UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2020

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to          

 

Commission File Number: 000-09047

 

OMNIQ Corp.

(Exact name of registrant as specified in its charter)

 

Delaware		20-3454263
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1865 West 2100 South

Salt Lake City, UT 84119

(Address of principal executive offices) (Zip Code)

 

(801) 244-9577

(Registrant’s telephone number, including area code)

 

Quest Solution, Inc.

860 Conger Street

Eugene, OR 87402

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Ticker symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	[  ]		Accelerated filer	[  ]
Non-accelerated filer	[  ]		Smaller reporting company	[X]
(Do not check if a smaller reporting company)
Emerging growth company	[  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,107,230 shares of common stock, $0.001 par value, as of May 12, 2020.

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	F-1
CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2020 (UNAUDITED) AND DECEMBER 31, 2019, (AUDITED)	F-1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019, (UNAUDITED)	F-2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019, (UNAUDITED)	F-3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019, (UNAUDITED)	F-4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	F-5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	7
ITEM 4. CONTROLS AND PROCEDURES	7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.	8
ITEM 1A. RISK FACTORS.	8
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.	8
ITEM 4. MINE SAFETY DISCLOSURES.	8
ITEM 5. OTHER INFORMATION.	8
ITEM 6. EXHIBITS.	8
SIGNATURES	9

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

OMNIQ CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share data)		As of
		March 31, 2020				December 31, 2019
		(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents		$	3,321			$	1,615
Accounts receivable, net			12,714				6,694
Inventory			1,768				1,889
Prepaid expenses			667				362
Other current assets			8				65
Total current assets			18,478				10,625
Property and equipment, net of accumulated depreciation of $2,221 and $2,195, respectively			417				463
Goodwill			14,695				13,921
Trade name, net of accumulated amortization of $3,018 and $2,932, respectively			1,372				1,458
Customer relationships, net of accumulated amortization of $6,954 and $6,578, respectively			5,636				6,012
Other intangibles, net of accumulated amortization of $224 and $185, respectively			1,199				1,138
Cash, restricted			541				533
Right of use lease asset			118				131
Other assets			148				172
Total assets		$	42,604			$	34,453
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	24,993			$	18,694
Accrued interest and accrued liabilities, related party			37				-
Line of credit			4,978				1,365
Accrued payroll and sales tax			2,287				1,556
Notes payable, related parties – current portion			790				1,025
Notes payable – current portion			6,450				6,497
Lease liability – current portion			49				54
Other current liabilities			1,410				1,599
Total current liabilities			40,994				30,790
Long term liabilities
Notes payable, related party, less current portion			1,065				1,172
Accrued interest and accrued liabilities, related party			42				76
Notes payable, less current portion			142				143
Lease liability			73				80
Other long term liabilities			444				384
Total liabilities			42,760				32,645
Stockholders’ equity (deficit)
Series A Preferred stock; $0.001 par value; 1,000,000 shares designated, 0 shares issued and outstanding			-				-
Series B Preferred stock; $0.001 par value; 1 share designated, 0 shares issued and outstanding			-				-
Series C Preferred stock; $0.001 par value; 15,000,000 shares designated, 4,828,530 and 4,828,530 shares issued and outstanding, respectively			5				5
Common stock; $0.001 par value; 200,000,000 shares authorized; 4,024,837 and 3,960,405 shares issued and outstanding, respectively.			4				4
Additional paid-in capital			47,845				46,861
Accumulated (deficit)			(47,994	)			(45,063	)
Accumulated other comprehensive loss			(16	)			1
Total stockholders’ equity (deficit)			(156	)			1,808
Total liabilities and stockholders’ equity (deficit)		$	42,604			$	34,453

 

The accompanying unaudited notes to the financials should be read in conjunction with these condensed
consolidated financial statements.

 

 

OMNIQ CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

		For the three months ended March 31
(In thousands, except share and per share data)		2020				2019
Revenues
Total Revenues		$	13,799			$	18,620
Cost of goods sold
Cost of goods sold			10,763				14,023
Gross profit			3,036				4,597
Operating expenses
General and administrative			793				689
Salary and employee benefits			2,856				2,855
Depreciation and amortization			548				543
Professional fees			875				415
Total operating expenses			5,072				4,502
Income (loss) from operations			(2,036	)			95
Other income (expenses):
Interest expense			(795	)			(684	)
Other (expenses) income			(42	)			(46	)
Total other expenses			(837	)			(730	)
Net loss before Income Taxes			(2,873	)			(635	)
Provision for Income Taxes
Current			-				-
Total Provision for Income Taxes			-				-
Net loss attributable to OMNIQ Corp.		$	(2,873	)		$	(635	)
Less: Preferred stock – Series C dividend			(72	)			(47	)
Net loss attributable to the common stockholders		$	(2,945	)		$	(682	)
Net loss per share - basic		$	(0.74	)		$	(0.19	)
Net loss per share from continuing operations - basic		$	(0.74	)		$	(0.19	)
Weighted average number of common shares outstanding - basic			3,984,006				3,584,076

 

The accompanying unaudited notes to the financials should be read in conjunction with these condensed
consolidated financial statements.

 

 

OMNIQ CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

 

		Series C Preferred Stock								Common Stock								Additional Paid-in				Shares				Accumulated				Other Comprehensive				Total Stockholders’ Equity
(In thousands)		Shares				Amount				Shares				Amount				Capital				Repurchased				Deficit				Income (Loss)				(Deficit)
Balance, December 31, 2018			4,829			$	5				3,597			$	4			$	42,264			$	(230	)		$	(39,752	)		$	1			$	2,292
Dividend on Class C Shares			-				-				-				-								-				(47	)			-				(47	)
ESPP Stock Issuance			-				-				-				-				1				-				-				-				1
Stock-based compensation – options and warrants			-				-				-				-				323				-				-				-				323
Stock redemption											(25	)			-				(230	)			230												-
Accumulated other Comprehensive Loss			-				-				-				-				-				-								-				-
Net (loss)			-				-				-				-				-				-				(633	)			-				(633	)
Balance, March 31, 2019			4,829			$	5				3,572			$	4			$	42,358			$	-			$	(40,432	)		$	1			$	1,936	)
Balance, December 31, 2019			4,829			$	5				3,960			$	4			$	46,861			$	-			$	(45,063	)		$	1			$	1,808
Dividend on Class C Shares			-				-				-				-								-				(72	)			-				(72	)
Accumulated other comprehensive loss			-				-				-				-				-				-				-				(17	)			(17	)
Stock-based compensation – options and warrants			-				-				-				-				190				-				-				-				190
Subscribed common stock											-								440				-				-				-				440
Professional fees – restricted shares			-				-				65				-				354				-				-				-				354
Other misc. items			-				-				-				-				-				-				14				-				14
Net (loss)			-				-				-				-				-				-				(2,873	)			-				(2,873	)
Balance, March 31, 2020			4,829			$	5				4,025			$	4			$	47,845			$	-			$	(47,994	)		$	(16	)		$	(156	)

 

The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements.

 

 

OMNIQ CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)

 

		For the three months ended March 31
(In thousands)		2020				2019
Cash flows from continuing operating activities:
Net loss		$	(2,873	)		$	(635	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock based compensation			544				323
Amortization of ROU lease asset			13				18
Depreciation and amortization			548				543
Changes in operating assets and liabilities:
Accounts receivable			(6,006	)			(1,941	)
Prepaid expenses			(310	)			(319	)
Inventory			121				173
Accounts payable and accrued liabilities			6,186				6,214
Accrued interest and accrued liabilities, related party			3				-
Accrued payroll and sales taxes payable			731				144
Other assets			54				(102	)
Lease liability			(12	)			(17	)
Other liabilities			(531	)			132
Net cash (used in) provided by operating activities			(1,532	)			4,533
Cash flows from investing activities:
Restricted cash			(8	)			-
Other assets			24				(213	)
Purchase of property and equipment			(1	)			-
Net cash provided by (used in) investing activities			15				(213	)
Cash flows from financing activities:
Proceeds from ESPP stock issuance			-				1
Proceeds from / (payments on) line of credit			3,613				(3,737	)
Payment on notes/loans payable			(390	)			(618	)
Net cash provided by (used in) financing activities			3,223				(4,354	)
Net increase (decrease) in cash			1,706				(34	)
Cash, beginning of period			1,615				378
Cash, end of period		$	3,321			$	344
Cash paid for interest		$	601			$	-
Cash paid for taxes		$	-			$	-
Supplementary for non-cash flow information:
Stock issued for services		$	354			$	-
Intangible assets acquired in non-cash exchange			885				-
Stock options and warrants issued		$	190			$	323

 

The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements.

 

 

OMNIQ CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-

 

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

The interim consolidated financial statements of OMNIQ Corp. include the combined accounts of Quest Marketing, Inc., an Oregon Corporation, Quest Exchange Ltd., a Canadian based holding company, HTS Image Processing, Inc. (“HTS”), a Delaware corporation, HTS (USA), Inc., a Delaware corporation and HTS Image Ltd. (“HTS Ltd.”) (f/k/a Teamtronics Ltd.), an Israeli corporation.

 

On December 31, 2016, the Company acquired one hundred percent (100%) of the shares of Bar Code Specialties, Inc. (“BCS”) and merged BCS into Quest Marketing to form one US legal entity as part of its streamlining efforts.

 

The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2019 and notes thereto included in the Company’s Form 10-K filed with the SEC on March 30, 2020. The Company operates in one segment.

 

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020.

 

COVID-19

 

The novel coronavirus (“COVID-19”) was first identified in late 2019. COVID-19 spread rapidly throughout the world and, in March 2020, the World Health Organization (“WHO”) characterized COVID-19 as a pandemic. COVID-19 is a pandemic of respiratory disease spreading from person-to-person that poses a serious public health risk. It has significantly disrupted supply chains and businesses around the world. The extent and duration of the COVID-19 impact on our operations and financial position is highly uncertain.

 

Management cares about the employees, customers and the communities served, so quick and strict action was taken based on the Center for Disease Control and WHO recommendations to combat illness in the workforce and to lessen business interruption for the Company and customers. OMNIQ has been designated an essential business and the operations remain open to serve customers. The Company’s management and employees are focused on safely providing the equipment, parts, and services customers need to continue their work.

 

Management continues to closely monitor and evaluate the impact of the COVID-19 pandemic on the Company’s operations and will take, the necessary actions to right-size the business in this environment, which is evolving daily. Some potential actions include, but are not limited to, modified work schedules as well as appropriate adjustments to the operating expenditures and capital spending plans.

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of significant accounting policies of OMNIQ Corp. is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

 

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

The Company has evaluated recent pronouncements and believes that none of them will have a material effect on the Company’s financial statements.

 

REVERSE STOCK SPLIT

 

Effective November 20, 2019, the Company implemented a one-for-20 reverse stock split of the Company’s common stock (the “Reverse Split”). The par value of common stock and the number of authorized shares were not adjusted as a result of the Reverse Split. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. As a result of the Reverse Split, proportionate adjustments have been made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options and warrants issued by the Company and outstanding immediately prior to the Reverse Split, which resulted in a proportionate decrease in the number of shares of the Company’s common stock reserved for issuance upon exercise or vesting of such stock options, restricted stock units and warrants, and, in the case of stock options and warrants, a proportionate increase in the exercise price of all such stock options and warrants. In addition, the number of shares authorized for future grant under the Company’s equity incentive/compensation plans immediately prior to the Reverse Split was reduced proportionately.

 

GOODWILL AND INTANGIBLE ASSETS

 

Intangible assets are stated at cost, net of accumulated amortization. The assets are being amortized on the straight-line method over useful lives ranging from 3 to 11 years. Amortization expense for the three months ended March 31, 2020 and March 31, 2019 was $501 thousand and $501 thousand, respectively.

 

 

NET LOSS PER COMMON SHARE

 

Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share.” Basic net loss per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted-average number of common shares outstanding for computing basic EPS for the three months ended March 31, 2020 and 2019 were 3,984,006 and 3,584,076, respectively. Diluted net loss per share of common stock is the same as basic net loss per share of common stock because the effects of potentially dilutive securities are antidilutive.

 

Dilutive securities are excluded from the computation of diluted net loss per share because such securities have anti-dilutive impact due to losses reported.

 

The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share because such securities have an anti-dilutive impact due to losses reported, as of March 31:

 

(In thousands)		2020				2019
Options to purchase common stock			717				792
Convertible preferred stock			241				241
Warrants to purchase common stock			225				275
Potential shares excluded from diluted net loss per share			1,183				1,308

 

FOREIGN CURRENCY TRANSLATION

 

The consolidated financial statements of the Company are presented in U.S. dollars. The functional currency for the Company and each of its subsidiaries (“Quest US entities”), except HTS Ltd., is U.S. dollars. The functional currency of HTS Ltd. is the Israeli Shekel. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the time of the transaction. For the Company’s U.S. entities, continuing operations are conducted in U.S. dollars. The Company owns a non-operating subsidiary in Canada, from which it has had no activity since October 1, 2016. For HTS Ltd., continuing operations are conducted in Israeli Shekel.

 

Reclassifications and adjustments — Certain prior year amounts in the condensed consolidated interim financial statements have been reclassified to conform with current year presentation. The impact of the reclassifications made to prior year amounts is not material and did not affect net loss.

 

NOTE 2 – GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of March 31, 2020, the Company had a working capital deficit of $22.5 million and an accumulated deficit of $48.0 million. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. Management’s plan to eliminate the going concern situation includes, but is not limited to, the continuation of improving cash flow, maintaining moderate cost reductions, the creation of additional sales and profits across its product lines, and the obtaining of sufficient financing to restructure current debt in a manner more in line with the Company’s improving cash flow and cost reduction successes.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

NOTE 3 – CONCENTRATIONS

 

For the three months ended March 31, 2020 and the year ended December 31, 2019, one customer accounted for 32.5% and 12.3% of the Company’s revenues, respectively. At March 31, 2020 and December 31, 2019, one customer accounted for 36.6% and 29.6% of the Company’s accounts receivable balance, respectively.

 

NOTE 4 – BUSINESS ACQUISITION

 

Eyepax acquisition

 

On February 28, 2020 (Closing Date), the Company entered into an Asset Purchase Agreement, with Eyepax IT Consulting, LLC (Seller); whereby, the Company acquired Seller’s accounts receivable and the license, ownership rights and source code of the parking Enforcement and Revenue Control System. The Company also assumed the Seller’s accounts payable liabilities. The aggregate purchase price paid is as follows:

 

	1.	$100,000 shall be paid on the Closing Date, less $5,000 previously paid as an advance payment, accordingly the remaining balance to be paid on Closing Date is $95,000.
	2.	$25,000 per month for three months shall be paid on or before the last business day of the month beginning with the first month after the Closing Date, and a fourth payment of $20,000 until a total of $95,000 has been made.
	3.	Beginning on the first month after Closing Date, $5,000 per month shall be paid in ten (10) monthly installments.
	4.	80,000 shares of the Company’s common stock in the name of the Seller, will be issued during 45 days from Closing Date at $5.00 per common share.
	5.	Stock options to purchase 20,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The option shares will vest in equal quarterly periods, expiring on February 28th, 2023.

 

The purchase price was measured at fair value on the Closing Date as follows:

 

(In thousands)
Cash payments to Seller			245
Subscribed common stock			440
Stock purchase options			91
Total			776

 

The assets acquired and liabilities assumed have been recognized at the Closing date and were measured at fair value as follows:

 

(In thousands)
Accounts receivable			14
Software (intangible)			100
Liabilities assumed			(113	)
Net assets acquired at fair value			1
Total purchase price			776
Goodwill recognized			775

 

The Company estimated the fair value the stock purchase option using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate and dividend yield. In valuing these options, the Company assumed a cumulative stock volatility of 269.42%, 36 months expected life, and a risk-free interest rate of 1.160% and dividend yield of 0%.

 

 

NOTE 5 – OTHER LIABILITIES

 

At March 31, 2020 and December 31, 2019, other liabilities consisted of the following:

 

(In thousands)		March 31, 2020				December 31, 2019
Other vendor payable		$	801			$	801
Dividend payable			417				344
Bonus payable			128				385
Others			508				453
Total other liabilities			1,854				1,983
Less Current Portion			(1,410	)			(1,599	)
Total long term other liabilities		$	444			$	384

 

NOTE 6 – CREDIT FACILITIES AND LINE OF CREDIT

 

On July 1, 2016, the Company entered into a Factoring and Security Agreement (the “FASA”) with Action Capital Corporation (“Action”) to establish a sale of accounts facility, whereby the Company may obtain short-term financing by selling and assigning to Action acceptable accounts receivable. Pursuant to the FASA, the outstanding principal amount of advances made by Action to the Company at any time shall not exceed $5.0 million. Action will reserve and withhold an amount in a reserve account equal to 5% of the face amount of each account purchased under the FASA. The balance outstanding under the Action credit line at March 31, 2020 and December 31, 2019, was $5.0 million and $1.4 million respectively, which includes accrued interest.

 

The per annum interest rate with respect to the daily average balance of unpaid advances outstanding under the FASA (computed on a monthly basis) will be equal to the “Prime Rate” of Wells Fargo Bank N.A. plus 2%, plus a monthly fee equal to 0.75% of such average outstanding balance. The Company shall also pay all other costs incurred by Action under the FASA, including all bank fees. The FASA will continue in full force and effect unless terminated by either party upon 30 days’ prior written notice. Performance of the Company’s obligations under the FASA is secured by a security interest in certain collateral of the Company. The FASA includes customary representations and warranties and default provisions for transactions of this type.

 

NOTE 7 – NOTES PAYABLE

 

Notes payable at March 31, 2020 and December 31, 2019, consists of the following:

 

(In thousands)		March 31, 2020				December 31, 2019
Supplier Note Payable		$	6,443			$	6,490
All Other			149				150
Total			6,592				6,640
Less current portion			(6,450	)			(6,497	)
Long Term Notes Payable		$	142			$	143

 

Future maturities of notes payable as of March 31, 2020 are as follows;

 

2019		$	6,448
2020			6
2021			138
2022			-
2023			-
Total		$	6,592

 

In connection with the acquisition of Bar Code Specialties, Inc. (“BCS”), a California corporation, the Company assumed a related party note payable to the former CTO of the RFID division of BCS. The note is payable in equal monthly installments of $5 thousand beginning October 31, 2014 and ended October 2018. The loan bears interest at 8.0% and is unsecured and subordinated to the Company’s bank debt. The balance on this loan at March 31, 2020 and December 31, 2019 was $138 thousand, all of which was classified as long-term. In July 2016, the holder of the note signed a subordination agreement with the Supplier of the Secured Promissory Note (as defined below) and Action Capital, whereby the noteholder agrees to subordinate its right to payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full, therefore, the note is classified as long-term.

 

On July 18, 2016, the Company and the Supplier entered into a certain secured promissory note, with an effective date of July 1, 2016, in the principal amount of $12.5 million (the “Secured Promissory Note”). The USD Note accrues interest at 12% per annum and is payable in six consecutive monthly installments of principal and accrued interest in a minimum principal amount of $250 thousand each, with any remaining principal and accrued interest due and payable on December 31, 2016.

 

	●	On September 7, 2018, the Company entered into a Sixth Amendment to the Secured Promissory Note (the “Sixth Amendment”) extending the maturity date to January 31, 2019. The Sixth Amendment also increases the principal amount to $8.7 million, an increase of $6.8 million, by rolling the Company’s then existing and outstanding accounts payable into the note by the previously mentioned amount of increase. The Company will continue to make monthly payments in the amount of $300 thousand for the first three monthly payments, and also in the amount of $500 thousand for the last two monthly payments prior to the note’s maturity.
	●	On April 30, 2019, the Company entered into a Seventh Amendment to the Secured Promissory Note (the “Seventh Amendment”) extending the maturity date to July 31, 2019. The Seventh Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $350 thousand each. The Company has made partial payments towards the required monthly installments under the terms of the Seventh Amendment. As has been the case with each previous amendment, the Company is in continual negotiations with the holder of the Secured Promissory Note to extend the maturity date and establish a new schedule of payments.

 

 

NOTE 8 –NOTES PAYABLE, RELATED PARTIES

 

Notes and loans payable, related parties consisted of the following:

 

(In thousands)		March 31, 2020				December 31, 2019
Note payable – debt restructure Marin		$	840			$	900
Note payable – debt restructure Thomet			525				563
Note payable – debt restructure Zicman			125				135
Convertible note payable – shareholders			150				150
Note payable – RWCC			215				449
Total notes payable, related parties			1,855				2,197
Less current portion			790				1,025
Long-term portion		$	1,065			$	1,172

 

Note payable – debt restructure Marin

 

On February 28, 2018, the Company finalized two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”) which have an effective date of December 30, 2017. Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11.0 million of which an aggregate of $10.7 million (the “Owed Amount”) was outstanding as of February 26, 2018 which includes accrued interest earned but not paid. Pursuant to the Marin Settlement Agreement I, the amount of the indebtedness owed to Marin was reduced by $9.5 million bringing the total amount owed to $1.2 million. Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20 thousand each commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc. is satisfied and all amounts currently in default under the credit agreement with Scansource (currently approximately $6.0 Million) is reduced to $2.0 million. As a result, the balance on this loan and related accrued interest at December 31, 2018 were all classified as long term, being due in 2023. As of March 31, 2020, the balance of this loan was $840 thousand.

 

 

Note payable – debt restructure Thomet

 

On February 28, 2018, the Company finalized a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5.4 million in full in exchange for 60 monthly payments of $13 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of 25,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30, 2017. As of March 31, 2020, the balance of this loan was $525 thousand and is due in 2023.

 

Note payable – debt restructure Zicman

 

On February 28, 2018, the Company finalized a settlement agreement with George Zicman whereby the Company settled its indebtedness to Mr. Zicman in the amount of $1.3 million in full in exchange for 60 monthly payments of $3 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of 5,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement Agreement II. The effective date of the agreement is December 30, 2017. As of March 31, 2020, the balance of this loan was $126 thousand.

 

Each of the Marins, Thomet and Zicman entered into a voting agreement with the Company whereby they agreed to vote any shares of common stock beneficially owned by them as directed by the Company’s CEO and also agreed to a leakout restriction whereby they each agreed not to sell more than 10% of the common stock beneficially owned during any 30-day period.

 

Convertible note payable - shareholders

 

On October 5, 2018, the Company entered into a purchase agreement with Walefar Investments, Ltd. (“Walefar”) and Campbeltown Consulting, Inc. (“Campbeltown”) (Walefar and Campbeltown are collectively referred to as the “Sellers”). Pursuant to the agreement, the Company purchased 100% of the capital stock of HTS Image Processing, Inc. (“HTS”) from the Sellers. As consideration, the Company (i) issued to the Sellers 1,122,648 shares of the Company’s common stock, having a value of $5.3 million based on the average closing price of the common stock for the 20 days’ preceding the agreement (the “Per Share Value”), (ii) cash in the amount of $300 thousand, and (iii) a 12 month convertible promissory note with a principal amount of $700 thousand and an interest rate of six percent (6%) per year (the “Convertible Promissory Note”). The note also provides the Sellers the right to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $4.72. The agreement constitutes a “related party transaction” because of Company director Shai Lustgarten’s position as Chief Executive Officer of HTS and stock ownership in HTS. Additionally, Campbeltown is a “related party” because Carlos Jaime Nissenson, the beneficial owner of Campbeltown, is a consultant to the Company, a principal stockholder of the Company, and father of Company director and CFO Neev Nissenson. Carlos Jaime Nissenson was also a stockholder and director of HTS. Pursuant to the agreement, Shai Lustgarten received 561,324 shares of the Company’s common stock and Carlos Jaime Nissenson received 561,324 shares of the Company’s common stock.

 

 

 

On May 29, 2019, the Company, Campbeltown and Walefar entered into an Amendment to the HTS Purchase Agreement (the “Amendment”), which provided for an adjustment to the number of shares of common stock issued to Walefar and Campbeltown in the acquisition of HTS. Pursuant to the Amendment, Campbeltown and Walefar agreed to return for cancelation 277,116 and 277,116 shares of common stock, respectively. This Amendment reduced the amount of shares issued in the acquisition to 568,415 shares from 1,122,648 shares and the amount of share consideration to approximately $2.7 million from $5.3 million. This adjustment was made as a result of a correction in the calculation of working capital and other share give back provisions of the HTS Purchase Agreement. As a result of the Offering (see Note 9), $400 thousand of the notes outstanding were converted to common stock.

 

On September 30, 2019, and in accordance with the terms of the Convertible Promissory Note, Walefar and Campbeltown each exercised the right to convert $75 thousand in unpaid principal balance into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $4.72. Accordingly, the Company issued 15,890 shares to each of Walefar and Campbeltown.

 

As of March 31, 2020, the remaining principal amount of $75 thousand is owed to each Walefar and Campbeltown, respectively, ($150 thousand total) under the Convertible Promissory Note.

 

Note payable – RWCC

 

The company acquired the Note Payable – RWCC (“RWCC Note”) (f.k.a. Certus) with the acquisition of HTS. The RWCC Note was a non-interest-bearing note. The RWCC Note was historically discounted using an effective interest rate of 5.0%. The outstanding balance of $215 thousand is classified as short term and is due and payable in April 2020 with monthly payment of approximately $85,000 per month. The RWCC Note is classified as a related party note because the Chief Executive Officer of RWCC is the son of a significant shareholder of the Company and a sibling of a member of the Board of Directors.

 

Repayment of notes payable

 

The repayment of the notes payable, related parties at March 31, 2020 is as follows:

 

(In thousands)
2020		$	685
2021			426
2022			426
2023			319
Thereafter			-
Total		$	1,856

 

NOTE 9 – STOCKHOLDERS’ EQUITY

 

PREFERRED STOCK

 

Series A

 

As of March 31, 2020, there were 1,000,000 Series A preferred shares designated and no Series A preferred shares outstanding. The board of directors of the Company (the “Board”) had previously set the voting rights for the preferred stock at 1 share of preferred to 250 common shares.

 

Series B

 

As of March 31, 2020, there was 1 preferred share designated and no preferred shares outstanding.

 

 

Series C

 

As of March 31, 2020, there were 15,000,000 Series C preferred share authorized and 4,828,530 Series C preferred shares outstanding. They have preferential rights above common shares and the Series B preferred shares and are entitled to receive a quarterly dividend at a rate of $0.06 per share per annum. As part of a debt settlement agreement effective December 30, 2017, 1,685,000 shares were issued with the quarterly dividend at a rate of $0.06 per share per annum were waived for a period of 24 months, with no dividends being accrued or paid. Series C preferred shares outstanding are convertible into common stock at the rate of 20 preferred shares for one common share.

 

COMMON STOCK

 

On February 27, 2020, the Company issued an aggregate of 64 thousand shares of common stock valued at $354 thousand as compensation for professional services to the Company.

 

As of March 31, 2020, the Company had, 4,024,837 common shares outstanding.

 

Warrants and Stock Options

 

Warrants - The following table summarizes information about warrants granted during the three-month periods ended March 31, 2020 and 2019:

 

		March 31, 2020								March 31, 2019
		Number of warrants				Weighted Average Exercise Price				Number of warrants				Weighted Average Exercise Price
Balance, beginning of period			1,166,667			$	6.42				275,000			$	4.60
Warrants granted			25,000				11.60				-				-
Warrants expired			-				-				-				-
Warrants cancelled, forfeited			-				-				-				-
Warrants exercised			-				-				-				-
Balance, end of period			1,191,667			$	6.53				275,000			$	4.60
Exercisable warrants			1,191,667			$	6.53				275,000			$	4.60

 

 

Outstanding warrants as of March 31, 2020 are as follows:

 

Range of Exercise Prices				Weighted Average residual life span (in years)				Outstanding Warrants				Weighted Average Exercise Price				Exercisable Warrants				Weighted Average Exercise Price
$	2.20				1.34				75,000			$	2.20				75,000			$	2.20
$	4.00				0.75				150,000			$	4.00				150,000			$	4.00
$	5.60				0.24				10,000			$	5.60				10,000			$	5.60
$	7.00				4.52				891,667			$	7.00				891,667			$	7.00
$	8.00				1.91				10,000			$	8.00				10,000			$	8.00
$	10.00				1.53				25,000			$	10.00				25,000			$	10.00
$	12.00				0.53				15,000			$	12.00				15,000			$	12.00
$	14.00				0.91				15,000			$	14.00				15,000			$	14.00
$	2.20 to 14.00				3.63				1,191,667			$	6.53				1,191,667			$	6.53

 

Warrants outstanding at March 31, 2020 and 2019 have the following expiry date and exercise prices:

 

Expiry Date		Exercise Prices				March 31, 2020				March 31, 2019
June 26, 2020		$	5.60				10,000				10,000
October 10, 2020		$	12.00				15,000				15,000
December 30, 2020		$	4.00				150,000				150,000
February 27, 2021		$	14.00				15,000				-
August 2, 2021		$	2.20				75,000				75,000
October 10, 2021		$	10.00				25,000				25,000
February 27, 2022		$	8.00				10,000				-
October 6, 2024		$	7.00				891,667				-
							1,191,667				275,000

 

2014 Stock Option Plan

 

On November 17, 2014, the Board adopted a stock option plan (the “2014 Plan”) whereby the Board may grant to directors, officers, employees, or consultants of the Company options to acquire common shares. The Board has the authority to determine the terms, limits, restrictions and conditions of the grant of options, to interpret the plan and make all decisions relating thereto. The 2014 Plan was adopted in order to provide an inducement and serve as a long term incentive program. The maximum number of common shares that may be reserved for issuance was set at 500,000.

 

The option exercise price is established by the Board and may not be lower than the market price of the common shares at the time of grant. The options may be exercised during the option period determined by the Board, which may vary, but will not exceed ten years from the date of the grant.

 

2018 Stock Option Plan

 

On March 8, 2018, the Company adopted a stock option plan (the “2018 Plan”) as an incentive, to retain in the employ of and as directors, officers, consultants, advisors and employees to the Company. On October 31, 2018, the Board amended the Plan to increase the amount of shares authorized for issuance thereunder from 500 thousand to 800 thousand shares of the Corporation’s common stock, par value $0.001 (the “Shares”). On January 23, 2019, the Company’s shareholders adopted and ratified the Plan.

 

As at March 31, 2020, the Company had issued options under the 2018 Plan allowing for the subscription of 709,250 shares of its common stock, with 90,750 shares remaining for issuance.

 

Stock Options - The following table summarizes information about stock options granted during the three months ended March 31, 2020 and 2019:

 

		March 31, 2020								March 31, 2019
		Number of stock options				Weighted Average Exercise Price				Number of stock options				Weighted Average Exercise Price
Balance, beginning of period			1,133,550			$	4.00				1,006,050			$	4.80
Stock options granted			20,000				5.00				-				-
Stock options expired			30,250				3.98				-				-
Stock options cancelled, forfeited			-				-				-				-
Stock options exercised			-				-				-				-
Balance, end of period			1,123,300			$	4.01				1,006,050			$	4.80
Exercisable stock options			986,925			$	3.88				792,050			$	4.80

 

 

 

For the three months ended March 31, 2020, the Company granted 20,000 stock options.

 

Outstanding stock options as of March 31, 2020 are as follows:

 

Range of Exercise Prices				Weighted Average residual life span (in years)				Outstanding Stock Options				Weighted Average Exercise Price				Exercisable Stock Options				Weighted Average Exercise Price
$	1.50 to 1.80				1.88				114,050			$	1.70				114,050			$	1.70
$	2.20				1.34				175,000			$	2.20				175,000			$	2.20
$	5.00				3.28				147,500			$	5.00				50,313			$	5.00
$	10.00				4.64				125,000			$	10.00				125,000			$	10.00
$	2.40				2.93				335,000			$	2.40				335,000			$	2.40
$	4.40				3.59				93,000			$	4.40				69,750			$	4.40
$	5.40				3.67				133,750			$	5.40				117,813			$	5.40
$	1.50 to 10.00				2.95				1,123,300			$	4.01				986,926			$	3.88

 

Stock options outstanding at March 31, 2020, and 2019 have the following expiration date and exercise prices:

 

Expiration Date		Exercise Prices				March 31, 2020				March 31, 2019
August 2, 2021		$	2.20				175,000				175,000
February 17, 2022		$	1.50				38,017				38,017
February 17, 2022		$	1.80				76,033				76,033
March 5, 2023		$	2.40				335,000				340,000
July 31, 2023		$	5.00				127,500				-
October 31, 2023		$	4.40				93,000				108,250
November 30, 2023		$	5.40				133,750				143,750
November 20, 2024		$	5.00				125,000				125,000
February 28, 2023		$	5.00				20,000				-
							1,123,300				1,006,050

 

Stock compensation expense is $123 thousand for the three months ended March 31, 2020 and $323 thousand for the three months ended March 31, 2019. The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

 

NOTE 10 – SALARY AND EMPLOYEE BENEFITS

 

Salary and employee benefits for the three months ended March 31, 2020 and March 31, 2019 consists of the following:

 

(In thousands)		2020				2019
Stock compensation			123				323
Salaries (except R&D)			1,280				1,275
R&D salaries			340				208
Bonuses			40				25
Commissions			1,073				1,024
Total			2,856				2,855

 

NOTE 11 – LITIGATION

 

Our subsidiary, HTS (USA), Inc., was previously in litigation with Sagy Amit, a former employee, who claimed that he was owed wages and commissions. As of March 31, 2020, the case has been resolved.

 

The company is not a party to any other pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the Company’s Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

 

 

NOTE 12 – RELATED PARTY TRANSACTIONS

 

Related party transactions are discussed in Note 8.

 

NOTE 13 – LEASES

 

The Company accounts for leases in accordance with ASC Topic 842, “Leases,” which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements.

 

In accordance with the adoption of ASC 842 on January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets, which represent our right to use an underlying asset for the lease term, and operating lease liabilities which represent our obligation to make lease payments. Generally, we enter into operating lease agreements for facilities. Finance lease assets are recorded within property and equipment, net of accumulated depreciation. The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as non-current liabilities in our consolidated balance sheet based on their contractual due dates. Finance lease liabilities are classified according to contractual due dates.

 

The operating lease ROU assets and liabilities are recognized as of the lease commencement date at the present value of the lease payments over the lease term. Most of our leases do not provide an implicit rate that can readily be determined. Therefore, we use a discount rate based on our incremental borrowing rate which was between 13.16% and 15.06% for all operating leases. Our operating lease agreements may include options to extend the lease term or terminate it early. We have included options to extend in the operating lease ROU assets and liabilities when we are reasonably certain that we will exercise such options. The weighted average remaining lease terms and discount rates for our operating leases were approximately 2.64 years and 14.6% at March 31, 2020. We did not have finance leases at March 31, 2020. Operating lease expense is recognized as rent expense on a straight-line basis over the lease term. We evaluate ROU assets for impairment consistent with our property and equipment policy disclosure included in our 2019 Form 10-K.

 

As of March 31, 2020, operating lease ROU assets were $118 thousand and operating lease liabilities were $122 thousand, of which $73 thousand were classified as noncurrent.

 

Future minimum lease commitments at March 31, 2020 were as follows:

 

Year ending December 31,		Operating Leases
(In thousands)
2020 (excluding the three months ended March 31, 2020)		$	53
2021			41
2022			38
2023 and thereafter			16
Total lease payments			148
Less imputed interest			(26	)
Total		$	122

 

Supplemental cash flow information related to leases was as follows:

 

(In thousands)		Three Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Cash flows from operating activities - operating leases		$	17
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		$	-

 

NOTE 14 – SUBSEQUENT EVENTS

 

PAYCHECCK PROTECTION PROGRAM

 

On April 30, 2020, the Company received an unsecured loan (the “PPP Loan”) in the amount of $888 thousand, under the Paycheck Protection Program (the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average 2019 monthly payroll expenses.

 

The PPP Loan was made through Zions First National Bank (the “Lender”) and the Company entered into a U.S. Small Business Administration Paycheck Protection Program Note (“Note”) with the Lender evidencing the PPP Loan. The term of the PPP Loan is two years. Interest will accrue on the outstanding principal balance of the PPP Loan at a fixed rate of 1.0%, which shall be deferred for the first six months of the term of the PPP Loan. Monthly payments will be due and payable beginning in November 2020 and continue each month thereafter until maturity of the PPP Loan. The Company may prepay principal of the PPP Loan at any time in any amount without penalty. The Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties or provisions of the PPP Loan.

 

The Company may apply to the Lender for forgiveness of the PPP Loan, and the amount which may be forgiven will be equal to the sum of the payroll and benefit costs and covered rent and utility payments incurred by the Company during the eight-week period beginning on April 30, 2020, as calculated in accordance with the terms of the CARES Act. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part, but the Company intends to use the proceeds in accordance with the PPP Loan program. 

 

 

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. The reader should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the Company’s results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.

 

A complete discussion of these uncertainties are contained in our Annual Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020.

 

Introduction

 

We are a national mobility systems integrator with a focus on design, delivery, deployment and support of fully integrated mobile solutions. We take a consultative approach by offering end to end solutions that include hardware, software, communications and full lifecycle management services. The professionals simplify the integration process and deliver the solutions to our customers. Motorola, Intermec, Honeywell, Panasonic, AirWatch, Wavelink, SOTI and Zebra are major suppliers which we use in the solutions that we provide to our customers.

 

Our business strategy developed into leveraging management’s relationships in the business world for investments for the Company. We intend to continue with our acquisition of existing companies with revenues and positive cash flow.

 

 

On October 5, 2018, we entered into a purchase agreement with Walefar and Campbeltown (the “HTS Purchase Agreement”) (Walefar and Campbeltown are collectively referred to as the “Sellers”). Pursuant to the HTS Purchase Agreement, we purchased 100% of the capital stock of HTS Image Processing, Inc. (“HTS”) from the Sellers and consequently acquired HTS’s wholly owned subsidiaries HTS (USA), Inc. and HTS Image Ltd. (“HTS Ltd.”) (f/k/a Teamtronics Ltd.)

 

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 the our financial statements contained in this Form 10-Q.

 

OVERVIEW

 

On February 28, 2018, the Company finalized settlement agreements with related parties which have an effective date of December 30, 2017. As part of the settlement agreements, the Company authorized the issuance of 30,000 shares of common stock valued at $59 thousand, 1,685,000 shares of Preferred Stock valued at $0.80 per share and issued 150,000 stock warrants with an exercise price of $4.00. The total net amount of debt extinguished in these transactions was $15.4 million.

 

The Company’s sales from continuing operations for the three months ended March 31, 2020, were $13.8 million, a decrease of approximately $4.8 million, or 25.9% over the three months ended March 31, 2019.

 

 

The loss from continuing operations for the three months ended March 31, 2020 was $2.9 million, an increase of $2.2 million compared with the loss in the three months ended March 31, 2019 of $0.6 million. Basic loss per share from continuing operations for the three months ended March 31, 2020 was ($0.74) versus ($0.19) per share for the same time period in 2019.

 

GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of March 31, 2020, the Company had a working capital deficit of $22.5 million and an accumulated deficit of $48.0 million. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. Management’s plan to eliminate the going concern situation includes, but is not limited to, the continuation of improving cash flow, maintaining moderate cost reductions, the creation of additional sales and profits across its product lines, and the obtaining of sufficient financing to restructure current debt in a manner more in line with the Company’s improving cash flow and cost reduction successes. The Company has also diversified its sourcing and procurement of materials and finished goods. The Company also completed a debt settlement with a related party in exchange for equity, eliminating future needs for cash in servicing debt.

 

With the acquisition of HTS in October 2018, the Company has in its portfolio of products a computer vision technology that is based on artificial intelligence and machine learning concepts. These solutions have a higher gross profit that will provide an increase in cash flow on a consolidated basis. The Company plans for these products to be a significant revenue source in 2020. Also with the acquisition of HTS, the Company acquired an operating facility with the ability for light manufacturing and assembling components. The Company can use HTS’s assembling facility to reduce the cost of goods and increase profit margins.

 

The circumstances which raise substantial doubt about the Company’s ability to continue as a going concern have been somewhat mitigated by the successful debt reduction settlements entered into 2018. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Results of Operations

 

The following tables set 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.

 

(In thousands, except per share data)		Three months ended March 31								Variation
		2020				2019				$				%
Revenue		$	13,799			$	18,620				(4,821	)			(25.9	)
Cost of Goods sold			10,763				14,023				(3,260	)			(23.2	)
Gross Profit			3,036				4,597				(1,561	)			(34.0	)
Operating Expenses			5,072				4,502				570				12.7
Income (loss) from operations			(2,036	)			95				(2,131	)			(2,243.2	)
Net loss from continuing operations			(2,873	)			(635	)			(2,238	)			352.4
Net Loss per common Share		$	(0.74	)		$	(0.19	)			(0.55	)			289.5

 

Revenues

 

For the three months ended March 31, 2020 and 2019, the Company generated net revenues in the amount of $13.8 million and $18.6 million, respectively. The 2020 decrease between the three-month periods was attributable strong fulfillment and deliveries by the Company’s subsidiary HTS Image Processing in first quarter 2019.

 

Cost of Goods Sold

 

For the three months ended March 31, 2020 and 2019, the Company recognized a total of $10.8 million and $14.0 million, respectively, of cost of goods sold. For the three months ended March 31, 2020 and 2019, cost of goods sold were 78.0% and 75.3% of net revenues, respectively. Variation from prior periods is difficult in an ever increasing competitive industry. Due to this, the Company is continually reevaluating its current product mix and supply channels to improve margins in 2020.

 

 

Operating expenses

 

Total operating expense for the three months ended March 31, 2020 and 2019 recognized was $5.1 million and $4.5 million, respectively, representing an 12.7% increase. The increase is primarily attributable to an increase in non-cash stock-based compensation awarded to professional service providers.

 

General and Administrative – General and administrative expenses for the three months ended March 31, 2020 and 2019 totaled $793 thousand and $689 thousand, respectively, representing a 15.1% increase. The increase in the first three months of 2020 is primarily attributed to non-cash stock-based compensation as well as general growth of operations.

 

Salary and benefits – Salary and employee benefits for the three months ended March 31, 2020 totaled $2.9 million, including $123 thousand from non-cash stock-based compensation, as compared to $2.9 million including $324 thousand from non-cash stock based compensation for the three months ended March 31, 2019. Excluding stock-based compensation, salaries increased by $200 thousand in the first three months of 2020 compared to the first three months of 2019, which increase is primarily attributed to an increase in R&D-related salaries.

 

Professional Fees – Professional fees for the three months ended March 31, 2020 were $875 thousand as compared to $415 thousand for the three months ended March 31, 2019, representing an increase of $460 thousand. The increase is attributable to non-cash stock-based compensation awarded to professional service providers.

 

Other income and expenses

 

Interest Expense - Interest expense for the three months ended March 31, 2020 totaled $795 thousand, as compared to $684 thousand for the three months ended March 31, 2019. The increase is attributable to interest incurred in connection with the Sixth Amendment to the Secured Promissory in addition to interest expense incurred in connection with vendor interest agreements.

 

Net loss from continuing operations

 

The Company realized a net loss from continuing operations of $2.9 million for the three months ended March 31, 2020, compared to a net loss from continuing operations of $635 thousand for the three months ended March 31, 2019, an increase of $2.2 million. The increase in net loss between the three-month periods is mainly attributable to the lower sales amount in the first three months of 2020.

 

 

Liquidity and capital resources

 

As of March 31, 2020, the Company had cash in the amount of $3.3 million of which $541 thousand is on deposit and restricted as collateral for a letter of credit and a corporate purchasing card, and a working capital deficit of $22.5 million, compared to cash in the amount of $1.6 million, of which $533 thousand was restricted, and a working capital deficit of $20.2 million as of December 31, 2019. In addition, the Company had a stockholders’ deficit of $156 thousand at March 31, 2020 and stockholders’ equity of $1.8 million as of December 31, 2019.

 

The Company’s accumulated deficit was $48.0 million and $45.1 million at March 31, 2020 and December 31, 2019, respectively.

 

The Company’s operations resulted in net cash used of $1.5 million during the three months ended March 31, 2020, compared to net cash provided of $4.5 million during the three months ended March 31, 2019, a decrease of $3.0 million. The changes in the non-cash working capital accounts are primarily attributable the large increase in accounts receivable during the first three months of 2020.

 

Net cash provided by investing activities was $15 thousand for the three months ended March 31, 2020, compared to net cash used of $213 thousand for the three months ended March 31, 2019, an increase of $228 thousand, primarily attributable to a small increase in other assets during the first three months of 2020, as opposed to a modest decrease in other assets during the first three months of 2019.

 

The Company’s financing activities provided net cash of $3.2 million during the three months ended March 31, 2020, compared to net cash used of $4.4 million during the three months ended March 31, 2019. For the three months ended March 31, 2020, the Company received cash from the line of credit with Action Capital of approximately $3.6 million.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e)) as of March 31, 2020, the end of the period covered by this Quarterly Report on Form 10-Q.

 

Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer (Principal Financial and Accounting Officer) concluded that, as of March 31, 2020, our disclosure controls and procedures were ineffective as of the end of the period covered to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions regarding required disclosure. This was due to the following material weaknesses which are indicative of many small companies with limited staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both United States generally accepted accounting principles and Securities and Exchange Commission guidelines. Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer, and our Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosure.

 

During 2019, we identified material weaknesses in our internal control over financial reporting, which were disclosed in our annual report on Form 10-K filed with the SEC on March 30, 2020.

 

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter, (i.e., the three months ended March 31, 2020), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Our subsidiary, HTS (USA), Inc., was previously in a litigation with Sagy Amit, a former employee, who claimed that he was owed wages and commissions. As of March 31, 2020, the case has been resolved.

 

ITEM 1A. RISK FACTORS

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the Securities and Exchange Commission this Form 10-Q, including exhibits. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at SEC’s Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.

 

You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov.

 

We intend to furnish our stockholders with annual reports which will be filed electronically with the SEC containing consolidated financial statements audited by our independent auditors, and to make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial statements.

 

Our website is located at http://www.omniq.com. The Company’s website and the information to be contained on that site, or connected to that site, is not part of or incorporated by reference into this filing.

 

ITEM 6. EXHIBITS

 

(a)		Exhibits.
31.1		Certification of our Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of our Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2		Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 14, 2020

 

OMNIQ CORP.
By:	/s/ Shai Lustgarten
	Shai Lustgarten
	President and Chief Executive Officer

 

 

EXHIBIT INDEX

 

4.1		Promissory Note dated April 29, 2020
10.1		Loan Agreement between the Company and Zions Bank dated April 29, 2020
31.1		Certification of our Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of our Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2		Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)