SuperCom Ltd. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone 2019 Q4 filing. Amounts are U.S. dollars unless otherwise noted. SuperCom provides e-Government identity, IoT and connectivity, and cybersecurity products and services, principally to governments and enterprises.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $16.475 million | $21.882 million |
| Gross profit / margin | $6.348 million / 38.5% | $8.139 million / 37.2% |
| Operating loss | $8.173 million | $9.675 million |
| Net loss | $11.505 million | $15.740 million |
| Net loss per share, basic and diluted | $0.71 | $1.03 |
| Net cash used in operating activities | $7.660 million | $6.416 million |
| Cash and cash equivalents at year-end | $0.110 million | $1.639 million |
| Total assets / liabilities | $40.004 million / $31.672 million | $44.349 million / $24.799 million |
- Revenue declined 24.7%. By segment, e-Gov revenue fell 68.5% to $1.925 million, IoT declined 6.5% to $11.664 million, and Cyber Security declined 12.4% to $2.886 million.
- Services contributed $12.020 million of revenue and products $4.455 million. Gross margin improved to 38.5%, while operating expenses fell 18.5% to $14.521 million amid restructuring and lower headcount.
- Financial expenses, net, rose to $3.289 million from $0.335 million, including interest, bank fees and foreign-exchange effects. The filing attributes much of the year-over-year net-loss improvement to lower costs and to 2018 items, including a $5.987 million tax-asset reduction and a $1.527 million inventory write-off.
- Year-end current assets were $23.147 million and current liabilities $14.313 million, a reported working-capital surplus of $8.834 million. Cash plus restricted deposits totaled $1.210 million; $1.100 million of this was restricted, mainly for guarantees and leases.
- Operating cash use worsened year over year, which management primarily attributed to increased trade receivables. The filing gives two different 2019 operating-cash-use figures: $7.660 million in the cash-flow statement and $7.237 million in its liquidity discussion.
Debt, material changes and unusual items
- The Fortress senior secured credit facility provided for up to $20 million. The company drew $4 million of incremental principal in 2019; outstanding principal including accrued interest was $14.687 million at year-end. The facility is secured by company assets, bears LIBOR plus a 7% or 8% margin, and is stated to mature September 6, 2021. The filing says principal amortization was expected to begin in June 2021 and that management expected the maturity date to be amended to 2022.
- Related-party loans totaled $2.267 million at year-end, were unsecured in the financial statement description by interest (they bore no interest), and were supported by a floating charge on company assets described in the related-party disclosure. Separately, a $116,000 loan from Ordan Trabelsi was disclosed.
- The allowance for doubtful accounts increased to $6.667 million from $4.747 million. Bad-debt provision was $1.920 million in 2019, primarily associated with an African government customer, versus $2.406 million in 2018.
- Employees declined to 109 from 165. Management said restructuring reduced operating expenses and expected further savings, including lower R&D and overhead costs.
- Remaining performance obligations were $13.4 million at year-end; the company expected approximately 22% to be recognized in the following 12 months and 78% thereafter. This is contracted performance-obligation value, not a revenue or earnings forecast.
Outlook, risks and contingencies
- Management expected cost savings and cash generation from existing customer contracts to support operations for at least 12 months, and cited a further $6 million available under the Fortress facility. This outlook depends on contract cash flows, collections, financing availability and cost reductions.
- The company reported a $77.464 million accumulated deficit and recurring operating cash outflows. Its very low unrestricted cash balance and reliance on debt and external financing are important liquidity risks.
- COVID-19 was disclosed as a subsequent event. Management said pandemic-related restrictions had materially affected operations, including customer access, court activity and monitoring-program additions, tenders, deployments, collections, support and product supply; further adverse effects were possible.
- Other principal risks include volatile, project-based government revenue; customer and government budget concentration; competition and bidding risk; foreign-exchange exposure; collection risk; dependence on suppliers and distributors; and integration risks from past acquisitions. One customer represented 7% of 2019 revenue.
- A dispute inherited with the SmartID acquisition involving Merwell was in arbitration; the filing says a provision was recorded. The company also disclosed bank guarantees of approximately $792,000.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2019 because of a material weakness involving insufficient accounting resources, segregation of duties, monitoring and oversight. The 2019 financial statements received an unqualified audit opinion; the auditor did not express an opinion on internal-control effectiveness.
- After year-end, the company raised approximately $3.2 million gross in a July 2020 private placement of 2.37 million shares at $1.35 per share, each sold with a $1.70 warrant. The filing also reports a 2020 share issuance and financing; these are subsequent events, not FY2019 results.
Important facts for investors to verify
- Reconcile the filing’s conflicting FY2019 operating-cash-use disclosures of $7.660 million and $7.237 million.
- Confirm current unrestricted cash, remaining Fortress borrowing capacity, loan covenants, interest terms, amortization schedule and any maturity extension.
- Assess collectability and aging of receivables, particularly the African government exposure, and the adequacy of the $6.667 million allowance.
- Track whether the $13.4 million of remaining performance obligations convert to revenue and cash on the expected timetable, given implementation and collection risks.
- Review remediation of the material weakness and whether accounting staffing, segregation of duties and financial-reporting oversight have improved.
- Monitor the Merwell arbitration, other contingencies, and the operational and financial effects of COVID-19 and customer contract deployments.