B.O.S. Better Online Solutions Ltd. — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; filed April 1, 2019. This is an annual report, not a standalone Q4 filing. Financial figures below are in U.S. dollars; statements use U.S. GAAP. The independent auditor issued an unqualified opinion on the 2018 and 2017 financial statements.
Business context and reporting period
BOS operates two divisions: RFID and Mobile Solutions, providing identification, inventory and related services, primarily in Israel; and Supply Chain Solutions, distributing electronic components and providing supply-chain services worldwide. Annual revenue was split 45% RFID and Mobile and 55% Supply Chain.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $32.650 million | $28.932 million |
| Gross profit / margin | $6.743 million / 20.7% | $6.345 million / 21.9% |
| Operating income | $1.204 million | $1.086 million |
| Net income | $990,000 | $773,000 |
| Basic and diluted EPS | $0.28 | $0.24 |
| Cash from operating activities | $743,000 in audited cash-flow statement | $377,000 in audited cash-flow statement |
| Cash and cash equivalents | $1.410 million | $1.533 million |
| Working capital | $7.637 million | $7.342 million |
| Total assets | $20.111 million | $21.407 million |
| Bank loans | $2.334 million total, including $467,000 current | $3.028 million total, including $505,000 current |
| Shareholders’ equity | $11.511 million | $10.218 million |
Q4 revenue was $9.093 million, compared with $7.925 million in Q4 2017. The filing does not provide a clear quarterly profit or cash-flow value.
Material changes versus the prior comparable period
- Revenue grew 13% year over year. Supply Chain revenue rose 17%, mainly on higher Far East sales; RFID and Mobile revenue rose 7%, attributed to new customers.
- Gross profit increased, but gross margin fell from 21.9% to 20.7%. Management attributed the decline primarily to competition in RFID and Mobile, where divisional gross margin declined from 26.5% to 23%.
- Operating expenses increased to $5.539 million from $5.259 million, including higher sales commissions and costs related to iDnext services. BOS terminated the iDnext service agreement in February 2019.
- Net income increased 28% to $990,000. Net financial expense declined to $255,000 from $297,000, mainly as bank debt fell.
- Revenue mix shifted geographically: Far East sales increased to $3.8 million from $1.4 million, while India sales decreased to $4.2 million from $4.5 million. Israel remained the largest market at $23.0 million, or 70% of revenue.
- Cash-flow figures are inconsistent within the filing: the audited statement reports operating cash flow of $743,000 in 2018 and $377,000 in 2017, while MD&A reports $765,000 and $355,000, respectively. Investing cash outflow is reported as $689,000 in the audited statement but $796,000 in MD&A. The filing text does not explain these differences.
Outlook, risks, contingencies and unusual items
- Management’s stated strategy is to expand both divisions, particularly through complementary acquisitions; the filing provides no numerical financial guidance.
- In March 2019 BOS agreed to acquire Imdecol’s assets, with closing expected by June 1, 2019. The purchase price depends partly on operating performance and includes cash, BOS shares and an inventory purchase. The cash portion is expected to be financed mainly with bank loans and internal cash. Closing and integration risks remain.
- Debt is owed to one bank, bears floating interest and is secured by charges over company and Israeli subsidiary assets. BOS reported that it met financial covenants at year-end. A 100-basis-point increase in variable interest rates was estimated to reduce after-tax future cash flows by $30,000.
- The company’s cash was $1.410 million, while $332,000 of restricted bank deposits brought cash and restricted cash to $1.742 million. Management stated that working capital was sufficient for ongoing operations, but acquisition financing could require more borrowing or equity.
- Equity financing may dilute shareholders: the 2017 standby equity distribution agreement allows share sales at a discount. As of March 15, 2019, $1.1 million remained available under that facility. Shares outstanding rose from 3,553,714 at year-end to 3,857,790 by March 15, 2019.
- A landlord claim seeks approximately $500,000; BOS disputes it and filed a counterclaim of approximately $222,000. A separate shareholder-related claim was settled in February 2019, with BOS paying a $35,000 insurance deductible.
- Other principal risks include competitive pressure on margins, customer order cancellations and inventory exposure, reliance on key suppliers, India and other overseas markets, currency and interest-rate movements, regulatory compliance, cybersecurity, and political and security conditions in Israel. The company also warns of Nasdaq listing compliance risk.
- Goodwill was $4.676 million, concentrated in RFID and Mobile; no impairment was recorded in 2018. Management’s valuation used a 15% weighted average cost of capital and 2% long-term growth rate. The company reported an accumulated deficit of $68.842 million.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2018. The auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Reconcile the conflicting cash-flow amounts in MD&A and the audited cash-flow statement, including the investing cash-flow difference.
- Review the Imdecol acquisition’s final terms, financing, closing status, contingent consideration and integration performance.
- Assess whether gross-margin pressure in RFID and Mobile persists and whether revenue growth converts into operating cash flow.
- Confirm bank covenant compliance, debt repayment capacity and the effect of variable rates; evaluate the proposed acquisition’s effect on liquidity.
- Track share issuance under the standby equity facility and option exercises, including resulting dilution.
- Monitor the landlord litigation, the April 2019 shareholder meeting request to replace the board, and Nasdaq continued-listing compliance.