B.O.S. Better Online Solutions Ltd. — FY2014 Form 20-F
Reporting period: Fiscal year ended December 31, 2014; filed April 29, 2015. This is an annual report, not a standalone 2014 fourth-quarter filing. Financial amounts below are U.S. dollars; unless stated otherwise, figures are in millions.
Business context
BOS, an Israeli company listed on Nasdaq as BOSC, operates two divisions: Supply Chain Solutions, distributing electronic components and providing supply-chain services, and RFID and Mobile Solutions, supplying automatic-identification hardware, software and integration services. In 2014, the divisions generated 59% and 41% of revenue, respectively. Israel accounted for 80% of revenue; one Supply Chain customer represented 13%.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $27.601 | $25.903 |
| Gross profit / margin | $5.045 / 18.3% | $5.031 / 19.4% |
| Operating income / margin | $0.120 / 0.4% | $0.584 / 2.3% |
| Net income (loss) | $(0.433) | Break-even |
| Operating cash flow | $1.084 | $1.048 |
| Cash and cash equivalents at year-end | $1.522 | $1.005 |
| Working capital | $0.634 | $(0.409), calculated from balance-sheet totals |
| Short-term loans and current maturities | $4.867 | $6.352 |
| Total loans, including long-term portion | $5.057 | $7.498 |
| Total assets | $16.261 | $19.187 |
Revenue increased 6.5%, which management attributed to stronger Israeli demand in both divisions. Gross profit was nearly unchanged, while margin declined, principally reflecting inventory write-offs of $404,000 versus $121,000 in 2013. Operating expenses rose to $4.925 million from $4.447 million, including higher bad-debt allowance and technology staffing costs. Lower financial expense ($444,000 versus $549,000) did not prevent a return to a net loss; management attributed the higher income-tax expense in part to writing off tax assets related to ongoing losses at BOS-Odem.
Operating cash flow was positive, but cash generation benefited from working-capital movements, including a $1.993 million decrease in receivables and an $875,000 decrease in inventory, partly offset by lower payables. Financing cash flow was a $356,000 outflow after $1.725 million of net share proceeds and $2.081 million of loan repayments. The company reported $4.297 million of short-term loans, largely from Bank Leumi, and $760,000 of total long-term debt, including $570,000 due within one year. Bank Leumi facilities are secured by company assets and subsidiary shares.
Material changes and notable items
- RFID and Mobile revenue increased to $11.328 million from $10.451 million; Supply Chain revenue increased to $16.317 million from $15.496 million. Segment gross profit was $2.868 million and $2.177 million, respectively.
- The share count increased substantially during 2014, including shares issued under standby equity distribution agreements (SEDAs) and a $500,000 private placement to Novel Infrastructure. Year-end shares outstanding were 1,802,692, versus 1,258,245 a year earlier.
- At December 31, the company had $1.522 million cash and $634,000 positive working capital. Management said working capital was sufficient for present requirements; short-term credit availability nevertheless depends in part on bank renewals.
- Goodwill was $4.122 million, unchanged year over year; no impairment was recorded in 2012–2014. The impairment assessment depends on forecast cash flows and assumptions including a 15.75% discount rate and 2.5% long-term growth rate.
- OCS royalty obligations were approximately $3.7 million, contingent on sales of grant-funded products. The relevant software was no longer being sold in 2013 and 2014, so no royalty expense was recorded in those years. The company reported no legal proceedings.
Outlook, risks and contingencies
Management’s stated strategy is to broaden RFID and Mobile offerings and grow Supply Chain sales through additional manufacturer representations and international expansion. It anticipated that RFID and Mobile would gradually increase as a share of revenue, but provided no numerical guidance. Management planned to continue reducing loans through operating cash flow and equity financing.
- Key risks include customer and supplier concentration, price and product-mix pressure on gross margins, inventory obsolescence or customer order cancellations, competition and technology changes, and dependence on key personnel.
- Liquidity and refinancing are material considerations: a substantial portion of credit is provided by Bank Leumi, borrowings are partly variable-rate, and bank facilities are secured by company assets. A 100-basis-point increase in rates was estimated to reduce future after-tax cash flows by $50,000.
- Currency exposure arises because much revenue is U.S.-dollar-denominated while significant Israeli costs are in shekels. The shekel depreciated approximately 12% against the dollar in 2014; the company used forward contracts, whose reported effects were not material overall.
- The SEDAs can dilute existing holders. The February 2015 agreement allowed up to $1.3 million of share sales over 40 months at a discount to market pricing; it was entered into after the reporting year. The filing also described potential dilution under earlier equity lines.
- Other risks include Israeli political and security conditions, Nasdaq continued-listing requirements, and possible goodwill impairment. The filing states the company did not believe it was a PFIC for 2014, but gave no assurance about future classification.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective as of December 31, 2014; the auditor did not attest to that assessment.
Important facts for investors to verify
- Reconcile the filing’s working-capital disclosures: the balance-sheet totals imply $(409,000) for 2013, while selected financial data elsewhere reports $(500,000).
- Review the audited cash-flow statement and working-capital movements to assess how repeatable 2014 operating cash flow is.
- Confirm current borrowing balances, renewal terms, security interests and repayment capacity, particularly for revolving Bank Leumi credit.
- Track share issuance, SEDA drawdowns, resale registration and potential dilution; the filing reports different share counts at year-end and subsequent dates.
- Assess inventory quality and the drivers of the 2014 write-offs, customer concentration, and the progress of international expansion.
- Review assumptions supporting the $4.122 million goodwill balance and the status of the contingent OCS royalty obligation.