Kornit Digital(KRNT) - 2019 Q4 - Annual Report

PART I ITEM 3. Key Information The company presents selected financial data from 2015-2019 and details significant business and operational risks Selected Financial Data The company shows consistent revenue growth from 2015-2019, alongside volatile net income and rising total assets Consolidated Statements of Income Data (2015-2019) | Indicator | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $86,405 | $108,694 | $114,088 | $142,373 | $179,866 | | Gross Profit | $40,585 | $49,410 | $54,111 | $69,869 | $82,076 | | Operating Income (Loss) | $5,768 | $1,430 | $(2,083) | $5,604 | $7,598 | | Net Income (Loss) | $4,725 | $828 | $(2,015) | $12,429 | $10,167 | | Diluted EPS | $0.18 | $0.03 | $(0.06) | $0.35 | $0.26 | Consolidated Balance Sheet Data (2015-2019) | Indicator | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $18,464 | $22,789 | $18,629 | $74,132 | $40,473 | | Working Capital | $65,455 | $68,651 | $63,907 | $107,584 | $205,825 | | Total Assets | $123,352 | $140,046 | $178,374 | $214,823 | $405,466 | | Total Shareholders' Equity | $100,262 | $107,188 | $150,699 | $179,136 | $338,303 | - Total share-based compensation expense increased steadily from $2.4 million in 2015 to $6.6 million in 2019[33] Risk Factors Key risks include market adoption, customer concentration, supplier dependency, and geopolitical instability in Israel - A significant portion of sales is concentrated among a few customers, with Amazon alone accounting for 12% of 2019 revenues[43] - The company's business is seasonal, with the third or fourth quarter historically being the strongest and the first quarter the weakest[45][46] - The company relies on single or limited-source suppliers for critical components, such as print heads from FujiFilm Dimatix, Inc (FDMX)[52][53] - The company's headquarters and primary manufacturing facilities in Israel create susceptibility to regional political, economic, and military instability[112] - The widespread outbreak of the coronavirus is noted as a significant risk that could adversely affect business operations and financial condition[95] ITEM 4. Information on the Company The company details its history, business overview, and corporate structure within the transforming textile printing industry History and Development of the Company Founded in 2002 and public since 2015, recent capital expenditures focus on a new facility and a U.S. acquisition - The company was incorporated in Israel in 2002 and its shares began trading on NASDAQ (KRNT) on April 2, 2015[125][126] - Principal capital expenditures include a new manufacturing facility in Israel and the $4.7 million acquisition of assets from a former U.S. distributor[128] Business Overview The company's digital printing solutions target the textile industry's shift to on-demand and sustainable production - The global value of digital printed textile output was estimated at $3.2 billion in 2018 and is expected to grow to $5.5 billion by 2023[130] - Kornit's mission is to facilitate the textile industry's transition from analog to digital production methods[183] - The company's solutions are differentiated by their patented wet-on-wet printing methodology, which streamlines the production process[185][187] - As of December 31, 2019, Kornit had over 1,000 customers globally, and 2019 revenues were $179.9 million, a 26.3% increase[190] - A key growth strategy is to enter adjacent markets to drive the adoption of digital printing over analog screen-printing[205] Organizational Structure The Israeli parent company operates through six wholly-owned subsidiaries in key global regions - The company consists of the Israeli parent, Kornit Digital Ltd, and six wholly-owned subsidiaries in Israel, the U.S., Germany, Hong Kong, the U.K., and Japan[248] Property, Plant and Equipment Key facilities include leased headquarters in Israel and the U.S., with a new manufacturing plant under construction - Corporate headquarters are in Rosh Ha'Ayin, Israel, with a new manufacturing facility under construction in Kiryat Gat, expected to be completed around August 2020[249] - The U.S. headquarters are located in Englewood, New Jersey, under a lease that expires in February 2028[250] ITEM 5. Operating and Financial Review and Prospects Management discusses financial results, highlighting revenue growth, margin pressure, liquidity, and contractual obligations Operating Results Revenues grew 26.3% in 2019, but gross margin declined due to product mix and acquisition-related costs Revenue Breakdown (2018 vs. 2019) | Revenue Source | 2018 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Systems | $65.8M | $91.4M | +38.8% | | Ink & Consumables | $59.9M | $65.2M | +8.9% | | Services | $16.6M | $23.3M | +39.8% | | Total Revenues | $142.4M | $179.9M | +26.3% | - Gross margin decreased to 45.6% in 2019 from 49.1% in 2018, due to acquisition-related costs, product mix, and inventory write-offs[283] - Sales and marketing expenses increased by 31.2% in 2019, driven by higher headcount, increased sales commissions, and marketing events[286] - Taxes on income were a $0.7 million expense in 2019 compared to a $5.4 million tax benefit in 2018, which was primarily a one-time item[290] Liquidity and Capital Resources The company maintains a strong liquidity position, bolstered by a 2019 follow-on offering, despite lower operating cash flow Cash Flow Summary (2017-2019) | (in thousands) | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $5,990 | $33,368 | $11,004 | | Net cash provided by (used in) investing activities | $(46,744) | $16,682 | $(179,497) | | Net cash provided by financing activities | $36,437 | $5,525 | $135,131 | - The decrease in operating cash flow in 2019 was significantly impacted by an $18.6 million increase in accounts receivable[348][350] - The company raised $129.7 million in net proceeds from a follow-on offering in June 2019, significantly boosting cash from financing activities[361] Contractual Obligations Total contractual obligations were $56.8 million as of year-end 2019, primarily from leases and purchase commitments Contractual Obligations as of December 31, 2019 (in thousands) | Obligation Type | Total | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 and thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $26,316 | $4,341 | $3,750 | $2,938 | $2,284 | $2,281 | $10,722 | | Uncertain tax positions | $3,039 | - | - | - | - | - | - | | Purchase commitments | $26,367 | - | - | - | - | - | - | | Severance payment | $1,035 | - | - | - | - | - | - | | Total | $56,757 | $4,341 | $3,750 | $2,938 | $2,284 | $2,281 | $10,722 | ITEM 6. Directors, Senior Management and Employees This section details the company's leadership, compensation, board structure, and growing employee base Compensation Aggregate 2019 compensation for directors and executives was $4.8 million, combining salary, bonuses, and equity - Aggregate compensation paid to directors and executive officers for the year ended December 31, 2019, was $4.8 million[386] 2019 Compensation for Top 5 Covered Executives (in thousands) | Name and Principal Position | Base Salary & Perquisites | Variable Compensation | Equity-Based Compensation | Total | | :--- | :--- | :--- | :--- | :--- | | Ronen Samuel, CEO | $637 | $325 | $338 | $1,300 | | Guy Avidan, CFO | $470 | $100 | $330 | $900 | | Gilad Yron, EVP Global Business | $454 | - | $334 | $788 | | Haggai Abbo, VP Product Development | $374 | $52 | $234 | $660 | | Amir Shaked, VP Corporate Development | $392 | $68 | $179 | $639 | - The company maintains several equity incentive plans, with the 2015 Incentive Compensation Plan currently active for granting share options and RSUs[407] Board Practices The nine-member board has a staggered structure and utilizes foreign private issuer exemptions from certain NASDAQ rules - The board of directors consists of nine members divided into three staggered classes with three-year terms[423] - In August 2019, the company opted out of the Israeli requirement for external directors, instead adhering to NASDAQ's majority independent director rule[424] - The Audit Committee and Compensation Committee are composed entirely of independent directors, consistent with NASDAQ and SEC rules[435][439][442] Employees The company's global workforce grew to 547 employees by year-end 2019, primarily based in Israel and the U.S Employees by Area of Activity (2017-2019) | Area of Activity | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Service | 66 | 79 | 101 | | Sales and marketing | 87 | 98 | 131 | | Manufacturing and operations | 73 | 83 | 103 | | Research and development | 122 | 115 | 128 | | General and administrative | 64 | 69 | 84 | | Total | 412 | 444 | 547 | - As of December 31, 2019, the company had 339 employees in Israel, 96 in the United States, 68 in Europe, and 44 in Asia Pacific[470] ITEM 7. Major Shareholders and Related Party Transactions Major institutional shareholders are identified, following the complete exit of the former controlling shareholder Major Shareholders As of early 2020, major shareholders included Wasatch Advisors, American Capital Management, and Clal Insurance 5% or Greater Shareholders (as of early 2020) | Shareholder | Percentage Ownership | | :--- | :--- | | Wasatch Advisors Inc. | 8.7% | | American Capital Management Inc. | 6.2% | | Clal Insurance Enterprises Holdings Ltd. | 5.6% | - Fortissimo Capital, the company's former controlling shareholder, completed the sale of all its remaining ordinary shares in December 2018[477] ITEM 8. Financial Information The company reports no material legal proceedings and has a policy of retaining earnings rather than paying dividends - The company has never declared or paid cash dividends and does not anticipate paying any in the foreseeable future[492] - The company is not currently a party to any material legal proceedings that would have a significant effect on its financial position[491] ITEM 10. Additional Information This section details the material contract with Amazon, including warrants, and outlines key tax considerations for shareholders Material Contracts A Master Purchase Agreement with Amazon includes volume-based pricing and warrants tied to purchase milestones - The company has a Master Purchase Agreement with Amazon for the supply of digital printers, ink, and consumables[504] - Kornit issued a warrant to an Amazon affiliate to acquire up to 2,932,176 ordinary shares, vesting based on payments up to $150 million[506][507] - As of December 31, 2019, warrants to purchase 1,612,683 ordinary shares have vested and are exercisable by Amazon[507] Taxation Tax implications for non-Israeli and U.S. shareholders are outlined, including capital gains, dividends, and PFIC risk - Non-Israeli resident shareholders are generally exempt from Israeli capital gains tax on the sale of shares, subject to certain conditions[519] - Dividends paid to non-Israeli residents are generally subject to a 25% withholding tax, which may be reduced under an applicable tax treaty[523] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2019 taxable year but notes that status is determined annually[107][544] ITEM 11. Quantitative and Qualitative Disclosures About Market Risks The company's primary market risks are foreign currency exposure from NIS-denominated costs and interest rate risk - The company faces significant foreign currency risk as approximately 84% of 2019 revenues were in USD, while a majority of operating costs were in NIS[563] - A sensitivity analysis indicates that a 10% change in the value of the NIS against the USD in 2019 would have impacted net income by approximately $18 million[564] - The company has a foreign currency cash flow hedging program using derivative instruments to manage a portion of its exposure[566] PART II ITEM 15. Controls and Procedures Management concluded that both disclosure controls and internal control over financial reporting were effective at year-end - As of December 31, 2019, management concluded that the company's disclosure controls and procedures were effective[575] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[577][105] ITEM 16. Corporate Governance and Other Matters This section covers the audit committee financial expert, code of ethics, accountant fees, and governance exemptions - The Board of Directors has determined that Lauri Hanover qualifies as an "audit committee financial expert"[581] Principal Accountant Fees (in thousands) | Fee Type | 2018 | 2019 | | :--- | :--- | :--- | | Audit fees | $319 | $499 | | Audit-Related Fees | - | $85 | | Tax Fees | $81 | $120 | | All Other Fees | $53 | $72 | | Total | $453 | $776 | - As a foreign private issuer, the company follows Israeli law for shareholder meeting quorum and director nominations, which differs from NASDAQ requirements[592] PART III ITEM 18. Financial Statements This section contains the complete audited consolidated financial statements and the independent auditor's report - The independent auditor's report on the financial statements provides an unqualified opinion[603] - The independent auditor's report on internal control over financial reporting also provides an unqualified opinion[613] - A critical audit matter identified by the auditor was the valuation of inventory, specifically management's estimates for excess and obsolete inventory[608][609]