MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OPERATIONS
The following discussion and analysis should be read together with our unaudited consolidated financial statements and the related notes as of June 30, 2023, which appear
elsewhere in this report.
Cautionary Note Regarding Forward-Looking Statements
The discussion and analysis in this section contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, with respect to our
business, financial condition and results of operations. Such forward-looking statements reflect our current views with respect to future events and financial results. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,”
“continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. These include statements regarding our earnings,
projected growth and forecasts, and similar matters which are not historical facts. We remind readers that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the
actual future events or results to differ materially from those described in the forward-looking statements. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that
are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these
forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: (i) inability to realize
benefits from acquisitions, (ii) our inability to manage our growth profitably, (iii) intense competition in our industry, (iv) acquisition of businesses disrupting our business and harming our financial condition and operations, (v) the need to
obtain additional financing , (vi) our ability to respond promptly and effectively to market changes, (vii) our ability to obtain and maintain contracts with governments, (viii) our dependence on third-party representatives to generate revenues and
supply components, (ix) unfavorable global economic conditions, (x) developments affecting international operations and foreign markets, (xi) breaches of network or information technology security, (xii) intellectual property litigation, and (xiii)
such other factors discussed throughout Item 3. D. Risk Factors of our Annual Report on Form 20-F for the year ended December 31, 2022. Any forward-looking statement made by us in this section is based only on information currently available to us
and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments
or otherwise.
Overview
Founded in 1988, we are a global provider of traditional and digital identity solutions, advanced IoT, and cyber security products and solutions to governments and private and
public organizations worldwide.
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).
On December 26, 2013, we acquired the SmartID division of On Track Innovations Ltd., or OTI, including all contracts, software, other related technologies, and intellectual
property, or IP, assets. The SmartID division has a strong international presence, with a broad range of competitive and well-known e-Gov solutions and technology. The acquisition significantly expanded the breadth of our e-Gov capabilities globally,
while providing us with outstanding market and technological experts, together with leading ID software platforms and technologies.
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 an all-in-one field-proven IoT suite, accompanied by services specifically tailored to meet the requirements of IoT solutions. Our proprietary IoT suite of hybrid hardware, connectivity and software components
is 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, from 2012 we have developed the next generation IoT suite of devices, connectivity and Monitoring software; the PureSecurity Hybrid Suite of wrist
band, tags, beacons, PureCom, Pure Monitors, PureTrack and other components.
On January 1, 2016, we acquired Leaders in Community Alternatives, Inc., or LCA. LCA is a California-based, private criminal justice organization providing community-based
services and electronic monitoring programs to government agencies in the U.S. for more than 25 years. LCA offers a broad range of competitive solutions for governmental institutions across the U.S. in addressing realignment strategies and plans.
Connectivity
In 2016, as part of our strategy to enhance and broaden our IoT connectivity products and solutions offerings for public safety, enterprises, hospitality, and smart cities
markets, on May 18, 2016, we acquired Alvarion Technologies Ltd. or Alvarion. Alvarion designs solutions for carrier wi-fi, enterprise connectivity, smart city, smart hospitality, connected campuses, and connected events that are both complete and
heterogeneous to ensure ease of use and optimize operational efficiency. Carriers, local governments and hospitality sectors worldwide deploy Alvarion’s intelligent wi-fi networks to enhance productivity and performance, as well as its legacy
backhaul services and products.
Cyber Security
During 2015, we identified the cyber security market as a very fast-growing market where we believe that SuperCom has major advantages due to synergic technologies and 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.
General
Our consolidated financial statements appearing in this 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 U.S. dollars. In addition, substantial portions of our costs are
incurred in U.S. dollars. Since the U.S. dollar is the primary currency of the economic environment in which we and certain of our subsidiaries operate, the U.S. dollar is our functional and reporting currency and, accordingly, monetary accounts
maintained in currencies other than the U.S. 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 U.S. dollar, have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component of shareholders’ equity in accumulated other
comprehensive income (loss).
Results of Operations
Revenues
Our revenues for the six months ended June 30, 2023, increased by $7.9 million, or 125%, to $14.1 million compared to $6.3
million for the six months ended June 30, 2022. This increase in revenue was primary due to implementation of new multi years IoT contracts in Europe amounted to $7.2 million.
Cost of Sales
Our cost of sales increased in the first six months of 2023 to $10.2 million from $3.6 million in the first six months of 2022, an increase of 182%. This
increase in cost of sales was primary due to the large increase in revenue of $7.9 million.
Gross Margin
Our gross margin decreased in the first six months of 2023 to 27.2% compared to 41.8% in the first half of 2022.
The decrease in gross marginwas primary due to the change in revenue mix, mainly due to implementation stage of new IoT contract in
Europe representing lower gross margin.
Expenses
Our operating expenses decreased in the first six months of 2023 to $5.5 million, or by 3%, from $5.7 million in the first six months of 2022. This
increase in operating expenses in the first half of 2023 was primarily due to (i) decrease of $0.1 million in research and development expenses, (ii) decrease of $0.3 million in sales and marketing expenses, (iii) decrease of $0.1 million in general
and administration expenses, (iv) an increase of $0.4 million in other expenses.
Financial Expenses, net
We had financial expenses of $869 thousands in the first half of 2023 compared to a financial income of $2,032 thousands in the first half of 2022. The decrease in financial
expenses was due to (i) changes in the exchange rate of the NIS against the U.S. dollar in 2023 compared to 2022, (ii) an interest fee on loans and credit lines, and (iii) bank fees related to guarantees issued to our customers.
Income Tax Benefit
We recorded an income tax expense in the amount of $0 during the first half of the year 2023, compared to an income tax expense in the amount of $0
thousand during the first half of the year 2022.
Net Loss
As a result of the changes in our operational expenses, financial expense that we recorded in the first half of 2023, as described above, our net loss in
the first half of 2023 was $2,590 thousand compared to a net loss of $5,159 thousands in the first half of 2022.
4
GENERAL
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6 Months Ended |
Jun. 30, 2023 |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] |
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| GENERAL |
| a. |
SuperCom Ltd. (the “Company”) is an Israeli resident company organized in 1988 in Israel. On January 24, 2013, the Company changed its name back to SuperCom Ltd, its original name, from Vuance Ltd. On September 12, 2013, the Company’s ordinary shares were approved for listing on the NASDAQ Capital Market and began trading under the ticker symbol “SPCB” on September 17, 2013. Previously, the Company’s ordinary shares traded on the OTCQB® electronic quotation service.
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The Company is a global provider of e-GOV, IoT, Communication and Cyber Security solutions to governments and organizations, both private and public, throughout the world; (i) IoT products and solutions reliably identify, track and monitor people or objects in real-time, enabling customers to detect unauthorized movement of people, vehicles and other monitored objects. The Company provides an all-in-one field-proven PureSecurity suite, accompanied by services specifically tailored to meet the requirements of an IoT customer; (ii) Proprietary e-Government platforms and innovative solutions for traditional and biometrics enrollment, personalization, issuance, and border control services, the Company 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; (iii) Solutions for carrier wi-fi, enterprise connectivityas well as its legacy backhaul services and products; (iv) 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, The Company maps sensitive information and controls data flow through email, web, external devices, and additional channels.
The Company has experienced net losses and significant cash outflows from cash used in operating activities over the past 3 years. As of six months ended June 30, 2023, the Company had an accumulated deficit of $105,516 and net cash used in operating activities of $3,409, compared to $4,134 for six months ended June 30, 2022.
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 June 30, 2023, the Company had cash, cash equivalent, and restricted cash of $1,521 and positive working capital of $21,196.
Additionally, the Company secured financing of $20,000 during 2018, of which $6,000 remains available to the Company to draw during the 12 months following the balance sheet date, under certain conditions. Throughout 2021, the Company also secured through the issuance of multiple notes aggregate gross proceeds of $12,000 of subordinated debt.
On March 1, 2022, the Company raised $4.65 million in a registered direct offering with a single accredited institutional investor of an aggregate of 3,130,000 of its ordinary shares, and 4,401,585 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent private placement to the Purchaser of the Company’s private warrants to purchase an aggregate of 5,648,689 or ordinary shares at an exercise price of $0.70 per share.
On July 27, 2022, the Company raised $1.74 million in a cash exercise of Company’s private warrants, as amended, of 5,648,689 of its ordinary shares at exercise price of $0.308, and concurrent private placement to the accredited institutional investor of the Company’s private warrants to purchase an aggregate of 5,648,689 or ordinary shares at an exercise price of $0.32 per share.
On March 31, 2023, the Company raised $2.4 million in a registered direct offering with a single accredited institutional investor through the sale of an aggregate of 485,000 of its ordinary shares, and 1,032,615 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent private placement to such Purchaser of the Company’s private warrants to purchase an aggregate of 1,517,615 of its ordinary shares at an exercise price of $1.66 per share.
On July 31, 2023, the Company raised $2.75 million in a registered offering with a single accredited institutional investor through the sale of an aggregate of 661,000 of its ordinary shares, and 2,574,295 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent issuance to such Purchaser of the Company’s warrants to purchase an aggregate of 3,235,295 of its ordinary shares at an exercise price of $0.85 per share.
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) for working capital needs for multiple new government customer contracts with significant positive cash flow.
Furthermore, the available $6 million secured credit facility from Fortress Investment Group may provide the Company with additional access to capital if needed.
The Company believes that based on the above-mentioned secured financings, management’s plans, significant 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.
| c. |
Senior Secured Credit Facility
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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, finalized on October 26, 2018 has an aggregate principal of $10,000, and the Incremental Term Loan provides 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 company's needs. The Credit Facility is set to mature on September 6, 2021, and 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 that remain un-borrowed, the Company incurs interest at a rate of 0.50% per annum ("Unused Fee"). From closing until today, the Company only paid monthly interest payments. The Company expects to start making partial monthly amortization payments towards the principal balance, with the majority of the principal to be paid via a bullet payment at the maturity date, expected to be in December 2024.
The Credit Facility is subject to an original issue discount equal to 2.5% of any drawn amounts, and amounts repaid cannot be re-borrowed. At maturity, an end-of-term fee of 2.25% to 4.5% is owed by the Company for any amounts drawn. In connection with securing the Credit Facility, the Company incurred legal and due diligence fees, which are recorded together with the original issue discount and end-of-term fee, and amortized into interest expense over the life of the Credit Facility.
In connection with the Credit Facility, the Investor received 25,000 warrants initially and an additional 75,000 warrants for amendments (the “Credit Facility Warrants”) and purchased 106,705 unregistered common shares at a share price of $1.87 from Company at a total of $200. The Credit Facility Warrants mature 7 years from the date of issuance, were set to be issued at a strike price at a premium to the then current market price.
In 2021, the Company secured through the issuance of an additional subordinated notes, gross proceeds of $12,000. For the consideration of $12,000 in gross proceeds, SuperCom issued a two-year unsecured, subordinated promissory note to a certain institutional investor, one in February 2021 and the other in June 2021, both with similar structures and terms. The notes have a 5% annual coupon and a built-in increase to the balance of the notes by 5% every 6 months, for any portion of the notes which has not been paid down prior to maturity. All principal and interest accrued is required to be paid in only one-bullet payment at maturity, and the company has the right to pre-pay any portion of either note at any time without a pre-payment penalty. The company has an option at its discretion only, at any time after 12 months to pay down all or a portion of either note using its ordinary shares, subject to certain conditions being met.
As of June 30, 2023, the outstanding principal, including accrued interest, of the Credit Facility and the aggregate balance for these Subordinated Debt was $32,909.
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.
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