OMNIQ Corp. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion summarizes the financial position of OMNIQ, Corp. and its consolidated subsidiaries as of December 31, 2022, and its consolidated results of operations for the year ended December 31, 2022, and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties (see discussion of “Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K). Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A—Risk Factors of this Annual Report on Form 10-K. The Company’s consolidated revenue for the year ended December 31, 2022 were $102.5 million, representing an increase of $24 million from the year ended December 31, 2021 of $78.3 million. Revenues in 2022 and 2021 are presented in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (Topic 606). Net loss attributable to common stockholders’ of OmniQ Corp was $13.8 million in 2022, an increase of $400 thousand from the 2021 loss of $13.4 million. Basic loss per share attributable to common stockholders was $1.82 for the year 2022 compared to $2.20 per share for the year 2021. On May 3, 2021, the Company and OmniQ Technologies Ltd., a wholly owned subsidiary of the Company (“OmniQ Technologies”) entered into a share purchase agreement (the “Dangot Share Purchase Agreement”) with Mr. Haim Dangot. Pursuant to the Dangot Share Purchase Agreement, OmniQ Technologies agreed to purchase 51%, or 5,100 shares, of the capital stock of Dangot Computers Ltd., an Israel company (“Dangot”), from Dangot’s sole shareholder, Haim Dangot, for consideration equivalent to 23,740,500 NIS (New Israeli Shekel), which is equal to US $7.7 million (the “Closing Consideration”), based on the exchange rate at the date of acquisition of NIS to dollars. The Closing Consideration was paid on July 8, 2021 in the following manner: (a) the Company issued 220,103 shares of its common stock having a share value of $2,084 thousand and (b) cash in the amount of $5,058 thousand and $600 thousand payable to owner. Haim Dangot also granted OmniQ Technologies an irrevocable option to purchase the remaining 4,900 shares, or 49%, of Dangot’s capital stock (the “Dangot Option”) in the 12-month period following the closing date (the “Dangot Option Period”) at a share purchase price of 489,500 NIS (US $150,522 per each 1% of Dangot’s remaining shares on a fully diluted basis) which is the same valuation per share as the purchase price for the 51%. Effective October 1, 2021 the Company exercised a portion of its option and purchased an additional 26% of Dangot bringing its ownership to 77%. The Company paid $4,012,000 to purchase the additional shares. On April 1, 2022, the Company closed on its acquisition of Dangot and exercised the remaining portion of its option to purchase 23.0% of the capital stock, thereby making Dangot a fully owned subsidiary of the Company. The Company paid $3,518,000 to purchase the additional shares. The Company utilized its working capital and a combination of short and long term loans. 11 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 $38 million as of December 31, 2022 ● Accumulated deficit of $84 million as of December 31, 2022 ● Multiple years of losses from operations ● Multiple years of negative cash flows from operations ● Noncompliance with certain debt covenants Management Evaluation Management considers the condition outlined above as the most significant factors in raising substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Management’s Plans to Mitigate and Alleviate Conditions or Events The following conditions, plans and actions are currently being implemented to address the Company’s conditions: ● Outstanding warrants exist from prior offerings that could be exercised for cash depending upon the performance of our stock. ● The Company’s acquisition of Dangot Computers, Ltd. has improved the balance sheet, profitability, and cash flow and is expected to help the Company as a whole to generate positive cash flows from operations for the foreseeable future. ● The Company received financing for the acquisition of the last 23% of shares of Dangot on March 30, 2022 (The company owns 100% of Dangot). 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. ● The acquisition of Dangot has added capabilities to the Company which have already transformed into significant new orders 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 has already cut staff by about 5% and will continue to do additional overhead cuts. ● March 25, 2022 management finalized an $8.5M line of credit from Western Alliance Bank. This line of credit replaced the high interest Action Capital line of Credit ($6M) and settle the ScanSource debt $2.5M. ● Blue Star - The Company’s total accounts payable due to Blue Star as of December 31, 2022 was approximately $36 million. Blue Star is an unsecured creditor, financing a substantial amount the Company’s supply chain demand. Management believes that Blue Star will continue supplying the Company with preferable credit terms. Blue Star has agreed to the annual interest rate of 5% on invoices that are past due. 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. 12 Overview – Results of Operations The following table sets 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. Year ended December 31, Variation In thousands 2022 2021 $ % Revenue $ 102,545 78,251 $ 24,294 31.05 % Cost of Goods sold 80,441 61,582 18,859 30.62 % Gross Profit 22,104 16,669 5,435 32.60 % Operating Expenses 31,656 27,149 4,507 16.60 % Loss from operations (9,552 ) (10,480 ) 928 8.85 % Net loss (13,614 ) (13,144 ) (470 ) (3.58 %) Net Loss per common Share from continuing operations $ (1.82 ) $ (2.20 ) $ 0.38 17.19 % Revenues Revenue for the years ended December 31, 2022 and 2021 were generated from the sales of hardware, service contracts, software, labels and ribbons and related services provided by the Company to its customers. For the years ended December 31, 2022 and 2021, the Company recognized $102.5 million and $78.3 million in net revenues, respectively. This represents an increase of 31.05%. The increase was due to growth in the marketplace and the acquisition of Dangot. Cost of Goods Sold For the years ended December 31, 2022 and 2021, the Company recognized a total of $80.4 million and $61.6 million respectively, of cost of goods sold. Cost of goods sold was 78% of net revenues for 2022 and 79% of revenue for 2021. Our gross margin percentage has remained relatively stable in an industry that is experiencing gross margin pressure. Operating Expenses For the years ended December 31, 2022 and 2021, operating expenses were $31.7 million and $27.1 million, respectively. This represents an increase of $4.5 million, or 16.6%, which is due to a general increase in business operations, including the addition of Dangot in July 2021. The following explains in detail the change in operating expenses. Research & Development – Research and development for the year ended December 31, 2022 and 2021 totaled $1.8 million per year. Selling, General and Administrative – Selling, General and Administrative expenses were $27.7 million for the year ended December 31, 2022, compared to $21.9 million for the year ended December 31, 2021, representing an increase of $5.8 million, or 27%. The increase was due to additional share issuances to employees and directors as well as a large software implementation. Depreciation – Depreciation for the year ended December 31, 2022 were $324 thousand compared to $251 thousand for the year ended December 31, 2021. This represents an increase of $73 thousand, or 29%, attributable to growth in fixed assets. Intangible Amortization – Intangible amortization expenses for the year ended December 31, 2022 were $1.8 million, compared to $3.2 million for the year ended December 31, 2021. This represents a decrease of $1.4 million, or 43%, attributable to the acquisition of additional intangibles. 13 Other Income and Expenses The Company incurred $3.5 million in interest expense for the year ended December 31, 2022, compared to $2.5 million for the year ended December 31, 2021. The interest expense is comprised of interest incurred on promissory notes payable, the company’s line of credit, and vendor payables. Foreign Currency Transactions The Company has multiple subsidiaries conducting operations in Israel, therefore there were transactions denominated in currency other than US dollars for both 2022 and 2021. Foreign transaction gains and losses are reported on the consolidated statement of operations and comprehensive loss and were included in the amount of loss from comprehensive income. Provision for Income Taxes For the year ended December 31, 2022, the Company has $35 thousand of current income tax provision (US State & Local and Foreign) and $30 thousand deferred income tax expense. For the year ended December 31, 2021, the Company has $321 thousand of current income tax provision (US State & Local and Foreign) and $165 thousand deferred income tax benefit. Net loss The Company realized a net loss of $13.6 million for the year ended December 31, 2022, compared to a net loss from continuing operations of $13.1 million for the year ended December 31, 2021. The increased loss in 2022 is due primarily to an increase in stock compensation. Liquidity and Capital Resources As of December 31, 2022, the Company had cash in the amount of $1.3 million and a working capital deficit of $38 million, compared to cash in the amount of $7.1 million, and a working capital deficit of $22.9 million as of December 31, 2021. The Company had stockholders’ deficit attributable to OmniQ stockholders of $10.5 million and $98 thousand as of December 31, 2022 and 2021, respectively. This increase in our stockholders’ deficit was primarily attributable to net losses. The Company’s accumulated deficit was $84.4 million and $70.6 million as of December 31, 2022 and 2021, respectively. The Company’s operations provided net cash of $1.2 million and used $3.2 million the years ended December 31, 2022 and 2021, respectively. The increase of cash from operations of $4.4 million is primarily a result of reduction in accounts receivable. The Company’s cash used in investing activities was $4,154 thousand for the year ended December 31, 2022 compared to cash provided by investing activities of $9,235 thousand for the year ended December 31, 2021. The Company’s financing activities used $3.1 million of cash during the year ended December 31, 2022, and provided $14.5 million during the year ended December 31, 2021. During the year ended December 31, 2022, the Company made payments of $2.5 million on its notes payable, including its Supplier Secured Promissory note and related party notes payable, compared to the year ended December 31, 2021, when the Company made payments of $4.7 million on its notes payable, including its Supplier Secured Promissory note and related party notes payable. Additionally, the Company borrowed $4 million on the Company’s line of credit during the year ended December 31, 2022, compared to the year ended December 31, 2021, when $1 million was paid on the Company’s line of credit. The Company did not raise funds during the year ended December 31, 2022, compared to $13.3 million raised for the year ended December 31, 2021. Off-Balance Sheet Arrangements The Company currently does not have any off-balance sheet arrangements. Critical Accounting Policies We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The application of many accounting principles requires us to make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and they and our actual results may change based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts first become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates and/or judgments. See also note 2 to our consolidated financial statements for a summary of our significant accounting policies. 14 Revenue Recognition . When entering into contracts with our customers, we review the five steps outlined in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (Topic 606) : i. Identify the contract with our customer. ii. Identify the performance obligations in the contract. iii. Determine the transaction price. iv. Allocate the transaction price to the performance obligations. And v. Evaluate the satisfaction of the performance obligations, We account for contracts with our customers when we have approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance, and collectability of consideration is probable. We evaluate, in accordance with Topic 606, whether or not we meet the criteria to be a principal or an agent and record the revenue on a gross or net basis. We are considered a principal if we obtain control of any one of the following: i. A good or other asset from another party that we then transfer to our customer. ii. A right to a service to be performed by another party, which gives us the ability to direct that party to provide the service to the customer on our behalf, and iii. A good or service from another party that we then combine with other goods or services in providing the specified good or service to our customer. We have certain relationships with manufacturers and suppliers to sell us products or provide services. Our contracts may transfer to our customer a right to a future service or product to be provided by our manufacturer or supplier. When a specified good or service is a right to a good or service provided by a manufacturer or supplier, we evaluate whether we control the right to the goods or services before that right is transferred to the customer rather than whether we control the underlying goods or services. Indicators that we control the specified good or service before it is transferred to the customer (and we are therefore a principal) include, but are not limited to, the following: i. We are responsible for fulfilling the promise to provide the specified good or service. This typically includes responsibility for the acceptability of the specified good or service. If we are primarily responsible for fulfilling the promise to provide the specified good or service, this may indicate that the other party involved in providing the specified good or service is acting on our behalf. Often, we provide value added services (combining hardware, integrating hardware to software, etc.) to the products and services purchased from our manufacturers and suppliers. ii. We have inventory risk before the specified good or service has been transferred to a customer. Our purchases of products or services from our manufactures and suppliers is evidenced by our issuing a binding purchase order contract with the negotiated terms including specifications, pricing, and delivery among other things. Our obligation for purchased products and services is mutually exclusive of our customers’ performance (failure to take acceptance, make payment, etc.) iii. We have sole discretion in establishing our price for the specified good or service. Establishing the price our customer pays for a specified good or service may indicate we have the ability to direct the use of that good or service and obtain substantially all of the remaining benefits. We control and set the pricing for the product or services to be provided to our customers. If the terms of a transaction do not indicate we are acting as a principal in the transaction, we are then considered acting as an agent and the associated revenues would be recognized on a net basis. As principal, when (or as) we satisfy a performance obligation, we recognize revenue in the gross amount of consideration which we expect to be entitled in exchange for the specified good or service transferred. We are an agent if our performance obligation is to arrange for the provision of the specified good or service by another party. As an agent, we do not control the specified good or service provided by another party before that good or service is transferred to our customer. As an agent, when (or as) we satisfy a performance obligation, we recognize revenue in the amount of any fee or commission which we expect to be entitled in exchange for arranging for the specified goods or services to be provided by another party to our customer. Under Topic 606, we recognize revenue (on either a gross or net basis previously discussed) only when we satisfy a performance obligation by transferring a promised good or service to our customer. A good or service is considered transferred when the customer obtains control. The standard defines control as an entity’s ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset. We recognize revenue (either gross or net) once control has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: i. We have a right to payment for the product or service, ii. The customer has legal title to the product, iii. We have transferred physical possession of the product to the customer, iv. The customer has the risk and rewards of ownership of the product, and v. The customer has accepted the product. Revenue Recognition for Hardware. Revenues from sales of hardware products are recognized on a gross basis as we are acting as a principal in these transactions, with the selling price to the customer recorded as sales and the acquisition cost of the product recorded as cost of sales. We recognize revenue from these transactions when control has passed to the customer. Manufacturers and suppliers, from whom we purchase hardware, often provide their warranties that only provide assurance the products and services will conform to their specifications. These assurance-type warranties are not sold separately and are not considered separate performance obligations. In some transactions, a third-party will provide the customer with an extended warranty. These extended warranties are sold separately and provide the customer with a service in addition to assurance that the product will function as expected. We consider these warranties to be separate performance obligations from the underlying product. For warranties, where we are arranging those services be provided by a third-party, we are acting as an agent in the transaction and record revenue on a net basis at the point of sale. 15 Revenue Recognition for Software. Sales of software licenses are generally considered a single performance obligation. When we are considered the principal, we recognize revenues on a gross basis at the point the software is delivered to and accepted by our customer. Generally, software licenses are sold with accompanying third-party delivered software assurance, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software assurance is in effect. As explained above, we evaluate whether the software assurance is a separate performance obligation by assessing if the third-party delivered software assurance is critical or essential to the core functionality of the software itself. This involves considering: i. If the software provides its original intended functionality to the customer without the updates, ii. If the customer would ascribe a higher value to the upgrades versus the up-front deliverable, iii. If the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and iv. If the customer chooses to not delay or always install upgrades. If we determine the accompanying third-party delivered software assurance is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software assurance are recognized as a single performance obligation. In some transactions, a third-party will provide the customer with an extended warranty. These extended warranties are sold separately and provide the customer with a service in addition to assurance that the product will function as expected. We consider these warranties to be separate performance obligations from the underlying product. For warranties, where we are arranging those services be provided by a third-party, we are acting as an agent in the transaction and record revenue on a net basis at the point of sale. Revenue Recognition for Services. We provide professional services, which include project managers and consultants recommending, designing, and implementing IT solutions. Revenue from professional services is recognized either on a time and materials basis or proportionally, as costs are incurred for fixed fee project work. Revenue is recognized on a gross basis each month as work is performed and we transfer those services. Revenues from the sale of professional and support services, provided by us, are recognized over the period the service is provided. As the customer receives the benefit of the service each month, we recognize the respective revenue on a gross basis as we are acting as a principal in the transaction. Additionally, we manage a services team that provides project support to customers that are billed on a fixed fee basis. We are acting as the principal in the transaction and recognize revenue on a gross basis based on the total number of hours incurred for the period over the total expected hours for the project. Total expected hours to complete the project is updated for each period and best represents the transfer of control of the service to the customer. Freight Costs. We record both the freight billed to its customers and the related freight costs as cost of sales when the underlying product revenue is recognized. For freight not billed to its customers, we record the freight costs as cost of sales. The Company considers shipping to be a fulfillment activity and not a separate performance obligation. Definite-lived Intangible Assets Impairment Evaluation The Company periodically evaluates the carrying value of definite-lived intangibles when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of its use of acquired assets or its overall business strategy, and significant industry or economic trends. The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. The Company recorded no impairment loss for definite-lived intangible assets during the years ended December 31, 2022 and 2021. When the Company determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators, the Company determines the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate and recognizes an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset. If the Company’s revenues or other estimated operating results are not achieved at or above our forecasted level, and the Company is unable to recover such costs through price increases, the carrying value of certain of the Company’s intangible assets may prove to be unrecoverable and we may incur impairment charges of definitive-live intangible assets. Indefinite-lived Intangible Assets, Including Goodwill Indefinite-lived intangible assets, including goodwill, are not amortized but are required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. The Company is permitted the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of the Company’s reporting unit is less than its corresponding carrying value. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of the reporting unit is less than its corresponding carrying value then the Company is not required to take further action. However, if the Company concludes otherwise, then the Company must calculate the fair value of the reporting unit and compare it with its carrying amount, including Indefinite-lived intangible assets and recognize impairment equal to the difference between the carrying amount of the reporting unit and its fair value, considering the related income tax effect from any tax-deductible goodwill. The estimated fair value of the reporting unit exceeded the carrying value as of December 31, 2022 and 2021, and, therefore, no impairment has been recognized. 16 Stock Based Compensation We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by Financial Accounting Standards Board (the “FASB”) where the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. We record stock-based compensation expense according to the provisions of ASC Topic 718, Compensation – Stock Compensation. ASC Topic 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Under the provisions of ASC Topic 718, the Company determines the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company estimates the expected volatility and expected option life assumption consistent with ASC Topic 718, Compensation – Stock Compensation. The expected volatility of the Company’s common stock at the date of grant is estimated based on a historic volatility rate and the expected option life is calculated based on historical stock option experience as the best estimate of future exercise patterns. The dividend yield assumption is based on historical and anticipated dividend payouts. The risk-free interest rate assumption is based on observed interest rates consistent with the expected life of each stock option grant. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. Compensation expense is recorded for all stock options expected to vest based on the amortization of the fair value at the date of grant on a straight-line basis primarily over the vesting period of the options. Additional accounting policies can be found in Note 2 to our Audited Consolidated Financial Statements. Recent Accounting Pronouncements Management has evaluated all recent accounting pronouncements issued by the Financial Accounting Standards Board (FASB) and determined that none of the pronouncements will have a material impact on the financial statements of the Company. The Company will continue to monitor the issuance of any new accounting pronouncements and assess their potential impact on the financial statements in future periods. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section is not required for smaller reporting companies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this Item are included as a separate section of this report commencing on page F-1. 17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE