Camtek Ltd. — Interim / Quarterly Report 2020

Nov 18, 2020

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934

For the Month of November 2020

CAMTEK LTD.

(Translation of Registrant's Name into English)

Ramat Gavriel Industrial Zone P.O. Box 544 Migdal Haemek 23150 ISRAEL

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ☒ Form 40-F ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. This Report of Foreign Private Issuer on Form 6-K, including all exhibits hereto, is hereby incorporated by reference into the registration statement on Form F-3 (File No. 333-237680) of the Company, filed with the SEC, to be a part thereof from the date on which this report is submitted, to the extent not superseded by documents or reports subsequently filed or furnished.

CAMTEK LTD. (Registrant)

By: /s/ Moshe Eisenberg Moshe Eisenberg, Chief Financial Officer

Dated: November 17, 2020

Exhibit

Number Description of Exhibit

99.1 Unaudited interim consolidated financial statements as of September 30, 2020. 99.2 Operating and Financial Review and Prospects.

Exhibit 99.1

Camtek Ltd. and its Subsidiaries

Interim Condensed Consolidated Financial Statements As of September 30, 2020 (Unaudited)

Interim Unaudited Condensed Consolidated Financial Statements as at September 30, 2020

Contents

	Page
Interim Unaudited Condensed Consolidated Balance Sheets	F-3
Interim Unaudited Condensed Consolidated Statements of Operations	F-4 to F-5
Interim Unaudited Condensed Consolidated Statements of Shareholders' Equity	F-6 to F-7
Interim Unaudited Condensed Consolidated Statements of Cash Flows	F-8 to F-9
Notes to the Interim Unaudited Condensed Consolidated Financial Statements	F-10 to F-17

Interim Unaudited Condensed Consolidated Balance Sheets

		September 30, 2020	December 31, 2019
	Note		U.S. Dollars (in thousands)
Assets
Current assets
Cash and cash equivalents	5A	26,042	38,047
Short-term deposits		80,000	51,500
Trade accounts receivable, net		33,747	31,443
Inventories	5B	34,436	23,803
Other current assets	5C	3,032	2,909
Total current assets		177,257	147,702
Property, plant and equipment, net	5D	18,886	18,526
Long term inventory	5B	4,090	2,791
Deferred tax assets, net		8	746
Other assets, net		80	113
Intangible assets, net	5E	619	491
		4,797	4,141
Total assets		200,940	170,369
Liabilities and shareholders' equity
Current liabilities
Trade accounts payable		20,468	11,334
Other current liabilities	5F	24,283	20,272
Total current liabilities		44,751	31,606
Long term liabilities
Other long-term liabilities		2,191	2,461
		2,191	2,461
Total liabilities		46,942	34,067
Shareholders' equity
Ordinary shares NIS 0.01 par value, 100,000,000 shares authorized at September 30, 2020 and at December 31, 2019;
41,303,757 issued shares at September 30, 2020 and 40,742,355 at December 31, 2019;
39,211,381 shares outstanding at September 30, 2020 and 38,649,979 at December 31, 2019;	3	159	157
Additional paid-in capital		104,909	101,327
Retained earnings		50,828	36,716
		155,896	138,200
Treasury stock, at cost (2,092,376 shares as of September 30, 2020 and December 31, 2019)		(1,898)	(1,898)
Total shareholders' equity		153,998	136,302
Total liabilities and shareholders' equity		200,940	170,369

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

Interim Unaudited Condensed Consolidated Statements of Operation

(In thousands, except per share data)

		Nine months ended September 30,		Three months ended September 30,		Year ended December 31,
		2020	2019	2020	2019	2019
	Note	U.S. dollars		U.S. dollars		U.S. dollars
Revenues	4	107,240	100,818	40,061	32,470	134,019
Cost of revenues		57,315	51,875	20,636	17,252	69,235
Gross profit		49,925	48,943	19,425	15,218	64,784
Research and development costs		13,952	11,891	5,068	4,164	16,331
Selling, general and
administrative expenses	6A	21,374	19,668	8,036	6,681	26,481
		35,326	31,559	13,104	10,845	42,812
Operating income		14,599	17,384	6,321	4,373	21,972
Financial income, net	6B	958	340	307	188	801
Income from continuing
operations before taxes		15,557	17,724	6,628	4,561	22,773
Income tax expense		(1,445)	(1,508)	(604)	(398)	(1,950)
Net income from continuing operations		14,112	16,216	6,024	4,163	20,823
Discontinued operations
Income from discontinued operations
Income before tax expense		-	1,257	-	-	1,257
Income tax expense		-	(94)	-	-	(94)
Net income from discontinued
operations		-	1,163	-	-	1,163
Net income		14,112	17,379	6,024	4,163	21,986
		F - 4

Interim Unaudited Condensed Consolidated Statements of Operations (cont'd )

Net income per ordinary share:

	September 30,	Nine months ended	Three months ended September 30,		Year ended December 31,
	2020	2019	2020	2019	2019
Note	U.S. dollars		U.S. dollars		U.S. dollars
Basic earnings from continuing operations	0.36	0.43	0.15	0.11	0.55
Basic earnings from discontinued operations	-	0.03	-	-	0.03
Basic net earnings	0.36	0.47	0.15	0.11	0.58
Diluted earnings from continuing operations	0.35	0.43	0.15	0.11	0.54
Diluted earnings from discontinued operations	-	0.03	-	-	0.03
Diluted net earnings	0.35	0.46	0.15	0.11	0.57
Weighted average number of ordinary shares outstanding (in thousands):
Basic	38,957	37,286	39,176	38,541	37,626
Diluted	39,878	38,064	40,066	39,307	38,432

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

Interim Unaudited Condensed Consolidated Statements of Shareholders' Equity

	Ordinary Shares NIS 0.01 par value	Number of Treasury	Treasury	Additional paid-in	Retained	Total shareholders'
	Number of	U.S. Dollars	Shares	stock	capital	earnings	equity
	Shares Issued	(in thousands)			U.S. Dollars (in thousands)
Balances at
December 31,
2018	38,535,445	151	(2,092,376)	(1,898)	81,873	21,281	101,407
Issuance of shares	1,700,000	5	-	-	16,048	-	16,053
Share-based compensation
expense	-	-	-	-	1,250	-	1,250
Exercise of share
options	379,794	1	-	-	298	-	299
Net income	-	-	-	-	-	13,216	13,216
Balances at
June 30, 2019	40,615,239	157	(2,092,376)	(1,898)	99,469	34,497	132,225
Share-based
compensation
expense Exercise of share	-	-	-	-	818	-	818
options	73,781	*	-	-	65	-	65
Dividend distributed	-	-	-	-	-	(6,551)	(6,551)
Net income	-	-	-	-	-	4,163	4,163
Balances at
September 30, 2019	40,689,020	157	(2,092,376)	(1,898)	100,352	32,109	130,720
Issuance of shares	-	-	-	-	(27)	-	(27)
Share-based
compensation
expense	-	-	-	-	824	-	824
Exercise of share
options	53,335	*	-	-	178	-	178
Net income	-	-	-	-	-	4,607	4,607
Balances at
December 31, 2019	40,742,355	157	(2,092,376)	(1,898)	101,327	36,716	136,302
Share-based
compensation
expense	-	-	-	-	1,768	-	1,768
Exercise of share
options	382,359	1	-	-	333	-	334
Net income	-	-	-	-	-	8,088	8,088
Balances at
June 30, 2020	41,124,714	158	(2,092,376)	(1,898)	103,428	44,804	146,492
			F - 6

Interim Unaudited Condensed Consolidated Statements of Shareholders' Equity (cont'd)

Share-based
compensation
expense	-	-	-	-	1,297	-	1,297
Exercise of share
options	179,043	1	-	-	184	-	185
Net income	-	-	-	-	-	6,024	6,024
Balances at
September 30, 2020	41,303,757	159	(2,092,376)	(1,898)	104,909	50,828	153,998

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

Interim Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine months ended September 30,		Three months ended September 30,		Year ended December 31,
	2020	2019	2020	2019	2019
	U.S. dollars		U.S. dollars		U.S. dollars
Cash flows from operating activities:
Net income	14,112	17,379	6,024	4,163	21,986
Discontinued operations, net of cash	-	(1,163)	-	-	(1,163)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization	1,625	1,577	568	526	2,134
Deferred tax expense	738	1,071	512	255	1,526
Share based compensation expense	3,065	2,068	1,297	818	2,892
Change in provision for doubtful debts	(83)	(205)	(83)	-	(29)
Loss on disposal of fixed assets	-	63	-	63	64
Changes in operating assets and liabilities:
Trade accounts receivable, gross	(2,360)	3,223	5,748	(2,192)	156
Inventories	(12,838)	2,119	(5,824)	2,062	4,798
Due from related parties, net	56	19	36	(47)	58
Other assets	(146)	269	455	186	(236)
Trade accounts payable	9,136	(4,036)	(83)	(764)	(4,100)
Other current liabilities	4,008	(4,312)	(3,757)	(341)	(3,577)
Liability for employee severance benefits, net	110	60	64	6	117
Net cash provided by operating
activities of continued operations	17,423	18,132	4,957	4,735	24,626
Net cash provided by operating
activities	17,423	18,132	4,957	4,735	24,626
Cash flows from investing activities:
Investment in short-term deposits	(28,500)	(24,000)	(11,000)	(24,000)	(51,500)
Purchase of fixed assets	(1,390)	(1,080)	(615)	(426)	(1,256)
Purchase of intangible assets	(196)	(106)	(70)	(40)	(106)
Net cash used in investing
activities from continuing operations	(30,086)	(25,186)	(11,685)	(24,466)	(52,862)
Net cash provided by investing activities of discontinued operations	-	1,257	-	-	1,257
Net cash used in investing
activities	(30,086)	(23,929)	(11,685)	(24,466)	(51,605)
	F - 8

Interim Unaudited Condensed Consolidated Statements of Cash Flows (cont'd)

(In thousands)
Cash flows from financing activities:
Share issuance, net	-	16,053	-	-	16,026
Proceeds from exercise of share options	519	364	185	65	542
Dividend payment	-	(6,551)	-	(6,551)	(6,551)
Net cash provided by (used in) financing activities	519	9,866	185	(6,486)	10,017
Effect of change in exchange rate on cash and cash equivalents	139	36	116	(11)	74
Net increase (decrease) in cash and cash equivalents	(12,005)	4,105	(6,427)	(26,228)	(16,888)
Cash and cash equivalents at beginning of
the period	38,047	54,935	32,469	85,268	54,935
Cash and cash equivalents at end of the
period	26,042	59,040	26,042	59,040	38,047
	Nine months ended September 30,		Three months ended September 30,		Year ended December 31,
	2020	2019	2020	2019	2019
		U.S. dollars U.S. dollars			U.S. dollars
Supplementary cash flows information:
Income taxes paid	308	512	97	172	666
Lease payments	780	799	250	271	1,077
Non-cash transactions:
Fixed assets purchased with supplier credit	152	73	152	73	154

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

F - 9

(US Dollar Amounts in thousands, except per share data)

Note 1 - Nature of Operations

• A. Camtek Ltd. ("Camtek" or the "Company"), an Israeli corporation, is jointly controlled 22.9% by Priortech Ltd., an Israeli corporation listed on the Tel-Aviv Stock Exchange and 20% by Chroma Ate Inc., a Taiwanese company ("Chroma") (See Note 1(C) below). Camtek provides automated and technologically advanced solutions dedicated to enhancing production processes, increasing product yield and reliability, and enabling and supporting customers' latest technologies in the semiconductor fabrication industry.
• B. As detailed in the annual financial statements as of December 31, 2019, since January 2020, the Covid-19 outbreak has dramatically expanded into a worldwide pandemic creating macro-economic uncertainty and disruption in the business and financial markets. At present, business activity is continuing at all of the Company's locations, with new routines implemented as required by local Covid-19 regulations.

From the beginning of the outbreak, the Company has been carefully managing the risks and its global operations. The Israeli facility has been able to maintain its required production levels. Worldwide, the Company has benefitted from its strategy of having in place local professional teams in each of its territories that can independently install and support systems. The Company has been able to minimize the impact of the Covid-19 pandemic on its business activity and to deliver most of its orders for the first nine months of 2020 on time.

C. In February 2019, Chroma acquired approximately 20.5% of Camtek's shares in a cash transaction. 6,117,440 Camtek shares were purchased from Priortech for \$58,100 and an additional 1,700,000 new shares were issued by Camtek to Chroma for \$16,200. The cash consideration was calculated based on a share-price of \$9.50 per Camtek share, which reflected a 29% premium on Camtek's closing price as of February 8, 2019.

A voting agreement was signed between Priortech and Chroma according to which the parties agreed to vote together in Camtek's shareholders' meetings. According to the voting agreement, after the closing of the transaction, Chroma is entitled to two seats on Camtek's Board of Directors and Priortech is entitled to three seats.

In addition to the investment, Chroma and Camtek entered into an agreement in which Camtek will in the future license its triangulation technology, a metrology solution, in a fee-bearing license for non-semiconductor applications to be used by Chroma. In addition, Chroma and Camtek agreed to cooperate in potential projects for the semiconductor market based on synergies between their inspection and metrology technologies.

The transaction was completed in June 2019.

D. In September 2017, the Company completed the sale of its PCB inspection and metrology business unit. The buyers acquired all of the assets and liabilities related to the PCB business unit, including 100% equity interests in the Company's Chinese and Taiwanese subsidiaries. The Company received total cash consideration of \$32,000 upon closing and a further \$1,257 in 2019 based upon the PCB business unit's financial performance in 2018.

Due to the sale of the Company's PCB business, the results of this unit ceased to be consolidated in 2017 and are accounted as discontinued operations.

$$\mathbb{F} \text{–} 10$$

(US Dollar Amounts in thousands, except per share data)

Note 2 - Basis of Preparation

A. Statement of compliance

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and do not include all of the information required for full annual financial statements. The unaudited condensed consolidated interim statements should be read in conjunction with the Company's 2019 annual audited consolidated financial statements and footnotes, which were filed with the U.S. Securities and Exchange Commission as part of the Company's Annual Report on Form 20-F for the year ended December 31, 2019.

In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020 or for any other future period.

B. Recent Accounting Pronouncements

• 1. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The Company adopted the new standard effective January 1, 2020 and the adoption of this guidance did not have a material impact on its consolidated financial statements.
• 1. In August 2018, the FASB issued Accounting Standard Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) (ASU 2018-13), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The Company adopted the new standard effective January 1, 2020 and the adoption of this guidance did not have a material impact on its consolidated financial statements.
• 1. In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective in the first quarter of 2021 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

(US Dollar Amounts in thousands, except per share data)

Note 3 - Shareholders' Equity

A. General

The Company's shares are traded on the NASDAQ Global Market under the symbol "CAMT", and also listed and traded on the Tel-Aviv stock exchange

B. Changes in Stock Options and RSUs

In the first nine months of 2020, 561,402 stock options were exercised.

In the first nine months of 2020, 494,750 restricted share units (RSUs) were granted by the Company. The RSUs vest over a four-year period.

C. Share-based Compensation Expense

The total share-based compensation expense amounted to \$3,065, \$2,068, \$1,297, \$818 and \$2,892 for the nine-month periods ended September 30, 2020 and 2019, the three-month periods ended September 30, 2020 and 2019 and the year ended December 31, 2019, respectively.

Note 4 – Segment Information

The Company has a single reportable operating segment.

Substantially all fixed assets are located in Israel and substantially all revenues are derived from shipments to other countries. Revenues are attributable to geographic areas/countries based upon the destination of shipment of products and related services as follows:

	Nine months ended September 30,		Three months ended September 30,		Year ended December 31,
	2020	2019	2020	2019	2019
	U.S. Dollars
Asia Pacific	97,317	85,346	35,403	24,755	115,925
United States	4,425	9,303	1,167	3,881	10,388
Europe	5,498	6,169	3,491	3,834	7,706
	107,240	100,818	40,061	32,470	134,019

(US Dollar Amounts in thousands, except per share data)

Note 5 - Supplementary Financial Statements Information

A. Cash and cash equivalents

The Company's cash and cash equivalent balance at September 30, 2020 and December 31, 2019 is denominated in the following currencies:

	September 30,	December 31,
	2020	2019
	U.S. Dollars
US Dollars	22,287	32,675
New Israeli Shekels	2,143	3,318
Euro	616	707
Other currencies	996	1,347
	26,042	38,047

B. Inventories

	September 30,	December 31,
	2020	2019
		U.S. Dollars
Components	18,922	13,822
Work in process	7,387	6,019
Finished products (including systems at customer locations not yet sold)	12,217	6,753
	38,526	26,594

Inventories are presented in:

	September 30,	December, 31
	2020	2019
	U.S. Dollars
Current assets	34,436	23,803
Long-term assets	4,090	2,791
	38,526	26,594

(US Dollar Amounts in thousands, except per share data)

Note 5 - Supplementary Financial Statements Information (cont'd)

C. Other Current Assets

	September 30,	December 31,
	2020	2019
		U.S. Dollars
Due from Government institutions	1,106	955
Prepaid expenses	631	476
Interest receivable	568	348
Income tax receivables	449	846
Deposits for operating leases	191	149
Other	68	60
Due from related parties	19	75
	3,032	2,909

D. Property, Plant and Equipment, Net

	September 30,	December, 31 2019
	2020
	U.S. Dollars
Land	863	863
Building	14,387	14,253
Machinery and equipment	9,824	8,416
Office furniture and equipment	724	625
Computer equipment and software	4,681	4,652
Automobiles	87	87
Leasehold improvements	546	546
Right of use assets	2,676	2,471
	33,788	31,913
Less accumulated depreciation	14,902	13,387
	18,886	18,526

(US Dollar Amounts in thousands, except per share data)

Note 5 - Supplementary Financial Statements Information (cont'd)

E. Intangible Assets, Net

	September 30,	December 31,
	2020	2019
		U.S. Dollars
Patent registration costs	1,906	1,711
Accumulated amortization and impairment	1,287	1,220
Total intangible assets, net	619	491

F. Other Current Liabilities

	September 30, 2020	December 31, 2019
		U.S. Dollars
Accrued employee compensation and related benefits	8,376	7,713
Commissions	6,336	5,963
Advances from customers and deferred revenues	4,577	2,004
Accrued warranty costs	1,958	1,723
Accrued expenses	1,413	1,343
Government institutions	916	700
Operating lease obligations	707	826
	24,283	20,272

(US Dollar Amounts in thousands, except per share data)

Note 6 - Statements of Operations information

A. Selling, general and administrative expenses

		Nine months ended September 30,		Three months ended September 30,
	2020	2019	2020	2019	2019
			U.S. Dollars
Selling (1)	15,397	14,277	5,846	4,861	19,294
General and administrative	5,977	5,391	2,190	1,820	7,187
	21,374	19,668	8,036	6,681	26,481
(1) Including shipping and handling costs	1,694	766	557	218	1,063

B. Financial income (expenses), net

	Nine months ended September 30,		Three months ended September 30,		Year ended December 31,
	2020	2019	2020	2019	2019
			U.S. Dollars
Interest income	1,047	1,017	318	399	1,412
Other, net (1)	(89)	(677)	(11)	(211)	(611)
	958	340	307	188	801
(1) Including foreign currency income (expense) resulting from
transactions not denominated in U.S. Dollars	13	(655)	34	(265)	(352)
	F - 16

(US Dollar Amounts in thousands, except per share data)

Note 7 - Balances with Related Parties

		September 30,	December 31,
		2020	2019
		U.S. Dollars
Due from affiliated companies		19	75
	F - 17

Operating and Financial Review and Prospects.

A. Operating Results

General

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements included therein, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.

Overview

We design, develop, manufacture and market automated solutions dedicated for enhancing production processes and yield for the semiconductor fabrication market, principally based on core AOI technology.

We sell our systems worldwide. The vast majority of our sales are to manufacturers in the Asia Pacific region, including China, South East Asia, Korea and Taiwan, due to, among other factors, the migration of the electronic manufacturers into this region.

In the first nine months of 2020, our sales to customers in the Asia Pacific region accounted for approximately 91% of our total revenues.

In addition to revenues derived from the sale of systems and related products, we generate revenues from providing maintenance and support services for our products. We generally provide a one-year warranty with our systems. Accordingly, service revenues are not earned during the warranty period.

Critical Accounting Policies

Critical accounting policies are those that are, in management's view, most important to the portrayal of a company's financial condition and results of operations and most demanding judgment calls, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We believe our most critical accounting policies relate to:

Revenue Recognition. On January 1, 2018, the Company adopted Topic 606 retrospectively with the cumulative effect recognized as of the date of adoption.

The Company's contracts with its customers include performance obligations to provide and install its products or to service the installed products. A product sale contract may include an extended warranty (that is, for longer than the twelve-month standard warranty), which is considered a separate performance obligation.

The Company recognizes revenue from contracts for sales of products when the Company transfers control of the product to the customer, which is generally upon installation at the customer's premises. Revenues from the contract are recognized in an amount that reflects the consideration the Company expects to be entitled to receive once the product is operating in accordance with its specifications and signed documentation of the arrangement, such as a signed contract or purchase order, has been received. Payment terms with customers may vary, but are generally based on milestones within the delivery process such as shipping and installation. Payment terms do not include significant financing components.

In the limited circumstances when the products are installed by a trained distributor acting as an end user, revenue is recognized upon delivery to the distributor assuming all other criteria for revenue recognition are met.

The Company does not incur costs in obtaining a contract except for agents' commissions, which are incurred upon the recognition of revenues. Revenues are recognized over a period of less than a year and as such, there are no underlying sales commissions to be capitalized.

Service revenues consist mainly of contracts charged under time and material arrangements. Service revenues from maintenance contracts are recognized ratably over the contract period.

Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers.

The Company's multiple performance obligations consist of product sales and non-standard warranties. A non-standard warranty is one that is for a period longer than 12 months. Accordingly, income from a non-standard warranty is deferred as unearned revenue and is recognized ratably as revenue commencing with and over the applicable warranty term.

The Company records contract liabilities when the customer has been billed in advance of the Company completing its performance obligations. These amounts are recorded as deferred revenue in the Consolidated Balance Sheets.

Valuation of Accounts Receivable. We review accounts receivable to determine which are doubtful of collection. In making this determination of the appropriate allowance for doubtful accounts, we consider information at hand regarding specific customers, including aging of the receivable balance, evaluation of the security received from customers, our history of write-offs, relationships with our customers and the overall credit worthiness of our customers. Changes in the credit worthiness of our customers, the general economic environment and other factors may impact the level of our future write-offs.

Valuation of Inventory. Inventories consist of completed systems, partially completed systems and components, and are recorded at the lower of cost, determined by the moving – average basis, or market. We review inventory for obsolescence and excess quantities to determine that items deemed obsolete or excess inventory are appropriately reserved. In making the determination, we consider forecasted future sales or service/maintenance of related products and the quantity of inventory at the balance sheet date, assessed against each inventory item's past usage rates and future expected usage rates. Changes in factors such as technology, customer demand, competing products and other matters could affect the level of our obsolete and excess inventory in the future.

In the first nine months of 2020 we wrote-off inventory in the amount of approximately \$0.1 million. In the year 2019 we wrote-off inventory in the amount of approximately \$0.2 million. The write-off amounts are included in the line item called "Cost of products sold", in the consolidated statements of operations. The write-offs create a new cost basis and are a permanent reduction of inventory cost. The write-off was made against damaged, obsolete, excess and slow-moving inventory. Inventory that is not expected to be converted or consumed in the following 12 months is classified as non-current. As of September 30, 2020, a \$4.1 million portion of our inventory was classified as non-current. Management periodically evaluates our inventory composition, giving consideration to factors such as the probability and timing of anticipated usage and the physical condition of the items, and then estimates a charge (reducing the inventory) to be provided for slow moving, technologically obsolete or damaged inventory. These estimates could vary significantly from actual requirements based upon future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the inventory write-offs were established.

Intangible assets. Patent registration costs are capitalized at cost and amortized, beginning with the first year of utilization, over its expected life of ten years.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the long lived asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as computed by subtracting the fair market value of the asset from its carrying value.

Provisions for contingent liabilities. A contingency (provision) in accordance with ASC Topic 450-10-05, Contingencies, is an existing condition or situation involving uncertainty as to the range of possible loss to the entity. A provision for claims is recognized if it is probable (likely to occur) that a liability has been incurred and the amount can be estimated reasonably. Provisions in general are highly judgmental, especially in cases of legal disputes. We assess the probability of an adverse event and if the probability is evaluated to be probable, we are required to fully provide for the total amount of the estimated contingent liability. We continually evaluate our pending provisions to determine if accruals are required. It is often difficult to accurately estimate the ultimate outcome of a contingent liability. Different variables can affect the timing and amount we provide for certain contingent liabilities. Our assessments are therefore subject to estimates made by us and our legal counsel, adverse revision in our estimates of the potential liability could materially impact our financial condition, results of operations or liquidity.

Valuation of Long Lived Assets. We apply ASC Subtopic 360-10, "Property, Plant and Equipment". This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the long lived asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as computed by subtracting the fair market value of the asset from its carrying value. We prepare future cash flows based on our best estimates including projections and financial statements, future plans and growth estimates.

Income Taxes. We account for income taxes under ASC Subtopic 740-10 Income Taxes – Overall. Deferred tax assets or liabilities are recognized in respect of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts as well as in respect of tax losses and other deductions which may be deductible for tax purposes in future years, based on tax rates applicable to the periods in which such deferred taxes will be realized. The rates applied are those enacted in law as of September 30, 2020. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and during which the carry-forwards are available. Valuation allowances are established when necessary to reduce deferred tax assets to the amount considered more likely than not to be realized.

Our financial statements include deferred tax assets, net, which are calculated according to the above methodology. If there is an unexpected critical deterioration in our operating results and forecasts, we would have to increase the valuation allowance with respect to those assets. We believe that it is more likely than not that those net deferred tax assets included in our financial statements will be realized in subsequent years.

Stock Option and Restricted Share Plans. We account for our employee stock-based compensation awards in accordance with ASC Topic 718, Compensation - Stock Compensation. ASC Topic 718 requires that all employee stock-based compensation is recognized as a cost in the financial statements and that for equity-classified awards such cost is measured at the grant date fair value of the award. We estimate grant date fair value using the Black-Scholes-Merton option-pricing model. Forfeitures are recognized when they occur.

Leases. On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02) using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842.

Upon adoption, we recognized total a right-of-use (ROU) assets of approximately \$2.1 million, with corresponding lease liabilities of approximately \$2.1 million on the consolidated balance sheets. The adoption did not impact our beginning retained earnings, or prior year consolidated statements of income and statements of cash flows.

Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on its understanding of what our credit rating would be (2.5% in 2020). Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. When determining the probability of exercising such options, we consider contract-based, asset-based, entity-based, and market-based factors. Lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease costs are expensed as incurred on the consolidated statements of income. Our lease agreements generally do not contain any residual value guarantees or restrictive covenants.

Operating lease ROU assets are presented as property, plant and equipment on the consolidated balance sheet. The current portion of operating lease liabilities is included in other current liabilities and the long-term portion is presented within long-term liabilities on the consolidated balance sheet.

For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

ROU assets for operating leases are periodically reduced by impairment losses. We use the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment – Overall, to determine whether an ROU asset is impaired, and if so, the amount of the impairment loss to recognize.

Comparison of Period to Period Results of Operations

The following table presents consolidated statement of operations data for the periods indicated as a percentage of total revenues from continuing operations:

		Nine Months Ended September 30,
	2020	2019
Revenues	100.0%	100.0%
Cost of revenues	53.4%	51.5%
Gross profit	46.6%	48.5%
Operating expenses:
Research and development, net	13.0%	11.8%
Selling, general and administrative expenses	19.9%	19.5%
Total operating expenses	32.9%	31.3%
Operating income	13.6%	17.2%
Financial income, net	0.9%	0.3%
Income tax (expenses) benefit	(1.3)%	1.5%
Net income from continuing operations	13.2%	16.11%
Income from discontinued operations
Income before tax expense, net	-	1.2%
Income tax expenses	-	(0.1)%
Net income from discontinued operations	-	1.2%
Net income	13.2%	17.2%

Nine months Ended September 30, 2020 compared to Nine months ended September 30, 2019

Revenues. Revenues increased by 6% to \$107.2 million in the first nine months of 2020 compared to \$ 100.8 million in the first nine months of 2019.

Gross Profit. Gross profit consists of revenues less cost of revenues, which includes the cost of components, production materials, labor, service related expenses, depreciation, factory and overhead expenses and provisions for warranties. These expenditures are partially affected by sales volume. Our total gross profit increased to \$49.9 million in the first nine months of 2020 from \$ 48.9 million in the first nine months of 2019, an increase of \$1 million, or 2%. Our gross margin decreased to 46.6% in the first nine months of 2020 compared to a gross margin of 48.5% in the first nine months of 2019, primarily due to sales mix. In the first half of 2020, the Company received orders for multiple 2D inspection machines with basic configuration and accordingly relatively lower ASP, which resulted in lower gross margins, this was partially offset by improved mix and higher revenues in the third quarter of 2020 compared to the third quarter of 2019.

Research and Development Costs. Research and development expenses consist primarily of salaries, materials consumption and costs associated with subcontracting certain development efforts. Total research and development expenses in the first nine months of 2020 increased to \$14.0 million from \$11.9 million in the first nine months of 2019 due to increased activity.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of expenses associated with salaries, commissions, promotion and travel, professional services and rent costs. Our selling, general and administrative expenses increased by 9% to \$21.4 million in the first nine months of 2020 from \$19.7 million in the first nine months of 2019, mainly due to an increase in shipping costs as a result of the Covid-19 pandemic and increased salary and related expenses due to the increased activity.

Financial Income (Expenses), Net. Financial income/expenses consist of interest, revaluation and other bank fees. We had net financial income of \$1.0 million in the first nine months of 2020, compared to net financial income of \$0.3 million in the first nine months of 2019. These changes mainly relate to a decrease in revaluation expenses and interest received on increased short-term deposits.

Provision for Income Taxes. Income tax expense was \$1.4 million in the first nine months of 2020 compared to expense of \$1.5 million in the first nine months of 2019, mainly due to decreased income before tax.

Income from Discontinued Operations. In the first nine months of 2019, we recognised net income of \$1.2 million related to the earn-out portion of the sale of the PCB business unit which was based upon its financial performance in 2018.

Net Income. We realized net income of \$14.1 million in the first nine months of 2020 compared to net income of \$17.4 million in the first nine months of 2019, in light of the factors discussed above.

B. Liquidity and Capital Resources

Our cash and cash equivalent and short-term deposit balances totalled approximately \$106.0 million on September 30, 2020 and \$89.5 million on December 31, 2019. Our cash is invested in bank deposits spread among several banks, primarily in Israel.

In June 2019, we raised \$16.2 million pursuant to the share issuance to Chroma Ate, Inc. ("Chroma").

Our working capital was approximately \$132.5 million at September 30, 2020 and \$116.1 million at December 31, 2019. The increase is mainly attributed to the increase in cash and cash equivalents, short-term deposits, trade accounts receivable and inventory, offset by the increase in trade accounts payable and other current liabilities.

Our capital expenditures during the first nine months of 2020 were approximately \$1.6 million, mainly in support of our operating activities.

Cash flow from operating activities

Net cash and cash equivalents provided by operating activities for the nine months ended September 30, 2020, totalled \$17.4 million. Net cash and cash equivalents provided by operating activities for the nine months ended September 30, 2019 totalled \$18.1 million.

During the nine months ended September 30, 2020, cash provided by operating activities was primarily attributed to the positive net income and the increase in trade accounts payable and other liabilities, offset by the increase in trade accounts receivable and inventory.

Cash flow from investing activities

Cash flow used in investing activities in the nine months ended September 30, 2020, was \$30.1 million, primarily due to investment in short-term deposits, compared to \$25.2 million in the nine months ended September 30, 2019.

Cash flow from financing activities

Cash flow provided by financing activities in the nine months ended September 30, 2020 was \$0.5 million, due to proceeds from the exercise of share options. Cash flow provided by financing activities in the nine months ended September 30, 2019 was \$9.9 million, due to proceeds from the share issuance to Chroma and the exercise of share options, partially offset by a divided payment.