OMNIQ Corp. 10-Q

10-Q 1 form10-q.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2020 [ ] 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: 000-09047 OMNIQ Corp. (Exact name of registrant as specified in its charter) Delaware 20-3454263 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1865 West 2100 South Salt Lake City, UT 84119 (Address of principal executive offices) (Zip Code) (801) 244-9577 (Registrant’s telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Ticker symbol(s) Name of each exchange on which registered N/A N/A N/A 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 [X] 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 (§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 [X] 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. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Emerging growth company [ ] 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 [X] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,684,694 shares of common stock, $0.001 par value, as of November 9, 2020. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS F-1 CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2020 AND DECEMBER 31, 2019, (UNAUDITED) F-1 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019, (UNAUDITED) F-2 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019, (UNAUDITED) F-3 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019, (UNAUDITED) F-5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) F-6 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 6 ITEM 4. CONTROLS AND PROCEDURES 6 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 7 ITEM 1A. RISK FACTORS. 7 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 7 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 7 ITEM 4. MINE SAFETY DISCLOSURES. 7 ITEM 5. OTHER INFORMATION. 7 ITEM 6. EXHIBITS. 7 SIGNATURES 8 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OMNIQ CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) As of September 30, 2020 December 31, 2019 (In thousands, except share and per share data) ASSETS Current assets Cash and cash equivalents $ 5,066 $ 1,615 Accounts receivable, net 9,901 6,694 Inventory 1,671 1,889 Prepaid expenses 782 362 Other current assets 9 65 Total current assets 17,429 10,625 Property and equipment, net of accumulated depreciation of $555 and $2,195, respectively 332 463 Goodwill 14,695 13,921 Trade name, net of accumulated amortization of $1,156 and $2,932, respectively 1,156 1,458 Customer relationships, net of accumulated amortization of $4,885 and $6,578, respectively 4,885 6,012 Other intangibles, net of accumulated amortization of $1,104 and $185, respectively 1,104 1,138 Cash, restricted 533 533 Right of use lease asset 91 131 Other assets 106 172 Total assets $ 40,331 $ 34,453 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued liabilities $ 28,480 $ 18,694 Line of credit 3,235 1,365 Accrued payroll and sales tax 1,542 1,556 Notes payable, related parties – current portion 480 1,025 Notes payable – current portion 6,997 6,497 Lease liability – current portion 38 54 Other current liabilities 1,267 1,599 Total current liabilities 42,039 30,790 Long term liabilities Notes payable, related party, less current portion 774 1,172 Accrued interest and accrued liabilities, related party 50 76 Notes payable, less current portion 352 143 Lease liability 57 80 Other long term liabilities 220 384 Total liabilities 43,492 32,645 Stockholders’ equity (deficit) Series A Preferred stock; $0.001 par value; 1,000,000 shares designated, 0 shares issued and outstanding - - Series B Preferred stock; $0.001 par value; 1 share designated, 0 shares issued and outstanding - - Series C Preferred stock; $0.001 par value; 5,000,000 shares designated, 2,145,030 and 4,828,530 shares issued and outstanding, respectively 2 5 Common stock; $0.001 par value; 15,000,000 shares authorized; 4,634,637 and 3,960,405 shares issued and outstanding, respectively. 5 4 Additional paid-in capital 50,710 46,861 Accumulated (deficit) (53,849 ) (45,063 ) Accumulated other comprehensive loss (29 ) 1 Total stockholders’ equity (deficit) (3,161 ) 1,808 Total liabilities and stockholders’ equity (deficit) $ 40,331 $ 34,453 The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements. F- 1 OMNIQ CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) For the three months For the nine months ending September 30, ending September 30, (In thousands, except share and per share data) 2020 2019 2020 2019 Revenues Total Revenues $ 15,833 $ 13,097 $ 42,309 $ 45,843 Cost of goods sold Cost of goods sold 13,024 9,601 33,886 34,123 Gross profit 2,809 3,496 8,423 11,720 Operating expenses General and administrative 837 727 2,414 1,941 Salary and employee benefits 2,581 2,700 7,666 7,763 Depreciation and amortization 594 536 1,696 1,620 Professional fees 1,818 268 3,018 1,226 Total operating expenses 5,830 4,231 14,794 12,550 Loss from operations (3,021 ) (735 ) (6,371 ) (830 ) Other income (expenses): Interest expense (744 ) (618 ) (1,957 ) (1,769 ) Other (expenses) (16 ) (90 ) (318 ) (9 ) Total other expenses (760 ) (708 ) (2,275 ) (1,778 ) Net Loss Before Income Taxes (3781 ) (1,443 ) (8,646 ) (2,608 ) Provision for Income Taxes Current - - - - Total Provision for Income Taxes - - - - Net Loss attributable to OMNIQ Corp. $ (3,781 ) $ (1,443 ) $ (8,646 ) $ (2,608 ) Foreign currency translation adjustment (16 ) 12 (30 ) 12 Comprehensive loss (3,797 ) (1,431 ) (8,676 ) (2,596 ) Reconciliation of net loss to net loss attributable to common shareholders Net loss (3,781 ) (1,443 ) (8,646 ) (2,608 ) Less: Preferred stock – Series C dividend (32 ) (48 ) (158 ) (141 ) Net loss attributable to the common stockholders $ (3,813 ) $ (1,491 ) $ (8,804 ) $ (2,749 ) Net (loss) per share - basic $ (0.83 ) $ (0.38 ) $ (2.03 ) $ (0.64 ) Weighted average number of common shares outstanding - basic 4,588,944 3,879,159 4,339,634 3,865,647 The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements. F- 2 OMNIQ CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED) Series C Preferred Stock Common Stock Additional Paid-in Shares Accumulated Other Comprehensive Total Stockholders’ Equity (In thousands) Shares Amount Shares Amount Capital Repurchased Deficit Income (Loss) (Deficit) Balance, December 31, 2018 4,829 $ 5 3,597 $ 4 $ 42,264 $ (230 ) $ (39,752 ) $ 1 $ 2,292 Dividend on Class C Shares - - - - - (47 ) - (47 ) ESPP Stock Issuance - - - - 1 - - - 1 Stock-based compensation – options and warrants - - - - 323 - - - 323 Stock redemption (25 ) - (230 ) 230 - Accumulated other Comprehensive Loss - - - - - - - - Net (loss) - - - - - - (633 ) - (633 ) Balance, March 31, 2019 4,829 $ 5 3,572 $ 4 $ 42,358 $ - $ (40,432 ) $ 1 $ 1,936 Dividend on Class C Shares - - - - - (48 ) - (48 ) ESPP Stock Issuance - - 1 - - - - - - Stock-based compensation – options and warrants - - - - 100 - - - 100 Stock and warrant issuances, net of issuance costs 832 1 4,058 - 4,059 Purchase price adjustment – shares to be received - - (555 ) (1 ) 1 - - - - Net (loss) income - - - - - - (530 ) - (530 ) Balance, June 30, 2019 4,829 $ 5 3,850 $ 4 $ 46,517 $ - $ (41,010 ) $ 1 $ 5,517 Dividend on Class C Shares - - - - - 276 - 276 ESPP Stock Issuance - - - - - - - - - Stock-based compensation – options, warrants, issuances - - 78 - 670 - - - 670 Foreign currency translation - - - - - - - 12 12 Conversion of debt - - 32 - 150 - - - 150 Net (loss) - - - - - - (1,443 ) - (1,443 ) Balance, September 30, 2019 4,829 $ 5 3,960 $ 4 $ 47,337 $ - $ (42,177 ) $ 13 $ 5,182 The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements. F- 3 Series C Preferred Stock Common Stock Additional Paid-in Shares Accumulated Other Comprehensive Total Stockholders’ Equity (In thousands) Shares Amount Shares Amount Capital Repurchased Deficit Income (Loss) (Deficit) Balance, December 31, 2019 4,829 $ 5 3,960 $ 4 $ 46,861 $ - $ (45,063 ) $ 1 $ 1,808 Dividend on Class C Shares - - - - - (72 ) - (72 ) Accumulated other comprehensive loss - - - - - - - (17 ) (17 ) Stock-based compensation – options and warrants - - - - 190 - - - 190 Subscribed common stock - 440 - - - 440 Professional fees – restricted shares - - 65 - 354 - - - 354 Other misc. items - - - - - - 14 - 14 Net (loss) - - - - - - (2,873 ) - (2,873 ) Balance, March 31, 2020 4,829 $ 5 4,025 $ 4 $ 47,845 $ - $ (47,994 ) $ (16 ) $ (156 ) Dividend on Class C Shares - - - - - (54 ) - (54 ) Accumulated other comprehensive loss - - - - - - - 3 3 Stock-based compensation – options - - - - 105 - - - 105 Subscribed common stock 80 - - - - - - Professional fees (including prepaid) – stock based - - 67 - 547 - - - 547 Cashless exercise of stock options - - 34 - - - - - - Conversion agreements – preferred shares (2,684 ) (3 ) - - 3 - - - - Conversion agreements - debt - - - - 822 - - - 822 Net (loss) - - - - - - (1,992 ) - (1,992 ) Balance, June 30, 2020 2,145 $ 2 4,206 $ 4 $ 49,322 $ - $ (50,040 ) $ (13 ) $ (725 ) Dividend on Class C Shares - - - - - (32 ) - (32 ) Foreign currency translation adjustment - - - - - - - (16 ) (16 ) Employee stock-based compensation (options) - - - - 76 - - - 76 Options/warrants exercised - - 57 - - - - - - Nonemployee stock-based compensation (warrants, grants) - - 120 1 1,312 - - - 1,313 Conversion agreements - - 252 - - - - - - Other misc. items - - - - - - 4 - 4 Net (loss) - - - - - - (3,781 ) - (3,781 ) Balance, September 30, 2020 2,145 $ 2 4,635 $ 5 $ 50,710 $ - $ (53,849 ) $ (29 ) $ (3,161 ) The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements. F- 4 OMNIQ CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) For the nine months ended September 30 (In thousands) 2020 2019 Cash flows from continuing operating activities: Net loss $ (8,646 ) $ (2,608 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Stock based compensation 2,275 1,093 Amortization of ROU lease asset 40 - Depreciation and amortization 1,696 1,620 Changes in operating assets and liabilities: Accounts receivable (3,193 ) 1,420 Prepaid expenses (116 ) (154 ) Inventory 218 (234 ) Accounts payable and accrued liabilities 9,673 4,412 Accrued interest and accrued liabilities, related party (26 ) (6 ) Accrued payroll and sales taxes payable (14 ) (295 ) Other assets 48 57 Lease liability (39 ) - Other liabilities (420 ) (358 ) Net cash provided by operating activities 1,496 4,947 Cash flows from investing activities: Other assets 66 (225 ) Purchase of property and equipment (5 ) (45 ) Net cash provided by investing activities 61 (270 ) Cash flows from financing activities: Proceeds from ESPP stock issuance - 1 Net proceeds from common stock and warrant issuances - 3,937 Proceeds from / (payments on) line of credit 1,870 (4,017 ) Proceeds from notes/loans payable 898 - Payment on notes/loans payable (874 ) (3,022 ) Net cash provided by (used in) financing activities 1,894 (3,101 ) Net increase in cash 3,451 1,576 Cash, beginning of period 1,615 378 Cash, end of period $ 5,066 $ 1,954 Cash paid for interest $ 77 $ 1,156 Cash paid for taxes $ - $ - Supplementary for non-cash flow information: Stock issued for services $ 1,971 $ 138 Intangible assets acquired in non-cash exchange 885 - Conversion of notes payable 281 550 Stock options issued $ 304 $ 1,093 The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements. F- 5 OMNIQ CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The interim consolidated financial statements of OMNIQ Corp. include the combined accounts of Quest Marketing, Inc., an Oregon Corporation, Quest Exchange Ltd., a Canadian based holding company, HTS Image Processing, Inc. (“HTS”), a Delaware corporation, OMNIQ Vision, Inc. (f/k/a HTS (USA), Inc.), a Delaware corporation and HTS Image Ltd. (“HTS Ltd.”) (f/k/a Teamtronics Ltd.), an Israeli corporation. The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2019 and notes thereto included in the Company’s Form 10-K filed with the SEC on March 30, 2020. The Company operates in one segment. Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020. COVID-19 The novel coronavirus (“COVID-19”) was first identified in late 2019. COVID-19 spread rapidly throughout the world and, in March 2020, the World Health Organization (“WHO”) characterized COVID-19 as a pandemic. COVID-19 is a pandemic of respiratory disease spreading from person-to-person that poses a serious public health risk. It has significantly disrupted supply chains and businesses around the world. The extent and duration of the COVID-19 impact on our operations and financial position is highly uncertain. Management cares about the employees, customers and the communities served, so quick and strict action was taken based on the Center for Disease Control and WHO recommendations to combat illness in the workforce and to lessen business interruption for the Company and customers. OMNIQ has been designated an essential business and the operations remain open to serve customers. The Company’s management and employees are focused on safely providing the equipment, parts, and services customers need to continue their work. Management continues to closely monitor and evaluate the impact of the COVID-19 pandemic on the Company’s operations and will take, the necessary actions to right-size the business in this environment, which is evolving daily. Some potential actions include, but are not limited to, modified work schedules as well as appropriate adjustments to the operating expenditures and capital spending plans. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of OMNIQ Corp. is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. F- 6 RECENT ACCOUNTING PRONOUNCEMENTS The Company has evaluated recent pronouncements and believes that none of them will have a material effect on the Company’s financial statements. REVERSE STOCK SPLIT Effective November 20, 2019, the Company implemented a one-for-20 reverse stock split of the Company’s common stock (the “Reverse Split”). The par value of common stock and the number of authorized shares were not adjusted as a result of the Reverse Split. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. As a result of the Reverse Split, proportionate adjustments have been made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all preferred stock, stock options and warrants issued by the Company and outstanding immediately prior to the Reverse Split, which resulted in a proportionate decrease in the number of shares of the Company’s common stock reserved for issuance upon exercise or vesting of such preferred stock, stock options, restricted stock units and warrants, and, in the case of stock options and warrants, a proportionate increase in the exercise price of all such stock options and warrants. In addition, the number of shares authorized for future grant under the Company’s equity incentive/compensation plans immediately prior to the Reverse Split was reduced proportionately. GOODWILL AND INTANGIBLE ASSETS Intangible assets are stated at cost, net of accumulated amortization. The assets are being amortized on the straight-line method over useful lives ranging from 3 to 11 years. Amortization expense for the nine months ended September 30, 2020 and September 30, 2019 was $1.6 million and $1.5 million, respectively. F- 7 NET LOSS PER COMMON SHARE Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share.” Basic net loss per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted-average number of common shares outstanding for computing basic EPS for the nine months ended September 30, 2020 and 2019 were 4,339,634 and 3,865,647, respectively. Diluted net loss per share of common stock is the same as basic net loss per share of common stock because the effects of potentially dilutive securities are antidilutive. Dilutive securities are excluded from the computation of diluted net loss per share because such securities have anti-dilutive impact due to losses reported. The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share because such securities have an anti-dilutive impact due to losses reported, as of September 30: (In thousands) 2020 2019 Options to purchase common stock 1,553 629 Convertible preferred stock 107 241 Warrants to purchase common stock 75 225 Potential shares excluded from diluted net loss per share 1,735 1,095 FOREIGN CURRENCY TRANSLATION The consolidated financial statements of the Company are presented in U.S. dollars. The functional currency for the Company and each of its subsidiaries (“Quest US entities”), except HTS Ltd., is U.S. dollars. The functional currency of HTS Ltd. is the Israeli Shekel. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the time of the transaction. For the Company’s U.S. entities, continuing operations are conducted in U.S. dollars. The Company owns a non-operating subsidiary in Canada, from which it has had no activity since October 1, 2016. For HTS Ltd., continuing operations are conducted in Israeli Shekel. NOTE 2 – GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2020, the Company had a working capital deficit of $24.6 million and an accumulated deficit of $53.8 million. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. Management’s plan to eliminate the going concern situation includes, but is not limited to, the continuation of improving cash flow, maintaining moderate cost reductions, the creation of additional sales and profits across its product lines, and the obtaining of sufficient financing to restructure current debt in a manner more in line with the Company’s improving cash flow and cost reduction successes. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. NOTE 3 – CONCENTRATIONS For the nine months ended September 30, 2020 and September 30, 2019, one customer accounted for 39.0% and 15.3% of the Company’s revenues, respectively. At September 30, 2020 and December 31, 2019, one customer accounted for 19.2% and 11.1% of the Company’s accounts receivable balance, respectively. F- 8 NOTE 4 – BUSINESS ACQUISITION Eyepax acquisition On February 28, 2020 (Closing Date), the Company entered into an Asset Purchase Agreement, with Eyepax IT Consulting, LLC (Seller); whereby, the Company acquired Seller’s accounts receivable and the license, ownership rights and source code of the parking Enforcement and Revenue Control System. The Company also assumed the Seller’s accounts payable liabilities. The aggregate purchase price paid is as follows: 1. $100,000 shall be paid on the Closing Date, less $5,000 previously paid as an advance payment, accordingly the remaining balance to be paid on Closing Date is $95,000. 2. $25,000 per month for three months shall be paid on or before the last business day of the month beginning with the first month after the Closing Date, and a fourth payment of $20,000 until a total of $95,000 has been made. 3. Beginning on the first month after Closing Date, $5,000 per month shall be paid in ten (10) monthly installments. 4. 80,000 shares of the Company’s common stock in the name of the Seller, will be issued during 45 days from Closing Date at $5.00 per common share. 5. Stock options to purchase 20,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The option shares will vest in equal quarterly periods, expiring on February 28th, 2023. The purchase price was measured at fair value on the Closing Date as follows: (In thousands) Cash payments to Seller 245 Subscribed common stock 440 Stock purchase options 91 Total 776 The assets acquired and liabilities assumed have been recognized at the Closing date and were measured at fair value as follows: (In thousands) Accounts receivable 13 Software (intangible) 100 Liabilities assumed (113 ) Net assets acquired at fair value 1 Total purchase price 775 Goodwill recognized 774 The Company estimated the fair value the stock purchase option using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate and dividend yield. In valuing these options, the Company assumed a cumulative stock volatility of 269.42%, 36 months expected life, and a risk-free interest rate of 1.160% and dividend yield of 0%. F- 9 NOTE 5 – OTHER LIABILITIES At September 30, 2020 and December 31, 2019, other liabilities consisted of the following: (In thousands) September 30, 2020 December 31, 2019 Other vendor payable $ 801 $ 801 Dividend payable 220 344 Bonus payable - 385 Others 466 453 Total other liabilities 1,487 1,983 Less Current Portion (1,267 ) (1,599 ) Total long term other liabilities $ 220 $ 384 NOTE 6 – CREDIT FACILITIES AND LINE OF CREDIT On July 1, 2016, the Company entered into a Factoring and Security Agreement (the “FASA”) with Action Capital Corporation (“Action”) to establish a sale of accounts facility, whereby the Company may obtain short-term financing by selling and assigning to Action acceptable accounts receivable. Pursuant to the FASA, the outstanding principal amount of advances made by Action to the Company at any time shall not exceed $5.0 million. Action will reserve and withhold an amount in a reserve account equal to 5% of the face amount of each account purchased under the FASA. The balance outstanding under the Action credit line at September 30, 2020 and December 31, 2019, was $3.2 million and $1.4 million respectively, which includes accrued interest. The per annum interest rate with respect to the daily average balance of unpaid advances outstanding under the FASA (computed on a monthly basis) will be equal to the “Prime Rate” of Wells Fargo Bank N.A. plus 2%, plus a monthly fee equal to 0.75% of such average outstanding balance. The Company shall also pay all other costs incurred by Action under the FASA, including all bank fees. The FASA will continue in full force and effect unless terminated by either party upon 30 days’ prior written notice. Performance of the Company’s obligations under the FASA is secured by a security interest in certain collateral of the Company. The FASA includes customary representations and warranties and default provisions for transactions of this type. NOTE 7 – NOTES PAYABLE Notes payable at September 30, 2020 and December 31, 2019, consists of the following: (In thousands) September 30, 2020 December 31, 2019 Supplier Note Payable $ 6,443 $ 6,490 PPP loan 888 - All Other 18 150 Total 7,349 6,640 Less current portion (6,997 ) (6,497 ) Long Term Notes Payable $ 352 $ 143 Future maturities of notes payable as of September 30, 2020 are as follows; 2020 $ 6,548 2021 599 2022 202 2023 - 2024 - Total $ 7,349 F- 10 Payroll Protection Program (PPP) Loan On April 30, 2020, the Company received an unsecured loan (the “PPP Loan”) in the amount of $888 thousand, under the Paycheck Protection Program (the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average 2019 monthly payroll expenses. The PPP Loan was made through Zions First National Bank (the “Lender”) and the Company entered into a U.S. Small Business Administration Paycheck Protection Program Note (“Note”) with the Lender evidencing the PPP Loan. The term of the PPP Loan is two years. Interest will accrue on the outstanding principal balance of the PPP Loan at a fixed rate of 1.0%, which shall be deferred for the first six months of the term of the PPP Loan. Monthly payments will be due and payable beginning in November 2020 and continue each month thereafter until maturity of the PPP Loan. The Company may prepay principal of the PPP Loan at any time in any amount without penalty. The Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties or provisions of the PPP Loan. As of September 30, 2020, the Company has applied to the Lender for forgiveness of the PPP Loan, and the amount which may be forgiven will be equal to the sum of the payroll and benefit costs and covered rent and utility payments incurred by the Company during the twenty four-week period beginning on April 30, 2020, as calculated in accordance with the terms of the CARES Act. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part, but the Company has used and intends to use the proceeds in accordance with the PPP Loan program. The balance on this loan at September 30, 2020 and December 31, 2019 was $888 thousand and $0, respectively. Other note payable In connection with the acquisition of Bar Code Specialties, Inc. (“BCS”), a California corporation, the Company assumed a related party note payable to the former CTO of the RFID division of BCS. The note is payable in equal monthly installments of $5 thousand beginning October 31, 2014 and ended October 2018. The loan bears interest at 8.0% and is unsecured and subordinated to the Company’s bank debt. On June 5, 2020, the Company reached an agreement with the noteholder to convert an aggregate of $261 thousand in principal, unpaid interest, and penalties into an aggregate of 37,270 shares of Common Stock at a conversion price of $7.00 per share, which was based on the closing price on June 3, 2020. The balance on this loan at September 30, 2020 and December 31, 2019 was $0 and $138 thousand, respectively, all of which was classified as long-term. Supplier Note Payable On July 18, 2016, the Company and the Supplier entered into a certain secured promissory note, with an effective date of July 1, 2016, in the principal amount of $12.5 million (the “Secured Promissory Note”). The USD Note accrues interest at 18% per annum and is payable in six consecutive monthly installments of principal and accrued interest in a minimum principal amount of $250 thousand each, with any remaining principal and accrued interest due and payable on December 31, 2016. ● On September 7, 2018, the Company entered into a Sixth Amendment to the Secured Promissory Note (the “Sixth Amendment”) extending the maturity date to January 31, 2019. The Sixth Amendment also increases the principal amount to $8.7 million, an increase of $6.8 million, by rolling the Company’s then existing and outstanding accounts payable into the note by the previously mentioned amount of increase. The Company will continue to make monthly payments in the amount of $300 thousand for the first three monthly payments, and also in the amount of $500 thousand for the last two monthly payments prior to the note’s maturity. ● On April 30, 2019, the Company entered into a Seventh Amendment to the Secured Promissory Note (the “Seventh Amendment”) extending the maturity date to July 31, 2019. The Seventh Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $350 thousand each. The Company has made partial payments towards the required monthly installments under the terms of the Seventh Amendment. As has been the case with each previous amendment, the Company is in continual negotiations with the holder of the Secured Promissory Note to extend the maturity date and establish a new schedule of payments. F- 11 NOTE 8 –NOTES PAYABLE, RELATED PARTIES Notes and loans payable, related parties consisted of the following: (In thousands) September 30, 2020 December 31, 2019 Note payable – debt restructure Marin $ 720 $ 900 Note payable – debt restructure Thomet 450 563 Note payable – debt restructure Zicman (6 ) 135 Convertible note payable – shareholders 90 150 Note payable – RWCC - 449 Total notes payable, related parties 1,254 2,197 Less current portion 480 1,025 Long-term portion $ 774 $ 1,172 Repayment of notes payable The repayment of the notes payable, related parties at September 30, 2020 is as follows: (In thousands) 2020 $ 188 2021 390 2022 390 2023 286 Thereafter - Total $ 1,254 Note payable – debt restructure Marin On February 28, 2018, the Company finalized two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”) which have an effective date of December 30, 2017. Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11.0 million of which an aggregate of $10.7 million (the “Owed Amount”) was outstanding as of February 26, 2018 which includes accrued interest earned but not paid. Pursuant to the Marin Settlement Agreement I, the amount of the indebtedness owed to Marin was reduced by $9.5 million bringing the total amount owed to $1.2 million. Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20 thousand each commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc. is satisfied and all amounts currently in default under the credit agreement with Scansource (currently approximately $6.0 Million) is reduced to $2.0 million. As a result, the balance on this loan and related accrued interest at December 31, 2018 were all classified as long term, being due in 2023. As of September 30, 2020, the balance of this loan was $720 thousand. F- 12 Note payable – debt restructure Thomet On February 28, 2018, the Company finalized a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5.4 million in full in exchange for 60 monthly payments of $13 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of 25,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30, 2017. As of September 30, 2020, the balance of this loan was $450 thousand and is due in 2023. Note payable – debt restructure Zicman On February 28, 2018, the Company finalized a settlement agreement with George Zicman whereby the Company settled its indebtedness to Mr. Zicman in the amount of $1.3 million in full in exchange for 60 monthly payments of $3 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of 5,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement Agreement II. The effective date of the agreement is December 30, 2017. As of September 30, 2020, the balance of this loan was $0. Each of the Marins, Thomet and Zicman entered into a voting agreement with the Company whereby they agreed to vote any shares of common stock beneficially owned by them as directed by the Company’s CEO and also agreed to a leakout restriction whereby they each agreed not to sell more than 10% of the common stock beneficially owned during any 30-day period. Convertible note payable - shareholders On October 5, 2018, the Company entered into a purchase agreement with Walefar Investments, Ltd. (“Walefar”) and Campbeltown Consulting, Inc. (“Campbeltown”) (Walefar and Campbeltown are collectively referred to as the “Sellers”). Pursuant to the agreement, the Company purchased 100% of the capital stock of HTS Image Processing, Inc. (“HTS”) from the Sellers. As consideration, the Company (i) issued to the Sellers 1,122,648 shares of the Company’s common stock, having a value of $5.3 million based on the average closing price of the common stock for the 20 days’ preceding the agreement (the “Per Share Value”), (ii) cash in the amount of $300 thousand, and (iii) a 12 month convertible promissory note with a principal amount of $700 thousand and an interest rate of six percent (6%) per year (the “Convertible Promissory Note”). The note also provides the Sellers the right to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $4.72. The agreement constitutes a “related party transaction” because of Company director Shai Lustgarten’s position as Chief Executive Officer of HTS and stock ownership in HTS. Additionally, Campbeltown is a “related party” because Carlos Jaime Nissenson, the beneficial owner of Campbeltown, is a consultant to the Company, a principal stockholder of the Company, and father of Company director and CFO Neev Nissenson. Carlos Jaime Nissenson was also a stockholder and director of HTS. Pursuant to the agreement, Shai Lustgarten received 561,324 shares of the Company’s common stock and Carlos Jaime Nissenson received 561,324 shares of the Company’s common stock. F- 13 On May 29, 2019, the Company, Campbeltown and Walefar entered into an Amendment to the HTS Purchase Agreement (the “Amendment”), which provided for an adjustment to the number of shares of common stock issued to Walefar and Campbeltown in the acquisition of HTS. Pursuant to the Amendment, Campbeltown and Walefar agreed to return for cancelation 277,116 and 277,116 shares of common stock, respectively. This Amendment reduced the amount of shares issued in the acquisition to 568,415 shares from 1,122,648 shares and the amount of share consideration to approximately $2.7 million from $5.3 million. This adjustment was made as a result of a correction in the calculation of working capital and other share give back provisions of the HTS Purchase Agreement. As a result of the Offering (see Note 9), $400 thousand of the notes outstanding were converted to common stock. On September 30, 2019, and in accordance with the terms of the Convertible Promissory Note, Walefar and Campbeltown each exercised the right to convert $75 thousand in unpaid principal balance into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $4.72. Accordingly, the Company issued 15,890 shares to each of Walefar and Campbeltown. As of September 30, 2020, the remaining principal amount of $45 thousand is owed to each Walefar and Campbeltown, respectively, ($90 thousand total) under the Convertible Promissory Note. Note payable – RWCC The Company acquired the Note Payable – RWCC (“RWCC Note”) (f.k.a. Certus) with the acquisition of HTS. The RWCC Note was a non-interest-bearing note. The RWCC Note was historically discounted using an effective interest rate of 5.0%. As of September 30, 2020, this note was fully paid. The RWCC Note is classified as a related party note because the Chief Executive Officer of RWCC is the son of a significant shareholder of the Company and a sibling of a member of the Board of Directors. NOTE 9 – STOCKHOLDERS’ EQUITY PREFERRED STOCK Series A As of September 30, 2020, there were 1,000,000 Series A preferred shares designated and no Series A preferred shares outstanding. The board of directors of the Company (the “Board”) had previously set the voting rights for the Series A preferred stock at 1 share of preferred to 250 common shares. Series B As of September 30, 2020, there was 1 preferred share designated and no preferred shares outstanding. F- 14 Series C As of September 30, 2020, there were 5,000,000 Series C preferred shares authorized and 2,145,030 Series C preferred shares outstanding. They have preferential rights above common shares and the Series B preferred shares and are entitled to receive a quarterly dividend at a rate of $0.06 per share per annum. As part of a debt settlement agreement effective December 30, 2017, 1,685,000 shares were issued with the quarterly dividend at a rate of $0.06 per share per annum were waived for a period of 24 months, with no dividends being accrued or paid. Series C preferred shares outstanding are convertible into common stock at the rate of 20 preferred shares for one common share. Effective June 5, 2020, certain holders of an aggregate of 2,683,500 shares of Series C Preferred Stock individually converted their shares of Series C Preferred Stock into an aggregate of 134,175 shares of common stock at a ratio of 20 shares of Preferred Stock for each share of Common Stock. In addition, the holders of such shares converted all accrued but unpaid dividends, penalties, and interest in the aggregate amount of $393,331 into an aggregate of 56,190 shares of Common Stock at a conversion price of $7.00 per share which was based on the closing price on June 3, 2020. The shares of Common Stock pertaining to these transactions were issued in July, 2020. COMMON STOCK During the first nine months of 2020, the Company issued an aggregate of 203 shares of common stock to certain individuals as part of the Company’s Employee Stock Purchase Program valued at approximately $1 thousand. On July 17, 2020, the Company issued 70,000 shares to IRTH Communications, LLC as part of a consulting agreement. The shares were valued at $392 thousand. On July 17, 2020, the Company issued 50,000 shares to Stock Loan Solutions LLC as part of a consulting agreement. The shares were valued at $280 thousand. On July 28, 2020, the Company issued 251,635 shares as part of a series of conversion agreements with former noteholders and preferred shareholders. The shares were valued at $3.5 million including conversion penalties. During July 2020, various holders exercised in cashless transactions options and warrants resulting in the issuance of 56,248 shares valued at $339 thousand. As of September 30, 2020, the Company had 4,634,637 common shares outstanding. Warrants The following table summarizes information about warrants granted during the nine-month periods ended September 30, 2020 and 2019: September 30, 2020 September 30, 2019 Number of warrants Weighted Average Exercise Price Number of warrants Weighted Average Exercise Price Balance, beginning of period 1,166,667 $ 6.42 275,000 $ 4.60 Warrants granted 325,000 8.20 891,667 7.00 Warrants expired (10,000 ) 5.60 - - Warrants cancelled, forfeited - - - - Warrants exercised (150,000 ) 4.00 - - Balance, end of period 1,331,667 $ 7.14 1,166,667 $ 6.42 Exercisable warrants 1,165,001 $ 7.08 1,166,667 $ 6.42 For the nine months ended September 30, 2020, the Company granted 325,000 warrants in connection with various consulting agreement. F- 15 Outstanding warrants as of September 30, 2020 are as follows: Range of Exercise Prices Weighted Average residual life span (in years) Outstanding Warrants Weighted Average Exercise Price Exercisable Warrants Weighted Average Exercise Price $ 2.20 .84 75,000 $ 2.20 75,000 $ 2.20 $ 7.00 4.02 891,667 $ 7.00 891,667 $ 7.00 $ 7.50 5.93 250,000 $ 7.50 83,334 $ 7.50 $ 8.00 1.41 10,000 $ 8.00 10,000 $ 8.00 $ 10.00 3.66 75,000 $ 10.00 75,000 $ 10.00 $ 12.00 0.03 15,000 $ 12.00 15,000 $ 12.00 $ 14.00 0.41 15,000 $ 14.00 15,000 $ 14.00 $ 2.20 to 14.00 3.99 1,331,667 $ 7.14 1,165,001 $ 7.08 Warrants outstanding at September 30, 2020 and 2019 have the following expiry date and exercise prices: Expiry Date Exercise Prices September 30, 2020 September 30, 2019 June 26, 2020 $ 5.60 - 10,000 October 10, 2020 $ 12.00 15,000 15,000 December 30, 2020 $ 4.00 150,000 February 27, 2021 $ 14.00 15,000 - August 2, 2021 $ 2.20 75,000 75,000 October 10, 2021 $ 10.00 25,000 25,000 February 27, 2022 $ 8.00 10,000 - May 18, 2023 $ 10.00 50,000 - October 6, 2024 $ 7.00 891,667 891,667 September 1, 2025 $ 7.50 83,334 - June 4, 2026 $ 7.50 83,333 - December 4, 2027 $ 7.50 83,333 - 1,331,667 1,166,667 2014 Stock Option Plan On November 17, 2014, the Board adopted a stock option plan (the “2014 Plan”) whereby the Board may grant to directors, officers, employees, or consultants of the Company options to acquire common shares. The Board has the authority to determine the terms, limits, restrictions and conditions of the grant of options, to interpret the plan and make all decisions relating thereto. The 2014 Plan was adopted in order to provide an inducement and serve as a long term incentive program. The maximum number of common shares that may be reserved for issuance was set at 500,000. The option exercise price is established by the Board and may not be lower than the market price of the common shares at the time of grant. The options may be exercised during the option period determined by the Board, which may vary, but will not exceed ten years from the date of the grant. 2018 Stock Option Plan On March 8, 2018, the Company adopted a stock option plan (the “2018 Plan”) as an incentive, to retain in the employ of and as directors, officers, consultants, advisors and employees to the Company. On October 31, 2018, the Board amended the Plan to increase the amount of shares authorized for issuance thereunder from 500,000 to 800,000 shares of the Corporation’s common stock, par value $0.001 (the “Shares”). On January 23, 2019, the Company’s shareholders adopted and ratified the Plan. F- 16 As at September 30, 2020, the Company had issued options under the 2018 Plan allowing for the subscription of 740,500 shares of its common stock, with 59,500 shares remaining for issuance. 2020 Stock Option Plan On September 30, 2020, the Company adopted a stock option plan (the “2020 Plan”). The purpose of the 2020 Plan is to provide long-term incentives and rewards to directors, officers, consultants, advisors and employees of the Company and its subsidiaries in order to assist the Company to attract and retain individuals with experience and/or ability on a basis competitive with industry practices and to associate the interest of these individuals with those of the Company’s shareholders by providing for the issuance of stock-based awards. The total number of shares of Common Stock authorized for issuance under the 2020 Plan is 1,000,000 shares. Stock Options The following table summarizes information about stock options granted during the nine months ended September 30, 2020 and 2019: September 30, 2020 September 30, 2019 Number of stock options Weighted Average Exercise Price Number of stock options Weighted Average Exercise Price Balance, beginning of period 1,133,550 $ 4.00 1,006,050 $ 3.80 Stock options granted 775,000 4.63 127,500 5.00 Stock options expired (30,250 ) 3.98 - - Stock options cancelled, forfeited - - - - Stock options exercised (66,750 ) 2.51 - - Balance, end of period 1,811,550 $ 4.32 1,133,550 $ 4.00 Exercisable stock options 959,550 $ 4.02 893,488 $ 3.80 F- 17 For the nine months ended September 30, 2020, the Company granted 775,000 stock options. These options were granted as part of the asset acquisition described in Note 4, and to a member of the board of advisors, and to certain employees as part of the Company’s Equity Incentive Plan. Outstanding stock options as of September 30, 2020 are as follows: Range of Exercise Prices Weighted Average residual life span (in years) Outstanding Stock Options Weighted Average Exercise Price Exercisable Stock Options Weighted Average Exercise Price $ 1.50 to 1.80 1.38 114,050 $ 1.70 114,050 $ 1.70 $ 2.20 0.84 175,000 $ 2.20 175,000 $ 2.20 $ 10.00 4.14 125,000 $ 10.00 125,000 $ 10.00 $ 2.40 2.43 272,000 $ 2.40 272,000 $ 2.40 $ 4.20 4.56 10,000 $ 4.20 2,500 $ 4.20 $ 4.40 8.65 454,250 $ 4.40 66,000 $ 4.40 $ 4.84 10.01 380,000 $ 4.84 - $ 4.84 $ 5.00 2.78 147,500 $ 5.00 87,188 $ 5.00 $ 5.40 3.17 133,750 $ 5.40 117,812 $ 5.40 $ 1.50 to 10.00 5.57 1,811,550 $ 4.32 959,550 $ 4.02 Stock options outstanding at September 30, 2020, and 2019 have the following expiration date and exercise prices: Expiration Date Exercise Prices September 30, 2020 September 30, 2019 August 2, 2021 $ 2.20 175,000 175,000 February 17, 2022 $ 1.50 38,017 38,017 February 17, 2022 $ 1.80 76,033 76,033 February 28, 2023 $ 5.00 20,000 - March 5, 2023 $ 2.40 272,000 340,000 July 31, 2023 $ 5.00 127,500 127,500 October 31, 2023 $ 4.40 89,250 108,250 November 30, 2023 $ 5.40 133,750 143,750 November 20, 2024 $ 10.00 125,000 125,000 April 20, 2025 $ 4.20 10,000 - September 30, 2030 $ 4.40 365,000 - September 30, 2030 $ 4.84 380,000 - 1,811,550 1,133,550 These options and warrants were valued at the grant date using the Black-Scholes valuation methodology. The Company determines the assumptions used in the valuation of warrants and option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company may use different assumptions for options and warrants granted throughout the year. The valuation assumptions used to determine the fair value of each option/warrant award on the date of grant were: expected stock price volatility 152.5% - 155.6%; expected term in years 1.0-10.0; and risk-free interest rate 0.22%-1.16%. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods. Employee and nonemployee stock compensation expense is $2.3 million for the nine months ended September 30, 2020 and $1.1 million for the nine months ended September 30, 2019. F- 18 NOTE 10 – SALARY AND EMPLOYEE BENEFITS Salary and employee benefits for the nine months ended September 30, 2020 and September 30, 2019 consists of the following: (In thousands) 2020 2019 Employee stock compensation 304 1,093 Salaries (except R&D) 3,651 3,273 R&D salaries 1,017 714 Bonuses 81 95 Commissions 2,613 2,588 Total 7,666 7,763 NOTE 11 – LITIGATION Our subsidiary, OMNIQ Vision, Inc. (f/k/a HTS (USA), Inc.), was previously in litigation with a former employee who claimed that he was owed wages and commissions. As of March 31, 2020, the case had been resolved. While the terms of the resolution are confidential, management has determined that the amounts involved in resolving the case are immaterial to the financial statements taken as a whole. The Company is currently pursuing legal claims against two former employees who resigned from the Company to launch a competing business, RedLPR LLC (the “RedLPR case”). The claims include trade secret misappropriation and tortious interference. The RedLPR case was filed in the U.S. District Court, District of Utah on June 24, 2019. The Company recently was named a defendant in a Mississippi state lawsuit that is directly related to the RedLPR case (the “Mississippi case”). The Mississippi case also names RedLPR, LLC as a defendant. The Mississippi case was brought by Riverland Park Technologies (“Riverland”). Riverland is also a party to the RedLPR case. The Mississippi case was filed in the Circuit Court of Rankin County, Mississippi on September 21, 2020. The Company was named a defendant in a case involving a former employee who claims he is owed approximately $60 thousand in unpaid commissions. The Company’s position is that the former employee’s claims have no apparent factual basis and appear to be designed to force a quick “nuisance value” settlement. This case was filed in the Superior Court of the State of California, County of San Diego on October 21, 2020. The company is not a party to any other pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the Company’s Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding. NOTE 12 – RELATED PARTY TRANSACTIONS Related party transactions are discussed in Note 8. NOTE 13 – SUBSEQUENT EVENTS On October 12, 2020, the Company issued 50,000 shares of Common Stock to Three Rivers Business Consulting, LLC as part of a consulting agreement. The shares were valued at $284 thousand. Additionally, the Company issued warrants to purchase 50,000 shares of Common Stock to Three Rivers Business Consulting, LLC. The warrants were valued at approximately $229 thousand. F- 19 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements. The reader should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the Company’s results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. A complete discussion of these uncertainties are contained in our Annual Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020. Introduction We are a national mobility systems integrator with a focus on design, delivery, deployment and support of fully integrated mobile solutions. We take a consultative approach by offering end to end solutions that include hardware, software, communications and full lifecycle management services. The professionals simplify the integration process and deliver the solutions to our customers. Motorola, Intermec, Honeywell, Panasonic, AirWatch, Wavelink, SOTI and Zebra are major suppliers which we use in the solutions that we provide to our customers. Our business strategy developed into leveraging management’s relationships in the business world for investments for the Company. We intend to continue with our acquisition of existing companies with revenues and positive cash flow. The following is a discussion of our financial condition, results of operations, financial resources, and working capital. This discussion and analysis should be read in conjunction with our financial statements contained in this Form 10-Q. OVERVIEW The Company’s sales from continuing operations for the nine months ended September 30, 2020 were $42.3 million, a decrease of approximately $3.5 million, or 7.7%, over the nine months ended September 30, 2019. 3 The loss from continuing operations for the nine months ended September 30, 2020 was $8.6 million, an increase of $6.0 million compared with the loss in the nine months ended September 30, 2019 of $2.6 million. Basic loss per share from continuing operations for the nine months ended September 30, 2020 was ($2.03) versus ($0.64) per share for the same time period in 2019. GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2020, the Company had a working capital deficit of $24.6 million and an accumulated deficit of $53.8 million. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. Management’s plan to eliminate the going concern situation includes, but is not limited to, the continuation of improving cash flow, maintaining moderate cost reductions, the creation of additional sales and profits across its product lines, and the obtaining of sufficient financing to restructure current debt in a manner more in line with the Company’s improving cash flow and cost reduction successes. The Company has also diversified its sourcing and procurement of materials and finished goods. The Company also completed a debt settlement with a related party in exchange for equity, eliminating future needs for cash in servicing debt. With the acquisition of HTS in October 2018, the Company has in its portfolio of products a computer vision technology that is based on artificial intelligence and machine learning concepts. These solutions have a higher gross profit that will provide an increase in cash flow on a consolidated basis. The Company plans for these products to be a significant revenue source in 2020. Also with the acquisition of HTS, the Company acquired an operating facility with the ability for light manufacturing and assembling components. The Company can use HTS’s assembling facility to reduce the cost of goods and increase profit margins. The circumstances which raise substantial doubt about the Company’s ability to continue as a going concern have been somewhat mitigated by the successful debt reduction settlements entered into 2018. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Results of Operations The following tables set forth certain selected condensed statement of operations data for the periods indicated in dollars. In addition, we note that the period-to-period comparison may not be indicative of future performance. (In thousands, except per share data) Nine months ended September 30 Variation 2020 2019 $ % Revenue $ 42,309 $ 45,843 (3,534 ) (7.7 ) Cost of Goods sold 33,886 34,123 (237 ) (0.7 ) Gross Profit 8,423 11,720 (3,297 ) (28.1 ) Operating Expenses 14,794 12,550 2,244 17.9 Income (loss) from operations (6,371 ) (830 ) (5,541 ) 667.6 Net loss from continuing operations (8,646 ) (2,608 ) (6,038 ) 231.5 Net Loss per common Share $ (2.03 ) $ (0.64 ) (1.21 ) 173.6 (In thousands, except per share data) Three months ended September 30 Variation 2020 2019 $ % Revenue $ 15,833 $ 13,097 2,736 20.9 Cost of Goods sold 13,024 9,601 3,423 35.7 Gross Profit 2,809 3,496 (687 ) (19.7 ) Operating Expenses 5,830 4,231 1,599 37.8 Income (loss) from operations (3,021 ) (735 ) (2,286 ) 311.0 Net loss from continuing operations (3,781 ) (1,443 ) (2,338 ) 162.0 Net Loss per common Share $ (0.83 ) $ (0.38 ) (0.45 ) 118.5 Revenues For the nine months ended September 30, 2020 and 2019, the Company generated net revenues in the amount of $42.3 million and $45.8 million, respectively. For the three months ended September 30, 2020 and 2019, the Company generated net revenues in the amount of $15.8 million and $13.1 million, respectively. The decrease between the nine-month periods was attributable to stronger fulfillment and deliveries by the Company in the first nine months of 2019. The increase between the three-month periods was attributable to increased demand by certain customers in connection with the COVID-19 pandemic. Cost of Goods Sold For the nine months ended September 30, 2020 and 2019, the Company recognized a total of $33.9 million and $34.1 million, respectively, of cost of goods sold. For the nine months ended September 30, 2020 and 2019, cost of goods sold were 80.1% and 74.4% of net revenues, respectively. For the three months ended September 30, 2020 and 2019, the Company recognized a total of $13.0 million and $9.6 million, respectively, of cost of goods sold. For the three months ended September 30, 2020 and 2019, cost of goods sold were 82.3% and 73.3% of net revenues, respectively. Determining the cause of variation from prior periods is difficult in an ever increasing competitive industry. Due to this, the Company is continually reevaluating its current product mix and supply channels to improve margins in 2020. The 2020 increase in cost of goods sold as a percentage of net revenue was attributable to certain lower-margin deals reached by the Company with certain large customers during the COVID-19 pandemic. 4 Operating expenses Total operating expense for the nine months ended September 30, 2020 and 2019 recognized was $14.8 million and $12.6 million, respectively, representing a 17.9% increase. Total operating expense for the three months ended September 30, 2020 and 2019 recognized was $5.8 million and $4.2 million, respectively, representing a 37.8% increase. The increases are primarily attributable to an increase in non-cash stock-based compensation awarded to professional service providers. General and Administrative – General and administrative expenses for the nine months ended September 30, 2020 and 2019 totaled $2.4 million and $1.9 million, respectively, representing a 24.4% increase. General and administrative expenses for the three months ended September 30, 2020 and 2019 totaled $837 thousand and $727 thousand, respectively, representing a 15.1% increase. The increases are primarily attributed to increased R&D spending as well as general costs associated with expanding our range of solutions offered to customers. Salary and benefits – Salary and employee benefits for the nine months ended September 30, 2020 totaled $7.7 million, including $304 thousand from non-cash stock-based compensation, as compared to $7.8 million including $1.1 million from non-cash stock based compensation for the nine months ended September 30, 2019. Excluding stock-based compensation, salaries increased by $699 thousand in the first nine months of 2020 compared to the first nine months of 2019, which increase is primarily attributed increased R&D salary and employee benefits as well as the appointment of an in-house general counsel. Salary and employee benefits for the three months ended September 30, 2020 totaled $2.6 million, including $76 thousand from non-cash stock-based compensation, as compared to $2.7 million including $670 thousand from non-cash stock based compensation for the three months ended September 30, 2019. Excluding stock-based compensation, salaries increased by $475 thousand in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Professional Fees – Professional fees for the nine months ended September 30, 2020 were $3.0 million as compared to $1.2 million for the nine months ended September 30, 2019. Professional fees for the three months ended September 30, 2020 were $1.8 million as compared to $268 thousand for the three months ended September 30, 2019. The increase is primarily attributable to non-cash stock-based compensation awarded to professional service providers. Other income and expenses Interest Expense - Interest expense for the nine months ended September 30, 2020 totaled $2.0 million, as compared to $1.8 million for the nine months ended September 30, 2019. Interest expense for the three months ended September 30, 2020 totaled $744 thousand, as compared to $618 thousand for the three months ended September 30, 2019. The increase is primarily attributable to interest incurred in connection with the Sixth Amendment to the Secured Promissory in addition to interest expense incurred in connection with vendor interest agreements as well as interest incurred in connection with the increased average daily balance in the line of credit. Net loss from operations The Company realized a net loss from continuing operations of $8.6 million for the nine months ended September 30, 2020, compared to a net loss of $2.6 million for the nine months ended September 30, 2019, an increase of $6.0 million. The Company realized a net loss from continuing operations of $3.8 million for the three months ended September 30, 2020, compared to a net loss of $1.4 million for the three months ended September 30, 2019, an increase of $2.4 million. The increase in net loss between the nine-month periods is mainly attributable to the Company’s lower sales and corresponding margin in 2020 compared with the same periods in 2019, as discussed above, as well as the increase in operating expenses, as discussed above. 5 Liquidity and capital resources As of September 30, 2020, the Company had cash in the amount of $5.6 million of which $533 thousand is on deposit and restricted as collateral for a letter of credit and a corporate purchasing card, and a working capital deficit of $24.6 million, compared to cash in the amount of $2.1 million, of which $533 thousand was restricted, and a working capital deficit of $20.2 million as of December 31, 2019. In addition, the Company had a stockholders’ deficit of $3.2 million at September 30, 2020 and stockholders’ equity of $1.8 million as of December 31, 2019. The Company’s accumulated deficit was $53.8 million and $45.1 million at September 30, 2020 and December 31, 2019, respectively. The Company’s operations resulted in net cash provided of $1.5 million during the nine months ended September 30, 2020, compared to net cash provided of $4.9 million during the nine months ended September 30, 2019, a decrease of $3.4 million. The changes in the non-cash working capital accounts are primarily attributable the large increases in accounts receivable and accounts payable during the first nine months of 2020. Net cash provided by investing activities was $61 thousand for the nine months ended September 30, 2020, compared to net cash used of $270 thousand for the nine months ended September 30, 2019, an increase of $331 thousand, primarily attributable to a decrease in other assets. The Company’s financing activities provided net cash of $1.9 million during the nine months ended September 30, 2020, compared to net cash used of $3.1 million during the nine months ended September 30, 2019. For the nine months ended September 30, 2020, the Company received cash from the line of credit with Action Capital of approximately $1.9 million and also from the PPP Loan of $888 thousand. Inflation The Company’s results of operations have not been affected by inflation and management does not expect inflation to have a material impact on its operations in the future. Off- Balance Sheet Arrangements The Company currently does not have any off-balance sheet arrangements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company’s management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e)) as of September 30, 2020, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer (Principal Financial and Accounting Officer) concluded that, as of September 30, 2020, our disclosure controls and procedures were ineffective as of the end of the period covered to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions regarding required disclosure. This was due to the following material weaknesses which are indicative of many small companies with limited staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both United States generally accepted accounting principles and Securities and Exchange Commission guidelines. Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer, and our Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosure. During 2019, we identified material weaknesses in our internal control over financial reporting, which were disclosed in our annual report on Form 10-K filed with the SEC on March 30, 2020. 6 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter, (i.e., the three months ended September 30, 2020), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently pursuing legal claims against two former employees who resigned to launch a competing business, RedLPR (“RedLPR case”). The claims include trade secret misappropriation and tortious interference. Related to the RedLPR case, the Company recently was named a defendant in a Mississippi state lawsuit brought by Riverland Technologies. Riverland is also a party to the previously mentioned claims. And finally, the company was named defendant in a case involving a former employee who claims he is owed approximately $60 thousand in unpaid commissions. The company’s position is that the former employee’s claims have no apparent factual basis and appear to be designed to force a quick “nuisance value” settlement. ITEM 1A. RISK FACTORS Not applicable. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ITEM 5. OTHER INFORMATION. None. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission this Form 10-Q, including exhibits. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at SEC’s Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov. We intend to furnish our stockholders with annual reports which will be filed electronically with the SEC containing consolidated financial statements audited by our independent auditors, and to make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial statements. Our website is located at http://www.omniq.com . The Company’s website and the information to be contained on that site, or connected to that site, is not part of or incorporated by reference into this filing. ITEM 6. EXHIBITS (a) Exhibits. 31.1 Certification of our Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of our Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) 32.2 Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) 7 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. Date: November 12, 2020 OMNIQ CORP. By: /s/ Shai Lustgarten Shai Lustgarten President and Chief Executive Officer 8 EXHIBIT INDEX 4.1 Promissory Note dated April 29, 2020 10.1 Loan Agreement between the Company and Zions Bank dated April 29, 2020 31.1 Certification of our Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of our Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) 32.2 Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) 9