UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20162019
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-09047
Quest Solution, Inc.OMNIQ CORP.
(Exact name of Registrant as specified in its charter)
| Delaware | 20-3454263 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
860 Conger Street
Eugene, OR 974021865 West 2100 South, Salt Lake City, UT 84119
(Address of principal executive offices)(zip code)
(714) 899-4800
(Issuer’s telephone number)number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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”,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] | |||
| 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 7(a)(2)(B) of the Securities Act . [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2016,2019, was $4,561,407.$12.8 million.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 35,214,826date: 4,024,837 shares of common stock were outstanding as of April 14, 2017.March 25, 2020.
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Annual Report on Form 10-K that are not historical facts are “forward-looking statements,” which can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Annual Report on Form 10-K, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:
| ● | Our ability to raise capital when needed and on acceptable terms and conditions; | |
| ● | Our ability to manage credit and debt structures from vendors, debt holders and secured lenders. | |
| ● | Our ability to manage the growth of our business through internal growth and acquisitions; | |
| ● | The intensity of competition; | |
| ● | General economic | |
| ● | Our ability to attract and retain management, and to integrate and maintain technical information and management information systems. |
All written and oral forward-looking statements made in connection with this Annual Report on Form 10-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements. Except as may be required under applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result more information, future events or occurrences.
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General
Quest Solution, Inc.OMNIQ Corp., a Delaware corporation, formerly Amerigo Energy,Quest Solution, Inc., together with its two wholly owned subsidiaries, referred to herein as “we,” “us,” and “our” (“Quest”OMNIQ” or the “Company”), was incorporated in 1973. Since its incorporation, the Company has been involved in various lines of business.
In January 2014, the Company had determined it was in the best interest of stockholders to focus on operating companies with a track record of positive cash flows and larger existing revenue bases. The Company’s strategy developed into leveraging management’s relationships in the business world for investments for the Company. On January 10, 2014, the Company entered into that certain Share Purchase Agreement with Quest Solution, Inc., an Oregon corporation (“Quest Solution”), in the technology, software, and mobile data collection systems business, in order to acquire Quest Solution for a purchase price of $16,000,000, payable in the form of (i) a promissory note for $4,969,000; and (ii) a promissory note for $11,031,000.
In May 2014, our Board of Directors voted to change the name of the Company from Amerigo Energy, Inc. to Quest Solution, Inc., and the Company received the approval from a majority of its stockholders and filed the amendment to its Articles of Incorporation with the Secretary of State for 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 we were assigned our new trading symbol “QUES” on the OTCQB.
On November 19, 2014, the Company entered into a Stock Purchase Agreement with Bar Code Specialties, Inc., a California corporation (“BCS”), and David Marin, the sole stockholder of BCS, pursuant to which the Company agreed to purchase all outstanding shares of common stock of BCS held by the Mr. Marin for an aggregate purchase price of $10,396,316, payable in the form of a five-year secured subordinated convertible promissory note. BCS is a company specializing in systems integration and data collection. Initially the company focused on the distribution vertical, but quickly grew its operational focus to include retail, manufacturing, food, and healthcare.
Effective October 1, 2015, the Company acquired the interest in ViascanQdata, Inc. (“ViascanQData”), 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. The purchase price for the shares of ViascanQdata was 5,200,000 shares of Series B Preferred Stock (which are convertible on a 1:1 basis into common shares, with no other preferential rights) as well as a promissory note of one million five hundred thousand dollars ($1,500,000). In 2016, ViascanQData changed its legal corporate name to Quest Solution Canada Inc.
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 of which $575,000 was received at closing and the balance is to be received before April 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 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., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction includes:
History
Between 2008 and 2013, the Company was in the business of developing oil and gas reserves while increasing the production rate base and cash flow. The plan was to continue acquiring oil and gas leases for drilling and to take advantage of other opportunities and strategic alliances. Due to declines in production with respect to the Company’s oil and gas leases, the Company sought to explore its position in the oil industry. As the operational leases for the Company were not providing sufficient cash flow from operations to allow management to expand its investment in this industry, other potential opportunities were evaluated.
In February 2013,January 2014, the Company acquiredhad determined it was in the rightsbest interest of stockholders to focus on operating companies with a spirits linetrack record of positive cash flows and larger existing revenue bases. The Company’s strategy developed into leveraging management’s relationships in the business and compiled a team of beverage, entertainment, retail and consumer product industry professionals.world for investments for the Company. On January 10, 2014, the Company cameentered into that certain Share Purchase Agreement with Quest Solution, Inc., an Oregon corporation (“Quest Solution”), in the technology, software, and mobile data collection systems business, in order to agreement withacquire Quest Solution for a purchase price of $16.0 million , payable in the original ownersform of the spirits brand, to cancel the previous agreement(i) a promissory note for $5.0 million; and the license was returned to them. The cancellation of(ii) a Consulting Agreement betweenpromissory note for $11.0 million.
On November 19, 2014, the Company entered into a Stock Purchase Agreement with Bar Code Specialties, Inc., a California corporation (“BCS”), and David Marin, the previous owners resulted insole stockholder of BCS, pursuant to which the return and cancellation 1,765,000 of theCompany agreed to purchase all outstanding shares of common stock of BCS held by Mr. Marin for an aggregate purchase price of $10.4 million, payable in the form of a five-year secured subordinated convertible promissory note. BCS is a company specializing in systems integration and data collection. Initially the Company focused on the distribution vertical, but quickly grew its operational focus to include retail, manufacturing, food, and healthcare.
Effective October 1, 2015, the Company acquired the interest in ViascanQdata, Inc. (“ViascanQData”), a Canadian based operation in the same business line as OMNIQ. The purchase price for the shares of ViascanQdata was 5,200,000 shares of Series B Preferred Stock (which were convertible on a 1:1 basis into common shares, with no other preferential rights) as well as a promissory note of $1.5 million.
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 of which $575 thousand was received at closing and the balance was received on April 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 $32 thousand thereon. Lastly, Quest Exchange Ltd., 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., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction includes:
| ● | Full release from five employment contracts, inclusive of the former CEO, Gilles Gaudreault. This release included cancelation of the contracts as well as the deferred salary and signing bonus provisions which would have inured to the employee. | |
| ● | The Company cancelled the intercompany debts of approximately $7.0 million as well. The Company was also to receive a contingent consideration of 15% of the net value proceeds, up to a maximum of $2.3 million, received upon a liquidity event or a change of control of Quest Solution Canada Inc. for a period of 7 years subsequent to the transaction. | |
| ● | The Company also negotiated a right of first refusal for any offer to purchase Quest Solution Canada Inc. for a 7 year period. In connection with the payments referenced above, the Company relinquished its right of first refusal. |
Subsequent to December 31, 2018, the Company learned that Quest Solution Canada, Inc. was sold mostly for the assumption of certain liabilities. The Company reached an agreement with Quest Solution Canada requiring it to pay the Company an aggregate of $200 thousand divided into monthly payments which payments are currently being made.
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 entered into a settlement agreement with George Zicman whereby the Company settled its indebtedness to Mr. Zicman in the amount of $1.3 million in full in exchange for 60 monthly payments of $3 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. in the amount of $2.8 million is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of 5,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described below 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 entered into a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5.4 million in full in exchange for 60 monthly payments of $13 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. in the amount of $2.8 million is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of 25,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions as described below in the description of the Marin Settlement II Agreement.
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On February 28, 2018, the Company entered into two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”). 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 previously been issued.issued David Marin a promissory note for $11.0 million of which an aggregate of $10.7 million (the “Owed Amount”) was outstanding as of February 26, 2018 which includes accrued interest earned but not paid. Pursuant to the Marin Settlement I Agreement, the amount of the indebtedness owed to Marin was reduced by $9.5 million bringing the total amount owed to $1.2 million. Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20 thousand each commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc., in the amount of $2.8 million 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 released their security interest against the Company. In connection with the $9.5 million reduction in the purchase price, the Company issued the Marins 3 year warrants to purchase an aggregate of 150,000 shares of Common Stock at an exercise price of $4.00 per-share.
On February 28, 2018, the Company entered into 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 thousand which currently had a balance of $111 thousand in its entirety in exchange for an aggregate of 85,000 shares of the Company’s Series C Preferred Stock. The Series C Preferred Shares outstanding are convertible into common stock at the rate of 20 Preferred Shares to one share of common stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) and automatically converts into Common Stock at $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) in the event that the Company’s common stock has a closing price of $30 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 nor 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 thousand Note and the accrued interest thereon was cancelled in its entirety.
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 entered into a settlement agreement (the “Settlement Agreement”) with Jason Griffith, a creditor and principal stockholder of the Company. Griffith is the owner of a promissory note in the principal amount of $1.25 million plus he is owed accrued interest of $125 thousand and is owed an additional $215 thousand of accrued dividends on his Series C Preferred Stock (the $1.6 million as calculated above is collectively referred to as the “Owed Amount”). Pursuant to the Settlement Agreement, Griffith will convert the Owed Amount into 430,000 shares of the Company’s restricted common stock and the Owed Amount will be deemed satisfied in full. Griffith will continue to retain ownership of his 1,800,000 shares of Series C Preferred Stock except that he agrees that all accrued dividends are deemed satisfied and no dividends will be payable or will accrue on these preferred shares until one year from the date of the Settlement Agreement. The Series C Preferred Shares outstanding are convertible into common stock at the rate of 20 Preferred Shares to one share of common stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) and automatically converts into Common Stock at $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) in the event that the Company’s common stock has a closing price of $30 per share for 20 consecutive trading days. Griffith has agreed that he will not publicly sell more than 10% of any Shares of Common Stock beneficially owned by him in any 30-day period.
On October 5, 2018, the Company entered into a purchase agreement (the “HTS Purchase Agreement”) with Walefar Investments, Ltd. (“Walefar”) and Campbeltown Consulting, Ltd. (“Campbeltown”) (Walefar and Campbeltown are collectively referred to as the “Sellers”). Pursuant to the HTS Purchase Agreement, the Company purchased 100% of the capital stock of HTS Image Processing, Inc. (“HTS”) from the Sellers. As consideration, the Company (i) issued to the Sellers 1,122,648 shares of the Company’s common stock, having a value of $5.3 million based on the average closing price of the common stock for the 20 days’ preceding the HTS Purchase Agreement (the “Per Share Value”), (ii) cash in the amount of $300 thousand, and (iii) a 12 month convertible promissory note with a principal amount of $700 thousand and an interest rate of six percent (6%) per year. The note also provides the Sellers the right to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $4.72. The HTS Purchase 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 561,324 shares of the Company’s common stock and Carlos Jaime Nissenson received 561,324 shares of the Company’s common stock.
On May 29, 2019, the Company, Campbeltown and Walefar entered into an Amendment to the HTS Purchase Agreement (the “Amendment”), which provided for an adjustment to the number of shares of common stock issued to Walefar and Campbeltown in the acquisition of HTS. Pursuant to the Amendment, Campbeltown and Walefar agreed to return for cancelation 277,166 and 277,116 shares of common stock respectively. This Amendment reduced the number of shares issued in the acquisition to 568,415 shares from 1,122,648 shares and the amount of share consideration to approximately $2.7 million from approximately $5.3 million. This adjustment was made as a result of a correction in the calculation of working capital and other share give back provisions of the HTS Purchase Agreement. This Amendment also reduced the Company’s issued and outstanding common stock to 3,850,451 shares from 4,404,684 shares as of June 4, 2019.
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 $5.0 million of units (the “Units”) resulting in gross proceeds of $5.0 million, before deducting placement agent fees and offering expenses (the “Offering”). The individual Unit purchase price was $6.00. 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 833,333 shares of Common Stock (the “Shares”) and warrants (the “Warrants”) to purchase 833,333 shares of Common Stock (the “Warrant Shares”) at an exercise price equal to $7.00 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. Nissenson, a consultant to and principal stockholder of the Company, participated in the Offering by converting $200 thousand 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 $5.0 million. As a result of the Conversions, a principal amount of $150 thousand is owed to each Walefar and Campbeltown respectively under the note issued to them as partial consideration in the sale of HTS Image Processing to the Company on October 5, 2018.
On November 18, 2019, the Company filed an amendment to its Certificate of Incorporation, as amended, with the Secretary of State of Delaware, pursuant to which the Company i) changed its name from Quest Solution, Inc. to OMNIQ Corp. and ii) effected a reverse split of its common stock at a ratio of one (1) for twenty (20), effective November 20, 2019 (the “Reverse Split”).
The above section’s discussion of the Company’s securities reflects the consolidation of shares as a result of the Reverse Split.
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Strategy
Following the divestiture of Quest Solution Canada Inc., the Company’s strategy ishas been to focus on operational excellence and cost reduction, addressing the balance sheet debt load and putting together a business plan that is based on modest revenue growth.growth and technological leadership. The Company willintends to continue to identify synergies within the Company to offer a more complete offering of products, services and technological solutions to customers throughout the United States. Furthermore, the market in which QuestOMNIQ operates is undergoing consolidation and Quest willOMNIQ intends to start identifying profitable, strategic companies in the data collection, big data analytics and mobile systems integration market, as well as other complementary technologies for potential future acquisition in order to become the leading specialty integrator within our served markets.
The Company is a provider of products and solutions to two main markets, Supply Chain Management and Smart/Safe City. The Company has recently expanded its product solutions, which are based on Artificial Intelligence (“AI”) and Machine Learning algorithms and offer Computer Vision applications. OMNIQ’s newest product offerings have not only established the Company as an innovative and technological company, but also one that is, able to offer its fortune 1,000 customers an end-to-end solution. OMNIQ is a pioneer in providing cutting edge technological solutions to the markets it serves. The Company, as a world-wide systems integrator, within the United States with a focusfocuses on design, delivery, deployment and support of fully integrated mobile and automatic identification data collection solutions. OMNIQ uses unique Computer Vision technology and additional identification technologies in its solutions. The Company is also a manufacturer and/or distributor of labels, tags, ribbons and RFID identification tags. QuestOMNIQ takes a consultative approach by offering end-to-end solutions that include software, algorithm, hardware, service contracts, software, communications and full lifecycle management services. QuestOMNIQ simplifies the integration process with its experienced team of professionals. The Company delivers problem solving solutions backed by numerous customer references. The Company offers comprehensive packaged and configurable software some of which is developed by QuestOMNIQ and some of it is sourced from 3rd parties. QuestOMNIQ is also a leading providing of bar code labels and ribbons (media) to companies in Southern California. Questits customers. OMNIQ provides consultative services to companies to select, design and manufacture the right label for their product offering. Once a company selects the product, sales are generally highly repeatable on a regular basis.
Quest’sOMNIQ’s newest offering of groundbreaking AI-based vision solutions are currently in use for sensitive Homeland Security anti-terror projects and automated parking solutions.
Inspired by time-critical “friend or foe” decision-making processes, OMNIQ’s patented algorithms are based on a combination of cognitive science and machine learning-based pattern recognition technology which is arbitrated through a multi-layered decision-making process that offers both speed and accuracy.
OMNIQ’s experienced team of consulting and integration professionals guide companies through the entire development and deployment process, from selecting technology to the successful company-wide rollout of a customized solution that fits a company’s unique requirements. After performing a thorough technical evaluation of the client’s current operations and specific operational problems, Quest’sOMNIQ’s team determines the optimal hardware and software solutions to optimize the client’s operational workflow. QuestOMNIQ delivers, ongoing services provided throughout the deployment process and throughout the entire product life cycle. QuestOMNIQ also delivers full installation services for all mobile, data collection computers and printing equipment including full staging and kitting of the equipment.
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Quest
OMNIQ has been successful byin delivering mission critical mobile computing and data collection solutions to Fortune 1000 companies for over two decades for Fortune 1000 companies.decades. The requirements and needs of our customers continue to evolve as they require new mobile and wireless technologies and services to make their business more competitive and profitable. The result is a continuous flow of opportunities for QuestOMNIQ to assist customers to evaluate, choose, implement, and support the right mobile and data collection solutions. As we focus on what we do best, we believe that there is more than adequate market size, growth and opportunity available to the Company to succeed.
Core to the solutions offered by QuestOMNIQ is a full suite of configurable packaged software solutions that were internally developed and provide customers with unique solutions with significant business Return on Investment (“ROI”), including:
Order Entry:Software designed to increase productivity in the field. Remote workers increasingly demand rapid access to real-time information and up to date data to facilitate and streamline their job functions in the field Quest’sfor which we believe OMNIQ’s Order Entry Software is the answer.
DSD and Route:Software packages designed to increase overall productivity. In the fourth quarter of 2016, QuestOMNIQ introduced the next generation of Direct Store Delivery (DSD) and Proof of Delivery software called Route EdgeTM. The QuestOMNIQ DSD and Route EdgeTM software packages include proprietary applications for portable devices, computer servers and management dashboards that extend the power of existing systems out to field associates to enhance routing and delivery efficiency.
Intelligent Order Entry:Adds intelligence to aging order entry system to maximize profits. The hand held industry is a vital link in getting remote orders from the field to corporate. Quest’sOMNIQ’s Intelligent Order Entry Software adds this capability to aging order entry systems.
ITrack:iTrack:Track Device Deployment. iTrack, an Internet Tracking System, is a management tool that tracks the deployment of hardware devices in the field and their repair history.
Warehouse:EnhancesEnhance efficiency in distribution and manufacturing environments.WarehouseThe warehouse is a collection of applications for portable devices that we believe extend the power of your existing system out to the warehouse floor and dock doors.
Proof of Delivery:Enhances document delivery performance. QuestOMNIQ offers proof-of-delivery capabilities as part of its Mobility Suite that we believe gives companies an edge over competitors by improving customer service.
WTMiP:Extends business beyond four walls. WTMiP provides the link between corporate and the mobile worker. WTMiP servers allow files and data to seamlessly synchronize between the corporate host and laptops, hand heldhandheld devices and Windows CE or Windows Mobile devices.
Easy Order:Easy order on-line purchasing portal. Quest’sOMNIQ’s Easy Order Solution offers companies a customized portal that streamlines and simplifies ordering by providing clients with their own unique private on-line store.
QTSaaS (Quest Total Solutions as a Service): QTSaaS is a complete mobile services offering that includes hardware, software, services and wireless data in a bundled subscription payment offering over a period of time. Quest’sOMNIQ’s partnership with Hyperion Partners LLC and wireless carriers allows QuestOMNIQ to offer mobility solutions to our customers on platforms that extend the market into new mobile applications that previously were not being automated.
Media and Label Business:Repeatable easy order online purchasing portal. The largest segment of data collection opportunity for QuestOMNIQ is the barcode label market providing ongoing and repeatable purchasing business. QuestOMNIQ intends to continue in the label business in the United States to drive business growth and increased margins.
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Target Markets
Based onThe two markets the Company serves are Smart/Safe City and Supply Chain Management. OMNIQ’s groundbreaking AI-based vision solutions are currently in use for sensitive Homeland Security anti-terror projects and discerning customers within the access control, airport, border crossing, municipality safety and parking industries. OMNIQ seeks to utilize its expertise competence, success and end-to-end software solution set, Quest focuses onsolutions in markets that represent high-return mobile line of business applications. Questwhich we believe provide the greatest opportunity to increase margins.
Within the Supply Chain Management market, OMNIQ believes it can further develop its existing and substantial installedcustomer base of customers who arethat is in need of replacement ofreplacing their legacy systems with a new go-to-market strategy that leverages our field sales and system resources, telemarketing, customer portals and vertical market and barcode label specialists. QuestOMNIQ also believes that its base of industry leading customers are candidates for the Company’s barcode label and ribbon (media) offerings forproducts in the Company’s core markets of manufacturing, distribution, transportation and logistics, retail and healthcare sectors. Questsectors, which sectors are at the core of OMNIQ’s business are also ideal candidates for the Company’s machine learning technology. OMNIQ has been successful byin integrating mission critical mobile computing and data collection solutions for Fortune 1000 companies for over two decades for Fortune 1000 companies.decades. The requirements and needs of our customers continue to evolve as they require new mobile and wireless technologies and services to make their business more competitive and profitable. The result is a continuous flow of opportunities for QuestOMNIQ to assist customers to evaluate, choose, implement, and support the right mobile and data collection solutions. As we focus on what we do best, we believe that there is more than adequate market size, growth and opportunity available to the Company to succeed.
The Company believes that integrating its new patented and proprietary AI technology into its existing Supply Chain offerings will allow for automated logistics monitoring and optimization, creating operational efficiencies at the higher margins associated with the AI value-creation paradigm for both OMNIQ and its fortune 1000 clientele.
Competitive overview
The mobile system integration market is characterized by a limited number of large competitors and numerous smaller niche players. QuestOMNIQ typically pursues larger accounts and national customers, competing most often with the larger channel partners, including Stratix, Peak Technologies, Lowry, and Barcoding Inc. For specific solutions, the Company also competes with niche players that are often focused on a single industry. Hardware sales are often pressured by competition from online retailers, but Quest’sthe Company believes that its consultative, integrated solutions approach is a clear differentiator for most prospective customers.
Sales Strategy
The Company’s current direct sales teams are supported by systems engineers averaging over twenty (20) years of experience in the mobile industry. The sales organization’s growth in size and reach mirrors the Company’s addition of new products and services. Sales team members are organized by industry areas of opportunity, areas of expertise and territory. Quest’sOMNIQ’s sales teams are organized to address national accounts offering a broad array of unique solutions for key linelines of business applications, which allows for upsell and cross sell opportunities within each client.to our clients. For the barcode label (media) business, QuestOMNIQ utilizes a specialty sales force andas well as action as resellers and distributors of QuestOMNIQ manufactured label products to serve the market.
Sales persons are supported internally by sales support personnel who coordinate quotes and logistics and by members of the systems engineering group and software teams.
The normal sales cycle is one (1) to six (6) to nine (9) months, and typically involves the development of a scope of work and preparation of a ROI analysis. QuestOMNIQ prepares templates for this purpose which reduces the sales cycle. The analyses and proposals include information on leasing and other financing options, which helps differentiate the Company from its competitors. The label business sales cycles are shorter with purchases made more frequently on a transactional basis.
General Discussion of Operations
Concentrations
NOTE 4 – CONCENTRATIONS
For the years ended December 31, 20162019 and 2015,2018, one customer accounted for 17.3%12.3% and 13.1%17.0%, respectively, of the Company’s revenues.
Accounts receivable at December 31, 20162019 and 20152018 are made up of trade receivables due from customers in the ordinary course of business.
One customer Two customers made up 33.1%20.9% of the accounts receivable balance at December 31, 2019 and 20.8%two customers together represented 23.7% of the balance for 2016 and 2015,of accounts receivable at December 31, 2018, which represented greater than 10% of accounts receivable at December 31, 20162019 and 2015,2018, respectively.
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Accounts payable are made up of payablepayables due to vendors in the ordinary course of business at December 31, 20162019 and 2015.2018. One vendor made up 76.4%83.0% and 86.6%62.7% of the balance,our accounts payable in 2019 and 2018, respectively, which represented greater than 10% of accounts payable at December 31, 20162019 and 2015,2018, respectively.
Employees and Consultants
As of December 31, 2016,the date of this filing, we had a total of 6361 full time employees and 1no part time employee.employees.
As of April 14, 2017, we had a total of 62 full time employees and 1 part time employee.
Expected Significant Changes In The Number Of Employees
The Company anticipates some minor change in the number of employees over the next twelve months as administrative functions are consolidated. Management has instituted a cost reduction program that included a reduction in labor and related payroll expenses. Should the Company be approached with an accretive acquisition that the Company determines is a positive return on investment and/or weighted average cost of capital, then there will likely be increases in employees who come with the acquired company.
Quest’sOMNIQ’s website is located atwww.QuestSolution.comwww.omniq.com. The Company’s website and the information to be contained on that site, or connected to that site, are not part of or incorporated by reference into this filing.
This section is not required for smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
This section is not required for smaller reporting companies.
The corporate offices of the Company are currently located at 860 Conger Street, Eugene, Oregon 97402. 1865 West 2100 South, Salt Lake City, UT 84119. The Company opened an executive suite in Salt Lake City, Utah in August 2017. This office houses the offices for the Company’s CEO. Rent on this location was waived by the landlord until January 1st 2018, when the office space expanded to house a portion of the Company’s accounting and administrative staff. The Company’s rent per month at this location is now $24 thousand per month and the lease term does not exceed one year.
In April 2012, Quest Marketing, Inc. signed an operating lease at 860 Conger Street, Eugene, Oregon 97402. The premises consist of approximately 7,000 square feet of warehouse and office space. The lease providesprovided for monthly payments of $3,837$4 thousand through March 2013 and is adjusted annually to reflect changes in the cost of living for the remainder of the lease term. In no event shall the monthly rent be increased by more than 2% in any one year. The lease expired on March 31, 2017 and the Company extended the term of the lease for an additional two yearyears with the same cost of living increase. The Company recently terminated the lease. This location handleshandled administrative functions as well as havinghad an operations team, inside sales, warehouse and support center for Quest’sOMNIQ’s sales team.
The lease at the Company’s Ohio location, signed by Quest Marketing, Inc. in July 2011, provides for monthly payments of $2,587 through June 2012, and $2,691 thereafter.$3 thousand. The lease is due to expirewas extended on June 30, 2018.2019 for an additional 12 months. This location is used by the Company’s software development team and engineers for assistance with its sales team.
The Company hassigned a commercial real estate operatingnew lease with the former owner of BCSon February 1, 2018 for the Company’s office and warehouse location in Anaheim, California, downsizing from Garden Grove, California. The Company pays rent is at the rate of $9,000$2 thousand per month and thethrough January 31, 2020. The monthly rent from February 1, 2020 until February 28th, 2021 is $3 thousand. The lease expires January 2022.on February 28, 2021. This location houses satellite sales and a technical support office.
As of October 1, 2018, in connection with the original BCS operations team, which was acquired in November 2014, as well asHTS acquisition, the label production facility, administrative and financeCompany added the lease for the Company.offices for the R&D employees that are located in Israel. The rental cost for the three months ended December 2018 was $53 thousand. On December 2018, the offices moved to a “We Work” offices located in Haifa, Israel to reduce the rental cost. The amount paid for December 2018 was 9,170 Nis, or approximately $3 thousand, in January 2019 13 thousand Nis, or approximately $4 thousand, and from February 2019 until January 2020 the amount of 25 thousand Nis per month, or approximately $7 thousand, and from January 2020, 30 thousand Nis per month, or approximately $8 thousand.
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The Company is notDuring 2019, our subsidiary, HTS USA, INC., was in litigation with Sagy Amit, a party to any 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 affiliateformer employee, who claimed that he was owed wages and commissions. As of the Company, any ownerdate of record or beneficially of more than 5% ofthis filing, the Company’s common stock is a party adverse to the Company orcase has a material interest adverse to the Company in any proceeding.been resolved.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Quest sharesShares of OMNIQ’s common stock are not traded on an established market. Quest’sOMNIQ’s common stock is traded through broker/dealers and in private transactions, and quotations are reported on the OTCQB under the symbol “QUES”“OMQS”. OTCQB quotations reflect interdealer prices, without mark-up, mark-down or commission and may not represent actual transactions. The table below sets forth the range of high and low prices paid for transactions in Quest’s common stock as reported on the OTCQB for the periods indicated. No dividends have been declared or paid on Quest’sOMNIQ’s common stock and none are likely to be declared or paid in the near future.
| Common Stock | ||||||||
| High | Low | |||||||
| Fiscal Year Ended December 31, 2015: | ||||||||
| Fiscal Quarter Ended March 31, 2015 | $ | 0.47 | $ | 0.35 | ||||
| Fiscal Quarter Ended June 30, 2015 | $ | 0.49 | $ | 0.28 | ||||
| Fiscal Quarter Ended September 30, 2015 | $ | 0.45 | $ | 0.26 | ||||
| Fiscal Quarter Ended December 31, 2015 | $ | 0.42 | $ | 0.12 | ||||
| Fiscal Year Ended December 31, 2016: | ||||||||
| Fiscal Quarter Ended March 31, 2016 | $ | 0.27 | $ | 0.16 | ||||
| Fiscal Quarter Ended June 30, 2016 | $ | 0.28 | $ | 0.12 | ||||
| Fiscal Quarter Ended September 30, 2016 | $ | 0.17 | $ | 0.07 | ||||
| Fiscal Quarter Ended December 31, 2016 | $ | 0.11 | $ | 0.06 | ||||
| Common Stock | ||||||||
| High | Low | |||||||
| Fiscal Year Ended December 31, 2018: | ||||||||
| Fiscal Quarter Ended March 31, 2018 | $ | 7.60 | $ | 1.00 | ||||
| Fiscal Quarter Ended June 30, 2018 | $ | 6.80 | $ | 3.80 | ||||
| Fiscal Quarter Ended September 30, 2018 | $ | 6.20 | $ | 3.60 | ||||
| Fiscal Quarter Ended December 31, 2018 | $ | 6.20 | $ | 3.00 | ||||
| Fiscal Year Ended December 31, 2019: | ||||||||
| Fiscal Quarter Ended March 31, 2019 | $ | 13.00 | $ | 3.52 | ||||
| Fiscal Quarter Ended June 30, 2019 | $ | 10.00 | $ | 4.16 | ||||
| Fiscal Quarter Ended September 30, 2019 | $ | 8.60 | $ | 4.00 | ||||
| Fiscal Quarter Ended December 31, 2019 | $ | 8.00 | $ | 2.62 | ||||
InThese prices have been adjusted to reflect the event a public market for our1-for-20 reverse stock split that became effective on November 20, 2019.
On March 25, 2020, the common stock is sustained in the future, sales of our common stock may be made by holders of our public float or by holders of restricted securities in compliance with the provisions of Rule 144 of the Securities Act of 1933. In general, under Rule 144, a non-affiliated person who has satisfied a six-month holding period in a fully reporting company under the Securities Exchange Act of 1934, as amended, may, sell their restricted Common Stock without volume limitation, so long as the issuer is current with all reports under the Exchange Act in order for there to be adequate common public information. Affiliated persons may also sell their common shares held forclosed at least six months, but affiliated persons will be required to meet certain other requirements, including manner of sale, notice requirements and volume limitations. Non-affiliated persons who hold their common shares for at least one year will be able to sell their common stock without the need for there to be current public information in the hands of the public. Future sales of shares of our public float or by restricted common stock made in compliance with Rule 144 may have an adverse effect on the then prevailing market price, if any, of our common stock. See “Risk Factors.”$4.74 per share.
Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | ||||||||||||||||||
| (a) | (b) | (c) | (a) | (b) | (c) | |||||||||||||||||||
| Equity compensation plans approved by security holders | n/a | n/a | n/a | 1,408,550 | $ | 4.09 | 21,750 | |||||||||||||||||
| Equity compensation plans not approved by security holders | 4,049,000 | 0.50 | 7,356,000 | |||||||||||||||||||||
| Total | 4,049,000 | 0.50 | 7,356,000 | 1,408,550 | $ | 4.09 | 21,750 | |||||||||||||||||
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The Equity Compensation Plan Information table above reflects the Company’s Reverse Split.
On January 23, 2019, the Company received shareholder approval to adopt its 2018 Equity Incentive Plan.
Dividends and other Distributions
QuestOMNIQ has never declared or paid any cash dividends on its common stock. The Company currently plans to retain future earnings to finance growth and development of its business and does not anticipate paying any cash dividends in the foreseeable future. QuestOMNIQ may incur indebtedness in the future which may prohibit or effectively restrict the payment of dividends, although the Company has no current plans to do so. Any future determination to pay cash dividends will be at the discretion of Quest’sOMNIQ’s board of directors. The Company’s Series C Preferred Stock pays a 6% dividend, but the Company was unable to make such dividend payments and so those dividends are accrued quarterly. Accrued but unpaid dividends do not bear interest. Pursuant to the settlement agreements made with Kurt Thomet, George Zicman, and with David and Kathleen Marin, in which over $15 million in debt was extinguished, the new shares of Series C Preferred Stock issued in exchange, totaling 1,685,000 shares, will not pay and will not accrue dividends for a 24 month period, or any time prior to March 1, 2020.
Recent Sales of Unregistered Securities
In January 2014, concurrent with the cancellation of the license agreement with Le Flav Spirits,Effective November 20, 2019, the Company cancelled two consulting agreements previously entered into during April 2013,effected a reverse split of its common stock at a ratio of one (1) for twenty (20). The amount of shares and shares underlying derivative securities, as well as their exercise prices, shown below are presented in which shares previously issued were returned to the Company, a total of 1,765,000 shares were returned and canceled in full settlement, the shares were not repurchased by the Company but were voluntarily returned by the consultant.
On March 1, 2014, the Company issued a total of 100,000 shares valued at $41,000 to the then Chief Operating Officer, Doug Zorn, for services. During 2014, those shares were returned and canceled in exchange for agreement to compensate the individual with $30,000, deferred until successful completion of an equity fundraising. The shares were not repurchased by the Company but voluntarily returned by the individual.
During January 2014, the Company issued warrants to the sellers of Quest Marketing, Inc. vesting with the following milestones. When the warrants vest the Company will have consulting costs charged to operations.
During 2015, the latter three warrants were voluntarily canceled.
On May 9, 2014, the Company issued a total of 240,000 shares; consulting costs charged to operations were $124,800 for marketing services to an outside Consultant.
On August 8, 2014, the Company issued 250,000 shares of stock related to warrants which were exercised by a prior Consultant.their post-Reverse Split form.
On September 25, 2014,5, 2019, the Company entered into a letter agreement with Shai Lustgarten, the Company’s Chief Executive Officer, pursuant to which the Company and Mr. Lustgarten agreed to extend the term of Mr. Lustgarten’s employment agreement for an additional two (2) years. As consideration and in light of the Company’s achievements under the leadership of Mr. Lustgarten, the Company, pursuant to its 2018 Equity Incentive Plan, issued to Mr. Lustgarten 50,000 shares of the Company’s common stock.
On September 5, 2019, the Company entered into a letter agreement with Mr. Carlos J. Nissensohn and/or an entity under his control, a consultant to the Company and principal stockholder, pursuant to which they agreed to extend the term of Mr. Nissensohn’s and/or an entity under his control’s consulting agreement for an additional two (2) years. As consideration and in light of Mr. Nissensohn’s and/or an entity under his control’s past consulting services which the Company believes were essential to its recent achievements, the Company, pursuant to the 2018 Equity Incentive Plan, issued to Mr. Nissensohn and/or an entity under his control 27,500 shares of the Company’s common stock
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 50,000 restrictedan aggregate, with the Conversions included, of $5.0 million of units (the “Units”) resulting in gross proceeds of $5.0 million, before deducting placement agent fees and offering expenses (the “Offering”). The individual Unit purchase price was $0.30. Each Unit is comprised of one share of the Company’s common stock, valued at $25,000$0.001 par value per share (the “Common Stock”), and a warrant to purchase one share of Common Stock, and, as a private investor.
On November 10, 2014,result of the Offering, the Company issued 900,000833,333 shares valuedof Common Stock (the “Shares”) and warrants (the “Warrants”) to purchase 833,333 shares of Common Stock (the “Warrant Shares”) at $387,000an exercise price equal to settle $450,000$7.00 per Warrant Share, which Warrants are exercisable for a period of debt duefive and one-half years from the issuance date. Both Shai Lustgarten, the Company’s Chief Executive Officer, and Carlos J. Nissenson, a consultant to and principal stockholder of the then Company, President, Kurt Thomet. These shares were redeemedparticipated in the Offering by converting $200 thousand each of unpaid principal owed to them from the HTS acquisition (the “Conversions”), by the Company in December 2015.exchange for Shares and Warrants on the same terms as all other Purchasers. With the Conversions included, the Offering resulted in gross proceeds of $5.0 million. As a result of the Conversions, a principal amount of $150 thousand is owed to each Walefar and Campbeltown respectively under the note issued to them as partial consideration in the sale of HTS Image Processing to the Company on October 5, 2018.
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In
On December 2014,11, 2018, the Company issued a totalto Orion Capital Advisors, LLC (“Orion”) 7,500 shares of 419,079 shares valued at $159,250 to settle debts owedcommon stock pursuant to the then CEO (69,079 shares)Consulting Agreement between the Company and our CFO (350,000 shares), and a total of $30,000 was recognized as forgiveness of salary for the CEO in the year ending December 31, 2014.Orion dated October 10, 2018.
On July 1, 2014,December 11, 2018, the Company issued a consultant a totalto Three Rivers Business Consulting, LLC (“Three Rivers”) 7,500 shares of 200,000 warrants valued at $113,548 for servicescommon stock pursuant to be performed. The value of these warrants was estimated by using the Black-Scholes option pricing model withBusiness Development Agreement between the following assumptions: exercise price of $1.50, term of 2 years; risk free interest rate of 0.47%; dividend yield of 0%Corporation and expected volatility of 283%. As of December 31, 2014, the agreement with this consultant was canceled; a total of $14,194 had been recognized as expense.Three Rivers dated August 1, 2018.
On July 1, 2014,December 7, 2018, the Company issued an advisory board member a total of 200,000 warrants valued at $109,999 for services to be performed. The value of these warrants was estimated by using the Black-Scholes option pricing model with the following assumptions: exercise price of $1.00, term of 4 years; risk free interest rate of 1.70%; dividend yield of 0% and expected volatility of 441%. As of December 31, 2014 a total of $13,750 had been recognized as expense.
During November 2014, concurrent with the acquisition of BCS, the Company granted two stock options to purchase an aggregate of 2,500,000143,750 shares of common stock: (i) a time-vestedstock, at an exercise price of $5.40, pursuant to the Company’s 2018 Equity Incentive Plan.
On October 31, 2018, the Company issued options to purchase 1,500,000an aggregate of 108,250 shares based onof common stock, at an exercise price of $4.40, pursuant to the durationCompany’s 2018 Equity Incentive Plan.
On October 18, 2018, the Company issued Orion 7,500 shares of common stock pursuant to a consulting agreement with Orion.
On October 11, 2018, the Company issued 1,122,648 shares of common stock, a 12-month convertible promissory note in the principal amount of $700 thousand with a conversion price of $4.72, in connection with the HTS Purchase Agreement with Walefar and Campbeltown, dated October 5, 2018. As of the BCS stockholder’s servicedate of this filing, an aggregate principal amount of $150 thousand remains outstanding. On May 29, 2019, the Company, Campbeltown and Walefar entered into an Amendment to the HTS Purchase Agreement (the “Amendment”), which provided for an adjustment to the number of shares of common stock issued to Walefar and Campbeltown in the acquisition of HTS. Pursuant to the Amendment, Campbeltown and Walefar agreed to return for cancelation 277,116 and 277,116 shares of common stock respectively. This Amendment reduced the amount of shares issued in the acquisition to 568,415 shares from 1,122,648 shares and the amount of share consideration to approximately $2.7 million from approximately $5.3 million. This adjustment was made as a result of a correction in the calculation of working capital and other share give back provisions of the HTS Purchase Agreement. This Amendment also reduces the Company’s issued and outstanding common stock to 3,850,421 from 4,404,653.
On October 4, 2018, the Company issued Yes If, LLC, an entity controlled by Jason Griffith, warrants to purchase an aggregate of 25,000 shares of common stock at $10.00 per share pursuant to his consulting agreement with the Company.
On October 4, 2018, the Company issued Orion Capital warrants to thatpurchase an aggregate of 15,000 shares of common stock at $12.00 per share pursuant to a consulting agreement with the Company.
On October 4, 2018, the Company issued Three Rivers 5,000 shares of common stock, 5,000 shares of common stock to Corporate Profile LLC pursuant to a letter agreement and 5,297 shares of common stock to Sichenzia Ross Ference LLP for legal services.
On August 1, 2018, the Company issued 3,226 shares of common stock to the Company’s legal counsel, Sichenzia Ross Ference LLP as payment for legal services.
On July 27, 2018, the Company issued 10,000 shares of its common stock to John Nesbett pursuant to the Company’s investor relations agreement with his entity, Institutional Marketing Services, Inc. and Sichenzia Ross Ference, LLP was issued 3,226 shares of common stock for legal services.
On June 26, 2018, the Company issued 7,500 shares of common stock to Maren Life Reinsurance LTD and warrants to purchase 10,000 shares of common stock at $5.60 per share as part of a debt settlement agreement.
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On June 7, 2018, the Company authorized the issuance of 430,000 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 and accrued interest was extinguished.
On March 8, 2018, the Company granted a total of 85,000 shares of common stock and options to purchase up to 340,000 shares of common stock under the 2018 Equity Incentive Plan. Also, pursuant to the Company’s 2018 Equity Incentive Plan, the Company granted 50,000 shares of the Company’s common stock to the Company’s Chief Executive Officer Shai Lustgarten. Also, the company granted a total of 90,000 shares to the individuals for services rendered including the Company’s Chief Financial Officer Ben Kemper, external consultants, Kurt Thomet, and George Zicman.
On December 30, 2017, the Company authorized the issuance of 30,000 shares of common stock valued at $59 thousand and 1,600,000 shares of Series C Preferred Stock as part of a debt extinguishment agreement with Kurt Thomet and George Zicman who were creditors and former employees of the Company. The common shares were issued on June 9, 2018. The Series C Preferred Stock was valued at $0.80 per share. The total net amount of debt extinguished in this transaction was $5.8 million. The Company also authorized the issuance of 85,000 shares of Series C Preferred Stock and issued 150,000 stock warrants with an exercise price of $0.50 per share, which expire on November 20, 2024. The options vest in over the next four (4) years,$4.00 as part of a separate debt reduction agreement with the first vesting of 12.5%David Marin, who is a principal stockholder of the balance at six (6) months fromCompany. The total net amount of debt forgiven in this transaction was $9.6 million.
On October 2, 2017, the dateCompany granted 25,000 stock options to the Company’s CFO as part of issuance. (ii)the CFO’s employment agreement.
On August 2, 2017, the Company granted a performancetotal of 75,000 stock option to purchase 1,000,000 shares based on the achievement of specified revenue and net income milestones to an Executivewarrants with an exercise price of $0.50$2.20 per share which expire on November 20, 2024. The options vest after completion of nine (9) years of service with the Company or on having consolidated revenues greater than $45 million. 1,000,000 shares vested during 2015, but have not been exercised.
During November 2014, with the acquisition of BCS, the Company issued two service-based stock options to purchase 1,200,000and 30,000 shares of common stock each. These Options vestsas part of a consulting agreement with respect to 200,000 shares on November 20, 2014, and the balance will vest in a series of twenty (20) equal installments on the last day of each complete calendar quarter over the five (5)-year period commencing on January 1, 2015, subject to their continuous service with the Company. Carlos Jaime Nissenson.
On November 20, 2014,August 2, 2017, the Company vestedgranted a total of 400,000324,050 stock options, valued at $183,662. The value of these warrants was estimated by using the Black-Scholes option pricing model with the following assumptions: exercise price of $0.50, term of 5 years; risk free interest rate of 1.64%; dividend yield of 0% and expected volatility of 154%. As of December 31, 2014 a total value of these 400,000 options had been recognized as a non-cash expense related to these options. In 2015, 1,200,000 of these110,000 stock options were canceled.
During November 2014, with the acquisition of BCS, the Company issued two performance-based stock optionsgranted to purchase 2,200,000 shares of Common Stock each. These options will vestfive Board members and become exercisable for all of the shares on November 21, 2023, provided that the Executives remain in continuous service with the Company on such date. The shares subject to the option will vest as follows: (a) if the Company achieves annual net revenues between $100 million and $150 million in any given year, an additional 200,000 shares shall immediately vest; (b) if the Company achieves net revenues between $150 million and $200 million in any given year, an additional 400,000 shares shall immediately vest; (c) if the Company achieves annual net revenues between $200 million and $300 million in any given year, an additional 600,000 shares shall immediately vest; and (d) if the Company achieves annual net revenues in excess of $300 million in any given year, an additional 1,000,000 shares shall immediately vest (until, in each case, the option is fully vested). In the event of any vesting event in (a) through (d) above where net income as a percentage of net revenues exceeds 10%, the shares vesting on such event shall be increased by 50%. In the event net income as a percentage of net revenues for such year is less than 5%, the shares vesting on such event shall be decreased by 50%. In 2015, 2,200,000 of these189,050 stock options were canceled.
On May 19, 2015, Quest entered into a Security Purchase Agreement (the “SPA”) with an accredited investor, who is also a subordinated debt holder and an employee of Quest, pursuant to which Quest issued 667,000 shares of Common Stock in exchange for $200,000.
On June 24, 2015, Quest issued subordinated promissory notes (the “Promissory Notes”) to three investors (who are also Quest employees) in the aggregate principal amount of $400,000 in exchange for an aggregate 170,000 shares of Quest’s restricted common stock, par value $0.001 per share. The Company recorded an interest expense of $62,731 relative to this issuance.
During the quarter ended June 30, 2015, the Company issued 650,000 shares of restricted common stock to consultants of the Company relative to a 12 month contract. The Company has the option to repurchase 550,000 of the shares issued within the 12 month period. The Company also issued 100,000 sharesgranted to the Chief Executive Officer in connection withpursuant to his employment contract on May 1, 2015. The Company recorded a $288,880 expense relatedEmployment Contract and 25,000 to the consulting contracts to be amortized over the period of these contracts.Company’s legal counsel.
During the quarter ended SeptemberOn June 30, 2015, a stockholder of the Company voluntarily returned 2,517 shares of Common Stock, which were canceled from the Company’s issued and outstanding shares.
During the quarter ended December 31, 2015, the Compensation Committee of the board of directors agreed to quarterly issuance / vesting of 12,500 common shares per independent board member as compensation. During the 4th quarter, 37,500 shares were issued in conjunction with this agreement at a value of $15,375. In addition,2017, the Company issued 100,000 common4,375 shares to a consultant for services valued at $22,000 and 20,000 common shares to an employee valued at $4,600.
For the year ended December 31, 2016, the Company issued 150,000 shares to the board members in relation to the vesting schedule agreed to during 4thquarter 2015, which provides 12,500 commonis based on an annual grant 5,000 restricted shares every October and vesting over 8 quarters per independent board member as compensation. The shares were valued at $28,800.
In addition, 39,000 shares were issued to certain employees in the first quarter of 2016 that had a value of $7,800.
On June 17, 2016, the Company entered into a Stock Redemption Agreement whereby it redeemed 1,000,000 shares of restricted common stock in exchange for 357,000 shares of Series C preferred stock.
On July 31, 2016 as part of the Separation Agreement with Mr. Ross,April 2017, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,00032,000 shares of restricted common stock. In addition, the Company issued 100,000 shares of Series C preferred stock pursuant to the same Separation Agreement in exchange for the redemption of 42,500 restricted common shares.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 1,650,000 shares of common stock for $750,000 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. On September 30, 2016, the Company completed the redemption of 1,650,000 shares of common stock.
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 December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance of the note and accrued interest is $241,159.
In November 2016, the Company issued 131,000 shares to an employeeChief Executive Officer as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $8,449.
$48 thousand. In December 2016,addition, the Company issued 708,0003,500 shares to theits then Chief Financial Officer as a signing bonus and performance bonus, respectively, underadditional fees pursuant to his EmploymentContractor Agreement. The shares were valued at $48,498.$8 thousand.
For the year ended December 31, 2016, pursuant to the Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration statement, 238,785 shares of Common Stock were issued for proceeds of $20,058.
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Issuer Purchases of Equity Securities
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||
| June 1 – June 30, 2016 | 1,000,000 | (1) | 0.357 | N/A | N/A | |||||||
| July 1 - July 31, 2016 | 392,500 | (2) | 0.19 | N/A | N/A | |||||||
| September 1 - September 30, 2016 | 1,650,000 | (3) | 0.45 | N/A | N/A | |||||||
| Total | 3,042,500 | 0.39 | N/A | N/A | ||||||||
Related Party
In 2015, Quest redeemed 900,000 shares of common stock from Thomet pursuant to the Settlement Agreement.
In the third quarter of 2015, the Company issued 1,000,000 shares of restricted common stock to a note holder pursuant to the Settlement Agreement valued at $357,000.
As of December 31, 2016, the Company had 35,095,763 common shares outstanding.
The foregoing issuances of securities were exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)(2) as transactions not involving a public offering.
ITEM 6. SELECTED FINANCIAL DATA
This section is not required for smaller reporting companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the Company’s results of operations and its financial condition together with its consolidated subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. Historical results and percentage relationships set forth in the statement of operations, including trends which might appear, are not necessarily indicative of future operations.
OVERVIEW
In 2016, the Company announced strategic actions to streamline its operations, drive future growth and accelerate value creation for shareholders. These repositioning actions resulted in agreements to sell the Canadian operations. The operations of the Canadian subsidiary have been reported within discontinued operations for all years presented.
The Company’s sales from continuing operations for 20162019 were $60.0$57.2 million, representing an increase of $1.4$1.0 million or 2.5%. Net sales related to discontinued operations were $11.3 million for 2016 comparedfrom 2018’s amount of $56.2 million. Revenues in 2019 and 2018 are presented in accordance with $5.3 million in 2015 (there were 9 months of operations in fiscal 2016 and 3 months in fiscal 2015).Accounting Standard Codification (“ASC”) 606.
The loss from continuing operations for common stockholders was $7.5$5.5 million in 2016,2019, an increase of $6$0.1 million compared withfrom the prior year loss of $1.5$5.4 million. Basic and Diluted loss per share from continuing operations were $0.21 versus $0.04was $1.37 in 2019 compared to $2.18 per share in 2015.2018.
LossIn October 2018, the Company acquired HTS Image Processing, Inc. Management started looking for unique technologies to better position OMNIQ as a technological leader by adding new products to OMNIQ’s customers solutions and adding new vertical markets while differentiating OMNIQ from discontinuedits competitors. By having as part of OMNIQ’s portfolio of solutions a unique technology, one that differentiates us from the competition in the Supply Chain / Industry 4.0 market.
HTS was thus acquired, with proven proprietary patented technology in the space of computer vision, machine learning, AI and pattern recognition that can be a game changer in the supply chain market, as well as the leader in the verticals it operates in, Parking, Homeland Security, Safe City and Safe District. The objective, bringing it all together to utilize our strengths within the markets we operate in and to the customers we serve.
The country and the world as a whole are currently dealing with a breakout of COVID19. While the crisis has not had a material effect to date on the Company’s operations, for 2016 was $$6.9 million ($0.19 per share).comparedthe crisis may result in a general downturn to $0.2 million in 2015 ($0.01 per share).the economy and could have a negative effect on the Company’s revenues but it does not believe that this effect is currently calculable.
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 December 31, 2016,2019, the Company had a working capital deficit of $15,323,313$20.2 million and an accumulated deficit of $32,935,199.$45.1 million. These facts and others raise substantial doubt about the Company’s ability to continue as a going concern. 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 raisefollowing:
The continuation of improving cash flow by maintaining moderate cost reductions (subsequent to aggressive cost reduction actions already taken in 2018 and continued in 2019);
Increasing the accounts receivable factoring line of credit;
Negotiating lower interest rates on outstanding debt;
Potential issuances of additional capital through issuance of debt and equity, improved cash flow management, aggressive cost reductions, and thecommon stock;
The creation of additional sales and profits across its product lines. On 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 diversification in the sourcing and procurement of materials and finished goods. The addition of two new key vendors in 2018 increased the Company’s purchasing power by adding credit availability in an amount just under $5.0 million;
With the acquisition of HTS in October 2018, the Company has in its portfolio of products a computer vision technology that is based on AI 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 2020. Also with the acquisition of HTS, the Company acquired an operating facility with the ability for light manufacturing and assembling components. The Company can use HTS’s assembling facility to reduce operating expensethe cost of goods and startincrease profit margins;
In April 2019, the path to attain profitability wasCompany raised approximately $5.0 million in gross proceeds from 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 additional833,333 shares of the Company’s common stock for cash and services during the next 12 months.
stock.
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These matters raise substantial doubt about the Company’s ability to continue as a going concern. 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.
Overview -– Results of Operations
The following table sets forth certain selected condensed statement of operations data for the periods indicated in dollars. In addition, we note that the period-to-period comparison may not be indicative of future performance.
| Years Ended December 31 | Variation | |||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||
| Revenue | $ | 60,047,124 | $ | 58,598,531 | 1,448,593 | 2.5 | ||||||||||
| Cost of Goods sold | 47,952,,579 | 46,650,277 | 1,302,302 | 2.8 | ||||||||||||
| Gross Profit | 12,094,545 | 11,948,254 | 146,291 | 1.2 | ||||||||||||
| Operating Expenses | 13,283,849 | 14,044,203 | (760,354 | ) | (5.4 | ) | ||||||||||
| Loss from operations | (1,189,304 | ) | (2,905,949 | ) | 906,645 | 43.3 | ||||||||||
| Net loss from continuing operations | (7,493,270 | ) | (1,715,080 | ) | (6,018,146 | ) | n/m | |||||||||
| Net loss from discontinued operations | (6,851,875 | ) | (239,956 | ) | (6,611,919 | ) | n/m | |||||||||
| Net loss | (14,345,145 | ) | (1,715,080 | ) | (12,630,065 | ) | n/m | |||||||||
| Net Loss per common Share from continuing operations | (0.21 | ) | (0.04 | ) | (0.17 | ) | n/m | |||||||||
| Net Loss per common Share from discontinued operations | (0.19 | ) | (0.01 | ) | (0.18 | ) | n/m | |||||||||
| Net Loss per common Share | (0.40 | ) | (0.05 | ) | (0.35 | ) | n/m | |||||||||
n/m; not meaningful
| Years Ended December 31 | Variation | |||||||||||||||
| In thousands | 2019 | 2018 | $ | % | ||||||||||||
| Revenue | $ | 57,199 | $ | 56,202 | 997 | 1.77 | ||||||||||
| Cost of Goods sold | 43,165 | 43,140 | 25 | 0.06 | ||||||||||||
| Gross Profit | 14,034 | 13,062 | 972 | 7.44 | ||||||||||||
| Operating Expenses | 16,898 | 16,086 | 812 | 5.05 | ||||||||||||
| Loss from operations | (2,864 | ) | (3,024 | ) | 160 | (5.29 | ) | |||||||||
| Net loss | (5,456 | ) | (5,222 | ) | (234 | ) | 4.48 | |||||||||
| Net Loss per common Share from continuing operations | (1.37 | ) | (2.18 | ) | 0.81 | (37.12 | ) | |||||||||
Revenues
For the years ended December 31, 2016 and 2015, the Company recognized $60,047,124 and $58,598,531 in net revenues, respectively. This represents an increase of 2.5% attributable to organic growth. The growth rate is in line with that of the industry. Revenue for 20162019 and 20152018 was generated from the sales of hardware, service contracts, software, labels and ribbons and related services provided by the Company to its customers. For the years ended December 31, 2019 and 2018, the Company recognized $57.2 million and $56.2 million in net revenues, respectively. This represents an increase of 1.77%.
Cost of Goods Sold
For the years ended December 31, 20162019 and 2015,2018, the Company recognized a total of $47,952,579$43.2 million and $46,650,277,$43.1 million respectively, of cost of goods sold. Cost of goods sold were 80.9%75.5% of net revenues at for 20162019 and 80.4%77.0% for 2015. The2018. Our gross margin percentage has remained relatively stable in an industry that is putting a lot of pressure on the gross margin.
The increase in gross margins also reflects the Company’s focus on selling products with higher gross margins.
Operating expenses
For the years ended December 31, 20162019 and 2015,2018, operating expenses related to continuing operations were $13,283,849$16.9 million and $14,044,203,$16.1 million, respectively. This represents a decreasean increase of $760,354,$812 thousand, or 5.4%5.05%, which is due to management focus on expense reduction and streamlining operations.a general increase in business operations, including the addition of HTS in October 2018. The following explains in detail the change in operating expenses.
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Salary and benefits – Salary, commissions and employee benefits for the year ended December 31, 20162019 totaled $8,409,223,$10.1 million, compared to $8,220,135$9.9 million for the year ended December 31, 2015.2018, representing an increase of $0.2 million, or 2.0%. Included in salary and benefits is a stock based compensation expense of $374,451$1.0 million for the year ended December 31, 20162019 compared to $751,054$2.2 million for the year ended December 31, 2016. The decrease in the stock compensation, which is non-cash, is a result of fewer shares and less options being granted.2018. The increase in salary and benefits is attributable in part to the related increases of sales commissions associated with increased net revenues of the Companyadditional salary and the increase in headcount for the first half of the 2016 year.benefits paid to HTS employees during 2019.
General and Administrative – General and administrative expenses were $2,327,889$2.7 million for the year ended December 31, 2016,2019, compared to $2,813,984$2.5 million for the year ended December 31, 2015.2018, representing an increase of $0.2 million, or 8%. The decrease is a resultincrease was due to the inclusion of the cost containment efforts that have been put in place to realize the synergies of the combined entities.HTS general and administrative expenses.
Professional Fees– Professional fees for the year ended December 31, 20162019 were $754,411$2.0 million compared to $411,261$1.9 million for the period year ended December 31, 2015. The increase was related to the complexity of the business that resulted in the increased use of outside consultants and specifically legal fees attributable to the divestiture of Quest Solution Canada. In addition, the increase was related to cost of being a public company resulting in2018. This represents an increase of $0.1 million, or 5.3% attributable to additional professional accounting, consulting,fees incurred by HTS. Of the $2.0 million of professional fees for 2019, $0.3 million related to compensation issued in the independent Boardform of Directorsstock options, warrants, and attorney fees.grants.
Stock based compensation expense – Stock based compensation expenses for the year ended December 31, 20162019 were $374,451,$1.3 million, compared to $751,054$2.2 million for the year ended December 31, 2015.2018. This consists of stock compensation classified as professional fees and as salary and employee benefits. This decrease in 2016 relates2019 was due to the Company issuing less net shares for services, the decrease in vesting of incentivemanagement’s decision to grant fewer stock options and the decrease in stock priceto company personnel during the period.2019.
Other income and expenses
The Company incurred $4,531,263$2.6 million in interest expense for year ended December 31, 2016, compared to $1,438,422 for the year ended December 31, 2015. The interest expense in 2016 is comprised of the interest on the credit facilities as well as the financing fees and cancellation fees related2019, compared to the facilities, interest on the notes, supplier financing and the debt discount on the promissory notes which are non-cash. The following are the factors that explain the increase; $0.5$1.6 million related to the increase in the average line of credit balance and the interest rate on the facility, $0.4 million related to the cancellation of the FGI line of credit, $0.2 million in financing fees related to the different credit facilities, $0.3 million increase related to the increase in the Promissory note balances, $0.3 million increase related to the supplier financing and $1.4 million increase in the debt discount which is non cash.
Restructuring Expense - During the second quarter, the Company took steps to streamline and simplify its operations in North America. The Employees to be separated from the Company as a result of these streamlining initiatives were offered severance or working notices. As a result, the Company has recorded a restructuring charge of $544,941 for the year ended December 31, 20162018. The interest expense in 2019 is comprised of interest incurred on promissory notes payable, the company’s line of credit, and vendor payables. This increase in 2019 was due to realize the streamlining initiatives. The restructuring charges include severance pay, legal costsan increase in vendor payables subject to execute contract terminations, and cost of stock redemptions.
In 2016 the Company recognized a loss of $450,000 for the write-off of assets which it determined to have no future economic benefit. In additioninterest expense as well as increase in 2016, the Company realized a gain on the forgiveness of a contingent liability of $150,000. In 2015, the Company realized a $374,500 gain on sale of technology licenses and trade agreements that were transferred to a former employee and shareholder in the ordinary course of business as part of an omnibus settlement agreement.
interest rate charged by certain creditors.
Foreign currency transactions
The Company usesDue to the temporal method to translate itsacquisition of HTS Image Processing, Inc., which has operations in Israel, there were foreign currency transactions. Under this method, monetary assetstransactions conducted in 2018 and liabilities are translated at the exchange rate in2019. The effect at the consolidated balance sheet date. Other assets and liabilities are translated at the exchange rate in effect at the transaction date. Items appearing in the current year’s consolidated statement of loss, except for cost of inventory and amortization, which are translated using the historical rate, are translated at average yearly rates. Foreign exchange gains and losses are included in the consolidated statement of loss. The Company recorded a gain on foreign currency of $129,589 in 2016 due to the weakening of the Canadian dollar in relationcurrency transactions was not material to the United States dollar.our financial performance.
Provision for income taxes
During the year ended December 31, 2019, the Company had $14 thousand in state income tax expenses for states in which the Company recently began operations and for which past net operating losses may not apply.
During the year ended December 31, 2016,2018, the Company recognized a totalhad $6 thousand in state income tax expenses for states in which the Company recently began operations and for which past net operating losses may not apply. Additionally, the Company had foreign income tax expense of $1,068,352 which is comprised$42 thousand related to operations of $298,719 of current taxes and $769,633 of deferred taxes. Management’s analysis of the future utilization of the cumulative net operating loss carryforwards determined that it does not meet the more likely than not criteria regarding the utilization of the net operating losses prior to their expiration. Accordingly, the valuation allowance on the deferred tax asset is 100% during the year ended December 31, 2016.HTS Image Ltd. For the year ended December 31, 2015,2018, the Company recognizedrecorded a deferred tax benefitliability of $1,797,977 related$552 thousand for the difference in the tax effect for the book versus tax basis for the intangible assets acquired with the acquisition of HTS. Given the Company’s uncertainty as to the realization of the future tax benefits associated with the net deferred tax asset true net operating losses carryforward.
assets, a 100% valuation allowance has been recorded.
Net loss from continuing operations
The Company realized a net loss from continuing operations of $7,493,270$5.5 million for the year ended December 31, 2016,2019, compared to a net loss from continuing operations of $1,475,124$5.2 million for the year ended December 31, 2015.2018. The increase of loss in 2019 mostly comes from the net is attributable to the numerous one-timeincrease in salary and employee benefit and general and administrative expenses, in the current year.
Net loss from discontinued operations
Effective September 30, 2015, the Company sold the shares of its wholly owned subsidiary, Quest Solution Canada Inc. to Viascan Group Inc. 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 in 2015. The Company realized a net loss from discontinued operations of $6,851,875 for the year ended December 31, 2016, which represents nine months of operations, and a net loss from discontinued operations of $239,956 for the year ended December 31, 2015, which represents three months of operations.discussed previously.
Liquidity and capital resources
For the year endedAt December 31, 2016,2019, the Company had cash in the amount of $954,700$2.1 million of which $665,220$0.5 million is on deposit and restricted, as collateral for a letter of credit and a corporate purchasing card, and a working capital deficit of $15,323,313,$20.2 million, compared to cash in the amount of $1,514,241,$910 thousand of which $690,850 is$532 thousand was on deposit and restricted, and a working capital deficit of $9,181,844 excluding the current portion of subordinated notes payable and the net asset held for disposal,$20.5 million for the year ended December 31, 2015. In addition, the Company’s stockholder’s deficit2018. The Company had stockholders’ equity of $13,750,714$1.8 million and $471,367stockholders’ equity of $2.3 million for the years ended December 31, 20162019 and 2015,2018, respectively. This decrease in our stockholders’ equity was primarily due to the book net loss for 2019.
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The Company’s accumulated deficit is $32,935,199was $45.1 million and $18,457,236$39.8 million for the years ended December 31, 20162019 and 2015,2018, respectively.
The Company’s operations provided net cash of $5,652,679$4.3 million and $9,300,222$2.7 million for the years ended December 31, 20162019 and 2015, respectively, a decrease2018, respectively. The increase in cash from operations of $3,647,543. The decrease$1.4 million is primarily a result of a large net loss from continued operations and a decreasean increase in gross margin, as well as changes in the non-cash working capital items of $1.8 million in 2016 compared to 2015. Non-cash changes in working capital items in 2016 included an $8,881,651 increase inCompany’s accounts receivable and accounts payable
balances.
The Company’s cash generated fromused in investing activities was $584,908$251 thousand for the year ended December 31, 20162019 compared to cash used of $778,741 fromin investing activities of $151 thousand for the year ended December 31, 2015. In 2016, the Company received cash in the amount of $0.6 million in the divestiture of Quest Solution Canada Inc., whereas in 2015, $0.7 million2018. The primary use of cash for investing was used to provide the letterspurchase of credit contained in the restricted cash.property and equipment.
The Company’s financing activities used $2,176,424$2.8 million of cash during the year ended December 31, 2016,2019, and $4,935,039used $2.6 million during the year ended December 31, 2015, a decrease in usage of $2,758,615.2018. During the year ended December 31, 2016, $3,083,784 was paid down2019, the Company made payments of $3.4 million on theits notes payable, including its Supplier Secured Promissory note $750,000 was usedand related party notes payable, compared to redeem 1,650,000 common shares, and to offset the uses of cash, the Company received proceeds of $2,098,950 from the line of credit. During the year ended December 31, 2015, $6,626,036 was2018, when the Company made payments of $3.8 million on its notes payable, including notes payable, related party, and its Supplier Secured Promissory note. Additionally, the Company paid down $3.2 million on notes payablethe Company’s line of credit, compared to the Company as part ofyear ended December 31, 2018, when $866 thousand was borrowed from the acquisitions, as well, the Company received proceeds of $1,140,997 from theCompany’s line of credit.
The Company’s results of operations have not been affected by inflation and management does not expect inflation to have a material impact on the Company’s operations in the future.
Contractual Obligations
The significant contractual obligations as of December 31, 2016, were as follows:
| Payments due by Period | ||||||||||||||||||||
Less than One Year | One to Three Years | Three to Five Years | More Than Five Years | Total | ||||||||||||||||
| Subordinated Notes payable, related parties | $ | - | $ | - | $ | - | $ | 17,515,345 | $ | 17,515,345 | ||||||||||
| Notes payable, non-related parties | 9,782,925 | 130,294 | - | - | 9,913,219 | |||||||||||||||
| Accrued interest and accrued liabilities, related party | - | - | - | 629,238 | 629,238 | |||||||||||||||
| Total | $ | 9,782,925 | $ | 130,294 | $ | - | $ | 18,144,583 | $ | 28,057,802 | ||||||||||
Off-Balance Sheet Arrangements
The Company currently does not have any off-balance sheet arrangements.
Critical Accounting Policies
Preparation of the Company’s financial statements requires management to make judgments, assumptions and estimates regarding uncertainties that could affect reported revenue, expenses, assets, liabilities and equity. Note 1 describes the significant accounting policies used in preparation of the consolidated financial statements. The most significant areas where management judgments and estimates impact the primary financial statements are described below. Actual results in these areas could differ materially from management’s estimates under different assumptions or conditions.
REVENUE RECOGNITIONRevenue Recognition
The Company is a primary distribution channel for a large group of vendors and suppliers, including original equipment manufacturers (“OEMs”), software publishers and wholesale distributors.
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of consideration is probable. The Company evaluates the following indicators amongst others when determining whether it is acting as a principal in the transaction and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.
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The Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically allow for the Company to recognize revenue when the product reaches the customer’s location.
The Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold the inventory at its warehouses. The Company is the principal in the transaction and recognizes revenue for drop-shipment arrangements on a gross basis.
Revenue Recognition for Hardware
Revenues from sales of hardware products are recognized on a gross basis as the Company is acting as a principal in these transactions, with the selling price to the customer recorded as Net sales and the acquisition cost of the product recorded as Cost of sales. The Company recognizes revenue from these transactions when control has passed to the customer, which is usually upon delivery of the product to the customer.
The Company’s vendor partners warrant most of the products the Company sells. These manufacturer warranties are assurance-type warranties and are not considered separate performance obligations. The warranties are not sold separately and only provide assurance that products will conform to the manufacturer’s specifications. In some transactions, a third-party will provide the customer with an extended warranty. These extended warranties are sold separately and provide the customer with a service in addition to assurance that the product will function as expected. The Company considers these warranties to be separate performance obligations from the underlying product. For warranties, the Company is arranging for those services to be provided by the third-party and therefore is acting as an agent in the transaction and records revenue on a net basis at the point of sale.
Revenue Recognition for Software
Revenues from most software license sales are recognized as a single performance obligation on a gross basis as the Company is acting as a principal in these transactions at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software assurance, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software assurance is in effect. The Company evaluates whether the software assurance is a separate performance obligation by assessing if the third-party delivered software assurance is critical or essential to the core functionality of the software itself. This involves considering (i) if the software provides its original intended functionality to the customer without the updates, (ii) if the customer would ascribe a higher value to the upgrades versus the up-front deliverable, (iii) if the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and (iv) if the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software assurance is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software assurance are recognized as a single performance obligation. In some transactions, a third-party will provide the customer with an extended warranty. These extended warranties are sold separately and provide the customer with a service in addition to assurance that the product will function as expected. The Company considers these warranties to be separate performance obligations from the underlying product. For warranties, the Company is arranging for those services to be provided by the third-party and therefore is acting as an agent in the transaction and records revenue on a net basis at the point of sale.
Revenue Recognition for Services
The Company provides professional services, which include project managers and consultants recommending, designing and implementing IT solutions. Revenue from professional services is recognized either on a time and materials basis or proportionally as costs are incurred for fixed fee project work. Revenue is recognized on a gross basis each month as work is performed and the Company transfers those services.
Revenues from the sale of professional and support services, provided by the Company, are recognized over the period the service is provided. As the customer receives the benefit of the service each month, the Company recognizes the respective revenue on a gross basis as the Company is acting as a principal in the transaction. Additionally, the Company’s managed services team provides project support to customers that are billed on a fixed fee basis. The Company is acting as the principal in the transaction and recognizes revenue on a gross basis based on the total number of hours incurred for the period over the total expected hours for the project. Total expected hours to complete the project is updated for each period and best represents the transfer of control of the service to the customer.
Freight Costs
The Company records both the freight billed to its customers and the related freight costs as Cost of sales when the underlying product revenue is recognized. For freight not billed to its customers, the Company records the freight costs as Cost of sales. The Company’s typical shipping terms result in shipping being performed before the customer obtains control of the product. The Company considers shipping to be a fulfillment activity and not a separate performance obligation.
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The Company recognizes nearly all revenue through the sale of products and services, and records the sale when products are shipped or delivered, title and risk of loss pass to the customer, and collection is reasonably assured. The vast majority of deliverables are tangible products, with a smaller portion attributable to installation, service or maintenance. Revenue related to maintenance is recognized ratably over the contractual term. Management believes that all relevant criteria and conditions are considered when recognizing revenue.
ACCOUNTS RECEIVABLE
The Company’s management performs ongoing credit evaluations of our customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of their current credit information. Management continuously monitors collections and payments from its customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection issues that were identified. If the actual uncollected amounts significantly exceed the estimated allowance, the Company’s operating results would be significantly adversely affected. While such credit losses have historically been within management’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.
INVENTORIES
Inventories are statedvalued at the lower of cost or market and are principally valued on a(replacement cost, not to exceed net realizable value) using the first-in, first-out basis. The Company’s management reviewsmethod. Recoverability of inventories is assessed based on review of future customer demand that considers multiple factors, including committed purchase orders from customers, as well as purchase commitment projections provided by customers, among other things. This valuation also requires us to make judgments and assumptions based on information currently available about market conditions, including competition, product pricing, product life cycle and development plans. If we overestimate demand for our products, the amount of our loss will be impacted by our contractual ability to reduce inventory for obsolescence, make appropriate provisions and dispose of obsolete inventory on a regular basis. Various factors are considered in these reviews, including sales history and recent trends, industry conditions and general economic conditions. If actual circumstances indicate a decline in any of these factors, particularly an abrupt change in economic conditions, the Company could incur an obsolescence expense. Management’s estimatespurchases from our suppliers. Our assumptions of future product demand are inherently uncertain, and changes in our estimates and assumptions may provecause us to be inaccurate,realize material write-downs in which case the Company may have understated or overstated the provision required for excess, obsolete and unmarketable inventories. In the future, if our inventories are determined to be overvalued, we would be required to recognize such costs in its cost of goods sold at the time of such determination.future.
LONG-LIVED ASSETS
Long-lived assets, which include property, equipment, goodwill and identifiable intangible assets, are reviewed for impairment whenever events or changes in business circumstances indicate impairment may exist. If the Company determines that the carrying value of a long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. The Company’s management reviews for possible goodwill impairment at least annually, in the fourth quarter. If an initial assessment indicates it is more likely than not an impairment may exist, it is evaluated by comparing the unit’s estimated fair value to its carrying value. Fair value is generally estimated using an income approach that discounts estimated future cash flows using discount rates judged by management to be commensurate with the applicable risk. Estimates of future sales, operating results, cash flows and discount rates are subject to changes in the economic environment, including such factors as the general level of market interest rates, expected equity market returns and the volatility of markets served, particularly when recessionary economic circumstances continue for an extended period of time. Management believes the estimates of future cash flows and fair values are reasonable; however, changes in estimates due to variance from assumptions could materially affect the evaluations.
INCOME TAXES
Income tax expense and tax assets and liabilities reflect management’s assessment of taxes paid or expected to be paid (received) on items included in the financial statements. Deferred tax assets and liabilities arise from temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and consideration of operating loss and tax credit carryforwards. Deferred income taxes are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are provided to reduce deferred tax assets to the amount that will more likely than not be realized. This requires management to make judgments and estimates regarding the amount and timing of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies.
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STOCK BASED COMPENSATION
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by FASB where the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
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The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Recent Accounting Pronouncements
See Note 3 of the consolidated financial statement for management’s discussion of recent accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This section is not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are included as a separate section of this report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Resignation of Independent Registered Public Accounting Firm
On June 6, 2019, RBSM LLP (“RBSM”) notified the Company of its resignation, effective immediately, as the Company’s independent registered public accounting firm. RBSM served as the auditors of the Company’s financial statements for the period from the Company’s fiscal year end December 31, 2014 through the date of resignation.
The reports of RBSM on the Company’s consolidated financial statements for the Company’s fiscal years ended December 31, 2018 and 2017 did not contain any adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle.
During the Company’s fiscal years ended December 31, 2018 and 2017 and the subsequent interim period through June 5, 2019, there were (i) no disagreements with RBSM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of RBSM, would have caused RBSM to make reference to the subject matter of the disagreements as defined in Item 304 of Regulation S-K in connection with any reports its reports, and (ii) there were no “reportable events” as such term is described in Item 304 of Regulation S-K.
NoneNew Independent Registered Public Accounting Firm
On June 6, 2019, the Board authorized management of the Company to engage Haynie & Company as the Company’s independent registered public accounting firm for the Company’s fiscal year ending December 31, 2019. On June 6, 2019, the Company entered into an engagement agreement with Haynie & Company to provide audit services for the year ending December 31, 2019.
During the fiscal years ended December 31, 2018 and 2017 and during the subsequent interim period through June 6, 2019, neither the Company nor anyone acting on its behalf consulted with Haynie & Company regarding (i) the application of accounting principles to a specified transaction either completed or proposed or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report nor oral advice was provided that Haynie & Company concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a disagreement between the Company and its predecessor auditor as described in Item 304(a)(1)(iv) of Regulation S-K or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure and Control Procedures
The Company maintains “disclosure controls and procedures”, as such terms are defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosures. The Company acknowledges that any controls and procedures can provide only reasonable assurances of achieving the desired control objectives.
We have carried out an evaluation as required by Rule 13a-15(d) under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedure as of December 31, 2016.2019. Based upon their evaluation, the Chief Executive Officer and Principal Accounting Officer concluded that, as of December 31, 2016,2019, the Company’s disclosure controls and procedures were not effective. Although we have determined that the existing controls and procedures are not effective, the deficiencies identified have not been deemed material to our reporting disclosures.
(b) Management’s Report on Internal Controls over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
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Internal control over financial reporting cannot provide absolute assurance of achieving their objectives. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgement and breakdowns resulting from human failures. Due to their inherent limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. It is possible to design safeguards to reduce, but not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Management has used the framework set forth in the report entitled Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), known as COSO, to evaluate the effectiveness of our internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on such evaluation, our CEO and Principal Financial Officer have concluded that, as of December 31, 2016,2019, our internal controls over financial reporting were not effective.
As a result of our evaluation, we identified a material weakness in our controls related to segregation of duties and other immaterial weaknesses in several areas of data management and documentation.
The Company’s management is composed of a small number of professionals resulting in a situation where limitations on segregation of duties exist. Accordingly, as a result of the material weakness identified above, we have concluded that the control deficiencies result in a reasonable possibility that a material misstatement of the annual or interim financial statements willmay not be prevented on a timely basis by the Company’s internal controls. The Company continues to employ and refine a structure in which critical accounting policies, issues and estimates are identified, and together with other complex areas, are subject to multiple reviews by executives. In addition, the Company evaluates and assesses its internal controls and procedures regarding its financial reporting, utilizing standards incorporating applicable portions of the Public Company Accounting Oversight Board’s 2009 Guidance for Smaller Public Companies in Auditing Internal Controls Over Financial Reporting as necessary on an on-going basis. The Company has committed to hiringhired additional finance department staff during the year ending December 31, 20172019 which will allowallows for a higher level of segregation and improve the Company’s overall compliance with COSO.COSO but the deficiency is still present. The hiring of additional staff is dependent upon the Company obtaining sufficient cash flows from operations or financings.
While the material weakness set forth above were the result of the scale of the Company’s operations and is intrinsic to its small size, the Company believes the risk of material misstatements relative to financial reporting are minimal.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by its registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits the Company to provide only management’s report in this annual report.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table presents information calledwith respect to our officers and directors as of the date of this Report:
| Name and Address | Age | Position(s) | ||
| Shai Lustgarten | 49 | CEO and Chairman | ||
| Neev Nissenson | 41 | Chief Financial Officer and Director | ||
| Andrew J. MacMillan | 72 | Director | ||
| Yaron Shalem | 47 | Director |
Background of officers and directors
The following is a brief account of the education and business experience during at least the past five years of our officers and directors, indicating each person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Shai S. Lustgarten,was appointed the Company’s CEO in April 2017 and served as the Company’s interim CFO from December 2018 through September 4, 2019. Mr. Lustgarten had been the Chief Executive Officer of Teamtronics, Inc. beginning June 2016. Teamtronics manufactures rugged computers and electronic equipment mainly used in the Gas and oil industry. From 2014 to 2017, Mr. Lustgarten was the Chief Executive Officer at Micronet Limited Inc., a developer and manufacturer of mobile computing platforms for by this item is incorporated herein by referenceintegration into fleet management and mobile workforce solutions listed on the Tel Aviv Stock Exchange. From 2013 to 2014, Mr. Lustgarten served as EVP Business Development and Head of the Aerospace and defense Division of Micronet EnertecTechnologies, a technology company listed on the NASDAQ Capital Market. From 2009 to 2013 Mr. Lustgarten was VP of Sales, Marketing and CMO of TAT Technologies, a world leading supplier of electronic systems to the definitive Proxy Statement, which will be filedcommercial and defense markets, from. His prior experience also includes serving as CEO of T.C.E. Aviation Ltd. in Belgium and serving from 1993 to 1997 as the assistant to the Military Attaché at the Embassy of Israel in Washington, DC from. He received his Bachelor of Science degree in Business Management & Computer Science from the University of Maryland.
Neev Nissenson became a director of the Company in April 2017 and was appointed as our CFO on September 5, 2019, effective October 10, 2019. He is an experienced entrepreneur and financial officer. In 2015, Mr. Nissenson founded Hotwine, Inc., a California based wine startup company. Since August 2016 and until October 10, 2019, Mr. Nissenson served as the Chief Financial Officer of Hypnocore, Ltd., an Israeli based startup company that develops mobile applications for sleep monitoring and therapy. During 2011 to 2015, Mr. Nissenson was the Chief Financial Officer of GMW, Inc., a high-end wine retailer from Napa, California. Before that, Mr. Nissenson served as the Vice President from 2006 to 2011 and the Chief Financial Officer from 2009 to 2011 at Phoenix International Ventures, Inc., an aerospace defense company. Mr. Nissenson was also a member of the Municipal Committee for Business from 2004 to 2007 and a member of Municipal Committee for Street Naming from 2005 to 2007 in the City of Herzliya, Israel. He is also an armored platoon commander in the Israeli Defense Forces (Reserve) Armored Corps with a rank of Captain. Mr. Nissenson graduated from Tel Aviv University in 2005 with a B.A. majoring in General History and Political Science. In 2007, he graduated from the Commission pursuantHebrew University with anExecutive Master’s degree in Business Administration specializing in Integrative Management.
Andrew J. MacMillan became a director of the Company in April 2017. Heis a corporate communications professional with 20 years of corporate communications experience in the global securities industry, plus 18 years of direct investment banking and related experience. He was a director of NTS, Inc. since December 20, 2012 and since December 27, 2012 served as the Chairman of its Nominating and Corporate Governance Committee until NTS’ sale to Regulation 14A undera private equity firm in June 2014. Since 2010, Mr. MacMillan has served as an independent management consultant providing marketing and communications advisory to clients. Prior to that from 2007 until 2010, Mr. MacMillan served as Director, Global Communications & Marketing of AXA Rosenberg, a leading equity asset management firm. Prior to that, Mr. MacMillan served in a variety of corporate communication roles including Senior Vice President of Corporate Communications & Government Affairs at Ameriprise Financial, Head of Corporate Communications (Americas) at Barclays Capital, Senior Vice President of Corporate Communications of The NASDAQ Stock Market and Director of Corporate Communications at Credit Suisse First Boston. Mr. MacMillan previously served as an investment banker, acquisition officer, and consultant directly involved with capital raising, acquisitions, and financial feasibility studies. Mr. MacMillan holds a BS in Industrial Engineering from the Exchange Act.University of Iowa and a Masters in Business Administration from Harvard.
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Yaron Shalem became a director of the Company in April 2017. He has extensive experience in financial and business management. Mr. Shalem has served as the Chief Financial Officer at Saga Foundation since January 2018. Prior to that Mr. Shalem served as the Chief Financial Officer at Singulariteam VC since January 2014 till January 2018. He also worked as the Chief Financial Officer at Mobli Media Inc. from January 2014 to December 2016. Mr. Shalem’s experience also includes serving as the Chief Financial Officer of TAT Technologies Ltd., a NASDAQ listing company, from April 2008 to December 2013. Mr. Shalem is a CPA in Israel. He received his B.A. in Economy & Accounting from Tel Aviv University in 1999 and an MBA degree from Bar-Ilan University 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information calledtable below shows the compensation for by this item is incorporated herein by referenceservices in all capacities we paid during the years ended December 31, 2019 and 2018 to the definitive Proxy Statement,individuals serving as our principal executive officers during the last completed fiscal year and our other two most highly paid executive officers at the end of the last completed fiscal year (whom we refer to collectively as our “named executive officers”);
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards | Option Awards | All Other Compensation | Total | |||||||||||||||||||||
| In thousands | ||||||||||||||||||||||||||||
| Shai Lustgarten(1) | 2018 | 262 | 260 | $ | 119 | 343 | (1) | $ | 984 | |||||||||||||||||||
| Chief Executive Officer and interim Chief Financial Officer (Principal Executive Officer) | 2019 | 489 | $ | 250 | 43 | $ | 782 | |||||||||||||||||||||
| Neev Nissenson(2) | 2019 | 32 | 3 | 90 | - | $ | 125 | |||||||||||||||||||||
| Chief Financial Officer | ||||||||||||||||||||||||||||
| Benjamin Kemper(3) | - | |||||||||||||||||||||||||||
| Former Chief Financial Officer | 2018 | 142 | 120 | 60 | $ | 322 | ||||||||||||||||||||||
| 1. | Mr. Lustgarten began his employment as the Company’s CEO on April 1, 2017. The fair value of the options awarded to Mr. Lustgarten in 2018 was determined to be $241 thousand, using the Black-Scholes Option Pricing Model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Mr. Lustgarten’s salary for 2018 includes $15 thousand in salary from HTS Image Processing, Inc. which the Company acquired in October 2018 and a $2 thousand car allowance for the period October to December 2018. | |
| 2. | Neev Nissenson was appointed as the Company’s CFO on September 5, 2019, effective October 10, 2019. | |
| 3. | Mr. Kemper began his employment as the Company’s CFO on August 21, 2017. The salary includes $12 thousand from HTS Image Processing, Inc. Mr. Kemper resigned on December 18, 2018. |
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Bonuses
Any bonuses granted in the future will relate to meeting certain performance criteria that are directly related to areas within the named executive’s responsibilities with the Company. As we continue to grow, more defined bonus programs may be established to attract and retain our employees at all levels.
Employment Contracts
On April 1, 2017, the Company entered into an employment agreement with our President and Chief Executive Officer, Shai Lustgarten. The employment agreement has an initial term of two years with an initial base salary of $240 thousand per year. Mr. Lustgarten has the ability to earn a performance based bonus at the discretion of the board. Mr. Lustgarten’s employment agreement was extended an additional two years.
On September 5, 2019, the Company entered into a letter agreement with Shai Lustgarten, pursuant to which the Company and Mr. Lustgarten agreed to extend the term of Mr. Lustgarten’s employment agreement for an additional two (2) years. As consideration and in light of the Company’s achievements under the leadership of Mr. Lustgarten, the Company, pursuant to its 2018 Equity Incentive Plan, issued to Mr. Lustgarten 50,000 shares of the Company’s common stock.
On February 27, 2020, the Company entered into an employment agreement with Shai Lustgarten, the Company’s Chief Executive Officer, (the “Lustgarten Agreement”) pursuant to which Mr. Lustgarten shall continue to serve as the Company’s Chief Executive Officer. The Lustgarten Agreement has a four (4) year term and automatically renews for additional one (1) year periods unless either party elects to terminate the Lustgarten Agreement. Pursuant to the Lustgarten Agreement, the Company shall pay Mr. Lustgarten an annual base salary of $560,000. Mr. Lustgarten shall also be eligible to receive i) equity awards pursuant to the Company’s 2018 Equity Incentive Plan (the “Plan”) and ii) certain milestone bonuses as set forth in the Lustgarten Agreement. In the event Mr. Lustgarten’s employment is terminated by Mr. Lustgarten for good reason, or terminated by the Company without cause, Mr. Lustgarten shall be entitled to the greater of (i) the unpaid base salary or (ii) one (1) year’s base salary.
On August 21, 2017, the Company entered into an employment agreement with Benjamin Kemper, the Company’s former Chief Financial Officer. The employment agreement provided for a base salary of $130 thousand. Mr. Kemper resigned from his position as Chief Financial Officer on December 18, 2018. Mr. Lustgarten assumed the role of Interim Chief Financial Officer of the Company until Neev Nissenson joined the Company as Chief Financial Officer in October 2019.
On September 5, 2019, the Company and HTS Image Ltd., the Company’s wholly-owned subsidiary, entered into an employment agreement with Neev Nissenson to serve as the Chief Financial Officer of each the Company and HTS Image Ltd., effective October 10, 2019, pursuant to which the Company shall pay Neev Nissenson a monthly base salary of NIS (New Israeli Shekels) 44 thousand. Neev Nissenson is eligible to earn certain bonuses upon the Company’s achievement of certain performance milestones as set forth in his employment agreement. Mr. Nissenson’s employment agreement has an initial term of two (2) years and shall automatically renew for one (1) year periods. As consideration and pursuant to the Company’s 2018 Equity Incentive Plan, the Company issued to Mr. Nissenson an option to purchase 35,000 shares of the Company’s common stock at an exercise price of $5.00 per share.
At the sole discretion of our Board of Directors, all officers are entitled to merit-based cash and equity bonuses.
Director Compensation
| Name | Year | Fees Earned or Paid in Cash ($) | Stock Awards | Option(1) Awards | Non-Equity Incentive Plan Compensation | Nonqualified Deferred Compensation | All Other Compensation | Total | ||||||||||||||||||||||||
| In thousands | ||||||||||||||||||||||||||||||||
| Neev Nissenson (1) | 2018 | 9 | 41 | - | - | - | 50 | |||||||||||||||||||||||||
| 2019 | 11 | - | 11 | |||||||||||||||||||||||||||||
| Andrew MacMillan (1) | 2018 | 9 | 41 | - | - | - | 50 | |||||||||||||||||||||||||
| 2019 | 17 | 32 | 49 | |||||||||||||||||||||||||||||
| Yaron Shalem (1) | 2018 | 9 | 41 | - | - | - | 50 | |||||||||||||||||||||||||
| 2019 | 17 | 32 | 49 | |||||||||||||||||||||||||||||
| 1. | The fair value of the options awarded to Mr. Nissenson, MacMillan and Shalem in 2019 and 2018 was determined to be $266 thousand and $64 thousand, respectively using the Black-Scholes Option Pricing Model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends |
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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The employment agreement for our named executive officer generally provides that in the event of termination of such executive’s employment for any reason, or if the executive resigns, the Company is required pay certain separation benefits, including (i) unpaid annual salary earned through the termination date; (ii) unused vacation; (iii) accrued and unpaid expenses; and (iv) other vested and accrued benefits to which he is entitled under the Company’s employee benefit plan. In the event the executive voluntarily resigns for “good reason” (as defined in each executive’s respective Employment Agreement) or the Company terminates their employment for any reason other than for cause (as defined in each executive’s respective Employment Agreement), the Company will be filedrequired to pay certain termination benefits, including (i) a lump sum payment equal to the greater of (A) unpaid annual salary through the end of the Initial Term or Renewal Term (as those terms are defined in each executive’s respective Employment Agreement) or (B) two years of annual salary and (ii) COBRA reimbursement.
CORPORATE GOVERNANCE
Board Leadership Structure and Risk Oversight
Our Board currently consists of four members, Shai Lustgarten, Neev Nisenson, Andrew J. MacMillan and Yaron Shalem. Mr. Lustgarten also serves as our Chief Executive Officer and Neev Nissenson also serves as our Chief Financial Officer. William Austin Lewis resigned from the Board in April 2017. Thomas O. Miller resigned from the Board in July 2017.
One of the key functions of our Board is to provide oversight of our risk management process. Our Board administers this oversight function directly, with support from its three standing committees—the Audit Committee, the Compensation Committee, and the Corporate Governance/Nominating Committee.
Director Independence
Pursuant to Item 407(a)(1)(ii) of Regulation S-K promulgated under the Securities Act, we have adopted the definition of “independent director” as set forth in Rules 5000(a)(19) and 5605(a)(2) of the rules of the Nasdaq Stock Market. The Board determined that Andrew J. MacMillan and Yaron Shalem qualify as “independent directors” pursuant to such rules.
Meetings
Our Board of Directors met 10times during 2019. Each member of our Board of Directors attended 100% of the total number of meetings of our Board and its committees on which he served during 2019.
Board Committees
We have three standing committees: the Audit Committee, the Compensation Committee, and the Corporate Governance/Nominating Committee. We believe that the members of the Audit Committee, Compensation Committee and Corporate Governance/Nominating Committee are deemed to be “independent” pursuant to the NASDAQ listing standards and applicable SEC rules. We believe that all members of our Board of Directors have been and remain qualified to serve on the committees of our Board and have the experience and knowledge to perform the duties required of the committees.
Audit Committee
The Audit Committee consists of Yaron Shalem and Andy MacMillan, whereby Mr. Shalem is the Chairman. Our Board has determined that Mr. Shalem qualifies as an “audit committee financial expert,” as defined under the rules of the SEC.
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The primary responsibility of the Audit Committee is to oversee the Company’s financial reporting process on behalf of the Board and report the results of their activities to the Board. The Audit Committee’s responsibilities include providing assistance to the Board in fulfilling the Board’s oversight responsibility relating to:
| ● | the integrity of the Company’s financial statements and the related public reports, | |
| ● | disclosures and regulatory filings in which they appear; | |
| ● | the systems of internal control over financial reporting, operations, and legal/regulatory compliance; | |
| ● | the performance, qualifications and independence of the Company’s independent accountants; | |
| ● | the performance, qualifications and independence of the Company’s internal audit function, and | |
| ● | compliance with the Company’s ethics policies and applicable legal and regulatory requirements. |
Our Audit Committee charter is available on the “About” subpage of our website (www.omniq.com) under the link “Corporate Governance”.
Compensation Committee
The Compensation Committee consists of Andrew J. MacMillan, Shai Lustgarten and Yaron Shalem. Mr. MacMillan is the Chairman.
The Compensation Committee’s responsibilities include, among others:
| ● | approve annually the corporate goals and objectives applicable to the compensation of the Chief Executive Officer and/or President, evaluate at least annually the Chief Executive Officer’s and/or President’s performance in light of those goals and objectives, and determine and approve the Chief Executive Officer’s and/or President’s compensation level based on this evaluation; | |
| ● | review matters relating to executive succession and management development; | |
| ● | formulate, evaluate, and approve compensation for the Company’s officers; | |
| ● | formulate, evaluate, and approve cash incentives and deferred compensation plans for executives; | |
| ● | formulate, approve, and administer and, when appropriate, recommend to the Board for approval, incentive compensation plans and equity-based plans; and | |
| ● | approve employment contracts, severance agreements, change in control provisions, and other compensatory arrangements with Company executives. |
The Compensation Committee has the authority, in its sole discretion, to select, retain and obtain the advice of a compensation consultant as necessary to assist with the Commission pursuant to Regulation 14Aexecution of its duties and responsibilities.
Our Compensation Committee charter is available on the “About” subpage of our website (www.omniq.com) under the Exchange Act.link “Corporate Governance”.
Corporate Governance/Nominating Committee
The Corporate Governance/Nominating Committee consists of Andrew J. MacMillan, Yaron Shalem and Shai S. Lustgarten, whereby Shai Lustgarten is the Chairman.
The Corporate Governance/Nominating Committee’s responsibilities include, among others:
| ● | develop and oversee the Company’s corporate governance practices and procedures, including identifying best practices and reviewing and recommending to the Board for approval any changes to the documents, policies and procedures in the Company’s corporate governance framework; |
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| ● | establish procedures for the director nomination and to determine the qualifications, qualities, skills, and other expertise required to be a director and to develop, and recommend to the Board for its approval, criteria to be considered in selecting nominees for director; | |
| ● | identify and screen individuals qualified to become members of the Board, consistent with the above criteria, considering any director candidates recommended by the Company’s stockholders; | |
| ● | oversee a process for an annual evaluation of the Company’s Chief Executive Officer and/or President; and | |
| ● | develop and oversee a process for an annual evaluation of the Board and its committees, including a formal assessment of each individual director. |
Our Corporate Governance/Nominating Committee charter is available on the “About” subpage of our website (www.omniq.com) under the link “Corporate Governance”.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information called forregarding beneficial ownership of our Common Stock as of December 31, 2019: (i) by this item is incorporated hereineach of our directors; (ii) by referenceeach of our executive officers; (iii) by our executive officers and directors as a group, and (iv) by each person or entity known by us to the definitive Proxy Statement, which will be filed with the Commission pursuant to Regulation 14a under the Exchange Act.beneficially own 5% or more of any class of our common stock. As of December 31, 2019, there were 3,960,405 shares of our common stock outstanding.
| Name and Address of Beneficial Owner (1) | Amount of Beneficial Ownership | Percentage of Shares Outstanding | ||||||
| Shai Lustgarten (Chairman and CEO) (1) | 1,181,191 | 29.83 | % | |||||
| Andrew MacMillan (2) | 67,500 | 1.70 | % | |||||
| Yaron Shalem (2) | 67,500 | 1.70 | % | |||||
| Neev Nissenson (CFO) (2) | 90,000 | 2.27 | % | |||||
| All Executive Officers and Directors as a group (4 individuals) | 1,406,191 | 35.51 | % | |||||
| David Marin (3) | 304,050 | 7.68 | % | |||||
| Carlos Nissenson (4) | 887,641 | 22.41 | % | |||||
| 1. | Includes 319,050 shares issuable upon the exercise of options. Also includes (i) 746,808 shares and (ii) 33,333 shares issuable upon the exercise of warrants held by Walefar Investments Ltd., which is beneficially owned by Mr. Lustgarten. | |
| 2. | Represents shares issuable upon exercise of options. | |
| 3. | Includes 296,988 shares issuable upon the conversion of preferred stock and the exercise of warrants. The address of the shareholder is 12272 Monarch Street, Garden Grove, CA 92841. | |
| 4. | The address of the shareholder is Vasili Michailidi 9, 3206 Limassol, Cyprus. Includes 729,308 shares held by Campbeltown Consulting Ltd., which is beneficially owned by Mr. Nissenson. Also includes 158,333 shares underlying warrants. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
All issuances described in this Item 13 reflect the Company’s Reverse Split.
2017
On August 2, 2017, the Company entered into a Consulting agreement with Carlos J. Nissensohn, a family member of a Director, and now also an Officer, of the Company. The information calledterms and condition of the contract are as follows:
| ● | 24 month term with 90 day termination notice by the Company | |
| ● | A monthly fee of $15 thousand and a one-time signatory fee of 30,000 restricted shares | |
| ● | 75,000warrants to buy shares at $2.20 having a four year life and a vesting period of 12 months in 4 quarterly and equal installments, subject to Mr. Nissensohn’s continuous service to the Company |
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| ● | In case the Company procures debt financing during the term of this agreement, without any equity component, Mr. Nissensohn shall be entitled to 3% of the gross funds raised, however if the Company is required to pay a success fee to another external entity, then Mr. Nissensohn shall be entitled to only 2% of the gross funds raised | |
| ● | In addition to the above, in the event of an equity financing resulting in gross proceeds of at least $3.0 million to the Company within 24 months of the date the contract, Mr. Nissenson shall further be entitled to certain warrants to be granted by the Company which upon their exercise pursuant to their terms, Mr. Nissensohn shall be entitled to receive OMNIQ shares which represent 3% of the OMNIQ issued share capital immediately prior to the consummation of such investment. The warrants will carry an exercise price per warrant/share representing 100% of the closing price per share as closed in the equity financing. This section and the issue of the warrant by OMNIQ are subject to the approval of the Board of Directors of OMNIQ. However, if the Board does not approve the issuance of warrants; then Mr. Nissensohn will be entitled to a fee with the equivalent value based on a Black Scholes valuation | |
| ● | In addition to the above, Mr. Nissensohn will be entitled to a$50 thousand onetime payment which shall be paid on the 1stday that the OMNIQ shares become traded on the NASDAQ or NYSE Stock Market within 24 months of the date of the contract | |
| ● | In addition to the aforementioned, in the event that Company shall close any M&A transaction with a third party target, Mr. Nissenson shall be entitled to a success fee in the amount equal to 3% of the total transaction price, in any combination of cash and shares that will be determined by OMNIQ. |
On September 8, 2017, the Company’s board of directors approved the Company’s 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, measures to improve efficiency and cost savings and financial services in accordance with the terms and conditions of the Consulting Agreement. In exchange for by this item is incorporated herein by referenceits consulting services, the Consultant will receive a monthly fee of $10 thousand for the months of September through December 2017, $15 thousand per month for the months of January through June 2018 and $20 thousand 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 definitive Proxy Statement,Company in connection with its recently announced business restructuring efforts.
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.
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.
2018
On February 26, 2018, the Company entered into a lease termination agreement with David and Kathy Marin whereby it canceled 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 entered into two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”). 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 million of which an aggregate of $10.7 million (the “Owed Amount”) was outstanding as of February 26, 2018 which includes accrued interest earned but not paid. Pursuant to the Marin Settlement I Agreement, the amount of the indebtedness owed to Marin was reduced by $9.5 million bringing the total amount owed to $1.2 million. Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20 thousand each commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc., currently in the amount of $2.8 million 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 released their security interest against the Company. In connection with the $9.5 million reduction in the purchase price, the Company issued the Marins 3 year warrants to purchase an aggregate of 150,000 shares of Common Stock at an exercise price of $4.00 per-share.
| 28 |
On February 28, 2018, the Company entered into 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 thousand which currently had a balance of $111 thousand in its entirety in exchange for an aggregate of 85,000 shares of the Company’s Series C Preferred Stock. The Series C Preferred Shares outstanding are convertible into common stock at the rate of 20 Preferred Shares to one share of common stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) and automatically converts into Common Stock at $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) in the event that the Company’s common stock has a closing price of $30 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 nor 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 thousand Note and the accrued interest thereon was cancelled in its entirety.
On February 28, 2018, the Company entered into a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5.4 million in full in exchange for 60 monthly payments of $13 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. currently in the amount of $2.8 million is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of 25,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement.
On February 28, 2018, the Company entered into a settlement agreement with George Zicman whereby the Company settled its indebtedness to Mr. Zicman in the current amount of $1.3 million in full in exchange for 60 monthly payments of $3 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. currently in the amount of $2.8 million is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of 5,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement.
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 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 entered into a settlement agreement (the “Settlement Agreement”) with Jason Griffith, a creditor and principal stockholder of the Company. Griffith is the owner of a promissory note in the principal amount of $1.25 million plus he is owed accrued interest of $125 thousand and is owed an additional $215 thousand of accrued dividends on his Series C Preferred Stock (the $1.6 million as calculated above is collectively referred to as the “Owed Amount”). Pursuant to the Settlement Agreement, Griffith will convert the Owed Amount into 430,000 shares of the Company’s restricted common stock and the Owed Amount will be fileddeemed satisfied in full. Griffith will continue to retain ownership of his 1,800,000 shares of Series C Preferred Stock except that he agrees that all accrued dividends are deemed satisfied and no dividends will be payable or will accrue on these preferred shares until one year from the date of the Settlement Agreement. The Series C Preferred Shares outstanding are convertible into common stock at the rate of 20 Preferred Shares to one share of common stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) and automatically converts into Common Stock at $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) in the event that the Company’s common stock has a closing price of $30 per share for 20 consecutive trading days. Griffith has agreed that he will not publicly sell more than 10% of any Shares of Common Stock beneficially owned by him in any 30-day period.
| 29 |
On October 5, 2018, the Company entered into the HTS Purchase Agreement with Walefar and Campbeltown, (Walefar and Campbeltown are collectively referred to as the Commission“Sellers”). Pursuant to the HTS Purchase Agreement, the Company purchased 100% of the capital stock of HTS from the Sellers. As consideration, the Company (i) issued to the Sellers 1,122,648 shares of the Company’s common stock, having a value of $5.3 million based on the average closing price of the common stock for the 20 days’ preceding the HTS Purchase Agreement (the “Per Share Value”), (ii) cash in the amount of $300 thousand, and (iii) a 12 month convertible promissory note with a principal amount of $700 thousand and an interest rate of six percent (6%) per year. The note also provides the Sellers the right to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $4.72. The HTS Purchase 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, a 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 HTS Purchase Agreement, Shai Lustgarten received 561,324 shares of the Company’s common stock and Carlos Jaime Nissenson received 561,324 shares of the Company’s common stock.
On May 29, 2019, the Company, Campbeltown and Walefar entered into an Amendment to the HTS Purchase Agreement (the “Amendment”), which provided for an adjustment to the number of shares of common stock issued to Walefar and Campbeltown in the acquisition of HTS. Pursuant to the Amendment, Campbeltown and Walefar agreed to return for cancelation 277,116 and 277,116 shares of common stock respectively. This Amendment reduced the amount of shares issued in the acquisition to 568,415 shares from 1,122,648 shares and the amount of share consideration to approximately $2.7 million from approximately $5.3 million. This adjustment was made as a result of a correction in the calculation of working capital and other share give back provisions of the HTS Purchase Agreement. This Amendment also reduces the Company’s issued and outstanding common stock to 3,850,451 from 4,404,684 as of June 4, 2019.
2019
On September 5, 2019, the Company entered into a letter agreement with Mr. Carlos J. Nissensohn and/or an entity under his control, a consultant to the Company and principal stockholder, (the “Nissensohn Agreement”) pursuant to Regulation 14Awhich they agreed to extend the term of Mr. Nissensohn’s and/or an entity under his control’s consulting agreement, entered into on August 2, 2017, for an additional two (2) years. As consideration and in light of Mr. Nissensohn’s and/or an entity under his control’s past consulting services which the Exchange Act.Company believes were essential to its recent achievements, the Company, pursuant to its 2018 Equity Incentive Plan, issued to Mr. Nissensohn and/or an entity under his control 27,500 shares of the Company’s common stock.
2020
On February 27, 2020, the Company entered into a consulting agreement with Mr. Carlos J. Nissensohn and/or an entity under his control, a consultant to the Company and principal stockholder, (the “Nissensohn Agreement”) pursuant to which Mr. Carlos J. Nissensohn and/or an entity under his control shall provide certain consulting services to the Company. The Nissensohn Agreement has a four (4) year term and automatically renews for additional one (1) year periods unless either party elects to terminate the Nissensohn Agreement. Pursuant to the Nissensohn Agreement, the Company shall pay Mr. Nissensohn a monthly fee of $30,000. Mr. Nissensohn shall also be eligible to receive certain milestone bonuses as set forth in the Nissensohn Agreement. Mr. Nissensohn is a principal stockholder of the Company.
Certain conflicts of interest may exist between the Company and its management, and conflicts may develop in the future. The Company has not established policies or procedures for the resolution of current or potential conflicts of interest between the Company, its officers and directors or affiliated entities. There can be no assurance that management will resolve all conflicts of interest in favor of the Company, and conflicts of interest may arise that can be resolved only through the exercise by management their best judgment as may be consistent with their fiduciary duties. Management will try to resolve conflicts to the best advantage of all concerned.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our Board is directly responsible for the appointment, compensation, and oversight of our independent auditor. It is the policy of our Board to pre-approve all audit and non-audit services provided by our independent registered public accountants. On June 6, 2019, RBSM LLP (“RBSM”) notified the Company of its resignation, effective immediately, as the Company’s independent registered public accounting firm. RBSM served as the auditors of the Company’s financial statements for the period from the Company’s fiscal year end December 31, 2014 through the date of dismissal. On June 6, 2019, the Company entered into an engagement agreement with Haynie & Company to provide audit services for the year ending December 31, 2019. Our Board has considered whether the provision by Haynie & Company of services of the varieties described below is compatible with maintaining the independence of Haynie & Company. Our Board believes that Haynie & Company only provided audit services. We use another firm to provide tax compliance services.
The information calledfees shown in the table under the 2019 column reflect fess billed to us by RBSM and Haynie & Company while the 2018 column reflect fees billed only by RBSM.
| Fiscal Year Ended | ||||||||
| December 31, | ||||||||
| In thousands | 2019 | 2018 | ||||||
| Audit fees | $ | 207 | $ | 189 | ||||
| Audit related fees | - | - | ||||||
| Tax fees | - | - | ||||||
| All other fees | - | - | ||||||
| Totals | $ | 207 | $ | 189 | ||||
In the above table, in accordance with the SEC’s definitions and rules, “audit fees” are fees for professional services for the audit of a company’s financial statements included in the annual report on Form 10-K, for the review of a company’s financial statements included in the quarterly reports on Form 10-Q, and for services that are normally provided by this item is incorporated herein by referencethe accountant in connection with statutory and regulatory filings or engagements; “audit-related fees” are fees for assurance and related services that are reasonably related to the definitive Proxy Statement, which will be filed withperformance of the Commission pursuantaudit or review of a company’s financial statements; “tax fees” are fees for tax compliance, tax advice, and tax planning; and “all other fees” are fees for any services not included in the first three categories.
Our policy is to Regulation 14A underpre-approve all audit and permissible non-audit services performed by the Exchange Act.independent accountants. These services may include audit services, audit-related services, tax services and other services. Under our Audit Committee’s policy, pre-approval is generally provided for particular services or categories of services, including planned services, project-based services and routine consultations. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. Our Audit Committee approved all services that our independent accountants provided to us in the past two fiscal years.
| 30 |
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission this Annual Report on Form 10-K including exhibits. You may read and copy all or any portion of any reports, statements or other information in the files at Commission’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. The Company’s filings, including this Annual Report on Form 10-K, will also be available to you on the website maintained by the Commission athttp://www.sec.gov.www.sec.gov.
The Company’s website is located at http://www.QuestSolution.com.www.omniq.com. The Company’s website and the information to be contained on that site, or connected to that site, are not part of or incorporated by reference into this filing.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) The following documents are filed under pages F-1 through F-26 and are included as part of this Form 10-K:
(a)(2) Financial statement schedules are omitted as they are not applicable.
(a)(3) Exhibits required by Item 601 of Regulation S-K are incorporated herein by reference and are listed on the attached Exhibit Index, which begins immediately following the financial statements of this Annual Report on Form 10-K.
NONE.
| 31 |
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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: April 17, 2017March 30, 2020
| By: | /s/ | |
| Chief Executive Officer and Chairman of the Board | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ | ||||
| /s/ | Director, Chief Financial Officer | March 30, 2020 | ||
| Neev Nissenson | ||||
| /s/Yaron Shalem | Director | |||
| /s/ | Director |
| ||
| 32 |
QUEST SOLUTION, INC.OMNIQ CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| 33 |
Report of Independent Registered Public Accounting Firm
To Thethe Board of Directors and Stockholders of
OMNIQ Corp. and subsidiaries (f/k/a Quest Solution, Inc.)
Opinion on the Financial Statements
We have audited, before the effects of the adjustments to retrospectively apply the impact of the reverse stock split described in Note 3, the accompanying consolidated balance sheetssheet of OMNIQ Corp. and subsidiaries (f/k/a Quest Solution, Inc. and subsidiaries (“The Company”) (the Company) as of December 31, 2016 and 2015,2018, and the related consolidated statements of operations,comprehensive income (loss), stockholders’ equity (deficit)deficit, and cash flows for the yearsyear ended December 31, 20162018, and 2015. Thesethe related notes, before the effects of the adjustments discussed in Note 3 are not presented herein, (collectively referred to as the consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements, referredbefore the effects of the adjustments to aboveretrospectively apply the impact of the reverse stock split described in Note 3, the present fairly, in all material respects, the financial positionpositions of Quest Solution, Inc. and subsidiaries,the Company as of December 31, 20162018, and 2015 and the consolidated results of its operations and its cash flows for the yearsyear ended December 31, 2016 and 20152018, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the impact of the reverse stock split described in Note 3 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Haynie & Company.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has an accumulated deficit and recurring losses. These facts and others raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis.
Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/ RBSM LLP
We have served as the Company’s auditor from 2015 to 2018
Larkspur, CA
June 5, 2019
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of OMNIQ Corp (formerly Quest Solution, Inc.)
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of OMNIQ Corp. and Subsidiaries (the Company), formerly known as Quest Solution, Inc., as of December 31, 2019, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited the adjustment to the financial statements of the Company as of and for the year ended December 31, 2018 to retrospectively apply the reverse stock split described in Note 3 to the financial statements. In our opinion, such adjustment is appropriate and has been properly applied. We were not engaged to audit, review or apply any procedures to the financial statements of the Company as of and for the year ended December 31, 2018 other than with respect to the adjustment and, accordingly, we do not express an opinion or any other form of assurance on the financial statements of the Company as of and for the year ended December 31, 2018 taken as a whole.
Consideration of the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a working capital deficiencydeficit in stockholders’ equity, and significant subordinated debt resultinghas sustained recurring losses from acquisitions. These factors raiseoperations. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans inwith regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Haynie & Company
Salt Lake City, Utah
March 30, 2020
We have served as the Company’s auditor since 2019.
| F-2 |
RBSM, LLP
Larkspur, CAOMNIQ CORP.
April 17, 2017
CONSOLIDATED BALANCE SHEETS
As of December 31,
| (In thousands, except share and per share data) | 2019 | 2018 | ||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,615 | $ | 378 | ||||
| Accounts receivable, net | 6,694 | 12,262 | ||||||
| Inventory | 1,889 | 1,803 | ||||||
| Prepaid expenses | 362 | 169 | ||||||
| Other current assets | 65 | 78 | ||||||
| Total current assets | 10,625 | 14,690 | ||||||
| Property and equipment, net of accumulated depreciation of $2,195 and $2,037, respectively | 463 | 389 | ||||||
| Goodwill | 13,921 | 13,921 | ||||||
| Trade name, net of accumulated amortization of $2,932 and $2,585, respectively | 1,458 | 1,805 | ||||||
| Customer relationships, net of accumulated amortization of $6,578 and $5,076, respectively | 6,012 | 7,514 | ||||||
| Other intangibles, net of accumulated amortization of $185 and $33, respectively | 1,138 | 1,267 | ||||||
| Cash, restricted | 533 | 532 | ||||||
| ROU asset | 131 | - | ||||||
| Other assets | 172 | 30 | ||||||
| Total assets | $ | 34,453 | $ | 40,148 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 18,694 | $ | 17,484 | ||||
| Line of credit | 1,365 | 4,534 | ||||||
| Accrued payroll and sales tax | 1,556 | 2,173 | ||||||
| Notes payable, related parties – current portion | 1,025 | 1,891 | ||||||
| Notes payable – current portion | 6,497 | 8,823 | ||||||
| Lease liability – current portion | 54 | - | ||||||
| Other current liabilities | 1,599 | 265 | ||||||
| Total current liabilities | 30,790 | 35,170 | ||||||
| Long term liabilities | ||||||||
| Notes payable, related party, less current portion | 1,172 | 1,912 | ||||||
| Accrued interest and accrued liabilities, related party | 76 | 33 | ||||||
| Notes payable, less current portion | 143 | 130 | ||||||
| Lease liability | 80 | |||||||
| Other long term liabilities | 384 | 610 | ||||||
| Total liabilities | 32,645 | 37,855 | ||||||
| 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 shares issued and outstanding | 5 | 5 | ||||||
| Common stock; $0.001 par value; 200,000,000 shares authorized; 3,960,405 and 3,596,585 shares issued and outstanding, respectively. | 4 | 4 | ||||||
| Common stock; $0.001 par value; 554,233 shares to be received | - | (2,616 | ) | |||||
| Common stock to be repurchased by the Company | - | (230 | ) | |||||
| Additional paid-in capital | 46,861 | 44,882 | ||||||
| Accumulated (deficit) | (45,063 | ) | (39,753 | ) | ||||
| Accumulated other comprehensive loss | 1 | 1 | ||||||
| Total stockholders’ equity | 1,808 | 2,293 | ||||||
| Total liabilities and stockholders’ equity | $ | 34,453 | $ | 40,148 | ||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 289,480 | $ | 823,391 | ||||
| Cash, restricted | 665,220 | 690,850 | ||||||
| Accounts receivable, net | 10,589,677 | 7,903,338 | ||||||
| Inventory | 531,593 | 471,479 | ||||||
| Prepaid expenses | 272,926 | 649,123 | ||||||
| Deferred tax asset, current | - | 160,545 | ||||||
| Other current assets | 772,966 | 395,642 | ||||||
| Assets held for disposal | - | 18,254,601 | ||||||
| Total current assets | 13,121,862 | 29,348,969 | ||||||
Fixed assets, net of accumulated depreciation of $3,224,023 and $3,133,397, respectively | 136,835 | 201,897 | ||||||
| Deferred tax asset, non-current | - | 433,997 | ||||||
| Goodwill | 10,114,164 | 10,114,164 | ||||||
| Trade name | 2,936,481 | 3,513,481 | ||||||
| Intangibles, net | - | 8,250 | ||||||
| Customer relationships | 6,435,652 | 7,560,352 | ||||||
| Other assets | 47,563 | 689,347 | ||||||
| Total assets | $ | 32,792,557 | $ | 51,870,457 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 10,566,066 | $ | 14,360,980 | ||||
| Accrued interest and accrued liabilities, related party | - | 177,776 | ||||||
| Line of credit | 5,059,292 | 2,960,342 | ||||||
| Advances, related party | 100,000 | 400,000 | ||||||
| Accrued payroll and sales tax | 1,829,934 | 1,322,188 | ||||||
| Deferred revenue, net | 879,026 | 685,317 | ||||||
| Current portion of note payable | 9,782,925 | - | ||||||
| Notes payable, related parties | - | 6,790,148 | ||||||
| Other current liabilities | 227,932 | 369,609 | ||||||
| Liabilities held for disposal | - | 10,795,906 | ||||||
| Total current liabilities | 28,445,175 | 37,862,266 | ||||||
| Long term liabilities | ||||||||
| Note payable, related party, net of debt discount | 17,515,345 | 13,546,840 | ||||||
| Accrued interest and accrued liabilities, related party | 629,238 | - | ||||||
| Long term portion of note payable | 130,294 | 126,942 | ||||||
| Deferred revenue, net | 565,423 | 533,874 | ||||||
| Other long term liabilities | 332,270 | 271,902 | ||||||
| Total liabilities | 47,617,745 | 52,341,824 | ||||||
| Stockholders’ equity (deficit) | ||||||||
| Series A Preferred stock; $0.001 par value; 1,000,000 shares designated, 0 shares issued and outstanding as of December 31, 2016 and 2015, respectively. | - | - | ||||||
| Series B Preferred stock; $0.001 par value; 1 share designated, 0 shares and 1 share issued and outstanding as of December 31, 2016 and 2015, respectively. | - | 1 | ||||||
| Series C Preferred stock; $0.001 par value; 15,000,000 shares designated, 3,143,530 and 0 shares issued and outstanding as of December 31, 2016 and 2015, respectively, liquidation preference of $1 per share and a cumulative dividend of $0.06 per share. | 3,144 | - | ||||||
| Common stock; $0.001 par value; 100,000,000 shares authorized; 35,095,763 and 36,871,478 shares issued and outstanding of December 31, 2016 and 2015 respectively. | 35,095 | 36,871 | ||||||
| Common stock to be repurchased by the Company | (230,490 | ) | - | |||||
| Additional paid-in capital | 18,302,262 | 17,948,997 | ||||||
| Accumulated (deficit) | (32,935,199 | ) | (18,457,236 | ) | ||||
| Total stockholders’ (deficit) | (14,825,188 | ) | (471,367 | ) | ||||
| Total liabilities and stockholders’ equity (deficit) | $ | 32,792,557 | $ | 51,870,457 | ||||
The accompanying unaudited notes to the financials should be read in conjunction with these condensed
consolidated financial statements.
| F-3 |
OMNIQ CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
| (In thousands, except share and per share data) | 2019 | 2018 | ||||||
| Revenues | ||||||||
| Total Revenues, net | $ | 57,199 | $ | 56,202 | ||||
| Cost of goods sold | ||||||||
| Cost of goods sold | 43,165 | 43,140 | ||||||
| Gross profit | 14,034 | 13,062 | ||||||
| Operating expenses | ||||||||
| General and administrative | 2,674 | 2,472 | ||||||
| Salary and employee benefits | 10,079 | 9,917 | ||||||
| Depreciation and amortization | 2,154 | 1,841 | ||||||
| Professional fees | 1,991 | 1,856 | ||||||
| Total operating expenses | 16,898 | 16,086 | ||||||
| Loss from operations | (2,864 | ) | (3,024 | ) | ||||
| Other income (expenses): | ||||||||
| Interest expense | (2,555 | ) | (1,570 | ) | ||||
| Other (expenses) income | (23 | ) | (1,133 | ) | ||||
| Total other expense | (2,578 | ) | (2,703 | ) | ||||
| Net loss before income taxes | (5,442 | ) | (5,727 | ) | ||||
| (Provision) benefit for Income Taxes | ||||||||
| Current | (14 | ) | (47 | ) | ||||
| Deferred | - | 552 | ||||||
| Total income tax benefit (provision) | (14 | ) | 505 | |||||
| Net loss from continuing operations | (5,456 | ) | (5,222 | ) | ||||
| Less: Preferred stock – series C dividend | (146 | ) | 189 | |||||
| Net loss attributable to the common stockholders | (5,310 | ) | (5,411 | ) | ||||
| Foreign currency translation adjustment | - | 1 | ||||||
| Other comprehensive income (loss) | $ | (5,310 | ) | $ | (5,410 | ) | ||
| Net loss per share – basic | $ | (1.37 | ) | $ | (2.18 | ) | ||
| Net loss per share – diluted | $ | (1.37 | ) | $ | (2.18 | ) | ||
| Weighted average number of common shares outstanding – basic and diluted | 3,889,478 | 2,481,530 | ||||||
The accompanying notes to the financials should be read in conjunction with these financial statements.
| F-4 |
OMNIQ CORP.
CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONSSTOCKHOLDERS’ EQUITY (DEFICIT)
For the Years Ended December 31, 2019 and 2018
| Year ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenues | ||||||||
| Gross Sales | $ | 61,189,727 | $ | 59,240,644 | ||||
| Less sales returns, discounts, & allowances | (1,142,603 | ) | (642,113 | ) | ||||
| Total Revenues | 60,047,124 | 58,598,531 | ||||||
| Cost of goods sold | ||||||||
| Cost of goods sold | 47,952,579 | 46,650,277 | ||||||
| Total cost of goods sold | 47,952,579 | 46,650,277 | ||||||
| Gross profit | 12,094,545 | 11,948,254 | ||||||
| Operating expenses | ||||||||
| General and administrative | 2,327,889 | 2,813,984 | ||||||
| Salary and employee benefits | 8,409,223 | 8,220,135 | ||||||
| Depreciation and amortization | 1,792,326 | 2,598,823 | ||||||
| Professional fees | 754,411 | 411,261 | ||||||
| Total operating expenses | 13,283,849 | 14,044,203 | ||||||
| Loss from operations | (1,189,304 | ) | (2,905,949 | ) | ||||
| Other income (expenses): | ||||||||
| Gain on intangible | - | 374,500 | ||||||
| Write-off of other assets | (450,000 | ) | - | |||||
| Gain on extinguishment of other liabilities | 150,000 | - | ||||||
| Interest expense | (4,531,263 | ) | (1,438,422 | ) | ||||
| Restructuring expense | (544,941 | ) | - | |||||
| Gain on foreign currency | 129,589 | - | ||||||
| Other (expenses) income | 11,001 | (100,777 | ) | |||||
| Total other expense | (5,235,614 | ) | (1,164,699 | ) | ||||
| Net Loss Before Income Taxes | (6,424,918 | ) | (3,260,648 | ) | ||||
(Provision) benefit for Income Taxes | ||||||||
| Deferred | (769,633 | ) | 1,797,977 | |||||
| Current | (298,719 | ) | (12,453 | ) | ||||
| Total Benefit for Income Taxes | (1,068,352 | ) | 1,785,524 | |||||
| Net loss from continuing operations | $ | (7,493,270 | ) | $ | (1,475,124 | ) | ||
| Net loss from discontinued operations | (6,851,875 | ) | (239,956 | ) | ||||
| Net Loss attributable to Quest Solution Inc. | $ | (14,345,145 | ) | $ | (1,715,080 | ) | ||
| Less: Preferred stock – Series C dividend | (132,818 | ) | - | |||||
| Net loss attributable to the common stockholders | $ | (14,212,327 | ) | $ | (1,715,080 | |||
| Net loss per share - basic | $ | (0.40 | ) | $ | (0.05 | ) | ||
| Net loss per share - diluted | $ | (0.40 | ) | $ | (0.05 | ) | ||
| Net loss per share from continuing operations - basic | $ | (0.21 | ) | $ | (0.04 | ) | ||
| Net loss per share from continuing operations - diluted | $ | (0.21 | ) | $ | (0.04 | ) | ||
| Net loss per share from discontinued operations - basic | $ | (0.19 | ) | $ | (0.01 | ) | ||
| Net loss per share from discontinued operations - diluted | $ | (0.19 | ) | $ | (0.01 | ) | ||
| Weighted average number of common shares outstanding - basic | 35,947,523 | 36,195,065 | ||||||
| Weighted average number of common shares outstanding - diluted | 35,947,523 | 36,195,065 | ||||||
| Series C Preferred Stock | Common Stock | Additional Paid-in | Shares | Accumulated | Other Comprehensive | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| (In thousands) | Shares | Amount | Shares | Amount | Capital | Repurchased | Deficit | Income (Loss) | (Deficit) | |||||||||||||||||||||||||||
| Balance, December 31, 2017 | 4,829 | $ | 5 | 1,841 | $ | 2 | $ | 34,530 | $ | (230 | ) | $ | (35,555 | ) | $ | - | $ | (1,248 | ) | |||||||||||||||||
| ASC 606 | - | - | - | - | - | - | 1,213 | - | 1,213 | |||||||||||||||||||||||||||
| Board Issuances | - | - | 50 | - | 119 | - | - | - | 119 | |||||||||||||||||||||||||||
| Dividend on Class C Shares | - | - | - | - | - | - | (189 | ) | - | (189 | ) | |||||||||||||||||||||||||
| ESPP Stock Issuance | - | - | 4 | - | 11 | - | - | - | 11 | |||||||||||||||||||||||||||
| Stock-based compensation – options and warrants | - | - | - | - | 1,818 | - | - | - | 1,818 | |||||||||||||||||||||||||||
| Stock Based Compensation | - | - | 141 | - | 395 | - | - | - | 395 | |||||||||||||||||||||||||||
| Debt Settlements | - | - | 430 | 1 | 2,666 | - | - | - | 2,667 | |||||||||||||||||||||||||||
| Shares issued for acquisition of HTS | - | - | 1,123 | 1 | 5,298 | - | - | - | 5,299 | |||||||||||||||||||||||||||
| Shares to be received | - | - | - | - | (2,616 | ) | - | - | - | (2,616 | ) | |||||||||||||||||||||||||
| Other | - | - | 8 | - | 45 | - | - | - | 45 | |||||||||||||||||||||||||||
| Accumulated other comprehensive loss | - | - | - | - | - | - | - | 1 | 1 | |||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | - | (5,222 | ) | - | (5,222 | ) | |||||||||||||||||||||||||
| Balance, December 31, 2018 | 4,829 | $ | 5 | 3,597 | $ | 4 | $ | 42,266 | $ | (230 | ) | $ | (39,753 | ) | $ | 1 | $ | 2,293 | ||||||||||||||||||
| Balance, December 31, 2018 | 4,829 | $ | 5 | 3,597 | $ | 4 | $ | 42,266 | $ | (230 | ) | $ | (39,753 | ) | $ | 1 | $ | 2,293 | ||||||||||||||||||
| Dividend on Class C Shares | - | - | - | - | - | - | 146 | - | 146 | |||||||||||||||||||||||||||
| ESPP Stock Issuance | - | - | - | - | 1 | - | - | - | 1 | |||||||||||||||||||||||||||
| Stock-based compensation – options, warrants, issuances | - | - | 78 | - | 1,267 | - | - | - | 1,267 | |||||||||||||||||||||||||||
| Stock and warrant issuances, net of issuance costs | - | - | 833 | 1 | 3,406 | - | - | - | 3,407 | |||||||||||||||||||||||||||
| Purchase price adjustment – shares to be received | - | - | (555 | ) | (1 | ) | 1 | - | - | - | - | |||||||||||||||||||||||||
| Stock redemption | - | - | (25 | ) | - | (230 | ) | 230 | - | - | - | |||||||||||||||||||||||||
| Conversion of debt | - | - | 32 | - | 150 | - | - | - | 150 | |||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | - | (5,456 | ) | - | (5,456 | ) | |||||||||||||||||||||||||
| Balance, December 31, 2019 | 4,829 | $ | 5 | 3,960 | $ | 4 | $ | 46,861 | $ | - | $ | (45,063 | ) | $ | 1 | $ | 1,808 | |||||||||||||||||||
The accompanying notes to the financials should be read in conjunction with these financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
| F-5 |
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Shares to be | Accumulated | Total Stockholders | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Repurchased | Deficit | Equity (deficit) | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2014 | 500,000 | $ | 500 | - | - | - | $ | - | 35,029,495 | $ | 35,029 | $ | 17,900,139 | $ | - | $ | (16,742,156 | ) | $ | 1,193,512 | ||||||||||||||||||||||||||||
| Stock compensation | - | - | - | - | 870,000 | 870 | 314,610 | - | 315,480 | |||||||||||||||||||||||||||||||||||||||
| Sale of shares | - | - | - | - | 667,000 | 667 | 199,333 | - | 200,000 | |||||||||||||||||||||||||||||||||||||||
| Shares issued for interest | - | - | - | - | 170,000 | 170 | 62,561 | - | 62,731 | |||||||||||||||||||||||||||||||||||||||
| Options earned | - | - | - | - | - | - | 429,617 | - | 429,617 | |||||||||||||||||||||||||||||||||||||||
| Shares canceled | - | - | - | - | (2,517 | ) | (3 | ) | - | - | (3 | ) | ||||||||||||||||||||||||||||||||||||
| Debt settlement | - | - | - | - | 1,000,000 | 1,000 | 356,000 | - | 357,000 | |||||||||||||||||||||||||||||||||||||||
| Preferred and options cancelled for debt issued | (500,000 | ) | (500 | ) | - | - | - | - | (3,119,500 | ) | - | (3,120,000 | ) | |||||||||||||||||||||||||||||||||||
| Board issuances | - | - | - | - | 37,500 | 38 | 15,338 | - | 15,375 | |||||||||||||||||||||||||||||||||||||||
| Share redemption | - | - | - | - | (900,000 | ) | (900 | ) | (341,100 | ) | - | (342,000 | ) | |||||||||||||||||||||||||||||||||||
| ViascanQdata Purchase | 1 | 1 | - | - | 2,131,999 | - | 2,132,000 | |||||||||||||||||||||||||||||||||||||||||
| Net loss from continuing operations | (1,475,124 | ) | (1,475,124 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss from discontinued operations | (239,956 | ) | (239,956 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2015 | - | $ | - | 1 | $ | 1 | - | $ | - | 36,871,478 | $ | 36,871 | $ | 17,948,997 | $ | - | (18,457,236 | ) | $ | (471,367 | ) | |||||||||||||||||||||||||||
| Board issuances | - | - | - | - | 150,000 | 150 | 28,650 | - | - | 28,800 | ||||||||||||||||||||||||||||||||||||||
| Options earned | - | - | - | - | - | - | 73,128 | - | - | 73,128 | ||||||||||||||||||||||||||||||||||||||
| Stock Issuances for cash | - | - | - | - | 238,785 | 239 | 19,819 | - | - | 20,058 | ||||||||||||||||||||||||||||||||||||||
| Stock Issuances for services | 878,000 | 878 | 63,869 | 64,747 | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Debt to Preferred | - | - | - | - | 4,525,560 | 4,526 | 4,350,034 | - | - | 4,354,560 | ||||||||||||||||||||||||||||||||||||||
| Conversion of Common to Preferred | - | - | - | - | 457,000 | 457 | (1,042,500 | ) | (1,043 | ) | 84,903 | - | - | 84,317 | ||||||||||||||||||||||||||||||||||
| Stock Issuance Costs | - | - | - | - | (65,448 | ) | - | - | (65,448 | ) | ||||||||||||||||||||||||||||||||||||||
| Share redemption | - | - | - | - | (1,650,000 | ) | (1,650 | ) | (748,350 | ) | - | - | (750,000 | ) | ||||||||||||||||||||||||||||||||||
| Share redemption for note payable | (350,000 | ) | (350 | ) | (59,150 | ) | - | - | (59,500 | ) | ||||||||||||||||||||||||||||||||||||||
| Debt Forgiveness | 575,000 | 575,000 | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares to be repurchased | (230,490 | ) | (230,490 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Dividend on Class C Shares | (132,818 | ) | (132,818 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Divestiture of Quest Solution Canada Inc. | (1 | ) | (1 | ) | (1,839,030 | ) | (1,839 | ) | - | - | (3,969,190 | ) | - | - | (3,971,030 | ) | ||||||||||||||||||||||||||||||||
| Net loss from continuing operations | (7,493,270 | ) | (7,493,270 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss from discontinued operations | (6,851,875 | ) | (6,851,875 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | - | $ | - | - | $ | - | 3,143,530 | $ | 3,144 | 35,095,763 | $ | 35,095 | $ | 18,302,262 | $ | (230,490 | (32,935,199 | ) | $ | (14,825,188 | ) | |||||||||||||||||||||||||||
OMNIQ CORP.
The accompanying notes to the financials should be read in conjunction with these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
| For the Year Ending | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from continuing operating activities: | ||||||||
| Net loss | $ | (7,493,270 | ) | (1,475,124 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Restructuring expenses | 544,941 | - | ||||||
| Stock based compensation | 374,451 | 751,034 | ||||||
| Shares issued for interest | - | 62,731 | ||||||
| Debt discount accretion | 2,135,298 | 718,202 | ||||||
| Depreciation and amortization | 1,792,326 | 2,598,823 | ||||||
| Gain on intangible | - | (374,500 | ) | |||||
| Write-off of other assets | 450,000 | - | ||||||
| Gain on extinguishment of other liabilities | (150,000 | ) | - | |||||
| Deferred income taxes (recovery) | 769,633 | (1,797,977 | ) | |||||
| Unrealized foreign exchange loss | 42,875 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) / decrease in accounts receivable | (2,686,339 | ) | 1,195,891 | |||||
| (Increase) / decrease in prepaid | 68,421 | (448,186 | ) | |||||
| (Increase) / decrease in inventory | (60,114 | ) | 134,752 | |||||
| Increase in accounts payable and accrued liabilities | 8,881,651 | 6,954,834 | ||||||
| Increase in accrued interest and accrued liabilities, related party | 574,379 | 137,167 | ||||||
| Increase in deferred revenue, net | 225,258 | 930,849 | ||||||
| Increase in accrued payroll and sales taxes payable | 47,122 | 405,109 | ||||||
| (Increase) / decrease in other assets | 151,020 | (390,625 | ) | |||||
| (Decrease) in other liabilities | (14,973 | ) | (102,758 | ) | ||||
| Net cash provided by operating activities | 5,652,679 | 9,300,221 | ||||||
| Cash flows from investing activities: | ||||||||
| Cash from divestiture of Quest Solution Canada Inc. | 576,592 | - | ||||||
| (Increase) / decrease in restricted cash | 25,630 | (690,850 | ) | |||||
| Purchase of property and equipment | (17,314 | ) | (87,891 | ) | ||||
| Net cash provided by (used in) investing activities | 584,908 | (778,741 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from shares sold | 20,058 | 200,000 | ||||||
| Share issuance expenses | (65,448 | ) | - | |||||
| Increase in Insurance Note | 130,238 | - | ||||||
| Proceeds from line of credit | 2,098,950 | 1,140,997 | ||||||
| Redemption of shares | (750,000 | ) | - | |||||
| Payment of notes payable | (3,610,222 | ) | (6,626,036 | ) | ||||
| Payment of loans payable | - | (350,000 | ) | |||||
| Net cash (used in) financing activities | (2,176,424 | ) | (4,935,039 | ) | ||||
| Cash used in discontinued operations | (4,595,074 | ) | (2,996,791 | ) | ||||
| Net (decrease) increase in cash | (533,911 | ) | 589,650 | |||||
| Cash, beginning of period | 823,391 | 233,741 | ||||||
| Cash, end of period | $ | 289,480 | 823,391 | |||||
| Cash paid for interest | $ | 1,029,414 | 567,194 | |||||
| Cash paid for taxes | $ | 399,037 | 96,069 | |||||
| Supplementary for non-cash flow information: | ||||||||
| Stock issued for Services | $ | 64,747 | $ | - | ||||
| Stock issued for interest expense | $ | - | $ | 62,731 | ||||
| Debt issued to redeem preferred and stock options | $ | - | $ | 3,120,000 | ||||
| Share redemption for settlement of intangible | $ | - | $ | 342,000 | ||||
Conversion of Debt to common shares | $ | - | $ | 357,000 | ||||
| Conversion of Common to Preferred | $ | 357,000 | $ | - | ||||
| Share redemption for note payable | $ | 59,500 | $ | - | ||||
| Shares to be repurchased | $ | (230,490 | ) | $ | - | |||
| Conversion of Debt to preferred shares | $ | 4,354,560 | $ | - | ||||
| (In thousands, except share and per share data) | 2019 | 2018 | ||||||
| Cash flows from operations | ||||||||
| Net loss | $ | (5,456 | ) | $ | (5,222 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Change in deferred tax allowance | - | (552 | ) | |||||
| Stock-based compensation | 1,267 | 2,387 | ||||||
| Excess fair value of common stock issued for debt conversion | - | 1,264 | ||||||
| Depreciation and amortization | 2,154 | 1,841 | ||||||
| Amortization of ROU asset | 93 | - | ||||||
| Write-off of other assets | - | (36 | ) | |||||
| Other | - | (10 | ) | |||||
| Amortization of debt discount | - | 59 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 5,568 | (5,853 | ) | |||||
| Prepaid expenses | (271 | ) | 322 | |||||
| Inventory | (178 | ) | (429 | ) | ||||
| Other assets | (11 | ) | 49 | |||||
| Accounts payable and accrued liabilities | 2,011 | 8,114 | ||||||
| Accrued interest and accrued liabilities, related party | 43 | 32 | ||||||
| Accrued payroll and sales taxes payable | (617 | ) | 642 | |||||
| Lease liability | (89 | ) | - | |||||
| Other liabilities | (259 | ) | 88 | |||||
| Net cash provided by operating activities | 4,255 | 2,696 | ||||||
| Cash flows from investing activities | ||||||||
| Restricted cash | - | 153 | ||||||
| Purchase of property and equipment | (134 | ) | (29 | ) | ||||
| Cash paid for acquisition net of cash acquired | - | (23 | ) | |||||
| Cash from sale of assets | - | 42 | ||||||
| Other assets | (117 | ) | 8 | |||||
| Net cash provided by (used in) investing activities | (251 | ) | 151 | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from ESPP stock issuance | 1 | - | ||||||
| Proceeds from sale of common stock | 3,770 | 11 | ||||||
| Payments on notes/loans payable | (3,369 | ) | (3,819 | ) | ||||
| Proceeds from the issuance of notes/loans payable | - | 487 | ||||||
| Proceeds from (payments on) line of credit | (3,169 | ) | 866 | |||||
| Due to Owner | - | (100 | ) | |||||
| Net cash used in financing activities | (2,767 | ) | (2,555 | ) | ||||
| Net increase (decrease) in cash | 1,237 | 292 | ||||||
| Foreign currency translation adjustment | - | 61 | ||||||
| Cash, beginning of year | 378 | 25 | ||||||
| Cash, end of year | $ | 1,615 | $ | 378 | ||||
| Net increase (decrease) in restricted cash | 1 | (153 | ) | |||||
| Restricted cash, beginning of year | 532 | 685 | ||||||
| Restricted cash, end of year | $ | 533 | $ | 532 | ||||
| Cash paid for interest | $ | 2,167 | $ | 1,440 | ||||
| Cash paid for taxes | $ | 47 | $ | - | ||||
| Supplementary for non-cash flow information: | ||||||||
| Stock issued for services | $ | 274 | $ | 2,213 | ||||
| Stock issued for debt settlement | $ | - | $ | 2,711 | ||||
| Accounts payable converted to notes payable | $ | - | $ | (6,764 | ) | |||
| Debt conversion | $ | 550 | $ | - | ||||
| Notes payable – related party and accrued interest converted to common stock | - | 2,666 | ||||||
| Change in terms of accounts payable | $ | (801 | ) | $ | - | |||
The accompanying notes are integral to the financials should be read in conjunction with these consolidated financial statements.
| F-6 |
OMNIQ CORP.
QUEST SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As ofFor the Years Ended December 31, 20162019 and 20152018
NOTE 1 – HISTORY AND ORGANIZATION OF THE COMPANY
OMNIQ Corp. (formerly Quest Solution, Inc.), a Delaware corporation (“Quest”OMNIQ” 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.
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.
History
In May 2014, the Board of Directors voted to getseek 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 we 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.
In November 2014, the companyCompany acquired 100% of the shares of Bar Code Specialties, Inc. (“BCS”) located in Southern California. BCS is a national mobility systems integrator and label manufacturer with a focus on warehouse and distribution industries. Since the combination of the two companies, the companyCompany has been exploring efficiencies in all facets of the businesses and learning best practices from both executive teams. On December 31, 2016, the Company merged BCS into Quest Marketing to form one US legal entity as part of its streamlining efforts.
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Effective October 1, 2015, the Company acquired the 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 of which $576,592$577 thousand was received at closing and the balance iswas required to be paid before April 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$32 thousand thereon. Lastly, Quest Exchange Ltd., 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., 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:
| - | ● | Full release from five employment contracts, inclusive of the former CEO, Gilles Gaudreault. This release included cancelation of the contracts as well as the deferred salary and signing bonus provisions which would have inured to the employee. |
| - | ● | The Company |
| - | ● | The Company also negotiated a right of first refusal for any offer to purchase Quest Solution Canada Inc. for a 7 year period. |
| - | ● | The assets sold consisted primarily of accounts receivable, inventories, property and equipment, and other assets. The buyer also assumed certain accounts payable and accrued liabilities. |
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,October 5, 2018, the Company merged BCSentered 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 capital stock of HTS Image Processing, Inc. (“HTS��) from the Sellers. Also, the Company acquired HTS’s wholly owned subsidiaries HTS USA, Inc. and Teamtronics Ltd (“TT Ltd”).
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 $5.0 million of units (the “Units”) resulting in gross proceeds of $5.0 million, before deducting placement agent fees and offering expenses (the “Offering”). The individual 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 833,333 shares of Common Stock (the “Shares”) and warrants (the “Warrants”) to purchase 833,333 shares of Common Stock (the “Warrant Shares”) at an exercise price equal to $7.00 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. Nissenson, a consultant to and principal stockholder of the Company, participated in the Offering by converting $200 thousand 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 $5.0 million. As a result of the Conversions, a principal amount of $150 thousand is owed to each Walefar and Campbeltown respectively under the note issued to them as partial consideration in the sale of HTS Image Processing to the Company on October 5, 2018.
On May 29, 2019, the Company, Campbeltown and Walefar entered into an Amendment to the HTS Purchase Agreement (the “Amendment”), which provided for an adjustment to the number of shares of common stock issued to Walefar and Campbeltown in the acquisition of HTS. Pursuant to the Amendment, Campbeltown and Walefar agreed to return for cancelation 277,166 and 277,116 shares of common stock respectively. This Amendment reduced the number of shares issued in the acquisition to 568,415 shares from 1,122,648 shares and the amount of share consideration to approximately $2.7 million from approximately $5.3 million. This adjustment was made as a result of a correction in the calculation of working capital and other share give back provisions of the HTS Purchase Agreement. This Amendment also reduced the Company’s issued and outstanding common stock to 3,850,451 from 4,404,684 as of June 4, 2019.
On November 18, 2019, the Company filed an amendment to its Certificate of Incorporation, as amended with the Secretary of State of Delaware, pursuant to which the Company i) changed its name from Quest MarketingSolution, Inc. to form one US legal entity as partOMNIQ Corp. (ticker symbol OMQS) and ii) effected a reverse split of its streamlining efforts.common effective November 20, 2019 (the “Reverse Split”). The Amendment provides that every twenty shares of the Company’s issued and outstanding common stock will automatically be combined into one issued and outstanding share of common stock, without any change in par value per share. As a result of the Reverse Split, proportionate adjustments have been made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options and warrants issued by the Company and outstanding immediately prior to the Effective Date, which resulted in a proportionate decrease in the number of shares of the Company’s common stock reserved for issuance upon exercise or vesting of such stock options, restricted stock units and warrants, and, in the case of stock options and warrants, a proportionate increase in the exercise price of all such stock options and warrants. In addition, the number of shares authorized for future grant under the Company’s equity incentive/compensation plans immediately prior to the Effective Date have been reduced proportionately. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split.
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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 December 31, 2016,2019, the Company had a working capital deficit of $15,323,313$20.2 million and an accumulated deficit of $32,935,199.$45.1 million. These facts and others raise substantial doubt about the Company’s ability to continue as a going concern. 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 raisefollowing:
The continuation of improving cash flow by maintaining moderate cost reductions (subsequent to aggressive cost reduction actions already taken in 2018 and continued in 2019);
Increasing the accounts receivable factoring line of credit;
Negotiating lower interest rates on outstanding debt;
Potential issuances of additional capital through issuance of debt and equity, improved cash flow management, aggressive cost reductions, and thecommon stock;
The creation of additional sales and profits across its product lines. On 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 diversification in the sourcing and procurement of materials and finished goods. The addition of two new key vendors in 2018 increased the Company’s purchasing power by adding credit availability in an amount just under $5.0 million;
With the acquisition of HTS in October 2018, the Company has in its portfolio of products a computer vision technology that is based on AI 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;
In April 2019, the path to attain profitability wasCompany raised approximately $5.0 million in gross proceeds from 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 additional833,333 shares of common stock for cash and services during the next 12 months.
These matters raise substantial doubt about the Company’s ability to continue as a going concern. 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.common stock.
NOTE 3 – BASISPRINCIPLES OF PRESENTATIONCONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Quest include the combined accountsfinancial position and results of operations of OMNIQ Corp. and its wholly-owned subsidiaries Quest Marketing, BCS,Inc., Quest Exchange Ltd., and ViascanQdata, which subsequently changed its legal nameHTS Image Processing, Inc., collectively referred to Quest Solution Canada Inc.. Effective October 1, 2015,herein as “we” or “us” or “our” or the “Company.” All significant intercompany accounts and transactions have been eliminated in these consolidated financial statements. Business combinations are included in the consolidated financial statements from their respective dates of acquisition.
RECLASSIFICATIONS AND COMPARABILITY
Certain amounts in the financial statements of ViascanQData, Inc. (“ViascanQdata”)prior years have been consolidated intoreclassified to conform to the Company’s consolidated results of operations as well. Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the operations of Quest Solution Canada Inc. have been classified as a discontinued operation and thecurrent year presentation for comparative purposes. This had no effect on total assets and liabilities of Quest Solution Canada Inc. have been classified as held for disposal. The Companies currently operate as a single business unit. All material intercompany transactions and accounts have been eliminated in consolidation.or net income.
CASH AND CASH EQUIVALENTSREVERSE STOCK SPLIT
Cash consists of petty cash, checking, savings, and money market accounts. ForEffective November 20, 2019, the purposeCompany implemented a one-for-20 reverse stock split of the statementsCompany’s common stock. The par value of cash flows, all highly liquid investments with an original maturitycommon stock and the number of three months or less are considered to be cash equivalents. Thereauthorized shares were no cash equivalentsnot adjusted as a result of December 31, 2016the reverse stock split. All share and 2015.
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 bankper share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of $665,220 at December 31, 2016 ($690,850 at December 31, 2015). This cash is securitycommon stock to additional paid-in capital. As a result of the Reverse Split, proportionate adjustments have been made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options and collateral for a corporate credit card agreement with a bank and for deposit against a letter of creditwarrants issued for executive life insurance policies owned by the Company.Company and outstanding immediately prior to the Effective Time, which resulted in a proportionate decrease in the number of shares of the Company’s common stock reserved for issuance upon exercise or vesting of such stock options, restricted stock units and warrants, and, in the case of stock options and warrants, a proportionate increase in the exercise price of all such stock options and warrants. In addition, the number of shares authorized for future grant under the Company’s equity incentive/compensation plans immediately prior to the Effective Time was reduced proportionately.
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 Significant areas where 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 yearmanagement judgments were used include calculation 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 collectionstock based compensation, deferred tax assets/liabilities, valuation 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. Based on management’s evaluation, accounts receivable has a balance in theintangible assets, allowance for doubtful accounts receivable, and net realizable value of $17,701 and $83,870 for the years ended December 31, 2016 and 2015, respectively.inventory.
PROPERTY AND EQUIPMENT
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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. Depreciation expense for the years ended December 31, 2016 and 2015 was $90,626 and $92,656, respectively. 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.
ADVERTISING
The Company generally expenses marketing and advertising costs as incurred. During 2016 and 2015, the Company spent $337,275 and $159,599, respectively, on marketing, trade show and store front expense and advertising, net of co-operative rebates.
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.
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.
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:
| ● | Level 1 - Quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data. | |
| ● | Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company. |
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 MeasuredThe carrying amounts of certain financial instruments, such as cash equivalents, short term investments, accounts receivable, accounts payable and Recorded at Fair Value on a Recurring Basisaccrued liabilities, approximate fair value due to their relatively short maturities.
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CASH AND CASH EQUIVALENTS
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 December 31, 2019 and 2018.
The Company measures certain liabilitiesmaintains its cash in bank deposit accounts which, 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 fiscal years ending December 31, 2016 and 2015.times, may exceed federally insured limits.
The Company has classified its contingent consideration related to the acquisitions asrestricted cash on deposit with a Level 3 liability. Revenue and other assumptions usedfederally insured bank in the calculation require significant management judgment. The Company reassesses the fair valueamount 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 each of the fiscal years ended$533 thousand and $532 thousand at December 31, 20162019 and 2015.
As2018, respectively. This cash is security and collateral for a corporate credit card agreement with a bank and for deposit against a letter of December 31, 2016,credit issued for executive life insurance policies owned by the Company does not have any contingent liabilities.Company.
REVENUE RECOGNITIONACCOUNTS RECEIVABLE
Recurring technology and services revenue consists of subscription-based fees, software subscription license fees, software maintenance fees and hosting fees relatedAccounts receivable are carried at their estimated collectible amounts. The Company provides allowances for uncollectible accounts receivable equal to the useestimated collection losses that will be incurred in collection of our solution to manage our customers’ communications expenses, as well as feesall receivables. Accounts receivable are periodically evaluated for perpetual software licensescollectability based on past credit history with customers and professional servicestheir current financial condition. The Company’s management determines which accounts are past due and products sold.
We recognize revenue when persuasive evidence of an arrangement exists, pricing is fixed and determinable, collection is reasonably assured and delivery or performance of service has occurred. Recurring technology and services subscription-based fees, software subscription license fees, software maintenance fees and hosting fees are recognized ratably overif deemed uncollectible, the term ofCompany charges off the receivable in the period of service. The subscription-based services we provide include help desk, staging, carrier activations and provisioning.
Sales revenuethe determination is recognized upon the shipment of merchandise to customers.made. The Company recognizes revenues from software sales when software products are shipped.
Software license fees consistgenerally requires no collateral to secure its ordinary accounts receivable. Based on management’s evaluation, accounts receivable has a balance in the allowance for doubtful accounts of fees paid for a perpetual license agreement for our technology, which are recognized in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 605, Software Revenue Recognition, as amended.
Professional services related to the implementation of our software products, which we refer to as consulting services, are generally performed on a fixed fee basis under separate service arrangements. Consulting services revenue is recognized as the services are performed by measuring progress towards completion based upon either costs or the achievement of certain milestones.
NET INCOME (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$36 thousand and $33 thousand for the years ended December 31, 20162019 and 2015 were 36,062,174 and 36,195,065,2018, 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.
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:INVENTORY
Substantially all inventory consists of raw materials and finished goods and are valued at the lower of cost or net realizable value; where net realizable value is considered to be estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation.
| 2016 | 2015 | |||||||
| Options to purchase common stock | 2,644,000 | 6,044,000 | ||||||
| Convertible preferred stock | 3,143,530 | 5,200,000 | ||||||
| Convertible debentures | 2,042,076 | 3,661,509 | ||||||
| Warrants to purchase common stock | 1,405,000 | 1,410,000 | ||||||
| Common stock subject to repurchase | (507,079) | - | ||||||
| Potential shares excluded from diluted net loss per share | 9,280,527 | 17,552,509 | ||||||
PROPERTY AND EQUIPMENT
Property and equipment are recorded at 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. Depreciation expense for the years ended December 31, 2019 and 2018 was $152 thousand and $57 thousand, respectively. 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.
GOODWILL AND INTANGIBLE ASSETS
As a result of acquisitions, the Company recorded goodwill and identifiable intangible assets as part of its allocation of the purchase consideration.
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 for impairment annually at December 31 for impairment.or whenever events indicate that the carrying amount might not be recoverable. 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 the reporting unitunit’s 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.
The Company has adopted the provisions of ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires goodwill impairments to be measured on the basis of the fair value of a reporting unit relative to the reporting unit’s carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. Thus, ASU 2017-04 permits an entity to record a goodwill impairment that is entirely or partly due to a decline in the fair value of other assets that, under existing GAAP, would not be impaired or have a reduced carrying amount. Furthermore, the ASU removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Accordingly, the goodwill of reporting unit or entity with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit/entity may indicate that goodwill is impaired.
We test ourFor goodwill and otherindefinite lived intangible assets, the Company completes what is referred to as the “Step 0” analysis which involves evaluating qualitative factors including macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance. If our “Step 0” analysis indicates it is more likely than not that the fair value is less than the carrying amount, we would perform a quantitative two-step impairment test. The quantitative analysis compares the fair value of our reporting unit or indefinite-lived intangible assets to the carrying amounts, and an impairment loss is recognized equivalent to the excess of the carrying amount over the fair value. Fair value is determined based on discounted cash flows, market multiples or appraised values, as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge. Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the timing and amount of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory trends.
In the year ended December 31, 2019 the Company determined that there were no indicators of impairment of goodwill.
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Intangibles
Intangible assets with finite useful lives consist of trademarks, customer lists, and intellectual property rights and are amortized on a straight-line basis over their estimated useful lives, which range from two to seven years. The estimated useful lives associated with finite-lived intangible assets are consistent with the estimated lives of the associated products and may be modified when circumstances warrant. Such assets are reviewed for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate therethat the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset. There was no impairment recorded for 2019 and 2018.
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 processes rely 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 impairment. Wesignificant, are requiredrecorded when pending information is finalized, within one year from the acquisition date.
Revenue Recognition
The Company is a primary distribution channel for a large group of vendors and suppliers, including original equipment manufacturers (“OEMs”), software publishers and wholesale distributors.
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of consideration is probable. The Company evaluates the following indicators amongst others when determining whether it is acting as a principal in the transaction and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to write downprovide the specified goods or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.
The Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically allow for the Company to recognize revenue when the product reaches the customer’s location.
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The Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold the inventory at its warehouses. The Company is the principal in the transaction and recognizes revenue for drop-shipment arrangements on a gross basis.
Revenue Recognition for Hardware
Revenues from sales of hardware products are recognized on a gross basis as the Company is acting as a principal in these transactions, with the selling price to the customer recorded as Net sales and the acquisition cost of the product recorded as Cost of sales. The Company recognizes revenue from these transactions when control has passed to the customer, which is usually upon delivery of the product to the customer.
The Company’s vendor partners warrant most of the products the Company sells. These manufacturer warranties are assurance-type warranties and are not considered separate performance obligations. The warranties are not sold separately and only provide assurance that products will conform to the manufacturer’s specifications. In some transactions, a third-party will provide the customer with an extended warranty. These extended warranties are sold separately and provide the customer with a service in addition to assurance that the product will function as expected. The Company considers these warranties to be separate performance obligations from the underlying product. For warranties, the Company is arranging for those services to be provided by the third-party and therefore is acting as an agent in the transaction and records revenue on a net basis at the point of sale.
Revenue Recognition for Software
Revenues from most software license sales are recognized as a single performance obligation on a gross basis as the Company is acting as a principal in these transactions at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software assurance, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software assurance is in effect. The Company evaluates whether the software assurance is a separate performance obligation by assessing if the third-party delivered software assurance is critical or essential to the core functionality of the software itself. This involves considering if the software provides its original intended functionality to the customer without the updates, if the customer would ascribe a higher value to the upgrades versus the up-front deliverable, if the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and if the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software assurance is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software assurance are recognized as a single performance obligation. In some transactions, a third-party will provide the customer with an extended warranty. These extended warranties are sold separately and provide the customer with a service in addition to assurance that the product will function as expected. The Company considers these warranties to be separate performance obligations from the underlying product. For warranties, the Company is arranging for those services to be provided by the third-party and therefore is acting as an agent in the transaction and records revenue on a net basis at the point of sale.
Revenue Recognition for Services
The Company provides professional services, which include project managers and consultants recommending, designing and implementing IT solutions. Revenue from professional services is recognized either on a time and materials basis or proportionally as costs are incurred for fixed fee project work. Revenue is recognized on a gross basis each month as work is performed and the Company transfers those services.
| F-13 |
Revenues from the sale of professional and support services, provided by the Company, are recognized over the period the service is provided. As the customer receives the benefit of the service each month, the Company recognizes the respective revenue on a gross basis as the Company is acting as a principal in the transaction. Additionally, the Company’s managed services team provides project support to customers on a fixed fee basis. The Company is acting as the principal in the transaction and recognizes revenue on a gross basis based on the total number of hours incurred for the period over the total expected hours for the project. Total expected hours to complete the project is updated for each period and best represents the transfer of control of the service to the customer.
Freight Costs
The Company records both the freight billed to its customers and the related freight costs as Cost of sales when the underlying product revenue is recognized. For freight not billed to its customers, the Company records the freight costs as Cost of sales. The Company’s typical shipping terms result in shipping being performed before the customer obtains control of the product. The Company considers shipping to be a fulfillment activity and not a separate performance obligation.
ADVERTISING
The Company generally expenses marketing and advertising costs as incurred. During 2019 and 2018, the Company spent $224 thousand and $148 thousand, respectively, on marketing, trade show and store front expense and advertising, net of co-operative rebates.
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.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation in accordance with ASC Topic 718 “Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
For non-employee stock-based compensation, we have adopted ASC Topic 505 “Equity-Based Payments to Non-Employees”, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of goodwill only when our testing determines the recorded amount of goodwill exceedsrelated stock or options or the fair value. Our annualvalue of the services on the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
On December 23, 2015, the Company’s Board of Directors approved the Quest Solution, Inc. Employee Stock Purchase Plan (the “ESPP”), under which 95,000 shares of common stock were reserved for the purchase by the Company’s employees. Under the plan, employees may purchase a limited number of shares of the Company’s common stock at a 15% discount from the closing market prices measured on the last days of each month.
On March 6, 2018, the Board approved the Company’s 2018 Equity Incentive Plan and later amended it on October 31, 2018. On January 23, 2019, the Company’s shareholders adopted and ratified the 2018 Equity Incentive Plan. The total number of shares of Common Stock authorized for issuance under the 2018 Plan is 800,000.
Equity instruments issued to parties other than employees for acquiring goods or services
The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification (“FASB ASC Section 505-50-30”). Pursuant to FASB ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date for testing goodwill impairmentused to determine the fair value of the equity instrument issued is December 31, atthe earlier of the date on which the performance is complete or the date we test our reporting units,on which it is currently our ownership in Quest Marketing.probable that performance will occur.
NoneWarrants
The fair value of the goodwillwarrants is deductibleestimated on the date of issuance using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected term of the warrants, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment. Expected volatilities used in the valuation model are based on the average volatility of the Company’s stock. The risk-free rate for income tax purposes.the expected term of the option is based on the United States Treasury yield curve in effect at the time of grant.
| F-14 |
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.dollars except its subsidiary located in Israel. 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 CanadianIsraeli 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.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income/(loss) is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has no items of comprehensive income/loss other than net income/loss in any period presented for continuing operations. Therefore, net loss attributable to common stockholders as presented in the consolidated statements of operations equals comprehensive loss.
INCOME TAXES
The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for consolidated financial reporting purposes and such amounts recognized for tax purposes and are measured by applying enacted tax rates in effect in years in which the differences are expected to reverse.
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company’s income is subject to taxation in both the U.S. and a foreign jurisdiction, Israel. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company has evaluatedestablishes reserves for income tax-related uncertainties based on estimates of whether, and the deferredextent to which, additional taxes will be due. These reserves for tax contingencies are established when the Company believes that positions do not meet the more-likely-than-not recognition threshold. The Company adjusts uncertain tax liabilities in light of changing facts and circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The provision for income taxes with regards to Section 382includes the impact of the Internal Revenue Codeuncertain tax liabilities and has determined no limitations on the use of net operating loss carryforwards exist at December 31, 2016 and 2015 for all of the net operating loss carryforward.changes in liabilities that are considered appropriate.
STOCK-BASED COMPENSATIONCOMPREHENSIVE INCOME (LOSS)
Comprehensive income/(loss) is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company recognizes stock-based compensationCompany’s other comprehensive income (loss) is composed of foreign currency translation adjustments.
NET LOSS PER COMMON SHARE
See NOTE 15 regarding our 1-for-20 reverse stock split. Share related amounts have been retroactively adjusted in this report to reflect this reverse stock-split for all periods presented.
Net loss per share is provided in accordance with FASB ASC Topic 718 “Stock Compensation”, which requires260-10, “Earnings per Share”. Basic net loss per common share (“EPS”) is computed by dividing income available to common stockholders by the measurementweighted-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 years ended December 31, 2019 and recognition of compensation expense for all share-based payment awards made to employees2018 were 3,889,478 and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
For non-employee stock-based compensation, we have adopted ASC Topic 505 “Equity-Based Payments to Non-Employees”, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
On December 23, 2015, the Company’s Board of Directors approved the Quest Solution, Inc. Employee Stock Purchase Plan (the “ESPP”), under which 1,900,000 shares2,481,530, respectively. Diluted net loss per share of common stock were reserved foris the purchase by the Company’s employees. Under the plan, employees may purchase a limited numbersame as basic net loss per share of shares of the Company’s common stock at a 15% discountbecause the effects of potentially dilutive securities are antidilutive.
| F-15 |
The following table sets forth the potentially dilutive securities excluded from the closing market prices measured on the last dayscomputation of each month.diluted net loss per share because such securities have an anti-dilutive impact due to losses reported:
| In thousands | 2019 | 2018 | ||||||
| Options to purchase common stock | 737 | 629 | ||||||
| Convertible preferred stock | 241 | 241 | ||||||
| Warrants to purchase common stock | 225 | 225 | ||||||
| Common stock subject to repurchase | - | (25 | ) | |||||
| Potential shares excluded from diluted net loss per share | 1,203 | 1,070 | ||||||
RECENT ACCOUNTING PRONOUNCEMENTS
Pronouncements Not Yet Adopted
In August 2014,2018, the FASB issued ASU 2014-15 requiring management2018-13,Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to evaluate whether there are conditionsthe Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or events, considered inremove certain disclosure requirements associated with 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 interimmovement amongst or hierarchy associated with Level 1, Level 2 and annual reporting periods and must make certain disclosures if it concludes that substantial doubt exists.Level 3 fair value measurements. This ASUguidance 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.
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, 2016fiscal years, 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, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. The ASU requires that deferred tax assets and liabilities be classified as non-current in a statement 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.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum 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 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or 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, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606):Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of Topic 606 but clarifies the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective for the annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-08 on our consolidated financial statements and results of operations.
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.2019. 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 asupon issuance 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.update. The Company does not anticipateexpect the adoption of this guidance to have a material impact on its consolidated financial statements, absent any goodwill impairment.Financial Statements.
Recently Adopted Accounting Pronouncements
In July 2018, the FASB issued ASU 2018-10,Leases (Topic 842). This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity’s leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to the new guidance that allows companies the option of using the effective date of the new standard as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU as a cumulative effect adjustment to the opening balance sheet or retained earnings. Based on the effective dates, the Company has adopted the new guidance at the beginning of the first quarter of fiscal 2019 using the new transition election to not restate comparative periods. The Company has elected the package of practical expedients upon adoption, which permits the Company to not reassess under the new standard the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. In addition, the Company has elected not to separate lease and non-lease components for all real estate leases and did not elect the hindsight practical expedient. Lastly, the Company elected a short-term lease exception policy, permitting it to exclude the recognition requirements of this standard from leases with initial terms of 12 months or less. Upon adoption, the Company recognized right-of-use assets of approximately $235 thousand and operating lease liabilities of approximately $235 thousand on its consolidated balance sheet, with no significant change to its consolidated statements of operations or cash flows.
Other
| F-16 |
In June 2018, the FASB issued ASU 2018-07,Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies several aspects of the accounting standardsfor nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that have been issued byfiscal year. The Company adopted ASU 2018-07 on January 1, 2019 and the Financial Accounting Standards Board or other standards-setting bodies areadoption of this standard is not expected to have a material impact on ourthe Company’s consolidated financial position, resultsstatements.
In August 2018, the FASB issued ASU 2018-13,Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of operationschanges meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and cash flows. For period endedLevel 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2016,15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of other accounting standards had nothis guidance to have a material impact on ourits consolidated Financial Statements.
In November 2018, the FASB issued ASU No. 2018-19,“Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. In general, the amendments in this standard are effective for public business entities that meet the definition of a SEC filer for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the timing and impact of adoption on the Company’s consolidated financial positions, resultsstatements.
In March 2018, the FASB issued ASU 2018-05,Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting Standards Codification 740,Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of operations,the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed.
NOTE 4 – ACQUISITIONS
On October 5, 2018 (“Closing Date”), the Company entered 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 capital stock of HTS Image Processing, Inc., and HTS’s wholly owned subsidiaries HTS USA, Inc. and Teamtronics Ltd., from the Sellers. As consideration, the Company (i) issued to the Sellers 1,122,648 shares (“Shares Issued”) of the Company’s common stock, having a value of $5.3 million based on the average closing price of the Company’s common stock for the twenty days preceding the Closing Date, (ii) cash in the amount of $300 thousand, and (iii) a 12 month convertible promissory note with a principal amount of $700 thousand and an interest rate of six percent (6%) per year. The note also provides the Sellers the right to convert all or cash flows.
any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $4.72. The HTS Purchase 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 CFO and director Neev Nissenson. Carlos Jaime Nissenson was also a stockholder and director of HTS.
The aggregate consideration (“Total Consideration) to be paid by the Company has evaluated other recent pronouncements and believes that nonewas an amount of them will haveshares of the Company’s common stock (the “Share Consideration”), having a material effectpreliminary value of $7.0 million based on the company’saverage closing price of the common stock for the 20 days’ preceding the closing of the Transaction (the “Per Share Value”), and $300 thousand in cash and a convertible promissory note in the amount of $700 thousand (the “Cash Consideration”). The Share Consideration and this Cash Consideration is collectively referred to as the (“Consideration”). The Share Consideration was to be adjusted by the net working capital plus $20 thousand for audit fees and reduced by the amount of money owed by HTS to banks and other financial statements.
NOTE 4 – CONCENTRATIONSinstitutions. On the Closing Date, the estimated Share Consideration was approximately $5.3 million.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits. At December 31, 2016HTS Purchase Agreement contained a provision where by HTS and 2015, the Company’s uninsured cash balance, each totaled $0.
For the years ended December 31, 2016Sellers agree to indemnify, defend and 2015, one customer accounted for 17.3% and 13.1%, respectively, of the Company’s revenues.
Accounts receivable at December 31, 2016 and 2015 are made up of trade receivables due from customers in the ordinary course of business. One customer made up 33.1% and 20.8% of the balance for 2016 and 2015, which represented greater than 10% of accounts receivable at December 31, 2016 and 2015, respectively.
Accounts payable are made up of payable due to vendors in the ordinary course of business at December 31, 2016 and 2015. One vendor made up 76.4% and 86.6% of the balance, which represented greater than 10% of accounts payable at December 31, 2016 and 2015, respectively.
NOTE 5 – ACQUISITION OF VIASCANQDATA
Effective October 1, 2015,hold harmless the Company completed the purchase of ViascanQdata, a Canadian based company in the same industry of technology, software,against any and mobile data collection systems business which also has a mediaall claims, demands, losses, costs, expenses, obligations, liabilities and label business.
The purchase price for the shares of ViascanQdata was 1 share of Series B Preferred Stock (which are convertible into 5,200,000 common shares, with no other preferential rights) as well as a promissory note of one million five hundred thousand dollars ($1,500,000). Given the associated assumed debts at the closing, the goodwill acquired was estimated at $11,137,861.
ViascanQdata historically has used the Canadian Dollar (CDN) as their functional currency. All numbers have been adjusted based on the exchange rate with the US Dollar asdamages, including interest, penalties and reasonable attorney’s fees and costs that arise within 12 months of the date of this HTS Purchase Agreement (“Covered Losses”), incurred by the transaction.Buyer or any of its affiliates arising, resulting from, or relating to any and all liabilities of HTS that have not been disclosed in the HTS Financial Statements, any misrepresentation of a material fact or omission to disclose a material fact made by HTS or the Sellers in the HTS Purchase Agreement.
| F-17 |
Also, the HTS Purchase Agreement provided that HTS shall have a gross profit of $1.1 million for the fiscal year ended December 31, 2017 and $1.7 million for the six months ended June 30, 2018. “Gross Contribution” shall be defined as revenue minus cost of material. Furthermore, the Gross Contribution Adjustment provided that in the event that HTS’ Gross Contribution is less than 85% of the figure set out above, any deficiency in excess of 15% (the “Net Deficiency”) shall result in the forfeiture of a portion of the Share Consideration, with a value equal to the Net Deficiency.
Also, HTS was required to deliver to the Company audited financial statements as of December 31, 2017 and for the year then ended (“HTS Audited Financial Statements’) and reviewed financial statements as of September 30, 2018 and for the nine months then ended (“HTS Reviewed Financial Statements”).
Based on the three indemnification clauses, above, the Sellers shall deposit 20%, or 224,530 shares, of the Share Consideration in escrow with the Buyer’s counsel (the “Covered Loss Shares”) for the purposes of Covered Losses or the Net Deficiency. In accordancethe event the Company makes a valid claim pursuant to the Covered Losses or the Net Deficiency, the dollar value of such claim shall be satisfied by cancelation of an amount of the Escrowed Shares with ASC 805-10-25-13,an equal value to the Losses or Net Deficiency. For purposes of any adjustment, the Shares shall be valued at the Per Share Value. The Covered Loss Shares shall be the maximum indemnification reimbursement. In addition, the Buyers shall deposit an additional 20%, or 224,530, of the Share Consideration, which shall not be released until the HTS Audited Financial Statements and the HTS Reviewed Financial Statements are delivered to the Company (“Audit Shares”) (collectively “Indemnification Shares”).
Subsequent to the Acquisition Date, the amount for the working capital and money owned by HTS to banks and other financial institutions provided by the Sellers was adjusted. Upon the finalization of the assets and liabilities acquired as of October 1, 2018, the Share Consideration was adjusted to $2.7 million, or 568,415 shares. The Total Consideration was adjusted by $2.6 million, or 554,233 shares (“Adjusted Shares”). The Adjusted Shares were recorded as of the Acquisition Date at the Acquisition Date fair value of the Company’s common stock. Since the maximum amount of the Covered Loss shares is 224,530, the Company and the Sellers amended, the Agreement, on May 29, 2019 with an effective date of the Acquisition Date, to provide for the cancelation of the adjusted Shares.
Also, On December 24, 2018, the Company received the HTS Audited Financial Statements. The HTS Reviewed Financial Statements were not delivered. As part of the Amendment, the Company waived the requirement for the HTS Reviewed Financial Statements. The Audit shares have been included in the purchase price at the Acquisition Date fair value of the Company’s common stock.
In thousands
| Calculation of the purchase price: | ||||
| Fair value of stock at closing | $ | 2,683 | ||
| Cash at closing | 300 | |||
| Convertible promissory note | 700 | |||
| Purchase price | $ | 3,683 | ||
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition and the preliminary allocation of the purchase price to the fair value of net assets acquired:acquired and liabilities assumed:
| In thousands | ||||||||
| Cash | $ | 74,855 | $ | 277 | ||||
| Accounts receivable, net | 2,163,502 | 1,911 | ||||||
| Inventory | 1,587,272 | 1,196 | ||||||
| Fixed assets, net | 1,399,796 | |||||||
| Other assets | 114,709 | |||||||
| Prepaid expenses | 16 | |||||||
| Fixed assets | 96 | |||||||
| Intangibles | 4,700 | |||||||
| Goodwill | 11,137,861 | 3,806 | ||||||
| Total purchase price allocated | $ | 16,477,995 | ||||||
| Accounts payable | (2,944 | ) | ||||||
| Related party payable | (1,868 | ) | ||||||
| Notes payable | (1,462 | ) | ||||||
| Notes payable- related parties | (1,541 | ) | ||||||
| Foreign currency adjustment | 48 | |||||||
| Deferred tax liability | (552 | ) | ||||||
| Net assets acquired | $ | 3,683 | ||||||
| Accounts Payable and other Current Liabilities | $ | 12,008,825 | ||
| Long Term Debts Assumed | 837,170 | |||
| Promissory Note Issued | 1,500,000 | |||
| Stock Issued | 2,132,000 | |||
| Total purchase price allocated | $ | 16,477,995 |
| F-18 |
Discontinued Operations – DivestureThe transaction was accounted for using the acquisition method. Accordingly, goodwill has been measured as the excess of Quest Solution Canada, Inc.the total consideration over the amounts assigned to the identifiable assets acquired and liabilities assumed including the related deferred tax liability.
Effective September 30, 2016,Intangibles assets consisted of the following:
| In thousands, except years | Fair Value | Life in Years | ||||||
| Market related intangibles | $ | 170 | 5 | |||||
| Customer relationships | 3,400 | 9 | ||||||
| Patents | 1,030 | 11 | ||||||
| Software | 100 | 4 | ||||||
| $ | 4,700 | |||||||
The estimated fair values for the market related intangibles and patents were determined by using the relief-from-royalty or excess earnings methods. The estimated fair value for the customer relationships and software were determined using the multi-period excess earnings method and the cost approach, respectively.
Each of the intangible assets will be amortized on a straight-line basis over their estimated useful lives.
On May 29, 2019, the Company, sold allCampbeltown 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 each return for cancelation 277,116 shares of common stock. This Amendment reduced the amount of shares issued in the acquisition to 568,415 shares from 1,122,648 shares and the amount of share consideration to approximately $2.3 million from approximately $5.3 million . This adjustment was made as a result of a correction in the calculation of working capital and other share give back provisions of the HTS Purchase Agreement. This Amendment also reduces the Company’s issued and outstanding sharescommon stock to 3,850,421 from 4,404,653 as of Quest Solution Canada Inc. The Company decided to sell this division primarily because it has incurred significant operating losses.May 29, 2019.
The consideration received was $1.0 million in cash of which $576,592 was received at closing and the balance is to be received before April 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 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., 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:
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.Pro forma (Unaudited)
The following is a reconciliation ofunaudited pro forma information presents 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 statementscombined results of operations as indicated belowif the acquisitions had been completed on January 1, 2018. The 2016 fiscal year has 9 monthsunaudited pro forma results include amortization associated with preliminary estimates for the acquired intangible assets on these unaudited pro forma adjustments.
The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies, or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational purpose only and are not necessarily indicative of what the actual results of operations andof the 2015 fiscal year has 3 monthscombined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations:
| For the year | ||||||||
| ending December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenues | $ | 11,326,849 | $ | 5,255,601 | ||||
| Cost of goods sold | (9,751,651 | ) | (4,046,494 | ) | ||||
| Gross profit | 1,575,198 | 1,209,107 | ||||||
| Operating expenses | ||||||||
| General and administrative | (874,506 | ) | (300,668 | ) | ||||
| Salary and employee benefits | (2,074,977 | ) | (623,276 | ) | ||||
| Depreciation and amortization | (178,069 | ) | (104,215 | ) | ||||
| Professional fees | (58,138 | ) | (18,258 | ) | ||||
| Goodwill impairment | (4,800,000 | ) | - | |||||
| Total operating expenses | (7,985,690 | ) | (1,046,417 | ) | ||||
| Operating (loss) income | (6,410,492 | ) | 162,690 | |||||
| Other income (expenses): | ||||||||
| Restructuring expenses | (108,640 | ) | - | |||||
| Gain (loss) on foreign currency | 117,138 | 229,442 | ) | |||||
| Interest expense | (443,019 | ) | (171,815 | ) | ||||
| Other (expenses) income | 129 | (1,389 | ) | |||||
| Total other income (expenses) | (434,392 | ) | (402,646 | ) | ||||
| Net Income (Loss) Before Income Taxes | (6,844,884 | ) | (239,956 | ) | ||||
| Provision for Current Income Taxes | (6,991 | ) | - | |||||
| Net Loss from discontinued operations | $ | (6,851,875 | ) | $ | (239,956 | ) | ||
The major classes of assets and liabilities of Quest Solution Canada Inc. classified as held for disposal as at December 31, 2015 are, as follows:
| For the year ended December 31, 2018 In thousands | Quest | HTS | Total | Dr | Cr | Proforma | ||||||||||||||||||
| Revenues | $ | 56,202 | $ | 5,516 | $ | 61,718 | - | (1,909 | ) | $ | 59,809 | |||||||||||||
| Net income (loss) | $ | (5,695 | ) | $ | (1,276 | ) | $ | (6,971 | ) | 314 | (184 | ) | $ | (7,101 | ) | |||||||||
| As of | ||||
| December 31, 2015 | ||||
| ASSETS | ||||
| Current assets | ||||
| Cash | $ | 19,324 | ||
| Accounts receivable, net | 3,505,920 | |||
| Inventory, net | 2,260,133 | |||
| Prepaid expenses | 81,468 | |||
| Other current assets | 1,133 | |||
| Total current assets | 5,867,978 | |||
| Fixed assets | 1,248,763 | |||
| Goodwill | 11,137,860 | |||
| Total assets | $ | 18,254,601 | ||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) | ||||
| Current liabilities | ||||
| Accounts payable and accrued liabilities | $ | 5,488,998 | ||
| Line of credit | 2,490,315 | |||
| Accrued payroll and sales tax | 276,147 | |||
| Deferred revenue, net | 57,659 | |||
| Notes payable, related parties, current portion | 356,672 | |||
| Current portion of note payable | 1,255,477 | |||
| Other current liabilities | 64,175 | |||
| Total current liabilities | 9,989,443 | |||
| Long term liabilities | ||||
| Note payable, related party, net of debt discount | 363,928 | |||
| Long term portion of note payable | 442,535 | |||
| Other long term liabilities | - | |||
| Total liabilities | $ | 10,795,906 | ||
| Net Assets held for disposal | $ | 7,458,695 | ||
| F-19 |
The net cash flows incurred by Quest Solution Canada Inc. for
For the year ended December 31, are presented below. The 2016 fiscal year has 92018, the proforma adjustments of $314 thousand is for the amortization expense for the nine months ended September 30, 2018 associated with the fair value of operationsthe intangible assets acquired and the 2015 fiscal year has 3$184 thousand is to remove the amortization for the nine months ended September 30, 2018 for the intangible assets that were revalued. The amortization expense for the three months ended December 31, 2018 is included in the Quest results of operations:operations.
| For the year | ||||||||
| ending December 31, | ||||||||
| 2016 | 2015 | |||||||
| Net cash used by operating activities | $ | (1,743,606 | ) | $ | (3,476,756 | ) | ||
| Net cash provided in investing activities | 16,097 | - | ||||||
Net cash (used) provided in financing activities | (2,867,565 | ) | 479,965 | |||||
| Net Cash Outflow from discontinued operations | $ | (4,595,074 | ) | $ | (2,996,791 | ) | ||
NOTE 65 – ACCOUNTS RECEIVABLE
At December 31, 2016 and 2015, accountsAccounts receivable consisted of the following:following as of December 31:
| In thousands | 2019 | 2018 | ||||||
| Trade Accounts Receivable | $ | 6,730 | $ | 12,295 | ||||
| Less Allowance for doubtful accounts | (36 | ) | (33 | ) | ||||
| Total Accounts Receivable (net) | $ | 6,694 | $ | 12,262 | ||||
For the years ended December 31, 2019 and 2018, one customer accounted for 12.3% and 17.0%, respectively, of the Company’s revenues.
Accounts receivable at December 31, 2019 and 2018 are made up of trade receivables due from customers in the ordinary course of business. Two customers together represented 20.9% of the balance of accounts receivable at December 31, 2019 and two customers made up 23.7% of the accounts receivable balance at December 31 for 2018, which represented greater than 10% of accounts receivable at December 31, 2019 and 2018, respectively.
| 2016 | 2015 | |||||||
| Trade Accounts Receivable | $ | 10,607,378 | $ | 7,987,208 | ||||
| Less Allowance for doubtful accounts | (17,701 | ) | (83,870 | ) | ||||
| Total Accounts Receivable (net) | $ | 10,589,677 | $ | 7,903,338 | ||||
NOTE 6 – INVENTORIES
Inventories consisted of the following as of December 31, 2019:
| In thousands | 2019 | 2018 | ||||||
| Equipment and Clearing Service | $ | 728 | $ | 801 | ||||
| Raw Materials | 1,022 | 568 | ||||||
| Work in process | 44 | 47 | ||||||
| Finished goods | 95 | 388 | ||||||
| Total inventories | $ | 1,889 | $ | 1,804 | ||||
NOTE 7 – INVENTORY
At December 31, 2016 and 2015, inventories consisted of the following:
| 2016 | 2015 | |||||||
| Equipment and Clearing Service | $ | 375,863 | $ | 313,847 | ||||
| Raw Materials | 119,922 | 119,220 | ||||||
| Finished goods | 35,808 | 38,412 | ||||||
| Total inventories | $ | 531,593 | $ | 471,479 | ||||
NOTE 8 –GOODWILL AND INTANGIBLE ASSETS
IntangibleThe Company’s goodwill balance is attributable to acquisitions. There have been no impairment charges recorded against goodwill in 2019 and 2018. Identifiable 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 1011 years. Amortization expense for the years ended December 31, 20162019 and 20152018 was $1,701,700$2.0 million and $2,506,167,$1.8 million, respectively.
| 2016 | 2015 | |||||||
| 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 | (4,207,867 | ) | (2,506,167 | ) | ||||
| Intangibles, net | $ | 19,486,297 | $ | 21,187,997 | ||||
| F-20 |
Goodwill and Intangible assets consisted of the following as of December 31:
| In thousands | 2019 | 2018 | ||||||
| Goodwill | $ | 13,921 | $ | 13,921 | ||||
| Trade Names | 4,390 | 4,390 | ||||||
| Customer Relationships | 12,590 | 12,590 | ||||||
| Intellectual property | 1,323 | 1,300 | ||||||
| Accumulated amortization | (9,695 | ) | (7,694 | ) | ||||
| Intangibles, net | $ | 22,529 | $ | 24,507 | ||||
The future amortization expense on the Trade NamesCustomer Relationships, and Customer RelationshipsIP are as follows:
| In thousands | ||||||||
| Years ending December 31, | ||||||||
| 2017 | $ | 1,701,714 | ||||||
| 2018 | 1,679,599 | |||||||
| 2019 | 1,471,714 | |||||||
| 2020 | 1,471,714 | 2,007 | ||||||
| 2021 | 1,405,791 | 1,941 | ||||||
| 2022 | 1,315 | |||||||
| 2023 | 1,289 | |||||||
| 2024 | 546 | |||||||
| Thereafter | 1,641,601 | 1,510 | ||||||
| Total | $ | 9,372,133 | $ | 8,608 | ||||
Goodwill is not amortized but is evaluated for impairment annually or when indicators of a potential impairment are present. The 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 (using an accelerated method for customer relationships and trade names) 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 December 31, 20162019 and 2015.2018.
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable are made up of payables due to vendors in the ordinary course of business at December 31, 2019 and 2018. One vendor made up 83.0% and 62.7% of our accounts payable in 2019 and 2018, respectively, which represented greater than 10% of accounts payable at December 31, 2019 and 2018, respectively.
NOTE 9 – INTELLECTUAL PROPERTYCREDIT FACILITIES AND LINE OF CREDIT
The Company maintains operating lines of credit, factoring and revolving credit facilities with banks and finance companies to provide working capital for the business.
On August 27, 2015,July 1, 2016, the Company entered into a SettlementFactoring and Security Agreement (the “FASA”) with Thomet. Under the termsAction Capital Corporation (“Action”) to establish a sale of the Settlement Agreement,accounts facility, whereby the Company was requiredmay obtain short-term financing by selling and assigning to pay Thomet $7,036,000 as full satisfaction for two (2) promissory notes held by Thomet by September 30, 2015. Included in this agreement (and deducted from the $7.036 million settlement) was the assignment of license rights to Thomet with an assigned value of $1.15 million. The licenses were previously acquired for $450,000 from Rampart Systems. Thomet shall pay Quest Solution a royalty fee of 3.5% of revenue relatedAction acceptable accounts receivable. Pursuant to the “gun-barrel,” “rebar inspection,” and “air frame” licenses for a five (5) year period, beginning onFASA, the effective dateoutstanding principal amount of the Assignment Agreement (as defined in the Settlement Agreement). The parties agreed to exclude the existing mining distribution license from the royalties to be paidadvances made by Action to the Company by Thomet. On October 19, 2015, Quest Solutionat any time shall not exceed $5.0 million. Action will reserve and Thomet entered into that First Amendmentwithhold an amount in a reserve account equal to 5% of the Omnibus Settlement Agreement, which modified the payment scheduleface amount of each account purchased under the Settlement Agreement.
FASA. The amount due to Thometbalance at December 31, 20162019 is $5,092,245 which includes accrued interest. In July 2016, the holders of the notes signed subordination agreements with the Supplier of the Secured Promissory Note and Action, whereby the noteholders agree to subordinate their rights and payments 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 December 31, 2016 were all classified as long term.
NOTE 10 – OPERATING LEASE COMMITMENTS
In April 2012, Quest Marketing signed an operating lease at 860 Conger Street, Eugene, OR 97402. The premises, consisting of approximately 7,000 square feet of warehouse/office space shall serve as the Company’s new headquarters. The lease provides for monthly payments of $3,837 through March 2013 and adjusted annually to reflect changes in the cost of living for the remainder of the lease term. In no event shall the monthly rent be increased by more than 2 percent in any one year. The lease expired March 2017 and the Company extended the term of the lease for an additional two year with the same cost of living increase.
The lease at the Company’s Ohio location, signed by Quest Marketing in July 2011, provides for monthly payments of $2,587 through June 2012 and $2,691 thereafter. The lease is due to expire June 30, 2018.
The Company has a commercial real estate operating lease with the former owner of BCS for the company’s BCS office and warehouse location in Garden Grove, CA. Total rent expense at this location was $108,000 for the year ending December 31, 2016 and 2015.
Total rent expense paid was $206,198 and $284,936 for the years ending December 31, 2016 and 2015, respectively.
The following is a schedule of future minimum facility lease payments required under the related party operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2016.
SUMMARY OF OPERATING LEASE COMMITMENTS
The future minimum operating lease payments are as follows:
| Years ending December 31, | ||||
| 2017 | $ | 190,938 | ||
| 2018 | 172,775 | |||
| 2019 | 120,157 | |||
| 2020 | 108,000 | |||
| 2021 | 108,000 | |||
| Thereafter | 9,000 | |||
| Total | $ | 708,870 | ||
NOTE 11 – OTHER LIABILITIES
At December 31, 2016 and 2015, other liabilities consisted of the following:
| 2016 | 2015 | |||||||
| Unearned Incentive from credit Cards | $ | 123,105 | $ | 100,000 | ||||
| Key Man life Insurance liability | 208,091 | 92,776 | ||||||
| Dividend payable | 101,075 | - | ||||||
| Others | 127,931 | 448,735 | ||||||
| 560,202 | 641,511 | |||||||
| Less Current Portion | (227,932 | ) | (369,609 | ) | ||||
| Total long term other liabilities | $ | 332,270 | $ | 271,902 | ||||
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.
At December 31, 2016, the balance of amount of premium financed note are $2,388,148 and the cash value of the policy as of this date is $2,208,750, with a net negative cash value of the policies of $179,398.
On, June 10, 2016, the Company entered into an assignment and assumption with three of the beneficiaries of the key man insurance policies. The agreement states that the Company will be assigning the policy over to the beneficiary and the beneficiary will assume all the obligations under the premium financed note in place. The premium financed note has to be bifurcated with the lender in order to complete the transaction.
The value of the policies is recorded at the new value per the right of offset noted in Topics 210-220. To have 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 of the loan. The Company also intends to settle out the loans in the future with the cash value of the policy.
NOTE 12 – PROFIT SHARING PLAN
The Company maintains a contributory profit sharing plan covering substantially all fulltime employees within the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). Starting in 2016, the Safe Harbor element was removed from the plan and the employer may make a discretionary matching contribution equal to a uniform percentage or dollar amount of participants’ elective deferrals for each Plan Year. In 2015, the Company is required to make a safe harbor non-elective contribution equal to 3 percent of a participant’s compensation. The plan also includes a 401(k) savings plan feature that allows substantially all employees to make voluntary contributions and provides for discretionary matching contributions determined annually by the Board of Directors. For the year ending December 31, 2016, the Company elected to match 50% of the first 2% of compensation deferred for a total contribution of $48,571. For the year ending December 31, 2015, the safe harbor contributions were $197,188. These amounts are included in Accrued payroll and sales tax on the balance sheet.$1.4 million.
| F-21 |
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 1310 – DEFERRED REVENUE
DeferredIn May 2014, the FASB issued new revenue consistsrecognition guidance under ASU 2014-09 that supersedes the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). The new standard, ASC Topic 606, focuses on creating a single source of prepaid third party hardwarerevenue guidance for revenue arising from contracts with customers for all industries. The objective of ASC Topic 606, 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. 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 Company took into the guidance provided in these ASUs related to revenue recognition.
| F-22 |
Accordingly, the Company has adopted ASC Topic 606 as of January 1, 2018 using the modified retrospective transition approach, in which the cumulative effect of applying the standard would be recognized at the date of initial application. An adjustment to decrease deferred revenue in the amount of $1.2 million was established on the date of adoption relating to amounts deferred related to extended service agreements, software maintenancecontract sales through December 31, 2017. Prior to adoption of ASC Topic 606 net revenue from the sales of these contracts would be recognized immediately since the Company has no continuing obligation related to the sale of these products if the new guidance had been applied in the past. As a result of the adoption the Company recognizes revenue from extended service contracts andon a net versus gross basis in the related costs and expenses recordedconsolidated statements of operations. The Company recognized the cumulative effect of initially applying ASC Topic 606 as an adjustment of $1.2 million of net of thedeferred revenue charged to the customer and paid within normal business terms. The net amount recorded as a deferred revenue liability is being amortized into the resultsopening balance of operations over the related periods on a straight line basis, normally 1-5 years with 3 years being the average term.accumulated deficit.
| 2016 | 2015 | |||||||
| Deferred Revenue | $ | 8,721,725 | $ | 7,332,218 | ||||
| Less Deferred Costs & Expenses | (7,277,275 | ) | (6,113,027 | ) | ||||
| Net Deferred Revenue | 1,444,449 | 1,219,191 | ||||||
| Less Current Portion | (879,026 | ) | (685,317 | ) | ||||
| Total Long Term net Deferred Revenue | $ | 565,423 | $ | 533,874 | ||||
| Expected future amortization of net deferred revenue, are as follows; | ||||||||
| 2017 | $ | 180,935 | ||||||
| 2018 | 141,356 | |||||||
| 2019 | 124,393 | |||||||
| 2020 | 118,739 | |||||||
| Total | $ | 565,423 | ||||||
| F-23 |
NOTE 1411 – CREDIT FACILITIES AND LINE OF CREDIT
The Company maintains operating lines of credit, factoring and revolving credit facilities with banks and finance companies to provide working capital for the business.
On December 31, 2014, the Company entered into a 3 year, $8 million revolving line of credit agreement with Wells Fargo Bank (“WFB”) which provided for borrowings based on eligible trade accounts receivable, as defined in the WFB loan agreement dated December 31, 2014. The line was secured by trade accounts receivable and a first priority lien on substantially all of the assets of the Company. All other debt of the Company was subordinated to the WFB bank line of credit. In November 2015, the WFB line of credit was paid off. The Company continues to maintain a purchasing card relationship with WFB with a limit of approximately $300,000, of which $55,328 was outstanding as of December 31, 2016 and included in trade accounts payable.
In November 2015, the Company entered into a Sale of Accounts and Security Agreement with Faunus Group International (“FGI”) for the USA with a maximum credit limit of $15,000,000. The line was secured by trade accounts receivable and a first priority lien on substantially all of the assets of the Company. The agreement contained certain pricing and fee structures for collateral management, minimum usage, early termination and facility fees. On July 1, 2016, FGI accepted full payment of all obligations of the Company under the U.S. and Canadian Sale of Accounts and Security Agreements (the “Existing Financing Agreements”), terminated the Existing Financing Agreements, terminated certain subordination agreements and guarantees, and released FGI’s security interests in the Company’s collateral.
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% of the face amount of each account purchased under the FASA. The balance at December 31, 2016 is $5,059,292 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 15 - NOTES PAYABLE, RELATED PARTIES
Notes payable, at December 31, consistsrelated parties consisted of the following:
| 2016 | 2015 | |||||||
| Supplier Secured Note Payable | $ | 9,414,352 | $ | - | ||||
| Insurance Notes | 19,502 | - | ||||||
| All Other | 479,365 | 126.942 | ||||||
| Total | 9,913,219 | 126,942 | ||||||
| Less current portion | (9,782,925 | ) | - | |||||
| Long Term Notes Payable | $ | 130,294 | $ | 126,942 | ||||
Future maturitiesfollowing as of notes payable are as follows;
| 2017 | $ | 9,782,295 | ||
| 2018 | 130,924 | |||
| Total | $ | 9,913,219 |
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 December 31, 2016 was $19,502 and the monthly payments are current. The Directors and Officers Liability Insurance is renewed annually and there is no outstanding balance at December 31, 2016.
In connection with the BCS 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 ending October 2018. The loan bears interest at 1.89% and is unsecured and subordinated to the Company’s bank debt. The balance on this loan at December 31, 2016 was $130,294 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, whereby the noteholder agrees to subordinate it right and payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full.31:
| 2019 | 2018 | |||||||
| In thousands | ||||||||
| Note payable – debt restructure Marin | $ | 900 | $ | 1,160 | ||||
| Note payable – debt restructure Thomet | 563 | 713 | ||||||
| Note payable – debt restructure Zicman | 135 | 171 | ||||||
| Convertible note payable – shareholders | 150 | 700 | ||||||
| Note payable - RWCC | 449 | 1,059 | ||||||
| Total notes payable | 2,197 | 3,803 | ||||||
| Less current portion | 1,025 | 1,891 | ||||||
| Long-term portion | $ | 1,172 | $ | 1,912 | ||||
In January 2016,
For 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 atyears ended December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock2019 and the remaining balance of the note is $229,072.
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. The balance on this note at December 31, 2016 was $9,414,352 which is all classified as current.
On March 31, 2017, the Company entered into an 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 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. The balance on this note at March 31, 2017 was $7,809,007.
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 note will be repaid 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 and will repay the balance of the $102,000 over 12 monthly installments commencing October 1, 2016. The balance on these two notes at December 31, 2016 was $119,999 which is all classified as current.
NOTE 16 – SUBORDINATED NOTES PAYABLE
Subordinated Notes payable at December 31, consisted of the following:
| 2016 | 2015 | |||||||
| Note payable - acquisition of Quest | $ | 5,967,137 | $ | 6,577,509 | ||||
| Note payable – acquisition of BCS | 10,348,808 | 10,348,808 | ||||||
| Note payable – acquisition of ViascanQdata | - | 2,446,969 | ||||||
| Quest Preferred Stock note payable | 1,199,400 | 3,120,000 | ||||||
| Note payable – License contingent liability | - | 150,000 | ||||||
| Total notes payable | 17,515,345 | 22,643,286 | ||||||
| Less: debt discount | - | (2,306,298 | ) | |||||
| Less: current portion | - | (6,790,148 | ) | |||||
| Total long-term notes payable | $ | 17,515,345 | $ | 13,546,840 | ||||
As of December 31, 2016 and 2015,2018, the Company recorded interest expense in connection with these notes in the amount of $728,267$49 thousand and $559,598,$115 thousand, respectively.
Note payable – debt restructure Marin
As of December 31, 2016 and 2015,
On February 28, 2018, the Company recorded an accretionentered into two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”). 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 debt discountcapital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11.0 million of which an aggregate of $10.7 million. (the “Owed Amount”) was outstanding as of February 26, 2018 which includes accrued interest earned but not paid. Pursuant to the Marin Settlement I Agreement, the amount of the indebtedness owed to Marin was reduced by $9.5 million. bringing the total amount owed to $1.2 million. Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20 thousand each commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc., currently in the amount of $2,306,298$1.8 million is satisfied and $718,202, respectively.all amounts currently in default under the credit agreement with Scansource (currently approximately $ 6.0 Million) is reduced to $2.0 million. The Marins have agreed to release their security interest against the Company. In 2016,connection with the modifications to$9.5 million. reduction in the debt and the subordination agreement signed,purchase price, the Company accretingissued the remaining balanceMarins 3 year warrants to purchase an aggregate of debt discount in order to record the notes payable150,000 shares of Common Stock at their face value.an exercise price of $4.00 per-share.
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,On February 28, 2018, the Company entered into Promissory Note Conversionan additional settlement agreement with the Marins (the “Marin Settlement Agreement with oneII”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100 thousand which currently had a balance of $111 thousand in its entirety in exchange for an aggregate of 85,000 shares of the Noteholders whereby $684,000 of the promissory note was converted into 684,000 shares ofCompany’s Series C Preferred Stock. As partThe Series C Preferred Shares outstanding are convertible into common stock at the rate of 20 Preferred Shares to one share of common stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) and automatically converts into Common Stock at $1.00 per share ($20.00 per 20 shares of Preferred Stock which convert to one share of common stock) in the transaction,event that the relatedCompany’s common stock has a closing price of $30 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 nor 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 thousand Note and the accrued interest thereon was cancelled in its entirety.
| F-24 |
Note payable – debt discount of $171,000 was recorded against Additional paid in capital. As part of the acquisition of Quest Marketing,restructure Thomet
On February 22, 2018, the Company engaged an independent valuation analysis to doentered into a valuation of the purchase accounting. In July 2016, the holders of the notes signed subordination agreementssettlement agreement with the Supplier of the Secured Promissory Note and Action,Kurt Thomet whereby the noteholders agreeCompany settled its indebtedness to subordinate their rights andMr. Thomet in the current amount of $5.4 million in full in exchange for 60 monthly payments untilof $12,500 each commencing the Supplier withearlier of (i) October 26, 2018 or (ii) the Secured Promissory Note is reimbursed in full. As a result,date when the balance on this loan and related accrued interest at December 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 at $2.00 per share, subject to board approval such that no debt holder can own more than 5% of the outstanding shares. Principal and interest payments have been postponed. 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 subordinateCompany’s obligation under 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 December 31, 2016 were all classified as long term.
The note payable in relation to the acquisition of ViascanQdata was issued effective October 1, 2015. $1,500,000 of the note was issued to Viascan Group, a related party due to the ownership interest to the then CEO and head of Media Sales. The interest rate is 6% on thispromissory note with payments due in 2016 and 2018. In June, the holder of the note granted the Company a forgiveness of debtScansource, Inc. currently in the amount of $500,000 which was recorded as an increase in$1.8 million is satisfied and all amounts currently due under the additional paid in capital because it was a related party transaction. On June 17, 2016,credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company entered into Promissory Note Conversion Agreement with the Noteholder whereby entire balance due at date which amounted to $1,049,250 comprisingissued Mr. Thomet an aggregate of capital and interest was converted into 1,049,25025,000 shares of Series C Preferred Stock. Effective September 30, 2016, the entire balance of the 1,049,250restricted common stock and 1,000,000 shares of Series C Preferred Stock were redeemedwith the same rights and restrictions as described above in the description of the Marin Settlement II Agreement.
Note payable – debt restructure Zicman
On February 19, 2018, the Company entered into a settlement agreement with George Zicman whereby the Company settled its indebtedness to Mr. Zicman in the current amount of $1.3 million in full in exchange for 60 monthly payments of $3 thousand each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. currently in the amount of $1.8 million is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of 5,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement.
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 as partCompany’s CEO and also agreed to a leakout restriction whereby they each agreed not to sell more than 10% of the divestiture of Quest Solution Canada Inc. The balance is debts assumed by the Company on the transaction date. The balance as at September 30, 2016 of these debts were assumed by the acquirer of Quest Solution Canada Inc. as part of the divestiture transactioncommon stock beneficially owned during any 30-day period.
Quest Preferred Stock note payable
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 3,400,000170,000 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$75 thousand 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 Promissory Note Conversion Agreement with the Noteholder whereby $1,800,000$1.8 million 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. AsDuring the year ended December 31, 2018, the Company issued 430,000 shares of the Company’s common stock at a result,fair value of $2.7 million for the balance on this loanconversion of the principal and related accrued interest at December 31, 2016 were all classifiedof $1.2 million and $0.2 million, respectively, or $1.4 million. The difference of $1.3 million was recorded as long term.loss on debt settlement in the consolidated statement of operations.
Convertible note payable – shareholders
The Company had a contingent liabilityconvertible note payable – shareholders relates to the purchase price paid for the acquisition of HTS. The Note is in the amount of $150,000$700 thousand with $350 thousand due to an un-related third partyeach of the two sellers. The $700 thousand was due and payable on October 5, 2019 with accrued interest at the rate of 6.0% per annum.
The Holders have the right, at any time on or after the Issue Date, to convert all or any portion of the then outstanding and unpaid principal amount and interest (including any Default Interest) into fully paid and non-assessable shares of the Company’s common stock, as such common stock exists on the conversion date, or any shares of the Company’s capital stock or other securities of the Company into which such common stock shall hereafter be changed or reclassified, at the conversion price (as defined below) determined as provided herein (a “Conversion”); The number of conversion shares to be issued upon each conversion of the note shall be determined by dividing the conversion amount by the applicable conversion price then in effect on the date specified in the notice of conversion delivered to the Company by the holder. The conversion rate was set at $4.72 per share.
On April 4, and in connection with the Securities Purchase Agreement, Shai Lustgarten, the Company’s Chief Executive Officer, and Carlos J. Nissenson, a consultant to and principal stockholder of the Company, participated in the Offering by converting $200 thousand 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.
On September 30, 2019, and in accordance with the terms of the Convertible Promissory Note, Walefar and Campbeltown each exercised the right to convert $75 thousand in unpaid principal balance into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $0.236. Accordingly, the Company issued 317,796 shares to each of Walefar and Campbeltown.
As a result of the Conversions, a principal amount of $150 thousand is owed to each Walefar and Campbeltown respectively under the convertible note payable.
Note payable - RWCC
The company acquired the Note Payable – RWCC (“RWCC Note”) with the acquisition of technology licensesHTS. The Certus Note was a non-interest-bearing note. The Certus Note was historically discounted using an effective interest rate of 5.0%. The outstanding balance of $1.0 million is due and payable in 2015. ThisApril 2020 with monthly payment becomes due whenof approximately $85 thousand per month. The Certus Note is classified as a related party note because the respective technology becomes operable and viable. At December 31, 2016 this amount was forgiven byChief Executive Officer of Certus, Ltd. is the holderson of a significant shareholder of the Company and a gainsibling of settlementthe Company’s Chief Financial Officer and member of $150,000 was recorded on the income statement.Board of Directors.
| F-25 |
The repayment of the subordinated notes payable, related parties as of December 31, 2019 is contingent onas follows for the complete reimbursementyears ending December 31,:
In thousands
| 2020 | 1,025 | |||
| 2021 | 426 | |||
| 2022 | 426 | |||
| 2023 | 320 | |||
| Thereafter | - | |||
| Total | $ | 2,197 |
NOTE 12 - NOTES PAYABLE
Notes payable consists of the following as of December 31,:
| In thousands | 2019 | 2018 | ||||||
| Supplier Secured Note Payable | $ | 6,490 | $ | 8,340 | ||||
| All Other | 150 | 613 | ||||||
| Total | 6,640 | 8,953 | ||||||
| Less current portion | 6,497 | 8,823 | ||||||
| Long Term Notes Payable | $ | 143 | $ | 130 | ||||
Future maturities of notes payable are as follows for the years ending December 31,:
In thousands
| 2020 | $ | 6,497 | ||
| 2021 | 6 | |||
| 2022 | - | |||
| Thereafter | 137 | |||
| Total | $ | 6,640 |
Supplier Secured Note Payable
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 $12.5 million. The USD Note accrues interest at 12% per annum and is payable in six consecutive monthly installments of principal and accrued interest in a minimum principal amount of $250 thousand each, with any remaining principal and accrued interest due and payable on December 31, 2016.
| ● | On 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 thousand 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 thousand 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 thousand each. |
| F-26 |
| ● | 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 thousand each. | |
| ● | On November 15, 2017 the Company entered into a Fourth Amendment extending the maturity date to December 31, 2017 and this Fourth Amendment is effective on October 31, 2017 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 thousand each. | |
| ● | On February 14, 2018 the Company entered into a Fifth Amendment extending the maturity date to March 31st, and this Fifth Amendment is effective on December 31, 2017 whereby any remaining principal and accrued interest is due and payable on March 31, 2018. 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 thousand each. | |
| ● | On September 14, 2018, the Company entered into a Sixth Amendment extending the maturity date to January 31, 2019. The Amendment also increases the principal amount to $8.7 million, an increase of $6.8 million , by rolling the Company’s existing outstanding accounts payable into the note by the previously mentioned amount of increase. | |
| ● | On April 30, 2019, the Company entered into a Seventh Amendment extending the maturity date to July 31, 2019. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $350 thousand each. The Company has made partial payments towards the required monthly installments under the terms of the Seventh Amendment. As has been the case with each previous amendment, the Company is in continual negotiations with the holder of the Secured Promissory Note to extend the maturity date and establish a new schedule of payments. |
Bill Davidson Promissory Note
In connection with the BCS 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 $5 thousand beginning October 31, 2014 and ending October 2018. The loan bears interest at 8% and is unsecured and subordinated to the Company’s bank debt. The balance on this loan at December 31, 2019 and 2018 was $137 thousand and $130 thousand, respectively, of which all 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 other conditionsAction, whereby the noteholder agrees to subordinate its rights to payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full. This is subordinated to the Supplier Secured Note payable and can’t be paid until the Supplier Secured Note Payable is satisfied; therefore, the note is classified as such basedlong-term.
Maren Trust Promissory Note
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 25,354 shares of common stock for $220 thousand on these factors management has estimated thatan installment basis which was recorded as a note on the future maturities of subordinated notes payabletransaction date carrying interest at 9%. As at December 31, 2018, the Company did not complete the redemption of 25,354 shares of common stock and the remaining balance of the note was $241 thousand. In February 2018, the Company made the final payment and the 25,354 shares were cancelled.
| F-27 |
NOTE 13 – OTHER LIABILITIES
At December 31, 2019 and 2018, other liabilities consisted of the following:
| In thousands | 2019 | 2018 | ||||||
| Other vendor payable | $ | 801 | - | |||||
| Dividend payable | 344 | 478 | ||||||
| Bonus payable | 385 | - | ||||||
| Others | 453 | 397 | ||||||
| Total other liabilities | 1,983 | 875 | ||||||
| Less Current Portion | (1,599 | ) | (265 | ) | ||||
| Total long term other liabilities | $ | 384 | $ | 610 | ||||
The Company had 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 and assumption with three of the beneficiaries of the key man insurance policies. The agreement states that the Company will be assigning the policy over to the beneficiary and the beneficiary will assume all the obligations under the premium financed note in place. The premium financed note has to be bifurcated with the lender in order to complete the transaction.
At December 31, 2017, the balance of amount of premium financed note for the remaining policy is $1.5 million and the cash value of the policy as of this date is $1.4 million, with a net negative cash value of the policies of $86 thousand.
The value of the policies is recorded at the new value per the right of offset noted in Topics 210-220. To have 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 of the loan. The Company also intends to settle out the loans in the future with the cash value of the policy.
As of June 30, 2018, the Company has no further obligations related to the key man insurance policies other than finalizing paperwork on the latter assignments and in removing the liabilities from the Company books. As a result, the company recognized an accounting gain of $150 thousand.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
PROFIT SHARING PLAN
The Company maintains a contributory profit sharing plan covering substantially all fulltime employees within the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). In 2016, the Safe Harbor element was removed from the plan and the employer may make a discretionary matching contribution equal to a uniform percentage or dollar amount of participants’ elective deferrals for each Plan Year. In 2015, the Company is required to make a safe harbor non-elective contribution equal to 3 percent of a participant’s compensation. The plan also includes a 401(k) savings plan feature that allows substantially all employees to make voluntary contributions and provides for discretionary matching contributions determined annually by the Board of Directors. For the years ending December 31, 2019, and 2018, the Company elected to forgo the match.
OPERATING LEASES
As of December 31, 2019, the Company has three operating leases for office and assembly space and no financing leases. The impact of ASU No. 2016-02 on our consolidated balance sheet beginning January 1, 2019 was through the recognition of ROU assets and lease liabilities for operating leases. Amounts recognized at January 1 and December 31, 2019 for operating leases are as follows:
| In thousands | January 1, 2019 | December 31, 2019 | ||||||
| ROU assets | $ | 235 | $ | 131 | ||||
| Lease liability | $ | 235 | $ | 134 | ||||
The Company elected the practical expedient ASU 2018-11,Leases (Topic 842): Targeted Improvements which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date. Therefore, the Company recognized and measured leases existing at January 1, 2019 (inception date). In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing leases upon adoption. Lastly, the Company elected a short-term lease exception policy, permitting it to exclude the recognition requirements of this standard from leases with initial terms of 12 months or less. No impact was recorded to the income statement or beginning retained earnings for Topic 842.
Beginning January 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments, including annual rent increases, over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of January 1, 2019. As none of our leases included an implicit rate of return, we used our incremental borrowing rate based on lease term information available as of the adoption date or lease commencement date in determining the present value of lease payments.
| F-28 |
On January 1, 2019, the Company had three operating leases for office and/or warehouse space and one operating lease for a vehicle. The Company was leasing approximately 7,000 sf of office space in Eugene, OR with monthly payments of $4 thousand and an incremental borrowing rate of 15.06%. In December 2019, the Company terminated this lease. On January 1, 2019, the Company was also leasing a small office space in Akron, OH with monthly payments of $3 thousand and an incremental borrowing rate of 14.55%. As of December 31, 2019, the Company had 41 months remaining on the lease with a lease liability of $96 thousand. On January 1, 2019, the Company was also leasing a small office and warehouse in Anaheim, CA with monthly payments of $2 thousand and an incremental borrowing rate of 14.83%. As of December 31, 2019, the Company had 12 months remaining on the lease with a lease liability of $28 thousand. On January 1, 2019, the Company was leasing a vehicle with monthly payments of less than $1 thousand and an incremental borrowing rate of 14.83%. As of December 31, 2019, the Company had 25 months remaining on the lease with a lease liability of $9 thousand.
Other information related to our operating leases is as follows:
| In thousands | ||||
| ROU asset - January 1, 2019 | $ | 235 | ||
| Decrease | $ | (11 | ) | |
| Amortization | $ | (93 | ) | |
| ROU asset - December 31, 2019 | $ | 131 | ||
| Lease liability - January 1, 2019 | $ | 235 | ||
| Decrease | $ | (11 | ) | |
| Amortization | $ | (90 | ) | |
| Lease liability - December 31, 2019 | $ | 134 | ||
| 2017 | - | |||
| 2018 | - | |||
| 2019 | - | |||
| 2020 | - | |||
| 2021 | - | |||
| Thereafter | 17,515,345 | |||
| Total | $ | 17,515,345 |
| In thousands | December 31, 2019 | |||
| Lease liability | ||||
| Short term | $ | 54 | ||
| Long term | $ | 80 | ||
| Total | $ | 134 | ||
As of December 31, 2019, our operating leases had a weighted average remaining lease term of 33.78 months and a weighted average discount rate of 14.63%.
The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Consolidated Balance Sheet as of December 31, 2019:
| In thousands | ||||
| Year | Minimum lease payments | |||
| 2020 | $ | 70 | ||
| 2021 | $ | 41 | ||
| 2022 | $ | 38 | ||
| Thereafter | $ | 16 | ||
| Total | $ | 165 | ||
| Less interest | $ | (31 | ) | |
| Present value of future minimum lease payments | $ | 134 | ||
| Less current obligations | $ | (54 | ) | |
| Long term lease obligations | $ | 80 | ||
LITIGATION
The Company was sued by Kurt Thomet for breach of obligations related to the outstanding debt obligations remaining from the promissory note executed on January 18, 2014 and subsequent amendments. The lawsuit was withdrawn in 2018 with the restructure of debt the subsequent to year end but effective December 31, 2018. The Company is not a party to any other pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the Company’s Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.
NOTE 1715 – STOCKHOLDERS’ EQUITY
PREFERRED STOCK
Series A
As of December 31, 20162019 and 2015,2018, there were 1,000,000 Series A preferred shares designated and 0 Series A preferred shares outstanding. The board of directors had previously set the voting rights for the preferred stock at 1 share of preferred to 25013 common shares.
On October 1, 2015, the Board of directors approved the repurchase and retirement of all of the issued and outstanding Series A preferred shares and 3,400,000 stock options from a related party, in exchange for a $3,120,000 subordinated note.
Series B
As of December 31, 2016,2019 and 2018, there was 1 preferred share designated and 0 preferred shares outstanding. At December 31, 2015 there was 1 preferred share authorized and 1 preferred share issued and outstanding.
These preferred shares were issued solely for the purpose of the acquisition of ViascanQdata and are only convertible into common shares at the rate of 1 for 1 at any time. They have no preferential rights above common shares. Effective on September 30, 2016, with the divestiture of Quest Solution Canada Inc., the one share was redeemed by the Company and retired.
Series C
As of December 31, 2016,2019 and 2018, there waswere 15,000,000 Series C preferred sharePreferred Shares authorized with 4,828,530 issued and 3,143,530 Seriesoutstanding. The series C preferred share outstanding. It hasshares have preferential rights above common shares and the Series B preferred sharesPreferred Shares and is entitled to receive a quarterly dividend at a rate of $0.06 per annum. Each Series C preferred share outstanding is convertible into one (1) shareper annum and have a liquidation preference of common stock of Quest Solution, Inc. On June 17, 2016, 4,882,500 shares were issued as$1 per share. As part of Promissory Note Conversionseveral debt settlement agreements as described in Note 16. On July 31, 2016 the Company issued 100,000effective December 30, 2017, 1,685,000 shares of Series C preferred stock pursuant to a Separation Agreement in exchange for the redemption of 42,500 restricted common shares. Effective on September 30, 2016,Preferred Stock were issued, with the sales of Quest Solution Canada Inc., 1,839,030caveat that the shares will not pay and will not accrue dividends for a 24-month period or any time prior to March 1, 2020. Series C preferred shares were redeemed byoutstanding are convertible into common stock at the Companyrate of 20 preferred shares to one share of common stock. As of December 31, 2019 and retired.2018, the accrued dividends on the Series C Preferred Stock was $344 thousand and $478 thousand, respectively.
The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share ($20.00 per 20 shares of preferred stock which convert to one share of common stock) and automatically converts into Common Stock at $1.00 per share ($20.00 per 20 shares of preferred stock which convert to one share of common stock) in the event that the Company’s common stock has a closing price of $30 per share for 20 consecutive trading days.
| F-29 |
COMMON STOCK
Effective November 11, 2019, the Company implemented a one-for-20 reverse stock split of the Company’s common stock. The par value of common stock and the number of authorized shares were not adjusted as a result of the reverse stock split. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.
On May 19, 2015, QuestSeptember 30, 2019, and in accordance with the terms of the Convertible Promissory Note, Walefar and Campbeltown each exercised the right to convert $75 thousand in unpaid principal balance into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $0.236. Accordingly, the Company issued 317,796 shares to each of Walefar and Campbeltown.
On September 5, 2019, the Company entered into a Securityletter agreement with Shai Lustgarten, the Company’s Chief Executive Officer, pursuant to which the Company and Mr. Lustgarten agreed to extend the term of Mr. Lustgarten’s employment agreement for an additional two (2) years. As consideration and in light of the Company’s achievements under the leadership of Mr. Lustgarten, the Company, pursuant to its 2018 Equity Incentive Plan, issued to Mr. Lustgarten 50,000 shares of the Company’s common stock valued at $250 thousand.
On September 5, 2019, the Company entered into a letter agreement with Mr. Carlos J. Nissensohn and/or an entity under his control, a consultant to the Company and principal stockholder, pursuant to which they agreed to extend the term of Mr. Nissensohn’s and/or an entity under his control’s consulting agreement for an additional two (2) years. As consideration and in light of Mr. Nissensohn’s and/or an entity under his control’s past consulting services which the Company believes were essential to its recent achievements, the Company, pursuant to the 2018 Equity Incentive Plan, issued to Mr. Nissensohn and/or an entity under his control 27,500 shares of the Company’s common stock, valued at $138 thousand.
On April 4, 2019, the Company entered into a form of Securities Purchase Agreement (the “SPA”“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 accredited investor, whoaggregate, with the Conversions included, of $5.0 million of units (the “Units”) resulting in gross proceeds of $5.0 million, before deducting placement agent fees and offering expenses (the “Offering”). The individual Unit purchase price was $6.00. Each Unit is alsocomprised of one share of the Company’s common stock, $0.001 par value per share (the “Common Stock”), and a subordinated debt holderwarrant to purchase one share of Common Stock, and, an employeeas a result of Quest, pursuant to which Questthe Offering, the Company issued 667,000833,333 shares of Common Stock in exchange for $200,000.
On June 24, 2015, Quest issued subordinated promissory notes (the “Promissory Notes”“Shares”) and warrants (the “Warrants”) to three investors (who were Quest employees at the time) in the aggregate principal amount of $400,000 in exchange for an aggregate 170,000purchase 833,333 shares of Quest’s restricted common stock, par value $0.001Common Stock (the “Warrant Shares”) at an exercise price equal to $7.00 per share. This amount is treated asWarrant Share, which Warrants are exercisable for a related party advance onperiod of five and one-half years from the balance sheet. The Company recorded an interest expense of $62,731 relativeissuance date. Both Shai Lustgarten, the Company’s Chief Executive Officer, and Carlos J. Nissenson, a consultant to this issuance.
During the quarter ended June 30, 2015, the Company issued 650,000 shares of restricted common stock to consultants of the Company relative to a 12 month contract. The Company had the option to repurchase 550,000 of the shares issued within the 12 month period. The Company recorded a $219,853 expense related to the consulting contracts in fiscal 2015 and $69,027 was recorded to expense in fiscal 2016.
During the quarter ended September 30, 2015, aprincipal stockholder of the Company, voluntarily returned 2,517participated in the Offering by converting $200 thousand 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 $5.0 million. As a result of the Conversions, a principal amount of $150 thousand is owed to each Walefar and Campbeltown respectively under the note issued to them as partial consideration in the sale of HTS Image Processing to the Company on October 5, 2018.
In March 2018 and pursuant to the Company’s 2018 Equity Incentive Plan, the Company granted 50,000 shares of Common Stock, which were canceled from the Company’s issued and outstanding shares.
During the quarter ended December 31, 2015, the Compensation Committee of the board of directors agreed to quarterly issuance / vesting of 12,500 common shares per independent board member as compensation, as a result, 37,500 shares were issued in conjunction with this agreement at a value of $15,375. In addition, the Company issued 100,000 common shares to a consultant for servicesstock valued at $22,000 and 20,000 common shares to an employee valued at $4,600.
For the year ended December 31, 2016, the Company issued 150,000 shares$119 thousand to the board members in relation to the vesting schedule agreed to in the 4th quarter of 2015, which provides 12,500 common shares per independent board member as compensation.Company’s Chief Executive Officer Shai Lustgarten. The shares were valued at $28,800.the fair market value of the Company’s common stock on the date of issuance.
InDuring 2018, the first quarterCompany issued 3,996 shares of 2016, 39,000the Company’s common stock, valued at $11 thousand, to employees of the Company as part of the Company’s 2018 Equity Incentive Plan. The shares were issued to certain employees that had avalued as of the date of grant at the fair value of $7,800.the Company’s common stock.
During 2018, the Company issued 141,022 shares of the Company’s common stock for services rendered by independent third parties, the Company’s former CFO, and related party noteholders. The shares were valued at $395 thousand using the fair market value of the shares on the date of issuance.
During 2018, the Company issued 430,000 shares of the Company’s common stock at a fair value of $2.7 million for the conversion of principal and accrued interest of $1.2 million and $247 thousand, respectively, or $1.4 million. The difference of $1.2 million was record as interest expense in the consolidated statement of operations. The shares were valued using the fair value of the Company’s common stock as of the date of issuance.
On June 17, 2016,26, 2018, the Company entered into a Stock Redemption Agreement whereby it redeemed 1,000,000 restrictedissued 7,500 shares of common stock in exchange for 357,000 shares of Series C preferred stock.
On July 31, 2016to Maren Life Reinsurance LTD as part of a debt settlement agreement.
In October 2018, and as partial consideration of the Separation Agreement with Mr. Ross,acquisition of HTS, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,0001,122,648 shares of restrictedthe Company’s common stock. In addition, the Company issued 100,000 shares of Series C preferred stock pursuant to the same Separation Agreement in exchangeprevious owners of HTS. These shares were valued at $5.3 million. See Note 4 – Acquisitions for the redemption of 42,500 restricted common shares.further details.
| F-30 |
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 1,650,00025,354 shares of common stock for $750,000$230 thousand on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. On September 30, 2016,In March 2019, the Company completedmade its last payment under the redemption of 1,650,000 shares of common stock.
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 December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance of the note and accrued interest is $241,159.
In November 2016, the Company issued 131,000 shares to an employee as a signing bonus and performance bonus, respectively, under his Employment Agreement. The25,354 shares were valued at $8,449.
In December 2016, the Company issued 708,000 shares to the Chief Financial Officer as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $48,498.
For the year ended December 31, 2016, pursuant to the Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration statement, 238,785 shares of Common Stock were issued for proceeds of $20,058.
In total, for the year ended December 31, 2016, the Company has redeemed a total of 3,042,500 shares of common stock.
Related Party
Quest Solution redeemed 900,000 shares of common stock from Thomet pursuant to the Settlement Agreement which was redeemed before December 31, 2015.
Quest Solution issued 1,000,000 shares of restricted common stock to a note holder pursuant to the Settlement Agreement valued at $357,000 during the third quarter of 2015.
As of December 31, 2016, the Company had 35,095,763 common shares outstanding.cancelled.
Warrants and Stock Options
In connection with the April 4, 2019 Securities Purchase Agreement previously described in detail, the Company issued warrants to purchase 891,667 shares of Common Stock at an exercise price equal to $7.00 per Warrant Share, which Warrants are exercisable for a period of five and one-half years from the issuance date. The warrants were valued at $2.9 million. Also during 2019, the Company issued options to purchase 128 thousand shares valued at $564 thousand.
These options and warrants were valued at the grant date using the Black-Scholes valuation methodology. The Company determines the assumptions used in the valuation of warrants and option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company may use different assumptions for options and warrants granted throughout the year. The valuation assumptions used to determine the fair value of each option/warrants award on the date of grant were: expected stock price volatility 156.0% - 157.0%; expected term in years 4.0-5.5; and risk-free interest rate 1.40% - 2.31%.
The following table summarizes information about warrants granted during the years ended December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |||||||||||||||
| Number of warrants | Weighted Average Exercise Price | Number of warrants | Weighted Average Exercise Price | |||||||||||||
| Balance, beginning of year | 1,410,000 | 0.52 | 8,410,000 | 1.40 | ||||||||||||
| Warrants granted | - | - | - | - | ||||||||||||
| Warrants expired | (5,000 | ) | (1.00 | ) | - | - | ||||||||||
| Warrants cancelled, forfeited | - | - | (7,000,000 | ) | (1.57 | ) | ||||||||||
| Warrants exercised | - | - | - | |||||||||||||
| Balance, end of year | 1,405,000 | 0.52 | 1,410,000 | 0.52 | ||||||||||||
| Exercisable warrants | 1,405,000 | 0.52 | 1,410,000 | 0.52 | ||||||||||||
During 2015, the Company canceled a total of 7,000,000 warrants that were issued in connection with the acquisition of Quest Marketing, Inc.
| 2019 | 2018 | |||||||||||||||
| Number of warrants | Weighted Average Exercise Price | Number of warrants | Weighted Average Exercise Price | |||||||||||||
| Balance, beginning of year | 275,000 | $ | 4.55 | 295,250 | $ | 5.00 | ||||||||||
| Warrants granted | 891,667 | 7.00 | 50,000 | 9.72 | ||||||||||||
| Warrants expired | - | - | 70,250 | 10.40 | ||||||||||||
| Warrants cancelled, forfeited | - | - | - | - | ||||||||||||
| Warrants exercised | - | - | - | - | ||||||||||||
| Balance, end of year | 1,166,667 | 6.42 | 275,000 | 4.55 | ||||||||||||
| Exercisable warrants | 1,166,667 | $ | 6.42 | 275,000 | $ | 4.55 | ||||||||||
Outstanding warrants as atof December 31, 20162019 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 | 1.25 | 900,000 | 0.25 | 900,000 | 0.25 | |||||||||||||||||
| 1.00 | 1.33 | 505,000 | 1.00 | 505,000 | 1.00 | |||||||||||||||||
| 0.25 to 1.00 | 1.28 | 1,405,000 | 0.52 | 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 | |||||||||||||||
| 2.20 | 1.59 | 75,000 | $ | 2.20 | 75,000 | $ | 2.20 | |||||||||||||
| 4.00 | 1.00 | 150,000 | 4.00 | 150,000 | 4.00 | |||||||||||||||
| 5.60 | 0.49 | 10,000 | 5.60 | 10,000 | 5.60 | |||||||||||||||
| 7.00 | 4.77 | 891,667 | 7.00 | 891,667 | 7.00 | |||||||||||||||
| 12.00 | 0.78 | 15,000 | 12.00 | 15,000 | 12.00 | |||||||||||||||
| 10.00 | 1.78 | 25,000 | 10.00 | 25,000 | 10.00 | |||||||||||||||
| 2.20 to 12.00 | 3.93 | 1,166,667 | $ | 6.42 | 1,166,667 | $ | 6.42 | |||||||||||||
Warrants outstanding at the end of the year have the following expiry date and exercise prices:prices as of the year ended December 31,:
| Expiry Date | Exercise Prices | December 31, 2016 | December 31, 2015 | |||||||||
| July 10, 2016 | 1.00 | - | 5,000 | |||||||||
| 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 | |||||||||
| 1,405,000 | 1,410,000 | |||||||||||
| Expiry Date | Exercise Prices | 2019 | 2018 | |||||||||
| December 30, 2020 | $ | 4.00 | 150,000 | 150,000 | ||||||||
| August 2, 2021 | 2.20 | 75,000 | 75,000 | |||||||||
| June 26, 2020 | 5.60 | 10,000 | 10,000 | |||||||||
| October 10, 2020 | 12.00 | 15,000 | 15,000 | |||||||||
| October 10, 2021 | 10.00 | 25,000 | 25,000 | |||||||||
| October 6, 2024 | 7.00 | 891,667 | - | |||||||||
| $ | 6.42 | 1,166,667 | 275,000 | |||||||||
| F-31 |
Share Purchase Option Plan
The Company has a stock option plan whereby the Board of Directors, may grant to directors, officers, employees, or consultants of the 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 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 10,000,000.500,000.
The option exercise price is established by the Board of Directors and may not be lower than the market price of the common shares at the time of grant. The options may be exercised during the option period determined by the Board of Directors, which may vary, but will not exceed ten years from the date of the grant. There are 10,000,000500,000 of the Company’s common shares which may be issued pursuant to the exercise of share options granted under the Plan. As at December 31, 2016,2017, the Company had issued options, allowing for the subscription of 2,644,000481,250 common shares of its share capital.
Stock Options - The following table summarizes information about stock options granted during the years ended December 31, 20162019 and 2015:2018:
| December 31, 2016 | December 31, 2015 | 2019 | 2018 | |||||||||||||||||||||||||||||
| Number of stock options | Weighted Average Exercise Price | Number of stock options | Weighted Average Exercise Price | Number of options | Weighted | Number of options | Weighted | |||||||||||||||||||||||||
| Balance, beginning of year | 6,044,000 | 0.50 | 9,300,000 | 0.50 | 1,006,050 | $ | 3.80 | 481,250 | $ | 4.20 | ||||||||||||||||||||||
| Stock options granted | - | - | 144,000 | 0.36 | 127,500 | 5.00 | 592,000 | 3.40 | ||||||||||||||||||||||||
| Stock options expired | - | - | - | - | - | - | (1,800 | ) | - | |||||||||||||||||||||||
| Stock options cancelled, forfeited | (3,400,000 | ) | (0.50 | ) | (3,400,000 | ) | (0.50 | ) | - | - | (65,400 | ) | - | |||||||||||||||||||
| Stock options exercised | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Balance, end of year | 2,644,000 | 0.49 | 6,044,000 | 0.50 | 1,133,550 | 4.00 | 1,006,050 | 3.80 | ||||||||||||||||||||||||
| Exercisable stock options | 1,925,250 | 0.49 | 1,950,250 | 0.49 | 952,425 | $ | 3.94 | 792,050 | $ | 3.80 | ||||||||||||||||||||||
During 2015,2018, the Company canceled a total of 3,400,00065,400 stock options in connection with the redemption and cancellation of the Series A preferred stock from the former CEO.
During 2016, the Company canceled a total of 3,400,000 stock options in connection with the Separation Agreement signed with the former CFO.options.
Outstanding stock options as atof December 31, 20162019 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 | |||||||||||||||||
| 0.33 to 0.38 | 1.29 | 144,000 | 0.36 | 144,000 | 0.36 | |||||||||||||||||
| 0.50 | 7.89 | 2,500,000 | 0.50 | 1,781,250 | 0.50 | |||||||||||||||||
| 0.33 to 0.50 | �� | 7.53 | 2,644,000 | 0.49 | 1,925,250 | 0.49 | ||||||||||||||||
| Range of Exercise Prices | Weighted Average residual life span (in years) | Outstanding Stock Options | Weighted | Exercisable Stock Options | Weighted | |||||||||||||||
| 1.50 to 1.80 | 2.13 | 114,050 | $ | 1.70 | 114,050 | $ | 1.70 | |||||||||||||
| 2.20 | 1.59 | 175,000 | 2.20 | 175,000 | 2.20 | |||||||||||||||
| 5.00 | 3.58 | 127,500 | 5.00 | 31,875 | 5.00 | |||||||||||||||
| 10.00 | 4.89 | 125,000 | 10.00 | 125,000 | 10.00 | |||||||||||||||
| 2.40 | 3.18 | 340,000 | 2.40 | 297,500 | 2.40 | |||||||||||||||
| 4.40 | 3.84 | 108,250 | 4.40 | 81,188 | 4.40 | |||||||||||||||
| 5.40 | 3.92 | 143,750 | 5.40 | 127,813 | 5.40 | |||||||||||||||
| 0.075 to 0.50 | 3.22 | 1,133,550 | $ | 4.00 | 952,425 | $ | 3.94 | |||||||||||||
Stock options outstanding at the end of the year have the following expiry date and exercise prices:
| Expiry Date | Exercise Prices | December 31, 2016 | December 31, 2015 | |||||||||
| March 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 | |||||||||
| November 20, 2024 | 1.00 | 1,781,250 | 1,806,250 | |||||||||
| 1,925,250 | 1,950,250 | |||||||||||
| Expiry Date | Exercise Prices | December 31, 2019 | December 31, 2018 | |||||||||
| August 2, 2021 | $ | 2.20 | 175,000 | 175,000 | ||||||||
| February 17, 2022 | 1.70 | 114,050 | 114,050 | |||||||||
| March 05, 2023 | 2.40 | 340,000 | 340,000 | |||||||||
| July 31, 2023 | 5.00 | 127,500 | - | |||||||||
| October 31, 2023 | 4.40 | 108,250 | 108,250 | |||||||||
| November 30, 2023 | 5.40 | 143,750 | 143,750 | |||||||||
| November 20, 2024 | 10.00 | 125,000 | 125,000 | |||||||||
| $ | 4.00 | 1,133,550 | 1,006,050 | |||||||||
| F-32 |
For the year ending December 31, 2016 and December 31, 2015, theThe Company recorded stock compensation expense relating to the vesting of stock options and warrants as follows;
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Board compensation expense | $ | 28,880 | $ | 15,375 | ||||
| Stock compensation | 273,443 | 315,480 | ||||||
| Stock Option vesting | 73,128 | 420,199 | ||||||
| Total | $ | 375,451 | $ | 751,034 | ||||
NOTE 18 – RESTRUCTURING EXPENSES
Forfollows for the yearyears ended December 31, 2016, the Company took steps to streamline2019 and simplify its operations in North America. The employees to be separated from the Company as a result of these streamlining initiatives were offered severance or working notices. As a result, the Company has recorded a restructuring charge of $544,951 to realize the streamlining initiatives. The restructuring charges include severance pay, legal costs to execute contract terminations, and cost of stock redemptions.2018;
NOTE 19 – LITIGATION
The Company is not a party to any 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.
| 2019 | 2018 | |||||||
| In thousands | ||||||||
| Stock compensation | $ | 388 | $ | 569 | ||||
| Stock Option vesting | 879 | 1,818 | ||||||
| Total | $ | 1,267 | $ | 2,387 | ||||
NOTE 2016 – RELATED PARTY TRANSACTIONS
TheDuring part of 2018, the Company leasesleased a building from the former owner of BCS for $9,000$9 thousand per month, which iswas believed to be the current fair market value of similar buildings in the area. These amounts are included in the lease disclosure schedule, Footnote 10.Note 14.
During 2015,In addition, on August 2, 2017, the Company issued 1,000,000 shares of restricted Common Stock toentered into a note holder, who is also an employeeConsulting agreement with Carlos J. Nissenson, a principal shareholder of the Company pursuant toand a family member of a Director of the Settlement Agreement valued at $357,000 duringCompany. The terms and condition of the third quarter of 2015.contract are as follows:
During 2015, the Company redeemed the Series A preferred stock and 3,400,000 common stock options from an employee of the Company, pursuant to the Redemption Agreement valued at $3,120,000, during the fourth quarter of 2015.
| ● | 24-month term with 90 day termination notice by the Company | |
| ● | A monthly fee of $15 thousand and a one-time signatory fee of 30,000 restricted shares | |
| ● | 75,000 warrants to buy shares at $2.20 having a four-year life and a vesting period of12 months in four quarterly and equal installments, subject toMr. Nissenson’ scontinuous service to the Company | |
| ● | In case the Company procures debt financing during the term of this agreement, without any equity component, Mr. Nissenson shall be entitled to 3% of the gross funds raised, however if the Company is required to pay a success fee to another external entity, then Mr. Nissenson shall be entitled to only 2% of the gross funds raised | |
| ● | In addition to the above, in the event of an equity financing resulting in gross proceeds of at least $3 million to the Company within 24 months of the date the contract, Mr. Nissenson shall further be entitled to certain warrants to be granted by the Company which upon their exercise pursuant to their terms, Mr. Nissenson shall be entitled to receive QUEST shares which represent 3% of the QUEST issued share capital immediately prior to the consummation of such investment. The warrants will carry an exercise price per warrant/share representing 100% of the closing price per share as closed in the equity financing. This section and the issue of the warrant by QUEST are subject to the approval of the Board of Directors of QUEST. However, if the Board does not approve the issuance of warrants; then Mr. Nissenson will be entitled to a fee with the equivalent value based on a Black Scholes valuation | |
| ● | In addition to the above, Mr. Nissenson will be entitled to a$50 thousand one-time payment which shall be paid on the 1stday that the QUEST shares become traded on the NASDAQ or NYSE Stock Market within 24 months of the date of the contract | |
| ● | In addition to the aforementioned, in the event that the Company shall close any M&A transaction with a third party target, Mr. Nissenson shall be entitled to a success fee in the amount equal to 3% of the total transaction price, in any combination of cash and shares that will be determined by QUEST |
Additional related party transactions are discussed in Notes 1611 and 17.15.
NOTE 2117 – INCOME TAX
For the year ended December 31, 2016, the current income tax provision of $298,719 includes federal and state income taxes. The deferred income tax provision is $769,633 resulted from the reversal and the valuation allowance change in the deferred tax assets.
For the year ended December 31, 2015,2019, the Company recognized ahas $14 thousand of current income tax provision (US State & Local and Foreign) and no deferred income tax benefit of $1,797,977 related to the net operating losses carryforward.
provision.
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows atas of December 31, 2016:
In thousands | ||||||||||||||||
| Deferred tax assets | Current | Long-Term | 2019 | 2018 | ||||||||||||
| Reserves and deferred revenue | $ | 377,555 | $ | 743,393 | $ | 238 | $ | 460 | ||||||||
| 163(J) Limitation | 664 | 299 | ||||||||||||||
| Stock options | - | 472,254 | - | 976 | ||||||||||||
| Net operating loss | - | 6,567,549 | 5,319 | 5,029 | ||||||||||||
| Total gross deferred tax assets | 377,555 | 7,783,196 | 6,221 | 6,764 | ||||||||||||
| Less: Valuation Allowance | (5,414 | ) | (5,870 | ) | ||||||||||||
| Net deferred tax assets | 807 | 894 | ||||||||||||||
| Deferred tax liabilities | (20,155 | ) | (108,033 | ) | ||||||||||||
| Amortization of intangible assets and depreciation | - | (35,569 | ) | (807 | ) | (894 | ) | |||||||||
| Total deferred tax liabilities | (807 | ) | (894 | ) | ||||||||||||
| Net deferred tax assets | $ | 357,400 | $ | 7,639,594 | $ | - | $ | - | ||||||||
| F-33 |
Components of net deferred tax assets, including a valuation allowance, are as follows atas of December 31:
| December 31, | ||||||||||||||||
| 2016 | 2015 | 2019 | 2018 | |||||||||||||
| Deferred tax assets | $ | 7,996,994 | $ | 2,440,391 | $ | 5,414 | $ | 5,870 | ||||||||
| Valuation allowance | (7,996,994 | ) | (1,845,851 | ) | (5,414 | ) | (5,870 | ) | ||||||||
| Total deferred tax assets | $ | - | $ | 594,540 | $ | - | $ | - | ||||||||
The valuation allowance for deferred tax assets as of December 31, 20162019 and 20152018 was $7,996,994$5.4 million and $1,845,851,$5.9 million, respectively. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. AsManagement has recorded a 100% Valuation Allowance, against its Net Deferred Tax Assets, since Management believes it is more likely than not that it will not be realized at the Company continues its integration processdate of Quest Marketing and BCS, thethis statement. The Company will continue to monitor the potential utilization of this asset. Should factors and evidence change to aid in this assessment, a potential adjustment to the valuation allowance in future periods may occur.
The Company records any penalties and interest as a component of operating expenses.
The reconciliation between statutory rate and effective rate is as follows atas of December 31, 2016:2019 and 2018:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Federal statutory tax rate | 34.0 | % | (34.0 | )% | ||||
| State taxes | (0.27 | )% | 4.81 | % | ||||
| Non-deductible items | (17.80 | )% | (1.53 | )% | ||||
| Change in valuation allowance | (46.33 | )% | 25.24 | % | ||||
| Return to provision adjustments | 22.35 | % | (5.65 | )% | ||||
| Effective tax rate | (8.05 | )% | 58.87 | % | ||||
| 2019 | 2018 | |||||||
| Federal statutory tax rate | 21.0 | % | 21.0 | % | ||||
| State taxes | 1.41 | % | 1.73 | % | ||||
| Foreign income taxes | - | % | (0.66 | )% | ||||
| Nondeductible items | (11.52 | )% | (8.87 | )% | ||||
| Acquisition accounting adjustments | - | % | 8.74 | % | ||||
| Change in valuation allowance | 13.48 | % | 8.58 | % | ||||
| Return to provision adjustments | (25.33 | )% | (22.09 | )% | ||||
| Other | 0.56 | % | (0.44 | )% | ||||
| Effective tax rate | (0.40 | )% | 7.99 | % | ||||
The Company reported no uncertain tax liability as of December 31, 20162019 and expects no significant change to the uncertain tax liability over the next twelve months. The Company’s 2013, 2014, 2015, 2016, 2017, and 20152018 federal and state income tax returns are open for examination by the applicable governmental authorities.
As of December 31, 2016,2019, the Company had a net operating loss (NOL) carryforward of approximately $18,904,000.$22.1 million. The NOL carryforward begins to expire in 2024. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules which combine unrelated shareholders that do not individually own 5% or more of the corporation’s stock into one or more “public groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). In general, the annual use limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The Company has not completed a study as to whether there is a 382 limitation on its NOLs that will limit or possibly eliminate the use of its NOLs in the future. Company’s Management has recorded a 100% valuation allowance on the entire NOL as it believes that it is more likely than not that the deferred tax asset associated with the NOLs will not be realized regardless of whether or not an “ownership change” has occurred.
NOTE 2218 – SUBSEQUENT EVENTS
On April 1, 2017, Shai Lustgarten, was appointed as the President and Chief Executive Officer of the Company. Mr. Lustgarten will be located atIn accordance with ASC 855, “Subsequent Events”, the Company headquartershas evaluated all subsequent events through the date of this filing. No other significant events have occurred besides the events disclosed in Eugene, Oregon. The Employment Agreements hasthe Notes to the Financial Statements.
Asset purchase agreement
On February 28, 2020, the Company entered in an initial termasset purchase agreement (the “Asset Purchase Agreement”) with EyepaxIT Consulting LLC, a California limited liability company, (“Eyepax”) and the principal owners of two years,Eyepax (collectively the “Sellers”), effective September 30, 2019, pursuant to which Termthe Company purchased certain assets from the Sellers at a cash purchase price of $245,000. As additional consideration, the Company shall be extended or terminated with mutual consent. Mr. Lustgarten’s initial base salary shall be $240,000 per year. Mr. Lustgarten shall be eligibleissue to receive (i) a one-time sign-on bonus of $48,000 worth ofthe Sellers 80,000 shares of the Company’s restricted common stock whichand an option to purchase 20,000 shares will vest upon approval on the 2017 Financial Plan submitted to the Board of Directors (ii) a performance bonus at the end of the Company’s fiscal year 2017 based on measurable objectives, to be approved by the Compensation Committee of the Board of Directors, and (iii) acommon stock option grant of 2,281,000 stock options. The options are exercisable as follows: options to purchase 760,333 are immediately vested at an exercise price of $0.075 per share; options to purchase 760,333 vest on February 19, 2018 at an exercise price of $0.09 per share, and options to purchase 760,334 shares vest on February 17, 2019 at an exercise price of $0.09$5.00 per share, subject to any changeadjustment, which shall vest quarterly in control acceleration provisions.four (4) equal installments and expire on February 28, 2023. Pursuant to the Asset Purchase Agreement, the Company shall enter into an employment agreement with Mr. Lalith Caldera, a principal owner of Eyepax, and pay Mr. Caldera an annual salary of $100,000.
COVID-19
On April 7, 2017 withJanuary 30, 2020, the World Health Organization declared the coronavirus outbreak a "Public Health Emergency of International Concern" and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an effective dateadverse impact on the economies and financial markets of March 31, 2017,many countries, including geographical areas in which the Company and the Supplier entered into a second amendment to that certain Secured Promissory Note, dated July 1, 2016, in the original principal amount of $12,492,136.51 and amended on November 30, 2016. operates.
The Second Amendment extends the maturity dateextent of the Note from March 31, 2017 to September 30, 2017. The Second Amendment provides thatimpact of COVID-19 on our operational and financial performance will depend on certain developments, including the monthly installments of principalduration and accrued interest in a minimum principal amount will remain at $400,000 each, with any remaining principal and accrued interest due and payable on September 30, 2017. The interest ratespread of the Note remains at 12% per annum.outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain.
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EXHIBIT INDEX
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* Filed herewith.
ITEM 16. NONE.
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