SuperCom Ltd. — FY2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter earnings report. Financial statements are audited and prepared under U.S. GAAP; amounts below are U.S. dollars unless stated otherwise.
Business context
SuperCom provides identity and e-government systems, electronic monitoring and RFID solutions, cyber-security products, and secure mobile payments, primarily to government and enterprise customers. In 2015, e-ID projects and related maintenance, royalties, and project management remained major revenue sources. Nearly all revenue was generated outside the United States, with Africa accounting for $25.2 million of $28.3 million total revenue.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $28.34 million | $29.70 million |
| Gross profit / margin | $17.89 million / 63.1% | $22.40 million / 75.4% |
| Operating income / margin | $1.49 million / 5.3% | $8.01 million / 27.0% |
| Net income | $1.02 million | $6.20 million |
| Basic and diluted EPS | $0.07 | $0.46 basic; $0.45 diluted |
| Cash from operating activities | $(3.67) million | $6.27 million |
| Cash and cash equivalents at year-end | $22.25 million | $4.79 million |
| Current assets / current liabilities | $48.08 million / $10.24 million | $28.37 million / $12.67 million |
| Total liabilities | $11.51 million | $14.57 million |
| Shareholders’ equity | $54.43 million | $28.31 million |
Restricted bank deposits were $3.27 million at year-end, mainly related to an ongoing contract. The filing states these were expected to be released within three months. The balance sheet reports earn-out liabilities but no material conventional borrowing balance. Management said cash on hand and operating cash flow should cover working capital and capital expenditure needs for at least 12 months.
Material changes versus FY2014
- Revenue declined 4.6%, while gross profit fell 20.1% and net income declined 84%.
- Gross margin contracted to 63.1%. Management attributed this to lower-margin deployments, customer-readiness-related project costs, and lower-margin recurring revenue mix.
- Operating expenses rose 14.0% to $16.40 million. R&D was $3.67 million; general and administrative expense rose 42% to $3.95 million, including higher headcount and stock-based compensation.
- Operating cash flow swung from $6.27 million provided to $3.67 million used, reflecting lower income, reduced customer advances, and higher inventory. Cash increased primarily due to the June 2015 share offering, which generated net proceeds of $27.1 million.
- Revenue mix shifted: products revenue rose to $9.43 million from $4.98 million, while maintenance, royalties, and project management revenue declined to $18.91 million from $24.72 million.
Outlook, commentary, risks and unusual items
- Management reported four new M2M contracts awarded in Europe and Asia in the second half of 2015 and said it believed it was positioned to win additional contracts in 2016. The filing does not provide numeric revenue or earnings guidance.
- Two large e-ID projects experienced deployment delays tied to customer economic or budget constraints. One government customer agreement was in final deployment after most Phase I milestones; another project had a subsystem postponed or removed and revised milestones and scope.
- Five customers represented 90% of 2015 revenue. Two customers each accounted for 30%; the company warned that customer loss or reduced orders could materially affect results.
- A $1.576 million doubtful-debt provision was recorded in 2015 for a customer debt subject to a disagreement; management said collection efforts continued but gave no assurance of outcome. The year-end allowance for doubtful accounts was also $1.576 million.
- Acquisition-related risks include integration, contingent payments, and uncertain realization of expected synergies. In November 2015, SuperCom acquired cyber-security company Prevision for approximately $1.1 million, plus contingent annual payments. After year-end, it acquired LCA for approximately $3 million, Safend with up to $1.5 million of working-capital support, and PowaPOS assets for approximately $1.14 million.
- In April 2016, the company agreed with OTI to reduce the remaining maximum SmartID earn-out from $10.7 million to $3.55 million; $2.05 million was paid in May, with $1.5 million remaining subject to the earn-out mechanism.
- Other disclosed risks include competitive bidding and pricing pressure, foreign-exchange exposure (a hypothetical 10% currency movement was estimated to change expected 2015 net income by about $1.5 million), government-contract cancellation, geopolitical and operational risks in Israel, and acquisition integration. The company reported no off-balance-sheet arrangements.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. No cash dividends were declared, and management did not anticipate paying dividends in the foreseeable future.
Important facts for investors to verify
- Whether the major e-ID deployments reached operational acceptance and began generating the expected maintenance revenue and cash collections.
- Collection status and any resolution of the customer receivable associated with the $1.576 million doubtful-debt provision.
- Customer concentration, contract renewals, and the status of the two delayed or revised e-ID projects.
- Actual cash conversion, inventory levels, and release of restricted deposits, given negative operating cash flow despite higher year-end cash.
- Final contingent consideration and integration costs for SmartID and the post-year-end acquisitions, including the subsequent OTI earn-out settlement.
- Share-count and dilution effects: the June 2015 offering issued 2.415 million shares, and 774,936 shares were repurchased in December 2015 and retired in March 2016.