect to each of Mr. Avi Eizenman, and Mr. Liron Eizenman):

The termination of employment of Mr. Avi Eizenman or Mr. Liron Eizenman by him or by us, for any reason other than cause (which is generally defined as willful conduct or omission materially injurious to the company), death or disability, shall require 12 months advance written notice. If, however, following a change of control transaction, either: (i) he shall give notice of termination of his employment for good reason (which is generally defined as an adverse change to the status, responsibilities, salary or other material terms of his employment); or (ii) we shall give notice of termination of his employment for any reason other than cause or disability, 18 months advance written notice shall be required. A change of control transaction includes transactions such as sale of all or substantially all of the company’s shares or assets, or a merger, acquisition, or other reorganization in which control of our company changes following such transaction.

If the employment of Mr. Avi Eizenman, or Mr. Liron Eizenman shall be terminated for any reason other than cause, he shall be entitled to receive his last full monthly salary multiplied by the number of years (or portions thereof) that he was employed by us (i.e. the severance amount he would be entitled to receive under the Israeli law, had we terminated his employment for any reason other than cause) (the “Severance Law Amount”). If, however, his employment shall be terminated: (i) by the company for any reason other than cause or disability; or (ii) by him for a good reason following a change of control, he shall be entitled to receive one and half times the Severance Law Amount. If his employment under the arrangement is terminated by reason of death or disability, then, in addition to the above, he shall be entitled to receive a lump sum severance payment equal to his last full monthly salary multiplied by twelve 12 months.

The Extraordinary General Meeting of the Shareholders on July 31, 2013, approved the adoption of the Executive Compensation Policy of the Company, which included the above referenced extended notice provisions, and severance payments in the event of termination, with respect to each of Mr. Avi Eizenman and Mr. Liron Eizenman. The Amended Executive Compensation Policy was approved by our Annual General Meeting convened in June 2019. At the Annual General Meeting, held on June 7, 2022, an Amended Executive Compensation Policy was rejected by our shareholders but following the Meeting it was approved by our compensation committee and the Board of Directors on June 12, 2022, in accordance with the Companies Law in Israel and after determining that the approval of the Amended Compensation Policy was for the benefit of the Company.

Our Articles provide for a Board of Directors of not less than two and not more than eight members. At the Annual General Meeting of the Shareholders on June 8, 2016, it was decided to adopt a new Directors Voting Mechanism, and to amend the Articles accordingly. Under the new Directors Voting Mechanism, Directors are divided into three groups, Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that at each Annual General Meeting of the shareholders a given group of Directors is brought for election, to serve on a continuous basis for a three-year term, until the Annual General Meeting in three years’ time and until their respective successors are duly elected, at which point their term in office shall expire. At each Annual General Meeting, the Annual General Meeting shall be entitled to elect Directors to replace the Directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in office of one group of directors shall expire. Other office holders serve at the discretion of the Board of Directors. The amended and restated Articles of Association of the Company provide that any director may, subject to the provisions of the Companies Law and the approval by the Board of Directors, appoint another person to serve as an Alternate Director and may cancel such appointment. Under the Companies Law, a person who is already serving as a director will not be permitted to act as an Alternate Director. Additionally, the Companies Law prohibits a person from serving as an Alternate Director for more than one Director. Appointment of an Alternate Director for a member of a board committee is only permitted if the alternate is a member of the Board of Directors and does not already serve as a member of such committee. If the committee member being substituted is an External Director, the alternate may only be another External Director who possesses the same expertise as the External Director being substituted. The term of appointment of an Alternate Director may be for one meeting of the Board of Directors or for a specified period or until notice is given of the cancellation of the appointment. To our knowledge, no Director currently intends to appoint any other person as an Alternate Director, except if the Director is unable to attend a meeting of the Board of Directors.

Under the Companies Law, companies registered under the laws of Israel, the shares of which have been offered to the public in or outside of Israel, are required to appoint no less than two external directors. No person may be appointed as an external director if such person is a relative (as defined in the Companies Law) of a “controlling shareholder” or if such person, or the person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of the person’s appointment to serve as External Director, any affiliation with any of either the company, any entity or person controlling, controlled by or under common control with the company” or relatives of such person. The term “affiliation” includes:

The Israeli Minister of Justice, in consultation with the ISA, may determine that certain matters will not constitute an affiliation, and has issued certain regulations with respect thereof.

If the company does not have a “controlling shareholder” or a shareholder who holds company shares entitling him to vote at least 25% of the votes in a shareholders meeting, then the company may not appoint as an external director any person or such person’s relative, partner, employer or any entity under the person’s control, who has or had, on or within the two years preceding the date of the person’s appointment to serve as external director, any affiliation with the Chairman of the Board, Chief Executive Officer, a substantial shareholder who holds at least 5% of the issued and outstanding shares of the company or voting rights which entitle him to vote at least 5% of the votes in a shareholders meeting, or the Chief Financial Officer.

A person shall be qualified to serve as an external director only if he or she possesses “expertise in finance and accounting” or “professional qualifications.” At least one external director must possess “expertise in finance and accounting.”

A director can satisfy the requirements of having “expertise in finance and accounting” if due to his or her education, experience and qualifications he or she has acquired expertise and understanding in business and accounting matters and financial statements, in a manner that allows him or her to understand, in depth, the company’s financial statements and to spur a discussion regarding the manner in which the financial data is presented.

A public company’s board of directors must evaluate the proposed external director’s “expertise in finance and accounting”, by considering, among other things, such candidate’s education, experience and knowledge in the following: (i) accounting and auditing issues typical to the field in which the company operates and to companies of a size and complexity similar to such company; (ii) the company’s independent public accountant’s duties and obligations; (iii) preparation of the company’s consolidated financial statements and their approval in accordance with the Companies Law and the Israeli Securities Law.

A director is deemed to be ”professionally qualified” if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a field that is the company’s main field of operations, or a field relevant to his or her position; or (iii) has at least five years’ experience in any of the following, or has at least a cumulative total of at least five years’ experience in any two of the following: (A) a senior position in the business management of a corporation with a significant extent of business, (B) a senior public position or a senior position in public service, or (C) a senior position in the company’s main field of operations. As with a candidate’s “expertise in finance and accounting”, the board of directors here too must evaluate the proposed external director’s “professional qualification” in accordance with the criteria set forth above.

The declaration required by law to be signed by a candidate to serve as an external director must include a statement by such candidate concerning his or her education and experience, if relevant, in order that the board of directors may properly evaluate whether such candidate meets the requirements of having “expertise in finance and accounting” or being “professionally qualified” as set forth in the regulations. Additionally, the candidate should submit documents and certificates that support the statements set forth in the declaration.

No person may serve as an external director if the person’s position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. Additionally, no person may serve as an external director if the person, the person’s relative, spouse, employer or any entity controlling or controlled by the person, has a business or professional relationship with someone with whom affiliation is prohibited, even if such relationship is not maintained on a regular basis, excepting negligible relationships, or if such person received from the company any compensation as an external director in excess of what is permitted by the Companies Law. Pursuant to the recently enacted amendment to the Companies Regulations (Matters Which do not Constitute Affiliation), 2006, effective as of April 3, 2016 (the “Amendment to the Affiliation Regulations”), business or professional relationship maintained on a regular basis between the company and the external director will not constitute affiliation if the relationship commenced after the appointment of the external director for office, the company and the external director consider the relationship to be negligible and the audit committee approved, based on information presented to it, that the relationship is negligible, and the external director declared that he or she did not know and could not have reasonably know about the formation of the relationship and has no control over its existence or termination. If, at the time external directors are to be appointed, all current members of the board of directors who are not controlling shareholders or relatives of such shareholders are of the same gender, then at least one external director must be of the other gender.

External directors are to be elected for a term of three years by a majority vote at a shareholders’ meeting, provided that either:

External directors may be re-elected for two additional terms of three years each, provided that with respect to the appointment for each such additional three-year term, one of the following has occurred: (i) the reappointment of the external director has been proposed by one or more shareholders holding together 1% or more of the aggregate voting rights in the company and the appointment was approved at the general meeting of the shareholders by the requisite majority, provided that: (1) in calculating the majority, votes of controlling shareholders or shareholders having a personal interest in the appointment as a result of an affiliation with a controlling shareholder and abstentions are disregarded, (2) the total number of shares of shareholders who do not have a personal interest in the appointment as a result of an affiliation with a controlling shareholder and/or who are not controlling shareholders, present and voting in favor of the appointment exceed 2% of the aggregate voting rights in the company, and the external director who has been nominated in such fashion is not a “linked or competing shareholder”, and does not have or has not had, on or within the two years preceding the date of such person’s appointment to serve for another term as external director, any affiliation with a linked or competing shareholder. The term “linked or competing shareholder” means the shareholder(s) who nominated the external director for reappointment or a material shareholder of the company holding more than 5% of the shares in the company, provided that at the time of the reappointment, such shareholder(s) of the company, the controlling shareholder of such shareholder(s) of the company, or a company under such shareholder(s) of the company’s control, has a business relationship with the company or are competitors of the company; the Israeli Minister of Justice, in consultation with the ISA, may determine that certain matters will not constitute a business relationship or competition with the company; (ii) the reappointment of the external director has been proposed by the board of directors and the appointment was approved by the majority of shareholders required for the initial appointment of an external director; or (iii) the external director has proposed himself for reappointment and the reappointment was approved in accordance with Sub-section (i) above.

However, under regulations promulgated pursuant to the Companies Law, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, may elect external directors for additional terms that do not exceed three years each, beyond the three three-year terms generally applicable, provided that, if an external director is being re-elected for an additional term or terms beyond three three-year terms: (i) the audit committee and board of directors must determine that, in light of the external director’s expertise and special contribution to the board of directors and its committees, the re-election for an additional term is to the company’s benefit; (ii) the external director must be re-elected by the required majority of shareholders and subject to the terms specified in the Companies Law; and (iii) the term during which the nominee has served as an external director and the reasons given by the audit committee and board of directors for extending his or her term of office must be presented to the shareholders prior to their approval.

Further to these regulations, an amendment to the Companies Regulations (Relief for Companies Whose Shares are Registered for Trading Outside of Israel) – 2000, (the “Amendment to the Relief Regulations”), provides additional exemptions for such companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, provided that: (i) such company does not have a controlling shareholder; and (ii) the company complies with the requirements of the foreign securities laws and stock exchange regulations applicable to companies which are incorporated under the laws of such foreign countries with regard to appointing independent directors and composition of the compensation and audit committees. Any company that satisfies the above criteria and elects to comply with the applicable foreign securities laws and stock exchange regulations, shall be exempt from the following rules under the Companies Law: (i) to have at least 2 external directors appointed to serve in a public company; (ii) at least one of the external directors is required to have financial and accounting expertise and the rest are required to have professional expertise; (iii) the external directors shall be appointed by the general meeting and subject to certain voting thresholds; (iv) if all of the board members who are not controlling shareholders are of one sex, the appointed external director shall be of the other sex; (v) all of the board committees which are empowered and authorized to exercise any of the board’s authorities must consist of at least one external director. The exemption from these rules under Amendment 1 requires that the board be composed of both male and female directors.

External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the company or are found by a court to be unable to perform their duties on a full-time basis. External directors may also be removed by an Israeli court if they are found guilty of bribery, fraud, administrative offenses in a company or use of inside information. Each committee of a company’s board of directors which has been granted any authority normally reserved for the board of directors must include at least one external director; provided, however, that the audit committee and compensation committee must each include all external directors then serving on the board of directors.

Following termination of service as an external director, a public company, a controlling shareholder thereof and any entity controlled by a controlling shareholder, may not grant any benefit, directly or indirectly, to any person who served as an external director of such public company, or to his or her spouse or child, including, not appointing such person, or his or her spouse or child, as an office holder of such public company or of any entity controlled by a controlling shareholder of such public company, not employing such person or his or her spouse or child and not receiving professional services for pay from such person, either directly or indirectly, including through a corporation controlled by such person, all until the lapse of two years from termination of office with respect to the external director, his or her spouse or child; and with respect to other relatives of the former external director – until the lapse of one year from termination of office.

An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director.

In accordance with the Amendment to the Relief Regulations and in compliance with the terms described above in connection therewith, in July 2020, the Company elected to take advantage of the aforementioned exception and has chosen to opt out of the requirement to appoint external directors and regarding the composition of the audit committee and compensation committee, subject to the following conditions: (i) none of the Company's shareholders is a controlling shareholder; (ii) the Company complies with NASDAQ rules and regulations with respect to the composition of the Company’s audit and compensation committees; (iii) the Company complies with NASDAQ rules and regulations with respect to the requirements of independent directors. For so long as the Company meets the requisite requirements, the Company intends to apply the exemption from appointing at least two external directors under the Companies Law. Accordingly, Mr. Ilan Erez and Ms. Ayelet Aya Hayak who were originally elected by our shareholders as external directors under the Companies Law, are no longer classified as external directors, but have continued to serve on the Company’s board of directors as independent directors under the NASDAQ rules.

The Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee pursuant to the Companies Law include identifying irregularities in the management of our business and approving related party transactions as required by law, classifying company transactions as extraordinary transactions or non-extraordinary transactions and as material or non-material transactions in which an office holder has an interest (which will have the effect of determining the kind of corporate approvals required for such transaction), assessing the proper function of the company’s internal audit regime and determining whether its internal auditor has the requisite tools and resources required to perform his or her role and to regulate the company’s rules on employee complaints, reviewing the scope of work of the company’s independent accountants and their fees, and implementing a whistleblower protection plan with respect to employee complaints of business irregularities. In addition, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) to establish procedures to be followed in respect of related party transactions with a controlling shareholder (where such are not extraordinary transactions), which may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee, or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit committee; and (ii) to determine procedures for approving certain related party transactions with a controlling shareholder, which were determined by the audit committee not to be extraordinary transactions, but which were also determined by the audit committee not to be negligible transactions.

Under the Companies Law, an audit committee must consist of at least three directors, including all the external directors of the company, and a majority of the members of the audit committee must be independent or external directors. The Companies Law defines independent directors as either external directors or directors who: (1) meet the requirements of an external director, other than the requirement to possess accounting and financial expertise or “professional qualifications”, with audit committee confirmation of such; (2) have been directors in the company for an uninterrupted duration of less than 9 years (and any interim period during which such person was not a director which is less than 2 years shall not be deemed to interrupt the duration); and, (3) were classified as such by the company.

The following persons may not be a member of the audit committee:

According to the Companies Law, (1) the chairman of the audit committee must be an external director, (2) the required quorum for audit committee meetings and decisions is a majority of the committee members, of which the majority of members present must be independent and external directors, and (3) any person who is not eligible to serve on the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a certain matter, provided however, that company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise, company counsel and company secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings and for the decisions if such presence is requested by the audit committee.

Pursuant to the Amendment to the Relief Regulations, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, and which satisfy the criteria detailed above, are exempt from the following rules regarding the audit committee under the Companies Law: (i) the committee shall be comprised of at least 3 members, who shall include all of the external directors, and the majority of the members shall be independent; (ii) the audit committee may not include the chairman of the board, or any director employed by the Company, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder; (iii) the controlling shareholder or his relatives shall not be members of the audit committee; (iv) the chairman of the audit committee shall be an external director; (v) a person who is prohibited from being a member of the audit committee shall not be present at the committee’s meetings; (vi) if the committee also serves as a financials committee, the rules applicable to the financials committee shall apply; (vii) the legal quorum shall be the majority of the committee members, provided that the majority of directors present are independent, at least one of whom is an external director.

Currently, Ms. Ayelet Aya Hayak, Mr. Ilan Erez and Mr. Eli Doron serve as members of our audit committee, and Mr. Ilan Erez serves as the chairperson.

Pursuant to the Companies Law, the Board of Directors of Israeli publicly traded companies are required to appoint a compensation committee comprised of at least three members, including all external directors, who must also comprise a majority of the members of the compensation committee. In addition, the chairman of the compensation committee must be an external director. Following the compensation committee’s recommendations, the Board of Directors is required to establish a compensation policy, which includes a framework for establishing the terms of office and employment of the office holders and guidelines with respect to the structure of the variable pay of office holders. Such guidelines are the basis for adequate balance between the components of compensation, which exists when a linkage is maintained between compensation and performance and the creation of value for shareholders in the Company, while maintaining the Company’s ability to recruit and maintain talented officeholders and incentivizing them to pursue the Company’s objectives. In particular, an appropriate balance between the fixed component (base salary and additional benefits) and the variable component and capital compensation avoids placing an exaggerated emphasis on one component.

The following persons may not be a member of the compensation committee:

The responsibilities of the compensation committee include the following:

In December 2012, our Board of Directors changed the composition of the members of our compensation committee by removing Mr. Avi Eizenman from the compensation committee, and appointing the Company’s two external directors, Mr. Ilan Erez and Ms. Einat Domb-Har to our compensation committee, and appointing Mr. Ilan Erez as chairman of our compensation committee. On July 1, 2013, following the election of Ms. Ayelet Aya Hayak as an external director instead of Ms. Einat Domb-Har, Ms. Aya Hayak replaced Ms. Domb-Har on our compensation committee. Following the election of Mr. Eli Doron as a member of our board of directors, Mr. Eli Doron replaced Mr. Zohar Zisapel on our compensation committee. Our compensation committee has been nominated and empowered by the Board of Directors to act in accordance with the powers and prerogatives delegated to it by the Companies Law and take any decisions and make any recommendations to the Board all as set forth in the Companies Law.

Pursuant to Amendment 27 to the Companies Law, effective as of April 3, 2016 (“Amendment 27”), the audit committee may serve as the company’s compensation committee, provided that it meets the composition requirements of the compensation committee.

Pursuant to the Amendment to the Relief Regulations, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, and satisfying the criteria detailed above, are exempt from the following rules regarding the Compensation Committee under the Companies Law: (i) the board of a public company is required to appoint a compensation committee; (ii) the compensation committee shall be comprised of at least 3 members, all of the external directors shall be members and shall constitute the majority of its members and the rest of the members shall be members whose terms of service are as required under the Companies Law.

Under Section 267B(a) and Parts A and B of Annex 1A of the Companies Law, which were legislated as part of Amendment 20, a company’s compensation policy shall be determined based on, and take into account, the following parameters:

In addition, the compensation policy should take into account that in the event the compensation paid to office holders shall include variable components – it should address the ability of the board of directors to reduce the value of the variable component from time to time or to set a cap on the exercise value of convertible securities components that are not paid out in cash. Additionally, in the event that the terms of office and employment include grants or payments made upon termination – such grants should take into consideration the length of the term of office or period of employment, the terms of employment of the office holder during such period, the company’s success during said period and the office holder’s contribution to obtaining the company’s goals and maximizing its profits as well as the circumstances and context of the termination.

In addition, the compensation policy must set forth standards and rules on the following issues: (a) with respect to variable components of compensation – basing the compensation on long term performance and measurable criteria (though a non-material portion of the variable components can be discretionary awards taking into account the contribution of the office holder to the company. Pursuant to Amendment 27, variable components in the amount of up to a three month salary of the relevant office holder, on an annual basis, shall be considered a non-material portion of the variable components); (b) establishing the appropriate ratio between variable components and fixed components and placing a cap on such variable components (including a cap on the grant date value of convertible securities components that are not paid out in cash); (c) setting forth a rule requiring an office holder to return amounts paid, in the event that it is later revealed that such amounts were paid on the basis of data which prove to be erroneous and resulted in an amendment and restatement of the company‘s financial statements; (d) determining minimum holding or vesting periods for equity based variable components of compensation, while taking into consideration appropriate long term incentives; and (e) setting a cap on grants or benefits paid upon termination.

The board of directors of a company is obligated to adopt a compensation policy after considering the recommendations of the compensation committee. The final adoption of the compensation committee is subject to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth in the Companies Law, pursuant to which one of the following must be met:

Nonetheless, even if the shareholders of the company do not approve the compensation policy, the board of directors of a company may approve the compensation policy, provided that the compensation committee and, thereafter, the board of directors determined, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of the compensation policy is for the benefit of the company.

On July 31, 2013, an Extraordinary General Meeting of the Shareholders of the Company took place, approving the Executive Compensation Policy as later amended at the Annual General Meeting of the Shareholders held on June 5, 2019 (the “Policy”), which had been recommended by the Compensation Committee and approved by the Board of Directors, for the Company's directors and office holders, in accordance with the requirements of the Companies Law. The Policy was approved by our shareholders at the Annual General Meeting of our shareholders which took place on June 5, 2019. At the Annual General Meeting, held on June 7, 2022, an Amended Executive Compensation Policy was rejected by our shareholders but following the Meeting it was approved by our compensation committee and the Board of Directors on June 12, 2022, in accordance with the Companies Law in Israel and after determining that the approval of the Amended Compensation Policy was for the benefit of the Company.

The Policy includes, among other issues prescribed by the Companies Law, a framework for establishing the terms of office and employment of the office holders, a recoupment policy, and guidelines with respect to the structure of the variable pay of office holders.

Each of our compensation committee and board of directors may engage compensation advisors and other professionals to assist in formulating compensation packages in line with the Policy, including, without limitation, to assist in collecting relevant data, framing the appropriate factors to be considered and evaluating the different factors being considered.

All compensation arrangements of office holders are to be approved in the manner prescribed by applicable law. Our office holders, including External Directors or Independent Directors, may waive their entitlement to their compensation, subject to applicable law.

Our recoupment policy relating to office holder compensation allows for the recovery of all or a portion of any compensation paid to our office holders during the previous three years on the basis of financial data included in our financial statements in any fiscal year that were found to be inaccurate and were subsequently restated. In such event, we will seek reimbursement from the office holders to the extent such office holders would not have been entitled to all or a portion of such compensation, based on the financial data included in the restated financial statements. Our compensation committee will be responsible for approving the amounts to be recouped and for setting terms for such recoupment from time to time. Notwithstanding the aforesaid, the recoupment policy will not be triggered in the event of a financial restatement due to changes in the applicable reporting or accounting standards. The above noted recoupment policy does not derogate from any relevant recoupment or claw-back provisions under any applicable law or regulatory rules which apply to us.

All of our office holders (other than non-employee directors) may be incentivized through cash bonuses and long-term equity-based incentives to provide the office holder with a stake in our success – thus linking the office holder's long-term financial interests with the interests of our shareholders. In accordance with the Policy, the incentives are developed through a program that sets performance targets based on each office holder's role and scope. Actual payments are driven by the business and individual performance vis-à-vis the performance targets set at the beginning of the year. The formula for the performance targets and the maximum variable components payable to each office holder (other than directors) shall be presented and recommended by our Chief Executive Officer and reviewed and approved by our compensation committee and our board of directors. The formula for the performance targets and the maximum variable components payable to any employee office holders who are also directors shall be presented and recommended by our compensation committee and reviewed and approved by our board of directors and our shareholders. Our Board of Directors may reduce or resolve not to award any officeholder’s performance based cash bonuses, even where performance targets have been met, provided such reduction or cancellation is in the best interests of the Company. The maximum value of the variable compensation components for an office holder at the Company shall not exceed eighty eight percent of such office holder's total compensation package on an annual basis. Equity based compensation may be granted in any form permitted under our equity incentive plans, as in effect from time to time (collectively, the "Equity Incentive Plans"), including stock options, restricted share units and restricted stock. Equity grants to office holders shall be made in accordance with the terms of the Equity Incentive Plans. All equity-based incentives granted to our office holders shall be subject to vesting periods in order to promote long-term retention of the awarded office holders. Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to our office holders other than directors shall vest gradually over a period of between two to four years. We do not have any equity ownership guidelines that require any of our office holders to hold a stated number or fixed percentage of our ordinary shares, nor do they have to continue to hold for any period of time shares in the Company which they acquired as a result of the exercise of fully vested equity grants. The value of the equity-based compensation shall be calculated on the grant date, according to acceptable valuation practices at the time of grant. The board of directors shall not have discretion to limit the value of the equity-based compensation at the time of exercise. The board of directors may, following approval by our compensation committee, extend the period of time for which an award to an office holder is to remain exercisable, or make provisions with respect to the acceleration of the vesting period of any office holder's awards, including, without limitation, in connection with a corporate transaction involving a change of control.

Our compensation committee will periodically review the Policy and monitor its implementation, and recommend to our board of directors and shareholders to amend the Policy as it deems necessary from time to time. The term of the Policy shall be three years as of the date of its re-adoption on June 12, 2022, during which, the Board of Directors is required to examine the Policy and revise it from time to time, if the circumstances under which it had been adopted have materially changed. 

Following such three-year term, the Policy, including any revisions recommended by our compensation committee and approved by our board of directors, as applicable, shall be brought once again to the shareholders for approval.

Under the Companies Law, the board of directors of a public company must appoint an internal auditor, who is nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether our actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder (as defined in Item 10 below), nor an affiliate, nor a relative of an office holder or affiliate, and he or she may not be our independent accountant or its representative. Yisrael Gewirtz of Fahn Kaneh Control Management Ltd. (a subsidiary of Fahn Kanne & Co. - Grant Thornton Israel) serves as our internal auditor.

The number of employees over the last three financial years is set forth in the table below.

As of March 31, 2024, we had 233 employees, including 24 in marketing, sales and customer services, 120 in research and development, 74 in manufacturing, and 15 in corporate operations and administration. All such employees, except for 28 employees of our subsidiary in the United States and 38 employees of our subsidiary in Denmark, are based in Israel. We consider our relations with our employees excellent and have never experienced a labor dispute, strike or work stoppage. None of our employees are represented by a labor union. We do not employ a significant number of temporary employees, but we do use temporary employees from time to time, as necessary.

In Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations including the Industrialists' Associations. These provisions of collective bargaining agreements are applicable to our Israeli employees by virtue of expansion orders issued in accordance with relevant labor laws by the Israeli Ministry of Labor and Welfare, and which apply such agreement provisions to our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which apply to our employees principally concern the requirement for length of the work day and workweek, mandatory contributions to a pension fund, annual recreation allowance, travel expenses payment and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.

Israeli law generally requires severance pay, which may be funded by managers' insurance and/or a pension fund described below, upon the retirement or death of an employee or termination of employment without cause (as defined in the law). The payments to the managers' insurance and/or pension fund in respect of severance pay amount to approximately 8.33% of an employee's wages, in the aggregate. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include payments for national health insurance.

As required by applicable law, we contribute to either a fund known as managers' insurance or to a pension fund, or to a combination of both. Such practice was further reinforced in July 1, 2008, when we entered into agreements with a majority of our employees in order to implement Section 14 to the Severance Pay Law ("Section 14"), according to which the payment of monthly deposits by us into managers' insurance and/or pension fund are in respect of severance obligation to such employees. See Note 11 of our consolidated financial statements. These funds provide a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay or part of it, if legally entitled, upon termination of employment. For employees based in Israel without a Section 14 arrangement as of their commencement date, the Company designates a separate portion of its funds and attributes them to its severance payment obligations. Additionally, the Company makes provisions in its books concerning any additional severance payments liability.

The following table sets forth, as of March 31, 2024, the number of shares owned by our office holders, directors and senior management. The percentages shown are based on 6,163,655 ordinary shares outstanding as of March 31, 2024:

Item 7.          MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

The following table sets forth, as of March 31, 2024, the number of Ordinary Shares, including options and warrants to purchase Ordinary Shares exercisable within 60 days, owned by (i) all shareholders known to the Company to own more than five percent (5%) of the Company's Ordinary Shares and (ii) all directors and officers as a group (based on 6,163,655 Ordinary Shares outstanding on that date). Each of our shareholders has identical voting rights with respect to its shares. All of the information with respect to beneficial ownership of the Ordinary Shares is given to the best of our knowledge. Except where otherwise indicated, and subject to applicable community property laws, we believe, based on information furnished to us by such owners or otherwise disclosed in any public filings, that the beneficial owners of the Ordinary Shares listed below have sole dispositive and voting power with respect to such Ordinary Shares.

Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than 5% of this class of securities, except for: Wellington Trust Company, NA (“Wellington”).

As reported on Schedule 13G filed by Wellington with the SEC on February 8, 2024, those securities as to which the Schedule was filed by Wellington, in its capacity as investment adviser, are owned of record by its clients. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than five percent of this class of securities.

The Company's major shareholders do not have different voting rights.

As of March 31, 2024, there were five record holders of ordinary shares, including three record holders in the United States. Collectively, these three record holders in the United States held less than 1% of the outstanding ordinary shares.

All related party transactions and arrangements (or modifications of existing ones) with our related parties, transactions in which office holders of the Company have a personal interest, or transactions which raise issues of such office holders' fiduciary duties, are subject to the applicable corporate approvals under the Companies Law. Without giving effect to the buyback purchases described at Item 16E, the following transactions are considered "related party transactions" for this Item 7B:

In January 2004, Our shareholders approved an Indemnification Agreement with our directors and office holders, which has since been amended on a number of occasions.

The Indemnification Agreement provides that our directors and office holders will be exempt from liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by the Company for certain obligations and expenses imposed on the office holder in connection with acts performed in his or her capacity as an office holder of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an office holder's duty of loyalty, a willful breach of an office holder's duty of care, or a reckless disregard for the circumstances or consequences of a breach of a duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an office holder or a director in favor of another person by a judgment is currently US$ 3,000,000 for each instance of a covered scenario. In addition, we would be liable to indemnify the office holder or director for all reasonable litigation expenses with respect to certain proceedings. We have maintained liability insurance for our directors and office holders. On September 23, 2007, our shareholders approved the procurement of a policy, which provides for total coverage of up to US$ 4,000,000. All of our directors are parties to our Indemnification Agreements and are covered by our directors and office holders' insurance policy.

Under our Executive Compensation Policy, any change to the Indemnification Agreement or the insurance policy, including the cost and/or any changes which materially depart from the key terms of the current agreement and/or insurance policy (provided that such changes apply equally to all executives of the Company, including directors) will be submitted to the Company's compensation committee and the Board of Directors for their approval but shall not, unless required by law or the Company's Articles of Association, be presented at a General Meeting of the Shareholders.

See also "Item 6 – Directors and Senior Management – Compensation."

Our consolidated financial statements and other financial information are included herein on pages F-1 through F-55.

As of the date of this Annual Report, we are not a party to any material litigation and we are not aware of any pending or threatened litigation that would have a material adverse effect on us or our business.

On January 14, 2013, we announced that our Board of Directors has adopted a policy for distributing dividends, subject to all applicable laws. According to this policy, each year we will distribute a dividend of up to 50% of our annual distributable profits. Our Board of Directors reserves the right to declare additional dividend distributions, to change the rate of dividend distributions (either as a policy or on a one-time basis), to cancel a specific distribution or to cancel the policy as a whole at any time, at its sole discretion. According to the said policy, the actual distribution of a dividend will be subject to meeting the conditions required by applicable law, including the distribution tests set forth in Section 302 of the Companies Law, and to the specific decision of the Company's Board of Directors for each distribution. On March 15, 2018, our Board of Directors adopted a resolution to suspend the dividend policy until further notice.

Since the date of the annual financial statements included in this Annual Report, no significant changes have occurred.

Item 9.         THE OFFER AND LISTING

Markets and Share Price History

Following our delisting from trading on the TASE, the only trading market for our ordinary shares is the NASDAQ Global Select Market, where our shares have been listed and traded under the symbol SILC since January 2, 2014. Prior thereto, our shares were listed and traded on the NASDAQ Global Market (previously NASDAQ National Market) under the symbol SILC (previously SILCF) from February 11, 2008. Prior thereto, our shares were listed and traded on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap).

The table below sets forth the high and low reported sales prices in Dollars of our ordinary shares, as reported by NASDAQ during the indicated periods:

Our shareholders approved our amended and restated Articles of Association on January 24, 2008, as well as certain additional amendments to the Articles of Association on April 11, 2012, June 8, 2016 and June 7, 2022. Our objective as stated in the Articles of Association is to carry on any business and perform any act which is not prohibited by law.

We currently have only one class of outstanding shares, our Ordinary Shares, having a nominal value of NIS 0.01 per share. Holders of Ordinary Shares have one vote per share, and are entitled to participate equally in the payment of dividends and share distributions and, in the event of a liquidation of the Company, in the distribution of assets after satisfaction of liabilities to creditors. No preferred shares are currently authorized.

Our Articles of Association require that we hold our annual general meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place, either within or without the State of Israel, determined by the board of directors, upon 21 days' prior notice to our shareholders or 35 days' prior notice to the extent required with respect to certain matters as required under the regulations to the Companies Law. In general, no business may be commenced at a general meeting until a quorum of two or more shareholders holding at least 33 1/3% of the voting rights is present in person or by proxy. Shareholders may vote in person or by proxy.

Information regarding our real property leases is provided in "Item 4.D. – Information on the Company – Property, Plant and Equipment" and "Item 19 – Exhibits."

For information on the engagement terms of our new President and CEO, see Item 7B “Related Party Transactions.”

Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, or receipt of any dividend distributions made to our shareholders, including, in particular, the effect of any foreign, state or local taxes, including pursuant to the Tax Act (as defined below), and of any taxes withheld at source by the Company.

Taxation of Israeli Shareholders on Receipt of Dividends.

Item 11.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Item 12.          DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Item 13.          DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

Item 14.          MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

Item 15.          CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Item 15A.       CONTROLS AND PROCEDURES

Item 16.          Reserved.

Item 16A.       AUDIT COMMITTEE FINANCIAL EXPERT

Item 16B.        CODE OF ETHICS

Item 16C.       PRINCIPAL ACCOUNTANT FEES AND SERVICES

Item 16D.       EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not Applicable.

Item 16E.       PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Item 16G.       CORPORATE GOVERNANCE

Item 16H.       MINE SAFETY DISCLOSURE

Not Applicable.

Item 16I.         DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not Applicable.

Item 16K.       DISCLOSURE REGARDING ANNUAL REPORTING: RISK MANAGEMENT, STRATEGY, AND GOVERNANCE DISCLOSURE.