Business Context and Reporting Period
Company: B.O.S. Better Online Solutions Ltd. (BOSC)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fiscal Year Ended December 31, 2011 (Filed March 29, 2012)
Business Overview: The Company operates in two segments: RFID and Mobile Solutions, and Supply Chain Solutions. It is an Israeli corporation listed on NASDAQ. In 2011, the Company continued to face financial challenges, resulting in a net loss and negative operating cash flow. Management implemented an efficiency plan including workforce reduction and debt restructuring.
Key Financial Metrics (Year Ended Dec 31, 2011)
| Metric | 2011 (USD '000) | 2010 (USD '000) |
|---|---|---|
| Revenues | $33,434 | $30,187 |
| Gross Profit | $6,510 | $7,483 |
| Gross Margin | 19.5% | 24.8% |
| Operating Loss | $(973) | $1,257 (Profit) |
| Net Loss | $(3,214) | $(635) |
| Diluted EPS | $(1.14) | $(0.24) |
| Cash and Equivalents (End of Period) | $411 | $703 |
| Operating Cash Flow | $(365) | $1,284 |
| Total Debt (Short & Long Term) | $9,026 | $8,172 |
| Shareholders' Equity | $3,598 | $3,713 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased by 10.8% to $33.4 million, driven primarily by the Supply Chain Solutions segment ($21.3M vs $17.7M in 2010).
- Profitability Decline: The Company swung from an operating profit of $1.3M in 2010 to an operating loss of $1.0M in 2011. This was largely due to a $555,000 impairment charge on goodwill and intangible assets (brand name and customer list) and increased inventory write-offs ($443k vs $36k).
- Debt Restructuring: A significant portion of the convertible note ($2.5M principal and accrued interest) was converted into 1.68 million ordinary shares at a reduced price of $1.50/share. This resulted in a non-cash "inducement" charge of $616,000 recorded as a financing expense.
- Liquidity: Cash and cash equivalents decreased by 41.5% to $411,000 due to negative operating cash flows and investing activities.
Guidance, Outlook, Risks, and Unusual Items
- NASDAQ Compliance Risk: On January 17, 2012, the Company received notice from NASDAQ that it failed to maintain the minimum $1.00 bid price requirement. The Company has 180 days (until July 16, 2012) to regain compliance.
- Bank Covenants: The Company did not meet financial covenants with Bank HaPoalim regarding profitability and ratios but obtained a written waiver for 2011. Management expects to meet bank covenants through December 31, 2012.
- Going Concern: Due to the net loss and negative operating cash flow, the Company has implemented an efficiency plan. Management believes current cash resources are sufficient for the next 12 months.
- Discontinued Operations: The Company's U.S. Supply Chain subsidiaries (Lynk and Summit) filed for Chapter 7 bankruptcy in late 2010; the case was closed in March 2011. No loss from discontinued operations was recorded in 2011.
- Unusual Items:
- Impairment: $555,000 charge for impairment of intangible assets.
- Inducement Expense: $616,000 non-cash charge related to the conversion of debt to equity.
- Investment Impairment: $156,000 other-than-temporary impairment loss on investment in New World Brands Inc. (NWB).
Investor Verification Checklist
- NASDAQ Status: Verify if the Company has regained compliance with the $1.00 minimum bid price requirement to avoid delisting.
- Debt Covenants: Confirm the Company's ability to meet Bank HaPoalim and Bank Leumi covenants in 2012 without further waivers.
- Cash Burn Rate: Assess the sustainability of operations given the negative operating cash flow of $365,000 and declining cash reserves.
- Segment Performance: Review the specific drivers of the Supply Chain segment's revenue growth versus the margin compression in the RFID segment.
- Related Party Transactions: Review ongoing agreements with Cukierman & Co. and THCAP for potential conflicts or additional costs.