Safe-T Group Ltd. (now identified in request metadata as Alarum Technologies Ltd.) — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 26, 2019. The filing is an annual Form 20-F rather than a standalone fourth-quarter report. Financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars in thousands unless otherwise stated.
Business context
The company develops and markets cybersecurity and data-protection software, including its patented Reverse-Access technology and Software Defined Access platform. Products are sold through perpetual or subscribed licenses, maintenance and support contracts, professional services, OEM partners, distributors and resellers. ADSs began trading on Nasdaq in August 2018, with each ADS representing 40 ordinary shares.
- Approximately 80 customers as of December 31, 2018, compared with approximately 64 at December 31, 2017.
- Revenue mix by geography: Israel 67%, North America 24% and other regions 9%, versus 75%, 21% and 4%, respectively, in 2017.
- Direct sales represented 53% of revenue and channel-partner sales 47% in 2018.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $1,466 | $1,096 | +34% |
| Gross profit | $675 | $513 | +32% |
| Gross margin | 46% | 47% | Down 1 percentage point |
| Operating loss | $(9,206) | $(7,296) | Loss increased $1,910 |
| Net finance income/(expense) | $(2,541) | $1,984 | Unfavorable $4,525 change |
| Net loss | $(11,753) | $(5,313) | Loss increased $6,440 |
| Net cash used in operating activities | $(8,736) | $(5,345) | Cash use increased $3,391 |
| Cash and cash equivalents at year-end | $3,717 | $3,514 | +6% |
- License revenue increased 63% to $794; maintenance and support revenue increased 17% to $606; other services revenue declined 27% to $66.
- Research and development expense increased 50% to $2,414, and selling and marketing expense increased 37% to $5,542. General and administrative expense declined 10% to $1,925.
- 2018 operating cash use was funded primarily by $9,362 of financing cash flow, including $9,231 of net proceeds from public and private offerings.
- Total assets were $6,368, total liabilities $2,658 and shareholders’ equity $3,710 at December 31, 2018. Accumulated deficit was $49,689.
- The filing reports no conventional debt securities, but includes $729 of derivative financial liabilities at year-end and $131 of Israeli Innovation Authority liabilities.
- Non-IFRS net loss was $8,688 in 2018 versus $5,725 in 2017, excluding selected non-cash and other items.
Material changes versus the prior comparable period
- Revenue growth accelerated to 34% from 30% in 2017, supported primarily by higher license sales and customer growth.
- Despite higher gross profit, operating losses widened because research and development and sales and marketing investments grew substantially faster than revenue.
- Net loss more than doubled, principally due to the higher operating loss and a shift from $1,984 of net finance income in 2017 to $2,541 of net finance expense in 2018. The finance expense was driven largely by remeasurement of warrants and other derivative instruments.
- Operating cash burn increased materially, while year-end cash rose only modestly because financing proceeds largely offset operating and investing cash outflows.
- The company completed the purchase of CyKick Labs’ intellectual property for approximately $236, including technology and assumed Israeli Innovation Authority royalty obligations.
- The company completed a Nasdaq public offering in August 2018, generating gross proceeds of approximately $7.335 million and issuing ADSs and Series A and Series B warrants. The Series B warrants were reset in December 2018, resulting in additional potential ADS issuance.
Guidance, outlook, risks and unusual items
- Management expected continued losses and negative operating cash flows until products achieve commercial profitability and stated that substantial additional capital would be required.
- Based on cash and budget estimates, management expected resources to fund operations only through at least June 15, 2019. The auditor’s report and financial statements include an explanatory paragraph regarding substantial doubt about going-concern status.
- Growth plans focus on expanding U.S., European, Southeast Asian and African operations; increasing sales and marketing; adding OEM, reseller and distribution partners; opening international branches; and continuing research and development.
- Net bookings were $1,830, including $423 of contingent bookings, versus $1,651 in 2017. Backlog was $982 versus $565. Annual recurring revenue was approximately $910 versus $740 in 2017.
- Renewal rates for subscriptions and maintenance and support contracts were approximately 81% in 2018 versus 90% in 2017; elsewhere in the filing, the company also describes an approximately 85% renewal rate over 2017 and 2018.
- Material risks include dependence on future financing, limited operating history, continuing losses, intense cybersecurity competition, uncertain product-market adoption, reliance on channel partners, evolving cyber threats, intellectual-property challenges, foreign-exchange exposure and dependence on key personnel.
- Management identified material weaknesses in internal control over financial reporting as of December 31, 2018, including inadequate segregation of duties and ineffective period-end financial reporting controls. Disclosure controls and procedures were reported as ineffective.
- The company had no material legal proceedings and no off-balance-sheet arrangements disclosed.
- Subsequent events included cancellation of approximately 1.586 million options and a nonbinding proposal to acquire an Israeli proxy-network company for an expected consideration of approximately $9.7 million in cash and equity, subject to definitive agreements and approvals.
Most important facts to verify
- Confirm the registrant’s current legal name and ticker: the supplied filing is for Safe-T Group Ltd., while the request identifies Alarum Technologies Ltd.
- Reconcile the filing’s inconsistent renewal-rate disclosures of approximately 81% and 85%.
- Assess the company’s ability to raise capital before the stated June 15, 2019 liquidity horizon and the implications of the going-concern qualification.
- Review potential dilution from Series B warrants, employee options and other outstanding warrants.
- Evaluate whether increased research, development, sales and marketing spending can produce sustainable revenue growth and improved margins.
- Review the Israeli Innovation Authority royalty obligations, including the disputed approximately $0.5 million incubator-related obligation and restrictions on transferring funded technology outside Israel.
- Monitor remediation of the identified internal-control material weaknesses and the effect of the proposed acquisition on liquidity, dilution and operating risk.