Eltek .(ELTK) - 2018 Q4 - Annual Report

Part I Key Information This section provides a high-level financial overview and details significant risks facing the company, including a history of net losses and working capital deficits Selected Financial Data Presents five years of audited financial data from 2014 to 2018, showing fluctuating revenues, consistent operating and net losses from 2016 to 2018, and declining total assets and shareholders' equity Consolidated Statement of Operations Data (2014-2018, in thousands) | Year ended December 31, | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | 33,939 | 32,754 | 37,065 | 41,350 | 46,626 | | Gross profit | 2,597 | 1,327 | 2,817 | 6,548 | 6,022 | | Operating profit (loss) | (2,072) | (3,418) | (1,999) | 1,497 | (903) | | Net profit (loss) attributable to Eltek Ltd. | (2,607) | (3,775) | (3,624) | 1,043 | (2,665) | | Basic and diluted net profit (loss) per share | (1.28) | (1.58) | (1.82) | 0.51 | (0.26) | Consolidated Balance Sheet Data (2014-2018, in thousands) | As of December 31, | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Working capital (deficit) | (5,314) | (4,565) | (93) | 1,982 | (72) | | Total assets | 18,160 | 22,145 | 20,145 | 25,419 | 26,266 | | Total shareholders' equity | 882 | 3,459 | 6,634 | 10,335 | 9,307 | Risk Factors This section details numerous business, industry, financial, and location-specific risks, including operating losses, working capital deficits, and geopolitical instability - The company has a history of operating losses, incurring a net loss of $2.6 million in 2018, an accumulated deficit of approximately $21.5 million since inception, and a working capital deficiency of $5.3 million as of December 31, 2018[26] - As of December 31, 2018, the company was not in compliance with its bank loan covenants, though waivers were granted, future non-compliance could lead to accelerated repayment demands[32][34] - A significant portion of revenue comes from a small number of customers, with one group accounting for 12.0% and another for 9.3% of total revenues in 2018[37] - The company faced non-compliance with NASDAQ's minimum stockholders' equity requirement in October 2018 but regained compliance in March 2019 following a Rights Offering, with continued non-compliance risking delisting[124] - Mr. Yitzhak Nissan, Chairman of the Board, beneficially owns 69.9% of the company's outstanding ordinary shares, giving him and his controlled entity, Nistec Golan, significant influence over all shareholder matters[120] - The company's location in Israel exposes it to political, economic, and military instability in the Middle East, which could disrupt operations and harm business conditions[133][134] Information on the Company Eltek manufactures and supplies technologically advanced custom-made Printed Circuit Boards (PCBs), focusing on high-end, quick-turnaround products for defense, aerospace, and medical industries History and Development of the Company Incorporated in Israel in 1970, Eltek specializes in advanced custom PCBs, with recent developments including Nistec's controlling stake acquisition in 2013 and a $3.4 million Rights Offering in 2019 - Nistec acquired a controlling stake (50.5%) in November 2013, and following a Rights Offering in March 2019, the beneficial ownership of Nistec's controlling shareholder, Mr. Nissan, increased to 69.9%[162][164] - In December 2016, the company sold all its shares of its German manufacturing subsidiary, Kubatronik-Leiterplatten GmbH[160] - A Rights Offering in March 2019 raised $3.4 million in gross proceeds from shareholders[164] Business Overview The company operates in the highly competitive PCB industry, focusing on complex, high-reliability products for defense/aerospace and medical equipment, facing intense competition and a decreasing order backlog Production by Industry (2016-2018) | Industry | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Defense and aerospace | 43.1% | 48.0% | 44.8% | | Medical equipment | 9.5% | 14.3% | 16.0% | | Industrial equipment | 6.0% | 4.2% | 9.2% | | Others | 41.4% | 33.6% | 30.0% | - Sales to non-Israeli customers accounted for 44.2% of revenues in 2018, an increase from 39.8% in 2017 but a decrease from 52.7% in 2016[188] - The company's order backlog decreased to approximately $7.0 million as of December 31, 2018, compared to $9.1 million at the end of 2017[197] Organizational Structure Eltek Ltd. is the parent company with wholly-owned marketing subsidiaries in the USA and Germany, with Nistec Golan Ltd., controlled by Chairman Yitzhak Nissan, holding a controlling stake - The company has two wholly-owned subsidiaries: Eltek USA Inc. in Delaware and Eltek Europe GmbH in Germany, which manage sales and marketing in their respective regions[207] - In December 2018, the controlling shareholder Nistec Ltd. transferred its ownership interest in the company to Nistec Golan Ltd., both entities controlled by Mr. Yitzhak Nissan[209] Property, Plants and Equipment The company's main facilities are located in a leased building in Petach Tikva, Israel, with the lease expiring in February 2022, and it also leases office space and manufacturing equipment - The company's principal facilities in Petach Tikva, Israel, are leased under an agreement that expires in February 2022[212] - The company leases manufacturing equipment with total payment obligations of $1.2 million through October 2024[214] Operating and Financial Review and Prospects This section provides a detailed analysis of the company's financial performance and condition, highlighting revenue growth, improved gross profit, continued net losses, and liquidity concerns addressed by a recent Rights Offering Operating Results In 2018, revenues grew 3.4% to $33.9 million, gross profit doubled to $2.6 million, and the operating loss narrowed significantly to $2.1 million, driven by increased demand and cost reduction efforts Financial Performance Comparison (2017 vs. 2018) | Metric | 2018 ($M) | 2017 ($M) | Change | | :--- | :--- | :--- | :--- | | Revenues | 33.9 | 32.8 | +3.4% | | Gross Profit | 2.6 | 1.3 | +100% | | Operating Loss | (2.1) | (3.4) | -38.2% | Financial Performance Comparison (2016 vs. 2017) | Metric | 2017 ($M) | 2016 ($M) | Change | | :--- | :--- | :--- | :--- | | Revenues | 32.8 | 37.0 | -11.7% | | Gross Profit | 1.3 | 2.8 | -51.2% | | Operating Loss | (3.4) | (2.0) | +70.0% | Liquidity and Capital Resources The company's liquidity is strained with a $5.3 million working capital deficit as of December 31, 2018, financed through operations, bank loans, and significant shareholder loans, with a March 2019 Rights Offering raising $3.4 million for debt and working capital - The company had a working capital deficit of $5.3 million as of December 31, 2018, an increase from a deficit of $3.7 million at the end of 2017[274] Summary of Cash Flows (2016-2018, in thousands) | Cash Flow Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | (813) | (3,444) | 165 | | Net cash used in investing activities | (619) | (275) | (750) | | Net cash provided by financing activities | 1,527 | 3,244 | 473 | - In March 2019, a Rights Offering provided $3.4 million in gross proceeds to support liquidity[275] - As of April 16, 2019, the total principal amount of loans payable by the company to its controlling shareholder, Nistec, was approximately $3.3 million[301] Tabular Disclosure of Contractual Obligations As of December 31, 2018, the company had total contractual obligations of $18.9 million, with the majority ($15.4 million) due within one year, primarily consisting of short-term bank credit Contractual Obligations as of December 31, 2018 (in thousands) | Contractual Obligations | Total | Less than 1 year | 2-3 years | 4-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Short-term bank credit | 9,274 | 9,274 | - | - | - | | Long-term debt obligations | 724 | 416 | 308 | - | - | | Operating lease | 2,852 | 883 | 1,766 | 203 | - | | Other contractual obligations | 1,538 | 581 | 652 | 305 | - | | Total | 18,876 | 15,421 | 2,736 | 508 | 211 | Directors, Senior Management and Employees This section details the company's leadership, compensation practices, and employee base, highlighting the controlling shareholder's role and a decrease in employee count Compensation Details the compensation for the five most highly compensated officers for 2018, with Chairman Yitzhak Nissan receiving $312,100 and total compensation for all directors and executive officers approximately $1.5 million Compensation of 5 Most Highly Compensated Officers (2018) | Name of Officer | Position | Total Compensation (USD) | | :--- | :--- | :--- | | Yitzhak Nissan | Chairman & Former CEO | 312,100 | | Kathy Nargi-Toth | Former President of Eltek USA | 237,313 | | Eli Yaffe | CEO | 216,142 | | Amnon Shemer | Former CFO | 205,173 | | Avraham Gal | Former VP Operations | 158,223 | Employees As of December 31, 2018, the company had 316 full-time employees in Israel and 4 in the U.S., reflecting a steady decrease in Israeli employee count since 2016 - The number of full-time employees in Israel decreased to 316 at the end of 2018, down from 329 in 2017 and 354 in 2016[392][393][394] Share Ownership As of April 16, 2019, Chairman Yitzhak Nissan beneficially owned 69.9% of the company's outstanding ordinary shares, individually and through his controlled company, Nistec Golan, granting him significant control - As of April 16, 2019, Yitzhak Nissan, Chairman of the Board, beneficially owned 3,062,523 ordinary shares, representing 69.9% of the outstanding shares[403] Major Shareholders and Related Party Transactions This section details the ownership structure and transactions with related parties, highlighting Nistec Golan Ltd.'s majority ownership and ongoing financial and operational agreements with Nistec Major Shareholders As of April 16, 2019, Nistec Golan Ltd. held 62.4% and Yitzhak Nissan individually held 7.5% of the company's ordinary shares, solidifying their combined 69.9% control Major Shareholders (as of April 16, 2019) | Name | Number of Shares Beneficially Owned | Percentage of Ownership | | :--- | :--- | :--- | | Nistec Golan Ltd. | 2,731,783 | 62.4% | | Yitzhak Nissan | 330,740 | 7.5% | Related Party Transactions The company has multiple crucial agreements with its controlling shareholder, Nistec, including a monthly management fee, regular business transactions for PCBs and services, and significant financial support through loans and guarantees - The company pays a monthly management fee of NIS 90,000 (approximately $25,000) to its controlling shareholder, Nistec[419] - The company engages in regular business transactions with Nistec, including selling PCBs to Nistec and acquiring soldering and assembly services from Nistec[839][840] - Nistec has provided significant financial support to the company through direct loans and guarantees for bank credit facilities[848] Financial Information This section references the consolidated financial statements and discusses legal proceedings and the company's dividend policy, noting ongoing lawsuits and no anticipated future dividends Consolidated Statements and Other Financial Information The company is involved in several legal proceedings with former employees regarding personal injury and termination claims, with an aggregate claimed amount of approximately $900,000 for the latter, and has never paid dividends, intending to retain future earnings for business operations - The company is involved in lawsuits from four former employees seeking payments related to their employment and termination, with an aggregate claimed amount of approximately $900,000[433] - The company has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future, intending to retain earnings to finance operations[435] Additional Information This section covers corporate governance details as dictated by the company's articles of association and Israeli law, including shareholder rights and meeting procedures, and provides a comprehensive overview of applicable Israeli and U.S. tax considerations for the company and its shareholders Memorandum and Articles of Association This section describes the company's corporate governance framework under its articles of association and Israeli law, detailing shareholder rights, meeting procedures, and specific provisions that could restrict a change in control - The company's authorized share capital consists of 10,000,000 ordinary shares with a nominal value of NIS 3.00 each[450] - Israeli law includes provisions for full and special tender offers that regulate acquisitions of significant stakes (over 90% and 25%/45% respectively), which may delay, prevent, or make an acquisition of the company more difficult[459][461] Taxation This section details Israeli and U.S. tax implications, noting Israel's 23% corporate tax rate for 2018, potential benefits from "benefited enterprise" status, and the risk of Passive Foreign Investment Company (PFIC) classification for U.S. Holders - The regular corporate tax rate in Israel for 2018 is 23%[478] - The company has a "benefited enterprise" status which may provide future tax exemptions or reduced rates, but these benefits have not yet been utilized and will expire if not used by the 2023 tax year[485][488] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2018 tax year, but notes this status is subject to change and could have adverse tax consequences for U.S. Holders[535] Quantitative and Qualitative Disclosures About Market Risks The company is exposed to market risks including foreign currency fluctuations (USD/NIS and EUR/NIS), commodity price risk for raw materials, and interest rate risk on its debt - A 1% devaluation of the U.S. dollar against the NIS would result in an estimated decrease of approximately $200,000 in the company's operating income[551] - A hypothetical 1% increase in interest rates would result in an increase of approximately $100,000 in the company's annual financial expenses[554] Controls and Procedures Company management, including the CEO and CFO, concluded that as of December 31, 2018, the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective - Based on an evaluation as of December 31, 2018, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[561] - Management assessed the effectiveness of internal control over financial reporting using the COSO framework and concluded that it was effective as of December 31, 2018[565] Corporate Governance and Accountant Fees This section covers various governance and compliance topics, including the designated audit committee financial expert, the company's code of ethics, fees paid to its independent auditor, and reliance on Israeli home country practices for certain NASDAQ corporate governance rules Principal Accountant Fees and Services The company paid its independent registered public accounting firm, Kost Forer Gabbay & Kasierer, a total of $146,700 in fees for the year ended December 31, 2018, covering audit, audit-related, tax, and other professional services, all pre-approved by the Audit Committee Accountant Fees (in thousands) | Fee Type | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Audit Fees | $85.0 | $82.0 | $74.5 | | Audit Related Fees | $55.0 | - | - | | Tax Fees | - | $3.0 | $3.0 | | All other Fees | $6.7 | $13.5 | $11.3 | | Total | $146.7 | $98.5 | $85.8 | Corporate Governance As a foreign private issuer, the company follows certain Israeli home country corporate governance practices instead of NASDAQ rules, including exceptions for board independence, director nomination, and shareholder meeting quorum requirements - The company follows Israeli law instead of NASDAQ rules for: maintaining a majority of independent directors, the director nomination process, and the quorum for shareholder meetings[581] Financial Statements This section contains the company's audited consolidated financial statements for the years ended December 31, 2018, 2017, and 2016, prepared in accordance with U.S. GAAP, including the independent auditor's report, balance sheets, statements of comprehensive loss, changes in shareholders' equity, cash flows, and detailed notes