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, 2023, and its consolidated results of operations for the year ended December 31, 2023, 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. The 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. Revenues in 2023 and 2022 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 $29.5 million in 2023, an increase of $15.7 million from the 2022 loss of $13.8 million. Basic loss per share attributable to common stockholders was $3.50 for the year 2023 compared to $1.82 per share for the year 2022. 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. 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 $45 million as of December 31, 2023 ● Accumulated deficit of $113.9 million as of December 31, 2023 ● Multiple years of losses from operations ● Year over year decrease in sales ● Noncompliance with certain debt covenants Management Evaluation Management 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. Management’s Plans to Mitigate and Alleviate Conditions or Events ● Management is evaluating operating expenses and is developing a plan to reduce expenditures without negatively impacting current operations. ● Management has placed a strategic focus on increasing sales with prime customers. ● Sales efforts are focused on the most profitable product lines. ● Blue Star - The Company’s total accounts payable due to Blue Star as of December 31, 2023, was approximately $42 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 five years. ● Management finalized 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. 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. For the year ended December 31, Variation In thousands 2023 2022 $ % Revenue $ 81,193 $ 100,758 $ (19,565 ) (19.42 %) Cost of Goods sold 65,485 78,654 (13,169 ) (16.74 %) Gross Profit 15,708 22,104 (6,396 ) (28.94 %) Operating Expenses 41,904 31,656 10,248 32.37 % Loss from operations (26,196 ) (9,552 ) (16,644 ) 174.25 % Net loss (29,431 ) (13,614 ) (15,817 ) 116.18 % Net Loss per common Share from continuing operations $ (3.50 ) $ (1.82 ) $ (1.68 ) 92.22 % Revenues Revenue for the years ended December 31, 2023 and 2022 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, 2023 and 2022, the Company recognized $81.2 million and $100.8 million in net revenues, respectively. 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. Cost of Goods Sold For the years ended December 31, 2023 and 2022, the Company recognized a total of $65 million and $78.7 million, respectively, of cost of goods sold. 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. Operating Expenses For the years ended December 31, 2023 and 2022, operating expenses were $41.9 million and $31.7 million, respectively. This represents an 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. Research & 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. Selling, General and Administrative – Selling, General and Administrative expenses were $23 million 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%. The change was due to a decrease in commissions as a result of lower sales and management’s efforts to cut costs. Depreciation – Depreciation for the year ended December 31, 2023 was $464 thousand compared to $324 thousand for the year ended December 31, 2022. This represents an increase of $140 thousand, or 43%, attributable to growth in fixed assets. Intangible 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. Impairment 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. The results 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. 13 Other Income and Expenses The Company incurred $3.3 million in interest expense for the year ended December 31, 2023, compared to $3.5 million for the year ended December 31, 2022. 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 2023 and 2022. 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, 2023, the Company has $741 thousand of current income tax provision (US State & Local and Foreign) and $221 thousand deferred income tax expense. 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. Net loss The 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. Liquidity and Capital Resources As of December 31, 2023, the Company had cash in the amount of $1.7 million and a working capital deficit of $45 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 $35 million and $10.5 million as of December 31, 2023 and 2022, respectively. This increase in our stockholders’ deficit was primarily attributable to net losses. The Company’s accumulated deficit was $113.9 million and $84.4 million as of December 31, 2023 and 2022, respectively. The 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. The 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. The 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, 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 credit. 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. 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. 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. 14 Revenue Recognition . We determine revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (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. We 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 work order. 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. As 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. A 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. We 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. We 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. Management 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 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, 2023 and 2022. 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. 15 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 (“Topic 718”). 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. 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 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. Foreign conflicts We 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. Additional accounting policies can be found in Note 2 to our Audited Consolidated Financial Statements. Recently adopted accounting pronouncements In 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. The 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 companies. 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. In 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. As a result, 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. Recent Accounting Pronouncements not yet adopted In 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. In 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. 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. 16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE