UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 |
(IRS
Employer Identification No.) |
860 Conger Street
Eugene,
OR 97402
(Address of principal executive offices) (zip code)
(714) 899-4800
(Issuer’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] |
| Accelerated filer | [ ] |
| Non-accelerated filer | [ ] (Do not check if a smaller reporting company) |
| Smaller reporting company | [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2017, was $2,208,622.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 39,673,631 shares of common stock were outstanding as of May 4, 2018.
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Annual Report on Form 10-K that are not historical facts are “forward-looking statements,” which can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Annual Report on Form 10-K, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:
| ● | Our ability to raise capital when needed and on acceptable terms and conditions; | |
| ● | Our ability to manage credit and debt structures from vendors, debt holders and secured lenders. | |
| ● | Our ability to manage the growth of our business through internal growth and acquisitions; | |
| ● | The intensity of competition; | |
| ● | General economic conditions; and | |
| ● | Our ability to attract and retain management, and to integrate and maintain technical information and management information systems. |
All written and oral forward-looking statements made in connection with this Annual Report on Form 10-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements. Except as may be required under applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result more information, future events or occurrences.
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General
Quest Solution, Inc., a Delaware corporation, formerly Amerigo Energy, Inc., together with its two wholly owned subsidiaries, referred to herein as “we,” “us,” and “our” (“Quest” or the “Company”), was incorporated in 1973. Since its incorporation, the Company has been involved in various lines of business.
In January 2014, the Company had determined it was in the best interest of stockholders to focus on operating companies with a track record of positive cash flows and larger existing revenue bases. The Company’s strategy developed into leveraging management’s relationships in the business world for investments for the Company. On January 10, 2014, the Company entered into that certain Share Purchase Agreement with Quest Solution, Inc., an Oregon corporation (“Quest Solution”), in the technology, software, and mobile data collection systems business, in order to acquire Quest Solution for a purchase price of $16,000,000, payable in the form of (i) a promissory note for $4,969,000; and (ii) a promissory note for $11,031,000.
On November 19, 2014, the Company entered into a Stock Purchase Agreement with Bar Code Specialties, Inc., a California corporation (“BCS”), and David Marin, the sole stockholder of BCS, pursuant to which the Company agreed to purchase all outstanding shares of common stock of BCS held by the Mr. Marin for an aggregate purchase price of $10,396,316, payable in the form of a five-year secured subordinated convertible promissory note. BCS is a company specializing in systems integration and data collection. Initially the company focused on the distribution vertical, but quickly grew its operational focus to include retail, manufacturing, food, and healthcare.
Effective October 1, 2015, the Company acquired the interest in ViascanQdata, Inc. (“ViascanQData”), a Canadian based operation in the same business line as Quest. The purchase price for the shares of ViascanQdata was 5,200,000 shares of Series B Preferred Stock (which are convertible on a 1:1 basis into common shares, with no other preferential rights) as well as a promissory note of one million five hundred thousand dollars ($1,500,000).
Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the consideration received was $1.0 million in cash of which $575,000 was received at closing and the balance was received on April 30, 2017. In addition, the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stock of the Company, as well as the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd., a wholly owned subsidiary of the Company, redeemed 5,200,000 exchangeable shares as part of the divestiture.
Additionally, as part of the transaction, Viascan Group Inc., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction includes:
| ● | Full release from five employment contracts, inclusive of the former CEO, Gilles Gaudreault. This release included cancelation of the contracts as well as the deferred salary and signing bonus provisions which would have inured to the employee. | |
| ● | The Company cancelled the intercompany debts of approximately $7.0 million as well. The Company will also receive a contingent consideration of 15% of the net value proceeds, up to a maximum of $2.3 million, received upon a liquidity event or a change of control of Quest Solution Canada Inc. for a period of 7 years subsequent to the transaction. | |
| ● | The Company also negotiated a right of first refusal for any offer to purchase Quest Solution Canada Inc. for a 7 year period. |
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.
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History
Between 2008 and 2013, the Company was in the business of developing oil and gas reserves while increasing the production rate base and cash flow. The plan was to continue acquiring oil and gas leases for drilling and to take advantage of other opportunities and strategic alliances. Due to declines in production with respect to the Company’s oil and gas leases, the Company sought to explore its position in the oil industry. As the operational leases for the Company were not providing sufficient cash flow from operations to allow management to expand its investment in this industry, other potential opportunities were evaluated.
Strategy
Following the divestiture of Quest Solution Canada Inc., the Company’s strategy has been to focus on operational excellence and cost reduction, addressing the balance sheet debt load and putting together a business plan that is based on modest revenue growth. The Company intends to continue to identify synergies within the Company to offer a more complete offering of products, services and technological solutions to customers throughout the United States. Furthermore, the market in which Quest operates is undergoing consolidation and Quest intends to start identifying strategic companies in the data collection and mobile systems integration market, as well as other complementary technologies for potential future acquisition in order to become the leading specialty integrator within our served markets.
The Company is a systems integrator within the United States with a focus on design, delivery, deployment and support of fully integrated mobile and automatic identification data collection solutions. The Company is also a manufacturer and/or distributor of labels, tags, ribbons and RFID identification tags. Quest takes a consultative approach by offering end-to-end solutions that include hardware, service contracts, software, communications and full lifecycle management services. Quest simplifies the integration process with its experienced team of professionals. The Company delivers problem solving solutions backed by numerous customer references. The Company offers comprehensive packaged and configurable software some of which is developed by Quest and some of it is sourced from 3rd parties. Quest is also a leading providing of bar code labels and ribbons (media) to companies in Southern California. Quest provides consultative services to companies to select, design and manufacture the right label for their product offering. Once a company selects the product, sales are generally highly repeatable on a regular basis.
Quest’s experienced team of consulting and integration professionals guide companies through the entire development and deployment process, from selecting technology to the successful company-wide rollout of a customized solution that fits a company’s unique requirements. After performing a thorough technical evaluation of the client’s current operations and specific operational problems, Quest’s team determines the optimal hardware and software solutions to optimize the client’s operational workflow. Quest delivers, ongoing services provided throughout the deployment process and throughout the entire product life cycle. Quest also delivers full installation services for all mobile, data collection computers and printing equipment including full staging and kitting of the equipment.
Quest has been successful by delivering mission critical mobile computing and data collection solutions for over two decades for Fortune 1000 companies. The requirements and needs of our customers continue to evolve as they require new mobile and wireless technologies and services to make their business more competitive and profitable. The result is a continuous flow of opportunities for Quest to assist customers to evaluate, choose, implement, and support the right mobile and data collection solutions. As we focus on what we do best, we believe that there is more than adequate market size, growth and opportunity available to the Company to succeed.
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Core to the solutions offered by Quest is a full suite of configurable packaged software solutions that were internally developed and provide customers with unique solutions with significant business Return on Investment (“ROI”), including:
Order Entry: Software designed to increase productivity in the field. Remote workers increasingly demand rapid access to real-time information and up to date data to facilitate and streamline their job functions in the field Quest’s Order Entry Software is the answer.
DSD and Route: Software packages designed to increase overall productivity. In the fourth quarter 2016, Quest introduced the next generation of Direct Store Delivery (DSD) and Proof of Delivery software called Route Edge TM. The Quest DSD and Route Edge TM software packages include proprietary applications for portable devices, computer servers and management dashboards that extend the power of existing systems out to field associates to enhance routing and delivery efficiency.
Intelligent Order Entry: Adds intelligence to aging order entry system to maximize profits. The hand held industry is a vital link in getting remote orders from the field to corporate. Quest’s Intelligent Order Entry Software adds this capability to aging order entry systems.
ITrack: Track Device Deployment. iTrack, an Internet Tracking System, is a management tool that tracks the deployment of hardware devices in the field and their repair history.
Warehouse: Enhance efficiency in distribution and manufacturing environments. Warehouse is a collection of applications for portable devices that extend the power of your existing system out to the warehouse floor and dock doors.
Proof of Delivery: Enhances document delivery performance. Quest offers proof-of-delivery capabilities as part of its Mobility Suite that gives companies an edge over competitors by improving customer service.
WTMiP: Extends business beyond four walls. WTMiP provides the link between corporate and the mobile worker. WTMiP servers allow files and data to seamlessly synchronize between the corporate host and laptops, hand held devices and Windows CE or Windows Mobile devices.
Easy Order: Easy order on-line purchasing portal. Quest’s Easy Order Solution offers companies a customized portal that streamlines and simplifies ordering by providing clients with their own unique private on-line store.
QTSaaS (Quest Total Solutions as a Service): QTSaaS is a complete mobile services offering that includes hardware, software, services and wireless data in a bundled subscription payment offering over a period of time. Quest’s partnership with Hyperion Partners and wireless carriers allows Quest to offer mobility solutions to our customers on platforms that extend the market into new mobile applications that previously were not being automated.
Media and Label Business: Repeatable easy order online purchasing portal. The largest segment of data collection opportunity for Quest is the barcode label market providing ongoing and repeatable purchasing business. Quest intends to continue in the label business in the United States to drive business growth and increased margins.
Target Markets
Based on its expertise, competence, success and software solution set, Quest focuses on markets that represent high-return mobile line of business applications. Quest believes it can further develop its existing and substantial installed base of customers who are in need of replacement of legacy systems with a go-to-market strategy that leverages our field sales and system resources, telemarketing, customer portals and vertical market and barcode label specialists. Quest also believes that its base of industry leading customers are candidates for the Company’s barcode label and ribbon (media) offerings for the Company’s core markets of manufacturing, distribution, transportation and logistics, retail and healthcare sectors. Quest has been successful by integrating mission critical mobile computing and data collection solutions for over two decades for Fortune 1000 companies. The requirements and needs of our customers continue to evolve as they require new mobile and wireless technologies and services to make their business more competitive and profitable. The result is a continuous flow of opportunities for Quest to assist customers to evaluate, choose, implement, and support the right mobile and data collection solutions. As we focus on what we do best there is more than adequate market size, growth and opportunity available to the Company to succeed.
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Competitive overview
The mobile system integration market is characterized by a limited number of large competitors and numerous smaller niche players. Quest typically pursues larger accounts and national customers, competing most often with the larger channel partners, including Stratix, Peak Technologies, Lowry, and Barcoding Inc. For specific solutions the Company also competes with niche players that are often focused on a single industry. Hardware sales are often pressured by competition from online retailers, but Quest’s consultative, integrated solutions approach is a clear differentiator for most prospective customers.
Sales Strategy
The Company’s current direct sales teams are supported by systems engineers averaging over twenty (20) years of experience in the mobile industry. The sales organization’s growth in reach mirrors the Company’s addition of new products and services. Sales team members are organized by industry areas of opportunity, areas of expertise and territory. Quest’s sales teams are organized to address national accounts offering a broad array of unique solutions for key line of business applications, which allows for upsell and cross sell opportunities within each client. For the barcode label (media) business, Quest utilizes a specialty sales force and well as resellers and distributors of Quest manufactured label products to serve the market.
Sales persons are supported internally by sales support personnel who coordinate quotes and logistics and by members of the systems engineering group and software teams.
The normal sales cycle is six (6) to nine (9) months, and typically involves the development of a scope of work and preparation of a ROI analysis. Quest prepares templates for this purpose which reduces the sales cycle. The analyses and proposals include information on leasing and other financing options, which helps differentiate the Company from its competitors. The label business sales cycles are shorter with purchases made more frequently on a transactional basis.
General Discussion of Operations
Concentrations
For the years ended December 31, 2017 and 2016, one customer accounted for 15.7% and 17.3%, respectively, of the Company’s revenues.
Accounts receivable at December 31, 2017 and 2016 are made up of trade receivables due from customers in the ordinary course of business. One customer made up 15.6% and 33.1% of the balance of accounts receivable at December 31 for 2017 and 2016, respectively which represented greater than 10% of accounts receivable at December 31, 2017 and 2016, respectively.
Accounts payable are made up of payables due to vendors in the ordinary course of business at December 31, 2017 and 2016. One vendor made up 70.1% and 76.8% of the balance for of accounts payable 2017 and 2016, respectively, which represented greater than 10% of accounts payable at December 31, 2017 and 2016, respectively.
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Expected Significant Changes In The Number Of Employees
The Company anticipates only minor changes in the number of employees over the next twelve months of 2018 as administrative functions are consolidated, which are expected to be offset in part by adding new sales staff. The Company’s current management instituted a cost reduction program in the second half of 2017 that included a reduction in labor and related payroll expenses.
As of December 31, 2017, we had a total of 57 full time employees and no part time employees.
As of April 16, 2018, we had a total of 35 full time employees and 1 part time employee.
Quest’s website is located at www.QuestSolution.com. The Company’s website and the information to be contained on that site, or connected to that site, are not part of or incorporated by reference into this filing.
Recent Events
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.
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 Goerge 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.
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This section is not required for smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
This section is not required for smaller reporting companies.
The corporate offices of the Company are currently located at 860 Conger Street, Eugene, Oregon 97402. In April 2012, Quest Marketing, Inc. signed an operating lease at 860 Conger Street, Eugene, Oregon 97402. The premises consist of approximately 7,000 square feet of warehouse and office space. The lease provided for monthly payments of $3,837 through March 2013, and is adjusted annually to reflect changes in the cost of living for the remainder of the lease term. In no event shall the monthly rent be increased by more than 2% in any one year. The lease expired on March 31, 2017 and the Company extended the term of the lease for an additional two years with the same cost of living increase. This location handles administrative functions as well as having an operations team, inside sales, warehouse and support center for Quest’s sales team.
The lease at the Company’s Ohio location, signed by Quest Marketing, Inc. in July 2011, provides for monthly payments of $2,587 through June 2012, and $2,691 thereafter. The lease is due for renewal on June 30, 2018, and the Company’s intention is to renew the lease for another term. This location is used by the Company’s software development team and engineers for assistance with its sales team.
The Company has a commercial real estate operating lease with the former owner of BCS for the Company’s office and warehouse location in Garden Grove, California. The Company pays rent at the rate of $9,000 per month. This location houses the original BCS operations team, which was acquired in November 2014, as well as the label production facility, administrative and finance for the Company. Through mutual agreement on February 23, 2018, the Company signed a termination agreement on the lease for the Garden Grove location which was vacated entirely on April 30, 2018.
The Company signed a new lease on February 1, 2018 for the Company’s office and warehouse location in Anaheim downsizing from Garden Grove, California. The Company rent is at the rate of $2,372 per month through January 31, 2019, then increasing to $2,466.54 per month to January 31, 2020. The rent from February 1, 2020 until February 28th 2021 is $2,565.20. The lease expires on February 28, 2021. This location houses satellite sales and technical support office.
The Company opened an executive suite in Salt Lake City, Utah in August 2017. This office houses the offices for the Company’s CEO and CFO. Rent on this location was waived by the landlord until January 1st 2018, when the office space expanded to house a portion of the Company’s accounting and administrative staff. The Company rent per month at this location is now $3,000 per month.
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 with prejudice in February 2018 by restructuring the Company’s debt obligations to him effective December 31, 2017.
The Company was sued by Deborah Donoghue and Aaron Rubenstein as a nominal defendant to recover alleged “short-swing profits” from Jason F. Griffith on his conversion into Series C shares. The lawsuit was settled on October 24, 2017 with the Company covering the agreement costs and with Jason Griffith agreeing to offset the Company’s cost with a reduction in debt owed to him.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Quest shares of common stock are not traded on an established market. Quest’s common stock is traded through broker/dealers and in private transactions, and quotations are reported on the OTCQB under the symbol “QUES”. OTCQB quotations reflect interdealer prices, without mark-up, mark-down or commission and may not represent actual transactions. The table below sets forth the range of high and low prices paid for transactions in Quest’s common stock as reported on the OTCQB for the periods indicated. No dividends have been declared or paid on Quest’s common stock and none are likely to be declared or paid in the near future.
| Common Stock | ||||||||
| High | Low | |||||||
| Fiscal Year Ended December 31, 2016: | ||||||||
| Fiscal Quarter Ended March 31, 2016 | $ | 0.27 | $ | 0.16 | ||||
| Fiscal Quarter Ended June 30, 2016 | $ | 0.28 | $ | 0.12 | ||||
| Fiscal Quarter Ended September 30, 2016 | $ | 0.17 | $ | 0.07 | ||||
| Fiscal Quarter Ended December 31, 2016 | $ | 0.11 | $ | 0.06 | ||||
| Fiscal Year Ended December 31, 2017: | ||||||||
| Fiscal Quarter Ended March 31, 2017 | $ | 0.15 | $ | 0.01 | ||||
| Fiscal Quarter Ended June 30, 2017 | $ | 0.14 | $ | 0.08 | ||||
| Fiscal Quarter Ended September 30, 2017 | $ | 0.15 | $ | 0.08 | ||||
| Fiscal Quarter Ended December 31, 2017 | $ | 0.14 | $ | 0.05 | ||||
On April 25, 2018, the common stock closed at $0.29 per share.
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Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | n/a | n/a | n/a | |||||||||
| Equity compensation plans not approved by security holders | 15,530,000 | 0.23 | 375,000 | |||||||||
| Total | 15,530,000 | 0.23 | 375,000 | |||||||||
The Company intends to submit its 2018 Equity Inventive Plan adopted on March 8, 2018 for shareholder approval at its 2018 annual meeting of shareholders.
Dividends and other Distributions
Quest has never declared or paid any cash dividends on its common stock. The Company currently plans to retain future earnings to finance growth and development of its business and does not anticipate paying any cash dividends in the foreseeable future. Quest may incur indebtedness in the future which may prohibit or effectively restrict the payment of dividends, although the Company has no current plans to do so. Any future determination to pay cash dividends will be at the discretion of Quest’s board of directors. The Company’s Series C Preferred Stock pays a 6% dividend, but the Company was unable to make such dividend payments and so those dividends are accrued quarterly. Accrued but unpaid dividends do not bear interest. Pursuant to the settlement agreements made with Kurt Thomet, George Zicman, and with David and Kathleen Marin, in which over $15 million in debt was extinguished, the new shares of Series C Preferred Stock issued in exchange, totaling 1,685,000 shares, will not pay and will not accrue dividends for a 24 month period, or anytime prior to March 1, 2020.
Recent Sales of Unregistered Securities
The Company issued 39,000 shares of Common Stock to certain employees in the first quarter of 2016 that had a value of $7,800.
On June 17, 2016, the Company entered into a Stock Redemption Agreement whereby it redeemed 1,000,000 shares of common stock in exchange for 357,000 shares of Series C preferred stock.
On July 31, 2016 as part of the Separation Agreement with Mr. Ross, a prior officer, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,000 shares of common stock. In addition, the Company issued 100,000 shares of Series C preferred stock pursuant to the same Separation Agreement in exchange for the redemption of 42,500 common shares.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 1,650,000 shares of common stock for $750,000 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. On September 30, 2016, the Company completed the redemption of 1,650,000 shares of common stock.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 507,079 shares of common stock for $230,490 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. As at December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance of the note and accrued interest is $241,159.
In November 2016, the Company issued 131,000 shares to an employee as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $8,449.
In December 2016, the Company issued 708,000 shares to the Chief Financial Officer as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $48,498.
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In April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement. The shares were valued at $48,000. In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement. The shares were valued at $8,400.
On June 30, 2017, the Company issued 87,500 shares to board members in relation to the vesting schedule agreed to during 4th quarter 2015, which is based on an annual grant 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 Preferred Stock as part of a debt extinguishment agreement with two related parties. The 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 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 7,000,000 shares of Common Stock under the 2018 Equity Incentive Plan.
On March 8, 2018, the Company issued 500,000 shares of Common Stock and 1,000,000 Warrants to purchase Common Stock with an exercise price of $0.11 per share to Carlos J. Nissensohn pursuant to his consulting agreement with the Company.
On March 08,2018, the Company issued 200,000 shares of the Company’s common stock to the JSM SOC-DIG LP.
Issuer Purchases of Equity Securities
The Company did not re-purchase any equity securities in 2017.
As of December 31, 2017, the Company had 36,828,371 common shares outstanding.
ITEM 6. SELECTED FINANCIAL DATA
This section is not required for smaller reporting companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the Company’s results of operations and its financial condition together with its consolidated subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. Historical results and percentage relationships set forth in the statement of operations, including trends which might appear, are not necessarily indicative of future operations.
OVERVIEW
In 2017, the Company’s new management carried out certain strategic actions to streamline its operations, drive future growth and accelerate value creation for our shareholders. The Company had previously announced such intention but only began successfully implementing such actions under its new management. The Company has significantly reduced its labor costs.
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The Company’s sales from continuing operations for 2017 were $54.5 million, a decrease of $5.6 million. The reason for the decline was twofold, the Company experienced delays in its supply chain at the end of 2017 resulting in the decrease of sales in 2017, pushing many of those sales into January of 2018, which are expected to provide a boost to the first quarter of 2018, and the Company moved away from certain low margin sales.
The loss from continuing operations for common stockholders was $2.4 million in 2017, a decrease of $5.1 million from the prior year loss of $7.5 million. Basic and Diluted loss per share from continuing operations was $0.06 in 2017 compared to $0.2104 per share in 2016. The Company, through successful efforts in cost reductions on many fronts, decreased the operating loss by 38% and increased the EBITDA by 76% from the prior year of 2016.
There was no loss from discontinued operations for 2017.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of December 31, 2017, the Company had a working capital deficit of $14,755,001 and an accumulated deficit of $35,554,994. 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), 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 finalized in December of 2017. See “Business – Recent Events”. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Overview - Results of Operations
The following table sets forth certain selected condensed statement of operations data for the periods indicated in dollars. In addition, we note that the period-to-period comparison may not be indicative of future performance.
| Years Ended December 31 | Variation | |||||||||||||||
| 2017 | 2016 | $ | % | |||||||||||||
| Revenue | $ | 54,458,845 | $ | 60,047,124 | (5,588,279 | ) | (9.3 | ) | ||||||||
| Cost of Goods sold | 43,089,210 | 47,952,579 | (4,863,369 | ) | (10.1 | ) | ||||||||||
| Gross Profit | 11,369,635 | 12,094,545 | (724,910 | ) | (6.0 | ) | ||||||||||
| Operating Expenses | 12,248,128 | 13,283,849 | (1,035,721 | ) | (7.8 | ) | ||||||||||
| Loss from operations | (878,493 | ) | (1,189,304 | ) | 310,811 | 26.1 | ||||||||||
| Net loss from continuing operations | (2,431,175 | ) | (7,493,270 | ) | 5,062,095 | (67.5 | ) | |||||||||
| Net loss from discontinued operations | (0.00 | ) | (6,851,875 | ) | 6,851,875 | n/m | ||||||||||
| Net loss | (2,431,175 | ) | (14,345,145 | ) | 11,913,970 | (83.1 | ) | |||||||||
| Net Loss per common Share from continuing operations | (0.06 | ) | (0.21 | ) | 0.15 | (71.4 | ) | |||||||||
| Net Loss per common Share from discontinued operations | (0.00 | ) | (0.19 | ) | 0.19 | n/m | ||||||||||
| Net Loss per common Share | (0.06 | ) | (0.40 | ) | 0.34 | (85.0 | ) | |||||||||
n/m; not meaningful
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Revenues
For the years ended December 31, 2017 and 2016, the Company recognized $54,458,845 and $60,047,124 in net revenues, respectively. This represents a decrease of 9.3% attributable to the push of sales into January 2018 as a result of fulfillment difficulty in our supply chain and our movement away from less profitable business. Revenue for 2017 and 2016 was generated from the sales of hardware, service contracts, software, labels and ribbons and related services provided by the Company to its customers. Despite the decline in revenues, the Company did finish 2017 with one of the strongest backlogs in the Company’s history, and the Company believes that its customer loyalties remaining strong.
Cost of Goods Sold
For the years ended December 31, 2017 and 2016, the Company recognized a total of $43,089,210 and $47,952,579 respectively, of cost of goods sold. Cost of goods sold were 79.1% of net revenues for 2017 and 79.9% for 2016. Our gross margin percentage remained stable in an industry that is putting a lot of pressure on the gross margin.
Operating expenses
For the years ended December 31, 2017 and 2016, operating expenses related to continuing operations were $12,248,128 and $13,283,849, respectively. This represents a decrease of $1,035,721, or 7.8%, which is due to management’s focus on expense reduction and streamlining operations when they took office in Q2 and Q3. The cost cutting measures included a thorough analysis of the Company’s staffing policies and strategies, and an analysis of the Company’s geographic layout as well as its involvement in the label manufacturing business. Many of the new management team’s cost cutting measures were completed toward the end of the fourth quarter in 2017, with some taking place subsequent to year end. The Company expects that most of the beneficial results of these efforts will be noticed in 2018.
Salary and benefits – Salary, commissions and employee benefits for the year ended December 31, 2017 totaled $7,951,970, compared to $8,409,223 for the year ended December 31, 2016, a decrease of $457,253, or 5.4%. Included in salary and benefits is a stock based compensation expense of $750,745 for the year ended December 31, 2017 compared to $374,451 for the year ended December 31, 2016. The increase in stock compensation expense, which is a non-cash item, is a result of shares and options being granted to the executives and consultants added in 2017. The decrease in salary and benefits is attributable to results from the Company’s cost cutting platform rolled out in the 3rd, and more extensively in the 4th quarter of 2017. The decrease in salary expense is also in part due to the related decreases of sales commissions associated with decreased net revenues for 2017.
General and Administrative – General and administrative expenses were $1,861,847 for the year ended December 31, 2017, compared to $2,327,889 for the year ended December 31, 2016, a decrease of $466,042, or 20.2%. Included in the General and Administrative expenses are provisions for state income taxes in states in which the Company began operations during 2017 in the amount of $102,905. The Company believes it may not be able to take advantage of the NOL carryforward for taxes in those states. Also included are tax penalties incurred during the year in the amount of $42,151. General and Administrative expenses were the first area focused on for the Company’s improved cutting cost plan. The Company believes that these results are a promising foreshadowing of the improvements to be seen in many other areas within the Company.
Professional Fees – Professional fees for the year ended December 31, 2017 were $674,374 compared to $754,411 for the period year ended December 31, 2016, a decrease of $80,037, or 10.6%. The decrease was related to the high level of services required from the complexity of the divestiture of Quest Solution Canada in 2016. These decreases were partially offset by the addition of consultants hired by the Company to assist in refinancing efforts, key areas in operations needing reorganization, and in assisting management with Company and industry expertise and historical knowledge. The Company also required a one-time increase in professional fees resulting from the extinguishment of over $15 million in debt effective in the 4th quarter of 2017.
Stock based compensation expense – Stock based compensation expenses for the year ended December 31, 2017 were $750,745, compared to $374,450 for the year ended December 31, 2016, an increase of $376,295 or 100.5%. This increase in 2017 relates to the Company’s strategy of improving cash flow to fuel future growth and to quickly reduce the working capital deficit.
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Other income and expenses
The Company incurred $1,555,350 in interest expense for the year ended December 31, 2017, compared to $4,531,263 for the year ended December 31, 2016, a decrease of $2,975,913 or 65.7%. The interest expense in 2017 is comprised of the interest on the credit facilities as well as the financing fees, interest on the notes, supplier financing and the debt discount on the promissory notes which are non-cash. This decrease is due to the current financing facility remaining throughout the year as opposed to prior year costs for $0.4 million related to the cancellation of the FGI line of credit, a $0.2 million decrease in financing fees related to the different credit facilities, an $0.3 million increase related to the increase in the Promissory note balances, $0.3 million increase related to the supplier financing and $1.4 million increase in the debt discount which is non cash.
Restructuring Expense - During the second quarter, the Company continued steps to streamline and simplify its operations in North America. The employees who separated from the Company as a result of these streamlining initiatives were offered severance. As a result, the Company has recorded a restructuring charge of $26,880 for the year ended December 31, 2017. The restructuring charges include severance pay and limited continuing medical coverage.
Foreign currency transactions
The Company recorded a gain on foreign currency of $129,589 in 2016 due to the weakening of the Canadian dollar in relation to the United States dollar. Due to the divestment of the Canada division, there were no foreign currency transactions conducted in 2017.
Provision for income taxes
During the year ended December 31, 2017, the Company had no income tax expense. Management’s analysis of the future utilization of the cumulative net operating loss carryforwards determined that it does not meet the more likely than not criteria regarding the utilization of the net operating losses prior to their expiration. Accordingly, the valuation allowance on the deferred tax asset is 100% during the year ended December 31, 2017. For the year ended December 31, 2016, the Company had a tax expense of $1,068,352.
Net loss from continuing operations
The Company realized net loss from continuing operations of $2,431,175 for the year ended December 31, 2017, compared to a net loss from continuing operations of $7,493,270 for the year ended December 31, 2016. The latter half of 2017 served as a successful period for the turnaround efforts of the Company’s new executive management team. With a strong focus on reducing professional fees, interest expenses, financing costs, and general and administrative overheads, it’s important to note that Quest Solution realized a $5,062,095, or 67.6% improvement in continuing operations as compared to 2016. This is considered by management to be a positive indicator of improved future performance considering the Company experienced over a 9% decrease in revenues due to difficulties in supply chain. The Company believes that Quest Solution is positioned to continue the improved performance in 2018.
Liquidity and capital resources
At December 31, 2017, the Company had cash in the amount of $709,244 of which $684,610 is on deposit and restricted as collateral for a letter of credit and a corporate purchasing card, and a working capital deficit of $14,755,001, compared to cash in the amount of $954,700, of which $665,220 was restricted, and a working capital deficit of $15,323,313 for the year ended December 31, 2016. The Company had a stockholders’ deficit of $1,248,168 and $14,825,188 for the years ended December 31, 2017 and 2016, respectively. This significant decrease in our stockholders’ deficit was due to the decrease in related party debt that took place effective December 30th, 2017.
The Company’s accumulated deficit was $35,554,994 and $32,935,199 for the years ended December 31, 2017 and 2016, respectively.
The Company’s operations provided net cash of $7,490,304 and $5,652,679 for the years ended December 31, 2017 and 2016, respectively.
The Company’s cash used in investing activities was $(36,581) for the year ended December 31, 2017 compared to cash provided by investing activities of $584,908 for the year ended December 31, 2016.
The Company’s financing activities used $7,718,568 of cash during the year ended December 31, 2017, and $2,176,424 during the year ended December 31, 2016, an increase in usage of $5,542,144. During the year ended December 31, 2017, $6,205,817 was paid down on the Supplier Secured Promissory note, and $1,391,875 was paid down on the Company’s line of credit. Comparing to the year ended December 31, 2016, $3,083,784 was paid down on the Supplier Secured Promissory note. In addition, the Company received proceeds of $2,098,950 from the line of credit.
The Company’s results of operations have not been affected by inflation and management does not expect inflation to have a material impact on the Company’s operations in the future.
Contractual Obligations
The significant contractual obligations as of December 31, 2017 were as follows:
| Payments due by Period | ||||||||||||||||||||
|
Less than One Year |
One to Three Years |
Three to Five Years |
More Than Five Years |
Total | ||||||||||||||||
| Subordinated Notes payable, related parties | $ | 106,500 | $ | 1,278,000 | $ | 745,500 | $ | 1,199,400 | $ | 3,329,400 | ||||||||||
| Notes payable, non-related parties | 3,429,025 | 130,294 | - | - | 3,559,319 | |||||||||||||||
| Accrued interest and accrued liabilities, related party | 38,430 | - | - | 161,371 | 199,801 | |||||||||||||||
| Total | $ | 3,573,955 | $ | 1,408,294 | $ | 745,500 | $ | 1,360,771 | $ | 7,088,520 | ||||||||||
Off-Balance Sheet Arrangements
The Company currently does not have any off-balance sheet arrangements.
Critical Accounting Policies
Preparation of the Company’s financial statements requires management to make judgments, assumptions and estimates regarding uncertainties that could affect reported revenue, expenses, assets, liabilities and equity. Note 1 describes the significant accounting policies used in preparation of the consolidated financial statements. The most significant areas where management judgments and estimates impact the primary financial statements are described below. Actual results in these areas could differ materially from management’s estimates under different assumptions or conditions.
REVENUE RECOGNITION
The Company recognizes nearly all revenue through the sale of products and services, and records the sale when products are shipped or delivered, title and risk of loss pass to the customer, and collection is reasonably assured. The vast majority of deliverables are tangible products, with a smaller portion attributable to installation, service or maintenance. Nearly all revenue is recognized on a gross basis with the exception of revenue related to maintenance, which is recognized on a net basis and fully at the time of sale. Management believes that all relevant criteria and conditions are considered when recognizing revenue.
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ACCOUNTS RECEIVABLE
The Company’s management performs ongoing credit evaluations of our customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of their current credit information. Management continuously monitors collections and payments from its customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection issues that were identified. If the actual uncollected amounts significantly exceed the estimated allowance, the Company’s operating results would be significantly adversely affected. While such credit losses have historically been within management’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.
INVENTORIES
Inventories are stated at the lower of cost or market and are principally valued on a first-in, first-out basis. The Company’s management reviews inventory for obsolescence, make appropriate provisions and dispose of obsolete inventory on a regular basis. Various factors are considered in these reviews, including sales history and recent trends, industry conditions and general economic conditions. If actual circumstances indicate a decline in any of these factors, particularly an abrupt change in economic conditions, the Company could incur an obsolescence expense. Management’s estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess, obsolete and unmarketable inventories. In the future, if our inventories are determined to be overvalued, we would be required to recognize such costs in its cost of goods sold at the time of such determination.
LONG-LIVED ASSETS
Long-lived assets, which include property, equipment, goodwill and identifiable intangible assets, are reviewed for impairment whenever events or changes in business circumstances indicate impairment may exist. If the Company determines that the carrying value of a long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. The Company’s management reviews for possible goodwill impairment at least annually, in the fourth quarter. If an initial assessment indicates it is more likely than not an impairment may exist, it is evaluated by comparing the unit’s estimated fair value to its carrying value. Fair value is generally estimated using an income approach that discounts estimated future cash flows using discount rates judged by management to be commensurate with the applicable risk. Estimates of future sales, operating results, cash flows and discount rates are subject to changes in the economic environment, including such factors as the general level of market interest rates, expected equity market returns and the volatility of markets served, particularly when recessionary economic circumstances continue for an extended period of time. Management believes the estimates of future cash flows and fair values are reasonable; however, changes in estimates due to variance from assumptions could materially affect the evaluations.
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INCOME TAXES
Income tax expense and tax assets and liabilities reflect management’s assessment of taxes paid or expected to be paid (received) on items included in the financial statements. Deferred tax assets and liabilities arise from temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and consideration of operating loss and tax credit carryforwards. Deferred income taxes are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are provided to reduce deferred tax assets to the amount that will more likely than not be realized. This requires management to make judgments and estimates regarding the amount and timing of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies.
STOCK BASED COMPENSATION
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by FASB where the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Recent Accounting Pronouncements
See Note 3 of the consolidated financial statement for management’s discussion of recent accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This section is not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are included as a separate section of this report commencing on page F-1.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure and Control Procedures
The Company maintains “disclosure controls and procedures”, as such terms are defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosures. The Company acknowledges that any controls and procedures can provide only reasonable assurances of achieving the desired control objectives.
We have carried out an evaluation as required by Rule 13a-15(d) under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedure as of December 31, 2017. Based upon their evaluation, the Chief Executive Officer and Principal Accounting Officer concluded that, as of December 31, 2017, the Company’s disclosure controls and procedures were not effective. Although we have determined that the existing controls and procedures are not effective, the deficiencies identified have not been deemed material to our reporting disclosures.
(b) Management’s Report on Internal Controls over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting cannot provide absolute assurance of achieving their objectives. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgement and breakdowns resulting from human failures. Due to their inherent limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. It is possible to design safeguards to reduce, but not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Management has used the framework set forth in the report entitled Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), known as COSO, to evaluate the effectiveness of our internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on such evaluation, our CEO and Principal Financial Officer have concluded that, as of December 31, 2017, our internal controls over financial reporting were not effective.
As a result of our evaluation, we identified a material weakness in our controls related to segregation of duties, rarely seen complex US GAAP issues and SEC reporting issues, as well as other immaterial weaknesses in several areas of data management and documentation. The Company had to rely on the expertise and knowledge of external advisors in matters related to complex US GAAP issues.
The Company’s management is composed of a small number of professionals resulting in a situation where limitations on segregation of duties exist. Accordingly, as a result of the material weakness identified above, we have concluded that the control deficiencies result in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented on a timely basis by the Company’s internal controls. The Company continues to employ and refine a structure in which critical accounting policies, issues and estimates are identified, and together with other complex areas, are subject to multiple reviews by management.
To immediately address the material weaknesses identified in our evaluation, we engaged external advisors to apply additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with US GAAP. As a result, management believes the consolidated financial statements included in this annual report on Form 10-K fairly represent in all material respects our financial condition, results of operations, and cash flows at and for the periods presented in accordance with US GAAP.
Material Weakness Remediation Efforts
Management is committed to remediating each of the material weaknesses identified above. We are currently seeking to recruit more experienced US GAAP/financial reporting professionals to augment and upgrade our finance and accounting staff to address issues of accuracy, completeness, and timeliness in financial statement preparation and reporting. Until we have additional internal finance and accounting staff, we plan to work closely with external financial advisors to review and monitor our accounting procedures, perform internal audit procedures, and to prepare our consolidated financial statements and reports.
The Company has committed to hiring additional finance department staff during the year ending December 31, 2018 which will allow for a higher level of segregation and improve the Company’s overall compliance with COSO. The hiring of additional staff is dependent upon the Company obtaining sufficient cash flows from operations or financings.
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While the material weakness set forth above were the result of the scale of the Company’s operations and is intrinsic to its small size, the Company believes the risk of material misstatements relative to financial reporting are minimal.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by its registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits the Company to provide only management’s report in this annual report.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table presents information with respect to our officers and directors as of the date of this Report:
Name and Address |
Age |
Position(s) | ||
| Shai Lustgarten | 47 | CEO and Chairman | ||
| Benjamin Kemper | 39 | CFO | ||
| Andrew J. MacMillan | 69 | Director | ||
| Neev Nissenson | 38 | Director | ||
| Yaron Shalem | 45 | Director |
Background of officers and directors
The following is a brief account of the education and business experience during at least the past five years of our officers and directors, indicating each person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Shai S. Lustgarten, was appointed the Company’s CEO in April 2017. Mr. Lustgarten had been the Chief Executive Officer of Teamtronics, Inc. beginning June 2016. Teamtronics manufactures rugged computers and electronic equipment mainly used in the Gas and oil industry. From 2014 to 2017, Mr. Lustgarten was the Chief Executive Officer at Micronet Limited Inc., a developer and manufacturer of mobile computing platforms for integration into fleet management and mobile workforce solutions listed on the Tel Aviv Stock Exchange. From 2013 to 2014, Mr. Lustgarten served as EVP Business Development and Head of the Aerospace and defense Division of Micronet EnertecTechnologies, a technology company listed on the NASDAQ Capital Market. From 2009 to 2013 Mr. Lustgarten was VP of Sales, Marketing and CMO of TAT Technologies, a world leading supplier of electronic systems to the commercial and defense markets, from. His prior experience also includes serving as CEO of T.C.E. Aviation Ltd. in Belgium and serving a from 1993 to 1997 as the assistant to the Military Attaché at the Embassy of Israel in Washington, DC from. He received his Bachelor of Science degree in Business Management & Computer Science from the University of Maryland.
Benjamin M. Kemper became the Company’s CFO in August 2017. Mr. Kemper has been the Chief Financial Officer of Teamtronics Inc. since September 2016. Teamtronics manufactures rugged computers and electronic equipment mainly used in the Gas and oil industry. Prior to joining Teamtronics, Mr. Kemper was the Director of Finance of Beijer Electronics, and Director of Finance for Micronet Inc. from 2013-2016. Beijer mobile business was acquired by Micronet Inc. in 2014. Micronet, a division of a publicly traded entity on NASDAQ and TASE, designs and manufactures rugged computers and tablets for fleet management and mobile workforce needs. As such, Mr. Kemper was responsible for coordinating consolidated reporting procedures and for assuring accuracy under US GAAP. Mr. Kemper also led and directed financial aspects of certain M&A projects. From March 2012 to July 2013, Mr. Kemper was the District Financial Director for Flint Energy Services Inc. where he was responsible for cost analysis, financial reporting, forecasting and bidding and budgeting for projects, as well as other financial responsibilities.
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Andrew J. MacMillan became a director of the Company in April 2018. He is a corporate communications professional with 20 years of corporate communications experience in the global securities industry, plus 18 years of direct investment banking and related experience. He was a director of NTS, Inc. since December 20, 2012 and since December 27, 2012 served as the Chairman of its Nominating and Corporate Governance Committee until NTS’ sale to a private equity firm in June 2014. Since 2010, Mr. MacMillan has served as an independent management consultant providing marketing and communications advisory to clients. Prior to that from 2007 until 2010, Mr. MacMillan served as Director, Global Communications & Marketing of AXA Rosenberg, a leading equity asset management firm. Prior to that, Mr. MacMillan served in a variety of corporate communication roles including Senior Vice President of Corporate Communications & Government Affairs at Ameriprise Financial, Head of Corporate Communications (Americas) at Barclays Capital, Senior Vice President of Corporate Communications of The Nasdaq Stock Market and Director of Corporate Communications at Credit Suisse First Boston. Mr. MacMillan previously served as an investment banker, acquisition officer, and consultant directly involved with capital raising, acquisitions, and financial feasibility studies. Mr. MacMillan holds a BS in Industrial Engineering from the University of Iowa and a Masters in Business Administration from Harvard.
Neev Nissenson became a director of the Company in April 2018. He is an experienced entrepreneur and financial officer. In 2015, Mr. Nissenson founded Hotwine, Inc., a California based wine startup company, and has been serving as its Chief Executive Officer since then. Since August 2016, Mr. Nissenson has been serving as the Chief Financial Officer of Hypnocore, Ltd., an Israeli based startup company that develops mobile applications for sleep monitoring and therapy. During 2011 to 2015, Mr. Nissenson was the Chief Financial Officer of GMW, Inc., a high-end wine retailer from Napa, California. Before that, Mr. Nissenson served as the Vice President from 2006 to 2011 and the Chief Financial Officer from 2009 to 2011 at Phoenix International Ventures, Inc., an aerospace defense company. Mr. Nissenson was also a member of the Municipal Committee for Business from 2004 to 2007 and a member of Municipal Committee for Street Naming from 2005 to 2007 in the City of Herzliya, Israel. He is also an armored platoon commander in the Israeli Defense Forces (Reserve) Armored Corps with a rank of Captain. Mr. Nissenson graduated from Tel Aviv University in 2005 with a B.A. majoring in General History and Political Science. In 2007, he graduated from the Hebrew University with an Executive Master’s degree in Business Administration specializing in Integrative Management.
Yaron Shalem became a director of the Company in April 2018. He has extensive experience in financial and business management. Mr. Shalem has served as the Chief Financial Officer at Singulariteam VC since April 2014. He also worked as the Chief Financial Officer at Mobli Media Inc. from January 2014 to December 2016. Mr. Shalem’s experience also includes serving as the Chief Financial Officer of TAT Technologies Ltd., a NASDAQ listing company, from April 2008 to December 2013. Mr. Shalem is a CPA in Israel. He received his B.A. in Economy & Accounting from Tel Aviv University in 1999 and an MBA degree from Bar-Ilan University 2004.
ITEM 11. EXECUTIVE COMPENSATION
The table below shows the compensation for services in all capacities we paid during the years ended December 31, 2017 and 2016 to the individuals serving as our principal executive officers during the last completed fiscal year and our other two most highly paid executive officers at the end of the last completed fiscal year (whom we refer to collectively as our “named executive officers”);
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards | Option Awards(2) | All
Other Compensation | Total | |||||||||||||||||||||
| Shai Lustgarten(1) | 2017 | 193,346 | 241,037 | 434,383 | ||||||||||||||||||||||||
| Benjamin Kemper (2) | 2017 | 40,500 | 20,000 | 71,185 | 131,685 | |||||||||||||||||||||||
| Gilles Gaudreault (3) | 2016 | 128,087 | - | - | - | - | 128,087 | |||||||||||||||||||||
| Chief Executive Officer (Principal Executive Officer through September 30, 2016) | ||||||||||||||||||||||||||||
| Joey Trombino(4) | 2016 | 57,156 | 5,000 | 48,498 | 27,750 | 138,404 | ||||||||||||||||||||||
| Chief Financial Officer | 2017 | 87,850 | 8,400 | 52,030 | 148,280 | |||||||||||||||||||||||
| Scot Ross(5) | 2016 | 103,846 | - | - | - | 170,192 | 274,038 | |||||||||||||||||||||
| Chief Financial Officer | 2017 | 235,835 | 92,408 | 328,243 | ||||||||||||||||||||||||
| Jason Griffith | 108,000 | 108,000 | ||||||||||||||||||||||||||
| Executive Vice President of Corporate Development & Investor Relations | ||||||||||||||||||||||||||||
| George Zicman | 2016 | 260,919 | 100,000 | - | - | - | 360,919 | |||||||||||||||||||||
| 2017 | 335,830 | 335,830 | ||||||||||||||||||||||||||
| Thomas O. Miller | 2016 | 160,000 | - | - | - | - | 160,000 | |||||||||||||||||||||
| President and Chairman of the Board (Principal Executive Officer from May 1, 2015 through April 1, 2017) | 2017 | 43,076 | 18,994 | 62,070 | ||||||||||||||||||||||||
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| (1) | Mr. Lustgarten began his employment as the Company’s CEO on April 1, 2017. | |
| (2) | Mr. Kemper began his employment as the Company’s CFO on August 21, 2017. | |
| (3) | Effective September 30, 2016, Mr. Gaudreault resigned from the Company as part of the divestiture of Quest Solution Canada Inc. | |
| (4) | Mr. Trombino began his employment with the Company on May 2, 2016. Mr. Trombino resigned on August 21, 2017. | |
| (5) | On July 31, 2016 Mr. Ross and the Company entered into a Separation Agreement whereby his employment contract was terminated. The Separation Agreement included a severance of $165,000 which is payable over 22 equal bi-weekly installments. The total severance and the amounts relating to his car allowance are included in the column entitled “All Other Compensation”. |
| Director Compensation | ||||||||||||||||||||||||||||
| Name | Fees Earned or Paid in Cash ($) | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Nonqualified Deferred Compensation | All
Other Compensation | Total | |||||||||||||||||||||
| William Austin Lewis, IV(1) | 48,000 | 9,600 | - | - | - | - | 57,600 | |||||||||||||||||||||
| Neev Nissenson | 9,000 | 40,596 | 49,596 | |||||||||||||||||||||||||
| Andrew MacMillan | 9,000 | 40,596 | 49,596 | |||||||||||||||||||||||||
| Yaron Shalem | 9,000 | 40,596 | 49,596 | |||||||||||||||||||||||||
1 - Mr. Lewis became a member of the Board in July 2015 and resigned on April 18, 2017.
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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Each of the employment agreements for our named executive officers generally provides that in the event of termination of such executive’s employment for any reason, or if the executive resigns, the Company is required pay certain separation benefits, including (i) unpaid annual salary earned through the termination date; (ii) unused vacation; (iii) accrued and unpaid expenses; and (iv) other vested and accrued benefits to which he is entitled under the Company’s employee benefit plan. In the event the executive voluntarily resigns for “good reason” (as defined in each executive’s respective Employment Agreement) or the Company terminates their employment for any reason other than for cause (as defined in each executive’s respective Employment Agreement), the Company will be required to pay certain termination benefits, including (i) a lump sum payment equal to the greater of (A) unpaid annual salary through the end of the Initial Term or Renewal Term (as those terms are defined in each executive’s respective Employment Agreement) or (B) two years of annual salary and (ii) COBRA reimbursement.
CORPORATE GOVERNANCE
Board Leadership Structure and Risk Oversight
Our Board currently consists of four members, Shai Lustgarten, Andrew J. MacMillan, Neev Nissenson and Yaron Shalem. Mr. Lustgarten also serves as our Chief Executive Officer. William Austin Lewis resigned from the Board in April 2017. Thomas O. Miller resigned from the Board in July 2017.
One of the key functions of our Board is to provide oversight of our risk management process. Our Board administers this oversight function directly, with support from its three standing committees—the Audit Committee, the Compensation Committee, and the Corporate Governance/Nominating Committee.
Director Independence
Pursuant to Item 407(a)(1)(ii) of Regulation S-K promulgated under the Securities Act, we have adopted the definition of “independent director” as set forth in Rules 5000(a)(19) and 5605(a)(2) of the rules of the Nasdaq Stock Market. The Board determined that Andrew J. MacMillan, Neev Nissenson and Yaron Shalem qualify as “independent directors” pursuant to such rules.
Meetings
Our Board of Directors met three times during 2017. Each member of our Board of Directors attended 100% of the total number of meetings of our Board and its committees on which he served during 2017.
Board Committees
We have three standing committees: the Audit Committee, the Compensation Committee, and the Corporate Governance/Nominating Committee. The members of the Audit Committee, Compensation Committee and Corporate Governance/Nominating Committee are deemed to be “independent” pursuant to the Nasdaq listing standards and applicable SEC rules. We believe that all members of our Board of Directors have been and remain qualified to serve on the committees of our Board and have the experience and knowledge to perform the duties required of the committees.
Audit Committee
The Audit Committee consists of Yaron Shalem and Neev Nissenson, whereby Mr. Shalem is the Chairman. Our Board has determined that Mr. Shalem qualifies as an “audit committee financial expert,” as defined under the rules of the SEC.
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The primary responsibility of the Audit Committee is to oversee the Company’s financial reporting process on behalf of the Board and report the results of their activities to the Board. The Audit Committee’s responsibilities include providing assistance to the Board in fulfilling the Board’s oversight responsibility relating to:
| ● | the integrity of the Company’s financial statements and the related public reports, | |
| ● | disclosures and regulatory filings in which they appear; | |
| ● | the systems of internal control over financial reporting, operations, and legal/regulatory compliance; | |
| ● | the performance, qualifications and independence of the Company’s independent accountants; | |
| ● | the performance, qualifications and independence of the Company’s internal audit function, and | |
| ● | compliance with the Company’s ethics policies and applicable legal and regulatory requirements. |
Our Audit Committee charter is available on the “About” subpage of our website (www.questsolution.com) under the link “Corporate Governance”.
Compensation Committee
The Compensation Committee consists of Andrew J. MacMillan, Shai Lustgarten and Yaron Shalem. Mr. MacMillan is the Chairman.
The Compensation Committee’s responsibilities include, among others:
| ● | approve annually the corporate goals and objectives applicable to the compensation of the Chief Executive Officer and/or President, evaluate at least annually the Chief Executive Officer’s and/or President’s performance in light of those goals and objectives, and determine and approve the Chief Executive Officer’s and/or President’s compensation level based on this evaluation; | |
| ● | review matters relating to executive succession and management development; | |
| ● | formulate, evaluate, and approve compensation for the Company’s officers; | |
| ● | formulate, evaluate, and approve cash incentives and deferred compensation plans for executives; | |
| ● | formulate, approve, and administer and, when appropriate, recommend to the Board for approval, incentive compensation plans and equity-based plans; and | |
| ● | approve employment contracts, severance agreements, change in control provisions, and other compensatory arrangements with Company executives. |
The Compensation Committee has the authority, in its sole discretion, to select, retain and obtain the advice of a compensation consultant as necessary to assist with the execution of its duties and responsibilities.
Our Compensation Committee charter is available on the “About” subpage of our website (www.questsolution.com) under the link “Corporate Governance”.
Corporate Governance/Nominating Committee
The Corporate Governance/Nominating Committee consists of Andrew J. MacMillan, Yaron Shalem and Shai S. Lustgarten, whereby Shai Lustgarten is the Chairman.
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The Corporate Governance/Nominating Committee’s responsibilities include, among others:
| ● | develop and oversee the Company’s corporate governance practices and procedures, including identifying best practices and reviewing and recommending to the Board for approval any changes to the documents, policies and procedures in the Company’s corporate governance framework; |
| ● | establish procedures for the director nomination and to determine the qualifications, qualities, skills, and other expertise required to be a director and to develop, and recommend to the Board for its approval, criteria to be considered in selecting nominees for director; | |
| ● | identify and screen individuals qualified to become members of the Board, consistent with the above criteria, considering any director candidates recommended by the Company’s stockholders; | |
| ● | oversee a process for an annual evaluation of the Company’s Chief Executive Officer and/or President; and | |
| ● | develop and oversee a process for an annual evaluation of the Board and its committees, including a formal assessment of each individual director. |
Our Corporate Governance/Nominating Committee charter is available on the “About” subpage of our website (www.questsolution.com) under the link “Corporate Governance”.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of our Common Stock as of May 7, 2018: (i) by each of our directors; (ii) by each of our executive officers; (iii) by our executive officers and directors as a group, and (iv) by each person or entity known by us to beneficially own 5% or more of any class of our common stock. As of May 7, 2018, there were 39,673,631 shares of our common stock outstanding.
| Name
and Address of Beneficial Owner (1) |
Amount of Beneficial Ownership | Percentage of Shares Outstanding | ||||||
| Shai Lustgarten (Chairman and CEO) (1) | 5,921,000 | 14.92 | % | |||||
| Benjamin Kemper (2) | 1,000,000 | 2.52 | % | |||||
| Andrew MacMillan (3) | 900,000 | 2.26 | % | |||||
| Yaron Shalem (3) | 900,000 | 2.26 | % | |||||
| Neev Nissenson (3) | 900,000 | 2.26 | % | |||||
| Jason Griffith (4) | 10,047,367 | 25.33 | % | |||||
| David Marin (5) | 6,294,500 | 15.86 | % | |||||
| All Executive Officers and Directors as a group (5 individuals) | 9,621,000 | 24.25 | % | |||||
| (1) | Include 4,281,000 shares issuable upon the exercise of options. | |
| (2) | Includes 500,000 shares issuable upon the exercise of options. | |
| (3) | Represents shares issuable upon exercise of options. | |
| (4) | Includes 9,433,669 shares issuable upon conversion of Preferred Stock and Convertible promissory notes. | |
| (5) | Includes 5,939,750 shares issuable upon the conversion of Preferred Stock and the exercise of Warrants. |
Messrs. Griffith and Marin have entered into voting proxy agreements whereby they have granted Shai Lustgarten the power to vote their shares of voting capital stock. In addition Kurt Thomet and George Zicman have entered into similar agreements giving Mr. Lustgarten the right to vote their shares of voting capital stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
2016
On June 17, 2016, the Company entered into a Promissory Note Conversion Agreement with Thomas O Miller whereby $202,530 note payable comprising of capital and interest was converted into 202,530 shares of Series C Preferred Stock.
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On June 17, 2016, the Company entered into a Promissory Note Conversion Agreement with George Zicman whereby $684,000 of the promissory note was converted into 684,000 shares of Series C Preferred Stock. In addition, the Company entered into a Stock Redemption Agreement with George Zicman whereby it redeemed 1,000,000 restricted common stock in exchange for 357,000 shares of Series C preferred stock.
On June 17, 2016, the Company entered into Promissory Note Conversion Agreement with Viascan Group Inc. whereby entire balance due at date which amounted to $1,049,250 comprising of capital and interest was converted into 1,049,250 shares of Series C Preferred Stock. Effective September 30, 2016, the entire balance of the 1,049,250 shares of Series C Preferred Stock were redeemed by the Company as part of the divestiture of Quest Solution Canada Inc.
On June 17, 2016, the Company entered into Promissory Note Conversion Agreement with Jason F. Griffith whereby $1,800,000 of the promissory note was converted into 1,800,000 shares of Series C Preferred Stock.
On July 31, 2016 as part of the Separation Agreement with Mr. Ross, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,000 shares of restricted common stock. In addition, the Company issued 100,000 shares of Series C preferred stock pursuant to the same Separation Agreement in exchange for the redemption of 42,500 restricted common shares.
In December 2016, the Company issued 708,000 common shares to Joey Trombino, the Chief Financial Officer as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $48,498.
The Company leased a building from the former owner of BCS for $9,000 per month, which is believed to be the current fair market value of similar buildings in the area. These amounts are included in the lease disclosure schedule, Footnote 10 of our Annual Report on Form 10-K for the year ended December 31, 2017. The lease was terminated effective April 18, 2018.
2017
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 of 12 months in 4 quarterly and equal installments, subject to Mr. Nissensohn’s continuous 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 |
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| ● | In addition to the above, Mr. Nissensohn will be entitled to a $ 50,000 onetime payment which shall be paid on the 1st day 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 September 8, 2017, Quest Solution, Inc.(the “Company”) approved the Company entering into a consulting agreement (the “Consulting Agreement”) with YES IF (the “Consultant”), an entity controlled by Jason Griffith, the Company’s former Chief Executive Officer and a principal stockholder. The Consultant shall provide the Company and its controlled entities with certain business development, managerial, measures to improve efficiency and cost savings and financial services in accordance with the terms and conditions of the Consulting Agreement. In exchange for its consulting services, the Consultant will receive a monthly fee of $10,000 for the months of September through December 2017, $15,000 per month for the months of January through June 2018 and $20,000 per month for the months of July 2018 through August 2019. As the former CEO of the Company, the Company believes that the Consultant will be extremely beneficial to the Company in connection with its recently announced business restructuring efforts.
On September 8, 2017, the Company entered into a voting agreement with Jason Griffith pursuant to which Mr. Griffith agreed to vote any shares beneficially owned by him in accordance with the instructions of Shai Lustgarten, the Company’s Chief Executive Officer. The voting proxy does not include any matters involving the creation of a new or cancellation of an existing class of stock, a reverse split (except in connection with an uplisting of the Company’s common stock on a National Exchange), dividend of stock or any change of control to the Company.
On September 8, 2017, the Company entered into a voting agreement with Jason Griffith, whereby he committed to vote any shares beneficially owned by him in accordance with the instructions of Shai Lustgarten, the Company’s CEO. The Voting Agreement could result in a change of control of the Company.
On February 28, 2018, the Company entered into two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”). Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11,000,000 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 $1,800,000 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. The effective date of the agreement is December 30, 2017.
On February 28, 2018, the Company entered into an additional settlement agreement with the Marins (the “Marin Settlement Agreement II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 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.
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On February 28, 2018, the Company entered into a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5,437,136.40 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 $1,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource (currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of 500,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions as described above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30, 2017.
On February 28, 2018, the Company entered into a settlement agreement with Goerge 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 $1,800,000 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 and also agreed to a leakout restriction whereby they each agreed not to sell more than 10% of the common stock beneficially owned during any 30-day period.
On February 26, 2018, the Company entered into a lease termination agreement with David and Kathy Marin whereby it cancelled the lease for the premises located at 12272 Monarch St., Garden Grove, California effective as of April 20, 2018.
Certain conflicts of interest exist and may continue to exist between the Company and its officers and directors due to the fact that each has other business interests to which they devote significant attention. Each officer and director may continue to do so notwithstanding the fact that management time should be devoted to the business of the Company.
Certain conflicts of interest may exist between the Company and its management, and conflicts may develop in the future. The Company has not established policies or procedures for the resolution of current or potential conflicts of interest between the Company, its officers and directors or affiliated entities. There can be no assurance that management will resolve all conflicts of interest in favor of the Company, and conflicts of interest may arise that can be resolved only through the exercise by management their best judgment as may be consistent with their fiduciary duties. Management will try to resolve conflicts to the best advantage of all concerned.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our Board is directly responsible for the appointment, compensation, and oversight of our independent auditor. It is the policy of our Board to pre-approve all audit and non-audit services provided by our independent registered public accountants. Our Board has considered whether the provision by RBSM, LLP of services of the varieties described below is compatible with maintaining the independence of RBSM, LLP. Our Board believes the RBSM, LLP only provided audit services. We use another firm to provide tax compliance.
The table below sets forth the aggregate fees we paid to RBSM, LLP for audit and non-audit services provided to us in 2017 and 2016.
| Fiscal Year Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Audit fees | $ | 139,000 | $ | 102,757 | ||||
| Audit related fees | - | - | ||||||
| Tax fees | - | - | ||||||
| All other fees | - | - | ||||||
| Totals | $ | 139,000 | $ | 102,757 | ||||
In the above table, in accordance with the SEC’s definitions and rules, “audit fees” are fees for professional services for the audit of a company’s financial statements included in the annual report on Form 10-K, for the review of a company’s financial statements included in the quarterly reports on Form 10-Q, and for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements; “audit-related fees” are fees for assurance and related services that are reasonably related to the performance of the audit or review of a company’s financial statements; “tax fees” are fees for tax compliance, tax advice, and tax planning; and “all other fees” are fees for any services not included in the first three categories.
Our policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services may include audit services, audit-related services, tax services and other services. Under our Audit Committee’s policy, pre-approval is generally provided for particular services or categories of services, including planned services, project-based services and routine consultations. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. Our Audit Committee approved all services that our independent accountants provided to us in the past two fiscal years.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission this Annual Report on Form 10-K including exhibits. You may read and copy all or any portion of any reports, statements or other information in the files at Commission’s Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.
You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. The Company’s filings, including this Annual Report on Form 10-K, will also be available to you on the website maintained by the Commission at http://www.sec.gov.
The Company’s website is located at http://www.QuestSolution.com. The Company’s website and the information to be contained on that site, or connected to that site, are not part of or incorporated by reference into this filing.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) The following documents are filed under pages F-1 through F-26 and are included as part of this Form 10-K:
(a)(2) Financial statement schedules are omitted as they are not applicable.
(a)(3) Exhibits required by Item 601 of Regulation S-K are incorporated herein by reference and are listed on the attached Exhibit Index, which begins immediately following the financial statements of this Annual Report on Form 10-K.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 7, 2018
| QUEST SOLUTION, INC. | ||
| By: | /s/ Shai Lustgarten | |
| Shai Lustgarten | ||
| Chairman of the Board | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Shai Lustgarten | Director, Chairman of the Board | May 7, 2018 | ||
| Shai Lustgarten | ||||
| /s/ Yaron Shalem, IV | Director | May 7, 2018 | ||
| Yaron Shalem, IV | ||||
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QUEST SOLUTION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Quest Solution, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quest Solution, Inc. (the “Company”), as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2017 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, has an accumulated deficit and has stated that substantial doubt exists about Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans in regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ RBSM, LLP |
RBSM, LLP
We have served as the Company’s auditor since 2015
Larkspur, CA
May 7, 2018
| F-1 |
QUEST SOLUTION, INC.
Year Ended December 31, |
||||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 24,634 | $ | 289,480 | ||||
| Cash, restricted | 684,610 | 665,220 | ||||||
| Accounts receivable, net | 6,387,734 | 10,589,677 | ||||||
| Inventory | 439,720 | 531,593 | ||||||
| Prepaid expenses | 476,840 | 272,926 | ||||||
| Other current assets | 126,187 | 772,966 | ||||||
| Total current assets | 8,139,725 | 13,121,862 | ||||||
| Fixed assets, net of accumulated depreciation of $3,285,245 and $3,224,022, respectively | 92,803 | 136,835 | ||||||
| Goodwill | 10,114,164 | 10,114,164 | ||||||
| Trade name | 2,359,481 | 2,936,481 | ||||||
| Customer relationships | 5,310,938 | 6,435,652 | ||||||
| Other assets | 39,512 | 47,563 | ||||||
| Total assets | $ | 26,056,623 | $ | 32,792,557 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 13,239,810 | $ | 10,566,066 | ||||
| Accrued interest and accrued liabilities, related party | 38,430 | - | ||||||
| Line of credit | 3,667,417 | 5,059,292 | ||||||
| Advances, related party | - | 100,000 | ||||||
| Accrued payroll and sales tax | 1,531,233 | 1,829,934 | ||||||
| Deferred revenue, net | 761,194 | 879,026 | ||||||
| Current portion of note payable | 3,429,025 | 9,782,925 | ||||||
| Notes payable, related parties | 106,500 | - | ||||||
| Other current liabilities | 121,117 | 227,932 | ||||||
| Total current liabilities | 22,894,726 | 28,445,175 | ||||||
| Long term liabilities | ||||||||
| Note payable, related party, | 3,222,900 | 17,515,345 | ||||||
| Accrued interest and accrued liabilities, related party | 165,014 | 629,238 | ||||||
| Long term portion of note payable | 130,294 | 130,294 | ||||||
| Deferred revenue, net | 452,024 | 565,423 | ||||||
| Other long term liabilities | 439,833 | 332,270 | ||||||
| Total liabilities | 27,304,791 | 47,617,745 | ||||||
| Stockholders’ deficit | ||||||||
| Series A Preferred stock; $0.001 par value; 1,000,000 shares designated, 0 shares issued and outstanding as of December 31, 2017 and 2016, respectively. | - | - | ||||||
| Series B Preferred stock; $0.001 par value; 1 share designated, 0 shares and 0 share issued and outstanding as of December 31, 2017 and 2016, respectively. | - | - | ||||||
| Series C Preferred stock; $0.001 par value; 15,000,000 shares designated, 4,828,530 and 3,143,530 shares issued and outstanding as of December 31, 2017 and 2016, respectively, liquidation preference of $1 per share and a cumulative dividend of $0.06 per share. | 4,829 | 3,144 | ||||||
| Common stock; $0.001 par value; 100,000,000 shares authorized; 36,828,371 and 35,095,763 shares issued and outstanding of December 31, 2017 and 2016 respectively. | 36,828 | 35,095 | ||||||
| Common stock to be repurchased by the Company | (230,490 | ) | (230,490 | ) | ||||
| Warrants paid-in capital | 120,000 | - | ||||||
| Additional paid-in capital | 34,375,659 | 18,302,262 | ||||||
| Accumulated (deficit) | (35,554,994 | ) | (32,935,199 | ) | ||||
| Total stockholders’ deficit | (1,248,168 | ) | (14,825,188 | ) | ||||
| Total liabilities and stockholders’ equity deficit | $ | 26,056,623 | $ | 32,792,557 | ||||
The accompanying notes are integral to these consolidated financial statements.
| F-2 |
QUEST SOLUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Revenues | ||||||||
| Total Revenues | $ | 54,458,845 | $ | 60,047,124 | ||||
| Cost of goods sold | ||||||||
| Cost of goods sold | 43,089,210 | 47,952,579 | ||||||
| Total cost of goods sold | 43,089,210 | 47,952,579 | ||||||
| Gross profit | 11,369,635 | 12,094,545 | ||||||
| Operating expenses | ||||||||
| General and administrative | 1,858,847 | 2,327,889 | ||||||
| Salary and employee benefits | 7,951,970 | 8,409,223 | ||||||
| Depreciation and amortization | 1,762,937 | 1,792,326 | ||||||
| Professional fees | 674,374 | 754,411 | ||||||
| Total operating expenses | 12,248,128 | 13,283,849 | ||||||
| Loss from operations | (878,493 | ) | (1,189,304 | ) | ||||
| Other income (expenses): | ||||||||
| Write-off of other assets | (10 | ) | (450,000 | ) | ||||
| Gain on extinguishment of other liabilities | - | 150,000 | ||||||
| Interest expense | (1,555,350 | ) | (4,531,263 | ) | ||||
| Restructuring expense | (26,880 | ) | (544,941 | ) | ||||
| Gain on foreign currency | - | 129,589 | ||||||
| Other (expenses) income | 29,558 | 11,001 | ||||||
| Total other expense | (1,552,682 | ) | (5,235,614 | ) | ||||
| Net Loss Before Income Taxes | (2,431,175 | ) | (6,424,918 | ) | ||||
| Provision for Income Taxes | ||||||||
| Current | - | (1,068,352 | ) | |||||
| Total Benefit for Income Taxes | - | (1,068,352 | ) | |||||
| Net loss from continuing operations | $ | (2,431,175 | ) | $ | (7,493,270 | ) | ||
| Net loss from discontinued operations | - | (6,851,875 | ) | |||||
| Net Loss attributable to Quest Solution Inc. | $ | (2,431,175 | ) | $ | (14,345,145 | ) | ||
| Less: Preferred stock – Series C dividend | (289,695 | ) | (101,075 | ) | ||||
| Net loss attributable to the common stockholders | $ | (2,141,480 | ) | $ | (14,244,070 | ) | ||
| Net loss per share - basic | $ | (0.06 | ) | $ | (0.40 | ) | ||
| Net loss per share - diluted | $ | (0.06 | ) | $ | (0.40 | ) | ||
| Net loss per share from continuing operations - basic | $ | (0.06 | ) | $ | (0.21 | ) | ||
| Net loss per share from continuing operations - diluted | $ | (0.06 | ) | $ | (0.21 | ) | ||
| Net loss per share from discontinued operations - basic | $ | - | $ | (0.19 | ) | |||
| Net loss per share from discontinued operations - diluted | $ | - | $ | (0.19 | ) | |||
| Weighted average number of common shares outstanding - basic and diluted | 35,814,751 | 35,947,523 | ||||||
The accompanying notes are integral to these consolidated financial statements.
| F-3 |
QUEST SOLUTION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
| Series C | Additional | Total | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Shares | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Repurchased | Deficit | Equity (deficit) | |||||||||||||||||||||||||
| Balance, December 31, 2015 | - | $ | - | 36,871,478 | $ | 36,871 | $ | 17,948,997 | $ | - | $ | (18,457,236 | ) | $ | (471,368 | ) | ||||||||||||||||
| Board issuances | - | - | 150,000 | 150 | 28,650 | - | - | 28,800 | ||||||||||||||||||||||||
| Options earned | - | - | - | - | 73,128 | - | - | 73,128 | ||||||||||||||||||||||||
| Stock Issuances for cash | - | - | 238,785 | 239 | 19,819 | - | - | 20,058 | ||||||||||||||||||||||||
| Stock Issuances for services | - | - | 878,000 | 878 | 63,869 | - | - | 64,747 | ||||||||||||||||||||||||
| Conversion of Debt to Preferred | 4,525,560 | 4,526 | - | - | 4,350,034 | - | - | 4,354,560 | ||||||||||||||||||||||||
| Conversion of Common to Preferred | 457,000 | 457 | (1,042,500 | ) | (1,043 | ) | - | - | - | (586 | ) | |||||||||||||||||||||
| Stock Issuance Costs | - | - | - | - | (65,448 | ) | - | - | (65,448 | ) | ||||||||||||||||||||||
| Share redemption | - | - | (1,650,000 | ) | (1,650 | ) | (747,707 | ) | - | - | (749,357 | ) | ||||||||||||||||||||
| Share redemption for note payable | - | - | (350,000 | ) | (350 | ) | (59,150 | ) | - | - | (59,500 | ) | ||||||||||||||||||||
| Debt Forgiveness | - | - | - | - | 575,000 | - | - | 575,000 | ||||||||||||||||||||||||
| Shares to be repurchased | - | - | - | - | - | (230,490 | ) | - | (230,490 | ) | ||||||||||||||||||||||
| Dividend on Class C Shares | - | - | - | - | 84,260 | - | (132,818 | ) | (48,558 | ) | ||||||||||||||||||||||
| Divestiture of Quest Solution Canada Inc. | (1,839,030 | ) | (1,839 | ) | - | - | (3,969,190 | ) | - | - | (3,971,029 | ) | ||||||||||||||||||||
| Net loss from continuing operations | - | - | - | - | - | - | (7,493,270 | ) | (7,493,270 | ) | ||||||||||||||||||||||
| Net (loss) income continuing ops | - | - | - | - | - | - | (6,851,875 | ) | (6,851,875 | ) | ||||||||||||||||||||||
| Balance, December 31, 2016 | 3,143,530 | $ | 3,144 | 35,095,763 | $ | 35,095 | $ | 18,302,262 | $ | (230,490 | ) | $ | (32,935,199 | ) | $ | (14,825,188 | ) | |||||||||||||||
| Board Issuances | - | - | 87,500 | 88 | 8,093 | - | - | 8,181 | ||||||||||||||||||||||||
| Dividend on Class C Shares | - | - | - | - | - | - | (188,620 | ) | (188,620 | ) | ||||||||||||||||||||||
| ESPP Stock Issuance | - | - | 335,108 | 335 | 26,871 | - | - | 27,206 | ||||||||||||||||||||||||
| Stock-based compensation – options and warrants | - | - | - | - | 686,164 | - | - | 686,164 | ||||||||||||||||||||||||
| Stock Based Compensation | - | - | 710,000 | 710 | 55,690 | - | - | 56,400 | ||||||||||||||||||||||||
| Debt Settlements | 1,685,000 | 1,685 | 600,000 | 600 | 15,416,579 | - | - | 15,418,864 | ||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | - | (2,431,175 | ) | (2,431,175 | ) | ||||||||||||||||||||||
| Balance, December 31, 2017 | 4,828,530 | $ | 4,829 | 36,828,371 | $ | 36,828 | $ | 34,495,659 | $ | (230,490 | ) | $ | (35,554,994 | ) | $ | (1,248,168 | ) | |||||||||||||||
The accompanying notes are integral to these consolidated financial statements.
| F-4 |
QUEST SOLUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ending | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from continuing operating activities: | ||||||||
| Net loss | $ | (2,431,175 | ) | $ | (7,493,270 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Restructuring expenses | 26,880 | 544,941 | ||||||
| Stock based compensation | 750,745 | 374,451 | ||||||
| Debt discount accretion | - | 2,135,298 | ||||||
| Depreciation and amortization | 1,762,937 | 1,792,326 | ||||||
| Write-off of other assets | 117,526 | 450,000 | ||||||
| Gain on extinguishment of other liabilities | - | (150,000 | ) | |||||
| Deferred income taxes (recovery) | - | 769,633 | ||||||
| Unrealized foreign exchange loss | - | 42,875 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) / decrease in accounts receivable | 4,201,943 | (2,686,339 | ) | |||||
| (Increase) / decrease in prepaid | (203,914 | ) | 68,421 | |||||
| (Increase) in inventory | (25,653 | ) | (60,114 | ) | ||||
| Increase in accounts payable and accrued liabilities | 2,673,744 | 8,881,651 | ||||||
| Increase in accrued interest and accrued liabilities, related party | 707,125 | 574,379 | ||||||
| Increase / (decrease) in deferred revenue, net | (231,231 | ) | 225,258 | |||||
| Increase / (decrease) in accrued payroll and sales taxes payable | (325,581 | ) | 47,122 | |||||
| (Increase) / decrease in other assets | 654,830 | 151,020 | ||||||
| (Decrease) in other liabilities | (187,872 | ) | (14,973 | ) | ||||
| Net cash provided by operating activities | 7,490,304 | 5,652,679 | ||||||
| Cash flows from investing activities: | ||||||||
| Cash from divestiture of Quest Solution Canada Inc. | - | 576,592 | ||||||
| (Increase) / decrease in restricted cash | (19,390 | ) | 25,630 | |||||
| Purchase of property and equipment | (17,191 | ) | (17,314 | ) | ||||
| Net cash (used in) provided by investing activities | (36,581 | ) | 584,908 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from shares sold | 27,206 | 20,058 | ||||||
| Share issuance expenses | - | (65,448 | ) | |||||
| Increase in notes funding | - | 130,238 | ||||||
| Proceeds (payments) from line of credit | (1,391,875 | ) | 2,098,950 | |||||
| Redemption of shares | - | (750,000 | ) | |||||
| Payment of notes/loans payable | (6,353,900 | ) | (3,610,222 | ) | ||||
| Net cash used in financing activities | (7,718,568 | ) | (2,176,424 | ) | ||||
| Cash used in discontinued operations | - | (4,595,074 | ) | |||||
| Net (decrease) in cash | (264,846 | ) | (533,911 | ) | ||||
| Cash, beginning of year | 289,480 | 823,391 | ||||||
| Cash, end of year | $ | 24,634 | $ | 289,480 | ||||
| Cash paid for interest | $ | 692,358 | $ | 1,029,414 | ||||
| Cash paid for taxes | $ | (19,848 | ) | $ | 399,037 | |||
| Supplementary for non-cash flow information: | ||||||||
| Stock issued for services | $ | 750,745 | $ | 64,747 | ||||
| Conversion of common to preferred | $ | - | $ | 357,000 | ||||
| Share redemption for note payable | $ | - | $ | 59,500 | ||||
| Shares to be repurchased | $ | (230,490 | ) | $ | (230,490 | ) | ||
| Equity Issued for advance, related party | $ | 100,000 | $ | - | ||||
| Conversion of debt and accrued interest to equity, related parties | $ | 15,418,864 | $ | 4,354,560 | ||||
The accompanying notes are integral to these consolidated financial statements.
| F-5 |
QUEST SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017 and 2016
NOTE 1 – HISTORY AND ORGANIZATION OF THE COMPANY
Quest Solution, Inc., a Delaware corporation (“Quest” or the “Company”), was incorporated in 1973. Prior to 2008, the Company was involved in various unrelated business activities. From 2008-2014 the Company was involved in multiple businesses inclusive of an oil and gas investment company. Due to changes in market conditions, management determined to look for acquisitions which were positive cash flow and would provide immediate shareholder value. In January 2014, the first such acquisition was completed of Quest Marketing Inc. (dba Quest Solution, Inc.) (“Quest Marketing”).
Quest is a national mobility systems integrator with a focus on design, delivery, deployment and support of fully integrated mobile solutions. The Company takes a consultative approach by offering end to end solutions that include hardware, software, communications and full lifecycle management services. The professionals simplify the integration process and deliver the solutions to our customers. Motorola, Intermec, Honeywell, Panasonic, AirWatch, Wavelink, SOTI and Zebra are major suppliers which Quest Solution uses in the solutions we provide to our customers.
The Company’s business strategy developed into leveraging management’s relationships in the business world for investments for the Company. The company intends to continue with its acquisition of existing companies with revenues and positive cash flow.
History
In May 2014, the Board of Directors voted to get approval from the shareholders of the Company for a name change from Amerigo Energy, Inc. to Quest Solution, Inc. The Company received the approval from a majority of its stockholders and filed the amendment to its Articles of Incorporation with the State of Delaware. The name change became effective by the State of Delaware on May 30, 2014. The Company also requested a new stock symbol as a result of the name change and we assigned our new trading symbol “QUES”.
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. On December 31, 2016, the Company merged BCS in Quest Marketing to form one US legal entity as part of its streamlining efforts.
| F-6 |
Effective October 1, 2015, the Company acquired the interest in ViascanQdata, Inc., (“Viascan”) a Canadian based operation in the same business line as Quest and their CEO, Gilles Gaudreault, was appointed the CEO of Quest, with our then CEO, Tom Miller, remaining as President and Chairman of the Board. During the 2016 fiscal year, Viascan changed its corporate name to Quest Solution Canada Inc.
Divesture of Canadian Operations
Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the consideration received was $1.0 million in cash of which $576,592 was received at closing and the balance is required to be paid before April 30, 2017. In addition, the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stock of the Company, as well as the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd., a wholly owned subsidiary of the Company, redeemed 5,200,000 exchangeable shares as part of the divestiture.
Additionally, as part of the transaction, Viascan Group Inc., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction included:
| ● | Full release from five employment contracts, inclusive of the former CEO, Gilles Gaudreault. This release included cancelation of the contracts as well as the deferred salary and signing bonus provisions which would have inured to the employee. | |
| ● | The Company is canceled the intercompany debts of approximately $7.0 million as well. The Company will also receive a contingent consideration of 15% of the net value proceeds, up to a maximum of $2.3 million, received upon a liquidity event or a change of control of Quest Solution Canada Inc. for a period of 7 years subsequent to the transaction. | |
| ● | The Company also negotiated a right of first refusal for any offer to purchase Quest Solution Canada Inc. for a 7 year period. | |
| ● | The assets sold consisted primarily of accounts receivable, inventories, property and equipment, and other assets. The buyer also assumed certain accounts payable and accrued liabilities. |
The operations of Quest Solution Canada Inc. have been classified as a discontinued operation and the assets and liabilities of Quest Solution Canada Inc. have been classified as held for disposal.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of December 31, 2017, the Company had a working capital deficit of $14,755,001 and an accumulated deficit of $35,554,994. 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), 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 finalized in December of 2017. See “Business – Recent Events”. 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-7 |
NOTE 3 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Quest include the combined accounts of Quest Marketing, BCS, and Quest Exchange Ltd. Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the operations of Quest Solution Canada Inc. have been classified as a discontinued operations. The 2017 financials do not include any information concerning the divestment of Quest Solution Canada Inc., as this divestment occurred prior to 2017 and is not included in the year end consolidated financials for 2017. The Companies currently operate as a single business unit. All material intercompany transactions and accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash consists of petty cash, checking, savings, and money market accounts. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of December 31, 2017 and 2016.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.
The Company has restricted cash on deposit with a federally insured bank in the amount of $684,610 at December 31, 2017 ($665,220 at December 31, 2016). This cash is security and collateral for a corporate credit card agreement with a bank and for deposit against a letter of credit issued for executive life insurance policies owned by the Company.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the consolidated financial statements.
PURCHASE ACCOUNTING AND BUSINESS COMBINATIONS
The Company accounts for its business combinations using the purchase method of accounting which requires that intangible assets be recognized apart from goodwill if they are contractual in nature or separately identifiable. Acquisitions are measured on the fair value of consideration exchanged and, if the consideration given is not cash, measurement is based on the fair value of the consideration given or the fair value of the assets acquired, whichever is more reliably measurable. The excess of cost of an acquired entity over the fair value of identifiable acquired assets and liabilities assumed is allocated to goodwill.
| F-8 |
The valuation and allocation process relies on significant assumptions made by management. In certain situations, the allocations of excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives updated information, including appraisals and other analyses, which are completed within one year of the acquisition. Revisions to the fair values, which may be significant, are recorded when pending information is finalized, within one year from the acquisition date.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at their estimated collectible amounts. The Company provides allowances for uncollectible accounts receivable equal to the estimated collection losses that will be incurred in collection of all receivables. Accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company’s management determines which accounts are past due and if deemed uncollectible, the Company charges off the receivable in the period the determination is made. The Company generally requires no collateral to secure its ordinary accounts receivable. Based on management’s evaluation, accounts receivable has a balance in the allowance for doubtful accounts of $12,501 and $17,701 for the years ended December 31, 2017 and 2016, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at purchased cost and depreciated using both straight-line and accelerated methods over estimated useful lives ranging from 3 to 15 years. Upon disposition of property and equipment, related gains and losses are recorded in the results of operations. Depreciation expense for the years ended December 31, 2017 and 2016 was $61,223 and $90,626, respectively. For federal income tax purposes, depreciation is computed using the modified accelerated cost recovery system. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred.
ADVERTISING
The Company generally expenses marketing and advertising costs as incurred. During 2017 and 2016, the Company spent $188,077 and $337,275, respectively, on marketing, trade show and store front expense and advertising, net of co-operative rebates.
The Company received rebates on advertising from co-operative advertising agreements with several vendors and suppliers. These rebates have been recorded as a reduction to the related advertising and marketing expense.
INVENTORY
Substantially all inventory consists of raw materials and finished goods and are valued based upon first-in first-out (“FIFO”) cost, not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed evaluation of inventory relative to any potential slow moving products or discontinued items as well as the market conditions for the specific inventory items.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
| ● | Level 1 - Quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data. | |
| ● | Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company. |
| F-9 |
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification of assets and liabilities within the three levels of the hierarchy outlined above.
Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain liabilities at fair value on a recurring basis such as our contingent consideration related to business combinations and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the fiscal years ending December 31, 2017 and 2016.
The Company has classified its contingent consideration related to the acquisitions as a Level 3 liability. Revenue and other assumptions used in the calculation require significant management judgment. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis. Based on that assessment, the Company recognized an adjustment of $0 to the actual calculation of the earn-out obligations during each of the fiscal years ended December 31, 2017 and 2016.
As of December 31, 2017, the Company does not have any contingent liabilities.
REVENUE RECOGNITION
Recurring technology and services revenue consists of subscription-based fees, software subscription license fees, software maintenance fees and hosting fees related to the use of our solution to manage our customers’ communications expenses, as well as fees for perpetual software licenses and professional services and products sold.
We recognize revenue when persuasive evidence of an arrangement exists, pricing is fixed and determinable, collection is reasonably assured and delivery or performance of service has occurred. Recurring technology and services subscription-based fees, software subscription license fees, software maintenance fees and hosting fees are recognized ratably over the term of the period of service. The subscription-based services we provide include help desk, staging, carrier activations and provisioning.
Sales revenue is recognized upon the shipment of merchandise to customers. The Company recognizes revenues from software sales when software products are shipped.
Software license fees consist of fees paid for a perpetual license agreement for our technology, which are recognized in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 605, Software Revenue Recognition, as amended.
Professional services related to the implementation of our software products, which we refer to as consulting services, are generally performed on a fixed fee basis under separate service arrangements. Consulting services revenue is recognized as the services are performed by measuring progress towards completion based upon either costs or the achievement of certain milestones.
NET INCOME (LOSS) PER COMMON SHARE
Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic net loss per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted-average number of common shares outstanding for computing basic EPS for the years ended December 31, 2017 and 2016 were 35,814,751 and 35,947,523, 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.
| F-10 |
The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share because such securities have an anti-dilutive impact due to losses reported:
| 2017 | 2016 | |||||||
| Options to purchase common stock | 9,625,000 | 2,644,000 | ||||||
| Convertible preferred stock | 4,828,530 | 3,143,530 | ||||||
| Convertible debentures | - | 2,042,076 | ||||||
| Warrants to purchase common stock | 5,905,000 | 1,405,000 | ||||||
| Common stock subject to repurchase | (507,079 | ) | (507,079 | ) | ||||
| Potential shares excluded from diluted net loss per share | 19,851,451 | 8,727,527 | ||||||
Goodwill and intangible assets
As a result of acquisitions, the Company recorded goodwill and identifiable intangible assets as part of its allocation of the purchase consideration.
Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested 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.
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 2017.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements of the Company are presented in U.S. dollars. The functional currency for the Company is U.S. dollars. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the time of the transaction. All of the Company’s continuing operations are conducted in U.S. dollars. The Company owns a non-operating subsidiary in Canada, from which it has received no revenue since October 1, 2016. Canadian records of the divested Canadian operation were maintained in the local currency and re-measured to the functional currency as follows: monetary assets and liabilities are converted using the balance sheet period-end date exchange rate, while the non-monetary assets and liabilities are converted using the historical exchange rate. Expenses and income items are converted using the weighted average exchange rates for the reporting period. Foreign transaction gains and losses are reported on the consolidated statement of operations and were included in the amount of loss from discontinued operations.
| F-11 |
COMPREHENSIVE INCOME (LOSS)
Comprehensive income/(loss) is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has no items of comprehensive income/loss other than net income/loss in any period presented for continuing operations. Therefore, net loss attributable to common stockholders as presented in the consolidated statements of operations equals comprehensive loss.
INCOME TAXES
The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for consolidated financial reporting purposes and such amounts recognized for tax purposes, and are measured by applying enacted tax rates in effect in years in which the differences are expected to reverse.
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation in accordance with ASC Topic 718 “Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
For non-employee stock-based compensation, we have adopted ASC Topic 505 “Equity-Based Payments to Non-Employees”, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
On December 23, 2015, the Company’s Board of Directors approved the Quest Solution, Inc. Employee Stock Purchase Plan (the “ESPP”), under which 1,900,000 shares of common stock were reserved for the purchase by the Company’s employees. Under the plan, employees may purchase a limited number of shares of the Company’s common stock at a 15% discount from the closing market prices measured on the last days of each month.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2014, the FASB issued ASU 2014-15 requiring management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern, which is currently performed by the external auditors. Management will be required to perform this assessment for both interim and annual reporting periods and must make certain disclosures if it concludes that substantial doubt exists. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016. The adoption of this guidance is not expected to have a material effect on our financial statements.
| F-12 |
In July 2015, the Financial Accounting Standard Board (“FASB”) issued ASU 2015-11 (ASC 330), Simplifying the Measurement of Inventory. This guidance requires companies to measure inventory using the lower of cost and net realizable value. It is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt ASU 2015-11 as of January 1, 2017 on a prospective basis and there is expected to be no impact of this guidance on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. The ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position, thereby simplifying the current guidance that requires an entity to separate deferred assets and liabilities into current and noncurrent amounts. The Company adopted ASU 2015-17 as of January 31, 2017 on a prospective basis. The statement of financial position as of January 31, 2017 reflects the classification of deferred tax assets and liabilities as noncurrent.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S GAAP, the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application required. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of Topic 606 but clarifies the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective for the annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-08 on our consolidated financial statements and results of operations.
| F-13 |
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-15 on our consolidated financial statements and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application to any business development transaction.
In January 2017, the FASB issued ASU No. 2017-04, which eliminates Step 2 from the goodwill impairment test. The goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The amendments should be applied on a prospective basis. For public business entities that are SEC filer with the Securities and Exchange Commission, or the SEC, the amendments are effective for annual or any interim impairment tests in reporting periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
| F-14 |
In May 2017, the FASB issued (ASU) No. 2017-09, which clarifies when an entity should account for a change to the terms or conditions of a share-based payment award as a modification. Under the ASU, modification accounting is required if the fair value, vesting conditions or classification of the award changes because of the change in terms or conditions. The amendments in this update will be applied prospectively to an award modified on or after the effective date. The amendments are effective for reporting periods (interim and annual) beginning after December 15, 2017.
In July 2017, the FASB issued Accounting Standards Update, or ASU, No. 2017-11. The amendments in part I of the ASU change the classification analysis of certain equity-linked financial instruments (or embedded derivatives) with down round features. When determining the classification of an instrument as a liability or as equity, entities will be required to disregard down round features upon the assessment of whether the instrument is indexed to the entity’s own stock. Entities that provide earnings per share, or EPS, data will adjust their basic EPS calculation for the effect of the feature when it is triggered (i.e. upon the occurrence of an event that results in the reduction of the strike price of the related equity-linked financial instrument), and will recognize the effect of the feature within equity. Part II of this guidance replaces the indefinite deferral of certain provisions of ASC Topic 480, distinguishing liabilities from equity, mandatorily redeemable non-controlling interests and mandatorily redeemable financial instruments of non-public entities with a scope exception.
The amendments in part I of the ASU should be applied either retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective or retrospectively for each prior reporting period presented. These amendments are effective for reporting periods (interim and annual) beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective date by one year (ASU 2015-14). This ASU will now be effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); and 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12). The new standard is effective for us beginning January 1, 2018. We are implementing the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. After an analysis on the new standard we have determined that there will be no material effect on the way Quest Solution recognizes revenue with one exception, our Service and Maintenance contract sales. The sales of extended sales and service maintenance contracts is not a material component of our total revenue, however under the guidance in ASC 606 the revenue recognition will be accelerated as there is no material future performance obligation.
Other accounting standards that have been issued by the Financial Accounting Standards Board or other standards-setting bodies are not expected to have a material impact on our financial position, results of operations and cash flows. For period ended December 31, 2017, the adoption of other accounting standards had no material impact on our financial positions, results of operations, or cash flows.
The Company has evaluated other recent pronouncements and believes that none of them will have a material effect on the company’s financial statements.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted. Accounting Standard Codification (ASC) 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment regardless of the effective date of those tax law changes. Certain provisions of the Tax Act are effective September 27, 2017, others are effective or identified as of December 31, 2017 and others are effective after January 1, 2018.
| F-15 |
Given the timing of enactment of the Tax Act and the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period should not extend beyond one year from the Tax Act enactment date and is deemed to have ended when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the registrant is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740, Accounting for Income Taxes, on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. More specifically, SAB 118 summarizes a three-step process to be applied at each reporting period to account for and disclose the tax effects of the Tax Act. The steps are (1) to record the effects of the change in tax law for which accounting is complete; (2) to record provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but for which a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made, to continue to apply ASC 740, Accounting for Income Taxes, based on the tax law in effect prior to enactment of the Tax Act.
Amounts recorded where accounting is complete for the year ended January 1, 2018 primarily relate to the reduction in the U.S. corporate income tax rate to 21 percent. The Company revalued its ending gross deferred tax items, previously recorded at 35 percent, using the enacted 21 percent corporate tax rate. This change resulted in no net tax expense/benefit but did cause a reduction to our U.S. federal deferred tax asset fully offset by a reduction of our valuation allowance.
Effects of tax law changes where a reasonable estimate of the accounting effects cannot yet been made include the one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries earned post 1986. The Company has performed a preliminary earnings and profits analysis with consideration given to foreign loss carryforwards acquired as a result of the Company’s acquisitions and determined on a provisional basis that there should be no income tax effect in the current or any future period. The Company will continue to identify and evaluate data to more thoroughly identify the tax impact and record adjustments, if any, within the measurement period.
NOTE 4 – CONCENTRATIONS
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits. At December 31, 2017 and 2016, the Company’s uninsured cash balance, each totaled $0.
| F-16 |
For the years ended December 31, 2017 and 2016, one customer accounted for 15.7% and 17.3%, respectively, of the Company’s revenues.
Accounts receivable at December 31, 2017 and 2016 are made up of trade receivables due from customers in the ordinary course of business. One customer made up 15.5% and 33.1% of the balance for 2017 and 2016, which represented greater than 10% of accounts receivable at December 31, 2017 and 2016, respectively.
Accounts payable are made up of payable due to vendors in the ordinary course of business at December 31, 2017 and 2016. One vendor made up 71.8% and 76.8% of the balance, which represented greater than 10% of accounts payable at December 31, 2017 and 2016, respectively.
NOTE 5 – DIVESTITURE OF QUEST SOLUTION CANADA INC.
Effective October 1, 2015, the Company completed the purchase of ViascanQdata, a Canadian based company in the same industry of technology, software, and mobile data collection systems business which also has a media and label business.
Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc. The Company decided to sell this division primarily because it has incurred significant operating losses.
The consideration received was $1.0 million in cash of which $576,592 was received at closing and the was settled in June, 2017. In addition, the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stock of the Company, as well as the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd., a wholly owned subsidiary of the Company, redeemed 5,200,000 exchangeable shares as part of the divestiture.
| F-17 |
Additionally, as part of the transaction, Viascan Group Inc., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction included:
| ● | Full release from five employment contracts, inclusive of the former CEO, Gilles Gaudreault. This release included cancelation of the contracts as well as the deferred salary and signing bonus provisions which would have inured to the employee. | |
| ● | The Company canceled the intercompany debts of approximately $7.0 million as well. The Company will also receive a contingent consideration of 15% of the net value proceeds, up to a maximum of $2.3 million, received upon a liquidity event or a change of control of Quest Solution Canada Inc. for a period of 7 years subsequent to the transaction. | |
| ● | The Company also negotiated a right of first refusal for any offer to purchase Quest Solution Canada Inc. for a 7 year period. | |
| ● | The assets sold consisted primarily of accounts receivable, inventories, property and equipment, and other assets. The buyer also assumed certain accounts payable and accrued liabilities. |
On September 30, 2016, the Company divested its Canadian operations, Quest Solution Canada, Inc., in order to focus its efforts and resources on its US operations. This represented a strategic shift that had a major effect on the Company’s operations and financial results.
Accordingly, the assets and liabilities, operating results, and operating and investing activities cash flows for the former Canadian operations are presented as a discontinued operation separate from the Company’s continuing operations, for all periods presented in these consolidated financial statements and footnotes, unless indicated otherwise.
The following is a reconciliation of the major line items constituting pretax loss of discontinued operations to the after-tax loss of discontinued operations that are presented in the condensed consolidated statements of operations as indicated below The 2016 fiscal year has 9 months of operations and the 2015 fiscal year has 3 months of operations:
| For the year | ||||||||
| ending December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenues | $ | 11,326,849 | $ | 5,255,601 | ||||
| Cost of goods sold | (9,751,651 | ) | (4,046,494 | ) | ||||
| Gross profit | 1,575,198 | 1,209,107 | ||||||
| Operating expenses | ||||||||
| General and administrative | (874,506 | ) | (300,668 | ) | ||||
| Salary and employee benefits | (2,074,977 | ) | (623,276 | ) | ||||
| Depreciation and amortization | (178,069 | ) | (104,215 | ) | ||||
| Professional fees | (58,138 | ) | (18,258 | ) | ||||
| Goodwill impairment | (4,800,000 | ) | - | |||||
| Total operating expenses | (7,985,690 | ) | (1,046,417 | ) | ||||
| Operating (loss) income | (6,410,492 | ) | 162,690 | |||||
| Other income (expenses): | ||||||||
| Restructuring expenses | (108,640 | ) | - | |||||
| Gain (loss) on foreign currency | 117,138 | 229,442 | ) | |||||
| Interest expense | (443,019 | ) | (171,815 | ) | ||||
| Other (expenses) income | 129 | (1,389 | ) | |||||
| Total other income (expenses) | (434,392 | ) | (402,646 | ) | ||||
| Net Income (Loss) Before Income Taxes | (6,844,884 | ) | (239,956 | ) | ||||
| Provision for Current Income Taxes | (6,991 | ) | - | |||||
| Net Loss from discontinued operations | $ | (6,851,875 | ) | $ | (239,956 | ) | ||
| F-18 |
The net cash flows incurred by Quest Solution Canada Inc. for the year ended December 31, are presented below.
| For the year | ||||||||
| ending December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net cash used by operating activities | $ | - | $ | (1,743,606 | ) | |||
| Net cash provided in investing activities | - | 16,097 | ||||||
| Net cash (used) provided in financing activities | - | (2,867,565 | ) | |||||
| Net Cash Outflow from discontinued operations | $ | - | $ | (4,595,074 | ) | |||
NOTE 6 – ACCOUNTS RECEIVABLE
At December 31, 2017 and 2016, accounts receivable consisted of the following:
| 2017 | 2016 | |||||||
| Trade Accounts Receivable | $ | 6,400,235 | $ | 10,607,378 | ||||
| Less Allowance for doubtful accounts | (12,501 | ) | (17,701 | ) | ||||
| Total Accounts Receivable (net) | $ | 6,387,734 | $ | 10,589,677 | ||||
NOTE 7 – INVENTORY
At December 31, 2017 and 2016, inventories consisted of the following:
| 2017 | 2016 | |||||||
| Equipment and Clearing Service | $ | 329,003 | $ | 375,863 | ||||
| Raw Materials | 31,697 | 119,922 | ||||||
| Finished goods | 79,020 | 35,808 | ||||||
| Total inventories | $ | 439,720 | $ | 531,593 | ||||
NOTE 8 – INTANGIBLE ASSETS
The Company’s goodwill balance is solely attributable to acquisitions. There have been no impairment charges recorded against goodwill. Identifiable intangible assets are stated at cost, net of accumulated amortization. The assets are being amortized on the straight-line method over useful lives ranging from 3 to 10 years. Amortization expense for the years ended December 31, 2017 and 2016 was $1,701,714 and $1,701,700, respectively.
| 2017 | 2016 | |||||||
| Goodwill | $ | 10,114,164 | $ | 10,114,164 | ||||
| Trade Names | 4,390,000 | 4,390,000 | ||||||
| Customer Relationships | 9,190,000 | 9,190,000 | ||||||
| Accumulated amortization | (5,909,581 | ) | (4,207,867 | ) | ||||
| Intangibles, net | $ | 17,784,583 | $ | 19,486,297 | ||||
The future amortization expense on the Trade Names and Customer Relationships are as follows:
| Years ending December 31, | ||||
| 2018 | 1,679,599 | |||
| 2019 | 1,471,714 | |||
| 2020 | 1,471,714 | |||
| 2021 | 1,405,791 | |||
| 2022 | 786,000 | |||
| Thereafter | 855,600 | |||
| Total | $ | 7,670,418 | ||
Goodwill is not amortized but is evaluated for impairment annually or when indicators of a potential impairment are present. The impairment testing of goodwill is performed separately from our impairment testing of intangibles. The annual evaluation for impairment of goodwill and intangibles is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. None of the goodwill is deductible for income tax purposes.
| F-19 |
Purchased intangible assets with finite useful lives are amortized over their respective estimated useful lives (using an accelerated method for customer relationships and trade names) to their estimated residual values, if any. The Company’s finite-lived intangible assets consist of customer relationships, contractor and resume databases, trade names, and internal use software and are being amortized over periods ranging from two to nine years. Purchased intangible assets are reviewed annually to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, recoverability is assessed by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the rate of amortization is accelerated and the remaining carrying value is amortized over the new shorter useful life. No impairments were identified or changes to estimated useful lives have been recorded as of December 31, 2017 and 2016.
NOTE 9 – INTELLECTUAL PROPERTY
On August 27, 2015, the Company entered into a Settlement Agreement with Kurt Thomet. Under the terms of the Settlement Agreement, the Company was required to pay Thomet $7,036,000 as full satisfaction for two (2) promissory notes held by Thomet by September 30, 2015. Included in this agreement (and deducted from the $7.036 million settlement) was the assignment of license rights to Thomet with an assigned value of $1.15 million. The licenses were previously acquired for $450,000 from Rampart Systems. Thomet shall pay Quest Solution a royalty fee of 3.5% of revenue related to the “gun-barrel,” “rebar inspection,” and “air frame” licenses for a five (5) year period, beginning on the effective date of the Assignment Agreement (as defined in the Settlement Agreement). The parties agreed to exclude the existing mining distribution license from the royalties to be paid to the Company by Thomet. On October 19, 2015, Quest Solution and Thomet entered into that First Amendment to the Omnibus Settlement Agreement, which modified the payment schedule under the Settlement Agreement.
The amount due to Thomet at December 31, 2016 is $5,092,245 which includes accrued interest. In July 2016, the holders of the notes signed subordination agreements with the Supplier of the Secured Promissory Note and Action, whereby the noteholders agree to subordinate their rights and payments until the Supplier with the Secured Promissory Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at December 31, 2016 were all classified as long term.
As of December 31, 2017, all debts and accrued interest related to Kurt Thomet were settled. As part of that settlement, Thomet is owed a total of $750,000 to be paid evenly over a five year period beginning in October 2018. See Note 16.
NOTE 10 – OPERATING LEASE COMMITMENTS
In April 2012, Quest Marketing signed an operating lease at 860 Conger Street, Eugene, OR 97402. The premises, consisting of approximately 7,000 square feet of warehouse/office space shall serve as the Company’s new headquarters. The lease provides for monthly payments of $3,837 through March 2013 and adjusted annually to reflect changes in the cost of living for the remainder of the lease term. In no event shall the monthly rent be increased by more than 2 percent in any one year. The lease expired March 2017 and the Company extended the term of the lease for an additional two year with the same cost of living increase.
The lease at the Company’s Ohio location, signed by Quest Marketing in July 2011, provides for monthly payments of $2,587 through June 2012 and $2,691 thereafter. The lease is due to expire June 30, 2018.
The Company has a commercial real estate operating lease with the former owner of BCS for the company’s BCS office and warehouse location in Garden Grove, CA. Total rent expense at this location was $108,000 for the year ending December 31, 2017 and 2016. The Company rent is at the rate of $2,372 per month through January 31, 2019, then increasing to $2,466.54 per month to January 31, 2020. The rent from February 1, 2020 until February 28th 2021 is $2,565.20. The lease expires on February 28, 2021. This location houses satellite sales and technical support office.
The Company opened an executive suite in Salt Lake City, Utah in August 2017. This office houses the offices for the Company’s CEO and CFO. Rent on this location was waived by the landlord until January 1st 2018, when the office space expanded to house a portion of the Company’s accounting and administrative staff. The Company rent per month at this location is $3,000 per month.
Total rent expense paid was $170,765 and $206,198 for the years ending December 31, 2017 and 2016, respectively.
The following is a schedule of future minimum facility lease payments required under the related party operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2017.
| F-20 |
SUMMARY OF OPERATING LEASE COMMITMENTS
The future minimum operating lease payments are as follows:
| Years ending December 31, | ||||
| 2018 | 148,421 | |||
| 2019 | 72,246 | |||
| 2020 | 65,504 | |||
| Thereafter | 5,130 | |||
| Total | $ | 293,301 | ||
NOTE 11 – OTHER LIABILITIES
At December 31, 2017 and 2016, other liabilities consisted of the following:
| 2017 | 2016 | |||||||
| Unearned Incentive from credit Cards | $ | 77,307 | $ | 123,105 | ||||
| Key Man life Insurance liability | 150,146 | 208,091 | ||||||
| Dividend payable | 289,687 | 101,075 | ||||||
| Others | 43,810 | 127,931 | ||||||
| 560,951 | 560,202 | |||||||
| Less Current Portion | (121,117 | ) | (227,932 | ) | ||||
| Total long term other liabilities | $ | 439,833 | $ | 332,270 | ||||
The Company has purchased key man life insurance policies for some of its executives to insure the Company against risk of loss of an executive. Should loss of an executive occur, those funds would be used to pay off their respective promissory notes, repurchase their shares and settle out any amounts owed to them and their estate.
On, June 10, 2016, the Company entered into an assignment and assumption with three of the beneficiaries of the key man insurance policies. The agreement states that the Company will be assigning the policy over to the beneficiary and the beneficiary will assume all the obligations under the premium financed note in place. The premium financed note has to be bifurcated with the lender in order to complete the transaction.
At December 31, 2017, the balance of amount of premium financed note for the remaining policy is $1,481,850 and the cash value of the policy as of this date is $1,395,468, with a net negative cash value of the policies of $18.20.
The value of the policies is recorded at the new value per the right of offset noted in Topics 210-220. To have right of offset, the Company would need to show (1) amounts of debt are determinable, (2) reporting entity has the ‘right’ to setoff, (3) the right is enforceable by law, and (4) reporting entity has the ‘intention’ to setoff. Given that the Company has met all of these, the Company has elected to use the right of setoff as the cash value of the policies is being used as the collateral for the loans. Should the Company default on payments to the policy or determine to not continue with the policies, the cash value of the policy is intended to pay off of the loan. The Company also intends to settle out the loans in the future with the cash value of the policy.
NOTE 12 – PROFIT SHARING PLAN
The Company maintains a contributory profit sharing plan covering substantially all fulltime employees within the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). Starting in 2016, the Safe Harbor element was removed from the plan and the employer may make a discretionary matching contribution equal to a uniform percentage or dollar amount of participants’ elective deferrals for each Plan Year. In 2015, the Company is required to make a safe harbor non-elective contribution equal to 3 percent of a participant’s compensation. The plan also includes a 401(k) savings plan feature that allows substantially all employees to make voluntary contributions and provides for discretionary matching contributions determined annually by the Board of Directors. For the year ending December 31, 2017, the Company elected to forgo the match for 2017. For the year ending December 31, 2016, the Company match was $48,571 and was paid from the Accrued payroll and sales tax account in the balance sheet.
| F-21 |
NOTE 13 – DEFERRED REVENUE
Deferred revenue consists of prepaid third party hardware service agreements, software maintenance service contracts and the related costs and expenses recorded net of the revenue charged to the customer and paid within normal business terms. The net amount recorded as a deferred revenue liability is being amortized into the results of operations over the related periods on a straight line basis, normally 1-5 years with 3 years being the average term.
| 2017 | 2016 | |||||||
| Deferred Revenue | $ | 7,753,906 | $ | 8,721,725 | ||||
| Less Deferred Costs & Expenses | (6,540,688 | ) | (7,277,275 | ) | ||||
| Net Deferred Revenue | 1,213,218 | 1,444,450 | ||||||
| Less Current Portion | (761,194 | ) | (879,026 | ) | ||||
| Total Long Term net Deferred Revenue | $ | 452,024 | $ | 565,424 | ||||
| Expected future amortization of net deferred revenue, are as follows; | ||||
| 2018 | $ | 452,024 | ||
| 2019 | - | |||
| 2020 | - | |||
| 2021 | - | |||
| Total | $ | 452,024 | ||
NOTE 14 – CREDIT FACILITIES AND LINE OF CREDIT
The Company maintains operating lines of credit, factoring and revolving credit facilities with banks and finance companies to provide working capital for the business.
On July 1, 2016, the Company entered into a Factoring and Security Agreement (the “FASA”) with Action Capital Corporation (“Action”) to establish a sale of accounts facility, whereby the Company may obtain short-term financing by selling and assigning to Action acceptable accounts receivable. Pursuant to the FASA, the outstanding principal amount of advances made by Action to the Company at any time shall not exceed $5,000,000. Action will reserve and withhold an amount in a reserve account equal to 10% of the face amount of each account purchased under the FASA. The balance at December 31, 2017 is $3,667,417 which includes accrued interest.
| F-22 |
The per annum interest rate with respect to the daily average balance of unpaid advances outstanding under the FASA (computed on a monthly basis) will be equal to the “Prime Rate” of Wells Fargo Bank N.A. plus 2%, plus a monthly fee equal to 0.75% of such average outstanding balance. The Company shall also pay all other costs incurred by Action under the FASA, including all bank fees. The FASA will continue in full force and effect unless terminated by either party upon 30 days’ prior written notice. Performance of the Company’s obligations under the FASA is secured by a security interest in certain collateral of the Company. The FASA includes customary representations and warranties and default provisions for transactions of this type.
NOTE 15 - NOTES PAYABLE
Notes payable at December 31, 2017 consists of the following:
| 2017 | 2016 | |||||||
| Supplier Secured Note Payable | $ | 3,208,534 | $ | 9,414,352 | ||||
| Insurance Notes | - | 19,502 | ||||||
| All Other | 350,785 | 479,365 | ||||||
| Total | 3,559,319 | 9,913,219 | ||||||
| Less current portion | (3,429,025 | ) | (9,782,925 | ) | ||||
| Long Term Notes Payable | $ | 130,294 | $ | 130,294 | ||||
Future maturities of notes payable are as follows;
| 2018 | $ | 3,429,025 | ||
| 2019 | 130,294 | |||
| Total | $ | 3,559,319 |
The Company finances its Property and Casualty as well as its Directors and Officers Liability Insurance with First Insurance Funding. The Insurance period is for 12 months and the premium is financed over 9 months. The Property and Casualty Insurance is paid in equal monthly installments of $3,940 at 3.25% interest. The outstanding balance at December 31, 2016 was $19,502 and the monthly payments are current. The Directors and Officers Liability Insurance is renewed annually and there is no outstanding balance at December 31, 2017.
In connection with the BCS acquisition the Company assumed a related party note payable to the former CTO of the RFID division of BCS. The note is payable in equal monthly installments of $4,758 beginning October 31, 2014 and ending October 2018. The loan bears interest at 1.89% and is unsecured and subordinated to the Company’s bank debt. The balance on this loan at December 31, 2016 and 2017 was $130,294 of which all of it was classified as long term. In July 2016, the holder of the note signed a subordination agreement with the Supplier of the Secured Promissory Note and Action, whereby the noteholder agrees to subordinate it right and payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 507,079 shares of common stock for $230,490 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. As at December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance of the note is $220,490.
On July 18, 2016, the Company and the supplier entered into that certain Secured Promissory Note, with an effective date of July 1, 2016, in the principal amount of $12,492,137. The USD Note accrues interest at 12% per annum and is payable in six consecutive monthly installments of principal and accrued interest in a minimum principal amount of $250,000 each, with any remaining principal and accrued interest due and payable on December 31, 2016.
| ● | On November 30, 2016, the Company entered into an Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to March 31, 2017 and the monthly installments of principal and accrued interest were increased to $400,000 commencing December 15, 2016 with any remaining principal and accrued interest due and payable on March 31, 2017. The Amendment also provides that the Company will make an additional principal payment of $300,000 by December 15, 2016. | |
| ● | On March 31, 2017, the Company entered into a Second Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to September 30, 2017 whereby any remaining principal and accrued interest is due and payable on September 30, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $400,000 each. | |
| ● | On September 30, 2017, the Company entered into a Third Amendment Agreement to the secured Promissory Note whereby the maturity date was extended to October 31, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $600,000 each. | |
| ● | On November 15th, the Company entered into a Fourth Amendment extending the maturity date to December 31st, and this Fourth Amendment is effective on October 31st, whereby any remaining principal and accrued interest is due and payable on December 31, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $600,000 each. | |
| ● | On February 14, 2018 the Company entered into a Fifth Amendment extending the maturity date to March 31st, and this Fifth Amendment is effective on December 31, 2017 whereby any remaining principal and accrued interest is due and payable on March 31, 2018. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued interest in a minimum principal amount of $400,000 each. | |
| ● | As of April 12, 2018 the Company has offered to the holder of the Secured Promissory Note to pay the remaining balance of $1.97 million by the end of June 2018. The payments would be made in the amounts of $600,000 in April 2018, $700,000 in May 2018, and the remaining Note balance in June 2018. |
| F-23 |
On July 31, 2016 as part of the Separation Agreement with Mr. Ross, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,000 shares of restricted common stock. The promissory was paid off in 12 monthly installments commencing October 1, 2016 and this transaction was recorded as a restructuring charge in the amount of $84,317 in the third quarter of 2016. In addition, the Company restated a promissory note in favor of Mr. Ross which was paid at the balance of the $102,000 over 12 monthly installments commencing October 1, 2016. The balance on these two notes at December 31, 2017 was $0 and $119,999 at December 31, 2016.
NOTE 16 – SUBORDINATED NOTES PAYABLE
Subordinated Notes payable at December 31, consisted of the following:
| 2017 | 2016 | |||||||
| Note payable - acquisition of Quest | $ | - | $ | 5,967,137 | ||||
| Note payable – acquisition of BCS | - | 10,348,808 | ||||||
| Note payable – debt restructure Marin | 1,200,000 | |||||||
| Note payable – debt restructure Thomet | 750,000 | - | ||||||
| Quest Preferred Stock note payable | 1,199,400 | 1,199,400 | ||||||
| Note payable – debt restructure Zicman | 180,000 | - | ||||||
| Total notes payable | 3,329,400 | 17,515,345 | ||||||
| Less: current portion | 106,500 | - | ||||||
| Total long-term notes payable | $ | 3,222,900 | $ | 17,515,345 | ||||
As of December 31, 2017 and 2016, the Company recorded interest expense in connection with these notes in the amount of $79,055 and $728,267, 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 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.
| F-24 |
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 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 entered into two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”). Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11,000,000 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 $1,800,000 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.
On February 28, 2018, the Company entered into an additional settlement agreement with the Marins (the “Marin Settlement Agreement II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 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.
On February 22, 2018, the Company entered into a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5,437,136.40 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 $1,800,000 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.
On February 19, 2018, the Company entered into a settlement agreement with Goerge 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 $1,800,000 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.
| F-25 |
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.
The repayment of the subordinated notes payable is contingent on the complete reimbursement of the Supplier Secured Promissory Note and other conditions and as such based on these factors management has estimated that the future maturities of subordinated notes payable at December 31, 2017 is as follows:
| 2018 | 106,500 | |||
| 2019 | 894,000 | |||
| 2020 | 894,000 | |||
| 2021 | 894,000 | |||
| Thereafter | 1,213,500 | |||
| Total | $ | 4,002,000 | ||
NOTE 17 – STOCKHOLDERS’ DEFICIT
PREFERRED STOCK
Series A
As of December 31, 2017 and 2016, 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.
| F-26 |
Series B
As of December 31, 2017 and 2016, there was 1 preferred share designated and 0 preferred shares outstanding.
Series C
As of December 31, 2017, there was 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
For the year ended December 31, 2016, the Company issued 150,000 shares to the board members in relation to the vesting schedule agreed to in the 4th quarter of 2015, which provides 12,500 common shares per independent board member as compensation. The shares were valued at $28,800.
In the first quarter of 2016, 39,000 shares were issued to certain employees that had a value of $7,800.
On June 17, 2016, the Company entered into a Stock Redemption Agreement whereby it redeemed 1,000,000 restricted common stock in exchange for 357,000 shares of Series C preferred stock.
On July 31, 2016 as part of the Separation Agreement with Mr. Ross, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,000 shares of restricted common stock. In addition, the Company issued 100,000 shares of Series C preferred stock pursuant to the same Separation Agreement in exchange for the redemption of 42,500 restricted common shares.
| F-27 |
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 1,650,000 shares of common stock for $750,000 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. On September 30, 2016, the Company completed the redemption of 1,650,000 shares of common stock.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 507,079 shares of common stock for $230,490 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. As at December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance of the note and accrued interest is $241,159.
In November 2016, the Company issued 131,000 shares to an employee as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $8,449.
In December 2016, the Company issued 708,000 shares to the Chief Financial Officer as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $48,498.
In April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement. The shares were valued at $48,000. In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement. The shares were valued at $8,400,
For the year ended December 31, 2016, pursuant to the Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration statement, 238,785 shares of Common Stock were issued for proceeds of $20,058.
In total, for the year ended December 31, 2016, the Company has redeemed a total of 3,042,500 shares of common stock.
In April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement. The shares were valued at $48,000. In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement. The shares were valued at $8,400.
On June 30, 2017, the Company issued 87,500 shares to board members in relation to the vesting schedule agreed to during 4th quarter 2015, which is based on an annual grant 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 600,000 shares of common stock as part of a consulting agreement with Carlos Jaime Nissensohn. The shares were valued at $66,000.
On December 30, 2017 the Company issued 600,000 shares of common stock valued at $59,400 as part of a debt reduction agreement with two parties.
For the year ended December 31, 2017, pursuant to the Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration statement, 335,380 shares of Common Stock.
As of December 31, 2017, the Company had 36,828,371 common shares outstanding.
Warrants and Stock Options
Warrants - The following table summarizes information about warrants granted during the years ended December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Number
of warrants | Weighted Average Exercise Price | Number
of warrants | Weighted Average Exercise Price | |||||||||||||
| Balance, beginning of year | 1,405,000 | 0.52 | 1,410,000 | 0.52 | ||||||||||||
| Warrants granted | 4,500,000 | 0.17 | - | - | ||||||||||||
| Warrants expired | - | - | (5,000 | ) | (1.00 | ) | ||||||||||
| Warrants cancelled, forfeited | - | - | - | - | ||||||||||||
| Warrants exercised | - | - | - | - | ||||||||||||
| Balance, end of year | 5,905,000 | 0.25 | 1,405,000 | 0.52 | ||||||||||||
| Exercisable warrants | 4,780,000 | 0.29 | 1,405,000 | 0.52 | ||||||||||||
| F-28 |
Outstanding warrants as at December 31, 2017 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 | |||||||||||||||||
| 0.11 | 3.59 | 1,500,000 | 0.11 | 375,000 | 0.11 | |||||||||||||||||
| 0.20 | 3.0 | 3,000,000 | 0.20 | 3,000,000 | 0.20 | |||||||||||||||||
| 0.25 | 0.25 | 900,000 | .25 | 900,000 | 0.25 | |||||||||||||||||
| 1.00 | 0.33 | 505,000 | 1.00 | 505,000 | 1.00 | |||||||||||||||||
| 0.11 to 1.00 | 2.50 | 5,905,000 | 0.25 | 4,780,000 | 0.29 | |||||||||||||||||
Warrants outstanding at the end of the year have the following expiry date and exercise prices:
| Expiry Date | Exercise Prices | December 31, 2017 | December 31, 2016 | |||||||||
| March 22, 2018 | 1.00 | 300,000 | 300,000 | |||||||||
| April 1, 2018 | 0.25 | 900,000 | 900,000 | |||||||||
| April 30, 2018 | 1.00 | 5,000 | 5,000 | |||||||||
| July 10, 2018 | 1.00 | 200,000 | 200,000 | |||||||||
| December 30, 2020 | 0.20 | 3,000,000 | - | |||||||||
| August 2,2021 | 0.11 | 1,500,000 | - | |||||||||
| 5,905,000 | 1,405,000 | |||||||||||
Share Purchase Option Plan
The Company has a stock option plan whereby the Board of Directors, may grant to directors, officers, employees, or consultants of the Company options to acquire common shares. The Board of Directors of the Company has the authority to determine the terms, limits, restrictions and conditions of the grant of options, to interpret the plan and make all decisions relating thereto. The plan was adopted by the Company’s Board of Directors on November 17, 2014 in order to provide an inducement and serve as a long term incentive program. The maximum number of common shares that may be reserved for issuance was set at 10,000,000.
The option exercise price is established by the Board of Directors and may not be lower than the market price of the common shares at the time of grant. The options may be exercised during the option period determined by the Board of Directors, which may vary, but will not exceed ten years from the date of the grant. There are 10,000,000 of the Company’s common shares which may be issued pursuant to the exercise of share options granted under the Plan. As at December 31, 2017, the Company had issued options, allowing for the subscription of 9,625,000 common shares of its share capital.
Stock Options - The following table summarizes information about stock options granted during the years ended December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Number
of stock options | Weighted Average Exercise Price | Number
of stock options | Weighted Average Exercise Price | |||||||||||||
| Balance, beginning of year | 2,644,000 | 0.50 | 6,044,000 | 0.50 | ||||||||||||
| Stock options granted | 6,981,000 | 0.10 | - | - | ||||||||||||
| Stock options expired | - | - | - | - | ||||||||||||
| Stock options cancelled, forfeited | - | (0.50 | ) | (3,400,000 | ) | (0.50 | ) | |||||||||
| Stock options exercised | - | - | - | - | ||||||||||||
| Balance, end of year | 9,625,000 | 0.21 | 2,644,000 | 0.49 | ||||||||||||
| Exercisable stock options | 6,010,583 | 0.25 | 1,925,250 | 0.49 | ||||||||||||
| F-29 |
During 2016, the Company canceled a total of 3,400,000 stock options in connection with the redemption and cancellation of the Series A preferred stock from the former CEO.
During 2017, the Company canceled a total of 3,400,000 stock options in connection with the Separation Agreement signed with the former CFO.
Outstanding stock options as at December 31, 2017 are as follows:
| Range
of Exercise Prices | Weighted Average residual life span (in years) | Outstanding Stock Options | Weighted Average Exercise Price | Exercisable
Stock Options | Weighted Average Exercise Price | |||||||||||||||||
| 0.075 to 0.09 | 4.16 | 2,981,000 | 0.08 | 1,460,333 | 0.08 | |||||||||||||||||
| 0.11 | 3.59 | 3,500,000 | 0.11 | 1,750,000 | 0.11 | |||||||||||||||||
| 0.145 | 9.76 | 500,000 | 0.145 | 500,000 | 0.145 | |||||||||||||||||
| 0.33 to 0.38 | 0.29 | 144,000 | 0.36 | 144,000 | 0.36 | |||||||||||||||||
| 0.50 | 6.89 | 2,500,000 | 0.50 | 2,156,250 | 0.50 | |||||||||||||||||
| 0.075 to 0.50 | 4.9 | 9,625,000 | 0.21 | 6,010,583 | 0.25 | |||||||||||||||||
Stock options outstanding at the end of the year have the following expiry date and exercise prices:
| Expiry Date | Exercise Prices | December 31, 2017 | December 31, 2016 | |||||||||
| February 26, 2018 | 0.37 | 72,000 | 72,000 | |||||||||
| April 27, 2018 | 0.38 | 36,000 | 36,000 | |||||||||
| July 9, 2018 | 0.33 | 36,000 | 36,000 | |||||||||
| August 2, 2021 | 0.11 | 3,500,000 | - | |||||||||
| February 17, 2022 | 0.09 | 2,281,000 | - | |||||||||
| March 30, 2022 | 0.09 | 700,000 | - | |||||||||
| November 20, 2024 | 1.00 | 2,500,000 | 2,500,000 | |||||||||
| October 2, 2027 | 0.145 | 500,000 | - | |||||||||
| 9,625,000 | 2,644,000 | |||||||||||
For the year ending December 31, 2017 and December 31, 2016, the Company recorded stock compensation expense relating to the vesting of stock options as follows;
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Board compensation expense | $ | 8,181 | $ | 28,880 | ||||
| Stock compensation | 56,400 | 273,443 | ||||||
| Stock Option vesting | 686,164 |
73,128 | ||||||
| Total | $ | 750,745 | $ | 375,451 | ||||
| F-30 |
NOTE 18 – RESTRUCTURING EXPENSES
For the year ended December 31, 2017, the Company took steps to streamline and simplify its operations in North America. The employees to be separated from the Company as a result of these streamlining initiatives were offered severance or working notices. As a result, the Company has recorded a restructuring charge of $26,880 to realize the streamlining initiatives. The restructuring charge was for severance pay.
NOTE 19 – LITIGATION
The Company was sued by Kurt Thomet for breach of obligations related to the outstanding debt obligations remaining from the promissory note executed on January 18, 2014 and subsequent amendments. The lawsuit was withdrawn in 2018 with the restructure of debt the subsequent to year end but effective December 31, 2018. The Company is not a party to any other pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the Company’s Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.
NOTE 20 – RELATED PARTY TRANSACTIONS
The Company leases a building from the former owner of BCS for $9,000 per month, which is believed to be the current fair market value of similar buildings in the area. These amounts are included in the lease disclosure schedule, Footnote 10.
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 of 12 months in 4 quarterly and equal installments, subject to Mr. Nissensohn’s continuous 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 1st day 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 |
Additional related party transactions discussed in Notes 16 and 17.
NOTE 21 – INCOME TAX
For the year ended December 31, 2017, the Company has no current or deferred income tax provision.
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows at December 31, 2017 and December 31, 2017 respectively:
| Deferred tax assets | December 31, 2017 | December 31, 2016 | ||||||
| Reserves and deferred revenue | $ | 752,442 | $ | 1,120,948 | ||||
| Stock options | 477,600 | 472,254 | ||||||
| Net operating loss | 5,202,184 | 6,567,549 | ||||||
| Total gross deferred tax assets | 6,432,226 | 8,160,751 | ||||||
| Less: Valuation Allowance | (6,428,806 | ) | (7,996,994 | ) | ||||
| Deferred tax liabilities | (3,102 | ) | (128,188 | ) | ||||
| Amortization of intangible assets and depreciation | (318 | ) | (35,569 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
| F-31 |
Components of net deferred tax assets, including a valuation allowance, are as follows at December 31:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets | $ | 6,428,806 | $ | 7,996,994 | ||||
| Valuation allowance | (6,428,806 | ) | (7,996,994 | ) | ||||
| Total deferred tax assets | $ | - | $ | - | ||||
The valuation allowance for deferred tax assets as of December 31, 2017 and 2016 was $6,428,806 and $7,996,994, respectively. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company will continue to monitor the potential utilization of this asset. Should factors and evidence change to aid in this assessment, a potential adjustment to the valuation allowance in future periods may occur. The Company records any penalties and interest as a component of operating expenses.
The reconciliation between statutory rate and effective rate is as follows at December 31, 2017:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Federal statutory tax rate | 34.0 | % | 34.0 | % | ||||
| State taxes | 3.94 | % | (0.27 | )% | ||||
| Nondeductible items | (0.94 | )% | (17.8 | )% | ||||
| Change in valuation allowance | 66.48 | % | (46.3 | )% | ||||
| Return to provision adjustments | (14.17 | )% | 22.35 | % | ||||
| Rate Change | (85.99 | )% | 0.0 | % | ||||
| Other | (3.33 | )% | 0.0 | % | ||||
| Effective tax rate | - | % | (8.05 | )% | ||||
The Company reported no uncertain tax liability as of December 31, 2017 and expects no significant change to the uncertain tax liability over the next twelve months. The Company’s 2013, 2014, 2015 and 2016 federal and state income tax returns are open for examination by the applicable governmental authorities.
As of December 31, 2017, the Company had a net operating loss (NOL) carryforward of approximately $20,127,589. The NOL carryforward begins to expire in 2024. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules which combine unrelated shareholders that do not individually own 5% or more of the corporation’s stock into one or more “public groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). In general, the annual use limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The Company has not completed a study as to whether there is a 382 limitation on its NOLs that will limit the use of its NOLs in the future. The Company has recorded a valuation allowance on the entire NOL as it believes that it is more likely than not that the deferred tax asset associated with the NOLs will not be realized regardless of whether an “ownership change” has occurred.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted. Accounting Standard Codification (ASC) 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment regardless of the effective date of those tax law changes. Certain provisions of the Tax Act are effective September 27, 2017, others are effective or identified as of December 31, 2017 and others are effective after January 1, 2018.
Given the timing of enactment of the Tax Act and the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period should not extend beyond one year from the Tax Act enactment date and is deemed to have ended when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting.
| F-32 |
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the registrant is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740, Accounting for Income Taxes, on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. More specifically, SAB 118 summarizes a three-step process to be applied at each reporting period to account for and disclose the tax effects of the Tax Act. The steps are (1) to record the effects of the change in tax law for which accounting is complete; (2) to record provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but for which a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made, to continue to apply ASC 740, Accounting for Income Taxes, based on the tax law in effect prior to enactment of the Tax Act.
Amounts recorded where accounting is complete for the year ended January 1, 2018 primarily relate to the reduction in the U.S. corporate income tax rate to 21 percent. The Company revalued its ending gross deferred tax items, previously recorded at 35 percent, using the enacted 21 percent corporate tax rate. This change resulted in no net tax expense/benefit but did cause a reduction to our U.S. federal deferred tax asset fully offset by a reduction of our valuation allowance.
Effects of tax law changes where a reasonable estimate of the accounting effects cannot yet been made include the one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries earned post 1986. The Company has performed a preliminary earnings and profits analysis with consideration given to foreign loss carryforwards acquired as a result of the Company’s acquisitions and determined on a provisional basis that there should be no income tax effect in the current or any future period. The Company will continue to identify and evaluate data to more thoroughly identify the tax impact and record adjustments, if any, within the measurement period.
NOTE 22 – SUBSEQUENT EVENTS
On February 28, 2018, the Company entered into two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”). Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11,000,000 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 $1,800,000 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-33 |
On February 28, 2018, the Company entered into an additional settlement agreement with the Marins (the “Marin Settlement Agreement II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 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.
On February 22, 2018, the Company entered into a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5,437,136.40 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 $1,800,000 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.
On February 19, 2018, the Company entered into a settlement agreement with Goerge 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 $1,800,000 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.
Each of the Marins, Thomet and Zicman entered into a voting agreement with the Company whereby they agreed to vote any shares of common stock beneficially owned by them as directed by the Company’s CEO and also agreed to a leakout restriction whereby they each agreed not to sell more than 10% of the common stock beneficially owned during any 30-day period.
On 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.
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, and 1,000,000 warrants to purchase shares of the Company’s common stock, 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 and is hereby incorporated by reference.
On March 08,2018, the Company issued 200,000 shares of the Company’s common stock to the JSM SOC-DIG LP.
| F-34 |
EXHIBIT INDEX
* Filed herewith.
| 30 |
Exhibit 21.1
Subsidiaries of the Registrant
| Name | Jurisdiction of Organization | |
| Quest Marketing, Inc. | Oregon | |
| Quest Exchange Ltd. | Canada |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 333-213746) pertaining to the Quest Solution, Inc. Employee Stock Purchase Plan of our report dated May 7, 2018, with respect to the consolidated financial statements of Quest Solution, Inc., (which report expresses an unqualified opinion on the consolidated financial statements and an explanatory paragraph referring to the Company’s ability to continue as a going concern), included in its Annual Report on Form 10-K for the year ended December 31, 2017 and 2016, filed with the Securities and Exchange Commission.
| /s/ RBSM, LLP | |
| RBSM, LLP | |
May 7, 2018 |
|
| Larkspur, CA |
EXHIBIT 31.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14(a) under the Securities Exchange Act of 1934
I, Shai Lustgarten, certify that:
1. I have reviewed this annual report on Form 10-K of Quest Solution, Inc. for the fiscal year ended December 31, 2017;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d – 15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2018
| By: | /s/ Shai Lustgarten | |
| Shai Lustgarten | ||
| Chairman of the Board |
EXHIBIT 31.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13A-14(a) under the Securities Exchange Act of 1934)
I, Benjamin Kemper, certify that:
1. I have reviewed this annual report on Form 10-K of Quest Solution, Inc. for the fiscal year ended December 31, 2017;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d – 15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2018
| By: | /s/ Benjamin Kemper | |
| Benjamin Kemper | ||
| Chief Financial Officer | ||
| and Principal Accounting Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Quest Solution, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Shai Lustgarten, Chief Executive Officer, Chairman of the Board and Benjamin Kemper, Chief Financial Officer of the Company, respectively, do certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 7, 2018
| By: | /s/ Shai Lustgarten | |
| Shai Lustgarten | ||
| Chairman of the Board |
| By: | /s/ Benjamin Kemper | |
| Benjamin Kemper | ||
| Chief Financial Officer | ||
| and Principal Accounting Officer |
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2017 |
May 04, 2018 |
Jun. 30, 2017 |
|
| Document and Entity Information | |||
| Entity Registrant Name | Quest Solution, Inc. | ||
| Entity Central Index Key | 0000278165 | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2017 | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filer | No | ||
| Entity Current Reporting Status | Yes | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Entity Public Float | $ 2,208,622 | ||
| Entity Common Stock, Shares Outstanding | 39,673,631 | ||
| Trading Symbol | QUES | ||
| Document Fiscal Period Focus | FY | ||
| Document Fiscal Year Focus | 2017 |
History and Organization of the Company |
12 Months Ended | |||||||||||||||||||||
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Dec. 31, 2017 | ||||||||||||||||||||||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||||||
| History and Organization of the Company |
NOTE 1 – HISTORY AND ORGANIZATION OF THE COMPANY
Quest Solution, Inc., a Delaware corporation (“Quest” or the “Company”), was incorporated in 1973. Prior to 2008, the Company was involved in various unrelated business activities. From 2008-2014 the Company was involved in multiple businesses inclusive of an oil and gas investment company. Due to changes in market conditions, management determined to look for acquisitions which were positive cash flow and would provide immediate shareholder value. In January 2014, the first such acquisition was completed of Quest Marketing Inc. (dba Quest Solution, Inc.) (“Quest Marketing”).
Quest is a national mobility systems integrator with a focus on design, delivery, deployment and support of fully integrated mobile solutions. The Company takes a consultative approach by offering end to end solutions that include hardware, software, communications and full lifecycle management services. The professionals simplify the integration process and deliver the solutions to our customers. Motorola, Intermec, Honeywell, Panasonic, AirWatch, Wavelink, SOTI and Zebra are major suppliers which Quest Solution uses in the solutions we provide to our customers.
The Company’s business strategy developed into leveraging management’s relationships in the business world for investments for the Company. The company intends to continue with its acquisition of existing companies with revenues and positive cash flow.
History
In May 2014, the Board of Directors voted to get approval from the shareholders of the Company for a name change from Amerigo Energy, Inc. to Quest Solution, Inc. The Company received the approval from a majority of its stockholders and filed the amendment to its Articles of Incorporation with the State of Delaware. The name change became effective by the State of Delaware on May 30, 2014. The Company also requested a new stock symbol as a result of the name change and we assigned our new trading symbol “QUES”.
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. On December 31, 2016, the Company merged BCS in Quest Marketing to form one US legal entity as part of its streamlining efforts.
Effective October 1, 2015, the Company acquired the interest in ViascanQdata, Inc., (“Viascan”) a Canadian based operation in the same business line as Quest and their CEO, Gilles Gaudreault, was appointed the CEO of Quest, with our then CEO, Tom Miller, remaining as President and Chairman of the Board. During the 2016 fiscal year, Viascan changed its corporate name to Quest Solution Canada Inc.
Divesture of Canadian Operations
Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the consideration received was $1.0 million in cash of which $576,592 was received at closing and the balance is required to be paid before April 30, 2017. In addition, the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stock of the Company, as well as the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd., a wholly owned subsidiary of the Company, redeemed 5,200,000 exchangeable shares as part of the divestiture.
Additionally, as part of the transaction, Viascan Group Inc., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction included:
The operations of Quest Solution Canada Inc. have been classified as a discontinued operation and the assets and liabilities of Quest Solution Canada Inc. have been classified as held for disposal. |
Going Concern |
12 Months Ended |
|---|---|
Dec. 31, 2017 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Going Concern |
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of December 31, 2017, the Company had a working capital deficit of $14,755,001 and an accumulated deficit of $35,554,994. 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), 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 finalized in December of 2017. See “Business – Recent Events”. 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. |
Basis of Presentation and Summary of Significant Accounting Policies |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation and Summary of Significant Accounting Policies |
NOTE 3 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Quest include the combined accounts of Quest Marketing, BCS, and Quest Exchange Ltd. Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the operations of Quest Solution Canada Inc. have been classified as a discontinued operations. The 2017 financials do not include any information concerning the divestment of Quest Solution Canada Inc., as this divestment occurred prior to 2017 and is not included in the year end consolidated financials for 2017. The Companies currently operate as a single business unit. All material intercompany transactions and accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash consists of petty cash, checking, savings, and money market accounts. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of December 31, 2017 and 2016.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.
The Company has restricted cash on deposit with a federally insured bank in the amount of $684,610 at December 31, 2017 ($665,220 at December 31, 2016). This cash is security and collateral for a corporate credit card agreement with a bank and for deposit against a letter of credit issued for executive life insurance policies owned by the Company.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the consolidated financial statements.
PURCHASE ACCOUNTING AND BUSINESS COMBINATIONS
The Company accounts for its business combinations using the purchase method of accounting which requires that intangible assets be recognized apart from goodwill if they are contractual in nature or separately identifiable. Acquisitions are measured on the fair value of consideration exchanged and, if the consideration given is not cash, measurement is based on the fair value of the consideration given or the fair value of the assets acquired, whichever is more reliably measurable. The excess of cost of an acquired entity over the fair value of identifiable acquired assets and liabilities assumed is allocated to goodwill.
The valuation and allocation process relies on significant assumptions made by management. In certain situations, the allocations of excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives updated information, including appraisals and other analyses, which are completed within one year of the acquisition. Revisions to the fair values, which may be significant, are recorded when pending information is finalized, within one year from the acquisition date.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at their estimated collectible amounts. The Company provides allowances for uncollectible accounts receivable equal to the estimated collection losses that will be incurred in collection of all receivables. Accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company’s management determines which accounts are past due and if deemed uncollectible, the Company charges off the receivable in the period the determination is made. The Company generally requires no collateral to secure its ordinary accounts receivable. Based on management’s evaluation, accounts receivable has a balance in the allowance for doubtful accounts of $12,501 and $17,701 for the years ended December 31, 2017 and 2016, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at purchased cost and depreciated using both straight-line and accelerated methods over estimated useful lives ranging from 3 to 15 years. Upon disposition of property and equipment, related gains and losses are recorded in the results of operations. Depreciation expense for the years ended December 31, 2017 and 2016 was $61,223 and $90,626, respectively. For federal income tax purposes, depreciation is computed using the modified accelerated cost recovery system. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred.
ADVERTISING
The Company generally expenses marketing and advertising costs as incurred. During 2017 and 2016, the Company spent $188,077 and $337,275, respectively, on marketing, trade show and store front expense and advertising, net of co-operative rebates.
The Company received rebates on advertising from co-operative advertising agreements with several vendors and suppliers. These rebates have been recorded as a reduction to the related advertising and marketing expense.
INVENTORY
Substantially all inventory consists of raw materials and finished goods and are valued based upon first-in first-out (“FIFO”) cost, not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed evaluation of inventory relative to any potential slow moving products or discontinued items as well as the market conditions for the specific inventory items.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification of assets and liabilities within the three levels of the hierarchy outlined above.
Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain liabilities at fair value on a recurring basis such as our contingent consideration related to business combinations and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the fiscal years ending December 31, 2017 and 2016.
The Company has classified its contingent consideration related to the acquisitions as a Level 3 liability. Revenue and other assumptions used in the calculation require significant management judgment. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis. Based on that assessment, the Company recognized an adjustment of $0 to the actual calculation of the earn-out obligations during each of the fiscal years ended December 31, 2017 and 2016.
As of December 31, 2017, the Company does not have any contingent liabilities.
REVENUE RECOGNITION
Recurring technology and services revenue consists of subscription-based fees, software subscription license fees, software maintenance fees and hosting fees related to the use of our solution to manage our customers’ communications expenses, as well as fees for perpetual software licenses and professional services and products sold.
We recognize revenue when persuasive evidence of an arrangement exists, pricing is fixed and determinable, collection is reasonably assured and delivery or performance of service has occurred. Recurring technology and services subscription-based fees, software subscription license fees, software maintenance fees and hosting fees are recognized ratably over the term of the period of service. The subscription-based services we provide include help desk, staging, carrier activations and provisioning.
Sales revenue is recognized upon the shipment of merchandise to customers. The Company recognizes revenues from software sales when software products are shipped.
Software license fees consist of fees paid for a perpetual license agreement for our technology, which are recognized in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 605, Software Revenue Recognition, as amended.
Professional services related to the implementation of our software products, which we refer to as consulting services, are generally performed on a fixed fee basis under separate service arrangements. Consulting services revenue is recognized as the services are performed by measuring progress towards completion based upon either costs or the achievement of certain milestones.
NET INCOME (LOSS) PER COMMON SHARE
Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic net loss per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted-average number of common shares outstanding for computing basic EPS for the years ended December 31, 2017 and 2016 were 35,814,751 and 35,947,523, respectively. Diluted net loss per share of common stock is the same as basic net loss per share of common stock because the effects of potentially dilutive securities are antidilutive.
The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share because such securities have an anti-dilutive impact due to losses reported:
Goodwill and intangible assets
As a result of acquisitions, the Company recorded goodwill and identifiable intangible assets as part of its allocation of the purchase consideration.
Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested 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.
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 2017.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements of the Company are presented in U.S. dollars. The functional currency for the Company is U.S. dollars. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the time of the transaction. All of the Company’s continuing operations are conducted in U.S. dollars. The Company owns a non-operating subsidiary in Canada, from which it has received no revenue since October 1, 2016. Canadian records of the divested Canadian operation were maintained in the local currency and re-measured to the functional currency as follows: monetary assets and liabilities are converted using the balance sheet period-end date exchange rate, while the non-monetary assets and liabilities are converted using the historical exchange rate. Expenses and income items are converted using the weighted average exchange rates for the reporting period. Foreign transaction gains and losses are reported on the consolidated statement of operations and were included in the amount of loss from discontinued operations.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income/(loss) is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has no items of comprehensive income/loss other than net income/loss in any period presented for continuing operations. Therefore, net loss attributable to common stockholders as presented in the consolidated statements of operations equals comprehensive loss.
INCOME TAXES
The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for consolidated financial reporting purposes and such amounts recognized for tax purposes, and are measured by applying enacted tax rates in effect in years in which the differences are expected to reverse.
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation in accordance with ASC Topic 718 “Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
For non-employee stock-based compensation, we have adopted ASC Topic 505 “Equity-Based Payments to Non-Employees”, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
On December 23, 2015, the Company’s Board of Directors approved the Quest Solution, Inc. Employee Stock Purchase Plan (the “ESPP”), under which 1,900,000 shares of common stock were reserved for the purchase by the Company’s employees. Under the plan, employees may purchase a limited number of shares of the Company’s common stock at a 15% discount from the closing market prices measured on the last days of each month.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2014, the FASB issued ASU 2014-15 requiring management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern, which is currently performed by the external auditors. Management will be required to perform this assessment for both interim and annual reporting periods and must make certain disclosures if it concludes that substantial doubt exists. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016. The adoption of this guidance is not expected to have a material effect on our financial statements.
In July 2015, the Financial Accounting Standard Board (“FASB”) issued ASU 2015-11 (ASC 330), Simplifying the Measurement of Inventory. This guidance requires companies to measure inventory using the lower of cost and net realizable value. It is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt ASU 2015-11 as of January 1, 2017 on a prospective basis and there is expected to be no impact of this guidance on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. The ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position, thereby simplifying the current guidance that requires an entity to separate deferred assets and liabilities into current and noncurrent amounts. The Company adopted ASU 2015-17 as of January 31, 2017 on a prospective basis. The statement of financial position as of January 31, 2017 reflects the classification of deferred tax assets and liabilities as noncurrent.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S GAAP, the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application required. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of Topic 606 but clarifies the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective for the annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-08 on our consolidated financial statements and results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-15 on our consolidated financial statements and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application to any business development transaction.
In January 2017, the FASB issued ASU No. 2017-04, which eliminates Step 2 from the goodwill impairment test. The goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The amendments should be applied on a prospective basis. For public business entities that are SEC filer with the Securities and Exchange Commission, or the SEC, the amendments are effective for annual or any interim impairment tests in reporting periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In May 2017, the FASB issued (ASU) No. 2017-09, which clarifies when an entity should account for a change to the terms or conditions of a share-based payment award as a modification. Under the ASU, modification accounting is required if the fair value, vesting conditions or classification of the award changes because of the change in terms or conditions. The amendments in this update will be applied prospectively to an award modified on or after the effective date. The amendments are effective for reporting periods (interim and annual) beginning after December 15, 2017.
In July 2017, the FASB issued Accounting Standards Update, or ASU, No. 2017-11. The amendments in part I of the ASU change the classification analysis of certain equity-linked financial instruments (or embedded derivatives) with down round features. When determining the classification of an instrument as a liability or as equity, entities will be required to disregard down round features upon the assessment of whether the instrument is indexed to the entity’s own stock. Entities that provide earnings per share, or EPS, data will adjust their basic EPS calculation for the effect of the feature when it is triggered (i.e. upon the occurrence of an event that results in the reduction of the strike price of the related equity-linked financial instrument), and will recognize the effect of the feature within equity. Part II of this guidance replaces the indefinite deferral of certain provisions of ASC Topic 480, distinguishing liabilities from equity, mandatorily redeemable non-controlling interests and mandatorily redeemable financial instruments of non-public entities with a scope exception.
The amendments in part I of the ASU should be applied either retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective or retrospectively for each prior reporting period presented. These amendments are effective for reporting periods (interim and annual) beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective date by one year (ASU 2015-14). This ASU will now be effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); and 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12). The new standard is effective for us beginning January 1, 2018. We are implementing the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. After an analysis on the new standard we have determined that there will be no material effect on the way Quest Solution recognizes revenue with one exception, our Service and Maintenance contract sales. The sales of extended sales and service maintenance contracts is not a material component of our total revenue, however under the guidance in ASC 606 the revenue recognition will be accelerated as there is no material future performance obligation.
Other accounting standards that have been issued by the Financial Accounting Standards Board or other standards-setting bodies are not expected to have a material impact on our financial position, results of operations and cash flows. For period ended December 31, 2017, the adoption of other accounting standards had no material impact on our financial positions, results of operations, or cash flows.
The Company has evaluated other recent pronouncements and believes that none of them will have a material effect on the company’s financial statements.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted. Accounting Standard Codification (ASC) 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment regardless of the effective date of those tax law changes. Certain provisions of the Tax Act are effective September 27, 2017, others are effective or identified as of December 31, 2017 and others are effective after January 1, 2018.
Given the timing of enactment of the Tax Act and the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period should not extend beyond one year from the Tax Act enactment date and is deemed to have ended when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the registrant is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740, Accounting for Income Taxes, on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. More specifically, SAB 118 summarizes a three-step process to be applied at each reporting period to account for and disclose the tax effects of the Tax Act. The steps are (1) to record the effects of the change in tax law for which accounting is complete; (2) to record provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but for which a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made, to continue to apply ASC 740, Accounting for Income Taxes, based on the tax law in effect prior to enactment of the Tax Act.
Amounts recorded where accounting is complete for the year ended January 1, 2018 primarily relate to the reduction in the U.S. corporate income tax rate to 21 percent. The Company revalued its ending gross deferred tax items, previously recorded at 35 percent, using the enacted 21 percent corporate tax rate. This change resulted in no net tax expense/benefit but did cause a reduction to our U.S. federal deferred tax asset fully offset by a reduction of our valuation allowance.
Effects of tax law changes where a reasonable estimate of the accounting effects cannot yet been made include the one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries earned post 1986. The Company has performed a preliminary earnings and profits analysis with consideration given to foreign loss carryforwards acquired as a result of the Company’s acquisitions and determined on a provisional basis that there should be no income tax effect in the current or any future period. The Company will continue to identify and evaluate data to more thoroughly identify the tax impact and record adjustments, if any, within the measurement period. |
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Concentrations |
12 Months Ended |
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Dec. 31, 2017 | |
| Risks and Uncertainties [Abstract] | |
| Concentrations |
NOTE 4 – CONCENTRATIONS
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits. At December 31, 2017 and 2016, the Company’s uninsured cash balance, each totaled $0.
For the years ended December 31, 2017 and 2016, one customer accounted for 15.7% and 17.3%, respectively, of the Company’s revenues.
Accounts receivable at December 31, 2017 and 2016 are made up of trade receivables due from customers in the ordinary course of business. One customer made up 15.5% and 33.1% of the balance for 2017 and 2016, which represented greater than 10% of accounts receivable at December 31, 2017 and 2016, respectively.
Accounts payable are made up of payable due to vendors in the ordinary course of business at December 31, 2017 and 2016. One vendor made up 71.8% and 76.8% of the balance, which represented greater than 10% of accounts payable at December 31, 2017 and 2016, respectively. |
Divestiture of Quest Solution Canada Inc |
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| Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of Viascanqdata |
NOTE 5 – DIVESTITURE OF QUEST SOLUTION CANADA INC.
Effective October 1, 2015, the Company completed the purchase of ViascanQdata, a Canadian based company in the same industry of technology, software, and mobile data collection systems business which also has a media and label business.
Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc. The Company decided to sell this division primarily because it has incurred significant operating losses.
The consideration received was $1.0 million in cash of which $576,592 was received at closing and the was settled in June, 2017. In addition, the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stock of the Company, as well as the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd., a wholly owned subsidiary of the Company, redeemed 5,200,000 exchangeable shares as part of the divestiture.
Additionally, as part of the transaction, Viascan Group Inc., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction included:
On September 30, 2016, the Company divested its Canadian operations, Quest Solution Canada, Inc., in order to focus its efforts and resources on its US operations. This represented a strategic shift that had a major effect on the Company’s operations and financial results.
Accordingly, the assets and liabilities, operating results, and operating and investing activities cash flows for the former Canadian operations are presented as a discontinued operation separate from the Company’s continuing operations, for all periods presented in these consolidated financial statements and footnotes, unless indicated otherwise.
The following is a reconciliation of the major line items constituting pretax loss of discontinued operations to the after-tax loss of discontinued operations that are presented in the condensed consolidated statements of operations as indicated below The 2016 fiscal year has 9 months of operations and the 2015 fiscal year has 3 months of operations:
The net cash flows incurred by Quest Solution Canada Inc. for the year ended December 31, are presented below.
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Accounts Receivable |
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| Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||
| Accounts Receivable |
NOTE 6 – ACCOUNTS RECEIVABLE
At December 31, 2017 and 2016, accounts receivable consisted of the following:
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Inventory |
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Dec. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Inventory |
NOTE 7 – INVENTORY
At December 31, 2017 and 2016, inventories consisted of the following:
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Intangible Assets |
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible Assets |
NOTE 8 – INTANGIBLE ASSETS
The Company’s goodwill balance is solely attributable to acquisitions. There have been no impairment charges recorded against goodwill. Identifiable intangible assets are stated at cost, net of accumulated amortization. The assets are being amortized on the straight-line method over useful lives ranging from 3 to 10 years. Amortization expense for the years ended December 31, 2017 and 2016 was $1,701,714 and $1,701,700, respectively.
The future amortization expense on the Trade Names and Customer Relationships are as follows:
Goodwill is not amortized but is evaluated for impairment annually or when indicators of a potential impairment are present. The impairment testing of goodwill is performed separately from our impairment testing of intangibles. The annual evaluation for impairment of goodwill and intangibles is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. None of the goodwill is deductible for income tax purposes.
Purchased intangible assets with finite useful lives are amortized over their respective estimated useful lives (using an accelerated method for customer relationships and trade names) to their estimated residual values, if any. The Company’s finite-lived intangible assets consist of customer relationships, contractor and resume databases, trade names, and internal use software and are being amortized over periods ranging from two to nine years. Purchased intangible assets are reviewed annually to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, recoverability is assessed by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the rate of amortization is accelerated and the remaining carrying value is amortized over the new shorter useful life. No impairments were identified or changes to estimated useful lives have been recorded as of December 31, 2017 and 2016. |
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Intellectual Property |
12 Months Ended |
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Dec. 31, 2017 | |
| Notes to Financial Statements | |
| Intellectual Property |
NOTE 9 – INTELLECTUAL PROPERTY
On August 27, 2015, the Company entered into a Settlement Agreement with Kurt Thomet. Under the terms of the Settlement Agreement, the Company was required to pay Thomet $7,036,000 as full satisfaction for two (2) promissory notes held by Thomet by September 30, 2015. Included in this agreement (and deducted from the $7.036 million settlement) was the assignment of license rights to Thomet with an assigned value of $1.15 million. The licenses were previously acquired for $450,000 from Rampart Systems. Thomet shall pay Quest Solution a royalty fee of 3.5% of revenue related to the “gun-barrel,” “rebar inspection,” and “air frame” licenses for a five (5) year period, beginning on the effective date of the Assignment Agreement (as defined in the Settlement Agreement). The parties agreed to exclude the existing mining distribution license from the royalties to be paid to the Company by Thomet. On October 19, 2015, Quest Solution and Thomet entered into that First Amendment to the Omnibus Settlement Agreement, which modified the payment schedule under the Settlement Agreement.
The amount due to Thomet at December 31, 2016 is $5,092,245 which includes accrued interest. In July 2016, the holders of the notes signed subordination agreements with the Supplier of the Secured Promissory Note and Action, whereby the noteholders agree to subordinate their rights and payments until the Supplier with the Secured Promissory Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at December 31, 2016 were all classified as long term.
As of December 31, 2017, all debts and accrued interest related to Kurt Thomet were settled. As part of that settlement, Thomet is owed a total of $750,000 to be paid evenly over a five year period beginning in October 2018. See Note 16. |
Operating Lease Commitments |
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| Leases [Abstract] | |||||||||||||||||||||||||||||||
| Operating Lease Commitments |
NOTE 10 – OPERATING LEASE COMMITMENTS
In April 2012, Quest Marketing signed an operating lease at 860 Conger Street, Eugene, OR 97402. The premises, consisting of approximately 7,000 square feet of warehouse/office space shall serve as the Company’s new headquarters. The lease provides for monthly payments of $3,837 through March 2013 and adjusted annually to reflect changes in the cost of living for the remainder of the lease term. In no event shall the monthly rent be increased by more than 2 percent in any one year. The lease expired March 2017 and the Company extended the term of the lease for an additional two year with the same cost of living increase.
The lease at the Company’s Ohio location, signed by Quest Marketing in July 2011, provides for monthly payments of $2,587 through June 2012 and $2,691 thereafter. The lease is due to expire June 30, 2018.
The Company has a commercial real estate operating lease with the former owner of BCS for the company’s BCS office and warehouse location in Garden Grove, CA. Total rent expense at this location was $108,000 for the year ending December 31, 2017 and 2016. The Company rent is at the rate of $2,372 per month through January 31, 2019, then increasing to $2,466.54 per month to January 31, 2020. The rent from February 1, 2020 until February 28th 2021 is $2,565.20. The lease expires on February 28, 2021. This location houses satellite sales and technical support office.
The Company opened an executive suite in Salt Lake City, Utah in August 2017. This office houses the offices for the Company’s CEO and CFO. Rent on this location was waived by the landlord until January 1st 2018, when the office space expanded to house a portion of the Company’s accounting and administrative staff. The Company rent per month at this location is $3,000 per month.
Total rent expense paid was $170,765 and $206,198 for the years ending December 31, 2017 and 2016, respectively.
The following is a schedule of future minimum facility lease payments required under the related party operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2017.
SUMMARY OF OPERATING LEASE COMMITMENTS
The future minimum operating lease payments are as follows:
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Other Liabilities |
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| Other Liabilities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Liabilities |
NOTE 11 – OTHER LIABILITIES
At December 31, 2017 and 2016, other liabilities consisted of the following:
The Company has purchased key man life insurance policies for some of its executives to insure the Company against risk of loss of an executive. Should loss of an executive occur, those funds would be used to pay off their respective promissory notes, repurchase their shares and settle out any amounts owed to them and their estate.
On, June 10, 2016, the Company entered into an assignment and assumption with three of the beneficiaries of the key man insurance policies. The agreement states that the Company will be assigning the policy over to the beneficiary and the beneficiary will assume all the obligations under the premium financed note in place. The premium financed note has to be bifurcated with the lender in order to complete the transaction.
At December 31, 2017, the balance of amount of premium financed note for the remaining policy is $1,481,850 and the cash value of the policy as of this date is $1,395,468, with a net negative cash value of the policies of $18.20.
The value of the policies is recorded at the new value per the right of offset noted in Topics 210-220. To have right of offset, the Company would need to show (1) amounts of debt are determinable, (2) reporting entity has the ‘right’ to setoff, (3) the right is enforceable by law, and (4) reporting entity has the ‘intention’ to setoff. Given that the Company has met all of these, the Company has elected to use the right of setoff as the cash value of the policies is being used as the collateral for the loans. Should the Company default on payments to the policy or determine to not continue with the policies, the cash value of the policy is intended to pay off of the loan. The Company also intends to settle out the loans in the future with the cash value of the policy. |
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Profit Sharing Plan |
12 Months Ended |
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Dec. 31, 2017 | |
| Profit Sharing Plan | |
| Profit Sharing Plan |
NOTE 12 – PROFIT SHARING PLAN
The Company maintains a contributory profit sharing plan covering substantially all fulltime employees within the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). Starting in 2016, the Safe Harbor element was removed from the plan and the employer may make a discretionary matching contribution equal to a uniform percentage or dollar amount of participants’ elective deferrals for each Plan Year. In 2015, the Company is required to make a safe harbor non-elective contribution equal to 3 percent of a participant’s compensation. The plan also includes a 401(k) savings plan feature that allows substantially all employees to make voluntary contributions and provides for discretionary matching contributions determined annually by the Board of Directors. For the year ending December 31, 2017, the Company elected to forgo the match for 2017. For the year ending December 31, 2016, the Company match was $48,571 and was paid from the Accrued payroll and sales tax account in the balance sheet. |
Deferred Revenue |
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| Deferred Revenue Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred Revenue |
NOTE 13 – DEFERRED REVENUE
Deferred revenue consists of prepaid third party hardware service agreements, software maintenance service contracts and the related costs and expenses recorded net of the revenue charged to the customer and paid within normal business terms. The net amount recorded as a deferred revenue liability is being amortized into the results of operations over the related periods on a straight line basis, normally 1-5 years with 3 years being the average term.
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Credit Facilities and Line of Credit |
12 Months Ended |
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Dec. 31, 2017 | |
| Debt Disclosure [Abstract] | |
| Credit Facilities and Line of Credit |
NOTE 14 – CREDIT FACILITIES AND LINE OF CREDIT
The Company maintains operating lines of credit, factoring and revolving credit facilities with banks and finance companies to provide working capital for the business.
On July 1, 2016, the Company entered into a Factoring and Security Agreement (the “FASA”) with Action Capital Corporation (“Action”) to establish a sale of accounts facility, whereby the Company may obtain short-term financing by selling and assigning to Action acceptable accounts receivable. Pursuant to the FASA, the outstanding principal amount of advances made by Action to the Company at any time shall not exceed $5,000,000. Action will reserve and withhold an amount in a reserve account equal to 10% of the face amount of each account purchased under the FASA. The balance at December 31, 2017 is $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. |
Notes Payable |
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| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Payable |
NOTE 15 - NOTES PAYABLE
Notes payable at December 31, 2017 consists of the following:
Future maturities of notes payable are as follows;
The Company finances its Property and Casualty as well as its Directors and Officers Liability Insurance with First Insurance Funding. The Insurance period is for 12 months and the premium is financed over 9 months. The Property and Casualty Insurance is paid in equal monthly installments of $3,940 at 3.25% interest. The outstanding balance at December 31, 2016 was $19,502 and the monthly payments are current. The Directors and Officers Liability Insurance is renewed annually and there is no outstanding balance at December 31, 2017.
In connection with the BCS acquisition the Company assumed a related party note payable to the former CTO of the RFID division of BCS. The note is payable in equal monthly installments of $4,758 beginning October 31, 2014 and ending October 2018. The loan bears interest at 1.89% and is unsecured and subordinated to the Company’s bank debt. The balance on this loan at December 31, 2016 and 2017 was $130,294 of which all of it was classified as long term. In July 2016, the holder of the note signed a subordination agreement with the Supplier of the Secured Promissory Note and Action, whereby the noteholder agrees to subordinate it right and payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 507,079 shares of common stock for $230,490 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. As at December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance of the note is $220,490.
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 July 31, 2016 as part of the Separation Agreement with Mr. Ross, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,000 shares of restricted common stock. The promissory was paid off in 12 monthly installments commencing October 1, 2016 and this transaction was recorded as a restructuring charge in the amount of $84,317 in the third quarter of 2016. In addition, the Company restated a promissory note in favor of Mr. Ross which was paid at the balance of the $102,000 over 12 monthly installments commencing October 1, 2016. The balance on these two notes at December 31, 2017 was $0 and $119,999 at December 31, 2016. |
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Subordinated Notes Payable |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated Notes Payable |
NOTE 16 – SUBORDINATED NOTES PAYABLE
Subordinated Notes payable at December 31, consisted of the following:
As of December 31, 2017 and 2016, the Company recorded interest expense in connection with these notes in the amount of $79,055 and $728,267, 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 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 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 entered into two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”). Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11,000,000 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 $1,800,000 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.
On February 28, 2018, the Company entered into an additional settlement agreement with the Marins (the “Marin Settlement Agreement II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 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.
On February 22, 2018, the Company entered into a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5,437,136.40 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 $1,800,000 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.
On February 19, 2018, the Company entered into a settlement agreement with Goerge 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 $1,800,000 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.
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.
The repayment of the subordinated notes payable is contingent on the complete reimbursement of the Supplier Secured Promissory Note and other conditions and as such based on these factors management has estimated that the future maturities of subordinated notes payable at December 31, 2017 is as follows:
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Stockholders' Deficit |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' Deficit |
NOTE 17 – STOCKHOLDERS’ DEFICIT
PREFERRED STOCK
Series A
As of December 31, 2017 and 2016, 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 December 31, 2017 and 2016, there was 1 preferred share designated and 0 preferred shares outstanding.
Series C
As of December 31, 2017, there was 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
For the year ended December 31, 2016, the Company issued 150,000 shares to the board members in relation to the vesting schedule agreed to in the 4th quarter of 2015, which provides 12,500 common shares per independent board member as compensation. The shares were valued at $28,800.
In the first quarter of 2016, 39,000 shares were issued to certain employees that had a value of $7,800.
On June 17, 2016, the Company entered into a Stock Redemption Agreement whereby it redeemed 1,000,000 restricted common stock in exchange for 357,000 shares of Series C preferred stock.
On July 31, 2016 as part of the Separation Agreement with Mr. Ross, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,000 shares of restricted common stock. In addition, the Company issued 100,000 shares of Series C preferred stock pursuant to the same Separation Agreement in exchange for the redemption of 42,500 restricted common shares.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 1,650,000 shares of common stock for $750,000 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. On September 30, 2016, the Company completed the redemption of 1,650,000 shares of common stock.
In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 507,079 shares of common stock for $230,490 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. As at December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance of the note and accrued interest is $241,159.
In November 2016, the Company issued 131,000 shares to an employee as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $8,449.
In December 2016, the Company issued 708,000 shares to the Chief Financial Officer as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $48,498.
In April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement. The shares were valued at $48,000. In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement. The shares were valued at $8,400,
For the year ended December 31, 2016, pursuant to the Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration statement, 238,785 shares of Common Stock were issued for proceeds of $20,058.
In total, for the year ended December 31, 2016, the Company has redeemed a total of 3,042,500 shares of common stock.
In April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement. The shares were valued at $48,000. In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement. The shares were valued at $8,400.
On June 30, 2017, the Company issued 87,500 shares to board members in relation to the vesting schedule agreed to during 4th quarter 2015, which is based on an annual grant 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 600,000 shares of common stock as part of a consulting agreement with Carlos Jaime Nissensohn. The shares were valued at $66,000.
On December 30, 2017 the Company issued 600,000 shares of common stock valued at $59,400 as part of a debt reduction agreement with two parties.
For the year ended December 31, 2017, pursuant to the Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration statement, 335,380 shares of Common Stock.
As of December 31, 2017, the Company had 36,828,371 common shares outstanding.
Warrants and Stock Options
Warrants - The following table summarizes information about warrants granted during the years ended December 31, 2017 and 2016:
Outstanding warrants as at December 31, 2017 are as follows:
Warrants outstanding at the end of the year have the following expiry date and exercise prices:
Share Purchase Option Plan
The Company has a stock option plan whereby the Board of Directors, may grant to directors, officers, employees, or consultants of the Company options to acquire common shares. The Board of Directors of the Company has the authority to determine the terms, limits, restrictions and conditions of the grant of options, to interpret the plan and make all decisions relating thereto. The plan was adopted by the Company’s Board of Directors on November 17, 2014 in order to provide an inducement and serve as a long term incentive program. The maximum number of common shares that may be reserved for issuance was set at 10,000,000.
The option exercise price is established by the Board of Directors and may not be lower than the market price of the common shares at the time of grant. The options may be exercised during the option period determined by the Board of Directors, which may vary, but will not exceed ten years from the date of the grant. There are 10,000,000 of the Company’s common shares which may be issued pursuant to the exercise of share options granted under the Plan. As at December 31, 2017, the Company had issued options, allowing for the subscription of 9,625,000 common shares of its share capital.
Stock Options - The following table summarizes information about stock options granted during the years ended December 31, 2017 and 2016:
During 2016, the Company canceled a total of 3,400,000 stock options in connection with the redemption and cancellation of the Series A preferred stock from the former CEO.
During 2017, the Company canceled a total of 3,400,000 stock options in connection with the Separation Agreement signed with the former CFO.
Outstanding stock options as at December 31, 2017 are as follows:
Stock options outstanding at the end of the year have the following expiry date and exercise prices:
For the year ending December 31, 2017 and December 31, 2016, the Company recorded stock compensation expense relating to the vesting of stock options as follows;
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Restructuring Expenses |
12 Months Ended |
|---|---|
Dec. 31, 2017 | |
| Restructuring and Related Activities [Abstract] | |
| Restructuring Expenses |
NOTE 18 – RESTRUCTURING EXPENSES
For the year ended December 31, 2017, the Company took steps to streamline and simplify its operations in North America. The employees to be separated from the Company as a result of these streamlining initiatives were offered severance or working notices. As a result, the Company has recorded a restructuring charge of $26,880 to realize the streamlining initiatives. The restructuring charge was for severance pay. |
Litigation |
12 Months Ended |
|---|---|
Dec. 31, 2017 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Litigation |
NOTE 19 – LITIGATION
The Company was sued by Kurt Thomet for breach of obligations related to the outstanding debt obligations remaining from the promissory note executed on January 18, 2014 and subsequent amendments. The lawsuit was withdrawn in 2018 with the restructure of debt the subsequent to year end but effective December 31, 2018. The Company is not a party to any other pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the Company’s Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding. |
Related Party Transactions |
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| Related Party Transactions [Abstract] | ||||||||||||||||||||||||||||||||||||||||
| Related Party Transactions |
NOTE 20 – RELATED PARTY TRANSACTIONS
The Company leases a building from the former owner of BCS for $9,000 per month, which is believed to be the current fair market value of similar buildings in the area. These amounts are included in the lease disclosure schedule, Footnote 10.
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:
Additional related party transactions discussed in Notes 16 and 17. |
Income Tax |
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax |
NOTE 21 – INCOME TAX
For the year ended December 31, 2017, the Company has no current or deferred income tax provision.
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows at December 31, 2017 and December 31, 2017 respectively:
Components of net deferred tax assets, including a valuation allowance, are as follows at December 31:
The valuation allowance for deferred tax assets as of December 31, 2017 and 2016 was $6,428,806 and $7,996,994, respectively. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company will continue to monitor the potential utilization of this asset. Should factors and evidence change to aid in this assessment, a potential adjustment to the valuation allowance in future periods may occur. The Company records any penalties and interest as a component of operating expenses.
The reconciliation between statutory rate and effective rate is as follows at December 31, 2017:
The Company reported no uncertain tax liability as of December 31, 2017 and expects no significant change to the uncertain tax liability over the next twelve months. The Company’s 2013, 2014, 2015 and 2016 federal and state income tax returns are open for examination by the applicable governmental authorities.
As of December 31, 2017, the Company had a net operating loss (NOL) carryforward of approximately $20,127,589. The NOL carryforward begins to expire in 2024. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules which combine unrelated shareholders that do not individually own 5% or more of the corporation’s stock into one or more “public groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). In general, the annual use limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The Company has not completed a study as to whether there is a 382 limitation on its NOLs that will limit the use of its NOLs in the future. The Company has recorded a valuation allowance on the entire NOL as it believes that it is more likely than not that the deferred tax asset associated with the NOLs will not be realized regardless of whether an “ownership change” has occurred.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted. Accounting Standard Codification (ASC) 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment regardless of the effective date of those tax law changes. Certain provisions of the Tax Act are effective September 27, 2017, others are effective or identified as of December 31, 2017 and others are effective after January 1, 2018.
Given the timing of enactment of the Tax Act and the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period should not extend beyond one year from the Tax Act enactment date and is deemed to have ended when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the registrant is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740, Accounting for Income Taxes, on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. More specifically, SAB 118 summarizes a three-step process to be applied at each reporting period to account for and disclose the tax effects of the Tax Act. The steps are (1) to record the effects of the change in tax law for which accounting is complete; (2) to record provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but for which a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made, to continue to apply ASC 740, Accounting for Income Taxes, based on the tax law in effect prior to enactment of the Tax Act.
Amounts recorded where accounting is complete for the year ended January 1, 2018 primarily relate to the reduction in the U.S. corporate income tax rate to 21 percent. The Company revalued its ending gross deferred tax items, previously recorded at 35 percent, using the enacted 21 percent corporate tax rate. This change resulted in no net tax expense/benefit but did cause a reduction to our U.S. federal deferred tax asset fully offset by a reduction of our valuation allowance.
Effects of tax law changes where a reasonable estimate of the accounting effects cannot yet been made include the one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries earned post 1986. The Company has performed a preliminary earnings and profits analysis with consideration given to foreign loss carryforwards acquired as a result of the Company’s acquisitions and determined on a provisional basis that there should be no income tax effect in the current or any future period. The Company will continue to identify and evaluate data to more thoroughly identify the tax impact and record adjustments, if any, within the measurement period. |
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Subsequent Events |
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Dec. 31, 2017 | |||||||||||||
| Subsequent Events [Abstract] | |||||||||||||
| Subsequent Events |
NOTE 22 – SUBSEQUENT EVENTS
On February 28, 2018, the Company entered into two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”). Pursuant to the first Marin Settlement Agreement (the “Marin Settlement Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the Company had issued David Marin a promissory note for $11,000,000 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 $1,800,000 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.
On February 28, 2018, the Company entered into an additional settlement agreement with the Marins (the “Marin Settlement Agreement II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 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.
On February 22, 2018, the Company entered into a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness to Mr. Thomet in the current amount of $5,437,136.40 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 $1,800,000 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.
On February 19, 2018, the Company entered into a settlement agreement with Goerge 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 $1,800,000 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.
Each of the Marins, Thomet and Zicman entered into a voting agreement with the Company whereby they agreed to vote any shares of common stock beneficially owned by them as directed by the Company’s CEO and also agreed to a leakout restriction whereby they each agreed not to sell more than 10% of the common stock beneficially owned during any 30-day period.
On 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.
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:
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, and 1,000,000 warrants to purchase shares of the Company’s common stock, 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 and is hereby incorporated by reference.
On March 08,2018, the Company issued 200,000 shares of the Company’s common stock to the JSM SOC-DIG LP. |
Basis of Presentation and Summary of Significant Accounting Policies (Policies) |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation and Principles of Consolidation |
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Quest include the combined accounts of Quest Marketing, BCS, and Quest Exchange Ltd. Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the operations of Quest Solution Canada Inc. have been classified as a discontinued operations. The 2017 financials do not include any information concerning the divestment of Quest Solution Canada Inc., as this divestment occurred prior to 2017 and is not included in the year end consolidated financials for 2017. The Companies currently operate as a single business unit. All material intercompany transactions and accounts have been eliminated in consolidation. |
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| Cash and Cash Equivalents |
CASH AND CASH EQUIVALENTS
Cash consists of petty cash, checking, savings, and money market accounts. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of December 31, 2017 and 2016.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.
The Company has restricted cash on deposit with a federally insured bank in the amount of $684,610 at December 31, 2017 ($665,220 at December 31, 2016). 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. |
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| Use of Estimates |
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. |
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| Purchase Accounting and Business Combinations |
PURCHASE ACCOUNTING AND BUSINESS COMBINATIONS
The Company accounts for its business combinations using the purchase method of accounting which requires that intangible assets be recognized apart from goodwill if they are contractual in nature or separately identifiable. Acquisitions are measured on the fair value of consideration exchanged and, if the consideration given is not cash, measurement is based on the fair value of the consideration given or the fair value of the assets acquired, whichever is more reliably measurable. The excess of cost of an acquired entity over the fair value of identifiable acquired assets and liabilities assumed is allocated to goodwill.
The valuation and allocation process relies on significant assumptions made by management. In certain situations, the allocations of excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives updated information, including appraisals and other analyses, which are completed within one year of the acquisition. Revisions to the fair values, which may be significant, are recorded when pending information is finalized, within one year from the acquisition date. |
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| Accounts Receivable |
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 $17,701 for the years ended December 31, 2017 and 2016, respectively. |
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| Property and Equipment |
PROPERTY AND EQUIPMENT
Property and equipment are stated at purchased cost and depreciated using both straight-line and accelerated methods over estimated useful lives ranging from 3 to 15 years. Upon disposition of property and equipment, related gains and losses are recorded in the results of operations. Depreciation expense for the years ended December 31, 2017 and 2016 was $61,223 and $90,626, respectively. For federal income tax purposes, depreciation is computed using the modified accelerated cost recovery system. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred. |
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| Advertising |
ADVERTISING
The Company generally expenses marketing and advertising costs as incurred. During 2017 and 2016, the Company spent $188,077 and $337,275, respectively, on marketing, trade show and store front expense and advertising, net of co-operative rebates.
The Company received rebates on advertising from co-operative advertising agreements with several vendors and suppliers. These rebates have been recorded as a reduction to the related advertising and marketing expense. |
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| Inventory |
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. |
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| Fair Value of Financial Instruments |
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:
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification of assets and liabilities within the three levels of the hierarchy outlined above.
Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain liabilities at fair value on a recurring basis such as our contingent consideration related to business combinations and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the fiscal years ending December 31, 2017 and 2016.
The Company has classified its contingent consideration related to the acquisitions as a Level 3 liability. Revenue and other assumptions used in the calculation require significant management judgment. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis. Based on that assessment, the Company recognized an adjustment of $0 to the actual calculation of the earn-out obligations during each of the fiscal years ended December 31, 2017 and 2016.
As of December 31, 2017, the Company does not have any contingent liabilities. |
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| Revenue Recognition |
REVENUE RECOGNITION
Recurring technology and services revenue consists of subscription-based fees, software subscription license fees, software maintenance fees and hosting fees related to the use of our solution to manage our customers’ communications expenses, as well as fees for perpetual software licenses and professional services and products sold.
We recognize revenue when persuasive evidence of an arrangement exists, pricing is fixed and determinable, collection is reasonably assured and delivery or performance of service has occurred. Recurring technology and services subscription-based fees, software subscription license fees, software maintenance fees and hosting fees are recognized ratably over the term of the period of service. The subscription-based services we provide include help desk, staging, carrier activations and provisioning.
Sales revenue is recognized upon the shipment of merchandise to customers. The Company recognizes revenues from software sales when software products are shipped.
Software license fees consist of fees paid for a perpetual license agreement for our technology, which are recognized in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 605, Software Revenue Recognition, as amended.
Professional services related to the implementation of our software products, which we refer to as consulting services, are generally performed on a fixed fee basis under separate service arrangements. Consulting services revenue is recognized as the services are performed by measuring progress towards completion based upon either costs or the achievement of certain milestones. |
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| Net Income (Loss) Per Common Share |
NET INCOME (LOSS) PER COMMON SHARE
Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic net loss per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted-average number of common shares outstanding for computing basic EPS for the years ended December 31, 2017 and 2016 were 35,814,751 and 35,947,523, respectively. Diluted net loss per share of common stock is the same as basic net loss per share of common stock because the effects of potentially dilutive securities are antidilutive.
The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share because such securities have an anti-dilutive impact due to losses reported:
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| Goodwill and Intangible Assets |
Goodwill and intangible assets
As a result of acquisitions, the Company recorded goodwill and identifiable intangible assets as part of its allocation of the purchase consideration.
Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested 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.
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 2017. |
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| Foreign Currency Translation |
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements of the Company are presented in U.S. dollars. The functional currency for the Company is U.S. dollars. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the time of the transaction. All of the Company’s continuing operations are conducted in U.S. dollars. The Company owns a non-operating subsidiary in Canada, from which it has received no revenue since October 1, 2016. Canadian records of the divested Canadian operation were maintained in the local currency and re-measured to the functional currency as follows: monetary assets and liabilities are converted using the balance sheet period-end date exchange rate, while the non-monetary assets and liabilities are converted using the historical exchange rate. Expenses and income items are converted using the weighted average exchange rates for the reporting period. Foreign transaction gains and losses are reported on the consolidated statement of operations and were included in the amount of loss from discontinued operations. |
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| Comprehensive Income (Loss) |
COMPREHENSIVE INCOME (LOSS)
Comprehensive income/(loss) is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has no items of comprehensive income/loss other than net income/loss in any period presented for continuing operations. Therefore, net loss attributable to common stockholders as presented in the consolidated statements of operations equals comprehensive loss. |
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| Income Taxes |
INCOME TAXES
The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for consolidated financial reporting purposes and such amounts recognized for tax purposes, and are measured by applying enacted tax rates in effect in years in which the differences are expected to reverse.
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. |
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| Stock-based Compensation |
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation in accordance with ASC Topic 718 “Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
For non-employee stock-based compensation, we have adopted ASC Topic 505 “Equity-Based Payments to Non-Employees”, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
On December 23, 2015, the Company’s Board of Directors approved the Quest Solution, Inc. Employee Stock Purchase Plan (the “ESPP”), under which 1,900,000 shares of common stock were reserved for the purchase by the Company’s employees. Under the plan, employees may purchase a limited number of shares of the Company’s common stock at a 15% discount from the closing market prices measured on the last days of each month. |
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| Recent Accounting Pronouncements |
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2014, the FASB issued ASU 2014-15 requiring management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern, which is currently performed by the external auditors. Management will be required to perform this assessment for both interim and annual reporting periods and must make certain disclosures if it concludes that substantial doubt exists. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016. The adoption of this guidance is not expected to have a material effect on our financial statements.
In July 2015, the Financial Accounting Standard Board (“FASB”) issued ASU 2015-11 (ASC 330), Simplifying the Measurement of Inventory. This guidance requires companies to measure inventory using the lower of cost and net realizable value. It is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt ASU 2015-11 as of January 1, 2017 on a prospective basis and there is expected to be no impact of this guidance on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. The ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position, thereby simplifying the current guidance that requires an entity to separate deferred assets and liabilities into current and noncurrent amounts. The Company adopted ASU 2015-17 as of January 31, 2017 on a prospective basis. The statement of financial position as of January 31, 2017 reflects the classification of deferred tax assets and liabilities as noncurrent.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S GAAP, the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application required. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of Topic 606 but clarifies the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective for the annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-08 on our consolidated financial statements and results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-15 on our consolidated financial statements and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application to any business development transaction.
In January 2017, the FASB issued ASU No. 2017-04, which eliminates Step 2 from the goodwill impairment test. The goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The amendments should be applied on a prospective basis. For public business entities that are SEC filer with the Securities and Exchange Commission, or the SEC, the amendments are effective for annual or any interim impairment tests in reporting periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In May 2017, the FASB issued (ASU) No. 2017-09, which clarifies when an entity should account for a change to the terms or conditions of a share-based payment award as a modification. Under the ASU, modification accounting is required if the fair value, vesting conditions or classification of the award changes because of the change in terms or conditions. The amendments in this update will be applied prospectively to an award modified on or after the effective date. The amendments are effective for reporting periods (interim and annual) beginning after December 15, 2017.
In July 2017, the FASB issued Accounting Standards Update, or ASU, No. 2017-11. The amendments in part I of the ASU change the classification analysis of certain equity-linked financial instruments (or embedded derivatives) with down round features. When determining the classification of an instrument as a liability or as equity, entities will be required to disregard down round features upon the assessment of whether the instrument is indexed to the entity’s own stock. Entities that provide earnings per share, or EPS, data will adjust their basic EPS calculation for the effect of the feature when it is triggered (i.e. upon the occurrence of an event that results in the reduction of the strike price of the related equity-linked financial instrument), and will recognize the effect of the feature within equity. Part II of this guidance replaces the indefinite deferral of certain provisions of ASC Topic 480, distinguishing liabilities from equity, mandatorily redeemable non-controlling interests and mandatorily redeemable financial instruments of non-public entities with a scope exception.
The amendments in part I of the ASU should be applied either retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective or retrospectively for each prior reporting period presented. These amendments are effective for reporting periods (interim and annual) beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective date by one year (ASU 2015-14). This ASU will now be effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); and 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12). The new standard is effective for us beginning January 1, 2018. We are implementing the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. After an analysis on the new standard we have determined that there will be no material effect on the way Quest Solution recognizes revenue with one exception, our Service and Maintenance contract sales. The sales of extended sales and service maintenance contracts is not a material component of our total revenue, however under the guidance in ASC 606 the revenue recognition will be accelerated as there is no material future performance obligation.
Other accounting standards that have been issued by the Financial Accounting Standards Board or other standards-setting bodies are not expected to have a material impact on our financial position, results of operations and cash flows. For period ended December 31, 2017, the adoption of other accounting standards had no material impact on our financial positions, results of operations, or cash flows.
The Company has evaluated other recent pronouncements and believes that none of them will have a material effect on the company’s financial statements.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted. Accounting Standard Codification (ASC) 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment regardless of the effective date of those tax law changes. Certain provisions of the Tax Act are effective September 27, 2017, others are effective or identified as of December 31, 2017 and others are effective after January 1, 2018.
Given the timing of enactment of the Tax Act and the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period should not extend beyond one year from the Tax Act enactment date and is deemed to have ended when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the registrant is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740, Accounting for Income Taxes, on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. More specifically, SAB 118 summarizes a three-step process to be applied at each reporting period to account for and disclose the tax effects of the Tax Act. The steps are (1) to record the effects of the change in tax law for which accounting is complete; (2) to record provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but for which a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made, to continue to apply ASC 740, Accounting for Income Taxes, based on the tax law in effect prior to enactment of the Tax Act.
Amounts recorded where accounting is complete for the year ended January 1, 2018 primarily relate to the reduction in the U.S. corporate income tax rate to 21 percent. The Company revalued its ending gross deferred tax items, previously recorded at 35 percent, using the enacted 21 percent corporate tax rate. This change resulted in no net tax expense/benefit but did cause a reduction to our U.S. federal deferred tax asset fully offset by a reduction of our valuation allowance.
Effects of tax law changes where a reasonable estimate of the accounting effects cannot yet been made include the one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries earned post 1986. The Company has performed a preliminary earnings and profits analysis with consideration given to foreign loss carryforwards acquired as a result of the Company’s acquisitions and determined on a provisional basis that there should be no income tax effect in the current or any future period. The Company will continue to identify and evaluate data to more thoroughly identify the tax impact and record adjustments, if any, within the measurement period. |
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Basis of Presentation and Summary of Significant Accounting Policies (Tables) |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share |
The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share because such securities have an anti-dilutive impact due to losses reported:
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Divestiture of Quest Solution Canada Inc (Tables) |
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| Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Discontinued Operations |
The following is a reconciliation of the major line items constituting pretax loss of discontinued operations to the after-tax loss of discontinued operations that are presented in the condensed consolidated statements of operations as indicated below The 2016 fiscal year has 9 months of operations and the 2015 fiscal year has 3 months of operations:
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| Schedule of Discontinued Cash Flows |
The net cash flows incurred by Quest Solution Canada Inc. for the year ended December 31, are presented below.
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Accounts Receivable (Tables) |
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| Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||
| Schedule of Accounts Receivable Net |
At December 31, 2017 and 2016, accounts receivable consisted of the following:
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Inventory (Tables) |
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| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Inventory |
At December 31, 2017 and 2016, inventories consisted of the following:
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Intangible Assets (Tables) |
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Intangible Assets |
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| Schedule of Finite-lived Intangible Assets, Future Amortization Expense |
The future amortization expense on the Trade Names and Customer Relationships are as follows:
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Operating Lease Commitments (Tables) |
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| Leases [Abstract] | |||||||||||||||||||||||||||||||
| Schedule of Future Minimum Rental Payments for Operating Leases |
The future minimum operating lease payments are as follows:
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Other Liabilities (Tables) |
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| Other Liabilities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Other Liabilities |
At December 31, 2017 and 2016, other liabilities consisted of the following:
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Deferred Revenue (Tables) |
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| Deferred Revenue Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Deferred Revenue |
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| Schedule of Expected Future Amortization of Net Deferred Revenue |
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Notes Payable (Tables) |
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| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Notes Payable |
Notes payable at December 31, 2017 consists of the following:
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| Schedule of Future Maturities of Note Payable |
Future maturities of notes payable are as follows;
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Subordinated Notes Payable (Tables) |
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| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Subordinated Notes payable |
Subordinated Notes payable at December 31, consisted of the following:
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| Schedule of Future Maturities of Subordinated Notes Payable |
The repayment of the subordinated notes payable is contingent on the complete reimbursement of the Supplier Secured Promissory Note and other conditions and as such based on these factors management has estimated that the future maturities of subordinated notes payable at December 31, 2017 is as follows:
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Stockholders' Deficit (Tables) |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stock Options Warrants |
The following table summarizes information about warrants granted during the years ended December 31, 2017 and 2016:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Outstanding Warrants |
Outstanding warrants as at December 31, 2017 are as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Warrants Outstanding, Expiry Date and Exercise Prices |
Warrants outstanding at the end of the year have the following expiry date and exercise prices:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stock Options Granted |
The following table summarizes information about stock options granted during the years ended December 31, 2017 and 2016:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Outstanding Stock Options |
Outstanding stock options as at December 31, 2017 are as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stock Options, Expiry Date and Exercise Prices |
Stock options outstanding at the end of the year have the following expiry date and exercise prices:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Stock Compensation Expense |
For the year ending December 31, 2017 and December 31, 2016, the Company recorded stock compensation expense relating to the vesting of stock options as follows;
|
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Income Tax (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Deferred Tax Assets and Liabilities |
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows at December 31, 2017 and December 31, 2017 respectively:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Deferred Tax Assets and Valuation Allowances |
Components of net deferred tax assets, including a valuation allowance, are as follows at December 31:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Reconciliation of Statutory Rate and Effective Tax Rate |
The reconciliation between statutory rate and effective rate is as follows at December 31, 2017:
|
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History and Organization of the Company (Details Narrative) - USD ($) |
12 Months Ended | |||
|---|---|---|---|---|
Sep. 30, 2016 |
Dec. 31, 2017 |
Dec. 31, 2016 |
Nov. 30, 2014 |
|
| Cash from divestiture of Quest Solution Canada Inc. | $ 576,592 | |||
| Accrued dividend | 31,742 | |||
| Cancelled the debt | $ 7,000,000 | |||
| Preferred Class B Stock [Member] | ||||
| Number of redeemed shares during the period | 1 | |||
| Preferred Class C Stock [Member] | ||||
| Number of redeemed shares during the period | 1,839,030 | |||
| Quest Solution Canada Inc [Member] | ||||
| Sale of stock, consideration received on transaction | $ 1,000,000 | |||
| Cash from divestiture of Quest Solution Canada Inc. | $ 576,592 | |||
| Contingent consideration, percentage | 15.00% | |||
| Quest Solution Canada Inc [Member] | Maximum [Member] | ||||
| Net value proceeds of contingent consideration | $ 2,300,000 | |||
| Quest Exchange Ltd., [Member] | ||||
| Number of redeemed shares during the period | 5,200,000 | |||
| Viascan Group Inc [Member] | ||||
| Liabilities assumed | $ 1,000,000 | |||
| Bar Code Specialties Inc. [Member] | ||||
| Percentage of shares acquired | 100.00% | |||
Going Concern (Details Narrative) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||
| Working capital deficit | $ 14,755,001 | |
| Accumulated deficit | $ 35,554,994 | $ 32,935,199 |
Basis of Presentation and Summary of Significant Accounting Policies - Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share (Details) - shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Potential shares excluded from diluted net loss per share | 19,851,451 | 8,727,527 |
| Options to Purchase Common Stock [Member] | ||
| Potential shares excluded from diluted net loss per share | 9,625,000 | 2,644,000 |
| Convertible Preferred Stock [Member] | ||
| Potential shares excluded from diluted net loss per share | 4,828,530 | 3,143,530 |
| Convertible Debentures [Member] | ||
| Potential shares excluded from diluted net loss per share | 2,042,076 | |
| Warrants to Purchase Common Stock [Member] | ||
| Potential shares excluded from diluted net loss per share | 5,905,000 | 1,405,000 |
| Common Stock Subject to Repurchase [Member] | ||
| Potential shares excluded from diluted net loss per share | (507,079) | (507,079) |
Concentrations (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Uninsured cash | $ 0 | $ 0 |
| Revenue [Member] | One Customer [Member] | ||
| Percentage of concentration risk | 15.70% | 17.30% |
| Accounts Receivable [Member] | One Customer [Member] | ||
| Percentage of concentration risk | 15.50% | 33.10% |
| Accounts Receivable [Member] | One Customer [Member] | Minimum [Member] | ||
| Percentage of concentration risk | 10.00% | 10.00% |
| Accounts Payable [Member] | One Vendor [Member] | ||
| Percentage of concentration risk | 71.80% | 76.80% |
| Accounts Payable [Member] | One Vendor [Member] | Minimum [Member] | ||
| Percentage of concentration risk | 10.00% | 10.00% |
Divestiture of Quest Solution Canada Inc - Schedule of Discontinued Operations (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Business Combinations [Abstract] | |||
| Revenues | $ 11,326,849 | $ 5,255,601 | |
| Cost of goods sold | (9,751,651) | (4,046,494) | |
| Gross profit | 1,575,198 | 1,209,107 | |
| General and administrative | (874,506) | (300,668) | |
| Salary and employee benefits | (2,074,977) | (623,276) | |
| Depreciation and amortization | (178,069) | (104,215) | |
| Professional fees | (58,138) | (18,258) | |
| Goodwill impairment | (4,800,000) | ||
| Total operating expenses | (7,985,690) | (1,046,417) | |
| Operating (loss) income | (6,410,492) | 162,690 | |
| Restructuring expenses | (108,640) | ||
| Gain (loss) on foreign currency | 117,138 | (229,442) | |
| Interest expense | (443,019) | (171,815) | |
| Other (expenses) income | 129 | (1,389) | |
| Total other income (expenses) | (434,392) | (402,646) | |
| Net Income (Loss) Before Income Taxes | (6,844,884) | (239,956) | |
| Provision for Current Income Taxes | (6,991) | ||
| Net Loss from discontinued operations | $ (6,851,875) | $ (239,956) | |
Divestiture of Quest Solution Canada Inc - Schedule of Discontinued Cash Flows (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Business Combinations [Abstract] | ||
| Net cash used by operating activities | $ (1,743,606) | |
| Net cash provided in investing activities | 16,097 | |
| Net cash (used) provided in financing activities | (2,867,565) | |
| Net Cash Outflow from discontinued operations | $ (4,595,074) | |
Accounts Receivable - Schedule of Accounts Receivable Net (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Receivables [Abstract] | ||
| Trade Accounts Receivable | $ 6,400,235 | $ 10,607,378 |
| Less Allowance for doubtful accounts | (12,501) | (17,701) |
| Total Accounts Receivable (net) | $ 6,387,734 | $ 10,589,677 |
Inventory - Schedule of Inventory (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Equipment and clearing service | $ 329,003 | $ 375,863 |
| Raw Materials | 31,697 | 119,922 |
| Finished Goods | 79,020 | 35,808 |
| Total inventories | $ 439,720 | $ 531,593 |
Intangible Assets (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Impairment charges | ||
| Amortization expense | $ 1,701,714 | $ 1,701,700 |
| Minimum [Member] | ||
| Finite useful lives of amortized over period | 3 years | |
| Maximum [Member] | ||
| Finite useful lives of amortized over period | 10 years | |
Intangible Assets - Summary of Intangible Assets (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Accumulated amortization | $ (5,909,581) | $ (4,207,867) |
| Intangibles, net | 17,784,583 | 19,486,297 |
| Goodwill [Member] | ||
| Intangibles gross | 10,114,164 | 10,114,164 |
| Trade Names [Member] | ||
| Intangibles gross | 4,390,000 | 4,390,000 |
| Customer Relationships [Member] | ||
| Intangibles gross | $ 9,190,000 | $ 9,190,000 |
Intangible Assets - Schedule of Finite-lived Intangible Assets, Future Amortization Expense (Details) |
Dec. 31, 2017
USD ($)
|
|---|---|
| Goodwill and Intangible Assets Disclosure [Abstract] | |
| 2017 | $ 1,679,599 |
| 2018 | 1,471,714 |
| 2019 | 1,471,714 |
| 2020 | 1,405,791 |
| 2021 | 786,000 |
| Thereafter | 855,600 |
| Total | $ 7,670,418 |
Intellectual Property (Details Narrative) - USD ($) |
Aug. 27, 2015 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|---|
| Due to related party | $ 100,000 | ||
| Thomet [Member] | |||
| Due to related party | $ 750,000 | $ 5,092,245 | |
| Rampart Systems [Member] | Licensing Agreements [Member] | |||
| Licenses previous acquired | $ 450,000 | ||
| Settlement Agreement [Member] | Thomet [Member] | |||
| Payment of settlement | 7,036,000 | ||
| Cost of license | $ 1,150,000 | ||
| Percentage of royalty on sales | 3.50% | ||
| Licenses term | 5 years | ||
| Intellectual property, description | Under the terms of the Settlement Agreement, the Company was required to pay Thomet $7,036,000 as full satisfaction for two (2) promissory notes held by Thomet by September 30, 2015. Included in this agreement (and deducted from the $7.036 million settlement) was the assignment of license rights to Thomet with an assigned value of $1.15 million. The licenses were previously acquired for $450,000 from Rampart Systems. Thomet shall pay Quest Solution a royalty fee of 3.5% of revenue related to the “gun-barrel,” “rebar inspection,” and “air frame” licenses for a five (5) year period, beginning on the effective date of the Assignment Agreement (as defined in the Settlement Agreement). |
Operating Lease Commitments (Details Narrative) |
1 Months Ended | 12 Months Ended | |||
|---|---|---|---|---|---|
|
Mar. 31, 2013
USD ($)
|
Dec. 31, 2017
USD ($)
|
Dec. 31, 2016
USD ($)
|
Jun. 30, 2012
USD ($)
|
Apr. 30, 2012
a
|
|
| Square feet of office space | a | 7,000 | ||||
| Lease provides for monthly payments | $ 3,837 | $ 2,587 | |||
| Percentage of monthly rent increased more than any one year | 2.00% | ||||
| Lease expiration period | March 2017 | ||||
| Lease expiration date | Feb. 28, 2021 | ||||
| Rent expense | $ 170,765 | $ 206,198 | |||
| Lease term | 1 year | ||||
| January 31, 2019 [Member] | |||||
| Rent expense | $ 2,372 | ||||
| January 31, 2020 [Member] | |||||
| Rent expense | 2,467 | ||||
| From February 1, 2020 until February 28 2021[Member] | |||||
| Rent expense | 2,565 | ||||
| BCS Office and Warehouse [Member] | |||||
| Rent expense | $ 108,000 | $ 108,000 | |||
| Ohio [Member] | |||||
| Lease provides for monthly payments | $ 2,691 | ||||
| Lease expiration date | Jun. 30, 2018 | ||||
| Salt Lake City [Member] | |||||
| Rent expense | $ 3,000 | ||||
Operating Lease Commitments - Schedule of Future Minimum Rental Payments for Operating Leases (Details) |
Dec. 31, 2017
USD ($)
|
|---|---|
| Leases [Abstract] | |
| 2018 | $ 148,421 |
| 2019 | 72,246 |
| 2020 | 65,504 |
| Thereafter | 5,130 |
| Total | $ 293,301 |
Other Liabilities (Details Narrative) |
Dec. 31, 2017
USD ($)
|
|---|---|
| Other Liabilities Disclosure [Abstract] | |
| Premium financed notes | $ 1,481,850 |
| Cash value | 1,395,468 |
| Policy negative cash value | $ 18 |
Other Liabilities - Schedule of Other Liabilities (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Other Liabilities Disclosure [Abstract] | ||
| Unearned Incentive from credit Cards | $ 77,307 | $ 123,105 |
| Key Man life Insurance liability | 150,146 | 208,091 |
| Dividend payable | 289,687 | 101,075 |
| Others | 43,810 | 127,931 |
| Other liabilities | 560,951 | 560,202 |
| Less Current Portion | (121,117) | (227,932) |
| Total long term other liabilities | $ 439,833 | $ 332,270 |
Profit Sharing Plan (Details Narrative) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2015 |
Dec. 31, 2016 |
|
| Profit Sharing Plan | |||
| Percentage of non-elective contribution of participant's compensation | 3.00% | ||
| Deferred compensation description | The plan also includes a 401(k) savings plan feature that allows substantially all employees to make voluntary contributions and provides for discretionary matching contributions determined annually by the Board of Directors. For the year ending December 31, 2017, the Company elected to forgo the match for 2017. For the year ending December 31, 2016, the Company match was $48,571 and was paid from the Accrued payroll and sales tax account in the balance sheet. | ||
| Total contribution deferred compensation | $ 48,571 | ||
Deferred Revenue (Details Narrative) |
12 Months Ended |
|---|---|
Dec. 31, 2017 | |
| Amortization period of deferred revenue liability | 3 years |
| Minimum [Member] | |
| Amortization period of deferred revenue liability | 1 year |
| Maximum [Member] | |
| Amortization period of deferred revenue liability | 5 years |
Deferred Revenue - Schedule of Deferred Revenue (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Deferred Revenue Disclosure [Abstract] | ||
| Deferred Revenue | $ 7,753,906 | $ 8,721,725 |
| Less Deferred Costs & Expenses | (6,540,688) | (7,277,275) |
| Net Deferred Revenue | 1,213,218 | 1,444,450 |
| Less Current Portion | (761,194) | (879,026) |
| Total Long Term net Deferred Revenue | $ 452,024 | $ 565,423 |
Deferred Revenue - Schedule of Expected Future Amortization of Net Deferred Revenue (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Net deferred revenue | $ 452,024 | $ 565,423 |
| 2018 [Member] | ||
| Net deferred revenue | 452,024 | |
| 2019 [Member] | ||
| Net deferred revenue | ||
| 2020 [Member] | ||
| Net deferred revenue | ||
| 2021 [Member] | ||
| Net deferred revenue |
Credit Facilities and Line of Credit (Details Narrative) - USD ($) |
Jul. 02, 2016 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|---|
| Line of credit, balance | $ 3,667,417 | $ 5,059,292 | |
| Factoring and Security Agreement [Member] | Prime Rate [Member] | |||
| Percentage of average outstanding balance | 2.00% | ||
| Factoring and Security Agreement [Member] | Action Capital Corporation [Member] | |||
| Percentage of reserve account | 10.00% | ||
| Percentage of average outstanding balance | 0.75% | ||
| Factoring and Security Agreement [Member] | Action Capital Corporation [Member] | Maximum [Member] | |||
| Debt instrument face amount | $ 5,000,000 |
Notes Payable - Schedule of Notes Payable (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Total notes payable | $ 3,559,319 | $ 9,913,219 |
| Less: current portion | (3,429,025) | (9,782,925) |
| Long Term Notes Payable | 130,294 | 130,294 |
| Supplier Secured Note Payable [Member] | ||
| Total notes payable | 3,208,534 | 9,414,352 |
| Insurance Notes [Member] | ||
| Total notes payable | 19,502 | |
| All Other [Member] | ||
| Total notes payable | $ 350,785 | $ 479,365 |
Notes Payable - Schedule of Future Maturities of Note Payable (Details) - Notes Payable [Member] |
Dec. 31, 2017
USD ($)
|
|---|---|
| 2018 | $ 3,429,025 |
| 2019 | 130,294 |
| Total | $ 3,559,319 |
Subordinated Notes Payable - Schedule of Subordinated Notes payable (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Total notes payable | $ 3,329,400 | $ 17,515,345 |
| Less: current portion | 106,500 | |
| Total long-term notes payable | 3,222,900 | 17,515,345 |
| Note Payable Acquisition of Quest [Member] | ||
| Total notes payable | 5,967,137 | |
| Note Payable Acquisition of BCS [Member] | ||
| Total notes payable | 10,348,808 | |
| Note Payable Debt Restructure Marin [Member] | ||
| Total notes payable | 1,200,000 | |
| Note Payable Debt Restructure Thomet [Member] | ||
| Total notes payable | 750,000 | |
| Quest Preferred Stock Note Payable [Member] | ||
| Total notes payable | 1,199,400 | 1,199,400 |
| Note Payable Debt Restructure Zicman [Member] | ||
| Total notes payable | $ 180,000 |
Subordinated Notes Payable - Schedule of Future Maturities of Subordinated Notes Payable (Details) - Subordinated Notes Payable [Member] |
Dec. 31, 2017
USD ($)
|
|---|---|
| 2018 | $ 106,500 |
| 2019 | 894,000 |
| 2020 | 894,000 |
| 2021 | 894,000 |
| Thereafter | 1,213,500 |
| Total | $ 4,002,000 |
Stockholders' Deficit - Schedule of Stock Options Warrants (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Equity [Abstract] | ||
| Number of warrants balance, beginning of period | 1,405,000 | 1,410,000 |
| Number of warrants, granted | 4,500,000 | |
| Number of warrants, expired | (5,000) | |
| Number of warrants, cancelled, forfeited | ||
| Number of warrants, exercised | ||
| Number of warrants, balance end of period | 5,905,000 | 1,405,000 |
| Number of warrants, exercisable | 4,780,000 | 1,405,000 |
| Weighted Average Exercise Price balance, beginning of period | $ 0.52 | $ 0.52 |
| Weighted Average Exercise Price, granted | 0.17 | |
| Weighted Average Exercise Price, expired | (1.00) | |
| Weighted Average Exercise Price, cancelled, forfeited | ||
| Weighted Average Exercise Price, exercised | ||
| Weighted Average Exercise Price balance, end of period | 0.25 | 0.52 |
| Weighted Average Exercise Price, exercisable | $ 0.29 | $ 0.52 |
Stockholders' Deficit - Schedule of Warrants Outstanding, Expiry Date and Exercise Prices (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Warrant outstanding | 5,905,000 | 1,405,000 |
| March 22, 2018 [Member] | ||
| Warrant expiry Date | Mar. 22, 2018 | Mar. 22, 2018 |
| Warrant exercise Prices | $ 1.00 | $ 1.00 |
| Warrant outstanding | 300,000 | 300,000 |
| April 1, 2018 [Member] | ||
| Warrant expiry Date | Apr. 01, 2018 | Apr. 01, 2018 |
| Warrant exercise Prices | $ 0.25 | $ 0.25 |
| Warrant outstanding | 900,000 | 900,000 |
| April 30, 2018 [Member] | ||
| Warrant expiry Date | Apr. 30, 2018 | Apr. 30, 2018 |
| Warrant exercise Prices | $ 1.00 | $ 1.00 |
| Warrant outstanding | 5,000 | 5,000 |
| July 10, 2018 [Member] | ||
| Warrant expiry Date | Jul. 10, 2018 | Jul. 10, 2018 |
| Warrant exercise Prices | $ 1.00 | $ 1.00 |
| Warrant outstanding | 200,000 | 200,000 |
| December 30, 2020 [Member] | ||
| Warrant expiry Date | Dec. 31, 2020 | Dec. 31, 2020 |
| Warrant exercise Prices | $ 0.20 | $ 0.20 |
| Warrant outstanding | 3,000,000 | |
| August 2, 2021 [Member] | ||
| Warrant expiry Date | Aug. 02, 2021 | Aug. 02, 2021 |
| Warrant exercise Prices | $ 0.11 | $ 0.11 |
| Warrant outstanding | 1,500,000 | |
Stockholders' Deficit - Schedule of Stock Options Granted (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Equity [Abstract] | ||
| Number of stock options balance, beginning of period | 2,644,000 | 6,044,000 |
| Number of stock options, granted | 6,981,000 | |
| Number of stock options, expired | ||
| Number of stock options, cancelled, forfeited | (3,400,000) | |
| Number of stock options, exercised | ||
| Number of stock options balance, end of period | 9,625,000 | 2,644,000 |
| Number of stock options, exercisable | 6,010,583 | 1,925,250 |
| Weighted average exercise price balance, beginning of period | $ 0.49 | $ 0.50 |
| Weighted average exercise price, stock options granted | 0.10 | |
| Weighted average exercise price, stock options expired | ||
| Weighted average exercise price, stock options cancelled, forfeited | (0.50) | (0.50) |
| Weighted average exercise price, stock options exercised | ||
| Weighted average exercise price balance, end of period | 0.21 | 0.49 |
| Weighted average exercise price, exercisable | $ 0.25 | $ 0.49 |
Stockholders' Deficit - Summary of Stock Compensation Expense (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Equity [Abstract] | ||
| Board compensation expense | $ 8,181 | $ 28,880 |
| Stock compensation | 56,400 | 273,443 |
| Stock Option vesting | 686,164 | 73,128 |
| Total | $ 750,745 | $ 375,451 |
Restructuring Expenses (Details Narrative) - USD ($) |
3 Months Ended | 12 Months Ended | |
|---|---|---|---|
Sep. 30, 2016 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Restructuring and Related Activities [Abstract] | |||
| Restructuring charge | $ 84,317 | $ 26,880 | $ 544,941 |
Litigation (Details Narrative) |
12 Months Ended |
|---|---|
Dec. 31, 2017 | |
| Maximum [Member] | |
| Percentage of beneficially in common stock interest adverse | 5.00% |
Related Party Transactions (Details Narrative) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Aug. 02, 2017 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Rent expense, per month | $ 170,765 | $ 206,198 | |
| Consulting Agreement [Member] | Carlos J. Nissensohn [Member] | |||
| Debt monthly payment | $ 15,000 | ||
| One time signatory fee of restricted stock | 600,000 | ||
| Number of warrant shares | 1,500,000 | ||
| Warrant exercise price per share | $ 0.11 | ||
| Warrant term | 4 years | ||
| Equity component description | 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 | ||
| Proceeds from equity financing | $ 3,000,000 | ||
| Share capital percentage | 3.00% | ||
| Warrant exercise price percentage | 100.00% | ||
| Payment of financing | $ 50,000 | ||
| Total transaction price percentage | 3.00% | ||
| Bar Code Specialties, Inc [Member] | |||
| Rent expense, per month | $ 9,000 | ||
Income Tax (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Valuation allowance for deferred tax assets | $ 6,428,806 | $ 7,996,994 |
| Net operating loss (NOL) carryforward | $ 20,127,589 | |
| Net operating loss (NOL) carryforward expiration year | expire in 2024 | |
| Description on ownership change | Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules which combine unrelated shareholders that do not individually own 5% or more of the corporation’s stock into one or more “public groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). | |
| Effective income tax rate | 0.00% | (8.05%) |
| Income tax reconciliation description | Amounts recorded where accounting is complete for the year ended January 1, 2018 primarily relate to the reduction in the U.S. corporate income tax rate to 21 percent. The Company revalued its ending gross deferred tax items, previously recorded at 35 percent, using the enacted 21 percent corporate tax rate. | |
| January 1, 2018 [Member] | ||
| Effective income tax rate | 21.00% | |
Income Tax - Schedule of Deferred Tax Assets and Liabilities (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Income Tax Disclosure [Abstract] | ||
| Reserves and deferred revenue | $ 752,442 | $ 1,120,948 |
| Stock options | 477,600 | 472,254 |
| Net operating loss | 5,202,184 | 6,567,549 |
| Total gross deferred tax assets | 6,432,226 | 8,160,751 |
| Less:Valuation Allowance | (6,428,806) | (7,996,994) |
| Deferred tax liabilities | (3,102) | (128,188) |
| Amortization of intangible assets and depreciation | (318) | (35,569) |
| Net deferred tax assets |
Income Tax - Schedule of Deferred Tax Assets and Valuation Allowances (Details) - USD ($) |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Income Tax Disclosure [Abstract] | ||
| Deferred tax assets | $ 6,428,806 | $ 7,996,994 |
| Valuation allowance | (6,428,806) | (7,996,994) |
| Total deferred tax assets |
Income Tax - Schedule of Reconciliation of Statutory Rate and Effective Tax Rate (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| Income Tax Disclosure [Abstract] | ||
| Federal statutory tax rate | 34.00% | 34.00% |
| State taxes | 3.94% | (0.27%) |
| Nondeductible items | (0.94%) | (17.80%) |
| Change in valuation allowance | 66.48% | (46.30%) |
| Return to provision adjustments | (14.17%) | 22.35% |
| Rate Change | (85.99%) | 0.00% |
| Other | (3.33%) | 0.00% |
| Effective tax rate | 0.00% | (8.05%) |