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,
OMNIQ Vision, Inc. (f/k/a HTS (USA), Inc.), a Delaware corporation and HTS Image Ltd. (“HTS Ltd.”) (f/k/a Teamtronics
Ltd.), an Israeli corporation.
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 nine months ended September 30, 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 preferred stock, 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 preferred stock,
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 nine months ended September 30, 2020 and September 30, 2019 was
$1.6 million and $1.5 million, 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 nine months ended September 30, 2020 and 2019 were 4,339,634 and 3,865,647,
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 September 30:
(In thousands)
|
|
2020
|
|
|
2019
|
|
Options to purchase common stock
|
|
|
1,553
|
|
|
|
629
|
|
Convertible preferred stock
|
|
|
107
|
|
|
|
241
|
|
Warrants to purchase common stock
|
|
|
75
|
|
|
|
225
|
|
Potential shares excluded from diluted net loss per share
|
|
|
1,735
|
|
|
|
1,095
|
|
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.
NOTE
2 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As of September 30, 2020, the Company had a working capital deficit of $24.6 million and an accumulated deficit of $53.8 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 nine months ended September 30, 2020 and September 30, 2019, one customer accounted for 39.0% and 15.3% of the Company’s
revenues, respectively. At September 30, 2020 and December 31, 2019, one customer accounted for 19.2% and 11.1% 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
|
|
|
13
|
|
Software (intangible)
|
|
|
100
|
|
Liabilities assumed
|
|
|
(113
|
)
|
Net assets acquired at fair value
|
|
|
1
|
|
Total purchase price
|
|
|
775
|
|
Goodwill recognized
|
|
|
774
|
|
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
September 30, 2020 and December 31, 2019, other liabilities consisted of the following:
(In thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Other vendor payable
|
|
$
|
801
|
|
|
$
|
801
|
|
Dividend payable
|
|
|
220
|
|
|
|
344
|
|
Bonus payable
|
|
|
-
|
|
|
|
385
|
|
Others
|
|
|
466
|
|
|
|
453
|
|
Total other liabilities
|
|
|
1,487
|
|
|
|
1,983
|
|
Less Current Portion
|
|
|
(1,267
|
)
|
|
|
(1,599
|
)
|
Total long term other liabilities
|
|
$
|
220
|
|
|
$
|
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 September 30, 2020 and December 31, 2019, was $3.2 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 September 30, 2020 and December 31, 2019, consists of the following:
(In thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Supplier Note Payable
|
|
$
|
6,443
|
|
|
$
|
6,490
|
|
PPP loan
|
|
|
888
|
|
|
|
-
|
|
All Other
|
|
|
18
|
|
|
|
150
|
|
Total
|
|
|
7,349
|
|
|
|
6,640
|
|
Less current portion
|
|
|
(6,997
|
)
|
|
|
(6,497
|
)
|
Long Term Notes Payable
|
|
$
|
352
|
|
|
$
|
143
|
|
Future
maturities of notes payable as of September 30, 2020 are as follows;
2020
|
|
$
|
6,548
|
|
2021
|
|
|
599
|
|
2022
|
|
|
202
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
Total
|
|
$
|
7,349
|
|
Payroll
Protection Program (PPP) Loan
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.
As
of September 30, 2020, the Company has applied 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 twenty four-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 has used and intends
to use the proceeds in accordance with the PPP Loan program. The balance on this loan at September 30, 2020 and December 31, 2019
was $888 thousand and $0, respectively.
Other
note payable
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. On June 5, 2020, the Company reached an agreement with the noteholder to convert an aggregate
of $261 thousand in principal, unpaid interest, and penalties into an aggregate of 37,270 shares of Common Stock at a conversion
price of $7.00 per share, which was based on the closing price on June 3, 2020. The balance on this loan at September 30, 2020
and December 31, 2019 was $0 and $138 thousand, respectively, all of which was classified as long-term.
Supplier
Note Payable
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 18%
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)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Note payable – debt restructure Marin
|
|
$
|
720
|
|
|
$
|
900
|
|
Note payable – debt restructure Thomet
|
|
|
450
|
|
|
|
563
|
|
Note payable – debt restructure Zicman
|
|
|
(6
|
)
|
|
|
135
|
|
Convertible note payable – shareholders
|
|
|
90
|
|
|
|
150
|
|
Note payable – RWCC
|
|
|
-
|
|
|
|
449
|
|
Total notes payable, related parties
|
|
|
1,254
|
|
|
|
2,197
|
|
Less current portion
|
|
|
480
|
|
|
|
1,025
|
|
Long-term portion
|
|
$
|
774
|
|
|
$
|
1,172
|
|
Repayment
of notes payable
The
repayment of the notes payable, related parties at September 30, 2020 is as follows:
(In thousands)
|
|
|
|
2020
|
|
$
|
188
|
|
2021
|
|
|
390
|
|
2022
|
|
|
390
|
|
2023
|
|
|
286
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,254
|
|
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 September 30, 2020, the balance of this loan was $720 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 September 30, 2020, the balance
of this loan was $450 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 September 30, 2020, the balance of this loan was $0.
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 September 30, 2020, the remaining principal amount of $45 thousand is owed to each Walefar and Campbeltown, respectively, ($90
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%. As of
September 30, 2020, this note was fully paid. 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.
NOTE
9 – STOCKHOLDERS’ EQUITY
PREFERRED
STOCK
Series
A
As
of September 30, 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 Series A preferred
stock at 1 share of preferred to 250 common shares.
Series
B
As
of September 30, 2020, there was 1 preferred share designated and no preferred shares outstanding.
Series
C
As
of September 30, 2020, there were 5,000,000 Series C preferred shares authorized and 2,145,030 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.
Effective
June 5, 2020, certain holders of an aggregate of 2,683,500 shares of Series C Preferred Stock individually converted their shares
of Series C Preferred Stock into an aggregate of 134,175 shares of common stock at a ratio of 20 shares of Preferred Stock for
each share of Common Stock. In addition, the holders of such shares converted all accrued but unpaid dividends, penalties, and
interest in the aggregate amount of $393,331 into an aggregate of 56,190 shares of Common Stock at a conversion price of $7.00
per share which was based on the closing price on June 3, 2020. The shares of Common Stock pertaining to these transactions were
issued in July, 2020.
COMMON
STOCK
During
the first nine months of 2020, the Company issued an aggregate of 203 shares of common stock to certain individuals as part of
the Company’s Employee Stock Purchase Program valued at approximately $1 thousand.
On
July 17, 2020, the Company issued 70,000 shares to IRTH Communications, LLC as part of a consulting agreement. The shares were
valued at $392 thousand.
On
July 17, 2020, the Company issued 50,000 shares to Stock Loan Solutions LLC as part of a consulting agreement. The shares were
valued at $280 thousand.
On
July 28, 2020, the Company issued 251,635 shares as part of a series of conversion agreements with former noteholders and preferred
shareholders. The shares were valued at $3.5 million including conversion penalties.
During
July 2020, various holders exercised in cashless transactions options and warrants resulting in the issuance of 56,248
shares valued at $339 thousand.
As
of September 30, 2020, the Company had 4,634,637 common shares outstanding.
Warrants
The
following table summarizes information about warrants granted during the nine-month periods ended September 30, 2020 and 2019:
|
|
September 30, 2020
|
|
|
September 30, 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
|
|
|
325,000
|
|
|
|
8.20
|
|
|
|
891,667
|
|
|
|
7.00
|
|
Warrants expired
|
|
|
(10,000
|
)
|
|
|
5.60
|
|
|
|
-
|
|
|
|
-
|
|
Warrants cancelled, forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants exercised
|
|
|
(150,000
|
)
|
|
|
4.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
1,331,667
|
|
|
$
|
7.14
|
|
|
|
1,166,667
|
|
|
$
|
6.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable warrants
|
|
|
1,165,001
|
|
|
$
|
7.08
|
|
|
|
1,166,667
|
|
|
$
|
6.42
|
|
For
the nine months ended September 30, 2020, the Company granted 325,000 warrants in connection with various consulting agreement.
Outstanding
warrants as of September 30, 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
|
|
|
|
.84
|
|
|
|
75,000
|
|
|
$
|
2.20
|
|
|
|
75,000
|
|
|
$
|
2.20
|
|
$
|
7.00
|
|
|
|
4.02
|
|
|
|
891,667
|
|
|
$
|
7.00
|
|
|
|
891,667
|
|
|
$
|
7.00
|
|
$
|
7.50
|
|
|
|
5.93
|
|
|
|
250,000
|
|
|
$
|
7.50
|
|
|
|
83,334
|
|
|
$
|
7.50
|
|
$
|
8.00
|
|
|
|
1.41
|
|
|
|
10,000
|
|
|
$
|
8.00
|
|
|
|
10,000
|
|
|
$
|
8.00
|
|
$
|
10.00
|
|
|
|
3.66
|
|
|
|
75,000
|
|
|
$
|
10.00
|
|
|
|
75,000
|
|
|
$
|
10.00
|
|
$
|
12.00
|
|
|
|
0.03
|
|
|
|
15,000
|
|
|
$
|
12.00
|
|
|
|
15,000
|
|
|
$
|
12.00
|
|
$
|
14.00
|
|
|
|
0.41
|
|
|
|
15,000
|
|
|
$
|
14.00
|
|
|
|
15,000
|
|
|
$
|
14.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.20 to 14.00
|
|
|
|
3.99
|
|
|
|
1,331,667
|
|
|
$
|
7.14
|
|
|
|
1,165,001
|
|
|
$
|
7.08
|
|
Warrants
outstanding at September 30, 2020 and 2019 have the following expiry date and exercise prices:
Expiry Date
|
|
Exercise Prices
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2020
|
|
$
|
5.60
|
|
|
|
-
|
|
|
|
10,000
|
|
October 10, 2020
|
|
$
|
12.00
|
|
|
|
15,000
|
|
|
|
15,000
|
|
December 30, 2020
|
|
$
|
4.00
|
|
|
|
|
|
|
|
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
|
|
|
|
-
|
|
May 18, 2023
|
|
$
|
10.00
|
|
|
|
50,000
|
|
|
|
-
|
|
October 6, 2024
|
|
$
|
7.00
|
|
|
|
891,667
|
|
|
|
891,667
|
|
September 1, 2025
|
|
$
|
7.50
|
|
|
|
83,334
|
|
|
|
-
|
|
June 4, 2026
|
|
$
|
7.50
|
|
|
|
83,333
|
|
|
|
-
|
|
December 4, 2027
|
|
$
|
7.50
|
|
|
|
83,333
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,331,667
|
|
|
|
1,166,667
|
|
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 500,000 to 800,000 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 September 30, 2020, the Company had issued options under the 2018 Plan allowing for the subscription of 740,500 shares of its
common stock, with 59,500 shares remaining for issuance.
2020
Stock Option Plan
On
September 30, 2020, the Company adopted a stock option plan (the “2020 Plan”). The purpose of the 2020 Plan is to
provide long-term incentives and rewards to directors, officers, consultants, advisors and employees of the Company and its subsidiaries
in order to assist the Company to attract and retain individuals with experience and/or ability on a basis competitive with industry
practices and to associate the interest of these individuals with those of the Company’s shareholders by providing for the
issuance of stock-based awards. The total number of shares of Common Stock authorized for issuance under the 2020 Plan is 1,000,000
shares.
Stock
Options
The
following table summarizes information about stock options granted during the nine months ended September 30, 2020 and 2019:
|
|
September 30, 2020
|
|
|
September 30, 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
|
|
|
$
|
3.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
775,000
|
|
|
|
4.63
|
|
|
|
127,500
|
|
|
|
5.00
|
|
Stock options expired
|
|
|
(30,250
|
)
|
|
|
3.98
|
|
|
|
-
|
|
|
|
-
|
|
Stock options cancelled, forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock options exercised
|
|
|
(66,750
|
)
|
|
|
2.51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
1,811,550
|
|
|
$
|
4.32
|
|
|
|
1,133,550
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable stock options
|
|
|
959,550
|
|
|
$
|
4.02
|
|
|
|
893,488
|
|
|
$
|
3.80
|
|
For
the nine months ended September 30, 2020, the Company granted 775,000 stock options. These options were granted as part of the
asset acquisition described in Note 4, and to a member of the board of advisors, and to certain employees as part of the Company’s
Equity Incentive Plan.
Outstanding
stock options as of September 30, 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
|
|
|
|
1.38
|
|
|
|
114,050
|
|
|
$
|
1.70
|
|
|
|
114,050
|
|
|
$
|
1.70
|
|
$
|
2.20
|
|
|
|
0.84
|
|
|
|
175,000
|
|
|
$
|
2.20
|
|
|
|
175,000
|
|
|
$
|
2.20
|
|
$
|
10.00
|
|
|
|
4.14
|
|
|
|
125,000
|
|
|
$
|
10.00
|
|
|
|
125,000
|
|
|
$
|
10.00
|
|
$
|
2.40
|
|
|
|
2.43
|
|
|
|
272,000
|
|
|
$
|
2.40
|
|
|
|
272,000
|
|
|
$
|
2.40
|
|
$
|
4.20
|
|
|
|
4.56
|
|
|
|
10,000
|
|
|
$
|
4.20
|
|
|
|
2,500
|
|
|
$
|
4.20
|
|
$
|
4.40
|
|
|
|
8.65
|
|
|
|
454,250
|
|
|
$
|
4.40
|
|
|
|
66,000
|
|
|
$
|
4.40
|
|
$
|
4.84
|
|
|
|
10.01
|
|
|
|
380,000
|
|
|
$
|
4.84
|
|
|
|
-
|
|
|
$
|
4.84
|
|
$
|
5.00
|
|
|
|
2.78
|
|
|
|
147,500
|
|
|
$
|
5.00
|
|
|
|
87,188
|
|
|
$
|
5.00
|
|
$
|
5.40
|
|
|
|
3.17
|
|
|
|
133,750
|
|
|
$
|
5.40
|
|
|
|
117,812
|
|
|
$
|
5.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.50
to 10.00
|
|
|
|
5.57
|
|
|
|
1,811,550
|
|
|
$
|
4.32
|
|
|
|
959,550
|
|
|
$
|
4.02
|
|
Stock
options outstanding at September 30, 2020, and 2019 have the following expiration date and exercise prices:
Expiration Date
|
|
Exercise Prices
|
|
|
September 30, 2020
|
|
|
September 30, 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
|
|
February 28, 2023
|
|
$
|
5.00
|
|
|
|
20,000
|
|
|
|
-
|
|
March 5, 2023
|
|
$
|
2.40
|
|
|
|
272,000
|
|
|
|
340,000
|
|
July 31, 2023
|
|
$
|
5.00
|
|
|
|
127,500
|
|
|
|
127,500
|
|
October 31, 2023
|
|
$
|
4.40
|
|
|
|
89,250
|
|
|
|
108,250
|
|
November 30, 2023
|
|
$
|
5.40
|
|
|
|
133,750
|
|
|
|
143,750
|
|
November 20, 2024
|
|
$
|
10.00
|
|
|
|
125,000
|
|
|
|
125,000
|
|
April 20, 2025
|
|
$
|
4.20
|
|
|
|
10,000
|
|
|
|
-
|
|
September 30, 2030
|
|
$
|
4.40
|
|
|
|
365,000
|
|
|
|
-
|
|
September 30, 2030
|
|
$
|
4.84
|
|
|
|
380,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,811,550
|
|
|
|
1,133,550
|
|
These
options and warrants were valued at the grant date using the Black-Scholes valuation methodology. The Company determines the assumptions
used in the valuation of warrants and option awards as of the date of grant. Differences in the expected stock price volatility,
expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company
may use different assumptions for options and warrants granted throughout the year. The valuation assumptions used to determine
the fair value of each option/warrant award on the date of grant were: expected stock price volatility 152.5% - 155.6%; expected
term in years 1.0-10.0; and risk-free interest rate 0.22%-1.16%. The assumptions used in the Black-Scholes-Merton Option Pricing
model could materially affect compensation expense recorded in future periods.
Employee
and nonemployee stock compensation expense is $2.3 million for the nine months ended September 30, 2020 and $1.1 million for the
nine months ended September 30, 2019.
NOTE
10 – SALARY AND EMPLOYEE BENEFITS
Salary
and employee benefits for the nine months ended September 30, 2020 and September 30, 2019 consists of the following:
(In thousands)
|
|
2020
|
|
|
2019
|
|
Employee stock compensation
|
|
|
304
|
|
|
|
1,093
|
|
Salaries (except R&D)
|
|
|
3,651
|
|
|
|
3,273
|
|
R&D salaries
|
|
|
1,017
|
|
|
|
714
|
|
Bonuses
|
|
|
81
|
|
|
|
95
|
|
Commissions
|
|
|
2,613
|
|
|
|
2,588
|
|
Total
|
|
|
7,666
|
|
|
|
7,763
|
|
NOTE
11 – LITIGATION
Our
subsidiary, OMNIQ Vision, Inc. (f/k/a HTS (USA), Inc.), was previously in litigation with a former employee who claimed that he
was owed wages and commissions. As of March 31, 2020, the case had been resolved. While the terms of the resolution are confidential,
management has determined that the amounts involved in resolving the case are immaterial to the financial statements taken as
a whole.
The Company is currently pursuing
legal claims against two former employees who resigned from the Company to launch a competing business, RedLPR LLC (the
“RedLPR case”). The claims include trade secret misappropriation and tortious interference. The RedLPR case
was filed in the U.S. District Court, District of Utah on June 24, 2019.
The Company recently was named a
defendant in a Mississippi state lawsuit that is directly related to the RedLPR case (the “Mississippi case”).
The Mississippi case also names RedLPR, LLC as a defendant. The Mississippi case was brought by Riverland Park Technologies
(“Riverland”). Riverland is also a party to the RedLPR case. The Mississippi case was filed in the Circuit Court of Rankin County, Mississippi on September
21, 2020.
The Company was named a defendant in
a case involving a former employee who claims he is owed approximately $60 thousand in unpaid commissions. The
Company’s position is that the former employee’s claims have no apparent factual basis and appear to be designed
to force a quick “nuisance value” settlement. This case was filed in the Superior Court of the State of
California, County of San Diego on October 21, 2020.
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 – SUBSEQUENT EVENTS
On
October 12, 2020, the Company issued 50,000 shares of Common Stock to Three Rivers Business Consulting, LLC as part of a consulting
agreement. The shares were valued at $284 thousand. Additionally, the Company issued warrants to purchase 50,000 shares of Common
Stock to Three Rivers Business Consulting, LLC. The warrants were valued at approximately $229 thousand.