Alarum Technologies Ltd. annual report, Q4 FY2023

Alarum Technologies Ltd. — FY2023 Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 20-F and does not provide a separate Q4 2023 income statement or cash-flow statement.

Business Context

Alarum is an Israel-based global SaaS provider operating two continuing segments: enterprise internet access and web data collection, primarily through NetNut, and consumer internet access, primarily through CyberKick. Enterprise internet access is the principal growth business, serving approximately 700 customers at year-end 2023. The consumer segment was materially downsized in July 2023 and is maintained primarily for approximately 5,000 existing paying users.

In July 2023, Alarum sold its legacy enterprise cybersecurity business. The disposed business is presented as a discontinued operation. The company reports under IFRS as issued by the IASB.

Financial Performance and Liquidity

U.S. dollars in millions, except percentages	2023	2022	Change
Revenue	26.5	18.6	+42%
Gross profit	18.8	10.1	+86%
Gross margin	71%	55%	+16 pts
Operating loss	(5.5)	(12.7)	Improved
Loss from continuing operations	(5.6)	(12.5)	Improved
Net loss	(5.5)	(13.2)	Improved
Adjusted EBITDA	5.2	(8.5)	Improved
Cash flow from operating activities	4.7	(8.1)	Turned positive

Enterprise internet access revenue increased to $21.3 million from $8.5 million, while consumer internet access revenue decreased to $5.2 million from $10.0 million.
SaaS revenue increased to $23.7 million from $11.9 million. Advertising revenue declined to $2.8 million from $6.7 million and became immaterial in the second half of 2023.
Cost of revenue declined 9% to $7.7 million, primarily because consumer traffic-acquisition costs fell after the business was scaled down. The decline was partly offset by higher enterprise IP-address and infrastructure costs.
Operating expenses declined to $24.3 million from $22.9 million before considering the more detailed expense movements described by management; sales and marketing decreased to $10.0 million, research and development to $3.6 million, and general and administrative expenses to $4.4 million.
Alarum recorded $8.991 million of goodwill and intangible-asset impairment related to CyberKick, including $6.311 million of goodwill impairment and $2.680 million of intangible-asset impairment. The impairment was primarily driven by a major customer purchase pause, higher churn and the consumer-business scale-down.
Cash and cash equivalents were $10.9 million at December 31, 2023, compared with $3.3 million at December 31, 2022. Management reported approximately $14.0 million of cash and cash equivalents as of February 29, 2024.
Cash from investing activities was $0.6 million, including repayment of restricted deposits. Capital expenditures were approximately $55,000.
Cash from financing activities was $2.2 million, supported by equity offerings and warrant exercises, partly offset by debt repayments and lease payments.
Total liabilities were $6.9 million at year-end. Debt included $1.092 million of long-term loans, of which $0.290 million was classified as current. The $1.6 million short-term bank loan was fully repaid in August 2023. Lease liabilities totaled $0.893 million.
Net dollar-based retention for the enterprise business was 1.53 at December 31, 2023, indicating a 53% increase in annual recurring revenue from the prior-year customer cohort.

Material Changes Versus 2022

The business shifted toward enterprise web data collection and away from consumer customer acquisition, substantially reducing consumer media, traffic-acquisition and operating costs.
Enterprise revenue growth, improved cost structure and lower legal expenses drove a significant improvement in operating loss, adjusted EBITDA and operating cash flow.
Gross margin expanded from 55% to 71%, reflecting revenue mix and the reduction of lower-return consumer activities.
CyberKick goodwill and intangible assets were substantially impaired, leaving no CyberKick goodwill and $0.247 million of related technology intangible assets at year-end.
Alarum completed a September 2023 private placement generating $3.82 million of net proceeds and issued additional warrants. It also issued 2.394 million ordinary shares through its ATM program before terminating the program in August 2023.
Ordinary shares outstanding increased from 32.6 million at December 31, 2022 to 59.7 million at December 31, 2023, primarily reflecting equity issuance, earn-out shares and warrant exercises.
The company remediated the material weakness in internal control over financial reporting previously reported at December 31, 2022. Management concluded controls were effective at December 31, 2023; no external auditor attestation was required because Alarum is a non-accelerated filer.

Outlook, Commentary and Risks

Management believes current resources are sufficient to fund anticipated needs for at least the next twelve months, based on cash on hand and operating plans. Management nevertheless states that additional capital could be required if operating cash flow becomes negative or if the company increases investment in research and development, sales and marketing, working capital or acquisitions.

Management’s strategy is to expand enterprise IP proxy and web-data services into automated data collection and labeling, including data-collection tools, data-set libraries and related analytics. The filing does not provide formal revenue or earnings guidance.

Key risks include intense competition, pricing pressure, customer concentration, dependence on ISP and proxy-provider relationships, cybersecurity incidents, service outages and rapidly changing technology.
Privacy, data-protection and web-scraping regulations, including GDPR, CCPA and evolving rules concerning automated data collection, may restrict the company’s business model or increase compliance costs.
Three enterprise customers generated approximately 27% of enterprise internet-access revenue; one customer generated $3.055 million, or 12% of total 2023 revenue.
The company is exposed to foreign-exchange risk because most revenue is denominated in U.S. dollars while a significant portion of expenses is denominated in Israeli shekels. No currency hedging was used.
The Israel-Hamas war had not materially affected operations through the filing date, but management cannot predict its duration or future effect on operations, personnel, counterparties, financing or the Israeli economy.
Outstanding warrants, options and RSUs create potential dilution. As of March 10, 2024, approximately 15.15 million additional ordinary shares were issuable upon exercise of outstanding warrants and employee options.
The filing contains differing PFIC statements: one risk disclosure says the company did not expect to be a PFIC for 2023, while the U.S. tax discussion states it may have been a PFIC for 2023. Investors should obtain tax advice and verify the company’s final PFIC position.
Alarum does not anticipate paying cash dividends in the foreseeable future.

Important Facts to Verify

Confirm the absence of standalone Q4 2023 financial statements and distinguish annual results from fourth-quarter results.
Reconcile the reported $8.991 million CyberKick goodwill and intangible-asset impairment with the $6.311 million goodwill impairment shown separately in operating results.
Assess whether enterprise revenue growth and the 1.53 net dollar-based retention rate are sustainable after the consumer-business withdrawal.
Review customer concentration, including the three enterprise customers representing approximately 27% of enterprise segment revenue.
Analyze the full dilution impact of outstanding warrants, options and RSUs, including warrants issued in the September 2023 financing.
Verify post-year-end warrant exercises, cash balances and debt repayments through the latest available filing.
Evaluate the company’s ability to maintain positive operating cash flow without additional equity or debt financing.
Clarify the company’s PFIC status for U.S. tax purposes for 2023 and future years.