B.O.S. Better Online Solutions Ltd. — 2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016; filed March 27, 2017. This is an annual report, not a standalone fourth-quarter filing. Amounts are U.S. dollars unless stated otherwise; financial statement figures are in thousands.
Business context
BOS operates two divisions: RFID and Mobile Solutions, including AIDC equipment, software integration and inventory-count services; and Supply Chain Solutions, which distributes electronic components and provides supply-chain services. The company is headquartered in Israel. It acquired the business operations of iDnext and Next-Line on January 1, 2016, adding inventory-count and asset-tagging services.
Key financial results
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Revenue | $27.427 million | $25.599 million | Up 7%; management attributed the increase mainly to the acquisition. |
| Gross profit / margin | $5.315 million / 19.3% (as disclosed) | $5.137 million / 20.0% | Gross profit rose, while margin declined. |
| Operating expenses | $4.609 million | $4.449 million | Up, mainly attributed to the acquisition. |
| Operating income | $706,000 | $688,000 | Slight increase. |
| Financial expense, net | $339,000 | $376,000 | Lower, largely due to reduced currency-exchange expenses. |
| Net income | $360,000 | $334,000 | Up; 2014 had a $433,000 net loss. |
| Basic and diluted EPS | $0.14 | $0.17 | Lower despite higher net income, alongside a higher weighted-average share count. |
| Operating cash flow | $(361,000) | $370,000 | Turned negative; management linked the change mainly to working capital associated with the acquisition. |
| Cash and cash equivalents | $1.286 million | $1.419 million | Down $133,000. |
| Working capital | $6.099 million | $5.246 million | Increased; management said it was sufficient for current requirements. |
| Bank debt | $3.134 million total, including $400,000 current | $3.858 million | No short-term bank loans reported; remaining debt was due by December 2018 under the disclosed schedule. |
Fourth-quarter revenue was $6.777 million, compared with $7.376 million in Q4 2015, a decrease of approximately 8%. The filing does not provide a clear standalone Q4 profit or cash-flow value.
Material changes and unusual items
- RFID and Mobile Solutions revenue increased to $12.197 million from $9.270 million; Supply Chain Solutions revenue declined to $15.291 million from $16.336 million. The divisions represented 44% and 56% of 2016 revenue, respectively.
- The iDnext/Next-Line acquisition had stated consideration of $886,000: $154,000 cash, a $256,000 loan conversion, $298,000 in shares and $178,000 contingent consideration. The contingent liability was fully written off in 2016 because the acquired business did not achieve the required operating profit. Management expected the 2017 targets also would not be met.
- The company converted $3.858 million of short-term bank debt into long-term loans in January 2016. The agreement includes financial covenants tied to equity, EBITDA and operating results, and debt is secured by company and subsidiary assets.
- Shares outstanding increased from 2,192,268 at year-end 2015 to 2,935,286 at year-end 2016, reflecting issuances including shares used in the acquisition and equity financing.
- Goodwill was $4.676 million at year-end 2016, up from $4.122 million. No impairment was identified for 2014–2016; the annual test used a 15.1% weighted-average cost of capital and 2% long-term growth assumption.
Outlook, risks and contingencies
- Management anticipated expanding RFID and Mobile offerings, mainly through complementary acquisitions, and expected Supply Chain Solutions sales in the Far East to continue increasing in 2017. No numerical revenue or earnings guidance was provided.
- Risks include reliance on key customers and suppliers, variable quarterly orders and product mix, possible margin pressure, inventory obsolescence or order cancellations, acquisition integration, and competition and technology changes.
- Liquidity and financing risks include dependence on Bank Leumi, secured debt and covenant compliance, floating-rate exposure, and possible need to refinance or obtain additional financing. A 100-basis-point increase in rates was estimated to reduce future after-tax cash flow by $31,000.
- Foreign-exchange exposure is material because many revenues are U.S.-dollar-denominated while a significant portion of Israeli costs is in NIS. The company uses forward contracts; reported hedge effects were described as insignificant.
- The company disclosed an approximately $3.75 million contingent royalty obligation to Israel’s Office of the Chief Scientist, payable only if sales of funded products occur. It said the relevant software was no longer being sold and it anticipated no future royalty payments.
- The company reported no legal proceedings. It disclosed no impairment losses and stated that disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal control effectiveness.
- YA Global’s 2015 standby equity distribution agreement permits additional share sales at a discount. The filing reported $594,649 remaining available as of February 28, 2017 and warned of dilution and possible share-price pressure. Shares traded between $1.64 and $4.07 during 2016.
Important facts for investors to verify
- Whether operating cash flow recovers and receivables convert to cash; year-end trade receivables were $7.928 million and reported receivable aging was 106 days.
- Compliance with Bank Leumi’s financial covenants and the repayment/refinancing of the $2.734 million balance due in 2018.
- Whether acquired operations deliver sustainable profits, and how acquisition-related accounting, including the $178,000 contingent-liability write-off, affected reported earnings.
- Whether gross margin stabilizes and Far East sales growth offsets lower Supply Chain Solutions revenue.
- Potential share dilution from equity facilities, options and other issuances; verify the facility’s remaining availability and current share count against subsequent filings.
- Whether goodwill assumptions remain supportable, and whether customer concentration, supplier dependence, currency movements or geopolitical conditions change materially.