OMNIQ Corp. - Quarter Report: 2020 June (Form 10-Q)

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: June 30, 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)

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)

N/A

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

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

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.

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: 4,579,271 shares of common stock, $0.001 par value, as of August 12, 2020.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OMNIQ CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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)

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)

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)

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, 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 six months ended June 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 six months ended June 30, 2020 and June 30, 2019 was $1.0 million and $1.0 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 six months ended June 30, 2020 and 2019 were 4,135,420 and 3,854,564, 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 June 30:

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 June 30, 2020, the Company had a working capital deficit of $22.5 million and an accumulated deficit of $50.0 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 six months ended June 30, 2020 and June 30, 2019, one customer accounted for 44.4% and 21.4% of the Company’s revenues, respectively. At June 30, 2020 and December 31, 2019, one customer accounted for 56.0% and 13.5% 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:

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

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

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 June 30, 2020 and December 31, 2019, other liabilities consisted of the following:

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 June 30, 2020 and December 31, 2019, was $3.5 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 June 30, 2020 and December 31, 2019, consists of the following:

Future maturities of notes payable as of June 30, 2020 are as follows;

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.

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 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.

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 June 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 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.

NOTE 8 –NOTES PAYABLE, RELATED PARTIES

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

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 June 30, 2020, the balance of this loan was $780 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 June 30, 2020, the balance of this loan was $485 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 June 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 June 30, 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%. As of June 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.

Repayment of notes payable

The repayment of the notes payable, related parties at June 30, 2020 is as follows:

NOTE 9 – STOCKHOLDERS’ EQUITY

PREFERRED STOCK

Series A

As of June 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 June 30, 2020, there was 1 preferred share designated and no preferred shares outstanding.

Series C

As of June 30, 2020, there were 15,000,000 Series C preferred share 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 six months of 2020, the Company issued an aggregate of 141 shares of common stock to certain individuals as part of the Company’s Employee Stock Purchase Program valued at under $1 thousand.

On April 20, 2020, the Company issued 2,336 shares to Sichenzia Ross Ference LLP as payment for legal services rendered to the Company. The shares were valued at $10 thousand.

On April 20, 2020, the Company issued 15,000 shares to Balencic Creative Group as part of a consulting agreement. The shares were valued at $63 thousand.

On April 23, 2020, the Company issued 80,000 shares to Eyepax Consulting, LLC valued at $440 thousand as part of an asset purchase agreement dated February 27, 2020.

On May 8, 2020, an employee of the company received 27,777 shares as part of a transaction involving the cashless exercise of previously issued stock options.

On May 19, 2020, the Company issued 50,000 shares to Three Rivers Consulting as part of a consulting agreement. The shares were valued at $270 thousand.

On May 11, 2020, a certain advisor received 6,666 shares as part of a transaction involving the cashless exercise of previously issued stock options.

As of June 30, 2020, the Company had 4,206,692 common shares outstanding.

Warrants

The following table summarizes information about warrants granted during the six-month periods ended June 30, 2020 and 2019:

For the six months ended June 30, 2020, the Company granted 75,000 warrants in connection with a consulting agreement.

Outstanding warrants as of June 30, 2020 are as follows:

Warrants outstanding at June 30, 2020 and 2019 have the following expiry date and exercise prices:

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 June 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.

Stock Options

The following table summarizes information about stock options granted during the six months ended June 30, 2020 and 2019:

For the six months ended June 30, 2020, the Company granted 30,000 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.

Outstanding stock options as of June 30, 2020 are as follows:

Stock options outstanding at June 30, 2020, and 2019 have the following expiration date and exercise prices:

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 153.9% - 155.6%; expected term in years 1.0-5.0; 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 $753 thousand for the six months ended June 30, 2020 and $423 thousand for the six months ended June 30, 2019.

NOTE 10 – SALARY AND EMPLOYEE BENEFITS

Salary and employee benefits for the six months ended June 30, 2020 and June 30, 2019 consists of the following:

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 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 July 17, 2020, the company issued 70,000 shares of Common Stock 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 of Common Stock to StockLoan Solutions as part of a consulting agreement. The shares were valued at $280 thousand.

On July 17, 2020, the company issued warrants to purchase 250,000 shares of Common Stock to ThinkEquity as part of a service agreement. The warrants were valued at approximately $1.3 million.

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.

The following is a discussion of our financial condition, results of operations, financial resources, and working capital. This discussion and analysis should be read in conjunction with our financial statements contained in this Form 10-Q.

OVERVIEW

The Company’s sales from continuing operations for the six months ended June 30, 2020 were $26.5 million, a decrease of approximately $6.3 million, or 19.1%, over the six months ended June 30, 2019.