SuperCom LtdSPCB财报

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS A. Operating Results The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties.

Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Annual Report.

Overview We are a global provider of traditional identification and e-Government solutions, IoT products and solutions, as well as Cyber Security products and services to governments and organizations throughout the world.

Our product depth and global presence was expanded significantly with our acquisition of the SmartID division of OTI in December 2013, as well as our acquisitions of Prevision, Safend, LCA, PowaPOS business, and Alvarion between November 2015 and May 2016.

Initially, our operations grew significantly following the acquisition of the SmartID division and the 2016 acquisitions, especially our head count and research and development and sales and marketing expenses, as we did our best to respond to the new market and customer needs.

Although in recent years, we have worked diligently through integration and restructuring processes to optimize our operational structure and costs so in the recent eight years our operation grew significantly organically, while we have focused our operations in developed countries.

We are headquartered in Israel and operate internationally with subsidiaries in the New York, California, and other geographical regions where we attain and deploy new projects. General Our consolidated financial statements appearing in this Annual Report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in other currencies are re-measured into dollars in accordance with the principles set forth in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 830,” Foreign Currency Translation ” The majority of our sales are made outside Israel in dollars.

In addition, substantial portions of our costs are incurred in dollars.

Since the dollar is the primary currency of the economic environment in which we and certain of our subsidiaries operate, the dollar is our functional and reporting currency and, accordingly, monetary accounts maintained in currencies other than the dollar are re-measured using the foreign exchange rate at the balance sheet date.

Operational accounts and non-monetary balance sheet accounts are measured and recorded at the exchange rate in effect at the date of the transaction. The financial statements of certain subsidiaries, whose functional currency is not the dollar, have been translated into dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date.

Statement of operations amounts have been translated using the average exchange rate for the period. Key Factors Affecting Our Business Our operations and the operating metrics discussed below have been, and will likely continue to be, affected by certain key factors as well as certain historical events and actions.

The key factors affecting our business and our results of operations include, among others, competition, government regulation, the build out of infrastructures, macro-economic and political risks, churn rate, impact of currency fluctuations and inflation, effective corporate tax rate, conditions in Israel and trade relations.

For further discussion of the factors affecting our results of operations, see Item 3D “Risk Factors.” 29 Explanation of Key Income Statement Items, Significant Revenues and Expenses General 2023 was a year of returning to normal as the Covid-19 global pandemic’s impact had no impact on our operations in Israel, USA and worldwide.

Our sales, project operations and R&D processes have return to normal per our current business plan.

While returning fully to our business plan, we have optimized the operations of our Company, and our operating costs except for our investment in R&D which continued to enhance our product offerings and competitive standing among our target markets, our optimized company generated numerous new opportunities and large project wins in our target markets, but required us to use resources in many cases that have yet to yield income to our Company as part of multi-year government sale and project deployment life cycles.

We believe that comparing between our 2023 fiscal year, on one hand and 2022 and 2021 fiscal years, on the other hand, cannot be done effectively without taking into account the material impact of Covid-19 on our business in the years 2022 and 2021.

Revenues Some of our products and services are tailored to meet the specific needs of our customers. In order to satisfy these needs, the terms of each agreement, including the duration of the agreement and prices for our products and services, differ from agreement to agreement.

We generate a portion of our revenues from existing IoT, e-Gov, and Cyber Security long term services contracts, providing customers with turn-key systems, our products, software licenses, integration, installation, training, software upgrades, support, and multi-year maintenance services.

Revenues from the sale of such services are generally recognized following delivery of such services and upon achievement of milestones as approved by our customers. A portion of these revenues are recurring in nature and billed monthly. Revenues from the sale of Alvarion products are generally recognized upon delivery, and over time for delivery of Safend products.

Costs and Operating Expenses For the fiscal year ended December 31, 2023, our costs were materially impacted by the fact that the Covid-19 pandemic ended and attention of management was required to quickly adapt and optimize operational structures of the businesses as was described in the General section above.

Our research and development expenses consist of salaries, subcontractor expenses, related depreciation costs and overhead allocated to research and development activities. In 2023, our research and development expenses were decreased by 12% compared to the same period in 2022.

Our selling and marketing expenses consist primarily of salaries and related costs, commissions earned by sales and marketing personnel, trade show expenses, promotional expenses and overhead costs allocated to selling and marketing activities, as well as depreciation expenses and travel costs.

In 2023, our sales and marketing returned to normal and was optimized, our selling and marketing expenses decreased by 17% compared to the same period in 2022 Our general and administrative expenses consist primarily of salaries and related costs, allocated overhead costs, office supplies and administrative costs, fees and expenses of our directors, information technology, depreciation, and professional service fees, including legal, insurance and audit fees.

Our operating results are significantly affected by, among other things, the timing of contract awards and the performance of agreements. As a result, our revenues and income may fluctuate substantially from year to year, and we believe that comparisons over longer periods of time may be more meaningful.

The nature of certain of our expenses is mainly fixed or partially fixed and any fluctuation in revenues will generate a significant variation in gross profit and net income. 30 Operating Results The following table sets forth selected our consolidated income statement data for each of the two years ended December 31, 2023 and 2022, expressed as a percentage of total revenues. 2023 2022 Revenues 100 % 100 % Cost of revenues 61.5 63.8 Gross profit 38.5 36.2 Operating expenses: Research and development 11.7 19.3 Selling and marketing 8.3 15.1 General and administrative 20.5 29.4 Other expenses 10.6 6.4 Total operating expenses 51.1 70.2 Operating loss (12.6 ) (34.0 ) Financial expenses, net (2.5 ) (9.9 ) Loss before income tax (15.1 ) (43.9 ) Income tax expense - 1.7 Net Loss (15.1 ) (42.3 ) Year Ended December 31, 2023 Compared with Year Ended December 31, 2022 Revenues Our total revenues in 2023 were $26,570,000 compared to $17,649,000 in 2022, an increase of 51%.

The composition of revenues has changed during the fiscal year ended December 31, 2023 as follows: (i) the e-Gov segment revenue was $1,544,000 in comparison to $637,000 in 2022, an increase of 142% which reflects recurring revenue from some of our multiyear governments contracts; (ii) the IoT segment revenue was $23,766,000 in comparison to $15,628,000 in 2022, an increase of 52% which is attributed to an increase of revenue in the European market; and (iii) the Cyber Security segment revenue was $1,260,000 in comparison to $1,384,000 in 2022, a decrease of 9% which is mainly attributed to the decrease in our revenue from products license renewals, and in our consulting-based cyber offering.

Gross Profit Our gross profit during the fiscal year ended December 31, 2023 was $10,223,000 compared to $6,388,000 in 2022, an increase of 60%. The gross profit margin for 2023 was 38.5% compared to 36.2% in 2022.

The increase in our gross profit margin is mainly attributed to (i) the completion of a new $33 million contract’s implementation stage completed and the project’s recurring revenue stage which contributes to a higher than average gross margin; (ii) a change in the mix of revenues; (iii) an increase of 52% in IoT revenue, which contributes to a higher than average gross margin; and (iv) a decrease of revenue from cyber services contracts which contributes to a higher than average gross margin.

Expenses Our operating expenses, excluding other (income) expenses, net, during the fiscal year ended December 31, 2023 was $10,770,000 compared to $11,255,000 in 2022, a decrease of 4%.

The decrease in operating expenses was primarily due to (i) a decrease of 9% in research and development expenses, (ii) an increase of 5% in general and administrative expenses; and (iii) a decrease of 17% in sales and marketing expenses.

Our sales and marketing expenses decreased to $2,200,000 during the fiscal year ended December 31, 2023 from $2,657,000 in 2022, a decrease of 17%. The decrease in our sales and marketing expenses was primarily due to an optimization in our sales and marketing direct expenses and travels expenses during 2023.

Our research and development expenses decreased to $3,110,000 during the fiscal year ended December 31, 2023 from $3,412,000 in 2022, an decrease of 9%. The decrease in our research and development expenses was primarily due to the completion of some of the IoT products development.

Our general and administrative expenses increased to $5,460,000 during the fiscal year ended December 31, 2023 from $5,186,000 in 2022, an increase of 5%. 31 Other expenses were $2,812,000 during the fiscal year ended December 31, 2023, compared to other expense of $1,138,000 in 2022.

The increase in other expenses in 2023 from 2022 represents mainly (i) a provision of bad debt, related mainly to African and Latin American government customers, amounting to $1,457,000 and $1,000,000 respectively, and one-time expense due to settlement with e-GOV account amounted to $1,053,000 in 2023.

Financial Expenses, net We had financial expenses, net, of $663,000 during the fiscal year ended December 31, 2023 compared to $1,751,000 in 2022, a decrease of 62% due to $2,313,000 financial income from changes in fair value of derivative warrants liabilities offset by an increase of exchange rate expenses of $483,000 and of interest expense and other related fees on the outstanding loans and credit lines we maintain of $742,000.

Income Tax We recorded a tax income of $0 for the fiscal year ended December 31, 2023 compared to a tax income of $299,000 in 2022, mainly due to a tax asset recognized for Safend after four years of material profit and toward Safend tax allowance for the year 2022.

Net Loss As a result of the factors described above, our net loss for the fiscal year ended December 31, 2023, was $4,022,000 compared to a net loss of $7,457,000 in 2022 a decrease of 46%.

The decrease in our net loss is mainly related to (i) an increase of $1.7M in other expenses ;(ii) a decrease of $1.1M in financial expenses, offset by; (ii) a $3,835,000 increase in gross profit, and (iii) a $485,000 decrease in operating expenses excluding other expenses, net. Seasonality Our operating results are generally not characterized by a seasonal pattern.

Impact of Currency Fluctuation and of Inflation We report our financial results in U.S. dollars and receive payments in dollars for most of our sales, while a portion of our expenses, primarily salaries, are paid in NIS.

Therefore, the dollar cost of our operations in Israel is influenced by the extent to which any increase in the rate of inflation in Israel is not offset, or is offset on a lagging basis, by a devaluation of the NIS in relation to the dollar.

Monetary accounts maintained in currencies other than the U.S. dollar are re-measured into U.S. dollars at the exchange rate prevailing at the end of the reporting period in accordance with provisions of ASC 835-10.

All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected in the statements of operations as financial income or financial expenses as appropriate. When the rate of inflation in Israel exceeds the rate of devaluation of the NIS against the dollar, the dollar cost of our operations in Israel increases.

If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected.

Any increase in the value of the NIS in relation to the dollar also has the effect of increasing the dollar value of any NIS assets, unless such assets are linked to the dollar, and the dollar amounts of any unlinked NIS liabilities and expenses.

We cannot assure you that we will not be materially and adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of the devaluation lags behind inflation in Israel.

Conversely, depreciation of the NIS in relation to the dollar has the effect of reducing the dollar amount of any of our expenses or liabilities that are payable in NIS, unless those expenses or payables are linked to the dollar.

Depreciation of the NIS in relation to the dollar has the effect of reducing the dollar amount of any of our expenses or liabilities and also has the effect of decreasing the dollar value of any asset which consists of NIS or receivables payable in NIS, unless the receivables are linked to the dollar. 32 The following table presents information about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the dollar, and the rate of inflation in Israel adjusted for the devaluation: Year ended December 31, Israeli inflation rate % NIS devaluation (appreciation) rate % Israeli inflation adjusted for devaluation (appreciation) % 2023 3.0 3.1 (0.1) 2022 5.3 13.2 (7.9) Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability and period-to-period comparisons of our results.

We cannot assure you that in the future our results of operations may not be materially adversely affected by currency fluctuations. Historically, we have not used any hedging instruments, but in the future if we expect the fluctuation to have major effect on our operations, we may use such instruments.

Conditions in Israel We are organized under the laws of, and our principal executive offices and research and development facilities are located in, the State of Israel.

See Item 3D “Key Information – Risk Factors – Risks Relating to Operations in Israel” for a description of governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.

Trade Relations Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members.

Israel is also a member of the Organization for Economic Co-operation and Development, or the OECD, an international organization whose members are governments of mostly developed economies. The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around the world.

In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export products covered by such programs either duty-free or at reduced tariffs.

Israel and the European Union Community concluded a Free Trade Agreement in July 1975, which confers certain advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years.

In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all tariff and specified non-tariff barriers on most trade between the two countries.

On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as EFTA, established a free-trade zone between Israel and the EFTA nations.

In November 1995, Israel entered into a new agreement with the European Union, which includes redefinition of rules of origin and other improvements, including providing for Israel to become a member of the research and technology programs of the European Union.

In recent years, Israel has established commercial and trade relations with a number of other nations, including China, India, Russia, Turkey and other nations in Eastern Europe and Asia. Effective Corporate Tax Rate The Israeli corporate tax rate was 23% in 2022 and in 2023.

For the years ended December 31, 2023 and 2022 we had losses, and therefore the effective tax rate was mostly affected by changes in deferred tax. In 2023, the USA federal tax rate was 21%, the state tax rate was 8.84% in CA and 6.5% in NY, the New York City tax rate was 6.5%.

Our effective USA tax rate as for the year ended December 31, 2023 was 27.03%. Our taxes outside Israel are dependent on our operations in each jurisdiction as well as relevant laws and treaties. Under Israeli tax law, the results of our foreign consolidated subsidiaries cannot be consolidated for tax. B.

Liquidity and Capital Resources As of and for the year ended December 31, 2023, the Company had an accumulated deficit of $106,948, and net cash used in operating activities of $2,367 compared to $4,654 for the year ended December 31, 2022, which demonstrates a 49% reduction in negative operation cash flow. 33 Management has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations and noted that as of December 31, 2023, the Company had cash, cash equivalent and restricted cash of $5,577 and positive working capital of $23,059.

Additionally, the Company secured financing of $20,000 during 2018, of which, $6,000 remains available to the Company to draw during the 12 months following the balance sheet date, under certain conditions. Throughout 2021, the Company also secured through the issuance of multiple notes, aggregate gross proceeds of $12,000 of subordinated debt (“Subordinated Debt”).

The Company raised a gross amount of approximately $3,200 in a private placement in July 2020. To date, the Company has used the proceeds from the secured financing, subordinated debt and private placement (i) to satisfy certain indebtedness; and (ii) for general corporate purposes and (iii) working capital needs for multiple new government customer contracts with significant positive cash flow.

On March 1, 2022, the Company raised approximately $4.65 million in gross proceeds in a registered direct offering with a single accredited institutional investor of an aggregate of 3,130,000 of its ordinary shares, and 4,401,585 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent private placement to such purchaser of the Company’s private warrants to purchase an aggregate of 5,648,689 of ordinary shares at an exercise price of $0.70 per share.

On March 30, 2023, the Company raised approximately $2.4 million in gross proceeds in a registered direct offering with a single accredited institutional investor through the sale of an aggregate of 485,000 of its ordinary shares, and 1,032,615 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent private placement to such Purchaser of the Company’s private warrants to purchase an aggregate of 1,517,615 of its ordinary shares at an exercise price of $1.66 per share.

On August 3, 2023, the Company raised approximately $2.75 million in gross proceeds in a registered direct offering with a single accredited institutional investor through the sale of an aggregate of 661,000 of its ordinary shares, and 2,574,295 pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent private placement to such Purchaser of the Company’s private warrants to purchase an aggregate of 3,235,295 of its ordinary shares at an exercise price of $0.85 per share.

On November 15, 2023, the Company raised approximately $2.0 million in gross proceeds in a warrant exercise and reload with a single accredited institutional investor through warrant exercise of 1,081,000 warrant to ordinary shares, and warrant exercise of 3,671,910 warrant to pre-funded warrants to purchase ordinary shares with an exercise price of $0.00001 per share, and concurrent warrant reload to such Purchaser of the Company’s private warrants to purchase an aggregate of 9,505,820 of its ordinary shares at an exercise price of $0.5 per share.

Furthermore, the available $6 million secured credit facility from Fortress Investment Group may provide the Company additional access to capital if needed.

The Company believes that based on the above-mentioned secured financings, management’s current plans, maintaining the cost savings and expected cash streams from the Company’s current contracts with customers worldwide, the Company will be able to fund its operations for at least the next 12 months.

Cash Flows The following table summarizes our cash flows for the periods presented: Year ended December 31, 2023 2022 (in thousands) Net cash used in operating activities $ (2,367 ) $ (4,654 ) Net cash used in investing activities (3,366 ) (2,189 ) Net cash provided by (used in) financing activities 6,805 6,744 Net increase(decrease) in cash and cash equivalents 1,072 (99 ) Cash, cash equivalents and restricted cash at beginning of period 4,505 4,604 Cash, cash equivalents and restricted cash at end of period $ 5,577 $ 4,505 Net cash used in operating activities for the year ended December 31, 2023, was $2,367, compared to net cash used by operating activities of $4,654,000 during the year ended December 31, 2022, a decrease of 49%.

Net cash used in investing activities during the year ended December 31, 2023, was $3,366,000 compared to $2,189,000 during the year ended December 31, 2022, a decrease of 53.8%.

Net cash provided by financing activities during the year ended December 31, 2023, was $6,805,000 compared to $6,744,000 during the year ended December 31, 2022, which consisted mainly of two registered direct offering with $5,180,000 in gross proceeds and warrant exercise for cash with $1,819,000 in gross proceeds. 34 Discussion of Critical Accounting Policies The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Under different assumptions or conditions, actual results may differ from these estimates. Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our significant accounting principles are presented within Note 2 to our consolidated financial statements.

While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. These policies are those that are most important to the portrayal of our financial condition and results of operations. Actual results could differ from those estimates.

Our management believes that the accounting policies which affect the more significant judgments and estimates used in the preparation of our consolidated financial statements and which are the most critical to fully understanding and evaluating our reported results include the following: Revenue Recognition The Company and its subsidiaries generate their revenues from the sale of products, licensing, maintenance, royalties and long term contracts (including training and installation).

We measure revenue based upon the consideration specified in the client arrangement, and revenue is recognized when the performance obligations in the client arrangement are satisfied. A performance obligation is a contractual promise to transfer a distinct service to the customer.

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Under ASC 606, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration we expect to receive in exchange for those services.