B.O.S. Better Online Solutions Ltd. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. Filed April 14, 2014. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4-only financial results. Financial amounts below are in U.S. dollars unless stated otherwise, generally in thousands.
Business context
BOS is an Israeli provider of RFID and mobile identification/data-collection solutions and a distributor of electronic components and supply-chain services. It reports two divisions: RFID and Mobile Solutions, and Supply Chain Solutions. The company prepared its financial statements under U.S. GAAP. Its 2013 financial statements received an unqualified audit opinion.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Revenue | $25.903 million | $24.503 million | Up 5.7% |
| Gross profit | $5.031 million | $5.068 million | Down slightly |
| Gross margin | 19.4% | 20.7% | Down 1.3 percentage points |
| Operating profit | $584,000 | $192,000 | Improved |
| Financial expense, net | $549,000 | $781,000 | Lower, mainly from reduced currency expenses and debt |
| Profit (loss) before tax | $13,000 | $(736,000) | Returned to slight pretax profit |
| Net profit (loss) | $0 | $(549,000) | Breakeven after $13,000 tax expense |
| Cash from operating activities | $1.048 million | $1.709 million | Positive, but lower year over year |
RFID and Mobile Solutions revenue increased 17.5% to $10.451 million, attributed to mobile-equipment demand and new logistics centers. Supply Chain Solutions revenue declined to $15.496 million from $15.915 million. The divisions generated gross profit of $2.882 million and $2.149 million, respectively. Israel and other locations accounted for 79% of revenue; exports were 21% of revenue. One Supply Chain customer represented 13% of total revenue.
Cash and cash equivalents were $1.005 million, compared with $354,000 a year earlier. Working capital remained negative at $500,000, improving from negative $739,000. Current assets were $13.679 million and current liabilities $14.179 million. Total assets were $19.187 million and shareholders’ equity $3.703 million.
At year-end, short-term bank loans were $5.426 million and long-term bank loans, including current maturities, were $1.279 million. The company also owed $793,000 related to the Dimex acquisition. These amounts total approximately $7.5 million of bank and acquisition-related obligations; the filing separately describes bank loans as $7.5 million, so the precise debt measure should be checked against the debt notes. Net cash provided by investing activities was $133,000, including $337,000 of proceeds from a sale-and-leaseback. Financing activities used $530,000. Cash increased by $651,000 during the year.
Changes versus prior periods
- Revenue recovered from the 2012 decline, but remained below 2011 revenue of $33.434 million.
- Gross profit was nearly flat while revenue grew, and gross margin contracted. Inventory write-offs decreased to $121,000 from $385,000.
- Operating expenses fell to $4.447 million from $4.876 million. The company reported no R&D expense in 2013 after outsourcing software maintenance, development and support; sales and marketing costs also fell with workforce reductions, while G&A benefited partly from a royalty-liability reversal.
- Operating profit improved to $584,000 from $192,000 in 2012; the company moved from a $549,000 net loss to breakeven. It had reported a $3.214 million net loss in 2011.
- Year-end bank loans and acquisition-related debt declined overall from approximately $8.4 million in 2012 to approximately $7.5 million in 2013, as described by management.
Outlook, risks and unusual items
Management intends to expand both divisions, including RFID and mobile offerings and international Supply Chain sales. No numerical revenue, earnings or cash-flow guidance is provided. Management stated that cash resources were expected to meet operating needs for at least 12 months, while cautioning that this was not assured.
- Liquidity and financing: BOS relies on operating cash flow and credit from Bank Leumi and Bank HaPoalim. Its assets secure Bank Leumi facilities. The company was out of compliance with certain Bank HaPoalim financial covenants at December 31, 2013; it had a waiver, and in February 2014 the bank agreed to cancel covenants for 2014 and future years for an approximately $5,000 fee.
- Subsequent financing and dilution: In February 2014, YA Global provided a one-year $500,000 bridge loan at 10% interest, repayable in nine monthly installments beginning three months after receipt. A separate three-year equity distribution agreement permits up to $2 million of share sales at a 5% discount to a specified VWAP measure. Under the June 2013 equity line, BOS had drawn $450,000 and issued 67,509 shares by March 31, 2014. These facilities may dilute existing shareholders.
- Operating and market exposure: Risks include customer and supplier concentration, fluctuating product mix and margins, order cancellations, competition and technology changes, international and Israeli economic conditions, and NIS/U.S. dollar movements. Five suppliers accounted for 34% of Supply Chain purchases and another five for 58% of RFID and Mobile purchases in 2013.
- Commitments and contingencies: The company disclosed an approximately $3.316 million off-balance-sheet contingent royalty obligation to Israel’s Office of the Chief Scientist, payable only if relevant products generate sales. Total listed contractual obligations were $6.523 million, including $3.736 million of service and inventory purchase obligations. A 2008 contract claim seeking approximately $43,000 was dismissed in June 2013, with legal costs awarded to BOS; the filing states there were no other legal proceedings.
- Other notable items: BOS sold owned real estate for $337,000 in May 2013 and leased it back for five years, with an option to extend for another five years. It recorded no goodwill or intangible-asset impairment in 2013; goodwill was $4.122 million, with valuation dependent on projected cash flows and assumptions. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an internal-control attestation.
Key facts investors should verify
- Review the audited statements and debt notes to reconcile the filing’s differing descriptions of approximately $7.5 million in loans versus the separate bank-loan and Dimex acquisition balances.
- Assess liquidity against negative working capital, the $5.4 million revolving facility, scheduled debt payments and purchase commitments; verify the status and terms of the 2014 bridge loan and both YA Global equity lines.
- Track whether revenue growth can improve gross margin, particularly given the 2013 margin decline and reliance on key customers and suppliers.
- Check subsequent share issuance, warrant extensions and potential equity-line drawdowns for dilution; shares outstanding rose from 1,258,245 at year-end to 1,298,215 at March 31, 2014.
- Monitor the assumptions supporting the $4.122 million goodwill balance, the contingent royalty obligation, and the company’s ability to sustain operating cash flow and reach profitability.