B.O.S. Better Online Solutions Ltd. — FY 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; filed March 31, 2020. This is an annual report, not a standalone Q4 filing. Quarterly revenue was disclosed: Q4 2019 revenue was $9.354 million, compared with $9.093 million in Q4 2018. Financial amounts below are U.S. dollars; unless stated otherwise, figures are in millions.
Business context and financial performance
BOS operates two divisions: Supply Chain Solutions, which distributes electronic and electromechanical components and provides related services, and Intelligent Robotics and RFID, which sells automation, robotics, RFID and inventory-management solutions. The audited financial statements are prepared under U.S. GAAP.
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $33.817 | $32.650 |
| Gross profit / margin | $6.658 / 19.6% | $6.743 / 20.6% |
| Operating income (loss) | ($0.631) | $1.204 |
| Net income (loss) | ($0.913) | $0.990 |
| Basic and diluted EPS | ($0.23) | $0.28 |
| Cash flow from operations | ($0.915) | $0.743 |
| Cash and cash equivalents at year-end | $0.339 | $1.410 |
| Working capital | $7.313 | $7.637 |
| Bank loans, including current maturities | $2.705 | $2.334 |
Revenue increased approximately 3.6% year over year. Supply Chain revenue rose 8.5% to $19.750 million, while Intelligent Robotics and RFID revenue declined to $14.180 million from $14.633 million. Israel generated 69% of revenue; Far East markets contributed 15% and India 11%. Export revenue was $10.324 million, or 31% of the total.
Material changes and unusual items
- Gross margin declined to 19.6% from 20.6%. Gross profit decreased despite higher revenue.
- Operating results included $614,000 of goodwill impairment and $356,000 of intangible-asset impairment associated with the Imdecol robotics business acquired in June 2019.
- The Imdecol acquisition used $1.895 million of cash. The company reported contract cost overruns and delays on certain existing Imdecol projects, which also delayed revenue on other robotics projects. BOS said it did not expect Imdecol to repay amounts owed and wrote off part of Imdecol’s debt.
- Sales and marketing expense increased to $4.064 million, partly reflecting $350,000 of Imdecol-related costs. General and administrative expense rose to $2.255 million, including acquisition costs, a special-shareholder-meeting expense and costs related to the Co-CEO’s resignation.
- Financial expense rose to $330,000 from $255,000. Management attributed $120,000 of currency-difference expense to adopting the lease accounting standard. The company also recognized operating lease right-of-use assets and liabilities.
- Inventory rose to $5.407 million from $2.874 million; receivables increased to $10.063 million from $8.624 million. Operating cash flow turned negative, reflecting working-capital movements including higher receivables and inventory.
Cash, debt, liquidity and financing
At year-end, audited balance-sheet cash was $339,000, with $240,000 of restricted bank deposits. Current assets were $17.322 million and current liabilities were $10.009 million, yielding $7.313 million of working capital. Total assets were $25.199 million and shareholders’ equity was $12.557 million. The filing states management considered working capital sufficient for ongoing operations, while also identifying continued operating cash generation and financing availability as important.
Bank debt was $2.705 million, of which $664,000 was current and $2.041 million long-term. The loans carry a floating NIS rate (reported weighted rate 3.5%, Prime + 1.75%), are secured by charges over company and Israeli-subsidiary assets, and include financial covenants. BOS reported compliance with covenants at December 31, 2019. Contractual obligations included $7.259 million of purchase obligations for services and inventory, in addition to debt, leases and severance obligations.
Subsequent to year-end, Ruby-Tech obtained a $600,000 YA II loan at 8% interest, repayable in 12 monthly installments beginning March 2020; BOS guaranteed the loan and issued YA II warrants for up to 100,000 shares at $3.00. In March 2020, BOS also increased its bank credit by $180,000 at Prime + 1.5%, repayable over two years beginning June 2020. A separate equity distribution agreement had $1.1 million remaining available as of March 31, 2020; draws can dilute shareholders.
Outlook, risks and contingencies
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management describes a strategy to expand U.S. robotics sales, including through its Dallas sales office, and to broaden Supply Chain manufacturer representations.
- COVID-19 was identified as a material uncertainty after year-end: BOS relies on some Chinese manufacturers, and disruption could affect supply, customer activity, collections, operations, cash flows and financial condition. The filing does not quantify the impact.
- Key risks include low cash balances and negative 2019 operating cash flow; dependence on bank financing and covenant compliance; customer and supplier concentration; exposure to India and Far East demand; foreign-exchange and floating-rate risk; competition and technology changes; and integration and execution risks from Imdecol.
- A facilities-related lawsuit remained pending as to the alleged depreciation in property value after the court dismissed the other allegations and BOS’s counterclaim; a court-appointed appraiser was to assess the remaining issue. In February 2020, a court ruled that pledges securing Imdecol’s debt to BOS could be enforced.
- BOS disclosed a contingent $3.794 million royalty obligation relating to historical government R&D grants, but stated the relevant software was no longer sold or expected to be sold and that it anticipated no future royalty payments.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting as of year-end; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether the Imdecol business can meet operating and cash-flow expectations, and whether contract overruns, delayed projects or further impairments arise.
- Cash conversion and working-capital trends, particularly the growth in receivables and inventory and the ability to collect customer balances.
- Debt repayment capacity, covenant compliance, collateral exposure and the terms and repayment performance of the 2020 YA II and bank loans.
- The actual operational and financial effects of COVID-19, including Chinese supply availability and customer collections.
- Potential dilution from the equity distribution agreement, outstanding warrants and options, and any further share issuance.
- The status and potential financial exposure of the remaining property-related litigation.