Alarum Technologies Ltd. (formerly Safe-T Group Ltd.) — FY2020 Form 20-F Summary
Business context and reporting period
The filing is an annual report on Form 20-F for the fiscal year ended December 31, 2020, prepared under IFRS. It is not a standalone fourth-quarter filing. The company provides cybersecurity and secure-access solutions through its Cyber segment and internet proxy network services through its IPPN segment, primarily through NetNut Ltd. and, following its December 2020 acquisition, Chi Cooked LLC. The IPPN segment generated most of 2020 revenue.
Financial performance and key metrics
| U.S. dollars in thousands, except percentages and per-share data | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | 4,886 | 3,284 | +49% |
| Gross profit | 2,387 | 1,395 | +71% |
| Gross margin | 49% | 42% | +7 percentage points |
| Operating loss | (11,331) | (9,791) | Worse by 1,540 |
| Net loss | (7,845) | (12,998) | Improved by 5,153 |
| Non-IFRS net loss | (6,153) | (7,053) | Improved by 900 |
| Net cash used in operating activities | (6,612) | (6,733) | Improved by 121 |
| Net cash used in investing activities | (1,189) | (5,596) | Improved by 4,407 |
| Net cash provided by financing activities | 14,710 | 13,112 | +1,598 |
| Cash and cash equivalents at year-end | 11,017 | 4,341 | +6,676 |
| Total liabilities | 6,757 | 15,060 | Down by 8,303 |
| Total equity | 16,216 | 2,777 | +13,439 |
Revenue consisted of $3.839 million from IPPN services, $447,000 from licenses, $587,000 from maintenance and support, and $13,000 from other services. Cyber revenue declined to $1.047 million from $1.308 million, while IPPN revenue increased to $3.839 million from $1.976 million.
Cost of revenues increased 32% to $2.499 million, mainly because NetNut was consolidated for the full year. Research and development expense decreased 11% to $2.202 million, while selling and marketing expense increased 11% to $4.215 million and general and administrative expense increased 12% to $4.197 million.
The operating loss included $2.759 million of goodwill impairment and $345,000 of contingent-consideration measurement expense. Net financial income of $3.240 million, primarily from changes in the fair value of financial liabilities and warrants, materially reduced the reported net loss. Basic and diluted loss per share were each $0.02.
Liquidity, debt and capital resources
- Year-end cash and cash equivalents were $11.017 million; management reported approximately $21.8 million of cash and cash equivalents, including short-term bank deposits, as of March 17, 2021.
- The company had negative operating cash flow of $6.612 million in 2020 and continues to depend on external financing while it remains loss-making.
- Convertible debentures were fully converted or repaid during 2020, leaving no convertible debenture balance at December 31, 2020. Derivative financial instruments totaled $1.448 million.
- Contingent consideration liabilities totaled $1.599 million, including $915,000 classified as current and $684,000 as non-current.
- Financing cash inflows included $13.457 million of net public and private offering proceeds and $3.671 million from exercises of options, warrants and pre-funded warrants.
- The auditor reported substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, negative working capital and negative operating cash flows. The financial statements contain no going-concern adjustments.
Material changes versus the prior comparable period
- Revenue grew 49%, driven primarily by a full year of NetNut IPPN revenue and partly offset by a 29% decline in legacy Secure Data Exchange revenue.
- Gross margin improved from 42% to 49%, but operating loss increased because operating expenses and goodwill impairment exceeded gross-profit growth.
- Net loss improved substantially because 2020 included net financial income rather than the $3.184 million of net financial expense recorded in 2019.
- NetNut goodwill impairment increased to $2.759 million in 2020 from $1.002 million in 2019. Management cited COVID-19 effects, lower forecast operating results and potential short-term legal matters in its impairment assessment.
- The company acquired Chi Cooked LLC in December 2020 for initial consideration of approximately $1.049 million in cash, plus $684,000 of estimated contingent consideration. Chi Cooked contributed $92,000 of 2020 revenue after acquisition.
- The company completed the development and deployment of Secure File Access and released the generally available ZoneZero VPN solution. It stopped actively selling the legacy SDE product and shifted resources toward Zero Trust and IPPN offerings.
- Shares issued and paid increased to 726.1 million at December 31, 2020 from 56.4 million at December 31, 2019, reflecting offerings, warrant exercises and other equity activity, including the effect of the 2019 reverse split presentation.
Guidance, outlook, commentary and risks
Management expects to continue investing in research and development, sales and marketing, channel partners and international expansion. It planned to increase IPPN sales and marketing investment in 2021, use Proxy-in-a-Box to pursue defense and law-enforcement markets, and release the TrustWall Zero Trust Network Access solution later in 2021. Management also stated that it intended to control spending and reduce its burn rate while pursuing profitability.
Management believed available resources were sufficient for at least the next 12 months, but stated that substantial additional capital would likely be required. No quantitative revenue or earnings guidance was provided in the filing.
- COVID-19 lengthened cybersecurity sales cycles and slowed sales in certain IPPN verticals; the duration and severity of its effects remained uncertain.
- The company remains development-stage and has incurred recurring losses since inception. Additional equity or debt financing may be unavailable or dilutive.
- Competition is intense in both cybersecurity and IPPN markets, with larger and better-capitalized competitors potentially creating pricing and customer-acquisition pressure.
- The company relies on direct sales, OEMs, distributors, resellers, systems integrators and other channel partners. Direct sales represented approximately 92% of 2020 revenue and channel-partner and reseller sales approximately 8%.
- Luminati Networks filed patent-infringement and trade-secret claims against NetNut in June 2020. The case was in an early stage, no damages amount had been identified, and no liability was accrued.
- The company identified material weaknesses in internal control over financial reporting, including inadequate segregation of duties and ineffective period-end reporting controls. Disclosure controls and procedures were also ineffective as of December 31, 2020.
- The company is subject to foreign-exchange risk, particularly because a significant portion of expenses is denominated in NIS while most revenue is denominated in U.S. dollars.
- Israeli Innovation Authority obligations remain relevant to acquired technology, including approximately $140,000 of recorded royalty liability and potential restrictions or additional payments relating to technology transfers.
Most important facts for investors to verify
- Whether the company converts revenue growth, especially IPPN growth, into sustainable positive operating cash flow and profitability.
- The current cash balance, quarterly cash burn, financing availability and potential dilution from future equity offerings, warrants and options.
- The status, potential damages and operating impact of the Luminati litigation.
- Progress in remediating the identified internal-control material weaknesses.
- The sustainability of the 49% gross margin and the effect of ISP, network, server and acquired-intangible amortization costs.
- Performance of the Chi Cooked acquisition and the potential 2021 earn-out obligation, which depends on revenue and a minimum 37.5% operating margin.
- Whether cybersecurity sales cycles, COVID-19 effects, competition and regulatory developments affect adoption of ZoneZero, Secure File Access and IPPN products.