INFORMATION
A. [Reserved]
B. Capitalization
and Indebtedness
Not Applicable.
C. Reason
for the Offer and Use of Proceeds
Not Applicable.
D. Risk
Factors
This annual report and statements that we may make from time to
time may contain forward-looking information. There can be no assurance that actual results will not differ materially from our expectations,
statements or projections. Factors that could cause actual results to differ from our expectations, statements or projections include
the risks and uncertainties relating to our business described below.
3
Summary of Risk Factors
An investment in our ordinary shares is subject to a number of
risks. The following summarizes some, but not all, of these risks. Please carefully consider all of the information discussed in “Item
3. Key Information—D. Risk Factors” in this annual report for a more thorough description of these and other risks.
Risks Related to Our Business and Industry
• We may not be able to capitalize, as planned, on our Design Wins.
• The market for Cloud-based and Cloud-focused solutions is rapidly developing, and if it develops in ways that differ from our expectations, our business could be harmed.
• The market for Edge Networking Devices to Telcos and service providers for NFV or SD-WAN deployments is rapidly developing, and if it develops in ways that differ from our expectations, our business could be harmed.
• Rapid development of our business in the Cloud-based, Telco and service providers' markets may require us to offer our potential customers with longer payment terms to better position ourselves in these markets, to hold higher inventory levels and to significantly increase our need for working capital.
• Our networking and data infrastructure solution products which are targeted by us mainly to customers in the OEM, Cloud, Telco, Mobile and related service providers' markets, are characterized by long sales cycles.
• The loss of Design Wins from customers in the Cloud, Telco, Mobile and related service providers' markets may result in significant quarterly and even annual fluctuations in our revenues.
• Rapid development of our business in the Cloud, Telco, Mobile and related service providers' markets may lead to a decrease in our gross margins which may result in a decrease in our profitability.
• Should some of our customers explore various technologies during their development process in ways which are not compatible with our solutions, this may result in them deciding to pursue different solutions even after we secured Design Wins with such customers, which may impair our financial results.
• A loss of a material Design Win may lead to a decrease in the volume of orders placed in relation to such Design Win, which would impair our financial results.
• Difficulties in the fulfillment of financial obligations of one or more of our customers may have an adverse effect on our ability to collect consideration payable under purchase orders placed by such customers.
• We may not be successful in achieving and consummating Design Wins for our products for the Cloud, Telco, Mobile and the service providers markets, which constitute a main source of growth.
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• Significant growth in markets demanding functionality similar to the functionality offered by certain of our products may cause manufacturers to integrate such characteristics into server motherboards or increase the market share of servers and appliances that already have such functionality in-built, eliminating the need for our products.
• Our customers may replace the servers and appliances they currently use, use or sell servers and appliances that do not require our cards, and/or incorporate cards other than ours.
• We may experience difficulty in developing solutions for servers and appliances with proprietary interfaces, which may be used by some of our potential customers.
• The short lead time of customer orders versus the long lead time of our component suppliers could result in either a surplus or lack of sufficient supplies.
Risks Related to Operations
in Israel and Internationally
• The dollar cost of our operations in Israel may increase to the extent the results of inflation in Israel are not offset by a devaluation of the NIS against the dollar.
• The tax benefits available to us under Israeli law require us to meet several conditions and may be terminated or reduced in the future, which would increase our taxes.
• The government programs and benefits, which we previously received, require us to meet several conditions in order to transfer intellectual property and know-how developed using government funding abroad, or in order to consummate a change of control.
• The political environment and hostilities in Israel could harm our business.
• Many of our employees in Israel are required to perform military reserve duty.
• The U.S. trade tariffs implemented by President Trump may increase the costs of importing our products into the U.S, which could potentially reduce profit margins and affect our competitive position.
Risks Related to our Ordinary
Shares
• We may experience a decline in our share price, including during periods of uncertainty in global economic conditions, and there is no guarantee that our share price will remain stable or not decline.
• If we are characterized as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer adverse tax consequences.
General Risk Factors
• Unfavorable or unstable economic conditions in the markets in which we operate could have a material adverse effect on our business, financial condition, or operating results.
• Loss of our sources for certain key components could harm our operations.
5
• The markets for our products change rapidly and demand for new products is difficult to predict.
• We may need to invest significantly in research and development and business development in order to diversify our product offering and enter new markets.
• Our short lead time of customer orders introduces uncertainty into our revenues and severely limits our ability to accurately forecast future sales.
• The fluctuations in components' lead time and price may adversely affect our business.
• The decrease in demand for basic/standard server adapters may adversely affect our business.
• The loss or ineffectiveness of any of our key customer relationships or a reduction of purchase orders by such customers may have a material adverse effect on our operations and financial results.
• We are dependent on key personnel.
• We may not be able to protect our intellectual proprietary rights.
• Inability to cooperate with and receive information from our key component manufacturers could affect our ability to develop new products.
• We may make acquisitions or pursue mergers that could disrupt our business and harm our financial condition.
• We may be subject to risks associated with laws, regulations, economic sanctions and customer initiatives, which may force us to incur additional expenses and add complexities to our supply chain and operations.
• We depend on governmental licenses for our exports.
• Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
Risks Related to Our Business and Industry
We may not be able to capitalize,
as planned, on our Design Wins.
Once we secure a Design Win, we may not be able to properly capitalize
on such Design Win. For example, we may not receive revenues from a Design Win due to the customer deciding to hold back the introduction
of its product or service, of which our Design Win product is a component, to the market. Additionally, the Design Win client may decide
to abandon the use of our product or use an alternate source. For instance, a client may alter their operations processes, so that even
after we have achieved a Design Win with that client, it will outsource certain parts of its purchasing decision-making to third-parties.
Such changes in operations processes would require us to seek an additional Design Win with the third-party provider in addition to the
Design Win we already achieved in the past with that client, rather than continue selling the products per the initial Design Win, and
if we are unsuccessful in achieving such additional Design Win, our sales would be negatively affected. Additionally, the Design Win client
could shift its business focus away from the solutions that we had previously sold towards solutions in areas in which we do not operate.
Alternatively, we may experience delays in receiving revenues from a Design Win due to circumstances unrelated to us, such delays may
stem from delays in the deployment of the customer's product/service in the market. Delays may also lead to a request by the customer
to change the specifications of our product due to changes in industry standards and/or market requirements. There is no assurance that
we will be able to secure a Design Win for the product with the new specifications. A customer may also experience a lower demand than
forecasted by the customer at the time of securing the Design Win for its product/service, which will accordingly affect its demand for
our Design Win product. In addition, capitalization of Design Wins might be affected by supply chain disruptions. Our supply chain might
be affected by the current conflicts in the Middle East, including the wars between Israel and Hamas in Gaza, Hezbollah in Lebanon and
Iran, and the wider consequences, such as extensive cancellation and disruption of flights and shipments to and from Israel. Our Supply
chain might also be affected by other factors, such as any hostilities which could break out between China and Taiwan in the future, or
new restrictions relating to the spread of pandemics in various geographies globally. Extended delays in materialization of revenue from
Design Wins, as mentioned above, might be caused by the war in Ukraine and related business disruptions and sanctions, as well as U.S.
restrictions on certain trade with China.
6
The market for Cloud-based
and Cloud-focused solutions is rapidly developing, and if it develops in ways that are different from what we anticipate or expect, our
business could be harmed.
In recent years, the Cloud-based market has rapidly developed,
and the demand for Cloud-based data centers utilizing virtualization and SDN has increased. We expect that this increase in demand will
lead to increased demand for our CPE/EDGE products as well as for our networking, offloading and acceleration related Field Programmable
Gate Array (or FPGA) products. We also expect the Cloud-based data centers to be increasingly based on generic server platforms. These
platforms will require offload capabilities in order to address the performance challenges resulting from enormous volume of traffic,
the high volume of data, the need to encrypt such data, the need to run in virtualized environment, which by itself is a challenge for
the server CPU, and the need to include switching within the server for high efficiency SDN. We anticipate the demand for add-on adapters
which address these challenges will grow. Power, heat and space limitations in such environments increase the need for hardware accelerators.
Such systems will require essential building blocks in their own generic severs, which can be served by our products.
While we believe that we address the above needs with a comprehensive
suite of products, many factors may affect the market acceptance of cloud-based and cloud-focused solutions, the achievement of Design
Wins relating to such solutions, the consummation of Design Wins achieved by us and/or the acceptance of products incorporated into such
solutions. Some of these factors include the possibility of seeing a reduction in the number of physical servers and appliances required
by the providers of cloud based or virtualized solutions, or the evolving of different architecture designs which provide for functionality
which our products offer without the need for our products or the failure of the market to adopt technologies which had previously been
expected to be widely adopted by the market. While we have recently announced a 6-year plan under which we have, among other things, ceased
certain non-core product lines, and are expanding into a more diversified scale of accounts, there is no guarantee that we have
accurately predicted, or will continue to accurately predict, anticipated revenues which may be generated, our growth potential, our operations,
including our inventory levels, and our financial results as a result of the factors mentioned above.
In addition, we believe that the market’s demand for our products and solutions
in the Cloud demonstrates that the ongoing industry transition to the Cloud continues to represent a growth opportunity for us. Nonetheless,
if significant organizations providing Cloud based solutions or other virtualized networks do not perceive the benefits of our cloud-focused
and/or virtualized network based solutions, or if our competitors or new market entrants are able to develop solutions for this market
that do not require products such as ours, or offer features that are, or are perceived to be, more effective than our solutions, this
would have a material adverse effect on our ability to achieve and/or consummate Design Wins, on our business, and on our results of operations
and financial condition.
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The market for Edge Networking
Devices to Telcos and service providers for NFV or SD-WAN deployments is rapidly developing, and if it develops in ways that are different
from what we anticipate or expect, our business could be harmed.
With the evolution of the NFV and SD-WAN, most Telcos and service
providers have begun seeking solutions which utilize CPEs for the deployment of SD-WAN or other applications within an NFV architecture.
We believe that our CPE products address the requirements of such Telcos and service providers’ needs and requirements, and in recent
years we secured several Design Wins for such products.
While we believe that we address the above needs with a comprehensive
suite of products, many factors may affect the market acceptance of such solutions and our ability to secure Design Wins and/or awards
in this market. Some of these factors include our relatively limited experience in transacting with such Telcos and service providers,
the possible offering of a wider selection of products by some of our competitors, or the possible offering by our competitors of products
which include wider, better suited or more advanced features than the ones included in our products. Additional factors may also include
the development of technologies with which our current products may not be compatible, and the price expectations of such Telcos and service
providers which may require us to offer our products for lower prices in order to better position ourselves in the market, or remain competitive,
thus leading to lower gross profit, which in turn may have an adverse effect on our financial results. Additionally, we cannot provide
any assurance that our 6-year plan will successfully address these, or other changes in the market.
We believe that the market’s demand for our products and
solutions in the NFV and SD-WAN era demonstrate that the Telcos’ and service providers’ related industry is transitioning
into CPEs which represent a growth opportunity for us. Nonetheless, if such Telcos and service providers do not perceive the benefits
of our Edge Networking CPEs, or if our competitors or new market entrants are able to develop solutions for this market that are better
suited to the market demand, offer their solutions at lower prices, or offer features that are, or are perceived to be, more effective
than ours, this would have a material adverse effect on our business, results of operations and financial condition.
8
Rapid development of our
business in the Cloud-based, Telco and service providers’ markets may require us to offer our potential customers with longer payment
terms in order to better position ourselves in these markets, to hold higher inventory levels and to increase our need for working capital
significantly.
Rapid development of our business in the Cloud-based, Telco, and
service providers’ markets, which we consider major sources of growth in the future, may require us to offer longer payment terms
to our targeted customers in the Cloud, Telco and service providers markets as customary in these markets, in order to establish and maintain
relationships with such targeted customers and strengthen our competitive position in such markets. In addition, we may be required by
such customers to hold higher inventory levels in order to meet their expectations for on-demand deliveries, making the higher available
inventory pivotal to our ability to position ourselves and compete in such markets. These factors may significantly increase our need
for working capital in order to support our activities in these markets.
Our networking
and data infrastructure solution products which are targeted by us mainly at customers in the OEM, Cloud, Telco, Mobile and related service
providers’ markets, are characterized by long sales cycles.
We target and sell our networking and data infrastructure solution
products to customers mainly in the original equipment manufacturing (“OEMs”), Cloud, Telco Mobile and related service providers
markets. We usually sell our products to such customers after achieving Design Wins, which are secured after a process which ends with
the implementation of our products in our customers’ systems or their deployment within the relevant customer’s network. Securing
Design Wins is a lengthy, time-consuming process, which involves the decision-making process of our customers, which usually includes
several time-consuming processes as well, resulting from the critical importance of our products in our customers’ systems or networks.
Our customers usually need to define the required configuration of their server system, appliance or network, define the needed solution
and the type of products that will address their need, evaluate our products, test and qualify our products for their use and then (or
in parallel) negotiate the terms for a purchase. This process is lengthy and may result in investing twelve months or more from the time
we first contact a prospective customer before such customer implements our products in its system, appliance or network, constituting
what is known as a Design Win. The decision-making process may further be impacted by macro-economic factors such as high interest rates
and global economic slowdown, which may put pressure on companies seeking to make significant investments in infrastructure. Additionally,
once a Design Win for one of our products is secured, our sales of these products typically involve significant capital investment decisions
by the customer or its prospective end customers, as well as a significant amount of time to educate such end customers as to the benefits
of systems and appliances that include our products. As a result, before initiating the deployment of our products within their infrastructure,
and before purchasing systems and appliances, which include our products (and consequently facilitating sales of our products), our potential
customers usually invest a substantial amount of time performing internal reviews and obtaining capital expenditure approvals, thereby
lengthening the period of time required for a Design Win to mature into consistent sales. These long sale cycles make it difficult to
predict when and to what extent, discussions with potential customers will materialize into sales and could cause our revenue and operating
results to fluctuate widely from period to period. Furthermore, once a Design Win has been secured, the ramp-up of sales under the Design
Win is dependent on various factors which are not under our control and which may result in significant quarterly, or even annual, fluctuations
in the sale rates of our products. These, together with the macro-economic factors described earlier, may have an adverse impact on our
ability to accurately predict the ramp-up of sales of our products, and may have an adverse effect on our backlog estimates, actual sales
and results of operations.
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In addition, we are required to allocate significant resources
in order to compete for the achievement of Design Wins, since there is no guarantee that we will be successful in achieving such Design
Wins or that secured Design Wins will materialize into consistent sales in the competitive and rapidly evolving market in which we operate.
Unsuccessful efforts to secure or materialize Design Wins may lead to substantial increases in our expenditures, cause impairment of intangible
assets and related write-offs, divert the attention of our sales force and management from other business opportunities, and could ultimately
have a material adverse effect on our business, results of operations and financial condition.
The loss of Design Wins
from customers in the Cloud, Telco, Mobile and related service providers’ markets may result in significant quarterly and even annual
fluctuations in our revenues.
The Cloud, Telco, Mobile and related service providers’ markets
constitute major sources of potential growth. We anticipate that Design Wins secured from customers in these markets would be significantly
larger in size than our Design Wins from other customers. In light of the risk factors related to our operations in the Cloud, Telco,
Mobile and related service providers’ markets as detailed elsewhere in this Annual Report, we may experience losses of Design Wins
in such markets, for which we may not be able to compensate in a timely manner. The losses of such Design Wins may result in significant
quarterly or even annual fluctuations in our revenues and results of operations.
Rapid development of our
business in the Cloud, Telco, Mobile and related service providers’ markets may lead to a decrease in our gross margins which may
result in a decrease in our profitability.
Rapid development of our business in the Cloud, Telco, Mobile and
related service providers’ markets, and our increasing operations and efforts in these markets, require us to adopt a lower gross
margin strategy relative to our gross margins in past years, in order to take advantage of increased revenue potential and opportunities
in these markets. While in the past we were able to increase our profitability while operating under such lower gross margins, there can
be no assurance that we will be able to maintain or increase our profitability and/or earnings per share in the future and we may not
be successful in maintaining or increasing our profitability and/or earnings per share while operating under such lower gross margins
in the future.
10
The rapid development
of the Cloud, Telco, Mobile and related service providers’ markets may lead certain of our customers to explore various technologies
at different points in time during their development process, which are not necessarily compatible with our solutions, or for which our
solutions are not designed, for their own internal reasons, even after we secured Design Wins with such customers, and may ultimately
decide to pursue different solutions than ours, which may impact our ability to fully consummate our sales under such secured Design Wins
and impair our financial results.
The rapid development of the Cloud, Telco, Mobile and related service
providers’ markets may lead some of the players in these markets to explore different technologies in the course of their internal
development process. Even if we secure Design Wins with some of these players, there is no guarantee that such players will ultimately
decide to develop or commercialize their products for which our solutions were selected, for reasons which are not related to us and which
are not under our control. If such players decide to pursue other paths than the ones for which we secured Design Wins, we may be unable
to consummate such Design Wins, which may lead to excess inventory levels and write-offs, that may increase our costs. These factors may
increase our operational efforts and expenses. We may also be required to find alternative use for any unused inventory relating to such
Design Wins, and if we are unable to find such alternative use or sell such inventory to other customers, we may experience write-offs.
All of these factors may have a material adverse effect on our financial condition and results of operation. While we focus our efforts
on securing Design Wins in these markets, our share price may decline as a result of cancellation of such Design Wins in these markets,
if they occur.
A loss of a material Design
Win may lead to a decrease in the volume of orders placed in relation to such Design Win by a few of our customers, which would be harmful
for our business and impair our financial results.
In some cases, one of our Design Wins may lead to the placement
of purchase orders for our products by several of our customers for the purpose of integrating our products into other systems, as part
of the assembly process relating to the said Design Win. The loss of such material Design Win may lead to a decrease in the purchase orders
placed by such customers, impair our revenues generated from such customers and have a material adverse effect on our business and financial
results.
Difficulties in the fulfillment
of financial obligations of one or more of our customers may have an adverse effect on our ability to consummate the collection of consideration
payable under purchase orders placed by, or invoiced to, such customers under one or more Design Wins in relation to which such customers
operate.
Certain customers may become significant to us. In some cases,
a customer will place orders for our products under several Design Wins for the purpose of integrating our products into other systems.
In other cases, a customer, especially, but not limited to, those active in the Cloud, Telco, Mobile and related markets, will place very
significant orders for a single Design Win with us. Difficulties in the fulfillment of such customers’ financial obligations towards
us may expose us to credit risks, may have a material adverse effect on our business, including on our ability to consummate the collection
of consideration payable by, or invoiced to, such customer in connection with the Design Wins under which such customer placed orders,
may lead to financial losses, may increase our collection expenses, may lead to excess inventory levels, may lead to significant write-offs,
may cause legal disputes, may delay the consummation of the relevant Design Win and may ultimately lead to the reduction in the volume
of orders placed under such Design Win, or even lead to the cancellation thereof. This may have a material adverse effect on our business,
financial condition, and results of operations.
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We may not be successful
in achieving and consummating Design Wins for our products for the Cloud, Telco, Mobile and the service providers markets, which have
constituted a main source of growth.
Our ability to achieve Design Wins for our products for the Cloud,
Telco, Mobile and related service providers’ markets, and to consummate the sales of our products under Design Wins achieved, is
dependent on a large number of factors, many of which are out of our control. These factors include the highly competitive nature of the
markets in which we operate, including the Cloud, Telco, Mobile and service providers’ markets, the long sale cycles of our products
to our OEMs, Cloud, Telco and Mobile customers, as well as other factors detailed in this Item 3.D. In addition, the loss, ineffectiveness
or inability to maintain our customer relationships or our inability to develop new customer relationships, may have an adverse effect
on our ability to achieve, secure or consummate Design Wins for our Cloud, Telco, Mobile and service providers’ related products.
Significant growth in
markets demanding functionality similar to the functionality offered by certain of our products may cause manufacturers to integrate such
characteristics into server motherboards or increase the market share of servers and appliances that already have such functionality in-built,
eliminating the need for our products.
A significant portion of our products are add-on adapters that
are added to existing servers in order to improve their functionality. If demand for improved functionality similar to that of our add-on
adapters increases significantly, server manufacturers may begin incorporating such functionality as a part of the basic design of their
servers, thereby eliminating the need to achieve such functionality through add-on adapters. Furthermore, the market-share of special
purpose servers and appliances that already have such functionality built-in may increase, consequently reducing the market share of solutions
based on servers with add-on adapters. We cannot provide assurance that such a trend will
not occur in connection with our add-on adapters or any of our other products. Such a trend would have a material adverse effect on our
business, results of operations and financial condition.
Our customers may replace
the servers and appliances they currently use, use or sell servers and appliances that do not require our cards, and/or incorporate cards
other than ours.
Many of our customers that use and/or sell servers and appliances
which include our cards do so for a few years, and then consider migration to a newer generation. We cannot guarantee that our cards will
be needed or selected for such new generation or be compatible with it. A decision by a current customer to select a new server and/or
appliance without including our cards in such new server and/or appliance may have a significant adverse effect on our results of operations
and financial condition.
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We may experience difficulty
in developing solutions for servers and appliances with proprietary interfaces, which may be used by some of our potential customers.
The market for networking and data infrastructure includes servers
and appliances that make use of proprietary interfaces. These servers and appliances are offered to our potential customers in addition
to the customary servers and appliances which use standard interfaces. Our potential customers may decide to use servers and appliances
with such proprietary interfaces instead of the customary standard interfaces for which several manufacturers may provide add-on cards.
There can be no assurance that we would be able to develop non-standard add-on cards for servers and appliances with proprietary interfaces
or, if we are successful in developing such cards, that manufacturers of the proprietary interfaces or the customers electing to use these
interfaces will make use of our cards in such non-standard environments.
The short lead time of
customer orders combined with the long lead time of our suppliers when ordering certain components for our products could result in either
a surplus or lack of sufficient supplies and may negatively impact on our financial results.
While we are generally required to fill orders for our products
within one or two weeks following the receipt of a firm purchase order, we are usually required to place orders of certain components
for our products within sixteen to twenty weeks prior to delivery, and more recently, in many cases, even earlier, where the global supply
chains are affected by external disruptions, such as global shortage of certain components essential for our products, or by the recent
attacks by the Houthi militia on Red Sea shipping lanes, other global supply routes disruptions affected by the recent war with Iran and
the blockade of the Straits of Hormuz, and this could be further exacerbated should hostilities break out in the future, between China
and Taiwan. As a result, we must have a significant amount of components in our inventory to be able to meet our best forecasts of projected
purchase orders as opposed to on the basis of firm purchase orders. In the event that firm purchase orders are significantly lower than
such forecasts, a significant part of our inventory will not be used and we may be unable to adjust costs in a timely manner to compensate
for revenue shortfalls and in the event that firm purchase orders exceed such forecasts, we will not be able to fulfill such purchase
orders which may lead to the loss of business.
Risks Related to Operations in Israel and Internationally
The dollar cost of our
operations in Israel may increase to the extent the rate of inflation in Israel is not offset by a devaluation of the NIS in relation
to the dollar.
Inflation in Israel during 2025 was 2.6 % on an annualized basis.
Inflation in Israel, unless 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.
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The tax benefits available
to us under Israeli law require us to meet several conditions and may be terminated or reduced in the future, which would increase our
taxes.
Our production facilities have been granted “Approved Enterprise”
or “Benefited Enterprise” or “Preferred Enterprise” status in past years and we currently report as a “Preferred
Technological Enterprise”, under the Encouragement of Capital Investments Law, 5719-1959 (the “Law”), and as such, we
are entitled to certain tax benefits. In order to be eligible for these tax benefits, we must meet certain conditions. If we fail to meet
these conditions in the future, the tax benefits could be reduced or canceled. These tax benefits may not be continued in the future at
their current levels, or at any level. The termination or reduction of these benefits may increase our income tax expense in the future.
To the best of our knowledge, to date we have met the conditions for benefits under our “Preferred Technological Enterprise”
status in all material respects. There can be no assurance, however, that we will continue to meet such conditions in the future. If these
tax benefits are reduced, cancelled, or discontinued, our Israeli taxable income would be subject to “regular” Israeli corporate
tax rate of 23%. See “Item 10 – Additional Information – Taxation – the Encouragement of Capital Investments Law,
1959” for more information about our “Preferred Technological Enterprise” status.
The government programs
and benefits, which we previously received, require us to meet several conditions in order to transfer intellectual property and know-how
developed using government funding abroad, or in order to consummate a change of control.
We received grants from the Government of Israel through programs
with the former Office of the Chief Scientist of the Israeli Ministry of Economy and Industry (currently known as the Israel Innovation
Authority, or the “IIA”) under the Israeli Law for the Encouragement of Industrial Research, Development and Technological
Innovation, 1984, and related regulations (the “R&D Law”).
The R&D Law and the IIA impose certain limitations with respect
to transfer of manufacturing rights and license or transfer of IIA funded know-how, as well as to change of control in companies which
receive government funding from the IIA. Under the IIA rules, the IIA needs to be notified of any offering and the IIA grants and attendant
restrictions need to be disclosed in any applicable prospectus. Companies which received governmental funding from the IIA are also subject
to obligations to receive approval and in certain situations to increased payment obligations with respect to outsourcing or transferring
development or manufacturing activities with respect to any product or technology developed using IIA funding outside of Israel, or with
respect to transferring or licensing IIA funded know-how, which may impair our ability to sell or license such technology assets outside
or inside of Israel or to outsource, transfer development, or manufacturing activities with respect to any such product or technology
outside of Israel, or impose difficulties in consummation of a change of control in the Company.
The political environment
and hostilities in Israel could harm our business.
Since the establishment of the State of Israel in 1948, a state
of hostility has existed between Israel and the Arab countries in the region. This state of hostility has varied in degree and intensity
over time. There has also been conflict and unrest between Israel, the Palestinian Authority and certain terrorist groups operating within
the Palestinian Authority and Lebanon.
14
Also, Israel has been engaged, from time to time, in armed conflicts
with terror groups Hamas and Hezbollah, as well as Iranian-backed militias in Syria and Yemen. These conflicts involve missile strikes
against civilian targets in the southern and northern parts of Israel in particular and have also involved such missile strikes against
central parts of Israel.
On October 7, 2023, an unprecedented attack was launched against
Israel by terrorists from the Hamas terrorist organization that infiltrated Israel’s southern border from the Gaza Strip and in
other areas within the state of Israel attacking civilians and military targets while simultaneously launching extensive rocket attacks
on the Israeli population. In response, the Security Cabinet of the State of Israel declared war against Hamas.
Following the attack by Hamas on Israel’s southern border,
Hezbollah, a terrorist organization in Lebanon also launched missile, rocket, and shooting attacks against Israeli military sites, troops,
and Israeli towns in northern Israel. In response to these attacks, the Israeli army has carried out a number of targeted strikes on sites
belonging to Hezbollah in southern Lebanon and in October 2024, the Israeli military initiated a ground operation in Lebanon, primarily
near the Israel-Lebanon border. As of the end of November 2024, Israel entered into a ceasefire agreement with Hezbollah, but there are
no guarantees as to whether the agreement will hold or whether further hostilities will resume.
In April and October 2024, Iran launched missile and unmanned aerial
vehicle, or UAV, attacks on Israel. Most of the missiles and UAVs were intercepted by Israel’s defense systems, with support from
the United States, United Kingdom and other countries, including regional allies, preventing significant damage and resulting in no casualties.
Despite the successful interceptions, the attacks posed an elevated threat to Israel’s security.
In December 2024, Ba’athist Syria, led by President Bashar
al-Assad, collapsed during a major offensive by opposition forces made up of several competing rebel groups. In response, the Israeli
Defense Forces took control over a United Nations-designated buffer zone over Mount Hermon that separates Israel and Syria. Simultaneously,
Israel conducted targeted military strikes against military assets in Syria, aiming to eliminate any chemical weapons storage sites that
could be used by rebel groups and further weaken Iran’s operational capabilities in the region. While the transitional government
of Syria has indicated that it is interested in reconstruction and stability rather than a continuation of conflicts with Israel, there
are no guarantees that there will be no future escalation of hostilities or that Syria will not permit other neighboring countries to
launch attacks at Israel from its territory.
On June 13, 2025, Israel launched a preemptive strike targeting
military and nuclear infrastructure within Iran, aiming to disrupt Iran’s ability to coordinate or initiate further hostilities
against Israel and to impede its nuclear program. Over the following 12 days, both countries exchanged attacks, with Iran specifically
targeting civilian infrastructure. In response to the escalation, Israel temporarily closed its airspace and suspended all commercial
port activities. On June 22, 2025, the U.S. military joined Israel in conducting strikes against Iran's nuclear infrastructure. On June
24, 2025, Israel and Iran entered into a ceasefire agreement.
15
As of October 9, 2025, a ceasefire agreement was reached between
Israel and Hamas, which remains in effect to date, aiming for a permanent cessation of the conflict. However, tensions persist and isolated
incidents have occurred.
On February 28, 2026, Israel, together with the United States,
conducted a major joint military campaign of air and missile strikes against targets in Iran, which triggered a broad Iranian response,
including retaliatory missile and drone attacks toward Israel. In early March 2026, hostilities also intensified on Israel’s northern
border, including attacks launched by Hezbollah from Lebanon and responsive Israeli strikes. On April 8, 2026, a two-week ceasefire between
Iran and Israel and the United States began, which has since been extended. In addition, on April 16, 2026, a separate ten-day ceasefire
in Lebanon began which has since been extended. However, the security situation remains highly fluid, and there can be no assurance that
hostilities will not resume or further escalate.
It is possible that other terrorist organizations, including Palestinian
military organizations in the West Bank, as well as other hostile countries, such as Iran, will join the hostilities. Such hostilities
may include terror and missile attacks. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and
its trading partners could adversely affect our operations and results of operations.
Our insurance policies do not cover losses that may occur as a
result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of direct
damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or
that it will sufficiently cover its potential damages. Any losses or damages incurred by us could have a material adverse effect on our
business.
Any armed conflicts or political instability in the region would
likely negatively affect business conditions and could harm our results of operations. Further, in the past, the State of Israel and Israeli
companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli
companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion
of our business. A campaign of boycotts, divestment and sanctions has been undertaken against Israel, which could also adversely impact
our business.
Prior to the Hamas attack in October 2023, the Israeli government
pursued extensive changes to Israel’s judicial system. In response to the foregoing developments, individuals, organizations and
institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment
in Israel, including due to reluctance of foreign investors to invest or conduct business in Israel, as well as to increased currency
fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities markets, and other changes in
macroeconomic conditions. To the extent that any of these negative developments do occur, they may have an adverse effect on our business,
our results of operations and our ability to raise additional funds, if deemed necessary by our management and board of directors.
16
Many of our employees in
Israel are required to perform military reserve duty.
All non-exempt male adult citizens and permanent residents of Israel
under the age of 40, or older for reserves officers or citizens with certain occupations, as well as certain female adult citizens and
permanent residents of Israel, are obligated to perform military reserve duty and may be called to active duty under emergency circumstances.
In recent years, there have been significant call-ups of military reservists, and it is possible that there will be additional call-ups
in the future.
In connection with the Israeli security cabinet’s declaration
of war against Hamas, in October 2023, the war with Hezbollah in Lebanon, the wars with Iran, and possible hostilities with other organizations,
several hundred thousand Israeli military reservists have been drafted to perform immediate and extended periods of military service.
To date, a small number of our employees have been called for extended periods of active military duty. In addition, we rely on
service providers located in Israel and has entered into certain agreements with Israeli counterparties. Employees of such service providers
or contractual counterparties may be called for service in the current or future wars or other armed conflicts with Hamas with Hezbollah,
with Iran, and with possible other organizations and such persons may be absent from their positions for a period of time. To date, we
have not been significantly impacted by any absences of our personnel or by absences of personnel of any of our service providers or counterparties
located in Israel. However, military service call ups that result in absences of a significant number of our personnel or of those of
our service providers or contractual counterparties in Israel, may disrupt our operations, and absences for an extended period of time,
may materially and adversely affect our business, prospects, financial condition and results of operations.
Exchange rate fluctuations
and international risks could increase the cost of our 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.
Israeli courts might not
enforce judgments rendered outside of Israel.
We are incorporated in Israel. All our executive officers and directors
are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the
United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any such persons. It may
also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel. However, subject
to certain time limitations, Israeli courts may enforce U.S. final executory judgments for liquidated amounts in civil matters obtained
after due trial before a court of competent jurisdiction (according to the rules of private international law currently prevailing in
Israel) which enforces similar Israeli judgments, provided that the requisite procedural and legal requirements are adhered to.
17
If a foreign judgment is enforced by an Israeli court, it generally
will be payable in NIS, which can then be converted into foreign currency at the rate of exchange of such foreign currency on the date
of payment. Pending collection, the amount of the judgment of an Israeli court stated in NIS (without any linkage to a foreign currency)
ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate prevailing at such time. Judgment
creditors bear the risk of unfavorable exchange rates.
The U.S. trade tariffs implemented
by President Trump may increase the costs of importing our products into the U.S, which could potentially reduce profit margins and affect
our competitive position.
The U.S. trade tariffs implemented by President Trump may challenge
us, particularly concerning the increased costs associated with importing our finished products into the U.S. Initially set at 17%, these
tariffs have been temporarily reduced to 10% during a 90-day pause announced on April 9, 2025. However, effective as of August 8, 2025,
the U.S. announced the imposition of 15% tariffs on Israel, and tariffs, in excess of the blanket 10% tariff threshold previously announced,
on numerous countries and specific goods. We believe certain of our products such as NICs, Edge devices, acceleration cards, FPGA cards
and others are covered by one of the classifications as products exempted from tariffs.
On February 20, 2026, the U.S. Supreme Court held that the International
Emergency Economic Powers Act (IEEPA) does not authorize the President to impose tariffs, and affirmed a judgment invalidating tariffs
imposed under that statute. As a result, the legal status and ongoing applicability of certain tariffs reportedly imposed under IEEPA
are subject to significant uncertainty, including with respect to potential suspension, modification, or refunds of amounts previously
paid. At the same time, the U.S. government may seek to impose or maintain tariffs under other statutory authorities, and we cannot predict
the scope, timing, or outcome of these developments.
However, to the extent the tariffs apply to some or all of our
products, the additional cost on goods imported to the US, may affect our profit margins, and would effectively lead to a higher purchase
price for our customers. Such an increase could drive our customers to seek local alternatives that do not carry the tariff burden, potentially
decreasing the demand for our products and affecting our market share. Furthermore, the uncertainty and volatility introduced by these
tariffs complicate decision making, planning and forecasting for our customers as well as for us, making it difficult to predict future
costs and financial outcomes accurately.
Risks Related to our Ordinary Shares
We may experience a decline
in our share price, including during periods of uncertainty in global economic conditions, and there is no guarantee that our share price
will remain stable or not decline.
In
the past, our share price has declined, including during periods of uncertainty in global economic conditions, and we may be affected
by, among others, downturn in economic conditions. We cannot assure you that our share price will remain stable or not decline in the
future.
18
We may not be able to distribute
dividends in the future.
On January 14, 2013, we announced a dividend policy for distributing
up to 50% of our annual distributable profits as a dividend. As part of the stated dividend policy the Company's Board of Directors reserved
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. On March 15, 2018, our
Board of Directors adopted a resolution to suspend until further notice the said dividend policy.
Our ability to distribute dividends in the future may be adversely
affected by the risk factors described in this report. Any dividend will depend on our earnings, capital requirements, financial condition
and other business and economic factors affecting us at the time as our board of directors may consider relevant. Our ability to pay cash
dividends may be restricted by instruments governing any of our obligations. We are restricted by Israeli law to pay dividends in any
fiscal year only out of "profits", as defined by the Companies Law, unless otherwise authorized by an Israeli court, and provided that
the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. There is no assurance
that we will be able to pay dividends or increase our payment of dividends in the future, nor is there any assurance that our Board of
Directors will not further change or cancel our dividend policy in the future. If we are unable to pay dividends at levels anticipated
by investors in our shares, the market price of our shares may be negatively affected and the value of our shareholders' investment may
be reduced. See "Item 8.A. – Consolidated Statements and Other Financial Information", under the caption "A8. – Dividend Policy"
for additional information regarding the payment of dividends.
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.
The trading volume of our
shares has been low in the past and may be low in the future, resulting in lower than expected market prices for our shares.
Our shares have been traded at low volumes in the past and may
be traded at low volumes in the future for reasons related or unrelated to our performance. This low trading volume may result in lower
than expected market prices for our ordinary shares and our shareholders may not be able to resell their shares for prices equal to or
higher than the price for which they were purchased.
19
If we are characterized
as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer adverse tax consequences.
We will be a passive foreign investment company, or PFIC, if 75%
or more of our gross income in a taxable year, including our pro-rata share of the gross income of any company, U.S. or foreign, in which
we are considered to own, directly or indirectly, 25% or more of the shares by value, is passive income. Alternatively, we will be considered
a PFIC if at least 50% of the value of our assets in a taxable year, quarterly averaged over the year and determined either based on fair
market value or adjusted bases and including our pro-rata share of the assets of any company in which we are considered to own,
directly or indirectly, 25% or more of the shares by value, is attributable to assets that produce or are held for the production
of passive income. If we were to be a PFIC, and a U.S. Holder does not make an election to treat us as a "qualified electing fund", or
QEF, or a "mark-to-market" election, "excess distributions" to a U.S. Holder, and any gain recognized by a U.S. Holder on a disposition
or our ordinary shares, would be taxed in an unfavorable way. Among other consequences, gains recognized by the U.S. Holder on the sale
of our shares would be allocated pro-rata over the U.S. Holder’s holding period for the shares. The amounts allocated to the taxable
year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated
to each other taxable year would be subject to tax at the highest rate in effect for individuals or the highest rate in effect for corporations,
as appropriate for that taxable year, and certain "interest" charges may apply. In addition, our dividends, to the extent that they constitute
"excess distributions", would be taxed in the same manner as gain on the sale or other disposition of our shares, rather than the 20%
maximum rate applicable to certain dividends received by an individual from a "qualified foreign corporation". The tests for determining
PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to the
determination of PFIC status. In addition, under the applicable statutory and regulatory provisions, it is unclear whether we would be
permitted to use a gross loss from sales (sales less cost of goods sold) to offset our passive income in the calculation of gross income.
As a result of our substantial cash position, there is a substantial
risk that we will be classified as a PFIC under the asset test described above. There can be no assurance that we will not be classified
as a PFIC by the U.S. Internal Revenue Service. In light of the uncertainties described above, no assurance can be given that we will
not be a PFIC in any year. A U.S. Holder who makes a QEF election is taxed currently on such holder's proportionate share of our earnings,
including both ordinary income and net capital gain. If the IRS determines that we are a PFIC for a year with respect to which we have
determined that we were not a PFIC, however, it might be too late for a U.S. Holder to make a timely QEF election, unless the U.S. Holder
qualifies under the applicable Treasury regulations to make a retroactive (late) election. U.S. Holders who hold ordinary shares during
a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to exceptions for U.S. Holders
who made a timely QEF or mark-to-market election, or certain other elections. We do not currently intend to prepare or provide the information
that would enable you to make a Qualified Electing Fund election. Accordingly, our shareholders are urged to consult their tax advisors
regarding the application of PFIC rules.
20
General Risk Factors
We may be affected by global
economic trends such as recession, rising inflation, rising interest rates, economic slowdown, etc.
Recent inflation, geopolitical
issues, including hostilities which could break out between China and Taiwan in the future, the war in Gaza, with Hezbollah in Lebanon,
the wars with Iran, and possible hostilities with other organizations such as the Houthis in Yemen, increases in energy costs, high interest
rates, unstable global conditions and changes in currency exchange rates have led to global economic instability. Such changes, and their
impact on the global macro-economic environment, may adversely affect our business, operating results, and financial condition.
Despite the recent steady decrease, inflation rates remain high
relative to previous years in the markets in which we operate which may lead us to experience higher operating costs, as well as a decrease
in demand. Our suppliers may raise their prices and, in the competitive markets in which we operate, we may not be able to make corresponding
price increases to preserve our gross margins and profitability due to market conditions and competitive dynamics. Additionally, should
we attempt to increase the price of any of our products, such increase may not be accepted by our customers. Further, high interest rates,
and any increases in interest rates, may lead our customers, to experience higher financing costs, which may, in turn, negatively impact
on investment decisions relating to networking infrastructures, thereby adversely affecting our business, financial condition and results
of operations. In the event of a global recession or certain other economic conditions we may be forced to materially reduce our expenses.
As a result, we may have difficulty achieving continued profitability during a protracted slowdown.
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 by global geopolitical instability, global economic
slowdown and the continuing effects of the loosening and tightening of the supply chains (which followed long periods of global component
shortages, and which resulted in customers building up significant inventories to cope with such constraints). Such tightening may result
in increased ordered volumes that may not materialize if and when such tightening is loosened. Whereas, the reversal of supply chain tightness,
has on occasion and may continue to result in customers drawing on their existing inventory stock and cancelling or postponing 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.
21
Environmental, social and
governance matters may impact our business and reputation.
Customers and potential customers are increasingly using ESG screening
criteria in making their business decisions, to provide information relating to our environmental, social and governance, or ESG, practices.
Our failure, or perceived failure, to pursue or fulfill ESG goals, targets and objectives, or to satisfy various ESG reporting standards,
may harm our reputation, impact our relationships with our customers and could adversely affect our business.
Additionally, as ESG best practices, reporting standards and disclosure
requirements continue to develop, we may incur increasing costs related to ESG monitoring and reporting.
Loss of our sources for
certain key components could harm our operations.
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 depend. Nevertheless, we believe that we maintain a sufficient inventory of these components to protect
against delays in deliveries. However, we cannot guarantee 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, especially
due to disruptions to global supply chains, including those related to certain critical components relating to the production of our products,
as detailed above. For example, a key component in many of our cards is manufactured by Intel. While we have not encountered difficulties
in purchasing such components from Intel's distributors, we cannot guarantee that we will continue to be able to purchase such components
without delays or at reasonable prices. In the event that we are not able to purchase key components from our limited sources, or can
only purchase these key components under unreasonable terms, we may need to redesign certain products. We cannot guarantee that we will
have adequate resources for such a redesign or that such a redesign will be successful. Such inability to obtain alternative resources
or to successfully redesign our products could have a material adverse effect on our business, results of operations, and financial condition.
The markets for our products
change rapidly and demand for new products is difficult to predict and may affect our ability to commercialize our solutions.
The markets for our products are characterized by rapidly changing
technology and evolving industry standards. For example, the migration to higher line rate Ethernet solutions, the adaptation of new bus
interfaces and increased use of emerging technologies such as Cloud, Virtualization, NFV, SD-WAN, 5G and others, may cause some of our
customers to demand such new products and technologies. In the event that such customers decide to begin using new technologies, we may
not be able to develop products for the new technologies in a timely manner. Such customers may also select competing products despite
our ability to develop products incorporating new technologies. For example, while we have in the past announced the securing of
several Design Wins for our solutions, there is no assurance that our customers will continue to buy such solutions from us or that we
will be able to generate significant sales in these areas in the long run. If we do not generate significant sales in these areas
we may accumulate unusable inventory which can be used only with older technologies. We intend to continue investing in product and technology
development, however there can be no assurance that we will be successful in the marketing of our current products and in developing,
manufacturing and marketing enhanced and new products in a timely manner. Additionally, any decrease in the price of, or demand for, any
of our products or solutions could have a material adverse effect on our business, results of operations and financial condition.
22
The market for our products
is highly competitive and some of our competitors may be better positioned than us.
The market for our products is highly competitive. We face competition
from numerous companies, some of whom are more established, benefit from greater market recognition and have greater financial, production
and marketing resources than we do. For example, as further detailed in "Item 4.B – Business Overview – Competition", with
respect to Server Adapters, our main competitors are Nvidia, Intel, and Broadcom. However, we believe these companies are targeting mostly
major accounts and we believe rarely offer customized solutions, while we target accounts of all sizes, with a broader product offering
and with various interfaces and form factors.
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, Marvell, Nvidia, Netronome, Napatech, BittWare,
Lanner and Caswell compete with certain of our Smart Cards. In some cases of FPGA based cards, AMD also compete with our Smart Cards,
however, similarly to the Server Adapters space, they target mostly the larger 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.
As we expand into additional growth markets, we face distinct competitive
landscapes. In the AI Inference market, we compete with specialized hardware platform vendors such as Napatech and BittWare, as well as
with the internal engineering teams of our potential customers who may opt for in-house designs. In the emerging Post-Quantum Cryptography
(PQC) market, we face competition from established hardware security vendors and from alternative software-based acceleration methods
utilizing high-performance CPUs. In the White-Label Switching market, we compete with established Original Design Manufacturers (ODMs)
such as Edgecore and Quanta, as well as facing indirect competition from traditional proprietary networking incumbents.
There may be other solutions which might also compete with our
products. We cannot guarantee that our present or 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, results of our operations and financial
condition.
23
We may need to invest significantly
in research and development and business development in order to diversify our product offering and enter new markets.
Most of our revenues are generated from the sale of our networking
and data infrastructure solution products. The technology industry in which we operate is characterized by rapid technological changes,
frequent new product introductions, changes in customer requirements and evolving industry standards. While these changes could lead to
a reduction in the demand for our existing products, they could also create an opportunity for us to expand our product offering to our
existing customers and to new customers. Accordingly, our future success may depend on our ability to diversify our product offering and
enter new markets, which could involve numerous risks, including:
• Substantial research and development and business development expenditures, which could divert funds from other corporate uses and/or have a significant negative effect on our short-term results;
• Diversion of management's attention from our core business; and
• Entrance into markets in which we have little or no experience.
There can be no assurance that we will be able to successfully
complete the development and market introduction of new products and no assurance that we will be able to successfully enter new markets.
This could have a material adverse effect on our business, results of operations and financial condition.
We may experience difficulty
in developing new and commercially successful products at acceptable release times.
We conduct extensive research, development and engineering activities.
Our efforts emphasize our view of the importance of and the need for the development of new products, cost reduction of current products,
and enhancement of existing products in response to rapidly changing customer preferences, technologies, and industry standards. We cannot
guarantee (i) the continued success of our efforts, (ii) that our products will continue to be widely accepted by the marketplace, (iii)
that any of our ongoing development efforts will result in other commercially successful products, (iv) that such products will be released
in a timely manner or at a competitive price, (v) that we will be able to respond effectively to technological changes or new product
announcements by others, or (vi) that we will not be adversely affected by other external factors over which we have no control. Such
difficulties may have a material adverse effect on our business, results of operations and financial condition.
Our short lead time of
customer orders introduces uncertainty into our revenues and severely limits our ability to accurately forecast future sales.
Our sales are made on the basis of purchase orders placed from
time-to-time pursuant to Design Wins which create long-term pressures on us to prepare sufficient inventory to meet purchase orders for
which our customers typically require a short lead time. The unpredictability of whether customers will place the expected volume of purchase
orders, or whether they will defer previously made purchase orders, creates uncertainty. The tension between the long lead time required
for us to prepare our inventory and production facilities and the short lead time typically required in firm purchase orders introduces
uncertainty into our revenue and production forecasts and business planning, and leads to our inability to accurately forecast future
revenues from product sales. As a result, even dramatic fluctuation in revenue (whether an increase or decrease) might not be detected
until the very end of a financial quarter, which may not enable us to monitor and mitigate costs in a timely manner in order to compensate
for such fluctuation.
24
The fluctuations in components'
lead time and price may adversely affect our business.
In recent years, the market for electronic components, which
we typically use in our products, has been demonstrating fluctuations in lead time and prices. Such fluctuations are led by some of the
world’s leading vendors for such components and there is a risk that such fluctuations will impact our ability to deliver products
to our customers or to maintain our margins on such products, should they affect components for which we cannot find a replacement in
a timely manner or at a competitive price, and this may have an adverse effect on our business. Delays in lead time and fluctuations in
price, may be further exacerbated by the periodic effects of other events over which we have no control, such as any hostilities which
could break out between China and Taiwan in the future, or military conflicts involving or in proximity to, Israel.
The decrease in demand
for basic/standard server adapters may adversely affect our business.
Over the past few years, we have seen a gradual decrease in
demand for our basic server adapters. There is a risk that the actual decrease in demand would be faster than that projected by us. In
addition, in case of a decrease in sales, we may accumulate unusable inventory. Any such decrease in the demand for our basic server adapters
could have a material adverse effect on our business, results of operations and financial condition.
The possible cancellation
and write-off of capitalized development projects may adversely affect our business.
Capitalized development projects may be cancelled and written-off
due to a change in our strategy (such as that which occurred in 2023 where we discontinued two non-core programs as part of our new 6-year
strategic plan), or due to our being unsuccessful in the market, or to other related triggers. Such cancellations may result in a significant
one-time adverse effect on our results of operation.
The loss of a significant
customer may have a material adverse effect on us.
We depend on a small number of customers for our products. Our
top 3 ultimate customers in 2025 accounted for approximately 28% of our revenues in 2025 (out of which our top ultimate customer accounted
for approximately 14% of our revenues in 2025). We expect that a small number of customers will continue to account for a significant
portion of our revenues for the foreseeable future. Loss or cancellation of business from, significant changes in deliveries to, or decreases
in the prices of products sold to, one or more of our key customers has, in the past, significantly reduced our revenues for a reporting
period and could, in the future, harm our business, margins, results of operations, and financial condition.
The loss or ineffectiveness
of any of our key customer relationships or a reduction of purchase orders by such customers may have a material adverse effect on our
operations and financial results.
Our sales and marketing strategy includes development and maintenance
of strategic relationships with leading OEMs in the server industry and server-based systems industry, as well as with leading Cloud,
Telco and service provider customers, which integrate our products into their own systems, or deploy our products in their network. These
customers are not within our control, are not obligated to purchase our products, and may select other products that may compete with
our lines of products or shift their focus towards other product lines altogether. A reduction in sales efforts or discontinuance of sales
of our products by our OEM customers, and/or the reduction in or discontinuance of deployments by our Cloud, Telco, or service provider
customers, could lead to reduced sales and could materially adversely affect our operating results. In addition, there is the risk that
our customers would build up inventories in anticipation of a growth in sales or deployments. If such growth does not occur as anticipated,
such customers may draw down heavily on such built-up inventories, rather than continuing to purchase from us at previous rates, resulting
in a substantial decrease in the number of products ordered in subsequent quarters or potentially the discontinuance of product orders
altogether. The termination or loss of either one or more of our key customer relationships at approximately the same time, without being
able to compensate this loss with sales to other customers, may have a material adverse effect on our operations and financial results.
25
Our business may be adversely
impacted by risks arising from a widespread outbreak of an illness or any other communicable disease, or any public perception of the
risks, related to a pandemic or other health crisis, similar to the COVID-19 pandemic.
The extent to which a pandemic, similar to COVID-19 and its variants,
may ultimately impact our business will depend on future developments, which are highly uncertain and cannot be predicted, such as the
geographical spread, duration of the outbreak, and the effectiveness of actions taken in Israel, the United States and other countries,
to contain and treat the disease and address its impact. We, our suppliers and other business partners may experience significant impairment
of business activities due to operational shutdowns or suspensions that may be requested or mandated by national or local governmental
authorities or self-imposed by us, our suppliers or other business partners. We cannot predict whether, for how long, or the extent to
which a pandemic and pandemic containment efforts may disrupt our supply chain and/or operations.
We are dependent on key
personnel.
Our success has been, and will continue to be, dependent to a large
degree on our ability to retain the services of key personnel and to attract additional qualified personnel in the future. Competition
for such personnel is intense. There can be no assurance that we will be able to attract, assimilate, or retain key personnel in the future
and our failure to do so would have a material adverse effect on our business, financial condition and results of operations.
We may not be able to prevent
others from claiming that we have infringed their proprietary rights.
We cannot guarantee 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 have merit. Significant
and protracted litigation may be necessary to determine the scope of the proprietary rights of others or to defend against claims of infringement,
regardless of whether the claims have merit. Although we believe that all our products use only our intellectual property, or intellectual
property which is properly licensed to us, and we are working to ensure that all our employees are properly assigning or licensing to
us all rights to the intellectual property we use in our products on a regular basis, in the event that any infringement claim is brought
against us and infringement is proven, we could be required to discontinue the use of the relevant technology, to cease the manufacture,
use and sale of infringing products, to incur significant litigation damages, costs and expenses, to develop non-infringing technology
or to obtain licenses to the alleged infringing technology and to pay royalties to use such licenses. There can be no assurance that we
would be able to develop any such alternative technologies or obtain any such licenses on terms commercially acceptable to us.
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Although in the past we have resolved a claim of infringement through
a license agreement, the terms of which did not have a material effect on our business, any infringement claim or other litigation against
us could seriously harm our business, operating results and financial condition. While there are no other lawsuits or other claims currently
pending against us or our subsidiaries regarding the infringement of patents or intellectual property rights of others, we have been a
party to such claims in the past and may be party to such claims in the future.
We may not be able to protect
our intellectual proprietary rights.
Our success, ability to compete, and future revenue growth are
dependent and will depend, in part, on our ability to protect our intellectual property. It is possible that competitors or other unauthorized
third parties may obtain, copy, use, or disclose our technologies and processes. Any of our existing, acquired, or future patents or other
rights to our intellectual property may be challenged, invalidated, or circumvented. If our intellectual property rights do not adequately
protect our technology, our competitors may be able to offer products similar to ours.
In order to establish and protect the technology we use in our
products, we primarily rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patents. We
enter into confidentiality arrangements with our employees, key consultants and other third parties with whom we conduct business. In
addition, our employees and key consultants involved in the development of our technologies are required to sign non-compete and invention
assignment agreements. We also control access to and distribution of our technologies, documentation and other proprietary information.
Despite these efforts, internal or external parties may attempt to copy, disclose, obtain, or use our products, services, or technology
without our authorization.
Despite perceived exclusive access to any intellectual property
rights obtained via acquisition, and our best efforts during any such acquisition process to secure such rights, internal or external
parties may attempt to copy, disclose, obtain, or use our products, services, or technology without our authorization, or others may assert
infringement claims against us with respect to a product of ours which utilizes such acquired intellectual property rights.
We believe that the measures we take afford only limited protection,
and accordingly, there can be no assurance that the steps we take will be adequate to prevent the challenging of our rights in our technology,
or misappropriation of our technology or the independent development of similar technologies by others.
In addition, the process of seeking patent protection to our technology
may take a long time and be expensive. We cannot assure that pending or future patent applications will result in the issuance of patents
or that, if patents are issued, they 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.
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In addition, we cannot assure you that other countries in which
we market our services and products will protect our intellectual property rights to the same extent as the United States. Effective intellectual
property enforcement may be unavailable or limited in some countries. It may be difficult for us to protect our intellectual property
from misuse or infringement by other companies in these countries. Our inability to enforce our intellectual property rights in some countries
may harm our business and results of operations. Litigation, which could result in substantial costs to us and diversion of our resources,
may also be necessary to enforce our patents or other intellectual property rights.
Further, we cannot assure you that we will at all times enforce
our patents or other intellectual property rights or that courts will uphold our intellectual property rights, or enforce the contractual
arrangements that we have entered into to protect our proprietary technology, which could reduce our opportunities to generate revenues. Our
intellectual property assignment, confidentiality and non-competition agreements may not be enforceable and our proprietary technology
may not remain a secret. Others may develop similar technology and use it to compete with us. Despite our efforts to protect our proprietary
rights, former employees and other unauthorized parties may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary.
Inability to cooperate with
and receive information from our key component manufacturers could affect our ability to develop new products required by our customers
and by the industry in which we operate.
Our products are based on silicon which is mostly manufactured
by Intel and a few other leading components manufacturers. In order to design our products, we need to receive information that enables
us to design products with the use of such silicon. There can be no assurance that we will continue to receive all the information required
for designing products with the use of new silicons continuously released by such manufacturers. The reduction in the level of cooperation
with our manufacturers, including as a result of such manufacturers' decision to compete with our products, or our inability to obtain
information from our manufacturers relating to their products used by us, may adversely affect our ability to develop new products required
by customers and by the industry in which we operate.
Our investment portfolio
may be impaired by disruptions in the financial and credit markets.
Our investment portfolio currently consists of debt securities
which the Company classified on December 31, 2025, as "held-to-maturity." As of December 31, 2025, we hold approximately US$ 32.5 million
in corporate debt securities and government debt securities.
Due to possible significant disruptions in the financial and credit
markets, the debt securities in our portfolio are subject to a possible increased risk of default due to bankruptcy, lack of liquidity,
operational failure, or other factors affecting the issuers of those securities. In addition, securities in our portfolio are subject
to other risks, such as credit, liquidity, market and interest rate risks, which may be exacerbated by market disruptions, and which may
impair the assets. We may be required to adjust the carrying value of our investment securities due to a default, lack of liquidity or
other event. For that matter we are required to use of forward-looking information to calculate credit loss estimates.
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As of December 31, 2025, we were not required to adjust the
carrying value of our investment securities. If we do experience such a loss, it will be recorded in our consolidated statement of operations,
which could materially adversely impact our consolidated results of operations and financial condition.
We may make acquisitions
or pursue mergers that could disrupt our business and harm our financial condition.
As part of our business strategy, we have sought and may continue
to seek to invest in or acquire other businesses, technologies, or assets, and we may enter into joint ventures or other strategic
relationships with third parties.
We may assume liabilities, incur amortization expenses related
to intangible assets, or realize large and immediate write-offs in connection with future acquisitions. In addition, the future valuation
of these acquisitions may decrease from the market price paid by us, which may result in the writing-off or impairing, of the relevant
assets. In addition, our operation of any acquired or merged businesses, technologies, or
assets could involve numerous risks, including:
• Post-merger integration problems resulting from the combination of any acquired operations with our own operations or from the combination of two or more operations into a new merged entity;
• Diversion of management's attention from our core business;
• Substantial expenditures, which could divert funds from other corporate uses;
• Entering markets in which we have little or no experience; and
• Loss of key employees of the acquired operations.
We cannot assure you that any acquisition or merger will be
successful. If the operation of the business of any acquisition or merger disrupts our operations, our business may suffer. In addition,
even if we successfully integrate the acquired business with our own, we may not receive the intended benefits of the acquisition.
We may be subject to
risks associated with laws, regulations, economic sanctions and customer initiatives, including such that relate to the environment, conflict
minerals, privacy or other issues, which may force us to incur additional expenses, may make our supply chain and operations more complex
and may result in damage to our reputation with customers.
Our business, results of operations and financial condition
could be adversely affected if new laws, regulations, or standards relating to our business and products, us or our employees (including
labor laws and regulations) are implemented or existing laws, regulations or standards changed. Such laws and regulations include requirements
in the United States, Europe, Israel and other territories, in relation to data privacy and protection, anti-bribery and anti-corruption,
import and export, labor, tax and environmental and social issues. From time to time, we may also operate pursuant to specific authorizations
of, and commitments towards, U.S., Israeli, E.U., or other governmental authorities and agencies. While we make every effort to comply
with such requirements, we cannot assure you that we will be fully successful in our efforts, and that our business will not be harmed.
Failure to comply with such laws, regulations, authorizations and commitments could result in fines, damages, civil liability and criminal
sanctions against us, our officers and our employees, prohibitions on the conduct of our business and damage to our reputation.
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The long-term consequences of the war between Israel and Hamas
in Gaza, Hezbollah in Lebanon, wars with Iran, and possible hostilities with other organizations, are currently unknown but may also impact
our supply chain and expenses due to, for example, the possibility of certain countries severing diplomatic relations or imposing trade
boycotts on Israel. We may incur additional expenses, adverse effects on sales, or experience delays in our supply chain and operations,
as a result.
The impact of the current war in Ukraine and sanctions on Russia
and Belarus is that we have ceased to do business with such sanctioned countries.
Such laws and regulations include the EU's General Data Protection
Regulation ("GDPR") and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The GDPR provides that companies must comply with certain standards
regarding the protection of the personal data or risk significant financial penalties. Regulations or interpretive positions may
be enforced specifically with respect to the use of outsourced services, such as SaaS, hosting and cloud-based services. Compliance with
such legislation and regulations may require that we invest in the modification of our operations to comply with such legislation and
regulations, or subject ourselves to liability resulting from a breach of such regulations. Failure to comply with privacy legislation
or procedures may cause us to incur civil liability to government agencies, customers, shareholders and individuals whose privacy may
have been compromised.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
includes disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries
("DRC") and procedures regarding a manufacturer's efforts to prevent the sourcing of such "conflict" minerals. These requirements require
companies to undertake due diligence, disclose and report whether or not such "conflict" minerals originate from the DRC. 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. For additional information see
"Item 4 – Information on the Company – Business Overview."
We depend on governmental
licenses for our exports.
Our international sales depend largely on export licenses from
the government of Israel in relation to products which contain encryption capabilities, which we are currently required to hold. As of
the date of this annual report, we have obtained all such licenses necessary to carry out our international sales. If we fail to obtain
a material license in the future, or if a material license previously obtained is revoked or expires and is not renewed, our ability to
sell our products to overseas customers could be interrupted, resulting in a material adverse effect on our business, results of operations
and financial condition.
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Significant disruptions
of our information technology systems or breaches of our data security could adversely affect our business.
In November 2024, we were the subject of a cyberattack originating
from Iran. We took immediate action and activated the Company’s IT professionals and a third-party incident response team to evaluate
and monitor the situation. We took all appropriate measures to ensure and successfully maintain the continued smooth operation of the
company and its systems. While we do not currently believe that any damage to our systems or operations was caused by this attack, a significant
invasion, interruption, destruction, or breakdown of our information technology systems and/or infrastructure by persons with authorized
or unauthorized access could negatively impact our business and operations. Our systems may be the target of cyber-attacks in the future,
a risk that may be exacerbated to the extent our employees work from home and remotely access our IT networks. Future cyberattacks may
result in business interruption, information theft, legal claims and liability, regulatory penalties and/or reputational damage from cyber-attacks,
which may compromise our systems and lead to data leakage either internally or at our third-party providers. To the extent that
any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential
or proprietary information, we could incur material legal claims and liability, including under data privacy laws such as the GDPR. Although
we have invested in measures to reduce these risks, we cannot assure you that these measures will be successful in preventing the compromise
and/or disruption of our information technology systems and related data.
We are affected by worldwide
downturns in industries based on technology.
The volatility in the securities markets and its effect on high-technology
companies may have a ripple effect on our performance. For example, we were affected by the downturn in the economic markets which began
in 2008, posing a risk to industries based on technology as well as the overall economy. There can be no assurance that our results will
not be affected on a going forward basis by any economic downturns, including any downturn to the global economy resulting from
the current geopolitical volatility.
General economic conditions
may adversely affect the Company's results.
Uncertainty in global economic conditions, including any disruption
in financial and credit markets, pose a risk to the overall economy that could impact demand for our and our customers' products, as well
as our ability to manage commercial relationships with our customers and suppliers. If the global economic situation worsens, our business
could be negatively impacted, including such areas as reduced demand for our products and services, or supplier or customer disruptions,
which could reduce our revenues or our ability to collect our accounts receivable and could have a material adverse effect on our financial
condition and results of operations.
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