zk1313338.htm
Filed with the Securities and Exchange Commission on July 3, 2013
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
(Exact Name of Registrant as Specified in its Charter)
State of Israel | 3674 | Not Applicable |
(State or Other Jurisdiction of Incorporation or Organization | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
The Nolton House 14 Arie Shenkar Street Herzliya Pituach 4672514, Israel +972.9.889.0800 |
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal
Puglisi & Associates 850 Library Avenue, Suite 204 P.O. Box 885 Newark, Delaware 19715 Tel. (302) 738-6680 |
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
Copies of Communications to:
Steven J. Glusband, Esq. Carter Ledyard & Milburn LLP Two Wall Street New York, NY 10005 Tel: 212-732-3200 Fax: 212-732-3232 | Sarit Molcho, Adv. S. Friedman & Co., Advocates Amot Investment Tower 2 Weizman Street Tel Aviv 64239 Israel Tel: +972-3-6931931 Fax: +972-3-6931930 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after effectiveness of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, check the following box. o
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | | Proposed Maximum Aggregate Offering Price | | | Amount of Registration Fee (1) | |
Ordinary Shares, NIS 0.0588235 par value | | $ | 20,000,000 | | | $ | 2,732.80 | |
(1)Calculated pursuant to Rule 457(o) of the rules and regulations under the Securities Act of 1933.
___________________________
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine.
The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject To Completion, Dated July 3, 2013
Ordinary Shares
We are offering up to ______ of our ordinary shares. We are not required to sell any specific dollar amount or number of ordinary shares, but will use our best efforts to sell all of the ordinary shares being offered. The offering expires on the earlier of (i) the date upon which all of the ordinary shares being offered have been sold, or (ii) ___________, 2013.
Our ordinary shares are quoted on the OTCQB® marketplace under the symbol “SPCBF” On July 2, 2013, the last reported sale price for our ordinary shares was $0.54.
Investing in our ordinary shares involves a high degree of risk. See “Risk Factors” beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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Public offering price | | $ | | | | $ | | |
Underwriting discounts(1) | | $ | | | | $ | | |
Proceeds, before expenses, to us | | $ | | | | $ | | |
We estimate the total expenses of this offering will be approximately $ . Because there is no minimum offering amount required as a condition to closing in this offering, the actual public offering amount and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering set forth above. Some of the securities may be sold by the officers and directors of our Company. None of these officers or employees will receive any commission or compensation for the sale of the securities. We have no current arrangements nor have we entered into any agreements with any underwriters, broker-dealers or selling agents for the sale of the securities, but we plan on entering into such arrangements and agreements. If we can engage one or more underwriters, broker-dealers or selling agents and enter into any such arrangement(s), the securities will be sold through such licensed underwriter(s), broker-dealer(s) and/or selling agent(s). See “Plan of Distribution” beginning on page 76 of this prospectus for more information on this offering.
This offering will terminate on ___________, 2013, unless the offering is fully subscribed before that date or we decide to terminate the offering prior to that date. In either event, the offering may be closed without further notice to you. All costs associated with the registration will be borne by us. As there is no minimum purchase requirement, no funds are required to be escrowed and all net proceeds will be available to us at closing for use as set forth in “Use of Proceeds” beginning on page 25.
The date of this prospectus is , 2013.
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Unless the context otherwise requires, references in this prospectus to “the company,” “our company,” “we,” “our,” “us,” or “SuperCom” means SuperCom Ltd. and its subsidiaries. The term “NIS” refers to new Israeli shekel, and “dollar,” “USD” or “$” refers to U.S. dollars.
You should rely only on the information contained in this prospectus and in any free writing prospectus which we file with the Securities and Exchange Commission. We have not authorized anyone to provide you with information different from that contained in this prospectus or such free writing prospectus, if any. We are offering to sell, and seeking offers to buy, ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ordinary shares.
Unless otherwise indicated, U.S. dollar translations of the NIS amounts presented in this prospectus are translated using the rate of NIS 3.7330 per $1.00, the representative rate of exchange as of December 31, 2012, as published by the Bank of Israel.
In reading this prospectus, you should note that currency fluctuations may positively or negatively affect the presentation of our operating expenses and net income in U.S. dollars depending on increases or decreases of the U.S. dollar conversion amounts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations --Quantitative and Qualitative Disclosure about Market Risk -- Effects of Currency Fluctuations.”
This summary highlights information contained in other parts of this prospectus and provides an overview of the material aspects of this offering. This summary does not contain all of the information you should consider before investing in our ordinary shares. You should read this entire prospectus carefully, including the risks of investing in our ordinary shares discussed under “Risk Factors” beginning on page 7, our financial statements and the related notes included in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
SUPERCOM LTD.
Since 1988, we have been a leading global provider of traditional and digital identity solutions, providing advanced safety, identification, tracking and security products and solutions to governments and private and public organizations around the world. 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.
Beginning in 2012, we have focused on expanding our activities in the ID and e-ID market, including the design, development and marketing of identification technologies and solutions to governments in Europe, Asia and Africa using our e-Government platforms. Our activities include (a) utilizing paper secured by different levels of security patterns (UV, holograms, etc.) and (b) 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) and border control applications. We are focused on growing three vertical markets by providing all-in-one field-proven radio-frequency identification, or RFID, and mobile technology, accompanied with services specifically tailored to meet the requirements of electronic monitoring in the following industries: (i) public safety, (ii) healthcare and homecare, and (iii) animal and livestock management. Our proprietary RFID and Mobile PureRF® suite of hybrid hardware and software components are the foundation of these products and services.
We have been providing cutting edge real time positioning, tracking, monitoring and verification solutions, empowered by our PureRF® wireless hybrid suite of products and technologies, all operated by a secure, proprietary web-based, interactive, user-friendly interface. The basic components of our PureRF® Suite include an active tag, which contains a microchip equipped transmitter, an antenna, a capacitor and battery attached to the item to be identified, located or tracked; one or more wireless receivers that communicate with the active tags, one or more activators, and the tag's initializer, which is used to configure the PureRF® tags. A Web-based management system captures and processes the ID and sensor data from the active tags, and may be configured to provide an alert upon the occurrence of a trigger event.
Our PureRF® Suite identifies, locates, tracks, monitors, counts and protects people and objects, including inventory and vehicles, and can track multiple items simultaneously, providing an alert when a tagged item is removed from a pre-determined area, passes through a marked checkpoint or otherwise moves. Our PureRF® Suite can also provide secure access control into restricted areas and map and track visitors throughout a facility. We offer solutions for the transportation sector by enabling common carriers to monitor, track, locate and manage multiple baggage items. Our solutions can be used by businesses, shippers and warehouse operators to manage and track cartons, pallets, containers and individual items in order to facilitate movement, order picking, inventory verification and reduce delivery time. In addition, industrial companies can manage and track their mobile equipment and tools. We also offer solutions for the healthcare sector for asset, staff, patient and medical record location and identification and solutions for animal and livestock identification, tracking and safeguarding.
Our Strengths
We believe that, because of the following competitive strengths, we will be able to enhance our position as a leading provider traditional and digital identity solutions:
| · | Our scalable and highly flexible solutions can be customized to meet each organization´s present and future needs. |
| · | As an industry innovator, we continue to develop and incorporate cutting edge technologies into our products and solutions. |
| · | We employ a group of industry experts having expertise in business, commercial, and government identification and wireless technologies, who have decades of hands-on experience and expertise. |
| · | We provide a complete end-to-end suite of RFID products eliminating the need for integrating multiple platforms and enabling ease of operation and deployment. |
| · | We provide a full one stop solution to governments, eliminating the need to acquire and integrate multiple products from different international vendors, simplifying the procurement process while facilitating deployment, training, operations and services and maintenance. |
| · | We offer a rare combination of being a small, well established and highly responsive company with a wealth of experience. |
| · | We are able to offer quick deployment and a high level of responsiveness to customer needs. |
Our Strategy
We are focused on our core competencies - active RFID technology and solutions and e-ID projects and solutions. Our growth strategy includes the following components:
| · | Develop strong strategic relationships with our business partners, including our systems integrators and distributors who introduce our products and solutions into their respective markets. |
| · | Employ dedicated sales personnel to work closely with our business partners. Our sales personnel customize and adapt solutions that can then be installed and supported by these business partners. |
| · | Expand our active RFID and mobile activities globally, particularly in Europe, Israel and the Far East. Leverage on our reputation, talented personnel, and project management capabilities in the e-ID market to secure additional projects and solutions in the growing e-ID and e-Government markets. |
| · | Leverage our customer base, superior PureRF® hybrid suite of products, and IT management capabilities to secure additional long terms contracts with governments and communities in the public safety markets. |
| · | Develop strong strategic relationships with business partners in the healthcare and homecare markets in order to introduce our superior products and solutions into their designated markets. |
| · | Develop strong strategic relationships with business partners in the animal and livestock management markets in order to introduce our superior products and solutions into this emerging market. |
| · | Identify and acquire synergistic contracts or businesses in order to reduce time to market, obtain complementary technologies and secure required references for international bids. |
| · | Grow our business in emerging markets with perceived significant growth opportunities. |
Recent Financial Results
We recently reported the following operating results for the quarter ended March 31, 2013:
| | | Three Months Ended March 31, | |
| | | | | | | |
| | | (U.S. dollars in thousands) | |
| | | (unaudited) | |
Revenues | | | 2,032 | | | | 2,189 | |
Cost of revenues | | | (304 | ) | | | (956 | ) |
Gross profit | | | 1,728 | | | | 1,233 | |
Operating income | | | 653 | | | | 286 | |
Income before income tax | | | 625 | | | | 110 | |
Income tax benefit (expense) | | | 450 | | | | (5 | ) |
Net income | | | 1,075 | | | | 105 | |
Our Corporate Information
We were incorporated in Israel in 1988 and changed our name from SuperCom Ltd. to Vuance Ltd. in May 2007. We changed our name back to SuperCom Ltd. in January 2013. Our principal executive office is located at The Nolton House, 14 Arie Shenkar Street, Herzliya Pituach 4672514, Israel and our telephone number is +972.9.889.0800. Our website address is http://www.supercom.com/. The information contained on our website is not part of this prospectus.
Ordinary shares offered by us | [ ] ordinary shares |
Ordinary shares currently outstanding (July 3, 2013) | 38,595,557 ordinary shares |
Ordinary shares to be outstanding after the offering (1) | [ ] ordinary shares |
Use of proceeds | We estimate that we will receive up to $19.0 million in net proceeds from the sale of the securities in this offering, based on a price of [$____] per ordinary share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will use the proceeds from the sale of the ordinary shares: (i) to fund our possible acquisition of contracts, selected complimentary intellectual property and software packages from key players in the e-ID and electronic monitoring markets; (ii) to develop a local presence in Europe and the Far East; and (iii) for working capital needs and other general corporate purposes. See “Use of Proceeds” for more information. |
Symbol | Our ordinary shares currently trade on the OTCQB under the symbol “SPCBF” |
Dividends | We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not currently anticipate paying cash dividends on our ordinary shares. |
Risk factors | See “Risk Factors” beginning on page 7, and other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our ordinary shares. |
(1)The number of our ordinary shares outstanding after this offering does not include 4,413,350 ordinary shares issuable upon exercise of currently outstanding options and warrants.
The following summary consolidated financial data for and as of the five years ended December 31, 2012 are derived from our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our audited consolidated financial statements for the three years ended December 31, 2012 and as of December 31, 2011 and 2012 appear elsewhere in this prospectus. Our selected consolidated financial data as of December 31, 2008, 2009 and 2010 and for the years ended December 31, 2008 and 2009 have been derived from audited consolidated financial statements not included in this prospectus. The following summary consolidated financial and other data should be read in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
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| | | 2012 | | | 2011 | | | 2010 | | | | 2009(*) | | | | 2008(*) | |
| | | (U.S. dollars in thousands, except per share data) | |
SUMMARY OF STATEMENT OF OPERATIONS: | | | | | | | | | | | | | | | | | |
Revenues | | | 8,940 | | | | 7,922 | | | | 7,389 | | | | 9,304 | | | | 18,112 | |
Cost of Revenues | | | 1,619 | | | | 3,306 | | | | 2,057 | | | | 3,365 | | | | 6,945 | |
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Gross Profit | | | 7,321 | | | | 4,616 | | | | 5,332 | | | | 5,939 | | | | 11,167 | |
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Operating Expenses: | | | | | | | | | | | | | | | | | | | | |
Research and Development | | | 313 | | | | 462 | | | | 386 | | | | 898 | | | | 1,738 | |
Selling and Marketing | | | 3,060 | | | | 3,505 | | | | 4,405 | | | | 5,131 | | | | 9,905 | |
General and Administrative | | | 857 | | | | 732 | | | | 1,985 | | | | 1,648 | | | | 2,611 | |
Other expenses (income) | | | 1,085 | | | | (137 | ) | | | (396 | ) | | | 130 | | | | 8 | |
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Total Operating Expenses | | | 5,315 | | | | 4,562 | | | | 6,380 | | | | 7,807 | | | | 14,262 | |
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Operating Income (Loss) | | | 2,006 | | | | 54 | | | | (1,048 | ) | | | (1,868 | ) | | | (3,095 | ) |
Financial (Expenses) Income, Net | | | 1,805 | | | | 990 | | | | (678 | ) | | | (620 | ) | | | (3,087 | ) |
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Income (Loss) before Income Tax | | | 3,811 | | | | 1,044 | | | | (1,726 | ) | | | (2,488 | ) | | | (6,182 | ) |
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Income Tax (Expense) Benefit | | | 1,006 | | | | (25 | ) | | | (50 | ) | | | (71 | ) | | | (137 | ) |
Net Income (Loss) from continuing operations | | | | | | | | | | | | | | | | | | | | |
| | | 4,817 | | | | 1,019 | | | | (1,776 | ) | | | (2,559 | ) | | | (6,319 | ) |
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Loss from discontinued operations | | | - | | | | - | | | | (189 | ) | | | (2,526 | ) | | | (6,039 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 4,817 | | | | 1,019 | | | | (1,965 | ) | | | (5,085 | ) | | | (12,358 | ) |
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PER SHARE DATA: | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) from continuing operations | | $ | 0.18 | | | $ | 0.11 | | | $ | (0.29 | ) | | $ | (0.46 | ) | | $ | (1.22 | ) |
Diluted earnings (loss) from continuing operations | | $ | 0.13 | | | $ | 0.09 | | | $ | (0.29 | ) | | $ | (0.46 | ) | | $ | (1.22 | ) |
Basic and Diluted loss from discontinued operations | | | - | | | | - | | | $ | (0.03 | ) | | $ | (0.46 | ) | | $ | (1.17 | ) |
Basic earnings (loss) per share | | $ | 0.18 | | | $ | 0.11 | | | $ | (0.32 | ) | | $ | (0.92 | ) | | $ | (2.39 | ) |
Diluted earnings (loss) per share | | $ | 0.13 | | | $ | 0.09 | | | $ | (0.32 | ) | | $ | (0.92 | ) | | $ | (2.39 | ) |
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SUMMARY OF BALANCE SHEET DATA: | | | | | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents | | | 225 | | | | 215 | | | | 197 | | | | 656 | | | | 812 | |
Trade receivables (net of allowance for doubtful accounts of $ 1,726 and $ 134 as of December 31, 2012 and 2011, respectively) | | | 1,598 | | | | 1,542 | | | | 752 | | | | 857 | | | | 840 | |
Inventories | | | 280 | | | | 269 | | | | 197 | | | | 82 | | | | 1,307 | |
Total Current Assets | | | 2,930 | | | | 2,131 | | | | 1,664 | | | | 4,236 | | | | 6,443 | |
TOTAL ASSETS | | | 3,743 | | | | 2,455 | | | | 2,008 | | | | 4,682 | | | | 8,935 | |
Total Current Liabilities | | | 2,796 | | | | 7,829 | | | | 4,500 | | | | 6,332 | | | | 10,424 | |
Accrued Severance Pay | | | 236 | | | | 227 | | | | 254 | | | | 304 | | | | 378 | |
SHAREHOLDERS' EQUITY (DEFICIT) | | | 711 | | | | (5,601 | ) | | | (7,871 | ) | | | (6,271 | ) | | | (1,867 | ) |
________________________
(*) Due to the sale of certain business activities in January 2010, as described in “Management’s Discussion and Analysis of financial condition and results of Operations,” those business activities are presented as discontinued operations in accordance with U.S. GAAP.
Investing in our ordinary shares involves a high degree of risk. You should consider carefully the risks described below, together with the financial and other information contained in this prospectus, before you decide to invest in our ordinary shares. If any of the following risks actually occurs, our business, financial condition or results of operations would suffer. 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
We have a history of operating losses and may not be able to achieve and sustain profitable operations. We may not have sufficient resources to fund our operations in the future.
Although we had profitable operations after three years of losses in 2011 and 2012, there can be no assurance that we will continue to operate profitably in the future. In the past, we have partially funded our operations through the issuance of equity securities and convertible bonds to investors, but may be unable to do so in the future. If we do not generate sufficient cash from operations, we will be required to obtain additional financing or reduce our level of expenditure. Such financing may not be available in the future, or, if available, may not be on terms favorable to us.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions may limit our ability to raise additional capital to support business growth. If we are unable to obtain necessary additional financing or generate cash from operations, we may be required to reduce the scope of our operations and may need to implement certain operational changes to decrease our expenses. This would have the potential to decrease both our ability to attain profitability and our financial flexibility. If adequate funds are not available to us, our business, and results of operations and financial condition will be adversely affected.
We depend on large orders from one customer for a substantial portion of our revenues. The loss of this customer or a decrease in its orders could adversely impact our operating results.
In the years ended December 31, 2012 and 2011, 64% and 95%, respectively, of our consolidated net revenue are attributable to sales to a European governmental customer. In the year ended December 31, 2012, the revenues attributable to this customer decreased by 33% compared to 2011. This decrease resulted from a change in that customer’s inventory policy. Although we expect an increase in sales to that customer in 2013, sales may decline thereafter. A substantial reduction in sales to, or loss of, this customer would adversely affect our business unless we were able to replace the revenue received from the customer, which replacement we may not be able to find.
Our reliance on third party technologies, raw materials 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/or raw materials 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 and raw materials 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 raw materials and components for our systems, some of the key raw materials or components are available only from limited sources. Even where multiple sources are available, we typically obtain components and raw materials from only one vendor to ensure high quality, prompt delivery and low cost. If one of our suppliers were 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 or other materials to be supplied by our vendors could lead to unanticipated costs to repair or replace these parts or materials. If one of our suppliers were 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.
Our dependence on third-party distributors, sales agents and value-added resellers could result in marketing and distribution delays, which would prevent us from generating sales revenues.
We market and sell some of our products using a network of distributors and resellers covering the United States, Europe, Asia and Africa. We establish relationships with distributors and resellers through agreements that provide prices, discounts and other material terms and conditions under which the reseller is eligible to purchase our systems and products for resale. These agreements generally do not grant exclusivity to the distributors and resellers and, as a general matter, are not long-term contracts, do not have commitments for minimum sales, and could be terminated by the distributor. We do not have agreements with all of our distributors. We are currently engaged in discussions with other potential distributors, sales agents, and value-added resellers. Such arrangements may never be finalized and, if finalized, such arrangements may not increase our revenues or enable us to achieve profitability.
Our ability to terminate a distributor who is not performing satisfactorily may be limited. Inadequate performance by a distributor could adversely affect our ability to develop markets in the regions for which the distributor is responsible and could result in substantially greater expenditures by us in order to develop such markets. Our operating results will be highly dependent upon: (i) our ability to maintain our existing 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 distributors, sales agents, and value-added resellers to successfully market our products. A failure to achieve these objectives could result in lower revenues.
Because competition in our industry is intense, our business, operating results and financial condition may be adversely affected.
The global market for RFID and mobile based enabled products and solutions is highly fragmented and intensely competitive. It is 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 RFID and mobile technology begin to converge with the access control and information technology industry. 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 active RFID and mobile enabled solutions market expands, we expect additional competitors to enter the market. We cannot assure you 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 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 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 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.
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.
The success of our active RFID and mobile based business lines is dependent on several factors, including our ability to develop products meeting the needs of our markets, decrease product costs, timely complete and introduce new products, differente new products from those of our competitors, and gain market acceptance of our products. Our existing and potential customers’ varying budgets for capital expenditures and new product introduction also impact the success of these business lines. We have addressed the need to develop new products through our internal research and development efforts.
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 will be 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 RFID and mobile based technology must be adapted to and adopted in a variety of areas, any or all of which may not adopt our RFID and mobile based technology. These areas include, among others:
| · | healthcare and homecare; and |
| · | animal and livestock management. |
We cannot accurately predict the future growth rate, if any, or the ultimate size of the RFID and mobile based 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 RFID and mobile based 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 RFID and mobile based 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.
We need to develop and sustain our position as a provider of RFID and mobile based solutions and services to earn high margins from our technology, and if we are unable to develop such position, our business will not be as profitable as we hope, if at all.
The increasing sophistication of our RFID and Mobile based technology places a premium on providing innovative software systems and services to customers, in addition to manufacturing and supplying RFID and mobile technology. While we have had some early 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 RFID and mobile based technology lies in the development of software and applications that will permit the use of RFID and mobile based technology in selected new markets. In contrast, the margins involved in manufacturing and selling RFID and mobile based technology can be relatively small, and may not be sufficient to permit us to earn an attractive return on our development investments.
Unfavorable global economic conditions may adversely affect our customers, which directly impact our business and results of operations.
Our operations and performance depend on our target customers, including those from the governmental sector, having adequate resources to purchase our products. The turmoil in the credit markets and the global economic downturn that commenced in 2008 and intensified in Europe during 2011 and 2012 generally adversely impacted our target customers. Companies and governmental authorities have reduced or delayed and may continue to reduce or delay their purchasing activities in response to a lack of credit, economic uncertainty, budget deficits and concern about the general stability of markets. During 2011 and 2012, several European countries encountered severe economic difficulties which affected the entire Euro-zone economy. The financial crisis, among other things, resulted in the downgrade of the credit worthiness of several countries in Europe, which affected our customers’ ability and budget to perform projects within these territories. If such economic and market conditions remain uncertain or weaken further, specifically changes that may negatively impact the political or economic stability and environment of the European country from which we derive most of our consolidated net revenues, our business and future operations may be materially adversely affected.
Our efforts to expand our international operations are subject to a number of risks, any of which could adversely reduce our future international sales and increase our losses.
Most of our revenues to date are attributable to sales in jurisdictions other than the United States. For the years ended December 31, 2010, 2011 and 2012, approximately 91.6%, 94.6% and 96.6%, 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:
| · | increased collection risks; |
| · | export duties and tariffs; |
| · | uncertain political, regulatory and economic developments; |
| · | inability to protect our intellectual property rights; |
| · | highly aggressive competitors; |
| · | difficulties in staffing, managing and supporting foreign operations; |
| · | longer payment cycles; and |
| · | difficulties in collecting accounts receivable. |
Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, difficulty in collecting receivables, and a higher cost of doing business, any of which could adversely affect our business, results of operations or financial condition.
In addition, in many countries the national security organizations require our employees to obtain clearance before such employees can work on a particular transaction. Failure to receive, or delays in the receipt of, relevant foreign qualifications could also have a material adverse effect on our ability to make sales or fulfill our orders on a timely basis. Additionally, as foreign government regulators have become increasingly stringent, we may be subject to more rigorous regulation by governmental authorities in the future. If we fail to adequately address any of these regulations, our business will be harmed.
We are exposed to special risks 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.
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 (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 of 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.
We may be unsuccessful in integrating complementary technologies and businesses, the acquisition of which we may pursue in the future, and such integrations could divert our resources and adversely affect our financial results.
Other than our acquisition of certain of the assets of Intelli-Site, Inc., we have not made any other acquisition in the last five years. In the future, we may pursue acquisitions of, or investments in, complementary technologies and businesses. Integrating newly acquired business or technologies into our business could divert our management’s attention from other business concerns and could be expensive and time-consuming. Acquisitions could expose our business to unforeseen liabilities or risks associated with entering new markets. Consequently, we might not be successful in integrating the acquired businesses, technologies or products into our existing business and products, and might not achieve anticipated revenue or cost benefits. We may be unable to identify suitable acquisition candidates in the future or to make these acquisitions on a commercially reasonable basis, or at all. Such acquisitions present a number of potential risks and challenges that could, if not met, disrupt our business operations, increase our operating costs and reduce the value to us of the acquired company. For example, if we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition on favorable terms.
Any acquisition or disposition that we make could result in the use of our cash or equity securities, incurrence and assumption of debt, contingent liabilities, significant acquisition-related expenses, amortization of certain identifiable intangible assets, and research and development write-offs, and could require us to record goodwill and other intangible assets that could result in future impairments that could harm our financial results. We will likely incur significant transaction costs pursuing acquisitions or dispositions, including acquisitions or dispositions that may not be consummated. We may not be able to generate sufficient revenues from our acquisitions or dispositions to offset their costs, which could materially adversely affect our financial condition. The recognition of impairments of tangible, intangible and financial assets results in a non-cash charge on the income statement, which could adversely affect our results of operations. In addition, future acquisitions could result in customer dissatisfaction and performance problems with an acquired company, which could adversely affect our business.
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, distributors 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 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; IP litigation could require us to incur substantial costs even when our efforts are successful.
We may face intellectual property litigation, which could be costly, harm our reputation, limit our ability to sell our products, force us to modify our products or obtain appropriate licenses, and divert the attention of management and technical personnel. Our products employ technology that may infringe on the proprietary rights of others, and, as a result, we could become liable for significant damages and suffer other harm to our business.
Other than the litigation with Secu-Systems Ltd., as described under the caption “Legal Proceedings,” we have not been subject to intellectual property 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, but no lawsuits have been filed in respect of such claims.
Litigation may be necessary in the future to enforce any patents we have or may obtain and/or any other intellectual property 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 intellectual property 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, as well as to On Track Innovations Ltd., or OTI, 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 may be plaintiff or defendant in various legal actions from time to time.
From time to time, we are the defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful and considered analysis of each individual action with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. A change in the required reserves would affect our earnings in the period the change is made.
Products as complex as those we offer may contain undetected errors or may fail when first introduced or when new versions are released. Despite our product testing efforts and testing by current and potential customers, it is possible that errors will be found in new products or enhancements after commencement of commercial shipments. The occurrence of product defects or errors could result in adverse publicity, delay in product introduction, diversion of resources to remedy defects, loss of or a delay in market acceptance, or claims by customers against us, or could cause us to incur additional costs or lose revenues, any of which could adversely affect our business.
Our failure or inability to meet a customer's expectations in the performance of our services, or to do so in the time frame required by the customer, regardless of our responsibility for the failure, could result in a claim for substantial damages against us by the customer, discourage other customers from engaging us for these services, and damage our business reputation. We carry product liability insurance, but existing coverage may not be adequate to cover potential claims.
We do not maintain insurance coverage for professional liability or for theft by employees, nor do we maintain specific insurance coverage for any interruptions in our business operations. The successful assertion of one or more large claims against us that exceed available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductibles or co-insurance requirements, could adversely affect our business by significantly increasing our costs.
We have sought in the past and may 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 associated with such types of contracts.
Most contracts with governments or with state or local agencies or municipalities, or Governmental Contracts, 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.
In addition, Governmental Contracts subject us to 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. 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.
Governments may be in a position to obtain greater rights with respect to our intellectual property than we would grant to other entities. Governmental agencies also have the power, based on financial difficulties or investigations of their contractors, to deem contractors unsuitable for new contract awards. Because we will engage in the government contracting business, we will be subject to audits, and may be subject to investigation, by governmental entities. Failure to comply with the terms of any Governmental Contract 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 the fines and penalties and prohibiting us from earning revenues from Governmental Contracts during the suspension period.
Furthermore, governmental programs can experience delays or cancellation of funding, which can be unpredictable; this may make it difficult to forecast our revenues on a quarter-by-quarter basis.
We depend on the growth of certain industries and markets for our products; if such markets will not develop, our business may suffer.
Some of the markets that we target for our future growth are small and need to develop if we are to achieve our growth objectives. If some or all of these markets do not develop, or if they develop more slowly than we anticipate, then we will not grow as quickly or as profitably as we hope. For example, in February 2006, we announced the introduction of PureRF®, a new technology and solution for actively tracking people, objects and assets utilizing our active RFID Tracking technologies and products. This technology was developed in response to growing market demand for asset/ people tracking and monitoring solutions in the homeland security and commercial markets. If these markets will not grow as expected, we may not be able to meet our future growth plans. The development of our markets will depend on many factors that are beyond our control, including:
| · | there can be no assurances that we will be able to continue to apply our expertise and solutions developed for the government market to the commercial market; |
| · | the ability of the commercial markets to adopt and implement our active RFID and mobile solutions; and |
| · | the ability of our management to successfully market our technologies to such governmental and/or commercial entities. |
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 on a limited number of customers and our increased reliance on our e-ID, electronic monitoring PureRF® suite and products, our revenue has experienced wide fluctuations, and we expect that our revenue will continue to fluctuate in the future. 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:
| · | long customer sales cycles; |
| · | reduced demand for our products and services; |
| · | new competitors, or the introduction of enhanced products or services from new or existing competitors; |
| · | changes in the mix of products and services we or our customers and distributors sell; |
| · | contract cancellations, delays or amendments by customers; |
| · | the lack of government demand for our products and services or the lack of government funds appropriated to purchasing our products and services; |
| · | unforeseen legal expenses, including litigation costs; |
| · | expenses related to acquisitions; |
| · | other non-recurring financial charges; |
| · | the lack of availability, or increased cost, of key components and subassemblies; and |
| · | the inability to successfully manufacture in volume, and reduce the price of, certain of our products; |
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 nine to 24 months and the typical sales cycle for our commercial customers has ranged from one to six 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 financial results may be significantly affected by currency fluctuations.
We incur expenses for our operations in Israel in NIS and translate these amounts into U.S. dollars for purposes of reporting consolidated results. As a result, fluctuations in foreign currency exchange rates may adversely affect our expenses and results of operations, as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. In addition, we hold foreign currency balances, primarily NIS, which will create foreign exchange gains or losses, depending upon the relative values of the foreign currency, at the beginning and end of the reporting period, affecting our net income and earnings per share. The dollar cost of our operations in Israel may be adversely affected by the appreciation of the NIS against the dollar. In addition, the value of our non-dollar revenues could be adversely affected by the depreciation of the dollar against such currencies. We may use hedging techniques in the future (which we currently do not use), but there is no assurance that we will be able to eliminate the effects of currency fluctuations. In 2010 and 2012, the NIS appreciated by approximately 6.0% and 2.3%, respectively, against the dollar, while in 2011 the NIS depreciated by approximately 7.7% against the dollar. In 2012, the Euro appreciated against the dollar by 2%, while in 2010 and 2011, the Euro depreciated against the dollar by 7.4% and 3.2%, respectively. During the years ended December 31, 2012, 2011 and 2010, foreign currency fluctuations had a limited impact on our results of operations and we recorded foreign exchange benefit (expenses), net of $0, $5,000 and $(57,000), respectively. Our results of operations may be materially affected by currency fluctuations in the future.
We may have significant differences between forecasted demands to 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.
A change in tax laws of any country in which we operate could result in a higher tax expense or a higher effective tax rate on our worldwide earnings.
We conduct our operations in various countries throughout the world. Tax laws and regulations are highly complex and subject to interpretation. Consequently, we are subject to changing tax laws, treaties and regulations in and between countries in which we operate, including treaties between nations. Our income tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in the interpretation thereof, or in the valuation of our deferred tax assets, which is beyond our control could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings.
We may lose a tax dispute that will increase our tax rate on our worldwide earnings, which could result in a significant negative impact on our earnings and cash flows from operations.
Our income tax returns are subject to review and examination. We do not recognize the benefit of income tax positions we believe are more likely than not to be disallowed upon challenge by a tax authority. If any tax authority successfully challenges our operational structure or the taxable presence of our subsidiaries in certain countries; or if the terms of certain income tax treaties are interpreted in a manner that is adverse to our structure; or if we lose a material tax dispute in any country, our effective tax rate on our worldwide earnings could increase substantially and our earnings and cash flows from operations could be materially adversely affected.
We rely on the services of certain executive officers and key personnel, the loss of which 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; 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, or the FCC, limit the radio frequency used by and level of power emitting from electronic equipment. Our readers, controllers and other radio frequency technology scanning equipment are required to comply with these FCC rules, which may require certification, verification or registration of the equipment with the FCC. Certification and verification of new equipment requires testing to ensure the equipment's compliance with the FCC's rules. The equipment must be labeled according to the FCC's rules to show compliance with these rules. Testing, processing of the FCC'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. market. Electronic equipment permitted or authorized to be used by us through FCC certification or verification procedures must not cause harmful interference to licensed FCC users, and may be subject to radio frequency interference from licensed FCC users. Selling, leasing or importing non-compliant equipment is considered a violation of FCC rules and federal law, and violators may be subject to an enforcement action by the FCC. Any failure to comply with the applicable rules and regulations of the FCC could have a material adverse effect on our business, operating results and financial condition by increasing our compliance costs and/or limiting our sales in the United States.
We may fail to maintain effective internal control over financial reporting, which could result in material misstatements in our financial statements.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 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 the Sarbanes-Oxley Act requires management’s annual review and evaluation of our internal control over financial reporting in connection with the filing of the annual report on Form 20-F for each fiscal year. We may identify material weaknesses or significant deficiencies in our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in material misstatements in our financial statements. Any such failure could also adversely affect the results of our management’s evaluations and annual auditor reports regarding the effectiveness of our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could have a material adverse effect on our operating results, investor confidence in our reported financial information and the market price of our ordinary shares.
Risks Related to Our Location and Incorporation in Israel
Political, economic and military instability 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 manufacturing and research and development facilities are located in, the State of Israel. As a result, political, economic and military conditions 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 2013. Also, since 2011, riots and 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. 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 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.
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 SuperCom Ltd. and its officers and directors and Israeli auditors or in asserting U.S. securities law claims in Israel.
Most of our officers and directors and our Israeli auditors 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 and our Israeli auditors 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 and our Israeli auditors 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 SEC 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:
| · | the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q and current reports on Form 8-K; |
| · | the sections of the Exchange Act regulating the solicitation of proxies in connection with shareholder meetings; |
| · | the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; and |
| · | 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). |
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 U.S.
Risks Related to Our Ordinary Shares and the Offering
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:
| · | actual or anticipated variations in our quarterly operating results or those of our competitors; |
| · | announcements by us or our competitors of technological innovations or new and enhanced products; |
| · | developments or disputes concerning proprietary rights; |
| · | introduction and adoption of new industry standards; |
| · | changes in financial estimates by securities analysts; |
| · | market conditions or trends in our industry; |
| · | changes in the market valuations of our competitors; |
| · | announcements by us or our competitors of significant acquisitions; |
| · | entry into strategic partnerships or joint ventures by us or our competitors; |
| · | additions or departures of key personnel; |
| · | political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events; and |
| · | other events or factors in any of the countries in which we do business, including those resulting from war, incidents of terrorism, natural disasters or responses to such events. |
In addition, the stock market in general, and the market for Israeli companies and home security 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.
The trading market for our ordinary shares has low liquidity, which could give rise to price volatility and make it difficult for our shareholders to sell their shares at desired prices and amounts.
Our ordinary shares currently are traded on the OTC Electronic Quotation Service. Currently, we do not meet the initial listing conditions of the NASDAQ Stock Market. The market for shares quoted on the OTC is typically less liquid than that for shares listed on the NASDAQ Stock Market. This could make it more difficult for our shareholders to sell their shares at desired prices and amounts.
We may not be able to meet the listing standards of any stock exchange or be able to maintain any such listing. Such exchanges require companies to meet certain initial listing criteria, including certain minimum bid prices per share. We may not be able to achieve or maintain such minimum bid prices or may be required to effect a reverse stock split to achieve such minimum bid prices. Because our ordinary shares are quoted on the OTC, an investor may experience a lack of buyers to purchase such ordinary shares or a lack of market makers to support the stock price. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our ordinary shares to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our ordinary shares, which may further affect its liquidity. This would make it more difficult for us to raise additional capital and for investors to dispose of their shares of our ordinary shares.
Our ordinary shares may become subject to the “penny stock” rules of the SEC which will make transactions in our ordinary shares cumbersome and may reduce the value of our shares.
Trading in our ordinary shares may become subject to the "penny stock" regulations adopted by the SEC. These regulations generally define a "penny stock" to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions, such as if the issuer of the security has net tangible assets in excess of $2,000,000. The market price of our ordinary shares is currently less than $5.00 per share and our net tangible assets as of March 31, 2013 were approximately $3,743,000. While we believe that our ordinary shares are currently exempt from the definition of penny stock, there is no assurance that they will continue to be exempt from such definition. If our ordinary shares become subject to the “penny stock” rules of the SEC, it will make transactions in our ordinary shares cumbersome and may reduce the value of our shares. This is because for any transaction involving a penny stock, unless exempt, Rule 15g-9 generally requires: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
Disclosure also has to be made by the broker or dealer about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our ordinary shares and cause a decline in our market value if we were to become subject to the said "penny stock" rules.
We have shareholders that are able to exercise substantial influence over us and all matters submitted to our shareholders.
Sigma Wave Ltd., or Sigma, is the beneficial owner of approximately 46% of our outstanding shares. Such ownership interest gives Sigma the ability to influence and direct our activities, subject to approvals that may be required for related-party transactions pursuant to Israeli law. Sigma will have influence over the outcome of most matters submitted to our shareholders, including the election of directors and the adoption of a merger agreement, 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.
Our management will have broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree.
We currently intend to use the net proceeds from this offering: (i) to fund our acquisition of contracts and selected complimentary intellectual property and software packages from key players in the e-ID and electronic monitoring markets; (ii) to develop a local presence in Europe and the Far East; and (iii) for working capital needs and other general corporate purposes. We have not allocated specific amounts of the net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our stockholders. The failure of our management to use such funds effectively could have a material adverse effect on our business, prospects, financial condition, and results of operation.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on your investment will likely be limited to the value of our common stock.
We have never paid cash dividends on our ordinary shares and do not anticipate paying cash dividends in the foreseeable future. Under 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.
You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.
You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of up to [ ] shares offered in this offering at an assumed public offering price of $[ ] per share (the closing price of a share of our ordinary shares on [ ], 2013) and after deducting the underwriter’s discount and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $[ ] per share. In addition, in the past, we issued options and warrants to acquire ordinary shares. To the extent these options or warrants are ultimately exercised, you will sustain future dilution.
Stockholder ownership interest in our company may be diluted as a result of future financings or additional acquisitions.
We may seek to raise funds from time to time in public or private issuances of equity and such financings may take place in the near future or over the longer term. Sales of our securities offered through future equity offerings may result in substantial dilution to the interests of our current shareholders. The sale of a substantial number of securities to investors, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. In addition, we have issued shares of our common stock for various acquisitions in the past and may do so in the future, which may also result in substantial dilution to the interests of our current shareholders.
While we believe that we are not currently a PFIC and do not anticipate becoming a PFIC, United States tax authorities could treat us as a "passive foreign investment company," which could have adverse United States federal income tax consequences to United States holders.
Generally, if for any taxable year, 75% or more of our gross income is passive income, or at least 50% of the value of our assets, averaged quarterly, are held for the production of, or produce, passive income, we will be characterized as a passive foreign investment company ("PFIC") for U.S. federal income tax purposes. A determination that we are a PFIC could cause our U.S. shareholders to suffer adverse tax consequences, including having gains realized on the sale of our shares taxed at ordinary income rates, rather than capital gains rates, and being subject to an interest charge on such gain. Similar rules apply to certain "excess distributions" made with respect to our ordinary shares. A determination that we are a PFIC could also have an adverse effect on the price and marketability of our shares. If we are a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. holders owning our ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules.
Note Regarding Forward-Looking Statements
This prospectus and the documents incorporated in it by reference contain forward-looking statements that involve known and unknown risks and uncertainties. Examples of forward-looking statements include: projections of capital expenditures, competitive pressures, revenues, growth prospects, product development, financial resources and other financial matters. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or the negative of such terms, or other comparable terminology.
Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in this prospectus and in the documents incorporated by reference into this prospectus and other unforeseen risks, including, without limitation: (i) our belief about our competitive position in the tracking, asset management and monitoring, active RFID, e-ID markets, and our ability to become a key technological player in such markets; (ii) our belief about the commercial possibilities for our products in such markets; (iii) our expectation to be able to leverage our current products and technologies for the development of new applications and penetration to additional markets; (iv) our expectation to be able to continue to participate in the government market; (v) our belief about our ability to leverage our public sector experience into the commercial sector; (vi) our belief regarding the effects of competitive pricing on our margins, sales and market share; (vii) our expectations regarding the effects of the legal proceedings we are involved in on our sales and operating performance; (viii) our belief regarding the fluctuations of our operating results, including our belief about the effects of inflation and the fluctuation of the NIS/dollar exchange rate on our operating results; (ix) our expectations about our future revenues (or absence of revenues); (x) our expectations about the effects of seasonality on our revenues and operating results; (xi) our expectations regarding development and introduction of future products; (xii) our expectations regarding revenues from our existing customer contracts and purchase orders, including, without limitation, the value of our agreement for our end-to-end system for a national multi-ID issuing and control system with the government of a European country and our expectations for increased revenues from sales of additional technology and raw materials to such government; (xiii) our expectations regarding the success of our active RFID and electronics monitoring technology; (xiv) our expectations regarding the effectiveness of our marketing programs and generation of business from those programs, including our ability to continue to sell products through strategic alliances and our belief about the role customer service plays in our sales and marketing programs; (xv) our anticipation that sales to a relatively small number of customers will continue to account for a significant portion of our net sales; and (xvi) the anticipated timing of our product introductions.
Our ability to predict the results of our operations or the effects of various events on our operating results is inherently uncertain. Therefore, we caution you to consider carefully the matters described under the caption “Risk Factors” and certain other matters discussed in this prospectus, the documents incorporated by reference in this prospectus, and other publicly available sources. These factors and many other factors beyond the control of our management could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by the forward-looking statements. We are not under any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section, and you are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this prospectus.
The following table shows, for each of the months indicated, the high and low exchange rates between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar and based upon the daily representative rate of exchange as published by the Bank of Israel:
| | | | |
January 2013 | | 3.791 | | 3.714 |
February 2013 | | 3.733 | | 3.663 |
March 2013 | | 3.733 | | 3.637 |
April 2013 | | 3.633 | | 3.592 |
May 2013 | | 3.707 | | 3.556 |
June 2013 | | 3.687 | | 3.594 |
| June 2013 (to date) | | 3.637 | | 3.629 |
The following table shows, for the periods indicated, the average exchange rate between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar, calculated based on the average of the representative rate of exchange on the last day of each month during the relevant period as published by the Bank of Israel:
| | |
2008 | | 3.586 |
2009 | | 3.923 |
2010 | | 3.732 |
2011 | | 3.579 |
2012 | | 3.733 |
2013 (to date) | | |
As of July 2, 2013, the daily representative rate of exchange between the NIS and the U.S. dollar as published by the Bank of Israel was NIS 3.629 to $1.00.
The effect of exchange rate fluctuations on our business and operations is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosure about Market Risk.”
We estimate that we will receive up to $19.0 million in net proceeds from the sale of the securities in this offering, based on a per share purchase price of $[____] and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will use the proceeds from the sale of the securities: (i) to fund the possible acquisition of contracts, selected complimentary intellectual property and software packages from key players in the e-ID and electronic monitoring markets; (ii) to develop a local presence in Europe and the Far East; and (iii) for working capital needs and other general corporate purposes.
Price Range of Ordinary Shares
We became a publicly-traded company on the NASDAQ Europe stock market (formerly EASDAQ) on April 19, 1999. On October 23, 2003, following the closing of the NASDAQ Europe stock market, we transferred the listing of our ordinary shares to the Euronext Brussels stock market. We applied for delisting of our shares from the Euronext Brussels stock market, and our application was approved on May 6, 2008, effective August 4, 2008.
On July 29, 2004, we filed a Registration Statement on Form 20-F under the Exchange Act. When the Registration Statement became effective on September 29, 2004, we became a foreign private issuer reporting company under the Exchange Act. On November 5, 2004, our ordinary shares began trading in the U.S. on the OTC Bulletin Board under the symbol “SPCBF.OB," which following our name change to Vuance Ltd. on May 14, 2007 became “VUNCF.OB.” On August 23, 2007, our ordinary shares were approved for trading on The NASDAQ Capital Market under the symbol “VUNC.”
On September 29, 2009 we received a NASDAQ Staff Determination letter indicating that we failed to comply with the minimum stockholders’ equity requirement of $2.5 million as set forth in Listing Rule 5550(b). As a result, our securities were delisted from The NASDAQ Capital Market and trading in our shares was suspended effective at the open of business on October 1, 2009. Following the delisting and as of the open of business on October 1, 2009, our ordinary shares have traded on The OTCQB® electronic quotation service for securities traded over-the-counter. Our ordinary shares are currently quoted under the ticker symbol “SPCBF” after a ticker change approved on March 18, 2013.
The following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares on The NASDAQ Capital Market or the OTCQB Market, as applicable.
Year | | High | | | Low | |
2008 | | $ | 4.69 | | | $ | 0.29 | |
2009 | | $ | 0.68 | | | $ | 0.20 | |
2010 | | $ | 0.29 | | | $ | 0.05 | |
2011 | | $ | 0.14 | | | $ | 0.04 | |
2012 | | $ | 0.20 | | | $ | 0.01 | |
2013 (to date) | | $ | 0.53 | | | $ | 0.05 | |
Quarterly Stock Information
The following table sets forth, for each of the full financial quarters in the years indicated, the range of high ask and low bid prices of our ordinary shares on the OTCQB Market.
| | | High | | | Low | |
2011 | | | | | | |
First Quarter | | $ | 0.13 | | | $ | 0.06 | |
Second Quarter | | $ | 0.14 | | | $ | 0.04 | |
Third Quarter | | $ | 0.12 | | | $ | 0.04 | |
Fourth Quarter | | $ | 0.12 | | | $ | 0.05 | |
| | | | | | | | | |
2012 | | | | | | | | |
First Quarter | | $ | 0.17 | | | $ | 0.02 | |
Second Quarter | | $ | 0.20 | | | $ | 0.04 | |
Third Quarter | | $ | 0.20 | | | $ | 0.01 | |
Fourth Quarter | | $ | 0.17 | | | $ | 0.01 | |
| | | | | | | | | |
2013 | | | | | | | | |
First Quarter | | $ | 0.44 | | | $ | 0.05 | |
Second Quarter | | $ | 0.54 | | | $ | 0.22 | |
Monthly Stock Information
The following table sets forth, for each of the most recent six months, the range of high ask and low bid prices of our ordinary shares on the OTCQB Market.
Month | | High | | | Low | |
January 2013 | | $ | 0.14 | | | $ | 0.05 | |
February 2013 | | $ | 0.11 | | | $ | 0.06 | |
March 2013 | | $ | 0.44 | | | $ | 0.06 | |
April 2013 | | $ | 0.40 | | | $ | 0.24 | |
May 2013 | | $ | 0.32 | | | $ | 0.22 | |
June 2013 | | $ | 0.54 | | | $ | 0.25 | |
We have never paid cash dividends on our ordinary shares and do not anticipate paying cash dividends in the foreseeable future. Under 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. In addition, a competent court may approve, as per a motion to be filed by a company in accordance with the Israeli Companies Law requirements, a payment which does not meet the profits test, provided that the court was convinced that there is no reasonable concern that such payment will prevent the company from satisfying its existing and foreseeable obligations as they become due. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if our share price appreciates.
In accordance with our Articles of Association, our board of directors may from time to time declare and cause the Company to pay to the shareholders such interim or final dividends as the board of directors deems appropriate considering the profits of the Company and in compliance with the provisions of the Israeli Companies Law.
Subject to the rights of the holders of shares as to dividends, and to the provisions of our Articles of Association, dividends, whether in cash or in bonus shares, shall be paid or distributed, as the case may be, to shareholders pro rata to the amount paid up or credited as paid up on account of their shares, without taking into consideration any premium paid thereon.
If you invest in our ordinary shares, your interest will be diluted to the extent of the difference between the public offering price per ordinary share and the pro forma as adjusted net tangible book value per ordinary share immediately after this offering.
Our net tangible book value as of December 31, 2012 was $706,000, or $0.02 per share. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of ordinary shares outstanding upon consummation of this offering.
Our pro forma as adjusted net tangible book value dilution per ordinary share represents the difference between the amount per share paid by purchasers of ordinary shares in this offering and net tangible book value per ordinary share immediately after the completion of this offering on a pro forma as adjusted basis. After giving effect to the sale of ordinary shares by us in this offering at an assumed public offering price of $ per share (the closing price of our ordinary shares on 2013), and after deducting the estimated offering expenses payable by us, our pro forma as adjusted net tangible book value would have been $ million, or approximately $ per ordinary share based on shares outstanding upon completion of this offering. This represents an immediate increase in pro forma net tangible book value of $ per ordinary share to existing shareholders and an immediate dilution of $ per ordinary share to new investors in this offering. The following table illustrates this per share dilution:
Assumed initial public offering price per ordinary share | | | | |
Net tangible book value per ordinary share as of December 31, 2012 | | | | |
Increase in net tangible book value per ordinary share attributable to this offering | | | | |
Net tangible book value per ordinary share after the offering | | | | |
Dilution per ordinary share stock to new investors | | | | |
The following selected consolidated financial data for and as of the five years ended December 31, 2012 are derived from our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our audited consolidated financial statements for the three years ended December 31, 2012 and as of December 31, 2011 and 2012 appear elsewhere in this prospectus. Our selected consolidated financial data as of December 31, 2008, 2009 and 2010 and for the years ended December 31, 2008 and 2009 have been derived from audited consolidated financial statements not included in this prospectus. The following selected consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
| | | | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009(*) | | 2008(*) | |
| | | (U.S. dollars in thousands, except per share data) | |
SUMMARY OF STATEMENT OF OPERATIONS: | | | | | | | | | | | | | | | | | | | | |
Revenues | | | 8,940 | | | | 7,922 | | | | 7,389 | | | | 9,304 | | | | 18,112 | |
Cost of Revenues | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Gross Profit | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | |
Research and Development | | | 313 | | | | 462 | | | | 386 | | | | 898 | | | | 1,738 | |
Selling and Marketing | | | 3,060 | | | | 3,505 | | | | 4,405 | | | | 5,131 | | | | 9,905 | |
General and Administrative | | | 857 | | | | 732 | | | | 1,985 | | | | 1,648 | | | | 2,611 | |
Other expenses (income) | | | | | | | | ) | | | | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total Operating Expenses | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Operating Income (Loss) | | | 2,006 | | | | 54 | | | | (1,048 | ) | | | (1,868 | ) | | | (3,095 | ) |
Financial (Expenses) Income, Net | | | | | | | | | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | | | | | | |
Income (Loss) before Income Tax | | | 3,811 | | | | 1,044 | | | | (1,726 | ) | | | (2,488 | ) | | | (6,182 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Income Tax (Expense) Benefit | | | | | | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net Income (Loss) from continuing operations | | | 4,817 | | | | 1,019 | | | | (1,776 | ) | | | (2,559 | ) | | | (6,319 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Loss from discontinued operations | | | | | | | | | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | | | | | | | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | | | | | | |
PER SHARE DATA: | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) from continuing operations | | $ | 0.18 | | | $ | 0.11 | | | $ | (0.29 | ) | | $ | (0.46 | ) | | $ | (1.22 | ) |
Diluted earnings (loss) from continuing operations | | $ | 0.13 | | | $ | 0.09 | | | $ | (0.29 | ) | | $ | (0.46 | ) | | $ | (1.22 | ) |
Basic and Diluted loss from discontinued operations | | | - | | | | - | | | $ | (0.03 | ) | | $ | (0.46 | ) | | $ | (1.17 | ) |
Basic earnings (loss) per share | | $ | 0.18 | | | $ | 0.11 | | | $ | (0.32 | ) | | $ | (0.92 | ) | | $ | (2.39 | ) |
Diluted earnings (loss) per share | | $ | 0.13 | | | $ | 0.09 | | | $ | (0.32 | ) | | $ | (0.92 | ) | | $ | (2.39 | ) |
| | | | | | | | | | | | | | | | | | | | | |
SUMMARY OF BALANCE SHEET DATA: | | | | | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents | | | 225 | | | | 215 | | | | 197 | | | | 656 | | | | 812 | |
Marketable debt securities | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Trade receivables (net of allowance for doubtful accounts of $ 1,726 and $ 134 as of | | | | | | | | | | | | | | | | | | | | |
December 31, 2012 and 2011, respectively) | | | 1,598 | | | | 1,542 | | | | 752 | | | | 857 | | | | 840 | |
Inventories, net | | | 280 | | | | 269 | | | | 197 | | | | 82 | | | | 1,307 | |
Total Current Assets | | | 2,930 | | | | 2,131 | | | | 1,664 | | | | 4,236 | | | | 6,443 | |
TOTAL ASSETS | | | 3,743 | | | | 2,455 | | | | 2,008 | | | | 4,682 | | | | 8,935 | |
Total Current Liabilities | | | 2,796 | | | | 7,829 | | | | 4,500 | | | | 6,332 | | | | 10,424 | |
Accrued Severance Pay | | | 236 | | | | 227 | | | | 254 | | | | 304 | | | | 378 | |
SHAREHOLDERS' EQUITY (DEFICIT) | | | 711 | | | | (5,601 | ) | | | (7,871 | ) | | | (6,271 | ) | | | (1,867 | ) |
__________________________
(*) Due to the sale of certain business activities in January 2010, as described in “Management’s Discussion and Analysis of financial condition and results of Operations,” those business activities are presented as discontinued operations in accordance with U.S. GAAP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, included elsewhere in this prospectus. 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 prospectus.
Overview
We are a leading global provider of traditional and digital identity solutions, providing advanced safety, identification, tracking and security products and solutions to governments and private and public organizations around the world. 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.
Beginning in 2012, we have focused on expanding our activities in the ID and e-ID market, including the design, development and marketing of identification technologies and solutions to governments in Europe, Asia and Africa using our e-Government platforms. Our activities include (a) utilizing paper secured by different levels of security patterns (UV, holograms, etc.) and (b) 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) and border control applications. We are focused on growing three vertical markets by providing all-in-one field-proven radio-frequency identification, or RFID, and mobile technology, accompanied with services specifically tailored to meet the requirements of electronic monitoring in the following industries: (i) public safety, (ii) healthcare and homecare, and (iii) animal and livestock management. Our proprietary RFID and Mobile PureRF® suite of hybrid hardware and software components are the foundation of these products and services.
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 the majority of our revenues from existing e-ID and security long term services contracts, providing customers with raw materials, software upgrades, support, maintenance, training and installation. Revenues from the sale of such services are generally recognized following delivery of such services.
We also generate some of our revenues (less than 10%) from the sale of active RFID and mobile-based products and solutions. Revenues from the sale of such products are generally recognized upon delivery.
Costs and Operating Expenses
Our costs associated with a particular project may vary significantly depending on the specific requirements of the customer, the terms of the agreement, as well as on the nature of the technology being licensed. As a result, our gross profits from each project may vary significantly.
Our research and development expenses consist of salaries, raw materials, subcontractor expenses, related depreciation costs and overhead allocated to research and development activities.
Our selling and marketing expenses consist primarily of salaries and related costs, commissions earned by sales and marketing personnel, trade show expenses, promotional expenses and overhead costs allocated to selling and marketing activities, as well as depreciation expenses and travel costs.
Our general and administrative expenses consist primarily of salaries and related costs, allocated overhead costs, office supplies and administrative costs, fees and expenses of our directors, information technology, depreciation, and professional service fees, including legal, insurance and audit fees.
Our operating results are significantly affected by, among other things, the timing of contract awards and the performance of agreements. As a result, our revenues and income (loss) may fluctuate substantially from quarter to quarter, and we believe that comparisons over longer periods of time may be more meaningful. The nature of certain of our expenses is mainly fixed or partially fixed and any fluctuation in revenues will generate a significant variation in gross profit and net income (loss)
Critical Accounting Policies and Estimates
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 are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. ("US 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:
| · | Allowance for doubtful accounts |
| · | Debt to Equity Conversion; and |
Revenue Recognition
We generate the majority of our revenues from existing e-ID and security long term services contracts, providing our customers with, support, maintenance, royalties, training and installation. In addition, we generate some of our revenues from the sale of active RFID and mobile based products and solutions. We render services and sell our products in the U.S. through distributors and our local subsidiary, PureRFid, Inc., and directly throughout the rest of the world.
Services and Products sales are recognized when persuasive evidence of an agreement exists, services have been rendered or delivery of the product has occurred, the fee is fixed or determinable, collectability is reasonably assured, and inconsequential or perfunctory performance obligations remain. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provision lapses. We are not obligated to accept returned products or issue credit for returned products, unless a product return has been approved by the Company in advance and according to specific terms and conditions. As of December 31, 2012, we had an allowance for customer returns in an amount of $6,000.
We recognize certain long-term contract revenues in accordance with ASC Topic 605-35, "Construction-Type and Production-Type Contracts". Pursuant to ASC Topic 605-35, revenues from these contracts are recognized under the percentage of completion method. We measure the percentage of completion based on output or input criteria, such as contract milestones, percentage of engineering completion or number of units shipped, as applicable to each contract. Provisions for estimated losses on uncompleted contracts are made during the period in which such losses are first identified, in the amount of the estimated loss on the entire contract. As of December 31, 2012, no such estimated losses were identified.
We believes that the use of the percentage of completion method is appropriate, since we have the ability, using also an independent subcontractor's evaluation, to make reasonably dependable estimates of the extent of progress made towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights of the parties to the contract, the consideration to be exchanged and the manner and terms of settlement. In all cases, we expect to perform its contractual obligations and the parties are expected to satisfy their obligations under the contract.
In contracts that do not meet all the conditions mentioned above, we utilized zero estimates of profits; equal amounts of revenue and cost are recognized until results can be estimated with sufficient accuracy.
Revenues and costs recognized pursuant to ASC Topic 605-35 on contracts in progress are subject to management estimates. Actual results could differ from these estimates. As of December 31, 2011 and 2012, all the long-term contracts were completed and their related revenues were recognized in full.
Our warranty period is typically 12 months. Based primarily on our historical experience, we do not provide for warranty costs when revenue is recognized since such costs are not material.
Deferred revenues and customer advances include amounts received from customers for which revenues have not been recognized.
We provide our customer with a license to issue IDs, passports and driver licenses and we are entitled to receive royalties upon the issuance of each form of document by our customers. Such royalties are recognized when the issuances are reported to us, usually on a monthly basis.
Allowance for doubtful accounts
The allowance for doubtful accounts is determined with respect to specific amounts we have determined to be doubtful of collection. In determining the allowance for doubtful accounts, we consider, among other things, our past experience with such customers and the information available regarding such customers.
We perform ongoing credit evaluations of our customers' financial conditions and we require collateral as we deem necessary. An allowance for doubtful accounts is determined with respect to those accounts that we have determined to be doubtful of collection. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required. The allowance for doubtful accounts was $1,726,000 and $134,000 at December 31, 2012 and 2011, respectively. The $1,592, 000 increase in the allowance for doubtful accounts is based on our assessment of the collectability and the substantial effort and expenses required to collect payment from one of our large European customers.
Deferred Taxes
We account for income taxes, in accordance with the provisions of ASC 740 ("Income Taxes,") under the liability method of accounting. Under the liability method, deferred taxes are determined based on the differences between the financial statement and tax basis of assets and liabilities at enacted tax rates in effect in the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts expected to be realized. Expectation about realization of deferred tax assets related to losses carried forward are subjective and require estimates of future income in the territories in which such losses has been generated. Changes in those estimations could lead to changes in the expected realization of the deferred tax assets and to the increase or decrease in valuation allowances.
Debt to Equity Conversion
We account for our debt restructuring, determined to be troubled debt restructuring, in accordance with ASC 470-60 ("Troubled Debt Restructurings by Debtors"). The provisions of ASC 470-60 require that assets transferred or shares issued to fully or partially settle the debt should be measured at fair value. If shares are issued to fully settle the debt, the difference between the fair value of the shares issued and the carrying value of the debt would be recognized as a gain on restructuring. Determining the fair value of the shares issued, if not traded in active markets, can be highly subjective and any change in those values affecting the gain on restructuring to be recorded in the financial statements.
Contingencies
From time to time, we are the defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful and considered analysis of each individual action with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. A change in the required reserves would affect our earnings in the period the change is made. Other than as described under the heading “Legal Proceedings” in this prospectus, there are no material pending legal proceedings in which we are a party or of which our property is subject.
Operating Results
The following table sets forth selected our consolidated income statement data for each of the three years ended December 31, 2012, 2011 and 2010 expressed as a percentage of total revenues.
| | | 2012 | | | 2011 | | | 2010 | |
Revenues | | | 100 | % | | | 100 | % | | | 100 | % |
Cost of revenues | | | 18.1 | | | | 41.7 | | | | 27.8 | |
Gross profit | | | 81.9 | | | | 58.3 | | | | 72.2 | |
Operating expenses | | | | | | | | | | | | |
Research and development | | | 3.5 | | | | 5.8 | | | | 5.2 | |
Selling and marketing | | | 34.2 | | | | 44.2 | | | | 59.6 | |
General and administrative | | | 9.6 | | | | 9.2 | | | | 26.9 | |
Other expenses (income) | | | 12.1 | | | | (1.7 | ) | | | (5.4 | ) |
Total operating expenses | | | 59.5 | | | | 57.6 | | | | 86.3 | |
Operating income (loss) | | | 22.4 | | | | 0.7 | | | | (14.2 | ) |
Financial (expenses) income, net | | | 20.2 | | | | 12.5 | | | | (9.2 | ) |
Income (loss) before income tax | | | 42.6 | | | | 13.2 | | | | (23.4 | ) |
Income tax (expense) benefit | | | 11.3 | | | | (0.3 | ) | | | (0.7 | ) |
Loss from discontinued operations | | | - | | | | - | | | | (2.6 | ) |
Net income (loss) | | | 53.9 | | | | 12.9 | | | | (26.6 | ) |
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenues
Our revenues in 2012 were $8,940,000, compared to $7,922,000 in 2011, an increase of 13%. The increase is primarily due to an increase in revenues from our e-ID and Security projects.
Gross Profit
Our gross profits in 2012 increased to $7,321,000 from $4,616,000 in 2011, an increase of 58%. The gross profit margin for the year 2012 was 82% compared to 58% in 2011. The increase in gross profit margin is attributable to changes in our mix of revenues from products, services and royalties, and due to reduction of subcontractor provisional cost in the amount of $756,000 upon project completion and final payment to the subcontractor according the terms of the contract.
Expenses
Our operating expenses increased in 2012 to $5,315,000 from $4,562,000 in 2011, an increase of 16%. The increase in operating expenses was primarily due to a large increase in other expenses and a decrease in selling and marketing expenses, as discussed below.
Our research and development expenses decreased to $313,000 in 2012 from $462,000 in 2011, a decrease of 32%. The decrease in our research and development expenses was primarily due to an allocation of research and development engineers to project-related development, which is presented in costs of goods sold.
Our sales and marketing expenses decreased slightly to $3,060,000 in 2012 from $3,505,000 in 2011, a decrease of 13%. The decrease in sales and marketing expenses was primarily due to a decrease in commission expenses, arising from our efforts to optimize our selling and marketing efforts and cost reductions in our distribution, representatives and dealers’ networks worldwide.
Our general and administrative expenses increased to $857,000 in 2012 from $732,000 in 2011, an increase of 17%. The increase in general and administrative expenses was primarily due to an increase in salaries and related costs.
Other expenses was $1,085,000 in 2012, compared to other income of $137,000 in 2011. The transition from other income to other expenses is primarily due to bad debts expenses recorded in 2012 based on management's estimation with respect to the collectability of certain debt, offset in part by a capital gain arising from the conversion of debt to equity by certain service providers.
Financial (Expenses) Income, net
Financial (expenses) income consist primarily of interest related to our bank credit line and outstanding convertible bonds, bank fees, gains recorded on the conversion of convertible bonds to equity and exchange rate expenses. Financial income increased to $1,805,000 in 2012, compared to $990,000 in 2011, an increase of 82%. The increase is primarily due to an increase in gains recorded on the conversion of outstanding convertible bonds to equity as part of the debt restructuring that was effected in 2012 and in 2011.
Income Tax
Income tax benefit from continuing operations for the year ended December 31, 2012 was $ 1,006,000 compared to income tax of $ 25,000 in 2011. We recorded a tax benefit in 2012 due to a $ 1,006,000 decrease in the valuation allowance in respect of deferred tax assets resulting from tax loss carry forwards, compared to withholding tax expenses related to our project with a European country in 2011. We expect to record additional tax benefits in 2013 and 2014 in respect to deferred tax assets. At December 31, 2012, we had provided a valuation allowance of $10,287,000 with respect to deferred tax assets.
Net Income
As a result of the factors described above, our net income in 2012 was $4,817,000, compared to net income of $1,019,000 in 2011.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
Our revenues from continuing operations in 2011 were $7,922,000, compared to $7,389,000 in 2010, an increase of 7%. The increase in our revenues from continuing operations is primarily due to an increase in revenues from our e-ID project.
Gross Profit
Our gross profits from continuing operations decreased to $4,616,000 in 2011 from $5,332,000 in 2010, a decrease of 13%. Our gross profit margin in 2011 was 58% compared to 72% in 2010. The decrease in gross profit margin is attributable to changes in the mix of our revenues from products and services. Revenues from the sale of services generally have a higher gross profit than revenues from the sale of products.
Expenses
Our operating expenses from continuing operations decreased to $4,562,000 in 2011 from $6,380,000 in 2010, a decrease of 28%. The decrease in operating expenses was primarily due to a decrease in selling and marketing expenses and a decrease in general and administrative expenses, as discussed below.
Our research and development expenses from continuing operations increased to $462,000 in 2011 from $386,000 in 2010, an increase of 20%. The increase in our research and development expenses was primarily due to an increase in salaries and related costs due to headcount increase.
Our sales and marketing expenses from continuing operations decreased to $3,505,000 in 2011 from $4,405,000 in 2010, a decrease of 20%. The decrease in the sales and marketing expenses was primarily due to a decrease in commissions due to an increase in revenue from raw materials which carry a lower commission rate and a decrease in revenue from royalties and other services which have a higher commission rate.
Our general and administrative expenses from continuing operations decreased to $732,000 in 2011 from $1,985,000 in 2010, a decrease of 63%. The decrease in general and administrative expenses was primarily due to a decrease in salaries and related costs and in legal expenses. In addition, based on communications held with a customer, management changed its estimation with respect to the collectability of debt owed by that customer from doubtful as of December 31, 2010 to collectible at December 31, 2011.
Other income from continuing operations in 2011 was $137,000 and consisted primarily of gain from the extinguishment of working capital-related liabilities as part of an arrangement with creditors, compared to $396,000 in 2010, which consisted of a capital gain from the sale of our Hong Kong subsidiary and gain from the extinguishment of working capital-related liabilities as part of an arrangement with creditors.
Financial (Expenses) Income, net
Financial income from continuing operations for the year ended December 31, 2011 was $990,000 compared to financial expenses from continuing operations in 2010 of $678,000. In 2011, we recorded a $2,006,000 capital gain on the extinguishment of convertible bonds, recognized as part of our creditor arrangement. The gain was offset in part by an increase in financial expenses with respect to the remaining outstanding convertible bonds caused by an increase in the interest rate due to our breach of the covenants under such bonds, which required us to incur additional interest of 3% per month on unpaid amounts. The additional interest expense amounted to $271,000 during in 2011.
Income Tax
Income taxes on income from continuing operations decreased to $25,000 in 2011 from $50,000 in 2010. The decrease is mainly due to a decrease related to withholding tax at source expenses.
Loss from discontinued operations
Loss from discontinued operations for the year ended December 31, 2010 was $189,000. The loss from discontinued operations is attributed to the sale of our EAC and CSMS businesses, which were sold in January 2010.
Net Income (Loss)
As a result of the factors described above, our net income in 2011 was $1,019,000, compared to a net loss of $1,965,000 in 2010.
Seasonality
Our quarterly operations are subject to fluctuations due to several factors, including that the time from our initial contact with a customer to the time of sale is long and subject to delays which could result in the postponement of our receipt of revenues from one accounting period to the next, increasing the variability of our results of operations and causing significant fluctuations in our revenue from quarter to quarter. It is our experience that, as a general matter, a majority of our sales are made during the latter half of the calendar year consistent with the budgetary, approval and order processes of our governmental agencies customers. Additionally, 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 expenses, particularly for government and government agencies organizations. 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, which could have an adverse effect on our results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet transactions that have or are reasonably likely to have a material effect on our current or future financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Liquidity and Capital Resources
As of December 31, 2012, our cash and cash equivalents totaled $225,000, compared to $215,000 as of December 31, 2011. We have accumulated net losses of approximately $43,508,000 from our inception through December 31, 2012.
Since our incorporation in 1988, our principal source of financing has been public and private offerings of our equity and debt and from the sale of businesses and subsidiaries.
In November 2006, we raised $3,156,500 through the issuance of units consisting of convertible bonds, or the Convertible Bonds, and warrants. Units valued at $2,500,000 were issued to Brevan Howard Master Fund Limited, or BH, and units valued at $656,500 were issued to Special Situation Funds, or SSF. According to their original terms, the Convertible Bonds were to mature three years from the date of issuance and bore interest at an annual rate of 8%. The Convertible Bonds provided that any withholding and other taxes payable with respect to the interest would be grossed up and paid by us (approximately 3% of the principal of the bonds) and payment of interest would be net of any tax. Subject to certain redemption provisions, the Convertible Bonds were convertible at any time, at the option of the holders, into our ordinary shares at an original conversion price of $5 per share. The holders were also granted warrants entitling them to acquire 134,154 ordinary shares at an original exercise price of $5 per share during the next five years.
In November 2007, due to a breach of certain conditions of the Convertible Bonds, the holders had the right to accelerate the repayment of the principal with all the interest payable until the maturity date of the bonds. However, we signed an amendment to the agreement with the holders under which we were required to pay to one of the holders interest of $276,000 (together with any withholding and other taxes payable with respect to the interest-approximately 3% of the principal of the Convertible Bonds) and with respect to the other holder we changed the conversion price of the Convertible Bonds to $4.25. In consideration for these amendments, the holders waived their right to accelerate the repayment of the Convertible Bonds.
In June 2008, following a breach in the amended terms of the Convertible Bonds, we reached an agreement with BH, pursuant to which, among other things, BH waived the requirement that we comply with certain covenants in exchange for:
| · | Increasing the interest rate to 10% starting March 31, 2008 and any withholding and other taxes payable with respect to the interest would be grossed up and paid by us (approximately 3% of the principal of the bonds). |
| · | Reducing the exercise price of the Convertible Bonds and the warrants to $3.00 and $2.80, respectively. |
| · | Our undertaking to place a fixed charge on all income and/or rights in connection with a certain European airport project. This charge was senior to any indebtedness and/or other pledge and encumbrance, but provided us with certain rights of us to use part of the income. |
| · | Our grant of certain anti-dilution rights with respect to the warrants held by BH. |
In addition, it was agreed that under certain circumstances BH could demand an early payment in part or in full of the principal amount of its Convertible Bonds.
On August 12, 2009, we entered into an agreement with BH for additional amendments to certain terms of its Convertible Bonds. In exchange for granting security in certain of our assets, including all income and/or rights in connection therewith to which we and our subsidiaries were entitled to as a result of certain legal proceedings involving our Slovakian subsidiary, and all amounts in connection with the project related to the legal proceedings, BH agreed to (a) waive the requirement that we comply with and (b) amend certain provisions of, its Convertible Bonds including, (i) increasing the applicable rate of interest to 12% and by 0.5% every 180 days thereafter, (ii) releasing us from certain payments upon the completion of certain payments of principal and interest due under the Convertible Bonds, (iii) making monthly payments of $41,000 against the total amount due under the Convertible Bond s over an eight (8) year period, and (iv) increasing the number of warrants granted to 159,375 and reducing the exercise price of all the warrants to $0.40 per share. The modification was determined to be a debt extinguishment.
On November 9, 2009, we entered into an agreement SSF for additional amendments to certain terms of its Convertible Bonds. In exchange for a security in certain of our assets, SSF agreed to (a) waive its requirement that we comply with and (b) amend certain provisions of, its Convertible Bonds including, (i) increasing the applicable rate of interest to 12% and by 0.5% every 180 days thereafter, (ii) releasing us from certain payments upon the completion of certain payments of principal and interest due under its Convertible Bonds, (iii) making monthly payments of $10,000 against the total amount due under the Convertible Bonds over an eight (8) year period, (iv) reducing the exercise price of the Convertible Bonds and the warrants to $3 and $0.40, respectively and, (v) increasing the number of warrants granted to 31,238. The modification was determined to be a debt extinguishment.
In January 2010, we received consent from BH and SSF to sell our EAC and CSMS businesses, which consents were required pursuant to covenants contained in the Convertible Bonds, and in return we created a fixed charge in favor of BH and SSF on the intellectual property rights belonging to our remaining RFID business.
On March 22, 2010, we entered into a subscription agreement with a private investor, Mr. Yitzchak Babayov, pursuant to which on March 23, 2010 we issued 1,538,461 of our ordinary shares in consideration of a one-time cash payment of $200,000. Concurrent with the issuance of the shares, we issued a warrant to him to purchase up to 553,846 of our ordinary shares at an exercise price of $0.15 per share. The warrant has a term of five (5) years and contains standard adjustments for stock dividends, stock splits, reclassification and similar events.
On August 24, 2010, BH entered into an assignment and transfer agreement with our controlling shareholder, Sigma Wave Ltd., or Sigma. Pursuant to the agreement, BH assigned to Sigma all of its Convertible Bonds and warrants. The assignment had no impact on our assets or liabilities or our financial results.
At the annual general meeting of our shareholders held on September 12, 2010, our shareholders resolved to afford certain of our major creditors with the opportunity to convert the amounts owed to them into our ordinary shares, by means of a set off against the then total outstanding debt due to such creditors, at a price of $0.09 per ordinary share, subject to forgiveness of 60% of our total outstanding debt to such creditors, or the Creditor Arrangement. Our board of directors was authorized to set all other terms of the Creditor Arrangement, including, among other things, its timetable.
On November 3, 2010, we filed an application with the District Court in Petah Tikvah, Israel, to approve our Creditor Arrangement with all our creditors (including the Convertible Bond holders) in accordance with Section 350 of the Israeli Companies Law. On July 18, 2011, the District Court decided not to approve our application, primarily due to an objection to the proposed arrangement filed by SSF. Following the assignment of the Convertible Bonds held by SSF to Mr. Eliyahu Trabelsi, we reached an agreement with all of our Convertible Bond holders to the terms of the Creditor Arrangement. In February 2012, following the approval of our board of directors, we decided to continue with the original Creditor Arrangement outside of the District Court.
During the years 2010 to 2013, certain of our major creditors and Convertible Bond holders accepted our offer to convert the amounts owed to them into our ordinary shares, and following the conversion of $7,221,734 of debt and Convertible Bonds, we issued 2,544,457 warrants and 29,552,011 of our ordinary shares.
During the period from January 1, 2012 to December 31, 2012, our capital expenditures totaled approximately $28,000, (compared to $23,000 during 2011 and $4,000 during 2010, of which approximately $28,000 (compared to $23,000 during 2011 and $4,000 during 2010) was invested in our facilities in Israel.
We currently do not have significant capital spending or purchase commitments, but we expect to engage in capital spending consistent with the level of our operations. We anticipate that our cash on hand and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at least 12 months.
Cash Flows
Net cash provided by operating activities for the year ended December 31, 2012 was $24,000, compared to net cash used by operating activities of $189,000 during the year ended December 31, 2011, a transfer from negative to positive cash flow from operation activities of $213,000. This transfer was primarily due to net income of $4,817,000 in 2012 compared to $1,019,000 during 2011, which was offset by a decrease in trade payables of $659,000, a capital gain of $2,230,000 on the conversion of debt and Convertible Bonds into equity and a decrease in accrued expenses and other liabilities of $638,000 during 2012. Net cash used by investing activities during the year ended December 31, 2012 was $3,000, compared to net cash provided by investing activities of $116,000 during the year ended December 31, 2011, a transfer from positive to negative cash flow from investing activities of $119,000. This was primarily due to a release of $130,000 in cash that was held in a restricted account upon the completion of a contract in 2011.
Net cash used by financing activities during the year ended December 31, 2012 was $11,000, compared to net cash provided by financing activities of $91,000 during the year ended December 31, 2011, a decrease of $102,000, due to the drawdown of a new $100,000 line of credit from a bank.
Contractual Obligations
The following table summarizes our material contractual obligations and commitments as of December 31, 2012:
| | | | | | | | | | | | | | | | |
Long-term debt obligations | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Capital (finance) lease obligations | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Bank loan and credit line | | $ | 101,000 | | | $ | 101,000 | | | | -- | | | | -- | | | | -- | |
Operating lease obligations | | $ | 141,000 | | | $ | 141,000 | | | | -- | | | | -- | | | | -- | |
Total contractual cash obligations | | $ | 242,000 | | | $ | 242,000 | | | | -- | | | | -- | | | | -- | |
Operating lease obligations represent commitments under lease agreement for our facility and the facilities of certain subsidiaries. Purchase obligations represent purchase orders to an account payable. Total contractual cash obligations represent significant outstanding commitments for loans from banks, convertible bonds, purchase obligations and lease agreements for facilities. We are not a party to any capital leases.
Recent Accounting Pronouncements
In June 2011, the FASB issued Accounting Standard Update (ASU) 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.
ASU 2011-05 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and was applied retrospectively. The impact of the adaption was not significant.
In December 2011, the FASB issued Accounting Standard Update (ASU) 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11). ASU 2011-11 requires enhanced disclosures about financial instruments and derivative instruments that are either offset in accordance with the Accounting Standards Codification or are subject to an enforceable master netting arrangement or similar agreement. The amended guidance will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (fiscal year 2013 for us) and should be applied retrospectively to all comparative periods presented. We are currently evaluating the impact that the adoption of ASU 2011-11 would have on our consolidated financial statements, if any.
Quantitative and Qualitative Disclosure about Market Risk
We are exposed to market risks arising from our normal business activities. These market risks, which are beyond our control, principally involve the possibility that changes in interest rates, exchange rates or commodity prices will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rates and prices.
Impact of Inflation and Currency Fluctuations
Because the majority of our revenue is paid in or linked to the U.S. dollar, we believe that inflation and fluctuation in the NIS/dollar exchange rate has limited effect on our results of operations. However, a portion of the cost of our Israeli operations, mainly personnel, is incurred in NIS. Because some of our costs are in NIS, inflation in NIS/dollar exchange rate fluctuations does have some impact on our expenses and, as a result, on our net income. Our NIS costs, as expressed in dollars, are influenced by the extent to which any increase in the rate of inflation in Israel is not offset, or is offset on a delayed basis, by a devaluation of the NIS in relation to the dollar.
Historically, the New Israeli Shekel has been devalued in relation to the U.S. dollar and other major currencies principally to reflect the extent to which inflation in Israel exceeds average inflation rates in Western economies. Such devaluations in any particular fiscal period are never completely synchronized with the rate of inflation and therefore may lag behind or exceed the underlying inflation rate.
In 2012, the rate of appreciation of the NIS against the U.S. dollar was 2.3% and the rate of inflation, in Israel, was 1.6%. It is unclear what the devaluation/evaluation and inflation rates will be in the future, and we may be materially adversely affected if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or the evaluation of the NIS against the U.S. Dollar, or if the timing of the devaluation lags behind increases in inflation in Israel.
We do not engage in any hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations. At March 31, 2013, we did not own any market risk sensitive instruments except for our revolving line of credit. However, we may in the future undertake hedging or other similar transactions or invest in market risk-sensitive instruments if our management determines that it is necessary or advisable to offset these risks.
Overview
Since 1988, we have been a leading global provider of traditional and digital identity solutions, providing advanced safety, identification, tracking and security products and solutions, to governments, private and public organizations around the world. 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.
Beginning in 2012, we have focused on expanding our activities in the ID and e-ID market, including the design, development and marketing of identification technologies and solutions to governments in Europe, Asia and Africa using our e-Government platforms. Our activities include (a) utilizing paper secured by different levels of security patterns (UV, holograms, etc.) and (b) 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) and border control applications. We are focused on growing three vertical markets by providing all-in-one field-proven radio-frequency identification, or RFID, and mobile technology, accompanied with services specifically tailored to meet the requirements of electronic monitoring in the following industries: (i) public safety, (ii) healthcare and homecare, and (iii) animal and livestock management. Our proprietary RFID and Mobile PureRF® suite of hybrid hardware and software components are the foundation of these products and services.
We have been providing cutting edge real time position, tracking, monitoring and verification solutions, empowered by our PureRF® wireless hybrid suite of products and technologies, all operated by a secure, proprietary web-based, interactive, user-friendly interface. The basic components of our PureRF® Suite include an active tag, which contains a microchip equipped transmitter, an antenna, a capacitor and battery attached to the item to be identified, located or tracked; one or more wireless receivers that communicate with the active tags, one or more activators, and the tag's initializer, which is used to configure the PureRF® tags. A Web-based management system, captures and processes the ID and sensor data from the active tags, and may be configured to provide an alert upon the occurrence of a trigger event
Our PureRF® Suite identifies, locates, tracks, monitors, counts and protects people and objects, including inventory and vehicles, and can track multiple items simultaneously, providing an alert when a tagged item is removed from a pre-determined area, passes through a marked checkpoint or otherwise moves. Our PureRF® Suite can also provide secure access control into restricted areas and map and track visitors throughout a facility. We offer solutions for the transportation sector by enabling common carriers to monitor, track, locate and manage multiple baggage items. Our solutions can be used by businesses, shippers and warehouse operators to manage and track cartons, pallets, containers and individual items in order to facilitate movement, order picking, inventory verification and reduce delivery time. In addition, industrial companies can manage and track their mobile equipment and tools. We also offer solutions for the healthcare sector for asset, staff, patient and medical record location and identification and for animal and livestock identification, tracking and safeguarding.
Our Strengths
We believe that, because of the following competitive strengths, we will be able to enhance our position as a leading provider traditional and digital identity solutions:
| · | Our scalable and highly flexible solutions can be customized to meet each organization´s present and future needs. |
| · | As an industry innovator, we continue to develop and incorporate cutting edge technologies into our products and solutions. |
| · | We employ a group of industry experts having expertise in business, commercial, and government identification and wireless technologies, who have decades of hands-on experience and expertise. |
| · | We provide a complete end-to-end suite of RFID products eliminating the need for integrating multiple platforms and enabling ease of operation and deployment. |
| · | We provide a full one stop solution to governments, eliminating the need to acquire and integrate multiple products from different international vendors, simplifying the procurement process while facilitating deployment, training, operation and services and maintenance. |
| · | We offer a rare combination of being a small, well established and highly responsive company with a wealth of experience. |
| · | We are able to offer quick deployment and a high level of responsiveness to customer needs. |
Our Strategy
We are focused on our core competencies - active RFID technology and solutions and e-ID project and solutions. Our growth strategy includes the following components:
| · | Develop strong strategic relationships with our business partners, including our systems integrators and distributors who introduce our products and solutions into their respective markets. |
| · | Employ dedicated sales personnel to work closely with our business partners. Our sales personnel customize and adapt solutions that can then be installed and supported by these business partners. |
| · | Expand our active RFID and mobile activities globally, particularly in Europe, Israel and the Far East. Leverage on our reputation, talented personnel, and project management capabilities in the e-ID market to secure additional project and solutions in the growing e-ID and e-Government markets. |
| · | Leverage on our customer base, superior PureRF® hybrid suite of products, and IT management capabilities, to secure additional long terms contracts with governments and communities in the public safety markets. |
| · | Develop strong strategic relationships with business partners in the healthcare and homecare markets, in order to introduce our superior products and solutions into their designated markets. |
| · | Develop strong strategic relationships with business partners in the animal and livestock management markets in order to introduce our superior products and solutions into this emerging market. |
| · | Identify and acquire synergistic contracts or businesses in order to reduce time to market, obtain complementary technologies and secure required references for international bids. |
| · | Grow our business in emerging markets with perceived significant growth opportunities. |
Our History and Development
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 $6,600,000. 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.
During the fourth quarter of 2006, we established a new wholly-owned Israeli subsidiary, S.B.C. Aviation Ltd., which began operations in 2007 and focused on executing information technology and security projects.
In 2006 we decided to sell our e-ID Division in order to focus on opportunities in the U.S. for our currently active RFID and mobile businesses as well as our Critical Situation Management System, or CSMS, business, which we sold in 2010. CSMS is a mobile credentialing and access control system designed to meet the needs of homeland security and other public safety initiatives.
On December 31, 2006, we sold the majority of the e-ID Division activities and related intellectual property to On Track Innovations Ltd., or OTI, for 2,827,200 restricted ordinary shares of OTI, net of 212,040 shares that were granted to consultants as non-cash payment for their services to our company and direct expenses related to the transaction. As of December 31, 2008, we sold all of the OTI shares that we received in the transaction.
Simultaneously with the December 31, 2006 sale of the majority of our e-ID Division to OTI, we entered into a service and supply agreement with OTI under which: (i) OTI agreed to act as our subcontractor and provide services, products and materials necessary to carry out and complete certain projects that were not transferred to OTI; and (ii) OTI granted us an irrevocable, worldwide, non-exclusive, non-assignable and non-transferable license to use in connection with those projects, certain intellectual property rights transferred to OTI as part of the OTI transaction, for the duration of such projects.
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 $4,335,000 of our ordinary shares and direct expenses of approximately $600,000 in our ordinary shares. A total of 1,097,426 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 Vuance, Inc.
In September 2007, we announced that we had entered into a definitive agreement to acquire, through our U.S. subsidiary, Vuance, Inc., 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 and Vuance, Inc. completed the acquisition of certain of the assets and certain of the liabilities of Intelli-Site, Inc. pursuant to an asset purchase agreement with Intelli-Site and Integrated Security Systems, Inc., or ISSI. On the date of closing, Vuance, Inc. 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, Vuance, Inc. completed the sale to OLTIS Security Systems International, LLC, or OSSI, of certain of its assets (including certain accounts receivable and inventory) and certain of its 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 Vuance, Inc. had taken from Bridge Bank, National Association.
In January 2010, we and Vuance, Inc. completed the sale of certain of its assets and certain of its liabilities related to our Government Services Division, or Vuance CSMS Business, pursuant to an asset purchase agreement between us, Vuance, Inc., WidePoint Corporation, or WidePoint, and Advance Response Concepts Corporation. WidePoint paid Vuance, Inc. $250,000. In addition, WidePoint agreed to pay Vuance, Inc. a maximum earn-out of $1,500,000 over the course of calendar years 2010, 2011, and 2012, subject to the performance of certain financial requirements of the Vuance CSMS Business during each of those years.
On January 21, 2010, we incorporated a new wholly-owned Delaware subsidiary, PureRFid, Inc., to focus on marketing and sales for our active RFID products and solutions.
In October 2010, we entered into an agreement for the sale of our entire equity interest in SuperCom Asia Pacific Ltd., for no consideration. As part of this sale, we assigned to the purchaser certain outstanding loans due to us by SuperCom Asia Pacific in the amount of $1.4 million, which is equal to our cumulative investment in SuperCom Asia Pacific, and the purchaser in return undertook the operation and other liabilities of SuperCom Asia Pacific Ltd.
At the beginning of 2012, we decided to leverage on our experience in the e-ID market and increase our position in the market by: (i) proposing other new technologies and solutions to our existing e-ID customers, (ii) securing other e-ID 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-ID solutions to the global markets.
During 2012 we entered into the growing electronic monitoring vertical markets for public safety, real time healthcare and homecare, and animal and livestock management, using our RFID and Mobile PureRF® suite of products.
Market Opportunity
Radio frequency identification, or RFID, is a widely adopted technology in the auto-identification market, which addresses electronic identification and location of objects. Typically, an RFID tag or transponder is attached to or incorporated into a product or person. A handheld or stationary device that receives the radio frequency waves from these tags is used to determine their locations. Prior to the adoption of RFID, users identified and tracked assets manually as well as through the use of bar code technology. These solutions were limited because of the need for ongoing human intervention and the lack of instantaneous location capabilities. RFID technology possesses greater range, accuracy, speed and lower line−of−sight requirements than bar code technology.
The increased demand for better security systems and services has positively affected trends within the industry. Personnel and asset management are now leading security concerns in commercial and governmental enterprises. This has created 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 wireless ID-enabled security 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 are targeting the following markets with our PureRF® Suite and products:
Civil and Military Governments. Our PureRF® Suite can provide secure access control into restricted areas and map and track visitors throughout a facility. Many high security facilities, including governmental and industrial facilities, need access monitoring. For example, nuclear power plants, national research laboratories and correctional facilities need to accurately and securely monitor inbound and outbound activity. Line of sight identifiers, such as identification cards, suffer from problems that our RFID technology readily overcomes, including reliance on human visual identification, forgery and tampering. Our PureRF® Suite also enables identification and location of individuals in restricted areas in real time.
Airport and Port Security Infrastructure Providers. Our PureRF® Suite can offer solutions for the transportation sector by enabling common carriers to monitor, track, locate and manage multiple baggage items simultaneously, thereby reducing risk of lost baggage, increasing customer service and improving security.
Businesses and Industrial Companies. Our PureRF® Suite can be used by businesses, shippers and warehouse operators to manage and track cartons, pallets, containers and individual items in order to facilitate movement, order pick-up, inventory verification and reduce delivery time. In addition, industrial companies can manage and track their mobile equipment and tools. We believe that our PureRF® Suite can increase efficiency at every stage of asset, inventory and supply chain management by enabling long-range identification and location of products and removing the need for their human visual identification. Our products also work in conjunction with existing bar coding and warehouse systems to reduce the risk of loss, theft and slow speed of transfer.
Hospitals and Homecare. The healthcare sector has successfully utilized RFID technologies for the purposes of infant protection in maternity wards and resident safety in care homes similar to our asset and personnel location and identification system targeted at the secure facility and hazardous business sectors. Our PureRF® Suite can provide solutions for the healthcare sector for asset, staff, patient and medical record location and identification. We believe that as hospitals continue to upgrade their security measures, RFID technology will be utilized in real time location systems that are designed to immediately locate persons, equipment and objects within the hospital.
Animal and Livestock Owners. Our PureRF® Suite can be used as animal and livestock identification, tracking and safeguarding systems.
Our Solutions and Products
PureRF® Suite
Our RFID division is a RFID management solution provider. Our PureRF® Suite RFID asset-tracking management platform streamlines critical resources (assets and personnel) management scenarios through the introduction of PureRF®. PureRF® is an integrated movement detection solution, or MDS, platform, and a real time locating system, or RTLS, that enables users to monitor, track, locate, secure and manage multiple objects/items and is operated by a secure, proprietary knowledge-based, interactive, user-friendly interface.
Our RFID division features an all-in-one active RFID technology accompanied with services specifically tailored to meet the requirements of the following industries: (i) public safety, (ii) healthcare and homecare, and (iii) animal and livestock management. Our PureRF® Suite assists companies to efficiently utilize time and resources and we believe it is the leading solution for remote hands-off authentication, validation, identification, location and real-time monitoring of valuable resources, personal and assets.
Our PureRF® Suite provides a secure, precise and cost-effective means to positively identify, locate, track, monitor, count and protect people and objects, including inventory and vehicles. Our PureRF® Suite is a complete location position, or LP, system solution based on active RFID tag technology that provides commercial customers and governmental agencies enhanced asset management capabilities. The basic components of our PureRF® Suite include:
| | · | an active tag, which contains a microchip equipped transmitter, an antenna, a capacitor and battery attached to the item to be identified, located or tracked; |
| | · | a web-based management system, which captures and processes the signal from the active tag, and may be configured to provide an alert upon the occurrence of a trigger event; |
| | · | one or more wireless receivers; |
| | · | one or more activators; and |
| | · | the tag's initializer, which is used to configure the PureRF® tags. |
The ability to reliably identify and track the movement of people and objects in real time enables PureRF® Suite customers to detect unauthorized movement of vehicles, trace packages and containers, control personnel and vehicle access to premises, and protect personnel in hazardous working environments and disaster management situations.
We listen carefully to our strategic business partners and work closely with them to develop integrated solutions that meet their exacting specifications and requirements. We fully support our partners and customers from pre-sales meetings through installation and operation.
Our PureRF® Suite includes the following product components:
PureRF® Readers - Our PureRF® Reader is used to receive status messages from the PureRF Tags. Range adjustable antennas can be discretely hidden to identify and track Tag activity. Readers can operate individually for small applications or in a network to cover wide areas. Our reader units are small, reliable and effective and can be controlled by multiple communications media.
Our reader is an intelligent, reliable and effective small long range RFID reader with an integrated protocol converter. The protocol converter supports various standard interfaces such as 26 bit Wiegand format, serial RS-232, serial RS-485 or TCP/IP (Ethernet) protocols, which can be utilized in various solutions.
PureRF® Tags - The PureRF® solution relies upon small, low-powered RF tags that are attached to objects or people. These weatherproof and shock resistant tags are inexpensive and attach easily to key chains, uniform equipment, property, or vehicles to allow ID and tracking wherever it’s needed. License-free radio bands are used to track RF signals and can be read on hand-held devices. Transmitters can be programmed for periodic or event-driven transmissions. For high-security sites or situations, encrypted tag-to-reader communication prevents cloning or copying. An integrated anti-collision algorithm allows multiple tags to be simultaneously identified by a single reader, allowing employees to be matched to individual laptops or assets, shipping pallets to merchandise, assets to "authorized” locations and drivers to specific vehicles.
An RFID tag is an electronic printed circuit board, or PCB, combined with an antenna in a compact package. The packaging is structured to enable the RFID tag to be attached to an object or a person to be tracked. It can be attached to or incorporated into a product, animal or person for the purpose of identification and location detection using radio waves. Tags can be detected from varying distances depending on the influence of the surroundings on radio waves propagation.
PureRF tags also contain a short-range low frequency, or LF, receiver that can pick up signals transmitted by PureRF activators and Initializers. PureRF activators are deployed throughout the monitored space and continually transmit a short- range uniquely identifying signal.
When an activator’s ID is picked up by a PureRF tag, the activator's ID is included in the PureRF tag’s message transmissions. This indicates the tag’s location with more precise accuracy (compared to the RSSI method).
Hands-Free Long-Range RFID Asset Tags- These tags provide real-time asset loss prevention, inventory management, and personnel/asset tracking. They identify and track laptops, office machines, computer systems, tools, and telephones. They also identify employees and visitors in office buildings, hospitals, retail stores, warehouses, industrial facilities, mines and military installations.
Hands-Free Long-Range RFID Vehicle Tags- These tags provide long-range vehicle ID for parking and fleet management, access control, asset loss prevention at airports, gated communities, truck and bus terminals, employee parking lots, hospitals, industrial facilities, railroads, mines and military installations.
PureRF® Activators- PureRF activators are used to improve the accuracy of locating assets compared to what is provided by the receiver ID. They are used primarily at entrances and exits. For this purpose, PureRF activators are deployed throughout the monitored space where improved tag location measurement is required. The PureRF activators continually transmit a short-range uniquely identifying LF signal. Tags can read this signal when they are close to the activator (up to about 24 feet). The activator ID that a tag reads is added to the message that the tag transmits to the receiver. An activator’s ID indicates the location of a PureRF tag.
An RFID activator contains an electronic PCB combined with an antenna and it continuously transmits a unique identifier on a LF channel. The activator signal is received by the LF receiver that is incorporated in the tag. Such channel separation enables the tag to receive (activator ID) and transmit (to the receiver) simultaneously. The activator is an independent device that does not need to communicate with the third-party application. The activator only requires power to operate.
Control Software - The control software communicates with the receivers through the PureRF API (SDK) via the following interfaces/protocols: RS232, RS485, Wiegand, Ethernet and Wi-Fi. The application periodically collects the tags’ status messages from the receivers and records them in its database. Each tag message received contains the unique ID of the receiver that picked up its signal. The application can also analyze the database periodically to generate additional events based on status combinations.
The PureRF Application Protocol Interface , or API, provides a simple and straightforward object-oriented interface for accessing information collected by the PureRF receivers from PureRF tags and controlling their settings. The PureRF API can be integrated into a variety of applications, such as those intended for access control, security and incident management systems.
PureRF® Initializer - A PureRF Initializer is a device that integrates a LF transmitter and an RF receiver into one device. This enables the Initializer to perform bi-directional communication with the tags. The Initializer is used to control a tag's mode of operation (on/off) and for setting or modifying a tag's operational parameters, such as transmission frequency (timing) and activated sensors.
Electronics Monitoring
Our Electronics Monitoring division was established in order to provide a set of comprehensive and superior solutions for the public safety market. As a technology innovator in the arena of radio frequency identification and geographical location, we make use of its proven and solid platforms in order to deliver a state-of-the-art electronic monitoring, or EM, solution in a fast, flexible and attentive manner.
Our Electronics Monitoring division strives to design and provide the most cost effective reliable, stable and advanced products for its customers. We believe in establishing long term relationships with our customers and partners centered upon transparent and open communication. Our EM customers are law enforcement agencies, community safety agencies and a ministry of justice. Our partners are local IT and security companies who provide us with local support and operations.
Equipped with complex IT knowledge and experience, senior personnel from the EM industry and our suite of products and software, can customize EM programs and solutions at all levels, from tags to readers to servers, and at all stages, from installation to monitoring.
E-ID and e-Gov. (∑-ID)
From 1988 to 2006, our principal business was the design, development and marketing of advanced smart card and identification technologies and products for governmental and commercial customers in Europe, Asia and Africa. Our applications and solutions included e-passports, visas and other border entry documents, national identification and military, police and commercial access identification.
In our e-ID Division, we developed a fully automated production line for picture identification contactless smart cards and offered our customers raw materials, maintenance and service agreements. We provided identification solutions and contactless smart card production equipment for governmental and commercial customers. After the sale of the e-ID division to OTI, OTI agreed to act as our subcontractor and provide services, products and materials necessary to carry out and complete certain projects that were not transferred to OTI. The customers and contracts of our e-ID Division in the years ended December 31, 2012, 2011 and 2010 included the following:
| | · | A contract for a national multi-ID with a European country - In 2006, we entered into additional agreement with a European country which we estimate will generate approximately $50 million in revenues during the 10-year term of the project. Under the agreement we will provide the end-to-end system for a national multi-ID issuing and control system that includes the supply of digital enrollment and production equipment, software, maintenance and supply of secured raw material for the production of various national ID cards. Although the project commenced during the third quarter of 2006, there can be no assurance that we will realize the full estimated value of this agreement. |
| · | Biometric visa system for a European country. |
| | · | Automated smart card production system for a European country. |
| | · | E-Passport for a European country. |
At the beginning of 2012, we decided to leverage on our experience in the e-ID market and increase our position in the market by: (i) proposing other new technologies and solutions to our existing e-ID customers, (ii) securing other e-ID 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 that allowed us to propose and implement what we believe to be a competitive ID and e-ID solutions to the global market.
Currently, our e-ID and e-Gov. division (∑-IDTM) offers complete (or partial) end-to-end, turnkey and comprehensive solutions for various governmental ID programs, such as:
· Population Registries and Census | · National eID/IDs |
· Biometric Passports and Visas | · Smart Driving/Vehicle Licenses |
· Biometric Border Control and Immigration | · Voters and Elections |
· Internal Revenue and Social Security | · e-Government services |
Our ∑-IDTM systems comply with regional and international standards and enhance the usability by using smartcard applications. Our systems’ central servers include redundancy capabilities that provide disaster recovery or failover between sites. All solutions issue financial, accountability, transaction auditing and management information reports, which decrease the likelihood of tampering and fraud by individuals.
Our end-to-end solution covers all that is needed for a government to offer a particular service to the public: business process engineering, solution design and integration, hardware and software implementation, operator and technician training, and even financing. The solution covers all the foreseen workflows in the system, managerial and operational reports, and interfaces directly with the government's business activity.
Research and Development
Our research and development efforts have enabled us to offer our customers a broad line of products and solutions. We spent $0.3 million, $0.5 million and $0.4 million on research and development in 2012, 2011 and 2010, respectively. These amounts were spent on the development or improvement of our technologies and products, primarily in the areas of wireless ID. We intend to continue to research and develop new technologies and products for the e-ID and wireless ID and monitoring market. There can be no assurance that we can achieve any or all of our research and development goals.
Sales and Marketing
We sell our systems and products worldwide through distribution channels that include direct sales and sales through traditional distributor or resellers. We currently have five employees that are directly engaged in the sale, distribution and support of our products through centralized marketing offices in distinct world regions, including the employees of PureRFid, Inc., which sell our products in the U.S. We are also represented by several independent distributors and resellers.
Our distributors and resellers sell our systems and products to business enterprises and governmental agencies and also act as the initial customer service contact for the systems and products they sell. We establish relationships with distributors and resellers through written agreements that provide prices, discounts and other material terms and conditions under which the reseller is eligible to purchase our systems and products for resale. These agreements generally do not grant exclusivity to the distributors and resellers and, as a general matter, are not long-term contracts, do not have commitments for minimum sales and may be terminated by the distributor. We do not have agreements with all of our distributors.
The following table provides a breakdown of total revenue by geographic market for the three years ended December 31, 2012 (all amounts in thousands of dollars):
| | | Year ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Europe | | $ | 8,637 | | | $ | 7,498 | | | $ | 6,770 | |
Asia Pacific | | | - | | | | - | | | | - | |
United States | | | 217 | | | | 344 | | | | 536 | |
Israel | | | 86 | | | | 80 | | | | 83 | |
| | | $ | 8,940 | | | $ | 7,922 | | | $ | 7,389 | |
The following table provides a breakdown of total revenue by product category for the three years ended December 31, 2012 (all amounts in thousands of dollars):
| | Year ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Products | | $ | 3,856 | | | $ | 5,822 | | | $ | 3,822 | |
Maintenance, royalties and project management | | | 5,084 | | | | 2,100 | | | | 3,567 | |
Total | | $ | 8,940 | | | $ | 7,922 | | | $ | 7,389 | |
Customer Service
Customer service plays a significant role in our sales and marketing efforts. Our ability to maintain customer satisfaction is critical to building our reputation and increasing growth in our existing markets as well as penetrating new markets. In addition, customer contact and the customer feedback we receive in our ongoing support services provide us with information on customer needs and contribute to our product development efforts. We generally provide maintenance services under separate customized agreements. We provide services through customer training, local third-party service organizations, our subsidiaries, or our personnel, including sending appropriate personnel from any of our offices in the U.S. or Israel. We generally provide our customers with a warranty for our products for 12 months. Costs incurred annually by us for product warranties have to date been insignificant; however, there can be no assurance that these costs will not increase significantly in the future.
Manufacturing and Availability of Raw Materials
Our manufacturing operations consist primarily of materials planning and procurement, quality control of components, kit assembly and integration, final assembly, and testing of fully-configured systems. A significant portion of our manufacturing operations consists of the integration and testing of off-the-shelf components. All of our products and systems, whether or not manufactured by us are configured to customer orders and undergo several levels of testing prior to delivery, including testing with the most current version of software.
We manufacture a range of RFID products and e-ID and EM products or systems. We outsource the manufacture of: (i) printed circuit boards, or PCBs, to a number of different suppliers both in Israel or China,; (ii) enclosures to suppliers in Israel or China; and (iii) Teslin paper (a synthetic material used in making ID cards) and laminates from suppliers from the U.S. and Israel. The electronic assembly of our products is made in Israel and the U.S. We sometimes commit to a long-term relationship with such suppliers in exchange for receiving competitive pricing. All PCBs and enclosures are built to our engineering specifications. All PCBs are received in our manufacturing facilities in Israel and then tested, assembled by outsource manufacturers in Israel, calibrated, put in appropriate enclosures, and go through a validation and quality assurance, or QA, process. Other components are off-the-shelf products, which we purchase from a number of different suppliers.
All of the activities for e-ID and EM Projects, such as purchasing, logistics, integration, training, installation and testing, are done by our employees. In locations where we do not have a local representative, we assign certain tasks to local third parties and service providers that we supervise. In general we have subcontracting agreements with local IT companies who have dedicated and experienced personnel. Such subcontractors provide all local support, maintenance services and spare parts to customers in a specified area.
Competition
We assess our competitive position from our experience and market intelligence and from reviewing third party competitive research materials. We believe that Zebra, RF Code, Axcess, Ekahau, Wave Trend, Elpas and AeroScout are our potential competitors in the wireless ID tracking products and solutions market. We believe that G4S/Guidance ("GFS: LN), Serco ("SRP: LN"), 3M Monitoring, Buddi, BU (Geo), iSecureTrac, and SecureAlert("SCRA:US") are our potential competitors in the EM products and solutions market. We believe that 3M/Cogent, Tata group, Zetes Industries, On Track Innovation, Mühlbauer Group, Oberthur Technologies, Sagem, Morpho, Gemalto, Bundesdruckerei GmbH, and Nadra are our potential competitors in the e-ID products and solutions market. Due to the developing nature of the markets for our wireless ID, EM, e-ID, products and solutions and the ongoing changes in this market, the above-mentioned list may not constitute a full list of all of our competitors and additional companies may be considered our competitors.
Our management expects competition to intensify as the markets in which our products and solutions compete continue to develop. Some of our competitors may be more technologically sophisticated or have substantially greater technical, financial, or marketing resources than we do, or may have more extensive pre-existing relationships with potential customers. Although our products and services combine technologies and features that provide customers with complete and comprehensive solutions, we cannot assure that other companies will not offer similar products in the future or develop products and services that are superior to our products and services, achieve greater customer acceptance or have significantly improved functionality as compared to our products and services. Increased competition may result in our experiencing reduced margins, loss of sales or a decrease in market share.
Intellectual Property
Our ability to compete is dependent on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of trademark, copyright, trade secret and other intellectual property laws, employee and third-party nondisclosure agreements, licensing and other contractual arrangements. However, these legal protections afford only limited protection for our proprietary technology and intellectual property.
In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of Israel or the U.S.. Our method of protecting our intellectual property rights in Israel, the U.S. or any other country in which we operate may not be adequate to fully protect such rights.
Trademarks
We rely on trade names, trademarks and service marks to protect our name brands. We hold registered trademarks in several countries including Israel, the United States and the United Kingdom.We rely on trade names, trademarks and service marks to protect our name brands. We have registered trademarks for PureRF®, PureRFid®, SuperCom®, Vuance®, EduGate®, AAID® and Vuance Validate your World® and have applied for trademarks for PureMonitorTM, PureComTM, PureTagTM, PureTrackTM and PureArrestTM.
Licenses
We license technology and software, such as operating systems and database software, from third parties for incorporation into our systems and products and we expect to continue to enter into these types of agreements for future products. Our licenses are either perpetual or for specific terms.
As part of the OTI transaction, we received an irrevocable, worldwide, non-exclusive, non-assignable and non-transferable license to use the intellectual property that we transferred to OTI in connection with certain ongoing e-ID projects.
Government Regulation
Generally, we are subject to the laws, regulations and standards of the countries in which we operate and/or sell our products, which vary substantially from country to country. The difficulty of complying with these laws, regulations and standards may be more or less difficult than complying with applicable U.S. or Israeli regulations, and the requirements may differ.
Employees
As of December 31, 2012 we had 19 full-time employees, compared to 14 full-time employees as of December 31, 2011 and 22 full time employees as of December 31, 2010. Our ability to succeed depends, among other things, upon our continuing ability to attract and retain highly qualified managerial, technical, accounting, sales and marketing personnel.
We are subject to certain labor statutes and to certain provisions of collective bargaining agreements between the Histadrut (the General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations, including the Industrialists’ Association, with respect to our Israeli employees. In addition, some of our Israeli employees are also subject to minimum mandatory military service requirements.
Facilities
We do not own any real estate. We lease approximately 685 square meters of facilities in Herzliya Pituach, Israel under a two-year lease expiring on September 30, 2013. According to the agreement, the monthly fee (including management fees) is approximately $15,000. We intend to lease approximately 1,200 square meters of space in the Herzliya Pituach to support our growing needs for engineering work space, labs, quality assurance, validation, setup and integration. We believe that the cost of this space will be similar to the existing cost for our space in Herzliya Pituach on a square meter basis.
The total annual rental fees, net of rent income from subleases, for 2012, 2011 and 2010 were $194,000, $176,000 and $121,000, respectively. The total annual lease commitments for 2013 are $141,000.
Environmental
We believe that our operations comply in all material respects with applicable laws and regulations concerning the environment. While it is impossible to predict accurately the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not expected to have, a material adverse effect on our earnings or competitive position.
Legal Proceedings
We are party to legal proceedings in the normal course of our business. Other than as described below, there are no material pending legal proceedings to which we are a party or of which our property is subject. Although the outcome of claims and lawsuits against us cannot be accurately predicted, we do not believe that any of the claims and lawsuits described in this paragraph, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or cash flows for any quarterly or annual period.
In April 2004, the Department for Resources Supply of the Ministry of Ukraine filed a claim with the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry to declare a contract, dated April 9, 2002, between us and the Ministry of Internal Affairs of Ukraine, or the Ministry, void due to defects in the proceedings by which we were awarded the contract. In July 2004, the Arbitration Court declared the contract void and on April 27, 2005, we appealed the decision to the High Commercial Court of Ukraine. In May 2005, the Ministry filed with a new statement of claim the Arbitration Court for restitution of $1,047,740 paid to us by the Ministry under the contract. On September 27, 2005, the Arbitration Court issued a judgment against us in the second claim (the “Award”). On December 12, 2005, we were informed that the Supreme Court of Ukraine dismissed our appeal regarding the July 2004 decision. On June 29, 2006, the Supreme Court of Ukraine held that the Award was valid and legal under applicable law.
On September 28, 2008, the Ministry filed a petition in the Central District Court, Israel, seeking confirmation of the award as a valid foreign arbitral award under the laws of the State of Israel. During November 2008, we filed an objection to the petition and sought to declare the award null and void. Our objection and petition relied on what we believe to be well-based evidence relating to the manner under which the arbitration proceedings were conducted by the Arbitration Court and against their validness and legality. We believe that the arbitration proceedings were not conducted impartially and jeopardized our basic rights. Our claims were also corroborated by a contrary legal opinion written in the arbitration decision by one of the arbitrators.
On February 16, 2009 the Ministry filed its response to our claims, raising procedural and other claims, including a claim that we filed a monetary claim in Ukraine which is based on the award and the filing of such claim basically affirms our acknowledgment that the award is valid. On March 25, 2009, we filed a response to the Ministry’s response and a request that the arbitrators be ordered to testify about the scope of the proceedings. One of the three arbitrators testified in court. The remaining two did not appear in court at their allotted time. On April 15, 2012, the Court dismissed the petition and also declared the award null and void.
On October 30, 2003, SuperCom Slovakia, a 66% owned subsidiary of our company, received an award from the International Arbitral Centre of the Austrian Federal Economic Chamber in a case against the Ministry of Interior of the Slovak Republic relating to an agreement signed on March 17, 1998. Upon the Arbitral Award, the Ministry of Interior of the Slovak Republic was ordered to pay SuperCom Slovakia SKK 80,000,000 (approximately $3,438,000 as of December 31, 2011) plus interest accruing from March, 1999. In addition, the Ministry of Interior of the Slovak Republic was ordered to pay the costs of arbitration in the amount of EUR 42,716 (approximately $55,000 as of December 31, 2011) and SuperCom Slovakia’s legal fees in the amount of EUR 63,611 (approximately $82,000 as of December 31, 2011). We began an enforcement proceeding to collect the arbitral award. The Ministry of Interior of the Slovak Republic filed a claim with the Commercial Court in Vienna, Austria on February 10, 2004, whereby it challenged the award and requested to set aside the arbitral award. During September, 2005, the commercial court of Vienna dismissed the claim. On October 21, 2005, the Ministry of the Interior of the Slovak Republic filed an appeal. On August 25, 2006, the Austrian Appellate Court rejected the appeal and ordered the Ministry to reimburse SuperCom Slovakia´s costs of the appellate proceeding in the amount of EUR 6,688 within 14 days. On October 3, 2006, we were informed that the Ministry had decided not to file an extraordinary appeal to the Austrian Supreme Court’s decision rejecting its appeal. To date, our efforts to enforce the decision have been unsuccessful.
On December 16, 1999, Secu-Systems Ltd., or Secu-Systems, filed a lawsuit with the District Court in Tel Aviv-Jaffa jointly and severally against us and our former subsidiary InkSure Ltd.. or InkSure, which became a subsidiary of InkSure Technologies, Inc., seeking a permanent injunction and damages arising from the printing method applied to certain products developed by Inksure. In its lawsuit, Secu-Systems asserted claims of breach of a confidentiality agreement between Secu-Systems and us, unjust enrichment by us and InkSure, breach of fiduciary duties owed to Secu-Systems by us and InkSure, misappropriation of trade secrets by us and InkSure, and damage to Secu-Systems’ property. On March 15, 2006, the Court denied the breach of contract claim, but upheld the claim for misappropriation of trade secrets and ordered InkSure and us to cease all activity involving the use of the confidential knowledge and/or confidential information of Secu-Systems. In addition, the Court ordered us and Inksure to provide a report certified by an accountant setting forth in full the income and/or benefit received by InkSure and us as a result of the misappropriation activity through the date of the judgment, and ordered us and Inksure, jointly and severally, to pay to Secu-Systems compensation in the sum of NIS 100,000 ($26,000 as of December 31, 2011) and legal expenses as well as attorney’s fees of NIS 30,000 ($8,000 as of December 31, 2011). Secu-Systems filed an appeal, and we and InkSure filed a counter-appeal, on the ruling above.
Subsequently, several court hearings were held, judgments were issued and appeals were filed by each of the parties. On December 15, 2009, the Court suggested that the parties attempt to resolve this dispute through mediation. All of the parties agreed to mediate the matter. A binding mediation agreement signed by the parties that provided for us to pay to Secu-System NIS 893,000 (approximately $239,000 as of December 31, 2012) was approved by the Court on February 5, 2012. During 2011 and 2012 we paid in full our obligation in total amount of NIS 893,000 (approximately $239,000 as of December 31, 2012). As of December 31, 2012 there is no liability related to this litigation, and the litigation is closed.
Board of Directors
