| Summary of Significant Accounting Policies | Note 2 - Summary of Significant Accounting Policies
The significant accounting policies, which are applied consistently throughout the periods presented, are as follows:
A.
Financial statements in US dollars
Substantially all sales of the Company are made outside of Israel (see Note 13A regarding geographical distribution), in US dollars ("dollars"). Most
purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the dollar is the currency that represents the principal economic environment in which the Company operates
and is thus its functional currency. Transactions and monetary balances in other currencies are translated into the functional currency using the current exchange rate. All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in earnings when they
arise.
B.
Basis of presentation
The accompanying consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America and
include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
C.
Estimates and assumptions
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include income taxes, inventories, marketable securities, goodwill, intangible assets and
share-based compensation.
D.
Business combinations
The Company accounts for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requires recognition of assets
acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be
recorded in the consolidated statements of operations .
E.
Cash and cash equivalents
The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.
F.
Short-term bank deposits
Short term bank deposits consist of bank deposits with original maturities of more than three months and up to twelve months.
As of December 31, 2019, the Company's short-term bank deposits consist of bank deposits in US dollars carrying a weighted average interest rate of 2.58%. These short-term
bank deposits are held with a major Israeli bank, and their use and withdrawal are not subject to any restrictions.
G.
Marketable securities
The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold
to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield
using the effective interest method. Such amortization and accretion are included in the "Financial income, net" line item in the consolidated statements of operations. When other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or it is more
likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. A decline in the market value of HTM security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. To determine whether an
impairment is other than temporary, the Company considers all available information relevant to the collectibility of the security, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash
flows expected to be collected. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, forecasted performance of the investee, and the
general market condition in the geographic area or industry the investee operates in. If the Company intends to sell the security or it is more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the
other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not
more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit
loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.
H.
Trade accounts receivable, net
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in
net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required
allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. As of December 31, 2018 and 2019, the provision for doubtful accounts receivable amounted to US$ 20 thousand.
I.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the "weighted average-cost" method.
The Company writes down obsolete or slow moving inventory to its net realizable value.
J.
Assets held for employees’ severance benefits
Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets
are recorded at their current cash redemption value.
K.
Property, plant and equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line basis over the
estimated useful life of the assets at the following annual rates:
%
Machinery and equipment
15 - 33
Office furniture and equipment
6 - 33
Leasehold improvements
*
*
L.
Goodwill and other intangible assets
Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead
is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company operates in one operating segment and this segment comprises one reporting unit. Goodwill is reviewed for impairment at least annually in accordance with ASC 350 , . If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including
goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an
impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit
in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying amount, step two does not
need to be performed. During the year ended December 31, 2019, no impairments were found and therefore no impairment losses were recorded.
Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy
results in amortization of such intangible assets in the straight-line method.
M.
Impairment of Long-Lived Assets
In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment – Overall .
N.
Leases In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02. The guidance establishes a
right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. The Company determines if an arrangement is or contains a lease at contract
inception. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The
Company adopted the new accounting standard ASC 842 "Leases" and all the related amendments on January 1, 2019 and used the effective date as the Company’s date of initial application. Consequently, financial information was not updated and the
disclosures required under the new standard are not provided for dates and periods before January 1, 2019. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make
lease payments arising from the lease. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income
statement. As of December 31, 2019,
The new standard provides a number of optional practical expedients in transition. The Company chose to apply the following permitted practical
expedients:
•
Not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard.
•
Applying the practical expedient pertaining to the use-of hindsight.
•
Short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, that for those leases, the Company does not recognize ROU assets or lease liabilities but recognizes lease expenses over the lease
term on a straight-line basis.
•
Applying the practical expedient to not separate lease and non-lease components for all of the Company’s leases, other than leases of real estate.
The company did not separate lease and non-lease components for all contracts entered into before January 1, 2019 and identified as leases in accordance
with Topic 840. On the commencement date, the lease payments shall include variable lease payments that depend on an index (such as the Consumer Price Index), initially measured using the index at the commencement
date. The Company does not remeasure the lease liability for changes in future lease payments arising from changes in an index unless the lease liability is remeasured for another reason. Therefore, after initial recognition, such variable lease
payments are recognized in profit or loss as they are incurred. Variable payments that depends on use of the underlying asset are not included in the lease payments. Such variable payments are recognized in profit or loss in the period in which the event or
condition that triggers the payment occurs. Upon initial recognition, the Company recognizes a liability at the present value of the lease payments to be made over the lease term, and concurrently recognizes a ROU asset at the same amount of
the liability, adjusted for any prepaid lease payments. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments, the lease term and the
effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease. After lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the
discount rate hasn’t been updated as a result of a reassessment event). The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any cumulative prepaid or accrued
rent if the lease payments are uneven throughout the lease term. The Company’s lease agreements have remaining lease terms up to 7.5 years. Some of these agreements include options to extend the leases for up to 5 years and some include options to terminate the
leases immediately. Some of our vehicle lease agreements include rental payments based on the actual usage of the vehicles and other lease agreements include rental payments adjusted periodically for inflation. The agreements related to leases in
Israel are in Israeli Shekel ("ILS") or in ILS, linked to the Israeli Consumer Price Index or to the US Dollars. The agreements related to leases in the USA are in US Dollars and the agreements related to leases in Denmark are in Danish Krone
("DKK"). The Company’s lease agreements do not contain any residual value guarantees. See Note 10.
Prior to the adoption of the new lease standard, the Company leases consisted of real estate and cars for use in its operations, which have been classified as operating leases. Effects of the initial application of the new standard on the Company's consolidated balance sheet as of January 1, 2019:
According to the previous accounting policy
The change
As presented according to Topic 842
US$ thousands
Operating leases right-of-use
-
3,424
3,424
Prepaid expenses
90
(90
)
-
Operating lease liabilities
-
(3,334
)
(3,334
)
O. Revenue recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, a new accounting standard related to
revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of the promised goods at an
amount that reflects the consideration that is expected to be received in exchange for those goods. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with
customers. The Company adopted ASC 606 at the beginning of the first quarter of fiscal 2018, and implemented new accounting policies and internal controls necessary to support the requirements of ASC 606. The adoption of ASC 606 did not have any
impact on the Company's revenue recognition.
The Company recognizes revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange
for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. The Company accounts for a contract with
customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company identifies separated
contractual performance obligations and evaluates each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time. All of the Company's performance obligations for the reported periods were satisfied
at a point in time.
Revenue is allocated among performance obligations in a manner that reflects the consideration that the Company expects to be entitled to for the promised goods based on standalone selling prices
(SSP). SSP are estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of the product when the Company sell the goods separately in similar
circumstances and to similar customers.
Until January 1, 2018, revenues from sales of products were recognized upon delivery provided that the collection of the resulting receivable was reasonably assured, there was persuasive evidence
of an arrangement, no significant obligations remained and the price was fixed or determinable. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated statements of
operations.
P.
Research and development costs
Capitalization of software development costs related to programmable components incorporated into the Company's products, are charged to expense until technological feasibility has been established
for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is
established. The company has determined that technological feasibility for its software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. Amortization begins once the
software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. The Company started to
capitalize internal software development costs during 2018. The Company did not capitalize any internal software development costs for the year ended December 31, 2017, because the cost incurred and the time between technological feasibility and
product release was insignificant. Other costs incurred in the research and development of the Company’s products are expensed as incurred.
Q.
Allowance for product warranty The Company grants service warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience.
Accordingly, these financial statements do not include an accrual for warranty obligations.
R.
Treasury shares Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.
S.
Income taxes Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are presented as non-current assets and liabilities and measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of
operations in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
T.
Share-based compensation The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:
When portions of an award vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the
requisite service period for each separately vesting portion of the award.
U.
Basic and diluted earnings per share Basic income per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding. Diluted income per ordinary
share calculation is similar to basic income per ordinary share except that the weighted average of common shares outstanding is increased to include outstanding potential common shares during the period if dilutive. Potential common shares arise
from stock options and RSUs, and the dilutive effect is reflected by the application of the treasury stock method.
The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.
Year ended December 31
2017
2018
2019
Net income attributable to ordinary shares
(US$ thousands)
21,714
14,637
10,236
Weighted average number of ordinary shares outstanding
used in basic income per ordinary share calculation
7,455,528
7,552,094
7,520,389
Add assumed exercise of outstanding dilutive potential
ordinary shares
146,443
105,236
52,228
Weighted average number of ordinary shares outstanding
used in diluted income per ordinary share calculation
7,601,971
7,657,330
7,572,617
Basic income per ordinary shares (US$)
2.912
1.938
1.361
Diluted income per ordinary shares (US$)
2.856
1.912
1.352
Weighted average number of shares related to options
and RSUs excluded from the diluted earnings per share
calculation because of anti-dilutive effect
-
171,086
351,610
V. Comprehensive Income For the years ended December 31, 2017, 2018 and 2019, comprehensive income equals net income. W. Fair Value Measurements The Company's financial instruments consist mainly of cash and cash equivalents, marketable securities, trade and other receivables and trade accounts payable. The carrying amounts of these
financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these investments. The fair value of marketable securities is presented in Note 5 to these consolidated financial statements.
Assets held for severance benefits are recorded at their current cash redemption value. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on
assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy
distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or
liability. Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at measurement date.
X. Concentrations of risks (1) Credit risk Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, short-term bank
deposits, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial
institutions. Short-term bank deposits balances of the Company, which are subject to credit risk, consist of short-term bank deposits held with a major Israeli Bank. Marketable securities consist of held to maturity marketable securities issued by
highly rated corporations. As of December 31, 2018 and 2019, the ratings of the securities in the Company's portfolio was at least A-. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the
counterparty to a financial instrument fails to meet its contractual obligations). The Company closely monitors extensions of credit and has never experienced significant credit losses.
(2) Significant customers The Company's top three customers accounted for approximately 35% of its revenues in 2019. The Company expects that a small number of customers will continue to account for a
significant portion of its revenues for the foreseeable future. See note 13.
Y. Liabilities for loss contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has
been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Z. Recent Accounting Pronouncements
(1)
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of
estimated credit losses expected to occur over their remaining life. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim periods in
fiscal years beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019-11, which includes several amendments to the credit losses standard (ASU 2016-13), including amendments to the reporting of expected recoveries.
The Company is currently evaluating the impact of the provisions of ASU 2016-13 on its financial position, results of operations and cash flows.
(2)
In December 2019, the FASB issued ASU 2019-12, which removes certain exceptions for: recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds
guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This ASU is effective for annual periods in fiscal years beginning after
December 15, 2021, and interim periods in fiscal years beginning after December 15, 2022. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated balance sheets, results of operations, cash
flows or presentation thereof.
(3)
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill in Step 2
of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excess of a reporting unit’s carrying amount over its fair value as determined in Step 1 of the testing. ASU 2017-04 is effective for
interim and annual testing dates after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a
material impact on its consolidated balance sheets, results of operations, cash flows or presentation thereof. |
