SuperCom Ltd. — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter filing. Figures are in U.S. dollars unless stated otherwise. SuperCom provides e-government identity, IoT and connectivity, and cybersecurity products and services.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $11.770 million | $16.475 million |
| Gross profit / margin | $5.581 million / 47.4% | $6.348 million / 38.5% |
| Operating expenses | $9.330 million | $14.521 million |
| Operating loss | $3.749 million | $8.173 million |
| Net loss | $7.867 million | $11.505 million |
| Net loss per share, basic and diluted | $0.45 | $0.71 |
| Cash used in operations | $6.514 million | $7.660 million |
- Revenue declined 28.6%. IoT revenue fell 34.4% to $7.656 million; cybersecurity fell 23.7% to $2.203 million; e-Gov was nearly flat at $1.911 million.
- Gross margin increased to 47.4%, which management attributed to cost optimization and revenue mix. Operating expenses fell 35.7%, including lower R&D, sales and marketing, and administrative costs.
- Net loss narrowed, but financial expenses, net, rose to $4.113 million from $3.289 million, reflecting interest, bank fees, and currency effects.
- Revenue from services was $7.242 million, down from $12.020 million; product revenue was $4.528 million, up from $4.455 million.
Liquidity, debt and cash flow
- Year-end cash and cash equivalents were $3.137 million; restricted cash was $0.815 million. Cash, cash equivalents and restricted cash together totaled $3.952 million.
- Current assets were $24.942 million and current liabilities $19.598 million, for reported positive working capital of about $5.344 million. The company reported an accumulated deficit of $85.331 million.
- Net cash used in operating activities was $6.514 million; investing activities used $1.571 million; financing activities provided $10.827 million. The increase in cash and restricted cash was $2.742 million.
- Balance-sheet debt included $7.204 million of short-term loans and other borrowings and $14.952 million of long-term loans. Separately, the notes report $15.625 million outstanding principal, including accrued interest, under the Fortress facility and a $7.407 million aggregate balance for subordinated debt at year-end. Related-party liabilities were also reported; verify debt components and classifications against the notes.
- During 2020, SuperCom raised about $7 million in gross proceeds through subordinated notes and about $3.2 million in a private placement. It also issued shares through option exercises and conversion of loans; shares outstanding rose from 16.214 million to 19.999 million.
- After year-end, the company raised $7 million in February 2021 through a two-year unsecured subordinated note carrying a 5% annual coupon and a provision increasing unpaid principal by 5% every six months. Management said an additional $6 million Fortress facility remained available subject to conditions.
Changes, outlook and risks
- Management said COVID-19 materially disrupted sales, project deployment, customer support, travel, production, shipments, collections and research activities. It cited lockdowns and operational limits as factors in lower IoT and cybersecurity revenue.
- Management stated that cost reductions and expected receipts from existing contracts, together with financing, were expected to fund operations for at least 12 months from the report date. This depends on financing availability and contract cash flows; no formal revenue or earnings guidance is provided.
- Remaining performance obligations were $9.75 million at year-end; the company expected approximately 35% to be recognized within 12 months and 65% thereafter. These obligations are not equivalent to guaranteed future revenue or cash collection.
- Credit and collection risk is material: the doubtful-account allowance increased to $8.667 million from $6.667 million, and the 2020 doubtful-debt provision was $2.0 million. Management linked provisions mainly to African and Latin American government customers. Two customers represented 24% of 2020 revenue (13% and 11%), versus one customer at 7% in 2019.
- Other key risks include continued losses and operating cash outflows, substantial borrowing and financing dependence, customer concentration, competitive bidding and long sales cycles, supplier reliance, currency exposure, and the uncertain effects of COVID-19. A hypothetical 10% currency move, primarily involving the NIS, was estimated to change expected 2020 net income by about $0.9 million, all else equal.
- Management identified a material weakness in internal control over financial reporting: insufficient accounting resources, inadequate segregation of duties, and insufficient monitoring and oversight. Disclosure controls were deemed ineffective at December 31, 2020. The financial statements received an unqualified audit opinion; the auditor did not express an opinion on internal-control effectiveness.
- A dispute with Merwell over services on a driver’s-license project remained in arbitration; the filing says a provision was recorded. No cash dividends have been paid, and none are anticipated in the foreseeable future.
Important facts for investors to verify
- Debt balances, interest and maturity terms, covenant compliance, and conditions for drawing the remaining Fortress facility; also assess the terms and repayment or share-settlement options on the February 2021 note.
- Whether the $9.75 million of remaining performance obligations converts into timely revenue and cash collections, especially given customer payment risks and the increased doubtful-account allowance.
- Progress in remediating the material weakness and restoring effective financial-reporting and disclosure controls.
- How much of the revenue decline and operating disruption persists after COVID-related restrictions, and whether cost reductions can be maintained without impairing growth.
- Potential outcomes and financial exposure from the Merwell arbitration, and the effect of further financing or share issuance on existing shareholders.