v2.4.0.6
Document and Entity Information
12 Months Ended
Dec. 31, 2012
Document and Entity Information [Abstract]  
Document Type F-1
Document Period End Date Dec. 31, 2012
Amendment Flag true
Amendment Description Amendment No. 1 to Form F-1
Entity Registrant Name SuperCom Ltd
Entity Central Index Key 0001291855
Trading Symbol SPCBF
Entity Filer Category Non-accelerated Filer
v2.4.0.6
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
CURRENT ASSETS:    
Cash and cash equivalents $ 225 $ 215
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
Deferred tax short term 516   
Other accounts receivable and prepaid expenses (Note 3) 311 105
Inventories, net (Note 4) 280 269
Total current assets 2,930 2,131
Severance pay fund 203 228
Deferred tax long term 517   
Property and equipment, net (Note 6) 93 96
Total assets 3,743 2,455
CURRENT LIABILITIES:    
Short-term bank credit 101 112
Trade payables 1,780 2,439
Employees and payroll accruals 138 139
Accrued expenses and other liabilities (Note 8) 777 2,164
Convertible bonds (Note 11)    2,519
Short-term loan and others    456
Total current liabilities 2,796 7,829
LONG-TERM LIABILITIES:    
Accrued severance pay 236 227
Total long-term liabilities 236 227
SHAREHOLDERS':    
Share capital: Ordinary shares of NIS 0.25 par value - Authorized 12,235,288 shares as of December 31, 2012; Issued and outstanding: 8,651,703 and 2,831,827 shares as of December 31, 2012 and 2011, respectively 574 192
Additional paid-in capital 43,518 41,713
Amount of liability extinguished on account of shares 127 819
Accumulated deficit (43,508) (48,325)
Total shareholders' equity (deficiency) 711 (5,601)
Total liabilities and shareholders' equity $ 3,743 $ 2,455
v2.4.0.6
CONSOLIDATED BALANCE SHEETS (Parenthetical)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2012
USD ($)
Dec. 31, 2012
ILS
Dec. 31, 2011
USD ($)
Dec. 31, 2011
ILS
CONSOLIDATED BALANCE SHEETS [Abstract]        
Trade receivables, allowance for doubtful accounts $ 1,726   $ 134  
Ordinary shares, par value per share   0.25   0.25
Ordinary shares, shares authorized 12,235,288 12,235,288 12,235,288 12,235,288
Ordinary shares, shares issued 8,651,703 8,651,703 2,831,827 2,831,827
Ordinary shares, shares outstanding 8,651,703 8,651,703 2,831,827 2,831,827
v2.4.0.6
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]      
Revenues $ 8,940 $ 7,922 $ 7,389
Cost of revenues 1,619 3,306 2,057
Gross profit 7,321 4,616 5,332
Operating expenses:      
Research and development 313 462 386
Selling and marketing 3,060 3,505 4,405
General and administrative 857 732 1,985
Other expenses (income) 1,085 (137) (396)
Total operating expenses 5,315 4,562 6,380
Operating income (loss) 2,006 54 (1,048)
Financial income (expenses), net 1,805 990 (678)
Income (loss) before income tax 3,811 1,044 (1,726)
Income tax (expense) benefit 1,006 (25) (50)
Net income (loss) from continuing operations 4,817 1,019 (1,776)
Loss from discontinued operations       (189)
Net income (loss) $ 4,817 $ 1,019 $ (1,965)
Earnings (loss) per share from continuing operations:      
Basic $ 0.75 $ 0.47 $ (1.22)
Diluted $ 0.59 $ 0.37 $ (1.22)
Loss per share from discontinued operations basic and diluted:       $ (0.13)
Net earnings (loss) per share:      
Basic $ 0.75 $ 0.47 $ (1.35)
Diluted $ 0.59 $ 0.37 $ (1.35)
Weighted average number of ordinary shares used in computing basic earnings (loss) per share 6,464,808 2,147,370 1,453,614
Weighted average number of ordinary shares used in computing diluted earnings (loss) per share 8,156,339 2,755,353 1,453,614
v2.4.0.6
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT (USD $)
In Thousands, except Share data
Total
Ordinary shares [Member]
Additional paid-in capital [Member]
Amount of liability extinguished on account of shares [Member]
Accumulated deficit [Member]
Balance at Dec. 31, 2009 $ (6,271) $ 89 $ 41,019    $ (47,379)
Balance (in shares) at Dec. 31, 2009   1,346,922      
Issuance of shares in connection with acquisition of Intelli-Site (see Note 1a)    [1]    [1]         
Issuance of shares in connection with acquisition of Intelli-Site (see Note 1a) (in shares)   1,631      
Issuance of shares (Note 12f) 200 24 176      
Issuance of shares (Note 12f) (in shares)   361,991      
Exercise of options    [1]    [1]         
Exercise of options (in shares)   2,590      
Warrants issued in connection with extinguishments of liabilities (see Note 1d) 147    147      
Stock- based compensation 18    18      
Net income (loss) (1,965)          (1,965)
Balance at Dec. 31, 2010 (7,871) 113 41,360    (49,244)
Balance (in shares) at Dec. 31, 2010   1,713,134      
Exercise of options    [1]    [1]         
Exercise of options (in shares)   2,355      
Shares, options and warrants issued in connection with extinguishments of liabilities (see Notes 1d and 12d) 1,241 79 343 819   
Shares, options and warrants issued in connection with extinguishments of liabilities (see Notes 1d and 12d) (in shares)   1,116,338      
Stock- based compensation 10    10      
Net income (loss) 1,019          1,019
Balance at Dec. 31, 2011 (5,601) 192 41,713 819 (48,325)
Balance (in shares) at Dec. 31, 2011   2,831,827      
Exercise of options 0 5 (5)      
Exercise of options (in shares)   80,499      
Shares, options and warrants issued in connection with extinguishments of liabilities (see Notes 1d and 12d) 1,495 377 1,810 (692)   
Shares, options and warrants issued in connection with extinguishments of liabilities (see Notes 1d and 12d) (in shares)   5,739,377      
Stock- based compensation 0            
Net income (loss) 4,817          4,817
Balance at Dec. 31, 2012 $ 711 $ 574 $ 43,518 $ 127 $ (43,508)
Balance (in shares) at Dec. 31, 2012   8,651,703      
[1] Less than $1.
v2.4.0.6
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities:      
Net income (loss) $ 4,817,000 $ 1,019,000 $ (1,965,000)
Adjustments to reconcile net income (loss) to net cash used in operating activities:      
Depreciation and amortization 31,000 28,000 53,000
Accrued severance pay 9,000 (27,000) (47,000)
Stock-based compensation    10,000 18,000
Amortization of discount on convertible bonds       20,000
Deferred tax (1,033,000)      
Capital loss on disposal of property and equipment    6,000   
Capital gain on sale of subsidiary       (272,000)
Capital gain on extinguishments of liabilities (2,230,000) (2,149,000) (124,000)
Decrease (increase) in trade receivables, net (55,000) (790,000) 105,000
Decrease (increase) in other accounts receivable and prepaid expenses (206,000) 283,000 (105,000)
Decrease (increase) in inventories, net (11,000) (72,000) (132,000)
Increase (decrease) in trade payables (659,000) 1,466,000 (2,000)
Increase (decrease) in employees and payroll accruals (1,000) 3,000 (311,000)
Increase (decrease) in advances from customer    (1,010,000) 973,000
Increase (decrease) in accrued expenses and other liabilities (638,000) 1,044,000 577,000
Net cash used in operating activities 24,000 (189,000) (1,212,000)
Cash flows from investing activities:      
Purchase of property and equipment (28,000) (23,000) (4,000)
Proceeds from sale of property and equipment    3,000   
Proceeds from sale of operations net of cash sold (Appendix B)       397,000
Sale of subsidiary net of cash sold       (3,000)
Decrease in severance pay fund 25,000 6,000 49,000
Restricted cash deposits, net    130,000 200,000
Net cash provided by investing activities (3,000) 116,000 639,000
Cash flows from financing activities:      
Short-term bank credit, net (11,000) 112,000   
Principle repayment of convertible bonds    (21,000) (86,000)
Issuance of share capital, net of issuance costs       200,000
Proceeds from exercise of options and warrants, net    [1]    [1]    [1]
Payment of liability to a former owner of an acquiree         
Net cash (used in) provided by financing activities (11,000) 91,000 114,000
Increase (decrease) in cash and cash equivalents 10,000 18,000 (459,000)
Cash and cash equivalents at the beginning of the year 215,000 197,000 656,000
Cash and cash equivalents at the end of the year $ 225,000 $ 215,000 $ 197,000
[1] Less than $1.
v2.4.0.6
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Assets and liabilities of the operations, as of date of sale:      
Working capital (excluding cash and cash equivalents)       $ (208)
Property and equipment, net       88
Intangible assets, net       517
Sale of operations net of cash sold       397
Assets and liabilities of the subsidiary, as of date of sale:      
Working capital (excluding cash and cash equivalents)       (276)
Property and equipment, net       4
Long-term liability       (3)
Capital gain on sale of subsidiary       272
Sale of subsidiary net of cash sold       (3)
Cash paid during the year for:      
Interest 5 6   
Income taxes, net 27 25 50
Supplemental disclosure of non-cash investing and financing activities:      
Extinguishments of liabilities credited to shareholder's deficit (see Note 1d) 1,492 1,220 147
Issuance of shares to service providers and officer    $ 21   
v2.4.0.6
GENERAL
12 Months Ended
Dec. 31, 2012
GENERAL [Abstract]  
GENERAL
NOTE 1:-
GENERAL
 
 
a.
SuperCom Ltd. (the "Company") was incorporated in 1988 in Israel. The Company's ordinary shares have been listed for trade on the OTCQB Market, which operates an electronic quotation service for securities traded over-the-counter, since October 1, 2009 under the ticker symbol "VUNCF". On January 24, 2013 the Company changed back to  its original name, SuperCom Ltd. The company's ticker symbol is "SPCBF".
 
Until January 2010 (the date of the sale of the activities as described below in Note 1b), the Company developed and marketed security solutions for viewing, tracking, locating, credentialing, and managing essential assets and personnel, which encompassed electronic access control, urban security, and critical situation management systems as well as long-range Active RFID for public safety, commercial, and government sectors. Following the sale of certain activities in January 2010, the Company is focusing on its wireless ID products and solutions, e-ID projects and solutions.
 
The Company is headquartered in Israel.
 
The Company sells its products through centralized marketing offices in the U.S. and Israel.
 
The Company's active subsidiaries are: S.B.C. Aviation Ltd., (incorporated in Israel) which began operations in 2007 and is focused on executing perimeter security and a border control project at a European International Airport, and PureRFid, Inc. (incorporated in Delaware), which focuses on the marketing and selling of the Company's active RFID solutions. As of December 31, 2012, the Company's activities were conducted  mainly through Supercom Ltd. and PureRFid, Inc.
 
Regarding the sale of certain assets and liabilities of Vuance Inc in January 2010, see b below.
 
On March 25, 2009, the Company, through its subsidiary, Vuance Inc., completed the acquisition of certain assets and liabilities of Intelli-Site, Inc. ("Intelli-Site"). The purchase price was $262 payable in cash and in shares of the Company (which were subject to a certain lock up mechanism) and included a contingent consideration of up to $600 based upon certain conditions. The results of operations of Intelli-Site were included in the consolidated financial statements of the Company commencing April, 2009. However, during the first quarter of 2010, this activity (including the contingent consideration related to it) was sold, see b below. 
 
 
b.
Discontinued operations
 
 
 
On January 28, 2010, the Company and its subsidiary Vuance, Inc. completed the sale of certain of the assets (including certain accounts receivable and inventory) and certain of the liabilities (including certain accounts payable) of Vuance Inc. (the "Sale") related to the Company's electronic access control market (the "Vuance EAC Business"), pursuant to a certain Agreement for Purchase and Sale of Business Assets (the "Purchase Agreement"), dated as of January 9, 2010 between Vuance Inc. and OLTIS Security Systems International, LLC ("OSSI"). As consideration for the Sale of the Vuance EAC Business, OSSI paid Vuance Inc. $147 in cash. In addition, OSSI paid off  a loan of $290 from Bridge Bank, National Association. The Purchase Agreement included an indemnification clause pursuant to which, the Company agreed to indemnify and hold OSSI harmless from and against any claim or liability of the Company which may be asserted against OSSI, except to the extent of any business debts and other liabilities which OSSI expressly agreed to pay or assume at the closing date.
 
 
On January 29, 2010), the Company and Vuance, Inc. completed the sale of certain of the assets and certain of the liabilities of Vuance Inc. related to the Company's Government Services Division (the "Vuance CSMS Business"), pursuant to an  asset purchase agreement dated January 29, 2010 between the Company, Vuance Inc., WidePoint Corporation ("WidePoint") and Advance Response Concepts Corporation.
 
As consideration for the sale, WidePoint paid Vuance Inc. $250. In addition, WidePoint agreed to pay Vuance Inc. a maximum earn out of $1,500 over the course of the calendar years 2010, 2011, and 2012, subject to the performance of certain financial requirements of the Vuance CSMS Business during each of those years. The agreement included an indemnification clause pursuant to which, each of the parties agreed to indemnify and hold harmless the other party in certain events.
 
Each of the activities sold meets the definition of a component under ASC Topic 205-20 - "Discontinued Operation", and accordingly, the results of operations of these components were presented as discontinued operations. Following the sale of the activities, the Company does not have any involvement with respect to the activities sold.
 
The results of the discontinued operations are as follows:
 
   
Year ended
 
   
December 31,2010
 
    $  
         
Revenues
    541  
Cost of revenues
    (497 )
Research and development
    (96 )
Selling and marketing
    (105 )
General and administrative
    (28 )
Financial expenses
    (4 )
Impairment of goodwill and other intangible assets
    -  
Net loss
  $ (189 )

 
c.
Sale of subsidiary:
 
During October 2010, the Company sold its entire equity interest in its wholly owned Hong Kong subsidiary, SuperCom Asia Pacific Limited ("SAP"), for no consideration. As part of this sale, the Company assigned to the purchaser certain outstanding loans due to the Company by SAP in the amount of $1,400. As result of the sale, the Company realized a capital gain of $272 in the fourth quarter of 2010.
 
 
d.
Extinguishment of liabilities
 
On November 3, 2010, the Company submitted to the District Court in Petach-Tikva, Israel a request to summon meetings of creditors of the Company in order to approve a proposed arrangement between the Company and its creditors (including convertible bond holders) in accordance with Section 350 of the Israeli Companies Law 5759-1999. The proposed arrangement involved an allotment of ordinary shares or warrants to purchase ordinary shares of the Company to certain of its creditors at a price of $0.38 per ordinary share against 40% of the total outstanding debt to the creditors, in total satisfaction of the entire debt owed to the Company's creditors (thus forgiving and waiving 60% of the total outstanding debt of the Company). The proposed arrangement was based on the proposal which was approved by the general meeting of the shareholders of the Company  on September 12, 2010. The Company convened the meetings of its creditors to approve the proposed debt arrangement during February and March 2011. On March 15, 2011, the Company filed an application with the Petach-Tikva District Court for the approval of the creditor arrangement.
 
On July 18, 2011, the Discrict Court determined not to approve the  application, mainly due to an objection to the proposed arrangement filed by one of the Company's secured creditors, Special Situations Funds ("SSF"), which later assigned its convertible bonds on November 8, 2011 to Mr. Eliyahu Trabelsi (see also Notes 11 and 13f). In February 2012, following the approval of the board of directors, the Company decided to proceed with the arrangement which was approved by its general meeting without further proceedings in the District Court.
 
As of December 31, 2010, creditors holding  a total outstanding debt of $271 had accepted the Company's debt arrangement proposal. The Company allotted a total of 283,798 warrants to purchase ordinary shares of the Company to  those creditors (see also Note 12f2). In accordance with ASC Topic 470-50-40, the Company recorded  $124 as a gain from extinguishment of debt based on the difference between the carrying amount of the liabilities extinguished ($271) and the fair value of the warrants allotted ($147), which gain was credited directly to additional paid-in capital.
 
During 2011, creditors holding  outstanding debt of $3,369  accepted the Company's debt arrangement proposal. The Company allotted a total of 254,558 warrants and 70,588 options (with an exercise price of nil) to purchase ordinary shares of the Company and 3,185,609 ordinary shares of the Company (see also Note 11) to those creditors. In accordance with ASC Topic 470-50-40, the Company recorded  $2,149 as a gain on extinguishment of debts based on the difference between the carrying amount of the liabilities extinguished ($3,369) and the fair value of the warrants and options allotted ($1,220), which was gain credited directly to additional paid-in capital (see also Note 12).
 
Following the approval of the board of directors, during 2012, certain creditors and convertible bond holders including Sigma Wave Ltd ("Sigma") and Mr. Eliyahu Trabelsi, accepted the Company's debt arrangement proposal for $3,910 of outstanding debt. The Company allotted to Sigma and Mr. Eliyahu Trabelsi a total of 3,431,800 ordinary shares of the Company (see also Note 11), and granted a former service provider a warrant to purchase 325,647 ordinary shares. In accordance with ASC Topic 470-50-40, the Company recorded $2,417 as a gain on extinguishment of debt based on the difference between the carrying amounts of the liability extinguished ($3,910) and the fair value of (i) the ordinary shares granted ($1,240), (ii) the warrant  granted ($126),  and (iii) the amount of liability extinguished on account of shares ($127).
 
 
e.
Concentration of risk that may have a significant impact on the Company:
 
Throughout the reporting periods the Company derived most of its revenues from two major customers. See also Note 14c.
 
The Company purchases certain services and products used by it to generate revenues in its projects and sales from several sole suppliers. Although there are only a limited number of manufacturers of those  services and products, management believe that other suppliers could provide similar services and products on comparable terms without affecting operating results.
 
 
f.
During the year 2010, the Company's board of directors elected new board of directors recommended by Sigma Wave. Sigma acquired convertible bonds held by Brevan Howard Master Fund Limited ("BH") (see Note 11). The new board proposed a debt to equity conversion to certain creditors and bond holders, which was later approved by the Company's general assembly. The conversion which was completed in 2012, reduced the Company's debt by over $6 million.
 
The Company implemented a restructuring plan starting in the fourth quarter of 2010 which included: (i) a major reduction in operating expenses by reducing general and administrative costs and optimizing  the Company's  global sales network; (ii) increasing the Company's  gross  profit margin by negotiating better terms with suppliers and subcontractors; (iii) the sale of unprofitable subsidiaries and cost cutting in other subsidiaries; (iv) discontinuance  of activities and  divisions that were not synergistic with the Company's core operations; (v) increased  sales in the company core competence markets; (vi) increased activities in more lucrative and rapid growing vertical markets; and (vii) recruitment of highly experienced executives and market experts to support the Company's  broadening activity.
v2.4.0.6
SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2012
SIGNIFICANT ACCOUNTING POLICIES [Abstract]  
SIGNIFICANT ACCOUNTING POLICIES
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
 
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP").
 
 
a.
Use of estimates:
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to allowance for doubtful account and contingencies.
 
 
b.
Financial statements in U.S. dollars:
 
Most of the revenues of the Company and its subsidiaries are received in U.S. dollars. In addition, a substantial portion of the costs of the Company and its subsidiaries are incurred in U.S. dollars. Therefore, management believes that the dollar is the currency of the primary economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the U.S. dollar.
 
Monetary accounts maintained in currencies other than the U.S. dollar are re-measured into U.S. dollars in accordance with the standards of the Financial Accounting Standards Board ("FASB"). All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected in the statements of operations as financial income or financial expenses as appropriate.
 
 
c.
Principles of consolidation:
 
The consolidated financial statements include the accounts of the Company and its subsidiaries in Israel and the United States. Material intercompany transactions and balances were eliminated upon consolidation. Material profits from intercompany sales, not yet realized outside the group, were also eliminated.
 
 
d.
Cash and cash equivalents:
 
The Company considers unrestricted short-term highly liquid investments originally purchased with maturities of three months or less to be cash and cash equivalents.
 
 
e.
Allowance for doubtful accounts:
 
The allowance for doubtful accounts is determined with respect to specific amounts the Company has determined to be doubtful of collection. In determining the allowance for doubtful accounts, the Company considers, among other things, its past experience with such customers and the information available regarding such customers.
 
 
f.
Inventories:
 
Inventories are stated at the lower of cost or market value. Inventory write-offs are mainly provided to cover risks arising from slow-moving items or technological obsolescence. Cost is determined as follows:
 
Raw  materials, parts and supplies - using the "moving average cost" method or the "first in first out" method.
 
Finished products - on the basis of direct manufacturing costs.
 
 
h.
Property and equipment:
 
Property and equipment are stated at cost, net of accumulated depreciation.
 
Depreciation is computed using the straight-line method, over the estimated useful lives, at the following annual rates:
 
   
%
     
Computers and peripheral equipment
 
33
Office furniture and equipment
 
6 - 20
Leasehold improvements
 
Over the shorter of the term of the lease or the life of the asset

 
i.
Impairment of long-lived assets and intangible assets:
 
The Company's long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less costs to sell.
 
 
j.
Convertible Bonds:
 
The Company applied the provisions of ASC Topic 470 - 10 - 45 "Debt - Other presentation matters" with respect to a financing agreement signed after December 31, 2010, but before the issuance of the 2010 financial statements and accordingly, presented as of December 31, 2010, $4,262 of  convertible bonds  as a long term liability.
 
 
k.
Accrued severance pay and severance pay fund:
 
The liabilities of the Company for severance pay of its Israeli employees are calculated pursuant to Israel's Severance Pay Law. Employees are entitled to one month's salary for each year of employment, or portion thereof. The Company's liability for all its employees is presented under "accrued severance pay". The Company deposits on a monthly basis to severance pay funds and insurance policies. The value of these policies is presented as an asset on the Company's balance sheet.
 
The deposited funds include accrued income up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the Company's obligation pursuant to Israel's Severance Pay Law or labor agreements.
 
Severance expenses for the years ended December 31, 2012, 2011 and 2010 amounted to  $10, $15 and $57, respectively.
 
 
l.
Revenue recognition:
 
The Company and its subsidiaries generate their revenues from the sale of products, maintenance, royalties and long term contracts (including training and installation).
 
Product sales are recognized in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB No. 104"), when persuasive evidence of an agreement exists, delivery of the product has occurred or services have been rendered, 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.
 
The Company is 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, the Company had an allowance for customer returns in the amount of $6.
 
The Company recognizes 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.  The Company measures 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.
 
The Company believes that the use of the percentage of completion method is appropriate, since the Company has 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, the Company expects to perform its contractual obligations and the parties are expected to satisfy their obligations under the contract.

 
m.
Revenue recognition

In contracts that do not meet all the conditions mentioned above, the Company 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.
 
Revenues for maintenance services are recognized over the term of the contracts. The warranty period is usually 12 months. Based primarily on historical experience, the Company does 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.
 

The Company provides its customers with a license to issue IDs, passports and driver's licenses and it is entitled to royalties upon the issuance of each document by its customers. Such royalties are recognized when the issuances are reported to the Company (usually on a monthly basis).
 
 
n.
Shipping and handling costs:

Shipping and handling fees billed to customers are reflected as revenues while the related shipping and handling costs are included in cost of revenues. To date, shipping and handling costs have not been material.

 
o.
Research and development costs:
 
Research and development costs (other than software) are expensed as incurred.

 
p.
Income taxes:
 
The Company and its subsidiaries account for income taxes in accordance with ASC Topic 740, "Income Taxes". This Standard  prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of  the assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

The Company accounts for uncertain tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements. According to ASC Topic 740-10, tax positions must meet a more-likely-than-not recognition and measurement threshold. The Company's accounting policy is to classify interest and penalties relating to uncertain tax positions under income taxes, however the Company did not recognize such items in its fiscal 2012, 2011 and 2010 financial statements.

 
q.
Concentrations of credit risk:
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash deposits and trade receivables. The Company's trade receivables are derived from sales to limited number of customers located primarily in Eastern Europe, the United States and Israel. The Company performs ongoing credit evaluations of its customers' financial condition. The allowance for doubtful accounts is determined with respect to specific debts that the Company has determined to be doubtful of collection.

Cash and cash equivalents and restricted cash deposits are deposited with major banks in Israel and the United States. Management believes that such financial institutions are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments.
 
The Company has no significant off-balance-sheet credit risks, such as foreign exchange contracts, option contracts or other foreign hedging arrangements.