Business Context and Reporting Period
This Form 20-F covers Safe-T Group Ltd. for the fiscal year ended December 31, 2019; the filing text identifies the registrant as Safe-T Group Ltd., not Alarum Technologies Ltd. The company provides Zero-Trust cybersecurity and secure-access solutions, as well as Secure Internet Access proxy services through its NetNut subsidiary. Financial statements are prepared under IFRS in U.S. dollars.
NetNut was acquired on June 12, 2019, and contributed proxy-service revenue beginning in the second half of 2019. The company had approximately 160 customers at December 31, 2019 and 66.9 million ordinary shares outstanding at that date, after a 20-for-1 reverse split effective October 21, 2019.
Financial Performance and Position
| U.S. dollars in thousands, except per-share data | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | 3,284 | 1,466 | +124% |
| Gross profit | 1,395 | 675 | +107% |
| Gross margin | 42% | 46% | Down 4 percentage points |
| Operating loss | (9,791) | (9,206) | Loss increased 6% |
| Net loss | (12,998) | (11,753) | Loss increased 11% |
| Basic loss per ordinary share | (0.96) | (6.66) | Not directly comparable after share changes |
| Non-IFRS net loss | (7,053) | (8,688) | Improved 19% |
| Cash and cash equivalents at year-end | 4,341 | 3,717 | +17% |
| Total assets | 17,837 | 6,368 | +180% |
| Total liabilities | 15,060 | 2,658 | +467% |
| Shareholders’ equity | 2,777 | 3,710 | Down 25% |
Revenue consisted of $1.976 million from proxy services, $625,000 from licenses, $655,000 from maintenance and support, and $28,000 from other services. Proxy services represented approximately 60% of total revenue and did not contribute revenue in 2018. North America accounted for 43% of 2019 revenue, Israel for 33%, and the rest of the world for 24%.
Operating expenses were $11.186 million, including research and development of $2.485 million, selling and marketing of $3.783 million, general and administrative expenses of $3.757 million, $1.002 million of goodwill impairment, and $159,000 of contingent-consideration measurement expense. Approximate operating and net margins were negative 298% and negative 396%, respectively.
Net cash used in operating activities was $6.733 million, compared with $8.736 million in 2018. Investing cash use was $5.596 million, primarily due to the NetNut acquisition. Financing activities provided $13.112 million, primarily from equity offerings and convertible debentures. Cash increased by $624,000 after exchange-rate effects, or $783,000 before those effects.
Year-end current liabilities included $7.151 million of convertible debentures, $1.637 million of derivative financial instruments, $2.170 million of contingent consideration, and $1.553 million of other payables and accruals. The filing states that the company had negative working capital, although the source text does not provide a clear current-assets-minus-current-liabilities amount.
Material Changes Versus the Prior Comparable Period
- Revenue more than doubled, primarily because of the NetNut acquisition and $1.976 million of proxy-service revenue.
- Gross profit increased, but gross margin declined from 46% to 42%, reflecting the cost structure of proxy services and acquired intangible-asset amortization.
- Operating loss and net loss widened despite revenue growth. General and administrative expenses increased 95%, while selling and marketing expenses declined 32% following efficiency measures.
- Goodwill and intangible assets increased substantially following NetNut, but the company recorded $1.002 million of goodwill impairment and $270,000 of technology impairment.
- Operating cash burn improved by $2.003 million, but investing cash use increased sharply because of the acquisition.
- The company raised approximately $8.232 million through convertible debentures and warrants during 2019 and completed additional public and registered-direct offerings. These financings increased dilution and financial liabilities.
- Non-IFRS net loss improved because the measure excludes amortization and impairment, share-based compensation, issuance and acquisition expenses, and fair-value changes in convertible instruments, warrants, and contingent consideration.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that cash and cash equivalents, including short-term deposits, were approximately $2.6 million as of March 29, 2020 and expected to fund operations only until at least August 2020. The auditor’s report includes an explanatory paragraph regarding substantial doubt about the company’s ability to continue as a going concern. Management expects to require substantial additional equity or debt financing and does not provide a clear profitability or revenue forecast.
The company expects to continue investing in research and development, international sales and marketing, partnerships, and expansion of the proxy-services business, including China. It also stopped actively selling its legacy Secure Data Exchange product in early 2020 while continuing to support existing customers.
- The NetNut purchase agreement provided for contingent consideration of up to $5 million; $2.170 million was accrued at December 31, 2019.
- The company was required to transfer $300,000 to NetNut but had transferred only $175,000 by year-end. It recorded provisions for the earn-out and potential compensation related to the breach, and litigation could materially affect results.
- The company had material weaknesses in internal control over financial reporting as of December 31, 2019, including inadequate segregation of duties and ineffective period-end reporting controls. Disclosure controls were deemed ineffective.
- COVID-19 was identified as a subsequent-event risk. The filing states that the impact was uncertain, with potential adverse effects from operational restrictions and market disruption, but possible demand benefits for remote-access solutions.
- The company remains exposed to intense cybersecurity competition, evolving threats, product defects, intellectual-property disputes, channel-partner dependence, foreign-exchange movements, Israeli political and security conditions, and regulatory restrictions related to Israeli Innovation Authority grants.
- Following year-end, additional prefunded warrants were exercised and a lender converted $315,000 of debentures into 100,000 ADSs. The company also increased its authorized share capital to 1.5 billion ordinary shares in January 2020.
Facts Investors Should Verify
- Confirm the registrant’s current legal name and whether the filing relates to Alarum Technologies Ltd. or the historical Safe-T Group Ltd.
- Reconcile the company’s liquidity runway, negative working capital, debt maturities, and financing needs against the going-concern warning.
- Review the NetNut acquisition accounting, the $2.170 million contingent consideration accrual, the $1.002 million goodwill impairment, and the unresolved funding covenant breach.
- Assess dilution from convertible debentures, warrants, prefunded warrants, employee options, earn-out shares, and the expanded authorized share capital.
- Evaluate whether proxy-service growth can produce sustainable gross margins and operating cash flow after the acquisition-related costs and amortization.
- Monitor remediation of the material weaknesses in internal control and any future auditor or SEC disclosure regarding their status.
- Review subsequent 2020 financing, conversions, warrant exercises, and the actual operational effect of COVID-19, none of which is fully reflected in the 2019 financial statements.