UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
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☐
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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☒
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2021
OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ___________ to ___________
OR
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☐
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report
Commission file number: 001-33668
SUPERCOM LTD.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
3 Rothschild Street
Tel Aviv 6688106, Israel
(Address of principal executive offices)
Ordan Trabelsi, Chief Executive Officer
SuperCom Ltd.
3 Rothschild Street
Tel Aviv 6688106, Israel
+972-9-8890850 (phone); +972-9-8890820 (fax)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Ordinary Shares, NIS 0.25 Par Value
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SPCB
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The NASDAQ Capital Market
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Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Ordinary Shares, par value NIS 0.25 per share: 28,239,372 (as of December 31, 2021)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☒
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Emerging growth company ☐
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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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U.S. GAAP ☒
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International Financial Reporting
Standards as issued by the International Accounting Standards Board ☐ |
Other ☐
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
This annual
report on Form 20-F is incorporated by reference into the registrant’s Registration Statements on Form S-8, File No. 333-175785, 333-121231,
and on Form F-3 File No. 333-261442
INTRODUCTION
Founded in 1988, we are a global provider
of traditional and digital identity solutions, advanced IoT and connectivity solutions, and cyber security products and solutions, to
governments and private and public organizations throughout the world.
We are comprised of three main Strategic
Business Units (SBU): e-Gov, IoT and Connectivity, and Cyber Security:
e-Gov
Through our proprietary e-Government platforms
and innovative solutions for traditional and biometrics enrollment, personalization, issuance and border control services, we have helped
governments and national agencies design and issue secured multi-identification, or Multi-ID, documents and robust digital identity solutions
to their citizens, visitors and Lands.
We have focused on expanding our activities
in the traditional identification, or ID, and electronic identification, or e-Gov, market, including the design, development and marketing
of identification technologies and solutions to governments in Europe, Asia, America and Africa using our e-Government platforms. Our
activities include: (i) utilizing paper secured by different levels of security patterns (UV, holograms, etc.); and (ii) electronic identification
secured by biometric data, principally in connection with the issuance of national Multi-ID documents (IDs, passports, driver’s
licenses, vehicle permits, and visas, Secure Land Certificated) border control applications and Land Information System (LIS).
IoT
and Connectivity
Our IoT products and solutions reliably
identify, track and monitor people or objects in real time, enabling our customers to detect unauthorized movement of people, vehicles
and other monitored objects. We provide all-in-one field proven IoT suite, accompanied with services specifically tailored to meet the
requirements of an IoT solutions. Our proprietary IoT suite of hybrid hardware, connectivity and software components are the foundation
of these solutions and services. Our IoT division has primarily focused on growing the following markets: (i) public safety; (ii) healthcare
and homecare; (iii) Smart Cities; (iv) Smart Campus; and (iv) transportation.
During 2006, we identified the growing electronic
tracking and monitoring vertical markets for public safety, real time healthcare and homecare, and transportation management. We have
developed the PureRF Hybrid suite of wrist devices, connectivity, and controlling software, from 2012 we have developed the next generation
IoT suite of devices, connectivity and Monitoring software; the PureSecurity Hybrid Suite of wrist band, tags, beacons, PureCom, Pure
Monitors, PureTrack and other components.
On January 1, 2016, we acquired Leaders
in Community Alternatives, Inc., or LCA. LCA is a California based, private criminal justice organization, providing community-based services
and electronic monitoring programs to government agencies in the U.S. for more than 25 years. LCA offers a broad range of competitive
solutions for governmental institutions across the U.S. in addressing realignment strategies and plans.
Connectivity
In 2016, as part of our strategy to enhance
and broaden our IoT connectivity products and solutions offerings for public safety, enterprises, hospitality and smart cities markets,
on May 18, 2016, we acquired Alvarion Technologies Ltd., or Alvarion. Alvarion designs solutions for carrier wi-fi, enterprise connectivity,
smart city, smart hospitality, connected campuses and connected events that are both complete and heterogeneous to ensure ease-of-use
and optimize operational efficiency. Carriers, local governments and hospitality sectors worldwide deploy Alvarion’s intelligent
wi-fi networks to enhance productivity and performance, as well as its legacy backhaul services and products.
Cyber Security
During 2015, we identified the cyber security
market as a very fast-growing market where we believe that SuperCom has major advantages due to synergic technologies and a shared customer
base to our e-Gov, IoT and connectivity SBUs. In 2015, we acquired Prevision Ltd., or Prevision, a company with a strong presence in the
market and a broad range of competitive and well-known cyber security services. During the first quarter of 2016, we acquired Safend Ltd,
or Safend, an international provider of cutting edge endpoint data protection guarding against corporate data loss and theft through content
discovery and inspection, encryption methodologies, and comprehensive device and port control. Safend maps sensitive information and controls
data flow through email, web, external devices and additional channels.
Both acquisitions significantly expanded
the breadth of our cyber security capabilities globally, while providing us with outstanding market and technological experts and over
3,000 customers in the United States, Europe, and Asia, and more than three million software license seats deployed by multinational enterprises,
government agencies and small to mid-size companies around the globe, together with leading data and cyber security platforms and technologies.
Selected
Financial Data
The following table presents selected consolidated
financial data as of the dates and for each of the periods indicated. The selected consolidated financial data set forth below should
be read in conjunction with and is qualified entirely by reference to “Item 5. Operating and Financial Review and Prospects”
and our consolidated financial statements and notes thereto included elsewhere in this Annual Report.
The following summary consolidated financial
data for and as of the five years ended December 31, 2021 are derived from our audited consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. Our audited consolidated financial statements for the two years ended December 31, 2021 and 2020
appear elsewhere in this Annual Report. Our selected consolidated financial data for the years ended December 31, 2017, 2018 and 2019
have been derived from our audited consolidated financial statements not included in this Annual Report.
Income Statement Data:
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Year Ended December 31,
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|||||||||||||||||||
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2021 |
2020 |
2019 |
2018 |
2017 |
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(U.S.
dollars in thousands, except per share data) |
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Summary of Statement of Operations Data:
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Revenues |
12,267 |
11,770 |
16,475 |
21,882 |
33,264 |
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Cost of revenues |
6,063 |
6,189 |
10,127 |
13,743 |
20,351 |
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Gross profit |
6,204 |
5,581 |
6,348 |
8,139 |
12,913 |
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Operating expenses: |
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Research and development |
2,763 |
2,386 |
3,971 |
4,790 |
7,238 |
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Selling and marketing |
1,655 |
1,721 |
3,526 |
5,005 |
8,099 |
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General and administrative |
4,149 |
4,074 |
5,389 |
5,748 |
6,113 |
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Other (income) expenses |
4,374 |
1,149 |
1,635 |
2,271 |
(2,021 |
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Total operating expenses |
12,941 |
9,330 |
14,521 |
17,814 |
19,429 |
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Operating loss |
(6,737 |
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(3,749 |
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(8,173 |
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(9,675 |
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(6,516 |
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Financial expenses, net |
(3,396 |
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(4,113 |
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(3,289 |
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(335 |
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(538 |
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loss before income tax |
(10,133 |
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(7,862 |
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(11,462 |
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(10,010 |
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(7,054 |
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Income tax (expense) benefit |
(5 |
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(5 |
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(43 |
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5,730 |
393 |
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Net (loss) |
(10,138 |
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(7,867 |
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(11,505 |
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(15,740 |
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(6,661 |
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Per Share Data: |
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Basic loss per share |
(0.39 |
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(0.45 |
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(0.71 |
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(1.03 |
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(0.45 |
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Diluted loss per share |
(0.39 |
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(0.45 |
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(0.71 |
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(1.03 |
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(0.45 |
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2021 |
2020 |
2019 |
2018 |
2017 |
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(U.S. dollars in thousands,
except per share data) |
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Summary of Balance Sheet Data: |
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Cash and cash equivalents and restricted cash |
4,604 |
3,952 |
1,210 |
1,639 |
1,037 |
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Total Current Assets |
26,108 |
24,942 |
23,147 |
25,664 |
27,413 |
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TOTAL ASSETS |
42,119 |
40,344 |
40,004 |
44,349 |
54,198 |
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Total Current Liabilities |
5,603 |
19,599 |
14,313 |
13,543 |
17,960 |
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Total Long-term Liabilities |
32,124 |
15,827 |
17,359 |
11,256 |
3,531 |
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SHAREHOLDERS’ EQUITY |
4,392 |
4,919 |
8,332 |
19,550 |
32,707 |
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Statements made in this Annual Report on
Form 20-F (this “Annual Report”) concerning the contents of any contract, agreement or other document are summaries of such
contracts, agreements or documents and are not complete descriptions of all their terms. If we filed any of these documents as an exhibit
to this Annual Report or to any previous filing with the U.S. Securities and Exchange Commission, or the SEC, you may read the document
itself for a complete recitation of its terms.
In this Annual Report, all references to
“SuperCom,” the “Company,” “we,” “us” or “our” are to SuperCom Ltd., a company
organized under the laws of the State of Israel, and its subsidiaries. On January 24, 2013 we changed our name back to SuperCom Ltd.,
our original name, from Vuance Ltd.
In this Annual Report, unless otherwise specified or unless the
context otherwise requires, all references to “$” or “dollars” are to U.S. dollars and all references to “NIS”
are to New Israeli Shekels. Except as otherwise indicated, the financial statements of and information regarding SuperCom are presented
in U.S. dollars in accordance with generally acceptable accounting principles in the United States (“U.S. GAAP”). The representative
rate exchange rate between the NIS and the dollar as published by the Bank of Israel and effective on December 31, 2021, was NIS 3.11
per $1.00.
This Annual Report contains various “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as amended, with respect
to our business, financial condition and results of operations. Such forward-looking statements reflect our current view with respect
to future events and financial results. Statements which use the terms “anticipate,” “believe,” “expect,”
“plan,” “intend,” “estimate” and similar expressions are intended to identify forward looking statements.
We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors
and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry
results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied
by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no
obligation to publicly release any update or revision to any forward-looking statements to reflect new information, future events or circumstances,
or otherwise after the date hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking
statements in the section captioned “Risk Factors” that appears in this Annual Report in Item 3D “Key Information -
Risk Factors.”
TABLE
OF CONTENTS
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77 |
PART
I
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ITEM 1. |
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
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ITEM
2. |
OFFER
STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
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ITEM
3. |
KEY
INFORMATION |
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A.
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[reserved]
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B.
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Capitalization
and Indebtedness |
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Not applicable. |
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C.
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Reasons
for the Offer and Use of Proceeds |
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Not applicable. |
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D.
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Risk
Factors |
Investing in our ordinary
shares involves a high degree of risk. You should carefully consider the risks described below, together with the financial and other
information contained in this Annual Report, before you decide to invest in our ordinary shares. If any of the following risks actually
occur, our business, financial condition and results of operations could be materially adversely affected. In that case, the trading price
of our ordinary shares would likely decline and you might lose all or part of your investment.
Risks Related to Our
Business
If
we are unable to manage our growth profitably, our business, financial results and stock price could suffer.
Our future financial results will depend
in part on our ability to profitably manage our growth. Management will need to maintain existing customers and attract new customers,
recruit, retain and effectively manage employees, as well as expand operations and integrate customer support and financial control systems.
If integration-related expenses and capital expenditure requirements are greater than anticipated
or if we are unable to manage our growth profitably after the acquisition, our financial results and the market price of our ordinary
shares may decline.
Purchase
price allocation in connection with our acquisition of OTI’s SmartID division, Safend, Alvarion and Prevision requires estimates,
which may be subject to change in the future. Future changes to these estimates could impact our future operating results.
The application of purchase price allocation
requires that the total purchase price we paid for the SmartID division of OTI, Safend, Alvarion and Prevision be allocated to the fair
value of assets acquired and liabilities assumed based on their fair values at the acquisition date. All amounts in excess of or below
the fair value are recorded as goodwill or extraordinary profit, as applicable. The allocation process requires an analysis and valuation
of acquired assets, including fixed assets, technologies, intellectual properties, deferred tax assets, customer contracts and relationships,
trade names and liabilities assumed, including contractual commitments and legal contingencies. We identified and recorded the assets,
including specifically identifiable intangible assets, and liabilities assumed in connection with the acquisitions of the SmartID division,
Safend, Alvarion and Prevision at their respective estimated fair values as of the date of the acquisition. This process requires estimates
by our management and by our expert independent consultant based upon the best available information at the time of the preparation of
the financial statements. We have completed the purchase price allocation as reflected in this report. Any future changes to our estimates
of the fair value of the assets and liabilities of OTI’s SmartID division, Safend, Alvarion and Prevision, respectively, as of the
date of the acquisition could impact our future operating results.
In
the 3 years ended December 31, 2021, we depended on orders from large customers for a substantial portion of our revenues. The loss of
all or any of these customers or a decrease in their orders could adversely impact our business, operating results and financial condition.
In the year ended December 31, 2021, 10% of our consolidated
net revenue is attributable to sales to one large customer.
In the year ended December 31, 2020, 23% of our consolidated
net revenue is attributable to sales to two large customers.
In the year ended December 31, 2019, 7% of our consolidated net
revenue is attributable to sales to one large customer.
Because
competition in our industry is intense, our business, operating results and financial condition may be adversely affected.
The global markets for our IoT and connectivity,
e-Gov, and Cyber Security solutions are highly fragmented and intensely competitive. They are characterized by rapidly changing technology,
frequent new product introductions and rapidly changing customer requirements. We expect competition to increase as the industry grows
and as IoT, e-Gov, and Cyber Security, are adopted by public and private sectors around the world, we may not be able to compete successfully
against current or future competitors. We face competition from technologically sophisticated companies, many of which have substantially
greater technical, financial, and marketing resources than we do. In some cases, we compete with entities that have pre-existing relationships
with potential customers. As the markets in which our IoT, e-Gov, and Cyber Security, compete expand, we expect additional competitors
to enter the market. We cannot ensure that we will be able to maintain the quality of our products relative to those of our competitors
or continue to develop and market new products effectively. Continued competitive pressures could cause us to lose significant market
share.
Some of our competitors and potential competitors
have larger technical staffs, larger customer bases, more established distribution channels, greater brand recognition and greater financial,
marketing and other resources than we do. Our competitors may be able to develop products and services that (i) are superior to our products
and services, (ii) achieve greater customer acceptance or (iii) have significantly improved functionality as compared to our existing
and future products and services. In addition, our competitors may be able to negotiate strategic relationships on more favorable terms
than we are able to negotiate. Many of our competitors may also have well-established relationships with our existing and prospective
customers. Increased competition may result in our experiencing reduced margins, loss of sales or decreased market share.
The average selling prices for our products
and solutions may decline as a result of competitive pricing pressures, promotional programs and customers who negotiate price reductions
in exchange for longer-term purchase commitments. The pricing of products and solutions depends on the specific features and functions
of the products, purchase volumes and the level of sales and service support required. As we experience pricing pressure, the average
selling prices and gross margins for our products and solutions may decrease over product lifecycles. These same competitive pressures
may require us to write down the carrying value of any inventory on hand, which could adversely affect our operating results and earnings
per share.
Furthermore, most contracts with governments
or with state or public agencies or municipalities or large enterprises are awarded through a competitive bidding process, and some of
the business that we expect to seek in the future will likely be subject to a competitive bidding process. Competitive bidding presents
a number of risks, including:
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• |
the frequent need to compete against companies
or teams of companies with more financial and marketing resources and more experience than we have in bidding on and performing major
contracts; |
|
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• |
the need to compete against companies or
teams of companies that may be long-term, entrenched incumbents for a particular contract we are competing for and which have, as a result,
greater domain expertise and established customer relations; |
|
|
• |
the substantial cost and managerial time
and effort necessary to prepare bids and proposals for contracts that may not be awarded to us; |
|
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• |
the need to accurately estimate the resources
and cost structure that will be required to service any fixed-price contract that we are awarded; and |
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• |
the expense and delay that may arise if
our competitors protest or challenge new contract awards made to us pursuant to competitive bidding or subsequent contract modifications,
and the risk that any of these protests or challenges could result in the resubmission of bids on modified specifications, or in termination,
reduction or modification of the awarded contract. |
We may not be afforded the opportunity in
the future to bid on contracts that are held by other companies and are scheduled to expire, if the governments, or the applicable state
or local agency or municipality determines to extend the existing contract. If we are unable to win particular contracts that are awarded
through the competitive bidding process, we may not be able to operate in the market for the products and services that are provided under
those contracts for a number of years. If we are unable to win new contract awards or retain those contracts, if any, that we are awarded
over any extended period, our business, prospects, financial condition and results of operations will be adversely affected.
Our
business plan is subject to the risks of technological uncertainty, which may result in our products failing to be competitive or readily
accepted by our target markets.
There can be no assurance
that our research and development efforts will be successful. In addition, the technology that we integrate or that we may expect
to integrate with our product and service offerings is rapidly changing and developing. We face risks associated with the possibility
that our technology may not function as intended and the possible obsolescence of our technology and the risks of delay in the further
development of our own technologies. In addition, any service interruption that results in the unavailability of our system or reduces
its capacity could result in real or perceived public safety issues that may affect customer confidence in our services. Such instances
may result in loss of customer accounts or similar problems if they occur again in the future. Given rapidly changing technologies,
we are not certain that we will be able to adapt the use of our services to permit, upgrade, and expand our systems or to integrate smoothly
with new technologies. Network and information systems and other technologies are critical to our business activities. Network
and information systems-related events, including those caused by us, our service providers or by third parties, such as computer hacking,
cyber-attacks, computer viruses, or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious
social engineering or other malicious activities, or any combination of the foregoing could result in a degradation or disruption of our
services. These types of events could result in a loss of customers and large expenditures to repair or replace the damaged properties,
networks or information systems or to protect them from similar events.
Any
acquisitions that we have completed, or may complete in the future, may not perform as planned and could disrupt our business and harm
our financial condition and operations.
In an effort to effectively compete in the
IoT and connectivity, cyber security, and e-Gov products and services business, we have sought to acquire complementary businesses in
the past and we may continue to do so in the future. In the event of any future acquisitions, we could:
|
|
• |
issue additional securities that would dilute
our current shareholders’ percentage ownership; |
|
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• |
incur debt and assume liabilities; and
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incur large and immediate write-offs of
intangible assets, accounts receivable or other assets. |
These events could result in significant
expenses and decreased revenue, which could adversely affect the market price of our ordinary shares. In addition, integrating product
and service acquisitions and completing any future acquisitions involve numerous operational and financial risks. These risks include
difficulty in assimilating acquired operations, diversion of management’s attention, and the potential loss of key employees or
customers of acquired operations. Furthermore, companies acquired by us may not generate financial results consistent with our management’s
plans at the time of acquisition.
Although
we have had profitable operations in one (1) of the last seven (7) years ended December 31, 2021, if we do not generate sufficient cash
from operations, we will be required to obtain additional financing or reduce our level of expenditure. If we are unable to obtain adequate
financing, when we require it, our business, financial condition and results of operations could be adversely affected. Such financing
may not be available in the future, or, if available, may not be on terms favorable to us.
Historically, we had profitable operations
in one (1) of the last seven (7) years ended December 31, 2021 and have funded our business operations and capital expenditures primarily
through equity and/or debt issuances (including convertible securities). To support our growing business, we must have sufficient capital
to continue to make significant investments in our platform and product offerings. If we raise additional funds through the issuance of
equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to those of our ordinary
shares, and our existing shareholders may experience dilution. Any debt financing secured by us in the future could involve restrictive
covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for
us to obtain additional capital and to pursue business opportunities. Any refinancing of our existing indebtedness could be at significantly
higher interest rates, require additional restrictive financial and operational covenants, or require us to incur significant transaction
fees, issue warrants or other equity securities, or issue convertible securities. These restrictions and covenants may restrict our ability
to finance our operations and engage in, expand, or otherwise pursue our business activities and strategies. Our ability to comply with
these covenants and restrictions may be affected by events beyond our control, and breaches of these covenants and restrictions could
result in a default and an acceleration of our obligations under a debt agreement. If we raise additional funds through collaborations
and licensing arrangements, we might be required to relinquish significant rights to our technologies or our solutions under development,
or grant licenses on terms that are not favorable to us, which could lower the economic value of those programs to us.
We
evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development
efforts, business plans and operating performance and the condition of the capital markets at the time we seek financing. We cannot be
certain that additional financing will be available to us on favorable terms, or at all. If we are unable to obtain adequate financing
or financing on terms satisfactory to us, when we require it, this would have the potential to decrease both our ability to attain profitability
and our financial flexibility, our ability to continue to support our business growth and to respond to business challenges could be significantly
limited, and our business, financial condition and results of operations could be adversely affected.
The
market for our products is characterized by changing technology, requirements, standards and products, and we may be adversely affected
if we do not respond promptly and effectively to these changes.
The market for our products is characterized
by evolving technologies, changing industry standards, changing regulatory environments, frequent new product introductions and rapid
changes in customer requirements. The introduction of products embodying new technologies and the emergence of new industry standards
and practices can render existing products obsolete and unmarketable. Our future success will depend on our ability to enhance our existing
products and to develop and introduce, on a timely and cost-effective basis, new products and product features that keep pace with technological
developments and emerging industry standards and address the increasingly sophisticated needs of our customers. In the future:
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we may not be successful in developing and
marketing new products or product features that respond to technological change or evolving industry standards; |
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we may experience difficulties that could
delay or prevent the successful development, introduction and marketing of these new products and features; or |
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our new products and product features may
not adequately meet the requirements of the marketplace and achieve market acceptance. |
If we are unable to respond promptly and
effectively to changing technologies and market requirements, we will be unable to compete effectively in the future.
There can be no assurance that we will successfully
identify new product opportunities and develop and bring new products to market in a timely manner, or that the products and technologies
developed by others will not render our products or technologies obsolete or noncompetitive. The failure of our new product development
efforts could have a material adverse effect on our business, results of operations and future growth.
We
have sought in the past and will seek in the future to enter into contracts with governments, as well as state and local governmental
agencies and municipalities, which subjects us to certain risks.
Governmental contracts subject us to several
other risks, including risks associated with public budgetary restrictions and uncertainties, actual contracts that are less than awarded
contract amounts, and cancellation at any time at the option of the governmental agency. Governments may also be in a position to obtain
greater rights with respect to our intellectual property than we would grant to other entities. In addition, governmental agencies have
the power, based on financial difficulties or investigations of their contractors, to deem contractors unsuitable for new contract awards.
Because we engage in the government contracting business, we are subject to audits, and may be subject to investigation, by governmental
entities.
Any failure to comply with the terms of
any governmental contracts could result in substantial civil and criminal fines and penalties, as well as suspension from future contracts
for a significant period of time, any of which could adversely affect our business by requiring us to pay significant fines and penalties
or prevent us from earning revenues from governmental contracts during the suspension period. Cancellation of any one of our major governmental
contracts could have a material adverse effect on our financial condition.
Our
dependence on third-party representatives, resellers and distributors could result in marketing and distribution delays, which would prevent
us from generating sales revenues.
We market and sell some of our products
and solutions using a network of representatives, resellers and distributers covering the Americas, Europe, Asia and Africa. We establish
relationships with such persons through agreements that provide for the marketing and support of our systems and products. These agreements
generally do not grant exclusivity to the representative, resellers or distributors, and some of them are not long-term contracts, do
not have commitments for minimum sales, and could be terminated by the representative, reseller or distributor. We do not have agreements
with all of our representatives, resellers and distributors. We are currently engaged in discussions with additional potential representatives,
resellers or distributors. Such arrangements may never be finalized and, if finalized, such arrangements may not increase our revenues
or profitability.
Our
ability to terminate a representative, reseller or distributor who is not performing satisfactorily may be limited. Inadequate performance
by a representative, reseller or distributor could adversely affect our ability to develop markets in the regions for which such person
is responsible and could result in substantially greater expenditures by us in order to develop such markets. Our operating results are
highly dependent upon: (i) our ability to maintain our existing representative, reseller and distributor arrangements; (ii) our ability
to establish and maintain coverage of major geographic areas and establish access to customers and markets; and (iii) the ability of our
representatives, resellers and distributors to successfully market our products. A failure to achieve these objectives could result in
lower revenues.
If
our technology and solutions cease to be adopted and used by government and public and private organizations, we may lose some of our
existing customers and our operations will be negatively affected.
Our ability to grow depends significantly
on whether governmental and public and private organizations adopt our technology and solutions as part of their new standards and whether
we are able to leverage our expertise with government products into commercial products. If these organizations do not adopt our technology,
we might not be able to penetrate some of the new markets we are targeting, or we might lose some of our existing customer base.
In order for us to achieve our growth objectives,
our e-Gov, IoT and connectivity, Cyber Security, technology and solutions must be adapted to and adopted in a variety of areas, any or
all of which may not adopt our technology. These areas include, among others:
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national ID and e-Government; |
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counties and municipals; |
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public safety; |
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safe and smart cities |
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educational campus; |
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healthcare and homecare; and |
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large enterprises |
We cannot accurately predict the future
growth rate, if any, or the ultimate size of the e-Gov, IoT, Cyber Security, markets. The expansion of the market for our products and
services depends on a number of factors such as:
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the cost, performance and reliability of
our products and services compared to the products and services of our competitors; |
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customer perception of the benefits of our
products and solutions; |
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public perception of the intrusiveness of
these solutions and the manner in which organizations use the information collected; |
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public perception of the privacy protection
for their personal information; |
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customer satisfaction with our products
and services; and |
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marketing efforts and publicity for our
products and services. |
Even if our products and solutions gain
wide market acceptance, our products and services may not adequately address market requirements and may not gain wide market acceptance.
If our solutions or our products and services do not gain wide market acceptance, our business and our financial results will suffer.
If
we are unable to develop and sustain our position as a provider of e-Gov,
IoT and Connectivity, and Cyber Security, solutions and services and earn high margins
from our technology, our business will not be as profitable as we hope, if at all.
The increasing sophistication of our e-Gov,
IoT, Cyber Security, and Connectivity based technology places a premium on providing innovative software systems and services to customers,
in addition to manufacturing and supplying products. While we have had some success positioning ourselves as a provider of such services
and systems, we may not continue to be successful with this strategy and we may not be able to capture a significant share of the market
for the sophisticated solutions and services that we believe are likely to produce attractive margins in the future. A significant portion
of the value of our e-Gov, Cyber Security, and Connectivity technology lies in the development of software, firmware and applications
that will permit the use of our products and technology in selected new markets. In contrast, the margins involved in manufacturing and
selling IoT and Connectivity based technology can be relatively small and may not be sufficient to permit us to earn an attractive return
on our development investments.
Our
operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment.
Challenging economic
conditions worldwide have from time to time contributed, and may continue to contribute, to slowdowns in the communications and networking
industries at large, as well as in specific segments and markets in which we operate, resulting in:
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Increased price competition
for our products, not only from our competitors but also as a consequence of customers disposing of unutilized products |
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Risk of excess and
obsolete inventories |
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Risk of supply constraints
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Risk of excess facilities
and manufacturing capacity |
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Higher overhead costs
as a percentage of revenue and higher interest expense |
The global macroeconomic
environment continues to be challenging and inconsistent and is being significantly impacted by the COVID-19 pandemic. During fiscal 2021,
we continued to see a more broad-based weakening in the global macroeconomic environment which impacted our commercial and enterprise
markets. We also experienced continuing weakness in the service provider market and emerging countries, and we expect ongoing uncertainty
in these markets. Additionally, instability in the global credit markets, the impact of uncertainty regarding global central bank monetary
policy, the instability in the geopolitical environment in many parts of the world including as a result of Russia’s hostile activities
in Ukraine,1 the current economic challenges in China,
including global economic ramifications of Chinese economic difficulties, and other disruptions may continue to put pressure on global
economic conditions. If global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate
further, we may experience material impacts on our business, operating results, and financial condition.
Our
efforts to expand our international operations are subject to a number of risks, any of which could adversely reduce our future international
sales and increase our losses.
Most of our revenues to date are attributable to sales in jurisdictions
other than the United States. For the years ended December 31, 2021 and 2020, approximately 44% and 50%, respectively, of our revenues
were derived from sales to markets outside of the United States. Our inability to obtain or maintain federal or foreign regulatory approvals
relating to the import or export of our products on a timely basis could adversely affect our ability to expand our international business.
Additionally, our international operations could be subject to a number of risks, any of which could adversely affect our future international
sales and operating results, including:
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increased collection risks; |
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trade restrictions; |
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export duties and tariffs; |
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uncertain political, regulatory and economic
developments; |
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inability to protect our intellectual property
rights; |
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highly aggressive competitors; |
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currency issues; |
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difficulties in staffing, managing and supporting
foreign operations; |
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longer payment cycles; and |
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difficulties in collecting accounts receivable.
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Negative developments in any of these areas
in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, difficulty
in collecting receivables, and a higher cost of doing business, any of which could adversely affect our business, results of operations
or financial condition.
In addition, in many countries the national
security organizations require our employees to obtain clearance before such employees can work on a particular transaction. Failure to
receive, or delays in the receipt of, relevant foreign qualifications could also have a material adverse effect on our ability to make
sales or fulfill our orders on a timely basis. Additionally, as foreign government regulators have become increasingly stringent, we may
be subject to more rigorous regulation by governmental authorities in the future. If we fail to adequately address any of these regulations,
our business will be harmed.
We
are exposed to risks in operating in foreign markets, which may make operating in those markets difficult and thereby force us to curtail
our business operations.
In conducting our business in foreign countries,
we are subject to political, economic, legal, operational and other risks that are inherent in operating in other countries. Risks inherent
to operating in other countries range from difficulties in settling transactions in emerging markets to possible nationalization, expropriation,
price controls and other restrictive governmental actions. We also face the risk that exchange controls or similar restrictions imposed
by foreign governmental authorities may restrict our ability to convert local currency received or held by us in their countries into
U.S. dollars or other currencies, or to take those dollars or other currencies out of those countries.
Due
to the nature of our business, our financial and operating results could fluctuate.
Our financial and operating results have
fluctuated in the past and could fluctuate in the future from quarter to quarter. As a result of our dependence in the e-Gov division
on a limited number of customers and our increased reliance on our e-Gov, and IoT solutions and products, our revenue has experienced
wide fluctuations. We expect that our revenue will continue to fluctuate in the future as we market and implement solutions through our
IoT and e-Gov divisions. A portion of our sales is not recurring sales; therefore, quarterly and annual sales levels will likely fluctuate.
Sales in any period may not be indicative of sales in future periods. In addition, our result may fluctuate from year to year for the
following reasons:
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long customer sales cycles; |
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reduced demand for our products and services;
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price reductions; |
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new competitors, or the introduction of
enhanced products or services from new or existing competitors; |
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changes in the mix of products and services
we or our customers and representatives sell; |
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contract cancellations, delays or amendments
by customers; |
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the lack of government demand for our products
and services or the lack of government funds appropriated to purchasing our products and services; |
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unforeseen legal expenses, including litigation
costs; |
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expenses related to acquisitions;
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other non-recurring financial charges;
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the lack of availability, or increased cost,
of key components and subassemblies; and |
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the inability to successfully manufacture
in volume, and reduce the price of, certain of our products; |
In addition, the period between our initial
contact with a potential customer and the purchase of our products and services is often long and subject to delays associated with the
budgeting, approval and competitive evaluation processes that frequently accompany significant capital expenditures, particularly by governmental
agencies. The typical sales cycle for our government customers has, to date, ranged from three to 24 months and the typical sales cycle
for our commercial customers has ranged from one to 12 months. A lengthy sales cycle may have an impact on the timing of our revenue,
which may cause our quarterly operating results to fall below investor expectations. We believe that a customer’s decision to purchase
our products and services is discretionary, involves a significant commitment of resources, and is influenced by customer budgetary cycles.
To successfully sell our products and services, we generally must educate our potential customers regarding their use and benefits, which
can require significant time and resources. This significant expenditure of time and resources may not result in actual sales of our products
and services.
Our
reliance on third party technologies and components for the development of some of our products may delay product launches, impair our
ability to develop and deliver products and hurt our ability to compete in the market.
Most of our products integrate third-party
technology that we license and components that we purchase or otherwise obtain the right to use, including operating systems, microchips,
security and cryptography technology for card operating systems and dual interface technology. Our ability to purchase and license new
technologies and components from third parties is and will continue to be critical to our ability to offer a complete line of products
that meets customer needs and technological requirements. We may not be able to renew our existing licenses or to purchase components
on favorable terms, if at all. If we lose the rights to a patented technology, we may need to stop selling or may need to redesign our
products that incorporate that technology. We may also lose the potential competitive advantage such technology gave us. In addition,
competitors could obtain licenses for technologies for which we are unable to obtain licenses, and third parties may develop or enable
others to develop a similar solution to security issues, either of which could adversely affect our results of operations. Also, dependence
on the patent protection of third parties may not afford us any control over the protection of the technologies upon which we rely. If
the patent protection of any of these third parties were compromised, our ability to compete in the market could also be impaired.
Although we generally use standard components
for our systems, some of the key components are available only from limited sources. Even where multiple sources are available, we typically
obtain components from only one vendor to ensure high quality, prompt delivery and low cost. If one of our suppliers was unable to meet
our supply demands and we could not quickly replace the source of supply, it could have a material adverse effect on our business, operating
results and financial condition, for reasons including a delay of receipt of revenues and damage to our business reputation.
Delays
in deliveries from our suppliers, defects in goods or components supplied by our vendors, or delays in projects that are performed by
our subcontractors could cause our revenues and gross margins to decline.
We rely on a limited number of vendors and
subcontractors for certain components of the products we are supplying and projects we perform. In some cases, we rely on a single source
vendor or subcontractor. Any undetected flaws in components to be supplied by our vendors could lead to unanticipated costs to repair
or replace these parts. If one of our suppliers was unable to meet our supply demands and we could not quickly replace the source of supply,
it could cause a delay of receipt of revenues and damage our business reputation. We depend on subcontractors to adequately perform a
substantial part of our projects. If a subcontractor fails to fulfill its obligations under a certain project, it could delay our receipt
of revenues for such project and damage our business reputation, and therefore could have a material adverse effect on our business, operating
results and financial condition.
We
may have significant differences between forecasted demands and actual orders received, which may adversely affect our business.
The lead time for ordering parts and materials
and building many of our products can be many months. As a result, we must order parts and materials and build our products based on forecasted
demand. If demand for our products lags significantly behind our forecasts, we may produce more products than we can sell, which can result
in cash flow problems and write-offs or write-downs of obsolete inventory. If demand for our products exceeds our forecasts, our business
may be harmed as a result of delays to perform contracts.
Breaches
of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks or other breaches of network
or information technology, or IT, security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our
systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attack,
malware, computer viruses and other means of unauthorized access. While we maintain insurance coverage for some of these events, the potential
liabilities associated with these events could exceed the insurance coverage we maintain. A failure to protect the privacy of customer
and employee confidential data against breaches of network or IT security could result in damage to our reputation. To date, we have not
been subject to cyber-attacks or other cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations
or financial condition.
For us to further penetrate the marketplace,
the marketplace must be confident that we provide effective security protection for national and other secured identification documents
and cards. Although we have not experienced any act of sabotage or unauthorized access by a third party to our software or technology
to date, if an actual or perceived breach of security occurs in our internal systems or those of our customers, regardless of whether
we caused the breach, it could adversely affect the market’s perception of our products and services. This could cause us to lose
customers, resellers, alliance partners or other business partners, thereby causing our revenues to decline. If we or our customers were
to experience a breach of our internal systems, our business could be severely harmed by adversely affecting the market’s perception
of our products and services.
Third
parties could obtain access to our proprietary information or could independently develop similar technologies.
Despite the precautions we take, third parties
may copy or obtain and use our technologies, ideas, know-how and other proprietary information without authorization or may independently
develop technologies similar or superior to our technologies. In addition, the confidentiality and non-competition agreements between
us and most of our employees, representatives and clients may not provide meaningful protection of our proprietary technologies or other
intellectual property in the event of unauthorized use or disclosure. If we are not able to successfully defend our industrial or intellectual
property rights, we may lose rights to technologies that we need to develop our business, which may cause us to lose potential revenues,
or we may be required to pay significant license fees for the use of such technologies. To date, we have relied primarily on a combination
of trade secret and copyright laws, as well as nondisclosure and other contractual restrictions on copying, reverse engineering and distribution
to protect our proprietary technology.
Our current patents portfolio and any patents
that we may register in the future may provide only limited protection for our technology and may not be sufficient to provide competitive
advantages to us. For example, competitors could be successful in challenging any issued patents or, alternatively, could develop similar
or more advantageous technologies on their own or design around our patents. Any inability to protect intellectual property rights in
our technology could enable third parties to compete more effectively with us.
In addition, the laws of certain foreign
countries may not protect our intellectual property rights to the same extent as do the laws of Israel or the United States. Our means
of protecting our intellectual property rights in Israel, the United States or any other country in which we operate may not be adequate
to fully protect our intellectual property rights.
Third
parties may assert that we are infringing their intellectual property rights, and IP litigation could require us to incur substantial
costs even when our efforts are successful.
We may face IP litigation, which could be
costly, harm our reputation, limit our ability to sell our products, force us to modify our products or obtain appropriate licenses, and
divert the attention of management and technical personnel. Our products employ technology that may infringe on the proprietary rights
of others, and, as a result, we could become liable for significant damages and suffer other harm to our business. Our exposure to risks
associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility
into the development process with respect to such technology or the care taken to safeguard against infringement risks.
We have not been subject to material IP litigation
to date. We have received demand letters in the past alleging that products or processes of ours are in breach of patents, which we have
denied, and after a respective lawsuit has been filed in respect of such claims, it has been resolved and dismissed with no effect on
our business or any material cost to us.
Litigation may be necessary in the future
to enforce any patents we have or may obtain and/or any other IP rights, to protect our trade secrets, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement or invalidity, and we may not prevail in any such future
litigation. Litigation, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert
the efforts and attention of our management and technical personnel from normal business operations. In addition, adverse determinations
in litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from
third parties, prevent us from licensing our technology or selling or manufacturing our products, or require us to expend significant
resources to modify our products or attempt to develop non-infringing technology, any of which could seriously harm our business.
Our products may contain technology provided
to us by third parties. Because we did not develop such technology ourselves, we may have little or no ability to determine in advance
whether such technology infringes the IP rights of any other party. Our suppliers and licensors may not be required to indemnify us in
the event that a claim of infringement is asserted against us, or they may be required to indemnify us only with respect to intellectual
property infringement claims in certain jurisdictions, and/or only up to a maximum amount, above which we would be responsible for any
further costs or damages. In addition, we have indemnification obligations to certain parties with respect to any infringement of third-party
patents and intellectual property rights by our products. If litigation were to be filed against these parties in connection with our
technology, we would be required to defend and indemnify such parties.
We
rely on the services of certain executive officers and key personnel, the loss of whom could adversely affect our business.
Our future success depends largely on the
efforts and abilities of our executive officers and senior management and other key employees, including technical and sales personnel.
The loss of the services of any of these persons could adversely affect our business. We do not maintain any “key-person”
life insurance with respect to any of our employees.
Our
ability to remain competitive depends in part on attracting, hiring and retaining qualified technical personnel, and if we are not successful
in such efforts, our business could be disrupted.
Our future success depends in part on the
availability of qualified technical personnel, including personnel trained in software and hardware applications within specialized fields.
As a result, we may not be able to successfully attract or retain skilled technical employees, which may impede our ability to develop,
install, implement and otherwise service our software and hardware systems and to efficiently conduct our operations.
The information technology and network security
industries are characterized by a high level of employee mobility and the market for technical personnel remains extremely competitive
in certain regions, including Israel. This competition means that (i) there are fewer highly qualified employees available for hire, (ii)
the costs of hiring and retaining such personnel are high, and (iii) highly qualified employees may not remain with us once hired. Furthermore,
there may be pressure to provide technical employees with stock options and other equity interests in us, which may dilute our shareholders
and increase our expenses.
The additions of new personnel and the departure
of existing personnel, particularly in key positions, can be disruptive, might lead to additional departures of existing personnel and
could have a material adverse effect on our business, operating results and financial condition.
Some
of our products are subject to government regulation of radio frequency technology, which could cause a delay in introducing, or an inability
to introduce, such products in the United States and other markets.
The rules and regulations of the United
States Federal Communications Commission (FCC), or the European CE, limit the radio frequency used by and level of power emitting from
electronic equipment. Our Connectivity and IoT products and equipment are required to comply with these FCC and/or CE rules, which may
require certification, verification or registration of the equipment with the FCC and CE. Certification and verification of new equipment
requires testing to ensure the equipment’s compliance with the FCC’s and/or CE’s rules. The equipment must be labeled
according to the FCC’s and/or CE’s rules to show compliance with these rules. Testing, processing of the FCC’s and/or
CE’s equipment certificate or FCC registration and labeling may increase development and production costs and could delay introduction
of our verification scanning device and next generation radio frequency technology scanning equipment into the U.S. and European markets.
Selling, leasing or importing non-compliant equipment is considered a violation of FCC or CE rules and related law, and violators may
be subject to an enforcement action by the related authorities. Any failure to comply with the applicable rules and regulations of the
FCC and/or CE could have an adverse effect on our business, operating results and financial condition by increasing our compliance costs
and/or limiting our sales in the United States and Europe.
War,
terrorism, other acts of violence or natural or man-made disasters, including a global pandemic, may affect the markets in which the Company
operates, the Company’s customers, the Company’s delivery of products and customer service, and could have a material adverse
impact on our business, results of operations, or financial conditions.
The Company’s
business may be adversely affected by instability, disruption or destruction in a geographic region in which it operates, regardless of
cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or man-made disasters, including famine, food,
fire, earthquake, storm or pandemic events and spread of disease. Such events may cause customers to suspend their decisions on using
the Company’s products and services, make it impossible to attend or sponsor trade shows or other conferences in which our products
and services are presented to customers and potential customers, cause restrictions, postponements and cancellations of events that attract
large crowds and public gatherings such as trade shows at which we have historically presented our products, and give rise to sudden significant
changes in regional and global economic conditions and cycles that could interfere with purchases of goods or services, commitments to
develop new products. These events also pose significant risks to the Company’s personnel and to physical facilities, transportation
and operations, which could materially adversely affect the Company’s financial results.
The
COVID-19 pandemic is adversely impacting our global economy, which could adversely impact other parts of our business, including our ability
to access capital markets, if and when required. Additional factors could exacerbate such negative consequences and/or cause other and
potentially materially adverse effects.
An outbreak of a novel
strain of coronavirus, COVID-19 in December 2019 subsequently became a pandemic after spreading globally, including the United States,
and continues as of the date of this Annual Report. The COVID-19 pandemic materially adversely affected our financial results and business
operations during the fiscal year ended December 31, 2021 The extent to which the coronavirus impacts our results will depend on future
developments, including new information which may emerge concerning the severity of the coronavirus and the actions taken by us and our
partners to contain the coronavirus or treat its impact, among others. Our estimate of the ultimate impact of the coronavirus pandemic,
including the extent of any adverse impacts on our business, revenues, results of operations, cash flows and financial condition, which
will depend on, among other things, the duration and spread of coronavirus, the impact of federal and local government actions that have
been and continue to be taken in response, and the effectiveness of actions taken to contain or mitigate the pandemic and economic conditions
is subject to significant uncertainty.
Depending on the duration
and severity of the current COVID-19 pandemic, it may also have the effect of heightening many of the other risks described in this Annual
Report and our other filings with the SEC, such as risks relating to our ability to further develop and execute on our business plan;
our ability to access capital markets to obtain additional sources of suitable and adequate financing; restricted access to capital and
increased borrowing costs; our ability to fund our current debt obligations and complying with the covenants contained in the agreements
that govern our existing indebtedness; our ability to fund potential acquisitions and capital expenditures; and our ability to maintain
adequate internal controls in the event that our employees are restricted from accessing our regular offices for a significant period
of time.
We cannot reasonably
estimate the ultimate impact and duration of the coronavirus pandemic, including the extent of any adverse impacts on our business, revenues,
results of operations, cash flows and financial condition, which cannot currently be predicted and will depend on, among other things,
the duration and spread of coronavirus, the impact of federal and local government actions that have been and continue to be taken in
response, and the effectiveness of actions taken to contain or mitigate the pandemic and economic conditions.
The
ability of our employees to work may be significantly impacted by the coronavirus.
As of the date of this
Annual Report, the COVID-19 pandemic continues. Our employees are being affected by the COVID-19 pandemic. Operationally, substantially
all of our employees and consultants are working remotely, and we have restricted some of our production activities and business travel.
The health of our workforce is of primary concern and we may need to enact further precautionary measures to help minimize the risk of
our employees being exposed to the coronavirus. If significant portions of our workforce, including key personnel, are unable to work
effectively because of illness, government actions or other restrictions in connection with the COVID-19 pandemic, any adverse impact
of the pandemic on our businesses could be exacerbated. Furthermore, our management team is focused on mitigating the adverse effects
of the COVID-19 pandemic, which has required and will continue to require a large investment of time and resources across our entire Company,
thereby diverting their attention from other priorities that existed prior to the outbreak of the pandemic. If these conditions worsen,
or last for an extended period of time, our ability to manage our business may be impaired, and operational risks, cybersecurity risks
and other risks facing us even prior to the pandemic may be elevated.
We
cannot predict the impact of the COVID-19 pandemic on our customers, suppliers, vendors, and other business partners, and the full effects
of the COVID-19 pandemic are highly uncertain and cannot be predicted.
The COVID -19 pandemic
is partially affecting our revenue partners, vendors and other business partners, and we are not able to assess the full extent of the
current impact nor predict the ultimate consequences that will result therefrom.
We are continuously
monitoring our own operations and intend to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic to the best
of our abilities, but there can be no assurances that we will be successful in doing so. To the extent we are able to obtain information
about and maintain communications with our revenue partners, vendors and other business partners, we will seek to minimize disruptions
to our revenue and distribution channels, but many circumstances will be beyond our control. Governmental action and/or regional quarantines
may further result in labor shortages and work stoppages. All of these factors may have far-reaching direct and indirect impacts on our
business, operations, and financial results and condition. The ultimate extent of the effects of the COVID-19 pandemic on our Company
is highly uncertain and will depend on future developments which cannot be predicted. Even after the COVID-19 outbreak has subsided, we
may continue to experience material adverse impact on our business as a result of its global economic impact, including any related recession,
as well as lingering impact on demand for our services, our customers, suppliers, vendors and other business partners.
Risks Related to Our
Ordinary Shares
Volatility
of the market price of our ordinary shares could adversely affect our shareholders and us.
The market price of our ordinary shares
has been, and is likely to be, highly volatile and could be subject to wide fluctuations in response to numerous factors, including the
following:
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actual or anticipated variations in our
quarterly operating results or those of our competitors; |
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announcements by us or our competitors of
technological innovations or new and enhanced products; |
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developments or disputes concerning proprietary
rights; |
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introduction and adoption of new industry
standards; |
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changes in financial estimates by securities
analysts; |
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market conditions or trends in our industry;
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changes in the market valuations of our
competitors; |
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announcements by us or our competitors of
significant acquisitions; |
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entry into strategic partnerships or joint
ventures by us or our competitors; |
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failing to meet in the financial projection
or guidance; |
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Actual and anticipated market volatility
due to the COVID-19; |
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political and economic conditions, such
as a recession or interest rate or currency rate fluctuations or political events; and |
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other events or factors in any of the countries
in which we do business, including those resulting from war, incidents of terrorism, natural disasters or responses to such events.
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In addition, the stock market in general,
and the market for Israeli companies in particular, has been highly volatile. Many of these factors are beyond our control and may materially
adversely affect the market price of our ordinary shares, regardless of our performance. In the past, following periods of market volatility,
shareholders have often instituted securities class action litigation relating to the stock trading and price volatility of the company
in question. If we were involved in any securities litigation, it could result in substantial cost to us to defend and divert resources
and the attention of management from our business.
We
have a shareholder that is able to exercise substantial influence over us and all matters submitted to our shareholders.
Sigma Wave Ltd. (“Sigma”), which
is controlled by family members of Mrs. Tsviya Trabelsi, and by her husband Mr. Arie Trabelsi, a member of our board of directors, is
the beneficial owner of approximately 16.1% of our outstanding ordinary shares as of December 31, 2021. Mrs. Trabelsi and Mr. Trabelsi
are also the parents of Ordan Trabelsi, our CEO and President, and Barak Trabelsi, our COO and CTO. Such ownership interest gives Sigma
the ability to influence our corporate affairs and to control our Company, including our management, subject to approvals that may be
required for related-party transactions pursuant to Israeli law. Sigma may have influence over the outcome of most matters submitted to
our shareholders, including the election of our directors, and such influence could make us a less attractive acquisition or investment
target. Because the interests of Sigma may differ from the interests of our other shareholders, actions taken by Sigma with respect to
us may not be favorable to our other shareholders.
We
do not expect to pay cash dividends.
We have never paid cash dividends on our
ordinary shares and do not anticipate paying cash dividends in the near future. According to the Israeli Companies Law, dividends may
only be paid out of profits legally available for distribution and provided that there is no reasonable concern that such payment will
prevent us from satisfying our existing and foreseeable obligations as they become due. The payment of dividends will depend on earnings,
financial condition, debt covenants in place, and other business and economic factors affecting us at such time as our board of directors
may consider relevant. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only
occur if our stock price appreciates.
We
have failed to maintain effective internal control over financial reporting, which could result in material misstatements in our financial
statements.
The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley,
imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404 of Sarbanes-Oxley
governing internal controls and procedures for financial reporting have resulted in increased general and administrative expense and a
diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources.
Section 404 of Sarbanes-Oxley requires management’s annual review and evaluation of our internal control over financial reporting
in connection with the filing of the Annual Report on Form 20-F for each fiscal year. We have identified material weaknesses or significant
deficiencies in our internal control over financial reporting. Failure to maintain effective internal control over financial reporting
could result in material misstatements in our financial statements. Any such failure could also adversely affect the results of our management’s
evaluations and annual auditor reports regarding the effectiveness of our internal control over financial reporting. Failure to maintain
effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could have
a material adverse effect on our operating results, investor confidence in our reported financial information and the market price of
our ordinary shares.
Risks Related to Our
Location and Incorporation in Israel
Political,
economic and military instability, war and/or acts of terror in Israel may disrupt our operations and negatively affect our business condition,
harm our results of operations and adversely affect our share price.
We are incorporated under the laws of, and
our principal executive offices and research and development facilities are located in, the State of Israel. As a result, political, economic
and military conditions, war and/or acts of terror affecting Israel directly influence us. Any major hostilities involving Israel, a full
or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present
trading partners, or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial
condition and results of operations.
Since its establishment in 1948, Israel
has been involved in a number of armed conflicts with its Arab neighbors and a state of hostility, varying from time to time in intensity
and degree, has continued into 2022. Also, since 2011, uprisings in several countries in the Middle East and neighboring regions have
led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability
may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations.
In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have
a strong influence among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. Any armed conflicts,
terrorist activities or political instability in the region could materially and adversely affect our business, financial condition and
results of operations. In addition, the political and security situation in Israel may result in parties with whom we have agreements
involving performance in Israel claiming that they are not obligated to comply with their undertakings under those agreements pursuant
to force majeure provisions in such agreements. To date, these matters have not had any material effect on our business and results of
operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance
that these matters will not negatively affect us in the future.
Furthermore, we could be adversely affected
by the interruption or reduction of trade between Israel and its trading partners. Some countries, companies and organizations continue
to participate in a boycott of Israeli companies and others doing business with Israel or with Israeli companies. As a result, we are
precluded from marketing our products to these countries, companies and organizations. Foreign government defense export policies towards
Israel could also make it more difficult for us to obtain the export authorizations necessary for our activities. Also, over the past
several years, there have been calls, in Europe and elsewhere, to reduce trade with Israel. Restrictive laws, policies or practices directed
towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
Our
financial results may be adversely affected by inflation and currency fluctuations.
We report our financial results in dollars,
while a portion of our expenses, primarily salaries, are paid in NIS. Therefore, our NIS related costs, as expressed in U.S. dollars,
are influenced by the exchange rate between the U.S. dollar and the NIS. The appreciation of the NIS against the U.S. dollar will result
in an increase in the U.S. dollar cost of our NIS expenses. We are also influenced by the timing of, and the extent to which, any increase
in the rate of inflation in Israel over the rate of inflation in the United States is not offset by the devaluation of the NIS in relation
to the dollar. Our dollar costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the dollar or
if the timing of such devaluation lags behind inflation in Israel. In the past, the NIS exchange rate with the dollar and other foreign
currencies had fluctuated, generally reflecting inflation rate differentials. We cannot predict any future trends in the rate of inflation
in Israel or the rate of devaluation or appreciation of the NIS against the dollar. If the dollar cost of our operations in Israel increases,
our dollar measured results of operations will be adversely affected.
Our
operations could be disrupted as a result of the obligation of management or key personnel to perform military service in Israel.
Generally, all nonexempt male adult citizens
and permanent residents of Israel under the age of 40, or older for reserves officers or citizens with certain occupations, as well as
certain female adult citizens and permanent residents of Israel, are obligated to perform annual military reserve duty and are subject
to being called for active duty at any time under emergency circumstances. While we have operated effectively under these requirements
since our incorporation, we cannot predict the full impact of such conditions on us in the future, particularly if emergency circumstances
occur. If many of our employees are called for active duty, our operations in Israel and our business, operating results and financial
condition may be adversely affected.
We
may not be able to enforce covenants not-to-compete under current Israeli law.
We have non-competition agreements with
most of our employees, many of which are governed by Israeli law. These agreements generally prohibit our employees from competing with
us or working for our competitors for a specified period following termination of their employment. However, Israeli courts are reluctant
to enforce non-compete undertakings of former employees and tend, if at all, to enforce those provisions for relatively brief periods
of time in restricted geographical areas and only when the employee has unique value specific to that employer’s business and not
just regarding the professional development of the employee. Any such inability to enforce non-compete covenants may cause us to lose
any competitive advantage resulting from advantages provided to us by such confidential information.
We
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result
in litigation and adversely affect our business.
A significant portion of our intellectual
property has been developed by our Israeli employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967
(the “Israeli Patent Law”), inventions conceived by an employee during the term and as part of the scope of his or her employment
with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the
employee and employer giving the employee service invention rights. The Israeli Patent Law also provides that if there is no such agreement
between an employer and an employee, the Israeli Compensation and Royalties Committee (the “C&R Committee”), a body constituted
under the Israeli Patent Law, shall determine whether the employee is entitled to remuneration for his inventions. The C&R Committee
(decisions of which have been upheld by the Israeli Supreme Court) has held that employees may be entitled to remuneration for their service
inventions despite having specifically waived any such rights. Further, the C&R Committee has not yet set specific guidelines regarding
the method for calculating this remuneration or the criteria or circumstances under which an employee’s waiver of his right to remuneration
will be disregarded. We generally enter into intellectual property assignment agreements with our employees pursuant to which such employees
assign to us all rights to any inventions created in the scope of their employment or engagement with us. Although our employees have
agreed to assign to us service invention rights and have specifically waived their right to receive any special remuneration for such
assignment beyond their regular salary and benefits, we may face claims demanding remuneration in consideration for assigned inventions.
As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current or former employees,
or be forced to litigate such claims, which could negatively affect our business.
Your
rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities
of shareholders under U.S. law.
We are incorporated under Israeli law. The
rights and responsibilities of holders of our ordinary shares are governed by our Memorandum of Association and Articles of Association
and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and customary manner in
exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders, and to refrain from misusing
his power, including, among other things, when voting at the general meeting of shareholders on certain matters. Israeli law provides
that these duties are applicable to shareholder votes on, among other things, amendments to a company’s articles of association,
increases in a company’s authorized share capital and mergers and interested party transactions requiring shareholder approval.
A shareholder also has a general duty to refrain from exploiting any other shareholder of his or her rights as a shareholder. In addition,
a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder
vote or who, under our Articles of Association, has the power to appoint or prevent the appointment of a director or executive officer
in the company, has a duty of fairness toward the company. Israeli law does not define the substance of this duty of fairness, but provides
that remedies generally available upon a breach of contract will apply also in the event of a breach of the duty to act with fairness.
Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding
the implications of these provisions that govern shareholder behavior.
Provisions
of Israeli law may delay, prevent or otherwise encumber a merger with or an acquisition of our company, which could prevent a change of
control, even when the terms of such transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers,
requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors,
officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli
tax considerations may make potential transactions unappealing to us or to some of our shareholders whose country of residence does not
have a tax treaty with Israel exempting such shareholders from Israeli tax. These provisions of Israeli law could delay, prevent or impede
a merger with or an acquisition of our company, which could prevent a change of control, even when the terms of such transaction are favorable
to us and our shareholders and therefore potentially depress the price of our shares.
Our
shareholders may face difficulties in the enforcement of civil liabilities against us and our officers and directors or in asserting U.S.
securities law claims in Israel.
Most of our officers and directors are residents of Israel or
otherwise reside outside of the United States. SuperCom Ltd. is incorporated under Israeli law and its principal office and facilities
are located in Israel. All or a substantial portion of the assets of such persons are or may be located outside of the United States.
Therefore, service of process upon SuperCom Ltd., such directors and officers may be difficult to effect in the United States. It also
may be difficult to enforce a U.S. judgment against SuperCom Ltd., such officers and directors as any judgment obtained in the United
States against such parties may not be collectible in the United States. In addition, it may be difficult to assert U.S. securities law
claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws
because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim,
it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed
by Israeli law. There is little binding case law in Israel addressing these matters.
Being
a foreign private issuer exempts us from certain Securities and Exchange Commission requirements.
As a foreign private issuer within the meaning
of rules promulgated under the U.S. Securities and Exchange Act of 1934, as amended, or the Exchange Act, we are exempt from certain provisions
applicable to U.S. public companies including:
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the rules under the Exchange Act requiring
the filing with the Securities and Exchange Commission of quarterly reports on Form 10-Q and current reports on Form 8-K; |
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the sections of the Exchange Act regulating
the solicitation of proxies in connection with shareholder meetings; |
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the provisions of Regulation FD aimed at
preventing issuers from making selective disclosures of material information; and |
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the sections of the Exchange Act requiring
insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized
from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity
securities within less than six months). |
Because of these exemptions, investors are
not afforded the same protections or information generally available to investors holding shares in public companies organized in the
United States.
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ITEM 4. |
INFORMATION ON THE COMPANY
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A.
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History
and Development of the Company |
SuperCom Ltd. is a company organized under
the laws of the State of Israel. Our registered office is located at 3 Rothschild Street, Tel-Aviv, Israel, and our telephone number is
+972-9-889-0880. Our agent in the United States is SuperCom, Inc., and is located at 160 Franklin Street, Suite 310, Oakland, CA, 94607,
telephone number +1 (510) 505-2600.
The Company web address is SuperCom.com.
The SEC maintains an internet site located
at https://www.sec.gov/edgar.com, that contains reports, other statements and other information regarding issuers that file electronically
with the SEC.
SuperCom Ltd. was incorporated in the State
of Israel on July 4, 1988 pursuant to the provisions of the then-current Israeli Companies Ordinance. The legislative framework within
which we now operate is the Israeli Companies Law, which became effective on February 1, 2000, and the Israeli Companies Ordinance (New
Version) 1983, as amended (the “Companies Ordinance”).
From our incorporation in 1988 until 1999,
we were a development-stage company primarily engaged in research and development, establishing relationships with suppliers and potential
customers and recruiting personnel with a focus on the governmental market. In 2001, we implemented a reorganization plan, which we completed
in 2002. As a result of the reorganization, we expanded our marketing and sales efforts to include the commercial market with a new line
of advanced smart card and identification technologies products, while maintaining our governmental market business.
During 2002, we sold, in three separate
transactions with third party purchasers, our entire equity interest in a U.S. subsidiary, InkSure Technologies, Inc., for which we received
aggregate proceeds of approximately $6.6 million. In December 2002, we discontinued the operations, disposed of all of the assets and
terminated the employees of two U.S. subsidiaries, Genodus Inc. and Kromotek, Inc.
In 2006 we decided to sell most of our e-Gov
Division in order to focus on opportunities in the U.S. for our IoT businesses as well as our Critical Situation Management System, or
CSMS, business, which we sold in 2010.
On December 31, 2006, we sold the majority
of the e-Gov Division activities and related intellectual property to OTI for 2,827,200 restricted ordinary shares of OTI, as of December
31, 2008, we sold all of the OTI shares that we received in the transaction.
On August 28, 2007, we purchased, through our wholly owned subsidiary,
Vuance, Inc., all of the issued and outstanding stock capital of Security Holding Corp., or SHC, from Homeland Security Capital Corporation
and other minority shareholders for approximately $4.34 million of our ordinary shares and direct expenses of approximately $600,000 in
our ordinary shares. A total of 258,218 ordinary shares were issued to the sellers. SHC was a Delaware corporation engaged in the manufacture
and distribution of RFID-enabled solutions, access control and security management systems. During the fourth quarter of 2007, SHC and
its subsidiaries were merged into our Vuance, Inc. subsidiary.
In September 2007, we entered into a definitive
agreement to acquire the credentialing division of Disaster Management Solutions Inc., or DMS. This acquisition complemented our former
incident management solutions business and added the RAPTOR system to our former CSMS business, both of which were sold in 2010.
On March 25, 2009, we completed the acquisition
of certain of the assets and certain of the liabilities of Intelli-Site, Inc. pursuant to an asset purchase agreement. We agreed to pay
Intelli-Site $262,000 payable in cash and in our shares (which were subject to a certain lock up mechanism) and included a contingent
consideration of up to $600,000 based upon certain conditions.
In January 2010, we completed the sale to
OLTIS Security Systems International, LLC, or OSSI, of certain assets (including certain accounts receivable and inventory of a subsidiary)
and certain liabilities (including certain accounts payable) related to our electronic access control market for $146,822 in cash. In
addition, OSSI paid off a loan that our subsidiary had taken from Bridge Bank, National Association.
In January 2010, we completed the sale of
certain of the assets of Vuance, Inc and certain of its liabilities related to our Government Services Division, pursuant to an asset
purchase agreement for $250,000. In addition, the purchasers agreed to pay Vuance, Inc. an earn-out of up to $1.5 million over the course
of calendar years 2010 through 2013.
At the beginning of 2012, we decided to
leverage our experience in the e-Gov market and increase our position in the market by: (i) proposing other new technologies and solutions
to our existing e-Gov customers, (ii) securing other e-Gov projects and solutions by virtue of entering into joint ventures with partners
with a global presence and complementary goals and products and (iii) retaining an outstanding group of market executives and experts,
which allowed us to propose and implement what we believe to be competitive ID and e-Gov solutions to the global markets.
During 2012, we altered our strategy with
respect to the IoT division to focus on solutions for three growing electronic monitoring vertical markets: (i) public safety, (ii) healthcare
and homecare and (iii) transportation management. We have enhanced and developed a series of new products and solutions including the
Pure Security Suite, Puretag, PureCom, Pure Monitor and PureTrack,
Between 2013 and through 2016, our product
depth and global presence was expanded significantly with our acquisitions of the SmartID division of OTI in 2013, Prevision in 2015,
and LCA, Safend, the PowaPOS business, and Alvarion in 2016, together with our extensive research and development of new product lines
for the e-Gov, IoT, cyber security, and connectivity businesses.
On December 26, 2013, we acquired the SmartID
division of OTI, including all contracts, software, other related technologies and IP assets.
On November 12, 2015, we acquired Prevision,
an Israeli based cyber security company. We paid $1.1 million at the closing and agreed to make contingent annual payments of approximately
$250,000 pursuant to an earn-out mechanism until the end of 2019. As of December 31,2021, no earn-out liability exists.
On January 1, 2016, we acquired LCA, a U.S.
based company, including all contracts, software, other related technologies and IP assets. We paid $2.9 million at the closing and committed
to certain contingent earn-out payments over the next three years that are structured as a single digit percentage of annual revenues
in excess of stand-alone LCA management revenue projections, as of January 2020 the contingent earn-out is no longer exists.
On March 13, 2016, we acquired Safend, an
Israeli based cyber security company. Safend is an international provider of cutting-edge endpoint data protection guarding against corporate
data loss and theft through content discovery and inspection, encryption methodologies, and comprehensive device and port control. Safend
maps sensitive information and controls data flow through email, web, external devices and additional channels. Founded in 2003, Safend
sold its products to over 3,000 customers in the United States, Europe, and Asia, and more than three million software license seats deployed
by multinational enterprises, government agencies and small to mid-size companies around the globe.
On April 18, 2016, we acquired the PowaPOS
business, a division of POWA Technologies Ltd., the developer of a fully integrated mobile and tablet-based system integrating industry-leading
retail and secure payment solutions into one simplified, attractive and innovative POS platform.
On
May 18, 2016, we acquired Alvarion. Alvarion designs solutions for carrier wi-fi, enterprise connectivity, smart city, smart hospitality,
connected campuses and connected events that are both complete and heterogeneous to ensure ease-of-use and optimize operational efficiency.
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B. |
BUSINESS
OVERVIEW |
Founded in 1988, we are a global provider
of traditional and digital identity solutions, advanced IoT and connectivity solutions, and cyber security products and solutions, to
governments and private and public organizations throughout the world.
We are comprised of three main Strategic
Business Units (SBU): e-Gov, IoT and Connectivity (or “IoT”), and Cyber Security:
e-Gov
Through our proprietary e-Government platforms
and innovative solutions for traditional and biometrics enrollment, personalization, issuance and border control services, we have helped
governments and national agencies design and issue secured multi-identification, or Multi-ID, documents and robust digital identity solutions
to their citizens, visitors and Lands.
We have focused on expanding our activities
in the traditional identification, or ID, and electronic identification, or e-Gov, market, including the design, development and marketing
of identification technologies and solutions to governments in Europe, Asia, America and Africa using our e-Government platforms. Our
activities include: (i) utilizing paper secured by different levels of security patterns (UV, holograms, etc.); and (ii) electronic identification
secured by biometric data, principally in connection with the issuance of national Multi-ID documents (IDs, passports, driver’s
licenses, vehicle permits, and visas, Secure Land Certificated) border control applications and Land Information System (LIS) .
IoT
and Connectivity
IoT
Our IoT products and solutions reliably
identify, track and monitor people or objects in real time, enabling our customers to detect unauthorized movement of people, vehicles
and other monitored objects. We provide all-in-one field proven IoT suite, accompanied with services specifically tailored to meet the
requirements of an IoT solutions. Our proprietary IoT suite of hybrid hardware, connectivity and software components are the foundation
of these solutions and services. Our IOT division has primarily focused on growing the following markets: (i) public safety; (ii) healthcare
and homecare; (iii) Smart Cities (iv) Smart Campus and (iv) transportation.
During 2006, we identified the growing electronic
tracking and monitoring vertical markets for public safety, real time healthcare and homecare, and transportation management. We have
developed the PureRF Hybrid suit of wrist devices, connectivity, and controlling software, and from 2012 we have been developing and enhancing
our next generation IoT suite; the PureSecurity Hybrid Suite of wrist band, tags, beacons, PureCom, Pure Monitors, PureTrack and other
components.
On January 1, 2016 we acquired Leaders in
Community Alternatives, Inc., or LCA. LCA is a California based, private criminal justice organization, providing community-based services
and electronic monitoring programs to government agencies in the U.S. for more than 25 years. LCA offers a broad range of competitive
solutions for governmental institutions across the U.S. in addressing realignment strategies and plans.
Connectivity
In 2016, as part of our strategy to enhance
and broaden our IoT connectivity products and solutions offerings for public safety, enterprises, hospitality and smart cities markets,
on May 18, 2016, we acquired Alvarion Technologies Ltd., or Alvarion. Alvarion designs solutions for carrier wi-fi, enterprise connectivity,
smart city, smart hospitality, connected campuses and connected events that are both complete and heterogeneous to ensure ease-of-use
and optimize operational efficiency. Carriers, local governments and hospitality sectors worldwide deploy Alvarion’s intelligent
wi-fi networks to enhance productivity and performance, as well as its legacy backhaul services and products.
Cyber Security
During 2015, we identified the cyber security
market as a very fast growing market where we believe that SuperCom has major advantages due to synergic technologies and shared customer
base to our e-Gov, IoT and connectivity SBUs. In 2015, we acquired Prevision Ltd., or Prevision, a company with a strong presence in the
market and a broad range of competitive and well-known cyber security services. During the first quarter of 2016, we acquired Safend Ltd,
or Safend, an international provider of cutting edge endpoint data protection guarding against corporate data loss and theft through content
discovery and inspection, encryption methodologies, and comprehensive device and port control. Safend maps sensitive information and controls
data flow through email, web, external devices and additional channels.
Both acquisitions significantly expanded
the breadth of our cyber security capabilities globally, while providing us with outstanding market and technological experts and over
3,000 customers in the United States, Europe, and Asia, and more than three million software license seats deployed by multinational enterprises,
government agencies and small to mid-size companies around the globe, together with leading data and cyber security platforms and technologies.
Market Opportunity
We believe that our wide range of solutions
offers us several opportunities across global markets and industries. The overall e-Gov market remains strong. Our addressable market
includes both developing and developed countries.
We plan to grow the e-Gov division organically,
by adding new e-Gov government customers and by offering more services to existing customers. We believe that our platform is agile and
scalable, meaning that once a customer is using one of our applications, it is easy to add additional applications and services, which
can increase a client’s return on their investment. In addition, and as a result of the integration of SuperCom and the SmartID
division, we are now well-positioned to work on larger international tenders, we began actively bidding on larger international tenders
in markets where we see significant opportunities.
The opportunities we see for our e-Gov division
may have an impact on the number of opportunities for our IoT, and Cyber security divisions as well. We have begun to leverage our e-Gov
existing customer base, and we believe that the expertise and robust innovative solutions in these two segments represent a significant
opportunity for SuperCom.
We offer our new generation IoT and connectivity
hybrid suite, which provides a full solution encompassing proprietary software and various secure connectivity technology, to customers
in the United States and in Europe, South America and Africa, by exhibiting and demoing to potential customers in those regions. We launched
our new generation Pure Security offender monitoring suite and began submitting it to tenders in the public safety market. These tenders
range in value from tens of thousands to tens of millions of dollars.
On January 1, 2016, we acquired LCA, a California
based, private criminal justice organization with over 25 years of experience running electronic monitoring programs for government customers
in the U.S. It has significantly bolstered our competitive edge in competitive tenders allowing us to offer not only cutting edge technology,
but also extensive industry experience. We have since then beat market competitors in competitive processes and have been awarded projects
in various countries around the world including USA, Canada, Latvia, Czech Republic, Denmark, Bulgaria and other countries in Europe and
Asia. Following our recent success and status in active tenders, we believe we are well positioned to win additional new projects in years
to come.
In addition, there is always demand for
better security systems and services. We believe that personnel and asset management are now leading security concerns in commercial and
governmental enterprises, and that this should drive an increasing demand for secure, precise and cost-effective means to positively identify,
locate, track, monitor, count and protect people and objects, including inventory and vehicles. Our IoT solutions provide an optimal solution
to these problems as our solutions reliably identify and track the movement of people and objects in real time, enabling our customers
to detect unauthorized movement of vehicles as well as trace packages, containers and the access to premises by control personnel and
vehicles.
We identified the Cyber Security market
as a fast-growing market where SuperCom has major advantages due to synergic technologies and shared customer bases with our e-Gov, and
IoT divisions. In 2015, we acquired Prevision Ltd., a company with a broad range of competitive and well-known Cyber Security services.
During the first quarter of 2016, we acquired Safend Ltd, an international provider of cutting-edge endpoint data protection guarding
against corporate data loss and theft. We now have a platform of thousands of sophisticated enterprise customers which run our proprietary
endpoint protection software and utilize our cyber security services. Through this platform we hope to more easily deploy additional innovations
in cyber security, such as our proprietary Safe Mobile security software, to high quality enterprise customers.
Our Strategy
We are focused on our core competencies,
which are comprised of our e-Gov platform and solutions, our IoT suite and connectivity solutions, our extensive Cyber Security products
and solutions. Our growth strategy includes the following components:
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• |
Develop strong strategic relationships with
our business partners, including the systems integrators and representatives that introduce our products and solutions into their respective
markets. |
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• |
Employ dedicated sales personnel to work
closely with our business partners. Our sales personnel will customize and adapt solutions that can then be installed and supported by
these business partners. |
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• |
Expand our IoT and Cyber Security activities
globally, particularly in the Americas, Europe, and the Far East. |
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• |
Leverage our customer base, superior PureSecurity
hybrid suite of IoT solutions, and Cyber Security capabilities to secure additional long-term contracts with governments and communities
in the public safety markets. |
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• |
Leverage our reputation, talented personnel,
and project management capabilities in the e-Gov market to secure additional projects and solutions in the growing e-Government market.
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• |
Leverage our customer base, Connectivity
solutions, and Cyber Security capabilities to secure additional long-term contracts with governments and communities in the Communication
Infrastructure market. |
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• |
Develop strong strategic relationships with
business partners that will introduce our solutions into the healthcare, homecare, Safe City and Smart Campus markets. |
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• |
Develop strong strategic relationships with
business partners in the financial services industry, and un-banked and mobile payments markets. |
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Identify and acquire synergistic contracts
or businesses in order to reduce time to market, obtain complementary technologies and secure required references for international bids.
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Grow our business in emerging markets with
perceived significant growth opportunities. |
We currently target the following markets:
National
e-Government Market. Additional national e-Government clients with our e-Gov
and Cyber Security technologies and products.
Public
Safety Market.
Public safety, including law enforcement agencies, community, safety agencies and ministries of justice around the world, with our electronics
monitoring, or EM, solutions, including electronic identification, monitoring and tracking solutions for house arrests, GPS tracking,
inmate control, detainee monitoring, juvenile supervision and tracking of persons returned to communities.
Airports
and Ports. Airports and ports with our IoT, e-Gov, cyber security and connectivity
products and solutions. Our IoT products can help common carriers monitor, track, locate and manage multiple baggage items simultaneously,
thereby reducing the risk of lost baggage, increasing customer service and improving security. Our e-Gov solutions can offer airports
and ports turnkey border control systems. Our border control system is based on passenger biometric identification applications, electronic
passport identification, and both optical and electronic means to detect forged passports. The system, which is operable whether it is
online or offline, enables border control officers to receive accurate identification based on a combination of two machine-readable biometric
applications: fingerprints and facial recognition. We offer short implementation and quick integration with the existing border control
system of the country and provide external interfaces to digital certificate authority for signature verification as well as interfaces
to other agencies.
Enterprises
and Industrial Companies. Enterprises and industrial companies with our
cyber security, connectivity, and IoT products and solutions, which can be used by enterprises, shippers and warehouse operators to manage
and track cartons, pallets, containers and individual items in order to facilitate movement, pick up orders, verify inventory and reduce
delivery time. In addition, industrial companies can manage and track their mobile equipment and tools. We believe that our IoT suite
can increase efficiency at every stage of asset, inventory and supply chain management by enabling long-range identification and location
of products and removing the need for their human visual identification. Our products also work in conjunction with existing bar coding
and warehouse systems to reduce the risk of loss, theft and slow speed of transfer.
Hospitals
and Homecare. Hospitals and homecare with our cyber security, Connectivity,
and IoT products and solutions. The healthcare sector has successfully utilized IoT technologies for the purposes of infant protection
in maternity wards and resident safety in care homes similar to our asset and personnel location and identification system targeted at
the secure facility and hazardous business sectors. Our IoT Suite can provide solutions for the healthcare sector for asset, staff, patient
and medical record location and identification. We believe that as hospitals continue to upgrade their security measures, IoT and connectivity
technology will be utilized in real-time location systems that are designed to immediately locate persons, equipment and objects within
the hospital.
Municipals
and Educations. Municipals and education institution with our Safe City,
Smart City and Smart Campus products and solutions and cyber security, connectivity, and IoT products and solutions.
Government
and Enterprise Cyber Security Markets. Homeland and enterprise cyber security
markets with our Cyber Security products and services to governments and large enterprises.
Our Solutions and Products
e-Government
(e-Gov) SBU Products and Solutions
We have been active in the national ID and
e-Government industry for more than 25 years. We work with governments and public sectors, and we believe SuperCom e-Gov is an internationally
recognized competitor in the design, development, integration and delivery of highly secured national ID and e-Government solutions.
We offer a complete end-to-end in-house
solution for credentialing, identifying and verifying individuals by combining the capability to support biometric identification with
the portability of smart cards. Most of our products are based on a common platform, which we refer to as MAGNA™, a complete end-to-end
solution for such items as e-passports, national identity cards, voter identification cards and drivers’ licenses. Our solution
covers everything necessary for a government to offer a particular service to the public: business process engineering, solution design
and integration, hardware and software implementation, operator and technician training. The solution covers all workflows, managerial
and operational reports, and it interfaces directly with the government’s business activity.
In addition, our e-Gov division offers a
variety of related services, including: requirements extraction and system design, project management, project operation, training, operational
processes optimization, assimilation, project financing (under BOT/PPP scheme), knowledge transfer, fee collection, maintenance and support
and more.
We believe our e-Gov systems comply with
regional and international standards and enhance usability by using smart card applications. Our systems’ central servers include
redundancy capabilities that provide disaster recovery or failover between sites. All solutions issue financial, accountability, transaction
auditing and management information reports, which decrease the likelihood of tampering and fraud by individuals.
Our products combine the portability of
smart cards with the capability to support advanced identification and authentication technology and manage significant amounts of information.
Our MAGNA™ modular platform offers short implementation and quick integration with the existing border control system of a country
and provides external interfaces to digital certificate authority for signature verification, as well as interfaces to other agencies.
It offers a migration path to additional e-Government applications and to additional electronic ID documents, such as national IDs, voter
IDs and drivers’ licenses. Our platform can be customized to support a large number of applications, and it has been deployed in
different e-passport/national ID contracts worldwide. It is also being developed for additional applications, such as medical services.
Our border control system is based on passenger
biometric identification applications, electronic passport identification, and both optical and electronic means of detecting forged passports.
The system, operable online or offline, enables border control officers to receive accurate identification based on a combination of two
machine-readable biometric applications: fingerprints and facial recognition.
IoT
and Connectivity SBU Products and Solutions
Our IoT division features a multiple connectivity
base IoT hybrid suit accompanied by services specifically tailored to meet the requirements of the applicable industries, primarily: (i)
public safety, (ii) healthcare and homecare, (iii) SafeCity, (iv) Smart Campus, (v) Connectivity networks and (iii) transportation. Our
PureRF and PureSecurity PureCare suite assists organizations in efficiently utilizing time and resources. We believe it has a number of
advantages for remote hands-off authentication, validation, identification, location and real-time monitoring of valuable personal resources
and assets.
Equipped with complex IT and cyber security
knowledge and experience, our senior personnel from the IoT industry and our suite of products and software can customize IoT and connectivity
programs and solutions at all levels, from tags to readers to servers, and at all stages, from design to implementation and maintenance.
PureRF
Suite. Our PureRF Suite provides a secure, precise and cost-effective means
to positively identify, locate, track, monitor, count and protect people and objects, including inventory and vehicles. Our PureRF Suite
is a complete location position, or LP, system solution based on active RFID tag technology that provides commercial customers and governmental
agencies enhanced asset management capabilities. The basic components of our PureRF Suite include:
PureRF
Tags. The PureRF solution relies on small, low-powered PureRF tags that
are attached to objects or people. These weatherproof and shock-resistant tags are inexpensive and attach easily to key chains, uniform
equipment, property, or vehicles to allow identification and tracking wherever it is needed. License-free radio bands are used to track
RF signals and can be read on handheld devices. Transmitters can be programmed for periodic or event-driven transmissions. For high-security
sites or situations, encrypted tag-to-reader communication prevents cloning or copying. An integrated anti-collision algorithm allows
multiple tags to be simultaneously identified by a single reader, allowing employees to be matched to individual laptops or assets, shipping
pallets to merchandise, assets to “authorized” locations and drivers to specific vehicles.
Hands-Free
Long-Range RFID Asset Tags. These tags provide real-time asset loss prevention,
inventory management, and personnel/asset tracking. They identify and track laptops, office machines, computer systems, tools, and telephones.
They also identify employees and visitors in office buildings, hospitals, retail stores, warehouses, industrial facilities, mines and
military installations.
Hands-Free
Long-Range RFID Vehicle Tags. These tags provide long-range vehicle ID for
parking and fleet management, access control, asset loss prevention at airports, gated communities, truck and bus terminals, employee
parking lots, hospitals, industrial facilities, railroads, mines and military installations.
PureRF
Readers. Our PureRF reader is used to receive status messages from PureRF
tags. The PureRF reader is an intelligent, reliable and effective small long-range RFID reader with an integrated protocol converter.
The protocol converter supports various standard interfaces such as 26 bit Wiegand format, serial RS-232, serial RS-485 or TCP/IP (Ethernet)
protocols, which can be utilized in various solutions. Range-adjustable antennas can be discretely hidden to identify and track PureRF
tag activity. PureRF readers can operate individually for small applications or in a network to cover wide areas. The units are small,
reliable and effective and can be controlled by multiple communications methods.
PureRF
Activators. PureRF activators are used to improve the accuracy of locating
assets compared to what is provided by the receiver ID. They are used primarily at entrances and exits. For this purpose, PureRF activators
are deployed throughout the monitored space where improved tag location measurement is required. The PureRF activators continually transmit
a short-range uniquely identifying LF signal. Tags can read this signal when they are close to the activator (up to about 24 feet). The
activator ID that a tag reads is added to the message that the tag transmits to the receiver. An activator’s ID indicates the location
of a PureRF tag.
PureRF
Initializer. A PureRF initializer is a device that integrates an LF transmitter
and an RF receiver into one device. This enables the PureRF initializer to perform bi-directional communication with the tags. The PureRF
initializer is used to control a tag’s mode of operation (on/off) and to set or modify a tag’s operational parameters, such
as transmission frequency (timing) and activated sensors.
House
Arrest Monitoring System. Our house arrest monitoring system provides fully
customizable surveillance programs to eliminate frustration and operational inefficiencies. Our house arrest system is based on our PureMonitor
cloud-based software and includes the PureCom base station and the PureTag RF bracelet.
PureTag
RF Bracelet. Our PureTag RF bracelet is a highly secure, hypoallergenic,
lightweight and compact RF bracelet that operates across the complete spectrum of the PureSecurity Corrections Tracking Suite. Its features
include: (i) an encrypted RF signal, (ii) easy installation, (iii) four years of battery life, (iv) a disposable strap, (v) proximity
detection, (vi) motion tamper detection and (vii) a strap and case.
PureCom
RF Base Station. The PureCom RF base station brings new features and functionality
to new house arrest programs. Each PureCom RF base station supports up to 50 PureTag RF bracelets. Its features include (i) a smart LCD
screen, (ii) fingerprint ID verification, (iii) two-way communications via text and voice, cell, landline, Wi-Fi, and Ethernet connections,
(iv) streamlined field installation, (v) a 72-hour battery backup, (vi) dual SIM for broader coverage, (vii) onboard GPS tracking, and
(viii) a rugged impact resistant shell.
GPS
Offender Tracking System. Our GPS offender tracking system provides fully
customizable surveillance programs to minimize frustration and operational inefficiencies. The GPS offender tracking system is based on
our PureMonitor cloud-based software and includes the PureTrack smartphone device, the PureTag RF bracelet and an optional PureBeacon
device.
PureTrack.
Smartphone technology has made dramatic improvements in the way people work and talk. SuperCom channels a smartphone’s capabilities
into an unparalleled corrections supervision tool with the following features: (i) GPS, cell tower and Wi-Fi location tracking, (ii) RF
tethering via Bluetooth, (iii) configurable GPS point frequency, (iv) GSM, CDMA and Wi-Fi communication support, (v) calendar management,
(vi) persistent offender term notifications and reminders, (vii) smartphone voice, text, email, video communications, (viii) portable
breath-alcohol integration and (ix) bio-identification, including face, fingerprint, and voice recognition.
PureBeacon.
Our PureBeacon is a secure RF device designed to provide indoor surveillance of offenders when GPS is not suitable. In addition to preserving
the PureTrack battery life, other features include (i) four years of battery life, (ii) encrypted RF protocol, (iii) Bluetooth support,
(iv) proximity and case tamper detection, (v) an expansive range via a mesh network and (vi) a waterproof, dustproof and lightweight design.
PureMonitor
Offender Electronic Monitoring Software. PureMonitor is our cloud-based
software designed to deliver the information needed by officers. It enables quick navigation through e-interface to set schedules,
generate reports, review tracking information and run efficiently and effectively. PureMonitor supports GPS monitoring, RF house
arrest, alcohol monitoring, and biometric verification products. Officers can manage the complete platform of electronic monitoring tools
through a single log-in. The PureMonitor platform leverages a consistent look, feel and functionality across the entire product line.
It is designed to work with the agency’s software suite, while integrated with existing case management, jail management and
crime scene management systems. PureMonitor also contains a powerful suite of reports intended to allow complete and immediate visibility
into any program. It supports static and mobile monitoring applications in and out of the office.
Inmate
Monitoring System. We offer an inmate monitoring system that manages the
authorized movement of inmates throughout a corrections facility. Validating the location of people and assets flowing through a corrections
facility requires immense focus and dedicated resources, and inmate and officer safety depends on a system that ensures the right people
are in the right place at the right time. We have developed a solution that comprehensively provides one system for all facility-based
tracking concerns. Our inmate monitoring management solution is based on our cloud-based software and includes the DoorGuard tracking
station, the PureTag RF bracelet and an optional Personnel Tag for staff members.
DoorGuard.
DoorGuard is a tracking station that communicate the inmates’ activities to the management system. A DoorGuard unit is installed
at the entrance of each cell to monitor all entrances and exits. Units can also be placed in the corridors for additional tracking. The
DoorGuard features include (i) accurate location tracking, (ii) Ethernet and Wi-Fi communications, (iii) advanced tamper detection, (iv)
an encrypted RF signal, and (v) a waterproof and dustproof design.
Personnel
Tag. The Personnel Tag is a highly secure RF tag worn by prison officers
to obtain precise indoor location verification. It provides the following features: (i) panic button for immediate monitoring center alerts,
(ii) advanced tamper detection, (iii) an encrypted RF signal, (iv) a four-year battery life and (v) a lightweight design.
Domestic
Violence Victim Protection System. Our
domestic violence victim protection system offers an additional line of defense for domestic violence victims, providing information regarding
the location of the offender and the distance between the offender and the victim. Our solution incorporates the latest technology to
develop a public safety solution that is easy to implement. Our domestic violence victim protection system is based on our PureMonitor
cloud-based software and the PureTrack smartphone device, the PureTag RF bracelet and the PureProtect smartphone app.
PureProtect
Smartphone App. Victims can download our PureProtect smartphone app to ensure
that an offender is compliant with his or her restraining order. The PureProtect app identifies and alerts the victim of proximity violations
without breaching the victim’s privacy. Additionally, the app identifies offender movement and behavior patterns in order to prevent
attacks. The PureProtect app supports both Android and iOS phones. It provides GPS, cell tower and RF proximity, indicates the direction
of offender travel, includes GPS shielding and jamming detection, and is password protected. Alerts can be set up for a pre-defined distance
so that an alert will be sent to local authorities if that distance is violated.
Connectivity Products
and Solutions
AVIDITY
WBSac. The
Avidity WBSac product series is a high-performance Wi-Fi indoor and outdoor access point series intended to enable mobile operators, business
and enterprises to deliver high capacity and high-quality Wi-Fi solutions.
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Multiple radios provide concurrent 802.11a/n/ac
and 802.11b/g/n connections |
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Up to 1300 Mbps combined data rate
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Dual concurrent MIMO, Dual-polarized antennas
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Self-configuring, plug-and-play deployment
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Smart MESH supported |
BOLSTER
WBSn. The
Bolster WBSn is intended to enable mobile operators, governments and enterprises to deliver high-quality wi-fi solutions in metro and
rural areas, with significantly fewer base stations, and much lower costs. Carrier-grade IP-68 is designed to provide a high standard
of reliability, quality of service, security and manageability.
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• |
Gigabit outdoor Wi-Fi support up to 450
Mbps, (per band) 900 Mbps for both bands, and maximum aggregated capacity of up to one Gigabit per unit |
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• |
Built in Access Controller, for flexible
service planning |
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Self-configuring, plug-and-play deployment
|
BreezeULTRA™
P6000. The
BreezeULTRA family intends to provide high-capacity product in wireless broadband Point to Point communication license-exempt market.
BreezeULTRA offers a bold combination of capacity, performance, organic growth and ease of use capabilities.
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• |
Optimized for high-capacity
applications |
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• |
Available in the Licensed
Exempt frequencies: 5.1-5.9 GHz |
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• |
High Performance -
supporting up to 500 Mbps net throughput and distances of up to 50km/32 miles (w/high-gain antenna) |
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• |
Dynamic up-link /down-link
bandwidth allocation |
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• |
Optimized performance
of voice, video and data using four priorities of service |
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• |
Optimized interference
mitigation and NLOS performance |
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• |
Ease of ordering, installation
and configuration |
Arena
controller. Arena
controller is an essential element for constructing large scale carrier wi-fi networks for hotspot/hotzones and cellular offloading services.
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• |
Cost effective and scalable network architecture
with centralized control plane and distributed |
|
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data plane | |
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• |
Supporting up to 5,000 AP’s and 50,000
users per controller |
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• |
Control and manage AP and backhaul radio,
including statistic and reporting |
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• |
Automatic AP units detection, configuration
and firmware distribution |
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• |
Secured control layer management |
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• |
Hotspots/Hotzones and cellular offloading
services |
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• |
Providing a single peer to the AAA
|
BreezeNET®
B. BreezeNet
B is a comprehensive and highly proficient portfolio of wireless point-to-point solutions that offers long range and high-capacity support
for high bandwidth applications. It is intended to provide efficient, reliable and secure communications for voice and real-time applications
including building-to building connectivity and backhaul services.
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• |
High capacity, point-to-point, robust outdoor
wireless solution |
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• |
Flexible rate capacity options: B10, B14,
B28, B100 reaching up to 100 Mbps gross |
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• |
Long reach: over 60 km |
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• |
Optimized uplink/downlink configuration
to support different business applications such as public safety and video surveillance |
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Robust performance in Non-Line-of-Sight
(NLOS) environments |
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Simple deployment, management and maintenance
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Cyber Security SBU Products
and Solutions
Safend’s Encryption
Suite is an easy to use security application based on a single, lightweight agent, providing a comprehensive solution that protects the
organization’s sensitive data residing on servers, PCs, laptops and detachable devices.
Safend’s Data
Protection Suite includes:
Safend
Encryptor, which ensures that users’ data is secure against loss or
theft, by encrypting any data stored on internal hard disks.
Safend
Protector, which applies customized, highly-granular security policies over
all physical and wireless ports and devices. The Protector also mandates the encryption of all data transferred to removable storage devices
and CD/DVD media.
Safend
Inspector, which provides an additional protection layer for data transferred
over approved data transfer channels, such as a white-listed storage device, an approved Wi-Fi connection, or a machine’s LAN connection.
It enforces an accurate, data-centric security policy on transferred data, without disrupting legitimate business processes or disturbing
end user productivity.
Safend
Discoverer, which allows security administrators to locate sensitive data
stored on organizational endpoints. It helps identify gaps in data protection and compliance initiatives, and provides insight into which
security policies should be implemented, using other components of the Safend Data Protection Suite.
SafeMobile,
which provides high-end security framework designed to meet cyber threats on both the mobile client and on an organization’s main
server. The solution in development enables rapid deployment of any application on a smart device leaving the security challenges to the
framework.
Research and Development
Our research and development efforts have
enabled us to offer our customers a broader line of products and solutions, primarily in the areas of our e-Gov, IoT and Connectivity,
and Cyber Security. We intend to continue to research and develop new technologies and products for the e-Gov, Cyber Security, Connectivity
and IoT SBUs. There can be no assurance that we can achieve any or all of our research and development goals.
During the years ended December 31, 2021 and 2020, we have invested,
$2.8 million and $2.4 million, respectively, in research and development. We anticipate that we will continue to invest up to 20% of our
revenue in broadening our Cyber Security, e-Gov, IoT and Connectivity solutions and platforms. To expedite our development efforts, we
may continue to acquire technologies from other companies, where we believe that such acquisition may cost effectively expedite our time
to market of new products and solution.
Sales and Marketing
We sell our systems and products worldwide
through local representatives, subsidiaries and distribution channels that include direct sales and marketing through representatives.
We currently have 8 employees that are directly engaged in the sale, distribution and support of our products through centralized marketing
offices in distinct world regions, including our employees and service providers located in the United States, Israel, and Philippines
who sell and support our products in their regions. We are also represented by several independent representatives, resellers and distributors.
We establish relationships with representatives,
resellers and distributors through agreements that provide the marketing of our solutions and products. These agreements generally do
not grant exclusivity to the representative, resellers or distributors, and some of them are not long-term contracts, do not have commitments
for minimum sales, and could be terminated by the representative, reseller or distributor. We do not have agreements with all of our representatives,
resellers and distributors.
Principal Markets
The following table provides a breakdown of total revenue by geographic market
for the two years ended December 31, 2021 and 2020 (all amounts in thousands of dollars):
|
|
2021 |
2020 |
||||||
|
Africa |
$ |
1,586 |
1,791 |
|||||
|
Europe |
2,912 |
3,037 |
||||||
|
South and center America |
37 |
21 |
||||||
|
United States |
6,820 |
5,856 |
||||||
|
Israel |
757 |
746 |
||||||
|
Asia Pacific |
155 |
319 |
||||||
|
Total |
$ |
12,267 |
11,770 |
|||||
As part of the Company’s decision
to switch from one technology segment, e-government, into three technology segments or Strategic Business Units; e-Gov, IoT, and Cyber
Security, the Company made four acquisitions in 2016 of companies with various technologies and customer bases which enhanced and strengthened
the capabilities and value offerings of each of the three segments.
The following table provides a breakdown of total
revenue by segment for the two years ended December 31, 2021 and 2020 (all amounts in thousands of dollars):
|
|
Year ended December 31,
|
|||||||
|
|
2021 |
2020 |
||||||
|
e-Gov |
$ |
1,729 |
1,911 |
|||||
|
IoT |
8,904 |
7,656 |
||||||
|
Cyber Security |
1,634 |
2,203 |
||||||
|
Total |
$ |
12,267 |
11,770 |
|||||
The following table provides a breakdown
of total revenue by products and services for the two years ended December 31, 2021 (all amounts in thousands of dollars):
|
|
Year ended December 31,
|
|||||||
|
|
2021 |
2020 |
||||||
|
Revenues |
||||||||
|
Products |
$ |
4,475 |
4,528 |
|||||
|
Services |
7,792 |
7,242 |
||||||
|
|
||||||||
|
Total revenues |
$ |
12,267 |
11,770 |
|||||
Customer Service and
Support
Customer service includes mainly maintenance
and support services and plays a significant role in our sales and marketing efforts. Our ability to maintain customer satisfaction is
critical to building our reputation and increasing growth in our existing markets, as well as penetrating new markets. In addition, both
customer contact and the customer feedback we receive in our ongoing support services provide us with information on customer needs and
contribute to our product development efforts. We generally provide maintenance and support services under separate customized agreements
after the customer project is completed. We provide services through customer training, local third-party service organizations, our subsidiaries,
or our personnel, including sending appropriate personnel from any of our offices in United States, Israel. We usually give our customers
a twelve-month warranty for our products, and we offer additional extended warranty and maintenance programs. Costs incurred annually
by us for product warranties have to date been insignificant; however, we expect that the warranty costs may increase going forward because
our current e-Gov, IoT, and Cyber Security solutions are more complex than our previously offered solutions and additional new products
may be deployed.
Manufacturing and Availability
of Raw Materials
Our manufacturing operations consist primarily
of materials planning and procurement, quality control of components, kit assembly and integration, final assembly, and testing of fully
configured systems. A significant portion of our manufacturing operations consists of the integration and testing of off-the-shelf components.
Most of our products and systems, whether or not they are manufactured by us, are configured to customer orders and undergo several levels
of testing prior to delivery, including testing with the most current version of software.
We manufacture a range of IoT and e-Gov
products and systems. We outsource the manufacturing of: (i) printed circuit boards, or PCBs, to a number of different suppliers both
in Israel and the Far East, (ii) enclosures to suppliers in Israel and the Far East and (iii) Teslin paper (a synthetic material used
in making ID cards), laminates, inlays, modules, cards, from suppliers from the Far East, Europe, the United States and Israel. The electronic
assembly of our products is done in Israel, Europe, and the United States. We sometimes commit to long-term relationships with such suppliers
in exchange for receiving competitive pricing. All PCBs and enclosures are built to our engineering specifications. All PCBs are received
in our manufacturing facilities in Israel and are tested, assembled, calibrated and put in appropriate enclosures by outsource manufacturers
in Israel. Then they go through a validation and quality assurance process. Other components are off-the-shelf products, which we purchase
from a number of different suppliers.
Many of the activities for our e-Gov, IoT,
and Cyber Security segments, such as purchasing, logistics, integration, training, installation and testing, are done by our employees.
In locations where we do not have a local representative, we assign certain tasks to local third parties and service providers that we
supervise. We have subcontracting agreements with local IT companies who have dedicated and experienced personnel. Such subcontractors
provide all local support, maintenance services and spare parts to customers in a specified area.
Competition
We assess our competitive position from
our experience and market intelligence, including third party competitive research materials. We believe that Guidance (G4S), Attenti
Monitoring, STOP (Securus), Omnilink (Sierra Wireless), Sentinel, BI (GeoGroup), and Buddi, are our potential competitors
with respect to our IoT products and solutions. We believe that Face Technologies, Zetes Industries, Mühlbauer Group, Oberthur Technologies,
Gemalto(Thales), Bundesdruckerei GmbH and Nadra are our potential competitors in the e-Gov products and solutions market. We believe that
McAfee (Intel Security), Symantec, Sophos, and Trend Micro are the primary competitors for our Cyber Security division. Due to the developing
nature of the markets for our e-Gov, IoT, and Cyber Security products and solutions and the ongoing changes in this market, the above-mentioned
list may not constitute a full list of all of our competitors and additional companies may be considered our competitors.
Our management expects competition to intensify
as the markets in which our products and solutions compete continue to develop. Some of our competitors may be more technologically sophisticated
or have substantially greater technical, financial or marketing resources than we do, or may have more extensive pre-existing relationships
with potential customers. Although our products and services combine technologies and features that provide customers with complete and
comprehensive solutions, we cannot assure that other companies will not offer similar products in the future or develop products and services
that are superior to our products and services, achieve greater customer acceptance or have significantly improved functionality as compared
to our products and services. Increased competition may result in our experiencing reduced margins, loss of sales or a decrease in market
share.
Intellectual Property
Our ability to compete is dependent on our
ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of patents, trademarks, copyrights,
trade secrets and other intellectual property laws, as well as employee and third-party nondisclosure agreements, licensing and other
contractual arrangements. However, these legal protections afford only limited protection for our proprietary technology and intellectual
property.
In addition, the laws of certain foreign
countries may not protect our intellectual property rights to the same extent as do the laws of Israel or the United States. Our method
of protecting our intellectual property rights in Israel, the United States or any other country in which we operate may not be adequate
to fully protect such rights.
Currently we own 52 issued patents in the
United States and 74 issued patents in the rest of the world.
Trademarks
We rely on trade names, trademarks and service
marks to protect our name brands. We hold registered trademarks in several countries including Israel, the United States and the United
Kingdom. We rely on trade names, trademarks and service marks to protect our name brands. We have registered trademarks for PureRFid®
, SuperCom ® , Vuance®
, EduGate® , and “Vuance Validate your World”
® and have applied for trademarks for PureMonitorTM
, PureComTM , PureTagTM
, PureTrackTM, SmartIDTM
, MAGNA TM and PureArrestTM.
Licenses
We license technology and software, such
as operating systems and database software, from third parties for incorporation into our systems and products, and we expect to continue
to enter into these types of agreements for future products. Our licenses are either perpetual or for specific terms.
As part of the acquisition of the SmartID
division, we also received an irrevocable, worldwide, non-exclusive, non-assignable and non-transferable license to use certain intellectual
property from OTI in connection with our past, ongoing and future e-Gov projects.
Government Regulation
Generally, we are subject to the laws, regulations
and standards of the countries in which we operate and/or sell our products, which vary substantially from country to country. The difficulty
of complying with these laws, regulations and standards may be more or less difficult than complying with applicable U.S. or Israeli regulations
and the requirements may differ. Please see the section titled “Risk Factors” for more information on the effects of governmental
regulation on our business.
|
C.
|
Organizational
Structure |
The following reflects our active subsidiaries
and affiliates as of April 4, 2022:
SuperCom Inc. - wholly
owned.
SuperCom Inc., incorporated in Delaware,
is responsible for our sales, marketing and support in the United States, and wholly owns its subsidiary, LCA.
Leaders in Community
Alternatives, Inc. (“LCA”) - wholly owned.
LCA, incorporated in California, was acquired
by us on January 1, 2016, and provides electronic monitoring and community-based services under contracts with various government agencies.
Safend Ltd. - wholly
owned.
Safend Ltd., incorporated in Israel, was
acquired on March 13, 2016, and is a global data security company with a broad range of competitive and well-known encryption and data
protection solutions.
Prevision Ltd. - wholly
owned.
Prevision Ltd., incorporated in Israel,
was acquired on November 12, 2015, and is an international provider of Cyber Security services and solutions.
Alvarion Technologies
Ltd. - wholly owned.
Alvarion Ltd., incorporated in Israel, was
acquired on May 18, 2016, and is a global provider of wireless broadband products and Wi-Fi networks.
|
D.
|
Property,
Plants and Equipment |
We do not own any real estate. We lease
approximately 1,139 square meters of office and warehousing premise in Tel Aviv and Herzliya, Israel, under a new lease which started
on April 1, 2021 and expires on March 30, 2023 with
an option for 24-month extension. According to the lease agreements, the monthly fee (including management fees) is approximately $35,430.
We lease approximately 1,278 square meters of office
premises in California for our U.S. subsidiary, LCA Inc., which under the current lease contracts expire between 2022, with a monthly
fee of approximately $24,068.
We do not lease any facilities for any other
subsidiary or branch.
Our total annual rental fees, for 2021 and 2020 were $714,000
and $753,000, respectively.
|
ITEM
4A. |
UNRESOLVED STAFF COMMENTS
|
None.
|
ITEM
5. |
OPERATING AND FINANCIAL
REVIEW AND PROSPECTS |
|
A.
|
Operating
Results |
The following discussion of our results
of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this
Annual Report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and
involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include those discussed below and elsewhere in this Annual Report.
Overview
We are a global provider of traditional
identification and e-Government solutions, IoT products and solutions, as well as Cyber Security products and services to governments
and organizations throughout the world.
Our product depth and global presence was
expanded significantly with our acquisition of the SmartID division of OTI in December 2013, as well as our acquisitions of Prevision,
Safend, LCA, PowaPOS business, and Alvarion between November 2015 and May 2016. Initially, our operations grew significantly following
the acquisition of the SmartID division and the 2016 acquisitions, especially our head count and research and development and sales and
marketing expenses, as we did our best to respond to the new market and customer needs. Although in recent years, we have worked diligently
through integration and restructuring processes to optimize our operational structure and costs.
We are headquartered in Israel and operate
internationally with subsidiaries in the New York, California, and other geographical regions where we attain and deploy new projects.
General
Our consolidated financial statements appearing
in this Annual Report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States,
or U.S. GAAP. Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances
in other currencies are re-measured into dollars in accordance with the principles set forth in Financial Accounting Standards Board,
or FASB, Accounting Standards Codification, or ASC, Topic 830,” Foreign Currency Translation”
The majority of our sales are made outside Israel in dollars. In addition, substantial portions of our costs are incurred in dollars.
Since the dollar is the primary currency of the economic environment in which we and certain of our subsidiaries operate, the dollar is
our functional and reporting currency and, accordingly, monetary accounts maintained in currencies other than the dollar are re-measured
using the foreign exchange rate at the balance sheet date. Operational accounts and non-monetary balance sheet accounts are measured and
recorded at the exchange rate in effect at the date of the transaction. The financial statements of certain subsidiaries, whose functional
currency is not the dollar, have been translated into dollars. All balance sheet accounts have been translated using the exchange rates
in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period.
The resulting translation adjustments are reported as a component of shareholders’ equity in accumulated other comprehensive income
(loss).
Key
Factors Affecting Our Business
Our operations and the operating metrics
discussed below have been, and will likely continue to be, affected by certain key factors as well as certain historical events and actions.
The key factors affecting our business and our results of operations include, among others, competition, government regulation, the build
out of infrastructures, macro-economic and political risks, churn rate, impact of currency fluctuations and inflation, effective corporate
tax rate, conditions in Israel and trade relations. For further discussion of the factors affecting our results of operations, see Item
3D “Risk Factors.”
Explanation of Key Income
Statement Items, Significant Revenues and Expenses
General
2021 was an additional year of major operational
challenges due to the Covid-19 global pandemic and its impact on our operations in Israel, USA and worldwide. Our sales, project operations
and R&D processes have been materially affected by the Covid-19 related lockdowns, travels limitation, shipment limitations, productions
stoppage, and inability to service or implement some of our contracts. In order to minimize the impact of the Covid-19 on our business,
we optimized the operations of the company, and decreased our operating costs. Except for our investment in R&D which continued to
enhance our product offerings and competitive standing among our target markets. We also adapted our product offerings to the current
Covid-19 environment and offered solutions to customers to help deal with some of the issues surrounding the global pandemic. The optimized
corporation generated numerous new opportunities and project wins in our target markets, but required us to use resources in many cases
that have yet to yield income to the group as part of multi-year government sale and project deployment life cycles. We believe that comparing
between 2021-2020 and 2019-1018 cannot be done effectively without taking into account the material impact of Covid-19 on our business.
Revenues
Some of our products and services are tailored
to meet the specific needs of our customers. In order to satisfy these needs, the terms of each agreement, including the duration of the
agreement and prices for our products and services, differ from agreement to agreement.
We generate a portion of our revenues from
existing IoT, e-Gov, and Cyber Security long term services contracts, providing customers with turn-key systems, our products, software
licenses, integration, installation, training, software upgrades, support, and multi-year maintenance services. Revenues from the
sale of such services are generally recognized following delivery of such services and upon achievement of milestones as approved by our
customers. A portion of these revenues are recurring in nature and billed monthly.
During 2016 we acquired Alvarion and Safend,
which grew our suite of products from which we generate revenues. Revenues from the sale of such products are generally recognized upon
delivery of Alvarion product, and over time for delivery of Safend products.
Costs and Operating
Expenses
For the year 2021 and similar to 2020, our
costs were materially impacted by the Covid-19 pandemic and attention of management was required to quickly adapt and optimize operational
structures of the businesses as was described in the General section above.
Our research and development expenses consist
of salaries, subcontractor expenses, related depreciation costs and overhead allocated to research and development activities. In 2021,
our research and development expenses were increased by 15% compared to 2020.
Our selling and marketing expenses consist
primarily of salaries and related costs, commissions earned by sales and marketing personnel, trade show expenses, promotional expenses
and overhead costs allocated to selling and marketing activities, as well as depreciation expenses and travel costs. In 2021, our sales
and marketing was limited by the Covid-19 imposed travel limitation and lockdowns.
Our general and administrative expenses
consist primarily of salaries and related costs, allocated overhead costs, office supplies and administrative costs, fees and expenses
of our directors, information technology, depreciation, and professional service fees, including legal, insurance and audit fees.
Our operating results are significantly
affected by, among other things, the timing of contract awards and the performance of agreements. As a result, our revenues and income
may fluctuate substantially from year to year, and we believe that comparisons over longer periods of time may be more meaningful. The
nature of certain of our expenses is mainly fixed or partially fixed and any fluctuation in revenues will generate a significant variation
in gross profit and net income. In 2021 Covid-19 related limitations and forces had a material effect on our operations revenue and income.
Operating Results
The following table
sets forth selected our consolidated income statement data for each of the two years ended December 31, 2021 and 2020, expressed as a
percentage of total revenues.
|
|
2021 |
2020 |
||||||
|
Revenues |
100 |
% |
100 |
% | ||||
|
Cost of revenues |
49.4 |
52.6 |
||||||
|
Gross profit |
50.6 |
47.4 |
||||||
|
Operating expenses: |
||||||||
|
Research and development |
22.5 |
20.3 |
||||||
|
Selling and marketing |
13.5 |
14.6 |
||||||
|
General and administrative |
33.8 |
34.6 |
||||||
|
Other expenses |
35.7 |
9.8 |
||||||
|
Total operating expenses |
105.5 |
79.3 |
||||||
|
Operating loss |
(54.9 |
) |
(31.8 |
) | ||||
|
Financial expenses, net |
(27.7 |
) |
(34.9 |
) | ||||
|
Loss before income tax |
(82.6 |
) |
(66.8 |
) | ||||
|
Income tax expense |
(0.0 |
) |
(0.0 |
) | ||||
|
Net Loss |
(82.6 |
) |
(66.8 |
) | ||||
Year Ended December 31,
2021 Compared with Year Ended December 31, 2020
Revenues
Our total revenues in 2021 were $12,267,000 compared to $11,770,000
in 2020, an increase of 4.2%. The composition of revenues has changed during the fiscal year ended December 31, 2021 as follows: (i) the
e-Gov segment revenue was $1,729,000 in comparison to 1,911,000 in 2020, a decrease of 10% which reflects recurring revenue from some
of our multiyear governments contracts (ii) the IoT segment revenue was $8,904,000 in comparison to $7,656,000 in 2020, an increase of
16.3% which is attributed to increase of revenue in USA, offset by decline of revenue in the European market due to operation
limitations imposed by Covid-19 lockdowns and limitations on services based contracts mainly in Europe; (iii) the Cyber Security
segment revenue was $1,634,000 in comparison to $2,203,000 in 2020, a decrease of 25.8% which is mainly attributed a decrease in our revenue
from our products license renewals, and our consulting-based cyber offering also due to Covid-19 imposed lockdowns and travel limitations
on us and on our worldwide distributions channels and customers.
Gross Profit
Our gross profit during the fiscal year ended December 31, 2021
was $6,204,000 compared to $5,581,000 in 2020, an increase of 11.2%. The gross profit margin for 2021 was 50.6% compared to 47.4% in 2020.
The increase in our gross profit margin is mainly attributable to (i) a decrease in COGS as a result of cost optimization processes
(ii) a change in the mix of revenues, (iii) an increase of 16.3% in IoT revenue, which contributes higher than average gross margin, offset
by (v) decrease of revenue from Cyber services contracts which contributes higher than average gross margin
Expenses
Our operating expenses (without other expenses) increased during
the fiscal year ended December 31, 2021 to $8,567,000 from $8,181,000 in 2020, an increase of 4.7%. The increase in operating expenses
was primarily due to (i) an increase of 15.8% in research and development expenses, (ii) an increase of 1.9% in general and administrative
expenses mainly related to an increase in our administration headcount, (iii) a decrease of 3.8% in sales and marketing expenses mainly
related to the significant decrease in our sales and marketing direct expenses and travels expenses derived from the significant Covid-19
lockdowns and travel limitations.
Our sales and marketing expenses decreased to $1,655,000 during the fiscal year ended December 31, 2021
from $1,721,000 in 2020, a decrease of 3.8%. The decrease in our sales and marketing expenses was primarily due to decrease in our sales
and marketing direct expenses and travels expenses, derived from the significant Covid-19 lockdowns and travel limitations
Our research and development expenses decreased to $2,763,000
during the fiscal year ended December 31, 2021 from $2,386,000 in 2020, an increase of 15.8%. The increase in our research and development
expenses was primarily due to increased needs in developing our IoT and Cyber Security products, to adapt our products line toward the
healthcare market as the Covid-19 presented growing need for our technologies.
Our general and administrative expenses slightly increased to
$4,149,000 during the fiscal year ended December 31, 2021 from $4,073,000 in 2020, an increase of 1.9%.
Other expense was $4,347,000 during the fiscal year ended December
31, 2021, compared to other expense of $1,149,000 in 2020. Other expenses in 2021 and 2020 represent mainly (i) a provision of bad debt,
related mainly to African and Latin American government customers, amounting to $3,000,000 and $2,000,000 respectively and (ii) reorganization
one-time expenses amounted to $1,300,000 in 2021 compared to other income amounted to $850,000 in 2020.
Financial (Expenses)
Income, net
We had financial expenses, net of $3,396,000 during the fiscal
year ended December 31, 2021 compared to $4,113,000 in 2020. A decrease of 17.5%. Financial expenses consist primarily of bank fees
related to bid and performance guarantees issued to our customers, exchange rate effect, and interest expense and other related fee on
the outstanding loans and credits lines we maintain. The decrease in financial expenses was also due to (i) an expense related to the
changes in the exchange rate of the NIS against the U.S. dollar in 2021 compared to 2020 and (ii) an decrease in total interest fees and
other related fees on the outstanding loans and credit lines in the full year of 2021 in comparison to the full year of 2020.
Income Tax
We recorded a tax expense of $5,000 for the fiscal year ended
December 31, 2021 compared to a tax expense of $5,000 in 2020, which is mainly local and city taxes in USA.
Net Income
As a result of the factors described above, our net loss for the fiscal
year ended December 31, 2021, was $10,138,000 compared to a net loss of $7,867,000 in 2020. The increase in net loss is mainly related
to (i) an increase of $3.2m in other expenses consist of bad debt provision of $3,000,000 and additional $1.347,000 in onetime expenses
in 2021 compared to $1,149,000 in 2020, offset by; (ii) $0.7m decrease in financial expenses, and (iii) $0.8m increase in gross profit.
Seasonality
Our operating results are generally not
characterized by a seasonal pattern.
Impact of Currency Fluctuation
and of Inflation
We report our financial results in dollars
and receive payments in dollars for most of our sales, while a portion of our expenses, primarily salaries, are paid in NIS. Therefore,
the dollar cost of our operations in Israel is influenced by the extent to which any increase in the rate of inflation in Israel is not
offset, or is offset on a lagging basis, by a devaluation of the NIS in relation to the dollar.
Monetary accounts maintained in currencies
other than the U.S. dollar are re-measured into U.S. dollars at the exchange rate prevailing at the end of the reporting period in accordance
with provisions of ASC 835-10. All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected
in the statements of operations as financial income or financial expenses as appropriate.
When the rate of inflation in Israel exceeds
the rate of devaluation of the NIS against the dollar, the dollar cost of our operations in Israel increase. If the dollar cost of our
operations in Israel increases, our dollar-measured results of operations will be adversely affected. Any increase in the value of the
NIS in relation to the dollar also has the effect of increasing the dollar value of any NIS assets, unless such assets are linked to the
dollar, and the dollar amounts of any unlinked NIS liabilities and expenses. We cannot assure you that we will not be materially and adversely
affected in the future if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of the devaluation
lags behind inflation in Israel.
Conversely, depreciation of the NIS in relation
to the dollar has the effect of reducing the dollar amount of any of our expenses or liabilities that are payable in NIS, unless those
expenses or payables are linked to the dollar. Depreciation of the NIS in relation to the dollar has the effect of reducing the dollar
amount of any of our expenses or liabilities and also has the effect of decreasing the dollar value of any asset which consists of NIS
or receivables payable in NIS, unless the receivables are linked to the dollar.
The following table presents information
about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the dollar, and the rate of inflation
in Israel adjusted for the devaluation:
|
Year ended December 31, |
Israeli
inflation rate % |
NIS
devaluation (appreciation) rate % |
Israeli inflation adjusted for devaluation (appreciation) % |
|||||||||
|
2020 |
(0.7 |
) |
(7.0 |
) |
6.3 |
|||||||
|
2021 |
2.8 |
(3.3 |
) |
6.1 |
||||||||
Because exchange rates between the NIS and
the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability
and period-to-period comparisons of our results. We cannot assure you that in the future our results of operations may not be materially
adversely affected by currency fluctuations. Historically, we have not used any hedging instruments, but in the future if we expect the
fluctuation to have major effect on our operations, we may use such instruments.
Conditions in Israel
We are organized under the laws of, and
our principal executive offices and research and development facilities are located in, the State of Israel. See Item 3D “Key Information
– Risk Factors – Risks Relating to Operations in Israel” for a description of governmental, economic, fiscal, monetary
or political polices or factors that have materially affected or could materially affect our operations.
Trade Relations
Israel is a member of the United Nations,
the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.
Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade, which provides for
reciprocal lowering of trade barriers among its members. Israel is also a member of the Organization for Economic Co-operation and Development,
or the OECD, an international organization whose members are governments of mostly developed economies. The OECD’s main goal is
to promote policies that will improve the economic and social well-being of people around the world. In addition, Israel has been granted
preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel
to export products covered by such programs either duty-free or at reduced tariffs.
Israel and the European Union Community
concluded a Free Trade Agreement in July 1975, which confers certain advantages with respect to Israeli exports to most European
countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel
and the United States entered into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all tariff and specified
non-tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free
Trade Association, known as EFTA, established a free-trade zone between Israel and the EFTA nations. In November 1995, Israel entered
into a new agreement with the European Union, which includes redefinition of rules of origin and other improvements, including providing
for Israel to become a member of the research and technology programs of the European Union. In recent years, Israel has established commercial
and trade relations with a number of other nations, including China, India, Russia, Turkey and other nations in Eastern Europe and Asia.
Effective Corporate Tax
Rate
The Israeli corporate tax rate was 23% in 2020 and in 2021. For the years ended December
31, 2021 and 2020 we had losses, and therefore the effective tax rate was mostly affected by changes in deferred tax.
In 2021, the USA federal tax rate was 21%, the state
tax rate was 8.84% in CA and 6.5% in NY, the City tax rate was 6.5% in NYC. Our effective USA tax rate as for the year ended December
31, 2021 was 27.03%.
Our taxes outside Israel are dependent on
our operations in each jurisdiction as well as relevant laws and treaties. Under Israeli tax law, the results of our foreign consolidated
subsidiaries cannot be consolidated for tax.
|
B.
|
Liquidity
and Capital Resources |
As of and for the year ended December 31, 2021, the Company had
an accumulated deficit of $95,469, and net cash used in operating activities of $9,413 compared to $6,514 for the year ended December
31, 2020, also due to an increased investment in inventory and reduction in old account payables.
Management has evaluated the significance
of the conditions described above in relation to the Company’s ability to meet its obligations and noted that as of December 31,
2021, the Company had cash, cash equivalent and restricted cash of $4,604 and positive working capital of $20,505.
Further, during 2020, the Company underwent
a cost optimization process to have a more efficient structure to operate through the Covid-19 imposed lockdowns, travel limitations and
other related effects. During the optimization process, the Company has reduced its expenses through the reduction in its headcount and
overhead costs that resulted in a reduction of operating expenses by 36%, between the years 2020 and 2019. During the year 2021
the Company maintained the efficient cost structure achieved during 2020, with similar operation expenses except for an increase of 15%
in R&D expense.
Additionally, the Company secured financing
of $20,000 during 2018, of which, $6,000 remains available to the Company to draw during the 12 months following the balance sheet date,
under certain conditions. Throughout 2021, the Company also secured through the issuance of multiple notes, aggregate gross proceeds of
$12,000 of subordinated debt (“Subordinated Debt”). The Company raised a gross amount of approximately $3,200 in a private
placement in July 2020. To date, the Company has used the proceeds from the secured financing, subordinated debt and private placement
(i) to satisfy certain indebtedness; and (ii) for general corporate purposes and (iii) working capital needs for multiple new government
customer contracts with significant positive cash flow.
On March 1, 2022, the Company raised $4.65
million in a registered direct offering with a single accredited institutional investor of an aggregate of 3,130,000 of its ordinary shares,
and 4,401,585 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent private placement
to the Purchaser of the Company’s private warrants to purchase an aggregate of 5,648,689 or ordinary shares at an exercise price
of $0.70 per share.
Furthermore, the available $6 million secured credit facility
from Fortress Investment Group may provide the Company additional access to capital if needed.
The Company believes that based on the above-mentioned
secured financings, management’s plans, maintaining the cost savings and expected cash streams from the Company’s current
contracts with customers worldwide, it will be able to fund its operations for at least the next 12 months.
Cash Flows
The following table summarizes our cash
flows for the periods presented:
|
|
Year ended December 31,
|
|||||||
|
|
2021
|
2020
|
||||||
|
|
(in thousands) |
|||||||
|
Net cash used in operating activities |
(9,413 |
) |
(6,514 |
) | ||||
|
Net cash used in investing activities |
(1,639 |
) |
(1,571 |
) | ||||
|
Net cash provided by (used in) financing activities |
11,704 |
10,827 |
||||||
|
Net increase(decrease) in cash and cash equivalents |
652 |
2,742 |
||||||
|
Cash, cash equivalents and restricted cash at beginning of period
|
3,952 |
1,210 |
||||||
|
Cash, cash equivalents and restricted cash at end of period
|
4,604 |
3,952 |
||||||
Net cash used in operating activities for the year ended December
31, 2021, was $9,413,000, compared to net cash used by operating activities of $6,514,000 during the year ended December 31, 2020, an
increase of $2,899,000. The increase was primarily due to a significant decrease in our trade payable by $1.5m and in accrued expenses
by $2.9m in 2021 in comparison to 2020.
Net cash used in investing activities during the year ended December
31, 2021 was $1,639 ,000 compared to $1,571 ,000 during the year ended December 31, 2020.
Net cash provided by financing activities during the year ended December
31, 2021, was $11,704,000, and consisted mainly of long-term loans through 2 notes totaling gross proceeds of $12 million, compared to
$10,827,000 during the year ended December 31, 2020, which consisted mainly of loans with gross proceeds of $7 million.
Discussion of Critical
Accounting Policies
The preparation of financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We
evaluate our estimates and judgments on an ongoing basis.
We base our estimates and judgments on historical
experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different
assumptions or conditions, actual results may differ from these estimates.
Our discussion and analysis of our financial
condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S.
GAAP. Our significant accounting principles are presented within Note 2 to our consolidated financial statements. While all the accounting
policies impact the financial statements, certain policies may be viewed to be critical. These policies are those that are most important
to the portrayal of our financial condition and results of operations. Actual results could differ from those estimates. Our management
believes that the accounting policies which affect the more significant judgments and estimates used in the preparation of our consolidated
financial statements and which are the most critical to fully understanding and evaluating our reported results include the following:
Revenue Recognition
The Company and its subsidiaries generate their revenues from
the sale of products, licensing, maintenance, royalties and long term contracts (including training and installation).
Effective January 1, 2018, the Company adopted
Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contracts with Customers
(“ASC 606”). ASC 606 was applied using the modified retrospective method, therefore the cumulative effect of initially applying
the revenue standard is recognized as an adjustment to opening retained earnings at January 1, 2018. Accordingly, comparative periods
have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition (“ASC
605”).
Upon adoption of ASC 606, the Company identified
a change in the Company’s revenue recognition policies related to combined license and maintenance sales, as noted within the Company’s
Safend contracts. Under ASC 605, revenue for these contracts was recognized over the life of the contract. In accordance with ASC 606,
license revenue is recognized upon delivery while maintenance is recognized over the life of the contract.
Aside from its combined license and maintenance
sales, no other changes were identified to the characteristics of the Company’s other revenue recognition policies, other than the
enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations, variable consideration
and the related judgments and estimates necessary to apply the new standard.
We measure revenue based upon the consideration
specified in the client arrangement, and revenue is recognized when the performance obligations in the client arrangement are satisfied.
A performance obligation is a contractual promise to transfer a distinct service to the customer. The transaction price of a contract
is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance
obligation. Under ASC 606, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration
we expect to receive in exchange for those services. To achieve this core principal, the Company applies the following five steps:
1) Identify
the contract with a customer
A contract with a customer exists when (i)
the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred
and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines
that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent
and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention
to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer,
published credit and financial information pertaining to the customer.
2) Identify
the performance obligations in the contract
Performance obligations promised in a contract
are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer
can benefit from the service either on its own or together with other resources that are readily available from third parties or from
the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other
promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether
promised services are capable of being distinct in the context of the contract. If these criteria are not met the promised services are
accounted for as a combined performance obligation.
3) Determine
the transaction price
The transaction price
is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer.
We evaluate whether a
significant financing component exists when we recognize revenue in advance of customer payments that occur over time. For example, some
of our contracts include payment terms greater than one year from when we transfer control of goods and services to our customers and
the receipt of the final payment for those goods and services. If a significant financing component exists, we classify a portion of the
transaction price as interest income, instead of recognizing all of the transaction price as revenue. We do not adjust the transaction
price for the effects of financing if, at contract inception, the period between the transfer of control to a customer and final payment
is expected to be one year or less.
4) Allocate
the transaction price to performance obligations in the contract
If the contract contains
a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series
of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration,
the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract.
Contracts that contain multiple performance obligations require an allocation of the transaction price based on management’s judgement.
5) Recognize
revenue when or as the Company satisfies a performance obligation
The Company satisfies
performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is
satisfied by transferring a promised good or service to a customer.
Nature of goods and
services
The following is a description of the Company’s
goods and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations,
and significant payment terms for each, as applicable:
Software Maintenance
and Support Services Revenue
Software maintenance and support services
contracts are sold in conjunction with the Company’s software products for its e-Govt, IoT and Connectivity, and Cyber Security
segments. The contract terms for software maintenance and support span one to five years in length and provide customers with the rights
to unspecified software product updates if and when available, online and telephone access to technical support personnel.
The Company recognizes revenue from fixed-price
service and maintenance contracts using the input method of accounting. Under the input method, revenue is recognized on the basis of
an entity’s efforts toward satisfying a performance obligation. We recognize revenue from maintenance and support services provided
pursuant to the time elapsed under such contracts, as that is when our performance obligation to our customers under such arrangements
is fulfilled.
Perpetual Software License
Revenue
The Company generates revenue from the sales
of perpetual software licenses for its Cyber Security and e-Gov segments, including sales for its Magna_DL, Magna_VL, Magna_Passport,
and Magna_ID software products. The intellectual property rights for usage of these products are transferred to the customer at the time
of purchase and the software does not require implementation services, ongoing maintenance and support, or other adaptions in order to
maintain the license utility.
In arrangements where ongoing services are
not essential to the functionality of the delivered software, the Company recognizes perpetual software license revenue when the license
agreement has been approved and the software has been delivered. The Company can identify each party’s rights, payment terms, and
commercial substance of the content. Where applicable, we identify multiple performance obligations and record as revenue as the performance
obligations are fulfilled based on the adjusted market assessment approach.
Annual Software License
Revenue
The Company generates revenue from the sales
of time-based software licenses for certain of its software products. The intellectual property rights for access to these products are
transferred to the customer for contract terms of one year and the software requires ongoing maintenance, support, or other adaptations
in order to maintain utility.
The Company recognizes revenue over time
using the input method for its annual software licenses when ongoing services are determined to be essential to the functionality of the
delivered software. The license along with the any customization services are transferred to our customers pursuant to the time elapsed
under such contracts, as that is when our performance obligation to our customers under such arrangements is fulfilled.
System Design Revenue
System design revenue relate to services
provided to governments and national agencies in the early stages of a new project including incumbent system data information extraction,
customer interviewing and specification mapping, architecture and software design, secure credential design, project management and planning,
data migration design, project operation planning, training, assimilation, and operational processes optimization for the Company’s
e-Gov and IoT solutions.
The Company recognizes revenue from its
system design services using the input method of accounting. Under the input method, revenue is recognized on the basis of an entity’s
efforts or inputs toward satisfying a performance obligation. We recognize revenue from system design services provided pursuant to time-and-materials
based contracts as the services are performed, as that is when our performance obligation to our customers under such arrangements is
fulfilled. Where applicable, we identify multiple performance obligations and record revenue as the performance obligations are fulfilled
based on the expected cost plus a margin approach.
Implementation and System
Deployment Revenue
Implementation and system deployment revenue
relate to services provided to governments and national agencies typically after the design stage is concluded including infrastructure
setup and deployment, software and chip design development, software customizations, purchase, and deployment of hardware and necessary
system components, system integration and implementation, process engineering, customer training, system quality assurance testing, load
balancing and local environment optimizations, and operational system launch for the Company’s e-Gov and IoT solutions.
The Company recognizes revenue from its
implementation and system deployment services using the input method of accounting. Under the input method, revenue is recognized on the
basis of an entity’s efforts or inputs toward satisfying a performance obligation. We recognize revenue from implementation and
system deployment services provided pursuant to time-and-materials based contracts as the services are performed, as that is when our
performance obligation to our customers under such arrangements is fulfilled. Where applicable, we identify multiple performance obligations
and record revenue as the performance obligations are fulfilled based on the residual approach.
Procurement of Secure
Document Consumables Revenue
The Company procures secure document consumables
for its e-Gov government customers which are needed to issue secure documents after a project deployment is complete and a system is actively
running and operational. These consumables are manufactured at secure printing facilities utilizing proprietary and customized designs,
which the Company has developed during the project design stage, to provide multiple layers of security preventing falsification of documents.
These consumables include base card stock, security laminates, holograms, passive RFID chip inlays, passport booklets, secure chip cards,
and various other secure credentialing necessities.
The Company recognizes revenue on procurement
of secure document consumables products when the customer has control of the product, which is determined to be at the point in time when
the products are delivered. Where applicable, we identify multiple performance obligations and record revenue as the performance obligations
are fulfilled based on their stated prices within the contract.
Wireless & RFID
Products Revenue
The Company’s wireless products include
solutions for carrier Wi-Fi, enterprise connectivity, smart city, smart hospitality, connected campuses and connected events which enhance
productivity and performance. The Company’s RFID products include asset tags which provide real-time asset loss prevention, inventory
management, and personnel/asset tracking and vehicle tags which provide long-range vehicle ID for parking and fleet management, access
control, asset loss prevention at airports, gated communities, truck and bus terminals, employee parking lots, hospitals, industrial facilities,
railroads, mines and military installations.
The Company recognizes revenue on wireless
and RFID products when the customer has control of the equipment, which is determined to be at the point in time when the products are
shipped. Where applicable, we identify multiple performance obligations and record revenue as the performance obligations are fulfilled
based on their stated prices within the contract.
Electronic Monitoring
Services Revenue
Electronic monitoring services represent
fees the Company collects through the sale or rental of its PureSecurity Suite of products, which include the PureMonitor, PureTrack,
PureTag, PureCom, PureBeacon, and SCRAM devices. These devices identify, track, and monitor people or objects in real time through the
Company’s GPS monitoring, home monitoring, and alcohol tracking solutions.
The Company recognizes revenue on the sale
of electronic monitoring products when the customer has control of the equipment, which is determined to be at the point in time when
the products are shipped. For devices which are rented and for electronic monitoring services provided, we recognize revenue pursuant
to the time elapsed for such contracts, as that is when our performance obligation to our customers under such arrangements is fulfilled.
Our customers typically pay for these services based on a net rate per day per individual or on a fixed monthly rate.
Treatment Services Revenue
Treatment services revenue is an extension
of the Company’s electronic monitoring services. We provide individuals who have completed or are near the end of their sentence
with the resources necessary to productively transition back into society. Through our daily reporting centers, we provide criminal justice
programs and reentry services to help reduce recidivism which include case management, substance abuse education, vocational training,
parental support, employment readiness and job placement. These activities are considered to be a bundle of services which are a part
of a series of distinct services recognized over time.
The Company recognizes revenue from its
treatment services using the input method of accounting. Under the input method, revenue is recognized revenue on the basis of an entity’s
efforts or inputs toward satisfying a performance obligation. We recognize revenue from treatment services provided pursuant to time-and-materials
based contracts as the services are performed, as that is when our performance obligation to our customers under such arrangements is
fulfilled. Where applicable, we identify multiple performance obligations and record revenue as the performance obligations are fulfilled
based on the using the expected cost plus a margin approach.
Professional Services
Revenue
The Company offers professional services
for the Company’s Cyber Security software products, which includes an on-site / remote visit by a specialist technician to assist
with installation, deployment and configuration.
The Company recognizes revenue from professional
services upon completion of the service performed for the customer. As these services are completed during a single onsite visit, revenue
is recognized at the point in time of such onsite visit.
Disaggregation of revenue
In the following table, revenue is disaggregated
by major geographic region and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with
the reportable segments:
|
|
Year ended December 31,
2021 |
|||||||||||||||
|
|
Cyber
Security |
IoT |
e-Gov |
Total |
||||||||||||
|
Major geographic areas
|
||||||||||||||||
|
Africa |
$ |
- |
$ |
- |
$ |
1,586 |
$ |
1,586 |
||||||||
|
European countries |
527 |
2,242 |
143 |
2,912 |
||||||||||||
|
South America |
1 |
36 |
- |
37 |
||||||||||||
|
United States |
410 |
6,410 |
- |
6,820 |
||||||||||||
|
Israel |
648 |
109 |
- |
757 |
||||||||||||
|
APAC |
48 |
107 |
- |
155 |
||||||||||||
|
Total revenue |
$ |
1,634 |
$ |
8,904 |
$ |
1,729 |
$ |
12,267 |
||||||||
|
|
||||||||||||||||
|
Timing of revenue recognition
|
||||||||||||||||
|
Products and services transferred over time
|
$ |
44 |
$ |
7,176 |
$ |
1,428 |
$ |
8,648 |
||||||||
|
Products transferred at a point in time
|
1,590 |
1,728 |
301 |
3,619 |
||||||||||||
|
Total revenue |
$ |
1,634 |
$ |
8,904 |
$ |
1,729 |
$ |
12,267 |
||||||||
Transaction price allocated
to the remaining performance obligations.
Remaining performance obligations represent
the transaction price of system deployment, service and maintenance contracts for which work has not been performed as of the period end
date. As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations totals
$8.27 million. The Company expects approximately 39% of remaining performance obligations to be recognized into revenue within the next
12 months, with the remaining 61% recognized thereafter.
We apply the practical expedient in paragraph
ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one-year
or less. We apply the transition practical expedient in paragraph ASC 606-10-65-1(f)(3) and do not disclose the amount of the transaction
price allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount as revenue. Additionally,
applying the practical expedient in paragraph ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts (i.e.,
commissions) as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is
one-year or less.
With respect to our e-Gov business, in some
contracts we provide our customers with a license to issue IDs, passports and driver licenses and we are entitled to receive royalties
upon the issuance of each form of document by our customers. Such royalties are recognized when the issuances are reported to us, usually
on a monthly basis, for the year 2020 and 2021 we had no such contract.
Allowance for Doubtful
Accounts
The allowance for doubtful accounts is determined
with respect to specific amounts we have determined to be doubtful of collection. In determining the allowance for doubtful accounts,
we consider, among other things, our past experience with such customers and the information available regarding such customers.
We perform ongoing credit evaluations of our customers’
financial conditions and we require collateral as we deem necessary. An allowance for doubtful accounts is determined with respect to
those accounts that we have determined to be doubtful of collection. If the financial conditions of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances would be required. The allowance for doubtful accounts
was $11,667,000 and $8,667,000 as of December 31, 2021 and 2020, respectively.
Deferred Taxes
We account for income taxes, in accordance
with the provisions of FASB ASC 740, “Income Taxes” under the liability method of accounting. Under the liability method,
deferred taxes are determined based on the differences between the financial statement and tax basis of assets and liabilities at enacted
tax rates in effect in the year in which the differences are expected to reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to amounts expected to be realized. Expectation about realization of deferred tax assets related to losses
carried forward are subjective and require estimates of future income in the territories in which such losses have been generated. Changes
in those estimations could lead to changes in the expected realization of the deferred tax assets and to an increase or decrease in valuation
allowances.
|
C.
|
Research
and Development |
Our research and development efforts have
enabled us to offer our customers with a broader line of products and solutions for the e-Gov, IoT and Cyber Security segments. As of
December 31, 2021, the number of employees in our research and development activities was 25. We spent $3,502,000 (out of which $739,000
were capitalized as cost of software to be sold), and $2,976,000 (out of which $590,000 were capitalized as cost of software to
be sold), in 2021 and 2020, respectively. These amounts were spent on the development or improvement of our technologies and products,
primarily in the areas of IoT and Cyber Security. We intend to continue to research and develop new technologies and products. There can
be no assurance that we can achieve any or all of our research and development goals.
|
D.
|
Trend
Information |
See
discussion in Parts A and B of “Item 5. Operating and Financial Review and Prospects” for a description of the Trend information
relevant to us.
|
E.
|
Critical
Accounting Estimates Disclosure |
See
discussion in Part B of “Item 5. Operating and Financial Review and Prospects” for a description of the Critical Accounting
Estimates Disclosure relevant to us.
|
ITEM 6. |
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES |
|
A.
|
Directors
and Senior Management |
Set forth below are the name, age, principal position, and
a biographical description of each of our directors:
|
Name |
|
Age
|
|
Position
|
|
Arie Trabelsi |
|
64 |
|
Director |
|
Menachem Mirski |
65 |
Independent Director (1) (2)(3) | ||
|
Oren Raoul De Lange |
|
44 |
|
Independent Director (1)(2)(3) |
|
Shoshana Cohen Shapira |
|
64 |
|
Independent Director (1)(2)(3) |
|
|
(1) |
“Independent Director" |
|
|
(2) |
Member of the Audit Committee |
|
|
(3) |
Member of the Compensation Committee
|
Arie
Trabelsi. Mr. Trabelsi joined us in November 2010 as President and Chief
Executive Officer. He served as our Chief Executive Officer from November 1, 2010 until November 12, 2011 and from June 1, 2012 to February
21,2021, and served as Chairman of our board of directors from December 12, 2011 to December 27, 2012, and from February 24, 2019 to date.
He has more than 30 years of experience in the global wireless, Internet and communications industries. Mr. Trabelsi holds a BSc. Degree
in Electrical and Computer Engineering from Ben Gurion University and a MSc. Degree in Computer Engineering from Drexel University, Philadelphia,
Pennsylvania.
Menachem Mirski is an Electrical Engineer the founder and a partner
of Raz – El Ltd., a software and system development company located in Israel. He has more than 28 years of experience and expertise
as a software developer and project manager for embedded real time systems, including RF-based systems. Mr. Mirski holds a Bachelor of
Science in Computer and Electrical Engineering from Ben-Gurion University.
Shoshana
Cohen Shapira, is an Advocate, Notary and Mediator with extensive experience
in providing legal representation and consulting services to individuals and companies in various areas of law including taxes. She
is the owner of a legal practice with office in Zichron Yaacov, Israel. Mrs. Cohen Shapira holds a LLM degree from the Hebrew
University of Jerusalem.
Oren
Raoul De Lange, is an Attorney, and a Certified Public Accountant, CPA in
Israel with experience in US GAAP and IFRS, as well as with various areas of law including commercial and taxes. Mr. De Lange had
served in Ernst & Young, High Tech Sector & Israeli tax Department from 2015 until 2017, as well as a Director of Finance of Orbs
Ltd since 2017 until January, 2020. Mr. De Lange holds a LL.B and B.A degrees from the I.D.C Herzliya, Israel.
We are managed by our board of directors. Pursuant
to our Articles of Association, the number of directors may be determined from time to time by the board of director. Directors are elected
for a one year term ending at the following annual general meeting of shareholders, except for our external directors, who are elected
for three year terms in accordance with the Israeli Companies Law. However, if no directors are elected at an annual meeting, then the
incumbents shall be deemed re-elected at the same meeting. The General Meeting may resolve that a director be elected for a period longer
than the time ending at the next annual meeting but not longer than that ending at the third next annual meeting. The board of directors
elects one of its members to serve as the Chairman.
Executive Officers and
Key Employees
Our executive officers and certain key employees
as of April 4, 2022 are:
|
Name |
|
Age
|
|
Position
|
|
Ordan Trabelsi* |
|
37 |
|
President, Chief Executive Officer
|
|
Barak Trabelsi* |
|
36 |
|
Chief Operating Officer and CTO |
|
Gil Alfi |
|
51 |
|
Vice President Sales, Safend Ltd |
| Lester Villeneuve | 54 | Managing Director LCA , USA | ||
| Meir Vazana | 50 | Vice President Global Sales | ||
| Tzvika Mazor* |
39 | Vice President R&D |
* Executive officer
Barak
Trabelsi. Mr. Trabelsi joined us in January 2013 as director of new products
development, He served as our VP of IoT from 2016 until February 21, 2021 and serves as VP and Chief Operating Officer since February
21, 2021. Previously and commencing in June 2011, he served as Senior Product Manager in Equinox Ltd. Prior to that, for four years, he
served as VP of R&D of Sigma Wave, a wireless, security and internet focused company. Mr. Trabelsi has expertise in big data, cyber,
mobile and internet networks technologies, and experience in product development and strategies. Mr. Trabelsi holds a BSc. Degree in Computer
and Business from the Tel Aviv University, and an M.B.A. degree from Tel Aviv University.
Gil
Alfi. Mr. Alfi joined SuperCom Group in 2016 as VP Sales and Technology
of Safend. Until joining us, Mr. Alfi served as Regional Sales Director at Safend where he personally served as Regional Sales Director
in different regions in Europe and regions in Africa Prior to that, he served as Director of product management of different telco and
wireless companies. Mr. Alfi brings over more than 18 years of experience in different technology companies as technology lead in different
R&D teams. Mr. Alfi holds B.Sc. degree in Computer Science & Mathematics and MSc degree in Computer Science from Bar-Ilan
University.
Ordan
Trabelsi. Mr. Trabelsi serves as our President and Chief Operating Officer
since February 21, 2021. Previously he led our business and operations in the Americas through his roles as President of SuperCom Inc.
and Leaders in Community Alternatives, Inc. He has been with the company since May 2013 as the second US employee and grew the business
in the USA. He has also led numerous successful financings for the Company, including two public offerings. Trabelsi has experience in
strategic merger and acquisition, financing and product strategies as well as technology expertise in security, cyber, mobile and internet
networks technologies. Mr. Trabelsi holds a BSc. degree in Software and Electrical Engineering from the Technion - Israel Institute of
Technology, and an M.B.A. degree from the Columbia University Business School, New York, both with distinction.
Meir
Vazana, Mr. Meir Vazana joined SuperCom in January 2022 as VP Global Sales.
He has extensive experience leading sales departments towards significant growth and building successful relationships with HLS customers
worldwide.
Prior to joining
SuperCom, Meir served in key sales, business development, and management positions in the telecom and HLS industries for more than 25
years for companies such as Sky Sapience, MSAB, Cellebrite and VIR. Meir holds an MBA degree from the Open University.
Tzvika
Mazor, Mr. Tzvika Mazor joined SuperCom in April 2021 as VP R&D. He
has extensive experience in web and software development, along with experience in business processes and digital strategy. Prior to joining
SuperCom, he served as Director of Web and Front Office Applications at Stratasys. Tzvika holds a BSc. degree in Computer Sciences from
The College of Management Academic Studies.
Lester
Villeneuve, Mr. Lester Villeneuve has recently joined the SuperCom Group
as the Executive Director for Leaders in Community Alternatives (LCA). Jake is well versed and experienced working with a variety
of offender risk / need populations, stakeholders, and collaborative partners. He has worked extensively with individuals in contact with
the criminal justice system including several years as a Social Worker in a large urban jail, as a Senior Director of Community Justice
for a large non-profit organization, and as the Director of Jail-Based Mental Health Services in San Diego. Mr. Lester also spent
2 years with LCA, beginning in 2015 as the Director of the Sacramento ADRC in collaboration with County Probation there. Jake holds
a BA in Psychology from the University of Rhode Island and an MS in Criminal Justice from the University of New Haven.
|
B.
|
Compensation
|
The following table
sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December
31, 2021.
|
|
|
Salaries,
fees, commissions and bonuses |
|
|
Pension, retirement and similar benefits |
| ||
|
All directors and executive officers as
a group (6 persons) |
|
$ |
543,535 |
|
|
$ |
55,721 |
|
The aggregate amount of compensation paid
by us to our board members and executive officers as a group for the year ended December 31, 2021 was approximately $543,535. This sum
includes amounts paid for salary and commission and bonuses. In addition, we have provided automobiles to certain of our executive officers
at our expense. As of December 31, 2021, we had set aside approximately $55,721 to provide pension, retirement or similar benefits for
certain of our executive officers.
The monthly fee for a director (other than
with respect to our Chairman of the Board) is $1,500 and for external director a monthly fee of approximately $1,143 plus approximately
$708 for every board or audit committee meeting attended.
As of December 31, 2021, our directors and
executive officers as a group, then consisting of 6 persons, held options to purchase an aggregate of 54,000 ordinary shares, of which
54,000 were exercisable as of December 31, 2021, at an average exercise price of $0.1 per share.
Summary compensation
table
The below table presents the compensation,
on an individual basis, of our five most highly compensated office holders and key employees during or with respect to the year ended
December 31, 2021, as required by regulations promulgated under the Companies Law.
|
(1) |
Amounts reported in this column include
salary, social benefits, including those mandated by applicable law. |
|
(2) |
Amounts reported in this column represent
the expense recorded in our audited consolidated financial statements for the year ended December 31, 2021 based on the grant date fair
value in accordance with accounting guidance for stock-based compensation. See Note 12.c to our audited consolidated financial statements
for the year ended December 31, 2021. |
|
C.
|
Board
Practices |
Corporate Governance
Practices
Our board of directors considers good corporate
governance to be central to our effective and efficient operations. The following table lists our directors, the positions they hold with
us and the dates they were first elected or appointed:
|
Name |
Position
|
Date
Service Began |
Date of Expiration of
Current Term | |||
|
Arie Trabelsi |
Director |
February 24, 2019 |
Annual general meeting | |||
|
Menachem Mirski |
Independent Director |
July 25, 2011 |
Annual general meeting | |||
|
Oren Raoul De Lange |
Independent Director |
March 28, 2020 |
March 28, 2023 | |||
|
Shoshana Cohen Shapira |
Independent Director |
February 24, 2019 |
February 23, 2025 |
Our board of directors is presently comprised of 4 members, two of whom were
elected as external directors under the provisions of the Israeli Companies Law. Our Articles of Association provide that the majority
of the directors appointed to the board of directors will be independent directors. Mrs. Shapira, Mr. Mirski and Mr. De Lange satisfy
the applicable requirements for independence under our Articles of Association.
Alternate Directors
As permitted under the Companies Law, our
Articles of Association provide that any director may, subject to the board of directors’ approval, by written notice to us, appoint
another person who is qualified to serve as a director to serve as an alternate director. Under the Companies Law, a person who is not
qualified to be appointed as a director, a person who is already serving as a director or a person who is already serving as an alternate
director may not be appointed as an alternate director. Nevertheless, a director may be appointed as an alternate director for a member
of a committee of the board of directors so long as he or she is not already serving as a member of such committee. An external director
may not appoint an alternate director unless such alternate director is eligible to be an external director and has either “financial
and accounting expertise” or “professional expertise,” depending on the qualifications of the external director he or
she is replacing. See “— External Directors.” Similarly, an independent director within the meaning of the Companies
Law may not appoint an alternate director unless such alternate director is eligible to be an independent director within the meaning
of the Companies Law. An alternate director may be appointed for one meeting or until notice is given of the cancellation of the appointment.
External Directors
The Companies Law requires Israeli companies
with shares that have been offered to the public in or outside of Israel to appoint at least two external directors. The Companies Law
provides that a person may not be appointed as an external director if the person, or the person’s relative, partner, employer or
an entity under that person’s control, has or had during the two years preceding the date of appointment any affiliation with the
company, or any entity controlling, controlled by or under common control with the company. The term “relative” means a spouse,
sibling, parent, grandparent, child or child of spouse or spouse of any of the above as well as a sibling, brother, sister or parent of
the foregoing relatives. In general, the term “affiliation” includes an employment relationship, a business or professional
relationship maintained on a regular basis, control and service as an office holder. Furthermore, if the company does not have a controlling
shareholder or a shareholder holding at least 25% of the voting rights, “affiliation” also includes a relationship, at the
time of the appointment, with the chairman of the board, the chief executive officer, a substantial shareholder or the most senior financial
officer of such company. Regulations promulgated under the Companies Law include certain additional relationships that would not be deemed
an “affiliation” with a company for the purpose of service as an external director. In addition, no person may serve as an
external director if the person’s position or other activities create, or may create, a conflict of interest with the person’s
responsibilities as director or may otherwise interfere with the person’s ability to serve as director. If, at the time an external
director is appointed, all current members of the board of directors are of the same gender, then that external director must be of the
other gender. A director of one company may not be appointed as an external director of another company, if a director of the other company
is acting as an external director of the first company at such time.
At least one of the elected external directors
must have “accounting and financial expertise” and any other external director must have “accounting and financial expertise”
or “professional qualification,” as such terms are defined by regulations promulgated under the Companies Law. However, Israeli
companies listed on certain stock exchanges outside Israel are not required to appoint an external director with “accounting and
financial expertise” if a director with accounting and financial expertise who qualifies as an independent director for purposes
of audit committee membership under the laws of the foreign country in which the stock exchange is located serves on its board of directors.
All of the external directors of such a company must have “professional qualification.”
The external directors are elected by shareholders
at a general meeting. The shareholders voting in favor of their election must include at least a simple majority of the shares voted by
shareholders other than controlling shareholders or shareholders who have a personal interest in the election of the external director
(unless such personal interest is not related to such person’s relationship with the controlling shareholder). This majority requirement
will not be required if the total number of shares of such non-controlling shareholders and disinterested shareholders who vote against
the election of the external director represent 2% or less of the voting rights in the company.
In general, under the Companies Law, external
directors serve for a three-year term and may be reelected to two (2) additional three-year terms. However, Israeli companies listed on
certain stock exchanges outside Israel may appoint an external director for additional terms of not more than three years subject to certain
conditions. Such conditions include the determination by the audit committee and board of directors that, in view of the director’s
professional expertise and special contribution to the company’s board of directors and its committees, the appointment of the external
director for an additional term is in the best interest of the company. External directors can be removed from office only by the same
special percentage of shareholders that can elect them, or by a court, and then only if the external directors cease to meet the statutory
qualifications with respect to their appointment or if they violate their fiduciary duty to the company.
Pursuant to the Companies Law, the term
of office of an external director may be extended by the shareholders following the initial three year term for two additional three years
terms, at the nomination of either the board of directors or any shareholder(s) holding at least 1% of the voting rights in the company.
If the board of directors proposed the nominee, the reelection must be approved by the shareholders in the same manner required to appoint
external directors for an initial term, as described above. If such reelection is proposed by shareholders, such reelection requires the
approval of the majority of the shareholders voting on the matter, excluding the votes of any controlling shareholder and other shareholders
having a personal interest in the matter as a result of their relationship with the controlling shareholder(s), provided that the aggregate
votes cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter as a result of their
relationship with the controlling shareholder(s) who voted in favor of the nominee constitute more than 2% of the voting rights in the
company.
If the vacancy of an external directorship
causes a company to have fewer than two external directors, the company’s board of directors is required under the Companies Law
to call a special general meeting of the company’s shareholders as soon as possible to appoint such number of new external directors
so that the company thereafter has two external directors.
Each committee of the board of directors
that is authorized to exercise powers vested in the board of directors must include at least one external director and the audit committee
and the financial statements review committee must include all the external directors. An external director is entitled to compensation
as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly
or indirectly, in connection with such service.
Audit Committee
Under the Companies Law, the board of directors
of any public company must establish an audit committee. The chairman of the audit committee must be an external director. The audit committee
must consist of at least three directors and must include all of the external directors, the majority of which must be independent directors.
Such independent directors must meet all of the standards required of an external director and may not serve as a director for more than
nine consecutive years (a cessation of service as a director for up to two years during any nine year period will not be deemed to interrupt
the nine year period). Under the Companies Law, the audit committee and the compensation committee may not include: the chairman of the
board of directors; any director employed by the company or providing services to the company on an ongoing basis; a controlling shareholder
or any of the controlling shareholder’s relatives; and any director who rendered services to the controlling shareholder or an entity
controlled by the controlling shareholder. Any person who is not permitted to be a member of the audit committee may not be present in
the meetings of the audit committee unless the chairman of the audit committee determines that such person’s presence is necessary
in order to present a specific matter. However, an employee who is not a controlling shareholder or relative of a controlling shareholder
may participate in the audit committee’s discussions but not in any vote, and at the request of the audit committee, the secretary
of the company and its legal counsel may be present during the meeting.
Under the Companies Law, an audit committee
may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two
external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting
at which an approval was granted.
The role of the audit committee, pursuant
to the Companies Law, includes:
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• |
Monitoring deficiencies in the management
of the company, including in consultation with the independent auditors or the internal auditor, and advising the board of directors on
how to correct such deficiencies. If the audit committee finds a material deficiency, it will hold at least one meeting regarding such
material deficiency, with the presence of the internal auditor or the independent auditors but without the presence of the senior management
of the company. However, a member of the company’s senior management can participate in the meeting in order to present an issue
which is under his or her responsibility. |
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• |
Determining, on the basis of detailed arguments,
whether to classify certain engagements or transactions as material or extraordinary, as applicable, and therefore as requiring special
approval under the Companies Law. The audit committee must make such determination according to principles and guidelines predetermined
on an annual basis. |
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• |
Determining if transactions (excluding extraordinary
transactions) with a controlling shareholder, or in which a controlling shareholder has a personal interest, are required to be rendered
pursuant to a competitive procedure. |
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• |
Deciding whether to approve engagements
or transactions that require the audit committee approval under the Companies Law. |
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• |
Determining the approval procedure of non-extraordinary
transactions, following classification as such by the audit committee, including whether such specific non-extraordinary transactions
require the approval of the audit committee. |
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• |
Examining and approving the annual and periodic
working plans of the internal auditor. |
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• |
Overseeing the company’s internal
auditing and the performance of the internal auditor and confirming that the internal auditor has sufficient tools and resources at his
disposal, taking into account, among other factors, the special requirements of the company and its size; |
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• |
Examining the scope of work of the independent
auditor and its pay, and bringing such recommendations on these issue before the board. |
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• |
Determining the procedure for addressing
complaints of employees regarding shortcomings in the management of the company and ensuring the protection of employees who have filed
such complaints. |
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• |
Determining, with respect to transactions
with the controlling shareholder or in which such controlling shareholder has a personal interest, whether such transactions are extraordinary
or not, whether there is an obligation to conduct a competitive process under the supervision of the audit committee and whether, prior
to entering into such transaction, the company should conduct any other process that the audit committee may deem fit, all taking into
account the type of the company. The audit committee may set such qualifications up to one year in advance. |
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Determining the manner of approval of transactions
with the controlling shareholder or in which the controlling shareholder has a personal interest which (i) are not negligible transactions
(pursuant to the committee’s determination) and (ii) are not qualified by the committee as extraordinary transactions. |
Compensation Committee
Effective December 2012, under an amendment to the Companies
Law, effective as of December 12, 2012, each publicly traded company is required to establish a compensation committee, whose role is
to: (i) recommend to the board of directors a compensation policy for office holders, (ii) make recommendations to the shareholders once
every three years on the approval of the continued validity of the compensation policy; (iii) recommend updates to the compensation policy
from time to time and examine its implementation; (iv) determine whether to approve the terms of the service and employment of office
holders that require the committee’s approval; and (v) exempt a related party transaction from the requirement for shareholders’
approval. The compensation committee also has oversight authority over the actual terms of employment of directors and officers and may
make recommendations to the board of directors and the shareholders (where applicable) with respect to deviation from the compensation
policy that was adopted by the company. Under Israeli law, our compensation committee will consist of no fewer than three members, including
all of our independent directors (who must constitute a majority of the members of the committee), with the remainder of the members of
the compensation committee to be directors whose terms of service and employment were determined pursuant to the applicable regulations.
The amendment imposes the same restrictions on the actions and membership in the compensation committee as are discussed above under “Audit
Committee” with respect to, among other things, the requirement that an external director serve as the chairman of the committee
and the list of persons who may not serve on the committee or participate in its meetings. We have established a compensation committee
that is currently composed of Mrs. Shapira, Mr. Oren Raoul De Lange and Mr. Mirski
Management Employment
Agreements
We maintain written employment agreements
with substantially all of our key employees. These agreements provide, among other matters, for monthly salaries, our contributions to
Managers’ Insurance, an Education Fund and severance benefits. All of our agreements with our key employees are subject to termination
by either party upon the delivery of notice of termination as provided therein. We maintain a service agreement with our chairperson of
the board of directors. We do not have written agreements with any other director providing for benefits upon the termination of his or
her service to us.
Approval of Certain Transactions
Fiduciary
Duties of Office Holders
The Companies Law codifies the fiduciary
duties that “office holders,” including directors and executive officers, owe to a company. An “office holder”
is defined in the Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager,
other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions
without regard to such person’s title. An office holder’s fiduciary duties consist of a duty of care and a fiduciary duty.
The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ
under the same circumstances. This includes the duty to utilize reasonable means to obtain (i) information regarding the appropriateness
of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information of importance
pertaining to the foregoing actions. The fiduciary duty includes (i) avoiding any conflict of interest between the office holder’s
position in the company and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s
business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or
others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder
has received due to his position as an office holder.
Disclosure
of Personal Interests of an Office Holder; Approval of Transactions with Office Holders
The Companies Law requires that an office
holder promptly, and no later than the first board meeting at which such transaction is considered, disclose any personal interest that
he or she may have and all related material information known to him or her and any documents in their position, in connection with any
existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other
than in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability,
assets or liabilities, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings,
parents, grandparents, descendants, spouse’s descendants and the spouses of any of the foregoing, or by any corporation in which
the office holder or a relative is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint
at least one director or the general manager.
Some transactions, actions and arrangements
involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or
as otherwise provided for in a company’s articles of association, however, a transaction that is adverse to the company’s
interest may not be approved. In some cases, such a transaction must be approved by the audit committee and by the board of directors
itself, and under certain circumstances shareholder approval may also be required. A director who has a personal interest in a transaction
that is considered at a meeting of the board of directors or the audit committee may not be present during the board of directors or audit
committee discussions and may not vote on the transaction, unless the transaction is not an extraordinary transaction or the majority
of the members of the board or the audit committee have a personal interest, as the case may be. In the event the majority of the members
of the board of directors or the audit committee have a personal interest, then the approval of the general meeting of shareholders is
also required.
Approval
of a Compensation Policy for Office Holders
The Companies Law and the regulations adopted
thereunder require the compensation committee to adopt a policy for director and office holders. In adopting the compensation policy,
the compensation committee must take into account factors such as the office holder’s education, experience, past compensation arrangements
with the company, and the proportional difference between the person cost of compensation and the average cost of compensation of the
company’s employees.
The compensation policy must be approved
at least once every three years at the company’s general meeting of shareholders, and is subject to the approval of a majority vote
of the votes of the shareholders present and voting at a shareholders’ meeting, provided that either: (i) such majority includes
at least a majority of the votes of all shareholders who are not controlling shareholders and do not have a personal interest in the approval
of the compensation policy, present and voting at such meeting (excluding abstentions); or (ii) the total number of ordinary shares of
non-controlling shareholders and shareholders who do not have a personal interest in the approval of the compensation policy, voting against
the resolution does not exceed 2% of the aggregate voting rights in the company.
The Board may approve the compensation policy
even if such policy was not approved by the shareholders, provided that the compensation committee and the board of directors resolve,
based on detailed consideration of the compensation policy that approval of the policy, is in the best interest of the company, despite
the fact that it was not approved at the shareholders’ meeting.
The compensation policy shall serve as the
basis for decisions concerning the financial terms of employment or engagement of officer holders, including exculpation, insurance, indemnification
or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain
factors, including advancement of the company’s objectives, the company’s business and its long-term strategy, and creation
of appropriate incentives for executives. It must also consider, among other things, the company’s risk management, size and the
nature of its operations. The compensation committee must also consider among others, the ratio between the cost of terms offered to the
relevant director or office holder and the average and median cost of compensation of the other employees of the company, including those
employed through manpower companies, the effect of disparities in salary upon work relationships in the company, the possibility of reducing
variable compensation at the discretion of the board of directors; the possibility of setting a limit on the exercise value of non-cash
variable compensation; and as to severance compensation (in excess of those promulgated by applicable labor law), the period of service
of the director or office holder, the terms of his or her compensation during such service period, the company’s performance during
that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its
profits, and the circumstances under which the person is leaving the company.
The compensation policy must also include
the link between variable compensation and long-term performance and measurable criteria, the relationship between variable and fixed
compensation, and the upper limit for the value of variable compensation, the conditions under which a director or an office holder would
be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate
and was required to be restated in the company’s financial statements, the minimum holding or vesting period for variable, equity-based
compensation whilst referring to appropriate a long-term perspective based incentives; and maximum limits for severance compensation.
Once a compensation policy is properly adopted,
the Companies Law requires the compensation policy to be approved by the company’s compensation committee, with subsequent approval
of the board of directors. In addition, compensation of the directors and the chief executive officer is also subject to the approval
of the shareholders at a general meeting. The approval of the compensation of the chief executive officer that complies with the compensation
policy is subject to the same majority requirements as the approval of a transaction between a company and its controlling shareholder.
Where the director is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply.
The terms of employment of the company’s directors and executive officers must satisfy the requirements of the compensation policy
in respect of matters relating to compensation. Any deviations from the compensation policy in respect of the compensation of the office
holders require the approval of the compensation committee, the board of directors and the shareholders. If the deviation is with respect
to the compensation of the chief executive office then such approval must be made by the majority of the shareholders provided that such
majority includes the majority of the votes of the non-controlling shareholder and other shareholders who have personal interest in the
proposal (unless such personal interest is not related to the controlling shareholder) present and voting (excluding abstention). Such
special majority is not required if the number of votes of the non-controlling shareholders and shareholder who do not have personal interest
in the proposal as aforesaid is lower than 2% of the aggregate voting rights in the company.
External directors of the company are prohibited
from receiving, directly or indirectly, any compensation from the company, other than for their services as external directors pursuant
to the provisions and limitations set forth in regulations promulgated under the Companies Law, which compensation is determined prior
to their appointment and may not be changed throughout the term of their service as External directors (except for certain exceptions
set forth in such regulations).
Disclosure
of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
Pursuant to the Companies Law, the disclosure
requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a
public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company but excludes a shareholder
whose power derives solely from its position on the board of directors or any other position at the company. A person is presumed to be
a “controlling shareholder” if it holds or controls, by itself or together with others, one half or more of any one of the
“Means of Control” of the company. “Means of Control” is defined as any one of the following: (i) the right to
vote at a general meeting of the company, or (ii) the right to appoint directors of the company or its chief executive officer. For the
purpose of related party translations, under the Companies Law, a controlling shareholder is also a shareholder who holds 25% or more
of the voting rights if no other shareholder who holds more than 50% of the voting rights. For this purpose, the holdings of all shareholders
who have a personal interest in the same transaction will be aggregated.
Certain shareholders also have a duty of
fairness toward the company. These shareholders include any controlling shareholder, together with any shareholder who knows that it has
the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to prevent the appointment
of an office holder of the company or exercise any other rights available to it under the company’s articles of association with
respect to the company. The Companies Law does not define the substance of this duty of fairness, except to state that the remedies generally
available upon a breach of contract will also apply in the event of a breach of the duty of fairness.
An extraordinary transaction between a public
company and a controlling shareholder, or in which a controlling shareholder has a personal interest, including a private placement in
which the controlling shareholder has a personal interest, and the terms of engagement of the company, directly or indirectly, with a
controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder),
regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office
holder of the company, regarding his or her terms of employment, require the approval of a company’s audit committee (or compensation
committee with respect to compensation arrangements), board of directors and shareholders, in that order. Such transaction must be elected
by a majority vote of the Ordinary Shares present and voting at a shareholders’ meeting, provided that either: (i) such majority
includes at least a majority of votes held by all shareholders who do not have a personal interest in such transaction, present and voting
at such meeting (excluding abstentions); or (ii) the total number of votes of shareholders who do not have a personal interest in such
transaction voting against the approval of the transaction, does not exceed 2% of the aggregate voting rights in the company.
Pursuant to the Companies Law, the audit
committee of the company should determine in connection with such transaction if it requires rendering pursuant to a competitive procedure
or pursuant to other proceedings. See “Audit Committee” above.
To the extent that any such transaction
with a controlling shareholder or his relative is for a period extending beyond three years, shareholder approval is required once every
three years, unless, in respect to certain transactions, the audit committee determines that the longer duration of the transaction is
reasonable under the circumstances.
Pursuant to regulations promulgated pursuant
to the Companies Law, a transaction with a controlling shareholder that would otherwise require approval of the shareholders is exempt
from shareholders’ approval if each of the audit committee and the board of directors determine that the transaction meets certain
criteria that are set out in specific regulations promulgated under the Companies Law. Under these regulations, a shareholder holding
at least 1% of the issued share capital of the company may require, within 14 days of the publication of such determination, that despite
such determination by the audit committee and the board of directors, such transaction will require shareholder approval under the same
majority requirements that otherwise apply to such transactions.
The Companies Law provides that an acquisition
of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25%
or greater shareholder of the company. This rule does not apply if there is already another 25% or greater shareholder of the company.
Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as
a result of the acquisition the purchaser would hold greater than a 45% interest in the company, unless there is another shareholder holding
more than a 45% interest in the company. These requirements do not apply if, in general, (i) the acquisition was made in a private placement
that received shareholder approval, (ii) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming
a 25% or greater shareholder of the company, if there is not already a 25% or greater shareholder of the company, or (iii) was from a
shareholder holding a 45% interest in the company which resulted in the acquirer becoming a holder of a 45% interest in the company if
there is not already a 45% or greater shareholder of the company.
If, as a result of an acquisition of shares,
the acquirer will hold more than 90% of a public company’s outstanding shares or a class of shares, the acquisition must be made
by means of a tender offer for all of the outstanding shares or a class of shares. If less than 5% of the outstanding shares are not tendered
in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause
his shareholding to exceed 90% of the outstanding shares. The Companies Law provides for appraisal rights if any shareholder files a request
in court within six months following the consummation of a full tender offer. However, in the event of a full tender offer, the offeror
may determine that any shareholder who accepts the offer will not be entitled to appraisal rights. Such determination will be effective
only if the offeror or the company has timely published all the information that is required to be published in connection with such full
tender offer pursuant to all applicable laws.
Duties of Shareholders
Under the Companies Law, a shareholder has
a duty to refrain from abusing his or her power in the company and to act in good faith and in a customary manner in exercising its rights
and performing its obligations to the company and other shareholders, including, among other things, when voting at meetings of shareholders
on the following matters:
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• |
an amendment to the company’s articles
of association; |
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• |
an increase in the company’s authorized
share capital; |
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• |
a merger; and |
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• |
the approval of related party transactions
and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to
refrain from discriminating against other shareholders.
In addition, certain shareholders have a
duty to act with fairness towards the company. These shareholders include any controlling shareholder, any shareholder who knows that
his or her vote can determine the outcome of a shareholder vote, and any shareholder that, under a company’s articles of association,
has the power to appoint or prevent the appointment of an office holder. The Companies Law does not define the substance of this duty
except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to
act with fairness.
Exculpation, Insurance
and Indemnification of Directors and Officers
Exculpation
of Office Holders
Under the Companies Law, an Israeli company
may not exculpate an office holder from liability for breach of his duty of loyalty, but may exculpate in advance an office holder from
liability to the company, in whole or in part, for a breach of his duty of care, provided the articles of association of the company allow
it to do so. Our Articles of Association allow us to exculpate our office holders from liability towards us for breach of duty of care
to the maximum extent permitted by law.
Office
Holder Insurance
Our Articles of Association provide that,
subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders
for any act done by him or her by virtue of being an office holder, in respect of any of the following:
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a breach of duty of care towards us or any
other person; |
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• |
a breach of fiduciary obligations towards
us, provided that the office holder acted in good faith and had reasonable grounds to assume that his or her act would not be to our detriment;
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a financial liability imposed on him or
her in favor of another person; or |
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any other event for which insurance of an
office holder is or may be permitted. |
Indemnification
of Office Holders
Our Articles of Association provide that
we may indemnify an office holder for the following cases of liability and expenses incurred by him or her as a result of an act done
by him or her by virtue of being an office holder:
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financial liability imposed upon said office
holder in favor of another person by virtue of a decision by a court of law, including a decision by way of settlement or a decision in
arbitration which has been confirmed by a court of law; |
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reasonable expenses of the proceedings,
including lawyers’ fees, expended by the office holder or imposed on him by the court for: |
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(1) |
proceedings issued against him by or on
behalf of our company or by a third party; |
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(2) |
criminal proceedings in which the office
holder was acquitted; |
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(3) |
criminal proceedings in which he was convicted
in an offense, which did not require proof of criminal intent; or |
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(4) |
any other liability or expense for which
the indemnification of an officer holder is not precluded by law. |
We have obtained directors’ and officers’
liability insurance for the benefit of our office holders. In addition, we have granted indemnification letters to our office holders.
Limitations
on Exculpation, Insurance and Indemnification
The Companies Law provides that a company
may not exculpate or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary liability
incurred as a result of any of the following:
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a breach by the office holder of his or
her duty of loyalty towards the company unless, with respect to insurance coverage, the office holder acted in good faith and had a reasonable
basis to believe that the act would not prejudice the company; |
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a breach by the office holder of his or
her duty of care if the breach was done intentionally or recklessly; |
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any act or omission done with the intent
to derive an illegal personal benefit; or |
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any fine levied against the office holder.
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Required
Approvals
In addition, under the Companies Law, any
exculpation of, indemnification of, or procurement of insurance coverage for, our office holders must be approved by our audit committee
and our board of directors and, if the beneficiary is a director, an additional approval by our shareholders is required.
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D.
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Employees
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As of December 31, 2021 and 2020, we had
114 and 94 full-time employees, respectively (not including service providers). The following table describes our employees and the employees
of our subsidiaries by department.
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Dec. 31,
2021 |
Dec. 31,
2020 |
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Research, Development & Operations |
93 |
76 |
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Marketing and Sales |
8 |
7 |
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Administration |
13 |
11 |
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Total |
114 |
94 |
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Over the past two years, the number of our
employees by geographic area was as follows:
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Dec. 31,
2021 |
Dec. 31,
2020 |
||||||
|
Israel & Europe |
53 |
44 |
||||||
|
United States |
61 |
50 |
||||||
|
Total |
114 |
94 |
||||||
From time to time, we have engaged temporary
employees to fill open positions. These temporary employees, however, historically have not comprised a material number of our employees.
Our
Israeli employees are not part of a collective bargaining agreement and none of them are represented by labor unions. However, in Israel
we are subject to certain labor statutes and national labor court precedent rulings, as well as to certain provisions of collective bargaining
agreements between the Histadrut, which is the General Federation of Labor in Israel, and the Coordinating Bureau of Economic Organizations,
including the Industrialists’ Association. These provisions of collective bargaining agreements are applicable to our employees
by virtue of expansion orders issued in accordance with relevant labor laws by the Israeli Ministry of Labor and Welfare and which apply
such agreement provisions to our employees even though they are not directly part of a union that has signed a collective bargaining agreement.
The labor statutes and labor court rulings
that apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance
pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders
which apply to our employees principally concern the requirement for mandatory pension schemes, transportation allowance, and annual recreation
allowance, the lengths of the workday and workweek, and periodic automatic adjustment of wages relative to increases in the Consumer Price
Index in Israel. We provide our employees with benefits and working conditions that comply with the required minimums. Israeli employees
and employers are also required to pay pre-determined sums which include a contribution to national health insurance to the Israel National
Insurance Institute, which provides a range of social security benefits.
Generally, all nonexempt adult male citizens
and permanent residents of Israel, under the age of 40, or older for reserves officers or citizens with certain occupations, as well as
certain female adult citizens and permanent residents of Israel, are obligated to perform annual military reserve duty and are subject
to being called for active duty at any time under emergency circumstances. Some of our officers and employees are obligated to perform
annual reserve duty. While we have operated effectively under these requirements since we began operations, no assessment can be made
as to the full impact of such requirements on our workforce or business if conditions should change, and no prediction can be made as
to the effect on us of any expansion of such obligations.
Most of our employees have entered into
confidentiality agreements. We have also granted certain employees options to purchase shares of our ordinary shares under our option
plan. We consider our relationship with our employees to be good and we have never experienced a general strike or work stoppage.
|
E.
|
Share
Ownership |
Beneficial
Ownership by Executive Officers and Directors
The following table sets forth certain information as of December
31, 2021, regarding the beneficial ownership of our ordinary shares by each of our directors and all of our executive officers and directors
as a group.
|
Name |
Number of Ordinary Shares Beneficially Owned (1) |
Percentage of Outstanding Ordinary Shares (2) |
||||||
|
Arie Trabelsi(3) |
5,100,212 |
18.09 |
% | |||||
|
|
||||||||
|
Menachem Mirski |
— |
— |
||||||
|
Shoshana Cohen Shapira |
— |
— |
||||||
|
|
||||||||
|
Oren Raoul De Lange |
— |
— |
||||||
|
All executive officers and directors as a group (6 persons)
|
5,154,212 |
18.28 |
% | |||||
|
(1) |
Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options
currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the
person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by
footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment
power with respect to all shares shown as beneficially owned by them. |
|
(2) |
The percentages shown are based on 28,239,372 ordinary shares
issued and outstanding. |
|
(3) |
Sigma Wave Ltd. is controlled by Mrs. Tsviya
Trabelsi, and by her husband, Mr. Arie Trabelsi. As such, Mr. Trabelsi may be deemed to beneficially own the 4,588,212 ordinary shares
beneficially held by Sigma Wave Ltd. Mrs. |
Share Option Plans
In 2003, we adopted the SuperCom Ltd. 2003 Israeli Share Option
Plan, a stock option plan under which we now issue stock options, or the Option Plan. The Option Plan is intended to provide incentives
to our employees, officers, directors and/or consultants by providing them with the opportunity to purchase our ordinary shares. The Option
Plan is subject to the provisions of the Companies Law, administered by the audit committee, and is designed: (i) to comply with Section
102 of the Israeli Tax Ordinance or any provision which may amend or replace it and the rules promulgated thereunder and to enable us
and grantees thereunder to benefit from Section 102 of the Israeli Tax Ordinance and the Commissioner’s Rules; and (ii) to enable
us to grant options and issue shares outside the context of Section 102 of the Israeli Tax Ordinance. Options granted under the Option
Plan will become exercisable ratably over a period of three to five years or immediately in certain circumstances, commencing with the
date of grant. The options generally expire no later than 10 years from the date of grant. Any options that are forfeited or canceled
before expiration become available for future grants. As of December 31, 2021, 159,500 options were exercisable and 213,875 options were
outstanding.
As a result of an amendment to Section 102
of the Israeli Tax Ordinance as part of the 2003 Israeli tax reform, and pursuant to an election made by us thereunder, capital gains
derived by optionees arising from the sale of shares issued pursuant to the exercise of options granted to them under Section 102 after
January 1, 2003 will generally be subject to a flat capital gains tax rate of 25%. However, as a result of this election, we will no longer
be allowed to claim as an expense for tax purposes the amounts credited to such employees as a benefit when the related capital gains
tax is payable by them, as we had previously been entitled to do under Section 102.
On June 27, 2007, our Compensation
Committee and the board of directors approved a new option plan under which we may grant stock options to our U.S. employees and
our subsidiaries. Under this option plan, we may grant both qualified (for preferential tax treatment) and non-qualified stock options.
On August 15, 2007, this option plan was approved by our shareholders at the general shareholders meeting.
In June 2013, the Option plan was extended
for another period of 10 years, until December 31, 2023.
A summary of our stock option activity and
related information is as follows:
|
|
Year ended December 31,
|
|||||||||||||||
|
|
2021 |
2020 |
||||||||||||||
|
|
Number of
options |
Weighted average exercise price |
Number of
options |
Weighted average exercise price |
||||||||||||
|
|
$ |
$ |
||||||||||||||
|
Outstanding at Beginning of year |
334,839 |
2.31 |
564,197 |
2.64 |
||||||||||||
|
Granted |
- |
- |
- |
- |
||||||||||||
|
Exercised |
(44,964 |
) |
0.41 |
(123,545 |
) |
0.1 |
||||||||||
|
Canceled and forfeited |
(76,000 |
) |
2.22 |
(105,813 |
) |
2.94 |
||||||||||
|
Outstanding at end of year |
213,875 |
1.23 |
334,839 |
2.31 |
||||||||||||
|
Exercisable at end of year |
159,500 |
1.28 |
193,089 |
1.73 |
||||||||||||
We recognized compensation expenses related to our share-based
employee compensation awards of $31,000 and $211,000 for the years ended December
The following table summarizes the allocation
of the stock-based compensation expenses (all amounts in thousands of dollars):
|
|
Year
ended December 31, |
|||||||
|
|
2021 |
2020
|
||||||
|
$ |
$ |
|||||||
|
Cost of revenues |
7 |
84 |
||||||
|
Research and development expenses
|
12 |
48 |
||||||
|
Selling and marketing expenses |
7 |
77 |
||||||
|
General and administrative expenses
|
5 |
2 |
||||||
|
|
31 |
211 |
||||||
The options outstanding and exercisable
as of December 31, 2021, have the following ranges of exercise prices as follows:
|
Options outstanding
|
Options Exercisable
|
|||||||||||||||||||||||||||||||||
|
Range of exercise price |
Number outstanding as of December 31, 2021 |
Weighted average remaining contractual life (years) |
Weighted average exercise price |
Aggregate intrinsic value |
Number outstanding as of December 31, 2021 |
Weighted average remaining contractual life (years) |
Weighted average exercise price |
Aggregate intrinsic value |
||||||||||||||||||||||||||
|
$ |
$ |
$ |
|
$ |
$ |
|||||||||||||||||||||||||||||
|
0.00-2.00 |
207,875 |
7.09 |
1.11 |
- |
153,500 |
7.10 |
1.13 |
- |
||||||||||||||||||||||||||
|
3.00-5.00 |
6,000 |
7.00 |
4.96 |
- |
6,000 |
7.00 |
4.96 |
- |
||||||||||||||||||||||||||
|
213,875 |
7.08 |
1.22 |
- |
159,500 |
7.10 |
1.27 |
- |
|||||||||||||||||||||||||||
The total intrinsic value of options exercised
during the years ended December 31, 2021, and 2020 was $0 and $0, respectively, based on our company’s average stock price of $1.16
and $1.04 during the years ended on those dates respectively.
A summary of the status of options granted
to employees that had vested as of December 31, 2021 is presented below:
|
|
Options |
Weighted– average grant-date fair value |
||||||
|
Non-vested at January 1, 2021 |
141,750 |
$ |
1.64 |
|||||
|
Granted |
- |
$ |
- |
|||||
|
Vested |
(54,375 |
) |
$ |
1.07 |
||||
|
Forfeited and canceled |
(33,000 |
) |
$ |
3.52 |
||||
|
Non-vested at December 31, 2021 |
54,375 |
$ |
1.07 |
|||||
As of December 31, 2021, and December 31,
2020, there was $66,000 and $174,000, respectively, of unrecognized compensation cost related to non-vested share-based compensation arrangements
granted under the stock option plans.
|
ITEM 7. |
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
|
A.
|
Major
Shareholders |
The following table lists the beneficial ownership of our securities
as of December 31, 2021 by each person known by us to be the beneficial owner of 5% or more of the outstanding shares of any class of
our securities. 28,239,745 of our ordinary shares were outstanding.
|
Name of Beneficial Owner
|
|
Number
of Shares Beneficially Owned |
|
|
Percentage
of Shares Outstanding |
| ||
|
Sigma Wave Ltd |
|
|
4,588,212 |
|
|
|
16.25 |
|
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power with respect to securities. We believe that all persons named in the table
have sole voting and sole investment power with respect to all shares beneficially owned by them. All figures include ordinary shares
issuable upon the exercise of options and warrants exercisable within 60 days of December 31, 2021 and deemed to be outstanding and beneficially
owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but are not
deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
Sigma Wave Ltd. is
controlled by family members of Mrs. Tsviya Trabelsi, and by her husband, Mr. Arie Trabelsi. As such, Mr. Trabelsi may be deemed to beneficially
own the 4,588,212 ordinary shares beneficially held by Sigma Wave Ltd. Mrs. Trabelsi and Mr. Trabelsi are also the parents of Ordan Trabelsi,
our CEO and President, and Barak Trabelsi, our COO and CTO.
Significant
Changes in the Ownership of Major Shareholders
As of December 31, 2021, Sabby Volatility Warrant Master Fund
beneficially owned less than 5% of our then outstanding ordinary shares.
Voting Rights of Major
Shareholders
Our major shareholders do not have different
voting rights from the other holders of our ordinary shares.
Record
Holders
Based on a review of the information provided
to us by our U.S. transfer agent, as of December 31, 2021, there were approximately 27 record holders, of which 11 record holders holding
approximately 89.45% of our ordinary shares had registered addresses in the United States. These numbers are not representative of the
number of beneficial holders of our shares nor are they representative of where such beneficial holders reside, since many of these ordinary
shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately
88.49% of our outstanding ordinary shares as of such date).
|
B.
|
Related
Party Transactions |
It is our policy to enter into transactions
with related parties on terms that, on the whole, are no less favorable than those that would be available from unaffiliated parties.
Based on our experience in the business segments in which we operate and the terms of our transactions with unaffiliated third parties,
we believe that all of the transactions described below met our policy standards at the time they occurred.
Mr. Trabelsi has served as the chief executive
officer of the Company since June 1, 2012 until February 21, 2021. Mr. Trabelsi is the sole director of Sigma Wave, which is the controlling
shareholder of the Company. On May 9, 2013, the general meeting of shareholders of the Company approved the payment of management fees
to Mr. Trabelsi of $10.6 per month plus social benefits and an annual bonus of the greater of 2% of the Company’s annual net profit
or 0.5% of annual revenues, but in no event greater than Mr. Trabelsi annual salary.
As of December 31, 2021 and 2020, we had accrued $103,000,
$391,000, respectively as expenses arising from services provided by Mr. and Mrs. Trabelsi.
On April 29, 2012, the board of directors approved the recording of a floating
charge on the Company’s assets in favor of Mr. and Mrs. Trabelsi, unlimited in amount, in order to secure loans that are given by
them from time to time to the Company. The short terms loans provided by Mrs. and Mr. Trabelsi during the years 2011 until 2021
ranged from $2,809 up to $2,662,470 and bore no interest.
As of December 31,2021, total loans were $172. These loans bear no interest and are not
attached to any price index.
|
C.
|
Interests
of Experts and Counsel |
Not applicable.
|
ITEM 8. |
FINANCIAL
INFORMATION |
|
A.
|
Consolidated
Statements and Other Financial Information |
See the consolidated
financial statements, including the notes thereto, included in Item 18.
Legal
Proceedings
We
are party to legal proceedings in the normal course of our business. There are no material pending legal proceedings to which we are a
party or of which our property is subject. Although the outcome of claims and lawsuits against us cannot be accurately predicted, we do
not believe that any of the claims and lawsuits, will have a material adverse effect on our business, financial condition, results of
operations or cash flows for any quarterly or annual period.
Dividend Distribution
Policy
We have never paid cash dividends to our
shareholders. We intend to retain future earnings for use in our business and do not anticipate paying cash dividends on our ordinary
shares in the foreseeable future. Any future dividend policy will be determined by our Board of Directors and will be based upon conditions
then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions
and other conditions as the Board of Directors may deem relevant.
According to the Companies Law, a company
may distribute dividends out of its profits (as such term is defined in the Companies Law), provided that there is no reasonable concern
that payment of the dividend will prevent the company from satisfying all its current and foreseeable obligations, as they become due.
Notwithstanding the foregoing, dividends may be paid with the approval of a court, at the company’s request, provided that there
is no reasonable concern that payment of the dividend will prevent the company from satisfying its current and foreseeable obligations,
as they become due. In the event cash dividends are declared, such dividends will be paid in NIS.
|
B.
|
Significant
Changes |
Except as otherwise disclosed in this Annual Report, no significant
change has occurred since December 31, 2021.
|
ITEM
9. |
THE
OFFER AND LISTING |
|
A.
|
Offer
and Listing Details |
Our ordinary shares trade on the NASDAQ Capital Market under
the ticker symbol “SPCB”. As of December 31, 2021, we had 28,239,372 ordinary shares issued and outstanding.
Annual Stock Information
The following table sets forth, for the
periods indicated, the high and low closing prices of our ordinary shares on The NASDAQ Capital Market or the OTCQB Market, as applicable.
All of the share price information provided below has been adjusted to give effect to a 1 share for 4.250002 shares reverse stock split
effected on August 23, 2013.
|
Year |
High
|
Low
|
||||||
|
2013 |
$ |
5.65 |
$ |
0.30 |
||||
|
2014 |
$ |
13.78 |
$ |
4.85 |
||||
|
2015 |
$ |
13.84 |
$ |
4.46 |
||||
|
2016 |
$ |
5.25 |
$ |
2.62 |
||||
|
2017 |
$ |
4.36 |
$ |
2.17 |
||||
|
2018 |
$ |
3.92 |
$ |
1.32 |
||||
|
2019 |
$ |
1.75 |
$ |
0.59 |
||||
|
2020 |
$ |
3.09 |
$ |
0.37 |
||||
|
2021 |
$ |
2.24 |
$ |
0.44 |
||||
Quarterly Stock Information
The table below sets forth for the periods
indicated the high and low closing prices of our ordinary shares as reported on NASDAQ.
|
|
High |
Low
|
||||||
|
|
||||||||
|
2019
|
||||||||
|
First Quarter |
$ |
1.75 |
$ |
1.38 |
||||
|
Second Quarter |
$ |
1.49 |
$ |
0.98 |
||||
|
Third Quarter |
$ |
1.24 |
$ |
0.59 |
||||
|
Fourth Quarter |
$ |
0.80 |
$ |
0.59 |
||||
|
|
||||||||
|
2020
|
||||||||
|
First Quarter |
$ |
0.92 |
$ |
0.37 |
||||
|
Second Quarter |
$ |
3.09 |
$ |
0.66 |
||||
|
Third Quarter |
$ |
1.72 |
$ |
0.72 |
||||
|
Fourth Quarter |
$ |
1.10 |
$ |
0.78 |
||||
|
2021
|
||||||||
|
First Quarter |
$ |
2.24 |
$ |
1.08 |
||||
|
Second Quarter |
$ |
1.68 |
$ |
1.19 |
||||
|
Third Quarter |
$ |
1.39 |
$ |
0.98 |
||||
|
Fourth Quarter |
$ |
1.09 |
$ |
0.44 |
||||
Monthly Stock Information
The table below sets forth for the periods
indicated the high and low closing prices of our ordinary shares as reported on NASDAQ market.
|
Month |
High |
Low |
||||||
|
December 2021 |
$ |
0.66 |
$ |
0.44 |
||||
|
January 2022 |
$ |
0.56 |
$ |
0.48 |
||||
|
February 2022 |
$ |
0.64 |
$ |
0.52 |
||||
|
March 2022 |
$ |
0.71 |
$ |
0.50 |
||||
|
Through April 4, 2022 |
$ |
0.55 |
$ |
0.55 |
||||
|
B.
|
Plan
of Distribution |
Not applicable.
|
C.
|
Markets
|
Our ordinary shares began trading on the
NASDAQ Capital Market effective at the opening of trading on Tuesday, September 17, 2013 under the ticker symbol “SPCB”.
|
D.
|
Selling
Shareholders |
Not applicable.
|
E.
|
Dilution
|
Not applicable.
|
F.
|
Expenses
of the Issue |
Not applicable.
|
ITEM 10. |
ADDITIONAL
INFORMATION |
|
A.
|
Share
Capital |
Not applicable.
|
B.
|
Memorandum
and Articles of Association |
Our Memorandum of Association and Articles
of Association are attached hereto as noted in Item 19.
We are a public company organized in the
State of Israel under the Israeli Companies Law. We are registered with the Registrar of Companies of the State of Israel as a publicly
traded corporation, and we have been assigned public company number 52-00-4407-4. Set forth below is a summary of certain provisions
of our Memorandum of Association (the “Memorandum”), the Articles of Association (the “Articles”) and the Israeli
Companies Law as it applies to the Company. This description does not purport to be complete and is qualified in its entirety by reference
to the full text of the Memorandum and Articles and by Israeli law. The Memorandum and the Articles are filed as exhibits to this
Annual Report.
OBJECTS OF THE COMPANY
Pursuant to Section 2 of the Memorandum,
the principal object for which we were established is to engage in the development, manufacture, implementation and marketing of computerized
systems in general and computerized systems for producing tags, computerized photograph databases for the purpose of identification and
for issuing various certificates in particular; consultation in the above fields; development, manufacture, implementation and marketing
of any product based on the knowledge and expertise of the parties; and the purchase, sale, import, export and implementation of any action
required to realize the above objectives.
We are authorized to issue 48,000,000 ordinary
shares par value NIS 0.25 per share, of which 28,239,372 ordinary shares were outstanding as of December 31, 2021.
DIRECTORS
Our Articles provide that the number of
directors may be determined from time to time by the Board of Directors, and unless otherwise determined, the number of directors comprising
the Board of Directors will be between four and ten. With the exception of our external directors, who are elected for three year terms
in accordance with the Israeli Companies Law, our directors are elected for a one year term ending at the following annual general meeting
of shareholders. However, if no directors are elected at an annual meeting, then the persons who served as directors immediately
prior to the annual meeting shall be deemed reelected at the same meeting. The general meeting may resolve that a director be elected
for a period not longer than the third next annual meeting. Directors may resign or in certain circumstances be removed by our general
meeting prior to the expiration of his term.
The board may appoint additional directors
(whether to fill a vacancy or create a new directorship) to serve until the next annual shareholders meeting. In case an office of a director
has been vacated, the remaining directors may continue to act in every matter so long as the number of its members is not less than the
quorum required at the time for meetings of the board. If the number of members of the board decreases below said quorum, the board will
not be entitled to act except in case of emergency or for appointing additional directors in order to fill vacant positions on the board
or to call a general meeting of the shareholders. The Board of Directors elects one of its members to serve as the Chairman.
The Board of Directors may meet and adjourn
its meetings as it deems fit, provided, however, that the board must meet at least once in every three months period. A meeting of the
board may be called at the request of each director. The quorum required for a meeting of the board is not less than 30% of the number
of directors and in any event not less than two directors. Issues arising at any Board of Directors’ meeting are decided by a majority
of votes cast at the meeting. In lieu of a board meeting a resolution may be adopted in writing if signed by all directors or to which
all of the directors have agreed in writing or by telephone or facsimile, and a meeting may also be held through telephone conference
or other communications means, provided however that all participants may hear each other simultaneously. A resolution in writing signed
by all of the directors, shall be as valid and effective for all purposes as if passed at a meeting of the Board of Directors duly convened
and held, and for the purpose of the foregoing “director” shall include, if duly appointed therefore, a substitute director.
FIDUCIARY DUTIES OF OFFICERS
The Israeli Companies Law codifies the fiduciary
duties that “office holders,” including directors and executive officers, owe to a company. An office holder’s fiduciary
duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes avoiding any conflict of interest between the office
holder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business
opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information
or documents relating to the company’s affairs which the office holder has received due to his position as an office holder.
APPROVAL OF CERTAIN TRANSACTIONS
Transactions with Office
Holders; Extraordinary Transactions
Under the Israeli Companies Law, all arrangements
as to compensation of office holders who are not directors or controlling parties require approval of the audit committee or a compensation
committee to the extent that it complies with the statutory requirements which apply to the audit committee, and the Board of Directors.
Arrangements regarding the terms of employment and compensation of directors require approval by the audit committee, the Board of Directors
and the shareholders.
The Israeli Companies Law requires that
an office holder of the company promptly disclose any personal interest that he or she may have and all related material information known
to him or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary
transaction as defined under Israeli law, the office holder must also disclose any personal interest held by the office holder’s
spouse, siblings, parents, grandparents, descendants, spouse’s descendants, siblings and parents of the office holder’s spouse,
and the spouses of any of the foregoing. In addition, the office holder must also disclose any interest held by any corporation in which
the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least
one director or the general manager. An extraordinary transaction is defined as a transaction other than in the ordinary course of business,
otherwise than on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities.
In the case of a transaction which is not
an extraordinary transaction, after the office holder complies with the above disclosure requirement, only board approval is required
unless the articles of association of the company provide otherwise. The transaction must not be adverse to the company’s interest.
Furthermore, if the transaction is an extraordinary transaction, then, in addition to any approval stipulated by the articles of association,
it also must be approved by the company’s audit committee and then by the Board of Directors, and, under certain circumstances,
by a meeting of the shareholders of the company.
An individual who has a personal interest
in a matter that is considered at a meeting of the Board of Directors or the audit committee may not be present at the deliberations or
vote on this matter. However, with respect to an office holder, he/she may be present at the meeting discussions if the chairman
determines that the office holder has to present the matter. If a majority of the directors has a personal interest in a transaction with
us, such directors may be present at the deliberations and vote in this matter, and shareholder approval of the transaction is required.
Under the Israeli Companies Law and as long
as our Articles are not amended to determine otherwise, certain resolutions, such as resolutions regarding liquidation, require approval
of the holders of 75% of the shares represented at the meeting and voting thereon.
Approval of a Compensation
Policy for Office Holders
In accordance with the Companies Law, a
public company, such as our company, is required to adopt a compensation policy setting forth the principles to govern the terms of office
and employment (including cash and equity-based compensation, exemption from liability, indemnification, D&O insurance and other benefits
and payments related to the service and employment) of the Office Holders of the company. These amendments to the Companies Law also define
the criteria to be considered or included in such compensation policy. The compensation policy needs to be approved no later than September
2013 by the board of directors, after consideration of the recommendations of the compensation committee and by the majority of the company’s
shareholders provided that either: (i) such majority includes a majority of the total votes of shareholders who are not controlling shareholders
and do not have a Personal Interest in the approval of the compensation policy and who participate in the voting, in person, by proxy
or by written ballot, at the meeting (abstentions not taken into account); or (ii) the total number of votes of shareholders mentioned
in (i) above that are voted against the approval of the compensation policy do not represent more than 2% of the total voting rights in
the company.
Under certain circumstances and subject
to certain exceptions, the board of directors may approve the compensation policy even if not approved by the shareholders as described
above, provided that the compensation committee and the board of directors determine, following an additional discussion and based on
detailed reasons, that it is for the benefit of the company to adopt such compensation policy. We intend to comply with these
new requirements of the Israeli Companies Law within the required time frame.
Commencing
as of December 2012, any changes to compensation terms of Officers are to be approved in accordance with the principles set forth in such
amendments to the Israeli Companies Law as if a compensation policy was already in force. In accordance with the Companies Law, as amended,
the compensation policy must be re-approved every three years, in the manner described above. The board of directors is responsible for
reviewing from time to time the compensation policy and determining whether or not there are any circumstances that require adjustments
to the current compensation policy. (See also Item 6. Directors, Senior Management and Employees – Board Practices – Compensation
Committee.)
Disclosure of Personal
Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
The Israeli Companies Law applies the same
disclosure requirements to a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting
rights if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions with a controlling shareholder
or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office
holder (including the provision of services to the company), require the approval of the audit committee or the compensation committee,
as applicable, the Board of Directors and the shareholders of the company by simple majority, provided that either such majority vote
must include at least one-half of the shareholders who have no personal interest in the transaction and are present at the meeting (without
taking into account the votes of the abstaining shareholders), or that the total shareholdings of those who have no personal interest
in the transaction who vote against the transaction represent no more than two percent of the voting rights in the company.
Agreements and extraordinary transactions
with a term exceeding three years are subject to re-approval once every three years by the audit committee, board of directors and the
shareholders of the company. Certain types of extraordinary transactions may be approved in advance for a period exceeding three years
if the audit committee determines such approval reasonable under the circumstances.
Under the Companies Regulations (Relief
from Related Party Transactions), 5760-2000, promulgated under the Israeli Companies Law, as amended, certain extraordinary transactions
between a public company and its controlling shareholder(s) do not require shareholder approval. In addition, under such regulations,
directors’ compensation and employment arrangements in a public company do not require the approval of the shareholders if both
the audit committee and the board of directors agree that such arrangements are solely for the benefit of the company. Also, employment
and compensation arrangements for an office holder that is a controlling shareholder of a public company do not require shareholder approval
if certain criteria are met. The foregoing exemptions from shareholder approval will not apply if one or more shareholders holding at
least 1% of the issued and outstanding share capital of the company or of the company’s voting rights, objects to the use of these
exemptions provided that such objection is submitted to the company in writing not later than fourteen days from the date of the filing
of a report regarding the adoption of such resolution by the company. If such objection is duly and timely submitted, then the transaction
or compensation arrangement of the directors will require shareholders’ approval as detailed above.
The Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser
would the control 25% or greater of the company’s voting rights. This rule does not apply if there is already another such shareholder
which controls 25% or greater of the company’s voting rights. Similarly, the Israeli Companies Law provides that an acquisition
of shares in a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would hold
greater than a 45% voting rights in the company, unless there is another shareholder holding more than a 45% voting rights in the company.
These requirements do not apply to: (i) the acquisition of shares in a private placement, provided that such private placement was approved
by the general meeting of the company’s shareholders as a private placement purporting to confer to the offeree the control of 25%
or greater of the company’s voting rights if the there is no other holder of such a block of shares, or purporting to confer to
the offeree 45% of the voting rights in the company if there is no other person holding forty-five percent of the voting rights in the
company; (ii) was from a shareholder which controls 25% or greater of the company’s voting rights which resulted in the acquirer
becoming a shareholder of the company shareholder which controls 25% or greater of the company’s voting rights, or (iii) was from
a shareholder holding a 45% of the voting in the company which resulted in the acquirer becoming a holder of a 45% of the voting rights
in the company. A special tender offer will only be considered accepted if: (i) the number of shares tendered in the offer
exceeds the number of shares whose holders objected to the offer (excluding the shares of controlling shareholders of the offeror and
excluding the holders of a 25% or more block of the voting rights in the company); and (ii) at least 5% of the voting rights in the company
are purchased in the tender offer.
If,
as a result of an acquisition of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or a class
of shares, the acquisition must be made by means of a tender offer for all of the outstanding shares or a class of shares. If less than
5% of the outstanding shares are not tendered in the tender offer, and more than half of the shareholders without a personal interest
in accepting the offer tendered their shares, then all the shares that the acquirer offered to purchase will be transferred to the acquirer.
The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court within six months following the consummation
of a full tender offer, but the acquirer will be entitled to stipulate that tendering shareholders forfeit their appraisal rights. If
more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer
that will cause his shareholding to exceed 90% of the outstanding shares; provided, however, that if the dissenting shareholders constitute
less than 2% of the issued and outstanding share capital of the company then the full tender will be accepted and all of the shares that
the acquirer offered to purchase will be transferred to the acquirer by operation of law.
DUTIES OF SHAREHOLDERS
Under the Israeli Companies Law, a shareholder
has a duty to act in good faith and in a customary way towards the company and other shareholders and to refrain from abusing his or her
power in the company including, among other things, when voting in a general meeting of shareholders on the following matters:
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any amendment to the articles of association;
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an increase of the company’s authorized
share capital; |
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a merger; or |
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approval of interested party transactions
which require shareholder approval. |
Furthermore, the Israeli Companies Law requires
that a shareholder refrain from acting in a discriminatory manner towards other shareholders.
The Israeli Companies Law does not describe
the substance of the aforementioned duties of shareholders, but provides that laws applicable to a breach of contract, adjusted according
to the circumstances shall apply to a breach of such duties. With respect to the obligation to refrain from acting discriminatorily, a
shareholder that is discriminated against can petition the court to instruct the company to remove or prevent the discrimination, as well
as provide instructions with respect to future actions.
In addition, the Israeli Companies Law dictates
that any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and
any shareholder who, pursuant to the provisions of a company’s articles of association, has the power to appoint or prevent the
appointment of an office holder in the company, is under a duty to act with fairness towards the company.
The Israeli Companies Law does not describe
the substance of the aforementioned duty to act with fairness but provides that laws applicable to a breach of contract, adjusted according
to the circumstances and taking into account the status within the company of such shareholder, shall apply to a breach of such duty.
EXEMPTION, INSURANCE
AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Exemption
of Office Holders
Under the Israeli Companies Law, an Israeli
company may not exempt an office holder from liability for breach of his duty of loyalty, but may exempt in advance an office holder from
liability to the company, in whole or in part, for a breach of his duty of care, provided the articles of association of the company allow
it to do so. Our Articles allow us to exempt our office holders from liability towards us for breach of duty of care to the maximum
extent permitted by law.
Office
Holder Insurance
Our Articles provide that, subject to the
provisions of the Israeli Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders
for any act done by him or her by virtue of being an office holder, in respect of any of the following:
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a breach of duty of care towards us or any
other person, |
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a breach of fiduciary obligations towards
us, provided that the office holder acted in good faith and had reasonable grounds to assume that his or her act would not be to our detriment,
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a financial liability imposed on him or
her in favor of another person, or |
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any other event for which insurance of an
office holder is or may be permitted. |
Our Articles provide that we may indemnify
an office holder for the following cases of liability and expenses incurred by him or her as a result of an act done by him or her by
virtue of being an office holder:
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financial liability imposed upon said office
holder in favor of another person by virtue of a decision by a court of law, including a decision by way of settlement or a decision in
arbitration which has been confirmed by a court of law; |
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reasonable expenses of the proceedings,
including lawyers’ fees, expended by the office holder or imposed on him by the court for: |
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(1) |
proceedings issued against him by or on
behalf of the Company or by a third party; |
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(2) |
criminal proceedings in which the office
holder was acquitted; or |
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(3) |
criminal proceedings in which he was convicted
in an offense, which did not require proof of criminal intent; or |
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any other liability or expense for which
the indemnification of an officer holder is not precluded by law. |
We have obtained directors and officers
liability insurance for the benefit of our office holders. In addition, we have sometimes granted indemnification letters to our office
holders.
Limitations
on Exemption, Insurance and Indemnification
The Israeli Companies Law provides that
a company may not exempt or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary
liability incurred as a result of any of the following:
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a breach by the office holder of his or
her duty of loyalty towards the company unless, with respect to insurance coverage, the office holder acted in good faith and had a reasonable
basis to believe that the act would not prejudice the company; |
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a breach by the office holder of his or
her duty of care if the breach was done intentionally or recklessly; |
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any act or omission done with the intent
to derive an illegal personal benefit; or |
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any fine levied against the office holder.
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Required
Approvals
In addition, under the Israeli Companies
Law, any exemption of, indemnification of, or procurement of insurance coverage for, our office holders must be approved by our audit
committee and our Board of Directors and, if the beneficiary is a director, an additional approval by our shareholders is required.
RIGHTS OF ORDINARY SHARES
Our ordinary shares confer upon our shareholders
the right to receive notices of, and to attend, shareholder meetings, the right to one vote per ordinary share at all shareholders’
meetings for all purposes, and to share equally, on a per share basis, in such dividends as may be declared by our Board of Directors;
and upon liquidation or dissolution, the right to participate in the distribution of any surplus assets of the Company legally available
for distribution to shareholders after payment of all debts and other liabilities of the Company. All ordinary shares rank pari passu
in all respects with each other.
MEETINGS OF SHAREHOLDERS
An annual general meeting of our shareholders
will be held at least once in every calendar year, not later than 15 months after the last annual general meeting at such time and at
such place either within or without the State of Israel as may be determined by our Board of Directors.
Our Board of Directors may, whenever it
deems fit, convene a special general meeting. Special general meetings may also be convened upon requisition in accordance with the Israeli
Companies Law. Our Board is obligated to convene a special general meeting if it receives a written request from any of (a) two Directors
or 25% of the total number of Directors; (b) one or more Shareholders, holding at least 5% of our outstanding share capital and at least
1% of the shareholders’ voting power; or (c) one or more shareholders holding no less than 5% of our outstanding voting shares.
MERGERS
A merger of the Company shall require resolution
adopted by a simple majority vote cast at a general meeting, not taking into account abstentions provided, however, that if the transaction
is an extraordinary transaction with a controlling shareholder or in which a controlling shareholder has an interest, then the approvals
required will be the corporate approvals under the Israeli Companies Law for such extraordinary transaction.
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C.
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Material
Contracts |
While we have numerous contracts with customers,
representatives, distributors and landlords, except as described in Item 4. Information on the Company – Business Overview –
Key Customer Contracts we do not deem any such individual contract to be material contracts which are not in the ordinary course of our
business.
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D.
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Exchange
Controls |
Israeli law and regulations do not impose
any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.
Non-residents of Israel who purchase our
ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding
up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely reportable dollars, at the
exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.
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E.
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Taxation
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Taxation and Government
Programs
The following description is not intended
to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our ordinary shares.
You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences
that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli Tax Considerations
and Government Programs
The following is a summary of the current
material Israeli tax laws applicable to companies in Israel with special reference to its effect on us. This summary does not discuss
all the acts of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances
or to some types of investors subject to special treatment under Israeli law. Some parts of this discussion are based on new tax legislation
that has not been subject to judicial or administrative interpretation. Accordingly, we cannot assure you that the views expressed in
the discussion will be accepted by the tax authorities in question. The discussion is not intended and should not be construed as legal
or professional tax advice and does not cover all possible tax considerations.
POTENTIAL INVESTORS AND HOLDERS OF OUR SHARES
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
The following discussion describes the material
Israeli tax consequences regarding ownership and disposition of our ordinary shares applicable to non-Israeli shareholders, including
U.S. shareholders.
General Corporate Tax
Structure
Israeli companies are generally subject
corporate tax on their taxable income at the rate of 23.0% in 2021 and 2020.
On August 5, 2013, the Israeli parliament
(the Knesset) passed the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013
and 2014) – 2013, by which, inter alia, the corporate tax rate would be raised by 1.5% to a rate of 26.5% as from 2014. On January
4, 2016, the Knesset plenum approved a bill to amend the Income Tax Ordinance, including a reduction in corporate tax by 1.5% from 26.5%
to 25%, as from January 1, 2016. In 2017 the Knesset approved additional reduction of 1% every year to 24% in 2017, 23% in 2018 onwards.
For the year 2021, our USA subsidiaries are subject
to USA federal tax rate of 21%, to State tax rate of 8.84% in CA and 6.5% in NY, and to City tax of 6.5% in NYC.
Taxation of Capital Gains
Applicable to Israeli Shareholders and Non-Israeli Shareholders
General
Israeli law generally imposes a capital
gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located
in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between
real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase
of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain
circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the
total capital gain over the inflationary surplus.
The portion of the inflationary surplus
accrued from the date of acquisition until January 1, 1994 is taxed at a rate of 10%, and thereafter until the date of sale is exempt
from tax.
Israeli residents
Individuals
Pursuant to amendments to the Tax Ordinance,
effective as of January 1, 2012, the capital gains tax rate applicable to individuals upon the sale of securities is such individual’s
marginal tax rate but not more than 25%, or 30% with respect to an individual who meets the definition of a ‘Substantial Shareholder’
on the date of the sale of the securities or at any time during the 12 months preceding such date. A ‘Substantial Shareholder’
is defined as a person who, either alone or together with any other person, holds, directly or indirectly, at least 10% of any of the
means of control of a company (including, among other things, the right to receive profits of the company, voting rights, the right to
receive the company’s liquidation proceeds and the right to appoint a director). An additional tax at a rate of 3% on the capital
gain tax rate may be imposed upon shareholders whose annual taxable income exceeds NIS 651,600 (in 2021) (hereinafter “Surcharge
Tax”).
Companies
The real capital gain on the sale of securities
by a company will be taxed at the corporate tax rate applicable during the year of sale.
Non-Israeli residents
In general, if ordinary shares are traded
on a Recognized Exchange gains on the sale of ordinary shares held by non-Israeli tax resident investors will generally be exempt from
Israeli capital gains tax so long as the shares were not held through a permanent establishment that the non-Israeli tax resident investor
maintains in Israel. Notwithstanding the foregoing, dealers in securities in Israel are taxed at regular tax rates applicable to business
income.
However, non-Israeli corporations will not
be entitled to such exemption if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or
(ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly
or indirectly.
In addition, persons paying consideration
for shares, including purchasers of shares, Israeli securities dealers effecting a transaction, or a financial institution through which
securities being sold are held, are required, subject to any applicable exemptions and the demonstration by the selling shareholder of
its non-Israeli residency and other requirements, to withhold tax upon the sale of publicly traded securities at a rate of 25% for individuals
and at the corporate tax rate (23% in 2021) for corporations.
The Convention between the Government of
the State of Israel and the Government of the United States of America with Respect to Taxes on Income (the “Treaty”) is generally
effective as of January 1, 1995. Under the Treaty, the maximum Israeli withholding tax on dividends paid to a holder of our ordinary shares
who is a Treaty U.S. Resident (as defined below) is generally 25% or 30% for a shareholder that is considered a significant shareholder
at any time during the 12-month period preceding such distribution.
The Treaty further provides that a 15% or
a 12.5% Israeli dividend withholding tax will apply to dividends paid to a U.S. corporation owning 10% or more of an Israeli company’s
voting shares during, in general, the current and preceding tax year of the Israeli company. However, these provisions do not apply if
the company has certain amounts of passive income.
Pursuant to the Treaty, the sale, exchange
or disposition of our ordinary shares by a person who qualifies as a resident of the United States within the meaning of the Treaty and
who is entitled to claim the benefits afforded to such residents under the Treaty (a “Treaty U.S. Resident”) generally will
not be subject to the Israeli capital gains tax unless such Treaty U.S. Resident holds, directly or indirectly, shares representing 10%
or more of the voting power of the Company during any part of the 12-month period preceding such sale, exchange or disposition subject
to certain conditions. A sale, exchange or disposition of our ordinary shares by a Treaty U.S. Resident who holds, directly or indirectly,
shares representing 10% or more of the voting power of the Company at any time during such preceding 12-month period would not be exempt
under the Treaty from such Israeli tax; however, under the Treaty, such Treaty U.S. Resident would be permitted to claim a credit for
such taxes against U.S. federal income tax imposed on any gain from such sale, exchange or disposition, under the circumstances and subject
to the limitations specified in the Treaty and U.S. domestic law. As mentioned above, gains on the sale of ordinary shares held by non-Israeli
tax resident investors will generally be exempt from Israeli capital gains tax if the ordinary shares are traded on a Recognized Exchange.
This exemption would generally apply notwithstanding the Treaty.
In
some instances, where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration
may be subject to the withholding of Israeli tax at the source. However, under the Tax Treaty, such U.S. resident would be permitted to
claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits. The Tax Treaty does not relate to U.S. state or local taxes.
Tax on Dividends
Non-residents of Israel are subject to income
tax on income accrued or derived from sources in Israel. These sources of income include passive income such as dividends. On distributions
of dividends other than bonus shares, or stock dividends, income tax is applicable at the rate of 25%, or 30% for a shareholder that is
considered a significant shareholder at any time during the 12-month period preceding such distribution. A different rate may be provided
in a treaty between Israel and the shareholder’s country of residence. Under the Tax Treaty, the maximum tax on dividends paid to
a holder of our ordinary shares who is a US resident is 25%; however if not more than 25% of our gross income consists of interest or
dividends, then the maximum tax is 12.5% for a shareholder who is a US corporation holding at least 10% of our issued voting power during
the part of the taxable year preceding the date of payment of the dividend and during the whole of the prior taxable year (and additional
conditions under the Tax Treaty are met).
U.S. Federal Income Taxation
The following is a description of certain
U.S. federal income tax consequences relating to the acquisition, ownership and disposition of our ordinary shares by a U.S. Holder as
defined below. This description addresses only the U.S. federal income tax consequences to U.S. Holders that hold our ordinary shares
as capital assets. This description is based on the Internal Revenue Code of 1986, as amended (the “Code”), existing, proposed
and temporary Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax
Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. There can be
no assurances that the U.S. Internal Revenue Service, (“IRS”), will not take a different position concerning the tax consequences
of the acquisition, ownership and disposition of our shares or that such a position would not be sustained. U.S. Holders should consult
their own tax advisors concerning the U.S. federal, state, local and foreign tax consequences of purchasing, owning and disposing of our
ordinary shares in their particular circumstances.
This description does not address all the
tax consequences that may be relevant to a U.S. Holder subject to special tax rules, including without limitation:
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banks, financial institutions or insurance
companies; |
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real estate investment trusts, regulated
investment companies or grantor trusts; |
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dealers or traders in securities, commodities
or currencies; |
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tax-exempt
entities or organizations, including an “individual retirement account” or “Roth IRA” as defined in Section 408
or 408A of the Code; |
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certain
former citizens or long-term residents of the United States;
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persons
that received our shares as compensation for the performance of services;
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persons
that will hold our shares as part of a “hedging,” “integrated” or “conversion” transaction or as a
position in a “straddle” for U.S. federal income tax purposes;
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partnerships
or other pass-through, or holders that will hold our shares through such an entity;
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S corporations; |
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holders whose functional currency is not
the U.S. Dollar; or |
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holders that actually or constructively
own 10 percent or more of our voting shares. |
Moreover, this description does not address
the United States federal estate, gift or alternative minimum tax consequences, or any state, local or foreign tax consequences, of the
acquisition, ownership and disposition of our ordinary shares.
For purposes of this summary, the term “U.S.
Holder” means any beneficial owner of our ordinary shares who is:
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an individual and either a citizen or, for
U.S. federal income tax purposes, a resident of the United States; |
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a corporation (or other entity treated as
a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any political subdivision
thereof; |
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an estate whose income is subject to U.S.
federal income tax regardless of its source; or |
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a trust that (a) is subject to the primary
supervision of a court within the United States and the control of one or more U.S. persons or (b) has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a U.S. person. |
If a partnership (or an entity treated as
a partnership for U.S. federal income tax purposes) holds our ordinary shares, the U.S. federal income tax treatment of a partner in such
a partnership will generally depend upon the status of the partner and the activities of the partnership. Such partner or partnership
should consult their tax advisor about the U.S. federal income tax consequences of holding and disposing of ordinary shares in its particular
circumstance.
Taxation
of Dividends
Subject
to the discussion below under the heading “Passive Foreign Investment Companies,” the gross amount of any distribution made
to you with respect to our ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividend income
for U.S. federal income tax purposes, to the extent such dividend is paid out of our current and accumulated earnings and profits as determined
under U.S. federal income tax principles. Distributions in excess of our current and accumulated earnings and profits will be treated
as a non-taxable return of capital to the extent of your tax basis in the ordinary shares, and any amount in excess of your tax basis
will generally be treated as capital gain from the sale of ordinary shares. See “Disposition of Ordinary Shares” below for
a discussion of the taxation of capital gains. Because we are not a U.S. corporation, U.S. Holders that are corporations will not be entitled
to claim a dividends-received deduction under Section 243 of the Code with respect to distributions they receive from us.
Dividends that we pay in NIS, including
the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to
the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into U.S.
dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be
treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring,
holding and disposing of NIS.
Subject to complex limitations, any Israeli
withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal
income tax liability. The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect
to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income.
Dividends generally will be treated as foreign source passive category income for United States foreign tax credit purposes. Further,
there are special rules for computing the foreign tax credit limitation of a U.S. Holder who receives dividends subject to a reduced tax
rate.
In lieu of claiming a foreign tax credit,
U.S. Holders may, at their election, deduct foreign taxes, including Israeli taxes, in computing their taxable income, subject to applicable
limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued
in the taxable year.
The rules relating to the determination
of the foreign tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent
you would be entitled to this credit.
Subject to certain limitations, including
the Medicare tax, discussed below, “qualified dividend income” received by a non-corporate U.S. Holder will be subject to
tax at a preferential maximum tax rate of 20 percent. Distributions taxable as dividends paid on the ordinary shares should qualify
for the preferential 20 percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the United
States and Israel (the “Treaty”) or (ii) the ordinary shares are readily tradable on an established securities market in the
United States and certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that the ordinary
shares currently are readily tradable on an established securities market in the United States, and therefore any dividend distributions
with respect to our ordinary shares should be “qualified dividends” eligible for the preferential tax rate. However, no assurance
can be given that the ordinary shares will remain readily tradable. The preferential rate does not apply unless certain holding period
requirements are satisfied. With respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61 days during
the 121-day period beginning 60 days before the ex-dividend date. The preferential rate also does not apply to dividends received from
a passive foreign investment company or in respect of certain hedged positions or in certain other situations. The legislation enacting
the preferential tax rate on qualified dividends contains special rules for computing the foreign tax credit limitation of a taxpayer
who receives dividends subject to the preferential tax rate. U.S. Holders of ordinary shares should consult their own tax advisors regarding
the effect of these rules in their particular circumstances.
Additional
Tax on Investment Income
In addition to the income taxes described
above, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds, will be subject to a 3.8% Medicare
contribution tax on net investment income, which includes dividends and capital gains.
Disposition
of Ordinary Shares
If you sell or otherwise dispose of ordinary
shares, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized
on the sale or other disposition and your adjusted tax basis in the ordinary shares. Subject to the discussion below under the heading
“Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long-term capital
gain or loss if you have held the ordinary shares for more than one year at the time of the sale or other disposition. Long-term capital
gain realized by a non-corporate U.S. Holder is generally eligible for a preferential tax rate (currently at 20%). In general, any gain
that you recognize on the sale or other disposition of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation;
losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the
Code.
In the case of a cash basis U.S. Holder
who receives NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based on the U.S. dollar value
of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives
payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may
have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.
An
accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary
shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of
the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury
regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income
tax purposes because of differences between the U.S. dollar value of the currency received on the trade date and on the settlement
date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to the gain or loss, if any,
recognized by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive
Foreign Investment Companies
In general, a non U.S. corporation will
be considered a passive foreign investment company (“PFIC”), if (i) 75% or more of its gross income consists of passive income,
or (ii) 50% or more of the average value of its assets consists of assets that produce, or are held for the production of passive income.
For purposes of the above calculation, a non U.S. corporation that directly or indirectly owns at least 25% by value of the shares of
another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its
proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, certain royalties,
rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income.
Based on our current and projected income,
assets and activities, we believe that we are not currently a PFIC, nor do we expect to become a PFIC in the foreseeable future. However,
because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, there can
be no assurances that we will not become a PFIC in this or any future taxable year.
If we were to be treated as a PFIC for any
taxable year during which a U.S. Holder held ordinary shares, such U.S. Holder would be required to file IRS Form 8621 (Information Return
by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund). In addition, the favorable tax rates described above
with respect to dividends paid to certain non-corporate U.S. Holders would not apply if we were a PFIC for the taxable year of distribution
or the preceding taxable year.
If we were determined to be a PFIC for U.S.
federal income tax purposes, highly complex rules would apply to U.S. Holders owning, directly or indirectly, ordinary shares. Accordingly,
you are urged to consult your tax advisors regarding the application of such rules.
Backup
Withholding and Information Reporting
Payments in respect of ordinary shares may
be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate of 28%. Backup withholding
will not apply, however, if you (i) are a corporation or other exempt recipient, or (ii) furnish a correct taxpayer identification number
and make any other required certification.
Backup withholding is not an additional
tax. Amounts withheld under the backup withholding rules are properly credited against a U.S. Holder’s U.S. tax liability, and a
U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate tax return
or other claim for refund with the IRS.
U.S. individuals that hold certain specified
foreign financial assets, including stock in a foreign corporation, with values in excess of certain thresholds are required to file Form
8938 (Statement of Specified Foreign Financial Assets) with their US Federal income tax return. U.S. Holders are urged to consult their
tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our ordinary
shares.
|
F.
|
Dividends
and Paying Agents |
Not applicable.
|
G.
|
Statement
by Experts |
Not applicable.
|
H.
|
Documents
on Display |
We are subject to certain of the reporting
requirements of the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act.
As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject
to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our
officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16
of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements as frequently
or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we file with the SEC an annual report
on Form 20-F containing financial statements audited by an independent accounting firm. We also submit to the SEC reports on Form 6-K
containing (among other things) press releases and unaudited financial information. We post our annual report on Form 20-F on our website
www.supercom.com promptly following the filing of our annual report with the SEC. The information on our website is not incorporated by
reference into this Annual Report.
This Annual Report and the exhibits thereto
and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the SEC
public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s
public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The Exchange Act file number for our SEC filings is 001-33668.
The SEC maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with
the SEC using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
The documents concerning our company that
are referred to in this Annual Report may also be inspected at our offices located at 3 Rothschild Street, Tel Aviv, Israel.
|
I.
|
Subsidiary
Information |
Not applicable.
|
ITEM
11. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
Exposure to Market Risks
We may be exposed to a variety of risks,
including changes in interest rates affecting primarily interest received on short-term deposits and foreign currency fluctuations. In
2021 our principal market risk was our exposure to currency exchange fluctuations. We may limit our exposure to currency exchange rate
risk by using various hedging techniques (which was not used in 2021), including forward and option contracts. However, we cannot eliminate
the effects of currency fluctuations altogether. Exchange rate fluctuations resulting in a devaluation of the U.S. dollar compared to
the NIS could have a material adverse impact on our operating results and share price.
Foreign Currency Exchange
Risk
We may in the future carry out transactions
involving foreign currency exchange derivative financial instruments. The transactions would be designed to hedge our exposure in NIS
against the U.S. dollar.
We have operations in several countries
in connection with the sale of our products. A substantial portion of our sales and expenditures are denominated in dollars. We have mitigated,
and expect to continue to mitigate, a portion of our foreign currency exposure through salaries, marketing and support operations in which
all costs are local currency based. As a result, our results of operations and cash flows can be affected by fluctuations in foreign currency
exchange rates (primarily the NIS). A hypothetical 10% movement in foreign currency rates (primarily the NIS) against the dollar, with
all other variables held constant on the expected sales, would result in a decrease or increase in expected 2021 net income of approximately
$0.7 million.
|
ITEM
12. |
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not
Applicable
|
ITEM
13. |
DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
|
ITEM
14. |
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
None.
|
ITEM
15. |
CONTROLS
AND PROCEDURES |
Evaluation of Disclosure
Controls and Procedures
Our
disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure, and that such information
is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Our management, under the supervision and
with the participation of our Chief Executive Officer (CEO) and acting Chief Financial Officer (acting CFO), has evaluated the effectiveness
of our disclosure controls and procedures as of December 31, 2021, pursuant to Rule 13a-15 under the Exchange Act. Based upon this evaluation,
our CEO and acting CFO concluded that our disclosure controls and procedures were ineffective as of December 31, 2021 as a result of the
material weakness identified in our internal control over financial reporting. This material weakness is discussed in our “Report
of Management on Internal Control over Financial Reporting” below. Our management considers our internal control over financial
reporting to be an integral part of our disclosure controls and procedures.
Management’s Report
on Internal Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over our financial reporting. Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2021. In making our assessment, our management used the criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A material weakness, as defined
by SEC rules, is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness identified during management’s assessment
was a lack of sufficient resources in its accounting function resulting in a lack of segregation of duties and an insufficient level of
monitoring and oversight, which restricted the Company’s ability to gather, analyze, and properly review information in a timely
manner.”
Based on such assessment, management has
concluded that, as of December 31, 2021, our internal control over financial reporting is ineffective.
Notwithstanding the
identified material weakness, management believes that the consolidated financial statements included in this Annual Report fairly represent
with all material respects the financial position, results of operations and cash flows as of and for all periods presented.
Changes in Internal Control
over Financial Reporting
During the period covered by this Annual
Report ended December 31, 2021, there were no changes in our internal control over financial reporting that have materially affected or
are reasonably likely to materially affect the Company’s internal control over financial reporting.
|
ITEM
16. |
[RESERVED]
|
|
ITEM
16A. |
AUDIT
COMMITTEE FINANCIAL EXPERT |
Our
Board of Directors has determined that Mr. De Lange
and Mrs. Shapira, both members of our audit committee, are audit committee financial experts, as defined under the Exchange Act rules,
and are independent in accordance with applicable Exchange Act rules. The relevant experience of each of them is summarized in Item
6A “Directors and Senior Management.”
|
ITEM
16B. |
CODE
OF ETHICS |
We
have adopted a code of ethics that applies to our chief executive officer and all senior financial officers of our company, including
the chief financial officer, chief accounting officer or controller, or persons performing similar functions. Our code of ethics has been
filed as an exhibit to this Annual Report. Written copies are available upon request. If we make any substantive amendment to the code
of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of
such amendment or waiver on our website: http://www.supercom.com
|
ITEM
16C. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES |
Independent Registered
Public Accounting Firm Fees
The following table sets forth, for each
of the years indicated, the fees billed by our principal independent registered public accounting firms. All of such fees were pre-approved
by our Audit Committee.
|
|
Year Ended December 31,
|
|||||||
|
Services Rendered
|
2021 |
2020 |
||||||
|
Audit fees |
$ |
155,000 |
$ |
155,000 |
||||
|
Audit-related fees |
$ |
- |
$ |
- |
||||
|
Tax fees |
$ |
- |
$ |
- |
||||
|
Total |
$ |
155,000 |
$ |
155,000 |
||||
“Audit
Fees” are the aggregate fees billed for the audit of our annual financial
statements. This category also includes services that generally the independent registered public accounting firm provides, such as statutory
audits including audits required by Israeli government institutes.
“Audit-related
Fees” are the aggregate fees billed for services in respect of due
diligence related to mergers and acquisitions, consents and assistance with and review of documents filed with the SEC.
“Tax
Fees” are the aggregate fees billed for professional services rendered
for tax compliance and tax advice, other than in connection with the audit. Tax compliance involves preparation of original and amended
tax returns, tax planning and tax advice.
Pre-Approval Policies
and Procedures
The audit committee has adopted policies
and procedures relating to the approval of all audit and non-audit services that are to be performed by our independent auditors. These
policies generally provide that we will not engage our independent auditors to render audit or non-audit services unless the service is
specifically approved in advance by the Audit Committee, or the engagement is entered into pursuant to the pre-approval procedure described
below.
From time to time, the audit committee may
pre-approve specified types of services that are expected to be provided to us by our independent auditors during the next 12 months.
Any such pre-approval is detailed as to the particular service or type of services to be provided and is also generally subject to a maximum
dollar amount.
|
ITEM
16D. |
EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
|
ITEM
16E. |
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
Not applicable.
|
ITEM
16F. |
CHANGES
IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable
|
ITEM
16G. |
CORPORATE
GOVERNANCE |
Under NASDAQ Stock Market Rule 5615(a)(3),
foreign private issuers, such as our company, are permitted to follow certain home country corporate governance practices instead of certain
provisions of the NASDAQ Stock Market Rules. A foreign private issuer that elects to follow a home country practice instead of any of
such NASDAQ rules must submit to NASDAQ, in advance, a written statement from an independent counsel in such issuer’s home country
certifying that the issuer’s practices are not prohibited by the home country’s laws. We have provided NASDAQ with notices
of non-compliance with respect to the following NASDAQ rules:
|
ITEM
16H. |
MINE
SAFETY DISCLOSURE |
Not applicable.
PART III
|
ITEM 17.
|
FINANCIAL STATEMENTS
|
See Item 18.
|
ITEM 18.
|
FINANCIAL STATEMENTS
|
|
Index to Financial Statements
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm (PCAOB Name: Halperin Ilanit CPA/PCAOB ID No. 6501)
|
74 |
|
|
|
|
F-1
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5 – F-31
|
72
|
ITEM 19.
|
EXHIBITS
|
Index to Exhibits
|
Exhibit
|
|
Description
|
|
|
|
|
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
101.INS*
|
|
XBRL Instance Document
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB*
|
|
XBRL Taxonomy Label Linkbase Document
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
*
|
Filed herewith.
|
|
|
|
|
**
|
Furnished herewith.
|
|
†
|
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to Regulation S-K, Item 601(b)(10). Such omitted information is not material and would likely cause competitive harm to the registrant if publicly disclosed.
|
|
(1)
|
Filed as Exhibit 1.1 to the Registrant’s Registration Statement on Form F-1, registration number 333-189910, filed with the Securities and Exchange Commission on July 3, 2013, and incorporated herein by reference.
|
|
(2)
|
Filed as Exhibit 2 to the Registrant’s Report on Form 6-K filed with the Securities and Exchange Commission on August 22, 2013, and incorporated herein by reference.
|
|
(3)
|
Filed as Exhibit 2.1 to the Registrant’s Registration Statement on Form F-1, registration number 333-189810, filed with the Securities and Exchange Commission on July 3, 2013, and incorporated herein by reference.
|
|
(4)
|
Filed as Exhibit 4.2(a) to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2011, filed with the Securities and Exchange Commission on May 9, 2012, and incorporated herein by reference.
|
|
(5)
|
Filed as Exhibit 4.2(b) to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2011, filed with the Securities and Exchange Commission on May 9, 2012, and incorporated herein by reference.
|
|
(6)
|
Filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form F-1, registration number 333-189810, filed with the Securities and Exchange Commission on July 3, 2013, and incorporated herein by reference.
|
|
(7)
|
Filed as Exhibit 11.1 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2007, filed with the Securities and Exchange Commission on June 30, 2008, and incorporated herein by reference.
|
73
To the Board of Directors and
Stockholders of SuperCom Ltd.
Stockholders of SuperCom Ltd.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of SuperCom Ltd. (the Company) as of December 31, 2021 and 2020, and the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the two years ended December 31, 2021 and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the two years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment-
Description of the Matter
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of the reporting unit to it’s carrying value. The Company estimates fair value using the income method, which is based on the present value of estimated future cash flows attributable to the respective assets. This requires management to make significant estimates and assumptions related to forecasts of future net sales and earnings, including growth rates beyond a 10-year time period and discount rates. Changes in the assumptions could have a significant impact on either the fair value, the amount of any impairment charge, or both. Because the carrying values exceeded their estimated fair values, impairment of the Goodwill was recorded. Management determines the fair value of the reporting unit using the income approach. The income approach is based on a discounted cash flow model. The discounted cash flow model requires the exercise of significant judgment, including judgments and assumptions about appropriate discount rates and revenue growth.
Auditing management's goodwill impairment test of the reporting unit was complex and highly judgmental due to the estimation required by management in determining the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as management’s cash flow projections, including revenue growth operation margin, terminal value and the discount rate, which are affected by expectations about future market and economic conditions.
How We Addressed the Matter in Our Audit
To test the Company’s assessment of the goodwill impairment test, our audit procedures included, among others, evaluating the methodology used and testing the significant assumptions used by the Company in its analysis. We also performed sensitivity analyses of the significant assumptions, we evaluated management’s ability to accurately forecast net sales and earnings by comparing actual results to management’s historical forecasts and obtained appropriate explanations for the variances; examined management’s support for the current estimates and projections. We also involved our valuation specialist to assist in the evaluation of the Company’s valuation methods and certain significant assumptions.
Allowance for accounts receivables
Description of the Matter
As described further in Note 2 to the consolidated financial statements, the Company records an allowance for doubtful accounts when it determines that it is probable a receivable has been impaired, and the Company can reasonably estimate the amount of the incurred loss. This estimate is based on specific customer credit risk and credit evaluations. We identified the allowance for doubtful accounts as a critical audit matter.
The principal considerations for our determination that the allowance for doubtful accounts is a critical audit matter include the high degree of estimation uncertainty resulting from significant management judgment. There is also a high degree of subjectivity in management's assessment of the reasonableness of the allowance for doubtful accounts, specifically the portion of the receivable expected to be collected, which requires a heightened level of auditor judgement in auditing the estimate. Variations to this estimate could have a significant impact in the allowance recorded.
How We Addressed the Matter in Our Audit
•We obtained management’s assessment and calculation of the allowance for doubtful accounts, inquired of any known events that could impact the allowance calculation and obtained and inspected a sample of supporting documentation.
•We analyzed the changes in allowance by customer between years to understand the nature of the increase or decrease.
•We tested a sample of aged customer balances that had not been reserved, and inspected payments made and communications between management and the customer, to evaluate the completeness of the allowance for doubtful accounts.
Going concern assessment
Description of the Matter
As discussed in Notes 1c to the consolidated financial statements, the Company’s Management has concluded that there are no material uncertainties that give rise to significant doubt over the Company’s ability to continue as a going concern for at least twelve months from the date of the approval of the financial statements.
We identified management’s assumptions used to assess the Company’s ability to continue as a going concern as a critical audit matter due to inherent complexities and uncertainties related to the Company’s Management’s plans. Auditing these assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included the following:
|
◾
|
Assessing the reasonableness of key assumptions underlying management’s forecast operating cash flows, including revenue growth and gross margin assumptions and evaluating the reasonableness of management’s forecast operating cash flows.
|
|
◾
|
Evaluating the probability that the Company will be able to reduce capital expenditures and other operating expenditures if required.
|
|
◾
|
Assessing management’s plans in the context of other audit evidence obtained during the audit to determine whether it supported or contradicted the conclusions reached by management.
|
|
◾
|
Assessing the effect of events and agreement signed after balance sheet date.
|
/s/ Halperin Ilanit.
Certified Public Accountants (Isr.)
PCAOB number 650100001
Tel Aviv, Israel
April 4, 2022
We have served as the Company’s auditor since 2020
76
|
SUPERCOM LTD.
|
|
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
|
|
|
As of December 31,
|
|||||||
|
|
2021
|
2020
|
||||||
|
CURRENT ASSETS
|
||||||||
|
Cash and cash equivalents
|
$
|
3,537 |
$
|
3,137 | ||||
|
Restricted bank deposit
|
1,067 | 815 | ||||||
|
Accounts receivable, net of allowance for doubtful accounts of $11,667 and $8,667 as of December
31, 2021 and 2020, respectively (Note 13)
|
11,061 | 12,427 | ||||||
|
Other current assets (Note 3)
|
1,599 | 876 | ||||||
|
Inventories, net (Note 4)
|
3,561 | 2,404 | ||||||
|
Patents held for sale
|
5,283 | 5,283 | ||||||
|
TOTAL CURRENT ASSETS
|
26,108 | 24,942 | ||||||
|
|
||||||||
|
LONG-TERM ASSETS
|
||||||||
|
Severance pay funds
|
487 | 531 | ||||||
|
Deferred tax long term
|
202 | 204 | ||||||
|
Property and equipment, net (Note 5)
|
1,804 | 1,371 | ||||||
|
Other Intangible assets, net (Note 6)
|
5,610 | 6,270 | ||||||
|
Goodwill
|
7,026 | 7,026 | ||||||
|
Operating lease right-of-use asset
|
882 | - | ||||||
|
TOTAL LONG-TERM ASSETS
|
16,011 | 15,402 | ||||||
|
|
||||||||
|
TOTAL ASSETS
|
42,119 | 40,344 | ||||||
|
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Short-term loans and other
|
207 | 7,204 | ||||||
|
Accounts payable
|
1,395 | 2,860 | ||||||
|
Employees and payroll accruals
|
2,119 | 2,627 | ||||||
|
Related parties (Note 11.c)
|
172 | 1,749 | ||||||
|
Accrued expenses and other liabilities (Note 7)
|
1,559 | 4,393 | ||||||
|
Deferred revenues
|
151 | 765 | ||||||
|
TOTAL CURRENT LIABILITIES
|
5,603 | 19,598 | ||||||
|
|
||||||||
|
LONG-TERM LIABILITIES
|
||||||||
|
Long-term loan (Note 1c)
|
30,451 | 14,952 | ||||||
|
Deferred revenues
|
49 | 49 | ||||||
|
Deferred tax liability LT
|
170 | 170 | ||||||
|
Accrued severance pay
|
529 | 656 | ||||||
|
Operating lease liabilities
|
925 | - | ||||||
|
TOTAL LONG TERM LIABILITIES
|
32,124 | 15,827 | ||||||
|
|
||||||||
|
TOTAL LIABILITIES
|
37,727 | 35,425 | ||||||
|
|
||||||||
|
Commitments and contingent liabilities (Note 8)
|
||||||||
|
|
||||||||
|
SHAREHOLDERS’ EQUITY (Note 10)
|
||||||||
|
Ordinary shares, NIS 0.25 par value - authorized 48,000,000 shares, 28,239.372 shares issued and
outstanding at December 31, 2021 and 19,998.745 shares issued and outstanding at
December 31, 2020
|
2,028 | 1,397 | ||||||
|
Additional paid-in capital
|
97,833 | 88,853 | ||||||
|
Accumulated deficit
|
(95,469 |
)
|
(85,331 |
)
|
||||
|
Total shareholders’ equity
|
$
|
4,392 |
$
|
4,919 | ||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
42,119 | 40,344 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
|
SUPERCOM LTD.
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(U.S. dollars in thousands, except share and per share data)
|
| Year Ended December 31, | ||||||||
|
2021
|
2020
|
|||||||
|
Revenues
|
||||||||
|
Products
|
4,475 | 4,528 | ||||||
|
Services
|
7,792 | 7,242 | ||||||
|
Total revenues
|
12,267 | 11,770 | ||||||
|
|
||||||||
|
Cost of revenues
|
||||||||
|
Cost of products
|
1,935 | 2,178 | ||||||
|
Cost of services
|
4,128 | 4,011 | ||||||
|
Total cost of revenues
|
6,063 | 6,189 | ||||||
|
|
||||||||
|
Gross profit
|
6,204 | 5,581 | ||||||
|
|
||||||||
|
Operating expenses:
|
||||||||
|
Research and development
|
2,763 | 2,386 | ||||||
|
Sales and marketing
|
1,655 | 1,721 | ||||||
|
General and administrative
|
4,149 | 4,074 | ||||||
|
Other expense, net
|
4,374 | 1,149 | ||||||
|
Total operating expenses
|
12,941 | 9,330 | ||||||
|
|
||||||||
|
Operating loss
|
(6,737 |
)
|
(3,749 |
)
|
||||
|
|
||||||||
|
Financial expenses, net
|
(3,396 |
)
|
(4,113 |
)
|
||||
|
|
||||||||
|
Loss before income taxes
|
(10,133 |
)
|
(7,862 |
)
|
||||
|
|
||||||||
|
Income tax expense
|
(5 |
)
|
(5 |
)
|
||||
|
|
||||||||
|
Net loss
|
$
|
(10,138 |
)
|
$
|
(7,867 |
)
|
||
|
|
||||||||
|
Net loss per share:
|
||||||||
|
Basic and Diluted
|
$
|
(0.39 |
)
|
$
|
(0.45 |
)
|
||
|
|
||||||||
|
Shares used in calculation of net income per share:
|
||||||||
|
Basic and Diluted
|
26,198,102 | 17,386,369 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
SUPERCOM LTD.
(U.S. dollars in thousands, except share data)
|
|
Ordinary Shares
|
|||||||||||||||||||
|
|
Number of
Shares |
Share
Capital |
Additional
Paid-in Capital |
Accumulated
Deficit |
Total
Shareholders’ Equity |
|||||||||||||||
|
|
||||||||||||||||||||
|
Balance as of December 31, 2019
|
16,214,228 | 1,116 | 84,680 | (77,464 |
)
|
8,332 | ||||||||||||||
|
Exercise of options and Convertible loans
|
1,414,517 | 109 | 1,248 | - | 1,357 | |||||||||||||||
|
Stock based compensation
|
-
|
-
|
211 | - | 211 | |||||||||||||||
|
Share Issuance
|
2,370,000 | 172 | 2,772 | - | 2,944 | |||||||||||||||
|
Cancellation of Receivable on share purchase
|
-
|
-
|
(58 |
)
|
- | (58 |
)
|
|||||||||||||
|
Net loss
|
-
|
-
|
-
|
(7,867 |
)
|
(7,867 |
)
|
|||||||||||||
|
Balance as of December 31, 2020
|
19,998,745 | 1,397 | 88,853 | (85,331 |
)
|
4,919 | ||||||||||||||
|
Exercise of options and Convertible loans
|
8,240,627 | 631 | 8,949 |
-
|
9,580 | |||||||||||||||
|
Stock based compensation
|
-
|
-
|
31 | - | 31 | |||||||||||||||
|
Net loss
|
-
|
-
|
-
|
(10,138 |
)
|
(10,138 |
)
|
|||||||||||||
|
|
||||||||||||||||||||
|
Balance as of December 31, 2021
|
28,239,372 | 2,028 | 97,833 | (95,469 |
)
|
4,392 | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
|
|
Year Ended December 31,
|
|||||||
|
2021
|
2020
|
|||||||
|
CASH FLOWS - OPERATING ACTIVITIES
|
||||||||
|
Net loss
|
(10,138
|
)
|
(7,867
|
)
|
||||
|
|
||||||||
|
Adjustments to reconcile net income to net cash from operations:
|
||||||||
|
Depreciation and amortization
|
2,228
|
2,720
|
||||||
|
Stock-based compensation
|
31
|
211
|
||||||
|
Decrease (increase) in deferred tax
|
2
|
384
|
||||||
|
Decrease (increase) in accounts receivables, net
|
1,366
|
620
|
||||||
|
Decrease (increase) in other current assets
|
(723
|
)
|
177
|
|||||
|
Decrease in inventories, net
|
(1,157
|
)
|
242
|
|||||
|
Increase (decrease) in accounts payables
|
(1,465
|
)
|
(681
|
)
|
||||
|
Increase(decrease) in employees and payroll accruals
|
(508
|
)
|
(602
|
)
|
||||
|
Decrease in accrued severance pay
|
(127
|
)
|
76
|
|||||
|
Increase (decrease) in accrued expenses and other liabilities, related parties & liability for earn out
|
1,078
|
(1,794
|
)
|
|||||
|
|
||||||||
|
Net cash used in operating activities
|
(9,413
|
)
|
(6,514
|
)
|
||||
|
|
||||||||
|
CASH FLOWS - INVESTING ACTIVITIES
|
||||||||
|
Purchase of property and equipment
|
(947
|
)
|
(812
|
)
|
||||
|
Capitalization of software development costs
|
(736
|
)
|
(590
|
)
|
||||
|
Increase in severance pay fund
|
44
|
(169
|
)
|
|||||
|
|
||||||||
|
Net cash used in investing activities
|
(1,639
|
)
|
(1,571
|
)
|
||||
|
|
||||||||
|
CASH FLOWS - FINANCING ACTIVITIES
|
||||||||
|
Related parties
|
(1,577 |
)
|
(939 |
)
|
||||
|
Long-term debt, net
|
5,680 | 7,523 | ||||||
|
Receivable on account of share purchase
|
-
|
(58
|
)
|
|||||
|
Capital investment
|
-
|
2,945
|
||||||
|
Proceeds from exercise of options and warrants, net
|
7,601
|
1,356
|
||||||
|
Net cash provided by (used in) financing activities
|
11,704
|
10,827
|
||||||
|
|
||||||||
|
Increase in cash, cash equivalents, and restricted cash
|
652
|
2,742
|
||||||
|
Cash, cash equivalents, and restricted cash - beginning of year
|
3,952
|
1,210
|
||||||
|
|
||||||||
|
Cash, cash equivalents, and restricted cash - end of year
|
4,604
|
3,952
|
||||||
The accompanying notes are an integral part of the consolidated financial statements.
|
SUPERCOM LTD. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except per share data)
|
|
NOTE 1:
|
GENERAL
|
|
|
a.
|
SuperCom Ltd. (the “Company”) is an Israeli resident company organized in 1988 in Israel. On January 24, 2013 the Company changed its name back to SuperCom Ltd, its original name, from Vuance Ltd. On September 12, 2013, the Company’s ordinary shares were approved for listing on the NASDAQ Capital Market and began trading under the ticker symbol “SPCB” on September 17, 2013. Previously, the Company’s ordinary shares traded on the OTCQB® electronic quotation service.
The Company is a global provider of traditional and digital identity solutions, providing advanced safety, identification, tracking and security products to governments and organizations, both private and public, throughout the world. The Company provides cutting edge real-time positioning, tracking, monitoring and verification solutions enabled by its RFID &Mobile pure security advanced solutions suite of products and technologies, all connected to a web-based, secure, proprietary, interactive and user-friendly interface. The Company offers a wide range of solutions including, national ID registries, e-passports, biometric visas, automated fingerprint identification systems, digitized driver’s licenses, and electronic voter registration and election management using the common platform (“MAGNA”). The Company sells its products through marketing offices in the U.S, and Israel.
|
|
|
b.
|
In December 2019, a new strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, Hubei Province, China. During February until November of 2020, COVID-19 has spread globally, including in Israel, Asia, Europe, and America. In response to the COVID-19 virus, countries have taken different measures in relation to prevention and containment including lock-down and quarantine. The COVID-19 virus continues to impact worldwide economic activity and pose the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from conducting certain business activities for an indefinite period of time, including due to lockdowns that had been mandated by governmental authorities or otherwise elected by companies as a preventive measure.
During 2021, The company’s business, trading and operations were impacted materially by COVID-19. COVID-19 related imposed government restrictions in California, Israel and other geographies limited our ability to interact with our clients to provide full services as well as adding new clients to our monitoring programs given court systems shutdown. During most of the year 2021, the government imposed lockdowns and travel restrictions also hindered proper project deployment, productions, support, sales and R&D processes: (i) had prevented our sales teams to meet customers and demonstrate our products, (ii) had prevented our support teams to travel and visit customers in order to provide the adequate support and upgrades to our products (iii) had prevented our customers to complete tenders, purchases, (iv) had prevented proper collection of our client debt due to travel limitation or liquidity problems with our customers, (v) had prevented our customers and partners to complete the integrations and deployments of the Company current contacts. As the Company relies on manufacturers of components of our products in Far East, Israel, and USA, some of such components had not produced and/or shipped to the Company or to its customers.
COVID-19 continuous spread and protective measures taken by the authorities may continue to adversely affect our future results of operations, cash flows and financial condition.
|
|
c.
|
Liquidity Analysis
The Company has experienced net losses and significant cash outflows from cash used in operating activities over the past 3 years. As of and for the year ended December 31, 2021, the Company had an accumulated deficit of $95,469, and net cash used in operating activities of $9,413 compared to $6,514 for the year ended December 31, 2020, also due to an increased investment in inventory and reduction in old account payables.
Management has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations and noted that as of December 31, 2021, the Company had cash, cash equivalent and restricted cash of $4,604 and positive working capital of $20,505.
Further, during 2020, the Company underwent a cost optimization process to have a more efficient structure to operate through the Covid-19 imposed lockdowns, travel limitations and other related effects. During the optimization process, the Company has reduced its expenses through the reduction in its headcount and overhead costs that resulted in a reduction of operating expenses by 36%, between the years 2020 and 2019. During the year 2021 the Company maintained the efficient cost structure achieved during 2020, with similar operation expenses except for an increase of 15% in R&D expense.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 1: |
GENERAL (cont.) |
|
Additionally, the Company secured financing of $20,000 during 2018, of which, $6,000 remains available to the Company to draw during the 12 months following the balance sheet date, under certain conditions. Throughout 2021, the Company also secured through the issuance of multiple notes, aggregate gross proceeds of $12,000 of subordinated debt (“Subordinated Debt”). The Company raised a gross amount of approximately $3,200 in a private placement in July 2020. To date, the Company has used the proceeds from the secured financing, subordinated debt and private placement (i) to satisfy certain indebtedness; and (ii) for general corporate purposes and (iii) working capital needs for multiple new government customer contracts with significant positive cash flow.
On March 1, 2022, the Company raised $4.65 million in a registered direct offering with a single accredited institutional investor of an aggregate of 3,130,000 of its ordinary shares, and 4,401,585 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent private placement to the Purchaser of the Company’s private warrants to purchase an aggregate of 5,648,689 or ordinary shares at an exercise price of $0.70 per share.
Furthermore, the available $6 million secured credit facility from Fortress Investment Group may provide the Company additional access to capital if needed.
The Company believes that based on the above-mentioned secured financings, management’s plans, maintaining the cost savings and expected cash streams from the Company’s current contracts with customers worldwide, it will be able to fund its operations for at least the next 12 months.
|
||
|
d.
|
Senior Secured Credit Facility and Subordinated Debt
On September 6, 2018 and October 26, 2018, through a two-stage closing process, the Company entered into a Senior Secured Credit Facility with affiliates of Fortress Investment Group LLC("Fortress") with an aggregate principal amount of up to $20,000 (the "Credit Facility"). The Initial Term Loan which finalized on October 26, 2018 has an aggregate principal of $10,000, and the Incremental Term Loan provides for up to an additional $10,000 in principal through Incremental Draws of at least $1,000 each. In 2019, a total of $4,000 gross was drawn on the Incremental Term Loan, and some of the terms of the Credit Facility were amended to support the needs of the company. The Credit Facility bears interest on the borrowed balance at a rate per annum equal to LIBOR plus an applicable margin (the "Interest Margin") dependent on the EBITDA Leverage Ratio which is calculated and reset on a quarterly basis (8.0% for an EBITDA Leverage Ratio greater than or equal to 2.50x; 7.0% for an EBITDA Leverage Ratio less than 2.50x). At the Company's election, interest is paid in cash or in-kind in the amount of 4% per annum of the Interest Margin. The balance of interest is payable in cash monthly in arrears. For amounts which remain un-borrowed, the Company incurs interest at a rate of 0.50% per annum ("Unused Fee"). From closing and until today, the Company only paid monthly interest payments. In 2023 the Company expects to start making partial monthly amortization payments towards the principal balance, with the majority of the principal to be paid via a bullet payment at the maturity date, which the company expects to be amended to December 2023.
The Credit Facility is subject to an original issue discount equal to 2.5% of any drawn amounts, and amounts repaid cannot be re-borrowed. At maturity, an end-of-term fee of 2.25% to 4.5% is owed by the Company for any amounts drawn. In connection with securing the Credit Facility, the Company incurred legal and due diligence fees, which are recorded together with the original issue discount and end-of-term fee, and amortized into interest expense over the life of the Credit Facility.
In connection with the Credit Facility, the Investor received 25,000 warrants initially and an additional 75,000 warrants for amendments (the “Credit Facility Warrants”) and purchased 106,705 unregistered common shares at a share price of $1.87 from Company at a total of $200. The Credit Facility Warrants mature 7 years from the date of issuance, were set to be issued at a strike price at a premium to the then current market price.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 1: |
GENERAL (cont.) |
|
In 2021, the Company secured through the issuance of an additional subordinated notes, gross proceeds of $12,000. For the consideration of $12,000 in gross proceeds, SuperCom issued a two-year unsecured, subordinated promissory note to a certain institutional investor, one in February 2021 and the other in June 2021, both with similar structures and terms. The notes have a 5% annual coupon and a built-in increase to the balance of the notes by 5% every 6 months, for any portion of the notes which has not been paid down prior to maturity. All principal and interest accrued is required to be paid in only one-bullet payment at maturity, and the company has the right to pre-pay any portion of either note at any time without a pre-payment penalty. The company has an option at its discretion only, at any time after 12 months to pay down all or a portion of either note using its ordinary shares, subject to certain conditions being met. The Company converted the remaining balance of the subordinated notes issued in 2020 amounted to $8.240 to the Company’s ordinary shares.
As of December 31, 2021, the outstanding principal, including accrued interest, of the Credit Facility was $16,270 and the aggregate balance for these Subordinated Debt was $13,637.
The Company purchases certain services and products used by it to generate revenues in its projects and sales from several sole suppliers. Although there are only a limited number of manufacturers of those particular services and products, management believe that other suppliers could provide similar services and products on comparable terms without affecting operating results. |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
|
|
|
a.
|
Use of estimates:
The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates. As applicable to these financial statements, the most significant estimates and assumptions include (i) Revenue Recognition; (ii) Allowance for Doubtful Accounts; (iii) Deferred Income Taxes and (iv) measurement of the fair value of intangible assets and goodwill.
|
|
|
b.
|
Financial statements in U.S. dollars:
Most of the revenues of the Company are received in U.S. dollars. In addition, a substantial portion of the costs of the Company are incurred in U.S. dollars. Therefore, management believes that the dollar is the currency of the primary economic environment in which the Company operate. Thus, the functional and reporting currency of the Company is the U.S. dollar.
Transactions and balances denominated in U.S. dollars are presented at their original amounts. Monetary accounts denominated in currencies other than the dollar are re-measured into dollars in accordance with ASC No. 830, "Foreign Currency Matters". All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected in the statements of operations as financial income or financial expenses as appropriate.
|
|
|
c.
|
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances were eliminated upon consolidation. Profits from intercompany sales, not yet realized outside the group, were also eliminated.
|
|
|
d.
|
Cash and cash equivalents:
The Company considers unrestricted short-term highly liquid investments originally purchased with maturities of three months or less to be cash equivalents. The Company has not held any cash equivalents during 2021 and 2020.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
e.
|
Restricted Cash:
Restricted cash held in interest bearing saving accounts which are used as a security for the Company's Israeli facility leasehold bank guarantee, and as a security for ongoing terms of the contracts with existing customers and commercial tenders guarantees.
|
|
|
f.
|
Allowance for doubtful accounts:
The allowance for doubtful accounts is determined with respect to specific amounts the Company has determined to be doubtful of collection. In determining the allowance for doubtful accounts, the Company considers, among other things, its past experience with such customers and the information available regarding such customers.
|
|
|
g.
|
Inventories:
Inventories are stated at the lower of cost or net realizable value. Inventory write-offs are mainly provided to cover risks arising from slow-moving items or technological obsolescence. Cost is determined for all types of inventory using the moving average cost method.
|
|
|
h.
|
Property and equipment:
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method, over the estimated useful lives, at the following annual rates:
|
|
|
years
|
|
|
Computers and peripheral equipment
|
3 | |
|
Leased Products to Customers
|
5 | |
|
Office furniture and equipment
|
5 - 17
|
|
|
Leasehold improvements
|
Over the shorter of the term of the lease or the life of the asset
|
|
|
i.
|
Intangible assets:
Intangible assets that are not considered to have an indefinite useful life are amortized using units of production and the straight-line basis over their estimated useful lives, as noted below. Recoverability of these assets is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the assets. If the assets are considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets.
Intangible assets and their useful lives are as follows:
|
|
|
Useful Life (in Years)
|
|
|
|
|
|
|
Customers relationships & Other
|
Between 4.5-13 (mainly 13)
|
|
|
IP & Technology
|
Between 4-15 (mainly 15)
|
|
|
Capitalized software development costs
|
Between 4-5
|
|
As of December 31, 2021, and 2020 no impairment losses were identified.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
Acquisition-related intangible assets:
The Company accounts for its business combinations in accordance with ASC 805 “Business Combinations” and with ASC 350-20 “Goodwill and Other Intangible Assets” (“ASC 350-20”). ASC 805-10 specifies the accounting for business combinations and the criteria for recognizing and reporting intangible assets apart from goodwill.
Acquisition-related intangible assets result from the Company’s acquisitions of businesses accounted for under the purchase method and consist of the value of identifiable intangible assets including developed software products, brand and patents, as well as goodwill. Goodwill is the amount by which the acquisition cost exceeds the fair values of identifiable acquired net assets on the date of purchase. Acquisition-related definite lived intangible assets are reported at cost, net of accumulated amortization.
|
|
|
j.
|
Goodwill:
The Company’s goodwill reflects the excess of the consideration paid or transferred including the fair value of contingent consideration over the fair values of the identifiable net assets acquired. The goodwill impairment test is performed by evaluating an initial qualitative assessment of the likelihood of impairment. If this step indicates that the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the impairment test is performed.
In step one of the impairment test, the Company compares the fair value of the reporting unit to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the net assets allocated to that unit, goodwill is not impaired, and no further testing is required. If the fair value is less than the carrying value of the reporting unit, then the second step of the impairment test is performed to measure the amount of the impairment.
In the second step, the reporting unit’s fair value is allocated to all the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that simulates the business combination principles to derive an implied goodwill value. If the implied fair value of the reporting unit’s goodwill is less than its carrying value, the difference is recorded as impairment.
For the years ended December 31, 2021 and 2020 the Company performed an annual impairment analysis and no impairment losses have been identified.
|
|
|
k.
|
Impairment of long-lived assets and intangible assets:
The Company’s long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
|
|
|
l.
|
Long lived assets held for sale:
The company accounted for its long lived assets held for sale under ASC 360-10 ("Impairment or disposal of Long-lived Assets").
Under management decision, the patents acquired under Alvarion Ltd. and Safend Ltd. acquisitions during 2016, were not intended for internal use by the Company, and thus accounted for as Long lived assets held for sale. During 2020 and 2021, following management decision, the Company elected to enter into engagements with several brokers for the purpose of marketing and sale of those patents. Realization costs of the patents are immaterial.
For the years ended December 31, 2021 and 2020 the Company did not identify any triggers for impairment.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
m.
|
Accrued severance pay and severance pay fund:
The liabilities of the Company for severance pay of its Israeli employees are calculated pursuant to Israel’s Severance Pay Law. Employees are entitled to one month’s salary for each year of employment, or portion thereof. The Company’s liability for all its employees is presented under “accrued severance pay”. The Company deposits on a monthly basis to severance pay funds and insurance policies. The value of these policies is presented as an asset on the Company’s balance sheet.
The deposited funds include accrued income up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the Company’s obligation pursuant to Israel’s Severance Pay Law or labor agreements.
Severance expenses for the years ended December 31, 2021 and 2020 amounted to $385 and $304, respectively.
|
|
|
n.
|
Revenue recognition:
The Company and its subsidiaries generate their revenues from the sale of products, licensing, maintenance, royalties and long term contracts (including training and installation).
Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 was applied using the modified retrospective method, therefore the cumulative effect of initially applying the revenue standard is recognized as an adjustment to opening retained earnings at January 1, 2018.
Upon adoption of ASC 606, the Company identified a change in the Company’s revenue recognition policies related to combined license and maintenance sales, as noted within the Company’s Safend contracts. Under ASC 605, revenue for these contracts was recognized over the life of the contract. In accordance with ASC 606, license revenue is recognized upon delivery while maintenance is recognized over the life of the contract. As a result of applying the new standard, the Company had recognized a cumulative effect adjustment to Retained Earnings as of January 1, 2018 in the amount of $257.
Aside from its combined license and maintenance sales, no other changes were identified to the characteristics of the Company’s other revenue recognition policies, other than the enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations, variable consideration and the related judgments and estimates necessary to apply the new standard.
The Company measures revenue based upon the consideration specified in the client arrangement, and revenue is recognized when the performance obligations in the client arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Under ASC 606, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the Company expect to receive in exchange for those services. To achieve this core principal, the Company applies the following five steps:
1) Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
3) Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer.
The Company evaluates whether a significant financing component exists when the Company recognizes revenue in advance of customer payments that occur over time. For example, some of the Company contracts include payment terms greater than one year from when we transfer control of goods and services to the Company customers and the receipt of the final payment for those goods and services. If a significant financing component exists, the Company classifies a portion of the transaction price as interest income, instead of recognizing all of the transaction price as revenue. The Company does not adjust the transaction price for the effects of financing if, at contract inception, the period between the transfer of control to a customer and final payment is expected to be one year or less.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price based on management’s judgement.
5) Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
Nature of goods and services
The following is a description of the Company’s goods and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each, as applicable:
Software Maintenance and Support Services Revenue
Software maintenance and support services contracts are sold in conjunction with the Company’s software products for its e-Gov, IoT and Connectivity, and Cyber Security revenue streams. The contract terms for software maintenance and support span to five years in length and provide customers with the rights to unspecified software product updates if and wh en available, online and telephone access to technical support personnel.
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
The Company recognizes revenue from fixed-price service and maintenance contracts using the input method of accounting. Under the input method, revenue is recognized on the basis of an entity’s efforts toward satisfying a performance obligation. The Company recognizes revenue from maintenance and support services provided pursuant to the time elapsed under such contracts, as that is when the performance obligation to the Company customers under such arrangements is fulfilled.
Perpetual Software License Revenue
The Company generates revenue from the sales of perpetual software licenses for its Cyber Security and e-Gov segments, including sales for its Magna_DL, Magna_VL, Magna_Passport, and Magna_ID software products. The intellectual property rights for usage of these products are transferred to the customer at the time of purchase and the software does not require implementation services, ongoing maintenance and support, or other adaptions in order to maintain utility.
In arrangements where ongoing services are not essential to the functionality of the delivered software, the Company recognizes perpetual software license revenue when the license agreement has been approved and the software has been delivered. The Company can identify each party’s rights, payment terms, and commercial substance of the content. Where applicable, the Company identifies multiple performance obligations and record as revenue as the performance obligations are fulfilled based on the adjusted market assessment approach.
Annual Software License Revenue
The Company generates revenue from the sales of time-based software licenses for certain of its software products. The intellectual property rights for access to these products are transferred to the customer for contract terms of one year and the software requires ongoing maintenance, support, or other adaptions in order to maintain utility.
The Company recognizes revenue over time using the input method for its annual software licenses when ongoing services are determined to be essential to the functionality of the delivered software. The license along with the any customization services are transferred to the Company customers pursuant to the time elapsed under such contracts, as that is when the Company performance obligation to its customers under such arrangements is fulfilled.
System Design Revenue
System design revenue relate to services provided to governments and national agencies in the early stages of a new project including incumbent system data information extraction, customer interviewing and specification mapping, architecture and software design, secure credential design, project management and planning, data migration design, project operation planning, training, assimilation, and operational processes optimization for the Company’s e-Gov and IoT solutions.
The Company recognizes revenue from its system design services using the input method of accounting. Under the input method, revenue is recognized on the basis of an entity’s efforts or inputs toward satisfying a performance obligation. The Company recognizes revenue from system design services provided pursuant to time-and-materials based contracts as the services are performed, as that is when the Company performance obligation to its customers under such arrangements is fulfilled. Where applicable, the Company identifies multiple performance obligations and record as revenue as the performance obligations are fulfilled based on the using the expected cost plus a margin approach.
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
Implementation and System Deployment Revenue
Implementation and system deployment revenue relate to services provided to governments and national agencies typically after the design stage is concluded including infrastructure setup and deployment, software and chip design development, software customizations, purchase, and deployment of hardware and necessary system components, system integration and implementation, process engineering, customer training, system quality assurance testing, load balancing and local environment optimizations, and operational system launch for the Company’s e-Gov and IoT solutions.
The Company recognizes revenue from its implementation and system deployment revenue using the input method of accounting. Under the input method, revenue is recognized on the basis of an entity’s efforts or inputs toward satisfying a performance obligation. The Company recognizes revenue from implementation and system deployment services provided pursuant to time-and-materials based contracts as the services are performed, as that is when the Company performance obligation to its customers under such arrangements is fulfilled. Where applicable, the Company identifies multiple performance obligations and record as revenue as the performance obligations are fulfilled based on the using the residual approach.
Procurement of Secure Document Consumables Revenue
The Company procures secure document consumables for its e-Gov government customers which are needed to issue secure documents after a project deployment is complete and a system in actively running and operational. These consumables are manufactured generally at secure printing facilities utilizing proprietary and customized designs, which the Company has developed during the project design stage, to provide multiple layers of security preventing falsification of documents. These consumables include base card stock, security laminates, holograms, passive RFID chip inlays, passport booklets, secure chip cards, and various other secure credentialing necessities.
The Company recognizes revenue on procurement of secure document consumables products when the customer has control of the product, which is determined to be at the point in time when the products are delivered. Where applicable, the Company identifies multiple performance obligations and record as revenue as the performance obligations are fulfilled based on their stated prices within the contract.
Wireless & RFID Products Revenue
The Company’s wireless products include solutions for carrier wi-fi, enterprise connectivity, smart city, smart hospitality, connected campuses and connected events which enhance productivity and performance. The Company’s RFID products include asset tags which provide real-time asset loss prevention, inventory management, and personnel/asset tracking and vehicle tags which provide long-range vehicle ID for parking and fleet management, access control, asset loss prevention at airports, gated communities, truck and bus terminals, employee parking lots, hospitals, industrial facilities, railroads, mines and military installations.
The Company recognizes revenue on wireless and RFID products when the customer has control of the equipment, which is determined to be at the point in time when the products are shipped. Where applicable, the Company identifies multiple performance obligations and record as revenue as the performance obligations are fulfilled based on their stated prices within the contract.
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
Electronic Monitoring Services Revenue
Electronic monitoring services represent fees the Company collects through the sale or rental of its PureSecurity Suite of products, which include the PureMonitor, PureTrack, PureTag, PureCom, PureBeacon, and SCRAM devices. These devices identify, track, and monitor people or objects in real time through the Company’s GPS monitoring, home monitoring, and alcohol tracking solutions.
The Company recognizes revenue on the sale of electronic monitoring products when the customer has control of the equipment, which is determined to be at the point in time when the products are shipped. For devices which are rented and for electronic monitoring services provided, the Company recognizes revenue pursuant to the time elapsed for such contracts, as that is when the Company performance obligation to its customers under such arrangements is fulfilled. The Company customers typically pay for these services based on a net rate per day per individual or on a fixed monthly rate.
Treatment Services Revenue
Treatment services revenue is an extension of the Company’s electronic monitoring services. The Company provides individuals who have completed or are near the end of their sentence with the resources necessary to productively transition back into society. Through the Company daily reporting centers, we provide criminal justice programs and reentry services to help reduce recidivism which include case management, substance abuse education, vocational training, parental support, employment readiness and job placement. These activities are considered to be a bundle of services which are a part of a series of distinct services recognized over time.
The Company recognizes revenue from its treatment services using the input method of accounting. Under the input method, revenue is recognized revenue on the basis of an entity’s efforts or inputs toward satisfying a performance obligation. The Company recognizes revenue from implementation and system deployment services provided pursuant to time-and-materials based contracts as the services are performed, as that is when the Company performance obligation to its customers under such arrangements is fulfilled. Where applicable, the Company identify multiple performance obligations and record as revenue as the performance obligations are fulfilled based on the using the expected cost plus a margin approach.
Professional Services Revenue
The Company offers professional services for the Company’s Cyber Security software products, which includes an on-site / remote visit by a specialist technician to assist with installation, deployment and configuration.
The Company recognizes revenue from professional services upon completion of the service performed for the customer. As these services are completed during a single onsite visit, revenue is recognized at a point in time of such onsite visit.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
Disaggregation of revenue
In the following table, revenue is disaggregated by major geographic region and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments:
|
|
|
Year ended December 31, 2021
|
||||||||||||||||
|
|
Cyber
Security |
IoT
|
e-Gov
|
Total
|
|||||||||||||
|
Major geographic areas
|
|||||||||||||||||
|
Africa
|
$
|
- |
$
|
- |
$
|
1,586 |
$
|
1,586 | |||||||||
|
European countries
|
527 | 2,242 | 143 | 2,912 | |||||||||||||
|
South America
|
1 | 36 | - | 37 | |||||||||||||
|
United States
|
410 | 6,410 | - | 6,820 | |||||||||||||
|
Israel
|
648 | 109 | - | 757 | |||||||||||||
|
APAC
|
48 | 107 | - | 155 | |||||||||||||
|
Total revenue
|
$
|
1,634 |
$
|
8,904 |
$
|
1,729 |
$
|
12,267 | |||||||||
|
|
|||||||||||||||||
|
Timing of revenue recognition
|
|||||||||||||||||
|
Products and services transferred over time
|
$
|
44 |
$
|
7,176 |
$
|
1,428 |
$
|
8,648 | |||||||||
|
Products transferred at a point in time
|
1,590 | 1,728 | 301 | 3,619 | |||||||||||||
|
Total revenue
|
$
|
1,634 |
$
|
8,904 |
$
|
1,729 |
$
|
12,267 | |||||||||
|
|
Year ended December 31, 2020
|
||||||||||||||||
|
|
Cyber
Security |
IoT
|
e-Gov
|
Total
|
|||||||||||||
|
Major geographic areas
|
|||||||||||||||||
|
Africa
|
$
|
- |
$
|
- |
$
|
1,791 |
$
|
1,791 | |||||||||
|
European countries
|
762 | 2,155 | 120 | 3,037 | |||||||||||||
|
South America
|
- | 21 | - | 21 | |||||||||||||
|
United States
|
544 | 5,312 | - | 5,856 | |||||||||||||
|
Israel
|
677 | 69 | - | 746 | |||||||||||||
|
APAC
|
220 | 99 | - | 319 | |||||||||||||
|
Total revenue
|
$
|
2,203 |
$
|
7,656 |
$
|
1,911 |
$
|
11,770 | |||||||||
|
|
|||||||||||||||||
|
Timing of revenue recognition
|
|||||||||||||||||
|
Products and services transferred over time
|
$
|
92 |
$
|
6,020 |
$
|
1,466 |
$
|
7,578 | |||||||||
|
Products transferred at a point in time
|
2,111 | 1,636 | 445 | 4,192 | |||||||||||||
|
Total revenue
|
$
|
2,203 |
$
|
7,656 |
$
|
1,911 |
$
|
11,770 | |||||||||
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
Transaction price allocated to the remaining performance obligations
Remaining performance obligations represent the transaction price of system deployment, service and maintenance contracts for which work has not been performed as of the period end date. As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance totals $8.27 million. The Company expects approximately 39% of remaining performance obligations to be recognized into revenue within the next 12 months, with the remaining 61% recognized thereafter.
The Company applies the practical expedient in paragraph ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one-year or less. We apply the transition practical expedient in paragraph ASC 606-10-65-1(f)(3) and do not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Company expects to recognize that amount as revenue. Additionally, applying the practical expedient in paragraph ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts (i.e., commissions) as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one-year or less.
|
||
|
|
o.
|
Research and development costs and software development costs:
Research and development costs are expensed as incurred. Software development costs eligible for capitalization are accounted for in accordance with 985-20 Software - Costs of Software to be Sold, Leased or Marketed. Capitalization of software development costs for products to be sold to third parties begins upon the establishment of technological feasibility and ceases when the product is available for general release. Amortization is calculated and provided over the estimated economic life of the software, using the greater of (i) straight-line method or if applicable (ii) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product. Amortization commences when developed software is available for general release to clients.
The estimated useful life of capitalized software development costs is 5 years.
|
|
|
p.
|
Income taxes:
The Company and its subsidiaries account for income taxes in accordance with ASC Topic 740, “Income Taxes”. This Statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws, that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
The Company accounts for uncertain tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. According to ASC Topic 740-10, tax positions must meet a more-likely-than-not recognition and measurement threshold. The Company’s accounting policy is to classify interest and penalties relating to uncertain tax positions under income taxes, however the Company did not recognize such items in its fiscal 2021 and 2020 financial statements.
ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, requires a reporting entity to classify all deferred tax assets and liabilities as noncurrent in a classified balance sheet. As of December 31, 2018, the Company adopted in a retrospective method the new Income Tax guidelines, stating all deferred tax assets and liabilities need be presented as non-current in the balance sheet.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
q.
|
Concentrations of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash deposits and trade receivables. The Company’s trade receivables are derived from sales to customers located primarily in Eastern Europe, Africa, the United States and South America. The Company performs ongoing credit evaluations of its customers’ financial condition. The allowance for doubtful accounts is determined with respect to specific debts that the Company has determined to be doubtful of collection.
Cash and cash equivalents and restricted cash deposits are deposited with major banks in Israel and the United States. Management believes that such financial institutions are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments. The Company has no significant off-balance-sheet concentration of credit risk.
|
|
|
r.
|
Basic and diluted earnings per share:
Basic earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus the dilutive potential of stock options and warrants outstanding during the year using the treasury stock method. The numbers of potential shares from the conversion of options and warrants that have been excluded from the calculation were 2.877 million and 334,839 for the years ended December 31, 2021 and 2020, respectively
|
|
|
s.
|
Fair value of financial instruments:
The Company applies ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"), pursuant to which fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The hierarchy is broken down into three levels based on the inputs as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.
Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
The carrying amounts of cash and cash equivalents, restricted cash, short-term bank deposits, other accounts receivable, trade payable, and other accounts payable and accrued expenses approximate their fair values due to the short-term maturities of such instruments.
The Company measures its earn-out liability at fair value (see also Note 10).
|
|
|
t.
|
Accounting for stock-based compensation:
Stock-based compensation, including grants of stock options, is recognized in the consolidated statement of operations over the requisite service period as an operating expense, based on the fair value of the award on the date of grant. The fair value of stock-based compensation is estimated using an option-pricing model.
The Company elected to recognize compensation costs for awards conditioned only on continued service that have a graded vesting schedule using the straight-line method and to value the awards based on the single-option award approach.
The Company accounts for forfeitures as they occur.
|
|
|
u.
|
Treasury Shares:
Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.
|
|
|
v.
|
Leases:
The Company adopted ASU 2016-02, Leases (“Topic 842” or “ASC 842”) on January 1, 2021, using the modified retrospective approach, by applying the new standard to all leases existing at the date of initial application. The standard requires lessees to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability and requires leases to be classified as either an operating or a finance type lease. The standard excludes leases of intangible assets or inventory. Leases with a term of 12 months or less can be accounted for in a manner similar to the accounting for operating leases under ASC 840. The ASC 842 requires lessors to account for leases using an approach that is substantially equivalent to ASC 840 for sales-type leases, direct financing leases and operating leases.
The Company leases real estate and storage areas, which are all classified as operating leases. In addition to rent payments, the leases may require the Company to pay for insurance, maintenance, and other operating expenses.
The Company determines if an arrangement is a lease at inception. Lease classification is governed by five criteria in ASC 842-10-25-2. If any of these five criteria is met, the Company classifies the lease as a finance lease. Otherwise, the Company classifies the lease as an operating lease.
Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
Operating lease expenses are recognized on a straight-line basis over the lease term. Exchange rate differences related to lease liabilities are recognized as finance income or expense. Several of the Company’s leases include options to extend the lease. For purposes of calculating lease liabilities, lease terms include options to extend the lease when it is reasonably certain that the Company will exercise such options.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
The Company's ROU assets are reviewed for impairment in accordance with ASC 360, "Property, Plant and Equipment" ("ASC 360"), whenever events in circumstances indicate that the carrying amount of an asset may not be recoverable.
The ASC 842 provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, the Company does not recognize ROU assets or lease liabilities but recognizes lease expenses over the lease term on a straight-line basis. The Company also elected to not separate lease and non-lease components for all of the Company’s leases.
Upon adoption as of January 1, 2021, the Company recorded right-of-use leased assets and corresponding liabilities of $1200. See Note 8 for further information on leases.
|
|
|
w.
|
Recent accounting pronouncements
ASU 2019-12, Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes, eliminates certain exceptions to the general principles in Topic 740 and clarifies certain aspects of the current guidance to improve consistent application among reporting entities. ASU 2019-12 is effective is effective for annual periods beginning after January 1, 2022 and interim periods within annual periods beginning after January 1, 2023, and early adoption was permitted. The Company is currently evaluating the effect the adoption of ASU 2019-12 will have on its consolidated financial statements.
ASU 2020-06, Debt - Debt with Conversion and Other Options,
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and(2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 is effective for interim and annual periods beginning after January 1, 2024, and early adoption was permitted. The Company is currently evaluating the impact that the adoption of ASU 2020-06 will have on the Company’s consolidated financial statement presentation or disclosures.
Other new pronouncements issued but not effective as of December 31, 2021 are not expected to have a material impact on the Company’s consolidated financial statements.
|
|
NOTE 3:
|
OTHER CURRENT ASSETS
|
|
|
December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Prepaid expenses
|
209 | 157 | |||||||
|
Advances to suppliers
|
323 | 308 | |||||||
|
Government institutions
|
208 | 124 | |||||||
|
Other
|
859 | 287 | |||||||
|
|
1,599
|
876
|
|||||||
|
NOTE 5:
|
PROPERTY AND EQUIPMENT, NET
|
|
|
December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Cost:
|
|||||||||
|
|
|||||||||
|
Computers and peripheral equipment
|
3,040 | 2,770 | |||||||
|
Office furniture and equipment
|
850 | 824 | |||||||
|
Trade Equipment
|
42 | 42 | |||||||
|
Leasehold improvements
|
210 | 196 | |||||||
|
Equipment in lease
|
2,534 | 1,898 | |||||||
|
|
6,676 | 5,730 | |||||||
|
Accumulated depreciation:
|
|||||||||
|
Computers and peripheral equipment
|
2,729 | 2,650 | |||||||
|
Office furniture and equipment
|
735 | 735 | |||||||
|
Trade Equipment
|
39 | 33 | |||||||
|
Leasehold improvements
|
197 | 196 | |||||||
|
Equipment in lease
|
1,172 | 745 | |||||||
|
|
4,872 | 4,359 | |||||||
|
Depreciated cost
|
1,804 | 1,371 | |||||||
|
Purchasing of Equipment for the years ended December 31, 2021 and 2020, were $946 and $812, respectively.
Depreciation expenses for the years ended December 31, 2021 and 2020, were $513 and $335, respectively.
|
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 6:
|
OTHER INTANGIBLE ASSETS, NET
|
|
Other intangible assets consisted of the following:
|
|
|
December 31, 2021
|
December 31, 2020
|
|||||||||||||||||||||||
|
|
Carrying
Amount |
Accumulated
Amortization |
Net Book
Value |
Carrying
Amount |
Accumulated
Amortization |
Net Book
Value |
|||||||||||||||||||
|
Customers relationships & Other
|
8,734 | 7,798 | 936 | 8,734 | 7,484 | 1,250 | |||||||||||||||||||
|
IP & Technology
|
7,019 | 4,524 | 2,495 | 7,019 | 3,959 | 3,060 | |||||||||||||||||||
|
Right of use
|
1,200 | 318 | 882 | - | - | - | |||||||||||||||||||
|
Capitalized software development costs
|
8,001 | 5,822 | 2,179 | 7,265 | 5,305 | 1,960 | |||||||||||||||||||
|
|
24,954 | 18,462 | 6,492 | 23,018 | 16,748 | 6,270 | |||||||||||||||||||
|
Amortization expenses amounted to $1,396 and $2,385 for the years ended December 31, 2021 and 2020, respectively.
|
|
NOTE 7:
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
December 31
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Liabilities related with the Smart ID acquisition (see note 8 c1)
|
- | 805 | |||||||
|
Accrued management services
|
86 | 125 | |||||||
|
Professional services
|
206 | 155 | |||||||
|
Facilities
|
136 | 39 | |||||||
|
Legal contingent liability
|
67 | 60 | |||||||
|
Legal service providers
|
28 | 39 | |||||||
|
Authorities
|
393 | 382 | |||||||
|
Other accrued expenses
|
643 | 2,788 | |||||||
|
|
1,559 | 4,393 | |||||||
|
NOTE 8:
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
a.
|
Lease commitments:
We do not own any real estate. We lease approximately 1,139 square meters of office and warehousing premise in Tel Aviv and Herzliya, Israel, under a new lease which started on April l 1, 2021 and expires on March 30, 2023 with an option for 24-month extension. According to the lease agreements, the monthly fee (including management fees) is approximately $35,430.
We lease approximately 1,278 square meters of office premises in California for our U.S. subsidiary, LCA Inc., which under the current lease contracts expire in 2022, with a monthly fee of approximately $24,068.
Future minimum lease commitments under non-cancelable operating leases for the years ended December 31, 2021, are as follows: |
|
2022
|
$
|
502
|
||||
|
2023
|
432
|
|||||
|
2024
|
103
|
|||||
|
Total operating lease payments
|
$
|
1,037
|
||||
|
Less: imputed interest
|
(112 | ) | ||||
|
Present value of lease Liabilities
|
$ | 925 |
|
Rent expenses amounted to $714 and $753 for the years ended December 31, 2021 and 2020, respectively.
|
|
|
b.
|
Guarantees, indemnity and liens:
|
|
|
1.
|
The Company and its subsidiaries issued bank guaranties in the total amount of approximately $1,067 as a part of the ongoing terms of lease contracts, contracts with existing customers and for tenders.
|
|
|
2.
|
Under the Fortress Agreement, the Company recorded a fix floating charge on all of the Company’s assets in favor of the Fortress, limited in amount, in order to secure long-term loan granted by them in favor of the Company.
|
|
NOTE 8:
|
COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
|
|
|
|
The Company is party to legal proceedings in the normal course of our business. There are no material pending legal proceedings to which the Company is a party or of which our property is subject. Although the outcome of claims and lawsuits against the Company cannot be accurately predicted, we do not believe that any of the claims and lawsuits, will have a material adverse effect on the Company business, financial condition, results of operations or cash flows for any quarterly or annual period. |
|
NOTE 9:
|
INCOME TAX
|
|
|
a.
|
Changes in Israeli corporate tax rates:
The regular corporate tax rate in Israel in 2021and 2020 is 23%.
|
|
|
b.
|
Our USA subsidiaries were subject to federal tax rate of 21% in 2020 and 2021, state tax of 8.84% in CA and 6.5% in NY, and city tax of 6.5% in NYC. |
|
|
c.
|
Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets of the Company and its subsidiaries are as follows:
|
|
|
December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Operating loss carry forwards
|
20,150 | 18,658 | |||||||
|
Reserves and allowances
|
4,206 | 2,589 | |||||||
|
|
|||||||||
|
Net deferred tax assets before valuation allowance
|
24,356 | 21,247 | |||||||
|
Valuation allowance
|
(23,797 |
)
|
(21,121 |
)
|
|||||
|
|
|||||||||
|
Net deferred tax assets
|
559 | 126 | |||||||
|
|
|||||||||
|
Deferred income taxes consist of the following:
|
|||||||||
|
Domestic
|
19,521 | 16,285 | |||||||
|
Valuation allowance
|
(18,963 |
)
|
(16,159 |
)
|
|||||
|
Net deferred tax assets
|
558 | 126 | |||||||
|
|
|||||||||
|
Foreign
|
4,835 | 4,962 | |||||||
|
Valuation allowance
|
(4,835 |
)
|
(4,962 |
)
|
|||||
|
|
-
|
-
|
|||||||
|
As of December 31, 2021, the Company and its subsidiaries, have provided a valuation allowance of $23,797 in respect of deferred tax assets resulting from tax loss carryforwards and other temporary differences. Other tax loss carryforwards and temporary differences in the amount of $565 were not provided with valuation allowance as the Company’s management currently believes that these tax assets are more likely than not to be recovered.
|
|
NOTE 9:
|
INCOME TAX (cont.)
|
|
|
d.
|
Carryforward tax losses:
As of December 31, 2021, SuperCom Ltd and its subsidiaries in Israel have accumulated losses for tax purposes of approximately $49,833, which may be carried forward and offset against taxable income in the future for an indefinite period. SuperCom Ltd. also has a capital loss of approximately $16,450, which may be carried forward and offset against capital gains for an indefinite period. Loss carryforwards in Israel are measured in NIS.
As of December 31, 2021, SuperCom’ s subsidiaries in the United States have estimated total available carryforward tax losses of approximately $18,558 which expires in the years 2028 to 2037. Utilization of the U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.
SuperCom Ltd has assessments which are considered as final until the tax year ended December 31, 2015.
SuperCom’s subsidiaries in the United States and Israel have not received final assessments since their incorporation.
|
|
|
e.
|
loss before income tax consists of the following:
|
|
|
Year ended December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Domestic
|
(10,616
|
)
|
(6,301
|
)
|
|||||
|
Foreign
|
483
|
(1,561
|
)
|
||||||
|
|
(10,133
|
)
|
(7,862
|
)
|
|||||
|
Substantially, all tax expenses are as a result of changes in deferred taxes.
|
||
|
|
f.
|
Reconciliation of the theoretical tax benefit to the actual tax benefit:
A reconciliation of theoretical tax expense, assuming all income is taxed at the statutory rate applicable to the income of companies in Israel, and the actual tax expense (benefit), is as follows:
|
|
|
Year ended December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Loss before income tax, as reported in the consolidated statements of operations
|
(10,133 |
)
|
(7,862 |
)
|
|||||
|
Statutory tax rate in Israel
|
23 |
%
|
23 |
%
|
|||||
|
|
|||||||||
|
Theoretical tax benefit
|
(2,331 |
)
|
(1,808 |
)
|
|||||
|
Current year carryforward losses and other differences for which a valuation allowance was recorded
|
1,438 | 1,278 | |||||||
|
Changes in valuation allowance
|
- | 48 | |||||||
|
Offset of Other non-current assets (accounted for as DTA element)
|
(56 |
)
|
(56 |
)
|
|||||
|
Changes in foreign currency exchange rate and other differences
|
788 | 5 | |||||||
|
Non-deductible expenses and other differences
|
166 | 538 | |||||||
|
|
|||||||||
|
Actual income tax expense (benefit)
|
5 | 5 | |||||||
|
NOTE 10:
|
SHARE CAPITAL
|
|
|
a.
|
The Company’s ordinary shares are quoted under the symbol “SPCB” on the NASDAQ Capital Market in the United States.
|
|
b.
|
Shareholders’ rights:
|
||
|
|
|
|
|
|
|
The ordinary shares confer upon the holders the right to receive notice to participate and vote in the general meetings of the Company, and the right to receive dividends, if declared. |
|
|
|
c.
|
Stock options:
|
|
|
1.
|
In 2003, the Company adopted a stock option plan under which the Company issues stock options (the “Option Plan”). The Option Plan is intended to provide incentives to the Company’s employees, officers, directors and/or consultants by providing them with the opportunity to purchase ordinary shares of the Company. Subject to the provisions of the Israeli Companies Law, the Option Plan is administered by the Compensation Committee, and is designed: (i) to comply with Section 102 of the Israeli Tax Ordinance or any provision which may amend or replace it and the rules promulgated thereunder and to enable the Company and grantees thereunder to benefit from Section 102 of the Israeli Tax Ordinance and the Commissioner’s Rules; and (ii) to enable the Company to grant options and issue shares outside the context of Section 102 of the Israeli Tax Ordinance. Options granted under the Option Plan will become exercisable ratably over a period of three to five years or immediately in certain circumstances, commencing with the date of grant. The options generally expire no later than 10 years from the date of grant. Any options which are forfeited or canceled before expiration become available for future grants.
|
|
NOTE 10:
|
SHARE CAPITAL (Cont.)
|
|
As a result of an amendment to Section 102 of the Israeli Tax Ordinance as part of the 2003 Israeli tax reform, and pursuant to an election made by the Company thereunder, capital gains derived by grantees arising from the sale of shares issued pursuant to the exercise of options granted to them under Section 102 after January 1, 2003, will generally be subject to a flat capital gains tax rate of 25%. However, as a result of this election, the Company will no longer be allowed to claim as an expense for tax purposes the amounts credited to such employees as a benefit when the related capital gains tax is payable by them, as the Company had previously been entitled to do under Section 102.
On June 27, 2007, the Compensation Committee and board of directors of the Company approved a new option plan under which the Company may grant stock options to the U.S. employees of the Company and its subsidiaries. Under this new option plan, the Company may grant both qualified (for preferential tax treatment) and non-qualified stock options. On August 15, 2007, the new option plan was approved by the shareholders of the Company at the general shareholders meeting.
In June 2013, the Option plan was extended for another period of ten years, until December 31, 2023.
During the years 2019, 2020 and 2021, the Company did not grant any option to purchase shares.
|
|
|
2.
|
A summary of the Company’s stock option activity and related information is as follows:
|
|
|
Year ended December 31
|
||||||||||||||||
|
|
2021
|
2020
|
|||||||||||||||
|
|
Number of
options |
Weighted
average exercise price |
Number of
options |
Weighted
average exercise price |
|||||||||||||
|
|
$
|
$
|
|||||||||||||||
|
Outstanding at Beginning of year
|
334,839 | 2.31 | 564,197 | 2.64 | |||||||||||||
|
Granted
|
- | - | - | - | |||||||||||||
|
Exercised
|
(44,964 |
)
|
0.41 | (123,545 |
)
|
0.1 | |||||||||||
|
Canceled and forfeited
|
(76,000 |
)
|
2.22 | (105,813 |
)
|
2.94 | |||||||||||
|
Outstanding at end of year
|
213,875 | 1.23 | 334,839 | 2.31 | |||||||||||||
|
Exercisable at end of year
|
159,500 | 1.28 | 193,089 | 1.73 | |||||||||||||
|
SUPERCOM LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) |
U.S. dollars in thousands (except per share data) |
|
NOTE 10:
|
SHARE CAPITAL (Cont.)
|
|
The weighted average fair value of options granted during the year ended December 31, 2018 was $1.87 per option.
The fair value of these options was estimated on the date of grant using the Black & Scholes option pricing model. The following weighted average assumptions were used for the 2018 grants: risk-free rate of 2.89% and 3.04%, dividend yield of 0%, expected volatility factor of 238% and 240% and expected term of 6.25 years.
The expected volatility was based on the historical volatility of the Company’s stock. The expected term was based on the historical experience and based on Management estimate.
Compensation expenses recognized by the Company related to its stock-based employee compensation awards were $31 and $211 for the years ended December 31, 2021 and 2020, respectively.
The following table summarizes the allocation of the stock-based compensation and warrants charge
|
|
|
Year e Ended December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Cost of revenues
|
7 | 84 | |||||||
|
Research and development expenses
|
12 | 48 | |||||||
|
Selling and marketing expenses
|
7 | 77 | |||||||
|
General and administrative expenses
|
5 | 2 | |||||||
|
|
|||||||||
|
|
31 | 211 | |||||||
|
The options outstanding and exercisable as of December 31, 2021, have been separated into ranges of exercise prices as follows:
|
|
Options outstanding
|
Options Exercisable
|
|||||||||||||||||||||||||||||||||
|
Range of
exercise price |
Number
outstanding as of December 31, 2021 |
Weighted
average remaining contractual life (years) |
Weighted
average exercise price |
Aggregate
intrinsic value |
Number
outstanding as of December 31, 2021 |
Weighted
average remaining contractual life (years) |
Weighted
average exercise price |
Aggregate
intrinsic value |
||||||||||||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||||||||||||||||
|
0.00-2.00
|
207,875 | 7.09 | 1.11 | - | 153,500 | 7.10 | 1.13 | - | ||||||||||||||||||||||||||
|
3.00-5.00
|
6,000 | 7.00 | 4.96 | - | 6,000 | 7.00 | 4.96 | - | ||||||||||||||||||||||||||
| 213,875 | 7.08 | 1.22 | - | 159,500 | 7.10 | 1.27 | - | |||||||||||||||||||||||||||
|
The total intrinsic value of options exercised for the years ended December 31, 2021 and 2020 was $0 and $0, respectively, based on the Company’s average stock price of $1.16 and $1.04, during the years ended on those dates, respectively.
|
|
A summary of the status of the Company’s non-vested options granted to employees as of December 31, 2021 and changes during the year ended December 31, 2021 is presented below: |
|
|
Options
|
Weighted–
average grant-date fair value |
|||||||
|
Non-vested as of December 31, 2020
|
141,750 | 1.64 | |||||||
|
Granted
|
- | - | |||||||
|
Vested
|
(54,375 |
)
|
1.07 | ||||||
|
Forfeited and canceled
|
(33,000 |
)
|
3.52 | ||||||
|
Non-vested as of December 31, 2021
|
54,375 | 1.07 | |||||||
|
As of December 31, 2021, there was $66 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the stock option plans, to be recognized over a weighted average period of approximately 0.61 years.
|
||
|
|
d.
|
Private placements and warrants:
During 2019, the Company issued 348,132 warrants to purchase the Company ordinary shares at an exercise price of $0.76 per share.
During 2020 and 2021, the Company issued 2.38 million warrants to purchase the Company ordinary shares at an exercise price of $1.7 per share. The warrants are exercisable until July 2025.
|
|
|
e.
|
Dividends:
No dividends were declared in the reported periods. In the event that cash dividends are declared in the future, such dividends will be paid in NIS. The Company does not intend to distribute cash dividends in the foreseeable future.
|
|
NOTE 11:
|
RELATED PARTY TRANSACTIONS
|
|
|
a.
|
On July 25, 2010, the board of directors of the Company elected Mrs. Tsviya Trabelsi to serve as Chairman. Mrs. Trabelsi is an officer at Sigma Wave Ltd., which is the controlling shareholder of the Company and is also the wife of the Company’s chief executive officer. On May 12, 2011, the special general meeting approved a service agreement with Mrs. Trabelsi whereby she will receive a monthly fee equal to 60% of the Company’s chief executive officer’s monthly cost. In addition to the above consideration, the Company will bear all reasonable costs and expenses incurred by the Chairman in connection with her services and provide her with an automobile. On December 12, 2011, Mrs. Tsviya Trabelsi resigned effective immediately and the board of directors of the Company approved the appointment of Mr. Arie Trabelsi as its new Chairman, effective December 12, 2011. On December 27, 2012, the company’s shareholders at a general meeting of shareholders approved the reappointment of Mrs. Trabelsi as Chairman. On May 9, 2013, the general meeting of shareholders of the Company approved the same management services compensation for Mrs. Trabelsi as those approved in May 2011.
|
|
|
b.
|
Mr. Trabelsi has served as the chief executive officer of the Company since June 1, 2012 until February 21, 2021. Mr. Trabelsi is the sole director of Sigma Wave, which is the controlling shareholder of the Company. On May 9, 2013, the general meeting of shareholders of the Company approved the payment of management fees to Mr. Trabelsi of $10.6 per month plus social benefits and an annual bonus of the greater of 2% of the Company’s annual net profit or 0.5% of annual revenues, but in no event greater than Mr. Trabelsi’s annual salary.
|
|
|
c.
|
As of December 31, 2021 and 2020, the Company accrued $103 and $391, respectively as expenses arising from related party management services.
|
|
|
d.
|
On April 29, 2012, the board of directors approved the recording of a floating charge on all of the Company’s assets in favor of the Mr. and Mrs. Trabelsi, unlimited in amount, in order to secure personal guarantees granted by them in favor of the Company to a bank and in order to secure loans that are given by them from time to time to the Company. As of December 31,2021, total loans were $172. These loans bear no interest and are not attached to any price index.
|
|
NOTE 12:
|
SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
|
|
|
a.
|
Summary information about segments:
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer.
As part of the Company decision to switch from one technology segment, the e-government, into 3 separate technologies segments or Strategic business units; e-Gov, IoT, and Cyber Security, the Company acquired during 2016, 4 different companies with various technologies and customers base which enrich and strengthen the capacities and offering of each of the 3 segments:
e-Gov: Through the Company proprietary e-Government platforms and innovative solutions for traditional and biometrics enrollment, personalization, issuance and border control services, the Company has helped governments and national agencies design and issue secured multi-identification, or Multi-ID, documents and robust digital identity solutions to their citizens, visitors and Lands.
IoT: The Company’s IoT products and solutions reliably identify, track and monitor people or objects in real time, enabling the customers to detect unauthorized movement of people, vehicles and other monitored objects.
|
|
The Company provides all-in-one field proven IoT suite, accompanied with services specifically tailored to meet the requirements of an IoT solutions. The Company’s proprietary IoT suite of hybrid hardware, connectivity and software components are the foundation of these solutions and services.
|
|
NOTE 12:
|
SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)
|
|
Cyber Security: The Company operates in the fields of cutting edge endpoint data protection guarding against corporate data loss and theft through content discovery and inspection, encryption methodologies, and comprehensive device and port control and cyber security services.
As a result, all prior period information has been recast to reflect the new segment composition.
|
|
|
Year ended December 31, 2021
|
||||||||||||||||
|
|
Cyber
Security |
IoT
|
e-Gov
|
Total
|
|||||||||||||
|
Revenues
|
1,634 | 8,904 | 1,729 | 12,267 | |||||||||||||
|
|
|||||||||||||||||
|
Operating loss
|
400 | (3,004 |
)
|
(4,133 |
)
|
(6,737 |
)
|
||||||||||
|
|
|||||||||||||||||
|
Goodwill
|
1,075 | 2,229 | 3,722 | 7,026 | |||||||||||||
|
|
|||||||||||||||||
|
Total Property and Equipment, net
|
47 | 1,543 | 214 | 1,804 | |||||||||||||
|
|
Year ended December 31, 2020
|
||||||||||||||||
|
|
Cyber
Security |
IoT
|
e-Gov
|
Total
|
|||||||||||||
|
Revenues
|
2,203 | 7,656 | 1,911 | 11,770 | |||||||||||||
|
|
|||||||||||||||||
|
Operating loss
|
581 | (1,373 |
)
|
(2,957 |
)
|
(3,749 |
)
|
||||||||||
|
|
|||||||||||||||||
|
Goodwill
|
1,075 | 2,229 | 3,722 | 7,026 | |||||||||||||
|
|
|||||||||||||||||
|
Total Property and Equipment, net
|
109 | 1,016 | 246 | 1,371 | |||||||||||||
|
Following is a reconciliation of the operating income (loss) of the reportable segments to the data included in the statements of operations:
|
|
|
Year ended December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
Operating loss
|
|||||||||
|
Total operating loss of reportable segments
|
(6,737 |
)
|
(3,749 |
)
|
|||||
|
Financial expenses, net
|
(3,396 |
)
|
(4,113 |
)
|
|||||
|
Loss before income taxes
|
(10,133 |
)
|
(7,862 |
)
|
|||||
|
NOTE 12:
|
SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)
|
|
|
b.
|
Summary information about geographic areas:
The following is a summary of revenues from external customers of the continued operations within geographic areas and data regarding property and equipment, net:
|
|
|
Year ended December 31,
|
||||||||||||||||
|
|
2021
|
2020
|
|||||||||||||||
|
|
Total
|
Property and
|
Total
|
Property and
|
|||||||||||||
|
|
Revenues
|
Equipment, net
|
revenues
|
Equipment, net
|
|||||||||||||
|
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Africa
|
1,586 | - | 1,791 | - | |||||||||||||
|
European countries
|
2,912 | - | 3,037 | - | |||||||||||||
|
South America
|
37 | - | 21 | - | |||||||||||||
|
United States
|
6,820 | 47 | 5,856 | 89 | |||||||||||||
|
Israel
|
757 | 1,757 | 746 | 1,282 | |||||||||||||
|
APAC
|
155 | - | 319 | - | |||||||||||||
|
|
12,267 | 1,804 | 11,770 | 1,371 | |||||||||||||
|
|
-
|
Revenues were attributed to countries based on the customer’s location.
|
|
|
-
|
Property and equipment were classified based on geographic areas in which such property and equipment items are held.
|
|
|
c.
|
Summary of revenues from external customers based on products and services:
|
|
|
Year ended December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Raw materials and equipment
|
1,119 | 2,926 | |||||||
|
Electronic monitoring
|
6,393 | 6,019 | |||||||
|
Treatment programs
|
3,292 | 1,640 | |||||||
|
Maintenance, royalties and project management
|
1,463 | 1,185 | |||||||
|
|
|||||||||
|
|
12,267 | 11,770 | |||||||
|
|
d.
|
Major customer data as a percentage of total sales:
|
|
|
Year ended December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
Customer A
|
- | 11 |
%
|
||||||
|
Customer B
|
10 |
%
|
13 |
%
|
|||||
|
NOTE 13:
|
OTHER EXPENSE, NET
|
|
|
Year ended December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Doubtful debt provision
|
3,000 | 2000 | |||||||
|
Change in liability for future earn-out
|
689 |
|
(59 |
)
|
|||||
|
Other
|
683 |
|
(792 |
)
|
|||||
|
Total other expense, net
|
4,372 | 1,149 | |||||||
|
Bad debt
The following is a summary of the accounts receivables allowance for doubtful accounts for the years ended December 31:
|
|
|
Year ended December 31,
|
||||||||
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Balance at beginning of period
|
8,667 | 6,667 | |||||||
|
Provision during the period
|
3,000 | 2,000 | |||||||
|
Balance at end of period
|
11,667 | 8,667 | |||||||
|
NOTE 14:
|
FINANCIAL EXPENSES, NET
|
|
|
2021
|
2020
|
|||||||
|
|
$
|
$
|
|||||||
|
Financial expenses:
|
|||||||||
|
|
|||||||||
|
Interest, bank charges and fees
|
(3,642 |
)
|
(3,812 |
)
|
|||||
|
Exchange differences, net
|
246 | (316 |
)
|
||||||
|
|
|||||||||
|
Total financial expenses
|
(3,396 |
)
|
(4,128 |
)
|
|||||
|
Financial income:
|
|||||||||
|
Interest income
|
- | 15 | |||||||
|
|
|||||||||
|
Total financial income
|
- | 15 | |||||||
|
|
|||||||||
|
Total financial expenses, net
|
(3,396 |
)
|
(4,113 |
)
|
|||||
|
NOTE 15:
|
Subsequent Events
|
|
a.
|
On March 1, 2022, (the “Closing Date”) the Company raised $4.65 million in a registered direct offering with a single accredited institutional investor (the “Purchaser”) of an aggregate of 3,130,000 of its ordinary shares, par value NIS 0.25 per share (the “ordinary shares”), and 4,401,585 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent private placement to the Purchaser of the Company’s private warrants to purchase an aggregate of 5,648,689 or ordinary shares at an exercise price of $0.70 per share. The private warrants will be exercisable beginning on the six-month anniversary of the Closing Date and will expire five years and six months following the Closing Date. These offerings were effected pursuant to the Securities Purchase Agreement, dated as of February 25, 2022 (the “Purchase Agreement”), with a single accredited institutional investor.
|
|
b.
|
In February 2022, Russia launched a military invasion into Ukraine. While as of the date of issuance of this annual report there have not been material impacts associated with the military invasion, management is continuously monitoring the developments to assess potential future impacts
|
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
SUPERCOM LTD. | ||
By: | /s/ Ordan Trabelsi | |
Name: | Ordan Trabelsi | |
Title: | Chief Executive Officer | |
Dated: April 4, 2022
77