UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2018
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-09047
QUEST SOLUTION, INC
(Exact name of registrant as specified in its charter)
| Delaware | 20-3454263 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
860 Conger Street
Eugene, OR 97402
(Address of principal executive offices) (Zip Code)
(714) 899-4800
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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] |
| Emerging growth company | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 39,673,631 shares of common stock, $0.001 par value, as of May 18, 2018.
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
QUEST SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | ||||||||
| March 31, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 244,596 | $ | 24,634 | ||||
| Restricted Cash | 381,494 | 684,610 | ||||||
| Accounts receivable, net | 9,418,463 | 6,387,734 | ||||||
| Inventory, net | 2,141,855 | 439,720 | ||||||
| Prepaid expenses | 2,411,851 | 476,840 | ||||||
| Other current assets | 30,251 | 126,187 | ||||||
| Total current assets | 14,628,510 | 8,139,725 | ||||||
| Fixed assets, net | 85,951 | 92,803 | ||||||
| Goodwill | 10,114,164 | 10,114,164 | ||||||
| Trade name, net | 2,215,231 | 2,359,481 | ||||||
| Customer Relationships, net | 5,029,759 | 5,310,938 | ||||||
| Other assets | 37,063 | 39,512 | ||||||
| Total assets | $ | 32,110,678 | $ | 26,056,623 | ||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 18,226,932 | $ | 13,239,810 | ||||
| Accrued interest on note payable | 43,323 | 38,430 | ||||||
| Line of credit | 4,832,353 | 3,667,417 | ||||||
| Accrued payroll and sales tax | 2,790,539 | 1,531,233 | ||||||
| Deferred revenue, net | - | 761,194 | ||||||
| Current portion of note payable | 2,275,404 | 3,429,025 | ||||||
| Notes payable, related parties | 106,500 | 106,500 | ||||||
| Other current liabilities | 156,957 | 121,117 | ||||||
| Total current liabilities | 28,432,008 | 22,894,726 | ||||||
| Long term liabilities | ||||||||
| Note payable, related party | 3,222,900 | 3,222,900 | ||||||
| Accrued interest, related party | 185,862 | 165,014 | ||||||
| Long term portion of note payable | 130,294 | 130,294 | ||||||
| Deferred revenue, net | - | 452,024 | ||||||
| Other long term liabilities | 486,538 | 439,833 | ||||||
| Total liabilities | 32,457,602 | 27,304,791 | ||||||
| Stockholders’ (deficit) | ||||||||
| Series A Preferred stock; $0.001 par value; 1,000,000 shares designated and 0 shares outstanding as of March 31, 2018 and December 31, 2017, respectively. | - | - | ||||||
| Series B Preferred stock; $0.001 par value; 1 share designated and 0 shares outstanding as of March 31, 2018 and December 31, 2017, respectively. | - | - | ||||||
| Series C Preferred stock; $0.001 par value; 15,000,000 shares designated, 3,143,530 shares outstanding as of March 31, 2018 and December 31, 2017, respectively, liquidation preference of $1.00 per share and a cumulative dividend of $0.06 per share. | 4,829 | 4,829 | ||||||
| Common stock; $0.001 par value; 100,000,000 shares designated, 39,673,631 and 36,828,371 shares outstanding of March 31, 2018 and December 31, 2017, respectively. | 39,673 | 36,828 | ||||||
| Common stock to be repurchased by the Company | (230,490 | ) | (230,490 | ) | ||||
| Additional paid-in capital | 35,177,970 | 34,495,659 | ||||||
| Accumulated (deficit) | (35,338,906 | ) | (35,554,994 | ) | ||||
| Total stockholders’ (deficit) | (346,924 | ) | (1,248,168 | ) | ||||
| Total liabilities and stockholders’ (deficit) | $ | 32,110,678 | $ | 26,056,623 | ||||
The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements.
| F-1 |
QUEST SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
| For the three months ended March 31 | ||||||||
| 2018 | 2017 | |||||||
| Revenues | ||||||||
| Total Revenues | $ | 15,180,547 | $ | 14,437,556 | ||||
| Cost of goods sold | ||||||||
| Cost of goods sold | 12,014,454 | 11,445,609 | ||||||
| Total costs of goods sold | 12,014,454 | 11,445,609 | ||||||
| Gross profit | 3,166,093 | 2,991,947 | ||||||
| Operating expenses | ||||||||
| General and administrative | 476,855 | 412,945 | ||||||
| Salary and employee benefits | 2,602,565 | 1,945,883 | ||||||
| Depreciation and amortization | 437,398 | 442,400 | ||||||
| Professional fees | 292,862 | 103,277 | ||||||
| Total operating expenses | 3,809,680 | 2,904,505 | ||||||
| Income (loss) from operations | (643,587 | ) | 87,442 | |||||
| Other income (expenses): | ||||||||
| Interest expense | (294,765 | ) | (355,658 | ) | ||||
| Other (expenses) income | 2,544 | (6,042 | ) | |||||
| Total other expenses | (292,221 | ) | (361,700 | ) | ||||
| Net loss before Income Taxes | (935,808 | ) | (274,258 | ) | ||||
| Provision for Income Taxes | ||||||||
| Current | (13,197 | ) | (56,900 | ) | ||||
| Total Provision for Income Taxes | (13,197 | ) | (56,900 | ) | ||||
| Net loss attributable to Quest Solution Inc. | $ | (949,005 | ) | $ | (331,158 | ) | ||
| Less: Preferred stock – Series C dividend | (48,124 | ) | (46,507 | ) | ||||
| Net loss attributable to the common stockholders | $ | (997,129 | ) | $ | (377,665 | ) | ||
| Net loss per share - basic | $ | (0.03 | ) | $ | (0.01 | ) | ||
| Net loss per share from continuing operations - basic | $ | (0.03 | ) | $ | (0.01 | ) | ||
| Weighted average number of common shares outstanding - basic | 37,125,286 | 35,141,560 | ||||||
The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements.
| F-2 |
QUEST SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
| For the three months ended March 31 | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from continuing operating activities: | ||||||||
| Net loss | $ | (949,005 | ) | $ | (331,158 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Stock based compensation | 685,156 | 26,756 | ||||||
| Topic 606 Cumulative Adjustment | 1,213,217 | - | ||||||
| Depreciation and amortization | 486,652 | 442,400 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) / decrease in accounts receivable | (3,030,729 | ) | 4,296,425 | |||||
| (Increase) / decrease in prepaid | (1,935,011 | ) | (65,259 | ) | ||||
| (Increase) in inventory | (1,702,135 | ) | (97,572 | ) | ||||
| Increase / (Decrease) in accounts payable and accrued liabilities | 4,987,122 | (889,466 | ) | |||||
| Increase in accrued interest and accrued liabilities, related party | 25,741 | 166,962 | ||||||
| (Decrease) in deferred revenue, net | (1,213,218 | ) | (14,064 | ) | ||||
| Increase in accrued payroll and sales taxes payable | 1,259,306 | 107,955 | ||||||
| Decrease in other assets | 98,385 | 419,411 | ||||||
| Increase in other liabilities | 34.421 | 14,568 | ||||||
| Net cash (used in) provided by operating activities | (40,098 | ) | 4,076,958 | |||||
| Cash flows from investing activities: | ||||||||
| (Increase) / decrease in restricted cash | 303,116 | 2,639 | ||||||
| Purchase of property and equipment | (54,371 | ) | (1,120 | ) | ||||
| Net cash provided by investing activities | 248,745 | 1,519 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from shares sold | - | 6,924 | ||||||
| Increase in notes funding | - | 85,000 | ||||||
| Proceeds (payments) from line of credit | 1,164,936 | (2,474,840 | ) | |||||
| Payment of notes/loans payable | (1,153,621 | ) | (1,707,919 | ) | ||||
| Net cash provided by (used) in financing activities | 11,315 | (4,090,835 | ) | |||||
| Net increase (decrease) in cash | 219,962 | (12,358 | ) | |||||
| Cash, beginning of period | 24,634 | 289,480 | ||||||
| Cash, end of period | $ | 244,596 | $ | 277,122 | ||||
| Cash paid for interest | $ | - | $ | 166,256 | ||||
| Cash paid for taxes | $ | - | $ | - | ||||
| Supplementary for non-cash flow information: | ||||||||
| Stock issued for services | $ | 208,800 | $ | 876 | ||||
| Stock options issued | $ | 472,675 | $ | 25,880 | ||||
| Shares to be repurchased | $ | (230,490 | ) | $ | (230,490 | ) | ||
The accompanying unaudited notes to the financials should be read in conjunction with these condensed consolidated financial statements.
| F-3 |
QUEST SOLUTION, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The interim consolidated financial statements of Quest Solution, Inc. include the combined accounts of Quest Marketing, Inc., an Oregon Corporation, and Quest Exchange Ltd., a Canadian based holding company.
On December 31, 2016, the Company merged BCS in Quest Marketing to form one US legal entity as part of its streamlining efforts.
The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2017 and notes thereto included in the Company’s Form 10-K filed with the SEC on May 8, 2018. The Company follows the same accounting policies in the preparation of interim reports, except for the adoption of ASC Topic 606, Revenue from Contracts with Customers. The Company operates in one segment.
Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Quest Solution, Inc. is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
Adoption of New Accounting Pronouncement in Fiscal 2018
In May 2014, the FASB issued new revenue recognition 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 revenue 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.
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 $1,213,218 was established on the date of adoption relating to amounts deferred related to extended service contract 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 on a net versus gross basis in the consolidated statements of operations. The Company recognized the cumulative effect of initially applying ASC Topic 606 as an adjustment of $1,213,218 of net deferred revenue to the opening balance of accumulated deficit.
| Deferred net revenue on December 31, 2017 | $ | 1,213,218 | ||
| Accumulated deficit on December 31, 2017 | $ | (35,554,994 | ) | |
| Accumulated deficit on January 1, 2018 | $ | (34,341,776 | ) | |
| Net loss on March 31, 2018 | $ | (949,005 | ) | |
| Less: Preferred stock - Series C dividend | $ | (48,125 | ) | |
| Accumulated deficit on March 31, 2018 | $ | (35,338,906 | ) |
Under this approach, revenue for 2017 is reported in the consolidated statements of operations and comprehensive income on the historical basis, and revenue for 2018 is reported in the consolidated statements of operations and comprehensive income under ASC Topic 606. A comparison of revenue for 2018 periods to the historical basis is included below. The Company acknowledges that the required adoption of ASC Topic 606 could have a material effect on annual revenue or net income from continuing operations on an ongoing basis.
| For the three months ended March 31 | ||||||||||||||||||||||||
| Topic 606 | Topic 605 | Topic 606 | Topic 605 | |||||||||||||||||||||
| 2018 | 2018 | % | 2017 | Variance from 2017 | Variance from2017 | |||||||||||||||||||
| Revenues | ||||||||||||||||||||||||
| Total revenues | 15,180,547 | 15,302,514 | 0.80 | % | 14,437,556 | 742,991 | 864,958 | |||||||||||||||||
| Total costs of goods sold | 12,014,454 | 12,304,443 | 2.36 | % | 11,445,609 | 568,845 | 858,834 | |||||||||||||||||
| Gross profit | 3,166,093 | 2,998,071 | (5.60 | % | ) | 2,991,947 | 174,146 | 6,124 | ||||||||||||||||
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued ASU 2017-04,Intangibles – Goodwill and Other (Topic 350) that will eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, impairment charge will be based on the excess of a reporting unit’s carrying amount over its fair value. The guidance is effective for the Company in the first quarter of fiscal 2023. Early adoption is permitted. The early adoption of this guidance did not have a material impact on its consolidated financial statements, absent any goodwill impairment.
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.
| F-4 |
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. The adoption did not materially impact 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. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.
In June 2016, the FASB issued ASU 2016-13,Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.
In February 2016, the FASB issued ASU 2016-02 amended 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.
The Company has evaluated other recent pronouncements and believes that none of them will have a material effect on the Company’s financial statements.
| F-5 |
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 March 31, 2018 and December 31, 2017.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.
The Company has restricted cash on deposit with a federally insured bank in the amount of $381,494 at March 31, 2018. This cash is security and collateral for a corporate credit card agreement with a bank and for deposit against a letter of credit issued for executive life insurance policies owned by the Company.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the consolidated financial statements.
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. Based on management’s evaluation, accounts receivable has a balance in the allowance for doubtful accounts of $12,501 and $12,501 for the three months ended March 31, 2018 and for the year ended December 31, 2017, respectively.
| F-6 |
GOODWILL AND INTANGIBLE ASSETS
Intangible assets are stated at cost, net of accumulated amortization. The assets are being amortized on the straight-line method over useful lives ranging from 3 to 7 years. Amortization expense for the period ended March 31, 2018 and December 31, 2017 was $425,429 and $1,701,714, respectively.
| March 31, 2018 | December 31, 2017 | |||||||
| 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 | (6,335,010 | ) | (5,909,581 | ) | ||||
| Intangibles, net | $ | 17,359,154 | $ | 17,784,583 | ||||
The future amortization expense on the Trade Names and Customer Relationships are as follows:
| Years ended December 31, | ||||
| 2018 | $ | 1,254,170 | ||
| 2019 | 1,471,714 | |||
| 2020 | 1,471,714 | |||
| 2021 | 1,405,792 | |||
| 2022 | 786,000 | |||
| Thereafter | 855,600 | |||
| Total | $ | 7,244,990 | ||
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 the reporting unit’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 our goodwill 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.
None of the goodwill is deductible for income tax purposes.
| F-7 |
Intangibles
Intangible assets with finite useful lives consist of Trademark and customer lists 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 when events or circumstances indicate that 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 the three months ended March 31, 2018.
ADVERTISING
The Company generally expenses advertising costs as incurred. During the three month periods ended March 31, 2018 and 2017, the Company spent $39,008 and $188,077 on advertising (marketing, trade show and store front expense), net of co-operative rebates, respectively. The Company received rebates on advertising from co-operative advertising agreements with several vendors and suppliers. These rebates have been recorded as a reduction to the related advertising and marketing expense in the periods they are received.
INVENTORY
Substantially all inventory consists of raw materials and finished goods and are valued based upon first-in first-out (“FIFO”) cost, not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed evaluation of inventory relative to any potential slow moving products or discontinued items as well as the market conditions for the specific inventory items.
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.
| F-8 |
NET LOSS PER COMMON SHARE
Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic net loss per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted-average number of common shares outstanding for computing basic EPS for the three months ended March 31, 2018 and 2017 were 37,125,286 and 35,141,560, respectively. Diluted net loss per share of common stock is the same as basic net loss per share of common stock because the effects of potentially dilutive securities are antidilutive.
Dilutive securities are excluded from the computation of diluted net loss per share because such securities have no anti-dilutive impact due to losses reported.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements of the Company are presented in U.S. dollars. The functional currency for the Company is U.S. dollars. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the time of the transaction. All of the Company’s continuing operations are conducted in U.S. dollars. The Company owns a non-operating subsidiary in Canada, from which it has no activity since October 1, 2016.
Reclassifications and adjustments — Certain prior year amounts in the condensed consolidated interim financial statements have been reclassified to conform with current year presentation.The impact of the reclassifications made to prior year amounts is not material and did not affect net loss.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of March 31, 2018, the Company had a working capital deficit of $13,803,498 and an accumulated deficit of $35,338,906. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. Management’s plan to eliminate the going concern situation includes, but is not limited to, the continuation of improving cash flow, maintaining moderate cost reductions (subsequent to aggressive cost reduction actions already taken in 2017 and in the first quarter of 2018), the creation of additional sales and profits across its product lines, and the obtaining of sufficient financing to restructure current debt in a manner more in line with the Company’s improving cash flow and cost reduction successes.
The matters that resulted in 2017, having substantial doubt about the Company’s ability to continue as a going concern, have been somewhat mitigated by the successful debt reduction settlements finalized in December of 2017 as detailed in the Company’s Annual Report on Form 10-K filed on May 8, 2018. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| F-9 |
NOTE 3 – CONCENTRATIONS
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, accounts receivable, and accounts payable. Beginning January 1, 2015, all of our cash balances were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per depositor at each financial institution. This coverage is available at all FDIC member institutions. The Company uses Wells Fargo Bank, which is an FDIC insured institution. The restricted cash in the amount of $381,494 at March 31, 2018 is in excess of the FDIC limit.
For the three months and year ended March 31, 2018 and December 31, 2017, one customer accounted for 30.5% and 15.7% of the Company’s revenues, respectively.
Accounts receivable at March 31, 2018 and December 31, 2017 are made up of trade receivables due from customers in the ordinary course of business. One customer made up 20.5% and another customer 15.7% of the trade accounts receivable balances at March 31, 2018 and December 31, 2017, respectively.
Accounts payable are made up of payables due to vendors in the ordinary course of business at March 31, 2018 and December 31, 2017. One vendor made up 59.4% and 70.1%, respectively of the outstanding balance, which represented greater than 10% of accounts payable at March 31, 2018 and December 31, 2017, respectively.
NOTE 4 – ACCOUNTS RECEIVABLE
At March 31, 2018 and December 31, 2017, accounts receivable consisted of the following:
| March 31, 2018 | December 31, 2017 | |||||||
| Trade Accounts Receivable | $ | 9,430,964 | $ | 6,400,235 | ||||
| Less Allowance for doubtful accounts | (12,501 | ) | (12,501 | ) | ||||
| Total Accounts Receivable (net) | $ | 9,418,463 | $ | 6,387,734 | ||||
NOTE 5 – INVENTORY
At March 31, 2018 and December 31, 2017, inventories consisted of the following:
| March 31, 2018 | December 31, 2017 | |||||||
| Equipment and clearing service | $ | 2,031,138 | $ | 329,003 | ||||
| Raw Materials | 31,697 | 31,697 | ||||||
| Finished Goods | 79,020 | 79,020 | ||||||
| Total inventories | $ | 2,141,855 | $ | 439,720 | ||||
NOTE 6 – FIXED ASSETS
Fixed assets are stated at cost, net of accumulated depreciation. Depreciation expense for the period ended March 31, 2018 and December 31, 2017 was $11,969 and $61,223, respectively
| March 31, 2018 | December 31, 2017 | |||||||
| Equipment | $ | 2,914,760 | 2,909,642 | |||||
| Furniture and Fixtures | 316,853 | 316,853 | ||||||
| Leasehold improvements | 151,553 | 151,553 | ||||||
| Accumulated depreciation | (3,297,215 | ) | (3,285,245 | ) | ||||
| Fixed Assets, net | $ | 85,951 | 92,803 | |||||
| F-10 |
NOTE 7 – OTHER LIABILITIES
At March 31, 2018 and December 31, 2017, other liabilities consisted of the following:
| March 31, 2018 | December 31, 2017 | |||||||
| Unearned Incentive from credit cards | $ | - | $ | 77,307 | ||||
| Key Man life Insurance liability | 150,146 | 150,146 | ||||||
| Dividend payable | 336,392 | 289,687 | ||||||
| Others | 156,957 | 43,811 | ||||||
| 583,753 | 560,951 | |||||||
| Less Current Portion | (156,957 | ) | (121,118 | ) | ||||
| Total long term other liabilities | $ | 486,538 | $ | 439,833 | ||||
NOTE 8 – CREDIT FACILITIES AND LINE OF CREDIT
On July 1, 2016, the Company entered into a Factoring and Security Agreement (the “FASA”) with Action Capital Corporation (“Action”) to establish a sale of accounts facility, whereby the Company may obtain short-term financing by selling and assigning to Action acceptable accounts receivable. Pursuant to the FASA, the outstanding principal amount of advances made by Action to the Company at any time shall not exceed $5,000,000. Action will reserve and withhold an amount in a reserve account equal to 5% of the face amount of each account purchased under the FASA. The balance outstanding under the Action credit line at March 31, 2018 was $4,832,353 and at December 31, 2017 $3,667,417 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 9 - NOTES PAYABLE
Notes payable at March 31, 2018 and December 31, 2017, consists of the following:
| March 31, 2018 | December 31, 2017 | |||||||
| Supplier Note Payable | $ | 1,976,915 | $ | 3,208,534 | ||||
| Insurance Note | 77,998 | - | ||||||
| All Other | 350,785 | 350,785 | ||||||
| Total | 2,405,698 | 3,559,319 | ||||||
| Less current portion | (2,275,404 | ) | (3,429,025 | ) | ||||
| Long Term Notes Payable | $ | 130,294 | $ | 130,294 | ||||
Future maturities of notes payable as of March 31, 2018 are as follows;
| 2018 | $ | 2,275,404 | ||
| 2019 | 130,294 | |||
| Total | $ | 2,405,698 |
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 ended 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 March 31, 2018 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 Capital, whereby the noteholder agrees to subordinate its right to payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full.
| F-11 |
On July 18, 2016, the Company and the supplier entered into that certain Secured Promissory Note, with an effective date of July 1, 2016, in the principal amount of $12,492,137. The USD Note accrues interest at 12% per annum and is payable in six consecutive monthly installments of principal and accrued interest in a minimum principal amount of $250,000 each, with any remaining principal and accrued interest due and payable on December 31, 2016.
| ● | On November 30, 2016, the Company entered into an Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to March 31, 2017 and the monthly installments of principal and accrued interest were increased to $400,000 commencing December 15, 2016 with any remaining principal and accrued interest due and payable on March 31, 2017. The Amendment also provides that the Company will make an additional principal payment of $300,000 by December 15, 2016. | |
| ● | On March 31, 2017, the Company entered into a Second Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to September 30, 2017 whereby any remaining principal and accrued interest is due and payable on September 30, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $400,000 each. | |
| ● | On September 30, 2017, the Company entered into a Third Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to October 31, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $600,000 each. | |
| ● | On November 15th, the Company entered into a Fourth Amendment extended the maturity date to December 31st, and this Fourth Amendment is effective on October 31st, whereby any remaining principal and accrued interest is due and payable on December 31, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $600,000 each. | |
| ● | On February 14, 2018 the Company entered into a Fifth Amendment extended 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 $400,000 each. |
| F-12 |
NOTE 10 – SUBORDINATED NOTES PAYABLE
Notes and loans payable consisted of the following:
| March 31, 2018 | December 31, 2017 | |||||||
| Note payable – Quest acquisition restructure | $ | 930,000 | $ | 930,000 | ||||
| Note payable – BCS acquisition restructure | 1,200,000 | 1,200,000 | ||||||
| Quest Preferred Stock note payable | 1,199,400 | 1,199,400 | ||||||
| Total notes payable | $ | 3,329,400 | $ | 3,329,400 | ||||
For the three months ended March 31, 2018 and 2017, the Company recorded interest expense in connection with these notes in the amount of $20,232 and $160,790, respectively.
The note payable for acquisition of Quest was issued on January 9, 2014 in conjunction with the acquisition of Quest Marketing, Inc. The initial interest rate was 1.89%, subsequent to December 31, 2015; the interest was increased to 6% and is due in 2018. Principal and interest payments have been postponed. In addition, on June 17, 2016, the Company entered into Promissory Note Conversion Agreement with one of the Noteholders whereby $684,000 of the promissory note was converted into 684,000 shares of Series C Preferred Stock. As part of the transaction, the related debt discount of $171,000 was recorded against Additional paid in capital. As part of the acquisition of Quest Marketing, the Company engaged an independent valuation analysis to do a valuation of the purchase accounting. In July 2016, the holders of the notes signed subordination agreements with the Supplier 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.
The note payable for acquisition of BCS was issued on November 21, 2014 in conjunction with the acquisition of BCS. The current interest is at 1.89% and is due in 2018. This note is convertible into Common Stock at $2.00 per share, subject to board approval such that no debt holder can own more than 5% of the outstanding shares. Principal $ 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 subordinate its right and payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at December 31, 2016 were all classified as long term.
The Quest preferred stock 6% note payable is in conjunction with the promissory note issued in October 2015 related to the redemption and cancelation of 100% of the issued and outstanding Series A preferred stock as well as 3,400,000 stock options that had been issued to a now former employee. The principal payments have been postponed. In June 2016, the holder of the note granted the Company a forgiveness of debt in the amount of $75,000 which was recorded as an increase in the additional paid in capital because it was a related party transaction. In addition, on June 17, 2016, the Company entered into a Promissory Note Conversion Agreement with the Noteholder whereby $1,800,000 of the promissory note was converted into 1,800,000 shares of Series C Preferred Stock. In July 2016, the holders of the notes signed subordination agreements with the Supplier of the Secured Promissory Note and Action, whereby the noteholder agree to subordinate its right and payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at December 31, 2016 were all classified as long term.
On February 28, 2018, the Company finalized two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”) which have an effective date of December 30, 2017. Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11,000,000 of which an aggregate of $10,696,465.17 (the “Owed Amount”) was outstanding as of February 26, 2018 which includes accrued interest earned but not paid. Pursuant to the Marin Settlement Agreement I, the amount of the indebtedness owed to Marin was reduced by $9,495,465.17 bringing the total amount owed to $1,201,000. Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20,000 each commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc., currently in the amount of $2,800,000 is satisfied and all amounts currently in default under the credit agreement with Scansource (currently approximately $ 6.0 Million) is reduced to $2.0 million. The Marins agreed to release their security interest against the Company. In connection with the $9,495,465.17 reduction in the purchase price, the Company issued the Marins 3 year warrants to purchase an aggregate of 3,000,000 shares of Common Stock at an exercise price of $0.20 per share.
| F-13 |
On February 28, 2018, the Company finalized an additional settlement agreement with the Marins (the “Marin Settlement Agreement II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 which currently had a balance of $111,064.69 in its entirety in exchange for an aggregate of 85,000 shares of the Company’s Series C Preferred Stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share and automatically converts into Common Stock at $1.00 per share in the event that the Company’s common stock has a closing price of $1.50 per share for 20 consecutive trading days. The preferred stock pays a 6% dividend commencing two years from issuance. During the first two years, the Series C Preferred stock shall neither pay or accrue the dividend. The Company also agreed to transfer title to a vehicle that was being utilized by Mr. Marin to David Marin. In exchange therefor, the $100,000 Note and the accrued interest thereon was cancelled in its entirety. The effective date of the agreement is December 30, 2017.
On February 22, 2018, the Company finalized a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5,437,136.40 in full in exchange for 60 monthly payments of $12,500 each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. currently in the amount of $21,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of 500,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30, 2017.
On February 19, 2018, the Company finalized a settlement agreement with George Zicman whereby the Company settled its indebtedness to Mr. Zicman in the current amount of $1,304,198.55 in full in exchange for 60 monthly payments of $3,000 each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. currently in the amount of $2,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of 100,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement Agreement II. The effective date of the agreement is December 30, 2017.
The repayment of the subordinated notes payable at March 31, 2018 is as follows:
| 2018 | $ | 106,500 | ||
| 2018 | 894,000 | |||
| 2019 | 894,000 | |||
| 2020 | 894,000 | |||
| Thereafter | 1,213,500 | |||
| Total | $ | 4,002,000 |
NOTE 11 – STOCKHOLDERS’ DEFICIT
PREFERRED STOCK
Series A
As of March 31, 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 250 common shares.
Series B
As of March 31, 2018 there was 1 preferred share designated and 0 preferred shares outstanding. Effective on September 30, 2016, with the divestiture of Quest Solution Canada Inc., the one share was redeemed by the Company and retired.
| F-14 |
Series C
As of March 31, 2018, there were 15,000,000 Series C preferred share authorized and 4,828,530 Series C preferred share outstanding. It has preferential rights above common shares and the Series B preferred shares and is entitled to receive a quarterly dividend at a rate of $0.06 per share per annum. As part of a debt settlement agreement effective December 30, 2017, 1,685,000 shares were issued with the quarterly dividend at a rate of $.06 per share per annum were waived for a period of 24 months, with no dividends being accrued or paid. Each Series C preferred share outstanding is convertible into one (1) share of common stock of Quest Solution, Inc.
COMMON STOCK
In April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement. In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement.
On June 30, 2017, the Company issued 87,500 shares to board members in relation to the vesting schedule agreed to during 4thquarter 2015, which is based on an annual grant of 100,000 restricted shares every October and vesting over 8 quarters per independent board member as compensation.
On August 2, 2017, the Company authorized the issuance of 600,000 shares of common stock as part of a consulting agreement with Carlos Jaime Nissensohn. The shares were issued in November, 2017
On December 30, 2017, the Company authorized the issuance of 600,000 shares of common stock valued at $59,400, as part of a debt extinguishment agreement with two related parties. The common shares were issued on March 9, 2018.
On March 08, 2018 and pursuant to the Plan, the Company granted a grand total of 1,700,000 Shares, as well as options to purchase up to 7,000,000 Shares (the “Options”) with an exercise price equal to the closing price of the Company’s common stock on Wednesday, March 07, 2018, $0.12 per share. A total of 1,000,000 Shares and 3,200,000 Options were issued to the Company’s Board of Directors as follows:
| ● | Shai Lustgarten (Chairman of the Board) received 1,000,000 Shares and 2,000,000 Options; | |
| ● | Andrew J. Macmillan received 400,000 Options; | |
| ● | Yaron Shalem received 400,000 Options; and | |
| ● | Niv Nissenson received 400,000 Options. |
On March 08, 2018 and pursuant to the Plan, the Company granted 500,000 Shares to its Chief Financial Officer Benjamin Kemper.
On March 08, 2018, the Company issued 500,000 shares of the Company’s common stock, par value $0.001, to Mr. Carlos J Nissensohn, who is the father of Niv Nissensohn, a director of the Company, pursuant to a consulting agreement (the “Consulting Agreement”) dated August 02, 2017 which was previously filed with the SEC on the Company’s Form 8-K dated August, 04, 2017.
On March 08,2018, the Company issued 200,000 shares of the Company’s common stock to the JSM SOC-DIG LP.
As of March 31, 2018, the Company had 39,673,631 common shares outstanding.
Warrants and Stock Options
On March 08, 2018, the Company adopted an Equity Incentive Plan (the “Plan”), as an incentive, to retain in the employ of and as directors, officers, consultants, advisors and employees to the Company. Ten million (10,000,000) shares of the Corporation’s common stock, par value $0.001 (the “Shares”), was set aside and reserved for issuance pursuant to the Plan.
Warrants- The following table summarizes information about warrants granted during the three month periods ended March 31, 2018 and 2017:
| March 31, 2018 | March 31, 2017 | |||||||||||||||
| Number of warrants | Weighted Average Exercise Price | Number of warrants | Weighted Average Exercise Price | |||||||||||||
| Balance, beginning of period | 5,905,000 | $ | 0.21 | 1,405,000 | $ | 0.52 | ||||||||||
| Warrants granted | - | - | - | - | ||||||||||||
| Warrants expired | (300,000 | ) | 1.00 | - | - | |||||||||||
| Warrants cancelled, forfeited | - | - | - | - | ||||||||||||
| Warrants exercised | - | - | - | - | ||||||||||||
| Balance, end of period | 5,605,000 | $ | 0.21 | 1,405,000 | $ | 0.52 | ||||||||||
| Exercisable warrants | 4,885,000 | $ | 0.23 | 1,405,000 | $ | 0.52 | ||||||||||
| F-15 |
Outstanding warrants as of March 31, 2018 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 | |||||||||||||||||
| $ | 0.20 | 2.75 | 3,000,000 | $ | 0.20 | 3,000,000 | $ | 0.20 | ||||||||||||||
| $ | 0.25 | 0.01 | 205,000 | $ | 0.25 | 205,00 | $ | 0.25 | ||||||||||||||
| $ | 0.11 | 3.34 | 1,500,000 | $ | 0.11 | 750,000 | $ | 0.11 | ||||||||||||||
| $ | 1.00 | 0.25 | 900,000 | $ | 1.00 | 900,000 | $ | 1.00 | ||||||||||||||
| $ | 0.11 to 1.00 | 2.38 | 5,605,000 | $ | 0.21 | 4,855,000 | $ | 0.23 | ||||||||||||||
Warrants outstanding at March 31, 2018 and 2017 have the following expiry date and exercise prices:
| Expiry Date | Exercise Prices | March 31, 2018 | March 31, 2017 | |||||||||
| March 22,2018 | $ | 1.00 | - | 300,000 | ||||||||
| April 1, 2018 | $ | 0.25 | 900,000 | 900,000 | ||||||||
| April 30, 2018 | $ | 0.25 | 5,000 | 5,000 | ||||||||
| July 1, 2018 | $ | 1.00 | 200,000 | 200,000 | ||||||||
| December 30, 2020 | $ | 0.20 | 3,000,000 | - | ||||||||
| August 2, 2021 | $ | 0.11 | 1,500,000 | - | ||||||||
| 5,605,000 | 1,405,000 | |||||||||||
Share Purchase Option Plan
The Company has a stock option plan adopted in on November 17, 2014 and an equity incentive plan adopted March 8, 2018 whereby the Board of Directors, may grant to directors, officers, employees, or consultants of the Company shares of common stock as well as 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 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 under the Plan was set at 20,000,000.
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 20,000,000 of the Company’s common shares which may be issued pursuant to the exercise of share options granted under the Plan. As at March 31, 2018, the Company had issued options, allowing for the subscription of 16,353,000 common shares of its share capital.
Stock Options - The following table summarizes information about stock options granted during the three months ended March 31, 2017 and 2016:
| March 31, 2018 | March 31, 2017 | |||||||||||||||
| Number of stock options | Weighted Average Exercise Price | Number of stock options | Weighted Average Exercise Price | |||||||||||||
| Balance, beginning of period | 9,625,000 | $ | 0.21 | 2,644,000 | $ | 0.49 | ||||||||||
| Stock options granted | 6,800,000 | $ | 0.12 | 700,000 | $ | 0.09 | ||||||||||
| Stock options expired | 72,000 | $ | 0.37 | - | - | |||||||||||
| Stock options cancelled, forfeited | - | - | - | - | ||||||||||||
| Stock options exercised | - | - | - | - | ||||||||||||
| Balance, end of period | 16,353,000 | $ | 0.17 | 3,344,000 | $ | 0.41 | ||||||||||
| Exercisable stock options | 10,167,666 | $ | 0.20 | 2,252,334 | $ | 0.45 | ||||||||||
| F-16 |
For the three months ended March 31, 2018, the Company granted a total of 6,800,000 stock options, 1,200,000 stock options were granted to three Board members and 2,000,000 stock options were granted to the Chief Executive Officer, 200,000 to Company’s legal counsel.
Outstanding stock options as of March 31, 2018 are as follows:
| Range of Exercise Prices | Weighted Average residual life span (in years) | Outstanding Stock Options | Weighted Average Exercise Price | Exercisable Stock Options | Weighted Average Exercise Price | |||||||||||||||||
| $ | 0.075 to 0.09 | 3.91 | 2,981,000 | $ | 0.08 | 2,220,666 | $ | 0.08 | ||||||||||||||
| $ | 0.11 | 3.34 | 3,500,000 | $ | 0.11 | 2,625,000 | $ | 0.11 | ||||||||||||||
| $ | 0.12 | 4.93 | 6,800,000 | $ | 0.12 | 2,500,000 | $ | 0.12 | ||||||||||||||
| $ | 0.145 | 9.51 | 500,000 | $ | 0.145 | 500,000 | $ | 0.145 | ||||||||||||||
| $ | 0.33 to 0.38 | 0.17 | 72,000 | $ | 0.36 | 72,000 | $ | 0.36 | ||||||||||||||
| $ | 0.50 | 6.65 | 2,500,000 | $ | 0.50 | 2,250,000 | $ | 0.50 | ||||||||||||||
| $ | 0.075 to 0.50 | 4.79 | 16,353,000 | $ | 0.17 | 10,167,666 | $ | 0.20 | ||||||||||||||
Stock options outstanding at March 31, 2018, and 2017 have the following expiry date and exercise prices:
| Expiry Date | Exercise Prices | March 31, 2018 | March 31, 2017 | |||||||||
| April 27, 2018 | $ | 0.38 | 36,000 | 36,000 | ||||||||
| July 9, 2018 | $ | 0.33 | 36,000 | 36,000 | ||||||||
| August 2, 2021 | $ | 0.11 | 3,500,000 | - | ||||||||
| February 17, 2022 | $ | 0.075 | 760,333 | 760,333 | ||||||||
| February 17, 2022 | $ | 0.09 | 1,520,667 | 1,520,667 | ||||||||
| March 30, 2022 | $ | 0.09 | 700,000 | 700,000 | ||||||||
| March 5, 2023 | $ | 0.12 | 6,800,000 | - | ||||||||
| November 20, 2024 | $ | 0.50 | 2,500,000 | 2,500,000 | ||||||||
| October 2, 2027 | $ | 0.145 | 500,000 | - | ||||||||
| 16,353,000 | 5,553,000 | |||||||||||
Stock compensation expense is $681,475 for the three months ended March 31, 2018 and $26,756 for the three months ended March 31, 2017.
NOTE 12 – 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 February 2018 with the restructure of debt made subsequent to the 2017 year end, but effective December 30, 2018.
The company is not a party to any other pended 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-17 |
NOTE 13 – RELATED PARTY TRANSACTIONS
The Company leased a building from the former owner of BCS for $9,000 per month, the lease was terminated on April 30, 2018.
In addition, on August 2, 2017, the Company entered into a Consulting agreement with Carlos J. Nissensohn, a family member of a Director of the Company. The terms and condition of the contract are as follows:
| ● | 24 month term with 90 day termination notice by the Company | |
| ● | A monthly fee of $15,000 and a one-time signatory fee of 600,000 restricted shares | |
| ● | 1,500,000 warrants to buy shares at $0.11 having a four year life and a vesting period of12 months in 4 quarterly and equal installments, subject toMr. Nissensohn’scontinuous service to the Company | |
| ● | 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 $3,000,000 to the Company within 24 months of the date the contract, Mr. Nissensohn 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 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. 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$50,000 onetime 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 Company shall close any M&A transaction with a third party target, Mr. Nissensohn 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 |
On February 28, 2018, the Company finalized two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”) which have an effective date of December 30, 2017. Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11,000,000 of which an aggregate of $10,696,465.17 (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 $9,495,465.17 bringing the total amount owed to $1,201,000. Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20,000 each commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc., currently in the amount of $2,800,000 is satisfied and all amounts currently in default under the credit agreement with Scansource (currently approximately $ 6.0 Million) is reduced to $2.0 million. The Marins have agreed to release their security interest against the Company. In connection with the $9,495,465.17 reduction in the purchase price, the Company issued the Marins 3 year warrants to purchase an aggregate of 3,000,000 shares of Common Stock at an exercise price of $0.20 per-share.
| F-18 |
On February 28, 2018, the Company finalized an additional settlement agreement with the Marins (the “Marin Settlement Agreement II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 which currently had a balance of $111,064.69 in its entirety in exchange for an aggregate of 85,000 shares of the Company’s Series C Preferred Stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share and automatically converts into Common Stock at $1.00 per share in the event that the Company’s common stock has a closing price of $1.50 per share for 20 consecutive trading days. The preferred stock pays a 6% dividend commencing two years from issuance. During the first two years, the Series C Preferred stock shall neither pay or accrue the dividend. The Company also agreed to transfer title to a vehicle that was being utilized by Mr. Marin to David Marin. In exchange therefor, the $100,000 Note and the accrued interest thereon was cancelled in its entirety. The effective date of the agreement is December 30, 2017.
On February 22, 2018, the Company finalized a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5,437,136.40 in full in exchange for 60 monthly payments of $12,500 each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. currently in the amount of $21,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of 500,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30, 2017.
On February 19, 2018, the Company finalized a settlement agreement with George Zicman whereby the Company settled its indebtedness to Mr. Zicman in the current amount of $1,304,198.55 in full in exchange for 60 monthly payments of $3,000 each commencing the earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource, Inc. currently in the amount of $2,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of 100,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30, 2017.
Each of the Marins, Thomet and Zicman entered into a voting agreement with the Company whereby they agreed to vote any shares of common stock beneficially owned by them as directed by the Company’s CEO and also agreed to a leakout restriction whereby they each agreed not to sell more than 10% of the common stock beneficially owned during any 30-day period.
NOTE 14 – SUBSEQUENT EVENTS
There are no subsequent events.
| F-19 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. The reader should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the Company’s results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.
A complete discussion of these uncertainties are contained in our Annual Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission on May 8, 2018.
Introduction
Quest Solution, Inc., a Delaware corporation (“Quest” or the “Company”), was incorporated in 1973. Prior to 2008, the Company was involved in various unrelated business activities. From 2008-2014, the Company was involved in multiple businesses inclusive of an oil and gas investment company. Due to changes in market conditions, management determined to look for acquisitions which were cash flow positive and would provide immediate shareholder value. In January 2014, the first such acquisition was completed of Quest Marketing Inc. (dba Quest Solution, Inc.) (“Quest Marketing”).
Quest is a national mobility systems integrator with a focus on design, delivery, deployment and support of fully integrated mobile solutions. The Company takes a consultative approach by offering end to end solutions that include hardware, software, communications and full lifecycle management services. The professionals simplify the integration process and deliver the solutions to our customers. Motorola, Intermec, Honeywell, Panasonic, AirWatch, Wavelink, SOTI and Zebra are major suppliers which Quest Solution uses in the solutions we provide to our customers.
In May 2014, the Board of Directors voted to get approval from the shareholders of the Company for a name change from Amerigo Energy, Inc. to Quest Solution, Inc. The Company received the approval from a majority of its stockholders and filed the amendment to its Articles of Incorporation with the State of Delaware. The name change became effective by the State of Delaware on May 30, 2014. The Company also requested a new stock symbol as a result of the name change and were assigned our new trading symbol “QUES”.
The Company’s business strategy developed into leveraging management’s relationships in the business world for investments for the Company. The Company intends to continue with its acquisition of existing companies with revenues and positive cash flow.
In November 2014, the Company 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 Company has been exploring efficiencies in all facets of the businesses and learning best practices from both executive teams.
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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
On February 28, 2018, the Company finalized settlement agreements with related parties which have an effective date of December 30, 2017. As part of the settlement agreements, the Company authorized the issuance of 600,000 shares of common stock valued at $59,400, 1,685,000 shares of Preferred Stock valued at $0.80 per share and issued 3,000,000 stock warrants with an exercise price of $.20. The total net amount of debt extinguished in these transactions was $15,418,865.
The Company’s sales from continuing operations for the three months ended March 31, 2018 were $15,180,547 million, an increase of $742,991 million, or 5.14% over the same quarter in 2017.
The loss from continuing operations for the three months ended March 31, 2017 was $949,005 million, an increase of $617,847 million compared with the loss in the comparative prior year of $331,158.Basic loss per share from continuing operations in Q1-2018 were ($0.03) versus ($0.01) per share in Q1-2017.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of March 31, 2018, the Company had a working capital deficit of $13,803,498 and an accumulated deficit of $35,338,906. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. Management’s plan to eliminate the going concern situation includes, but is not limited to, the continuation of improving cash flow, maintaining moderate cost reductions (subsequent to aggressive cost reduction actions already taken in 2017 and continued in 2018), the creation of additional sales and profits across its product lines, and the obtaining of sufficient financing to restructure current debt in a manner more in line with the company’s improving cash flow and cost reduction successes.
The matters that resulted in 2016, having substantial doubt about the Company’s ability to continue as a going concern, have been somewhat mitigated by the successful debt reduction settlements effective in December of 2017. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Results of Operations
The following table sets forth certain selected condensed statement of operations data for the periods indicated in dollars. In addition, we note that the period-to-period comparison may not be indicative of future performance.
| Three months ended March 31 | Variation | |||||||||||||||
| 2018 | 2017 | $ | % | |||||||||||||
| Revenue | $ | 15,180,547 | $ | 14,437,556 | 742,991 | 5.14 | ||||||||||
| Cost of Goods sold | 12,014,454 | 11,445,609 | 568,845 | 4.97 | ||||||||||||
| Gross Profit | 3,166,093 | 2,991,947 | 174,146 | 5.82 | ||||||||||||
| Operating Expenses | 3,809,680 | 2,904,505 | 376,924 | 31.2 | ||||||||||||
| Income (loss) from operations | (643,587 | ) | 87,442 | (731,029 | ) | n/m | ||||||||||
| Net loss from continuing operations | (949,005 | ) | (331,158 | ) | (617,847 | ) | n/m | |||||||||
| Net Loss per common Share | $ | (0.03 | ) | $ | (0.01 | ) | (0.02 | ) | n/m | |||||||
n/m; not meaningful
Revenues
For the three months ended March 31, 2018 and 2017, the Company generated net revenues in the amount of $15,180,547 and $14,437,556, respectively. The 2018 increase was attributable to unavailability of inventory at the manufacturer in Q4-2018 which delayed shipments into Q1-2018, and a sturdy push from the Company’s sales team in taking advantage of the growing customer relationships that continue to gain strength each quarter.
It is important to note that the Company was affected by the adoption of ASC 606, in a manner of only recognizing revenue on a net basis on all service and maintenance contracts sold to customers. By comparison under the old ASC Topic 605 standard, the Company would’ve recognized revenues of $15,302,514, an increase of $121,967 from the required standard under ASC Topic 606 in 2018.
Cost of Goods Sold
For the three months ended March 31, 2018 and 2017, the Company recognized a total of $12,014,454 and $11,445,609, respectively, of cost of goods sold. Cost of goods sold were 79.1% of net revenues at March 31, 2018 and 79.3% of revenues at March 31, 2017. Variation from prior years is difficult in an ever increasing competitive industry. Due to this the Company is continually reevaluating its current product mix and supply channels to improve margins in 2018.
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Operating expenses
Total operating expense for the three months ended March 31, 2018 and 2017 recognized was $3,809,680 and $2,904,505, respectively representing a 31.2% increase. The increase is attributable to the adoption of the Company’s new Equity Incentive Plan, the increase in sales commission related to the increase in revenue and the increase in professional fees.
General and Administrative – General and administrative expenses for the three months ended March 31, 2018 and 2017 totaled $476,855 and $412,945, respectively representing a 15.8% increase.
Salary and benefits – Salary and employee benefits for the three months ended March 31, 2018 totaled $2,602,565, including $681,475 from non-cash stock based compensation, as compared to $1,945,883, including $26,756 from non-cash stock based compensation. The increase in revenue in the first quarter of 2018 from the prior first quarter in 2017 comes with an increase in sales commissions of $146,596 paid to and accrued by the Company’s sales team. Excluding sales commissions and stock based compensation, the Company reduced salaries by $144,633 in the first quarter of 2018 compared to the first quarter of 2017.
Professional Fees – Professional fees for the three months ended March 31, 2018 were $292,862 as compared to $103,277 for the three months ended March 31, 2017. The increase is attributable to consulting agreements in connection with the Company’s plans to obtain financing for cash flow improvement and consolidation of debts.
Other income and expenses
Interest Expense - Interest expense for the three months ended March 31, 2018 totaled $294,765, as compared to $355,658 for the three months ended March 31, 2017. The reduction of $60,893 is directly related to the decreasing amount of debt that is paid off from continuing operations.
Net loss from continuing operations
The Company realized a net loss from continuing operations of $949,005 for the three months ended March 31, 2018, compared to a net loss of $377,665 for the three months ended March 31, 2017, an increase of $617,847. The increase in net loss is mainly attributable to the Company’s equity incentive plan and the increase in professional fees.
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Liquidity and capital resources
As of March 31, 2018, the Company had cash in the amount of $626,090 of which $381,494 is on deposit and restricted as collateral for a letter of credit and a corporate purchasing card, and a working capital deficit of $13,803,498, compared to cash in the amount of $709,244, of which $684,610 is restricted, and a working capital deficit of $14,755,001 as at December 31, 2017. In addition, the Company had a stockholder’s deficit of $346,924 at March 31, 2018 and $1,248,168 as of December 31, 2017.
The Company’s accumulated deficit was $35,338,906 and $35,554,994 at March 31, 2018 and on December 31, 2017, respectively.
The Company’s operations resulted in net cash used of $40,098 during the three months ended March 31, 2018, compared to net cash provided of $4,076,958 during the three months ended March 31, 2017, a decrease of $4,117,056. The changes in the non-cash working capital accounts are primarily attributable to an increase in accounts receivable of $3,030,729 during the three months ended March 31, 2018 and an increase of $4,987,122 in accounts payable.
Net cash provided by investing activities was $248,745 for the three months ended March 31, 2018, compared to net cash provided of $1,519 for the three months ended March 31, 2017, an increase of $247,226, attributable to decreases in restricted cash.
The Company’s financing activities provided net cash of $11,315 during the three months ended March 31, 2018, compared to net cash used of $4,090,835 during the three months ended March 31, 2017. For the three months ended March 31, 2018, the Company increased the line of credit to support the demands of a growing backlog of customer orders and decreased the notes payable by $1,153,621.
Inflation
The Company’s results of operations have not been affected by inflation and management does not expect inflation to have a material impact on its operations in the future.
Off- Balance Sheet Arrangements
The Company currently does not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e)) as of March 31, 2018, the end of the period covered by this Quarterly Report on Form 10-Q.
Based upon that evaluation, our Chief Executive Officer and C hief Financial Officer, (Principal Financial and Accounting Officer) concluded that, as of March 31, 2018, our disclosure controls and procedures were ineffective as of the end of the period covered to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.This was due to the following material weaknesses which are indicative of many small companies with limited staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both United States generally accepted accounting principles and Securities and Exchange Commission guidelines. Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer, and Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosure.
During 2017, we identified material weaknesses in our internal control over financial reporting, which were disclosed in our annual report on Form 10-K filed with the SEC on May 8, 2018.
| 6 |
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter, (i.e., the three months ended March 31, 2018), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As of the date of the report there are no material legal proceedings to which we are a party.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement. In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement.
On June 30, 2017, the Company issued 87,500 shares to board members in relation to the vesting schedule agreed to during 4thquarter 2015, which is based on an annual grant 100,000 restricted shares every October and vesting over 8 quarters per independent board member as compensation.
On August 2, 2017, the Company granted a total of 1,500,000 stock warrants with an exercise price of $0.11 per share and 600,000 shares of common stock as part of a consulting agreement with Carlos Jaime Nissensohn.
On August 2, 2017, the Company granted a total of 6,481,000 stock options, 2,200,000 stock options were granted to five Board members and 3,781,000 stock options were granted to the Chief Executive Officer pursuant to his Employment Contract and 500,000 to Company’s legal counsel.
On October 2, 2017 the Company granted 500,000 stock options to the Company’s CFO as part of the CFO’s employment agreement.
On December 30, 2017 the Company authorized the issuance of 600,000 shares of common stock valued at $59,400 and 1,600,000 shares of Series C Preferred Stock as part of a debt extinguishment agreement with two related parties. The common shares were issued on March 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 $5,811,334.95. The Company also authorized the issuance of 85,000 shares of Series C Preferred Stock and issued 3,000,000 stock warrants with an exercise price of $.20 as part of a separate debt reduction agreement with a different related party. The total net amount of debt forgiven in this transaction was $9,607,529.86.
On March 8, 2018, the Company granted a total of 1,700,000 shares of Common Stock and options to purchase up to 6,800,000 shares of Common Stock under the 2018 Equity Incentive Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission this Form 10-Q, including exhibits. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at SEC’s Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.
You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports which will be filed electronically with the SEC containing consolidated financial statements audited by our independent auditors, and to make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial statements.
Quest’s website is located athttp://www.QuestSolution.com. The Company’s website and the information to be contained on that site, or connected to that site, is not part of or incorporated by reference into this filing.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 21, 2018
QUEST SOLUTION, INC.
| By: | /s/ Shai Lustgarten | |
| Shai Lustgarten | ||
| President and Chief Executive Officer |
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EXHIBIT INDEX
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