Alarum Technologies Ltd. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 20-F, not a standalone fourth-quarter report; clear Q4-only financial figures are not provided. Financial statements are prepared under IFRS as issued by the IASB and were audited by Kesselman & Kesselman, a member firm of PwC International.
Business context
Alarum is an Israel-based global SaaS provider of internet access solutions through three reportable segments: enterprise internet access, consumer internet access, and enterprise cybersecurity. Enterprise services include web data collection and proxy networks operated primarily through NetNut. Consumer services include privacy, secure browsing, and cybersecurity products operated primarily through CyberKick. The enterprise cybersecurity business was largely outsourced to TerraZone.
At December 31, 2022, the Company had 32,628,044 ordinary shares outstanding and more than 16,000 customers. On November 8, 2022, the ADS ratio changed from one ADS representing one ordinary share to one ADS representing ten ordinary shares.
Financial performance and key metrics
| U.S. dollars in thousands, except percentages and per-share data | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | 18,779 | 10,281 | +83% |
| Cost of revenue | 8,652 | 5,145 | +68% |
| Gross profit | 10,127 | 5,136 | +97% |
| Gross margin | 54% | 50% | +4 percentage points |
| Operating loss | (13,424) | (15,012) | Improved by 1,588 |
| Net loss | (13,151) | (13,125) | Broadly unchanged |
| Basic loss per share | $(0.42) | $(0.48) | Improved |
| Adjusted EBITDA loss | (8,971) | (11,128) | Improved by 2,157 |
Revenue consisted of SaaS revenue of $11.850 million, advertising services revenue of $6.699 million, software licenses revenue of $28,000, and software support services revenue of $202,000. Enterprise internet access revenue was $8.479 million, consumer internet access revenue was $10.070 million, and enterprise cybersecurity revenue was $230,000.
Revenue growth was driven primarily by the full-year consolidation of CyberKick and higher NetNut revenue. Consumer access revenue increased 197% to $10.070 million, while enterprise internet access SaaS revenue increased 35% to $8.479 million. One consumer-segment customer accounted for approximately 63% of consumer revenue and 37% of consolidated revenue, or approximately $6.948 million.
Operating expenses were $23.551 million, including research and development of $4.033 million, selling and marketing of $12.187 million, general and administrative expenses of $6.762 million, and goodwill impairment of $569,000. Selling and marketing expense increased 46%, primarily due to consumer customer-acquisition spending. Research and development expense declined 15%, and general and administrative expense declined 4%, partly due to lower legal costs after settlement of intellectual-property proceedings.
Cash flow, liquidity and debt
| U.S. dollars in thousands | 2022 | 2021 |
|---|---|---|
| Net cash used in operating activities | (8,051) | (9,106) |
| Net cash provided by investing activities | 5,037 | (9,796) |
| Net cash provided by financing activities | 2,603 | 11,640 |
| Net decrease in cash and cash equivalents | (538) | (7,189) |
| Cash and cash equivalents at year-end | 3,290 | 3,828 |
The positive investing cash flow primarily reflected the sale of $5.707 million of short-term investments. At December 31, 2022, the Company had $1.606 million of short-term bank loans, $1.223 million of long-term loans including current maturities, and $217,000 of lease liabilities. The CyberKick credit line was up to $2 million, bore interest at SOFR plus 5.5%, was secured by CyberKick assets, guaranteed by Alarum, and included a refundable $500,000 deposit.
Alarum entered into a strategic funding agreement with O.R.B. Spring for up to $4 million to support consumer customer acquisition. During 2022, it withdrew $1.67 million and recognized $172,000 of related interest expense. Repayment is based on a revenue-share model and may require cash or shares if generated revenue is insufficient.
As of March 24, 2023, cash and cash equivalents were approximately $3.1 million. Management believed existing resources would fund operations through December 31, 2023, but stated that additional substantial capital would be required. The auditor’s report included an explanatory paragraph expressing substantial doubt about the Company’s ability to continue as a going concern.
Material changes versus 2021
- Revenue increased 83%, primarily because CyberKick was consolidated for the full year in 2022 versus approximately half a year in 2021.
- Gross margin improved from 50% to 54%, although traffic acquisition costs and clearing fees increased materially with consumer growth.
- Operating loss improved, but net loss remained approximately $13.2 million because of higher selling and marketing costs, financing expenses, and lower financial income.
- Operating cash burn improved by $1.055 million, but operations still consumed $8.051 million of cash.
- Financing shifted from significant 2021 equity and warrant proceeds to bank loans and strategic funding in 2022.
- The Company issued 2.181 million ordinary shares in July 2022 as the first CyberKick earn-out payment, valued at $1.05 million.
- Goodwill impairment was $569,000, all relating to the NNNW cash-generating unit; the entire NNNW goodwill balance was impaired by year-end.
- The Company settled the remaining Bright Data patent and trade-secret litigation in May 2022. The Israeli Innovation Authority also agreed to close a related program without additional financial liabilities.
- Management remediated the previously identified segregation-of-duties weakness but concluded that controls over period-end financial reporting remained ineffective at December 31, 2022.
Outlook, commentary, risks and unusual items
Management intends to continue investing in product development, sales and marketing, reseller and ISP relationships, and international expansion while reducing its burn rate. The consumer segment is expected to continue generating losses until products are commercialized globally and related costs are reduced. No specific revenue or profitability guidance is provided.
- Going concern and financing: recurring losses, negative operating cash flow, limited cash, and dependence on additional debt, equity, strategic funding, or partnerships create substantial liquidity risk.
- Customer concentration: one customer represented 37% of consolidated 2022 revenue, creating material renewal and concentration risk.
- Consumer acquisition economics: consumer growth depends heavily on advertising and customer-acquisition spending; the segment remains loss-making.
- Competition and technology: the Company competes with larger, better-funded enterprise proxy, web-data, privacy, and cybersecurity providers.
- Cybersecurity and infrastructure: breaches, service interruptions, IP-network blocking, cloud-provider failures, or product defects could damage customer relationships and results.
- Regulatory exposure: privacy, data protection, web-scraping, export-control, sanctions, and cybersecurity regulations may change and affect the business model.
- Internal controls: management reported a material weakness in period-end financial reporting and ineffective disclosure controls and procedures.
- Dilution: as of March 24, 2023, approximately 16.1 million additional ordinary shares were issuable upon exercise of outstanding warrants and employee options, according to the filing.
- Market listing: Nasdaq minimum-bid compliance was regained in November 2022, but continued compliance is not guaranteed.
- Foreign exchange and interest rates: expenses are substantially incurred in NIS, while revenue is primarily in U.S. dollars; borrowings are exposed to SOFR-based interest rates.
Subsequent to year-end, the Company received additional O.R.B. funding, raised approximately $75,000 gross through its ATM program from 25,847 ADSs, and amended the O.R.B. funding schedule through July 2024.
Most important facts for investors to verify
- Whether cash balances, operating cash burn, debt maturities, and available O.R.B. funding are sufficient beyond December 31, 2023.
- Whether the Company can reduce consumer customer-acquisition costs and move the consumer segment toward profitability.
- The retention, renewal terms, and ongoing revenue contribution of the customer representing 37% of 2022 revenue.
- Progress in remediating the material weakness in period-end financial reporting and the effectiveness of related controls in subsequent filings.
- The fully diluted share count, including outstanding options, warrants, O.R.B.-related warrants, and potential ATM issuance.
- The economic terms and cash consequences of the O.R.B. revenue-share arrangement and the CyberKick earn-out obligations.
- Whether enterprise internet access growth can offset competitive, regulatory, legal, and third-party ISP risks.
- Future goodwill and intangible-asset impairment sensitivity, particularly for the NetNut and CyberKick cash-generating units.