Starcom : Consolidated financial statements - December 31st 2019

STARCOM Plc

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2019

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STARCOM Plc

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

INDEX

PAGE
Chairman's Statement	2-5
Corporate Governance Statement	6-9
Directors' Report	10-13
Report of Independent Auditors	14
Consolidated Financial Statements:
Consolidated Statements of Financial Position	15
Consolidated Statements of Comprehensive Income	16
Consolidated Statements of Changes in Equity	17
Consolidated Statements of Cash Flows	18
Notes to the Consolidated Financial Statements	19-47
1

CHAIRMAN'S STATEMENT

I am pleased to report that the year ended 31 December 2019 has been another year of progress for the Company and I am particularly pleased to report that the Company's adjusted EBITDA for the year has shown a profit of [$300,000] compared with a loss for the previous year of $8,000. This marks a turning point in the Company's performance as revenues continue to grow - an increase by 14% to $6.8m in 2019, and with an improved sale mix, as discussed further below.

BUSINESS REVIEW BY PRODUCT

Lokies

The Company's intelligent keyless padlock, branded as Lokies, was successfully launched in April 2019 and has been well received in the market, with proof of concept ("POC") projects having been initiated with various key customers. In addition, a number of customers in Russia, Israel, Kazakhstan, Mexico, Bulgaria and Poland, have placed initial orders, forgoing the customary POC stage in order to reach their respective local markets faster. The Board believes that this innovative Internet of Things ("IoT") product can become a leader in the "smart padlocks" market and has the potential to spearhead significant growth for Starcom as it can be marketed via both B2B and B2C models.

Kylos

Kylos Air is Starcom's tracking product designed specifically for use in air freight shipping. It is intelligently activated and deactivated on takeoff and landing and has already secured the necessary safety certification from airlines including South West Airlines and Swiss WorldCargo, the airfreight division of SwissAir. This has stimulated interest amongst other potential clients and partners in the industry. One such example is

Cubemonk Inc., a provider of cargo tracking and monitoring services in the USA, which has placed initial significant orders for Kylos Air units to be integrated within their specialised unit load devices known as Smart

Cubes. Post the year end, Cubemonk and the Company entered into a longer-term relationship to cover future orders.

Starcom has also generated sales for the Kylos Forever to be incorporated into tankers owned by Israel Chemicals Ltd and we anticipate further growth from this client and from similar operations.

Tetis

The Agreement with WIMC Solutions Inc. is progressing according to expectations and our product is now being actively promoted into the container and cargo delivery sector. There are now more positive signs within the container market of the need to provide more tracking and security, which we expect should lead to further growth in revenues for Starcom from this sector.

Helios

In line with the Company's strategy to focus on the higher end IoT segments, the reliance on the low margin legacy vehicle tracking Helios product and its contribution to sales continued to decrease. The standard Helios represented 41% of hardware sales in 2019 (2018: 48%, 2017: 58%). This excludes the very positive contribution of the non-legacy, specialised Helios, where new features and client-specific adaptations enable competitive differentiation and therefore enable higher margin pricing.

For example, the Company's contract with its North African distributor for $1.1m of Helios units, announced in November 2018, combines the ability to monitor the fuel consumption of tankers in addition to the standard location tracking. Another example is Zero Motorcycles, where Starcom's technology is the essential enabler for connectivity between the factory and the electric motorbikes for remote monitoring and control of a variety of key parameters.

There are more such customers utilising the advanced Helios and Helios Hybrid units, including Bluetooth and CANBUS connection, the combination of GSM and Satellite communications, and the ability to directly derive data from a vehicle's computer to analyse the vehicle and the driver behavior.

SaaS

The Company continued to develop its cloud-based software which clients subscribe to and connect with in order to utilise the rich data communicated from its Helios, Kylos and Tetis units. Furthermore, the Company has developed a platform for the new Lokies product, which the Board believes has the potential to be one of the Company's significant growth engines over the coming years. The Company's ability to offer a comprehensive solution that combines both the hardware and the SaaS components is one of Starcom's strong competitive advantages. The recurring SaaS revenue continued its growth and, excluding one-time income, was $2m in the year (2018: $1.8m).

FINANCIAL REVIEW

Group revenues for the year were $6.8m, compared with $6.0m for the year ended 31 December 2018, an increase of 14%.

The gross margin for the year was 41%, compared with 40% for 2018.

Total operating expenditure increased by 5% to $3.4m (2018: $3.3m), mainly due to non-cash expenses such as depreciation and share option provisions.

Net loss after taxation for the year increased to $1.0m compared with the 2018 net loss of $0.9m, due mainly to an increase in Sales and Marketing costs. The operating loss in the period was $0.76m, compared to an operating loss of $0.88m in 2018.

The Group recorded an exchange rate loss of $0.2m resulting from the strengthening of the Israeli Shekel compared with the US dollar.

The Group balance sheet showed stability in trade receivables to $2.0m, compared with $1.9m as at 31

December 2018, despite the increase in revenues for the period compared with 2018.

Group inventories at the period end were $2.3m, compared to $2.3m as at 30 June 2019 and $2.0m at the end of 2018.

Trade payables at the year-end were $2.1m, compared with $1.4m as at 31 December 2018 and $1.8m at 30

June 2019.

Net cash used in operating activities in the period was approximately zero, compared with $0.7m for the year ended 31 December 2018.

OUTLOOK

Based on the existing range of products, mature technology, global client base, recurring SaaS revenues and substantial sales pipeline, the Company anticipates continued growth in 2020. The Board also anticipates that as the product mix continues to migrate towards the higher margin IoT products, gross margin should continue to improve.

The innovative Lokies is expected to be one of the key growth engines for the Company in 2020. The agreement and the purchasing plan provided by the Russian distributer signed up in 2019 underpins this assessment. Also encouraging is the three-year OEM contract recently signed with Cubemonk for the incorporation of our Kylos Air unit into their product. Zero is progressing with its own sales of the Starcom- 3

inside motorbikes which may have an impact on other similar manufacturers. The Board is therefore optimistic about the prospects for the Company in 2020, particularly the opportunities presented from its relationships with Cubemonk, CropX and WIMC, as well as its North African distributor.

We plan to expand our sales and marketing team to strengthen our ability to take advantage of the opportunities we now see as well as continuing to focus on R&D to maintain and improve our competitive edge.

Michael Rosenberg

Non-Executive Chairman Date: _____________