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, 2020 are derived from our audited consolidated financial
statements, which have been prepared in accordance with U.S. GAAP. Our audited consolidated financial statements for the two years ended December 31, 2020 and 2019 appear elsewhere in this Annual Report. Our selected consolidated financial data
as of December 31, 2016, 2017 and 2018 and for the years ended December 31, 2016, 2017 and 2018 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(U.S. dollars in thousands, except per share data)
|
|
Summary of Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
11,770
|
|
|
|
16,475
|
|
|
|
21,882
|
|
|
|
33,264
|
|
|
|
20,025
|
|
Cost of revenues
|
|
|
6,189
|
|
|
|
10,127
|
|
|
|
13,743
|
|
|
|
20,351
|
|
|
|
17,461
|
|
Gross profit
|
|
|
5,581
|
|
|
|
6,348
|
|
|
|
8,139
|
|
|
|
12,913
|
|
|
|
2,564
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,386
|
|
|
|
3,971
|
|
|
|
4,790
|
|
|
|
7,238
|
|
|
|
6,718
|
|
Selling and marketing
|
|
|
1,721
|
|
|
|
3,526
|
|
|
|
5,005
|
|
|
|
8,099
|
|
|
|
9,970
|
|
General and administrative
|
|
|
4,073
|
|
|
|
5,389
|
|
|
|
5,748
|
|
|
|
6,113
|
|
|
|
7,277
|
|
Other (income) expenses
|
|
|
1,150
|
|
|
|
1,635
|
|
|
|
2,271
|
|
|
|
(2,021
|
)
|
|
|
713
|
|
Gain on bargain acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,515
|
)
|
Total operating expenses
|
|
|
9,330
|
|
|
|
14,521
|
|
|
|
17,814
|
|
|
|
19,429
|
|
|
|
14,163
|
|
Operating loss
|
|
|
(3,749
|
)
|
|
|
(8,173
|
)
|
|
|
(9,675
|
)
|
|
|
(6,516
|
)
|
|
|
(11,599
|
)
|
Financial expenses, net
|
|
|
(4,113
|
)
|
|
|
(3,289
|
)
|
|
|
(335
|
)
|
|
|
(538
|
)
|
|
|
(303
|
)
|
(loss before income tax)
|
|
|
(7,862
|
)
|
|
|
(11,462
|
)
|
|
|
(10,010
|
)
|
|
|
(7,054
|
)
|
|
|
(11,902
|
)
|
Income tax (expense) benefit
|
|
|
(5
|
)
|
|
|
(43
|
)
|
|
|
5,730
|
|
|
|
393
|
|
|
|
(2,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
(7,867
|
)
|
|
|
(11,505
|
)
|
|
|
(15,740
|
)
|
|
|
(6,661
|
)
|
|
|
(13,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
|
(0.45
|
)
|
|
|
(0.71
|
)
|
|
|
(1.03
|
)
|
|
|
(0.45
|
)
|
|
|
(0.93
|
)
|
Diluted loss per share
|
|
|
(0.45
|
)
|
|
|
(0.71
|
)
|
|
|
(1.03
|
)
|
|
|
(0.45
|
)
|
|
|
(0.93
|
)
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(U.S. dollars in thousands, except per share data)
|
|
Summary of Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
|
3,952
|
|
|
|
1,210
|
|
|
|
1,639
|
|
|
|
1,037
|
|
|
|
1,708
|
|
Total Current Assets
|
|
|
24,942
|
|
|
|
23,147
|
|
|
|
25,664
|
|
|
|
27,413
|
|
|
|
21,120
|
|
TOTAL ASSETS
|
|
|
40,344
|
|
|
|
40,004
|
|
|
|
44,349
|
|
|
|
54,198
|
|
|
|
53,473
|
|
Total Current Liabilities
|
|
|
19,599
|
|
|
|
14,313
|
|
|
|
13,543
|
|
|
|
17,960
|
|
|
|
12,771
|
|
Total Long-term Liabilities
|
|
|
15,827
|
|
|
|
17,359
|
|
|
|
11,256
|
|
|
|
3,531
|
|
|
|
1,978
|
|
SHAREHOLDERS’ EQUITY
|
|
|
4,919
|
|
|
|
8,332
|
|
|
|
19,550
|
|
|
|
32,707
|
|
|
|
38,724
|
|
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
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 four year ended December 31, 2020, 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, 2020, 23% of our consolidated net revenue is attributable to sales to two large customers.
In the year ended December 31, 2019, 7% of our consolidated net revenue is attributable to sales to one large customers.
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.
Our business plan is subject to the risks of technological uncertainty, which may result in our
products failing to be competitive or readily accepted by our target markets.
There can be no assurance that our research and development efforts will be successful. In addition, the technology that we integrate or that we may expect
to integrate with our product and service offerings is rapidly changing and developing. We face risks associated with the possibility that our technology may not function as intended and the possible obsolescence of our technology and the risks
of delay in the further development of our own technologies. In addition, any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect
customer confidence in our services. Such instances may result in loss of customer accounts or similar problems if they occur again in the future. Given rapidly changing technologies, we are not certain that we will be able to adapt the use of
our services to permit, upgrade, and expand our systems or to integrate smoothly with new technologies. Network and information systems and other technologies are critical to our business activities. Network and information systems-related
events, including those caused by us, our service providers or by third parties, such as computer hacking, cyber-attacks, computer viruses, or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious
social engineering or other malicious activities, or any combination of the foregoing could result in a degradation or disruption of our services. These types of events could result in a loss of customers and large expenditures to repair or
replace the damaged properties, networks or information systems or to protect them from similar events.
Any acquisitions that we have completed, or may complete in the future, may not perform as planned and could disrupt our business and harm our financial condition and operations.
In an effort to effectively compete in the IoT and connectivity, cyber security, and e-Gov products and services business, we have sought to acquire complementary businesses in the past and we may continue to do so in
the future. In the event of any future acquisitions, we could:
|
•
|
issue additional securities that would dilute our current shareholders’ percentage ownership;
|
|
•
|
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 2 of the last seven years ended December 31, 2020, 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 two of the last seven years ended December 31, 2020 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;
|
|
•
|
counties and municipals;
|
|
•
|
healthcare and homecare; and
|
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:
|
•
|
the cost, performance and reliability of our products and services compared to the products and services of our competitors;
|
|
•
|
customer perception of the benefits of our products and solutions;
|
|
•
|
public perception of the intrusiveness of these solutions and the manner in which organizations use the information collected;
|
|
•
|
public perception of the privacy protection for their personal information;
|
|
•
|
customer satisfaction with our products and services; and
|
|
•
|
marketing efforts and publicity for our products and services.
|
Even if our products and solutions gain wide market acceptance, our products and services may not adequately address market requirements and may not gain wide market acceptance. If our solutions or our products and
services do not gain wide market acceptance, our business and our financial results will suffer.
If we are unable to develop and sustain our position as a provider of e-Gov, IoT and Connectivity, and Cyber Security, solutions and services and earn high margins from our technology, our business will not be as profitable as we hope, if at all.
The increasing sophistication of our e-Gov, IoT, Cyber Security, and Connectivity based technology places a premium on providing innovative software systems and services
to customers, in addition to manufacturing and supplying products. While we have had some success positioning ourselves as a provider of such services and systems, we may not continue to be successful with this strategy and we may not be able to
capture a significant share of the market for the sophisticated solutions and services that we believe are likely to produce attractive margins in the future. A significant portion of the value of our e-Gov, Cyber Security, and Connectivity
technology lies in the development of software, firmware and applications that will permit the use of our products and technology in selected new markets. In contrast, the margins involved in manufacturing and selling IoT and Connectivity based
technology can be relatively small and may not be sufficient to permit us to earn an attractive return on our development investments.
Our operating results may be adversely affected by unfavorable economic and market conditions and the uncertain
geopolitical environment.
Challenging economic conditions worldwide have from time to time contributed, and may continue to contribute, to slowdowns in the
communications and networking industries at large, as well as in specific segments and markets in which we operate, resulting in:
•
|
Increased price competition for our products, not only from our competitors but also as a consequence of customers disposing of
unutilized products
|
•
|
Risk of excess and obsolete inventories
|
•
|
Risk of supply constraints
|
•
|
Risk of excess facilities and manufacturing capacity
|
•
|
Higher overhead costs as a percentage of revenue and higher interest expense
|
The global macroeconomic environment continues to be challenging and inconsistent and is being significantly impacted by the COVID-19 pandemic. During
fiscal 2020, we continued to see a more broad-based weakening in the global macroeconomic environment which impacted our commercial and enterprise markets. We also experienced continuing weakness in the service provider market and emerging
countries, and we expect ongoing uncertainty in these markets. Additionally, instability in the global credit markets, the impact of uncertainty regarding global central bank monetary policy, the instability in the geopolitical environment in
many parts of the world including as a result of the United Kingdom “Brexit” withdrawal from the European Union, the current economic challenges in China, including global economic ramifications of Chinese economic difficulties, and other
disruptions may continue to put pressure on global economic conditions. If global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, we may experience material impacts on our
business, operating results, and financial condition.
Our efforts to expand our international operations are subject to a number of risks, any of which could adversely reduce our future international sales and increase our losses.
Most of our revenues to date are attributable to sales in jurisdictions other than the United States. For the years ended December 31, 2020 and 2019, approximately 50%
and 45%, 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. Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility into the development process with respect to such
technology or the care taken to safeguard against infringement risks.
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.
War, terrorism, other acts of violence or natural or man-made disasters, including a global pandemic, may affect the markets in which the Company operates,
the Company’s customers, the Company’s delivery of products and customer service, and could have a material adverse impact on our business, results of operations, or financial conditions.
The Company’s business may be adversely affected by instability, disruption or destruction in a geographic region in which it operates, regardless of cause, including war,
terrorism, riot, civil insurrection or social unrest, and natural or man-made disasters, including famine, food, fire, earthquake, storm or pandemic events and spread of disease. Such events may cause customers to suspend their decisions on using
the Company’s products and services, make it impossible to attend or sponsor trade shows or other conferences in which our products and services are presented to customers and potential customers, cause restrictions, postponements and cancellations
of events that attract large crowds and public gatherings such as trade shows at which we have historically presented our products, and give rise to sudden significant changes in regional and global economic conditions and cycles that could
interfere with purchases of goods or services, commitments to develop new products. These events also pose significant risks to the Company’s personnel and to physical facilities, transportation and operations, which could materially adversely
affect the Company’s financial results.
The COVID-19 pandemic is adversely impacting our global economy, which could adversely impact other parts of our business, including our ability to access
capital markets, if and when required. Additional factors could exacerbate such negative consequences and/or cause other and potentially materially adverse effects.
An outbreak of a novel strain of coronavirus, COVID-19 in December 2019 subsequently became a pandemic after spreading globally, including the United States. The COVID-19 pandemic materially adversely affected our
financial results and business operations during the fiscal year ended December 31, 2020. The extent to which the coronavirus impacts our results will depend on future developments, including new information which may emerge concerning the severity
of the coronavirus and the actions taken by us and our partners to contain the coronavirus or treat its impact, among others. Our estimate of the ultimate impact of the coronavirus pandemic, including the extent of any adverse impacts on our
business, revenues, results of operations, cash flows and financial condition, which will depend on, among other things, the duration and spread of coronavirus, the impact of federal and local government actions that have been and continue to be
taken in response, and the effectiveness of actions taken to contain or mitigate the pandemic and economic conditions is subject to significant uncertainty.
Depending on the duration and severity of the current COVID-19 pandemic, it may also have the effect of heightening many of the other risks described in this Annual Report and our other filings with the SEC, such as
risks relating to our ability to further develop and execute on our business plan; our ability to access capital markets to obtain additional sources of suitable and adequate financing; restricted access to capital and increased borrowing costs;
our ability to fund our current debt obligations and complying with the covenants contained in the agreements that govern our existing indebtedness; our ability to fund potential acquisitions and capital expenditures; and our ability to maintain
adequate internal controls in the event that our employees are restricted from accessing our regular offices for a significant period of time.
We cannot reasonably estimate the ultimate impact and duration of the coronavirus pandemic, including the extent of any adverse impacts on our business, revenues, results of operations, cash flows and financial
condition, which cannot currently be predicted and will depend on, among other things, the duration and spread of coronavirus, the impact of federal and local government actions that have been and continue to be taken in response, and the
effectiveness of actions taken to contain or mitigate the pandemic and economic conditions.
Risks Related to Our Ordinary Shares
Volatility of the market price of our ordinary shares could adversely affect our shareholders and us.
The market price of our ordinary shares has been, and is likely to be, highly volatile and could be subject to wide fluctuations in response to numerous factors, including the following:
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actual or anticipated variations in our quarterly operating results or those of our competitors;
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announcements by us or our competitors of technological innovations or new and enhanced products;
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developments or disputes concerning proprietary rights;
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introduction and adoption of new industry standards;
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changes in financial estimates by securities analysts;
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market conditions or trends in our industry;
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changes in the market valuations of our competitors;
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announcements by us or our competitors of significant acquisitions;
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entry into strategic partnerships or joint ventures by us or our competitors;
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failing to meet in the financial projection or guidance;
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Actual and anticipated market volatility due to the Covid-19.
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political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events; and
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other events or factors in any of the countries in which we do business, including those resulting from war, incidents of terrorism, natural disasters or responses to such events.
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In addition, the stock market in general, and the market for Israeli companies in particular, has been highly volatile. Many of these factors are beyond our control and may materially adversely affect the market price
of our ordinary shares, regardless of our performance. In the past, following periods of market volatility, shareholders have often instituted securities class action litigation relating to the stock trading and price volatility of the company in
question. If we were involved in any securities litigation, it could result in substantial cost to us to defend and divert resources and the attention of management from our business.
We have a shareholder that is able to exercise substantial influence over us and all matters submitted to our shareholders.
Sigma Wave Ltd., or Sigma, which is controlled by family members of Mrs. Tsviya Trabelsi, and by her husband Mr. Arie Trabelsi, a member of our board of
directors, is the beneficial owner of approximately 22.1% of our outstanding ordinary shares as of December 31, 2020. Such ownership interest gives Sigma the ability to influence our corporate affairs and to control our Company, including our
management, subject to approvals that may be required for related-party transactions pursuant to Israeli law. Sigma may have influence over the outcome of most matters submitted to our shareholders, including the election of our directors, and
such influence could make us a less attractive acquisition or investment target. Because the interests of Sigma may differ from the interests of our other shareholders, actions taken by Sigma with respect to us may not be favorable to our other
shareholders.
We do not expect to pay cash dividends.
We have never paid cash dividends on our ordinary shares and do not anticipate paying cash dividends in the near future. According to the Israeli Companies Law, dividends may only be paid out of profits legally
available for distribution and provided that there is no reasonable concern that such payment will prevent us from satisfying our existing and foreseeable obligations as they become due. The payment of dividends will depend on earnings, financial
condition, debt covenants in place, and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our ordinary shares may be less valuable because a return on your
investment will only occur if our stock price appreciates.
We have failed to maintain effective internal control over financial reporting, which could result in material misstatements in our financial statements.
The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404 of Sarbanes-Oxley governing internal controls
and procedures for financial reporting have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources.
Section 404 of Sarbanes-Oxley requires management’s annual review and evaluation of our internal control over financial reporting in connection with the filing of the Annual Report on Form 20-F for each fiscal year. We have 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 2020.
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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INFORMATION ON THE COMPANY
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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 3 Rothschild street, Tel-Aviv, Israel, and our telephone number is +972-9-889-0880. Our agent in the
United States is SuperCom, Inc., and is located at 200 Park Avenue South, New York, New York, telephone number +1 (212) 675-4606.
The Company web address is SuperCom.com.
SEC maintain an internet site https://www.sec.gov/edgar.com, that contain reports and other statements, and other information regarding issuers that file electronically with the SEC.
SuperCom Ltd. was incorporated in the State of Israel on July 4, 1988 pursuant to the provisions of the then-current Israeli Companies Ordinance. The legislative framework within which we now operate is the Israeli
Companies Law, which became effective on February 1, 2000, and the Israeli Companies Ordinance (New Version) 1983, as amended (the “Companies Ordinance”).
From our incorporation in 1988 until 1999, we were a development-stage company primarily engaged in research and development, establishing relationships with suppliers and potential customers and recruiting personnel
with a focus on the governmental market. In 2001, we implemented a reorganization plan, which we completed in 2002. As a result of the reorganization, we expanded our marketing and sales efforts to include the commercial market with a new line of
advanced smart card and identification technologies products, while maintaining our governmental market business.
During 2002, we sold, in three separate transactions with third party purchasers, our entire equity interest in a U.S. subsidiary, InkSure Technologies, Inc.,
for which we received aggregate proceeds of approximately $6.6 million. In December 2002, we discontinued the operations, disposed of all of the assets and terminated the employees of two U.S. subsidiaries, Genodus Inc. and Kromotek, Inc.
In 2006 we decided to sell most of our e-Gov Division in order to focus on opportunities in the U.S. for our IoT businesses as well as our Critical Situation Management System, or CSMS, business, which we sold in 2010.
On December 31, 2006, we sold the majority of the e-Gov Division activities and related intellectual property to OTI for 2,827,200 restricted ordinary shares of OTI, as of December 31, 2008, we sold all of the OTI
shares that we received in the transaction.
On August 28, 2007, we purchased through our wholly owned subsidiary, Vuance, Inc., all of the issued and outstanding stock capital of Security Holding Corp., or SHC, from
Homeland Security Capital Corporation and other minority shareholders for approximately $4.34 million of our ordinary shares and direct expenses of approximately $600,000 in our ordinary shares. A total of 258,218 ordinary shares were issued to
the sellers. SHC was a Delaware corporation engaged in the manufacture and distribution of RFID-enabled solutions, access control and security management systems. During the fourth quarter of 2007, SHC and its subsidiaries were merged into our
Vuance, Inc. subsidiary.
In September 2007, we entered into a definitive agreement to acquire the credentialing division of Disaster Management Solutions Inc., or DMS, 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, 2020 the seller does not
provide services to the Company and no contingent liability is outstanding.
On January 1, 2016 we acquired LCA, a U.S. based company, including all contracts, software, other related technologies and IP assets. We paid $2.9 million at the closing and committed to certain contingent earn-out
payments over the next three years that are structured as a single digit percentage of annual revenues in excess of stand-alone LCA management revenue projections, as of January 2020 the contingent earn-out is no longer exists.
On March 13, 2016, we acquired Safend, an Israeli based cyber security company. 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) .
IoT and Connectivity
IoT
Our IoT products and solutions reliably identify, track and monitor people or objects in real time, enabling our customers to detect unauthorized movement of
people, vehicles and other monitored objects. We provide all-in-one field proven IoT suite, accompanied with services specifically tailored to meet the requirements of an IoT solutions. Our proprietary IoT suite of hybrid hardware, connectivity
and software components are the foundation of these solutions and services. Our IOT division has primarily focused on growing the following markets: (i) public safety; (ii) healthcare and homecare; (iii) Smart Cities (iv) Smart Campus and (iv)
transportation.
During 2006, we identified the growing electronic tracking and monitoring vertical markets for public safety, real time healthcare and homecare, and transportation management. We have developed the
PureRF Hybrid suit of wrist devices, connectivity, and controlling software, and from 2012 we have been developing and enhancing our next generation IoT suite; the PureSecurity Hybrid Suite of wrist band, tags, beacons, PureCom, Pure Monitors,
PureTrack and other components.
On January 1, 2016 we acquired Leaders in Community Alternatives, Inc., or LCA. LCA is a California based, private criminal justice organization, providing community-based services and electronic monitoring programs to
government agencies in the U.S. for more than 25 years. LCA offers a broad range of competitive solutions for governmental institutions across the U.S. in addressing realignment strategies and plans.
Connectivity
In 2016, as part of our strategy to enhance and broaden our IoT connectivity products and solutions offerings for public safety, enterprises, hospitality and smart cities markets, on May 18, 2016, we acquired Alvarion
Technologies Ltd., or Alvarion. Alvarion designs solutions for carrier wi-fi, enterprise connectivity, smart city, smart hospitality, connected campuses and connected events that are both complete and heterogeneous to ensure ease-of-use and
optimize operational efficiency. Carriers, local governments and hospitality sectors worldwide deploy Alvarion’s intelligent wi-fi networks to enhance productivity and performance, as well as its legacy backhaul services and products.
Cyber Security
During 2015, we identified the cyber security market as a very fast growing market where we believe that SuperCom has major advantages due to synergic technologies and shared customer base to our e-Gov, IoT and
connectivity SBUs. In 2015, we acquired Prevision Ltd., or Prevision, a company with a strong presence in the market and a broad range of competitive and well-known cyber security services. During the first quarter of 2016, we acquired Safend Ltd,
or Safend, an international provider of cutting edge endpoint data protection guarding against corporate data loss and theft through content discovery and inspection, encryption methodologies, and comprehensive device and port control. Safend maps
sensitive information and controls data flow through email, web, external devices and additional channels.
Both acquisitions significantly expanded the breadth of our cyber security capabilities globally, while providing us with outstanding market and technological experts and over 3,000 customers in the United States,
Europe, and Asia, and more than three million software license seats deployed by multinational enterprises, government agencies and small to mid-size companies around the globe, together with leading data and cyber security platforms and
technologies.
Market Opportunity
We believe that our wide range of solutions offers us several opportunities across global markets and industries. The overall e-Gov market remains strong. Our addressable market includes both developing and developed
countries.
We plan to grow the e-Gov division organically, by adding new e-Gov government customers and by offering more services to existing customers. We believe that our platform is agile and scalable, meaning that once a
customer is using one of our applications, it is easy to add additional applications and services, which can increase a client’s return on their investment. In addition, and as a result of the integration of SuperCom and the SmartID division, we
are now well-positioned to work on larger international tenders, we began actively bidding on larger international tenders in markets where we see significant opportunities.
The opportunities we see for our e-Gov division may have an impact on the number of opportunities for our IoT, and Cyber security divisions as well. We have begun to leverage our e-Gov existing customer base, and we
believe that the expertise and robust innovative solutions in these two segments represent a significant opportunity for SuperCom.
We offer our new generation IoT and connectivity hybrid suite, which provides a full solution encompassing proprietary software and various secure connectivity technology, to customers in the United States and in
Europe, South America and Africa, by exhibiting and demoing to potential customers in those regions. We launched our new generation Pure Security offender monitoring suite and began submitting it to tenders in the public safety market. These
tenders range in value from tens of thousands to tens of millions of dollars.
On January 1, 2016, we acquired LCA, a California based, private criminal justice organization with over 25 years of experience running electronic monitoring programs for government customers in the U.S. It has
significantly bolstered our competitive edge in competitive tenders allowing us to offer not only cutting edge technology, but also extensive industry experience. We have since then beat market competitors in competitive processes and have been
awarded projects in various countries around the world including USA, Canada, Latvia, Czech Republic, Denmark, Bulgaria and other countries in Europe and Asia. Following our recent success and status in active tenders, we believe we are well
positioned to win additional new projects in years to come.
In addition, there is always demand for better security systems and services. We believe that personnel and asset management are now leading security concerns in commercial and governmental enterprises, and that this
should drive an increasing demand for secure, precise and cost-effective means to positively identify, locate, track, monitor, count and protect people and objects, including inventory and vehicles. Our IoT solutions provide an optimal solution to
these problems as our solutions reliably identify and track the movement of people and objects in real time, enabling our customers to detect unauthorized movement of vehicles as well as trace packages, containers and the access to premises by
control personnel and vehicles.
We identified the Cyber Security market as a fast growing market where SuperCom has major advantages due to synergic technologies and shared customer bases with our e-Gov, and IoT divisions. In 2015, we acquired
Prevision Ltd., a company with a broad range of competitive and well-known Cyber Security services. During the first quarter of 2016, we acquired Safend Ltd, an international provider of cutting edge endpoint data protection guarding against
corporate data loss and theft. We now have a platform of thousands of sophisticated enterprise customers which run our proprietary endpoint protection software and utilize our cyber security services. Through this platform we hope to more easily
deploy additional innovations in cyber security, such as our proprietary Safe Mobile security software, to high quality enterprise customers.
Our Strategy
We are focused on our core competencies, which are comprised of our e-Gov platform and solutions, our IoT suite and connectivity solutions, our extensive Cyber Security products and solutions. Our growth strategy
includes the following components:
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Develop strong strategic relationships with our business partners, including the systems integrators and representatives that introduce our products and solutions into their respective markets.
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Employ dedicated sales personnel to work closely with our business partners. Our sales personnel will customize and adapt solutions that can then be installed and supported by these business partners.
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Expand our IoT and Cyber Security activities globally, particularly in the Americas, Europe, and the Far East.
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Leverage our customer base, superior PureSecurity hybrid suite of IoT solutions, and Cyber Security capabilities to secure additional long-term contracts with governments and communities in the public
safety markets.
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Leverage our reputation, talented personnel, and project management capabilities in the e-Gov market to secure additional projects and solutions in the growing e-Government market.
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Leverage our customer base, Connectivity solutions, and Cyber Security capabilities to secure additional long-term contracts with governments and communities in the Communication Infrastructure market.
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Develop strong strategic relationships with business partners that will introduce our solutions into the healthcare, homecare, Safe City and Smart Campus markets.
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Develop strong strategic relationships with business partners in the financial services industry, and un-banked and mobile payments markets.
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