Item 2. Management’s Discussion and Analysis
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 within the meaning of the federal securities laws. Statements that
are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements
include statements preceded by, followed by or that include the words “may”, “could”, “would”, “should”,
“believe”, “expect”, “anticipate”, “plan”, “estimate”, “target”,
“project”, “intend”, “foresee” and similar expressions. These statements include, among others, statements
regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the
strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing
plans, budgets, working capital needs and sources of liquidity. By their nature, forward-looking statements involve risks and uncertainties
because they relate to events and depend on circumstances that may or may not occur in the future.
Forward-looking
statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and
assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements
include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new
marketing applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions.
These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could
cause actual results to differ materially from those contained in any forward-looking statement. In addition, even if our actual results
are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results may not be indicative
of results or developments in subsequent periods.
Except
as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and
Exchange Commission (“SEC”), we are under no obligation to publicly update or revise any forward-looking statements after
we file this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise. Investors, potential
investors and other readers are urged to consider the above-mentioned factors carefully in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking statements. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future results or performance.
For
a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1A — “Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2021 and Item 1A — “Risk Factors” in this Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2022, as well as other reports and registration statements filed by us with the SEC. These
factors should not be construed as exhaustive and should be read with other cautionary statements in this Quarterly Report on Form 10-Q
and our other public filings. For more information about us and the announcements we make from time to time, visit our Internet website
at www.omniq.com.
Introduction
We
use patented and proprietary artificial intelligence (AI) technology to deliver data collection, real time surveillance and monitoring
for supply chain management, homeland security, public safety, traffic & parking management and access control applications. The
technology and services we provide helps our clients move people, assets and data safely and securely through airports, warehouses, schools,
national borders, and many other applications and environments.
We
offer end-to-end solutions that include hardware, software, communications, and full lifecycle management services. We are an established
manufacturer and distributor of barcode labels, tags, and ribbons, as well as RFID labels and tags. Our highly tenured team of professionals
has the knowledge and expertise to simplify the integration process for our customers, and our team delivers proven problem-solving solutions
backed by numerous customer references. We offer comprehensive packaged and configurable software, and we are a leading provider of best-in-class
mobile and wireless equipment.
3
Our
customers include government agencies and leading Fortune 500 companies from diverse sectors, including healthcare, food and beverage,
manufacturing, retail, distribution, transportation and logistics, and oil, gas, and chemicals.
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 unaudited condensed consolidated financial statements contained in this Form 10-Q.
OVERVIEW
The
Company’s sales from operations for the six months ended June 30, 2022, were $50.5 million, an increase of approximately $17.6
million, or 54%, over the six months ended June 30, 2021.
The loss from operations for the six months ended June 30, 2022, was $3.4
million, a decrease of $1.3 million compared with the loss in the six months ended June 30, 2021, of $4.7 million. Basic loss per share
from continuing operations for the six months ended June 30, 2022, was ($0.79) versus ($1.24) per share for the same period in 2021.
LIQUIDITY
AND CAPITAL RESOURCES
The
accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. The following are
the principal conditions or events which potentially raise substantial doubt about the company’s ability to continue as a going
concern:
●
Balancing
the need for operational cash with the need to add additional products
●
Timely
and cost-effective development of products
●
Working
capital deficit of $31 million as of June 30, 2022
●
Accumulated
deficit of $76 million as of June 30, 2022
●
Multiple
years of losses from operations
●
Multiple
years of negative cash flows from operations
These
facts and others have in the past raised concerns about the Company’s ability to continue as a going concern. 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,
which we have successfully accomplished to date.
The
following conditions, plans and actions are currently being implemented by management to address the Company’s conditions:
●
The
Company has common stock which is now traded publicly on the NASDAQ stock exchange. Accordingly, it is better able to successfully
raise capital when needed. In addition, there are outstanding warrants from prior offerings that could be exercised depending upon
the performance of our stock.
●
The
Company raised gross proceeds of $15 million from a private placement of its common stock in July 2021.
●
The
Company received financing for the acquisition of the last 23% of shares of Dangot at a loan to value rate of 85%. The Company also
expects that Dangot’s cashflow will be able to service the debts associated with its acquisition without the need for cash
from the rest of the group. See note 11.
●
The
acquisition of Dangot has added capabilities to the Company which have already transformed into significant new orders (so far approx.
$1.3M) in the Parking segment. Management expects the collaboration and cross sales to contribute to improved revenues and margins.
●
Management
is evaluating operating expenses and is developing a plan to reduce expenditures without negatively impacting current operations.
●
Management
finalized an $8.5M line of credit from Western Alliance Bank. This line of credit will replaced the high interest Action Capital
line of Credit ($6M) and settle the ScanSource debt $2.5M. Overall the effective interest rate of the new line of credit is approx.
7% compared to 12% with Action and 10% with ScanSource.
●
As
of June 30, 2022, the Company had approximately $3 million, in cash.
●
Historical
results - For over ten years, the Company’s audit opinion has contained an explanatory paragraph describing an uncertainty
about the Company’s ability to continue as a going concern. The fact that the Company has a ten plus year plus history of continuing
operations, in and of itself, demonstrates an ability to continue for a period of 12 months, post-issuance of each report.
●
Blue
Star - The Company’s total accounts payable due to Blue Star as of June 30, 2022 was approximately $35M. Blue Star is an unsecured
creditor, financing a substantial amount of the Company’s supply chain demand. Blue Star continues selling to the Company with
preferable credit terms. Blue Star has agreed to reduce the annual interest rate on invoices that are past due to just 5%. We anticipate,
consistent with prior periods, Blue Star will continue to extend us such preferable payments terms in the foreseeable future. As
an unsecured creditor of the Company, Blue Star has no incentive to force a liquidation. The Company has enjoyed a good mutual relationship
for the past four years.
Management
believes that the aggregate impact of these plans is to mitigate the conditions raising substantial doubt about the Company’s ability
to continue as a going concern within one year after the date financial statement issuance.
4
Results
of Operations
The
following tables set forth certain selected unaudited condensed consolidated 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.
Three
months ended June 30,
Variation
In
thousands
2022
2021
$
%
Revenue
$
24,209
$
13,119
$
11,090
84.53
%
Cost
of Goods sold
$
18,222
$
9,820
$
8,402
85.55
%
Gross
Profit
$
5,987
$
3,299
$
2,688
81.48
%
Operating
Expenses
$
8,004
$
5,141
$
2,863
55.70
%
Loss
from operations
$
(2,017
)
$
(1,842
)
$
(175
)
9.50
%
Net
loss
$
(3,186
)
$
(2,510
)
$
(676
)
26.93
%
Net
Loss per common Share from continuing operations
$
(0.44
)
$
(0.53
)
$
0.09
(16.98
)%
Revenues
For
the three months ended June 30, 2022 and 2021, the Company generated net revenues in the amount of $24 million and $13 million, respectively.
The increase between the three-month periods was attributable to the additional sales channel’s provided by the acquisition of
Dangot.
Cost
of Goods Sold
For
the three months ended June 30, 2022 and 2021, the Company recognized a total of $18.2 million and $9.8 million, respectively, of cost
of goods sold. For the three months ended June 30, 2022 and 2021, cost of goods sold were 75% and 75% of net revenues, respectively.
Operating
expenses
Total
operating expense for the three months ended June 30, 2022 and 2021 recognized was $8 million and $5.1 million, respectively, representing
a 56% increase. The increases are related to the additional operations from Dangot.
Research
and Development – Research and development expenses for the three months ended June 30, 2022 and 2021 totaled $468 thousand
and $468 thousand, respectively.
Selling,
general and Administrative – Selling, general and administrative expenses for the three months ended June 30, 2022 and
2021 totaled $7 million and $4.1 million, respectively, representing a 70% increase. The increase was due primarily to increased number
of employees and operating activities from the acquisition of Dangot.
Depreciation
– Depreciation expenses for the three months ended June 30, 2022 and 2021 totaled $58 thousand and $42 thousand, respectively,
representing a 38% increase. The increase is attributable to the addition of fixed assets.
Intangible
amortization – Intangible amortization expenses for the three months ended June 30, 2022 and 2021 totaled $406 thousand
and $522 thousand, respectively. The decrease is due to diminishing life of intangibles.
5
Other
income and expenses
Interest
Expense – Interest expense for the three months ended June 30, 2022 totaled $878 thousand, as compared to $714 thousand
for the three months ended June 30, 2021. The increase is primarily attributable to additional lines of credit.
Six
months ended June 30,
Variation
In
thousands
2022
2021
$
%
Revenue
$
50,531
$
32,870
$
17,661
53.73
%
Cost
of Goods sold
$
38,417
$
26,936
$
11,481
42.62
%
Gross
Profit
$
12,114
$
5,934
$
6,180
104.15
%
Operating
Expenses
$
15,539
$
10,641
$
4,898
46.03
%
Loss
from operations
$
(3,425
)
$
(4,707
)
$
1,282
(27.24
)%
Net
loss
$
(5,753
)
$
(5,853
)
$
100
(1.71
)%
Net
Loss per common Share from continuing operations
$
(0.79
)
$
(1.24
)
$
0.45
(36.29
)%
Revenues
For
the six months ended June 30, 2022 and 2021, the Company generated net revenues in the amount of $50.5 million and $32.9 million, respectively.
The increase between the six-month periods was attributable to the additional sales channel’s provided by the acquisition of Dangot.
Cost
of Goods Sold
For
the six months ended June 30, 2022 and 2021, the Company recognized a total of $38.4 million and $26.9 million, respectively, of cost
of goods sold. For the six months ended June 30, 2022 and 2021, cost of goods sold were 76% and 82% of net revenues, respectively. The
2022 decrease in cost of goods sold as a percentage of net revenue was attributable to discounts being granted during the Covid pandemic
which are no longer being offered.
Operating
expenses
Total
operating expense for the six months ended June 30, 2022 and 2021 recognized was $15.5 million and $10.6 million, respectively, representing
a 46% increase. The increases are related to the additional operations from Dangot.
Research
and Development – Research and development expenses for the six months ended June 30, 2022 and 2021 totaled $990 thousand
and $962 thousand, respectively, representing a 3% increase. The increases are primarily attributed to expanding our range of solutions
offered and development of our AI proprietary products.
Selling,
general and Administrative – Selling, general and administrative expenses for the six months ended June 30, 2022 and 2021
totaled $13.5 million and $8.5 million, respectively, representing a 59% increase. The increase was due primarily to increased number
of employees and operating activities from the acquisition of Dangot.
Depreciation
– Depreciation expenses for the six months ended June 30, 2022 and 2021 totaled $151 thousand and $85 thousand, respectively,
representing a 78% increase. The increase is directly increased by the acquisition of additional fixed assets.
Intangible
amortization – Intangible amortization expenses for the six months ended June 30, 2022 and 2021 totaled $851 thousand and
$1,047 thousand, respectively. The decrease is due to diminishing life of intangibles.
Other
income and expenses
Interest
Expense – Interest expense for the three months ended June 30, 2022 totaled $1.7 million, as compared to $1.3 million for
the six months ended June 30, 2021. The increase is primarily attributable to additional lines of credit.
6
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
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