Silicom (SILC) Risk Analysis

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. We are subject to laws and regulations governing the collection, use and transmission of personal information. As the legislative and regulatory landscape for data privacy and protection continues to evolve around the world, there has been an increasing focus on privacy and data protection issues that may affect our business, including the GDPR, and other laws and regulations governing the collection, use, disclosure and transmission of data. We could also experience 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. Our systems may be the target of malware and other cyber-attacks. 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. Additionally, this may be exacerbated due to the spread of Covid-19, when our employees are required to work from home and remotely access our IT networks.

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.

Capitalized development projects may be cancelled and written-off due to a change in our strategy (such as that which occurred in 2020 where we aborted some efforts which did not match our focus strategy), 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.

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 effects of Covid-19.

The significant outbreak of a contagious disease, Covid-19, which was declared a pandemic by the World Health Organization in March 2020, has resulted in a widespread health crisis that has adversely affected the economies and financial markets of many countries, resulting in a global economic downturn. As a response to the spread of Covid-19 many countries, including Israel, USA and Denmark where most of our workforce is located, have been taking measures designated to limit the continued spread of Covid-19, including the closure of workplaces, restricting travel, prohibiting assembling, closing international borders and quarantining populated areas. Additionally, the Israeli Government has announced a mandatory 10-day quarantine period for any individual who is not fully vaccinated, who may have come in contract with a carrier of Covid-19, and any person who is not fully vaccinated and who has returned from travel abroad to certain countries which have been designated as ‘red' countries due to high levels of Covid-19 cases. Many Governments around the globe introduced temporary emergency regulations requiring all residents to remain in their homes along with limitations on which business are allowed to remain open and the number of workers allowed at each site – these emergency regulations are still current, at various levels, in many countries, including Israel. While Israel began vaccinating its population in December 2020, it is still unclear to what extent the vaccines will be able to stop the spread of the pandemic, especially because it is still unknown whether the vaccine is effective in neutralizing all variants of the virus and also since the vaccine is still unavailable to children under 16. Furthermore, the pace of vaccination around the world is not consistent and delays in one country could affect the speed at which the pandemic and its effects will be brought under control. While the full impact of the Covid-19 pandemic is still unknown at this time, we are closely monitoring the developments and continually assessing the potential impact on our business. Our business may be adversely affected by the Covid-19 pandemic due to the following risks, any of which may lead to an adverse effect on our financial performance, revenue, financial position and results: As any number of the members of our workforce, including key employees, may be infected and/or subject to quarantine periods and may be unable to perform their duties and our offices and factories may be forced to operate with a reduced workforce and/or be forced to close under the temporary emergency regulations. This may lead to ineffective control over our business and a lower work efficiency, productivity, manufacturing and financial performance; A reduced workforce, lack of international travel, and no face to face meetings may adversely affect our operations, including our R&D efforts, marketing and sales activities, the materialization of existing Design Wins, and the achievement of new Design Wins; We rely on third-party suppliers and manufacturers for many of our products. This pandemic has resulted in the extended shutdown of certain businesses globally, which may in turn result in disruptions or delays to our supply chain. These may include disruptions from the temporary closure of third-party supplier and manufacturer facilities, interruptions in product supply or restrictions on the export or shipment of our products. Any disruption of our suppliers and their contract manufacturers will likely impact our sales and operating results and Design Win related activities; Due to the impact of Covid-19 on flights and airlines, which reduced air transportation dramatically, we may be significantly limited, or it may be impossible, for us to ship our products to our customers and/or receive components and other bill of material parts from our suppliers; We may experience difficulties in collecting amounts due from customers, including major customers, due to a downturn in their financial condition; Due to the pandemic, from time to time significant numbers of our employees are required to work from their homes and remotely access our IT networks. Such remote working mode creates the risk of attacking the end-point user stations, connection channels and gateways. These potential breaches of our security measures may harm our business; In the past, following periods of market volatility, shareholders have often instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and attention of management from our business, even if we are successful.