UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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(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, 2024
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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 ___________
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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
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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 50 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 50 per share: 2,172,855 issued and outstanding (as of December 31, 2024)
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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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. 333-284419.
INTRODUCTION
Founded in 1988, we are a global provider of traditional and digital identity solutions, advanced Internet
of Things ( “IoT”) and connectivity solutions, and cyber security products and solutions, to governments and private and public
organizations throughout the world. In this Annual Report on Form 20-F (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, unless the context otherwise provides.
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. (“ 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, 2024
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 three years ended December 31, 2024, 2023 and 2022 appear elsewhere in this Annual Report. Certain of our
selected consolidated financial data for the years ended December 31, 2020, 2021 and 2022 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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2024 |
2023 |
2022 |
2021 |
2020 |
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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 |
27,635 |
26,570 |
17,649 |
12,267 |
11,770 |
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Cost of revenues |
14,251 |
16,347 |
11,261 |
6,063 |
6,189 |
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Gross profit |
13,384 |
10,223 |
6,388 |
6,204 |
5,581 |
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Operating expenses: |
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Research and development |
3,417 |
3,110 |
3,412 |
2,763 |
2,386 |
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Selling and marketing |
2,401 |
2,200 |
2,657 |
1,655 |
1,721 |
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General and administrative |
6,344 |
5,460 |
5,186 |
4,149 |
4,074 |
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Other (income) expenses |
1,999 |
2,812 |
1,138 |
4,374 |
1,149 |
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Total operating expenses |
14,161 |
13,582 |
12,393 |
12,941 |
9,330 |
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Operating loss |
(777 |
) |
(3,359 |
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(6,005 |
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(6,737 |
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(3,749 |
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Financial expenses, net |
1,020 |
(663 |
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(1,751 |
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(3,396 |
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(4,113 |
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loss before income tax |
243 |
(4,022 |
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(7,756 |
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(10,133 |
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(7,862 |
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Income tax (expense) benefit |
418 |
- |
299 |
(5 |
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(5 |
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Net income (loss) |
661 |
(4,022 |
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(7,457 |
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(10,138 |
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(7,867 |
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Per Share Data: |
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Basic Earnings Per Share |
0.38 |
(12 |
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(40 |
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(90 |
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(142 |
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Diluted Earnings Per Share |
0.38 |
(12 |
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(40 |
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(90 |
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(142 |
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2024 |
2023 |
2022 |
2021 |
2020 |
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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 |
3,538 |
5,577 |
4,505 |
4,604 |
3,952 |
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Total Current Assets |
26,262 |
28,462 |
26,290 |
26,108 |
24,942 |
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TOTAL ASSETS |
45,924 |
44,753 |
42,040 |
42,119 |
40,344 |
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Total Current Liabilities |
3,747 |
5,403 |
5,239 |
5,603 |
19,599 |
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Total Long-term Liabilities |
30,480 |
34,535 |
33,670 |
32,124 |
15,827 |
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SHAREHOLDERS’ EQUITY |
11,697 |
4,816 |
3,131 |
4,392 |
4,919 |
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Statements made in 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, 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, 2024, was NIS 3.647 per $1.00.
ii
FORWARD-LOOKING STATEMENTS
This Annual Report, including the information incorporated by reference into this Annual Report, contains
forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995, as amended. These statements involve
known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases,
you can identify forward-looking statements by terms including “anticipates,” “believes,” “intends,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “projects,” “could,” “should,” “will,” “would,” and
similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect
to future events and are based on assumptions and subject to risks and uncertainties. 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.”
Factors that could cause our actual results to differ materially from those expressed or implied in such
forward-looking statements include, but are not limited to:
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if we are unable to manage our revenue growth, our business, financial results and stock price could suffer; |
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our dependence on orders from large customers for a substantial portion of our revenues; |
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the impact of other companies and technologies that compete with us within our industry; |
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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; |
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our ability to generate sufficient cash from operations and potential need to obtain additional financing or reduce our level of
expenditure; |
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changing technology, requirements, standards and products in the market of our products; |
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our ability to enter into contracts with governments, as well as state and local governmental agencies and municipalities;
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our dependence on third-party representatives, resellers and distributors could result in marketing and distribution delays;
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if our technology and solutions cease to be adopted and used by government and public and private organizations; |
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our ability 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; |
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our operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment;
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our efforts to expand our international operations and maintain or increase our future international sales; |
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our exposure to risks in operating in foreign markets; |
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fluctuation in our financial and operating results; |
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our reliance on third party technologies and components for the development of some of our products; |
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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; |
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significant differences between forecasted demands and actual orders received; |
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breaches of network or information technology security, natural disasters or terrorist attacks; |
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ability by third parties to obtain access to our proprietary information or could independently develop similar technologies;
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assertion by third parties that we are infringing their intellectual property rights, and IP litigation; |
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our reliance on the services of certain of our executive officers and key personnel; |
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our ability to attract, hire and retain qualified technical personnel; |
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our products being subject to government regulation of radio frequency technology; |
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war, terrorism, other acts of violence or natural or man-made disasters, including a global pandemic; |
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the impact of the political and security situation in Israel and in the U.S. on our business; |
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impact of inflation and currency fluctuations; |
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impact of the obligation of our management or key personnel to perform military service in Israel; |
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our ability to enforce covenants not-to-compete under current Israeli law; and |
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our company being subject to claims for remuneration or royalties for assigned service invention rights by our employees. |
We caution you to carefully consider these risks and not to place undue reliance on our forward-looking
statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be
accurate indications of the times at, or by which, that performance or those results will be achieved. Forward-looking statements are
based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future
events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from what is expressed
in or suggested by the forward-looking statements.
Forward-looking statements speak only as of the date they are made. Unless we are required to do so under
U.S. federal securities laws or other applicable laws, we do not assume an obligation to or intend to update or revise any forward-looking
statements. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates
with respect to those or other forward-looking statements. We caution you not to give undue weight to such projections, assumptions and
estimates.
iii
TABLE OF CONTENTS
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A. |
Reserve |
1 |
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B. |
Capitalization and Indebtedness |
1 |
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C. |
Reasons for the Offer and Use of Proceeds |
1 |
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D. |
Risk Factors |
1 |
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A. |
History and Development of the Company |
15 |
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B. |
Business Overview |
17 |
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C. |
Organizational Structure |
26 |
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D. |
Property, Plants and Equipment |
27 |
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A. |
Operating Results |
28 |
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B. |
Liquidity and Capital Resources |
33 |
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C. |
Research and Development, Patents and Licenses, etc. |
39 |
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D. |
Trend Information |
39 |
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E. |
Off-Balance Sheet Arrangements |
39 |
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F. |
Tabular Disclosure of Contractual Obligations |
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A. |
Directors and Senior Management |
40 |
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B. |
Compensation |
41 |
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C. |
Board Practices |
42 |
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D. |
Employees |
50 |
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E. |
Share Ownership |
51 |
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53 | ||
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A. |
Major Shareholders |
53 |
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B. |
Related Party Transactions |
53 |
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C. |
Interests of Experts and Counsel |
53 |
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A. |
Consolidated Statements and Other Financial Information |
53 |
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B. |
Significant Changes |
54 |
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54 | ||
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A. |
Offer and Listing Details |
54 |
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B. |
Plan of Distribution |
54 |
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C. |
Markets |
54 |
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D. |
Selling Shareholders |
54 |
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E. |
Dilution |
54 |
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F. |
Expenses of the Issue |
54 |
iv
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56 | ||
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A. |
Share Capital |
55 |
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B. |
Memorandum and Articles of Association |
55 |
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C. |
Material Contracts |
60 |
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D. |
Exchange Controls |
60 |
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E. |
Taxation |
60 |
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F. |
Dividends and Paying Agents |
65 |
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G. |
Statement by Experts |
65 |
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H. |
Documents on Display |
65 |
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I. |
Subsidiary Information |
65 |
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77 |
v
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
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Not applicable.
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ITEM 3. |
KEY INFORMATION |
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A. |
[reserved] |
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B. |
Capitalization and Indebtedness |
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Not applicable. |
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C. |
Reasons for the Offer and Use of Proceeds |
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Not applicable. |
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D. |
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.
1
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 last three fiscal years ended December 31, 2024, 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, 2024, 59% of our consolidated net revenue is attributable to sales to two
large customers.
In the year ended December 31, 2023, 59% of our consolidated net revenue is attributable to sales to two
large customers.
In the year ended December 31, 2022, 36% of our consolidated net revenue is attributable to sales to one
large customer.
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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;
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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:
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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.
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 loss from operations during the last seven years ended December 31, 2024, expect to
continue to incur substantial and increased expenses as we continue to execute our business approach and have funded our business operations
and capital expenditures primarily through equity and/or debt financings (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.
The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications
and delays frequently encountered by a growing company, the difficulties that may be encountered with integrating acquired companies and
the highly competitive environment in which we operate. We cannot assure you that our business will be profitable or that we will ever
generate sufficient revenue to fully meet our expenses and support our anticipated activities.
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, internal political regimes and related 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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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
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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, and |
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Higher overhead costs as a percentage of revenue and higher interest expense |
During the fiscal year ended December 31, 2023, 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, the
Israel Hamas war, 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.
Unfavorable national and global economic conditions
could adversely affect our business, operating results and financial condition.
During periods of slowing economic activity, our customers may reduce their demand for our products, technology
and professional services, which would reduce our sales, and our business, operating results and financial condition may be adversely
affected. The global and domestic economies continue to face a number of economic challenges, including threatened sovereign defaults,
credit downgrades, restricted credit for businesses and consumers and potentially falling demand for a variety of products and services.
These developments, or the perception that any of them could occur, could result in longer sales cycles,
slower adoption of new technologies and increased price competition for our products and services. We could also be exposed to credit
risk and payment delinquencies on our accounts receivable, which are not covered by collateral.
Significant portions of our business are conducted outside the markets in which our products and solutions
are manufactured or generally sold, and accordingly, we often export a substantial number of products into such markets. We may be denied
access to potential customers or suppliers or denied the ability to ship products from any of our subsidiaries into the countries in which
we currently operate or wish to operate, as a result of economic, legislative, political and military conditions, including hostilities
and acts of terrorism, in such countries.
In particular, there is currently significant uncertainty about the future
relationship between the U.S. and various other countries, with respect to trade policies, treaties, government regulations, and tariffs.
For example, the recent imposition of tariffs and/or changes in tariffs on various products by the U.S. and other countries, including
China and Canada, have introduced greater uncertainty with respect to trade policies and government regulations affecting trade between
the U.S. and other countries, and new and/or increased tariffs have subjected, and may in the future subject, us to additional costs and
expenditure of resources. Major developments in trade relations, including the imposition of new or increased tariffs by the U.S. and/or
other countries, and any emerging nationalist trends in specific countries could alter the trade environment and consumer purchasing behavior
which, in turn, could have a material effect on our business financial condition and results of operations. We cannot predict future
trade policy and regulations in the United States and other countries, the terms of any renegotiated trade agreements or treaties, or
tariffs and their impact on our business. An escalated trade war could have a significant adverse effect on world trade and the world
economy. To the extent that trade tariffs and other restrictions imposed by the United States or other countries increase the price of,
or limit the amount of, our products or components or materials used in our products imported into the United States or other countries,
or create adverse tax consequences, the sales, cost, or gross margin of our products may be adversely affected and the demand from our
customers for products and services may be diminished. Uncertainty surrounding international trade policy and regulations as well as disputes
and protectionist measures could also have an adverse effect on consumer confidence and spending. If we deem it necessary to alter all
or a portion of our activities or operations in response to such policies, agreements, or tariffs, our capital and operating costs may
increase.
The Russian invasion of Ukraine, which began in February 2022 resulted in the imposition of certain sanctions
by the U.S., EU, UK and other jurisdictions. Any heightened military conflict, economic impact or persistent geopolitical instability,
including heightened operating risks in Russia and Europe, additional sanctions or counter-sanctions, heightened and prolonged inflation,
cyber disruptions or attacks, and higher supply chain costs, could lead to further disruption, instability and volatility in global markets
and industries that could have a material adverse effect on our operation. We have operations or activities in countries and regions outside
Israel and the United States, including Europe, and any of the foregoing could have a material adverse effect on our business, financial
condition, and results of operations. To date, we have experienced longer shipping times but which did not have any material adverse effect
on our business. If global economic and market conditions or economic conditions in key markets remain uncertain or weaken further,
our financial condition and operating results may be materially adversely affected.
Potential political, economic and military
instability in the State of Israel, where some of our offices, members of our management team, and our production and research and development
facilities are located, may adversely affect our results of operations.
Our principal executive office and research and development facilities are located in Israel. In addition,
majority of our senior management, several of our employees, majority of our officers and directors are located in Israel. Accordingly,
political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and groups in its neighboring countries, Hamas (an Islamist militia
and political group that has historically controlled the Gaza Strip) and Hezbollah (an Islamist militia and political group based in Lebanon).
In addition, several countries, principally in the Middle East, restrict doing business with Israel, and additional countries may impose
restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. Any hostilities
involving Israel, terrorist activities, political instability or violence in the region or the interruption or curtailment of trade or
transport between Israel and its trading partners could adversely affect our operations and results of operations and the market price
of our Ordinary Shares.
Our commercial insurance does not cover losses that may occur as a result of an event associated with the
security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct
damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or,
if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material
adverse effect on our business, financial condition and results of operations.
Further, many Israeli citizens are obligated to perform several days, and in some cases more, of annual
military reserve duty each year until they reach the age of 40 (or older for certain reservists) and, in the event of a military conflict,
may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military
reservists.
Additionally, having already passed into law a bill that removes the power of the Israeli judiciary to
strike down legislation it deems unreasonable, the Israeli government also announced its plans to pass into legislation other judicial
reforms that would, for example, increase political influence over the selection of judges. These plans have been met with mass protests
in Israel and criticism from leading Israeli business leaders and certain foreign leaders. If such government plans are eventually enacted,
they may cause operational challenges for us since we are headquartered in Israel and the majority of our employees are located in Israel.
In addition, if foreign policy is negatively impacted with regard to Israel, this could impact our business with suppliers and customers
which could in turn adversely impact our reputation, results of operations or financial condition.
In October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted
an orchestrated series of attacks on civilian and military targets, resulting in the mass death, maiming and kidnapping of civilians and
soldiers. Hamas also launched extensive rocket attacks on Israeli population and industrial centers in Israel. Following the attack, Israel’s
security cabinet declared war against Hamas and a military campaign against these terrorist organizations commenced in parallel to their
continued rocket and terror attacks.
Following the attack, the Israeli government declared that the country was at war and the Israeli military
began to call up reservists for active duty, including one of our employees, in anticipation of an active military campaign, the import
and export of goods may experience disruptions in and out of Israel as a result of such military conflict. A prolonged war could result
in further military reserve duty call-ups in the future as well as irregularities to our supply chain and the movement of components and
raw material into Israel and our finished products exported from Israel, which could disrupt our operations. Such disruption could materially
adversely affect our business, prospects, financial condition and results of operations.
The intensity and duration of Israel’s current war against Hamas is difficult to predict, as are
its economic implications on our Company’s business and operations and on Israel’s economy in general.
We have approximately 51 employees in Israel as of December 31, 2024. While to our knowledge, there have
been no reported casualties or injuries to our employees as of the date of this Annual Report, some of our Israeli employees have been
mobilized as members of the Israeli military reserves to active duty. The ongoing war could cause harm to our employees and otherwise
impair their ability to work for extended periods of time, as well as disrupt supply chains, transport networks, telecommunications and
financial systems, and other critical infrastructure necessary to conduct business in Israel. As the intensity of the war has been rapidly
evolving, including the potential for heightened geopolitical tensions in the Middle East, we continue to receive and review reports concerning
our operations and business partners and remain vigilant.
The risk of cybersecurity incidents may also increase in connection with the ongoing war. These attacks
may impact critical infrastructure and financial institutions globally, which in turn could adversely affect our operations. While we
have taken actions to mitigate such potential risks, the proliferation of malware from the war into systems unrelated to the war, or cyberattacks
targeted against Israeli companies, could adversely affect our operations.
Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present
trading partners could have a material adverse effect on our business. The political and security situation in Israel may result in parties,
with whom we have contracts, claiming that they have been discharged from performance, based on force majeure provisions. Political and
economic implications of these hostilities, therefore, could harm our operations and product development.
Any hostilities involving Israel and the potential interruption and curtailment of trade between Israel
and its trading partners could adversely affect our operations and make it more difficult for us to raise capital. We may experience disruptions
if acts associated with such hostilities result in serious damage to our business and manufacturing facilities. Our business interruption
insurance may not adequately compensate us for potential losses that may occur as a result of events associated with the security situation
in the Middle East. Any losses or damages incurred by us could have a material adverse effect on our business.
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, 2024 and 2023, approximately 75% and 75%, 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. |
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;
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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. Shortages caused by disruptions at our suppliers and subcontractors for a variety of reasons, including public
health emergencies and associated containment measures, war or geopolitical tensions (such as the Israel-Hamas war, tensions in the Middle
East and the Ukraine/Russia conflict), significant natural disasters (including as a result of climate change) or significant price changes
(including as a result of inflationary pressures). 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.
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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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. |
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.
Our failure to meet the continued listing requirements of Nasdaq
could result in a de-listing of our ordinary shares and penny stock trading.
There can be no assurance that we will be able to continue to meet all of the criteria necessary for Nasdaq
to allow us to remain listed. If we fail to satisfy the applicable continued listing requirement and continue to be in non-compliance
after notice and the applicable grace period ends, Nasdaq may commence delisting procedures against our Company (during which we may have
additional time of up to six months to appeal and correct our non-compliance).
If our ordinary shares are ultimately delisted from Nasdaq, our ordinary shares would likely then trade
only in the over-the-counter market and the market liquidity of our ordinary shares could be adversely affected and their market price
could decrease. If our ordinary shares were to trade on the over-the-counter market, selling our ordinary shares could be more difficult
because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and we could face significant material
adverse consequences, including: a limited availability of market quotations for our securities; reduced liquidity with respect to our
securities; a determination that our shares are a “penny stock,” which will require brokers trading in our securities to adhere
to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our securities;
a reduced amount of news and analyst coverage for our Company; and a decreased ability to issue additional securities or obtain additional
financing in the future. These factors could result in lower prices and larger spreads in the bid and ask prices for our ordinary shares
and would substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and
fewer development opportunities for us.
In addition to the foregoing, if our ordinary shares are ultimately delisted from Nasdaq and they trade
on the over-the-counter market, the application of the “penny stock” rules could adversely affect the market price of
our ordinary shares and increase the transaction costs to sell those shares. The SEC has adopted regulations which generally define a
“penny stock” as an equity security that has a market price of less than $5.00 per share, subject to specific exemptions.
If our ordinary shares are ultimately delisted from Nasdaq and then trade on the over-the-counter market at a price of less than $5.00
per share, our ordinary shares would be considered a penny stock. The SEC’s penny stock rules require a broker-dealer, before
a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information
about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements
showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require
that before a transaction in a penny stock occurs, the broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser’s agreement to the transaction. If applicable in the future, these
rules may restrict the ability of brokers-dealers to sell our ordinary shares and may affect the ability of investors to sell their
shares, until our ordinary shares is no longer considered a penny stock.
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 2024. 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.
We are a foreign private issuer under the rules and regulations
of the SEC and are therefore exempt from a number of rules under the Exchange Act and applicable to Nasdaq listed companies and are permitted
to file less information with the SEC than a domestic U.S. reporting company, which will reduce the level and amount of disclosure that
you.
As a foreign private issuer within the meaning of rules promulgated under the U.S. Securities and Exchange
Act of 1934, as amended, (the “Exchange Act”), we are exempt from certain rules and regulations provisions applicable to U.S.
public companies and public companies listed on Nasdaq 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). |
Accordingly, you receive less information about our Company and trading in our shares by our affiliates
than you would receive about a domestic U.S. company and are afforded less protection under the U.S. federal securities laws than you
would be afforded in holding securities of a domestic U.S. company.
As a foreign private issuer, we are also permitted and follow certain home country corporate governance
practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. We have informed
NASDAQ that we follow home country practice in Israel with regard to, among other things, director nomination procedure and approval of
compensation of officers. In addition, we have opted to follow home country law instead of the Listing Rules of the NASDAQ Stock Market
that require that a listed company obtain shareholder approval for certain dilutive events, such as the establishment or amendment of
certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other
than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets
of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United
States company listed on The NASDAQ Global Select Market may provide our shareholders with less protection than they would have as shareholders
of a domestic U.S. company.
Our status as a foreign private issuer is subject to an annual review and test, and will be tested again
as of June 30, 2025 (the last business day of our second fiscal quarter of 2025). If we lose our status as a foreign private issuer, we
will no longer be exempt from such rules. Among other things, beginning on January 1, 2026, we would be required to file periodic reports
and financial statements on a periodic basis (including both an annual report in respect of 2025 and quarterly reports in respect of each
of the quarters of 2026) as if we were a company incorporated in the U.S., which, among other things, could result in increased compliance
and reporting costs to us.
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ITEM 4. |
INFORMATION ON THE COMPANY |
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A. |
History and Development of the Company |
SuperCom 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.
Our 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 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.
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.
On January 24, 2013 we changed our name back to SuperCom Ltd., our original name, from Vuance Ltd.
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 31,2022, 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 (vi) 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.
|
|
• |
Multiple radios provide concurrent 802.11a/n/ac and 802.11b/g/n connections |
|
|
• |
Up to 1300 Mbps combined data rate |
|
|
• |
Dual concurrent MIMO, Dual-polarized antennas |
|
|
• |
Self-configuring, plug-and-play deployment |
|
|
• |
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.
|
|
• |
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 |
|
|
• |
Built in Access Controller, for flexible service planning |
|
|
• |
Self-configuring, plug-and-play deployment |
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.
|
|
• |
High capacity, point-to-point, robust outdoor wireless solution |
|
|
• |
Flexible rate capacity options: B10, B14, B28, B100 reaching up to 100 Mbps gross |
|
|
• |
Long reach: over 60 km |
|
|
• |
Optimized uplink/downlink configuration to support different business applications such as public
safety and video surveillance |
|
|
• |
Robust performance in Non-Line-of-Sight (NLOS) environments |
|
|
• |
Simple deployment, management and maintenance |
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.
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, 2024 and 2023, we have invested, $3.4 million and $3.2 million, respectively,
in research and development. We anticipate that we will continue to invest up to 15% 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, and Israel, 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 three years ended December 31, 2024, 2023 and 2022 (all amounts in thousands of dollars):
|
|
2024 |
2023 |
2022 |
|||||||||
|
Africa |
$ |
774 |
$ |
1,455 |
$ |
374 |
||||||
|
Europe |
18,166 |
17,673 |
9,559 |
|||||||||
|
South and center America |
8 |
12 |
- |
|||||||||
|
United States |
7,092 |
6,766 |
6,877 |
|||||||||
|
Israel |
1,533 |
585 |
693 |
|||||||||
|
Asia Pacific |
62 |
79 |
146 |
|||||||||
|
|
||||||||||||
|
Total |
$ |
27,635 |
$ |
26,570 |
$ |
17,649 |
||||||
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 three years ended December
31, 2024, 2023 and 2022 (all amounts in thousands of dollars):
|
|
Year ended December 31, |
|||||||||||
|
|
2024 |
2023 |
2022 |
|||||||||
|
e-Gov |
$ |
1,154 |
$ |
1,544 |
$ |
637 |
||||||
|
IoT |
25,283 |
23,766 |
15,628 |
|||||||||
|
Cyber Security |
1,198 |
1,260 |
1,384 |
|||||||||
|
Total |
$ |
27,635 |
$ |
26,570 |
$ |
17,649 |
||||||
The following table provides a breakdown of total revenue by products and services for the three years
ended December 312024, , 2023 and 2022 (all amounts in thousands of dollars):
|
|
Year ended December 31, |
|||||||||||
|
|
2024 |
2023 |
2022 |
|||||||||
|
Revenues |
||||||||||||
|
Products |
$ |
20,109 |
$ |
19,767 |
$ |
10,099 |
||||||
|
Services |
7,526 |
6,803 |
7,550 |
|||||||||
|
|
||||||||||||
|
Total revenues |
$ |
27,635 |
$ |
26,570 |
$ |
17,649 |
||||||
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 the United States, and 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 G4S, STOP, Omnilink, 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, Thales,
Bundesdruckerei GmbH and Nadra are our potential competitors in the e-Gov products and solutions market. We believe that 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 50 issued patents in the United States and 72 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 , MAGNATM
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 22, 2025:
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. (“Safend”) - 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. (“Prevision”) - 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. (“Alvarion”) - 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, 2026. According to the lease agreements, the monthly fee (including management fees) is approximately $39,000.
We lease approximately 1,701 square meters of office premises in Miami, Kentucky and California for our
U.S. subsidiaries, which under the current lease contracts expire by 2026, with a monthly fee of approximately $27,000 for 2024.
We do not lease any facilities for any other subsidiary or branch.
Our total annual rental fees, for 2024 and 2023 were $759,000 and $701,000, 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 so in the recent eight years our operation grew significantly organically, while we have focused our operations in
developed countries.
We are headquartered in Israel and operate internationally with subsidiaries in the New York, Miami, 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.
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
During 2024, our Company’s business was affected by the Seven Fronts
War of Israel with Hamas in Gaza, Lebanon and Iran. Some of our Company employees have been serving the army, all airlines except for
the Israeli ELAL previously stopped flying to and from Israel, and many customers and potential customers have refrained from visiting
Israel, increasing shipping costs due to the Hutim blockage on the Suez Canal for cargo ships shipping to Israel.
Furthermore, as a result of the War, public sentiments towards Israel often spill over into antisemitism,
affecting Jewish communities and, by extension, Israeli businesses including our Company.
Antisemitism and hatred in Europe and Asia had presented significant challenges for our Company,
these phenomena had affected our market access, brand reputation, and operational security, hence we needed to remain resilient and adaptable
in the face of these challenges to ensure continued operation and success in these regions .
Our sales, project operations and management experienced difficulties
visiting or even communicating with some European and Asian countries customers or potential customers. Our R&D processes have returned
to normal per our current business plan, although as described above, we have experienced difficulties implementing fully our business
plan mainly in regards for the expansion in Europe and Asia, hence we had temporarily moved our business focus to the U.S. market by expanding
our Sales and Marketing team in the U.S. and had developed products tailored for the US market.
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. Revenues
from the sale of Alvarion products are generally recognized upon delivery, and over time for delivery of Safend products.
Costs and Operating Expenses
For the fiscal year ended December 31, 2024, our costs were per our multi-year business plan, our gross
profit is aiming at 50%, and we have optimized our production lines and supply chains processes.
Our research and development expenses consist of salaries, subcontractor expenses, related depreciation
costs and overhead allocated to research and development activities. In 2024, our research and development expenses increased by 10% compared
to the same period in 2023. In 2023, our research and development expenses decreased by 9% compared to the same period in 2022.
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 2024, our sales and marketing team expanded mainly
in the U.S., our selling and marketing expenses increased by 9% compared to the same period in 2023. In 2023, our selling and marketing
expenses decreased by 17% compared to the same period in 2022.
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.
Operating Results
The following table sets forth selected our consolidated income statement data for
each of the three years ended December 31, 2024, 2023 and 2022, expressed as a percentage of total revenues.
|
|
2024 |
2023 |
2022 |
|||||||||
|
Revenues |
100 |
% |
100 |
% |
100 |
% | ||||||
|
Cost of revenues |
51.6 |
61.5 |
63.8 |
|||||||||
|
Gross profit |
48.4 |
38.5 |
36.2 |
|||||||||
|
Operating expenses: |
||||||||||||
|
Research and development |
12.4 |
11.7 |
19.3 |
|||||||||
|
Selling and marketing |
8.7 |
8.3 |
15.1 |
|||||||||
|
General and administrative |
23.0 |
20.5 |
29.4 |
|||||||||
|
Other expenses |
7.2 |
10.6 |
6.4 |
|||||||||
|
Total operating expenses |
51.2 |
51.1 |
70.2 |
|||||||||
|
Operating Income(loss) |
(2.8 |
) |
(12.6 |
) |
(34.0 |
) | ||||||
|
Financial expenses, net |
3.7 |
(2.5 |
) |
(9.9 |
) | |||||||
|
Income(loss) before income tax |
0.9 |
(15.1 |
) |
(43.9 |
) | |||||||
|
Income tax expense |
1.5 |
- |
1.7 |
|||||||||
|
Net Income(loss) |
2.4 |
(15.1 |
) |
(42.3 |
) | |||||||
Year Ended December 31, 2024 Compared with Year Ended December 31, 2023
Revenues
Our total revenues in 2024 were $27,635,000 compared to $26,570,000 in 2023, an increase of 4%. The composition
of revenues has changed during the fiscal year ended December 31, 2024 as follows: (i) the e-Gov segment revenue was $1,154,000 in comparison
to $1,544,000 in 2023, a decrease of 25% which reflects decreased recurring revenue from some of our multiyear governments contracts due
to manufacturing failure; (ii) the IoT segment revenue was $25,283,000 in comparison to $23,766,000 in 2023, an increase of 6% which is
attributed to an increase of revenue in the European market; and (iii) the Cyber Security segment revenue was $1,198,000 in comparison
to $1,260,000 in 2023, a decrease of 5% which is mainly attributed to the decrease in our revenue from product license renewals.
Gross Profit
Our gross profit during the fiscal year ended December 31, 2024 was $13,384,000
compared to $10,223,000 in 2023, an increase of 31%. The gross profit margin for 2024 was 48.4% compared to 38.5% in 2023. The increase
in our gross profit margin is mainly attributed to (i) the completion of the implementation and recurring revenue stages of our new $33
million contract which contributed to a higher than average gross margin; (ii) a change in the mix of revenues; (iii) an increase of 6%
in IoT revenue, which contributes to a higher than average gross margin; and (iv) offset by a decrease of revenue from e-Gov contracts
which contributed to a lower than average gross margin.
Expenses
Our operating expenses, excluding other (income) expenses, net, during the fiscal year ended December
31, 2024 were $12,162,000 compared to $10,770,000 in 2023, an increase of 13%. The increase in operating expenses was primarily due to
(i) an increase of 10% in research and development expenses, (ii) an increase of 16% in general and administrative expenses; and (iii)
an increase of 9% in sales and marketing expenses.
Our sales and marketing expenses increased to $2,401,000 during the fiscal
year ended December 31, 2024 from $2,200,000 in 2023, an increase of 9%. The increase in our sales and marketing expenses was primarily
due to an increase in our sales and marketing direct expenses and the increased costs related to commissions paid or incurred during 2024.
Our research and development expenses increased to $3,417,000 during the
fiscal year ended December 31, 2024 from $3,110,000 in 2023, an increase of 10%. The increase in our research and development expenses
was primarily due to new IoT product developed for the U.S. market.
Our general and administrative expenses increased to $6,344,000 during the fiscal year ended December 31,
2024 from $5,460,000 in 2023, an increase of 16%.
Other expenses were $1,999,000 during the fiscal year ended December 31, 2024, compared to other expenses
of $2,812,000 in 2023. The decrease in other expenses in 2024 from 2023 represents mainly (i) a provision of bad debt, related mainly
to African and Latin American government customers, amounting to $1,200,000 and $1,457,000 for 2024 and 2023, respectively, and a one-time
expense due to settlement with e-GOV account in the amount of $1,053,000 in 2023.
Financial Expenses, net
We had financial income, net, of $1,020,000 during the fiscal year ended
December 31, 2024 compared to financial expenses of $663,000 in 2023, an increase of $1,683,000 mainly due to $2,312,000 financial income
from debt conversion to equity at higher than market share price.
Income Tax
We recorded a tax income of $418,000 for the fiscal year ended December 31, 2024 compared to a tax income
of $0 in 2023, mainly due to a tax asset recognized for Safend after four years of material profit and toward Safend tax allowance for
the year 2024.
Net Income
As a result of the factors described above, our net income for the fiscal year ended December 31, 2024,
was $661,000 compared to a net loss of $4,022,000 in 2023 an increase of $4,683,000. The increase in our net income was mainly due
to (i) a decrease of $813,000 in other expenses; (ii) a decrease of $1,683,000 in financial expenses, (iii) offset by a $3,161,000 increase
in gross profit and (iv) a $418,000 increase in tax income.
Year Ended December 31, 2023 Compared with Year Ended December 31, 2022
Revenues
Our total revenues in 2023 were $26,570,000 compared to $17,649,000 in 2022, an increase of 51%. The composition
of revenues has changed during the fiscal year ended December 31, 2023 as follows: (i) the e-Gov segment revenue was $1,544,000 in comparison
to $637,000 in 2022, an increase of 142% which reflects recurring revenue from some of our multiyear governments contracts; (ii) the IoT
segment revenue was $23,766,000 in comparison to $15,628,000 in 2022, an increase of 52% which is attributed to an increase of revenue
in the European market; and (iii) the Cyber Security segment revenue was $1,260,000 in comparison to $1,384,000 in 2022, a decrease of
9% which is mainly attributed to the decrease in our revenue from products license renewals, and in our consulting-based cyber offering.
Gross Profit
Our gross profit during the fiscal year ended December 31, 2023 was $10,223,000 compared to $6,388,000
in 2022, an increase of 60%. The gross profit margin for 2023 was 38.5% compared to 36.2% in 2022. The increase in our gross profit
margin is mainly attributed to (i) the completion of a new $33 million contract’s implementation stage completed and the project’s
recurring revenue stage which contributes to a higher than average gross margin; (ii) a change in the mix of revenues; (iii) an increase
of 52% in IoT revenue, which contributes to a higher than average gross margin; and (iv) a decrease of revenue from cyber services
contracts which contributes to a higher than average gross margin.
Expenses
Our operating expenses, excluding other (income) expenses, net, during the fiscal year ended December
31, 2024 were $12,162,000 compared to $10,770,000 in 2023, an increase of 13%. The increase in operating expenses was primarily due to
(i) an increase of 10% in research and development expenses, (ii) an increase of 16% in general and administrative expenses; and (iii)
an increase of 9% in sales and marketing expenses.
Our sales and marketing expenses decreased to $2,200,000 during the fiscal year ended December 31, 2023
from $2,657,000 in 2022, a decrease of 17%. The decrease in our sales and marketing expenses was primarily due to an optimization in our
sales and marketing direct expenses and travels expenses during 2023.
Our research and development expenses decreased to $3,110,000 during the fiscal year ended December 31,
2023 from $3,412,000 in 2022, a decrease of 9%. The decrease in our research and development expenses was primarily due to the completion
of some of the IoT products development.
Our general and administrative expenses increased to $5,460,000 during the fiscal year ended December 31,
2023 from $5,186,000 in 2022, an increase of 5%.
Other expenses were $2,812,000 during the fiscal year ended December 31, 2023, compared to other expense
of $1,138,000 in 2022. The increase in other expenses in 2023 from 2022 represents mainly (i) a provision of bad debt, related mainly
to African and Latin American government customers, amounting to $1,457,000 and $1,000,000 respectively, and one-time expense due to settlement
with e-GOV account amounted to $1,053,000 in 2023.
Financial Expenses, net
We had financial expenses, net, of $663,000 during the fiscal year ended December 31, 2023 compared to
$1,751,000 in 2022, a decrease of 62% due to $2,313,000 financial income from changes in fair value of derivative warrants liabilities
offset by an increase of exchange rate expenses of $483,000 and of interest expense and other related fees on the outstanding loans and
credit lines we maintain of $742,000.
Income Tax
We recorded a tax income of $0 for the fiscal year ended December 31, 2023 compared to a tax income of
$299,000 in 2022, mainly due to a tax asset recognized for Safend after four years of material profit and toward Safend tax allowance
for the year 2022.
Net Loss
As a result of the factors described above, our net loss for the fiscal year ended December 31, 2023, was
$4,022,000 compared to a net loss of $7,457,000 in 2022 a decrease of 46%. The decrease in our net loss is mainly related to (i) an increase
of $1.7M in other expenses; (ii) a decrease of $1.1M in financial expenses, offset by; (ii) a $3,835,000 increase in gross profit, and
(iii) a $485,000 decrease in operating expenses excluding other expenses, net.
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 U.S. 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 increases. 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) % |
|||||||||
|
2024 |
3.2 |
4.9 |
(1.7 |
) | ||||||||
|
2023 |
3.0 |
3.1 |
(0.1 |
) | ||||||||
|
2022 |
5.3 |
13.2 |
(7.9 |
) | ||||||||
Because exchange rates between the NIS and the U.S. 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 Related to Our Location
and Incorporation 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 each of 2022, 2023 and 2024. For the years ended December
31, 2024, we had income and for 2023 and 2022 we had net losses; therefore the effective tax rate was mostly affected by changes in deferred
tax.
In 2024, 2023 and 2022, the U.S. federal tax rate was 21%, the state tax
rate was 8.84% in CA and 6.5% in NY, the New York City tax rate was 6.5%. Our effective U.S. tax rate as for the year ended December
31, 2024 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, 2024, the Company had an accumulated deficit of $106,287,000
and net cash used in operating activities of $1,294,000 compared to $2,367,000 for the year ended December 31, 2023, which demonstrates
a 61% reduction in negative operation cash flow.
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, 2024, and the Company had cash, cash equivalent and restricted cash
of $3,538,000 and positive working capital of $22,515,000.
Additionally, the Company secured financing of $20,000,000 during 2018. Throughout 2021, the Company also
secured through the issuance of multiple notes, aggregate gross proceeds of $12,000,000 of subordinated debt (“Subordinated Debt”).
The Company raised a gross amount of approximately $3,200,000 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 approximately $4.65 million in gross proceeds in a registered direct
offering with a single accredited institutional investor of an aggregate of 156,500 of its ordinary shares, and 220,079 pre-funded
warrants to purchase ordinary shares with an exercise price of $0.0002 per share, and concurrent private placement to such purchaser of
the Company’s private warrants to purchase an aggregate of 282,434 of ordinary shares at an exercise price of $14 per share
On March 30, 2023, the Company raised approximately
$2.4 million in gross proceeds in a registered direct offering with a single accredited institutional investor through the sale of an
aggregate of 24,250 of its ordinary shares, and 51,631 pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002
per share, and concurrent private placement to such purchaser of the Company’s private warrants to purchase an aggregate of 75,881
of its ordinary shares at an exercise price of $33.2 per share.
On August 3, 2023, the Company raised approximately
$2.75 million in gross proceeds in a registered direct offering with a single accredited institutional investor through the sale of an
aggregate of 33,050 of its ordinary shares, and 128,715 pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002
per share, and concurrent private placement to such purchaser of the Company’s private warrants to purchase an aggregate of 161,765
of its ordinary shares at an exercise price of $17.00 per share.
On November 15, 2023, the Company raised approximately
$2.0 million in gross proceeds in a warrant exercise and reload with a single accredited institutional investor through warrant exercise
of 54,050 warrant to ordinary shares, and warrant exercise of 183,596 warrant to pre-funded warrants to purchase ordinary shares with
an exercise price of $0.0002 per share, and concurrent warrant reload to such purchaser of the Company’s private warrants to purchase
an aggregate of 475,291 of its ordinary shares at an exercise price of $10 per share.
On April 19, 2024, the Company raised approximately $2.9 million in gross
proceeds in a registered direct offering with a single accredited institutional investor through the sale of an aggregate of 143,695 of
its ordinary shares, and 262,114 pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002 per share, and concurrent
private placement to such purchaser of the Company’s private warrants to purchase an aggregate of 405,808 of its ordinary shares
at an exercise price of $7.60 per share
On January 31, 2025, the Company raised approximately $6.0 million in gross proceeds in a registered direct
offering with two accredited institutional investors through the sale of an aggregate of 545,454 of its ordinary shares.
On February 19, 2025, the Company raised approximately $8.2 million in gross proceeds as a result of the
exercise of previously issued Company warrants by a single accredited institutional investor warrant holder through the exercise of warrants
to purchase an aggregate of 931,099 of the Company’s ordinary shares, and as a result of such exercise, the issuance to such accredited
institutional investor of the Company’s new warrants to purchase an aggregate of 698,324 of its ordinary shares at an exercise price
of $13.5 per share.
During the month of January 2025, the Company converted $4.4 million of senior debt held by Fortress, the
Company’s senior Lender, to ordinary shares and signed an amendment to the credit agreement with Fortress that, among other things,
reduced the outstanding debt to $14 million and extended the maturity date of the loans made by Fortress to the Company under such credit
agreement to December 31, 2028.
During 2024 and 2023, the Company converted $3,747,000 and $500,000, respectively,
out of the remaining principal and accrued interest of subordinated notes into the Company’s ordinary shares.
The Company believes that based on the above-mentioned secured financings, management’s
current plans, management’s expectation to maintain the cost savings and expected cash streams from the Company’s current
contracts with customers worldwide, the Company 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, |
|||||||||||
|
|
2024 |
2023 |
2022 |
|||||||||
|
|
(in thousands) |
|||||||||||
|
Net cash used in operating activities |
$ |
(1,294 |
) |
$ |
(2,367 |
) |
(4,654 |
) | ||||
|
Net cash used in investing activities |
(3,349 |
) |
(3,366 |
) |
(2,189 |
) | ||||||
|
Net cash provided by (used in) financing activities |
2,604 |
6,805 |
6,744 |
|||||||||
|
Net increase(decrease) in cash and cash equivalents |
(2,039 |
) |
1,072 |
(99 |
) | |||||||
|
Cash, cash equivalents and restricted cash at beginning of period |
5,577 |
4,505 |
4,604 |
|||||||||
|
Cash, cash equivalents and restricted cash at end of period |
$ |
3,538 |
$ |
5,577 |
4,505 |
|||||||
Net cash used in operating activities for the year ended December 31, 2024, was $1,294,000, compared to
net cash used by operating activities of $2,367,000 during the year ended December 31, 2023, a decrease of 45%.
Net cash used in investing activities during the year ended December 31, 2024, was $3,349,000 compared
to $3,366,000 during the year ended December 31, 2023, a decrease of 1%.
Net cash provided by financing activities during the year ended December 31, 2024, was $2,604,000 compared
to $6,805,000 during the year ended December 31, 2023, which consisted mainly of one registered direct offering.
Net cash used in operating activities for the year ended December 31, 2023, was $2,367, compared to net
cash used by operating activities of $4,654,000 during the year ended December 31, 2022, a decrease of 49%.
Net cash used in investing activities during the year ended December 31, 2023, was $3,366,000 compared
to $2,189,000 during the year ended December 31, 2022, an increase of 54%.
Net cash provided by financing activities during the year ended December
31, 2023, was $6,805,000 compared to $6,744,000 during the year ended December 31, 2022, an increase of 1% which consisted mainly of two
registered direct offerings resulting in $5,180,000 of aggregate gross proceeds and warrant exercise for cash resulting in $1,819,000
of gross proceeds.
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).
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 principle, 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. The table
also includes a reconciliation of the disaggregated revenue with the reportable segments:
|
|
Year ended December 31, 2024 |
|||||||||||||||
|
|
Cyber Security |
IoT |
e-Gov |
Total |
||||||||||||
|
Major geographic areas |
||||||||||||||||
|
Africa |
$ |
- |
$ |
- |
$ |
744 |
$ |
744 |
||||||||
|
European countries |
234 |
17,772 |
160 |
18,166 |
||||||||||||
|
Latin America |
8 |
- |
- |
8 |
||||||||||||
|
United States |
244 |
6,848 |
- |
7,092 |
||||||||||||
|
Israel |
658 |
655 |
220 |
1,533 |
||||||||||||
|
APAC |
54 |
8 |
- |
62 |
||||||||||||
|
Total revenue |
$ |
1,198 |
$ |
25,283 |
$ |
1,154 |
$ |
27,635 |
||||||||
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, 2024, the aggregate amount of the transaction
price allocated to remaining performance obligations totals $16.523 million. The Company expects approximately 63% of remaining performance
obligations to be recognized into revenue within the next 12 months, with the remaining 37% 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 years
2024, 2023 and 2022 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 $15,524,000, $14,124,000 and $12,667,000
as of December 31, 2024, 2023 and 2022, 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.
Inventory valuation.
Inventories are valued at the lower of cost or market. The Company assess the valuation of its inventory
on a yearly basis and write down the value for different finished goods and raw material items based on their potential utilization. Inventory
write-offs are provided to cover risks arising from slow-moving items, discontinued products, and excess inventories. The process for
evaluating these write-offs often requires management to make subjective judgments and estimates concerning the future utilization of
the inventory items.
Goodwill impairment assessment.
Management conducts an impairment test as of December 31 of each year, or more frequently if events or
changes in circumstances indicate that the carrying value of goodwill may be impaired. The Company’s evaluation of goodwill for
impairment involves the comparison of the fair value of each reporting unit or intangible asset to its respective carrying value. Fair
value is estimated by management using the income method, which is based on the present value of estimated future cash flows attributable
to the respective unit. Management applies significant judgment which is affected by expectations about future market and economic conditions
in estimating and making assumptions related to the appropriate discount rates, revenue growth and operating margins. Changes in the assumptions
could have a significant impact on the amount of potential impairment charge.
Assessment of the capitalized internal costs to develop software.
The Company capitalizes costs incurred to develop software during the application development stage. Judgment
is required to assess the stage of software development for upgrades and enhancements for existing software, which determines when costs
should be capitalized.
|
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, 2024, the number of employees in our research and development
activities was 43. We spent $5,168,000 (out of which $1,751,000 was capitalized as cost of software to be sold), $4,762,000 (out of which
$1,652,000 was capitalized as cost of software to be sold), $5,025,000 (out of which $1,613,000 was capitalized as cost of software to
be sold) in 2024, 2023 and 2022, 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 |
|
67 |
|
Director |
|
Tal Naftali Shmuel |
|
39 |
|
Independent Director (1) (2)(3) |
|
Oren Raoul De Lange |
|
47 |
|
Independent Director (1)(2)(3) |
|
Shoshana Cohen Shapira |
|
67 |
|
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 21,2022, and served as Chairman of our board of directors from December 12, 2011 to December 27, 2012, has been serving as
Chairman of our board of directors since February 24, 2019, and has been serving as our Acting Chief Financial Officer since and from
February 24, 2019. 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.
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, 2021. Mr. De Lange holds a LL.B and B.A degrees from the I.D.C Herzliya, Israel.
Tal Naftali Shmuel, is a Certified Public Accountant, CPA in Israel
with more than 10 years of experience in GAAP, IFRS, Financial Statement auditing and taxes. Mr. Shmuel has extensive experience in providing
representation and consulting services to individuals and companies in various areas of taxes and finance. Mr. Shmuel is the Owner and
the head of a CPA firm in Israel. Mr. Shmuel holds a B.A degrees in accounting and economics from Rupin College, Israel.
We are managed by our board of directors(the “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 22, 2025 are:
|
Name |
|
Age |
|
Position |
|
Ordan Trabelsi* |
|
40 |
|
President, Chief Executive Officer |
|
Barak Trabelsi* |
|
39 |
|
Chief Operating Officer and CTO |
|
Gil Alfi |
|
53 |
|
Vice President Sales, Safend Ltd |
|
Lester Villeneuve |
|
56 |
|
Managing Director LCA , USA |
|
Arie Trabelsi |
67 |
Acting Chief Financial Officer |
* Executive officer
Ordan Trabelsi. Mr. Trabelsi has been serving as our President and
Chief Operating Officer since February 21, 2022. 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.
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, 2022 and has been serving as VP and Chief Operating
Officer since February 21, 2022. 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.
Lester Villeneuve, Mr. Lester Villeneuve joined the SuperCom Group
as the Executive Director for Leaders in Community Alternatives (LCA) in 2023. Mr. Villeneuve 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.
Villeneuve has also spent two years with LCA, beginning in 2015 as the Director of the Sacramento ADRC in collaboration with County Probation
there. Mr. Villeneuve holds a BA in Psychology from the University of Rhode Island and an MS in Criminal Justice from the University
of New Haven.
Arie Trabelsi. Please see Mr. Arie
Trabelsi’s biographical description above.
|
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, 2024.
|
|
Salaries, fees,
commissions and bonuses |
Pension,
retirement and similar benefits |
||||||
|
All directors and executive officers as a group (6 persons) |
$ |
647,075 |
$ |
50,981 |
||||
The aggregate amount of compensation paid by us to our board members and executive officers as a group
for the year ended December 31, 2024 was approximately $647,075. 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, 2024, we had set aside
approximately $50,981 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 $731 plus approximately $281 for every board or audit committee meeting attended.
As of December 31, 2024, our directors and executive officers as a group, then consisting of 6 persons,
held options to purchase an aggregate of 32,000 ordinary shares, of which 24,000 were exercisable as of December 31, 2024, at an average
exercise price of $65 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, 2024, as required by regulations promulgated under
the Israeli Companies Law.
|
Name and Position |
Salary(1)
|
Bonus and commissions |
Equity-Based Compensation |
Total |
||||||||||||
|
Yoad Hayash
Director of R&D |
195,461 |
- |
- |
195,461 |
||||||||||||
|
Arkady Tachman R&D director, e-Gov |
195,077 |
4,113 |
- |
199,190 |
||||||||||||
|
Barak Trabelsi
COO & CTO |
230,765 |
- |
- |
230,765 |
||||||||||||
|
Ido Rozenfeld
R&D |
160,161 |
- |
- |
160,161 |
||||||||||||
|
Gil Alfi Vice President Sales, Cyber |
160,623 |
123,905 |
- |
284,528 |
||||||||||||
|
(1) |
Amounts reported in this column include salary, social benefits, including those mandated by applicable
law. |
|
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 |
|
Tal Naftali Shmuel |
|
Independent Director |
|
March 17, 2022 |
|
Annual general meeting |
|
Oren Raoul De Lange |
|
Independent Director |
|
March 28, 2021 |
|
March 28, 2026 |
|
Shoshana Cohen Shapira |
|
Independent Director |
|
February 24, 2019 |
|
February 23, 2028 |
Our Board of Directors is presently comprised of four (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. Shmuel, 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:
|
|
• |
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. |
|
|
• |
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. |
|
|
• |
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. |
|
|
• |
Deciding whether to approve engagements or transactions that require the audit committee approval under
the Companies Law. |
|
|
• |
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.
|
|
|
• |
Examining and approving the annual and periodic working plans of the internal auditor. |
|
|
• |
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; |
|
|
• |
Examining the scope of work of the independent auditor and its pay, and bringing such recommendations on
these issue before the board. |
|
|
• |
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. |
|
|
• |
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. |
|
|
• |
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. Shmuel.
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 that 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 of Directors 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:
|
|
• |
an amendment to the company’s articles of association; |
|
|
• |
an increase in the company’s authorized share capital; |
|
|
• |
a merger; and |
|
|
• |
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:
|
|
• |
a breach of duty of care towards us or any other person; |
|
|
• |
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; |
|
|
• |
a financial liability imposed on him or her in favor of another person; or |
|
|
• |
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:
|
|
• |
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;
|
|
|
• |
reasonable expenses of the proceedings, including lawyers’ fees, expended by the office holder or
imposed on him by the court for: |
|
|
(1) |
proceedings issued against him by or on behalf of our company or by a third party; |
|
|
(2) |
criminal proceedings in which the office holder was acquitted; |
|
|
(3) |
criminal proceedings in which he was convicted in an offense, which did not require proof of criminal intent;
or |
|
|
(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:
|
|
• |
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;
|
|
|
• |
a breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly;
|
|
|
• |
any act or omission done with the intent to derive an illegal personal benefit; or |
|
|
• |
any fine levied against the office holder. |
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.
|
D. |
Employees |
As of December 31, 2024, 2023 and 2022, we had 124, 121 and 122 full-time employees, respectively
(not including service providers). The following table describes our employees and the employees of our subsidiaries by department.
|
|
Dec. 31, 2024 |
Dec. 31, 2023 |
Dec. 31, 2022 |
|||||||||
|
Research, Development & Operations |
96 |
98 |
91 |
|||||||||
|
Marketing and Sales |
15 |
8 |
9 |
|||||||||
|
Administration |
13 |
15 |
22 |
|||||||||
|
Total |
124 |
121 |
122 |
|||||||||
Over the past three years, the number of our employees by geographic area was as follows:
|
|
Dec. 31, 2024 |
Dec. 31, 2023 |
Dec. 31, 2022 |
|||||||||
|
Israel & Europe |
51 |
53 |
58 |
|||||||||
|
United States |
73 |
68 |
64 |
|||||||||
|
Total |
124 |
121 |
122 |
|||||||||
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, 2024, 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 |
40,001 |
1.84 |
% | |||||
|
|
||||||||
|
Ordan Trabelsi |
91,500 |
4.21 |
% | |||||
|
|
||||||||
|
Barak Trabelsi |
64,500 |
2.97 |
% | |||||
|
|
||||||||
|
Tal Naftali Shmuel |
— |
— |
||||||
|
|
||||||||
|
Shoshana Cohen Shapira |
— |
— |
||||||
|
|
||||||||
|
Oren Raoul De Lange |
— |
— |
||||||
|
All executive officers and directors as a group (7 persons) |
196,001 |
9.02 |
% | |||||
|
(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 2,172,855 ordinary shares issued and outstanding as of December 31,
2024. |
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, 2024, 30,579 options were exercisable, and 40,838 options were outstanding under this plan.
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. As of December 31, 2024, no options were exercisable and no options were outstanding under this
plan.
In April 2023, the Option Plan was extended for another period of 10 years, until December 31, 2033.
A summary of our stock option activity and related information is as follows:
|
|
Year ended December 31 |
|||||||||||||||||||||||
|
|
2024 |
2023 |
2022 |
|||||||||||||||||||||
|
|
Number of
options |
Weighted
average
exercise
price |
Number of
options |
Weighted
average
exercise
price |
Number of
options |
Weighted
average
exercise
price |
||||||||||||||||||
|
Outstanding at Beginning of year |
41,109 |
$ |
70.20 |
40,553 |
$ |
71.6 |
1,069 |
$ |
246 |
|||||||||||||||
|
Granted |
- |
$ |
- |
1,100 |
$ |
20.6 |
40,047 |
$ |
65 |
|||||||||||||||
|
Exercised |
- |
$ |
- |
(13 |
) |
$ |
20.0 |
(83 |
) |
$ |
20 |
|||||||||||||
|
Canceled and forfeited |
(271 |
) |
$ |
62.88 |
(531 |
) |
$ |
83.4 |
(481 |
) |
$ |
75.8 |
||||||||||||
|
Outstanding at end of year |
40,838 |
$ |
70.21 |
41,109 |
$ |
70.2 |
40,552 |
$ |
71.6 |
|||||||||||||||
|
Exercisable at end of year |
30,579 |
$ |
72.38 |
20,849 |
$ |
76.0 |
10,680 |
$ |
83 |
|||||||||||||||
We recognized compensation expenses related to our share-based employee compensation awards of $401,841
, $243,000 and $138,000 for the years ended December 31, 2024, 2023 and, 2022, respectively.
The following table summarizes the allocation of the stock-based compensation expenses (all amounts in
thousands of dollars):
|
|
Year ended December 31, |
|||||||||||
|
|
2024 |
2023 |
2022 |
|||||||||
|
Cost of revenues |
$ |
4 |
$ |
13 |
$ |
17 |
||||||
|
Research and development expenses |
133 |
95 |
67 |
|||||||||
|
Selling and marketing expenses |
9 |
7 |
7 |
|||||||||
|
General and administrative expenses |
175 |
128 |
47 |
|||||||||
|
Other expenses, net |
81 |
- |
- |
|||||||||
|
|
||||||||||||
|
|
$ |
402 |
$ |
243 |
$ |
138 |
||||||
The options outstanding and exercisable as of December 31, 2024, have the ranges of exercise prices as
follows:
|
Options outstanding |
Options Exercisable |
|||||||||||||||||||||||||||||||||
|
Range of exercise price |
Number
outstanding as of December 31, 2023 |
Weighted average remaining contractual life (years) |
Weighted average exercise price |
Aggregate intrinsic value |
Number
outstanding as of December 31, 2023 |
Weighted average remaining contractual life (years) |
Weighted average exercise price |
Aggregate intrinsic value |
||||||||||||||||||||||||||
| $ |
$ |
$ |
|
$ |
$ |
|||||||||||||||||||||||||||||
|
20.00 |
373 |
4.20 |
20.0 |
- |
373 |
4.20 |
20.0 |
- |
||||||||||||||||||||||||||
|
24.60 |
662 |
6.05 |
24.60 |
- |
340 |
5.80 |
24.60 |
- |
||||||||||||||||||||||||||
|
65.00 |
38,150 |
4.68 |
65.00 |
- |
28,214 |
4.67 |
65.00 |
- |
||||||||||||||||||||||||||
|
150.00 |
1,190 |
4.18 |
150.00 |
- |
1,190 |
4.18 |
150.00 |
- |
||||||||||||||||||||||||||
|
400.00 |
463 |
4.07 |
400.00 |
- |
463 |
4.07 |
400.00 |
- |
||||||||||||||||||||||||||
|
40,838 |
5.54 |
- |
30,579 |
- |
||||||||||||||||||||||||||||||
The total intrinsic value of options exercised during the years ended December 31, 2024, and 2023 was $0
and $0, respectively, based on our Company’s average stock price of $3.95 and $11.60 during the years ended on those dates respectively.
A summary of the status of options granted to our employees that had vested as of December 31, 2024 is
presented below:
|
|
Options |
Weighted–
average grant-date fair value |
||||||
|
Non-vested at January 1, 2024 |
20,257 |
$ |
64.07 |
|||||
|
Granted |
- |
$ |
- |
|||||
|
Vested |
(9,819 |
) |
$ |
64.91 |
||||
|
Forfeited and canceled |
(179 |
) |
$ |
37.75 |
||||
|
Non-vested at December 31, 2025 |
10,259 |
$ |
63.73 |
|||||
As of December 31, 2024, there was $214,000 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 April 22, 2025 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 of which 4,101,907
of our ordinary shares were issued and outstanding:
Mas Alpha Securities Fund LP
Mas Alpha Securities Fund LP (“Mas Alpha”) holds 286,046 shares
of our ordinary shares, which reflects approximately 7% of our issued and outstanding ordinary shares, as reported in Mas Alpha’s
Schedule 13G filed with the SEC on April 2, 2025.
Significant Changes in the Ownership of Major Shareholders
Mas Alpha became a beneficial owner of more than 5% of our issued and
outstanding ordinary shares on March 27, 2025.
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, 2024,
there were approximately 23 record holders, of which 10 record holders holding approximately 99.72% 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 99.60% 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. Arie Trabelsi has served as the Chief Executive Officer of the Company since June 1, 2012 until February
21, 2022. 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, 2024 and 2023, we had accrued $18,000, and $18,000, respectively as expenses arising
from services provided by Mr. Trabelsi.
On April 29, 2012, our Board of Directors approved the recording of a floating charge on our assets in
favor of Mr. Arie Trabelsi and his spouse, unlimited in amount, in order to secure loans that are given by them from time to time to us.
The short terms loans provided by Mr. Arie Trabelsi and his spouse during the years from 2011 until 2023 ranged from $2,809 up to $2,662,470
and bore no interest. As of December 31,2024, total loans were $0. These loans bear no interest and are not attached to any price index.
The relationships and related party transactions described herein are in addition to any employment arrangements
with our executive officers and directors, which are described in this Annual Report above under “ITEM 6. Directors, Senior Management
and Employees”.
Indemnification Agreements
Our Articles of Association provide that we may indemnify our officers and directors for certain 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 such an office holder.
In addition, we have granted indemnification letters to our office holders. For more information, please see section above captioned “
ITEM 6.C. Directors, Senior Management and Employees ⸺. Board Practices ⸺ Exculpation, Insurance and Indemnification of
Directors and Officers”.
|
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, 2024.
|
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, 2024, we had 2,172,855 ordinary shares issued and outstanding.
|
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 and currently trade under the ticker symbol “SPCB”. On April 28, 2025, the closing price of our ordinary
shares on the NASDAQ Capital Market was USD 6.92 per share.
|
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 20,000,000 ordinary shares par value NIS 50 per share, of which 2,172,855 ordinary
shares were outstanding as of December 31, 2024.
DIRECTORS
Our Articles of Association provide that the number of directors may be determined from time to time by
our 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 of Directors 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 of Association 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 was approved in September 2013 by our 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:
|
|
• |
any amendment to the articles of association; |
|
|
• |
an increase of the company’s authorized share capital; |
|
|
• |
a merger; or |
|
|
• |
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:
|
|
• |
a breach of duty of care towards us or any other person, |
|
|
• |
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, |
|
|
• |
a financial liability imposed on him or her in favor of another person, or |
|
|
• |
any other event for which insurance of an office holder is or may be permitted. |
Indemnification of Office Holders
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:
|
|
• |
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;
|
|
|
• |
reasonable expenses of the proceedings, including lawyers’ fees, expended by the office holder or
imposed on him by the court for: |
|
|
(1) |
proceedings issued against him by or on behalf of the Company or by a third party; |
|
|
(2) |
criminal proceedings in which the office holder was acquitted; or |
|
|
(3) |
criminal proceedings in which he was convicted in an offense, which did not require proof of criminal intent;
or |
|
|
• |
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:
|
|
• |
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;
|
|
|
• |
a breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly;
|
|
|
• |
any act or omission done with the intent to derive an illegal personal benefit; or |
|
|
• |
any fine levied against the office holder. |
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.
|
C. |
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.
|
D. |
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.
|
E. |
Taxation |
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 2024,2023
and 2022.
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 2024, our U.S. subsidiaries are subject to U.S. federal tax rate of 21%, to the following
state tax rate of ; (i) 8.84% in the state of California, (ii) 6.5% in the State of New York , and (iii) the tax rate of
6.5% in the City of New York.
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 714,000 (in 2024) (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 2024) 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.
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F. |
Dividends and Paying Agents |
Not applicable.
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G. |
Statement by Experts |
Not applicable.
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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.
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I. |
Subsidiary Information |
Not applicable.
|
J. |
Annual Report to Security Holders |
Not applicable.
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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 2024 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 2024),
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 2023 net income of approximately $0.4 million.
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ITEM 12. |
DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES |
Not Applicable
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ITEM 13. |
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
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None.
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ITEM 14. |
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS |
None.
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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, 2024, 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, 2024 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, 2024. 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, 2024, 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, 2024, 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.
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ITEM 16. |
[RESERVED] |
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ITEM 16A. |
AUDIT COMMITTEE FINANCIAL EXPERT
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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.”
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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
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ITEM 16C. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES
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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.
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Year Ended December 31, |
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Services Rendered |
2024 |
2023 |
2022 |
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Audit fees |
$ |
247,000 |
$ |
145,000 |
$ |
160,000 |
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Audit-related fees |
$ |
- |
$ |
- |
- |
|||||||
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Tax fees |
$ |
12,000 |
$ |
12,000 |
12,000 |
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Total |
$ |
157,000 |
$ |
157,000 |
$ |
172,000 |
||||||
“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.
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ITEM 16D. |
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES |
Not applicable.
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ITEM 16E. |
PURCHASES OF EQUITY SECURITIES BY THE ISSUER
AND AFFILIATED PURCHASERS |
Not applicable.
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ITEM 16F. |
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
|
Not applicable.
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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.
|
|
• |
The requirements regarding the directors’ nominations process. Instead, we follow Israeli law and
practice in accordance with which our directors are recommended by our board of directors for election by our shareholders. See Item 6C.
“Directors, Senior Management and Employees - Board Practices - Election of Directors”. |
|
|
• |
The requirement to obtain shareholder approval for the establishment or amendment of certain equity based
compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering
involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company. Under
Israeli law and practice, the approval of the board of directors is required for the establishment or amendment of equity-based compensation
plans and private placements. Under Israeli regulations, Israeli companies whose shares have been publicly offered only outside of Israel
or are listed for trade only on an exchange outside of Israel, such as our company, are exempt from the Israeli law requirement to obtain
shareholder approval for private placements of a 20% or more interest in the company. For the approvals
and procedures required under Israeli law and practice for an issuance that will result in a change of control of the company and acquisitions
of the stock or assets of another company, see Item 6.C. “Directors, Senior Management and Employee - Board Practices - Approval
of Certain Transactions Under Israeli Law-Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with
Controlling Shareholders” and Item 10.B. “Additional Information — Memorandum and Articles of Association”
|
|
ITEM 16H. |
MINE SAFETY DISCLOSURE |
Not applicable.
|
ITEM 16J.
|
INSIDER TRADING POLICIES
|
Our Insider Trading Policy is included as part of our Company’s Code of Ethics – see Item 16B.
|
ITEM 16K.
|
CYBERSECURITY
|
At our Company, cybersecurity risk management is an integral part of our overall enterprise risk management program. Our cybersecurity risk management program is designed to align with industry practices and provide a framework for handling cybersecurity threats and incidents, including threats and incidents associated with the use of third-party applications and services provide by third-party service providers, and facilitate coordination across different departments of our company.
This framework includes steps for (i) assessing the severity of a cybersecurity threat, (ii) identifying the source of a cybersecurity threat, (iii) implementing cybersecurity countermeasures and mitigation strategies and (iv) informing management of material cybersecurity threats and incidents.
Our cybersecurity team engages as needed our Cyber Security division experts for risk assessment and system enhancements. In addition, our cybersecurity team provides training annually.
Our Board of Directors has overall oversight responsibility for our risk management and delegates the daily supervision of cybersecurity issues to our Chairman of the Baird, who is also the chairman of our Crisis Management Committee. The chairman of our Data Security Management Committee (as defined herein) reports material cybersecurity incidents to the Crisis Management Committee, and if needed, the chairman of our Crisis Management Committee will report the incident to our Board of Directors to take appropriate and timely measures in response to the incident.
Our management is responsible for identifying, considering, and assessing material cybersecurity risks on an ongoing basis, establishing processes to ensure that such potential cybersecurity risk exposures are monitored, putting in place appropriate mitigation measures and maintaining cybersecurity programs. We established our data security management committee (the “Data Security Management Committee”) in 2023, composed of personnel from our cyber-Security division, IT center, and management team, to improve data security. The Data Security Management Committee is responsible for developing data security protection strategies, plans, and systems and providing required support and coordinating on major data security incidents. Our cybersecurity programs are under the direction of our chairman of Data Security Management Committee who receives reports from our cybersecurity team and monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents. Our chairman of Data Security Management Committee and other dedicated personnel are experienced information systems security professionals with many years of experience. In addition, we established our crisis management committee (the “Crisis Management Committee”), chaired by our Chairman of the Board and composed of specialized teams to manage and respond to crisis in our business operations, including cybersecurity crisis.
In 2024, we did not identify any cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy, results of operations, or financial condition. However, despite our efforts, we cannot eliminate all risks from cybersecurity threats, or provide assurances that we have not experienced an undetected cybersecurity incident. For more information about these risks, see “Item 3. Key Information — 3.D. Risk Factors — Risks Related to Our Business — Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
69
PART III
|
ITEM 17.
|
FINANCIAL STATEMENTS
|
See Item 18.
|
ITEM 18.
|
FINANCIAL STATEMENTS
|
|
Index to Financial Statements
|
Page No.
|
|
|
|
|
Report of Independent Registered Public Accounting Firm (PCAOB Name: Yarel + Partners/PCAOB ID No. 1024)
|
73
|
|
|
|
|
F-1
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5 – F-36
|
70
|
ITEM 19.
|
EXHIBITS
|
Index to Exhibits
|
Exhibit
|
|
Description
|
|
|
|
|
| 11.2 | ||
|
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.
|
|
£
|
Management contract or compensatory plan or arrangement
|
71
|
†
|
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 Company's Registration Statement on Form F-1, File number 333-189910, filed with the SEC on July 3, 2013, and incorporated herein by reference.
|
| (2) |
Filed as Exhibit 2.1 to the Company's Registration Statement on Form F-1, File number 333-189810, filed with the SEC on July 3, 2013, and incorporated herein by reference.
|
|
(3)
|
Filed as Exhibit 10.3 to the Company's Registration Report on Form 6-K, filed with the SEC on March 31, 2023, and incorporated herein by reference.
|
|
(4)
|
Filed as Exhibit 4.2 to the Company's Registration Report on Form 6-K, filed with the SEC on August 3, 2023, and incorporated herein by reference
|
|
(5)
|
Filed as Exhibit 4.4 to the Company's Registration Statement on Form F-1, File number 333-273291, filed with the SEC on August 1, 2023, and incorporated herein by reference.
|
|
(6)
|
Filed as Exhibit 4.2 to the Company’s Report on Form 6-K, filed with the SEC on November 15, 2023, and incorporated herein by reference.
|
|
(7)
|
Filed as Exhibit 4.1 to the Registrant’s Registration Report on Form 6-K, filed with the SEC on January 22, 2024, and incorporated herein by reference
|
|
(8)
|
Filed as Exhibit 4.1 to the Company’s Report on Form 6-K, filed with the SEC on April 16, 2024, and incorporated herein by reference.
|
|
(9)
|
Filed as Exhibit 4.1 to the Company's Report on Form 6-K, filed with the SEC on April 19,2024, and incorporated herein by reference.
|
|
(10)
|
Filed as Exhibit 4.2 to the Company's Report on Form 6-K, filed with the SEC on April 19,2024, and incorporated herein by reference.
|
|
(11)
|
Filed as Exhibit 4.1 to the Company’s Report on Form 6-K, filed with the SEC on February 19, 2025, and incorporated herein by reference.
|
|
(12)
|
Filed as Exhibit 4.2 to the Company's Report on Form 6-K, filed with the SEC on February 19, 2025, and incorporated herein by reference.
|
|
(13)
|
Filed as Exhibit 4.2(a) to the Company’s Annual Report on Form 20-F, filed with the SEC on May 9, 2012, and incorporated herein by reference.
|
|
(14)
|
Filed as Exhibit 4.2(b) to the Company’s Annual Report on Form 20-F, filed with the SEC on May 9, 2012, and incorporated herein by reference.
|
|
(15)
|
Filed as Exhibit 10.1 to the Company’s Registration Statement on Form F-1 (File No. 333-189810), filed with the SEC on July 3, 2013, and incorporated herein by reference.
|
|
(16)
|
Filed as Exhibit 10.1 to the Company's Report on Form 6-K, filed with the SEC on January 31, 2025, and incorporated herein by reference.
|
|
(17)
|
Filed as Exhibit 8.1 to the Registrant’s Annual Report on Form 20-F, filed with the SEC on April 20, 2023, and incorporated herein by reference.
|
|
(18)
|
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.
|
|
(19)
|
Filed as Exhibit 97 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2023, filed with the SEC on April 22, 2024, and incorporated herein by reference.
|
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of SuperCom Ltd.
Stockholders of SuperCom Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SuperCom Ltd. (the Company) as of December 31, 2024 and 2023, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024, 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 audits 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.
73
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment -
Description of the Matter
The Company’s goodwill balance was $7.026 million as of December 31, 2024. Management conducts an impairment test as of December 31 of each year, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may be impaired. The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit or intangible asset to its respective carrying value. Fair value is estimated by management using the income method, which is based on the present value of estimated future cash flows attributable to the respective unit. Management applies significant judgment which is affected by expectations about future market and economic conditions in estimating and making assumptions related to the appropriate discount rates, revenue growth and operating margins. Changes in the assumptions could have a significant impact on the amount of potential impairment charge.
How We Addressed the Matter in Our Audit
To test the estimated fair value of the reporting units where the quantitative impairment tests were performed, we performed audit procedures that included, among others:
|
•
|
Assessing methodologies and testing the significant assumptions discussed above and whether the significant assumptions were consistent with evidence obtained in other areas of the audit.
|
|
•
|
Testing the completeness and accuracy of the underlying data used by the Company in its analysis.
|
|
•
|
We assessed the historical accuracy of management’s estimates.
|
|
•
|
We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair values of the reporting units that would result from changes in the assumptions.
|
|
•
|
We recalculated the resulting impairment charge recorded by the Company.
|
Allowance for Credit Losses -
Description of the Matter
The Company records an allowance for doubtful accounts when it determines that it is probable a receivable has been impaired. 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 main consideration for our determination that the allowance for doubtful accounts is a critical audit matter includes the high degree of estimation uncertainty resulting from significant management judgment 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 on the allowance recorded.
74
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 supporting documentation.
|
| • |
We analyzed the historical changes to determine past accuracy in estimating the allowance.
|
| • |
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 credit losses.
|
Assessment of the capitalized internal costs to develop software -
Description of the Matter
The Company capitalizes costs incurred to develop software during the application development stage. We identified the assessment of the capitalized internal costs to develop software as a critical audit matter. Subjective auditor judgment was required to assess the stage of software development for upgrades and enhancements for existing software, which determines when costs should be capitalized.
How We Addressed the Matter in Our Audit
| • |
We evaluated the process related to the approval of software projects or upgrades and enhancements to existing software, monitoring of the software development stage, and capitalization of internal costs.
|
| • |
We examined a sample of capitalized software costs to evaluate costs that were capitalized for software upgrades and enhancements. For each sample, we evaluated the capitalized costs and assessed the stage of software development by inspecting underlying documentation and inquiring of the Company's technology developers performing the internal-use software development activities regarding the specific nature, stage of completion, and hours incurred on the project.
|
Revenue Recognition - Estimates at Completion -
Description of the Matter
Revenues under contracts with governments and national agencies are generally recognized over time using the cost-to-cost method of accounting. Under this method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion, and revenue is recorded proportionally as costs are incurred. Contract costs, which are estimated utilizing current contract specifications and expected engineering requirements, typically are incurred over a longer period than a fiscal year, and the estimation of these costs at completion requires substantial judgment. The Company’s cost estimation process is based on professional knowledge and experience of engineers and project managers along with finance professionals.
Auditing the Company’s estimated costs at completion for long-term contracts was challenging and complex due to the judgment involved in evaluating management’s assumptions and key estimates over the duration of the contracts. The estimated costs at completion for the long-term contracts consider risks surrounding the Company’s ability to achieve the technical requirements and specifications of the contract, schedule, and other cost elements of the contract, and depend on whether the Company is able to mitigate risks surrounding such aspects of the contract.
75
How We Addressed the Matter in Our Audit
We obtained an understanding of the estimated costs at completion for the long-term contracts and related key assumptions and management’s review that the data underlying the estimated costs at completion was complete and accurate. To test the accuracy of the Company’s estimated costs at completion for the selected contracts, our audit procedures included, among others, evaluating the key assumptions used by management to determine such estimates. This included evaluating the historical accuracy of management’s estimates by comparing planned costs to actual costs incurred to date. We also tested the completeness and accuracy of the underlying data back to source documents and contracts.
In addition, we evaluated management’s application of the Company’s accounting policy, tested the mathematical accuracy of management’s calculation of revenue and associated timing of revenue recognized in the financial statements.
Valuation of Inventory -
Description of the Matter
The Company establishes inventory reserves which represent an amount for excess, slow-moving and obsolete inventory on hand that is expected to be written off or otherwise disposed of below cost at a future date. The Company’s estimate of the appropriate amount of the excess, slow-moving and obsolete inventory reserve utilizes certain inputs and involves judgment. Such inputs include data associated with historical sales trends, expected product life, forecasted sales demand and product mix and the Company’s core products. The calculation and analysis of historical sales data, expected product life, and forecasted sales demand and the application of this analysis to on-hand inventory involves complex analysis.
We identified the estimated inventory reserve for excess, slow-moving and obsolete inventory as a critical audit matter given the estimation uncertainty is impacted by a number of subjective factors including product lifecycle and forecasted sales demand. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of these subjective factors in combination with assumptions and inputs including historical sales trends, forecasted sales demand, and the on-hand inventory product mix used to determine excess, slow-moving and obsolete inventory.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company’s inventory process and methodology, evaluated the design and tested the Company’s net realizable values across each inventory and the reasonableness of assumptions, completeness, accuracy, and relevance of the underlying data used by management in the evaluation of write-off reserve. We evaluated the appropriateness and consistency of management’s methods and assumptions used in developing their estimate of the excess and slow-moving inventory reserve, which included consideration of product mix and the Company’s core products, product life cycle, forecasted sales demand and inventory turns of on-hand inventory. We reperformed the calculation of the excess and slow-moving inventory reserve utilizing the inputs, assumptions, and methodology consistent with management’s estimate
/s/ Yarel + Partners
Certified Public Accountants (Isr.)
Tel-Aviv, Israel
April 28, 2025
We have served as the Company’s auditor since 2023
|
SUPERCOM LTD.
|
|
CONSOLIDATED BALANCE SHEETS
|
|
(U.S. dollars in thousands, except share data)
|
|
|
As of December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
CURRENT ASSETS
|
||||||||
|
Cash and cash equivalents
|
$
|
3,150
|
$
|
5,206
|
||||
|
Restricted bank deposit
|
388
|
371
|
||||||
|
Accounts receivable, net of allowance for doubtful accounts of $8,106 and $14,124 as of December 31, 2024 and 2023, respectively (Note 17)
|
12,767
|
13,357
|
||||||
|
Other current assets (Note 3)
|
2,153
|
1,742
|
||||||
|
Inventories, net (Note 4)
|
2,521
|
2,503
|
||||||
|
Patents held for sale
|
5,283
|
5,283
|
||||||
|
TOTAL CURRENT ASSETS
|
26,262
|
28,462
|
||||||
|
|
||||||||
|
LONG-TERM ASSETS
|
||||||||
|
Property and equipment, net (Note 5)
|
3,261
|
2,701
|
||||||
|
Intangible assets, net (Note 6)
|
5,638
|
5,576
|
||||||
|
Goodwill
|
7,026
|
7,026
|
||||||
|
Other long-term assets (Note 7)
|
3,737
|
988
|
||||||
|
|
||||||||
|
TOTAL LONG-TERM ASSETS
|
19,662
|
16,291
|
||||||
|
|
||||||||
|
TOTAL ASSETS
|
45,924
|
44,753
|
||||||
|
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable
|
878
|
1,883
|
||||||
|
Employees and payroll accruals
|
1,165
|
1,015
|
||||||
|
Related parties (Note 15.c)
|
-
|
100
|
||||||
|
Short- term loans
|
423
|
792
|
||||||
|
Accrued expenses and other liabilities (Note 8)
|
470
|
485
|
||||||
|
Short- term operating lease liabilities (Note 9)
|
445
|
401
|
||||||
|
Deferred revenues
|
366
|
726
|
||||||
|
TOTAL CURRENT LIABILITIES
|
3,747
|
5,402
|
||||||
|
|
||||||||
|
LONG-TERM LIABILITIES
|
||||||||
|
Long-term loans (Note 1d)
|
29,748
|
33,952
|
||||||
|
Other long-term liabilities (Note 11)
|
732
|
583
|
||||||
|
TOTAL LONG TERM LIABILITIES
|
30,480
|
34,535
|
||||||
|
|
||||||||
|
TOTAL LIABILITIES
|
34,227
|
39,937
|
||||||
|
|
||||||||
|
Commitments and contingent liabilities (Note 12)
|
||||||||
|
|
||||||||
|
SHAREHOLDERS’ EQUITY (Note 14)
|
||||||||
|
Ordinary shares, NIS 50 par value - authorized 5,000,000 shares, 2,172,855 and 664,553 shares issued and outstanding at December 31, 2024 and 2023, respectively
|
29,238
|
9,094
|
||||||
|
Additional paid-in capital
|
88,746
|
102,670
|
||||||
|
Accumulated deficit
|
(106,287
|
)
|
(106,948
|
)
|
||||
|
Total shareholders’ equity
|
11,697
|
4,816
|
||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$
|
45,924
|
$
|
44,753
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 1
|
SUPERCOM LTD.
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
(U.S. dollars in thousands, except share and per share data)
|
|
|
Year Ended December 31,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Revenues
|
||||||||||||
|
Products
|
$
|
20,109
|
$
|
19,767
|
$ |
10,100
|
||||||
|
Services
|
7,526
|
6,803
|
7,549
|
|||||||||
|
Total revenues
|
27,635
|
26,570
|
17,649
|
|||||||||
|
|
||||||||||||
|
Cost of revenues
|
||||||||||||
|
Cost of products
|
8,828
|
11,175
|
7,261
|
|||||||||
|
Cost of services
|
5,423
|
5,172
|
4,000
|
|||||||||
|
Total cost of revenues
|
14,251
|
16,347
|
11,261
|
|||||||||
|
|
||||||||||||
|
Gross profit
|
13,384
|
10,223
|
6,388
|
|||||||||
|
|
||||||||||||
|
Operating expenses:
|
||||||||||||
|
Research and development
|
3,417
|
3,110
|
3,412
|
|||||||||
|
Sales and marketing
|
2,401
|
2,200
|
2,657
|
|||||||||
|
General and administrative
|
6,344
|
5,460
|
5,186
|
|||||||||
|
Other (income) expenses, net
|
1,999
|
2,812
|
1,138
|
|||||||||
|
Total operating expenses
|
14,161
|
13,582
|
12,393
|
|||||||||
|
|
||||||||||||
|
Operating loss
|
(777
|
) |
(3,359
|
) |
(6,005
|
) | ||||||
|
|
||||||||||||
|
Financial income (expenses), net
|
1,020
|
(663
|
) |
(1,751
|
) | |||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
243
|
(4,022
|
) |
(7,756
|
) | |||||||
|
|
||||||||||||
|
Income tax
|
418
|
-
|
299
|
|||||||||
|
|
||||||||||||
|
Net income (loss)
|
$
|
661
|
$
|
(4,022
|
) |
(7,457
|
) | |||||
|
|
||||||||||||
|
Net income (loss) per share - Basic:
|
$
|
0.38
|
$
|
(12)
|
$ |
(40)
|
||||||
|
Net income (loss) per share - Diluted:
|
$
|
0.38
|
$
|
(12)
|
$ |
(40)
|
||||||
|
Basic Shares used in calculation of net income per share:
|
1,730,461
|
338,102
|
184,561
|
|||||||||
|
Diluted Shares used in calculation of net income per share:
|
1,730,461
|
338,102
|
184,561
|
|||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 2
SUPERCOM LTD.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(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, 2021
|
141,197
|
2,028
|
97,833
|
(95,469
|
)
|
4,392
|
||||||||||||||
|
Conversion of loans
|
2,720
|
36
|
175
|
-
|
211
|
|||||||||||||||
|
Exercise of options
|
83
|
1
|
-
|
-
|
1
|
|||||||||||||||
|
Stock based compensation
|
-
|
-
|
138
|
-
|
138
|
|||||||||||||||
|
Share Issuance for a total consideration of $6,389 net of $543 issuance expenses
|
66,317
|
992
|
4,854
|
-
|
5,846
|
|||||||||||||||
|
Net loss
|
-
|
-
|
-
|
(7,457
|
)
|
(7,457
|
) | |||||||||||||
|
|
||||||||||||||||||||
|
Balance as of December 31, 2022
|
210,317
|
$
|
3,057
|
$
|
103,000
|
$
|
(102,926
|
)
|
$
|
3,131
|
||||||||||
|
Conversion of loans
|
25,932
|
361
|
531
|
-
|
892
|
|||||||||||||||
|
Exercise of options and warrants
|
54,063
|
718
|
2,574
|
-
|
3,292
|
|||||||||||||||
|
Stock based compensation
|
-
|
-
|
243
|
-
|
243
|
|||||||||||||||
|
Share Issuance for a total consideration of $1,393 net of $113 issuance expenses
|
374,241
|
4,958
|
(3,678
|
)
|
-
|
1,280
|
||||||||||||||
|
Net loss
|
-
|
-
|
-
|
(4,022
|
)
|
(4,022
|
) | |||||||||||||
|
|
||||||||||||||||||||
|
Balance as of December 31, 2023
|
664,553
|
$
|
9,094
|
$
|
102,670
|
$
|
(106,948
|
)
|
$
|
4,816
|
||||||||||
|
Conversion of loans
|
704,098
|
9,397
|
(5,651
|
)
|
-
|
3,747
|
||||||||||||||
|
Exercise of warrants
|
47,000
|
632
|
(632
|
)
|
-
|
-
|
||||||||||||||
|
Stock based compensation
|
-
|
-
|
402
|
-
|
402
|
|||||||||||||||
|
Share Issuance for a total consideration of $2,922 net of $218 issuance expenses
|
405,810
|
5,364
|
(2,660
|
)
|
-
|
2,704
|
||||||||||||||
|
Shares and warrants issued pursuant to settlement agreements
|
350,002
|
4,733
|
(5,365
|
)
|
-
|
(632
|
) | |||||||||||||
|
Reverse split round up
|
1,392
|
18
|
(18
|
)
|
- |
-
|
||||||||||||||
|
Net income
|
-
|
-
|
-
|
661
|
661
|
|||||||||||||||
|
Balance as of December 31, 2024
|
2,172,855
|
$
|
29,238
|
$
|
88,746
|
$
|
(106,287
|
)
|
$
|
11,697
|
||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
SUPERCOM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
|
Year Ended December 31,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
CASH FLOWS - OPERATING ACTIVITIES
|
||||||||||||
|
Net income (loss)
|
$
|
661
|
$
|
(4,022
|
)
|
$
|
(7,457
|
) | ||||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||||||
|
Accrued interest on loans
|
1,485
|
2,148
|
2,360
|
|||||||||
|
Loan forgiveness gain
|
(2,312
|
) |
-
|
-
|
||||||||
|
Depreciation and amortization
|
3,386
|
2,980
|
2,691
|
|||||||||
|
Stock-based compensation to employees
|
402
|
243
|
138
|
|||||||||
|
Stock-based compensation issued pursuant to settlement agreements
|
403
|
-
|
-
|
|||||||||
|
Decrease in deferred tax
|
(418
|
) |
-
|
(299
|
) | |||||||
|
Change in Fair value of derivatives& warrants liability
|
(798
|
) |
(2,313
|
)
|
-
|
|||||||
|
Credit Losses
|
1,540
|
1,457
|
1,000
|
|||||||||
|
Inventory write-downs
|
130
|
180
|
138
|
|||||||||
|
Decrease in accounts receivables, net
|
(3,064
|
) |
(4,135
|
)
|
(791
|
) | ||||||
|
Decrease (increase) in other current assets
|
(597
|
) |
670
|
|
(640
|
) | ||||||
|
Decrease (increase) in inventories, net
|
(148
|
) |
728
|
12
|
||||||||
|
Increase (decrease) in accounts payables
|
(1,005
|
) |
616
|
(128
|
) | |||||||
|
Increase (decrease) in employees and payroll accruals
|
150
|
(325
|
)
|
(780
|
) | |||||||
|
Increase (decrease) in accrued severance pay
|
-
|
(41
|
)
|
51
|
||||||||
|
Lease liabilities
|
(671
|
) |
(604
|
)
|
(436
|
) | ||||||
|
Increase (decrease) in accrued expenses and other liabilities, related parties & deferred revenues
|
(438
|
) |
51
|
(513
|
) | |||||||
|
|
||||||||||||
|
Net cash used in operating activities
|
(1,294
|
) |
(2,367
|
)
|
(4,654
|
) | ||||||
|
|
||||||||||||
|
CASH FLOWS - INVESTING ACTIVITIES
|
||||||||||||
|
Purchase of property and equipment
|
(1,598
|
) |
(1,714
|
)
|
(524
|
) | ||||||
|
Capitalization of software development costs
|
(1,751
|
) |
(1,652
|
)
|
(1,613
|
) | ||||||
|
Increase in severance pay fund
|
-
|
-
|
(52
|
) | ||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(3,349
|
) |
(3,366
|
)
|
(2,189
|
) | ||||||
|
|
||||||||||||
|
CASH FLOWS - FINANCING ACTIVITIES
|
||||||||||||
|
Related parties
|
(100
|
(68
|
)
|
(4
|
) | |||||||
|
Proceeds from loans and credit
|
-
|
-
|
900
|
|||||||||
|
Proceeds from exercise of options and warrants, net
|
-
|
1,819
|
-
|
|||||||||
|
Proceed from Shares and warrants issuance, net
|
2,704
|
5,054
|
5,848
|
|||||||||
|
Net cash provided by financing activities
|
2,604
|
6,805
|
6,744
|
|||||||||
|
|
||||||||||||
|
Increase (decrease) in cash, cash equivalents, and restricted cash
|
(2,039
|
) |
1,072
|
(99
|
) | |||||||
|
Cash, cash equivalents, and restricted cash - beginning of year
|
5,577
|
4,505
|
4,604
|
|||||||||
|
|
||||||||||||
|
Cash, cash equivalents, and restricted cash - end of year
|
$
|
3,538
|
$
|
5,577
|
$
|
4,505
|
||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash paid for taxes
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Cash paid for interest, net
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
NON-CASH TRANSACTIONS:
|
||||||||||||
|
Conversion of loans and warrant into ordinary shares
|
$
|
3,747
|
$
|
2,251
|
$
|
212
|
||||||
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. 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
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.
|
During 2024, the Company’s business, trading and operations were impacted materially by 7 fronts war and the resulted bad Public sentiments towards Israel in Europe and Asia.
During 2024, the Company’s business was affected by the 7 fronts war of Israel with Gaza, Lebanon and Iran, some of the Company employees have been serving the Army, the all airlines except for the Israeli ELAL stop flying to and from Israel, and many customers and potential customers refrain from visiting Israel, shipping cost increased due to the Hutim blockage on the Sues Canal for ships selling to Israel.
Furthermore, as a result of the Israel Hamas War, public sentiments towards Israel often spill over into antisemitism, affecting Jewish communities and, by extension, Israeli businesses including our Company.
Antisemitism and hatred in Europe and Asia had presented significant challenges for the Company, these phenomena had affected our market access, brand reputation, and operational security, hence we needed to remain resilient and adaptable in the face of these challenges to ensure continued operation and success in these regions .
Our sales, project operations and management experienced difficulties visiting or even communicating with some European and Asian countries customers or potential customers. Our R&D processes have return to normal per our current business plan, although as described above, we had experienced difficulties implementing fully our business plan mainly in regards for the expansion in Europe and Asia, hence we had temporarily moved our business focus to the US market by expanding our Sales and Marketing team in the US and had developed products tailored for the US market.
|
|
|
c.
|
Liquidity Analysis
The Company has experienced net losses and significant cash outflows from cash used in operating activities over the past years. As of and for the year ended December 31, 2024, the Company had an accumulated deficit of $106,287, and net cash used in operating activities of $1,294 compared to $2,367, and 4,654 for the years ended December 31, 2024, 2023 and 2022 respectively.
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, 2024, the Company had cash, cash equivalent and restricted cash of $3,538 and positive working capital of $22,398.
Additionally, the Company secured financing of $20,000 Fortress Investment Group 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”) and $1,600 of promissory notes. In 2022, the Company raised a net amount of approximately $5,848 in proceeds from accredited investors . To date, the Company has used the proceeds from the secured financing, subordinated debt and private placement and public offerings (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.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 1:
|
GENERAL (cont.)
|
|
|
On March 30, 2023, the Company raised approximately $2.4 million in gross proceeds in a registered direct offering with a single accredited institutional investor through the sale of an aggregate of 24,250 of its ordinary shares, and 51,631 pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002 per share, and concurrent private placement to such Purchaser of the Company’s private warrants to purchase an aggregate of 75,881 of its ordinary shares at an exercise price of $33.2 per share.
On August 3, 2023, the Company raised approximately $2.75 million in gross proceeds in a registered direct offering with a single accredited institutional investor through the sale of an aggregate of 33,050 of its ordinary shares, and 128,715 pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002 per share, and concurrent private placement to such Purchaser of the Company’s private warrants to purchase an aggregate of 161,765 of its ordinary shares at an exercise price of $17.00 per share.
On November 15, 2023, the Company raised approximately $2.0 million in gross proceeds in a warrant exercise and reload with a single accredited institutional investor through warrant exercise of 54,050 warrant to ordinary shares, and warrant exercise of 183,596 warrant to pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002 per share, and concurrent warrant reload to such Purchaser of the Company’s private warrants to purchase an aggregate of 475,291 of its ordinary shares at an exercise price of $10 per share.
On April 19, 2024, the Company raised approximately $2.9 million in gross proceeds in a registered direct offering with a single accredited institutional investor through the sale of an aggregate of 143,695 of its ordinary shares, and 262,114 pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002 per share, and concurrent private placement to such Purchaser of the Company’s private warrants to purchase an aggregate of 405,808 of its ordinary shares at an exercise price of $7.60 per share.
On January 31, 2025, the Company raised approximately $6.0 million in gross proceeds in a registered direct offering with a two accredited institutional investor through the sale of an aggregate of 545,454 of its ordinary shares.
On February 19, 2025, the Company raised approximately $8.2 million in gross proceeds as a result of the exercise of previously issued Company warrants by a single accredited institutional investor warrant holder through the exercise of warrants to purchase an aggregate of 931,099 of the Company’s ordinary shares, and as a result of such exercise, the issuance to such accredited institutional investor of the Company’s new warrants to purchase an aggregate of 698,324 of its ordinary shares at an exercise price of $13.5 per share
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.
On January 22, 2025, the Company entered into a Waiver and Fourth Amendment to Credit Agreement with affiliates of the Company’s senior lender Fortress Investment Group LLC, the Company’s wholly owned subsidiary, and certain other subsidiaries of the Company as guarantors, to amend the Credit Agreement. Pursuant to the Amendment, among other things, the parties agreed: (i) for $4,374,175 of the Outstanding Amount of the term loans made under the Credit Agreement to be exchanged into an aggregate of 100,000 of the Company’s ordinary at a price per share of $43.74, such that the Outstanding Amount is $14,000,000 after giving effect to the Amendment, and (ii)to extend the maturity date of the loans made by the senior lender to the Company to December 31, 2028 and to push back any Loan monthly interest and principal payments, such that they all shall be paid at maturity;
As of December 31, 2024, the outstanding balance of the Credit Facility was $18,375.
|
|
NOTE 1:
|
GENERAL (cont.)
|
|
|
In 2021, the Company secured through the issuance of subordinated notes, gross proceeds of $12,000. For the consideration of $12,000 in gross proceeds, SuperCom issued to a certain institutional investor in February 2021 and June 2021, two-year unsecured, subordinated promissory notes in the amounts of $7,000 and $5,000, respectively, both with similar structures and terms. Given the subordination agreement between the senior secured loan investor, the subordinated debt investor and the Company, the subordinated investor may request that the balance of the subordinated debt be paid only after the senior secured Fortress debt is paid in full. The notes have a 5% annual coupon and a built-in increase to the balance of the notes by 5% every 6 months for the first 24 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.
During 2024, 2023, 2022 and 2021 the Company converted $3,223 ,$500, $211 and $7,601, respectively, of the remaining principal and accrued interest of subordinated notes into the Company’s ordinary shares.
As of December 31, 2024, the outstanding principal and accrued interest of the Subordinated Debt was $11,373.
|
|
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 2024, and 2023.
|
|
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 credit losses:
The allowance for credit losses is determined with respect to specific amounts the Company has determined to be doubtful of collection. In determining the allowance for credit losses, 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
|
|
5
|
|
|
As of December 31, 2024, 2023 and 2022 no impairment losses were identified.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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, 2024, 2023 and 2022 the Company performed an annual impairment analysis and no impairment losses have been identified.
|
|
|
k.
|
Impairment of long-lived assets and intangible assets with definite useful life:
The Company’s long-lived assets and intangible assets with definite useful life 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. Management entered into engagements with several brokers for the purpose of marketing and sale of those patents.
The Company classifies an asset group (an “asset”) as held for sale in the period during which (i) the Company has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be abandoned.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in operating loss for the period in which the held for sale criteria are met.
Upon designation as an asset held for sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is no longer classified as held for sale. Realization costs of the patents are immaterial.
For the years ended December 31, 2024, 2023 and 2022 the Company did not identify any triggers for impairment
|
|
|
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 defined contribution plans.
A defined contribution plan is a program that benefits an employee after termination of employment, under which the Company regularly makes fixed payments to a fund administered by a separate and independent entity so that the Company has no legal or constructive obligation to pay additional contributions if such fund does not contain sufficient assets to pay all employees the benefits to which they may be entitled relating to employee service in the current and prior periods. The fund assets are not included in the Company’s consolidated balance sheets.
|
| 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).
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
The Company recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expect to receive in exchange for those goods or services.
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 principle, 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.
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
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 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.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
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.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
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.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
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 |
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, 2024
|
|||||||||||||||
|
|
Cyber
Security
|
IoT
|
e-Gov
|
Total
|
||||||||||||
|
Major geographic areas
|
||||||||||||||||
|
Africa
|
$
|
-
|
$
|
-
|
$
|
774
|
$
|
774
|
||||||||
|
European countries
|
234
|
17,772
|
160
|
18,166
|
||||||||||||
|
South America
|
8
|
-
|
-
|
8
|
||||||||||||
|
United States
|
244
|
6,848
|
-
|
7,092
|
||||||||||||
|
Israel
|
658
|
655
|
220
|
1,533
|
||||||||||||
|
APAC
|
54
|
8
|
-
|
62
|
||||||||||||
|
Total revenue
|
$
|
1,198
|
$
|
25,283
|
$
|
1,154
|
$
|
27,635
|
||||||||
|
|
Year ended December 31, 2023
|
|||||||||||||||
|
|
Cyber
Security
|
IoT
|
e-Gov
|
Total
|
||||||||||||
|
Major geographic areas
|
||||||||||||||||
|
Africa
|
$
|
-
|
$
|
-
|
$
|
1,455
|
$
|
1,455
|
||||||||
|
European countries
|
328
|
17,256
|
89
|
17,673
|
||||||||||||
|
South America
|
12
|
-
|
-
|
12
|
||||||||||||
|
United States
|
279
|
6,487
|
-
|
6,766
|
||||||||||||
|
Israel
|
562
|
23
|
-
|
585
|
||||||||||||
|
APAC
|
79
|
-
|
-
|
79
|
||||||||||||
|
Total revenue
|
$
|
1,260
|
$
|
23,766
|
$
|
1544
|
$
|
26,570
|
||||||||
|
|
Year ended December 31, 2022
|
|||||||||||||||
|
|
Cyber
Security
|
IoT
|
e-Gov
|
Total
|
||||||||||||
|
Major geographic areas
|
||||||||||||||||
|
Africa
|
$
|
-
|
$
|
-
|
$
|
374
|
$
|
374
|
||||||||
|
European countries
|
273
|
9,023
|
263
|
9,559
|
||||||||||||
|
South America
|
-
|
-
|
-
|
-
|
||||||||||||
|
United States
|
351
|
6,526
|
-
|
6,877
|
||||||||||||
|
Israel
|
614
|
79
|
-
|
693
|
||||||||||||
|
APAC
|
146
|
-
|
-
|
146
|
||||||||||||
|
Total revenue
|
$
|
1,384
|
$
|
15,628
|
$
|
637
|
$
|
17,649
|
||||||||
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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, 2024, the aggregate amount of the transaction price allocated to remaining performance totals $33 million. The Company expects approximately 53% of remaining performance obligations to be recognized into revenue within the next 12 months, with the remaining 27% recognized thereafter.
The Company applies the practical expedient in paragraph ASC 606-10-50-14 and does 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 2024 and 2023 financial statements.
|
|
|
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 is exposed to credit risk in the event of nonpayment by counterparties. The Company’s trade receivables are derived from sales to customers located primarily in 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. Please see Note 16d for information on major customers.
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.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
r.
|
Concentrations of suppliers:
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
|
|
|
s.
|
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 1.038 million, 528,750 and 85,650 for the years ended December 31, 2024, 2023 and 2022, respectively
|
|
|
t.
|
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.
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.
As of December 31, 2024, the Company measured its stock warrants liability at fair value based on significant inputs not observable in the market, which caused them to be classified as a Level 3 measurement within the fair value hierarchy
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
u.
|
Accounting for stock-based compensation:
The Company accounts for stock-based compensation arrangements using a fair value method which requires the recognition of compensation expenses for costs related to all stock-based payments including stock options. The fair value method requires the Company to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted that are expensed on a straight-line basis over the requisite service period, which is generally the vesting period. The Company accounts for forfeitures as they occur. Option valuation models, including the Black-Scholes option-pricing model, require the input of several assumptions. Changes in the assumptions used can materially affect the grant-date fair value of an award. These assumptions include the risk-free interest rate, expected dividend yield, expected volatility and the expected life of the award.
|
|
|
v.
|
Treasury Shares:
Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.
|
|
|
w.
|
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.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
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.
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. See Note 9 for further information on leases.
|
|
|
x.
|
Allocation of proceeds and related issuance costs:
When multiple instruments are issued in a single transaction (package issuance), the total net proceeds from the transaction are allocated among the individual freestanding instruments identified. The allocation occurs after identifying all the freestanding instruments and the subsequent measurement basis for those instruments.
Financial instruments that are required to be subsequently measured at fair value (i.e. derivative warrants liability and derivative liability related to bifurcated embedded conversion feature) are measured at fair value and the remaining consideration is allocated to other financial instruments that are not required to be subsequently measured at fair value (i.e. certain convertible bridge loans, warrants eligible for equity classification) and ordinary shares, based on the relative fair value basis for such instruments.
The allocation of issuance costs to freestanding instruments was based on an approach that is consistent with the allocation of the proceeds, as described above.
Issuance costs allocated to the derivative warrant liabilities were immediately expensed, as discussed above. Issuance costs allocated to warrants stock classified as equity component were recorded as a reduction of additional paid-in capital.
|
|
|
y.
|
Stock Warrants
Certain warrants that were granted by the Company to investors are classified as a component of permanent equity since they are freestanding financial instruments that are legally detachable and separately exercisable, do not embody an obligation for the Company to repurchase its own shares, and permit the holders to receive a fixed number of shares of common stock upon exercise for a fixed exercise price and thus, are considered as indexed to the Company’s own stock. In addition, the warrants must require physical settlement and may not provide any guarantee of value or return. Such warrants were initially recognized based on the allocation method described in Note 2x above as an increase to additional paid-in capital. When applicable, direct issuance expenses that were allocated to the above warrants were deducted from additional paid-in capital.
|
|
|
z.
|
Derivative Warrants Liability:
The Company accounts for certain warrants to purchase Ordinary Shares in connection with certain transactions, held by investors, that include a fundamental transaction feature pursuant to which such warrants could be required to be settled in cash upon certain events, as current liability according to the provisions of ASC 815-40, “Derivatives and Hedging - Contracts in Entity’s Own Equity” (“ASC 815-40”).
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
The Company accounted for these warrants as a financial liability measured upon initial recognition and on subsequent periods at fair value by using the Black-Scholes Option Pricing Model.
|
|
|
|
Certain warrants that were granted by the Company in connection with certain transactions (see also Notes 10&14) entitle the investors to exercise the warrants for a variable number of shares and/or for a variable exercise price, accordingly, the warrants were classified as a current liability according to the provisions of ASC 815-40, “Derivatives and Hedging - Contracts in Entity’s Own Equity” (“ASC 815-40”). The Company accounted for these warrants as a financial derivative liability measured upon initial recognition and on subsequent periods at fair value by using the Black-Scholes Option Pricing Model.
The fair value of the aforesaid warrants derivative liability is estimated using the Black-Scholes Model which requires inputs such as the expected term of the warrants, share price volatility and risk-free interest rate. These assumptions are reviewed on a regular basis and changes in the estimated fair value of the outstanding warrants are recognized each reporting period as part of in the “Financing (income) expenses, net” line in operations in the accompanying consolidated statement of net loss, until such warrants are exercised or expired. When applicable, direct issuance expenses that were allocated to the above warrants were expensed as incurred.
|
|
|
aa.
|
Reclassification
Certain comparative figures have been reclassified to conform to the current year presentation. Such reclassifications did not have any significant impact on the Company's equity, net loss or cash flows.
|
|
|
bb.
|
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the current incurred loss methodology with an expected loss methodology which is referred to as the current expected credit loss (“CECL”) methodology. The measurement of credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivables and trade accounts receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees and other similar instruments) and net investment in leases recognized by a lessor in accordance with Accounting Standards Codification (“ASC”) Topic 842 – Leases. ASU 2016-13 also made changes to the accounting for available-for-sale debt securities and requires credit losses to be presented as an allowance rather than as a write-down on such securities management does not intend to sell or believes that it is more likely than not they will be required to sell. The adoption of ASU 2016-13 on January 1, 2023 did not have a material impact on the Company’s consolidated financial statements and disclosures
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”), which addresses issues identified as a result of the complexities associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. This update addresses, among other things, the number of accounting models for convertible debt instruments and convertible preferred stock, targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance and amendments to the guidance for the derivatives scope exception for contracts in an entity’s own equity, as well as the related EPS guidance. This update applies to all entities that issue convertible instruments and/or contracts in an entity’s own equity. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The adoption of ASU 2020-06 on January 1, 2022 did not have a material impact on the Company’s consolidated financial statements and disclosures.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
|
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40); Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, a consensus of the FASB Emerging Issues Task Force (“ASU 2021-04”), which aims to clarify and reduce diversity in issuer's accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. This update applies to all entities that issue freestanding written call options that are classified in equity. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The adoption of ASU 2021-04 on January 1, 2022 did not have a material impact on the Company’s consolidated financial statements and disclosures.
|
|
|
cc.
|
Recently Issued Accounting Standards Not Yet Effective
In November 2024, the FASB issued ASU No. 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”). ASU 2024-03 was issued to improve disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of expenses in commonly presented expense captions. ASU 2024-03 is effective for the fiscal years beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The guidance is to be applied on a prospective basis; however, retrospective application is permitted. The Company is within the scope of this ASU and expects to adopt ASU 2024-03 on January 1, 2027, on a prospective basis, and adoption will result in new disclosures as prescribed by the guidance.
On December 14, 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, “Improvements to Income Tax Disclosures”, which requires disclosure of disaggregated income taxes paid, prescribes standard categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosures. This ASU will be effective for the Company's annual report for fiscal year 2026 and allows adoption on a prospective basis, with a retrospective option. This
ASU will only have an impact on the Company's income tax disclosures. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280), “Improvements to Reportable Segment Disclosures,” which enhances the disclosures required for operating segments in the annual and interim consolidated financial statements. This ASU will be effective for the Company's annual report for fiscal year 2025 and for interim period reporting beginning in fiscal year 2026 on a retrospective basis with early adoption permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
Other new pronouncements issued but not effective as of December 31, 2024 are not expected to have a material impact on the Company’s consolidated financial statements.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 3:
|
OTHER CURRENT ASSETS
|
|
|
December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
Prepaid expenses
|
$
|
160
|
$
|
133
|
||||
|
Advances to suppliers
|
1,117
|
337
|
||||||
|
Government institutions
|
271
|
479
|
||||||
|
Guaranty held by customer
|
566
|
662
|
||||||
|
Other
|
39
|
131
|
||||||
|
|
$
|
2,153
|
$
|
1,742
|
||||
|
NOTE 4:
|
INVENTORIES, NET
|
|
|
December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
Raw materials, parts and supplies
|
$
|
1,225
|
$
|
1,380
|
||||
|
Finished products
|
1,296
|
1,123
|
||||||
|
|
||||||||
|
|
$
|
2,521
|
$
|
2,503
|
||||
As of December 31, 2024 and 2023, inventory is presented net of write offs for slow inventory in the amount of approximately $2,525 and $2,395, respectively.
|
NOTE 5:
|
PROPERTY AND EQUIPMENT, NET
|
|
|
December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
Cost:
|
||||||||
|
|
||||||||
|
Computers and peripheral equipment
|
$
|
1,065
|
$
|
3,390
|
||||
|
Office furniture and equipment
|
272
|
852
|
||||||
|
Trade equipment
|
-
|
42
|
||||||
|
Leasehold improvements
|
210
|
210
|
||||||
|
Equipment held by customer
|
4,722
|
4,420
|
||||||
|
|
||||||||
|
|
6,269
|
8,914
|
||||||
|
Accumulated depreciation:
|
||||||||
|
Computers and peripheral equipment
|
786
|
2,990
|
||||||
|
Office furniture and equipment
|
225
|
785
|
||||||
|
Trade Equipment
|
-
|
42
|
||||||
|
Leasehold improvements
|
201
|
206
|
||||||
|
Equipment held by customer
|
1,796
|
2,190
|
||||||
|
|
||||||||
|
|
3,008
|
6,213
|
||||||
|
Depreciated cost
|
$
|
3,261
|
$
|
2,701
|
||||
|
|
Purchasing of Equipment for the years ended December 31, 2024, 2023 and 2022, were $1,598 $1,714 and $524, respectively.
Depreciation expenses for the years ended December 31, 2024, 2023 and 2022, were $1,037, $653 and $688, respectively.
During the year 2024, the Company disposed of fully depreciated property, plant, and equipment with cost of $4,155
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 6:
|
INTANGIBLE ASSETS, NET
Other intangible assets consisted of the following:
|
|
|
December 31, 2024
|
December 31, 2023
|
||||||||||||||||||||||
|
|
Carrying
Amount
|
Accumulated
Amortization
|
Net Book
Value
|
Carrying
Amount
|
Accumulated
Amortization
|
Net Book
Value
|
||||||||||||||||||
|
Customers relationships & Other
|
$
|
8,734
|
$
|
8,468
|
$
|
266
|
$
|
8,734
|
$
|
8,427
|
$
|
307
|
||||||||||||
|
IP & Technology
|
7,019
|
5,605
|
1,414
|
7,019
|
5,252
|
1,767
|
||||||||||||||||||
|
Capitalized software development costs
|
13,017
|
9,059
|
3,958
|
11,266
|
7,764
|
3,502
|
||||||||||||||||||
|
|
$
|
28,770
|
$
|
23,132
|
$
|
5,638
|
$
|
27,019
|
$
|
21,443
|
$
|
5,576
|
||||||||||||
Amortization expenses amounted to $1,689, 1,693 and $1,607 for the years ended December 31, 2024, 2023 and 2022, respectively.
|
NOTE 7:
|
OTHER LONG-TERM ASSETS, NET
|
|
|
December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
Deferred tax
|
$
|
919
|
$
|
501
|
||||
|
Long term trade receivables net of credit losses allowance of $7,118
|
2,213
|
- | ||||||
|
Operating lease right-of-use asset
|
605
|
487
|
||||||
|
|
||||||||
|
|
$
|
3,737
|
$
|
988
|
||||
|
NOTE 8:
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
Accrued management services
|
$
|
54
|
$
|
86
|
||||
|
Professional services
|
210
|
207
|
||||||
|
Derivative Warrants Liability (see note 10)
|
$
|
202
|
$
|
-
|
||||
|
Other accrued expenses
|
4
|
192
|
||||||
|
|
||||||||
|
|
$
|
470
|
$
|
485
|
||||
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 9:
|
LEASES
We do not own any real estate. We lease approximately 1,139 square meters of office and warehousing premises in Tel Aviv and Herzliya, Israel, under a lease which started on April l 1, 2021 and expires on March 31, 2026. According to the lease agreements, the monthly fee is approximately $39.
We lease approximately 1,701 square meters of office premises in California, Kentucky and Miami for our U.S. subsidiaries, which under the current lease contracts expire gradually by 2026, with a monthly fee of approximately $27 for 2024.
|
|
|
Year ended December 31,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
The components of lease expense were as follows:
|
||||||||||||
|
Operating leases expenses
|
$
|
759
|
$
|
701
|
$ |
475
|
||||||
|
|
||||||||||||
|
Cash flow information related to operating leases:
|
||||||||||||
|
Cash used in operating activities
|
$
|
782
|
$
|
694
|
$ |
502
|
||||||
|
|
||||||||||||
|
Non-cash activity - Right of use assets obtained in exchange for new operating lease liabilities
|
$
|
777
|
$
|
652
|
$ |
-
|
||||||
|
|
December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
|
||||||||
|
Supplemental information related to operating leases, including location of amounts reported in the accompanying consolidated balance sheets, follows:
|
||||||||
|
Other assets - Right-of-Use assets
|
$
|
1,428
|
$
|
1,824
|
||||
|
Accumulated amortization
|
823
|
1,337
|
||||||
|
|
$
|
605
|
$
|
487
|
||||
|
|
||||||||
|
Lease liabilities – current - accrued expenses and other liabilities
|
$
|
445
|
$
|
401
|
||||
|
|
118
|
108
|
||||||
|
|
$
|
563
|
$
|
509
|
||||
|
|
||||||||
|
Weighted average remaining lease term in years
|
1.20
|
2.25
|
||||||
|
Weighted average annual discount rate
|
9
|
%
|
9
|
%
|
||||
Future minimum lease commitments under non-cancelable operating leases for the years ended December 31, 2024, are as follows:
|
2025
|
493
|
|||
|
2026
|
121
|
|||
|
Total operating lease payments
|
614
|
|||
|
Less: imputed interest
|
(51
|
)
|
||
|
Present value of lease Liabilities
|
$
|
563
|
|
NOTE 10:
|
DERIVATIVE WARRANTS LIABILITY
|
|
Issued to investors
|
December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
Outstanding at January 1
|
$
|
-
|
$
|
-
|
||||
|
Issued to investors
|
1,000
|
3,786
|
||||||
|
Exercised
|
-
|
(1,473
|
)
|
|||||
|
Changes in fair value
|
(798
|
)
|
(2,313
|
)
|
||||
|
|
||||||||
|
Outstanding at December 31
|
$
|
202
|
$
|
-
|
||||
See note 14.c. for additional information on the derivative warrants issued.
The Company used the Black-Scholes valuation model to estimate fair value of these warrants. In using this model, the Company made certain assumptions about risk-free interest rates, dividend yields, expected stock price volatility, expected term of the warrants and other assumptions. Expected volatility was calculated based upon historical volatility of the Company. Risk-free interest rates are derived from the yield on U.S. Treasury debt securities. Dividend yields are based on historical dividend payments, which have been zero to date. The expected term of the warrants is based on the time to expiration of the warrants from the measurement date.
The following table summarizes the observable inputs used in the valuation of the warrants issued on January 19, 2024:
|
|
January 19,
|
December 31,
|
||||||
|
|
2024
|
2024
|
||||||
|
Risk-free interest rate
|
4.39
|
%
|
4.16
|
%
|
||||
|
Dividend yield
|
0
|
%
|
0
|
%
|
||||
|
Volatility factor
|
287
|
%
|
123
|
%
|
||||
|
Expected life of the warrants in years
|
2.00
|
1.05
|
||||||
|
NOTE 11:
|
OTHER LONG-TERM LIABILITIES
|
|
|
December 31,
|
|||||||
|
|
2024
|
2023
|
||||||
|
Deferred revenues
|
$
|
444
|
$
|
305
|
||||
|
Deferred tax liability
|
170
|
170
|
||||||
|
Long- term operating lease liabilities
|
118
|
108
|
||||||
|
|
||||||||
|
|
$
|
732
|
$
|
583
|
||||
|
NOTE 12:
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
a.
|
Guarantees, indemnity and liens:
|
|
|
1.
|
The Company and its subsidiaries issued bank guaranties in the total amount of approximately $388 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 fixed 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.
|
|
|
b.
|
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 13:
|
INCOME TAX
|
|
|
a.
|
The Corporate tax rate in Israel in 2024, 2023 and 2022 was 23%.
|
|
|
b.
|
Our USA subsidiaries were subject to federal tax rate of 21% in 2024, 2023 and 2022, state tax of 8.84% in CA , 6.5% in NY, and city tax of 6.5% in New York City
|
|
|
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,
|
|||||||
|
|
2024
|
2023
|
||||||
|
Operating loss carry forwards
|
$
|
23,536
|
$
|
24,106
|
||||
|
Reserves and allowances
|
5,228
|
4,939
|
||||||
|
|
||||||||
|
Net deferred tax assets before valuation allowance
|
28,764
|
29,045
|
||||||
|
Valuation allowance
|
(27,923
|
)
|
(28,622
|
)
|
||||
|
|
||||||||
|
Net deferred tax assets
|
841
|
423
|
||||||
|
|
||||||||
|
Deferred income taxes consist of the following:
|
||||||||
|
Domestic
|
20,025
|
21,234
|
||||||
|
Valuation allowance
|
(19,184
|
)
|
(20,811
|
)
|
||||
|
Net deferred tax assets
|
841
|
423
|
||||||
|
|
||||||||
|
Foreign
|
8,739
|
7,811
|
||||||
|
Valuation allowance
|
(8,739
|
)
|
(7,811
|
)
|
||||
|
|
$
|
-
|
$
|
-
|
||||
|
|
As of December 31, 2024, the Company and its subsidiaries, have provided a valuation allowance of $27,923 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 $841 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.
|
|
|
|
d.
|
Carryforward tax losses:
As of December 31, 2024, SuperCom Ltd and its subsidiaries in Israel have accumulated losses for tax purposes of approximately $69,482, 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 $14,570, which may be carried forward and offset against capital gains for an indefinite period. Loss carryforwards in Israel are measured in NIS.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 13:
|
INCOME TAX (cont.)
|
|
|
As of December 31, 2024, SuperCom’ s subsidiaries in the United States have estimated total available carryforward tax losses of approximately $27,955. 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, 2019. SuperCom’s subsidiaries in the United States and Israel have not received final assessments since their incorporation.
|
|
|
|
|
|
|
|
e.
|
Income (loss) before income tax consists of the following:
|
|
|
Substantially, all tax expenses (income) 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,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Income (loss) before income tax, as reported in the consolidated statements of operations
|
$
|
243
|
$
|
(4,022
|
)
|
(7,756
|
) | |||||
|
Statutory tax rate in Israel
|
23
|
% |
23
|
%
|
23
|
% | ||||||
|
|
||||||||||||
|
Theoretical tax expenses(income)
|
56
|
(925
|
)
|
(1,784
|
)
|
|||||||
|
Changes in valuation allowance
|
(601
|
) |
943
|
1185
|
||||||||
|
Changes in foreign currency exchange rate
|
315
|
527
|
507
|
|||||||||
|
Different tax rates
|
(89
|
) |
(82
|
)
|
(26
|
) | ||||||
|
Non-deductible expenses
|
(99
|
) |
(463
|
)
|
(181
|
) | ||||||
|
|
||||||||||||
|
Actual income tax expenses (income)
|
$
|
(418
|
)
|
$
|
-
|
(299
|
) | |||||
|
NOTE 14:
|
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.
|
On January 19, 2024, the Company issued to a single accredited institutional investor an aggregate of 73,758 of its ordinary shares, 276,244 pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002 per share, and private warrants to purchase an aggregate of 212,500 of its ordinary shares at an exercise price of $9 per share and at the same time canceled warrant issued to such Investor on July 2020 to purchase an aggregate of 7,400 of its ordinary shares.
The 212,500 Company’s private warrants issue on January 19, 2024, were classified as a financial liability because of the repurchase provisions of such warrants that permitted the holders of such warrants, in the event of a fundamental transaction, to receive a cash consideration that is not the same as the consideration payable to the common stockholders (see also Note 10).
On February 19,2024, all the 276,244 prefunded warrants were converted into 276,244 ordinary shares of the Company.
|
|
|
d.
|
On April 16, 2024, as a compensation for late filing of its registration statement, the Company issued to a single accredited institutional investor private warrants to purchase an aggregate of 50,000 of the Company’s ordinary shares at an exercise price of $7.44 per share which were scheduled to expire on April 15, 2029.
All warrants were classified as a component of shareholders’ equity because such warrants are free standing financial instruments that are legally detachable, separately exercisable, do not embody an obligation for the Company to repurchase its own shares, and permit the holders to receive a fixed number of Ordinary Shares upon exercise, requires physical settlement and do not provide any guarantee of value or return (unless, in accordance with ASC 815-40-55-3, there is a fundamental transaction, as defined in the warrant agreements, which allows the holders of the warrants to receive the same form of consideration payable to the holders of Ordinary Shares, in which case equity treatment is not precluded).
The Company used the Black-Scholes valuation model to estimate the fair value of these warrants. In using this model, the Company made certain assumptions about risk-free interest rates, dividend yields, expected stock price volatility, expected term of the warrants and other assumptions. Expected volatility was calculated based upon historical volatility of the Company. Risk-free interest rates are derived from the yield on U.S. Treasury debt securities. Dividend yields are based on historical dividend payments, which have been zero to date. The expected term of the warrants is based on the time to expiration of the warrants from the measurement date.
The following table summarizes the observable inputs used in the valuation of the warrants issued on April 16,2024 on issuance date and on exercise date:
|
|
|
e.
|
On April 19, 2024, the Company raised approximately $2.9 million in gross proceeds in a registered direct offering with a single accredited institutional investor through the sale of an aggregate of 143,695 of its ordinary shares, 262,115 pre-funded warrants to purchase ordinary shares with an exercise price of $0.0002 per share, and private warrants to purchase an aggregate of 405,808 of its ordinary shares at an exercise price of $7.6 per share.
On April 22, 2024, all 262,115 prefunded warrants of the Company were converted into 262,115 ordinary shares of the Company.
Issuance expenses totaled $218.
All warrants were classified as a component of shareholders’ equity
|
|
f.
|
During 2024 the Company converted $3,223 of the remaining principal and accrued interest of long-term loans into 587,500 of the Company’s ordinary shares, see Note 1.d. for additional information.
|
|
|
g.
|
During 2024 the Company converted $494 of the remaining principal and accrued interest of short-term loans issued in 2022 into 116,598 of the Company’s ordinary shares.
|
|
|
h.
|
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. 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.
In 2007 a new option plan was approved under which the Company may grant stock options to the U.S. employees of the Company and its subsidiaries (the “2007 Option Plan”). Under the 2007 Option Plan, the Company may grant both qualified (for preferential tax treatment) and non-qualified stock options. In June 2013, the Option Plan was extended for another period of ten years, until December 31, 2023.
In April 2023, the Option Plan was extended for another period of ten years, until December 31, 2033.
During the year 2022, the Company granted 40,047 option to purchase ordinary shares to certain officers and employees of the Company.
During the year 2023, the Company granted 1,100 option to purchase ordinary shares to certain employees of the Company.
During the years 2024 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:
The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the periods indicated:
|
|
|
Year ended December 31,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Weighted Average Risk-free interest rate
|
-
|
3.84
|
%
|
2.84
|
||||||||
|
Dividend yield
|
-
|
0
|
%
|
0
|
||||||||
|
Weighted Average Volatility factor
|
-
|
91
|
%
|
74
|
||||||||
|
Weighted Average Expected life of the options
|
|
4.53
|
6.64
|
|||||||||
|
|
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.
The following table contains additional information concerning options granted under the existing stock-option plan:
|
|
|
Year ended December 31
|
|||||||||||||||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||||||||||||||
|
|
Number of
options
|
Weighted
average
exercise
price
|
Number of
options
|
Weighted
average
exercise
price
|
Number of
options
|
Weighted
average
exercise
price
|
||||||||||||||||||
|
Outstanding at Beginning of year
|
41,109
|
$
|
70.20
|
40,552
|
$
|
71.6
|
1,069
|
$
|
246
|
|||||||||||||||
|
Granted
|
-
|
$
|
-
|
1,100
|
$
|
20.6
|
40,047
|
$
|
65
|
|||||||||||||||
|
Exercised
|
-
|
$
|
-
|
(13
|
)
|
$
|
20.0
|
(83
|
)
|
$
|
20
|
|||||||||||||
|
Canceled and forfeited
|
(271
|
)
|
$
|
62.88
|
(530
|
)
|
$
|
83.4
|
(481
|
)
|
$
|
75.8
|
||||||||||||
|
Outstanding at end of year
|
40,838
|
$
|
70.21
|
41,109
|
$
|
70.2
|
40,552
|
$
|
71.6
|
|||||||||||||||
|
Exercisable at end of year
|
30,579
|
$
|
72.38
|
20,849
|
$
|
76.0
|
10,680
|
$
|
83
|
|||||||||||||||
|
A summary of the Company’s non-vested options granted to employees is presented below:
|
|
|
Year ended December 31
|
|||||||||||||||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||||||||||||||
|
|
Number of
options
|
Weighted
average
exercise
price
|
Number of
options
|
Weighted
average
exercise
price
|
Number of
options
|
Weighted
average
exercise
price
|
||||||||||||||||||
|
Outstanding at Beginning of year
|
20,260
|
$
|
64.07
|
29,873
|
$
|
70.2
|
272
|
$
|
214
|
|||||||||||||||
|
Granted
|
-
|
$
|
-
|
1,100
|
$
|
24.6
|
40,047
|
$
|
65
|
|||||||||||||||
|
Vested
|
(9,822
|
)
|
$
|
64.91
|
(10,249
|
)
|
$
|
69.2
|
(9,965
|
)
|
$
|
78.8
|
||||||||||||
|
Canceled and forfeited
|
(179
|
)
|
$
|
37.75
|
(464
|
)
|
$
|
73.6
|
(481
|
)
|
$
|
75.8
|
||||||||||||
|
Non-vested as of December 31, 2024
|
10,259
|
$
|
63.73
|
20,260
|
$
|
64.07
|
29,873
|
$
|
70.2
|
|||||||||||||||
|
|
As of December 31, 2024, there was $214 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 1.66 years.
|
|
|
|
|
|
The following table summarizes the allocation of the stock-based compensation:
|
|
Year ended December 31,
|
||||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Cost of revenues
|
$
|
4
|
$
|
13
|
$
|
17
|
||||||
|
Research and development expenses
|
133
|
95
|
67
|
|||||||||
|
Selling and marketing expenses
|
9
|
7
|
7
|
|||||||||
|
General and administrative expenses
|
175
|
128
|
47
|
|||||||||
|
Other expenses, net
|
81
|
-
|
-
|
|||||||||
|
|
$
|
402
|
$
|
243
|
$
|
138
|
||||||
|
Exercise price $
|
Number of options
outstanding
|
Weighted
average
remaining
contractual life
(years)
|
Aggregate
intrinsic
value
|
Number of options
exercisable
|
||||||||||||||
|
$
|
20.00
|
373
|
4.20
|
$
|
-
|
373
|
||||||||||||
|
24.60
|
662
|
6.05
|
$
|
-
|
340
|
|||||||||||||
|
65.00
|
38,150
|
4.68
|
$
|
-
|
28,213
|
|||||||||||||
|
150.00
|
1,190
|
4.18
|
$
|
-
|
1,190
|
|||||||||||||
|
400.00
|
463
|
4.07
|
$
|
-
|
463
|
|||||||||||||
|
40,838
|
$
|
-
|
30,579
|
|||||||||||||||
|
The total intrinsic value of options exercised for the years ended December 31, 2024 and 2023 was $0 and $0, respectively.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 14:
|
SHARE CAPITAL (cont.)
|
|
|
h.
|
Warrants:
Each of the Company's warrants entitles the holder to exercise such warrant for one ordinary share and does not confer upon such holder any rights as an ordinary shareholder until such holder exercises such holder’s warrants and acquires the Ordinary Shares.
All Company warrants outstanding as of December 31, 2024 are classified as a component of shareholders’ equity (excluding the warrants issued on January 19, 2024, which are classified as a liability, see Note 10), because such warrants are free standing financial instruments that are legally detachable, separately exercisable, do not embody an obligation for the Company to repurchase its own shares, and permit the holders to receive a fixed number of Ordinary Shares upon exercise, requires physical settlement and do not provide any guarantee of value or return.
The following table contains additional information concerning warrants activity for the years 2024, 2023 and 2022:
|
|
|
Year ended December 31
|
|||||||||||||||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||||||||||||||
|
|
Number of
warrants
|
Weighted
average
exercise
price
|
Number of
warrants
|
Weighted
average
exercise
price
|
Number of
warrants
|
Weighted
average
exercise
price
|
||||||||||||||||||
|
Outstanding at Beginning of year
|
487,642
|
$
|
18.2
|
45,393
|
$
|
201.2
|
12,350
|
341.4
|
||||||||||||||||
|
Issued
|
455,808
|
$
|
7.6
|
475,291
|
$
|
10.0
|
60,987
|
99.2
|
||||||||||||||||
|
Exercised
|
-
|
$
|
-
|
32,743
|
$
|
64.0
|
28,243
|
61.6
|
||||||||||||||||
|
Expired /forfeited
|
-
|
$
|
-
|
-
|
$
|
-
|
-
|
-
|
||||||||||||||||
|
Outstanding at end of year
|
943,450
|
$
|
13.1
|
487,642
|
$
|
18.2
|
45,393
|
201.2
|
||||||||||||||||
|
|
Set forth below is data regarding the range of exercise prices and expiration date for warrants outstanding at December 31, 2023:
|
|
Exercise Price
|
Number of warrants
Outstanding
|
Exercisable until
|
||||||||
|
$
|
374
|
125
|
2025
|
|||||||
|
$
|
150
|
375
|
2026
|
|||||||
|
$
|
341.4
|
11,850
|
2027
|
|||||||
|
$
|
10
|
475,292
|
2029
|
|||||||
|
$
|
8.0
|
50,000
|
2029
|
|||||||
|
$
|
7.6
|
405,808
|
2029
|
|||||||
|
943,450
|
||||||||||
|
|
i.
|
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.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 15:
|
RELATED PARTY TRANSACTIONS
|
|
|
a.
|
Mr. Arie Trabelsi served as the chief executive officer of the Company since June 1, 2012 until February 21, 2022. Mr. Trabelsi is the sole director of Sigma Wave,. 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.
|
|
|
b.
|
As of December 31, 2024 and 2023, the Company accrued $25 and $86, respectively as expenses arising from related party management services.
|
|
NOTE 16:
|
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.
The company operates in three technologies segments or Strategic business units; e-Gov, IoT, and Cyber Security:
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.
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.
|
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 16:
|
SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)
|
|
|
Year ended December 31, 2024
|
|||||||||||||||
|
|
Cyber
Security
|
IoT
|
e-Gov
|
Total
|
||||||||||||
|
Revenues
|
$
|
1,198
|
$
|
25,283
|
$
|
1,154
|
$
|
27,635
|
||||||||
|
|
||||||||||||||||
|
Operating Income (loss)
|
271
|
39
|
|
(1,087
|
)
|
(777
|
)
|
|||||||||
|
|
||||||||||||||||
|
Goodwill
|
1,075
|
2,229
|
3,722
|
7,026
|
||||||||||||
|
|
||||||||||||||||
|
Total Property and Equipment, net
|
$
|
87
|
$
|
3,016
|
$
|
158
|
$
|
3,261
|
||||||||
|
|
Year ended December 31, 2023
|
|||||||||||||||
|
|
Cyber
Security
|
IoT
|
e-Gov
|
Total
|
||||||||||||
|
Revenues
|
$
|
1,260
|
$
|
23,766
|
$
|
1,544
|
$
|
26,570
|
||||||||
|
|
||||||||||||||||
|
Operating Income (Loss)
|
524
|
(99
|
)
|
(3,676
|
)
|
(3,359
|
)
|
|||||||||
|
|
||||||||||||||||
|
Goodwill
|
1,075
|
2,229
|
3,722
|
7,026
|
||||||||||||
|
|
||||||||||||||||
|
Total Property and Equipment, net
|
$
|
8
|
$
|
2,519
|
$
|
174
|
$
|
2,701
|
||||||||
|
|
Year ended December 31, 2022
|
|||||||||||||||
|
|
Cyber
Security
|
IoT
|
e-Gov
|
Total
|
||||||||||||
|
Revenues
|
$
|
1,384
|
$
|
15,628
|
$
|
637
|
$
|
17,649
|
||||||||
|
|
||||||||||||||||
|
Operating loss
|
680
|
(3,993
|
)
|
(2,692
|
)
|
(6,005
|
)
|
|||||||||
|
|
||||||||||||||||
|
Goodwill
|
1,075
|
2,229
|
3,722
|
7,026
|
||||||||||||
|
|
||||||||||||||||
|
Total Property and Equipment, net
|
$
|
30
|
$
|
1,590
|
$
|
50
|
$
|
1,640
|
||||||||
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,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Operating loss
|
||||||||||||
|
Total operating loss of reportable segments
|
$
|
(777
|
)
|
$
|
(3,359
|
)
|
(6,005
|
) | ||||
|
Financial expenses, net
|
1,020
|
(663
|
)
|
(1,751
|
) | |||||||
|
Loss before income taxes
|
$
|
243
|
$
|
(4,022
|
)
|
(7,756
|
) | |||||
SUPERCOM LTD. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
U.S. dollars in thousands (except per share data) |
|
NOTE 16:
|
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,
|
|||||||||||||||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||||||||||||||
|
|
Total
Revenues
|
Property and
Equipment, net
|
Total
revenues
|
Property and
Equipment, net
|
Total
Revenues
|
Property and
Equipment, net
|
||||||||||||||||||
|
Africa
|
$
|
774
|
$
|
-
|
$
|
1,455
|
$
|
-
|
$
|
374
|
$
|
-
|
||||||||||||
|
European countries
|
18,166
|
-
|
17,673
|
-
|
9,559
|
-
|
||||||||||||||||||
|
South America
|
8
|
-
|
12
|
-
|
-
|
-
|
||||||||||||||||||
|
United States
|
7,092
|
11
|
6,766
|
21
|
6,877
|
38
|
||||||||||||||||||
|
Israel
|
1,533
|
3,250
|
585
|
2,680
|
693
|
1,602
|
||||||||||||||||||
|
APAC
|
62
|
-
|
79
|
-
|
146
|
-
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$
|
27,635
|
$
|
3,261
|
$
|
26,570
|
$
|
2,701
|
$
|
17,649
|
$
|
1,640
|
||||||||||||
|
|
-
|
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,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Raw materials and equipment
|
$
|
2,508
|
$
|
2,841
|
302
|
|||||||
|
Electronic monitoring
|
18,386
|
17,819
|
11,614
|
|||||||||
|
Treatment programs
|
5,158
|
4,538
|
3,998
|
|||||||||
|
Maintenance, royalties and project management
|
1,583
|
1,372
|
1,735
|
|||||||||
|
|
||||||||||||
|
|
$
|
27,635
|
$
|
26,570
|
17,649
|
|||||||
|
|
d.
|
Major customer data as a percentage of total sales:
|
|
NOTE 17:
|
OTHER EXPENSES, NET
|
|
|
Year ended December 31,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Credit losses
|
$
|
1,200
|
$
|
1,457
|
$
|
1,000
|
||||||
|
Other
|
799
|
1,355
|
138
|
|||||||||
|
Total other expenses, net
|
$
|
1,999
|
$
|
1,812
|
$
|
1,138
|
||||||
|
|
Credit losses provision.
The following is a summary of the accounts receivables and other receivables allowance for credit losses for the years ended December 31:
|
|
|
Year ended December 31,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Balance at beginning of period
|
$
|
14,124
|
$
|
12,667
|
$
|
11,667
|
||||||
|
Provision during the period
|
1,200
|
1,457
|
1,000
|
|||||||||
|
Balance at end of period
|
$
|
15,324
|
$
|
14,124
|
$
|
12,667
|
||||||
|
NOTE 18:
|
FINANCIAL EXPENSES, NET
|
|
|
Year ended December 31,
|
|||||||||||
|
|
2024
|
2023
|
2022
|
|||||||||
|
Interest, bank charges and fees
|
$
|
(1,826
|
)
|
$
|
(2,512
|
)
|
$
|
(1,770
|
) | |||
|
Forgiveness Gain
|
$
|
2,312
|
$
|
-
|
-
|
|||||||
|
Change in Fair value of derivative warrants liabilities
|
798
|
2,313
|
-
|
|||||||||
|
Exchange differences, net
|
(264
|
)
|
(464
|
) |
19
|
|||||||
|
Total financial income(expenses), net
|
$
|
1,020
|
$
|
(663
|
)
|
$
|
(1,751
|
) | ||||
|
NOTE 19:
|
SUBSEQUENT EVENTS.
On January 22, 2025, the Company entered into a Waiver and Fourth Amendment to Credit Agreement (the “Amendment”) with affiliates of its senior lender Fortress Investment Group LLC (collectively, the “Lenders”), SuperCom Inc., the Company’s wholly owned subsidiary (the “Borrower”), and certain other subsidiaries of the Company as guarantors, to amend the Credit Agreement, dated as of September 6, 2018 (as amended, the “Credit Agreement”), entered into by the parties. Pursuant to the Amendment, among other things, the parties agreed: (i) for $4,374,175 of the Outstanding Amount of the term loans made under the Credit Agreement to be exchanged into an aggregate of 100,000 of the Company’s ordinary at a price per share of $43.74, such that the Outstanding Amount is $14,000,000 after giving effect to the Amendment. (ii)to extend the maturity date of the Loans to December 31, 2028 and to push back any Loan monthly interest and principal payments, such that they all shall be paid at maturity;
On January 31, 2025, the Company completed a registered direct offering with certain accredited institutional investors of an aggregate of 545,454 of its ordinary shares, at a purchase price of $11.00. The gross proceeds to the Company from this offering are approximately $6.0 million before deducting the placement agent's fees and other offering expenses.
On November 15, 2023, April 17, 2024, and April 18, 2024 the Company issued warrants to purchase up to an aggregate of 931,099 of its ordinary shares to a certain accredited institutional investor. On February 19, 2025, the Company entered into a letter agreement with the Investor pursuant to which the parties agreed that the Investor shall exercise for cash all of such warrants, generating gross proceeds of approximately $8.2 million to the Company, the Company issued to the Investor a new warrant to purchase up to 698,324 of its ordinary shares, which will expire on May 1, 2029, The new warrant has an exercise price of $13.50 per share.
|
F - 36
SIGNATURES
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 28, 2025
77
