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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 209 added, 247 removed, 113 unchanged (80% of the section changed)

8 unchanged sentences

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.

Company’s consolidated revenue for the year ended December 31, 2022 were $102.5 million, representing an increase of $24 million

in these forward-looking statements as a result of certain factors.

Company’s consolidated revenue for the year ended December 31, 2023 were $81.2 million, representing a decrease of $19.6 million

from the year ended December 31, 2022 of $100.8 million.

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Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”).

loss attributable to common stockholders’ of OmniQ Corp was $13.8 million in 2022, an increase of $400 thousand from the 2021 loss

loss attributable to common stockholders’ of OMNIQ Corp was $29.5 million in 2023, an increase of $15.7 million from the 2022 loss

of $13.8 million.

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the year 2022.

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.

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.

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.

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.

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

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years of losses from operations

years of negative cash flows from operations

Noncompliance with certain debt covenants

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.

over year decrease in sales

Noncompliance

with certain debt covenants

considers the conditions 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.

Plans to Mitigate and Alleviate Conditions or Events

is evaluating operating expenses and is developing a plan to reduce expenditures without negatively impacting current operations.

has placed a strategic focus on increasing sales with prime customers.

efforts are focused on the most profitable product lines.

Star - The Company’s total accounts payable due to Blue Star as of December 31, 2023, was approximately $42 million.

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.

The Company has enjoyed

a good mutual relationship for the past five years.

finalized a new line of credit with an additional financial institution.

October 2023 management finalized an equity raise which resulted in $2.5 million in net cash received from investors.

– Results of Operations

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we note that the period-to-period comparison may not be indicative of future performance.

Year ended December 31,

the year ended December 31,

Cost of Goods sold

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$81.2 million and $100.8 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.

of Goods Sold

the years ended December 31, 2022 and 2021, the Company recognized a total of $80.4 million and $61.6 million respectively, of cost

This represents a decrease of 19%.

The decrease was due to two main factors:

(1) The decrease in deliverables due to the war in Israel, and (2) a delay in the timing of a significant software project.

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.

the years ended December 31, 2023 and 2022, the Company recognized a total of $65 million and $78.7 million, respectively, of cost of

Cost of goods sold was 81% of revenues for 2023 and 78% of revenue for 2022.

Our gross margin percentage has remained relatively

stable in an industry that is experiencing gross-margin pressure.

the years ended December 31, 2023 and 2022, operating expenses were $41.9 million and $31.7 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.

& Development – Research and development for the year ended December 31, 2022 and 2021 totaled $1.8 million

increase of $10.2 million, or 32%, which is due to impairment expense of $14.7 million.

The following explains in detail the change in

operating expenses.

& Development – Research and development for the years ended December 31, 2023 and 2022 totaled $2.2 million and $1.8

million, respectively.

This represents an increase of $328 thousand or 18%, which is due to investment in developing additional software.

General and Administrative – Selling, General and Administrative expenses were $23 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%.

was due to additional share issuances to employees and directors as well as a large software implementation.

– Depreciation for the year ended December 31, 2022 were $324 thousand compared to $251 thousand for the year ended December

31, 2023, compared to $27.7 million for the year ended December 31, 2022, representing a decrease of $4.7 million, or 17%.

was due to a decrease in commissions as a result of lower sales and management’s efforts to cut costs.

– Depreciation for the year ended December 31, 2023 was $464 thousand compared to $324 thousand for the year ended December

This represents an increase of $140 thousand, or 43%, attributable to growth in fixed assets.

Amortization – Intangible amortization expenses for the year ended December 31, 2022 were $1.8 million, compared to $3.2

Amortization – Intangible amortization expense for the year ended December 31, 2023 was $1.6 million, compared to $1.8

million for the year ended December 31, 2022.

This represents a decrease of $1.4 million, or 43%, attributable to the acquisition of

additional intangibles.

of Goodwill – During the year ended December 31, 2023 the Company experienced significant decline in our stock price and

sustained losses from operations.

Therefore, we completed a quantitative goodwill impairment analysis as of December 31, 2023.

of the analysis indicated an impairment loss for goodwill related to acquisitions prior to 2021, and we recorded a non-cash impairment

of $14.7 million.

Income and Expenses

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for Income Taxes

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.

the year ended December 31, 2023, the Company has $741 thousand of current income tax provision (US State & Local and Foreign) and

$165 thousand deferred income tax benefit.

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.

$221 thousand deferred income tax expense.

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.

Company realized a net loss of $29.4 million for the year ended December 31, 2023, compared to a net loss of $13.6 million for the year

ended December 31, 2022.

The increased loss in 2023 is due primarily to impairment of goodwill and the decrease in revenue.

and Capital Resources

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The Company had stockholders’

deficit attributable to OmniQ stockholders of $10.5 million and $98 thousand as of December 31, 2022 and 2021, respectively.

deficit attributable to OmniQ stockholders of $35 million and $10.5 million as of December 31, 2023 and 2022, respectively.

This increase

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Company’s accumulated deficit was $113.9 million and $84.4 million as of December 31, 2023 and 2022, respectively.

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.

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.

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.

Company’s operations provided net cash of $170 thousand and $1.2 million for the years ended December 31, 2023 and 2022, respectively.

The decrease of cash from operations of $1 million is primarily a result of reduction in sales.

Company’s cash used in investing activities was $331 thousand for the year ended December 31, 2023 compared to cash used by investing

activities of $4.2 million for the year ended December 31, 2022.

Company’s financing activities used $50 thousand of cash during the year ended December 31, 2023, and used $3 million during the

year ended December 31, 2022.

During the year ended December 31, 2023, the Company made payments of $1.4 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.

compared to the year ended December 31, 2022, when the Company made payments of $2.5 million on its notes payable, including its Supplier

Secured Promissory note and related party notes payable.

Additionally, the Company paid $1.6 million on the Company’s line of credit

during the year ended December 31, 2023, compared to the year ended December 31, 2022, when the Company paid $4 million on the line of

The Company raised net proceeds of $2.4 million for the year ended December 31, 2023 and no funds were raised for the year ended

December 31, 2022.

Sheet Arrangements

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prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

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.

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 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.

Recognition .

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) :

the contract with our customer.

determine revenue recognition through the following steps:

(1) identification of the contract with a customer;

(2) identification of

the performance obligations in the contract;

the transaction price.

the transaction price to the performance obligations.

the satisfaction of the performance obligations,

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.

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:

good or other asset from another party that we then transfer to our customer.

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

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.

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.

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:

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.

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.)

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.

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.

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.

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:

have a right to payment for the product or service,

customer has legal title to the product,

have transferred physical possession of the product to the customer,

customer has the risk and rewards of ownership of the product, and

customer has accepted the product.

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

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

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.

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.

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

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:

the software provides its original intended functionality to the customer without the updates,

the customer would ascribe a higher value to the upgrades versus the up-front deliverable,

the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality),

the customer chooses to not delay or always install upgrades.

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.

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.

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.

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

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.

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.

(3) determination of the transaction price;

(4) allocation of the transaction price to the

performance obligations in the contract;

and (5) recognition of revenue when, or as, a performance obligation is satisfied.

combine contracts with the same customer into a single contract for accounting purposes when the contracts are entered into at or near

the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the other contract,

or the services are considered a single performance obligation.

Our contracts are typically governed by a customer purchase order or

The contract generally specifies the delivery of what constitutes a single performance obligation.

If an arrangement involves

multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value

on a standalone basis and whether there is objective and reliable evidence of their standalone selling price.

The total contract transaction

price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations.

The standalone selling price is based on an observable price for services sold to other comparable customers.

discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of

a contract and is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.

We do not have any material extended payment terms, as payment is due at or shortly after the time of the sale.

Sales, value-added and

other taxes collected concurrently with revenue producing activities are excluded from revenue.

contract liability is recognized as deferred revenue when we invoice customers, or receive customer cash payments, in advance of satisfying

the related performance obligation(s) under the terms of a contract.

Deferred revenue is recognized as revenue when we have satisfied

the related performance obligation.

have four main revenue streams:

(1) Hardware sales, (2) Hardware installation/configuration, (3) Hardware service contracts, and (4)

Third-party software sales.

For all these revenue streams, our performance obligations are satisfied at a point in time, and therefore,

revenue is recognized at the point in time when a customer takes control of the good or asset created by the service.

Factors that may

indicate transfer of control are when we have the right to receive payment for the good or service, when the legal title of the asset

has been transferred, physical possession of the asset has been transferred, the customer obtains the significant risks and rewards of

ownership of the asset, and the customer accepts the asset.

For some customers, control is transferred when the customer, or the customer’s

courier, picks up the hardware from our warehouse.

For other customers, control is transferred upon delivery.

For hardware sales which

also include installation and/or configuration as a single performance obligation, control is transferred only when the hardware is delivered

and installed/configured.

For hardware service contracts and for third-party software sales, the Company acts as the agent in the transaction,

and thus recognizes revenue on a net basis at a point in time when the transaction has been facilitated.

leverage drop-ship shipments with many of our partners and suppliers to deliver hardware to our customers without having to physically

hold the inventory at our warehouses, thereby increasing efficiency and reducing costs.

We recognize revenue for drop-ship arrangements

on a gross basis as the principal in the transaction when the product is received by the customer because we control the product prior

to transfer to the customer.

We also assume primary responsibility for the fulfillment in the arrangement, we assume inventory risk if

something were to happen to the hardware during shipping, we set the price of the product charged to the customer, we assume credit risk

for nonpayment by our customer, and we work closely with customers to determine their hardware specifications.

reviews historical returns on at least an annual basis to determine the need for an allowance for sales returns.

Historically, sales

returns have been extremely limited, with the effect on the financial statements immaterial.

Sales returns during any particular year

are so small and so infrequent that management determined that any material reserve against sales returns would likely not be appropriate.

Definite-lived

30 unchanged sentences

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.

Based Compensation

4 unchanged sentences

as compensation expense on the straight-line basis over the vesting period.

record stock-based compensation expense according to the provisions of ASC Topic 718, Compensation – Stock Compensation.

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.

record stock-based compensation expense according to the provisions of ASC Topic 718, Compensation – Stock Compensation (“Topic

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 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.

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.

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.

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.

the expected volatility and expected option life consistent with Topic 718.

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 options 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 US treasury 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.

are closely monitoring developments in the war between Israel and Hamas that began on October 7, 2023 including potential impacts to

The Companies business, customers, suppliers, employees, and operations in Israel, the Middle East and elsewhere.

At this time, impacts

to The Company are expected to be minimal but is subject to change given the volatile nature of the situation.

accounting policies can be found in Note 2 to our Audited Consolidated Financial Statements.

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.

adopted accounting pronouncements

June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) 2016-13,

Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which changes how entities will

measure credit losses for financial assets and certain other instruments that are not measured at fair value through net income.

new expected credit loss impairment model requires immediate recognition of estimated credit losses expected to occur.

Additional disclosures

are required regarding assumptions, models, and methods for estimating the credit losses.

ASU 2019-10, Financial Instruments-Credit Losses

(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842):

Effective Dates, deferred the effective date for non-public

The standard is effective for non-public companies for fiscal years beginning after December 15, 2022.

We adopted these requirements

as of January 1, 2023 with no material impact on our consolidated financial statements.

August 2020, the Financial Statement Accounting Board (the “FASB”) issued ASU 2020-06 which simplifies the accounting for

convertible instruments and its application of the derivatives scope exception for contracts in an entity’s own equity.

For contracts

in an entity’s own equity, the new guidance eliminates some of the current requirements for equity classification such as the requirement

that settlement in unregistered shares is permitted.

In addition, the new guidance reduces the number of accounting models that require

separating embedded conversion features from convertible instruments, including eliminating the requirement to recognize a beneficial

conversion feature if the conversion feature is in the money and does not require bifurcation as a derivative liability.

only conversion features accounted for under the substantial premium model and those that require bifurcation will be accounted for separately.

The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires

enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity.

The Company adopted the

new standards January 1, 2023.

The adoption of this standard may allow the Company, in the future and in certain circumstances, to avoid

derivative treatment of warrants and avoid beneficial conversion treatment of certain convertible preferred shares.

Adoption of this

standard had no effect on the Company’s financial statements.

Accounting Pronouncements not yet adopted

November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which

requires retrospective disclosure of significant segment expenses and other segment items on an annual and interim basis.

Additionally,

it requires disclosure of the title and position of the Chief Operating Decision Maker (“CODM”).

This ASU will be effective

for the Company’s fiscal December 31, 2024 year-end and interim periods beginning in fiscal 2025, with early adoption permitted.

We are assessing the impact of this guidance on our disclosures;

it will not have an impact on our results of operations, cash flows,

or financial condition.

December 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which requires an annual

tabular effective tax rate reconciliation disclosure including information for specified categories and jurisdiction levels, as well

as, disclosure of income taxes paid, net of refunds received, disaggregated by federal, state/local, and significant foreign jurisdiction.

This ASU will be effective for the Company’s fiscal December 31, 2025 year-end, with early adoption permitted.

We are assessing

the impact of this guidance on our disclosures;

it will not have an impact on our results of operations, cash flows, or financial condition.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-K

Item 7. Management’s Discussion and Analysis