B.O.S. Better Online Solutions Ltd. — FY 2012 Form 20-F
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone 2012 Q4 filing. Financial amounts below are in U.S. dollars; unless noted, figures are in millions.
Business context
BOS, an Israeli company listed on the Nasdaq Capital Market, operates two divisions: Supply Chain Solutions, which distributes and consolidates electronic components, and RFID and Mobile Solutions, which provides automatic identification and data-collection products and services. In 2012, Supply Chain Solutions generated 65% of reported revenue and RFID and Mobile Solutions 36%, before intercompany eliminations.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $24.503 million | $33.434 million |
| Gross profit / gross margin | $5.068 million / 20.7% | $6.510 million / 19.5% |
| Operating income (loss) | $0.192 million | ($0.973 million) |
| Financial expenses, net | $0.781 million | $2.241 million |
| Net loss | ($0.549 million) | ($3.214 million) |
| Operating cash flow | $1.709 million | ($0.365 million) |
| Cash and cash equivalents at year-end | $0.354 million | $0.411 million |
| Working capital at year-end | ($0.739 million) | ($0.349 million) |
Revenue fell 26.7%. Gross profit declined, although gross margin improved. The company returned to a modest operating profit and reduced its net loss; lower financial expenses were primarily related to the conversion of convertible debt in 2011. Operating cash flow improved, but cash declined after $0.311 million used in investing activities and $1.455 million used in financing activities.
At year-end, current liabilities were $12.876 million versus current assets of $12.137 million. Short-term bank loans and current maturities totaled $6.383 million, including $5.959 million drawn under a revolving facility. Long-term bank loans were $1.188 million, and the liability to Dimex Systems was $0.846 million. Bank debt and the Dimex liability together were approximately $8.4 million, excluding other obligations and interest.
Material changes versus the prior year
- Management attributed the revenue contraction in both divisions mainly to the global economic slowdown and intensified competition; it also closed an unprofitable product line.
- Operating expenses fell, including sales and marketing to $3.058 million from $4.273 million and general and administrative expenses to $1.693 million from $2.252 million. R&D expense decreased to $0.125 million from $0.403 million; the company arranged external maintenance, development and support for software in August 2012.
- Financial expenses decreased by $1.460 million year over year, largely because 2011 included costs associated with converting convertible debt.
- Inventory write-offs were $0.385 million, down from $0.443 million. No long-lived asset or goodwill impairment was recorded in 2012; a $0.555 million intangible-asset impairment had been recorded in 2011. BOS fully impaired its remaining $0.068 million investment in Surf in 2012.
Outlook, risks and contingencies
- Outlook: No numerical revenue or earnings guidance is provided. Management aims to expand international sales, especially in RFID and Mobile Solutions, and expects that division’s share of revenue to increase gradually. Growth depends on overseas expansion.
- Debt and covenants: BOS was not in compliance with Bank Hapoalim financial covenants at December 31, 2012. The bank waived the breach subject to conditions, including 2013 covenant compliance; the waiver runs until the earlier of May 1, 2014 or submission of the 2013 financial statements. A substantial portion of bank debt is short-term, and loans are secured by company assets or deposits. Some borrowing bears variable rates.
- Concentration and operating risks: Israel and “others” accounted for 85% of revenue. One Supply Chain Solutions customer represented 15% of 2012 revenue, up from 10% in 2011. The filing highlights dependence on key customers and suppliers, competition, pricing and gross-margin pressure, inventory obsolescence, customer credit, and the need to grow exports.
- Contingencies: The company disclosed an approximately $3.316 million contingent royalty obligation to Israel’s Office of the Chief Scientist, payable based on sales of supported products; it reported no such product sales beginning in 2012. It also disclosed $0.107 million of contingent export-grant royalties. A contract claim seeks approximately $43,000; the company recorded a provision. These contingent royalties are not presented as ordinary scheduled debt payments.
- Other matters: BOS completed a 1-for-4 reverse stock split in December 2012. It regained Nasdaq minimum-bid-price compliance in January 2013. Management assessed disclosure controls and internal control over financial reporting as effective, but the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Confirm the status and terms of the Bank Hapoalim covenant waiver, 2013 covenant compliance, and renewal or refinancing of short-term credit facilities.
- Review cash conversion, receivables collection and inventory quality, given negative working capital, low cash, and the $0.385 million inventory write-off.
- Assess whether revenue stabilizes and whether international expansion can reduce reliance on Israel and a major Supply Chain customer.
- Check the latest share count and potential dilution from outstanding options and warrants; the filing reports 1,132,685 shares outstanding at December 31, 2012 and 1,154,633 at March 31, 2013, after the reverse split.
- Evaluate the recoverability of goodwill, reported at $4.122 million, and the assumptions underlying its impairment test.