Super .(US:SPCB)2023-04-20 13:01Company Overview Business and Strategy SuperCom provides global identity, IoT, and cybersecurity solutions to governments and organizations through three strategic business units enhanced by key acquisitions - The company is structured into three main Strategic Business Units (SBUs): e-Gov, IoT and Connectivity, and Cyber Security17 - The e-Gov SBU provides digital and traditional identity solutions, such as national IDs and passports, to governments worldwide1718 - The IoT and Connectivity SBU offers solutions for real-time tracking and monitoring of people and objects, enhanced by the acquisitions of Leaders in Community Alternatives (LCA) and Alvarion Technologies192122 - The Cyber Security SBU was established through the acquisitions of Prevision and Safend, providing endpoint data protection and cybersecurity services to a broad customer base2324 Selected Financial Data The company's revenues increased to $17.6 million in 2022, though it has experienced net losses over the past five years alongside declining shareholders' equity and rising long-term liabilities Selected Consolidated Financial Data (2018-2022) | (U.S. dollars in thousands, except per share data) | 2022 | 2021 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Income Statement Data: | | | | | | | Revenues | 17,649 | 12,267 | 11,770 | 16,475 | 21,882 | | Gross profit | 6,388 | 6,204 | 5,581 | 6,348 | 8,139 | | Operating loss | (6,005) | (6,737) | (3,749) | (8,173) | (9,675) | | Net (loss) | (7,457) | (10,138) | (7,867) | (11,505) | (15,740) | | Basic loss per share | (2.0) | (3.9) | (4.5) | (7.1) | (10.3) | | Balance Sheet Data (End of Period): | | | | | | | Cash and cash equivalents and restricted cash | 4,505 | 4,604 | 3,952 | 1,210 | 1,639 | | TOTAL ASSETS | 42,040 | 42,119 | 40,344 | 40,004 | 44,349 | | Total Long-term Liabilities | 33,670 | 32,124 | 15,827 | 17,359 | 11,256 | | SHAREHOLDERS' EQUITY | 3,131 | 4,392 | 4,919 | 8,332 | 19,550 | Key Information Risk Factors The company faces significant risks from customer concentration, a history of net losses, international operational challenges, a material weakness in financial controls, and geopolitical instability - The company has a significant customer concentration risk, with one large customer accounting for 36% of consolidated net revenue in 2022434445 - The company has been profitable in only one of the last seven fiscal years and has historically funded its operations through equity and debt financing, with future financing not guaranteed on favorable terms55 - International operations are a key source of risk, with approximately 61% of 2022 revenues derived from markets outside the United States71 - A material weakness has been identified in the company's internal control over financial reporting, which could result in material misstatements in financial statements103 - The company's location and operations in Israel expose it to political, economic, and military instability in the region104105 - As a foreign private issuer, SuperCom is exempt from certain SEC reporting and NASDAQ governance rules, potentially resulting in less information being available to investors116117119 Information on the Company History and Development of the Company Founded in 1988, SuperCom evolved into a global security provider through strategic shifts and key acquisitions between 2013 and 2016 that established its current business structure - SuperCom Ltd. was incorporated in Israel on July 4, 1988123 - The company significantly expanded its product depth and global presence between 2013 and 2016 through a series of strategic acquisitions135 - Key acquisitions include: the SmartID division of OTI (2013), Prevision Ltd (2015), Leaders in Community Alternatives, Inc (LCA) (2016), Safend Ltd (2016), and Alvarion Technologies Ltd (2016)136137138 Business Overview SuperCom operates globally through e-Gov, IoT, and Cyber Security SBUs, with a strategy focused on synergies, global expansion, and long-term government contracts - The company's growth strategy includes leveraging its customer base across its SBUs, expanding IoT and Cyber Security activities globally, and securing additional long-term government contracts160 - The company owns a portfolio of 52 issued patents in the United States and 74 issued patents in the rest of the world222 Revenue by Segment (in thousands of dollars) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | e-Gov | $637 | $1,729 | | IoT | $15,628 | $8,904 | | Cyber Security | $1,384 | $1,634 | | Total | $17,649 | $12,267 | Revenue by Geographic Market (in thousands of dollars) | Region | 2022 | 2021 | | :--- | :--- | :--- | | Africa | $374 | $1,586 | | Europe | $9,559 | $2,912 | | South and center America | - | $37 | | United States | $6,877 | $6,820 | | Israel | $693 | $757 | | Asia Pacific | $146 | $155 | | Total | $17,649 | $12,267 | Revenue by Products and Services (in thousands of dollars) | Type | 2022 | 2021 | | :--- | :--- | :--- | | Products | $10,099 | $4,475 | | Services | $7,550 | $7,792 | | Total revenues | $17,649 | $12,267 | Organizational Structure SuperCom Ltd is the parent company of several wholly-owned subsidiaries in the U.S and Israel that execute its business strategy across its core segments - The company's active, wholly-owned subsidiaries as of April 2023 include SuperCom Inc (USA), Leaders in Community Alternatives, Inc (USA), Safend Ltd (Israel), Prevision Ltd (Israel), and Alvarion Technologies Ltd (Israel)228229230 Property, Plants and Equipment The company conducts its operations from leased facilities in Israel and California, with total rental expenses amounting to $817,160 in 2022 - The company leases all its properties, with primary locations in Tel Aviv and Herzliya, Israel, and office premises in California for its subsidiary, LCA Inc233234 - Total annual rental fees were $817,160 in 2022, up from $714,000 in 2021236 Operating and Financial Review and Prospects Operating Results In 2022, revenues grew 44% driven by the IoT segment, but gross margin declined while the net loss improved to $7.5 million due to lower 'Other expenses' - Total revenues increased by 44% in 2022 to $17.6M, largely due to a 76% increase in IoT segment revenue to $15.6M255 - Gross profit margin decreased to 36.2% in 2022 from 50.6% in 2021, mainly due to costs from a new contract's implementation and a shift in revenue mix256 - Operating expenses (excluding 'Other expenses') rose 31.3% to $11.3M in 2022, driven by increased R&D and sales and marketing activities257258259 - Net loss for 2022 was $7.5M, an improvement from a net loss of $10.1M in 2021, primarily due to a $3.2M reduction in 'Other expenses'265 Consolidated Income Statement Data (% of Total Revenues) | | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | 100% | 100% | | Cost of revenues | 63.8% | 49.4% | | Gross profit | 36.2% | 50.6% | | Research and development | 19.3% | 22.5% | | Selling and marketing | 15.1% | 13.5% | | General and administrative | 29.4% | 33.8% | | Other expenses | 6.4% | 35.7% | | Operating loss | (34.0%) | (54.9%) | | Net Loss | (42.3%) | (82.6%) | Liquidity and Capital Resources The company has an accumulated deficit but maintains positive working capital and has bolstered liquidity through financing activities, which management believes is sufficient for the next 12 months - The company has experienced net losses and significant cash outflows, with an accumulated deficit of $102.9 million as of December 31, 2022279621 - The company raised approximately $4.65 million in a registered direct offering in March 2022 and an additional $2.4 million in March 2023282283 - Management believes that existing financing and expected cash from customer contracts will be sufficient to fund operations for at least the next 12 months284629 Summary of Cash Flows (in thousands of dollars) | | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $ (4,654) | $ (9,413) | | Net cash used in investing activities | $ (2,189) | $ (1,639) | | Net cash provided by financing activities | $ 6,744 | $ 11,704 | | Net (decrease)/increase in cash | $ (99) | $ 652 | Critical Accounting Policies Critical accounting policies involve significant judgment, particularly in revenue recognition, allowance for doubtful accounts, and the valuation of intangible assets and goodwill - The company adopted ASC 606 for revenue recognition, which impacts how revenue from software licenses, maintenance, and long-term contracts is recognized291294 - As of December 31, 2022, the aggregate amount of transaction price allocated to remaining performance obligations was $33.13 million, with 43% expected to be recognized as revenue within 12 months324698 - The allowance for doubtful accounts is a significant estimate, standing at $12.67 million as of December 31, 2022329 - The company capitalizes software development costs incurred during the application development stage and amortizes them over an estimated useful life of 5 years700701 Research and Development The company increased its R&D investment to $4.6 million in 2022, with $1.2 million capitalized, to enhance products across its business segments - As of December 31, 2022, the company employed 29 people in research and development activities331 R&D Spending (in thousands of dollars) | | 2022 | 2021 | | :--- | :--- | :--- | | Total R&D Spend | $4,617 | $3,502 | | Capitalized Software Costs | $1,205 | $739 | | R&D Expense | $3,412 | $2,763 | Directors, Senior Management and Employees Directors and Senior Management The company's leadership includes experienced executives, with a four-member board chaired by Arie Trabelsi and key management roles held by his sons - Arie Trabelsi serves as a Director and has extensive experience in the communications industry335 - Key executive officers include Ordan Trabelsi (President & CEO) and Barak Trabelsi (COO & CTO)340341 - The board of directors is comprised of four members: Arie Trabelsi, and three independent directors: Tal Naftali Shmuel, Oren Raoul De Lange, and Shoshana Cohen Shapira334353 Compensation In 2022, total compensation for seven directors and executive officers was $666,357 in salaries and bonuses, plus $56,205 in pension benefits - As of December 31, 2022, directors and executive officers as a group held options to purchase 640,000 ordinary shares at an average exercise price of $3.25 per share348 2022 Compensation for All Directors and Executive Officers (7 persons) | Compensation Type | Amount (USD) | | :--- | :--- | | Salaries, fees, commissions and bonuses | $666,357 | | Pension, retirement and similar benefits | $56,205 | Board Practices Governed by Israeli law, the board has four members, including two external directors, and has established Audit and Compensation Committees with independent majorities - The board is comprised of four members, including two external directors, Shoshana Cohen Shapira and Oren Raoul De Lange, as required by Israeli Companies Law353 - The company has an Audit Committee and a Compensation Committee, both of which must include all external directors and have a majority of independent directors362365 - The company follows Israeli corporate law for approving transactions with office holders and controlling shareholders, requiring multi-level approvals369379382 Employees As of December 31, 2022, SuperCom had 122 full-time employees, with the largest department being Research, Development & Operations and the workforce split between the US and Israel/Europe Employee Headcount by Department and Geography | | Dec. 31, 2022 | Dec. 31, 2021 | | :--- | :--- | :--- | | By Department | | | | Research, Development & Operations | 91 | 93 | | Marketing and Sales | 9 | 8 | | Administration | 22 | 13 | | Total | 122 | 114 | | By Geography | | | | Israel & Europe | 58 | 53 | | United States | 64 | 61 | | Total | 122 | 114 | Share Ownership Director Arie Trabelsi is the largest beneficial owner with 15.69% of shares, while the company utilizes stock option plans for incentives, with 811,050 options outstanding at year-end 2022 - As of December 31, 2022, director Arie Trabelsi beneficially owned 15.69% of the outstanding shares, primarily through his control of Sigma Wave Ltd404405 - As of December 31, 2022, there was $1,125,448 of unrecognized compensation cost related to non-vested share-based compensation arrangements414 Stock Option Activity | | 2022 | 2021 | | :--- | :--- | :--- | | Number of options | | | | Outstanding at Beginning of year | 21,388 | 33,484 | | Granted | 800,937 | - | | Exercised | (1,666) | (4,496) | | Canceled and forfeited | (9,610) | (7,600) | | Outstanding at end of year | 811,050 | 21,388 | | Exercisable at end of year | 213,597 | 15,950 | Major Shareholders and Related Party Transactions Major Shareholders As of year-end 2022, Sigma Wave Ltd, controlled by director Arie Trabelsi's family, was the only known beneficial owner with over 5% of the company's shares - As of December 31, 2022, Sigma Wave Ltd. beneficially owned 10.9% of the outstanding shares416 - Sigma Wave Ltd is controlled by the family of Arie Trabelsi, a director and parent of CEO Ordan Trabelsi and COO Barak Trabelsi417 - As of December 31, 2022, approximately 92.3% of the company's ordinary shares were held of record by the U.S. nominee company CEDE & Co420 Related Party Transactions The company engages in transactions with director and controlling shareholder Arie Trabelsi, including a management fee agreement and short-term, interest-free loans - The company has a management fee agreement with director Arie Trabelsi, with accrued expenses of $85,000 as of December 31, 2022422 - Mr and Mrs Trabelsi have provided short-term, interest-free loans to the company, with an outstanding balance of $166,000 as of December 31, 2022423 Financial Information Legal Proceedings and Dividend Policy The company is involved in incidental legal proceedings and has never paid cash dividends, intending to retain future earnings to fund business growth - The company is party to legal proceedings in the normal course of business but does not believe any will have a material adverse effect426 - The company has never paid cash dividends and intends to retain future earnings for business use, with no plans for dividends in the foreseeable future427 Additional Information Memorandum and Articles of Association As an Israeli public company, its Articles of Association outline director duties, related-party transaction approvals, and an authorized capital of 10 million ordinary shares - The company is authorized to issue 10,000,000 ordinary shares with a par value of NIS 2.5 per share447 - The company's governance is subject to the Israeli Companies Law, which codifies the fiduciary duties of office holders and requires specific approval procedures for related-party transactions452454462 - The company has adopted a compensation policy for office holders, which must be approved by the board and shareholders every three years459461 Taxation This section details Israeli and U.S. tax considerations, including a 23% Israeli corporate tax rate, dividend withholding rules, and the company's status as a non-PFIC - The general corporate tax rate for Israeli companies was 23% in 2022490 - Gains on the sale of ordinary shares are generally exempt from Israeli capital gains tax for non-Israeli residents498 - Dividends distributed to non-residents are generally subject to a 25% withholding tax, which may be reduced by a tax treaty506 - The company believes it is not currently a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes523 Quantitative and Qualitative Disclosures About Market Risks Market Risk Exposure The company's primary market risk is foreign currency exchange rate fluctuations, particularly between the U.S. dollar and the New Israeli Shekel - The principal market risk is exposure to foreign currency fluctuations, mainly between the U.S. dollar and the NIS538539 - A hypothetical 10% movement in foreign currency rates against the U.S. dollar would result in an approximate $0.4 million change in the expected 2022 net income540 Controls and Procedures Evaluation of Controls and Procedures Management concluded that disclosure controls were ineffective as of year-end 2022 due to a material weakness in internal control over financial reporting - Management concluded that disclosure controls and procedures were ineffective as of December 31, 2022545 - A material weakness was identified in internal control over financial reporting due to a lack of sufficient resources and segregation of duties in its accounting function547 - Notwithstanding the material weakness, management believes the consolidated financial statements are fairly presented in all material respects548 Corporate Governance and Other Information Audit Committee Financial Expert The Board of Directors has determined that two independent audit committee members, Mr. De Lange and Mrs. Shapira, qualify as "audit committee financial experts" - The Board has identified Mr. De Lange and Mrs. Shapira as audit committee financial experts550 Principal Accountant Fees and Services In 2022, the company incurred $155,000 in fees from its principal accounting firm, all for audit services and pre-approved by the Audit Committee Accountant Fees (in thousands of dollars) | Service Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit fees | $155,000 | $160,000 | | Audit-related fees | - | - | | Tax fees | - | $12,000 | | Total | $155,000 | $172,000 | Changes in Certifying Accountant On December 21, 2022, SuperCom replaced its auditor with Yarel + Partners due to the former firm's reduced auditing practices, with no disagreements on accounting principles - The company replaced its auditor, Halperin Ilanit, with Yarel + Partners on December 21, 2022560 - There were no disagreements with the former auditor on any matters of accounting principles, financial statement disclosure, or auditing scope563 Corporate Governance As a foreign private issuer, SuperCom follows Israeli home country governance practices in lieu of certain NASDAQ rules for director nominations and equity plan approvals - The company follows its home country (Israel) governance practices in lieu of certain NASDAQ rules, including those for director nominations and shareholder approval of equity compensation plans567568 Financial Statements Report of Independent Registered Public Accounting Firm The independent auditor's report for 2022 highlights several Critical Audit Matters, including goodwill impairment, allowance for receivables, capitalized software costs, and going concern - The 2022 audit identified four Critical Audit Matters: Goodwill Impairment Assessment, Allowance for accounts receivables, Assessment of capitalized internal costs to develop software, and Going concern assessment580581583 - The 2021 audit identified three Critical Audit Matters: Goodwill Impairment Assessment, Allowance for accounts receivables, and Going concern assessment596598601 Consolidated Financial Statements Data The 2022 consolidated financial statements show total assets of $42.0 million, a net loss of $7.5 million, and negative operating cash flow of $4.7 million Consolidated Balance Sheets (As of December 31, in thousands of dollars) | | 2022 | 2021 | | :--- | :--- | :--- | | TOTAL CURRENT ASSETS | 26,290 | 26,108 | | TOTAL LONG-TERM ASSETS | 15,750 | 16,011 | | TOTAL ASSETS | 42,040 | 42,119 | | TOTAL CURRENT LIABILITIES | 5,239 | 5,603 | | TOTAL LONG TERM LIABILITIES | 33,670 | 32,124 | | TOTAL LIABILITIES | 38,909 | 37,727 | | Total shareholders' equity | 3,131 | 4,392 | | Total liabilities and shareholders' equity | 42,040 | 42,119 | Consolidated Statements of Operations (For the Year Ended December 31, in thousands of dollars) | | 2022 | 2021 | | :--- | :--- | :--- | | Total revenues | 17,649 | 12,267 | | Gross profit | 6,388 | 6,204 | | Total operating expenses | 12,393 | 12,941 | | Operating loss | (6,005) | (6,737) | | Financial expenses, net | (1,751) | (3,396) | | Net loss | (7,457) | (10,138) | | Basic and Diluted Net loss per share | $(2.0) | $(3.9) |