B.O.S. Better Online Solutions Ltd. — FY2011 Form 20-F
Reporting period: Fiscal year ended December 31, 2011; filed April 30, 2012. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited; the auditors gave an unqualified opinion.
Business context
BOS operates two segments: Supply Chain Solutions, which distributes electronic components, primarily for aerospace and defense customers, and RFID and Mobile Solutions, which provides automatic identification hardware, software, and implementation services. In 2011, Supply Chain generated 61% of revenue and RFID and Mobile 39%. About 80% of revenue was from Israel and other markets grouped with Israel.
Key financial results
| Metric (US$ millions, except per share) | 2011 | 2010 |
|---|---|---|
| Revenue | 33.434 | 30.187 |
| Gross profit / gross margin | 6.510 / 19.5% | 7.483 / 24.8% |
| Operating income (loss) | (0.973) | 1.257 |
| Continuing operations income (loss) | (3.214) | 0.171 |
| Net income (loss) | (3.214) | (0.635) |
| Net loss per share | (1.14) | (0.24) |
| Cash flow from continuing operations | (0.365) | 1.460 |
| Cash and cash equivalents at year end | 0.411 | 0.703 |
Revenue increased 10.8%. Segment revenue was $13.128 million for RFID and Mobile and $21.332 million for Supply Chain, before $1.026 million of intercompany eliminations. Inventory write-offs rose to $443,000 from $36,000. Total operating expenses included a $555,000 impairment of customer-list and brand-name intangibles. Financial expense increased to $2.241 million, including $760,000 of non-cash inducement and related costs associated with the convertible-debt conversion and warrant extension.
At year end, working capital was negative $76,000. Current assets were $13.682 million and current liabilities $13.758 million. Bank debt totaled approximately $9.026 million: $7.496 million in short-term loans and current maturities, plus $1.530 million in long-term loans. The company also reported approximately $1.047 million due to Dimex Systems. Shareholders’ equity was $3.598 million, and accumulated deficit was $70.317 million.
Investing cash outflow was $1.040 million and financing cash inflow was $1.113 million. Cash declined by $292,000 during the year. The company reported a $427,000 long-term bank deposit pledged as security for a Bank Hapoalim loan.
Material changes and unusual items
- In December 2011, approximately $2.523 million of convertible debt, including accrued interest, was converted into 1,681,965 ordinary shares at $1.50 per share, below the original $3.25 conversion price. Lender warrants to buy 643,984 shares were extended by two years. The remaining $501,000 Dimex loan was made non-convertible, reduced to 4% interest, and deferred for repayment in 24 monthly installments beginning January 2014.
- BOS failed to meet Bank Hapoalim financial covenants at December 31, 2011. The bank agreed to waive the breach subject to conditions, including covenant compliance in 2012. The company disclosed that Bank Leumi had no covenants applicable for fiscal 2011.
- The U.S. subsidiaries Lynk and Summit filed for Chapter 7 bankruptcy in November 2010; Lynk’s case closed in March 2011. Their prior results are presented as discontinued operations. There was no discontinued-operation loss in 2011, compared with $806,000 in 2010.
- Management said restructuring the software activity resulted in positive gross profit for that product line in Q4 2011. The filing does not provide a clear Q4 revenue or earnings figure.
Outlook, risks, and contingencies
Management expected cash resources to cover operating needs for at least the next 12 months and expected to meet bank covenants through December 31, 2012. It cited an efficiency plan, including workforce reductions and the debt conversion. Its growth plans emphasize expanding RFID and Mobile sales abroad, developing BOS ID software and international channels, and expanding Supply Chain activity in international markets; no quantified revenue or earnings guidance was provided.
- Nasdaq notified BOS in January 2012 that its share price did not meet the $1.00 minimum bid-price requirement. The initial compliance period ran through July 16, 2012; continued listing was not assured.
- Liquidity is exposed to reliance on two banks, substantial short-term borrowing, variable interest rates, and secured assets. The company warned that insufficient operating cash could require refinancing, new financing, delayed investment, or asset sales.
- Customer and supplier concentration, order cancellations, inventory obsolescence, competition and margin pressure, and limited growth in the Israeli RFID market are material business risks. In 2011, one Supply Chain customer accounted for 10% of total revenue.
- Contingent royalties included approximately $3.304 million owed to Israel’s Office of the Chief Scientist and $101,000 to an export-promotion fund; payments depend on relevant future sales. The filing states there were no sales in 2012 of products developed with Chief Scientist funding.
- A contract claim sought approximately $42,000; the company recorded a provision, and a hearing was expected in September 2012. The filing also identifies legal proceedings and other commitments as potential sources of future liability.
- Management concluded disclosure controls and internal control over financial reporting were effective as of year end. The annual report did not include an auditor attestation on internal control.
Investor verification priorities
- Confirm subsequent cash generation, borrowing availability, and compliance with Bank Hapoalim’s waiver conditions and 2012 covenants.
- Check whether BOS regained Nasdaq’s $1.00 minimum bid-price compliance by the applicable deadline and maintained other listing requirements.
- Review the quality and sustainability of revenue growth, gross margins, inventory levels, and customer concentration, including the reported Q4 software improvement.
- Verify the final accounting and dilution effects of the convertible-debt conversion, warrant extensions, and outstanding options and warrants.
- Assess the status of the Blockshtil claim, contingent royalty obligations, and any changes in impairment estimates or liquidity assumptions.