CYREN Ltd. - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                       to                     

Commission file number: 000–26495

CYREN LTD.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code 011–972–9–863–6888

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ☐    No ☒

Securities registered pursuant to Section 12(b) of the Act:

Indicate the number of shares outstanding of each issuer’s classes of common stock, as of the latest practicable date: 75,406,804 ordinary shares as of April 30, 2021.

Table of Contents

CYREN LTD.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2021

($USD in thousands, except share and per share amounts)

(Unaudited)

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CYREN LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

($USD in thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of the interim consolidated financial statements.

CYREN LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

($USD in thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of the interim consolidated financial statements.

CYREN LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($USD in thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of the interim consolidated financial statements.

CYREN LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

($USD in thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of the interim consolidated financial statements.

CYREN LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($USD in thousands, except share amounts)
(Unaudited)

The accompanying notes are an integral part of the interim consolidated financial statements.

CYREN LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($USD in thousands, except share and per share amounts)
(Unaudited)

The accompanying notes are an integral part of the interim consolidated financial statements.

CYREN LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($USD in thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of the interim consolidated financial statements.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

Cyren Ltd. (henceforth “Cyren”) was incorporated under the laws of the State of Israel on February 10, 1991 and its legal form is a company limited by shares. Cyren listed its shares to the public on July 15, 1999 under the name Commtouch Software Ltd. and changed its legal name to Cyren Ltd. in January 2014. Cyren and its subsidiaries, unless otherwise indicated will be referred to in these consolidated financial statements as the “Company”.

The Company is engaged in developing and marketing cyber security solutions to identify and protect threats in email, files and from the web. The Company sells its cloud-based solutions worldwide, in both embedded and Software-as-a-Service models, to Original Equipment Manufacturers (“OEMs”), service providers and enterprises. The Company operates in one reportable segment, which constitutes its reporting unit.

The accompanying consolidated balance sheet as of March 31, 2021, the consolidated statements of operations, the consolidated statements of comprehensive loss and the consolidated statements of cash flows for the three months ended March 31, 2021 and 2020, as well as the statement of changes in shareholders’ equity for the three months ended March 31, 2021, are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. In management’s opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of March 31, 2021, as well as its results of operations and cash flows for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for other interim periods or for future years.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

The accompanying unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021.

Other than the change described below, there have been no changes to the significant accounting policies described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 that have had a material impact on the unaudited interim consolidated financial statements and related notes.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business.

U.S. GAAP requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued or prior to the conditions or events that create the going concern risk.

The consolidated financial statements as of March 31, 2021 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” under ASC 740, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. The Company adopted this new guidance in the first quarter of fiscal 2021. The adoption of ASU 2019-12 did not have a material impact on the condensed consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with “Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements.

The Company adopted the new standard as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. The Company has elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard which does not require it to reassess the prior conclusions about lease identification, lease classification and initial direct costs.

In addition, the Company has elected the short-term lease exception for leases with a term of 12 months or less. As part of this election it will not recognize right-of-use assets and lease liabilities on the balance sheet for Note 3 with terms less than 12 months. The Company also elected the practical expedient to not separate lease and non-lease components for all our leases. This will result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability being greater than if the policy election was not applied.

Some leases include one or more options to extend the lease. The exercise of options to extend the lease is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are included in our right of use assets and lease liabilities as they are reasonably certain of exercise. The Company regularly evaluates the renewal options, and, when it is reasonably certain of exercise, it will include the renewal period in its lease term. Lease modifications result in remeasurement of the lease liability. 

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

The right-of-use asset and lease liability are initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate based on the information available at the date of adoption in determining the present value of the lease payments.

Some of the real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease adoption. Additional payments based on the change in an index or rate are recorded as a period expense when incurred. 

The Company has various operating leases for office space and vehicles that expire through 2030. Below is a summary of our operating right-of-use assets and operating lease liabilities as of March 31, 2021:

The short-term lease liabilities are included within accrued expenses and other short-term liabilities in the condensed consolidated balance sheet.

Minimum lease payments for our right of use assets over the remaining lease periods as of March 31, 2021, are as follows:

Premises rent expense was $737 and $654 for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, the Company subleases two real estate properties. Sublease receipts were $172 and $71 for the three months ended March 31, 2021 and 2020, respectively.

The Company has elected the practical expedient to not separate lease components from non-lease components. 

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

The weighted-average remaining lease terms and discount rates for all of operating leases were as follows as of March 31, 2021:

In connection with specific research and development, the Company received $3,699 of participation payments from the IIA through March 31, 2021. In return for the IIA’s participation in this program, the Company is committed to pay royalties at a rate of 3% of the program’s developed product sales, up to 100% of the amount of grants received plus interest at annual LIBOR rate. The Company’s total commitment for royalties payable with respect to future sales, based on IIA participations received, net of royalties paid or accrued, totaled $2,656 and $2,714 as of March 31, 2021 and December 31, 2020 respectively. For the quarters ended March 31, 2021 and 2020, $22 and $69, respectively, were recorded as cost of revenues with respect to royalties due to the IIA.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

Ordinary shares confer upon their holders the right to receive notice to participate and vote in general shareholder meetings of the Company and to receive dividends, if declared.

On December 5, 2018 the Company issued $10,000 aggregate principal amount of convertible notes in a private offering. The notes are unsecured, unsubordinated obligations of Cyren and carry a 5.75% interest rate, payable semi-annually in (i) 50% cash and (ii) 50% cash or ordinary shares at Cyren’s election. The notes have a 3-year term and are expected to mature in December 2021, unless converted in accordance with their terms prior to maturity. The notes were issued with a conversion price of $3.90 per share which was subject to adjustment using a weighted-average ratchet mechanism based on the size and price of future equity offerings and the total shares outstanding. On November 7, 2019 Cyren announced the closing of a rights offering that raised gross proceeds of $8,019. As a result of this offering, the conversion price of the convertible notes was adjusted to $3.73. In addition, the notes would be subject to immediate conversion upon any change in control in the Company (or subject to repayment if the price in the change in control transaction is less than the conversion price). The Company incurred interest expense of $142 and $141 for the quarters ended March 31, 2021, and 2020, respectively. The Company has accrued interest of $174 as of March 31, 2021.

The principal balance of the convertible notes as of March 31, 2021 was $10.0 million.

In March 2020, the Company entered into purchase agreements with a select group of accredited investors for the purchase of $10.25 million aggregate principal amount of Convertible Debentures in a private placement. Upon the closing, the Company received approximately $9.4 million (net of $0.8 million in issuance expenses).

The debentures are unsecured, subordinated obligations of Cyren and carry a 5.75% interest rate per annum, payable semi-annually in cash or ordinary shares at Cyren’s election. The debentures have a four-year term and mature in March 2024, unless converted in accordance with their terms prior to maturity. The debentures have a conversion price of $0.75 per share and are convertible into 1,333 ordinary shares per $1,000 principal amount of debentures. The conversion price is subject to adjustment based on the price and timing of future equity offerings and other customary adjustments. Upon the satisfaction of price and other conditions, Cyren has the right to force the conversion of the debentures.

In March 2021, the Company paid semi-annual interest payments totaling, $259, which was paid through the issuance of 291,422 shares.

For the quarter ended March 31, 2021, two debenture holders converted $909 of principal plus interest of their debentures, which was a portion of their holding. The principal and interest were paid through the issuance of 1,201,472 shares.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

The Company incurred interest expense of $176 for the quarter ended March 31, 2021, $49 of which is related to the amortization of debt issuance costs.

The Company has accrued interest of $16 as of March 31, 2021

The principal balance of the Convertible Debentures as of March 31, 2021 was $9.0 million. As of March 31, 2021, the total estimated fair value of the Convertible Debentures was approximately $7.3 million. The fair value was determined based on the closing trading price of $0.81 per share multiplied by the Convertible Debentures principal balance as of the last day of trading for the period The fair value of the Convertible Debentures is considered a Level 2 within the fair value hierarchy and was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the Convertible Debentures in an over-the-counter market.

On December 22, 2016, the Company’s shareholders approved a new equity plan - the 2016 Equity Incentive Plan (the “Equity Incentive Plan”). This plan, along with its respective Israeli appendix, replaced all then-existing employee and consultants’ stock option plans.

The Equity Incentive Plan allows for the issuance of Restricted Stock Units (“RSUs”), as well as options. The options and RSUs generally vest over a period of four years. Options granted under the Equity Incentive Plan generally expire after six years from the date of grant. Options and RSUs cease vesting upon termination of the optionee’s employment or other relationship with the Company. The per share exercise price for options shall be no less than 100% of the fair market value per ordinary share on the date of grant. Any options and RSUs that are cancelled or not exercised within the option term become available for future grant.

On July 30, 2019, the shareholders of the Company approved an increase in the number of Ordinary Shares reserved for issuance under the 2016 Equity Incentive Plan and its respective Israeli Appendix to a total of 11,200,000.

As of March 31, 2021, an aggregate of 6,191,972 ordinary shares of the Company are still available for future grant under the Equity Incentive Plan.

In 1999, the Company adopted the 1999 Directors Stock Option Plan, and in 2008 shareholders approved an extension of the term of this plan through July 13, 2019. On December 15, 2006, the plan was extended through 2016. On December 22, 2016, the Company’s shareholders approved a new equity plan - the 2016 Non-Employee Director Equity Incentive Plan (the “Non-Employee Director Plan”). This plan, along with its respective Israeli appendix, replaced all existing Directors stock option plans.

The Non-Employee Director Plan allows for the issuance of Restricted Stock Units (“RSUs”), as well as options. Each option and RSU granted under the Non-Employee Plan generally vests over a period of four years. Each option has an exercise price equal to the fair market value of the ordinary shares on the grant date of such option. Options granted under the Non-Employee Director Plan generally expire after six years from the date of grant. Options and RSUs cease vesting upon termination of the relationship with the Company.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

On July 30, 2019 the shareholders of the Company approved an increase in the number of Ordinary Shares reserved for issuance under the Non-Employee Director Plan and its respective Israeli Appendix to a total of 1,150,000 Ordinary Shares.

As of March 31, 2021, an aggregate of 830,550 ordinary shares of the Company are still available for future grant to non-employee directors.

The aggregate intrinsic value in the tables above represents the total intrinsic value (the difference between the fair value of the Company’s ordinary shares as of the last day of each period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last day of each period.

The total intrinsic value of options exercised during the quarters ended March 31, 2021 and 2020 was $0, and $0, respectively.

The weighted-average grant date fair value of options granted to employees and directors during the quarters ended March 31, 2021, and 2020, was $0.53 and $0.48, respectively.

As of March 31, 2021, the Company had $1,347 of unrecognized compensation expense related to non-vested stock options granted to employees and directors, expected to be recognized over a remaining weighted-average period of 2.00 years.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

The options vest and become exercisable at a rate of 1/16 of the options every three months.

As of March 31, 2021, the Company did not have any unrecognized compensation expense related to non-employee non-vested stock options.

As of March 31, 2021, the Company had approximately $5,433 of unrecognized compensation expense related to RSUs, expected to be recognized over a weighted-average period of 3.05 years.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

Summary information about geographic areas:

ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment and derives revenues from licensing of software and sales of professional services, maintenance and technical support (see note 1 for a brief description of the Company’s business). The following is a summary of revenues within geographic areas:

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

During the quarter ended March 31, 2021 and 2020, 23% and 22% of the Company’s revenues were derived from customer A. During the quarter ended March 31, 2021, no other customer accounted for more than 10% of total revenue.

As of March 31, 2021, approximately $38,440 of revenue is expected to be recognized from remaining performance obligations that are unsatisfied (or partially unsatisfied) for non-cancellable contracts. The Company expects to recognize revenue on approximately 55% of these remaining performance obligations during the remainder of 2021, approximately 32% in 2022, with the remainder recognized thereafter.

CYREN LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

($USD in thousands, except share and per share amounts)

(Unaudited)

On April 8, 2021, the Company received written notice (the “Notice”) from the Listing Qualifications Department of the Nasdaq Stock Market informing that because the closing bid price of the ordinary shares listed on the Nasdaq Capital Market was below $1.00 per share for 30 consecutive business days prior to the date of the Notice the Company currently do not meet the minimum closing bid requirement for continued listing on the Nasdaq Capital Market set forth in Rule 5550(a)(2) of the Nasdaq Listing Rules. The Company has until October 5, 2021 to regain compliance. If the Company does not regain compliance by October 5, 2021, the Company may be eligible for a second 180 day compliance period, provided that, on such date, the Company meets the continued listing requirement for market value of publicly held shares and all other applicable initial listing requirements for the Nasdaq Capital Market (other than the minimum closing bid price requirement) and the Company provides written notice to Nasdaq of its intention to cure the deficiency and plans for curing the deficiency during the second compliance period.

- - - - - - - - - - - - -

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto. The following discussion and analysis includes forward-looking statements that involve certain risks and uncertainties, including, but not limited to, those described in Item 1A. Risk Factors in our most recent Annual Report on Form 10-K (the “2020 Annual Report”). Our actual results may differ materially from those discussed below. See “Special Note Regarding Forward-Looking Statements” below.

Overview

Purpose built for the cloud, Cyren was an early pioneer and leading innovator of cloud delivered Software-as-a-Service (SaaS) cybersecurity solutions that protect businesses, their employees, and customers against threats from email, files, and the web.

Cyren’s cloud-based approach to security sets us apart from other vendors in the market. Our security solutions are architected around the fundamental belief that cyber security is a race against time – and the cloud best enables the speed, sophistication and advanced automation needed to detect and block threats as they emerge on the internet. As more and more businesses move their data and applications to the cloud, they need a security provider that is able to keep pace.

Security threats are more prevalent and stealthier than ever. As cybercrime has become more sophisticated, every malware, phishing and ransomware variant is unique, making it more difficult to detect attacks. While organizations have traditionally protected their users with gateway security appliances at their network perimeter, more frequent and evasive attacks combined with a more distributed workforce are reducing the effectiveness of this approach. Traditional appliances lack the real-time threat intelligence and processing power to detect emerging threats, and the growth of mobile devices and an increasingly distributed workforce mean that more and more business is conducted outside of the traditional network perimeter. As a result, when new attacks appear in a matter of seconds, legacy cybersecurity products can leave companies vulnerable for hours, days or even weeks.

Cyren’s cloud security products and services fall into three categories:

Key Opportunities and Challenges

Threat Landscape

The last several years have possibly experienced the greatest amount of dramatic global incidents directly related to malware and cyber threats since the advent of the internet. From election hacks to global ransomware attacks, malware threats are at an all-time high. Phishing attacks have become increasingly common, and no company, large or small seems immune to these threats. Hackers have become more successful at monetizing these attacks, and as long as these activities prove lucrative, we expect these incidents to continue. 

Cloud and Mobility

Businesses are going through a massive change in their IT strategies as they look to drive more business value, agility, and better customer experiences, while cloud and mobility are becoming increasingly important, as evidenced by the following trends: 

These are some of the reasons why we believe Cyren’s vision for 100% cloud security is compelling to IT security teams looking to protect their businesses in today’s cloud-centric mobile-first world. 

Investments in Research and Development and Sales and Marketing

Our cost of revenues, research and development expenses, and sales and marketing expenses are all significant contributing factors to our operating losses. Over time, we expect that our utilization of our cloud infrastructure will increase and provide the opportunity for improved gross margins. Our investments in research and development are required in order to enhance and improve our solutions. In the future, we expect to lower the rate of R&D investment as a percentage of revenue. The return on our sales and marketing investment is tied to attracting new customers and enhancing our business with existing customers, thereby lowering the overall sales and marketing costs as a percent of revenues. During 2020 we reduced our overall headcount in order to reduce expenses, and we believe managing future headcount and expense growth will be key in improving our gross and operating margins over time. In the first quarter of 2021, headcount declined as we continue to reduce expenses, and we believe managing future headcount and expense growth will be key in improving our gross and operating margins over time.

Growing Our Enterprise Business

Although all of our services are subscription services, our Enterprise offerings are typically invoiced up front for an annual contract amount, or the full multi-year contract amount, at the start of the term. As a result, this business is expected to provide a larger immediate contribution to cash flow and better return on investment. As this enterprise business grows as a portion of our overall revenues, we expect to increase deferred revenue and our operating results and cash flow to improve, which will make us less reliant on other sources of capital in the future.

Components of our Operating Results

Revenue

We derive revenues from the sale of real-time cloud-based services for each of Cyren’s email security, web security, antimalware, and advanced threat protection offerings.

We sell all of our solutions as subscription services, either to OEMs and service providers or directly or indirectly to enterprises.

Cost of Revenue

Personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation for employees that operate our network and provide support services to our customers, as well as data center costs, are the most significant components of our cost of revenues. Other costs include third-party contractors, royalties for use of third-party technologies, amortization of intangibles and depreciation of data center equipment. We expect these costs may increase in absolute dollars as we continue to optimize our cloud infrastructure and our support services, but should reduce as a percentage of overall revenue.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation, are the most significant component of our operating expenses. Operating expenses also include allocated overhead costs for facilities, IT, and depreciation. We expect operating expenses to increase in absolute dollars as we continue to grow. 

Research and Development. Research and development expenses consist primarily of personnel costs and outsourced engineering services. We believe these investments are crucial for our ability to continue to enhance the functionality of our services, as well as to develop and introduce new services to the market. We expect research and development expenses will increase as we enhance newly released products in 2020. Development costs related to internal use technology that supports our security services are capitalized on the balance sheet, while other development costs are expensed as they are incurred.

Sales and Marketing. Sales and marketing expenses primarily include personnel costs, sales commissions, marketing activities, and travel associated with sales and marketing. We market and sell our services worldwide through our sales organization and distribution channels. We capitalize sales commissions paid to internal sales personnel and amortize these expenses over an estimated period of benefit that reflects the expected future revenue streams. We reduced sales and marketing expenses in 2020 but anticipate that we may need to increase investment in these areas related to new products launched in 2020 and enhance our sales and marketing efforts to support our further growth. sales personnel are typically not immediately productive, and therefore the increase in expenses we incur when adding personnel is not immediately accompanied by increased revenue and in some cases may not result in increased revenue if these new sales personnel are unsuccessful in becoming productive.

General and Administrative. General and administrative expenses consist primarily of personnel costs, audit fees, legal expenses, recruiting expenses and other general operating costs. We expect our general and administrative expenses to grow in absolute dollars as we continue our operational growth.

Other Income (Expense), net

Other income (expense), net consists generally of capital gain or loss from the sale of assets.

Financial Expenses, net

Financial expenses, net consist mainly of foreign exchange gains and losses, interest expense on our outstanding debt and interest income earned on our cash and cash equivalents. In 2020 and 2021, these expenses also included income related to the accounting for a multi-year arrangement where a customer paid upfront the full contract value. This has been deemed a significant financing component under ASC 606.

Tax Benefit

Our tax benefit is derived primarily from income taxes in foreign jurisdictions in which we conduct business. We estimate income taxes in each of the jurisdictions in which we operate. This process involves determining income tax expense together with calculating the deferred income tax expense related to temporary differences resulting from the differing treatment of items for tax and accounting purposes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. These temporary differences result in deferred tax assets and liabilities, which are included net as applicable within our balance sheets. For most of our recent years, we have incurred operating losses in Israel and the U.S., where we have recorded a full valuation allowance against our deferred tax assets in those jurisdictions.

RESULTS OF OPERATIONS

The following table sets forth financial data for the three months ended March 31, 2021 and 2020. Percentages may not add due to rounding.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Revenues. Revenues decreased by $0.8 million, or 8%, from $9.6 million for the three months ended March 31, 2020 to $8.8 million for the three months ended March 31, 2021. The decrease was driven by renewals of customer contracts at lower values and the end of life of several legacy Enterprise products during 2020. In the second half of 2020, the Company released the newest Enterprise products, Cyren Inbox Security (launched April 2020) and Threat InDepth (launched in June 2020). Since the product launch, the Company has signed several new customer contracts representing over $1.1 million in revenue, but due to the timing and ratable nature of the contracts, there was not a material amount recognized in Q1 2021.

Cost of Revenues. Cost of revenues increased by $0.2 million, or 5%, from $3.6 million for the three months ended March 31, 2020 to $3.8 million for the three months ended March 31, 2021. For the three months ended March 31, 2021, cost of revenues represented 43% of revenue, compared to 37% during the prior year, and accordingly, gross margins for the period were 57% for the three months ended March 31, 2021 compared to 63% for the same period in the prior year. The increase in cost of revenue is primarily a result of higher amortization of $0.2 million for the three months ended March 31, 2021 related capitalized R&D projects that were finalized in 2020 and an increase of $0.1 million in payroll and related expenses for the three months ended March 31, 2021 primarily due to lower bonus expense for the three months ended March 31, 2020. Data center costs for the three months ended March 31, 2021 decreased by $0.1 million due to a reduction in data centers used and lower bandwidth and hosting costs.

Operating Expenses. Overall operating expenses increased by $0.4 million, 4%, from $8.6 million for the three months ended March 31, 2020 to $9.0 million for the three months ended March 31, 2021. Operating expenses for the quarter totaled 103% of quarterly revenue, compared to 89% of quarterly revenue a year ago. The increase in operating expenses was primarily due to a decrease in capitalized R&D, which reduces expenses, for the three months ended March 31, 2021, offset by a decrease in operating employee headcount, which totaled 176 employees at the end of March 31, 2021, compared to 205 employees at the end of March 31, 2020.

Research and Development, Net. R&D expense increased by $1.0 million, or 30%, from $3.3 million for the three months ended March 31, 2020 to $4.3 million for the three months ended March 31, 2021. R&D expense for the quarter represented 49% of revenue, compared to 35% a year ago. Payroll and related expenses decreased by approximately $0.1 million primarily driven by lower headcount and offset by annual compensation increases. R&D headcount decreased to 111 as of March 31, 2021 compared to 128 as of March 31, 2020. Capitalization of technology development, which reduces expenses, decreased from $1.2 million for the three months ended March 31, 2020 to $0.2 million for the three months ended March 31, 2021, which as a result, increased expense by $1.0 million. Overall, the change in capitalization of technology development was driven by higher capitalization in early 2020 in advance of a new product launch in April 2020.

Sales and Marketing. Sales and marketing expenses decreased by $0.4 million, or 13%, from $3.0 million for the three months ended March 31, 2020, to $2.6 million for the three months ended March 31, 2021. Sales and marketing expenses for the quarter totaled 30% of quarterly revenue, compared to 31% of quarterly revenue a year ago. The decrease in sales and marketing expense was primarily due to a reduction of overall sales and marketing headcount to 36 employees as of March 31, 2021 compared to 44 as of March 31, 2020 which resulted in an approximately $0.3 million reduction in payroll and payroll-related expenses, as well as a reduction in overall marketing spending related to travel and associated costs of $0.1 million and a decrease in intangible asset amortization of $0.1 million as an asset had been fully amortized in Q3 2020. These decreases were offset by an increase in the use of outside services by $0.1 for the three months ended March 31, 2021 to enhance our sales and marketing efforts to support the growth of our new product releases in 2020.

General and Administrative. General and administrative (“G&A”) expense was consistent quarter over quarter with G&A expense of $2.2 million for the three months ended March 31, 2021 and 2020. G&A expense represented 25% of revenue for the first quarter of 2021, compared to 23% of revenue during the first quarter of 2020. Payroll and related costs increased by $0.1 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to annual pay increases and higher bonus expenses for the three months ending March 31, 2021. Offsetting the increase, bad debt expense decreased by $0.1 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily driven improved collection efforts which included collections of receivable balances reserved as of December 31, 2020.

Other Income (Expense), Net. Other income, net for the three months ended March 31, 2021 was $0.018 million of expense primarily related to the disposal of fixed assets due to the exit of an office lease. Other income, net for the three months ended March 31, 2021 was $0.006 million of income primarily due to $0.016 million of expense associated with the disposal of fixed assets, offset by miscellaneous cash receipts of $0.022 million.

Financial Expense, Net. Financial expenses, net, decreased by $0.02 million for the three months ended March 31, 2021, to $0.21 million from $0.23 million as of March 31, 2020. Interest expense primarily associated with the Convertible Debentures increased by $0.15 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase is due to a full quarter of interest expense for the three months ended March 31, 2021 due to the issuance of the Convertible Debentures on March 19, 2020 which was a partial period of interest expense. Offsetting the increase in interest expense was a $0.17 million decrease in foreign currency expense for the three months ended March 31, 2021 driven by changes in exchange rates.

Effective Corporate Tax Rates

Corporate tax rates and real capital gains tax in Israel were 23% for the three months ended March 31, 2021 and 2020.

Our German subsidiary is subject to German tax at a consolidated rate of approximately 30%.

Other non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.

We do not provide deferred tax liabilities when we intend to reinvest earnings of foreign subsidiaries indefinitely. As of March 31, 2021, there are no undistributed earnings of foreign subsidiaries. 

We may currently qualify as an “industrial company” within the definition of the Law for the Encouragement of Industry (Taxation) and, as such, we may be eligible for certain tax benefits, including, inter alia, special depreciation rates for machinery, equipment and buildings, amortization of patents, certain other intangible property rights and deduction of share issuance expenses.

Net Operating Loss Carry-Forwards

As of December 31, 2020, Cyren Ltd.’s operating loss carryforwards for tax purposes amounted to 108.6 million and capital loss carryforwards of $17.8 million which may be carried forward and offset against taxable income in the future, for an indefinite period.

As of December 31, 2020, the U.S. subsidiary had net operating loss carryforwards of $40.7 million for federal tax purposes and $10.6 million for state tax purposes. These losses may offset any future U.S. taxable income of the U.S. subsidiary and will expire in the years 2021 through 2040.

Management currently believes that based upon its estimations for future taxable income, it is more likely than not that the deferred tax assets regarding the loss carryforwards will not be utilized in the foreseeable future. Thus, a valuation allowance was provided to reduce deferred tax assets to their realizable value.

LIQUIDITY AND CAPITAL RESOURCES

The Company intends to finance operating costs over the next twelve months through a combination of existing cash on hand, reducing operating spend, potentially divesting non-core assets and future issuances of equity and/or debt securities. As of March 31, 2021, we had an accumulated deficit of $252.8 million, cash and cash equivalents of $16.5 million, and generated a net loss of $4.2 million. We have incurred losses since inception and expect to continue to incur losses for the foreseeable future. Current assets amounted to approximately $18.9 million with current liabilities of approximately $21.9 million, resulting in negative working capital (defined as current assets minus current liabilities) of approximately $3.0 million. The current cash balance and historical trend of cash used in operations along with the maturity of the convertible notes in December 2021, which we are currently trying to restructure, and lack of certainty regarding a future capital raise and our ability to renegotiate the term of the convertible notes, raise substantial doubt about our ability to continue as a going concern for the next twelve months from the date of issuance of these financial statements. We do not anticipate that we will have sufficient funds to pay the principal of the convertible notes on their maturity date. The inability to restructure or borrow sufficient funds to refinance the convertible notes on commercially reasonable terms, or at all, would have serious consequences to our financial condition and results of operations.

Our future capital requirements will depend on many factors, including, but not limited to our growth, market acceptance of our offerings, the timing and extent of spending to support our efforts to develop our platform and the expansion of sales and marketing activities. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we issue additional equity securities in order to raise additional funds, contingent upon our ability to increase the authorized share count, further dilution to existing stockholders may occur. However, we cannot predict with certainty the outcome of our actions to generate liquidity, including the availability of additional financing. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected.

Please see the Financings section below for more details on the Company’s recent efforts to fund operating activities.

Outlook

The Company’s ability to continue as a going concern is dependent upon the Company growing the business, obtaining the necessary financing to meet its obligations, repay its liabilities arising from normal business operations and the Company’s ability to gain compliance with the Nasdaq Capital Market listing standards (see Item 1A Risk Factors for additional information). The company’s ability to finance its capital needs is uncertain and complicated by the convertible notes with an outstanding principal amount of $10.0 million which mature in December 2021. The Company is currently negotiating the restructuring of the convertible notes with the note holders and at this time is uncertain as to the outcome. However, the Company’s ability to raise additional equity is limited by the number of authorized shares available. The Company intends to seek shareholder approval of an increase in the number of authorized shares at the next annual meeting of shareholders, however there is no assurance that shareholders will approve such increase. The Company intends to finance operating costs over the next twelve months through a combination of existing cash on hand, reducing operating spend, potentially divesting non-core assets and future issuances of equity and/or debt securities. Over the past several years, the Company has devoted most of its effort to research and development, new product development and increasing revenues through additional investments in sales and marketing. The Company generated a loss of $4.2 million and a negative cash flow of $5.3 million from operating activities for the three-month period ended March 31, 2021. However, the Company has incurred losses since inception and expects to continue to incur losses for the foreseeable future.

We regularly have discussions with our customers regarding the renewal of their contracts and the renegotiation of the terms of such contracts at the time of renewal. In the fourth quarter of 2020, we received notification that our largest customer will renew one of their contracts for another three years through the first quarter of 2024, but that it does not intend to renew its largest contract with the Company beginning April 2021. In May 2021, the Company was able to renegotiate this agreement with the customer for a lower annual value for one year with the option for future renewals at the same value. As a result, we anticipate that quarterly revenues from this customer will decline from approximately 20% currently to approximately 14% of quarterly revenue beginning in the second quarter of 2021.

We continue to be focused on growing CIS revenue, however the contribution to revenue over time will gradually increase due to the timing and ratable nature of the contracts.

Cash Flows from Operating Activities

Cash used in operating activities was $5.3 million for the three months ended March 31, 2021 as compared to $4.4 million for the three months ended March 31, 2020.

For the three months ended March 31, 2021, the factors affecting our operating cash flows during the period was the net loss of $4.2 million, adjusted for non-cash items of $0.5 million of stock-based compensation expense, $0.5 million for non-cash operating lease expense, $1.3 million for depreciation and amortization of our property, equipment and intangible assets, interest on convertibles notes of $0.1 million and interest and amortization of debt issuance costs on the Convertible Debentures of $0.2 million, and $0.3 million for amortization of deferred commissions. The primary drivers of the changes in operating assets and liabilities were a $2.8 million decrease in deferred revenue due to a 36-month upfront customer payment, a $0.7 million decrease in operating lease liabilities, a $0.2 million decrease in other long-term liabilities, a $0.2 million decrease in employee and payroll accruals, accrued expenses and other liabilities, and a decrease in deferred commissions of $0.2 million, offset by a $0.2 million increase in trade receivables.

For the three months ended March 31, 2020, the factors affecting our operating cash flows during the period were our net loss of $2.8 million, adjusted for non-cash items of $0.6 million of stock-based compensation expense, $0.4 million for non-cash operating lease expense, $1.2 million for depreciation and amortization of our property, equipment and intangible assets, interest on convertibles notes paid in shares of $0.1 and $0.4 million for amortization of deferred commissions. The primary drivers of the changes in operating assets and liabilities were a $2.1 million decrease in deferred revenue due to a 36-month upfront customer payment, $0.7 million in accounts receivable, $0.4 million in the capitalization of deferred commissions, a $0.4 million decrease in operating lease liabilities, a $0.3 million decrease in prepaid expenses and other receivables, and $0.5 million decrease in employee and payroll accruals and other liabilities, offset by an increase in other long-term liabilities of $0.2 million.

Cash Flows from Investing Activities

For the three months ended March 31, 2021, net cash used in investing activities was $0.2 million which primarily consisted of $0.2 million for capitalization of technology.

For the three months ended March 31, 2020, net cash used in investing was $1.6 million which primarily consisted of $1.0 million for capitalization of technology and $0.6 million used to purchase property and equipment.

Our capital expenditures over the last three years consisted primarily of continued investment in R&D and also purchases of property and equipment to modernize and expand our data centers and to invest in our infrastructure in order to support new products and facilitate the growth of the Company.

Cash Flows from Financing Activities

For the three months ended March 31, 2021, net cash generated by financing activities was $12.6 million as we issued to several institutional investors in February 2021 in a registered direct offering (the “Offering”) 12,000,000 of our ordinary shares at a purchase price of $1.15 per share for net proceeds of approximately $12.6 million.

For the three months ended March 31, 2020, net cash generated by financing activities was $9.4 which was attributable to the Convertible Debentures issued on March 19, 2020 with gross proceeds of $10.2 million, offset by payment of debt issuance costs of $0.8 million.

Working Capital

As of March 31, 2021, we had negative working capital of $3.0 million and as of March 31, 2020, we had positive working capital of $6.4 million.

Financings

On December 5, 2018, the Company issued $10.0 million aggregate principal amount of convertible notes in a private placement to affiliates of an existing minority institutional shareholder. The convertible notes are unsecured, unsubordinated obligations of Cyren and carry a 5.75% interest rate, payable semi-annually in (i) 50% cash and (ii) 50% cash or ordinary shares at Cyren’s election. The notes have a 3-year term and mature in December 2021, unless converted in accordance with their terms prior to maturity. The notes were issued with a conversion price of $3.90 per share which was subject to adjustment using a weighted-average ratchet mechanism based on the size and price of future equity offerings and the total shares outstanding. We are currently negotiating the restructuring of the convertible notes with the Note holders to postpone the final repayment date by several months under certain terms, although there is no assurance that we will be able to do so on commercially reasonable terms or at all.

On November 7, 2019, we completed a rights offering that raised gross proceeds of $8.0 million. As a result of this offering, the conversion price of the convertible notes was adjusted to $3.73. In addition, the convertible notes are subject to immediate conversion upon any change in control in the Company (or subject to repayment if the price in the change in control transaction is less than the conversion price).

On March 19, 2020, we issued $10.25 million aggregate principal amount of Convertible Debentures in a private placement to certain investors. The Convertible Debentures are secured by a guarantee by two of our subsidiaries and carry a 5.75% interest rate, payable semi-annually in cash or, subject to the satisfaction of certain equity conditions, in ordinary shares. The Convertible Debentures mature in March 2024, unless converted in accordance with their terms prior to maturity. The Convertible Debentures have an initial conversion price of $0.75 per share, subject to adjustments. If the closing bid price of our ordinary shares has been at least $2.25 (subject to adjustment) for at least 20 trading days during any 30 consecutive trading day period, and certain conditions are satisfied, we may force a conversion of all or any part of the outstanding principal amount of the Convertible Debentures, accrued and unpaid interest and any other amounts then owing, subject to certain conditions.

On February 16, 2021, we issued to several institutional investors in a registered direct offering (the “Offering”), 12,000,000 of our ordinary shares at a purchase price of $1.15 per share for net proceeds of approximately $12.6 million. We intend to use the proceeds from this offering for working capital and general corporate purposes.

We also issued to the placement agent or its designees warrants (“Placement Agent Warrants”) to purchase up to 720,000 ordinary shares (the “Warrant Shares”), representing 6% of the aggregate number of Ordinary Shares sold in the Offering. The Placement Agent Warrants have an exercise price equal to $1.4375, or 125% of the Offering price, per ordinary share and will be exercisable commencing on August 16, 2021 for five years from the effective date of the Offering.

Registration Statements

In connection with our private placement to Warburg Pincus in November 2017, in which we issued approximately 10.6 million ordinary shares for $1.85 per share, we and Warburg Pincus entered into a registration rights agreement, which, among other things, provides Warburg Pincus with three demand registration rights, piggyback and shelf registration rights. The demand registration rights may be exercised starting August 6, 2018, subject to certain customary blackout periods.

In connection with the issuance of the Convertible Debentures, we entered into a registration rights agreement with the purchasers. Pursuant to that agreement, we filed a registration statement on Form S-3 with the SEC covering the resale of our ordinary shares that are issuable to the purchasers upon any conversion of the Convertible Debentures or as interest payments.

On September 21, 2018, we filed a shelf registration statement on Form F-3 with the SEC, which we converted to a Form S-3 on August 16, 2019. This registration statement enables us to issue debt securities, ordinary shares, warrants or subscription rights up to an aggregate amount of $50 million. Under the rules governing shelf registration statements, we will file a prospectus supplement with the SEC which describes the amount and type of securities being offered each time we issue securities under this registration statement. No securities were issued under the registration statement on Form F-3. In November 2019, we issued shares as part of our rights offerings and in February 2021, we issued shares in the registered direct offering using our Form S-3 as described above.

Off-Balance Sheet Arrangements

As of March 31, 2021, we did not have any off-balance sheet arrangements. 

Critical Accounting Policies and Estimates

Our significant accounting policies are discussed in Note 2. Significant Accounting Policies to our consolidated financial statements included in the Company’s 2020 Annual Report. There have been no significant changes to these policies for the three months ended March 31, 2021, except as described in Note 2. Significant Accounting Policies to our condensed consolidated financial statements are included elsewhere in this Quarterly Report. The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Annual Report.

Recent Accounting Pronouncements

Please refer to Note 2. Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this Quarterly Report for a full description of recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

Special Note Regarding Forward-Looking Statements

This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. We urge you to consider that statements which use the terms “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate”, “will” and similar expressions are intended to identify forward-looking statements. Specifically, this Quarterly Report contains forward-looking statements regarding:

These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the Company (such as in our other filings with the SEC or in company press releases) for other factors that may cause actual results to differ materially from those projected by the Company. Please refer to the factors described in Part II. Item 1A. Risk Factors in this Quarterly Report and Part I. Item 1A. Risk Factors, of the 2020 Annual Report for additional information regarding factors that could affect our results of operations, financial condition and liquidity. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof.

Impact from the COVID-19 Outbreak

On March 11, 2020, the World Health Organization declared the outbreak of a respiratory disease caused by a new coronavirus as a “pandemic” which is now known as COVID-19. The outbreak has impacted thousands of individuals worldwide. In response, many countries have implemented measures to combat the outbreak which have impacted global business operations.

As of the date of issuance of the financial statements, the Company’s operations have not been significantly impacted, however, the Company continues to monitor the situation. The ultimate extent of the impact of any epidemic, pandemic or other health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic or other health crisis and actions taken to contain or prevent their further spread, among others.

No impairments were recorded as of the balance sheet date as no triggering events or changes in circumstances had occurred as of quarter-end; however, due to significant uncertainty surrounding the situation, management’s judgment regarding this could change in the future.

In addition, while the Company’s results of operations, cash flows and financial condition could be negatively impacted, the extent of the impact cannot be reasonably estimated at this time.

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, we have formalized our disclosure controls and procedures. Our principal executive officer and principal financial officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Securities and Exchange Act Rules 13a-15(e) and 15d-15(e) as of March 31, 2021. Based on such evaluation, such officers have concluded that, as of March 31, 2021, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting, as defined in Securities and Exchange Act Rules 13a-15(f) and 15d-15(f), that occurred during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION.

ITEM 1A. RISK FACTORS

Except as provided below, there have been no material changes with respect to the risk factors disclosed in Part I, Item 1A. of our 2020 Annual Report.

We are currently not in compliance with the Nasdaq Capital Market listing standards. If our ordinary shares are delisted, the market price and liquidity of our ordinary shares and our ability to raise additional capital would be adversely impacted.

Our ordinary shares are currently listed on the Nasdaq Capital Market. Continued listing of a security on the Nasdaq Capital Market is conditioned upon compliance with various continued listing standards. On April 8, 2021, 2020, we received written notice (the “Notice”) from the Listing Qualifications Department of the Nasdaq Stock Market informing us that because the closing bid price for our ordinary shares listed on the Nasdaq Capital Market was below $1.00 per share for 30 consecutive business days prior to the date of the Notice, we do not currently meet the minimum closing bid requirement for continued listing on the Nasdaq Capital Market set forth in Rule 5550(a)(2) of the Nasdaq Listing Rules. We have until October 5, 2021 to regain compliance.

The Company plans to monitor the closing bid price for its Ordinary Shares between now and October 5, 2021, and intends to take all reasonable measures available to regain compliance under the Nasdaq Listing Rules and to maintain the listing of its Ordinary Shares on the Nasdaq Capital Market.

In the event that our ordinary shares are not eligible for continued listing on the Nasdaq Capital Market or another national securities exchange, trading of our ordinary shares could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our ordinary shares, and there would likely also be a reduction in our coverage by security analysts and the news media, which could cause the price of our ordinary shares to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.

ITEM 6. EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.