SuperCom Ltd. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this filing is an annual report and does not provide standalone fourth-quarter results. Financial amounts below are U.S. dollars; unless noted, millions.
Business context
SuperCom provides e-government identity systems, IoT and connectivity products and services, and cybersecurity solutions. Its 2017 reporting segments were e-Gov, IoT, and Cyber Security. The company continued integrating and optimizing businesses acquired in 2015–2016.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $33.264 | $20.025 |
| Gross profit / margin | $12.913 / 38.8% | $2.564 / 12.8% |
| Operating income (loss) | $(6.516) | $(11.599) |
| Net income (loss) | $(6.661) | $(13.993) |
| Basic and diluted EPS | $(0.45) | $(0.93) |
| Net cash used in operating activities | $(1.983) | $(11.045) |
| Cash and cash equivalents at year-end | $1.037 | $1.708 |
- Revenue rose 66%. e-Gov revenue increased to $18.232 million from $7.020 million, primarily due to a large contract and higher recurring revenue. IoT revenue was $11.264 million, up 4%; Cyber Security revenue was $3.768 million, up 73%.
- Gross margin improved substantially, which management attributed to revenue mix, higher-margin cybersecurity and recurring e-Gov revenue, completion of a lower-margin e-Gov deployment, and higher-margin IoT contracts.
- 2016 operating results included a $10.515 million bargain-acquisition gain from Safend and Alvarion. Excluding that nonrecurring gain, 2016 operating expenses were $24.678 million; management said 2017 expenses of $19.429 million were down 21% on that comparison. 2017 R&D expense was $7.238 million; total R&D investment including capitalized software development was $8.405 million.
- 2017 other income of $2.021 million included a $1.384 million recovery of a pre-acquisition receivable and a $0.593 million gain from revaluing contingent consideration. Financial expense, net, was $0.538 million, including foreign-exchange expense.
Balance sheet, debt and liquidity
- Year-end current assets were $27.413 million and current liabilities $17.960 million, for working capital of approximately $9.453 million. Total assets were $54.198 million; total liabilities were $21.491 million; shareholders’ equity was $32.707 million.
- Cash was $1.037 million, plus $1.063 million of restricted bank deposits, principally for guarantees and lease obligations. Trade receivables were $12.456 million, net of a $2.341 million doubtful-account allowance.
- Short-term bank loans were $0.738 million. Related-party loans of $2.082 million were classified as long-term and bear no interest; the company reported a related-party commitment not to demand repayment for 12 months. Related parties also provided an additional credit line of up to $1.5 million in 2018. Total debt is not stated as a single consolidated figure in the filing.
- Cash declined by $0.671 million during 2017. Financing provided $2.793 million, mainly from bank and related-party loans; investing used $1.481 million.
Changes, outlook and risks
- The net loss narrowed by $7.332 million year over year, while operating cash use improved by $9.062 million. The 2016 comparison is affected by its bargain-acquisition gain and restructuring/acquisition-related costs.
- Management expected 2018 headcount and overhead reductions, including a significant R&D reduction, to lower operating expenses. It said current customer-contract cash flows and cost savings were expected to support positive operating cash flow and fund operations for at least 12 months from the financial statement issuance date. This is management’s expectation, not a guarantee.
- Customer concentration remained significant: five customers accounted for 50% of 2017 revenue; one customer represented 21%. The company warned that loss or reduced orders from major customers could harm results.
- Foreign-exchange risk is material: the NIS appreciated 9.8% against the U.S. dollar in 2017. Management estimated a hypothetical 10% currency movement could change expected 2017 net income by approximately $2.0 million. The company did not use hedging instruments in 2017.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of inadequate segregation of duties in the period-end financial reporting process. It planned to hire a CFO and add qualified personnel, and expected remediation during 2018. The independent auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- Material risks include integration and execution of acquisitions, competitive bidding and government budgets, long and uneven sales cycles, reliance on a limited number of customers, international and currency exposure, and dependence on suppliers and third parties. An arbitration involving Merwell has a recorded provision; the company described a consolidated shareholder class action over alleged 2015 projections as having remote likelihood of an unfavorable outcome.
- The company reported no cash dividends and did not anticipate paying them in the foreseeable future. It also disclosed that the 2018 adoption of the new revenue standard could affect recognition timing for software licenses and some long-term contracts; its impact was still being assessed.
Important facts for investors to verify
- Whether planned cost reductions and contract cash receipts deliver positive operating cash flow, given low unrestricted cash and continued cash burn.
- Collection and timing of receivables, including the $12.456 million net receivable balance and the large pre-acquisition recovery recorded in 2017.
- Customer concentration, renewal prospects, and the timing and profitability of large e-Gov and government contracts.
- Availability and terms of the related-party credit line, repayment standstill, and outstanding related-party loans.
- Progress in remediating the material internal-control weakness and the effect of the new revenue-recognition standard on reported results.