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: September 30, 2017March 31, 2019
[ ] 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
QUEST SOLUTION, INCINC.
(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.) |
860 Conger Street
Eugene, OR 97402
(Address of principal executive offices) (Zip Code)
(714) 899-4800
(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: None
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [ ] NO [ ]
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: 36,778,57977,009,547 shares of common stock, $0.001 par value, as of November 16, 2017June 27, 2019.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of | ||||||||
September30, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 260,642 | $ | 289,480 | ||||
Restricted Cash | 684,610 | 665,220 | ||||||
Accounts receivable, net (Note 5) | 8,271,965 | 10,589,677 | ||||||
Inventory, net (Note 6) | 746,894 | 531,593 | ||||||
Prepaid expenses | 281,215 | 272,926 | ||||||
Other current assets | 183,347 | 772,966 | ||||||
Total current assets | 10,428,673 | 13,121,862 | ||||||
Fixed assets, net (Note 7) | 98,918 | 136,835 | ||||||
Goodwill | 10,114,164 | 10,114,164 | ||||||
Trade name, net | 2,503,731 | 2,936,481 | ||||||
Customer Relationships, net | 5,592,116 | 6,435,652 | ||||||
Other assets | 41,613 | 47,563 | ||||||
Total assets | $ | 28,779,215 | $ | 32,792,557 | ||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 13,558,337 | $ | 10,566,066 | ||||
Accrued interest on note payable | 33,428 | - | ||||||
Line of credit (Note 10) | 3,677,661 | 5,059,292 | ||||||
Advances, related party | 100,000 | 100,000 | ||||||
Accrued payroll and sales tax | 1,571,821 | 1,829,934 | ||||||
Deferred revenue, net (Note 9) | 830,903 | 879,026 | ||||||
Current portion of note payable (Note 11) | 5,229,496 | 9,782,925 | ||||||
Other current liabilities (Note 8) | 238,700 | 227,932 | ||||||
Total current liabilities | 25,240,346 | 28,445,175 | ||||||
Long term liabilities | ||||||||
Note payable, related party (Note 12) | 17,515,345 | 17,515,345 | ||||||
Accrued interest, related party | 1,121,818 | 629,238 | ||||||
Long term portion of note payable (Note 11) | 130,294 | 130,294 | ||||||
Deferred revenue, net (Note 9) | 418,128 | 565,423 | ||||||
Other long term liabilities (Note 8) | 415,397 | 332,270 | ||||||
Total liabilities | 44,841,328 | 47,617,745 | ||||||
Stockholders’ (deficit) | ||||||||
Series A Preferred stock; $0.001 par value; 1,000,000 shares designated and 0 shares outstanding as of September 30, 2017 and December 31, 2016, respectively. | - | - | ||||||
Series B Preferred stock; $0.001 par value; 1 share designated and 0 shares outstanding as of September 30, 2017 and December 31, 2016, respectively. | - | - | ||||||
Series C Preferred stock; $0.001 par value; 15,000,000 shares designated, 3,143,530 shares outstanding as of September 30, 2017 and December 31, 2016, respectively, liquidation preference of $1.00 per share and a cumulative dividend of $0.06 per share. | 3,144 | 3,144 | ||||||
Common stock; $0.001 par value; 100,000,000 shares designated, 36,157,422 and 35,095,763 shares outstanding of September 30, 2017 and December 31, 2016, respectively. | 36,157 | 35,095 | ||||||
Common stock to be repurchased by the Company | (230,490 | ) | (230,490 | ) | ||||
Additional paid-in capital | 18,887,852 | 18,302,262 | ||||||
Accumulated (deficit) | (34,758,776 | ) | (32,935,199 | ) | ||||
Total stockholders’ (deficit) | (16,062,113 | ) | (14,825,188 | ) | ||||
Total liabilities and stockholders’ (deficit) | $ | 28,779,215 | $ | 32,792,557 |
(In thousands, except share and per share data) | As of | |||||||
March 31, 2019 | December 31, 2018 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 344 | $ | 378 | ||||
Accounts receivable, net | 14,205 | 12,262 | ||||||
Inventory | 1,612 | 1,804 | ||||||
Prepaid expenses | 489 | 169 | ||||||
Other current assets | 179 | 78 | ||||||
Total current assets | 16,829 | 14,690 | ||||||
Property and equipment, net of accumulated depreciation of $2,079 and $2,037, respectively | 364 | 389 | ||||||
Goodwill | 13,921 | 13,921 | ||||||
Trade name, net of accumulated amortization of $2,672 and $2,585, respectively | 1,718 | 1,805 | ||||||
Customer relationships, net of accumulated amortization of $5,452 and $5,076, respectively | 7,138 | 7,514 | ||||||
Other intangibles, net of accumulated amortization of $71 and $33, respectively | 1,229 | 1,267 | ||||||
Cash, restricted | 532 | 532 | ||||||
Other assets | 243 | 31 | ||||||
Total assets | $ | 41,974 | $ | 40,148 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 22,895 | $ | 17,484 | ||||
Accrued interest and accrued liabilities, related party | 27 | - | ||||||
Line of credit | 797 | 4,534 | ||||||
Accrued payroll and sales tax | 2,318 | 2,173 | ||||||
Notes payable, related parties – current portion | 2,072 | 1,891 | ||||||
Notes payable – current portion | 8,405 | 8,823 | ||||||
Other current liabilities | 1,195 | 265 | ||||||
Total current liabilities | 37,709 | 35,170 | ||||||
Long term liabilities | ||||||||
Notes payable, related party, less current portion | 1,520 | 1,912 | ||||||
Accrued interest and accrued liabilities, related party | - | 33 | ||||||
Notes payable, less current portion | 147 | 130 | ||||||
Other long term liabilities | 662 | 610 | ||||||
Total liabilities | 40,038 | 37,930 | ||||||
Stockholders’ equity | ||||||||
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; 71,426,401 and 71,931,693 shares issued and outstanding, respectively. | 71 | 72 | ||||||
Common stock; $0.001 par value; 11,084,657 shares to be received | (2,616 | ) | ||||||
Common stock to be repurchased by the Company | - | (230 | ) | |||||
Additional paid-in capital | 42,291 | 44,814 | ||||||
Accumulated (deficit) | (40,432 | ) | (39,752 | ) | ||||
Accumulated other comprehensive loss | 1 | 1 | ||||||
Total stockholders’ equity | 1,936 | 2,293 | ||||||
Total liabilities and stockholders’ equity | $ | 41,974 | $ | 40,148 |
The accompanying unaudited notes to the financials should be read in conjunction with these condensed
consolidated financial statements.
F-1 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
For the three months ended March 31 | ||||||||
(In thousands, except share and per share data) | 2019 | 2018 | ||||||
Revenues | ||||||||
Total Revenues | $ | 18,620 | $ | 15,181 | ||||
Cost of goods sold | ||||||||
Cost of goods sold | 14,023 | 12,014 | ||||||
Total costs of goods sold | 14,023 | 12,014 | ||||||
Gross profit | 4,597 | 3,166 | ||||||
Operating expenses | ||||||||
General and administrative | 689 | 477 | ||||||
Salary and employee benefits | 2,855 | 2,603 | ||||||
Depreciation and amortization | 543 | 437 | ||||||
Professional fees | 415 | 293 | ||||||
Total operating expenses | 4,502 | 3,810 | ||||||
Income (loss) from operations | 95 | (644 | ) | |||||
Other income (expenses): | ||||||||
Interest expense | (684 | ) | (295 | ) | ||||
Other (expenses) income | (46 | ) | 3 | |||||
Total other expenses | (730 | ) | (292 | ) | ||||
Net loss before Income Taxes | (635 | ) | (936 | ) | ||||
Provision for Income Taxes | ||||||||
Current | - | (13 | ) | |||||
Total Provision for Income Taxes | - | (13 | ) | |||||
Net loss attributable to Quest Solution Inc. | $ | (635 | ) | $ | (949 | ) | ||
Less: Preferred stock – Series C dividend | (47 | ) | (48 | ) | ||||
Net loss attributable to the common stockholders | $ | (682 | ) | $ | (997 | ) | ||
Net loss per share - basic | $ | (0.01 | ) | $ | (0.03 | ) | ||
Net loss per share from continuing operations - basic | $ | (0.01 | ) | $ | (0.03 | ) | ||
Weighted average number of common shares outstanding - basic | 71,681,522 | 37,125,286 |
The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements.
F-2 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS STOCKHOLDERS’ EQUITY
(UNAUDITED)
For the three months | For the nine months | |||||||||||||||
ending September 30, | ending September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues | ||||||||||||||||
Gross Sales | $ | 13,311,109 | $ | 13,841,279 | $ | 41,594,938 | $ | 44,288,975 | ||||||||
Less sales returns, discounts, & allowances | (347,055 | ) | (277,128 | ) | (708,184 | ) | (849,256 | ) | ||||||||
Total Revenues | 12,964,054 | 13,564,151 | 40,886,754 | 43,439,719 | ||||||||||||
Cost of goods sold | ||||||||||||||||
Cost of goods sold | 10,132,067 | 10,910,089 | 32,263,124 | 34,648,909 | ||||||||||||
Total costs of goods sold | 10,132,067 | 10,910,089 | 32,263,124 | 34,648,909 | ||||||||||||
Gross profit | 2,831,987 | 2,654,062 | 8,623,630 | 8,790,810 | ||||||||||||
Operating expenses | ||||||||||||||||
General and administrative | 481,287 | 505,903 | 1,308,395 | 1,571,102 | ||||||||||||
Salary and employee benefits | 2,258,873 | 1,871,610 | 6,045,564 | 6,471,563 | ||||||||||||
Depreciation and amortization | 440,433 | 442,428 | 1,324,345 | 1,347,077 | ||||||||||||
Professional fees | 209,086 | 192,814 | 450,509 | 603,190 | ||||||||||||
Total operating expenses | 3,389,679 | 3,012,755 | 9,128,813 | 9,992,932 | ||||||||||||
Income (loss) from operations | (557,692 | ) | (358,693 | ) | (505,183 | ) | (1,202,122 | ) | ||||||||
Other income (expenses): | ||||||||||||||||
Restructuring expenses | - | (84,317 | ) | (26,880 | ) | (544,941 | ) | |||||||||
Gain on foreign currency | - | (90,215 | ) | - | 129,589 | |||||||||||
Write-off of other assets | (450,000 | ) | (450,000 | ) | ||||||||||||
Interest expense | (343,092 | ) | (1,110,804 | ) | (1,075,147 | ) | (2,802,980 | ) | ||||||||
Other (expenses) income | 13,202 | 3,065 | 16,122 | 6,871 | ||||||||||||
Total other expenses | (329,890 | ) | (1,732,271 | ) | (1,085,905 | ) | (3,661,461 | ) | ||||||||
Net Loss Before Income Taxes | (887,582 | ) | (2,090,964 | ) | (1,591,088 | ) | (4,863,583 | ) | ||||||||
Provision for Income Taxes | ||||||||||||||||
Deferred | - | - | - | - | ||||||||||||
Current | (15,300 | ) | (376,326 | ) | (91,409 | ) | (491,254 | ) | ||||||||
Total Provision for Income Taxes | (15,300 | ) | (376,326 | ) | (91,409 | ) | (491,254 | ) | ||||||||
Net loss from continuing operations | $ | (902,882 | ) | $ | (2,467,290 | ) | $ | (1,682,497 | ) | $ | (5,354,837 | ) | ||||
Net loss from discontinued operations | - | (3,919,175 | ) | - | (6,851,875 | ) | ||||||||||
Net Loss attributable to Quest Solution Inc. | $ | (902,882 | ) | $ | (6,386,465 | ) | $ | (1,682,497 | ) | $ | (12,206,712 | |||||
Other Comprehensive Loss | ||||||||||||||||
Foreign Currency Adjustments | 120,333 | (361,744 | ) | |||||||||||||
Net Loss attributable to Quest Solution Inc. | $ | (902,882 | ) | $ | (6,266,132 | ) | $ | (1,682,497 | ) | $ | (12,568,456 | ) | ||||
Less: Preferred stock – Series C dividend | (47,540 | ) | (43,968 | ) | (141,071 | ) | (62,707 | ) | ||||||||
Net loss attributable to the common stockholders | $ | (950,422 | ) | $ | (6,310,100 | ) | $ | (1,823,568 | ) | $ | (12,631,163 | ) | ||||
Net income (loss) per share - basic | $ | (0.03 | ) | $ | (0.18 | ) | $ | (0.05 | ) | $ | (0.34 | ) | ||||
Net income (loss) per share - diluted | $ | (0.03 | ) | $ | (0.18 | ) | $ | (0.05 | ) | $ | (0.34 | ) | ||||
Net loss per share from continuing operations - basic | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.15 | ) | ||||
Net loss per share from continuing operations - diluted | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.15 | ) | ||||
Net loss per share from discontinued operations - basic | $ | - | $ | (0.11 | ) | $ | - | $ | (0.19 | ) | ||||||
Net loss per share from discontinued operations - diluted | $ | - | $ | (0.11 | ) | $ | - | $ | (0.19 | ) | ||||||
Weighted average number of common shares outstanding - basic | 35,812,210 | 35,762,326 | 35,587,238 | 36,506,733 | ||||||||||||
Weighted average number of common shares outstanding - diluted | 35,812,210 | 35,762,326 | 35,587,238 | 36,506,733 |
Series C Preferred Stock | Common Stock | Additional Paid-in | Shares | Accumulated | Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||
(In thousands, except per share data) | Shares | Amount | Shares | Amount | Capital | Repurchased | Deficit | Income (Loss) | Equity (Deficit) | |||||||||||||||||||||||||||
Balance, December 31, 2017 | 4,829 | $ | 5 | 36,828 | $ | 37 | $ | 34,496 | $ | (230 | ) | $ | (35,555 | ) | $ | - | $ | (1,247 | ) | |||||||||||||||||
ASC 606 | 1,213 | 1,213 | ||||||||||||||||||||||||||||||||||
Board Issuances | 1,000 | 1 | 118 | 119 | ||||||||||||||||||||||||||||||||
Dividend on Class C Shares | (48 | ) | (48 | ) | ||||||||||||||||||||||||||||||||
ESPP Stock Issuance | 45 | - | 4 | 4 | ||||||||||||||||||||||||||||||||
Stock-based compensation – options and warrants | 352 | 352 | ||||||||||||||||||||||||||||||||||
Stock Based Compensation | 1,800 | 2 | 207 | 209 | ||||||||||||||||||||||||||||||||
Debt Settlements | - | |||||||||||||||||||||||||||||||||||
Net (loss) income | - | - | - | - | - | - | (949 | ) | (949 | ) | ||||||||||||||||||||||||||
Balance, March 31, 2018 | 4,829 | 5 | 39,673 | 40 | 35,177 | (230 | ) | (35,555 | ) | 216 | (347 | ) | ||||||||||||||||||||||||
Balance, December 31, 2018 | 4,829 | 5 | 71,932 | 72 | 42,198 | (230 | ) | (39,752 | ) | 1 | 2,293 | |||||||||||||||||||||||||
Dividend on Class C Shares | - | - | - | - | - | (47 | ) | - | (47 | ) | ||||||||||||||||||||||||||
ESPP Stock Issuance | - | - | 2 | - | 1 | - | - | - | 1 | |||||||||||||||||||||||||||
Stock-based compensation – options and warrants | - | - | - | - | 323 | - | - | - | 323 | |||||||||||||||||||||||||||
Stock redemption | (508 | ) | (1 | ) | (229 | ) | 230 | - | ||||||||||||||||||||||||||||
Accumulated other Comprehensive Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Net (loss) income | - | - | - | - | - | - | (633 | ) | - | (633 | ) | |||||||||||||||||||||||||
Balance, March 31, 2019 | 4,829 | $ | 5 | 71,426 | $ | 71 | $ | 42,291 | $ | - | $ | (40,432 | ) | $ | 1 | $ | 1,936 |
The accompanying unaudited notes to the financials should be read in conjunction with these condensed
consolidated financial statements.
F-3 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
For the nine months | ||||||||
ending September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from continuing operating activities: | ||||||||
Net loss | $ | (1,682,497 | ) | $ | (5,354,837 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Stock based compensation | 565,593 | 308,079 | ||||||
Debt discount accretion | - | 860,824 | ||||||
Depreciation and amortization | 1,324,345 | 1,347,077 | ||||||
Interest expense unpaid | 105,060 | |||||||
Restructuring expenses | 26,880 | 544,941 | ||||||
Loss on write off of other assets | 450,000 | |||||||
Unrealized Foreign Exchange Loss | - | 42,875 | ||||||
Changes in operating assets and liabilities: | ||||||||
Decrease in accounts receivable | 2,317,712 | 273,516 | ||||||
(Increase) / decrease in prepaid expenses | (8,289 | ) | 10,714 | |||||
Increase in inventory | (215,301) | (124,434 | ) | |||||
Increase in accounts payable and accrued liabilities | 2,992,271 | 5,763,282 | ||||||
Increase in accounts payable and accrued liabilities, related party | 517,425 | 297,447 | ||||||
Increase / (decrease) in deferred revenues, net | (195,418 | ) | 89,213 | |||||
Increase / (decrease) in accrued payroll and sales taxes payable | (284,992 | ) | 264,664 | |||||
Decrease in other assets | 595,569 | 475,670 | ||||||
Increase / (decrease) in other liabilities | (47,186 | ) | 34,04 | 1 | ||||
Net cash provided by operating activities | 5,906,112 | 5,388,132 | ||||||
Cash flows from investing activities: | ||||||||
Decrease in restricted Cash | (19,390 | ) | (76,838 | ) | ||||
Purchase of property and equipment | (10,142 | ) | (16,513 | ) | ||||
Net cash provided by investing activities | (29,532 | ) | (93,351 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds (payment) on line of credit | (1,381,631 | ) | 1,234,377 | |||||
Proceeds (payment) from notes/loans payable | (4,629,846 | ) | (1,971,627 | ) | ||||
Proceeds from shares sold | 21,059 | - | ||||||
Share issuance expenses | - | (41,259 | ) | |||||
Increase in Insurance Note | 85,000 | - | ||||||
Net cash (used in) financing activities | (5,905,418 | ) | (778,509 | ) | ||||
Cash used in discontinued operations | - | (5,017,775 | ) | |||||
Net (decrease) in cash | (28,838 | ) | (501,503 | ) | ||||
Cash, beginning of period | 289,480 | 823,391 | ||||||
Cash, end of period | $ | 260,642 | $ | 321,888 | ||||
Cash paid for interest | $ | 496,976 | $ | 1,273,044 | ||||
Cash paid for taxes | $ | 34,932 | $ | 123,581 | ||||
Supplementary cash flow information: | ||||||||
Stock issued for services | $ | 65,901 | $ | 33,675 | ||||
Stock options issued | $ | 499,692 | $ | 274,404 |
For the three months ended March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Cash flows from continuing operating activities: | ||||||||
Net loss | $ | (635 | ) | $ | (949 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Stock based compensation | 323 | 685 | ||||||
Topic 606 Cumulative Adjustment | - | 1,213 | ||||||
Depreciation and amortization | 543 | 487 | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) / decrease in accounts receivable | (1,941 | ) | (3,031 | ) | ||||
(Increase) / decrease in prepaid | (319 | ) | (1,935 | ) | ||||
(Increase) in inventory | 173 | (1,702 | ) | |||||
Increase / (decrease) in accounts payable and accrued liabilities | 6,214 | 4,987 | ||||||
Increase in accrued interest and accrued liabilities, related party | - | 26 | ||||||
(Decrease) in deferred revenue, net | - | (1,213 | ) | |||||
Increase in accrued payroll and sales taxes payable | 144 | 1,259 | ||||||
(Increase) / decrease in other assets | (102 | ) | 98 | |||||
Increase in other liabilities | 133 | 35 | ||||||
Net cash (used in) provided by operating activities | 4,533 | (40 | ) | |||||
Cash flows from investing activities: | ||||||||
(Increase) / decrease in restricted cash | - | 303 | ||||||
(Increase) / decrease in other assets | (213 | ) | - | |||||
Purchase of property and equipment | - | (54 | ) | |||||
Net cash provided by investing activities | (213 | ) | 249 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from ESPP stock issuance | 1 | - | ||||||
Proceeds from / (payments on) line of credit | (3,737 | ) | 1,165 | |||||
Payment on notes/loans payable | (618 | ) | (1,154 | ) | ||||
Net cash provided by (used) in financing activities | (4,354 | ) | 11 | |||||
Net increase (decrease) in cash | (34 | ) | 220 | |||||
Cash, beginning of period | 378 | 25 | ||||||
Cash, end of period | $ | 344 | $ | 245 | ||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for taxes | $ | - | $ | - | ||||
Supplementary for non-cash flow information: | ||||||||
Stock issued for services | $ | - | $ | 209 | ||||
Stock options issued | $ | 323 | $ | 473 | ||||
Shares to be repurchased | $ | - | $ | (230 | ) |
The accompanying unaudited notes to the financials should be read in conjunction with these condensed
consolidated financial statements.
F-4 |
QUEST SOLUTION, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The interim consolidated financial statements of Quest Solution, Inc. include the combined accounts of Quest Marketing, Inc., an Oregon Corporation, and Quest Exchange Ltd., a Canadian based holding company.
Divesture of Canadian Operations
Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canadacompany, HTS Image Processing, Inc., and the consideration received was $1.0 million in cash, which was all collected at June 30, 2017. In addition, the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stock of the Company, as well as the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd.a Delaware corporation, HTS (USA), Inc., a wholly owned subsidiary of the Company, redeemed 5,200,000 exchangeable shares as part of the divestiture.
Additionally, as part of the transaction, Viascan Group Inc.Delaware corporation and HTS Image Ltd. (f/k/a Teamtronics Ltd.), the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction included:
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The operations of Quest Solution Canada Inc. have been classified as a discontinued operation and the assets and liabilities of Quest Solution Canada Inc. have been classified as held for disposal.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 ininto 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, 20162018 and notes thereto included in the Company’s Form 10-K filed with the SEC on April 17, 2017.June 5, 2019. The Company follows the same accounting policies in the preparation of interim reports.reports, except for the adoption of ASC Topic 606, Revenue from Contracts with Customers. The Company operates in one segment.
Operating results for the three months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.2019.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Quest Solution, Inc. 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.
CASH
Cash consists of petty cash, checking, savings, and money market accounts. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of September 30, 2017 and December 31, 2016.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.
The Company has restricted cash on deposit with a federally insured bank in the amount of $684,610 at September 30, 2017. This cash is security and collateral for a corporate credit card agreement with a bank and for deposit against a letter of credit issued for executive life insurance policies owned by the Company.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the consolidated financial statements.
PURCHASE ACCOUNTING AND BUSINESS COMBINATIONS
The Company accounts for its business combinations using the purchase method of accounting which requires that intangible assets be recognized apart from goodwill if they are contractual in nature or separately identifiable. Acquisitions are measured on the fair value of consideration exchanged and, if the consideration given is not cash, measurement is based on the fair value of the consideration given or the fair value of the assets acquired, whichever is more reliably measurable. The excess of cost of an acquired entity over the fair value of identifiable acquired assets and liabilities assumed is allocated to goodwill.
The valuation and allocation process relies on significant assumptions made by management. In certain situations, the allocations of excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives updated information, including appraisals and other analyses, which are completed within one year of the acquisition. Revisions to the fair values, which may be significant, are recorded when pending information is finalized, within one year from the acquisition date.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at their estimated collectible amounts. The Company provides allowances for uncollectible accounts receivable equal to the estimated collection losses that will be incurred in collection of all receivables. Accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company’s management determines which accounts are past due and if deemed uncollectible, the Company charges off the receivable in the period the determination is made. The Company generally requires no collateral to secure its ordinary accounts receivable.
PROPERTY AND EQUIPMENT
Property and equipment are stated at purchased cost and depreciated using both straight-line and accelerated methods over estimated useful lives ranging from 3 to 15 years. Upon disposition of property and equipment, related gains and losses are recorded in the results of operations. For federal income tax purposes, depreciation is computed using the modified accelerated cost recovery system. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred.
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 10 years. Amortization expense for the period ending September 30, 2017 and December 31, 2016 was $1,276,286 and $1,701,700, respectively.
September 30, 2017 | December 31,2016 | |||||||
Goodwill | $ | 10,114,164 | $ | 10,114,164 | ||||
Trade Names | 4,390,000 | 4,390,000 | ||||||
Customer Relationships | 9,190,000 | 9,190,000 | ||||||
Accumulated amortization | (5,484,153 | ) | (4,207,867 | ) | ||||
Intangibles, net | $ | 18,210,011 | $ | 19,486,297 |
The future amortization expense on the Trade Names and Customer Relationships are as follows:
Years ending December 31, | ||||
2017 | $ | 425,429 | ||
2018 | 1,679,599 | |||
2019 | 1,471,714 | |||
2020 | 1,471,714 | |||
2021 | 1,405,791 | |||
Thereafter | 1,641,600 | |||
Total | $ | 8,095,847 |
Goodwill is not amortized, but is evaluated for impairment annually or when indicators of a potential impairment are present. Our impairment testing of goodwill is performed separately from our impairment testing of intangibles. The annual evaluation for impairment of goodwill and intangibles is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. None of the goodwill is deductible for income tax purposes.
Purchased intangible assets with finite useful lives are amortized over their respective estimated useful lives to their estimated residual values, if any. The Company’s finite-lived intangible assets consist of customer relationships, contractor and resume databases, trade names, and internal use software and are being amortized over periods ranging from two to nine years. Purchased intangible assets are reviewed annually to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, recoverability is assessed by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the rate of amortization is accelerated and the remaining carrying value is amortized over the new shorter useful life. No impairments were identified or changes to estimated useful lives have been recorded as of September 30, 2017 and December 31, 2016.
ADVERTISING
The Company generally expenses advertising costs as incurred. During the nine month periods ending September 30, 2017 and 2016, the Company spent $183,301 and $77,205 on advertising (marketing, trade show and store front expense), net of co-operative rebates, respectively. The Company received rebates on advertising from co-operative advertising agreements with several vendors and suppliers. These rebates have been recorded as a reduction to the related advertising and marketing expense in the periods they are received.
INVENTORY
Substantially all inventory consists of raw materials and finished goods and are valued based upon first-in first-out (“FIFO”) cost, not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed evaluation of inventory relative to any potential slow moving products or discontinued items as well as the market conditions for the specific inventory items.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future acquisitions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
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Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification of assets and liabilities within the three levels of the hierarchy outlined above.
Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain liabilities at fair value on a recurring basis such as our contingent consideration related to business combinations and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the period ending September 30, 2017 or fiscal year ending December 31, 2016.
The Company has classified its contingent consideration related to the acquisitions as a Level 3 liability. Revenue and other assumptions used in the calculation require significant management judgment. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis. Based on that assessment, the Company recognized an adjustment of $0 to the actual calculation of the earn-out obligations during the quarter ending September 30, 2017 and in the fiscal year ended December 31, 2016.
As of September 30, 2017 and December 31, 2016, the Company does not have any unrecorded contingent liabilities.
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, 2017 and 2016 were 35,587,238 and 36,506,733, 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 no anti-dilutive impact due to losses reported.
GOODWILL
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested annually at December 31 for impairment. The annual qualitative or quantitative assessments involve determining an estimate of the fair value of reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill exists. A qualitative assessment evaluates whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step quantitative goodwill impairment test. The first step of a quantitative goodwill impairment test compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss may be recognized. The amount of impairment loss is determined by comparing the implied fair value of reporting unit goodwill with the carrying amount. If the carrying amount exceeds the implied fair value then an impairment loss is recognized equal to that excess. No impairment charges have been recorded as a result of the Company’s annual impairment assessments.
We test our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is December 31, at which date we test our reporting units, which is currently our ownership in Quest Solution, Inc.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements of the Company are presented in U.S. dollars. The functional currency for the Company is U.S. dollars. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the time of the transaction. All of the Company’s continuing operations are conducted in U.S. dollars. The Company owns a non-operating subsidiary in Canada, from which it has received no revenue since October 1, 2016. Canadian records of the divested Canadian operation were maintained in the local currency and re-measured to the functional currency as follows: monetary assets and liabilities are converted using the balance sheet period-end date exchange rate, while the non-monetary assets and liabilities are converted using the historical exchange rate. Expenses and income items are converted using the weighted average exchange rates for the reporting period. Foreign transaction gains and losses are reported on the consolidated statement of operations and were included in the amount of loss from discontinued operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2014, the FASB issued ASU 2014-15 requiring management to evaluate whether there are conditions or events, consideredAdoption of New Accounting Pronouncement in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern, which is currently performed by the external auditors. Management will be required to perform this assessment for both interim and annual reporting periods and must make certain disclosures if it concludes that substantial doubt exists. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016. The adoption of this guidance is not expected to have a material effect on our financial statements.
In May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective date by one year (ASU 2015-14). This ASU will now be effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); and 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12). The new standard will be effective for us beginning January 1, 2018 and we expect to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. We are evaluating the impact of adoption on our consolidated results of operations, consolidated financial position and cash flows.Fiscal 2019
In July 2015, the Financial Accounting Standard Board (“FASB”) issued ASU 2015-11 (ASC 330), Simplifying the Measurement of Inventory. This guidance requires companies to measure inventory using the lower of cost and net realizable value. It is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt ASU 2015-11 as of January 1, 2017 on a prospective basis and there is expected to be no impact of this guidance on its consolidated financial statements.
In November 2015,2018, the FASB issued ASU 2015-17,2018-10Balance Sheet ClassificationLeases (Topic 842),Codification Improvements and ASU 2018-11Leases (Topic 842), Targeted Improvements, to provide additional guidance for the adoption of Deferred TaxesTopic 842., which simplifies ASU 2018-10 clarifies certain provisions and correct unintended applications of the presentationguidance such as the application of deferred income taxes. Theimplicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders’ equity. ASU requires that deferred tax assets2018-11 provides an alternative transition method and liabilities be classified as non-current in a statementpractical expedient for separating contract components for the adoption of financial position, thereby simplifying the current guidance that requires an entity to separate deferred assets and liabilities into current and noncurrent amounts. The Company early adopted ASU 2015-17 as of January 31, 2016 on a prospective basis. The statement of financial position as of January 31, 2016 reflects the classification of deferred tax assets and liabilities as noncurrent.
Topic 842.In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lesseesLeases (Topic 842) which requires an entity to recognize lease assets and liabilities arising from a lease liabilities for allboth financing and operating leases with lease terms of moregreater than 12 months, including those classified as operating leases. Both the assetmonths. ASU 2018-11, ASU 2018-10, and liability will initially be measured at the present value of the future minimumASU 2016-02 (collectively, “the new lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S GAAP, the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. This ASU isstandards”) are effective for annual periods, and interim periods within those annual periods,fiscal years beginning after December 15, 2018, and requires modified retrospective application. Earlywith early adoption is permitted. We adopted the standard on January 1, 2019 by applying the new lease requirements utilizing the Effective Date Method for all leases with terms greater than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which included carrying forward historical assessments of: (1) whether contracts are currently evaluatingor contain leases, (2) lease classification and (3) initial direct costs. The adoption of this standard resulted in the impactrecognition of right-of-use assets of $237,731 and additional lease liabilities of $237,731 as of January 1, 2019. The adoption of the new guidancestandard did not have a material impact on our consolidated financial statements and related disclosures.operating results or cash flows.
In March 2016,July 2018, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) 2016-09 amending several aspectsASU 2018-09,Codification Improvements.The amendments in ASU 2018-09 affect a wide variety of share-based payment accounting. This guidance requiresTopics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740,Compensation-Stock Compensation-Income Taxes, are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740,Compensation-Stock Compensation-Income Taxes, clarify that an entity should recognize excess tax benefits and tax deficienciesrelated to be recordedstock compensation transactions in the income statement whenperiod in which the awards vest oramount of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are settled, with prospective application required. The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application required. This ASU is effective for annual periods, and interim periods within those annual periods,fiscal years beginning after December 15, 2016. Early2018, with early adoption is permitted. We are currently evaluating the impactThe adoption of the new guidancestandard did not have a current impact on our consolidated financial statements and related disclosures.the Company’s Condensed Consolidated Financial Statements.
In March 2016,June 2018, the FASB issued ASU 2016-08, Revenue from Contracts with Customers2018-07,Compensation - Stock Compensation (Topic 606)718):Principal versus Agent Considerations (Reporting Revenue Gross versus Net) Improvements to Nonemployee Share-Based Payment Accounting,(“ASU 2016-08”). ASU 2016-08 does not change to expand the core principlescope of Topic 606 but clarifies718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the implementation guidance in Subtopic 505-50,Equity - Equity-Based Payments to Non-Employees. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on principal versus agent considerations.the grant date. The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. ASU 2016-082018-07 is effective for the annual and interim periodsfiscal years beginning after December 15, 2017. We are currently assessing2018, with early adoption permitted. The adoption of the potentialnew standard did not have a current impact of ASU 2016-08 on our consolidated financial statements and results of operations.the Company’s Condensed Consolidated Financial Statements for the period ended March 31, 2019.
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In June 2016, the FASB issued ASU 2016-13,Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-15 on our consolidated financial statements and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application to any business development transaction.
In January 2017, the FASB issued ASU 2017-04,Intangibles – Goodwill and Other (Topic 350) that will eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, impairment charge will be based on the excess of a reporting unit’s carrying amount over its fair value. The guidance is effective for the Company in the first quarter of fiscal 2023. Early adoption is permitted. The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements, absent any goodwill impairment.
The Company has evaluated other recent pronouncements and believes that none of them will have a material effect on the company’sCompany’s financial statements.
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 period ended March 31, 2019 and December 31, 2018 was $542,309 and $1,784,390, respectively.
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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, 2019 and 2018 were 71,681,522 and 37,125,286, 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 no 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,:
2019 | 2018 | |||||||
Options to purchase common stock | 15,841,000 | 15,081,000 | ||||||
Convertible preferred stock | 4,828,530 | 4,828,530 | ||||||
Warrants to purchase common stock | 5,500,000 | 4,500,000 | ||||||
Common stock subject to repurchase | - | (507,079 | ) | |||||
Potential shares excluded from diluted net loss per share | 26,169,530 | 19,851,451 |
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 Israeli Shekel. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the time of the transaction. For Quest US entities, continuing operations are conducted in U.S. dollars. The Company owns a non-operating subsidiary in Canada, from which it has no activity since October 1, 2016. For HTS LTD is an Israeli Company whose 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. The Company has acquired a significant working capital deficit and issued a substantial amount of subordinated debt in connection with its acquisitions. As of September 30, 2017,March 31, 2019, the Company had a working capital deficit of $14,811,674$20,880,835 and an accumulated deficit of $34,758,766.$40,431,495. 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 to obtain additional debt or equity financing for working capital (i.e., vendor trade credit extensions) or refinancing (restructuring of subordinated debt) as may be required and, ultimately, to attain profitable operations. Management is focused on reducing operating expenses.basis. Management’s plansplan to eliminate the going concern situation include,includes, but areis not limited to, the raisecontinuation of additional capital through the issuance of debt and equity, improvedimproving cash flow, management,maintaining moderate cost reductions (subsequent to aggressive cost reductions,reduction actions already taken in 2018 and in the first quarter of 2019), the creation of additional sales and profits across its product lines. One initiativelines, and the obtaining of sufficient financing to reduce operating expenserestructure current debt in a manner more in line with the Company’s improving cash flow and startcost reduction successes.
The matters that resulted in 2018 having substantial doubt about the pathCompany’s ability to attaining profitability wascontinue as a going concern, have been somewhat mitigated by the salesuccessful debt reduction settlements finalized in December of Quest Solution Canada Inc. primarily because it had incurred significant operating losses2017 as detailed in the Company’s Annual Report on Form 10-K filed on June 5, 2019. The consolidated financial statements do not include any adjustments relating to the recoverability and negative cash flow. In order to mitigateclassification of recorded asset amounts or the risk related with this uncertainty,amounts and classification of liabilities that might be necessary should the Company may issue additional shares of common and preferred stock for cash and services during the next 12 months.be unable to continue as a going concern.
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NOTE 3 – CONCENTRATIONS
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, accounts receivable, and accounts payable. Beginning January 1, 2015, all of our cash balances were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per depositor at each financial institution. This coverage is available at all FDIC member institutions. The Company uses Wells Fargo Bank, which is an FDIC insured institution. The restricted cash in the amount of $684,610 at September 30, 2017 is in excess of the FDIC limit.
For the ninethree months and year ending September 30, 2017ended March 31, 2019 and December 31, 2016,2018, one customer accounted for 16.0%21.4% and 17.3%17.0% of the Company’s revenues, respectively.
Accounts receivable at September 30, 2017 and December 31, 2016 are made up of trade receivables due from customers in the ordinary course of business. One customer made up 21.6% and another customer 33.1% of the trade accounts receivable balances at September 30, 2017 and December 31, 2016, respectively.
Accounts payable are made up of payables due to vendors in the ordinary course of business at September 30, 2017 and December 31, 2016. One vendor made up 86.4% and 76.4%, respectively of the outstanding balance, which represented greater than 10% of accounts payable at September 30, 2017 and December 31, 2016, respectively.
NOTE 4 –DISCONTINUED OPERATIONS – DIVESTURE OF QUEST SOLUTION CANADA, INC.BUSINESS ACQUISITION
Effective September 30, 2016,HTS Image Processing, Inc. acquisition
On October 5, 2018 (“Closing Date”), the Company sold allentered into the HTS Purchase Agreement with Walefar and Campbeltown, (Walefar and Campbeltown are collectively referred to as the “Sellers”). Pursuant to the HTS Purchase Agreement, the Company purchased 100% of the outstanding sharescapital stock of Quest Solution CanadaHTS Image Processing, Inc. The Company decided to sell this division primarily because it has incurred significant operating losses., and HTS’s wholly owned subsidiaries HTS USA, Inc. and HTS Image Ltd. (f/k/a Teamtronics Ltd.), from the Sellers.
Pro forma results of operations
The consideration received was $1.0 million in cash, which was all collected at June 30, 2017. In addition,following pro forma results of operations for the three months ended March 31, 2018 have been prepared as though the business acquisition had occurred as of January 1, 2018. This pro forma financial information is not indicative of the results of operations that the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stockwould have attained had the acquisition occurred at the beginning of the Company, as well asperiods presented, nor is the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd., a wholly owned subsidiarypro forma financial information indicative of the Company, redeemed 5,200,000 exchangeable shares as partresults of operations that may occur in the divestiture.future:
Additionally, as part of the transaction, Viascan Group Inc., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that was part of the transaction included:
Three Months Ended March 31, 2018 | ||||
Pro forma sales | $ | 17,141,884 | ||
Pro forma net income | (981,186 | ) | ||
Pro forma basic and diluted earnings per share | (0.03 | ) |
F-9 | ||
On September 30, 2016, the Company divested its Canadian operations, Quest Solution Canada, Inc., in order to focus its efforts and resources on its US operations. This represented a strategic shift that had a major effect on the Company’s operations and financial results.
Accordingly, the assets and liabilities, operating results, and operating and investing activities cash flows for the former Canadian operations are presented as a discontinued operation separate from the Company’s continuing operations, for all periods presented in these consolidated financial statements and footnotes, unless indicated otherwise.
The following is a reconciliation of the major line items constituting pretax loss of discontinued operations to the after-tax loss of discontinued operations that are presented in the condensed consolidated statements of operations as indicated below:
For the three months | For the nine months | |||||||
ending September 30, 2016 | Ending September 30, 2016 | |||||||
Revenues | $ | 3,911,501 | $ | 11,326,849 | ||||
Cost of goods sold | (3,988,733 | ) | (9,751,651 | ) | ||||
Gross profit | (77,232 | ) | 1,575,198 | |||||
Operating expenses | ||||||||
General and administrative | (315,088 | ) | (874,506 | ) | ||||
Salary and employee benefits | (689,118 | ) | (2,074,977 | ) | ||||
Depreciation and amortization | (61,076 | ) | (178,069 | ) | ||||
Professional fees | (21,387 | ) | (58,138 | ) | ||||
Goodwill impairment | (2,500,000 | ) | (4,800,000 | ) | ||||
Total operating expenses | (3,586,669 | ) | (7,985,690 | ) | ||||
Operating loss | (3,663,901 | ) | (6,410,492 | ) | ||||
Other income (expenses): | ||||||||
Restructuring expenses | - | (108,640 | ) | |||||
Gain (loss) on foreign currency | (155,548 | ) | 117,138 | |||||
Interest expense | (86,617 | ) | (443,019 | ) | ||||
Other (expenses) income | 23 | 129 | ||||||
Total other income (expenses) | (242,142 | ) | (434,392 | ) | ||||
Net Loss Before Income Taxes | (3,906,043 | ) | (6,844,884 | ) | ||||
Provision for Current Income Taxes | (13,132 | ) | (6,991 | ) | ||||
Net Loss from discontinued operations | $ | (3,919,175 | ) | $ | (6,851,875 | ) |
The major classes of assets and liabilities of Quest Solution Canada Inc. were classified as held for disposal as at September 30, 2016, as follows:
As at | ||||
September30, 2016 | ||||
ASSETS | ||||
Current assets | ||||
Cash | $ | (42,013 | ) | |
Accounts receivable, net | 2,302,399 | |||
Inventory, net | 1,832,631 | |||
Prepaid expenses | 97,990 | |||
Other current assets | 24,858 | |||
Total current assets | 4,215,865 | |||
Fixed assets | 1,097,248 | |||
Goodwill | 6,337,860 | |||
Total assets | $ | 11,650,973 | ||
LIABILITIES | ||||
Current liabilities | ||||
Accounts payable and accrued liabilities | $ | 3,205,449 | ||
Line of credit | - | |||
Accrued payroll and sales tax | 329,874 | |||
Deferred revenue, net | 99,905 | |||
Notes payable, related parties, current portion | 1,841,297 | |||
Other current liabilities | 114,265 | |||
Total current liabilities | 5,590,790 | |||
Long term liabilities | ||||
Other long term liabilities | 7,553 | |||
Total liabilities | $ | 5,598,343 | ||
Net Assets held for disposal | $ | 6,052,630 |
The net cash flows incurred by Quest Solution Canada Inc. for the nine months ended September 30, 2016 are presented below:
For the nine months | ||||
ending September 30, 2016 | ||||
Net cash provided by operating activities | $ | (1,743,606 | ) | |
Net cash provided in investing activities | 16,097 | |||
Net cash used in financing activities | (3,290,266 | ) | ||
Net Cash Outflow from discontinued operations | $ | (5,017,775 | ) |
NOTE 5 – ACCOUNTS RECEIVABLE
At September 30, 2017 and December 31, 2016, accounts receivable consisted of the following:
September30, 2017 | December 31, 2016 | |||||||
Trade Accounts Receivable | $ | 8,284,466 | $ | 10,607,378 | ||||
Less Allowance for doubtful accounts | (12,501 | ) | (17,701 | ) | ||||
Total Accounts Receivable (net) | $ | 8,271,965 | $ | 10,589,677 |
NOTE 6 – INVENTORY
At September 30, 2017 and December 31, 2016, inventories consisted of the following:
September30, 2017 | December 31, 2016 | |||||||
Equipment and clearing service | $ | 595,115 | $ | 375,863 | ||||
Raw Materials | 40,179 | 119,922 | ||||||
Finished Goods | 111,600 | 35,808 | ||||||
Total inventories | $ | 746,894 | $ | 531,593 |
NOTE 7 – FIXED ASSETS
Fixed assets are stated at cost, net of accumulated depreciation. Depreciation expense for period ending September 30, 2017 and December 31, 2016 was $48,059 and $90,626, respectively
September30, 2017 | December 31, 2016 | |||||||
Equipment | $ | 2,902,594 | 2,892,512 | |||||
Furniture and Fixtures | 316,852 | 316,792 | ||||||
Leasehold improvements | 151,553 | 151,553 | ||||||
Accumulated depreciation | (3,272,081 | ) | (3,224,022 | ) | ||||
Fixed Assets, net | $ | 98,918 | 136,835 |
NOTE 85 – OTHER LIABILITIES
At September 30, 2017March 31, 2019 and December 31, 2016,2018, other liabilities consisted of the following:
September30, 2017 | December 31, 2016 | |||||||
Unearned Incentive from credit cards | $ | 123,105 | $ | 123,105 | ||||
Key Man life Insurance liability | 150,146 | 208,091 | ||||||
Dividend payable | 242,146 | 101,075 | ||||||
Others | 138,700 | 127,931 | ||||||
654,097 | 560,202 | |||||||
Less Current Portion | (238,700 | ) | (227,932 | ) | ||||
Total long term other liabilities | $ | 415,397 | $ | 332,270 |
The Company has purchased key man life insurance policies for some of its executives to insure the Company against risk of loss of an executive. Should loss of an executive occur, those funds would be used to pay off their respective promissory notes, repurchase their shares and settle out any amounts owed to them and their estate.
.
On June 10, 2016, the Company entered into an assignment whereby the insured individuals would assume the key man insurance policies. The agreement stated that the Company assign the policy over to the insured and the insured would assume all the obligations under the premium financed note in place. At September 30, 2017, the three life insurance policies and premium financed notes have been transferred to the insureds.
At September 30, 2017, the balance of amount of the remaining premium financed note is $1,482,850 and the cash value of the policy as of this date is $1,425,537, with a net positive cash value of the policy of $57,313.
The value of the policies is recorded at the new value per the right of offset noted in Topics 210-220. To have a right of offset, the Company would need to show (1) amounts of debt are determinable, (2) reporting entity has the ‘right’ to setoff, (3) the right is enforceable by law, and (4) reporting entity has the ‘intention’ to setoff. Given that the Company has met all of these, the Company has elected to use the right of setoff as the cash value of the policies is being used as the collateral for the loans. Should the Company default on payments to the policy or determine to not continue with the policies, the cash value of the policy is intended to pay off the loan. The Company also intends to settle out the loans in the future with the cash value of the policy.
NOTE 9 – DEFERRED REVENUE
Deferred revenue consists of prepaid third party hardware service agreements, software maintenance service contracts and the related costs and expenses recorded net of the revenue charged to the customer and paid within normal business terms. The net amount recorded as a deferred revenue liability is being recognized into the results of operations over the related periods on a straight line basis, normally 1-5 years with 3 years being the average term.
September30, 2017 | December 31, 2016 | |||||||
Deferred Revenue | $ | 8,027,935 | $ | 8,721,725 | ||||
Less Deferred Costs & Expenses | (6,778,904 | ) | (7,277,276 | ) | ||||
Net Deferred Revenue | 1,249,031 | 1,444,449 | ||||||
Less Current Portion | (830,903 | ) | (879,026 | ) | ||||
Total Long Term net Deferred Revenue | $ | 418,128 | $ | 565,423 |
Expected future recognition of net deferred revenue as of September 30, 2017, is as follows;
2017 | $ | 418,128 | ||
2018 | 228,499 | |||
2019 | 220,189 | |||
2020 | 195,262 | |||
2021 | 186,953 | |||
Total | $ | 1,249,031 |
March 31, 2019 | December 31, 2018 | |||||||
Lease liability | $ | 219,507 | $ | - | ||||
Other vendor payable | 801,000 | - | ||||||
Dividend payable | 524,806 | 478,299 | ||||||
Others | 310,871 | 397,122 | ||||||
Total other liabilities | 1,856,184 | 875,421 | ||||||
Less Current Portion | (1,194,714 | ) | (265,178 | ) | ||||
Total long term other liabilities | $ | 661,470 | $ | 610,243 |
NOTE 106 – 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 $5,000,000. Action will reserve and withhold an amount in a reserve account equal to 10%5% of the face amount of each account purchased under the FASA. The balance outstanding under the Action credit line at September 30, 2017March 31, 2019 was $3,677,661$796,952 and $4,533,575 at December 31, 2016 $5,059,2922018, 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 117 - NOTES PAYABLE
Notes payable at September 30, 2017March 31, 2019 and December 31, 2016,2018, consists of the following:
September30, 2017 | December 31, 2016 | March 31, 2019 | December 31, 2018 | |||||||||||||
Supplier Note Payable | $ | 5,009,007 | $ | 9,414,352 | $ | 8,240,465 | $ | 8,340,465 | ||||||||
Insurance Note | - | 19,502 | ||||||||||||||
All Other | 350,783 | 479,365 | 311,096 | 612,980 | ||||||||||||
Total | 5,359,790 | 9,913,219 | 8,551,564 | 8,953,445 | ||||||||||||
Less current portion | (5,229,496 | ) | (9,782,925 | ) | (8,404,560 | ) | (8,823,151 | ) | ||||||||
Long Term Notes Payable | $ | 130,294 | $ | 130,294 | $ | 147,001 | $ | 130,294 |
Future maturities of notes payable as of September 30, 2017March 31, 2019 are as follows;
2017 | $ | 5,229,496 | ||
2018 | - | |||
2019 | - | |||
2020 | - | |||
2021 | - | |||
Thereafter | 130,294 | |||
Total | $ | 5,359,790 |
The Company finances its Property and Casualty as well as its Directors and Officers Liability Insurance with First Insurance Funding. The Insurance period is for 12 months and the premium is financed over 9 months. The Property and Casualty Insurance is paid in equal monthly installments of $3,940 at 3.25% interest. The outstanding balance at September 30, 2017 was $0 and the monthly payments are current. The Directors and Officers Liability Insurance is renewed annually and is paid in four equal installments of $17,121 at 3.25% interest. The outstanding balance at September 30, 2017 was $0 and the monthly payments are current.
In September 2017 the Property & Casualty policy were extended for a period of 60 days.
2019 | $ | 8,404,560 | ||
2020 | 16,707 | |||
Thereafter | 130,294 | |||
Total | $ | 8,551,561 |
In connection with the BCSBCS’ acquisition, 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 $4,758 beginning October 31, 2014 and endingended October 2018. The loan bears interest at 1.89%1.84% and is unsecured and subordinated to the Company’s bank debt. The balance on this loan at September 30, 2017March 31, 2019 and March 31, 2018 was $130,294 and $130,294 respectively, of which all of it 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 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.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 507,079 shares of common stock for $230,490 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. As at September 30, 2017, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance offull, therefore, the note is $220,490.classified as long-term.
On July 18, 2016, the Company and the supplier entered into that certain Secured Promissory Note, with an effective date of July 1, 2016, in the principal amount of $12,492,137. 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 $250,000 each, with any remaining principal and accrued interest due and payable on December 31, 2016. On November 30, 2016, the Company entered into an Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to March 31, 2017 and the monthly installments of principal and accrued interest were increased to $400,000 commencing December 15, 2016 with any remaining principal and accrued interest due and payable on March 31, 2017. The Amendment also provides that the Company will make an additional principal payment of $300,000 by December 15, 2016. On March 31, 2017, the Company entered into a Second Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to September 30, 2017 whereby any remaining principal and accrued interest is due and payable on September 30, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $400,000 each. On September 30, 2017, the Company entered into a Third Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to October 31, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $600,000 each. On November 15th, the Company entered into a Fourth Amendment extending the maturity date to December 31st, and this Fourth Amendment is effective on October 31st, whereby any remaining principal and accrued interest is due and payable on December 31, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $600,000 each.
On July 31, 2016 as part of the Separation Agreement with Mr. Ross, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,000 shares of restricted common stock. The promissory was paid off in 12 monthly installments commencing October 1, 2016 and this transaction was recorded as a restructuring charge in the amount of $84,317 in the third quarter of 2016. In addition, the Company restated a promissory note in favor of Mr. Ross which was paid at the balance of the $102,000 over 12 monthly installments commencing October 1, 2016. The balance on these two notes at September 30, 2017 was $0.
● | 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 $8,690,464.72, an increase of $6,763,549.41, 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 $300,000 for the first three monthly payments, and also in the amount of $500,000 for the last two monthly payments prior to the notes 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 $350,000 each. |
F-10 |
NOTE 12 – SUBORDINATED NOTES8 –NOTES PAYABLE, RELATED PARTIES
Notes and loans payable, related parties consisted of the following:
September30, 2017 | December 31, 2016 | |||||||
Note payable - acquisition of Quest | $ | 5,967,137 | $ | 5,967,137 | ||||
Note payable – acquisition of BCS | 10,348,808 | 10,348,808 | ||||||
Quest Preferred Stock note payable | 1,199,400 | 1,199,400 | ||||||
Total notes payable | 17,515,345 | 17,515,345 |
March 31, 2019 | December 31, 2018 | |||||||
Note payable – debt restructure Marin | $ | 1,060,000 | $ | 1,160,000 | ||||
Note payable – debt restructure Thomet | 675,000 | 712,500 | ||||||
Convertible note payable – shareholders | 700,000 | 700,000 | ||||||
Note payable - Certus | 986,449 | 1,059,473 | ||||||
Note payable – debt restructure Zicman | 171,000 | 171,000 | ||||||
Total notes payable, related parties | 3,592,449 | 3,802,973 | ||||||
Less current portion | 2,072,449 | 1,891,000 | ||||||
Long-term portion | $ | 1,520,000 | $ | 1,911,973 |
For the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, the Company recorded interest expense in connection with these notes in the amount of $496,850$51,495 and $523,586,$20,232, respectively.
The note payable for acquisition of Quest was issued on January 9, 2014 in conjunction with the acquisition of Quest Marketing, Inc. The initial interest rate was 1.89%, subsequent to December 31, 2015; the interest was increased to 6% and is due in 2018. Principal and interest payments have been postponed. In addition, on June 17, 2016, the Company entered into Promissory Note Conversion Agreement with one of the Noteholders whereby $684,000 of the promissory note was converted into 684,000 shares of Series C Preferred Stock. As part of the transaction, the related debt discount of $171,000 was recorded against Additional paid in capital. As part of the acquisition of Quest Marketing, the Company engaged an independent valuation analysis to do a valuation of the purchase accounting. In July 2016, the holders of the notes signed subordination agreements with the Supplier who holdsof the Secured Promissory Note and Action, whereby the noteholders agree to subordinate their rights and payments until the Supplier with the Secured Promissory Note with the Supplier is reimbursed in full. As a result, the balance on this loan and related accrued interest at September 30, 2017December 31, 2016 were all classified as long term.
The note payable for acquisition of BCS was issued on November 21, 2014 in conjunction with the acquisition of BCS. The current interest is at 1.89% and is due in 2018. This note is convertible into Common Stock at $2.00 per share, subject to board approval such that no debt holder can own more than 5% of the outstanding shares. Principal payments $ and interest payments have been postponed. In July 2016, the holders of the notes signed subordination agreements with the holderSupplier of the Secured Promissory Note and Action, whereby the noteholder agree to subordinate its right and payment of capital and interest until the Supplier who holdswith the Secured Promissory Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at September 30, 2017December 31, 2016 were all classified as long term.
The Quest preferred stock 6% note payable is in conjunction with the promissory note issued in October 2015 related to the redemption and cancelation of 100% of the issued and outstanding Series A preferred stock as well as 3,400,000 stock options that had been issued to a now former employee. The principal payments have been postponed. In June 2016, the holder of the note granted the Company a forgiveness of debt in the amount of $75,000 which was recorded as an increase in the additional paid in capital because it was a related party transaction. In addition, on June 17, 2016, the Company entered into a Promissory Note Conversion Agreement with the Noteholder whereby $1,800,000 of the promissory note was converted into 1,800,000 shares of Series C Preferred Stock. In July 2016, the holders of the notes signed subordination agreements with the Supplier of the Secured Promissory Note and Action, whereby the noteholder agree to subordinate its right and payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at September 30, 2017December 31, 2016 were all classified as long term.
On February 26, 2018, the Company entered into a lease termination agreement with David and Kathy Marin whereby it cancelled the lease for the premises located at 12272 Monarch St., Garden Grove, California effective as of April 20, 2018.
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 $11,000,000 of which an aggregate of $10,696,465 (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 $9,495,465 bringing the total amount owed to $1,201,000. Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20,000 each commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc., currently in the amount of $2,800,000 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. The Marins agreed to release their security interest against the Company. In connection with the $9,495,465 reduction in the purchase price, the Company issued the Marins 3 year warrants to purchase an aggregate of 3,000,000 shares of Common Stock at an exercise price of $0.20 per share.
F-11 |
On February 28, 2018, the Company finalized an additional settlement agreement with the Marins (the “Marin Settlement Agreement II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 which currently had a balance of $111,065 in its entirety in exchange for an aggregate of 85,000 shares of the Company’s Series C Preferred Stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share and automatically converts into Common Stock at $1.00 per share in the event that the Company’s common stock has a closing price of $1.50 per share for 20 consecutive trading days. The preferred stock pays a 6% dividend commencing two years from issuance. During the first two years, the Series C Preferred stock shall neither pay or accrue the dividend. The Company also agreed to transfer title to a vehicle that was being utilized by Mr. Marin to David Marin. In exchange therefor, the $100,000 Note and the accrued interest thereon was cancelled in its entirety. The effective date of the agreement is December 30, 2017.
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 $5,437,136 in full in exchange for 60 monthly payments of $12,500 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. currently in the amount of $21,800,000 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 500,000 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.
On February 28, 2018, the Company finalized a settlement agreement with George Zicman whereby the Company settled its indebtedness to Mr. Zicman in the current amount of $1,304,199 in full in exchange for 60 monthly payments of $3,000 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. currently in the amount of $2,800,000 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 100,000 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.
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.
On June 7, 2018, the Company authorized the issuance of 8,600,000 shares of common stock to Jason Griffith. The issuance was part of a convertible provision in an existing note held by Jason Griffith. With the issuance of stock, the debt of $1,199,400 and all accrued interest was extinguished.
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 22,452,954 shares of the Company’s common stock, having a value of $5,298,897 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 $300,000, and (iii) a 12 month convertible promissory note with a principal amount of $700,000 and an interest rate of six percent (6%) per year. 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 $0.236. 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 Neev Nissenson. Carlos Jaime Nissenson was also a stockholder and director of HTS. Pursuant to the agreement, Shai Lustgarten received 11,226,477 shares of the Company’s common stock and Carlos Jaime Nissenson received 11,226,477 shares of the Company’s common stock.
F-12 |
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 5,542,328 and 5,542,329 shares of common stock, respectively. This Amendment reduced the amount of shares issued in the acquisition to 11,368,297 shares from 22,452,954 shares and the amount of share consideration to approximately $2,682,918 from approximately $5,298,897. 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.
On April 4, 2019, the Company entered into a form of Securities Purchase Agreement (the “Securities Purchase Agreement”) with accredited investors (the “Purchasers”). Pursuant to the Securities Purchase Agreement, on April 9, 2019 (the “Closing Date”), the Company sold an aggregate, with the Conversions included, of $5,000,000 of units (the “Units”) resulting in gross proceeds of $5,000,000, before deducting placement agent fees and offering expenses (the “Offering”). The per Unit purchase price was $0.30. Each Unit is comprised of one share of the Company’s common stock, $0.001 par value per share (the “Common Stock”), and a warrant to purchase one share of Common Stock, and, as a result of the Offering, the Company issued 16,666,667 shares of Common Stock (the “Shares”) and warrants (the “Warrants”) to purchase 16,666,667 shares of Common Stock (the “Warrant Shares”) at an exercise price equal to $0.35 per Warrant Share, which Warrants are exercisable for a period of five and one-half years from the issuance date. Both Shai Lustgarten, the Company’s Chief Executive Officer, and Carlos J. Nissensohn, a consultant to and principal stockholder of the Company, participated in the Offering by converting $200,000 each of unpaid principal owed to them from the HTS acquisition (the “Conversions”) by the Company in exchange for Shares and Warrants on the same terms as all other Purchasers. With the Conversions included, the Offering resulted in gross proceeds of $5,000,000. As a result of the Conversions, a principal amount of $150,000 is owed to each Walefar and Campbeltown respectively under the note issued to them as partial consideration in the sale of HTS to the Company on October 5, 2018.
The repayment of the subordinated notes payable, is contingent on the complete reimbursement of the Supplier Secured Promissory Note and other conditions and as such based on these factors management has estimated that the future maturities of subordinated notes payablerelated parties at September 30, 2017March 31, 2019 is as follows:
2017 | - | |||
2018 | - | |||
2019 | - | |||
2020 | - | |||
2021 | - | |||
Thereafter | 17,515,345 | |||
Total | $ | 17,515,345 |
2019 | $ | 1,674,400 | ||
2020 | 757,549 | |||
2021 | 426,000 | |||
2022 | 426,000 | |||
Thereafter | 308,500 | |||
Total | $ | 3,592,449 |
NOTE 139 – STOCKHOLDERS’ DEFICITEQUITY
PREFERRED STOCK
Series A
As of September 30, 2017,March 31, 2019, there were 1,000,000 Series A preferred shares designated and 0 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 September 30, 2017March 31, 2019, there was 1 preferred share designated and 0 preferred shares outstanding. Effective on September 30, 2016, with the divestiture of Quest Solution Canada Inc., the one share was redeemed by the Company and retired.
F-13 |
Series C
As of September 30, 2017,March 31, 2019, there were 15,000,000 Series C preferred sharesshare authorized and 3,143,5304,828,530 Series C preferred sharesshare outstanding. It has preferential rights above common shares and the Series B preferred shares and is 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. Each Series C preferred share outstanding is convertible into one (1) share of common stock of Quest Solution, Inc.
COMMON STOCK
For the nine month period ended September 30, 2017,
On January 10, 2019, the Company issued 87,500an aggregate of 623 shares of common stock to board members in relation tofour individuals as part of the vesting schedule agreed to during 4th quarter 2015, which is based on an annual grant of 100,000 restricted shares every October and vesting over 8 quarters per independent board member as compensation. The shares were valued at $9,501.
In addition, pursuant to theCompany’s Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration statement, 264,423 shares of Common Stock were issued for proceeds of $21,060.$324.
In April 2017,On February 19, 2019, the Company issued 640,000an aggregate of 457 shares of common stock to certain individuals as part of the Chief Executive Officer as a signing bonus under his Employment Agreement. The shares were valued at $48,000. In addition,Company’s Employee Stock Purchase Program for proceeds of $233.
On March 31, 2019, the Company issued 70,000an aggregate of 707 shares of common stock to certain individuals as part of the Chief Financial Officer as additional fees pursuant to his Contractor Agreement. The shares were valued at $8,400Company’s Employee Stock Purchase Program for proceeds of $252.
As of September 30, 2017March 31, 2019, the Company had 36,157,42271,426,401 common shares outstanding.
Warrants and Stock Options
On March 8, 2018, the Company adopted the 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 ten million (10,000,000) to sixteen million (16,000,000) 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.
Warrants- The following table summarizes information about warrants granted during the ninethree month periods ended September 30, 2017March 31, 2019 and 2016:2018:
September 30, 2017 | September 30, 2016 | March 31, 2019 | March 31, 2018 | |||||||||||||||||||||||||||||
Number of warrants | Weighted Average Exercise Price | Number of warrants | Weighted Average Exercise Price | Number of warrants | Weighted Average Exercise Price | Number of warrants | Weighted Average Exercise Price | |||||||||||||||||||||||||
Balance, beginning of period | 1,410,000 | 0.31 | 1,410,000 | 0.31 | 5,500,000 | $ | 0.23 | 5,905,000 | $ | 0.21 | ||||||||||||||||||||||
Warrants granted | 1,500,000 | 0.31 | - | - | - | - | - | - | ||||||||||||||||||||||||
Warrants expired | (5,000 | ) | 0.31 | - | - | - | - | (300,000 | ) | 1.00 | ||||||||||||||||||||||
Warrants cancelled, forfeited | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Warrants exercised | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Balance, end of period | 2,905,000 | 0.31 | 1,410,000 | 0.31 | 5,500,000 | $ | 0.23 | 5,605,000 | $ | 0.21 | ||||||||||||||||||||||
Exercisable warrants | 1,405,000 | 0.31 | 1,410,000 | 0.31 | 5,500,000 | $ | 0.23 | 4,885,000 | $ | 0.23 |
F-14 |
Outstanding warrants as of September 30, 2017March 31, 2019 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 | |||||||||||||||||
0.25 | 0.50 | 900,000 | 0.25 | 900,000 | 0.25 | |||||||||||||||||
1.00 | 0.58 | 505,000 | 1.00 | 505,000 | 1.00 | |||||||||||||||||
0.11 | 3.84 | 1.500,000 | 0.11 | - | - | |||||||||||||||||
0.11 to 1.00 | 2.24 | 2,905,000 | 0.31 | 1,405,000 | 0.52 |
Range of Exercise Prices | Weighted Average residual life span (in years) | Outstanding Warrants | Weighted Average Exercise Price | Exercisable Warrants | Weighted Average Exercise Price | |||||||||||||||||
$ | 0.11 | 2.34 | 1,500,000 | $ | 0.11 | 1,500,000 | $ | 0.11 | ||||||||||||||
$ | 0.20 | 1.92 | 3,000,000 | 0.20 | 3,000,000 | 0.20 | ||||||||||||||||
$ | 0.28 | 1.25 | 200,000 | $ | 0.28 | 200,000 | $ | 0.28 | ||||||||||||||
$ | 0.50 | 2.50 | 500,000 | 0.50 | 500,000 | 0.50 | ||||||||||||||||
$ | 0.60 | 1.51 | 300,000 | $ | 0.60 | 300,000 | $ | 0.60 | ||||||||||||||
$ | 0.11 to 0.60 | 1.92 | 5,500,000 | $ | 0.23 | 5,500,000 | $ | 0.25 |
Warrants outstanding at September 30, 2017March 31, 2019 and 20162018 have the following expiry date and exercise prices:
Expiry Date | Exercise Prices | September 30, 2017 | September 30, 2016 | |||||||||
March 22, 2018 | 1.00 | 300,000 | 300,000 | |||||||||
April 1, 2018 | 0.25 | 900,000 | 900,000 | |||||||||
April 30, 2018 | 1.00 | 5,000 | 5,000 | |||||||||
July 10, 2018 | 1.00 | 200,000 | 200,000 | |||||||||
August 2, 2021 | .11 | 1,500,000 | - | |||||||||
2,905,000 | 1,405,000 |
Expiry Date | Exercise Prices | March 31, 2019 | March 31, 2018 | |||||||||
October 10, 2020 | $ | 0.60 | 300,000 | - | ||||||||
December 30, 2020 | $ | 0.20 | 3,000,000 | 3,000,000 | ||||||||
June 26, 2020 | $ | 0.28 | 200,000 | - | ||||||||
August 2, 2021 | $ | 0.11 | 1,500,000 | 1,500,000 | ||||||||
October 10, 2021 | $ | 0.50 | 500,000 | - | ||||||||
5,500,000 | 4,500,000 |
Share Purchase2014 Stock Option Plan
The Company hasOn November 17, 2014, the Board adopted a stock option plan (the “2014 Plan”) whereby the Board of Directors, may grant to directors, officers, employees, or consultants ofthe Company options to acquire common shares. The Board of Directors of the Company 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 plan2014 Plan was adopted by the Company’s Board of Directors on November 17, 2014 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 10,000,000.ten million (10,000,000).
The option exercise price is established by the Board of Directors 0andand 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, of Directors, which may vary, but will not exceed ten years from the date of the grant. There are 10,000,000 of the Company’s common shares which may be issued pursuant to the exercise of share options granted under the 2014 Plan. As at September 30, 2017,March 31, 2019, the Company had issued options, allowing for the subscription of 9,125,000 common20,121,000 shares of its share capital.common stock.
Stock Options - The following table summarizes information about stock options granted during the three months ended September 30, 2017March 31, 2019 and 2016:2018:
September 30, 2017 | September 30, 2016 | |||||||||||||||
Number of stock options | Weighted Average Exercise Price | Number of stock options | Weighted Average Exercise Price | |||||||||||||
Balance, beginning of period | 5,625,000 | 0.49 | 6,044,000 | 0.50 | ||||||||||||
Stock options granted | 3,500,000 | 0.11 | - | - | ||||||||||||
Stock options expired | - | - | - | - | ||||||||||||
Stock options cancelled, forfeited | - | - | - | - | ||||||||||||
Stock options exercised | - | - | - | - | ||||||||||||
Balance, end of period | 9,125,000 | 0.21 | 6,044,000 | 0.50 | ||||||||||||
Exercisable stock options | 3,339,750 | 0.34 | 2,237,750 | 0.49 |
March 31, 2019 | March 31, 2018 | |||||||||||||||
Number of stock options | Weighted Average Exercise Price | Number of stock options | Weighted Average Exercise Price | |||||||||||||
Balance, beginning of period | 20,121,000 | $ | 0.24 | 9,625,000 | $ | 0.21 | ||||||||||
Stock options granted | - | - | 6,800,000 | 0.12 | ||||||||||||
Stock options expired | - | - | 72,000 | 0.37 | ||||||||||||
Stock options cancelled, forfeited | - | - | - | - | ||||||||||||
Stock options exercised | - | - | - | - | ||||||||||||
Balance, end of period | 20,121,000 | $ | 0.24 | 16,353,000 | $ | 0.17 | ||||||||||
Exercisable stock options | 15,841,000 | $ | 0.24 | 10,167,666 | $ | 0.20 |
F-15 |
For the ninethree months ended September 30, 2017,March 31, 2019, the Company granted a total of 6,481,0000 stock options, 2,200,000 stock options were granted to five Board members and 3,781,000 stock options were granted to the Chief Executive Officer pursuant to his Employment Contract and 500,000 to Company’s legal counsel.options.
Outstanding stock options as of September 30, 2017March 31, 2019 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 | |||||||||||||||||
0.075 to 0.09 | 4.66 | 2,981,000 | 0.09 | 1,227,000 | 0.08 | |||||||||||||||||
0.11 | 3.84 | 3,500,000 | 0.11 | - | - | |||||||||||||||||
0.33 to 0.38 | 0.79 | 144,000 | 0.36 | 144,000 | 0.36 | |||||||||||||||||
0.50 | 7.45 | 2,500,000 | 0.50 | 1,968,750 | 0.50 | |||||||||||||||||
0.075 to 0.50 | 4.88 | 9,125,000 | 0.21 | 3,339,750 | 0.34 |
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 | |||||||||||||||||
$ | 0.075 to 0.09 | 2.88 | 2,281,000 | $ | 0.09 | 2,281,000 | $ | 0.08 | ||||||||||||||
$ | 0.11 | 2.34 | 3,500,000 | $ | 0.11 | 3,500,000 | $ | 0.11 | ||||||||||||||
$ | 0.12 | 3.93 | 6,800,000 | $ | 0.12 | 5,950,000 | $ | 0.12 | ||||||||||||||
$ | 0.22 | 4.59 | 2,165,000 | $ | 0.22 | 541,250 | $ | 0.22 | ||||||||||||||
$ | 0.27 | 4.67 | 2,875,000 | $ | 0.27 | 1,068,750 | $ | 0.27 | ||||||||||||||
$ | 0.50 | 5.64 | 2,500,000 | $ | 0.50 | 2,500,000 | $ | 0.50 | ||||||||||||||
$ | 0.075 to 0.50 | 3.36 | 20,121,000 | $ | 0.24 | 15,841,000 | $ | 0.24 |
Stock options outstanding at September 30, 2017March 31, 2019, and 20162018 have the following expiryexpiration date and exercise prices:
Expiry Date | Exercise Prices | September30, 2017 | September30, 2016 | |||||||||
February 26, 2018 | 0.37 | 72,000 | 72,000 | |||||||||
April 27, 2018 | 0.38 | 36,000 | 36,000 | |||||||||
July 9, 2018 | 0.33 | 36,000 | 36,000 | |||||||||
August 2, 2021 | 0.11 | 3,500,000 | - | |||||||||
February 17, 2022 | 0.075 | 760,333 | - | |||||||||
February 17, 2022 | 0.09 | 1,520,667 | - | |||||||||
March 30, 2022 | 0.09 | 700,000 | - | |||||||||
November 20, 2024 | 0.50 | 2,500,000 | 2,500,000 | |||||||||
9,125,000 | 2,644,000 |
ExpirationDate | Exercise Prices | March 31, 2019 | March 31, 2018 | |||||||||
August 2, 2021 | $ | 0.11 | 3,500,000 | 3,500,000 | ||||||||
February 17, 2022 | $ | 0.075 | 760,333 | 760,333 | ||||||||
February 17, 2022 | $ | 0.09 | 1,520,667 | 1,520,667 | ||||||||
March 5, 2023 | $ | 0.12 | 6,800,000 | 6,800,000 | ||||||||
October 31, 2023 | $ | 0.22 | 2,165,000 | - | ||||||||
November 30, 2023 | $ | 0.27 | 2,875,000 | - | ||||||||
November 20, 2024 | $ | 0.25 | 2,500,000 | - | ||||||||
20,121,000 | 12,581,000 |
Stock compensation expense is $565,539$322,954 for the ninethree months ending September 30, 2017ended March 31, 2019 and $308,078$685,156 for the nine monthlythree months ended September 30,2016.March 31, 2018.
NOTE 1410 – LITIGATION
AsOur subsidiary, HTS USA, INC., is currently in litigation with Sagy Amit, a former employee, who claims that he is owed wages and commissions. The case is pending in the Superior Court of September 30, 2017,California, County of San Diego and discovery has just commenced. The Company intends to vigorously contest the Companyaction.
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.
F-16 |
NOTE 1511 – RELATED PARTY TRANSACTIONS
Related party transactions are discussed in Notes 11 and 12.
NOTE 12 – LEASES
The Company accounts for leases in accordance with ASC Topic 842, “Leases,” which requires lessees to recognize a building fromright-of-use asset and lease liability on the former owner of BCSbalance sheet and expands disclosures about leasing arrangements for $9,000 per month, which is believed to be the current fair market value of similar buildings in the area.both lessees and lessors, among other items, for most lease arrangements.
In addition,accordance with the adoption of ASC 842 on August 2, 2017,January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets, which represent our right to use an underlying asset for the Company enteredlease term, and operating lease liabilities which represent our obligation to make lease payments. Generally, we enter into a Consulting agreementoperating 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 Carlos J. Nissensohn, a family member of a Directorthe 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 Company.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 conditiondiscount rates for our operating leases were approximately 2.7 years and 14.6% at March 31, 2019. We did not have finance leases at March 31, 2019. 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 2018 Form 10-K.
As of the contract areMarch 31, 2019, operating lease ROU assets were $214,611 and operating lease liabilities were $219,507, of which $121,405 were classified as noncurrent.
Future minimum lease commitments at March 31, 2019 were as follows:
Year ending December 31, | Operating Leases | |||
2019 (excluding the three months ended March 31, 2019) | $ | 94,971 | ||
2020 | 81,919 | |||
2021 | 36,365 | |||
2022 and thereafter | 53,200 | |||
Total lease payments | 266,456 | |||
Less imputed interest | (46,949 | ) | ||
Total | $ | 219,507 |
In addition, on September 8, 2017, Quest Solution, Inc.(the “Company”) approved the Company entering into a consulting agreement (the “Consulting Agreement”) with YES IF(the “Consultant”), an entity controlled by Jason Griffith, the Company’s former Chief Executive Officer and a principal stockholder. The Consultant shall provide the Company and its controlled entities with certain business development, managerial, measuresSupplemental cash flow information related to improve efficiency and cost savings and financial services in accordance with the terms and conditions of the Consulting Agreement. In exchange for its consulting services, the Consultant will receive a monthly fee of $10,000 for the months of September through December 2017, $15,000 per month for the months of January through June 2018 and $20,000 per month for the months of July 2018 through August 2019. As the former CEO of the Company, the Company believes that the Consultant will be extremely beneficial to the Company in connection with its recently announced business restructuring efforts.leases was as follows:
On September 8, 2017, the Company entered into a voting agreement with Jason Griffith pursuant to which Mr. Griffith agreed to vote any shares beneficially owned by him in accordance with the instructions of Shai Lustgarten, the Company’s Chief Executive Officer. The voting proxy does not include any matters involving the creation of a new or cancellation of an existing class of stock, a reverse split (except in connection with an uplisting of the Company’s common stock on a National Exchange), dividend of stock or any change of control to the Company.
The foregoing description of the terms of the Consulting Agreement and the Voting Agreement are not complete and are qualified in their entirety by reference to the full text of the Consulting Agreement, which are filed as Exhibits 10.1 and 10.2, respectively to this Current Report on Form 8-K and are incorporated by reference herein.
On September 8, 2017, the Company entered into a voting agreement with Jason Griffith, whereby he committed to vote any shares beneficially owned by him in accordance with the instructions of Shai Lustgarten, the Company’s CEO. The Voting Agreement could result in a change of control of the Company.
Three Months Ended March 31, 2019 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Cash flows from operating activities - operating leases | $ | 19,916 | ||
Right-of-use assets obtained in exchange for lease obligations: | ||||
Operating leases | $ | 17,066 |
NOTE 1613 – SUBSEQUENT EVENTS
On October 02, 2017,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 5,542,328 and 5,542,329 shares of common stock, respectively. This Amendment reduced the amount of shares issued in the acquisition to 11,368,297 shares from 22,452,954 shares and the amount of share consideration to approximately $2,682,918 from approximately $5,298,897. 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.
On April 4, 2019, the Company entered into a form of Securities Purchase Agreement (the “Securities Purchase Agreement”) with accredited investors (the “Purchasers”). Pursuant to the Securities Purchase Agreement, on April 9, 2019 (the “Closing Date”), the Company sold an employment agreementaggregate, with Mr. Benjamin Kemper as Chief Financial Officerthe Conversions included, of $5,000,000 of units (the “Units”) resulting in gross proceeds of $5,000,000, before deducting placement agent fees and offering expenses (the “Offering”). The per Unit purchase price was $0.30. Each Unit is comprised of one share of the Company.
The termCompany’s common stock, $0.001 par value per share (the “Common Stock”), and a warrant to purchase one share of Common Stock, and, as a result of the agreement is effective on October 02, 2017 and shall continue for twelve (12) months, unless earlier terminated in accordance with the employment agreement entered into betweenOffering, the Company issued 16,666,667 shares of Common Stock (the “Shares”) and Mr. Kemper. The term of Mr. Kemper’s employment shall be automatically renewed for successive one (1)-year periods until Mr. Kemper or the Company delivers to the other party a written notice of their intent not to renew the employment term. The Company shall pay Mr. Kemper a base salary at the annual rate of $130,000, a $20,000 signing bonus, as well as grant Mr. Kemper 500,000 optionswarrants (the “Warrants”) to purchase common stock16,666,667 shares of Common Stock (the “Warrant Shares”) at an exercise price equal to $0.35 per Warrant Share, which Warrants are exercisable for a period of five and one-half years from the issuance date. Both Shai Lustgarten, the Company’s Chief Executive Officer, and Carlos J. Nissensohn, a consultant to and principal stockholder of the Company, atparticipated in the closing stock priceOffering by converting $200,000 each of unpaid principal owed to them from the HTS acquisition (the “Conversions”) by the Company in exchange for Shares and Warrants on the trading date priorsame terms as all other Purchasers. With the Conversions included, the Offering resulted in gross proceeds of $5,000,000. As a result of the Conversions, a principal amount of $150,000 is owed to each Walefar and Campbeltown respectively under the note issued to them as partial consideration in the sale of HTS to the date hereof.Company on October 5, 2018.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
F-17 |
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.
Quest’s website is located athttp://www.QuestSolution.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 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 risks and uncertainties are contained in our Annual Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2016,2018, as filed with the Securities and Exchange Commission on April 17, 2017.June 5, 2019.
Introduction
Quest Solution, Inc., a Delaware corporation (“Quest” or the “Company”), was incorporated in 1973. Prior to 2008, the Company was involved in various unrelated business activities. From 2008-2014, the Company was involved in multiple businesses inclusive of an oil and gas investment company. Due to changes in market conditions, management determined to look for acquisitions which were positive cash flow and would provide immediate shareholder value. In January 2014, the first such acquisition was completed of Quest Marketing Inc. (dba Quest Solution, Inc.) (“Quest Marketing”).
Quest is a national mobility systems integrator with a focus on design, delivery, deployment and support of fully integrated mobile solutions. The Company takes 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 Quest Solution uses in the solutions we provide to our customers.
In May 2014, the Board of Directors voted to get approval from the shareholders of the Company for a name change from Amerigo Energy, Inc. to Quest Solution, Inc. The Company received the approval from a majority of its stockholders and filed the amendment to its Articles of Incorporation with the State of Delaware. The name change became effective by the State of Delaware on May 30, 2014. The Company also requested a new stock symbol as a result of the name change and were assigned our new trading symbol “QUES”.
The Company’s business strategy developed into leveraging management’s relationships in the business world for investments for the Company. The Company intends to continue with its acquisition of existing companies with revenues and positive cash flow.
3 |
In November 2014,
On October 5, 2018, the Company acquiredentered into a purchase agreement with Walefar and Campbeltown, (Walefar and Campbeltown are collectively referred to as the “Sellers”). Pursuant to the agreement, the Company purchased 100% of the sharescapital stock of Bar Code Specialties, Inc. (“BCS”) located in Southern California. BCS is a national mobility systems integratorHTS from the Sellers and label manufacturer with a focus on warehouse and distribution industries. Since the combination of the two companies, the Company has been exploring efficiencies in all facets of the businesses and learning best practices from both executive teams.
Effective October 1, 2015, the Companyconsequently acquired their interest in ViascanQdata, Inc., (“Viascan”) a Canadian based operation in the same business line as Quest and their CEO, Gilles Gaudreault, was appointed the CEO of Quest, with our then CEO, Tom Miller, remaining as President and Chairman of the Board. During the 2016 fiscal year, Viascan changed its corporate name to Quest Solution Canada Inc.
Divesture of Canadian Operations
Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the consideration received was $1.0 million in cash, which was all collected at September 30, 2017. In addition, the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stock of the Company, as well as the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd., aHTS’s wholly owned subsidiary of the Company, redeemed 5,200,000 exchangeable shares as part of the divestiture.
Additionally, as part of the transaction, Viascan Groupsubsidiaries HTS USA, Inc., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction included:
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The operations of Quest Solution Canada Inc. have been classified as a discontinued operation and the assets and liabilities of Quest Solution Canada Inc. have been classified as held for disposal.
On December 31, 2016, the Company merged BCS in Quest Marketing to form one US legal entity as part of its streamlining efforts.Teamtronics Ltd.
The following is a discussion of the Company’s financial condition, results of operations, financial resources, and working capital. This discussion and analysis should be read in conjunction with the Company’s financial statements contained in this Form 10-Q.
OVERVIEW
In 2016,On February 28, 2018, the Company announced strategic actions to streamline its operations by reducing expenses, drive future growth and accelerate value creation for shareholders. These repositioning actions resulted infinalized settlement agreements to sell the Canadian operations. The operationswith related parties which have an effective date of December 30, 2017. As part of the Canadian subsidiary have been reported within discontinued operations for all periods presented.settlement agreements, the Company authorized the issuance of 600,000 shares of common stock valued at $59,400, 1,685,000 shares of Preferred Stock valued at $0.80 per share and issued 3,000,000 stock warrants with an exercise price of $.20. The total net amount of debt extinguished in these transactions was $15,418,865.
TheThe Company’s sales from continuing operations for the three months ended September 30, 2017March 31, 2019 were $13.0$18.6 million, a slight decreasean increase of $0.6$3.4 million, or 4.4%22.7% over the same quarter in 2016.
2018.
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The loss from continuing operations for common stockholders for the three months ended September 30, 2017March 31, 2019 was $0.9 million,$633,358, a decrease of $1.6 million$315,647 compared with the loss in the three months ended March 31, 2018 of the comparative prior year of $2.5 million.$949,005. Basic and Diluted loss per share from continuing operations in Q3-2017 wereQ1-2019 was ($0.03)0.01) versus ($0.07)0.03) per share in Q3-2016.
Loss from discontinued operations for the three months ended September 30, 2016 was $3.9 million ($0.11 per share). There is no comparative amount for Q3-2017 as the divestiture had an effective date of September 30, 2016.Q1-2018.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has acquired a significant working capital deficit and issued a substantial amount of subordinated debt in connection with its acquisitions. As of September 30, 2017,March 31, 2019, the Company had a working capital deficit of $14,811,674$20,880,835 and an accumulated deficit of $34,578,776.$40,431,495. 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 to obtain additional debt or equity financing for working capital (i.e., vendor trade credit extensions) or refinancing (restructuring of subordinated debt) as may be required and, ultimately, to attain profitable operations. Management is focused on reducing operating expenses.basis. Management’s plan to eliminate the going concern situation include,includes, but areis not limited to, the raisingcontinuation of additional capital through the issuance of debt and equity, improvedimproving cash flow, management,maintaining moderate cost reductions (subsequent to aggressive cost reductions,reduction actions already taken in 2018 and continued in 2019), the creation of additional sales and profits across its product lines. One initiativelines, 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 addition of two new key vendors increased the Company’s purchasing power by adding credit availability in an amount just under $6,000,000. 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 cashflow on a consolidated basis. The Company plans for these products to be a significant revenue source in 2019. 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 operating expensethe cost of goods and startincrease profit margins.
The matters that resulted in 2018, and a net loss for the path to attaining profitability was the sale of Quest Solution Canada Inc. primarily because it had incurred significant operating losses and negative cash flow. In order to mitigate the risk related with this uncertainty, the Company may issue additional shares of common and preferred stock for cash and services during the next 12 months.
These matters raisethree months ended March 31, 2019, which create substantial doubt about the Company’s ability to continue as a going concern.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 table sets forth certain selected condensed statement of operations data for the periods indicated in dollars. In addition, we note that the period-to-period comparison may not be indicative of future performance.
Three months ended September 30 | Variation | Three months ended March 31 | Variation | |||||||||||||||||||||||||||||
2017 | 2016 | $ | % | 2019 | 2018 | $ | % | |||||||||||||||||||||||||
Revenue | $ | 12,964,054 | $ | 13,564,151 | (600,097 | ) | (4.4 | ) | $ | 18,620,238 | $ | 15,180,547 | 3,439,691 | 22.7 | ||||||||||||||||||
Cost of Goods sold | 10,132,067 | 10,910,089 | (778,022 | ) | (7.1 | ) | 14,022,969 | 12,014,454 | 2,008,515 | 16.7 | ||||||||||||||||||||||
Gross Profit | 2,831,987 | 2,654,062 | 177,925 | 6.7 | 4,597,269 | 3,166,093 | 1,431,176 | 45.2 | ||||||||||||||||||||||||
Operating Expenses | 3,389,679 | 3,012,755 | 376,924 | 12.5 | 4,501,102 | 3,809,680 | 746,422 | 19.6 | ||||||||||||||||||||||||
Income (loss) from operations | (557,692 | ) | (358,693 | ) | 198,999 | 55.5 | 96,167 | (643,587 | ) | 684,754 | (106.4 | ) | ||||||||||||||||||||
Net loss from continuing operations | (902,882 | ) | (2,467,290 | ) | 1,564,408 | 63.4 | (633,358 | ) | (949,005 | ) | 300,647 | (31.7 | ) | |||||||||||||||||||
Net loss from discontinued operations | - | (3,919,175 | ) | (3,919,175 | ) | 100.0 | ||||||||||||||||||||||||||
Net loss | $ | (902,882 | ) | $ | (6,386,465 | ) | (5,483,583 | ) | (85.9 | ) | ||||||||||||||||||||||
Net Loss per common Share | $ | (0.03 | ) | $ | (0.18 | ) | (0.15 | ) | 83.3 | $ | (0.01 | ) | $ | (0.03 | ) | 0.02 | (66.7 | ) | ||||||||||||||
Net Loss per common Share from continuing operations | $ | (0.03 | ) | $ | (0.07 | ) | (0.04 | ) | 57.1 | |||||||||||||||||||||||
Net Loss per common Share from discontinued operations | $ | - | $ | (0.11 | ) | (0.11 | ) | n/m |
Nine months ended September 30 | Variation | |||||||||||||||
2017 | 2016 | $ | % | |||||||||||||
Revenue | $ | 40,886,754 | $ | 43,439,719 | (2,552,965 | ) | (5.8 | ) | ||||||||
Cost of Goods sold | 32,263,124 | 34,648,909 | (2,385,785 | ) | (6.9 | ) | ||||||||||
Gross Profit | 8,623,630 | 8,790,810 | (167,180 | ) | (1.9 | ) | ||||||||||
Operating Expenses | 9,128,813 | 9,992,932 | (864,119 | ) | (8.6 | ) | ||||||||||
Income (loss) from operations | (505,183 | ) | (1,202,122 | ) | 696,939 | 58.0 | ||||||||||
Net loss from continuing operations | (1,682,497 | ) | (5,354,837 | ) | (3,672,340 | ) | 68.6 | |||||||||
Net loss from discontinued operations | - | (6,851,875 | ) | (6,851,875 | ) | 100.0 | ||||||||||
Net loss | $ | (1,682,497 | ) | $ | (12,206,712 | ) | (10,524,215 | ) | 86.2 | |||||||
Net Loss per common Share | $ | (0.05 | ) | $ | (0.34 | ) | (0.29 | ) | 85.3 | |||||||
Net Loss per common Share from continuing operations | $ | (0.05 | ) | $ | (0.15 | ) | (0.10 | ) | 66.7 | |||||||
Net Loss per common Share from discontinued operations | $ | - | $ | (0.19 | ) | (0.19 | ) | n/m |
n/m; not meaningful
Revenues
For the three months ended September 30, 2017March 31, 2019 and 2016,2018, the Company generated net revenues in the amount of $12,964,054$18,620,238 and $13,564,151,$15,180,547, respectively. The 2017 slight decrease2019 increase was attributable to unavailabilitystrong performance of inventory atour sales team, as well as the manufacturer which delayed shipments into Q4-2017.
For the nine months ended September 30, 2017 and 2016, the Company generated netinclusion of a full quarter of revenues in the amount of $40,886,754 and $43,439,719, respectively. The 2017 slight decrease was attributable to unavailability of inventory at the manufacturer which delayed shipments into Q4-2017 and timing of orders.from our acquired subsidiary, HTS Image Processing.
Cost of Goods Sold
For the three months ended September 30, 2017March 31, 2019 and 2016,2018, the Company recognized a total of $10,132,067$14,022,969 and $10,910,089,$12,014,454, respectively, of cost of goods sold. Cost of goods sold were 78.2%75.3% of net revenues at September 30, 2017March 31, 2019 and 80.4%79.1% of revenues at September 30, 2016. The variationMarch 31, 2018. Variation from prior years is duedifficult in an ever increasing competitive industry. Due to this, the change in the customer andCompany is continually reevaluating its current product mix and effortssupply channels to improve margins in 2017.2019.
For the nine months ended September 30, 2017 and 2016, the Company recognized a total of $32,263,124 and $34,648,909, respectively, of cost of goods sold. Cost of goods sold were 78.9% of net revenues at September 30, 2017 and 79.8% of revenues at September 30, 2016. The variation is due to the change in the customer and product mix and efforts to improve margins in 2017.
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Operating expenses
Total operating expense for the three months ended September 30, 2017March 31, 2019 and 20162018 recognized was $3,389,679$4,501,102 and $3,012,755,$3,809,680, respectively representing a 12.5%18.1% increase. The increase is attributable to changesa corresponding increase in management with related initial costs including stock compensation.
Total operating expense forrevenues as well as the nine months ended September 30, 2017 and 2016 recognized was $9,128,813 and $9,992,932, respectively representing an 8.6% decrease due toinclusion of a full quarter of cost reductions.of goods sold from our acquired subsidiary, HTS Image Processing.
General and Administrative – General and administrative expenses for the three months ended September 30, 2017March 31, 2019 and 20162018 totaled $481,287$688,508 and $505,903,$476,855, respectively representing a 4.9% decrease attributable44.4% increase attributed to management’s continued focus on expense reduction.
Generalthe inclusion of a full quarter of general and administrative expenses for the nine months ended September 30, 2017HTS, as well as an increase in travel costs associated with strategic and 2016 totaled $1,308,395 and $1,571,102, respectively representing a decrease of $262,707 or 16.7%.capital planning.
Salary and benefits – Salary and employee benefits for the three months ended September 30, 2017March 31, 2019 totaled $2,258,873,$2,855,416, including $416,548$322,954 from non-cash stock-based compensation, as compared to $2,602,565, including $681,475 from non-cash stock based compensation, as comparedcompensation. The increase in revenue in the first quarter of 2019 from the prior first quarter in 2018 comes with an increase in sales commissions of $6,502 paid to $1,871,610, including $103,636 from non-cashand accrued by the Company’s sales team. Excluding sales commissions and stock based compensation, forsalaries increased by $603,201 in the three months ended September 30, 2016. Thefirst quarter of 2019 compared to the first quarter of 2018, which increase is $387,263, representing an increase of 20.7% mostlyprimarily attributed to termination costs related to headcount reductions and the non-cash costs related to the appointmentaddition of the new board members.HTS IP salaries.
Salary and employee benefits for the nine months ended September 30, 2017 totaled $6,045,564 as compared to $6,471,563 for the nine months ended September 30, 2016. The decrease is $425,999 representing a 6.6% improvement is a result of a lower headcount and lower commissions due to the decrease in sales. Included in salaries and benefits is the stock compensation expense which was $565,593 for the nine months ended September 30, 2017 compared to $308,078 for the nine months ended September 30, 2016. The increases was related to the Company issuing stock for services and stock options during the period.
Professional Fees – Professional fees for the three months ended September 30, 2017March 31, 2019 were $209,086$414,869 as compared to $192,814$292,862 for the three months ended September 30, 2016.March 31, 2018. The increase was $16,272 or 8.4% is attributable to a CFO settlement withgeneral growth of the management’s continued focus on expense reduction.
Professional fees forCompany’s operations as well as consulting agreements related to strategic consolidation efforts as well as the nine months ended September 30, 2017 were $450,509 as compared to $603,190 for the nine months ended September 30, 2016. The decrease was $152,681 or 25.3% is attributable to management’s continued focus on expense reduction.April 2019 private placement.
Other income and expenses
Interest Expense - Interest expense for the three months ended September 30, 2017March 31, 2019 totaled $343,092,$683,635, as compared to $1,110,804$294,765 for the three months ended September 30, 2016 of which $200,000 was an OID discount on the Quest subordinated debt.March 31, 2018. The remaining variance of $567,712increase is directly related the 2016 termination and facility fees on the line of credit with FGI.
Interest expense for the nine months ended September 30, 2017 totaled $1,075,147, as compared to $2,802,980 for the nine months ended September 30, 2016 of which $860,824 was an OID discount on the Quest subordinated debt. The remaining variance of $867,009 is directly relatedattributable to the 2016 termination and facility fees onaddition of interest expense incurred by HTS IP as well as the line of credit with FGI,September 2018 amendment to the decrease in the outstanding balance of the line of credit amount and the improved profitability.
Restructuring Expense – The Company streamlined operations in early 2017, but has no additional restructuring charges in the third quarter. The restructuring expense recorded for the nine months ended September 30, 2016 was $544,941.Scansource Note payable agreement.
Net loss from continuing operations
The Company realized a net loss from continuing operations of $902,882approximately $635,000 for the three months ended September 30, 2017,March 31, 2019, compared to a net loss of $2,467,290approximately $949,000 for the three months ended September 30, 2016,March 31, 2018, a decrease of $1,564,408.approximately $316,000. The improvementdecrease in net loss is 63.4%.mainly attributable to the Company’s improvement of its gross margin percentage as well as the addition of high margin sales activities of HTS IP.
The Company realized a net loss from continuing operations of $1,682,497 for the nine months ended September 30, 2017, compared to a net loss of $5,354,837 for the nine months ended September 30, 2016, a decrease of $3,672,340. The improvement in net loss is 68.6%.
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Net loss from discontinued operations
The Company realized a net loss from discontinued operations of $6,851,875 for the nine months ended September 30, 2016. There were no comparative amounts in 2017 because effective September 30, 2016, the Company sold the shares of its wholly owned subsidiary, Quest Solution Canada Inc. to Viascan Group Inc.
Liquidity and capital resources
As of September 30, 2017,March 31, 2019, the Company had cash in the amount of $945,252$876,529 of which $684,610$532,408 is on deposit and restricted as collateral for a letter of credit and a corporate purchasing card, and a working capital deficit of $14,811,673,$20,880,835, compared to cash in the amount of $954,700,$909,830, of which $665,220$531,938 is restricted, and a working capital deficit of $15,323,313$20,480,183 as at December 31, 2016.2018. In addition, the Company had a stockholder’s deficitequity of $16,062,113$1,936,369 at September 30, 2017March 31, 2019 and $14,825,188$2,292,602 as of December 31, 2016.2018.
The Company’s accumulated deficit was $40,431,495 and $39,752,433 at March 31, 2019 and December 31, 2018, respectively.
The Company’s operations resulted in net cash provided of $5,906,112$4,533,404 during the ninethree months ended September 30, 2017,March 31, 2019, compared to net cash providedused of $5,388,132$40,098 during the ninethree months ended September 30, 2016,March 31, 2018, an increase of $517,980.$4,573,502. The changes in the non-cash working capital accounts are primarily attributable to an decreaseincrease in accounts receivable of $2,317,712$1,941,489 during the ninethree months ended September 30, 2017March 31, 2019, and a $2,992,271an increase of $6,213,757 in accounts payable.payable during the three months ended March 31, 2019.
Net cash used byin investing activities was $29,532$212,981 for the ninethree months ended September 30, 2017,March 31, 2019, compared to net cash usedprovided of $93,351$248,745 for the ninethree months ended September 30, 2016,March 31, 2018, a decrease of $63,819.$461,726, primarily attributable to a large decrease in restricted cash during the three months ended March 31, 2018.
The Company’s financing activities used net cash of $5,905,418$4,354,118 during the ninethree months ended September 30, 2017,March 31, 2019, compared to net cash usedprovided of $778,509$11,315 during the ninethree months ended September 30, 2016.March 31, 2018. For the ninethree months ended September 30, 2017,March 31, 2019, the Company decreasedpaid down the lineLine of creditCredit with Action Capital by $1,381,631 and decreased the notes payable by $4,544,846. Proceeds for shares sold were $21,059.approximately $4 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 principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e)) as of September 30, 2017,March 31, 2019, the end of the period covered by this Quarterly Report on Form 10-Q.
Based onupon that evaluation, our principal executive officerChief Executive Officer and principal financial officerChief Financial Officer, (Principal Financial and Accounting Officer) concluded that, as of March 31, 2019, our disclosure controls and procedures arewere 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 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 Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosure.
During 2018, 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 June 5, 2019.
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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.(i.e., the three months ended September 30, 2017,March 31, 2019), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
AsOur subsidiary, HTS USA, INC., is currently in litigation with Sagy Amit, a former employee, who claims that he is owed wages and commissions. The case is pending in the Superior Court of California, County of San Diego and discovery has just commenced. The Company intends to vigorously contest the date of the report there are no material legal proceedings to which we are a party.action.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
For the nine month period ended September 30, 2017, the Company issued 87,500 shares to board members in relation to the vesting schedule agreed to during 4th quarter 2015, which is based on an annual grant of 100,000 restricted shares every October and vesting over 8 quarters per independent board member as compensation.None.
In April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement. In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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.
Quest’s website is located athttp://www.QuestSolution.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.
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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: November 17, 2017June 28, 2019
QUEST SOLUTION, INC.
By: | /s/ Shai Lustgarten | |
Shai Lustgarten | ||
President and Chief Executive Officer |
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EXHIBIT INDEX
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