OMNIQ Corp. 10-Q

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, 2022 and Item 1A — “Risk Factors” in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, 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 nine months ended September 30, 2023, were $66 million, a decrease of approximately $12 million, or 15%, over the nine months ended September 30, 2022. The loss from operations for the nine months ended September 30, 2023, was $7 million, an increase of $1 million compared with the loss in the nine months ended September 30, 2022, of $6 million. Basic loss per share from continuing operations for the nine months ended September 30, 2023, was ($1.50) versus ($1.29) per share for the same period in 2022. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2023, the Company had cash in the amount of $408 thousand and a working capital deficit of $43 million, compared to cash in the amount of $1.3 million, and a working capital deficit of $38 million as of December 31, 2022. The Company had stockholders’ deficit attributable to OmniQ stockholders of $19.2 million and $10.5 million as of September 30, 2023, and December 31, 2022, respectively. This increase in our stockholders’ deficit was primarily attributable to net losses. The Company’s accumulated deficit was $96.2 million and $84.4 million as of September 30, 2023, and December 31, 2022. The Company’s operations used net cash of $2.7 and $2 million in the nine months ended September 30, 2023, and 2022, respectively. The increase in cash used by operations of $650 thousand is due to the decrease in revenue and paying down accounts payable. The Company’s cash provided from investing activities was $598 thousand for the nine months ended September 30, 2023, compared to cash used in investing activities of $3.9 million for the nine months ended September 30, 2022. The Company’s financing activities provided $323 thousand of cash during the nine months ended September 30, 2023, and used $2.3 million during the nine months ended September 30, 2022. During the nine months ended September 30, 2023, the Company made payments of $1 million on its notes payable, including its related party notes payable, compared to the payments of $3 million for the nine months ended September 30, 2022. Additionally, the Company borrowed $796 thousand on the Company’s line of credit during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, when $1.8 million was borrowed on the Company’s line of credit. Management is in the process of finalizing a new line of credit with an additional financial institution. In October 2023 management finalized an equity raise which resulted in $2.5 million in net cash received from investors. See note 12 of the financial statements. 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 September 30, Variation In thousands 2023 2022 $ % Revenue $ 17,480 $ 27,008 $ (9,527 ) (35.27 %) Cost of Goods sold 13,471 21,032 (7,561 ) (35.95 %) Gross Profit 4,009 5,976 (1,967 ) (32.91 %) Operating Expenses 6,631 8,634 (2,003 ) (23.20 %) Loss from operations (2,622 ) (2,658 ) 36 (1.35 %) Net loss (4,305 ) (3,810 ) (495 ) 12.99 % Net Loss per common Share from continuing operations $ (0.55 ) $ (0.52 ) $ (0.03 ) 5.77 % Revenues For the three months ended September 30, 2023 and 2022, the Company generated net revenues in the amount of $17 million and $27 million, respectively. The decrease between the three-month periods was attributable to the decrease in demand and limitations in the supply chain. Cost of Goods Sold For the three months ended September 30, 2023 and 2022, the Company recognized a total of $13.4 million and $21 million, respectively, of cost of goods sold. For the three months ended September 30, 2023 and 2022, cost of goods sold were 77% and 78% of net revenues, respectively. Operating expenses Total operating expense for the three months ended September 30, 2023 and 2022 recognized was $6.6 million and $8.6 million, respectively, representing a 23% decrease. The decreases are related to the decrease in revenue. Research and Development – Research and development expenses for the three months ended September 30, 2023 and 2022 totaled $482 thousand and $445 thousand, respectively. Selling, general and Administrative – Selling, general and administrative expenses for the three months ended September 30, 2023 and 2022 totaled $5.6 million and $7.6 million, respectively, representing a 27% decrease. The decreases are related to decrease in revenue and the cost reduction plan put in place by management. Depreciation – Depreciation expenses for the three months ended September 30, 2023 and 2022 totaled $146 thousand and $91 thousand, respectively, representing a 60% increase. The increase is attributable to the addition of fixed assets. Intangible amortization – Intangible amortization expenses for the three months ended September 30, 2023 and 2022 totaled $418 thousand and $474 thousand, respectively. 5 Other income and expenses Interest Expense – Interest expense for the three months ended September 30, 2023 totaled $898 thousand, as compared to $880 thousand for the three months ended September 30, 2022. The increase is primarily attributable to a additional in debt. Nine months ended September 30, Variation In thousands 2023 2022 $ % Revenue $ 65,748 $ 77,539 $ (11,791 ) (15.21 )% Cost of Goods sold 52,131 59,449 (7,318 ) (12.31 )% Gross Profit 13,617 18,090 (4,473 ) (24.73 )% Operating Expenses 20,756 24,176 (3,420 ) (14.15 )% Loss from operations (7,139 ) (6,086 ) (1,053 ) 17.30 % Net loss (11,678 ) (9,566 ) (2,112 ) 22.08 % Net Loss per common Share from continuing operations $ (1.50 ) $ (1.29 ) $ (0.21 ) 16.28 % Revenues For the nine months ended September 30, 2023 and 2022, the Company generated net revenues in the amount of $66 million and $78 million, respectively. The decrease between the nine-month periods was attributable to the decrease in demand and limitations in the supply chain Cost of Goods Sold For the nine months ended September 30, 2023 and 2022, the Company recognized a total of $52 million and $59 million, respectively, of cost of goods sold. For the nine months ended September 30, 2023 and 2022, cost of goods sold were 79% and 77% of net revenues, respectively. Operating expenses Total operating expense for the nine months ended September 30, 2023 and 2022 recognized was $21 million and $24 million, respectively, representing a 14% decrease. The decreases are related to the cost reduction plan put in place by management. Research and Development – Research and development expenses for the nine months ended September 30, 2023 and 2022 totaled $1.5 million and $1.4 million, respectively. Selling, general and Administrative – Selling, general and administrative expenses for the nine months ended September 30, 2023 and 2022 totaled $18 million and $21 million, respectively, representing a 17% decrease. The decreases are related to the cost reduction plan put in place by management. Depreciation – Depreciation expenses for the nine months ended September 30, 2023, and 2022 totaled $349 thousand and $241 thousand, respectively, representing a 45% increase. The increase is directly increased by the acquisition of additional fixed assets. Intangible amortization – Intangible amortization expenses for the nine months ended September 30, 2023, and 2022 totaled $1.3 million and $1.3 million, respectively. Other income and expenses Interest Expense – Interest expense for the nine months ended September 30, 2023 totaled $2.6 million, as compared to $2.6 million for the nine months ended September 30, 2022. 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