Kornit Digital(KRNT) - 2023 Q4 - Annual Report

PART I This part details the company's risks, business operations, financial performance, governance, shareholding, legal matters, and market risk exposures ITEM 3. Key Information This section outlines significant risks related to the company's business, intellectual property, stock, and Israeli operations, including market adoption, customer concentration, and geopolitical instability D. Risk Factors - The company's success highly depends on the broader market adoption of digital textile printing over traditional analog methods, where a slower shift could negatively impact revenue growth[40] - A significant portion of revenue is concentrated among a few key customers, with the top ten accounting for 49% of revenues in 2023 and Amazon alone representing 20%, posing a material risk[45] - Adverse macroeconomic conditions, including inflation and high interest rates, have negatively impacted demand for systems, delayed sales cycles, and reduced overall profitability[46] - The company relies on single or limited-source suppliers for critical components like print heads from FujiFilm Dimatix, Inc. (FDMX), where disruption could significantly delay manufacturing and harm the business[55][57][58] - Operations are heavily concentrated in Israel, exposing the company to risks from political, economic, and military instability, with the ongoing conflict leading to about 13% of the Israeli workforce called up for military reserve duty, potentially disrupting operations[121][122] - Research and development grants from the Israeli government impose restrictions on transferring manufacturing or technology outside of Israel, limiting strategic flexibility[127][128] ITEM 4. Information on the Company This section provides an overview of Kornit Digital, a leading provider of digital textile printing solutions, detailing its history, business model, strategic pillars, and global operations A. History and Development of the Company - Kornit Digital Ltd. was incorporated in Israel in 2002 and completed its IPO on the Nasdaq Global Select Market in April 2015 under the symbol "KRNT"[136] Recent Capital Expenditures | Year | Capital Expenditures (USD Million) | | :--- | :--- | | 2021 | $14.5 | | 2022 | $18.0 | | 2023 | $7.0 | - Key recent acquisitions include Voxel8 in August 2021 for $15.0 million to enhance additive manufacturing, and Tesoma GmbH in April 2022 for €15.4 million to acquire textile curing solutions[141][142] B. Business Overview - Kornit provides digital printing solutions for the textile industry, focusing on high-throughput Direct-to-Garment (DTG) and Direct-to-Fabric (DTF) segments, including proprietary systems, inks, consumables, and software[144] - The company's patented wet-on-wet printing methodology and NeoPigment inks eliminate the need for pre-treatment, allowing printing on a wide variety of fabrics in a streamlined and environmentally friendly manner[145][148] - Key products include the Atlas MAX series for DTG, the Apollo mass production platform capable of printing up to 400 shirts per hour, and the Presto MAX for the DTF market, along with Smart Curing solutions and workflow software like KornitX[172][175][176] - The company's growth strategy focuses on three pillars: expanding in growth markets, maximizing impressions from existing customers through new applications and services, and extending leadership through strategic acquisitions and partnerships[189][190][191] C. Organizational Structure - Kornit Digital Ltd. is the Israeli parent company with six wholly-owned subsidiaries located in Israel, North America (Delaware), Germany, Hong Kong, the United Kingdom, and Japan[198] D. Property, Plant and Equipment - The company's corporate headquarters are located in Rosh Ha'Ayin, Israel, in a leased facility of approximately 172,492 square feet[200] - A modern ink manufacturing and storage facility was opened in Kiryat Gat, Israel, in January 2022, with a total cost for the land and facility of approximately $22 million[201] - U.S. headquarters are located in Englewood, New Jersey, with additional sales, support, and marketing offices in Germany, Hong Kong, the UK, and Japan[202] ITEM 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance, liquidity, and critical accounting policies, highlighting a 19.1% revenue decline and a net loss in 2023, alongside a strong cash position A. Operating Results Financial Performance Summary (2023 vs. 2022) | Metric | 2023 (USD Million) | 2022 (USD Million) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $219.8 | $271.5 | -19.1% | | - Products | $161.0 | $222.5 | -27.6% | | - Services | $58.7 | $49.0 | +19.8% | | Gross Profit | $67.0 | $96.5 | -30.6% | | Gross Margin | 30.5% | 35.5% | -5.0 p.p. | | Operating Loss | ($87.5) | ($69.9) | +25.2% | | Net Loss | ($64.4) | ($79.1) | -18.6% | - The 19.1% decrease in total revenues for 2023 was primarily driven by a 59% decline in systems revenues, partially offset by an 8% increase in ink/consumables revenue and a 20% increase in service revenue[241] - Gross margin fell to 30.5% in 2023 from 35.5% in 2022, reflecting lower systems revenues against a fixed cost structure and higher inventory write-offs[242] - Total operating expenses decreased by 7.1% to $154.5 million in 2023, driven by workforce reductions and lower spending on materials and marketing activities[243] B. Liquidity and Capital Resources - As of December 31, 2023, the company had a strong liquidity position with $555.7 million in cash, cash equivalents, short-term deposits, and marketable securities[274] Consolidated Statement of Cash Flows Summary | Cash Flow Activity | 2023 (USD Million) | 2022 (USD Million) | | :--- | :--- | :--- | | Net cash used in operating activities | ($34.7) | ($99.3) | | Net cash provided by (used in) investing activities | $26.2 | ($407.3) | | Net cash used in financing activities | ($56.5) | ($0.3) | - Net cash used in operating activities was $34.7 million in 2023, an improvement from $99.3 million used in 2022, reflecting the net loss adjusted for non-cash items and working capital changes[281][282] - Net cash used in financing activities was $56.5 million in 2023, primarily due to $55.8 million used for the repurchase of ordinary shares[290] E. Critical Accounting Estimates - Key accounting policies requiring significant management judgment and estimates include revenue recognition, inventory valuation, share-based compensation, and income taxes[294][295] - For revenue recognition, the company allocates the transaction price to multiple performance obligations based on their relative stand-alone selling price (SSP)[299] - Inventories are valued at the lower of cost or net realizable value, with the company recording inventory write-offs of $22.0 million in 2023, up from $11.4 million in 2022, due to obsolescence and excess stock[303][304] ITEM 6. Directors, Senior Management and Employees This section details the company's leadership, compensation, board structure, and global employee base, including executive team members, aggregate compensation, and governance practices as a foreign private issuer A. Directors and Senior Management - The executive leadership team includes Ronen Samuel (CEO), Lauri Hanover (CFO), Daniel Gazit (CPO), and Kobi Mann (CTO)[316] - The Board of Directors is chaired by Yuval Cohen and consists of nine members[316][323] B. Compensation - Aggregate compensation for directors and executive officers for the year ended December 31, 2023, was $4.8 million, including $0.4 million for pension and severance benefits[334] 2023 Compensation for Top 5 Covered Executives | Name and Principal Position | Base Salary ($) | Benefits & Perquisites ($) | Variable Comp. ($) | Equity-Based Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Ronen Samuel, CEO | 393,000 | 103,000 | - | 1,254,000 | 1,750,000 | | Kobi Mann, CTO | 227,000 | 69,000 | - | 662,000 | 958,000 | | Chris Govier, President EMEA | 240,000 | 16,000 | 11,000 | 609,000 | 876,000 | | Ilan Elad, President KDAM | 290,000 | 52,000 | 39,000 | 442,000 | 823,000 | | Amir Shaked-Mandel, EVP Corp. Dev. | 210,000 | 55,000 | 17,000 | 478,000 | 760,000 | - The company maintains a 2015 Incentive Compensation Plan for granting equity awards, with 631,675 shares and 1,674,902 unvested RSUs outstanding as of December 31, 2023[344][345] C. Board Practices - The Board of Directors consists of nine members divided into three staggered classes, each serving a three-year term[359] - The company has elected an exemption under Israeli Companies Law, allowing it to not appoint external directors, provided it complies with Nasdaq listing rules for board and committee independence[361] - The Audit Committee consists of three independent directors, with Naama Halevi Davidov as Chairperson, and the Compensation Committee also consists of three independent directors, chaired by Yehoshua (Shuki) Nir[370][380] D. Employees Employee Headcount by Area of Activity | Area of Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Service | 151 | 160 | 165 | | Sales and marketing | 208 | 205 | 225 | | Manufacturing and operations | 151 | 179 | 126 | | Research and development | 223 | 239 | 223 | | General and administrative | 140 | 151 | 143 | | Total | 873 | 934 | 882 | - As of December 31, 2023, the company had 873 employees, a decrease from 934 in the prior year, with 486 in Israel, 124 in the U.S., 214 in Europe, and 49 in the Asia Pacific region[411] ITEM 7. Major Shareholders and Related Party Transactions This section identifies major shareholders and outlines key related party transactions, including executive compensation and indemnification agreements A. Major Shareholders 5% or Greater Shareholders (as of Feb 14, 2024) | Shareholder | Ownership (%) | | :--- | :--- | | Senvest Management, LLC | 9.2% | | Artisan Partners Limited Partnership | 7.8% | | Morgan Stanley | 6.6% | B. Related Party Transactions - The company has entered into written employment agreements with all executive officers, which include provisions for notice periods, non-competition, and confidentiality[425] - Indemnification agreements are in place with all directors and executive officers, providing protection to the fullest extent permitted by Israeli law[427] - The CEO's compensation package includes a base salary of NIS 1.46 million, a target annual bonus of 100% of base salary, and an annual long-term equity incentive target value of $2,500,000, split among TSR-based PSUs, RSUs, and stock options[428][430][434] ITEM 8. Financial Information This section addresses ongoing securities class action lawsuits and the company's consistent policy of not paying cash dividends, prioritizing reinvestment for growth A. Legal Proceedings - The company is defending against consolidated securities class action lawsuits filed in February 2023, alleging misrepresentations and omissions in public disclosures between February 2021 and July 2022, asserting claims under the Exchange Act and Securities Act[441][442][443] - The company believes the lawsuits are without merit and is defending against them vigorously, with no estimate of potential loss available as of the report date[444] B. Dividend Distribution Policy - The company has never declared or paid cash dividends on its ordinary shares and does not anticipate paying any in the foreseeable future[445] - Kornit intends to retain future earnings to finance operations and expand the business, though it may consider share repurchases depending on market conditions[445] ITEM 9. The Offer and Listing This section details the listing of Kornit Digital's ordinary shares on the Nasdaq Global Select Market under the ticker symbol "KRNT" since April 2015 - The company's ordinary shares are traded on the Nasdaq Global Select Market under the symbol "KRNT" since April 2, 2015[448] ITEM 10. Additional Information This section outlines material contracts, notably with Amazon, and provides a summary of Israeli and U.S. tax considerations for shareholders C. Material Contracts - The company has a Master Purchase Agreement with Amazon for the supply of digital printers, ink, and consumables at prices subject to volume[457] - A warrant was issued to an Amazon affiliate to acquire up to 3,401,028 ordinary shares at $59.26 per share, vesting over a five-year period based on Amazon's payments up to an aggregate of $400 million[459][460] - As of December 31, 2023, a total of 1,787,953 shares under the new Amazon warrant had vested and were issuable[467] E. Taxation - Non-Israeli resident shareholders are generally exempt from Israeli capital gains tax on the sale of shares, provided certain conditions are met and the sale is not exempt under a tax treaty[473] - Dividends paid to non-Israeli residents are generally subject to Israeli withholding tax at a rate of 25% (or 30% for a Substantial Shareholder), which may be reduced by an applicable tax treaty[477] - The company believes it was not a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the 2023 taxable year, but its status is subject to annual determination[117][496] ITEM 11. Quantitative and Qualitative Disclosures About Market Risks This section details the company's exposure to market risks, primarily foreign currency exchange risk between USD and NIS, and its hedging strategies - The company faces significant foreign currency risk, with approximately 81% of 2023 revenues in USD and a majority of operating costs in NIS, where exchange rate fluctuations can materially affect results[517] - A sensitivity analysis for 2023 indicates that a 10% increase in NIS value against USD would have decreased net income by approximately $8.5 million, while a 10% decrease would have increased it by $7.0 million[519] - To manage currency risk, the company has a foreign currency cash flow hedging program using derivative instruments like forward and option contracts to hedge a portion of its anticipated NIS-denominated expenses[521][522] PART II This part outlines the company's internal controls, disclosure procedures, share repurchase activities, and corporate governance practices, including cybersecurity risk management ITEM 15. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2023, as assessed by management and attested by auditors - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[530] - Management assessed the internal control over financial reporting and concluded it was effective as of December 31, 2023, based on the COSO 2013 framework[532] - The independent registered public accounting firm, Kost Forer Gabbay & Kasierer (a member of EY Global), issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[533][577] ITEM 16. Corporate Governance and Other Disclosures This section covers corporate governance, including a $75 million share repurchase program, adherence to Israeli governance practices as a foreign private issuer, and cybersecurity risk management 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers - The company has a $75 million share repurchase program, which was approved by an Israeli court in December 2022 and subsequently extended[543] - In 2023, the company repurchased 2,652,051 ordinary shares for approximately $55.8 million (excluding commissions) at an average price of $22.95 per share[544][547] - As of December 31, 2023, $19.2 million remained available for repurchases under the current board authorization[544] 16G. Corporate Governance - As a foreign private issuer, the company follows certain Israeli corporate governance practices in lieu of Nasdaq rules, including a lower quorum requirement for shareholder meetings (25% vs. 33.3%) and allowing director nominations by the board itself[549][554] 16K. Cybersecurity - The company's cybersecurity risk management is integrated into its overall risk management system, with oversight provided by the Audit Committee of the Board of Directors[555][560] - A Chief Information Security Officer (CISO) oversees the implementation of the information security program, supported by a management-level information security committee and a cybersecurity incident team[561] - The company states that while it has experienced cybersecurity incidents, it is not aware of any material cybersecurity incident during 2023[558] PART III This part presents the company's audited consolidated financial statements and a comprehensive list of all filed exhibits ITEM 18. Financial Statements This section presents the company's audited consolidated financial statements for fiscal year 2023, prepared under U.S. GAAP, including key financial statements and notes - The full audited consolidated financial statements for the years ended December 31, 2023, 2022, and 2021, and the related notes, are included in the report starting on page F-1[564][573][574] ITEM 19. Exhibits This section lists all exhibits filed with the annual report, including governance documents, material contracts, and required certifications - A list of all exhibits filed with the annual report is provided, including governance documents, material contracts, and required certifications[565]