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 (“US
GAAP”). The representative rate exchange rate between the NIS and the dollar as published by the Bank of Israel and effective
on December 31, 2018, was NIS 3.748 per $1.00.
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
A.
|
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, 2018 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, 2018 and as of December 31, 2017 and 2018 appear elsewhere in this Annual Report. Our selected consolidated financial
data as of December 31, 2014, 2015 and 2016 and for the years ended December 31, 2015 and 2016 have been derived from our audited
consolidated financial statements not included in this Annual Report other than the change in the manner of how we present deferred
income taxes as per ASU 2015-17 for which we have adjusted current and long-term deferred income tax classification.
Income Statement Data:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(U.S. dollars in thousands, except per share data)
|
|
Summary of Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
21,882
|
|
|
|
33,264
|
|
|
|
20,025
|
|
|
|
28,340
|
|
|
|
29,703
|
|
Cost of revenues
|
|
|
13,743
|
|
|
|
20,351
|
|
|
|
17,461
|
|
|
|
10,446
|
|
|
|
7,301
|
|
Gross profit
|
|
|
8,139
|
|
|
|
12,913
|
|
|
|
2,564
|
|
|
|
17,894
|
|
|
|
22,402
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,790
|
|
|
|
7,238
|
|
|
|
6,718
|
|
|
|
3,669
|
|
|
|
3,359
|
|
Selling and marketing
|
|
|
5,005
|
|
|
|
8,099
|
|
|
|
9,970
|
|
|
|
6,611
|
|
|
|
7,036
|
|
General and administrative
|
|
|
5,748
|
|
|
|
6,113
|
|
|
|
7,277
|
|
|
|
3,947
|
|
|
|
2,773
|
|
Other (income) expenses
|
|
|
2,271
|
|
|
|
(2,021
|
)
|
|
|
713
|
|
|
|
2,174
|
|
|
|
1,225
|
|
Gain on bargain acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,515
|
)
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
17,814
|
|
|
|
19,429
|
|
|
|
14,163
|
|
|
|
16,401
|
|
|
|
14,393
|
|
Operating income (loss)
|
|
|
(9,675
|
)
|
|
|
(6,516
|
)
|
|
|
(11,599
|
)
|
|
|
1,493
|
|
|
|
8,009
|
|
Financial income (expenses), net
|
|
|
(335
|
)
|
|
|
(538
|
)
|
|
|
(303
|
)
|
|
|
(277
|
)
|
|
|
(133
|
)
|
Income (loss) before income tax
|
|
|
(10,010
|
)
|
|
|
(7,054
|
)
|
|
|
(11,902
|
)
|
|
|
1,216
|
|
|
|
7,876
|
|
Income tax (expense) benefit
|
|
|
5,730
|
|
|
|
393
|
|
|
|
(2,091
|
)
|
|
|
(197
|
)
|
|
|
(1,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(15,740
|
)
|
|
|
(6,661
|
)
|
|
|
(13,993
|
)
|
|
|
1,019
|
|
|
|
6,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
(1.03
|
)
|
|
|
(0.45
|
)
|
|
|
(0.93
|
)
|
|
|
0.07
|
|
|
|
0.46
|
|
Diluted earnings per share
|
|
|
(1.03
|
)
|
|
|
(0.45
|
)
|
|
|
(0.93
|
)
|
|
|
0.07
|
|
|
|
0.45
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(U.S. dollars in thousands, except per share data)
|
|
Summary of Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,639
|
|
|
|
1,037
|
|
|
|
1,708
|
|
|
|
22,246
|
|
|
|
4,789
|
|
Total Current Assets
|
|
|
25,664
|
|
|
|
27,413
|
|
|
|
21,120
|
|
|
|
45,443
|
|
|
|
24,416
|
|
TOTAL ASSETS
|
|
|
44,349
|
|
|
|
54,198
|
|
|
|
53,473
|
|
|
|
65,942
|
|
|
|
42,874
|
|
Total Current Liabilities
|
|
|
13,543
|
|
|
|
17,960
|
|
|
|
12,771
|
|
|
|
10,238
|
|
|
|
12,666
|
|
Total Long-term Liabilities
|
|
|
11,256
|
|
|
|
3,531
|
|
|
|
1,978
|
|
|
|
1,272
|
|
|
|
1,902
|
|
SHAREHOLDERS’ EQUITY
|
|
|
19,550
|
|
|
|
32,707
|
|
|
|
38,724
|
|
|
|
54,432
|
|
|
|
28,306
|
|
B.
|
Capitalization and Indebtedness
|
|
|
|
Not applicable.
|
C.
|
Reasons for the Offer
and Use of Proceeds
|
|
|
|
Not applicable.
|
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
Although we expect that
the acquisitions of the SmartID division of OTI, Prevision, LCA, Safend, Alvarion and PowaPOS will result in benefits to us, we
may not realize those benefits due to unforeseen difficulties.
Although we are 4 years into the
process of integrating the operations of the SmartID division of OTI, and over 22 months into the process of integrating the operations
of Prevision, LCA, Safend, Alvarion and PowaPOS, realizing any of the anticipated benefits of these acquisitions, including anticipated
cost savings and additional revenue opportunities, involves a number of challenges. The failure to meet these integration challenges
could seriously harm our results of operations, and the market price of our ordinary shares may decline as a result.
Realizing the benefits of these
acquisitions will depend in part on the integration of our intellectual property, products, operations, personnel and sales force
and the completion of assignments of current and past contracts and rights. These integration activities are complex and time
- consuming, and we may encounter unexpected difficulties or incur unexpected costs, including:
|
·
|
our inability to achieve the operating synergies anticipated in the acquisition,
which would prevent us from achieving the positive earnings gains expected as a result of the acquisition;
|
|
·
|
diversion of management attention from ongoing business concerns to integration
matters;
|
|
·
|
difficulties in consolidating and rationalizing information technology and
intellectual property platforms and administrative infrastructures;
|
|
·
|
complexities associated with managing the combined businesses;
|
|
·
|
difficulties in integrating personnel;
|
|
·
|
possible termination of some contracts or agreements with customers of the
acquired divisions and entities as a result of the acquisitions, which would result in major reduction in our anticipated
combined business revenue;
|
|
·
|
possible termination of some contracts or agreements with service providers
and suppliers of the acquired divisions and entities as a result of the acquisitions, which could result in delays and increases
in our cost of revenues; and.
|
|
·
|
Possible cash flow interruption or loss of revenue as a result of the change
of ownership.
|
In addition, Safend, Alvarion,
and PowaPOS were acquired on an “as is” basis from a bankruptcy administrator or trustee with limited representations,
which limits our recourse against the sellers of the acquired businesses after closing, which in turn may expose us to unexpected
material losses or expenses after the closing. Our diligence investigations with respect to the acquired businesses were very
limited, which may also expose us to unexpected material losses or expenses after the closing. The relationship with most of the
customers and suppliers of the acquired businesses have been severed or compromised, and there is no assurance that we will be
able to recover such customers and suppliers. As a result, we may decide to discontinue the operation of one or more of the acquired
businesses.
We may not fully realize the anticipated
net reductions in costs and expenses and other benefits and synergies of these acquisitions to the extent, or in the timeframe,
anticipated. In addition to the integration risks discussed above, our ability to realize these benefits and synergies could be
adversely impacted by practical or legal constraints on our ability to combine operations.
If we are unable to manage
our growth profitably, our business, financial results and stock price could suffer.
Our future financial results will
depend in part on our ability to profitably manage our growth. Management will need to maintain existing customers and attract
new customers, recruit, retain and effectively manage employees, as well as expand operations and integrate customer support and
financial control systems. If integration - related expenses and capital expenditure requirements are greater than anticipated
or if we are unable to manage our growth profitably after the acquisition, our financial results and the market price of our ordinary
shares may decline.
Purchase price allocation
in connection with our acquisition of OTI’s SmartID division, Safend, Alvarion and Prevision requires estimates, which may
be subject to change in the future. Future changes to these estimates could impact our future operating results.
The application of purchase price
allocation requires that the total purchase price we paid for the SmartID division of OTI, Safend, Alvarion and Prevision be allocated
to the fair value of assets acquired and liabilities assumed based on their fair values at the acquisition date. All amounts in
excess of or below the fair value are recorded as goodwill or extraordinary profit, as applicable. The allocation process requires
an analysis and valuation of acquired assets, including fixed assets, technologies, intellectual properties, deferred tax assets,
customer contracts and relationships, trade names and liabilities assumed, including contractual commitments and legal contingencies.
We identified and recorded the assets, including specifically identifiable intangible assets, and liabilities assumed in connection
with the acquisitions of the SmartID division, Safend, Alvarion and Prevision at their respective estimated fair values as of
the date of the acquisition. This process requires estimates by our management and by our expert independent consultant based
upon the best available information at the time of the preparation of the financial statements. We have completed the purchase
price allocation as reflected in this report. Any future changes to our estimates of the fair value of the assets and liabilities
of OTI’s SmartID division, Safend, Alvarion and Prevision, respectively, as of the date of the acquisition could impact
our future operating results.
In the three years ended
December 31, 2018, 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 operating results.
In the year ended December 31, 2018, 24% of our consolidated
net revenue is attributable to sales to four large customers.
In the years ended December 31, 2017 and 2016, 50% and 32%,
respectively, of our consolidated net revenue was attributable to sales to four and six large customers, respectively. While we
expect to be less dependent on these customers in 2019 and in the future because of our expectation to secure more contracts from
new customers, a substantial reduction in sales to, or loss of, any of the four customers would adversely affect our business unless
we were able to replace the revenue received from those customers, which replacement we may not be able to find.
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:
|
·
|
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;
|
|
·
|
the need to compete against companies or teams of companies that may be
long-term, entrenched incumbents for a particular contract we are competing for and which have, as a result, greater domain
expertise and established customer relations;
|
|
·
|
the substantial cost and managerial time and effort necessary to prepare
bids and proposals for contracts that may not be awarded to us;
|
|
·
|
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
|
|
·
|
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.
Any acquisitions that we
have completed, or may complete in the future, may not perform as planned and could disrupt our business and harm our financial
condition and operations.
In an effort to effectively compete
in the IoT and connectivity, cyber security, and e-Gov products and services business, we have sought to acquire complementary
businesses in the past and we may continue to do so in the future. In the event of any future acquisitions, we could:
|
·
|
issue additional securities that would dilute our current shareholders’
percentage ownership;
|
|
·
|
incur debt and assume liabilities; and
|
|
·
|
incur large and immediate write-offs of intangible assets, accounts receivable
or other assets.
|
These events could result in significant
expenses and decreased revenue, which could adversely affect the market price of our ordinary shares. In addition, integrating
product and service acquisitions and completing any future acquisitions involve numerous operational and financial risks. These
risks include difficulty in assimilating acquired operations, diversion of management’s attention, and the potential loss
of key employees or customers of acquired operations. Furthermore, companies acquired by us may not generate financial results
consistent with our management’s plans at the time of acquisition.
Although we had profitable
operations in four of the last seven years2 ended December 31, 2018, if we do not generate sufficient cash from operations,
we will be required to obtain additional financing or reduce our level of expenditure. If we are unable to obtain adequate financing,
when we require it, our business, financial condition and results of operations could be adversely affected. Such financing may
not be available in the future, or, if available, may not be on terms favorable to us.
Historically, we had profitable
operations in four of the last seven years ended December 31, 2018 and have funded our business operations and capital expenditures
primarily through equity and/or debt issuances (including convertible securities). To support our growing business, we must have
sufficient capital to continue to make significant investments in our platform and product offerings. If we raise additional funds
through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges
senior to those of our ordinary shares, and our existing shareholders may experience dilution. Any debt financing secured by us
in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational
matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Any refinancing
of our existing indebtedness could be at significantly higher interest rates, require additional restrictive financial and operational
covenants, or require us to incur significant transaction fees, issue warrants or other equity securities, or issue convertible
securities. These restrictions and covenants may restrict our ability to finance our operations and engage in, expand, or otherwise
pursue our business activities and strategies. Our ability to comply with these covenants and restrictions may be affected by
events beyond our control, and breaches of these covenants and restrictions could result in a default and an acceleration of our
obligations under a debt agreement. If we raise additional funds through collaborations and licensing arrangements, we might be
required to relinquish significant rights to our technologies or our solutions under development, or grant licenses on terms that
are not favorable to us, which could lower the economic value of those programs to us.
We evaluate financing opportunities
from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans
and operating performance and the condition of the capital markets at the time we seek financing. We cannot be certain that additional
financing will be available to us on favorable terms, or at all. If we are unable to obtain adequate financing or financing on
terms satisfactory to us, when we require it, this would have the potential to decrease both our ability to attain profitability
and our financial flexibility, our ability to continue to support our business growth and to respond to business challenges could
be significantly limited, and our business, financial condition and results of operations could be adversely affected.
The market for our products
is characterized by changing technology, requirements, standards and products, and we may be adversely affected if we do not respond
promptly and effectively to these changes.
The market for our products is
characterized by evolving technologies, changing industry standards, changing regulatory environments, frequent new product introductions
and rapid changes in customer requirements. The introduction of products embodying new technologies and the emergence of new industry
standards and practices can render existing products obsolete and unmarketable. Our future success will depend on our ability
to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and product
features that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated
needs of our customers. In the future:
|
·
|
we may not be successful in developing and marketing new products or product
features that respond to technological change or evolving industry standards;
|
|
·
|
we may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and features; or
|
|
·
|
our new products and product features may not adequately meet the requirements
of the marketplace and achieve market acceptance.
|
If we are unable to respond promptly
and effectively to changing technologies and market requirements, we will be unable to compete effectively in the future.
There can be no assurance that
we will successfully identify new product opportunities and develop and bring new products to market in a timely manner, or that
the products and technologies developed by others will not render our products or technologies obsolete or noncompetitive. The
failure of our new product development efforts could have a material adverse effect on our business, results of operations and
future growth.
We have sought in the past
and will seek in the future to enter into contracts with governments, as well as state and local governmental agencies and municipalities,
which subjects us to certain risks.
Governmental contracts subject
us to several other risks, including risks associated with public budgetary restrictions and uncertainties, actual contracts that
are less than awarded contract amounts, and cancellation at any time at the option of the governmental agency. Governments may
also be in a position to obtain greater rights with respect to our intellectual property than we would grant to other entities.
In addition, governmental agencies have the power, based on financial difficulties or investigations of their contractors, to
deem contractors unsuitable for new contract awards. Because we engage in the government contracting business, we are subject
to audits, and may be subject to investigation, by governmental entities.
Any failure to comply with the
terms of any governmental contracts could result in substantial civil and criminal fines and penalties, as well as suspension
from future contracts for a significant period of time, any of which could adversely affect our business by requiring us to pay
significant fines and penalties or prevent us from earning revenues from governmental contracts during the suspension period.
Cancellation of any one of our major governmental contracts could have a material adverse effect on our financial condition.
Our dependence on third-party
representatives, resellers and distributors could result in marketing and distribution delays, which would prevent us from generating
sales revenues.
We market and sell some of our
products and solutions using a network of representatives, resellers and distributers covering the Americas, Europe, Asia and
Africa. We establish relationships with such persons through agreements that provide for the marketing and support of our systems
and products. These agreements generally do not grant exclusivity to the representative, resellers or distributors, and some of
them are not long-term contracts, do not have commitments for minimum sales, and could be terminated by the representative, reseller
or distributor. We do not have agreements with all of our representatives, resellers and distributors. We are currently engaged
in discussions with additional potential representatives, resellers or distributors. Such arrangements may never be finalized
and, if finalized, such arrangements may not increase our revenues or profitability.
Our ability to terminate a representative,
reseller or distributor who is not performing satisfactorily may be limited. Inadequate performance by a representative, reseller
or distributor could adversely affect our ability to develop markets in the regions for which such person is responsible and could
result in substantially greater expenditures by us in order to develop such markets. Our operating results are highly dependent
upon: (i) our ability to maintain our existing representative, reseller and distributor arrangements; (ii) our ability to establish
and maintain coverage of major geographic areas and establish access to customers and markets; and (iii) the ability of our representatives,
resellers and distributors to successfully market our products. A failure to achieve these objectives could result in lower revenues.
If our technology and solutions
cease to be adopted and used by government and public and private organizations, we may lose some of our existing customers and
our operations will be negatively affected.
Our ability to grow depends significantly
on whether governmental and public and private organizations adopt our technology and solutions as part of their new standards
and whether we are able to leverage our expertise with government products into commercial products. If these organizations do
not adopt our technology, we might not be able to penetrate some of the new markets we are targeting, or we might lose some of
our existing customer base.
In order for us to achieve our
growth objectives, our e-Gov, IoT and connectivity, Cyber Security, technology and solutions must be adapted to and adopted in
a variety of areas, any or all of which may not adopt our technology. These areas include, among others:
|
·
|
national ID and e-Government;
|
|
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counties and municipals;
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healthcare and homecare; and
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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.
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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.
Unfavorable global economic
conditions may adversely affect our customers, which may directly impact our business and results of operations.
Our operations and performance
depend on our target customers, including those from the governmental sector, having adequate resources to purchase our products.
The turmoil in the credit markets, the oil price declines and the global economic downturn that commenced in 2008 and intensified
in Europe, Africa and Asia in subsequent years generally adversely impacted our target customers. Companies and governmental authorities
have reduced or delayed and may continue to reduce or delay their purchasing activities in response to a lack of credit, economic
uncertainty, budget deficits and concern about the general stability of markets. Recently, several European, Latin American, and
African countries encountered severe economic difficulties which affected the entire Euro-zone, African and Latin American economy.
The financial crisis, among other things, resulted in the downgrade of the credit worthiness of several countries in Europe, Latin
America and Africa, which affected our customers’ ability and budget to perform projects within these territories. If such
economic and market conditions remain uncertain or weaken further, specifically changes that have negatively impacted and may
continue to negatively impact the political or economic stability and environment of the countries from which we derive most of
our consolidated net revenues, our business and future operations may be materially adversely affected.
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, 2018, 2017 and 2016, approximately 52%, 70% and 51%, 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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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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difficulties in staffing, managing and supporting foreign operations;
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longer payment cycles; and
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difficulties in collecting accounts receivable.
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Negative developments in any of
these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders
already placed, difficulty in collecting receivables, and a higher cost of doing business, any of which could adversely affect
our business, results of operations or financial condition.
In addition, in many countries
the national security organizations require our employees to obtain clearance before such employees can work on a particular transaction.
Failure to receive, or delays in the receipt of, relevant foreign qualifications could also have a material adverse effect on
our ability to make sales or fulfill our orders on a timely basis. Additionally, as foreign government regulators have become
increasingly stringent, we may be subject to more rigorous regulation by governmental authorities in the future. If we fail to
adequately address any of these regulations, our business will be harmed.
We are exposed to risks
in operating in foreign markets, which may make operating in those markets difficult and thereby force us to curtail our business
operations.
In conducting our business in
foreign countries, we are subject to political, economic, legal, operational and other risks that are inherent in operating in
other countries. Risks inherent to operating in other countries range from difficulties in settling transactions in emerging markets
to possible nationalization, expropriation, price controls and other restrictive governmental actions. We also face the risk that
exchange controls or similar restrictions imposed by foreign governmental authorities may restrict our ability to convert local
currency received or held by us in their countries into U.S. dollars or other currencies, or to take those dollars or other currencies
out of those countries.
Due to the nature of our
business, our financial and operating results could fluctuate.
Our financial and operating results
have fluctuated in the past and could fluctuate in the future from quarter to quarter. As a result of our dependence in the e-Gov
division on a limited number of customers and our increased reliance on our e-Gov, and IoT solutions and products, our revenue
has experienced wide fluctuations. We expect that our revenue will continue to fluctuate in the future as we market and implement
solutions through our IoT and e-Gov divisions. A portion of our sales is not recurring sales; therefore, quarterly and annual
sales levels will likely fluctuate. Sales in any period may not be indicative of sales in future periods. In addition, our result
may fluctuate from year to year for the following reasons:
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long customer sales cycles;
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reduced demand for our products and services;
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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. 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.
Other than the litigation described
in Item 8A “Consolidated Statements and Other Financial Information - Legal Proceedings,” 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. 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.
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.
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In addition, the stock market
in general, and the market for Israeli companies in particular, has been highly volatile. Many of these factors are beyond our
control and may materially adversely affect the market price of our ordinary shares, regardless of our performance. In the past,
following periods of market volatility, shareholders have often instituted securities class action litigation relating to the
stock trading and price volatility of the company in question. If we were involved in any securities litigation, it could result
in substantial cost to us to defend and divert resources and the attention of management from our business.
We have a shareholder that
is able to exercise substantial influence over us and all matters submitted to our shareholders.
Sigma Wave Ltd., or Sigma, which
is controlled by family members of Mrs. Tsviya Trabelsi, our Chairman of the Board, and by her husband, Mr. Arie Trabelsi, is
the beneficial owner of approximately 28.2% of our outstanding ordinary shares as of December 2, 2019. Such ownership interest
gives Sigma the ability to influence our corporate affairs and to control our Company, including our management, subject to approvals
that may be required for related-party transactions pursuant to Israeli law. Sigma may have influence over the outcome of most
matters submitted to our shareholders, including the election of our directors, and such influence could make us a less attractive
acquisition or investment target. Because the interests of Sigma may differ from the interests of our other shareholders, actions
taken by Sigma with respect to us may not be favorable to our other shareholders.
We do not expect to pay
cash dividends.
We have never paid cash dividends
on our ordinary shares and do not anticipate paying cash dividends in the near future. According to the Israeli Companies Law,
dividends may only be paid out of profits legally available for distribution and provided that there is no reasonable concern
that such payment will prevent us from satisfying our existing and foreseeable obligations as they become due. The payment of
dividends will depend on earnings, financial condition, debt covenants in place, and other business and economic factors affecting
us at such time as our board of directors may consider relevant. If we do not pay dividends, our ordinary shares may be less valuable
because a return on your investment will only occur if our stock price appreciates.
We may fail 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 may identify 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 2017. Also, since 2011, uprisings in several countries in the Middle East and
neighboring regions have led to severe political instability in several neighboring states and to a decline in the regional security
situation. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore,
could adversely affect our operations. In addition, Iran has threatened to attack Israel and is widely believed to be developing
nuclear weapons. Iran is also believed to have a strong influence among extremist groups in areas that neighbor Israel, such as
Hamas in Gaza and Hezbollah in Lebanon. Any armed conflicts, terrorist activities or political instability in the region could
materially and adversely affect our business, financial condition and results of operations. In addition, the political and security
situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are
not obligated to comply with their undertakings under those agreements pursuant to force majeure provisions in such agreements.
To date, these matters have not had any material effect on our business and results of operations; however, the regional security
situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively
affect us in the future.
Furthermore, we could be adversely
affected by the interruption or reduction of trade between Israel and its trading partners. Some countries, companies and organizations
continue to participate in a boycott of Israeli companies and others doing business with Israel or with Israeli companies. As
a result, we are precluded from marketing our products to these countries, companies and organizations. Foreign government defense
export policies towards Israel could also make it more difficult for us to obtain the export authorizations necessary for our
activities. Also, over the past several years, there have been calls, in Europe and elsewhere, to reduce trade with Israel. Restrictive
laws, policies or practices directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial
results or the expansion of our business.
Our financial results may
be adversely affected by inflation and currency fluctuations.
We report our financial results
in dollars, while a portion of our expenses, primarily salaries, are paid in NIS. Therefore, our NIS related costs, as expressed
in U.S. dollars, are influenced by the exchange rate between the U.S. dollar and the NIS. The appreciation of the NIS against
the U.S. dollar will result in an increase in the U.S. dollar cost of our NIS expenses. We are also influenced by the timing of,
and the extent to which, any increase in the rate of inflation in Israel over the rate of inflation in the United States is not
offset by the devaluation of the NIS in relation to the dollar. Our dollar costs in Israel will increase if inflation in Israel
exceeds the devaluation of the NIS against the dollar or if the timing of such devaluation lags behind inflation in Israel. In
the past, the NIS exchange rate with the dollar and other foreign currencies had fluctuated, generally reflecting inflation rate
differentials. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation or appreciation
of the NIS against the dollar. If the dollar cost of our operations in Israel increases, our dollar measured results of operations
will be adversely affected.
Our operations could be
disrupted as a result of the obligation of management or key personnel to perform military service in Israel.
Generally, all nonexempt male
adult citizens and permanent residents of Israel under the age of 40, or older for reserves officers or citizens with certain
occupations, as well as certain female adult citizens and permanent residents of Israel, are obligated to perform annual military
reserve duty and are subject to being called for active duty at any time under emergency circumstances. While we have operated
effectively under these requirements since our incorporation, we cannot predict the full impact of such conditions on us in the
future, particularly if emergency circumstances occur. If many of our employees are called for active duty, our operations in
Israel and our business, operating results and financial condition may be adversely affected.
We may not be able to enforce
covenants not-to-compete under current Israeli law.
We have non-competition agreements
with most of our employees, many of which are governed by Israeli law. These agreements generally prohibit our employees from
competing with us or working for our competitors for a specified period following termination of their employment. However, Israeli
courts are reluctant to enforce non-compete undertakings of former employees and tend, if at all, to enforce those provisions
for relatively brief periods of time in restricted geographical areas and only when the employee has unique value specific to
that employer’s business and not just regarding the professional development of the employee. Any such inability to enforce
non-compete covenants may cause us to lose any competitive advantage resulting from advantages provided to us by such confidential
information.
We may become subject to
claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation
and adversely affect our business.
A significant portion of our intellectual
property has been developed by our Israeli employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967
(the “Israeli Patent Law”), inventions conceived by an employee during the term and as part of the scope of his or
her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific
agreement between the employee and employer giving the employee service invention rights. The Israeli Patent Law also provides
that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee (the
“C&R Committee”), a body constituted under the Israeli Patent Law, shall determine whether the employee is entitled
to remuneration for his inventions. The C&R Committee (decisions of which have been upheld by the Israeli Supreme Court) has
held that employees may be entitled to remuneration for their service inventions despite having specifically waived any such rights.
Further, the C&R Committee has not yet set specific guidelines regarding the method for calculating this remuneration or the
criteria or circumstances under which an employee’s waiver of his right to remuneration will be disregarded. We generally
enter into intellectual property assignment agreements with our employees pursuant to which such employees assign to us all rights
to any inventions created in the scope of their employment or engagement with us. Although our employees have agreed to assign
to us service invention rights and have specifically waived their right to receive any special remuneration for such assignment
beyond their regular salary and benefits, we may face claims demanding remuneration in consideration for assigned inventions.
As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current or former employees,
or be forced to litigate such claims, which could negatively affect our business.
Your rights and responsibilities
as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders
under U.S. law.
We are incorporated under Israeli
law. The rights and responsibilities of holders of our ordinary shares are governed by our Memorandum of Association and Articles
of Association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith
and customary manner in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders,
and to refrain from misusing his power, including, among other things, when voting at the general meeting of shareholders on certain
matters. Israeli law provides that these duties are applicable to shareholder votes on, among other things, amendments to a company’s
articles of association, increases in a company’s authorized share capital and mergers and interested party transactions
requiring shareholder approval. A shareholder also has a general duty to refrain from exploiting any other shareholder of his
or her rights as a shareholder. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it
possesses the power to determine the outcome of a shareholder vote or who, under our Articles of Association, has the power to
appoint or prevent the appointment of a director or executive officer in the company, has a duty of fairness toward the company.
Israeli law does not define the substance of this duty of fairness, but provides that remedies generally available upon a breach
of contract will apply also in the event of a breach of the duty to act with fairness. Because Israeli corporate law has undergone
extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions
that govern shareholder behavior.
Provisions of Israeli law
may delay, prevent or otherwise encumber a merger with or an acquisition of our company, which could prevent a change of control,
even when the terms of such transaction are favorable to us and our shareholders.
Israeli corporate law regulates
mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions
involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders whose
country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. These provisions of
Israeli law could delay, prevent or impede a merger with or an acquisition of our company, which could prevent a change of control,
even when the terms of such transaction are favorable to us and our shareholders and therefore potentially depress the price of
our shares.
Our shareholders may face
difficulties in the enforcement of civil liabilities against us and our officers and directors or in asserting U.S.
securities law claims in Israel.
Most of our officers and directors are residents of Israel or
otherwise reside outside of the United States. SuperCom Ltd. is incorporated under Israeli law and its principal office and facilities
are located in Israel. All or a substantial portion of the assets of such persons are or may be located outside of the United States.
Therefore, service of process upon SuperCom Ltd., such directors and officers may be difficult to effect in the United States.
It also may be difficult to enforce a U.S. judgment against SuperCom Ltd., such officers and directors as any judgment obtained
in the United States against such parties may not be collectible in the United States. In addition, it may be difficult to assert
U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation
of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli
court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found
to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process.
Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these
matters.
Being a foreign private
issuer exempts us from certain Securities and Exchange Commission requirements.
As a foreign private issuer within
the meaning of rules promulgated under the U.S. Securities and Exchange Act of 1934, as amended, or the Exchange Act, we are exempt
from certain provisions applicable to U.S. public companies including:
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the rules under the Exchange Act requiring the filing with the Securities
and Exchange Commission of quarterly reports on Form 10-Q and current reports on Form 8-K;
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the sections of the Exchange Act regulating the solicitation of proxies
in connection with shareholder meetings;
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the provisions of Regulation FD aimed at preventing issuers from making
selective disclosures of material information; and
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the sections of the Exchange Act requiring insiders to file public reports
of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing”
trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within less
than six months).
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Because of these exemptions, investors
are not afforded the same protections or information generally available to investors holding shares in public companies organized
in the United States.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development
of the Company
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SuperCom Ltd. is a company organized
under the laws of the State of Israel. Our registered office is located at 20 Lincoln 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 200 Park Avenue South, New York,
New York, telephone number +1 (212) 675-4606.
SuperCom
Ltd. was incorporated in the State of Israel on July 4, 1988 pursuant to the provisions of the then-current Israeli Companies
Ordinance. The legislative framework within which we now operate is the Israeli Companies Law, which became effective on February
1, 2000, and the Israeli Companies Ordinance (New Version) 1983, as amended (the “Companies Ordinance”).
From our incorporation in 1988
until 1999, we were a development-stage company primarily engaged in research and development, establishing relationships with
suppliers and potential customers and recruiting personnel with a focus on the governmental market. In 2001, we implemented a
reorganization plan, which we completed in 2002. As a result of the reorganization, we expanded our marketing and sales efforts
to include the commercial market with a new line of advanced smart card and identification technologies products, while maintaining
our governmental market business.
During 2002, we sold, in three
separate transactions with third party purchasers, our entire equity interest in a U.S. subsidiary, InkSure Technologies, Inc.,
for which we received aggregate proceeds of approximately $6.6 million . In December 2002, we discontinued the operations, disposed
of all of the assets and terminated the employees of two U.S. subsidiaries, Genodus Inc. and Kromotek, Inc.
In 2006 we decided to sell most
of our e-Gov Division in order to focus on opportunities in the U.S. for our IoT businesses as well as our Critical Situation
Management System, or CSMS, business, which we sold in 2010.
On December 31, 2006, we sold
the majority of the e-Gov Division activities and related intellectual property to OTI for 2,827,200 restricted ordinary shares
of OTI, as of December 31, 2008, we sold all of the OTI shares that we received in the transaction.
On August 28, 2007, we purchased through our wholly-owned subsidiary,
Vuance, Inc., all of the issued and outstanding stock capital of Security Holding Corp., or SHC, from Homeland Security Capital
Corporation and other minority shareholders for approximately $4.34 million of our ordinary shares and direct expenses of approximately
$600,000 in our ordinary shares. A total of 258,218 ordinary shares were issued to the sellers. SHC was a Delaware corporation
engaged in the manufacture and distribution of RFID-enabled solutions, access control and security management systems. During the
fourth quarter of 2007, SHC and its subsidiaries were merged into our Vuance, Inc. subsidiary.
In September 2007, we entered
into a definitive agreement to acquire the credentialing division of Disaster Management Solutions Inc., or DMS, for approximately
$100,000 in cash and up to $650,000 in royalties’ payable upon sales of the advanced first responder credentialing system
named “RAPTOR” during the first twelve months following the acquisition in August 2007. This acquisition complemented
our former incident management solutions business and added the RAPTOR system to our former CSMS business, both of which were
sold in 2010.
On March 25, 2009, we completed
the acquisition of certain of the assets and certain of the liabilities of Intelli-Site, Inc. pursuant to an asset purchase agreement.
We agreed to pay Intelli-Site $262,000 payable in cash and in our shares (which were subject to a certain lock up mechanism) and
included a contingent consideration of up to $600,000 based upon certain conditions.
In January 2010, we completed
the sale to OLTIS Security Systems International, LLC, or OSSI, of certain assets (including certain accounts receivable and inventory
of a subsidiary) and certain liabilities (including certain accounts payable) related to our electronic access control market
for $146,822 in cash. In addition, OSSI paid off a loan that our subsidiary had taken from Bridge Bank, National Association.
In January 2010, we completed
the sale of certain of the assets of Vuance, Inc and certain of its liabilities related to our Government Services Division, pursuant
to an asset purchase agreement for $250,000. In addition, the purchasers agreed to pay Vuance, Inc. an earn-out of up to $1.5
million over the course of calendar years 2010 through 2013.
At the beginning of 2012, we decided
to leverage our experience in the e-Gov market and increase our position in the market by: (i) proposing other new technologies
and solutions to our existing e-Gov customers, (ii) securing other e-Gov projects and solutions by virtue of entering into joint
ventures with partners with a global presence and complementary goals and products and (iii) retaining an outstanding group of
market executives and experts, which allowed us to propose and implement what we believe to be competitive ID and e-Gov solutions
to the global markets.
During 2012, we altered our strategy
with respect to the IoT division to focus on solutions for three growing electronic monitoring vertical markets: (i) public safety,
(ii) healthcare and homecare and (iii) transportation management. We have enhanced and developed a series of new products and
solutions including the Pure Security Suite, Puretag, PureCom, Pure Monitor and PureTrack,
Between 2013 and through 2016,
our product depth and global presence was expanded significantly with our acquisitions of the SmartID division of OTI in 2013,
Prevision in 2015, and LCA, Safend , the PowaPOS business, and Alvarion in 2016, together with our extensive research and development
of new product lines for the e-Gov, IoT, cyber security, and connectivity businesses.
On December 26, 2013, we acquired
the SmartID division of OTI, including all contracts, software, other related technologies and IP assets. We paid OTI $8.8 million
($10 million less certain closing adjustments) at the closing and agreed to make contingent payments of up to $12.5 million pursuant
to an earn-out mechanism based on certain performance and other milestones. In April 2016, we had further negotiations with OTI,
and entered into an agreement with OTI. Under this agreement, the remaining earn-out amount was reduced to a maximum of $3.55
million, out of which an amount of $2.05 million was paid at the beginning of May 2016.
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 for the next four years. The contingent consideration is subject to
service provided by the seller to the company during the earn-out period and therefore is not part of the business combination,
as of January 15, 2018 the seller does not provide services to the Company.
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 2018 the contingent earn-out
is no longer exists.
On March 13, 2016, we acquired
Safend, an Israeli based cyber security company. In consideration for this acquisition, we agreed to provide up to $1.5 million
in working capital to Safend to support its activity and growth through a structured debt and equity vehicle and to provide administrative,
sales and marketing services and required capital. 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 and headquartered in Tel Aviv, Israel, 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.
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) .
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 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, 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.
Secure
Financial Solutions (SFS)
During
2014, we identified the SFS market as a very fast-growing market where we believe that SuperCom has significant advantages due
to synergic technologies and shared customer base to our other divisions. Since 2014, we have developed and introduced secure
financial services suite of products, the SuperPayTM. We offer advanced secure mobile payments ranging from mobile
wallet to mobile point of sale (POS) using a set of components and platforms to enable secure mobile payments and financial services.
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. PowaPOS has been deployed in countries
all over the world, and has been integrated by cloud-based POS software providers, we believe= this technology will be a highly
value-added solution to our secure payment customers around the world.
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. The acquisition of the SmartID division of OTI in late 2013
diversified our source of revenues and offered us access to new markets in Africa, Asia, and South America, all areas with great
potential.
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.
In 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.
With respect to our Secure Financial
Solutions, research indicates that 2.5 billion people globally are un-banked (meaning they have no bank account or credit card),
but over 1 billion of those people have access to mobile phones, which represents our SFS applicable market. We presented our
mobile money and mobile payment suite at several large payment conferences and the global market showed interest in our proprietary
solution. In September, 2016, we launched a mobile wallet solution together with Verifone, a leading global technology and service
provider in the point-of-sale market, and Nofshonit, one of the largest loyalty club providers and operators in Israel, for digital
loyalty and pre-paid shopping programs. We believe that our ability to capture even a small portion of this fast growing market
would represent a significant and long-term growth opportunity.
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.
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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.
Financial Services and Retail
Markets. Cyber Security, Financial services and retail markets through our SFS suite, VeloPOS, and through our Cyber Security
products and solution.
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, SPS, connectivity, and IoT products and solutions,
which can be used by enterprises, shippers and warehouse operators to manage and track cartons, pallets, containers and individual
items in order to facilitate movement, pick up orders, verify inventory and reduce delivery time. In addition, industrial companies
can manage and track their mobile equipment and tools. We believe that our IoT suite can increase efficiency at every stage of
asset, inventory and supply chain management by enabling long-range identification and location of products and removing the need
for their human visual identification. Our products also work in conjunction with existing bar coding and warehouse systems to
reduce the risk of loss, theft and slow speed of transfer.
Hospitals and Homecare.
Hospitals and homecare with our cyber security, Connectivity, and IoT products and solutions. The healthcare sector has successfully
utilized IoT technologies for the purposes of infant protection in maternity wards and resident safety in care homes similar to
our asset and personnel location and identification system targeted at the secure facility and hazardous business sectors. Our
IoT Suite can provide solutions for the healthcare sector for asset, staff, patient and medical record location and identification.
We believe that as hospitals continue to upgrade their security measures, IoT and connectivity technology will be utilized in
real-time location systems that are designed to immediately locate persons, equipment and objects within the hospital.
Municipals and Educations.
Municipals and education institution with our Safe City, Smart City and Smart Campus products and solutions and cyber security,
connectivity, and IoT products and solutions.
Government and Enterprise
Cyber Security Markets. Homeland and enterprise cyber security markets with our Cyber Security products and services to
governments and large enterprises.
Our Solutions and Products
e-Government (e-Gov) SBU
Products and Solutions
We have been active in the national
ID and e-Government industry for more than 25 years. We work with governments and public sectors, and we believe SuperCom e-Gov
is an internationally recognized competitor in the design, development, integration and delivery of highly secured national ID
and e-Government solutions.
We offer a complete end-to-end
in-house solution for credentialing, identifying and verifying individuals by combining the capability to support biometric identification
with the portability of smart cards. Most of our products are based on a common platform, which we refer to as MAGNA™, a
complete end-to-end solution for such items as e-passports, national identity cards, voter identification cards and drivers’
licenses. Our solution covers everything necessary for a government to offer a particular service to the public: business process
engineering, solution design and integration, hardware and software implementation, operator and technician training. The solution
covers all workflows, managerial and operational reports, and it interfaces directly with the government’s business activity.
In addition, our e-Gov division
offers a variety of related services, including: requirements extraction and system design, project management, project operation,
training, operational processes optimization, assimilation, project financing (under BOT/PPP scheme), knowledge transfer, fee
collection, maintenance and support and more.
We believe our e-Gov systems comply
with regional and international standards and enhance usability by using smart card applications. Our systems’ central servers
include redundancy capabilities that provide disaster recovery or failover between sites. All solutions issue financial, accountability,
transaction auditing and management information reports, which decrease the likelihood of tampering and fraud by individuals.
Our products combine the portability
of smart cards with the capability to support advanced identification and authentication technology and manage significant amounts
of information. Our MAGNA™ modular platform offers short implementation and quick integration with the existing border control
system of a country and provides external interfaces to digital certificate authority for signature verification, as well as interfaces
to other agencies. It offers a migration path to additional e-Government applications and to additional electronic ID documents,
such as national IDs, voter IDs and drivers’ licenses. Our platform can be customized to support a large number of applications,
and it has been deployed in different e-passport/national ID contracts worldwide. It is also being developed for additional applications,
such as medical services.
Our border control system is based
on passenger biometric identification applications, electronic passport identification, and both optical and electronic means
of detecting forged passports. The system, operable online or offline, enables border control officers to receive accurate identification
based on a combination of two machine-readable biometric applications: fingerprints and facial recognition.
IoT and Connectivity SBU
Products and Solutions
Our IoT division features a multiple
connectivity base IoT hybrid suit accompanied by services specifically tailored to meet the requirements of the applicable industries,
primarily: (i) public safety, (ii) healthcare and homecare, (iii) SafeCity, (iv) Smart Campus, (v) Connectivity networks and (iii)
transportation. Our PureRF and PureSecurity 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 media.
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.
Secure Financial Services Products
and Solutions
We offer a full suite of solutions,
ranging from mobile wallet to mobile POS using a set of components and platforms to enable secure mobile payments and financial
services. Our products and solutions include:
SuperPayTM Suite.
SuperPay is a secure mobile payment hybrid suite that allows mobile users to securely make payments while supporting smartphones.
SuperPay features a number of secure payment methods and utilizes biometric authentication features already integrated in advanced
smartphones such as iPhone Touch ID, Samsung fingerprint scanner, or external biometric authentication.
PowaPOS. Our PowaPOS
T25, using the advanced and simple to use PowaPOS SDK, is a fully integrated design incorporating retail peripherals into a compact
and cost-effective footprint. Powered by a single power cord, the PowaPOS platform features a universal tablet mount, built in
thermal printer, 2D barcode/QR code scanner, swiveling design with customer/clerk orientation sensor, and the PowaPOS Cash Drawer.
The PowaPOS SDK works with iOS, Android and Windows POS software applications, as well as third party payment devices and many
other retail peripherals.
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
|
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 bases 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
|
BreezeULTRA™ P6000.
The BreezeULTRA family intends to provide high capacity product in wireless broadband Point to Point communication license-exempt
market. BreezeULTRA offers a bold combination of capacity, performance, organic growth and ease of use capabilities.
|
·
|
Optimized for high capacity applications
|
|
·
|
Available in the Licensed Exempt frequencies:
5.1-5.9 GHz
|
|
·
|
High Performance - supporting up to 500 Mbps
net throughpu and distances of up to 50km / 32 miles (w/high-gain antenna)
|
|
·
|
Dynamic up-link /down-link bandwidth allocation
|
|
·
|
Optimized performance of voice, video and data
using four priorities of service
|
|
·
|
Optimized interference mitigation and NLOS performance
|
|
·
|
Ease of ordering, installation and configuration
|
Arena controller. Arena
controller is an essential element for constructing large scale carrier wi-fi networks for hotspot/hotzones and cellular offloading
services
|
·
|
Cost effective and scalable network architecture with centralized control
plane and distributed
|
|
·
|
Supporting up to 5000 AP’s and 50,000 users per controller
|
|
·
|
Control and manage AP and backhaul radio, including statistic and reporting
|
|
·
|
Automatic AP units detection, configuration and firmware distribution
|
|
·
|
Secured control layer management
|
|
·
|
Hotspots/Hotzones and cellular offloading services
|
|
·
|
Providing a single peer to the A AA
|
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
|
|
·
|
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 WiFi connection, or a machine’s LAN connection. It enforces an accurate, data-centric security
policy on transferred data, without disrupting legitimate business processes or disturbing end user productivity.
Safend Discoverer,
which allows security administrators to locate sensitive data stored on organizational endpoints. It helps identify gaps in data
protection and compliance initiatives, and provides insight into which security policies should be implemented, using other components
of the Safend Data Protection Suite.
SafeMobile,
which provides high-end security framework designed to meet cyber threats on both the mobile client and on an organization’s
main server. The solution in development enables rapid deployment of any application on a smart device leaving the security challenges
to the framework.
Research and Development
Our research and development efforts
have enabled us to offer our customers a broader line of products and solutions, primarily in the areas of our e-Gov, IoT and
Connectivity, and Cyber Security. We intend to continue to research and develop new technologies and products for the e-Gov, Cyber
Security, Connectivity and IoT SBUs. There can be no assurance that we can achieve any or all of our research and development
goals.
During the years ended December 31, 2018, 2017 and 2016, we
have invested, $4.8 million, $7.2 million, and $6.7 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 14 employees that are directly engaged in the sale, distribution and support of our products
through centralized marketing offices in distinct world regions, including our employees and service providers located in the
United States, Israel, Zambia, Philippines, England and China 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.
Key Customer Contracts
On March 25, 2014, we entered
into an agreement whereby we provide consulting services for the design, development, implementation, commissioning and maintenance
of a government customer’s new e-Government system. The agreement provides for a total contract sum of approximately $24
million, payable upon the completion of certain milestones. Phase I of the agreement consists of the design and implementation
of the new system for an aggregate contract price of approximately $18 million. We received over 25% of this amount as advance
payment for Phase I, and receive the remainder upon certain milestones during Phase I. Phase I is scheduled to last approximately
18 months. Under Phase II of this agreement, we will provide maintenance services for the five-year period following the system
becoming operational in Phase I. The aggregate contract price for Phase II is $6 million, which will be comprised of a 25% advance
payment at the onset of Phase II, with the remaining 75% paid in quarterly installments. During 2016, we completed the Phase I
milestones. Phase II commenced immediately after the Phase I was completed in mid-2016.
Principal Markets
The following table provides a
breakdown of total revenue by geographic market for the three years ended December 31, 2018 (all amounts in thousands of
dollars):
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Africa
|
|
|
4,816
|
|
|
|
9,713
|
|
|
|
5,681
|
|
Europe
|
|
|
3,114
|
|
|
|
2,482
|
|
|
|
1,211
|
|
South and center America
|
|
|
1,279
|
|
|
|
8,778
|
|
|
|
1,803
|
|
United States
|
|
|
10,452
|
|
|
|
9,921
|
|
|
|
9,888
|
|
Israel
|
|
|
1,514
|
|
|
|
1,309
|
|
|
|
724
|
|
APAC
|
|
|
707
|
|
|
|
1,034
|
|
|
|
675
|
|
Other
|
|
|
-
|
|
|
|
27
|
|
|
|
43
|
|
Total
|
|
|
21,882
|
|
|
|
33,264
|
|
|
|
20,025
|
|
As part of the Company’s
decision to switch from one technology segment, e-government, into three separate 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.
Following the acquisitions, in
2016 the Company went through an integration and restructuring process, and opted to report firstly by interim operation segments:
Government, Connectivity and Cyber Security.
In 2017, as the Company progressed
further in the restructuring process, it moved to report by the latest and current technology segments or Strategic Business Units.
The following table provides a breakdown of total revenue by segment for the three years ended December 31, 2018 (all amounts
in thousands of dollars):
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
e-Gov
|
|
|
6,117
|
|
|
|
18,232
|
|
|
|
7,020
|
|
IoT
|
|
|
12,470
|
|
|
|
11,264
|
|
|
|
10,833
|
|
Cyber Security
|
|
|
3,295
|
|
|
|
3,768
|
|
|
|
2,172
|
|
Total
|
|
|
21,882
|
|
|
|
33,264
|
|
|
|
20,025
|
|
The following table provides a
breakdown of total revenue by products and services for the three years ended December 31, 2018 (all amounts in thousands
of dollars):
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
8,516
|
|
|
|
19,396
|
|
|
|
7,631
|
|
Services
|
|
|
13,366
|
|
|
|
13,868
|
|
|
|
12,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
21,882
|
|
|
|
33,264
|
|
|
|
20,025
|
|
Customer Service and Support
Customer service includes mainly
maintenance and support services and plays a significant role in our sales and marketing efforts. Our ability to maintain customer
satisfaction is critical to building our reputation and increasing growth in our existing markets, as well as penetrating new
markets. In addition, both customer contact and the customer feedback we receive in our ongoing support services provide us with
information on customer needs and contribute to our product development efforts. We generally provide maintenance and support
services under separate customized agreements after the customer project is completed. We provide services through customer training,
local third-party service organizations, our subsidiaries, or our personnel, including sending appropriate personnel from any
of our offices in United States, Europe, Israel, Columbia and Zambia. We usually give our customers a twelve-month warranty for
our products, and we offer additional extended warranty and maintenance programs. Costs incurred annually by us for product warranties
have to date been insignificant; however, we expect that the warranty costs may increase going forward because our current e-Gov,
IoT, and Cyber Security solutions are more complex than our previously offered solutions and additional new products may be deployed.
Manufacturing and Availability
of Raw Materials
Our manufacturing operations consist
primarily of materials planning and procurement, quality control of components, kit assembly and integration, final assembly,
and testing of fully-configured systems. A significant portion of our manufacturing operations consists of the integration and
testing of off-the-shelf components. Most of our products and systems, whether or not they are manufactured by us, are configured
to customer orders and undergo several levels of testing prior to delivery, including testing with the most current version of
software.
We manufacture a range of IoT
and e-Gov products and systems. We outsource the manufacturing of: (i) printed circuit boards, or PCBs, to a number of different
suppliers both in Israel and the Far East, (ii) enclosures to suppliers in Israel and the Far East and (iii) Teslin paper (a synthetic
material used in making ID cards), laminates, inlays, modules, cards, from suppliers from the Far East, Europe, the United States
and Israel. The electronic assembly of our products is done in Israel, Europe, and the United States. We sometimes commit to long-term
relationships with such suppliers in exchange for receiving competitive pricing. All PCBs and enclosures are built to our engineering
specifications. All PCBs are received in our manufacturing facilities in Israel and are tested, assembled, calibrated and put
in appropriate enclosures by outsource manufacturers in Israel. Then they go through a validation and quality assurance process.
Other components are off-the-shelf products, which we purchase from a number of different suppliers.
Many of the activities for our
e-Gov, IoT, and Cyber Security segments, such as purchasing, logistics, integration, training, installation and testing, are done
by our employees. In locations where we do not have a local representative, we assign certain tasks to local third parties and
service providers that we supervise. We have subcontracting agreements with local IT companies who have dedicated and experienced
personnel. Such subcontractors provide all local support, maintenance services and spare parts to customers in a specified area.
Competition
We assess our competitive position
from our experience and market intelligence, including third party competitive research materials. We believe that Guidance (G4S),
Attenti Monitoring, STOP(Securus), Omnilink (Sierra Wireless), Sentinel, BI (GeoGroup), Buddi, and Track Group are our potential
competitors with respect to our IoT products and solutions. We believe that Face Technologies, Cogent (3M), Zetes Industries,
Mühlbauer Group, Oberthur Technologies, Gemalto, Bundesdruckerei GmbH and Nadra are our potential competitors in the e-Gov
products and solutions market. We believe that McAfee(Intel Security), Symantec, Sophos, and Trend Micro are the primary competitors
for our Cyber Security division. Due to the developing nature of the markets for our e-Gov, IoT, and Cyber Security products and
solutions and the ongoing changes in this market, the above-mentioned list may not constitute a full list of all of our competitors
and additional companies may be considered our competitors.
Our management expects competition
to intensify as the markets in which our products and solutions compete continue to develop. Some of our competitors may be more
technologically sophisticated or have substantially greater technical, financial or marketing resources than we do, or may have
more extensive pre-existing relationships with potential customers. Although our products and services combine technologies and
features that provide customers with complete and comprehensive solutions, we cannot assure that other companies will not offer
similar products in the future or develop products and services that are superior to our products and services, achieve greater
customer acceptance or have significantly improved functionality as compared to our products and services. Increased competition
may result in our experiencing reduced margins, loss of sales or a decrease in market share.
Intellectual Property
Our ability to compete is dependent
on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of patents, trademarks,
copyrights, trade secrets and other intellectual property laws, as well as employee and third-party nondisclosure agreements,
licensing and other contractual arrangements. However, these legal protections afford only limited protection for our proprietary
technology and intellectual property.
In addition, the laws of certain
foreign countries may not protect our intellectual property rights to the same extent as do the laws of Israel or the United States.
Our method of protecting our intellectual property rights in Israel, the United States or any other country in which we operate
may not be adequate to fully protect such rights.
Currently we own 52 issued patents
in the United States and 74 issued patents in the rest of the world.
Trademarks
We rely on trade names, trademarks
and service marks to protect our name brands. We hold registered trademarks in several countries including Israel, the United
States and the United Kingdom. We rely on trade names, trademarks and service marks to protect our name brands. We have registered
trademarks for PureRFid® , SuperCom ® , Vuance® , EduGate® , and “Vuance
Validate your World” ® and have applied for trademarks for PureMonitorTM , PureComTM
, PureTagTM , PureTrackTM AAID TM , SmartIDTM , MAGNA TM and PureArrestTM.
Licenses
We license technology and software,
such as operating systems and database software, from third parties for incorporation into our systems and products, and we expect
to continue to enter into these types of agreements for future products. Our licenses are either perpetual or for specific terms.
As part of the acquisition of
the SmartID division, we also received an irrevocable, worldwide, non-exclusive, non-assignable and non-transferable license to
use certain intellectual property from OTI in connection with our past, ongoing and future e-Gov projects.
Government Regulation
Generally, we are subject to the
laws, regulations and standards of the countries in which we operate and/or sell our products, which vary substantially from country
to country. The difficulty of complying with these laws, regulations and standards may be more or less difficult than complying
with applicable U.S. or Israeli regulations and the requirements may differ. Please see
the section titled “Risk Factors” for more information on the effects of governmental regulation on our business.
|
C.
|
Organizational Structure
|
The following
reflects our active subsidiaries and affiliates as of December 2, 2019:
SuperCom Inc.
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”)
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.
SuperCom Slovakia A.S. (“SuperCom
Slovakia”)
SuperCom Slovakia, incorporated
in Slovakia, was established to implement a national documentation project in the Republic of Slovakia. SuperCom Slovakia is 66%
owned by us and 34% owned by EIB Group a.s., a privately held Czech company. While we have a 66% ownership interest in SuperCom
Slovakia, our voting power in SuperCom Slovakia is 50%. The company has no activity.
Safend Ltd.
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 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 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 2,070 square meters of office and warehousing premise in Tel Aviv, Israel under a new three-year lease
expiring on June 30, 2022. According to the agreement, the monthly fee (including management fees) is approximately $56,000.
We lease approximately 200 square
meters of office premise in New York for our U.S. subsidiary, SuperCom Inc. We lease approximately 1,200 square meters of office
premise in California for our U.S. subsidiary, LCA Inc.
We do not lease any facilities
for any other subsidiary or our branch.
Our total annual rental fees, for 2018, 2017 and 2016 were $1,593,000, $2,065,000, and $2,062,000, respectively.
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
None.
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The following discussion of our
results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere
in this Annual Report. The following discussion contains forward-looking statements that reflect our current plans, estimates
and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Annual
Report.
Overview
We are a global provider of traditional
identification and e-Government solutions, IoT products and solutions, as well as Cyber Security products and services to governments
and organizations throughout the world.
Our product depth and global presence
was expanded significantly with our acquisition of the SmartID division of OTI in December 2013, as well as our acquisitions of
Prevision, Safend, LCA, PowaPOS business, and Alvarion between November 2015 and May 2016. Initially, our operations grew significantly
following the acquisition of the SmartID division and the 2016 acquisitions, especially our head count and research and development
and sales and marketing expenses, as we did our best to respond to the new market and customer needs. Although in recent years,
we have worked diligently through integration and restructuring processes to optimize our operational structure and costs.
We are headquartered in Israel
and operate internationally with subsidiaries in the New York, California, and other geographies where we win and deploy new projects.
General
Our consolidated financial statements
appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in
the United States, or U.S. GAAP. Transactions and balances originally denominated in dollars are presented at their original amounts.
Transactions and balances in other currencies are re-measured into dollars in accordance with the principles set forth in Financial
Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 830, ” Foreign Currency Translation
.” The majority of our sales are made outside Israel in dollars. In addition, substantial portions of our costs are
incurred in dollars. Since the dollar is the primary currency of the economic environment in which we and certain of our subsidiaries
operate, the dollar is our functional and reporting currency and, accordingly, monetary accounts maintained in currencies other
than the dollar are re-measured using the foreign exchange rate at the balance sheet date. Operational accounts and non-monetary
balance sheet accounts are measured and recorded at the exchange rate in effect at the date of the transaction. The financial
statements of certain subsidiaries, whose functional currency is not the dollar, have been translated into dollars. All balance
sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts
have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component
of shareholders’ equity in accumulated other comprehensive income (loss).
Key Factors
Affecting Our Business
Our operations and the operating
metrics discussed below have been, and will likely continue to be, affected by certain key factors as well as certain historical
events and actions. The key factors affecting our business and our results of operations include, among others, competition, government
regulation, the build out of infrastructures, macro-economic and political risks, churn rate, impact of currency fluctuations
and inflation, effective corporate tax rate, conditions in Israel and trade relations. For further discussion of the factors affecting
our results of operations, see Item 3D “Risk Factors.”
Explanation of Key Income Statement
Items, Significant Revenues and Expenses
General
2018 was a year of important developments
for the Company, as we continued to optimize the operational structure of the Company including the 2016 acquired businesses and
unlock cost synergies among the operating units. Investment in R&D continued to enhance our product offerings and competitive
standing among our target markets. The optimized restructured corporation generated numerous new opportunities and project wins
in our target markets, but required us to use resources in many cases that have yet to yield income to the group as part of multi-year
government sale and project deployment life cycles. We believe that comparing between 2018, 2017 and 2016 cannot be done effectively
without understanding the changes and the restructuring efforts invested.
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 e-Gov, IoT, and Cyber Security long term services contracts, providing customers with raw materials, software upgrades,
support, maintenance, training and installation. 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.
During 2016 we acquired Alvarion
and Safend, which grew our suite of products from which we generate revenues. Revenues from the sale of such products are generally
recognized upon delivery.
Costs and Operating Expenses
For the year 2018 our costs were
affected by the attention of management to continue the optimization of the businesses we acquired during the 2016 as was described
in the General section above.
Our research and development expenses
consist of salaries, subcontractor expenses, related depreciation costs and overhead allocated to research and development activities.
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.
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 quarter to quarter, 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, 2018, expressed
as a percentage of total revenues.
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
62.8
|
|
|
|
61.2
|
|
|
|
87.2
|
|
Gross profit
|
|
|
37.2
|
|
|
|
38.8
|
|
|
|
12.8
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
21.9
|
|
|
|
21.8
|
|
|
|
33.5
|
|
Selling and marketing
|
|
|
22.9
|
|
|
|
24.3
|
|
|
|
49.8
|
|
General and administrative
|
|
|
26.3
|
|
|
|
18.4
|
|
|
|
36.3
|
|
Other expenses (income)
|
|
|
10.4
|
|
|
|
(6.1
|
)
|
|
|
(48.9
|
)
|
Total operating expenses
|
|
|
81.4
|
|
|
|
58.4
|
|
|
|
70.7
|
|
Operating income (loss)
|
|
|
(44.2
|
)
|
|
|
(19.6
|
)
|
|
|
(57.9
|
)
|
Financial (expenses) income, net
|
|
|
(1.5
|
)
|
|
|
(1.6
|
)
|
|
|
(1.5
|
)
|
Income (loss) before income tax
|
|
|
(45.7
|
)
|
|
|
(21.2
|
)
|
|
|
(59.4
|
)
|
Income tax (expense) benefit
|
|
|
(26.2
|
)
|
|
|
1.2
|
|
|
|
(10.4
|
)
|
Net income (Loss)
|
|
|
(71.9
|
)
|
|
|
(20.0
|
)
|
|
|
(69.9
|
)
|
Year Ended December 31, 2018
Compared with Year Ended December 31, 2017
Revenues
Our total revenues in 2018 were $21,882,000 compared to $33,264,000
in 2017, a decrease of 34.2%. The composition of revenues has changed during 2018 as follows:)i) the e-Gov segment revenue was
$6,117,000 in comparison to $18,232,000 in 2017, a decrease of 66% which is mainly attributed to a large e-Gov contract deployment
in 2017 and the lack of new one of comparable size in 2018, representing volatile project-based revenues which have been inherent
in this segment, (ii) the IoT segment revenue was $12,470,000 in comparison to $11,264,000 in 2017, an increase of 10.7% which
is attributed to new contract wins and implementations in Europe and USA, and an increase in our recurring revenue from existing
customers; (iii) the Cyber Security segment revenue was $3,295,000 in comparison to $3,768,000 in 2017, a decrease of 12.6% which
is mainly attributed to the accumulated effect on the liability to recognize deferred revenue in the amount of $257,000 due to
the adoption of the new GAAP revenue recognition policy ASC-606, and a decrease in our revenue from our consulting-based cyber
offering.
Gross Profit
Our gross profit in 2018 was $8,139,000 compared to $12,913,000
in 2017, a decrease of 37%. The gross profit margin for 2018 was 37.2% compared to 38.8% in 2017. The decrease in our gross
profit margin is mainly attributable to (i) a decrease in COGS as a result of cost optimization processes(ii) a change in the mix
of revenues,(iii) an increase of revenue from steady states e-Gov contracts which contributes higher than average gross margin,
(iv) an increase in recurring revenue from multi-year IoT contracts with higher than average margins in the USA and Europe, offset
by (v) one time inventory write-off in the amount of $1,527,000. (iv) decline in revenue of $11,382,000.
Expenses
Our operating expenses decreased in 2018 to $17,814,000
from $19,429,000 in 2017, a decrease of 8.3%. If we exclude other income, the decrease is more apparent as our operating expenses
excluding other income decreased in 2018 to $15,543,000 from $21,450,000 in 2017, a decrease of 27.5%. The decrease in operating
expenses was primarily due to (i) a decrease of 33.8% in research and development expenses, (ii) a decrease of 6.0% in general
and administrative expenses mainly related to the significant decrease in our administration headcount, (iii) a decrease of 38%
in sales and marketing expenses mainly related to the significant decrease in our sales and marketing headcount derived from sales
force and network optimization.
Our research and development expenses decreased to $4,790,000
in 2018 from $7,238,000 in 2017, a decrease of 33.8%. The decrease in our research and development expenses was primarily due to
decreased needs in developing our e-Gov, IoT and Cyber Security products, after significant progress and competitive advantages
were developed through R&D investment in recent years.
Our general and administrative expenses decreased to $5,748,000
in 2018 from $6,113,000 in 2017, a decrease of 6.0%. The decrease in general and administrative expenses was primarily due to the
process of optimization of the operating expenses of the four subsidiaries we acquired in 2016.
Other expenses were $2,271,000 in 2018, compared to other income
of $2,021,000 in 2017. Other expenses in 2018 represent mainly a provision of bad debt, related African government, amounted to
$2,406,000, other income in 2017 represent mainly of recovery from pre-acquisition receivable amounted $1,384,000 and change in
valuation of contingent consideration amounted $593,000.
Financial (Expenses) Income,
net
We had financial expenses, net of $335,000 in 2018 compared
to $538,000 in 2017. Financial expenses consist primarily of bank fees related to guarantees issued to our customers and exchange
rate effect. The decrease in financial expenses was also due to changes in the exchange rate of the NIS against the U.S. dollar
in 2018 compare to 2017, offset by an interest fee on the loan from Fortress in the fourth quarter of 2018.
Income Tax
We recorded a tax expense of $5,730,000 for the year ended December
31, 2018 compared to a tax benefit of $393,000 in 2017, mainly due to reduction of tax assets valuation amounted to $5,987,000.
Net Income
As a result of the factors described above, our net loss for
the year ended December 31, 2018 was $15,740,000 compared to a net loss of $6,661,000 in 2017. The increase is mainly related to
the (i) 33% decrease in our cost of revenue and (ii) a decrease of 8.3% in operating expenses offset by; (i) 34% decrease in revenue.
(ii) one time inventory write off of $1,527,000, (iii) bad debt provision of $2,406,000 and (iv) onetime tax assets reduction of
5,987,000 for the year ended December 31, 2018.
Year Ended December 31, 2017
Compared with Year Ended December 31, 2016
Revenues
Our total revenues in 2017 were
$33,264,000 compared to $20,025,000 in 2016, an increase of 66%. The composition of the revenues has changed during 2017 as follow;
(i) the e-Gov unit revenue was $18,232,000 in comparison to $7,020,000 in 2016, an increase of 160% which is attributed to a large
e-Gov contract, and an increase in our recurring revenue from existing customers, (ii) the IoT and Connectivity Unit revenue was
$11,264,000 in comparison to $10,833,000 in 2016, an increase of 4% which is attributed to new contracts implementation in Europe
and USA, and a moderate increase in our recurring revenue from existing customers; (iii) the Cyber Security Unit revenue was $3,768,000
in comparison to $2,172,000 in 2016, an increase of 73% which is attributed to new licenses orders from new customers in Europe
and USA, and an increase in our recurring revenue from existing customers.
Gross Profit
Our gross profit in 2017 was $12,913,000
compared to $2,564,000 in 2016, an increase of 404%. The gross profit margin for 2017 was 38.8% compared to 12.8% in 2016. The
increase in our gross margin is mainly attributable to(i) a change in the mix of revenues from subsidiaries acquired in 2016 as
explained above, (ii) an increase of revenue from Cyber Security division with high gross margins, (iii) an increase of steady-state
revenue from e-Gov contracts which contribute higher than average gross margins, (iv) completion of large e-Gov deployment contract
with low gross margin, (iv) and an increase of revenue from IoT long term contracts with higher than average margins.
Expenses
Our operating expenses decreased in
2017 to $19,429,000 from $24,678,000 in 2016 (excluding gain from bargain acquisitions in the amount of $10,515,000), a decrease
of 21%. The decrease in operating expenses was primarily due to (i) an increase of 8% in research and development expenses, (ii)
a decrease of 16% in general and administrative expenses mainly related to the significant decrease in our administration headcount,
(iii) a decrease of 19% in sales and marketing expenses mainly related to the significant decrease in our sales and marketing
headcount derived from sales force and network optimization. Operating expenses excluding gain from bargain acquisitions is a
non-GAAP measure with the most comparable GAAP measure being operating expenses. The reconciling item between this non-GAAP measure
and operating expenses is the gain from the bargain acquisition. We believe this non-GAAP measure helps the reader in understanding
the performance of our operations for the current year given the non-recurring nature of the gain from bargain acquisitions.
Our research and development expenses
increased to $7,238,000 in 2017 from $6,718,000 in 2016, an increase of 8%. The increase in our research and development expenses
was primarily due to increased efforts in developing our connectivity, IoT, cyber security and e-Gov products and solutions.
Our general and administrative
expenses decreased to $6,113,000 in 2017 from $7,277,000 in 2016, a decrease of 16%. The decrease in general and administrative
expenses was primarily due to the process of optimization of the expenses of the four subsidiaries we acquired in 2016.
Other income was $2,021,000 in 2017, compared to other expenses
of $713,000 in 2016. Other income in 2017 represent mainly of recovery from preaquisition receivable amounted $1,384,000 and change
in valuation of contingent consideration amounted $593,000. Other expenses in 2016 represent mainly bad debt provision in that
amounts. The bad debt provision we recorded is based on management’s estimation with respect to the collectability of certain
debt.
During 2016 we had bargain profit
from the acquisitions of Safend and Alvarion in 2016 in the amount of $10,515,000, such bargain profit was not recognized in 2017.
Financial (Expenses) Income,
net
We had financial expenses, net
of $538,000 in 2017 compared to financial expenses, net of $303,000 in 2016. Financial expenses consist primarily of bank
fees related to guarantees issued to our customers and exchange rate expenses. The increase in
financial expenses was due to
changes in foreign currency rates, mainly due the major changes of 9.8% in the exchange rate of the NIS against the U.S. dollar
in 2017.
Income Tax
We recorded a tax benefit of $393,000
for the year ended December 31, 2017 compared to a tax expense of $2,091,000 in 2016, mainly due to changes in valuation allowance.
Net Income
As a result of the factors described
above, our net loss for the year ended December 31, 2017 was $6,661,000 compared to a net loss of $13,993,000 in 2016. This decrease
is mainly related to the decrease in our cost of revenue and operating expenses and a large increase in revenue for the year ended
December 31, 2017.
Seasonality
Our operating results are generally
not characterized by a seasonal pattern.
Impact of Currency Fluctuation
and of Inflation
We report our financial results
in dollars and receive payments in dollars for most of our sales, while a portion of our expenses, primarily salaries, are paid
in NIS. Therefore, the dollar cost of our operations in Israel is influenced by the extent to which any increase in the rate of
inflation in Israel is not offset, or is offset on a lagging basis, by a devaluation of the NIS in relation to the dollar.
Monetary accounts maintained in
currencies other than the U.S. dollar are re-measured into U.S. dollars at the exchange rate prevailing at the end of the reporting
period in accordance with provisions of ASC 835-10. All transaction gains and losses from the re-measurement of monetary balance
sheet items are reflected in the statements of operations as financial income or financial expenses as appropriate.
When the rate of inflation in
Israel exceeds the rate of devaluation of the NIS against the dollar, the dollar cost of our operations in Israel increase. If
the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. Any
increase in the value of the NIS in relation to the dollar also has the effect of increasing the dollar value of any NIS assets,
unless such assets are linked to the dollar, and the dollar amounts of any unlinked NIS liabilities and expenses. We cannot assure
you that we will not be materially and adversely affected in the future if inflation in Israel exceeds the devaluation of the
NIS against the dollar or if the timing of the devaluation lags behind inflation in Israel.
Conversely, depreciation of the
NIS in relation to the dollar has the effect of reducing the dollar amount of any of our expenses or liabilities that are payable
in NIS, unless those expenses or payables are linked to the dollar. Depreciation of the NIS in relation to the dollar has the
effect of reducing the dollar amount of any of our expenses or liabilities and also has the effect of decreasing the dollar value
of any asset which consists of NIS or receivables payable in NIS, unless the receivables are linked to the dollar.
The following table presents information
about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the dollar, and the rate of
inflation in Israel adjusted for the devaluation:
Year ended
December 31,
|
|
Israeli inflation
rate %
|
|
|
NIS devaluation
(appreciation)
rate %
|
|
|
Israeli
inflation adjusted for
devaluation
(appreciation) %
|
|
2016
|
|
|
(0.2
|
)
|
|
|
(1.5
|
)
|
|
|
1.3
|
|
2017
|
|
|
0.4
|
|
|
|
(9.8
|
)
|
|
|
10.2
|
|
2018
|
|
|
0.8
|
|
|
|
8.1
|
|
|
|
(7.3
|
)
|
Because exchange rates between
the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have
an impact on our profitability and period-to-period comparisons of our results. We cannot assure you that in the future our results
of operations may not be materially adversely affected by currency fluctuations. Historically, we have not used any hedging instruments,
but in the future if we expect the fluctuation to have major effect on our operations, we may use such instruments.
Conditions in Israel
We are organized under the laws
of, and our principal executive offices and research and development facilities are located in, the State of Israel. See Item
3D “Key Information – Risk Factors – Risks Relating to Operations in Israel” for a description of governmental,
economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.
Please see the section entitled “Risk Factors” for additional information.
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 redefinement
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 26.5% in 2015, 25% in 2016, 24% in 2017, and 23% in 2018 and thereafter. For the years ended December 31, 2018 and 2017 we
had losses, and therefore the effective tax rate was mostly affected by changes in deferred tax. Our effective tax rate as for
the year ended December 31, 2018 was 16%.
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 December 31, 2018, our
cash and cash equivalents totaled $1,639,000, compared to $1,037,000 as of December 31, 2017. As of December 31, 2018, our
restricted bank deposits totaled $1,162,000, related mainly to bid and performance guarantees and lease
agreements.
As of December 31, 2018, the Company has accumulated deficit
$65,959,000, and net cash used in operating activities of $6,416,000. In addition the Company has excess of current assets over
current liabilities of $12,121,000.
During 2017 and until end of December 2018, the Company underwent
a merger optimization process to a more cost-efficient structure which operates through three new business segments, supported
by common operating services. Following the optimization process, for the year 2018 the Company has reduced its operating expenses
by $1,615,000 or by $5,907,000 if you exclude other income of $2,021,000 in 2017 and other expenses of $2,271,000 in 2018. The
Company expects to reduce its expenses even further through reduction in its headcount and overhead costs, mainly throughout the
year of 2019, including significant reduction of R&D expenses, given significant R&D investment in recent years helped
launch successful core product suites and similar R&D investment levels are not currently needed.
The Company believes that based on the above mentioned significant
cost savings and expected growing cash stream from the Company’s current contracts with customers worldwide, it will generate
positive cash flow from operating activities, and will be able to fund its operations for at least the next 12 months.
Furthermore, the available $10 million secured credit
facility from Fortress Investment Group provides the Company additional access to capital if needed.
Cash Flows
The following table summarizes
our cash flows for the periods presented:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Net cash used in operating activities
|
|
|
(6,416
|
)
|
|
|
(1,983
|
)
|
|
|
(11,045
|
)
|
Net cash used in investing activities
|
|
|
(1,519
|
)
|
|
|
*(1,528
|
)
|
|
|
*(6,875
|
)
|
Net cash provided by (used in) financing activities
|
|
|
8,636
|
|
|
|
2,793
|
|
|
|
(4,830
|
)
|
Net increase(decrease) in cash and cash equivalents
|
|
|
701
|
|
|
|
*(718
|
)
|
|
|
*(22,702
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
|
2,100
|
|
|
|
*2,818
|
|
|
|
*25,520
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
|
2,801
|
|
|
|
*2,100
|
|
|
|
*2,818
|
|
* Reclassified(see note 2(x).
Net cash used in operating activities for the year ended December
31, 2018 was $6,416,000, compared to net cash used by operating activities of $1,983,000 during the year ended December 31, 2017,
an increase of $4,433,000. The increase was primarily due to a major decrease in trade payables as well as employees and related
accruals in 2018 in comparison to an increase in similar items in 2017.
Net cash used in investing activities during the year ended
December 31, 2018, was $1,519,000 compared to $1,528,000 during the year ended December 31, 2017.
Net cash provided by financing activities during the year ended
December 31, 2018, was $8,636,000, and consisted mainly of loans from Fortress and issuance of share equity, compared to $2,793,000
during the year ended December 31, 2017, which consisted mainly of loans from related parties.
Discussion of Critical Accounting
Policies
The preparation of financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. We evaluate our estimates and judgments on an ongoing basis.
We base our estimates and judgments
on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Under different assumptions or conditions, actual results may differ from these estimates.
Our discussion and analysis of
our financial condition and results of operations is based on our consolidated financial statements, which have been prepared
in accordance with U.S. GAAP. Our significant accounting principles are presented within Note 2 to our consolidated financial
statements. While all the accounting policies impact the financial statements, certain policies may be viewed to be critical.
These policies are those that are most important to the portrayal of our financial condition and results of operations. Actual
results could differ from those estimates. Our management believes that the accounting policies which affect the more significant
judgments and estimates used in the preparation of our consolidated financial statements and which are the most critical to fully
understanding and evaluating our reported results include the following:
Revenue Recognition
The Company and its subsidiaries generate their revenues from
the sale of products, licensing, maintenance, royalties and long term contracts (including training and installation).
Effective January 1, 2018, the Company
adopted Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contracts with Customers (“ASC
606”). ASC 606 was applied using the modified retrospective method, therefore the cumulative effect of initially applying
the revenue standard is recognized as an adjustment to opening retained earnings at January 1, 2018. Accordingly, comparative periods
have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition (“ASC 605”).
Upon adoption of ASC 606, the Company identified
a change in the Company’s revenue recognition policies related to combined license and maintenance sales, as noted within
the Company’s Safend contracts. Under ASC 605, revenue for these contracts was recognized over the life of the contract.
In accordance with ASC 606, license revenue is recognized upon delivery while maintenance is recognized over the life of the contract.
As a result of applying the new standard, the Company will recognize a cumulative effect adjustment to Retained Earnings as of
January 1, 2018 in the amount of $257,000.
Aside from its combined license and maintenance
sales, no other changes were identified to the characteristics of the Company’s other revenue recognition policies, other
than the enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations,
variable consideration and the related judgments and estimates necessary to apply the new standard.
We measure revenue based upon the consideration
specified in the client arrangement, and revenue is recognized when the performance obligations in the client arrangement are satisfied.
A performance obligation is a contractual promise to transfer a distinct service to the customer. The transaction price of a contract
is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of
the performance obligation. Under ASC 606, revenue is recognized when a customer obtains control of promised services in an amount
that reflects the consideration we expect to receive in exchange for those services. To achieve this core principal, the Company
applies the following five steps:
1) Identify
the contract with a customer
A contract with a customer exists when
(i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services
to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii)
the Company determines that collection of substantially all consideration for services that are transferred is probable based on
the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s
ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience
or, in the case of a new customer, published credit and financial information pertaining to the customer.
2) Identify
the performance obligations in the contract
Performance obligations promised in a contract
are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby
the customer can benefit from the service either on its own or together with other resources that are readily available from third
parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately
identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must
apply judgment to determine whether promised services are capable of being distinct in the context of the contract. If these criteria
are not met the promised services are accounted for as a combined performance obligation.
3) Determine
the transaction price
The transaction
price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to
the customer.
We evaluate whether a significant financing component exists when we recognize revenue in advance of customer
payments that occur over time. For example, some of our contracts include payment terms greater than one year from when we
transfer control of goods and services to our customers and the receipt of the final payment for those goods and services. If
a significant financing component exists, we classify a portion of the transaction price as interest income, instead of
recognizing all of the transaction price as revenue. We do not adjust the transaction price for the effects of financing if,
at contract inception, the period between the transfer of control to a customer and final payment is expected to be one year
or less.
4) Allocate
the transaction price to performance obligations in the contract
If the contract contains
a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a
series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable
consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific
part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price based
on management’s judgement.
5) Recognize
revenue when or as the Company satisfies a performance obligation
The Company satisfies
performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation
is satisfied by transferring a promised good or service to a customer.
Nature of goods and services
The following is a description of the Company’s
goods and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations,
and significant payment terms for each, as applicable:
Software Maintenance and Support Services
Revenue
Software maintenance and support services
contracts are sold in conjunction with the Company’s software products for its e-Govt, IoT and Connectivity, and Cyber Security
segments. The contract terms for software maintenance and support span one to five years in length and provide customers with
the rights to unspecified software product updates if and when available, online and telephone access to technical support personnel.
The Company recognizes revenue from fixed-price
service and maintenance contracts using the input method of accounting. Under the input method, revenue is recognized on the basis
of an entity’s efforts toward satisfying a performance obligation. We recognize revenue from maintenance and support services
provided pursuant to the time elapsed under such contracts, as that is when our performance obligation to our customers under such
arrangements is fulfilled.
Perpetual Software License Revenue
The Company generates revenue from the
sales of perpetual software licenses for its Cyber Security and e-Gov segments, including sales for its Magna_DL, Magna_VL, Magna_Passport,
and Magna_ID software products. The intellectual property rights for usage of these products are transferred to the customer at
the time of purchase and the software does not require implementation services, ongoing maintenance and support, or other adaptions
in order to maintain the license utility.
In
arrangements where ongoing services are not essential to the functionality of the delivered software, the Company recognizes perpetual
software license revenue when the license agreement has been approved and the software has been delivered. The Company can identify
each party’s rights, payment terms, and commercial substance of the content. Where applicable, we identify multiple performance
obligations and record as revenue as the performance obligations are fulfilled based on the adjusted market assessment approach.
Annual Software License Revenue
The Company generates revenue from the
sales of time-based software licenses for certain of its software products. The intellectual property rights for access to these
products are transferred to the customer for contract terms of one year and the software requires ongoing maintenance, support,
or other adaptations in order to maintain utility.
The Company recognizes revenue over time
using the input method for its annual software licenses when ongoing services are determined to be essential to the functionality
of the delivered software. The license along with the any customization services are transferred to our customers pursuant to the
time elapsed under such contracts, as that is when our performance obligation to our customers under such arrangements is fulfilled.
System Design Revenue
System design revenue relate to services
provided to governments and national agencies in the early stages of a new project including incumbent system data information
extraction, customer interviewing and specification mapping, architecture and software design, secure credential design, project
management and planning, data migration design, project operation planning, training, assimilation, and operational processes optimization
for the Company’s e-Gov and IoT solutions.
The Company recognizes revenue from its
system design services using the input method of accounting. Under the input method, revenue is recognized on the basis of an
entity’s efforts or inputs toward satisfying a performance obligation. We recognize revenue from system design services
provided pursuant to time-and-materials based contracts as the services are performed, as that is when our performance obligation
to our customers under such arrangements is fulfilled. Where applicable, we identify multiple performance obligations and record
revenue as the performance obligations are fulfilled based on the expected cost plus a margin approach.
Implementation and System Deployment
Revenue
Implementation and system deployment revenue
relate to services provided to governments and national agencies typically after the design stage is concluded including infrastructure
setup and deployment, software and chip design development, software customizations, purchase, and deployment of hardware and
necessary system components, system integration and implementation, process engineering, customer training, system quality assurance
testing, load balancing and local environment optimizations, and operational system launch for the Company’s e-Gov and IoT
solutions.
The Company recognizes revenue from its
implementation and system deployment services using the input method of accounting. Under the input method, revenue is recognized
on the basis of an entity’s efforts or inputs toward satisfying a performance obligation. We recognize revenue from implementation
and system deployment services provided pursuant to time-and-materials based contracts as the services are performed, as that
is when our performance obligation to our customers under such arrangements is fulfilled. Where applicable, we identify multiple
performance obligations and record revenue as the performance obligations are fulfilled based on the residual approach.
Procurement of Secure Document Consumables
Revenue
The Company procures secure document consumables
for its e-Gov government customers which are needed to issue secure documents after a project deployment is complete and a system
is actively running and operational. These consumables are manufactured at secure printing facilities utilizing proprietary and
customized designs, which the Company has developed during the project design stage, to provide multiple layers of security preventing
falsification of documents. These consumables include base card stock, security laminates, holograms, passive RFID chip inlays,
passport booklets, secure chip cards, and various other secure credentialing necessities.
The Company recognizes revenue on procurement
of secure document consumables products when the customer has control of the product, which is determined to be at the point in
time when the products are delivered. Where applicable, we identify multiple performance obligations and record revenue as the
performance obligations are fulfilled based on their stated prices within the contract.
Wireless & RFID Products Revenue
The Company’s wireless
products include solutions for carrier Wi-Fi, enterprise connectivity, smart city, smart hospitality, connected campuses and connected
events which enhance productivity and performance. The Company’s RFID products include asset tags which provide real-time
asset loss prevention, inventory management, and personnel/asset tracking and vehicle tags which provide long-range vehicle ID
for parking and fleet management, access control, asset loss prevention at airports, gated communities, truck and bus terminals,
employee parking lots, hospitals, industrial facilities, railroads, mines and military installations.
The Company recognizes revenue on wireless
and RFID products when the customer has control of the equipment, which is determined to be at the point in time when the products
are shipped. Where applicable, we identify multiple performance obligations and record revenue as the performance obligations
are fulfilled based on their stated prices within the contract.
Electronic Monitoring Services Revenue
Electronic monitoring services represent
fees the Company collects through the sale or rental of its PureSecurity Suite of products, which include the PureMonitor, PureTrack,
PureTag, PureCom, PureBeacon, and SCRAM devices. These devices identify, track, and monitor people or objects in real time through
the Company’s GPS monitoring, home monitoring, and alcohol tracking solutions.
The Company recognizes revenue on the
sale of electronic monitoring products when the customer has control of the equipment, which is determined to be at the point
in time when the products are shipped. For devices which are rented and for electronic monitoring services provided, we recognize
revenue pursuant to the time elapsed for such contracts, as that is when our performance obligation to our customers under such
arrangements is fulfilled. Our customers typically pay for these services based on a net rate per day per individual or on a fixed
monthly rate.
Treatment Services Revenue
Treatment services revenue is an extension
of the Company’s electronic monitoring services. We provide individuals who have completed or are near the end of their sentence
with the resources necessary to productively transition back into society. Through our daily reporting centers, we provide criminal
justice programs and reentry services to help reduce recidivism which include case management, substance abuse education, vocational
training, parental support, employment readiness and job placement. These activities are considered to be a bundle of services
which are a part of a series of distinct services recognized over time.
The Company recognizes revenue from its
treatment services using the input method of accounting. Under the input method, revenue is recognized revenue on the basis of
an entity’s efforts or inputs toward satisfying a performance obligation. We recognize revenue from treatment services provided
pursuant to time-and-materials based contracts as the services are performed, as that is when our performance obligation to our
customers under such arrangements is fulfilled. Where applicable, we identify multiple performance obligations and record revenue
as the performance obligations are fulfilled based on the using the expected cost plus a margin approach.
Professional Services Revenue
The Company offers professional
services for the Company’s Cyber Security software products, which includes an on-site / remote visit by a specialist technician
to assist with installation, deployment and configuration.
The Company recognizes revenue from professional
services upon completion of the service performed for the customer. As these services are completed during a single onsite visit,
revenue is recognized at the point in time of such onsite visit.
Disaggregation of revenue
In the following table, revenue is disaggregated
by major geographic region and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue
with the reportable segments:
|
|
Year ended December 31, 2018
|
|
|
|
Cyber
Security
|
|
|
IoT
|
|
|
e-Gov
|
|
|
Total
|
|
Major geographic areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
$
|
-
|
|
|
$
|
70
|
|
|
$
|
4,746
|
|
|
$
|
4,816
|
|
European countries
|
|
|
723
|
|
|
|
2,125
|
|
|
|
266
|
|
|
|
3,114
|
|
South America
|
|
|
-
|
|
|
|
174
|
|
|
|
1,105
|
|
|
|
1,279
|
|
United States
|
|
|
935
|
|
|
|
9,517
|
|
|
|
-
|
|
|
|
10,452
|
|
Israel
|
|
|
1,366
|
|
|
|
148
|
|
|
|
-
|
|
|
|
1,514
|
|
APAC
|
|
|
271
|
|
|
|
436
|
|
|
|
-
|
|
|
|
707
|
|
Total revenue
|
|
$
|
3,295
|
|
|
$
|
12,470
|
|
|
$
|
6,117
|
|
|
$
|
21,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred over time
|
|
$
|
1,084
|
|
|
$
|
11,102
|
|
|
$
|
3,999
|
|
|
$
|
16,185
|
|
Products transferred at a point in time
|
|
|
2,211
|
|
|
|
1,368
|
|
|
|
2,118
|
|
|
|
5,697
|
|
Total revenue
|
|
$
|
3,295
|
|
|
$
|
12,470
|
|
|
$
|
6,117
|
|
|
$
|
21,882
|
|
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, 2018, the aggregate amount of
the transaction price allocated to remaining performance obligations totals $5.8 million. The Company expects approximately 68%
of remaining performance obligations to be recognized into revenue within the next 12 months, with the remaining 32% recognized
thereafter.
We apply the practical expedient in paragraph
ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations
of one-year or less. We apply the transition practical expedient in paragraph ASC 606-10-65-1(f)(3) and do not disclose the
amount of the transaction price allocated to the remaining performance obligations and an explanation of when we expect to recognize
that amount as revenue. Additionally, applying the practical expedient in paragraph ASC 340-40-25-4, the Company recognizes the
incremental costs of obtaining contracts (i.e., commissions) as an expense when incurred if the amortization period of the assets
that the Company otherwise would have recognized is one-year or less.
With respect to our e-Gov business,
In some contracts we provide our customers with a license to issue IDs, passports and driver licenses and we are entitled to receive
royalties upon the issuance of each form of document by our customers. Such royalties are recognized when the issuances are reported
to us, usually on a monthly basis, for the year 2017 and 2018 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 $4,747,000 and $2,341,000
at December 31, 2018 and 2017, 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.
Business Combinations
Business combinations are accounted
for by applying the acquisition method. According to this method, the identifiable assets and liabilities of the acquired business
are recognized and recorded at fair value on the acquisition date. The acquisition date is the date on which we obtain control
over the acquiree.
The cost of the acquisition is
the aggregate fair value of the assets transferred, liabilities incurred and equity interests issued, if any, by us on the date
of acquisition. In addition, the consideration transferred includes the fair value of any contingent consideration. After the
acquisition date, we recognize changes in fair value of the contingent consideration in the statement of operations. Contingent
consideration is stated as a financial liability in the balance sheet.
We recognize goodwill at acquisition
according to the fair value of the consideration transferred, including any amounts recognized in respect of rights that do not
confer control in the acquiree as well as the fair value at the acquisition date of any pre-existing equity right in the acquiree,
less the net amount of the identifiable assets acquired and the liabilities assumed. After initial recognition, goodwill is measured
at cost less any accumulated impairment losses and is not systematically amortized. In case of excess of fair value of the assets
acquired over the consideration paid a gain from bargain gain is recognized.
Costs associated with an acquisition
that were incurred in the business combination, such as advisory, legal, valuation and other professional or consulting fees,
other than those associated with an issue of debt or equity instruments connected to the business combination, are recognized
as expenses in the period the services are received.
In December 2013, we completed a follow-on public offering
of 3,450,000 of our ordinary shares and received net proceeds of $12,043,000. We used $8.800.000 of such proceeds to fund our
acquisition of the SmartID division of OTI on December 26, 2013. We use the remaining proceeds for finance our operating activities,
especially to accelerate the sales and marketing and research and development efforts.
During the three years ended December 31, 2018, 2017 and
2016, our capital expenditures totaled approximately $1,456,000, $1,468,000, and $1,887,000 (not including our acquisition of
the LCA, Safend, Alvarion, the PowaPOS assets), respectively.
We currently do not have significant
capital spending or purchase commitments other than with respect to the contingent and earn-out payments associated with our acquisition
of the SmartID division, and Alvarion Ltd.
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, 2018, the number of employees in our research
and development activities was 36. We spent $5,963,000
(out of which $1,173,000 were capitalized as cost of software to be sold), $8,405,000 (out of which $1,167,000 were capitalized
as cost of software to be sold), and $8,205,000 (out of which $1,487,000 were capitalized as cost of software to be sold), in 2018,
2017 and 2016, respectively. These amounts were spent on the development or improvement of our technologies and products, primarily
in the areas of IoT, e-Gov, 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.
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.
|
Off-Balance
Sheet Arrangements
|
We are not a party to any off-balance
sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to
create material contingent obligations.
F.
|
Tabular
Disclosure of Contractual Obligations
|
The following table summarizes
our material contractual obligations and commitments as of December 31, 2018:
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Purchase obligations
|
|
|
34
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating lease obligations
|
|
|
787
|
|
|
|
428
|
|
|
|
359
|
|
|
|
-
|
|
|
|
-
|
|
Total contractual cash obligations
|
|
$
|
821
|
|
|
|
462
|
|
|
|
359
|
|
|
|
-
|
|
|
|
-
|
|
Operating lease obligations represent
commitments under lease agreement for our facility and the facilities of certain subsidiaries. Purchase obligations represent
purchase orders to an account payable, purchase obligations and lease agreements for facilities. We are not a party to any capital
leases.
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 as of December 2, 2019:
Name
|
|
Age
|
|
Position
|
Arie Trabelsi
|
|
61
|
|
Director& CEO
|
Menachem Mirski
|
|
63
|
|
Independent Director (1) (2)(3)
|
Avi Ayash
|
|
46
|
|
Independent Director (1)(2)(3)
|
Shoshana Cohen Shapira
|
|
61
|
|
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 date, and served as Chairman of our board of directors from December 12,
2011 to December 27, 2012. He has more than 29 years of experience in the global wireless, Internet and communications industries.
Prior to joining SuperCom, he led Sigma Wave Ltd., a wireless, security, and internet focused company and our controlling shareholder,
from November 1999. Mr. Trabelsi holds a BSc. degree in Electrical and Computer Engineering from Ben Gurion University and a MSc.
degree in Computer Engineering from Drexel University, Philadelphia, Pennsylvania.
Menachem Mirski has served
as a director of our company since July 25, 2010 and is the founder and a partner of Raz - El Ltd., a software and system development
company located in Israel. He has more than 28 years of experience and expertise as a software developer and project manager for
embedded real time systems, including RF-based systems. Mr. Mirski holds a Bachelor of Science in Computer and Electrical Engineering
from Ben-Gurion University.
Shoshana Cohen Shapira,
is an Advocate, Notary and Mediator with extensive experience in providing legal representation and consulting services to individuals
and companies in various areas of law including taxes. She is the owner of a legal practice with office in Zichron
Yaacov, Israel. Mrs. Cohen Shapira holds a LLM degree from the Hebrew University of Jerusalem.
We are managed by our board of
directors. Pursuant to our Articles of Association, the number of directors may be determined from time to time by the board of
directors, and unless otherwise determined, the number of directors comprising the board of directors will be between four and
ten. 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 December 10, 2019 are:
Name
|
|
Age
|
|
Position
|
Arie Trabelsi*
|
|
62
|
|
President, Chief Executive Officer
|
Barak Trabelsi*
|
|
33
|
|
Vice President, IoT
|
Galit Gilo*
|
|
62
|
|
Vice President, Land and GIS
|
Ordan Trabelsi
|
|
34
|
|
President, SuperCom Inc. and LCA.
|
Gil Alfi*
|
|
47
|
|
Vice President Sales, Safend Ltd
|
* Executive officer
Barak Trabelsi. Mr. Trabelsi
joined us in January 2013 as director of new products development. 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.
Galit Gilo. Mrs. Galit
Gilo joined SuperCom Group in 2015 as GIS and Land director. Until joining us, Mrs. Galit Gilo served as the GM of Sivan
Design Nigeria where she personally served as the GM. Prior to that, she served as IT director of KIKA Israel. Mrs. Galit Gilo
brings over more than 26 years of experience in computer engineering in GIS, finance, municipalities areas. She is an expert in
computer science. Mr. Galit Gilo holds Bsc. degree in Computer science from the Technion and Ma degree from the Tel-Aviv
university.
Ordan Trabelsi. Mr. Trabelsi
leads 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 to over $10 million
in annual revenues and profitability. He has also lead 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.
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
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, 2018.
|
|
Salaries,
fees,
commissions
and
bonuses
|
|
|
Pension,
retirement
and similar
benefits
|
|
All directors and executive officers as a group (10 persons)
|
|
$
|
955,300
|
|
|
$
|
79,500
|
|
The aggregate amount of compensation
paid by us to our board members and executive officers as a group for the year ended December 31, 2018 was approximately $955,300.
This sum includes amounts paid for salary and social benefits. In addition, we have provided automobiles to certain of our executive
officers at our expense. As of December 31, 2018, we had set aside approximately $79,500 to provide pension, retirement or similar
benefits for certain of our executive officers.
The monthly fee for a director
(other than with respect to our Chairman of the Board) is $1,500 and for external director a monthly fee of approximately $1,143
plus approximately $708 for every board or audit committee meeting attended.
As of December 31, 2018, our directors
and executive officers as a group, then consisting of 9 persons, held options to purchase an aggregate of 96,000 ordinary shares,
of which 33,000 were exercisable as of December 31, 2018, at an average exercise price of $4.63 per share.
Summary compensation table
The below table presents the compensation,
on an individual basis, of our five most highly compensated office holders during or with respect to the year ended December 31,
2018, as required by regulations promulgated under the Companies Law.
Name and
Position
|
|
Salary(1)
|
|
|
Bonus
and
commissions
|
|
|
Equity-Based
Compensation (2)
|
|
|
Total
|
|
Igor Merling
CTO, e-Gov
|
|
|
180,012
|
|
|
|
-
|
|
|
|
62,185
|
|
|
|
242,197
|
|
Ad Attias
Vice President, Cyber
|
|
|
148,629
|
|
|
|
|
|
|
|
-
|
|
|
|
148,629
|
|
Barak Trabelsi
GM &Vice President, IoT
|
|
|
148,553
|
|
|
|
14,000
|
|
|
|
-
|
|
|
|
162.553
|
|
Billy Gurevich
Chief Commercial Counsel
|
|
|
153,195
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153,195
|
|
Gil Alfi
Vice President Sales, Safend Ltd
|
|
|
161,833
|
|
|
|
71,781
|
|
|
|
-
|
|
|
|
233,614
|
|
(1)
|
Amounts reported in this column include salary, social benefits, including
those mandated by applicable law.
|
(2)
|
Amounts reported in this column represent the expense recorded in our audited
consolidated financial statements for the year ended December 31, 2018 based on the grant date fair value in accordance with
accounting guidance for stock-based compensation. See Note 12c to our audited consolidated financial statements for the year
ended December 31, 2018.
|
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
|
|
Next annual general meeting
|
Avi Ayash
|
|
Independent Director
|
|
December 8, 2011
|
|
December 8, 2019
|
Shoshana Cohen Shapira
|
|
Independent Director
|
|
February 24, 2019
|
|
February 23, 2022
|
Menachem Mirski
|
|
Independent Director
|
|
July 25, 2010
|
|
Next annual general meeting
|
Our Articles of Association provide that the number of directors
may be determined from time to time by the board of directors, and unless otherwise determined, the number of directors comprising
the board of directors will be between four and ten. Our board of directors is presently comprised of four 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. Ayash and Mr.
Mirski 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.
|
Under the Exchange Act and NASDAQ
Stock Market listing requirements, we are required to maintain an audit committee consisting of at least three independent directors,
each of whom is financially literate and one of whom has accounting or related financial management expertise. Our board of directors
has affirmatively determined that each member of our audit committee qualifies as an “independent director” for purposes
of serving on an audit committee under the Exchange Act and NASDAQ listing requirements. Our board of directors has determined
that each of Mrs. Shapira and Mr. Ayash qualify as an “audit committee financial expert,” as defined in Item 407(d)
(5) of Regulation S-K. All members of our audit committee meet the requirements for financial literacy under the applicable rules
and regulations of the SEC and NASDAQ Stock Market. Mrs. Shapira and Messrs. and Mirski are the members of our audit committee.
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. Ayash and Mr. Mirski.
Management Employment Agreements
We maintain written employment
agreements with substantially all of our key employees. These agreements provide, among other matters, for monthly salaries, our
contributions to Managers’ Insurance, an Education Fund and severance benefits. All of our agreements with our key employees
are subject to termination by either party upon the delivery of notice of termination as provided therein. We maintain a service
agreement with our chairperson of the board of directors. We do not have written agreements with any other director providing
for benefits upon the termination of his or her service to us.
Approval of Certain Transactions
Fiduciary
Duties of Office Holders
The Companies Law codifies the
fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An “office
holder” is defined in the Companies Law as a director, general manager, chief business manager, deputy general manager,
vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities
of any of the foregoing positions without regard to such person’s title. An office holder’s fiduciary duties consist
of a duty of care and a fiduciary duty. The duty of care requires an office holder to act at a level of care that a reasonable
office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means
to obtain (i) information regarding the appropriateness of a given action brought for his approval or performed by him by virtue
of his position and (ii) all other information of importance pertaining to the foregoing actions. The fiduciary duty includes
(i) avoiding any conflict of interest between the office holder’s position in the company and any other position he holds
or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding exploiting any business
opportunity of the company in order to receive personal gain for the office holder or others, and (iv) disclosing to the company
any information or documents relating to the company’s affairs that the office holder has received due to his position as
an office holder.
Disclosure
of Personal Interests of an Office Holder; Approval of Transactions with Office Holders
The Companies Law requires that
an office holder promptly, and no later than the first board meeting at which such transaction is considered, disclose any personal
interest that he or she may have and all related material information known to him or her and any documents in their position,
in connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction,
that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have a material
impact on the company’s profitability, assets or liabilities, the office holder must also disclose any personal interest
held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses
of any of the foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one director or the general manager.
Some transactions, actions and
arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board
of directors or as otherwise provided for in a company’s articles of association, however, a transaction that is adverse
to the company’s interest may not be approved. In some cases, such a transaction must be approved by the audit committee
and by the board of directors itself, and under certain circumstances shareholder approval may also be required. A director who
has a personal interest in a transaction that is considered at a meeting of the board of directors or the audit committee may
not be present during the board of directors or audit committee discussions and may not vote on the transaction, unless the transaction
is not an extraordinary transaction or the majority of the members of the board or the audit committee have a personal interest,
as the case may be. In the event the majority of the members of the board of directors or the audit committee have a personal
interest, then the approval of the general meeting of shareholders is also required.
Approval
of a Compensation Policy for Office Holders
The Companies Law and the regulations
adopted thereunder require the compensation committee to adopt a policy for director and office holders. In adopting the compensation
policy, the compensation committee must take into account factors such as the office holder’s education, experience, past
compensation arrangements with the company, and the proportional difference between the person cost of compensation and the average
cost of compensation of the company’s employees.
The compensation policy must be
approved at least once every three years at the company’s general meeting of shareholders, and is subject to the approval
of a majority vote of the votes of the shareholders present and voting at a shareholders’ meeting, provided that either:
(i) such majority includes at least a majority of the votes of all shareholders who are not controlling shareholders and do not
have a personal interest in the approval of the compensation policy, present and voting at such meeting (excluding abstentions);
or (ii) the total number of ordinary shares of non-controlling shareholders and shareholders who do not have a personal interest
in the approval of the compensation policy, voting against the resolution does not exceed 2% of the aggregate voting rights in
the company.
The Board may approve the compensation
policy even if such policy was not approved by the shareholders, provided that the compensation committee and the board of directors
resolve, based on detailed consideration of the compensation policy that approval of the policy, is in the best interest of the
company, despite the fact that it was not approved at the shareholders’ meeting.
The compensation policy shall
serve as the basis for decisions concerning the financial terms of employment or engagement of officer holders, including exculpation,
insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation
policy must relate to certain factors, including advancement of the company’s objectives, the company’s business and
its long-term strategy, and creation of appropriate incentives for executives. It must also consider, among other things, the
company’s risk management, size and the nature of its operations. The compensation committee must also consider among others,
the ratio between the cost of terms offered to the relevant director or office holder and the average and median cost of compensation
of the other employees of the company, including those employed through manpower companies, the effect of disparities in salary
upon work relationships in the company, the possibility of reducing variable compensation at the discretion of the board of directors;
the possibility of setting a limit on the exercise value of non-cash variable compensation; and as to severance compensation (in
excess of those promulgated by applicable labor law), the period of service of the director or office holder, the terms of his
or her compensation during such service period, the company’s performance during that period of service, the person’s
contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under
which the person is leaving the company.
The compensation policy must also
include the link between variable compensation and long-term performance and measurable criteria, the relationship between variable
and fixed compensation, and the upper limit for the value of variable compensation, the conditions under which a director or an
office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation
was based was inaccurate and was required to be restated in the company’s financial statements, the minimum holding or vesting
period for variable, equity-based compensation whilst referring to appropriate a long-term perspective based incentives; and maximum
limits for severance compensation.
Once a compensation policy is
properly adopted, the Companies Law requires the compensation policy to be approved by the company’s compensation committee,
with subsequent approval of the board of directors. In addition, compensation of the directors and the chief executive officer
is also subject to the approval of the shareholders at a general meeting. The approval of the compensation of the chief executive
officer that complies with the compensation policy is subject to the same majority requirements as the approval of a transaction
between a company and its controlling shareholder. Where the director is also a controlling shareholder, the requirements for
approval of transactions with controlling shareholders apply. The terms of employment of the company’s directors and executive
officers must satisfy the requirements of the compensation policy in respect of matters relating to compensation. Any deviations
from the compensation policy in respect of the compensation of the office holders require the approval of the compensation committee,
the board of directors and the shareholders. If the deviation is with respect to the compensation of the chief executive office
then such approval must be made by the majority of the shareholders provided that such majority includes the majority of the votes
of the non-controlling shareholder and other shareholders who have personal interest in the proposal (unless such personal interest
is not related to the controlling shareholder) present and voting (excluding abstention). Such special majority is not required
if the number of votes of the non-controlling shareholders and shareholder who do not have personal interest in the proposal as
aforesaid is lower than 2% of the aggregate voting rights in the company.
External directors of the company
are prohibited from receiving, directly or indirectly, any compensation from the company, other than for their services as external
directors pursuant to the provisions and limitations set forth in regulations promulgated under the Companies Law, which compensation
is determined prior to their appointment and may not be changed throughout the term of their service as External directors (except
for certain exceptions set forth in such regulations).
Disclosure
of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
Pursuant to the Companies Law,
the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling
shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a
company, but excludes a shareholder whose power derives solely from its position on the board of directors or any other position
at the company. A person is presumed to be a “controlling shareholder” if it holds or controls, by itself or together
with others, one half or more of any one of the “Means of Control” of the company. “Means of Control”
is defined as any one of the following: (i) the right to vote at a general meeting of the company, or (ii) the right to appoint
directors of the company or its chief executive officer. For the purpose of related party translations, under the Companies Law,
a controlling shareholder is also a shareholder who holds 25% or more of the voting rights if no other shareholder who holds more
than 50% of the voting rights. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction
will be aggregated.
Certain shareholders also have
a duty of fairness toward the company. These shareholders include any controlling shareholder, together with any shareholder who
knows that it has the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or
to prevent the appointment of an office holder of the company or exercise any other rights available to it under the company’s
articles of association with respect to the company. The Companies Law does not define the substance of this duty of fairness,
except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the
duty of fairness.
An extraordinary transaction between
a public company and a controlling shareholder, or in which a controlling shareholder has a personal interest, including a private
placement in which the controlling shareholder has a personal interest, and the terms of engagement of the company, directly or
indirectly, with a controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled
by a controlling shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such
controlling shareholder is also an office holder of the company, regarding his or her terms of employment, require the approval
of a company’s audit committee (or compensation committee with respect to compensation arrangements), board of directors
and shareholders, in that order. Such transaction must be elected by a majority vote of the Ordinary Shares present and voting
at a shareholders’ meeting, provided that either: (i) such majority includes at least a majority of votes held by all shareholders
who do not have a personal interest in such transaction, present and voting at such meeting (excluding abstentions); or (ii) the
total number of votes of shareholders who do not have a personal interest in such transaction voting against the approval of the
transaction, does not exceed 2% of the aggregate voting rights in the company.
Pursuant to the Companies Law,
the audit committee of the company should determine in connection with such transaction if it requires rendering pursuant to a
competitive procedure or pursuant to other proceedings. See “Audit Committee” above.
To the extent that any such transaction
with a controlling shareholder or his relative is for a period extending beyond three years, shareholder approval is required
once every three years, unless, in respect to certain transactions, the audit committee determines that the longer duration of
the transaction is reasonable under the circumstances.
Pursuant to regulations promulgated
pursuant to the Companies Law, a transaction with a controlling shareholder that would otherwise require approval of the shareholders
is exempt from shareholders’ approval if each of the audit committee and the board of directors determine that the transaction
meets certain criteria that are set out in specific regulations promulgated under the Companies Law. Under these regulations,
a shareholder holding at least 1% of the issued share capital of the company may require, within 14 days of the publication of
such determination, that despite such determination by the audit committee and the board of directors, such transaction will require
shareholder approval under the same majority requirements that otherwise apply to such transactions.
The Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser
would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made
by means of a tender offer if as a result of the acquisition the purchaser would hold greater than a 45% interest in the company,
unless there is another shareholder holding more than a 45% interest in the company. These requirements do not apply if, in general,
(i) the acquisition was made in a private placement that received shareholder approval, (ii) was from a 25% or greater shareholder
of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, if there is not already a
25% or greater shareholder of the company, or (iii) was from a shareholder holding a 45% interest in the company which resulted
in the acquirer becoming a holder of a 45% interest in the company if there is not already a 45% or greater shareholder of the
company.
If, as a result of an acquisition
of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or a class of shares, the acquisition
must be made by means of a tender offer for all of the outstanding shares or a class of shares. If less than 5% of the outstanding
shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer.
If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the
tender offer that will cause his shareholding to exceed 90% of the outstanding shares. The Companies Law provides for appraisal
rights if any shareholder files a request in court within six months following the consummation of a full tender offer. However,
in the event of a full tender offer, the offeror may determine that any shareholder who accepts the offer will not be entitled
to appraisal rights. Such determination will be effective only if the offeror or the company has timely published all the information
that is required to be published in connection with such full tender offer pursuant to all applicable laws.
Duties of Shareholders
Under the Companies Law, a shareholder
has a duty to refrain from abusing his or her power in the company and to act in good faith and in a customary manner in exercising
its rights and performing its obligations to the company and other shareholders, including, among other things, when voting at
meetings of shareholders on the following matters:
|
·
|
an amendment to the company’s articles of association;
|
|
·
|
an increase in the company’s authorized share capital;
|
|
·
|
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.
As of December 31, 2018, 2017
and 2016, we had 165, 215 and 246 full-time employees, respectively (not including service providers). The following table describes
our employees and the employees of our subsidiaries by department.
|
|
Dec. 31,
2018
|
|
|
Dec. 31,
2017
|
|
|
Dec. 31,
2016
|
|
Research, Development & Operations
|
|
|
128
|
|
|
|
161
|
|
|
|
173
|
|
Marketing and Sales
|
|
|
18
|
|
|
|
29
|
|
|
|
36
|
|
Administration
|
|
|
19
|
|
|
|
25
|
|
|
|
37
|
|
Total
|
|
|
165
|
|
|
|
215
|
|
|
|
246
|
|
Over the past three years, the
number of our employees by geographic area was as follows:
|
|
Dec. 31,
2018
|
|
|
Dec. 31,
2017
|
|
|
Dec. 31,
2016
|
|
Israel & Europe
|
|
|
82
|
|
|
|
128
|
|
|
|
148
|
|
United States
|
|
|
83
|
|
|
|
87
|
|
|
|
98
|
|
Total
|
|
|
165
|
|
|
|
215
|
|
|
|
246
|
|
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.
Beneficial
Ownership by Executive Officers and Directors
The following table sets forth certain information as of December
1, 2019 regarding the beneficial ownership of our ordinary shares by each of our directors and all of our executive officers and
directors as a group.
Name
|
|
Number of
Ordinary Shares
Beneficially
Owned (1)
|
|
|
Percentage
of Outstanding
Ordinary Shares
(2)
|
|
Arie Trabelsi(3)
|
|
|
4,582,212
|
|
|
|
28.13
|
%
|
|
|
|
|
|
|
|
|
|
Menachem Mirski
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Shoshana Cohen Shapira
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (8 persons)
|
|
|
4,615,212
|
|
|
|
28.34
|
%
|
|
(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 16,285,944 ordinary shares issued and outstanding as of November 08, 2019.
|
|
(3)
|
Sigma Wave Ltd. is controlled by Mrs. Tsviya Trabelsi,
and by her husband, Mr. Arie Trabelsi. As such, Mr. Trabelsi may be deemed to beneficially own the 4,582,212 ordinary shares
beneficially held by Sigma Wave Ltd. The address of Sigma Wave Ltd. is Tsufit 7, Caesarea, 38900, Israel.
|
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, 2018, 291,156 options
were exercisable and 854,656 options were outstanding.
As a result of an amendment to
Section 102 of the Israeli Tax Ordinance as part of the 2003 Israeli tax reform, and pursuant to an election made by us thereunder,
capital gains derived by optionees arising from the sale of shares issued pursuant to the exercise of options granted to them
under Section 102 after January 1, 2003 will generally be subject to a flat capital gains tax rate of 25%. However, as a result
of this election, we will no longer be allowed to claim as an expense for tax purposes the amounts credited to such employees
as a benefit when the related capital gains tax is payable by them, as we had previously been entitled to do under Section 102.
On June 27, 2007, our Compensation
Committee and the board of directors approved a new option plan under which we may grant stock options to our U.S. employees and
our subsidiaries. Under this option plan, we may grant both qualified (for preferential tax treatment) and non-qualified stock
options. On August 15, 2007, this option plan was approved by our shareholders at the general shareholders meeting.
In June 2013, the Option plan
was extended for another period of 10 years, until December 31, 2023.
During 2017, we have not issued
any options to purchase of our ordinary shares to our executive officers.
A summary of our stock option
activity and related information is as follows:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
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
|
|
|
331,660
|
|
|
|
4.03
|
|
|
|
416,432
|
|
|
|
4.24
|
|
|
|
487,432
|
|
|
|
5.12
|
|
Granted
|
|
|
568,500
|
|
|
|
2.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,833
|
|
|
|
2.82
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,000
|
)
|
|
|
0.64
|
|
|
|
(8,383
|
)
|
|
|
1.53
|
|
Canceled and forfeited
|
|
|
(45,504
|
)
|
|
|
6.84
|
|
|
|
(64,772
|
)
|
|
|
6.42
|
|
|
|
(130,500
|
)
|
|
|
6.96
|
|
Outstanding at end of year
|
|
|
854,656
|
|
|
|
2.53
|
|
|
|
331,660
|
|
|
|
4.03
|
|
|
|
416,432
|
|
|
|
4.24
|
|
Exercisable at end of year
|
|
|
291,156
|
|
|
|
3.44
|
|
|
|
236,277
|
|
|
|
3.67
|
|
|
|
186,253
|
|
|
|
4.14
|
|
We recognized compensation expenses
related to our share-based employee compensation awards of $256,000, $631,000, and $924,000 for the years ended December 31,
2018, 2017 and 2016, respectively.
The following table summarizes
the allocation of the stock-based compensation expenses (all amounts in thousands of dollars):
|
|
Year
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Cost of revenues
|
|
|
116
|
|
|
|
217
|
|
|
|
266
|
|
Research and development expenses
|
|
|
54
|
|
|
|
155
|
|
|
|
207
|
|
Selling and marketing expenses
|
|
|
52
|
|
|
|
183
|
|
|
|
292
|
|
General and administrative expenses
|
|
|
34
|
|
|
|
76
|
|
|
|
159
|
|
|
|
|
256
|
|
|
|
631
|
|
|
|
924
|
|
The options outstanding and exercisable
as of December 31, 2018, have the following ranges of exercise prices as follows:
|
|
Options
outstanding
|
|
|
Options
Exercisable
|
|
Range of
exercise price
|
|
Number
outstanding
as of
December 31,
2018
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Weighted
average
exercise price
|
|
|
Aggregate
intrinsic
value
|
|
|
Number
outstanding
as of
December
31, 2018
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Weighted
average
exercise
price
|
|
|
Aggregate
intrinsic
value
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
0.00-2.00
|
|
|
661,008
|
|
|
|
8.34
|
|
|
|
1.77
|
|
|
|
84,940
|
|
|
|
105,508
|
|
|
|
1.78
|
|
|
|
0.54
|
|
|
|
84,940
|
|
3.00-5.00
|
|
|
151,648
|
|
|
|
5.34
|
|
|
|
4.15
|
|
|
|
-
|
|
|
|
148,648
|
|
|
|
5.42
|
|
|
|
4.17
|
|
|
|
-
|
|
7.00-10.00
|
|
|
42,000
|
|
|
|
6.75
|
|
|
|
8.75
|
|
|
|
-
|
|
|
|
37,000
|
|
|
|
6.75
|
|
|
|
8.75
|
|
|
|
-
|
|
18.75-22.00
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
854,656
|
|
|
|
7.73
|
|
|
|
2.53
|
|
|
|
84,940
|
|
|
|
291,156
|
|
|
|
4.27
|
|
|
|
3.44
|
|
|
|
84,940
|
|
The total intrinsic value of options
exercised during the years ended December 31, 2018, 2017 and 2016 was $0, $65,000, and $16,000, respectively, based on our company’s
average stock price of $2.54, $3.27, and $3.77 during the years ended on those dates respectively.
A summary of the status of options
granted to employees that had vested as of December 31, 2018 is presented below:
|
|
Options
|
|
|
Weighted–
average
grant-date
fair value
|
|
Non-vested at January 1, 2018
|
|
|
95,383
|
|
|
$
|
6.84
|
|
Granted
|
|
|
568,500
|
|
|
$
|
1.87
|
|
Vested
|
|
|
(54,879
|
)
|
|
$
|
3.93
|
|
Forfeited and canceled
|
|
|
(45,504
|
)
|
|
$
|
6.84
|
|
Non-vested at December 31, 2018
|
|
|
563,500
|
|
|
$
|
1.90
|
|
As of December 31, 2018 and December
31, 2017, there was $994,000 and $277,000, respectively, of unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the stock option plans.
|
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The following table lists the beneficial ownership of our securities
as of November 8, 2019 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. As of November 8, 2019, 16,285,944 of our ordinary shares were outstanding.
Name of Beneficial
Owner
|
|
Number
of
Shares
Beneficially
Owned
|
|
|
Percentage
of
Shares
Outstanding
|
|
Sigma Wave Ltd
|
|
|
4,582,812
|
|
|
|
28.13
|
%
|
|
|
|
|
|
|
|
|
|
Ibex Investors LLC
|
|
|
1,989,068
|
|
|
|
12.21
|
%
|
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power with respect to securities. We believe that all persons named in the
table have sole voting and sole investment power with respect to all shares beneficially owned by them. All figures include ordinary
shares issuable upon the exercise of options and warrants exercisable within 60 days of December 1, 2019, and deemed to be outstanding
and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of
that person, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
Sigma Wave
Ltd. is controlled by family members of Mrs. Tsviya Trabelsi, and by her husband, Mr. Arie Trabelsi. As such, Mr. Trabelsi may
be deemed to beneficially own the 4,582,812 ordinary shares beneficially held by Sigma Wave Ltd. The address of Sigma Wave Ltd.
is Tsufit 7, Caesarea, 38900, Israel.
Significant
Changes in the Ownership of Major Shareholders
As of November 8, 2019, Ibex Investors beneficially owned 1,989,068
shares, or 12.21%, of our then outstanding ordinary shares
As of May 14,
2018, Ibex Investors beneficially owned 1,607,024 shares, or 10.74%, of our then outstanding ordinary shares
As of May
12, 2017, Ibex Investors beneficially owned 2,248,470 shares, or 15.08%, of our then outstanding ordinary shares
As of December
8, 2019, Heartland Advisors Inc. beneficially owned less than 5% of our then outstanding ordinary shares.
As of May
14, 2018, Heartland Advisors Inc. beneficially owned 1,193,152 shares, or 7.98%, of our then outstanding ordinary shares.
As of May
12, 2017, Heartland Advisors Inc. beneficially owned 1,492,900 shares, or 9.99%, of our then outstanding ordinary shares.
Voting Rights of Major Shareholders
Our major shareholders do not
have different voting rights from the other holders of our ordinary shares.
Record
Holders
Based on a review of the information
provided to us by our U.S. transfer agent, as of November 8, 2019, there were approximately 27 record holders, of which 10 record
holders holding approximately 74.5% 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 73.1% of our outstanding ordinary shares as of such date).
|
B.
|
Related Party Transactions
|
It is our policy to enter into
transactions with related parties on terms that, on the whole, are no less favorable than those that would be available from unaffiliated
parties. Based on our experience in the business segments in which we operate and the terms of our transactions with unaffiliated
third parties, we believe that all of the transactions described below met our policy standards at the time they occurred.
Mr. Trabelsi served as our Chief
Executive Officer from November 1, 2010 until November 12, 2011 and from June 1, 2012 to date. At the May 9, 2013 general meeting
of shareholders, shareholders approved the payment of management fees of $10,600 per month to Mr. Trabelsi plus social benefits
and an annual bonus of up to the greater of 2% of annual net profit or 0.5% of annual revenue. The annual bonus may not exceed
the total amount of Mr. Trabelsi’s annual salary.
As of December 31, 2018, we had
accrued $171,000 of expenses arising from consulting services provided by Mr. and Mrs. Trabelsi.
On April 29, 2012, our board of directors approved the recording
of a floating charge on all of our assets in favor of Mrs. and Mr. Trabelsi, unlimited in amount, in order to secure personal guarantees
granted by them in favor of our company to a bank and in order to secure short-term loans that are given by them from time to time
to us. The short terms loans provided by Mrs. and Mr. Trabelsi during the years 2011 until 2018 ranged from NIS 10,000 up to NIS
9,336,000 and bore no interest. Currently, there are outstanding loans from Mrs. and Mr. Trabelsi in the amount $165,000.
|
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. Other than as described below, 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 described in this paragraph, individually or in the aggregate,
will have a material adverse effect on our business, financial condition, results of operations or cash flows for any quarterly
or annual period.
As part
of the acquisition of the SmartID division of OTI, we assumed a dispute with Merwell Inc. (“Merwell”). Merwell has
alleged that it has not received the full payment it is entitled to for its services in respect of a drivers’ license project.
OTI alleged that Merwell breached its commitments under the service agreement and also acted in concert with third parties to
damage OTI’s business activities. This matter is now subject to an arbitration proceeding.
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.
Except as otherwise disclosed in this annual report, no significant
change has occurred since December 31, 2018.
|
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 November 8, 2019, we had 16,285,944
ordinary shares issued and outstanding.
Annual Stock Information
The following table sets forth,
for the periods indicated, the high and low closing prices of our ordinary shares on The NASDAQ Capital Market or the OTCQB Market,
as applicable. All of the share price information provided below has been adjusted to give effect to a 1 share for 4.250002 shares
reverse stock split effected on August 23, 2013.
Year
|
|
High
|
|
|
Low
|
|
2012
|
|
$
|
0.85
|
|
|
$
|
0.04
|
|
2013
|
|
$
|
5.65
|
|
|
$
|
0.30
|
|
2014
|
|
$
|
13.78
|
|
|
$
|
4.85
|
|
2015
|
|
$
|
13.84
|
|
|
$
|
4.46
|
|
2016
|
|
$
|
5.25
|
|
|
$
|
2.62
|
|
2017
|
|
$
|
4.36
|
|
|
$
|
2.17
|
|
2018
|
|
$
|
3.92
|
|
|
$
|
1.32
|
|
Quarterly Stock Information
The table below sets forth for
the periods indicated the high and low closing prices of our ordinary shares as reported on NASDAQ and the OTCQB market.
|
|
High
|
|
|
Low
|
|
2017
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.88
|
|
|
$
|
2.50
|
|
Second Quarter
|
|
$
|
3.19
|
|
|
$
|
2.17
|
|
Third Quarter
|
|
$
|
3.56
|
|
|
$
|
2.66
|
|
Fourth Quarter
|
|
$
|
4.36
|
|
|
$
|
2.72
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.92
|
|
|
$
|
2.73
|
|
Second Quarter
|
|
$
|
2.88
|
|
|
$
|
1.55
|
|
Third Quarter
|
|
$
|
2.14
|
|
|
$
|
1.71
|
|
Fourth Quarter
|
|
$
|
1.81
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.75
|
|
|
$
|
1.38
|
|
Second Quarter
|
|
$
|
1.49
|
|
|
$
|
0.98
|
|
Third Quarter
|
|
$
|
1.24
|
|
|
$
|
0.59
|
|
Monthly Stock Information
The table below sets forth for
the periods indicated the high and low closing prices of our ordinary shares as reported on NASDAQ market.
Month
|
|
High
|
|
|
Low
|
|
June 2019
|
|
$
|
1.24
|
|
|
$
|
1.05
|
|
July 2019
|
|
$
|
1.14
|
|
|
$
|
1.02
|
|
August 2019
|
|
$
|
1.10
|
|
|
$
|
0.95
|
|
September 2019
|
|
$
|
1.10
|
|
|
$
|
0.70
|
|
October 2019
|
|
$
|
0.80
|
|
|
$
|
0.59
|
|
Through December 2, 2019
|
|
$
|
0.72
|
|
|
$
|
0.65
|
|
Not applicable.
Our ordinary shares began trading
on the NASDAQ Capital Market effective at the opening of trading on Tuesday, September 17, 2013 under the ticker symbol “SPCB”.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
|
ITEM 10.
|
ADDITIONAL INFORMATION
|
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 28,000,000 ordinary shares par value NIS 0.25 per share, of which 16,285,944 ordinary shares were outstanding
as of November 8, 2019.
DIRECTORS
Our
Articles provide that the number of directors may be determined from time to time by the Board of Directors, and unless otherwise
determined, the number of directors comprising the Board of Directors will be between four and ten. With the exception of our
external directors, who are elected for three year terms in accordance with the Israeli Companies Law, our directors are elected
for a one year term ending at the following annual general meeting of shareholders. However, if no directors are elected
at an annual meeting, then the persons who served as directors immediately prior to the annual meeting shall be deemed reelected
at the same meeting. The general meeting may resolve that a director be elected for a period not longer than the third next annual
meeting. Directors may resign or in certain circumstances be removed by our general meeting prior to the expiration of his term.
The
board may appoint additional directors (whether to fill a vacancy or create a new directorship) to serve until the next annual
shareholders meeting. In case an office of a director has been vacated, the remaining directors may continue to act in every matter
so long as the number of its members is not less than the quorum required at the time for meetings of the board. If the number
of members of the board decreases below said quorum, the board will not be entitled to act except in case of emergency or for
appointing additional directors in order to fill vacant positions on the board or to call a general meeting of the shareholders.
The Board of Directors elects one of its members to serve as the Chairman.
The
Board of Directors may meet and adjourn its meetings as it deems fit, provided, however, that the board must meet at least once
in every three months period. A meeting of the board may be called at the request of each director. The quorum required for a
meeting of the board is not less than 30% of the number of directors and in any event not less than two directors. Issues arising
at any Board of Directors’ meeting are decided by a majority of votes cast at the meeting. In lieu of a board meeting a
resolution may be adopted in writing if signed by all directors or to which all of the directors have agreed in writing or by
telephone or facsimile, and a meeting may also be held through telephone conference or other communications means, provided however
that all participants may hear each other simultaneously. A resolution in writing signed by all of the directors, shall be as
valid and effective for all purposes as if passed at a meeting of the Board of Directors duly convened and held, and for the purpose
of the foregoing “director” shall include, if duly appointed therefore, a substitute director.
FIDUCIARY
DUTIES OF OFFICERS
The
Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers,
owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty
includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs,
avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal
advantage for himself or others, and revealing to the company any information or documents relating to the company’s affairs
which the office holder has received due to his position as an office holder.
APPROVAL
OF CERTAIN TRANSACTIONS
Transactions
with Office Holders; Extraordinary Transactions
Under
the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors or controlling parties
require approval of the audit committee or a compensation committee to the extent that it complies with the statutory requirements
which apply to the audit committee, and the Board of Directors. Arrangements regarding the terms of employment and compensation
of directors require approval by the audit committee, the Board of Directors and the shareholders.
The
Israeli Companies Law requires that an office holder of the company promptly disclose any personal interest that he or she may
have and all related material information known to him or her, in connection with any existing or proposed transaction by the
company. In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must
also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s
descendants, siblings and parents of the office holder’s spouse, and the spouses of any of the foregoing. In addition, the
office holder must also disclose any interest held by any corporation in which the office holder is a 5% or greater shareholder,
director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary
transaction is defined as a transaction other than in the ordinary course of business, otherwise than on market terms, or that
is likely to have a material impact on the company’s profitability, assets or liabilities.
In
the case of a transaction which is not an extraordinary transaction, after the office holder complies with the above disclosure
requirement, only board approval is required unless the articles of association of the company provide otherwise. The transaction
must not be adverse to the company’s interest. Furthermore, if the transaction is an extraordinary transaction, then, in
addition to any approval stipulated by the articles of association, it also must be approved by the company’s audit committee
and then by the Board of Directors, and, under certain circumstances, by a meeting of the shareholders of the company.
An
individual who has a personal interest in a matter that is considered at a meeting of the Board of Directors or the audit committee
may not be present at the deliberations or vote on this matter. However, with respect to an office holder, he/she may
be present at the meeting discussions if the chairman determines that the office holder has to present the matter. If a majority
of the directors has a personal interest in a transaction with us, such directors may be present at the deliberations and vote
in this matter, and shareholder approval of the transaction is required.
Under
the Israeli Companies Law and as long as our Articles are not amended to determine otherwise, certain resolutions, such as resolutions
regarding liquidation, require approval of the holders of 75% of the shares represented at the meeting and voting thereon.
Approval
of a Compensation Policy for Office Holders
In
accordance with the Companies Law, a public company, such as our company, is required to adopt a compensation policy setting forth
the principles to govern the terms of office and employment (including cash and equity-based compensation, exemption from liability,
indemnification, D&O insurance and other benefits and payments related to the service and employment) of the Office Holders
of the company. These amendments to the Companies Law also define the criteria to be considered or included in such compensation
policy. The compensation policy needs to be approved no later than September 2013 by the board of directors, after consideration
of the recommendations of the compensation committee and by the majority of the company’s shareholders provided that either:
(i) such majority includes a majority of the total votes of shareholders who are not controlling shareholders and do not have
a Personal Interest in the approval of the compensation policy and who participate in the voting, in person, by proxy or by written
ballot, at the meeting (abstentions not taken into account); or (ii) the total number of votes of shareholders mentioned in (i)
above that are voted against the approval of the compensation policy do not represent more than 2% of the total voting rights
in the company.
Under
certain circumstances and subject to certain exceptions, the board of directors may approve the compensation policy even if not
approved by the shareholders as described above, provided that the compensation committee and the board of directors determine,
following an additional discussion and based on detailed reasons, that it is for the benefit of the company to adopt such compensation
policy. We intend to comply with these new requirements of the Israeli Companies Law within the required time frame.
Commencing
as of December 2012, any changes to compensation terms of Officers are to be approved in accordance with the principles set forth
in such amendments to the Israeli Companies Law as if a compensation policy was already in force. In accordance with the Companies
Law, as amended, the compensation policy must be re-approved every three years, in the manner described above. The board of directors
is responsible for reviewing from time to time the compensation policy and determining whether or not there are any circumstances
that require adjustments to the current compensation policy. (See also Item 6. Directors, Senior Management and Employees
- Board Practices - Compensation Committee.)
Disclosure
of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
The
Israeli Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes
a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the
company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest,
and the terms of compensation of a controlling shareholder who is an office holder (including the provision of services to the
company), require the approval of the audit committee or the compensation committee, as applicable, the Board of Directors and
the shareholders of the company by simple majority, provided that either such majority vote must include at least one-half of
the shareholders who have no personal interest in the transaction and are present at the meeting (without taking into account
the votes of the abstaining shareholders), or that the total shareholdings of those who have no personal interest in the transaction
who vote against the transaction represent no more than two percent of the voting rights in the company.
Agreements
and extraordinary transactions with a term exceeding three years are subject to re-approval once every three years by the audit
committee, board of directors and the shareholders of the company. Certain types of extraordinary transactions may be approved
in advance for a period exceeding three years if the audit committee determines such approval reasonable under the circumstances.
Under
the Companies Regulations (Relief from Related Party Transactions), 5760-2000, promulgated under the Israeli Companies Law, as
amended, certain extraordinary transactions between a public company and its controlling shareholder(s) do not require shareholder
approval. In addition, under such regulations, directors’ compensation and employment arrangements in a public
company do not require the approval of the shareholders if both the audit committee and the board of directors agree that such
arrangements are solely for the benefit of the company. Also, employment and compensation arrangements for an office holder that
is a controlling shareholder of a public company do not require shareholder approval if certain criteria are met. The foregoing
exemptions from shareholder approval will not apply if one or more shareholders holding at least 1% of the issued and outstanding
share capital of the company or of the company’s voting rights, objects to the use of these exemptions provided that such
objection is submitted to the company in writing not later than fourteen days from the date of the filing of a report regarding
the adoption of such resolution by the company. If such objection is duly and timely submitted, then the transaction or compensation
arrangement of the directors will require shareholders’ approval as detailed above.
The
Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer
if as a result of the acquisition the purchaser would the control 25% or greater of the company’s voting rights. This rule
does not apply if there is already another such shareholder which controls 25% or greater of the company’s voting rights.
Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a special
tender offer if as a result of the acquisition the purchaser would hold greater than a 45% voting rights in the company, unless
there is another shareholder holding more than a 45% voting rights in the company. These requirements do not apply to: (i) the
acquisition of shares in a private placement, provided that such private placement was approved by the general meeting of the
company’s shareholders as a private placement purporting to confer to the offeree the control of 25% or greater of the company’s
voting rights if the there is no other holder of such a block of shares, or purporting to confer to the offeree 45% of the voting
rights in the company if there is no other person holding forty-five percent of the voting rights in the company; (ii) was from
a shareholder which controls 25% or greater of the company’s voting rights which resulted in the acquirer becoming a 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;
|
|
·
|
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 the 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.
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 and except for the Asset Purchase Agreement with OTI from
August 2013, as outlined in “Item 5. Operating and Financial Review and Prospects,” we do not deem any such individual
contract to be material contracts which are not in the ordinary course of our business
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.
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 2019 (23.0% in 2018, 24% in 2017; 25% in 2016).
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.
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 641,880 (in 2018) (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 (24% in 2017, 23% in 2018
onwards).
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 (24% in 2017) 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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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.
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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.
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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.
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Dividends and Paying
Agents
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Not applicable.
Not applicable.
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 20Lincoln Street, Tel Aviv, Israel.
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I.
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Subsidiary Information
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Not applicable.
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS
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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 2017 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 2018), 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 2018 net income of approximately $2.0 million.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
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Not
Applicable
In the year ended December 31, 2018, the Company
derived 24% of its revenues from three major customers.
The Company has experienced net losses and significant cash outflows from cash used in operating activities over the past 2 years.
As of and for the year ended December 31, 2018, the Company had an accumulated deficit of $65,959, and net cash used in operating
activities of $6,416, compared to $1,983 for the year ended December 31, 2017.
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,
2018, the Company had cash, cash equivalent and restricted cash and positive working capital of $2,801 and $12,121, respectively.
Further, during 2018 and 2019, the Company was undergoing a merger optimization process to be a more efficient structure to operate
through three new business segments, supported by common operation services. During the optimization process, the Company has reduced
its expenses through the reduction in its headcount and overhead costs, that resulted in a reduction of operating expenses by 30%,
between the years 2017 and 2018. Additionally, the Company secured financing of $20,000 during 2018, of which, $10,000 remains
available to the Company to draw during the 12 months following the balance sheet date as needed. To date, the Company has used
the proceeds borrowed from the secured financing (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.
As a result of above mentioned credit facility, management’s
plans, current cash flow position contracts with customers around the world, and current favorable trends in improving cash flow,
the Company concluded that the initial conditions which raised concerns regarding the ability to fund its operation for the next
12 months have been alleviated
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, are were set to be issued at a strike price at a premium to the then current
market price.
As of December 31, 2018, the
outstanding principal, including accrued interest, of the Credit Facility was $10,158. For the twelve months ended December
31, 2018, the Company had $9 of interest expense pertaining to the un-borrowed principal balance, the Unused Fee, $4 of
which is accrued as of December 31, 2018.
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.
Severance expenses for the years ended December 31,
2018, 2017 and 2016 amounted to $754, $860 and $876, respectively.
Effective January 1, 2018, the Company adopted Financial
Accounting Standards Board (“FASB”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).
ASC 606 was applied using the modified retrospective method, therefore the cumulative effect of initially applying the revenue
standard is recognized as an adjustment to opening retained earnings at January 1, 2018. Accordingly, comparative periods have
not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition (“ASC 605”).
Upon adoption of ASC 606, the
Company identified a change in the Company’s revenue recognition policies related to combined license and maintenance sales,
as noted within the Company’s Safend contracts. Under ASC 605, revenue for these contracts was recognized over the life of
the contract. In accordance with ASC 606, license revenue is recognized upon delivery while maintenance is recognized over the
life of the contract. As a result of applying the new standard, the Company will recognize a cumulative effect adjustment to Retained
Earnings as of January 1, 2018 in the amount of $257.
Aside from its combined license
and maintenance sales, no other changes were identified to the characteristics of the Company’s other revenue recognition
policies, other than the enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance
obligations, variable consideration and the related judgments and estimates necessary to apply the new standard.
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 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 we expect to receive in exchange for those services. To achieve
this core principal, the Company applies the following five steps:
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.
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.
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.
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.
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.
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 contracts are sold in conjunction with the Company’s software products for its e-Govt, IoT and Connectivity, and
Cyber Security revenue streams. 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.
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.
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 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 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
as revenue as the performance obligations are fulfilled based on the using the expected cost plus a margin approach.
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. 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 as revenue as the performance obligations are fulfilled based on the using
the residual approach.
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, we identify multiple performance obligations and record
as revenue as the performance obligations are fulfilled based on their stated prices within the contract.
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 as revenue as the performance
obligations are fulfilled based on their stated prices within the contract.
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 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 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 as revenue as the performance obligations are fulfilled based on the using the expected cost plus a margin
approach.
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.
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:
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, 2018, the aggregate amount of the transaction price
allocated to remaining performance totals $5.8 million. The Company expects approximately 68% of remaining performance
obligations to be recognized into revenue within the next 12 months, with the remaining 32% 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.
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.
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers ("the
Standard"). The Standard provides companies with a single model for recognizing revenue arising from contracts with customers
and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model
is to recognize revenue when control of the goods or services transfers to the customer. The new disclosure requirements will provide
information about the nature, amount, timing and uncertainty of revenue and cash flows from revenue contracts with customers. The
Standard is effective for annual and interim reporting periods beginning after December 15, 2017. Entities have the option of using
either a full retrospective or modified retrospective approach for adopting this Standard. Under the modified approach, which the
Company has elected, the Company has recognized the cumulative effect of initially applying the guidance with an adjustment to
the opening balance of retained earnings in the 2018.
For its software license transactions - the Company
had recognized revenue for the software license performance obligation upon delivery of the license to the customer, rather than
ratably over the service period.
For the Company's long term contracts, which have
been accounted for under the Percentage of Completion Method in 2017, the Company had evaluated the contract criteria pursue to
ASC-606 guidelines and determined to continue to account for under Percent of Completion.
For those contracts for which it was determined that
the performance obligation creates an asset with no alternative use and the Company has the right for payment to the work completed
to date, revenue was recognized over time, in a manner similar to previous accounting. However, contracts which have been determined
otherwise, revenue from those contracts would have been recognized at a point in time during the year and for some contracts the
revenue had been deferred
In August 2016, the FASB issued ASU 2016-15, Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which is intended to reduce
the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) (ASU 2016-18), which requires
the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. ASU 2016-15 and ASU 2016-18, have been adopted by the Company during the first quarter
of 2018, using a retrospective transition method to each period presented. The adoption ASU 2016-18 was retrospectively applied
to the Company’s consolidation cash flow statements for all period presented.
The
new standard is effective for us on January 1, 2019, with early adoption permitted. A modified retrospective transition approach
is required (which means prospectively with a cumulative adjustment to retained earnings for previous years effect), applying the
new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date
or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application.
If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between
the date of initial application and the effective date. The entity must also recast its comparative period financial statements
and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on January
1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated
and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The
new standard provides a number of optional practical expedients in transition. We expect to elect the ‘package of practical
expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease
classification and initial direct costs. We expect to elect all of the new standard’s available transition practical expedients.
On
adoption, we currently expect to recognize additional operating liabilities, in the range of approximately $300 to $400,
with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current
leasing standards for our existing operating leases.
The
new standard also provides practical expedients for a company’s ongoing accounting. We currently expect to elect the short-term
lease recognition exemption for some of our office leases and our vehicle leases. This means, for those leases that qualify, we
will not recognize ROU assets or lease liabilities. This includes not recognizing ROU assets or lease liabilities for existing
short-term leases of those assets in transition.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU amends the scope of modification
accounting for share-based payment arrangements, and provides guidance on the types of changes to the terms or conditions of
share-based payment awards to which an entity would be required to apply modification accounting. The new guidance allows
companies to make certain changes to awards without accounting for them as modifications. It does not change the accounting
for modifications. The Company adopted ASU 2017-09 during the first
quarter of 2018. There was no impact of the adoption of this standard on the Company's financial statements. During
the years ended December 31, 2018, 2017 and 2016, the Company recognized stock-based compensation expenses related to
employee stock options in the amounts of $256, $631, and $924,
respectively
In November 2016, the FASB issued Accounting Standards
Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts
generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period
and end-of-period total amounts shown on the statement of cash flows.
Certain reclassifications, in accordance with the
adoption of ASU 2016-15 and ASU 2016-18, have been made to the prior years’ financial statements to conform to the current
year presentation. These reclassifications had no net effect on previously reported results of operations.
In addition other certain reclassifications had been
made to the 2016 financial statement, including the separation of revenues and cost of revenue to products and services in accordance
with Rules 5-03(b)(1) and (2) of Regulation S-X, have been made to the prior year’ financial statements to conform to the
current presentation. These reclassifications had no net effect on previously reported results of operations.
As of December 31, 2018 and 2017, inventory is presented
net of write offs for slow inventory in the amount of approximately $1,527 and $232, respectively.
Depreciation expenses for the years ended December
31, 2018, 2017 and 2016, were $651, $721, and $1,748, respectively.
The Company’s facilities and those of certain
subsidiaries are rented under several operating lease agreements for periods ending between 2019 and 2022.
Future minimum lease commitments under non-cancelable
operating leases for the years ended December 31, are as follows:
As of December 31, 2018, the Company and its subsidiaries,
have provided a valuation allowance of $16,508 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 $385 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.
As of December 31, 2018, SuperCom Ltd and its subsidiaries
in Israel have accumulated losses for tax purposes of approximately $33,177, and $15,603 respectively, 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
$15,326, which may be carried forward and offset against capital gains for an indefinite period. Loss carryforwards in Israel are
measured in NIS.
As of December 31, 2018, SuperCom’s subsidiaries
in the United States have estimated total available carryforward tax losses of approximately $15,791 which expires in the years
2028 to 2037. Utilization of the U.S. net operating losses may be subject to substantial annual limitation due to the "change
in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result
in the expiration of net operating losses before utilization.
During the year 2018, the Company issued options to
purchase up to 568,500 shares to several employees of the Company. The options (fair value of which was estimated at $1061) have
a weighted average exercise price of $2.00, and of such options, 0 were exercised and 13,000 were cancelled by the end of 2018.
The fair value of these options was estimated on
the date of grant using the Black & Scholes option pricing model. The following weighted average assumptions were used for
the 2016 grants: risk-free rate of 1.61%, dividend yield of 0%, expected volatility factor of 219.29% and expected term of 3.25
years. The following weighted average assumptions were used for the 2018 grants: risk-free rate of 2.89% and 3.04%, dividend yield
of 0%, expected volatility factor of 238% and 240% and expected term of 6.25 years.