U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2015
QUEST SOLUTION, INC.
(Exact name of small business issuer as specified in its charter)
| Delaware | 20-3454263 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2580 Anthem Village Drive
Henderson, NV 89052
(Address of principal executive offices) (Zip Code)
(702) 399-9777
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [ ] NO [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | |
| Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | |
| (Do not check if a smaller reporting company) | ||
| Smaller reporting company | [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES [ ] NO [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 36,616,495 shares of common stock, $0.001 par value, as of August 11, 2015.
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
QUEST SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | ||||||||
| June 30, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 322,317 | $ | 233,741 | ||||
| Accounts receivable, net of allowances of $35,990 and $62,800, respectively | 10,109,443 | 9,099,229 | ||||||
| Inventory | 383,350 | 606,231 | ||||||
| Prepaids | 669,887 | 191,498 | ||||||
| Other current assets | 167,958 | 377,060 | ||||||
| Total current assets | 11,652,955 | 10,507,759 | ||||||
| Fixed assets, net of accumulated depreciation of $1,818,516 and $1,781,086, respectively | 173,152 | 206,662 | ||||||
| Deferred tax asset | 1,299,417 | 1,299,417 | ||||||
| Goodwill | 14,101,306 | 14,101,306 | ||||||
| Trade name | 2,700,000 | 2,700,000 | ||||||
| Intangibles, net | 458,435 | 466,870 | ||||||
| Customer Relationships | 4,390,000 | 4,390,000 | ||||||
| Other assets | 593,308 | 317,304 | ||||||
| Total assets | $ | 35,368,573 | $ | 33,989,318 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 8,564,562 | $ | 7,406,146 | ||||
| Accrued interest and liabilities, related party | 278,770 | 51,806 | ||||||
| Line of credit | 1,718,128 | 1,819,345 | ||||||
| Advances, related party | 400,000 | 50,000 | ||||||
| Accrued payroll and sales tax | 1,661,789 | 917,079 | ||||||
| Deferred revenue, net | 804,584 | 297,277 | ||||||
| Current portion of note payable | 150,000 | 310,000 | ||||||
| Notes payable, related parties, current portion | 2,799,226 | 4,201,650 | ||||||
| Other current liabilities | 403,608 | 548,425 | ||||||
| Total current liabilities | 16,780,667 | 15,601,353 | ||||||
| Long term liabilities | ||||||||
| Note payable, related party, net of debt discount | 17,076,599 | 17,007,175 | ||||||
| Deferred tax liability | - | 29,783 | ||||||
| Other long term liabilities | 314,453 | 157,495 | ||||||
| Total liabilities | 34,171,719 | 32,795,806 | ||||||
| Stockholders’ equity | ||||||||
| Preferred stock; $0.001 par value; 25,000,000 shares authorized 500,000 and 500,000 shares outstanding as of June 30, 2015 and December 31, 2014, respectively. | 500 | 500 | ||||||
| Common stock; $0.001 par value; 100,000,000 shares authorized; 36,616,495 and 35,029,495 shares outstanding of June 30, 2015 and December 31, 2014, respectively. | 36,616 | 35,029 | ||||||
| Additional paid-in capital | 18,609,425 | 17,900,139 | ||||||
| Accumulated (deficit) | (17,449,687 | ) | (16,742,156 | ) | ||||
| Total stockholders’ equity | 1,196,854 | 1,193,512 | ||||||
| Total liabilities and stockholders’ equity | $ | 35,368,573 | $ | 33,989,318 | ||||
The accompanying unaudited notes to the financials should be read in conjunction with these financial statements.
| F-1 |
QUEST SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months | For the six months | |||||||||||||||
| ending June 30, | ending June 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Revenues | ||||||||||||||||
| Gross Sales | $ | 13,731,186 | $ | 7,516,700 | $ | 24,443,202 | $ | 17,166,965 | ||||||||
| Less sales returns, discounts, & allowances | (173,571 | ) | (82,454 | ) | (209,617 | ) | (110,559 | ) | ||||||||
| Total Revenues | 13,557,615 | 7,434,246 | 24,233,585 | 17,056,406 | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Cost of goods sold | 10,226,805 | 5,726,660 | 18,508,170 | 13,013,983 | ||||||||||||
| Cost of goods sold, related party | - | 347,262 | - | 694,523 | ||||||||||||
| Total costs of goods sold | 10,226,805 | 6,073,922 | 18,508,170 | 13,708,506 | ||||||||||||
| Gross profit | 3,330,810 | 1,360,324 | 5,725,415 | 3,347,900 | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 795,026 | 255,538 | 1,807,520 | 500,693 | ||||||||||||
| Salary and employee benefits | 1,854,620 | 1,261,297 | 3,179,052 | 2,643,013 | ||||||||||||
| Depreciation and amortization | 20,368 | 2,928 | 45,864 | 10,822 | ||||||||||||
| Stock compensation | 420,253 | 5,586 | 458,877 | 30,085 | ||||||||||||
| Professional fees | 108,083 | 137,989 | 196,563 | 267,764 | ||||||||||||
| Total operating expenses | 3,198,400 | 1,663,338 | 5,687,876 | 3,452,377 | ||||||||||||
| Income (loss) from operations | 132,410 | (303,014 | ) | 37,539 | (104,477 | ) | ||||||||||
| Other income (expenses): | ||||||||||||||||
| Gain on debt settlement | - | - | - | 151,949 | ||||||||||||
| Loss on license settlement | - | - | - | (93,578 | ) | |||||||||||
| Loss on note receivable settlement | - | - | - | (18,995 | ) | |||||||||||
| Taxes | (64,322 | ) | - | (64,209 | ) | - | ||||||||||
| Interest expense | (342,794 | ) | (400 | ) | (738,066 | ) | (1,000 | ) | ||||||||
| Other expenses | (38,093 | ) | - | (38,485 | ) | - | ||||||||||
| Other income | 27,350 | 41,109 | 95,690 | 50,215 | ||||||||||||
| Total other income (expenses) | (417,859 | ) | 40,709 | (745,070 | ) | 88,591 | ||||||||||
| Net Loss Before Income Taxes | (285,449 | ) | (262,305 | ) | (707,531 | ) | (15,886 | ) | ||||||||
| (Provision) Benefit for Income Taxes | ||||||||||||||||
| Deferred | - | - | - | - | ||||||||||||
| Current | - | - | - | - | ||||||||||||
| Net income (loss) | $ | (285,449 | ) | $ | (262,305 | ) | $ | (707,531 | ) | $ | (15,886 | ) | ||||
| Net income (loss) per share - basic | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.00 | ) | ||||
| Net income (loss) per share - diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.00 | ) | ||||
| Weighted average number of common shares outstanding - basic | 35,414,484 | 35,510,416 | 35,224,128 | 33,385,416 | ||||||||||||
| Weighted average number of common shares outstanding - diluted | 40,219,637 | 35,510,416 | 40,219,637 | 33,385,416 | ||||||||||||
The accompanying unaudited notes to the financials should be read in conjunction with these financial statements.
| F-2 |
QUEST SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
| For the six months | ||||||||
| ending June 30, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (707,531 | ) | $ | (15,886 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Stock based compensation - shares for services | 434,119 | 20,800 | ||||||
| Warrants granted | 19,758 | 13,663 | ||||||
License settlement | - | 93,578 | ||||||
| Loss on cancelled shares | (105,901 | ) | ||||||
| Debt discount accretion | 400,000 | - | ||||||
| Depreciation and amortization | 45,864 | 1,473 | ||||||
| Loss on receivable settlement | (37,491 | ) | ||||||
| Loss on note receivable settlement | 18,995 | |||||||
| Bad debt expense | 1,559 | |||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) / decrease in accounts receivable | (1,010,214 | ) | (975,866 | ) | ||||
| (Increase) / decrease in prepaid | (404,523 | ) | 66,131 | |||||
| (Increase) / decrease in prepaid, related party | - | 694,523 | ||||||
| (Increase) / decrease in inventory | 222,881 | - | ||||||
| (Increase) / decrease in customer deposit | 5,275 | (2,007 | ) | |||||
| Increase / (decrease) in accounts payable and accrued liabilities | 1,758,310 | 333,627 | ||||||
| increase in deferred revenues, net | 507,307 | - | ||||||
| Increase / (decrease) in accrued interest and liabilities, related party | 226,964 | (25,808 | ) | |||||
| (Increase) / decrease in salary payable, related party | 90,000 | |||||||
| (Increase) / decrease in other liabilities | 127,175 | 62,249 | ||||||
| Increase / (decrease) in advances from related party | - | 112 | ||||||
| Net cash provided by (used in) operating activities | 1,625,385 | 233,751 | ||||||
| Cash flows from investing activities: | ||||||||
| (Purchase of) cash from acquisitions | - | 1,950,120 | ||||||
| Change in other assets | (71,802 | ) | 4,262 | |||||
| (Purchase of) Sale of property and equipment | (20,789 | ) | - | |||||
| Net cash provided by (used in) investing activities | (92,591 | ) | 1,954,382 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from loan receivable | - | 78,000 | ||||||
| Proceeds from note receivable | - | 4,500 | ||||||
| Proceeds from notes payable | 350,000 | |||||||
| Proceeds (payment) on line of credit | (101,217 | ) | (60,000 | ) | ||||
| Repayment of notes/loans payable | (1,893,000 | ) | (1,325,000 | ) | ||||
| Proceeds from shares sold | 200,000 | - | ||||||
| Net cash provided by (used in) financing activities | (1,444,217 | ) | (1,302,500 | ) | ||||
| Net (decrease) increase in cash | 88,576 | 885,633 | ||||||
| Cash, beginning of period | 233,741 | 13,302 | ||||||
| Cash, end of period | $ | 322,317 | $ | 898,935 | ||||
| Cash paid for interest | $ | 34,708 | $ | - | ||||
| Cash paid for taxes | $ | 49,484 | $ | - | ||||
| Supplementary cash flow information: | ||||||||
| Stock issued for services | $ | 294,614 | $ | 41,900 | ||||
| Stock options vested during period | $ | 139,505 | $ | - | ||||
| Warrants issued | $ | 19,758 | $ | 13,663 | ||||
The accompanying unaudited notes to the financials should be read in conjunction with these financial statements.
| F-3 |
QUEST SOLUTION, INC
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND Summary of Significant Accounting Policies
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The interim consolidated financial statements of Quest Solution, Inc. include the combined accounts of Quest Marketing, Inc., an Oregon corporation and Bar Code Specialties, Inc., (“BCS”) a California corporation. BCS was acquired on November 21, 2014, and the operating results of BCS have been consolidated into the Company’s consolidated results of operations beginning on November 22, 2014. The companies currently operate as a single business unit under the Quest Solution brand. All material intercompany transactions and accounts have been eliminated in consolidation.
The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles (“GAAP”) and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2014 and notes thereto included in the Company’s Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.
Operating results for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.
Summary of Significant Accounting Policies
This summary of significant accounting policies of Quest Solution, Inc. is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management who are responsible for the integrity and objectivity of the financial statements. These accounting policies conform to GAAP and have been consistently applied in the preparation of the financial statements.
Cash
Cash consists of petty cash, checking, savings, and money market accounts. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of June 30, 2015 and December 31, 2014.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.
| F-4 |
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the consolidated financial statements.
PURCHASE ACCOUNTING AND BUSINESS COMBINATIONS
The Company accounts for its business combinations using the purchase method of accounting which requires that intangible assets be recognized apart from goodwill if they are contractual in nature or separately identifiable. Acquisitions are measured on the fair value of consideration exchanged and, if the consideration given is not cash, measurement is based on the fair value of the consideration given or the fair value of the assets acquired, whichever is more reliably measurable. The excess of cost of an acquired entity over the fair value of identifiable acquired assets and liabilities assumed is allocated to goodwill.
The valuation and allocation process relies on significant assumptions made by management. In certain situations, the allocations of excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives updated information, including appraisals and other analyses, which are completed within one year of the acquisition. Revisions to the fair values, which may be significant, are recorded when pending information is finalized, within one year from the acquisition date.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at their estimated collectible amounts. The Company provides allowances for uncollectible accounts receivable equal to the estimated collection losses that will be incurred in collection of all receivables. Accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company’s management determines which accounts are past due and if deemed uncollectible, the Company charges off the receivable in the period the determination is made. The Company generally requires no collateral to secure its ordinary accounts receivable. At June 30, 2015 and December 31, 2014, accounts receivable 90 days past due totaled $643,012 and $118,913, respectively. Based on management’s evaluation, accounts receivable has a balance in the allowance for doubtful accounts of $35,990, and $66,215 for the period ending June 30, 2015 and December 31, 2014, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at purchased cost and depreciated using both straight-line and accelerated methods over estimated useful lives ranging from 3 to 10 years. Upon disposition of property and equipment, related gains and losses are recorded in the results of operations. Depreciation expense for period ending June 30, 2015 and December 31, 2014 was $37,429 and $16,222, 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.
INTANGIBLE ASSETS
Intangible assets are stated at cost, net of accumulated amortization. The intangible assets are being amortized on the straight-line method over useful lives ranging from 3 to 10 years. Amortization expense for the period ending June 30, 2015 and December 31, 2014 was $8,436 and $9,376, respectively.
| June 30, 2015 | December 31, 2014 | |||||||
| Software | $ | 1,276,524 | $ | 1,276,524 | ||||
| Licenses | 450,000 | 450,000 | ||||||
| Accumulated amortization | (1,268,089 | ) | (1,259,654 | ) | ||||
| Intangibles, net | $ | 458,435 | $ | 466,870 | ||||
| F-5 |
Total expected amortization expense for the next 2 years are as follows:
| Years ending December 31, | ||||
| 2015 | 8,435 | |||
| 2016 | 16,845 | |||
| Total | $ | 25,280 | ||
The Company has made a significant investment in software over the years. This amount is treated as intangible assets which are being amortized over the expected useful life. Intangible assets are evaluated annually for potential impairment.
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.
DEFERRED FINANCING COSTS
Deferred Financing Costs incurred by the Company in connection with the issuance of debt and the bank credit facility are deferred and amortized to interest expense over the life of the underlying indebtedness using the straight line method.
SHIPPING AND HANDLING COSTS
The Company classifies shipping and handling costs for purchases of raw materials and freight out net of freight charged to customers as a component of cost of goods sold. Total delivery costs for the three months ending June 30, 2015 and June 30, 2014 were $25,066 and $654 respectively.
ADVERTISING
The Company generally expenses advertising costs as incurred. During the three months ending June 30, 2015 and June 30, 2014, the Company spent $51,487 (marketing, trade show and store front expense) and $47,797 on advertising, net of co-operative rebates, respectively.
The Company received rebates from co-operative advertising agreements with several vendors and suppliers. These rebates have been recorded as a reduction to the related advertising and marketing expense in the period earned.
INVENTORY
Substantially all inventory consists of raw materials and finished goods and are valued based upon first-in first-out (“FIFO”) cost, not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed evaluation of inventory relative to any potential slow moving products or discontinued items as well as the market conditions for the specific inventory items.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future acquisitions.
| F-6 |
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable, and notes payable. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at June 30, 2015 and December 31, 2014. The Company did not engage in any transaction involving derivative instruments.
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
REVENUE RECOGNITION
Recurring technology, deferred maintenance service agreements and contract service revenue consists of subscription-based fees, software subscription license fees, software maintenance fees and hosting fees related to the use of our solution to manage our customers’ communications expenses, as well as fees for perpetual software licenses, professional services 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 over the term of the period of service. The subscription-based services we provide include help desk, staging, carrier activations and provisioning.
Sales revenue is recognized upon the shipment of merchandise to customers. The Company recognizes revenues from software sales when software products are shipped.
Software license fees consist 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 as of June 30, 2015 and December 31, 2014 were 35,414,484 and 33,362,776, respectively.
| F-7 |
The fully diluted number of 40,219,637, includes the potential of the existing senior subordinated debt holders converting a portion of their debt into common shareholder equity at $1.00 per share (for $2,656,382 in debt) and $2.00 per share (for $1,962,382 in debt). Despite the fact the conversion is “out of the money”, accounting rules require these amounts to be included in diluted shares outstanding. Additional terms of the debt would require the Board of Directors to consent to any debt holder converting and having a position greater than 4.99% outstanding on the date of conversion.
GOODWILL
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested annually at December 31 for impairment. The annual qualitative or quantitative assessments involve determining an estimate of the fair value of reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill exists. A qualitative assessment evaluates whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step quantitative goodwill impairment test. The first step of a quantitative goodwill impairment test compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss may be recognized. The amount of impairment loss is determined by comparing the implied fair value of reporting unit goodwill with the carrying amount. If the carrying amount exceeds the implied fair value then an impairment loss is recognized equal to that excess. No impairment charges have been recorded as a result of the Company’s annual impairment assessments.
We test our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is December 31, at which date we test our reporting units, which is currently our ownership in Quest Solution, Inc.
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 has evaluated the deferred income taxes with regards to Section 382 of the Internal Revenue Code and has determined no limitations on the use of net operating loss carryforwards exist at June 30, 2015.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation in accordancewith 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 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.
| F-8 |
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has evaluated the recent pronouncements and believes that none of them will have a material effect on the Company’s financial statements.
NOTE 2 – CONCENTRATIONS
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, accounts receivable, and accounts payable. Beginning January 1, 2015, all of our cash balances were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per depositor at each financial institution. This coverage is available at all FDIC member institutions. The Company uses Wells Fargo Bank, which is an FDIC insured institution. Based on these facts, collectability of bank balances appears to be adequate.
For the quarter and year ending June 30, 2015 and December 31, 2014, one customer accounted for 12.7% and another customer in 2014 accounted for 16% of the Company’s net revenues, respectively.
Accounts receivable at June 30, 2015 and December 31, 2014 are made up of trade receivables due from customers in the ordinary course of business. One customer made up 14% and another customer 34% of the trade accounts receivable balances at June 30, 2015 and December 31, 2014, respectively.
Accounts payable are made up of payables due to vendors in the ordinary course of business at June 30, 2015 and December 31, 2014. One vendor made up 74% and 82%, respectively of the outstanding balance, which represented greater than 10% of accounts payable at June 30, 2015 and December 31, 2014, respectively.
NOTE 3 – INVENTORY
At June 30, 2015 and December 31, 2014, inventories consisted of the following:
| June 30, 2015 | December 31, 2014 | |||||||
| Equipment held for resale | $ | 85,324 | $ | 45,011 | ||||
| Raw Materials | 133,167 | 44,216 | ||||||
| Work in Progress | 101,826 | 18,623 | ||||||
| Finished goods | 63,033 | 487,317 | ||||||
| Clearing service | 0 | 11,064 | ||||||
| Total inventories | $ | 383,350 | $ | 606,231 | ||||
NOTE 4 – COST OF GOODS SOLD, RELATED PARTY
At the acquisition of Quest Marketing on January 1, 2014, there was $1,273,292 of related party prepaid expenses for business related insurance policies Quest Marketing previously maintained insurance policies with an insurance company for which the stockholders also own. The Company deemed this to be a related party and the insurance expenses paid during 2013 which was for 2014 coverage while not a cash expense for 2014, was taken as an expense from January 2014 through November 2014. The amount of expense was $1,273,292 in prepaid expenses for insurance coverage, paid in 2013, for 2014 coverage. As of January 1, 2014, the Company did not be renew any of these policies now that they have expired.
For the six months ended June 30, 2014, the Company recorded $347,261 of expense related to this, as opposed to $0 recorded during the six months ended June 30, 2015.
NOTE 5 – PREPAIDS
The Company currently has $669,887 and $191,498 of expenses that were prepaid as of June 30, 2015 and December 31, 2014, respectively which we expect to expense during 2015. The Company issued shares of restricted common stock to consultants during the quarter, for which $293,232 of the expense is in prepaid expense and to be expensed over the course of the remainder of the 12 month contracts.
| F-9 |
NOTE 6 – OTHER LIABILITIES
In connection with the BCS acquisition the Company assumed a related party note payable to the former Chief Technology Officer 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.
NOTE 7 – 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). The Company is required to make a safe harbor non-elective contribution equal to 3% 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. Company safe harbor contributions were $98,066 for 2014 and paid in 2015.
BCS also has a Safe Harbor plan within the requirements of ERISA that provides matching contributions equal to 100% of the employee deferred contribution up to 3% of the compensation, plus 50% of the deferred contributions that exceed 3% up to 5% of total participant compensation. The BCS matching contributions for the six months ending June 30, 2015 were $35,336.
NOTE 8 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
| June 30, 2015 | December 31, 2014 | |||||||
| Salaries, commissions, benefits and sales tax | $ | 1,661,789 | $ | 917,079 | ||||
| Other current liabilities | 403,608 | 845,327 | ||||||
| Total accrued expenses and other current liabilities | $ | 2, 065,397 | $ | 1,762,406 | ||||
Deferred revenue consists of prepaid third party hardware service agreements, software maintenance service contracts and the related costs and expenses recorded net of the revenue charged to the customer and paid within normal business terms. The net amount recorded as a deferred revenue liability is being amortized into the results of operations over the related periods on a straight line basis, normally 1-5 years with 3 years being the average term.
| June 30, 2015 | December 31, 2014 | |||||||
| Deferred revenue | $ | 7,272,469. | $ | 3,793,181 | ||||
| Less deferred costs and expenses | (6,467,885) | (3,495,903 | ) | |||||
| Net deferred revenue | $ | 804,584 | $ | 297,277 | ||||
Expected future amortization of net deferred revenue, are as follows;
| 2015 | 255,740 | |||
| 2016 | 254,207 | |||
| 2017 | 199,245 | |||
| 2018 | 95,392 | |||
| Total | $ | 804,584 |
The company recorded net deferred revenue of $158,512 and $318,951, for the quarters ending June 30 and March 31, 2015, respectively.
NOTE 9 – TERM DEBT / WELLS FARGO LINE OF CREDIT DETAILS
As of June 30, 2015, the Company’s outstanding balance with the Wells Fargo revolving line of credit was $1,718,128.
Related Party
On June 24, 2015, the Company 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 “Common Stock”). The Promissory Notes accrue interest at six percent (6%) per annum and are payable in twelve (12) equal, monthly installments. The Promissory Notes are due on July 31, 2016.
| F-10 |
NOTE 10 – SUBORDINATED NOTES PAYABLE
Notes and loans payable consisted of the following:
| June 30, 2015 | December 31, 2014 | |||||||
| Note payable - acquisition of Quest / BCS | $ | 22,675,825 | $ | 24,408,825 | ||||
| Total notes payable | 22,675,825 | 24,408,825 | ||||||
| Less: debt discount | (2,800,000 | ) | (3,200,000 | ) | ||||
| Less: current portion | (2,799,226 | ) | (4,201,650 | ) | ||||
| Total long-term notes payable | $ | 17,076,599 | $ | 17,077,175 | ||||
As of June 30, 2015 and December 31, 2014, the Company recorded interest expense in connection with these notes in the amount of $668,574 and $51,806, respectively.
NOTE 11 – STOCKHOLDERS’ EQUITY
PREFERRED STOCK
As of June 30, 2015, there were 25,000,000 preferred shares authorized and 500,000 preferred shares outstanding. The board of directors had previously set the voting rights for the preferred stock at 1 share of preferred to 250 common shares.
COMMON STOCK
During the six months ended June 30, 2015, the Company issued the following shares.
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.
Related Party
As discussed in Note 9, 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 with the 12 month period. The Company recorded a $288,880 expense related to all of the consulting contracts. The Company also issued 100,000 shares to the Chief Executive Officer in connection with his employment contract on May 1, 2015.
Warrants and Options
On May 1, 2015, the Company issued one member of its board of directors a total of 36,000 warrants valued at $10,320 for their service. The value of these warrants was estimated by using the Black-Scholes option pricing model with the following assumptions: exercise price of $0.43, term of 3 years; risk free interest rate of 1.04%; dividend yield of 0% and expected volatility of 104%.
During the quarter ended June 30, 2015, the Company recognized approximately $38,624 related to the employee stock options which vested during the quarter.
NOTE 12 – LITIGATION
As of June 30, 2015, 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.
| F-11 |
NOTE 13 – RELATED PARTY TRANSACTIONS
The Company leases a building from the former owner of BCS for $9,000 per month, which is believed to be the current fair market value of similar buildings in the area. These amounts are included in the lease disclosure schedule, footnote 8.
In connection with the BCS acquisition the Company has an earn out/royalty receivable from the new owners of the BCS RFID business that was sold on November 19, 2014, prior to the acquisition by the Company. The maximum amount to be paid during the 4 year earn out period ending December 31, 2018 is $700,000. Payments to the company are due within 30 days of the closing of each calendar quarter and the first royalty calculation and payment is due to the company on April 30, 2015. Prior to the merger with Quest, BCS recorded a 50% valuation reserve to the fair market value of this earn out receivable as of the acquisition date by Quest Solution. The Company has not recorded or received any payments related to this earn out in 2015.
As of June 30, 2015, the Company owes $67,000 to an entity controlled by the CFO for services provided to BCS prior to its acquisition by Quest in November 2014.
Additional related party transactions discussed in Notes 9 (Term Debt), 10 (Notes Payable) and 11 (Stockholder’s Equity).
NOTE 14 – SUBSEQUENT EVENTS
On July 15, 2015, the Board of Directors, appointed W. Austin Lewis, IV to the Board to fill a vacancy on the Board.
In connection with his appointment to the Board, Mr. Lewis will receive (i) $3,000 per quarter as Board compensation and (ii) stock options for 36,000 shares of common stock, par value $0.001 per share (the “Common Stock”) granted at the Company’s current stock price, which vest over a three-year term.
The Company entered into key man life insurance for certain of its executives during the 2nd quarter. Although the policies were put in place in the 2nd quarter, they were not officially effective until the first few weeks of July 2015. These policies are being treated as premium financed life insurance, which means the premium for the policies is being financed by a third party, with the cash value of the policies serving as the collateral. The company was required to post a letter of credit in the amount of $121,424 towards the policies in July 2015. The purpose of the policy is should something happen to the respective executive the funds would be used for the pay-off of their promissory note, repurchase of shares and/or settlement of their employment contract. The annual cost to the company will be based on the interest rate of LIBOR + 1.35%, with a floor of 2.35%. The executives have agreed to reimburse the company upon payment of such interest cost so it should have a net zero effect to the company.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission this Form 10-Q, including exhibits, under the Securities Act. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at SEC’s Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.
You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports which will be filed electronically with the SEC containing consolidated financial statements audited by our independent auditors, and to make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial statements.
Quest’s website is located athttp://www.QuestSolution.com. The Company’s website and the information to be contained on that site, or connected to that site, is not part of or incorporated by reference into this filing.
| F-12 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements. The reader should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward- looking statements contained herein will be realized. Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the Company’s results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.
A complete discussion of these risks and uncertainties are contained in our Annual Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission on April 9, 2015.
Introduction
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, we made our first such acquisition of Quest Marketing Inc.
Quest Solution 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.
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In May 2014, our Board of Directors voted to get approval from the shareholders of the Company for a name change from Amerigo Energy, Inc. to Quest Solution, Inc. The company received the approval from a majority of its stockholders and filed the amendment to its Articles of Incorporation with the State of Delaware. The name change became effective by the State of Delaware on May 30, 2014. The Company also requested a new stock symbol as a result of the name change and we assigned our new trading symbol “QUES”.
The Quest Solution business plan previously included developing oil and gas reserves while increasing the production rate base and cash flow. Due to declines in production on the oil leases the Company had an interest in, the company was forced to revisit its position in the oil industry.
The Company’s business strategy developed into leveraging management’s relationships in the business world for investments for the Company. The company intends on continuing with its acquisition of existing companies with revenues and positive cash flow.
In November 2014, the Company acquired 100% of the shares of 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 company has been exploring efficiencies in all facets of the businesses and learning best practices from both executive teams.
The following is a discussion of the Company’s financial condition, results of operations, financial resources and working capital. This discussion and analysis should be read in conjunction with the Company’s financial statements contained in this Form 10-Q.
Overview
RESULTS OF OPERATIONS
Revenues
For the three months ended June 30, 2015 and 2014, the Company generated net revenues in the amount of $13,557,615 and $7,434,246, respectively, the increase of $6,123,369 or 82% and is primarily attributable to the acquisition of BCS in November 2014 and additional Quest sales activity sold in the second quarter ending June 30, 2015. Second quarter net revenues of $13,557,615 represented an increase of $2,881,645 or 27% over first quarter ending March 31, 2015.
For the six months ended June 30, 2015 and 2014, the company generated net revenues in the amount of $24,443,202 and $17,166,965, respectively, the increase of $7,276,237 or 42% is attributable to the acquisition of BCS in November 2014, as well as additional synergies and organic growth of the company.
The Company has adopted a policy related to the monthly recurring revenue on the sale of service contracts. This amounted to approximately $294,842 of additional gross margin sold in the 2nd quarter of 2015 which will be amortized over the respective life of the service contracts. These agreements generally have a life of 1-5 years and are being recognized over the actual term of the contract.
Cost of Goods Sold
For the three months ended June 30, 2015 and 2014, the Company recognized a total of $10,226,805 and $6,073,922, respectively, in cost of goods sold. The increase is attributable to the increased sales and the BCS acquisition in November 2014.
For the three months ended June 30, 2014, the Company recorded $347,261 of additional cost of goods sold-related party expense, as opposed to $0 recorded during the three months ended June 30, 2015. There was no related party cost of goods sold in 2015 as the company did not renew those agreements.
For the six months ended June 30, 2015 and 2014, the company recognized a total of $18,508,170 and $13,708,506, respectively, in cost of goods sold. The increase is attributable to the increased sales and the BCS acquisition in November 2014.
For the six months ended June 30, 2014, the Company recorded $694,523 of additional cost of goods sold-related party expense, as opposed to $0 recorded during the six months ended June 30, 2015. There was no related party cost of goods sold in 2015 as the company did not renew those agreements.
Operating expenses
Total operating expense for the three months ended June 30, 2015 and 2014 recognized was $3,198,400 and $1,663,338, respectively the increase is attributable to the BCS acquisition. For the six months ended June 30, 2015 and 2014, the amount recognized was $5,687,876 and $3,452,377, respectively, which the increase is also attributable to the BCS acquisition.
General and administrative expenses for the three months ended June 30, 2015 and 2014 totaled $795,076 and $255,538 during the comparable three month period. The increase is primarily the result of an increase in business activities related to the BCS acquisition as well as the reallocation of resources. For the six months ended June 30, 2015, and 2014, the amount recognized was $1,807,520 and $500,693, respectively.
Salary and employee benefits for the three months ended June 30, 2015 totaled $1,854,620 as compared to $1,261,297 for the three months ended June 30, 2014. The increase is related to the acquisition and changing leadership positions related to the BCS acquisition. For the six months ended June 30, 2015, and 2014, the amount recognized was $3,179,052 and $2,643,013, respectively.
Stock compensation for the three months ended June 30, 2015 were $420,253 as compared to $5,586 for the three months ended June 30, 2014. The increase was related to the vesting of stock options. For the six months ended June 30, 2015, and 2014, the amount recognized was $458,877 and $30,085, respectively.
Professional fees for the three months ended June 30, 2015 were $108,083 as compared to $137,989 for the three months ended June 30, 2014. The decrease was related to the reduction in usage of outside consultant’s vs personnel on staff. For the six months ended June 30, 2015, and 2014, the amount recognized was $196,563 and $267,764, respectively.
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Other income and expenses
Interest Expense - Interest expense for the three months ended June 30, 2015 totaled $342,794, including $200,000 of OID discount on the Quest subordinated debt, as compared to $0 for the three months ended June 30, 2014. The increase is directly related to accrued interest associated with the BCS acquisition and the OID discount charge relating to the outstanding balances on the Quest Acquisition subordinated debt. For the six months ended June 30, 2015, and 2014, the amount recognized was $ 738,066 and $1,000, respectively.
Net income (loss) attributable to common stock
The company realized a net loss of $285,449 for the three months ended June 30, 2015, compared to a net loss of $262,305 for the three months ended June 30, 2014, a decrease of $23,144. The net loss for the six months ended June 30, 2015 was $707,531, while for the same period in 2014 it was $15,886, an increase of $691,645, which is directly attributable to the increase in interest expense of $737,066 for the company during that same period.
Liquidity and capital resources
At June 30, 2015, we had cash in the amount of $322,317 and a working capital deficit of $5,127,712. In addition, our stockholders’ equity was $1,196,854 at June 30, 2015 and $1,193,512 at December 31, 2014.
Our accumulated deficit increased from $16,742,156 at December 31, 2014 to $17,449,687 at June 30, 2015.
Our operations resulted in net cash provided of $1,625,385 during the six months ended June 30, 2015, compared to cash generated of $233,751 during the six months ended June 30, 2015, an increase of $1,391,634. This is predominantly attributable to the net cash provided by deferred revenue of $804,584 and our increased collection of receivables due to the larger company with the acquisition of BCS in November 2014 and better terms on our accounts payable.
Net cash used by investing activities was $92,591 for the six months ended June 30, 2015, compared to net cash provided of $1,954,382 for the six months ended June 30, 2014, a decrease of $2,046,973. The large decrease was attributable to in March 2014 we acquired Quest Marketing, Inc. and in the second quarter 2015 we did not have an acquisition.
Our financing activities used net cash of $1,444,217 during the six months ended June 30, 2015, compared to net cash used of $1,302,500 during the six months ended June 30, 2014, an increase of $141,717. The increase is attributable to the borrowings and payments on promissory notes during the six months ended June 30, 2015.
Inflation
The Company’s results of operations have not been affected by inflation and management does not expect inflation to have a material impact on its operations in the future.
Off- Balance Sheet Arrangements
The Company currently does not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS
We evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report on Form 10-Q. This evaluation was undertaken by our Chief Executive Officer Thomas Miller.
Mr. Miller serves as our principal executive officer. The Company utilizes a third party to assist in the financial statement preparation for the auditor and our wholly owned subsidiary has an accounting team to prepare the financials at that level.
We reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the fiscal quarter covered by this report, as required by Securities Exchange Act Rule 13a-15, and concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management on a timely basis, including our principal executive officer and principal financial and accounting officer.
CONCLUSIONS
Based on this evaluation, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file pursuant to the Exchange Act are recorded, processed, summarized, and reported in such reports within the time periods specified in the Securities and Exchange Commission’s rules and forms.
CHANGES IN INTERNAL CONTROLS
There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
| (a) | Exhibits. | |
| 31.1 | Certification of our Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of our Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 13, 2015
| By: | /s/ Thomas Miller | |
| Thomas Miller | ||
| Chief Executive Officer |
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