UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 21, 2018 (October 05, 2018)
QUEST SOLUTION, INC.
(Exact name of registrant as specified in charter)
Delaware | 000-09047 | 20-3454263 | ||
(State or other jurisdiction | (Commission | (IRS Employer | ||
of incorporation) | File Number) | Identification No.) |
860 Conger Street, Eugene, OR 97402
(Address of Principal Executive Offices) (Zip Code)
(714) 899-4800
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, If Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
[ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
[ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
[ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
[ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company [ ]
If an emerging growth company, indicate by check mart if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
EXPLANATORY NOTE
On October 11, 2018, Quest Solution, Inc. (the “Company”) filed a Current Report on Form 8-K disclosing the closing of the purchase of HTS Image Processing, Inc. (“HTS” or the “Acquired Entity”) which qualifies as a “significant acquisition” under Rule 3-05 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”). The Company filed a Current Report on Form 8-K on October 11, 2018 and is filing this Amendment No.1 to such Current Report on Form 8-K (the “Amendment”) to disclose the financial statements required under Regulation S-X.
The information in Item 1.01, Item 2.01, Item 2.03, Item 3.02, Item 7.01 is restated herein without any changes.
Item 1.01 Entry into a Material Agreement.
Purchase Agreement (Related Party Transaction)
On October 05, 2018, Quest Solution, Inc. (the “Company”) entered into a purchase agreement (the “Purchase Agreement”) with Walefar Investments, Ltd. (“Walefar”), and Campbeltown Consulting, Ltd., (“Campbeltown”), (Walefar and Campbeltown are collectively referred to as the “Sellers”). Pursuant to the Agreement, the Company purchased 100% of the capital stock of HTS Image Processing, Inc., a Delaware company (“HTS”) from the Sellers. As consideration, the Company (i) issued to the Sellers 22,452,954 shares of the Company’s common stock (“Common Stock”), having a value of $5,298,897 based on the average closing price of the common stock for the 20 days’ preceding the Purchase Agreement (the “Per Share Value”), (ii) cash in the amount of $300,000, and (iii) a 12 month convertible promissory note with a principal amount of $700,000 and an interest rate of six percent (6%) per annum (the “Note”). The Note also provides the Sellers the right to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $0.236.
The Purchase Agreement constitutes a “related party transaction” as defined by Item 404 of Regulation S-K (§229.404) because of Company director Shai Lustgarten’s position as Chief Executive Officer of HTS and stock ownership in HTS. Additionally, Campbeltown is a “related party” because Carlos Jaime Nissenson, a beneficial owner of Campbeltown, is a consultant to the Company, a principal stockholder of the Company, and father of Company director Niv Nissenson. Carlos Jaime Nissenson is also a stockholder and director of HTS. Pursuant to the Purchase Agreement, Shai Lustgarten shall receive 11,226,477 shares of the Company’s Common Stock and Carlos Jaime Nissenson shall receive 11,226,477 shares of the Company’s Common Stock.
Because of the related party nature of the Purchase Agreement, the Board formed a special committee consisting of Andrew MacMillan, an “independent director” of the Company as defined by Item 407 of Regulation S-K (§229.407) (the “Special Independent Director”) who had no financial interest in HTS. The Special Independent Director was responsible for negotiating the terms of the Purchase Agreement. The Special Independent Director was also given the power to work with the Company’s counsel on the Purchase Agreement and coordinate with the Company’s financial advisor. The Board received an analysis of what it believed was a fair valuation range for the purchase of HTS (the “Valuation Analysis”). Each of the Board members participated in a presentation of the HTS’ artificial intelligence (“AI”) technology and how that AI technology can complement the Company’s business and opportunities. Based on the Valuation Analysis, the Company’s vision of a combined company and the recommendation of the Special Independent Director, the Company made an offer to the shareholders of HTS (the “Offer”). Additionally, the Board received a fairness opinion with respect to the Offer. Following further deliberation and the recommendation of the Special Independent Director, the Purchase Agreement was unanimously approved by the independent directors of the Company. Shai Lustgarten and Niv Nissenson abstained from the vote because of their aforementioned related party interest in the Purchase Agreement.
The foregoing description of the Purchase Agreement is qualified in their entirety by the full text of such agreements, which are incorporated herein by reference and filed as exhibits hereto.
Item 2.01 Completion of Acquisition or Disposition of Assets
As described in Item 1.01 above, the Company entered into a Purchase Agreement with Walefar and Campbeltown, pursuant to which the Company has purchased 100% of the capital stock of HTS. As consideration, the Company (i) issued to the Sellers 22,452,954 shares of Common Stock, having a value of $5,298,897 based on the Per Share Value, (ii) cash in the amount of $300,000, and (iii) a 12 month convertible promissory note with a principal amount of $700,000 and an interest rate of six percent (6%) per annum (the “Note”). The Note also provides the Sellers the right to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $0.236.
Item 2.03 Creation of a Direct Financial Obligation
As described in Item 1.01 above, the Company issued to the Sellers a 12 month convertible promissory note in the principal amount of $700,000 which encompasses the total amount owed by the Company to the Sellers.
Item 3.02 Unregistered Sales of Equity Securities
As described in Section 1.01 hereof, the Company issued an aggregate of 22,452,954 shares of Common Stock in connection with the October 05, 2018 Purchase Agreement.
Item 7.01 Regulation FD Disclosure
On October 11, 2018, the Company issued a press release (the “Press Release”) announcing the acquisition. A copy of the Press Release is attached hereto and incorporated herein by reference in its entirety as Exhibit 99.1.
Item 9.01 Financial statements and Exhibits
(a) | Financial Statements of Business Acquired. |
In accordance with Item 9.01(a), the following are filed as exhibits to this Current Report on Form 8-K:
Audited financial statements of the Acquired Entity as of, and for the year ended December 31, 2017 are filed as Exhibit 99.2 hereto.
Unaudited Financial Statements of the Acquired Entity for the Nine Months Ended September 30, 2018 are filed as Exhibit 99.3 hereto.
Pro Forma Financial Statements for the Nine Months Ended September 30, 2018 are filed as Exhibit 99.4 hereto.
(b) | Exhibits. |
Reference is made to the Exhibit Index following the signature page of this Current Report on Form 8-K, which is incorporated herein by reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: December 21, 2018
QUEST SOLUTION, INC. | ||
By: | /s/ Shai S. Lustgarten | |
Shai S. Lustgarten | ||
President and CEO |
Exhibit Index
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
Financial Statements and
Independent Auditor’s Report
For the year ended December 31, 2017
Table of Contents
Page | |
INDEPENDENT AUDITOR’S REPORT | 3 |
FINANCIAL STATEMENTS: | |
Balance Sheet | 4 |
Statement of Income | 6 |
Statement of Retained Deficit | 7 |
Statement of Cash Flows | 8 |
Notes to Financial Statements | 9 |
2 |
Members of the Board of Directors
HTS Image Processing, Inc. (formerly Teamtronics, Inc.)
We have audited the accompanying financial statements of HTS Image Processing, Inc. (formerly Teamtronics, Inc.) (a Delaware corporation) which comprise the balance sheet as of December 31, 2017, and the related statements of operations, stockholders,’ equity (deficit) and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Teamtronics, Inc. as of December 31, 2017, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Haynie & Company
Salt Lake City, Utah
December 24, 2018
3 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
December 31, | 2017 | |||
Assets | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 100,444 | ||
Accounts receivable, trade, net | 868,790 | |||
Inventories | 801,082 | |||
Prepaid and other current assets | 78,349 | |||
Total current assets | 1,848,665 | |||
Property and equipment: | ||||
Production equipment | 94,467 | |||
Vehicles | 62,791 | |||
Accumulated depreciation | (46,937 | ) | ||
Property and equipment, net | 110,321 | |||
Total assets | $ | 1,958,986 |
See the accompanying notes to financial statements.
4 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
Balance Sheet
(continued)
December 31, | 2017 | |||
Liabilities and stockholders’ equity (deficit) | ||||
Current liabilities: | ||||
Accounts payable | $ | 428,082 | ||
Accrued liabilities | 280,883 | |||
Deferred tax liability | 15,259 | |||
Current portion, long-term debt | 10,928 | |||
Total current liabilities | 735,152 | |||
Long-term debt, net of current portion | 1,378,359 | |||
Total liabilities | 2,113,511 | |||
Stockholders’ equity (deficit): | ||||
Common stock, $.001 par value; 1,000,000 shares | ||||
authorized, 1,000,000 issued and outstanding | 1,000 | |||
Retained earnings (deficit) | (155,525 | ) | ||
Total stockholders’ equity (deficit) | (154,525 | ) | ||
Total liabilities and stockholders’ equity (deficit) | $ | 1,958,986 |
See the accompanying notes to financial statements.
5 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
For the year ended December 31, | 2017 | |||
Net sales | $ | 4,850,799 | ||
Cost of sales | 3,819,838 | |||
Gross profit | 1,030,961 | |||
General, administrative and selling expenses | 407,448 | |||
Acquisition costs | 389,191 | |||
Depreciation expense | 39,652 | |||
Salaries and wages | 193,376 | |||
Operating income | 1,294 | |||
Income before income taxes | 1,294 | |||
Provision for income taxes | (182,056 | ) | ||
Net income (loss) | $ | (180,762 | ) |
See the accompanying notes to financial statements.
6 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
Statement of Changes in Stockholders’ Equity (Deficit)
For the year ended December 31, 2017
Total | ||||||||||||||||
Retained | Stockholders’ | |||||||||||||||
Total Common Stock | Earnings | Equity | ||||||||||||||
Shares | Amount | (Deficit) | (Deficit) | |||||||||||||
Balance at December 31, 2016 | 1,000,000 | $ | 1,000 | $ | 25,237 | $ | 26,237 | |||||||||
Net income (loss) | - | - | (180,762 | ) | (180,762 | ) | ||||||||||
Balance at December 31, 2017 | 1,000,000 | $ | 1,000 | $ | (155,525 | ) | $ | (154,525 | ) |
See the accompanying notes to financial statements.
7 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
For the year ended December 31, | 2017 | |||
Cash flows from operating activities: | ||||
Net income (loss) | $ | (180,762 | ) | |
Adjustments to reconcile net income (loss) to net cash | ||||
from operating activities: | ||||
Depreciation and amortization | 39,652 | |||
(Increase) decrease in operating assets: | ||||
Accounts receivable | 136,782 | |||
Inventories | 486,122 | |||
Prepaid and other current assets | (28,135 | ) | ||
Increase (decrease) in operating liabilities: | ||||
Accounts payable | (828,815 | ) | ||
Accrued liabilities | 160,538 | |||
Deferred tax liability | 15,259 | |||
Net cash from operating activities | (199,359 | ) | ||
Cash flows from investing activities: | ||||
Acquisition of property and equipment | (69,837 | ) | ||
Net cash from investing activities | (69,837 | ) | ||
Cash flows from financing activities: | ||||
Payments on long-term debt | (25,498 | ) | ||
Net cash from financing activities | (25,498 | ) | ||
Net change in cash and cash equivalents | (294,694 | ) | ||
Cash and cash equivalents, beginning of year | 395,138 | |||
Cash and cash equivalents, end of year | $ | 100,444 | ||
Supplemental disclosures of cash flow information: | ||||
Interest paid | $ | - | ||
Income taxes paid | - | |||
Schedule of non-cash financing activities | ||||
Accounts payable converted to note payable | $ | 1,327,363 |
See the accompanying notes to financial statements.
8 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
December 31, 2017
1. | Organization |
Organization
HTS Image Processing, Inc (formerly Teamtronics) (a Delaware C corporation - the Company) was organized on September 20, 2016 to manufacture and sell portable rugged computerized equipment for industrial and field automation.
2. | Significant Accounting Policies |
Basis of Accounting - The financial statements of the Company are prepared on the accrual basis of accounting and in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents are defined as cash and investments that have a maturity of less than three months. As of December 31, 2017, the Company had no cash equivalents in banks in excess of FDIC insurance of $250,000.
Accounts Receivable - Accounts receivable are stated net of an allowance for doubtful accounts. The Company estimates the allowance based on historical write-offs and management experience. As of December 31, 2017, management estimated all accounts receivable were collectible in full and accordingly, no allowance has been provided.
Inventory - The Company’s inventories are stated at the lower of cost (using the first-in first-out method - FIFO) or market. Inventories include raw materials (hardware, computer accessories etc.), and work-in-process. Work-in-process have standard overhead and labor costs allocated based on a percentage determined by management.
Property & Equipment - Property and equipment are recorded at cost. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives, generally from three to fifteen years. Maintenance, repairs and minor renewals are expensed as incurred. The cost of property sold or otherwise disposed of and the related accumulated depreciation is relieved from the accounts, and any gains or losses arising from sale or disposal are included in income.
9 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
Notes to Financial Statements (Continued)
December 31, 2017
2. | Summary of Significant Accounting Policies (continued) |
Paid Time Off - The Company provides paid time off for vacation, sick and personal time for its employees. Employees do not have the option of cashing out unused paid time off. The Company expenses the paid time off as incurred. No accrual has been made at year end due to the immateriality of the balance.
Product Warranty - The Company provides a warranty for its products which are sold. The warranty is for a period of 14 months from the shipping date. The Company has not incurred any warranty expense and has not made an accrual for an estimated warranty payable.
Impairment of long-lived assets - Management reviews net carrying value of all property and equipment and other long-lived assets on a periodic basis or whenever events or circumstances indicate that the carrying value of those assets may not be recoverable.
An impairment loss is recognized when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows. In this circumstance, the Company would recognize an impairment loss equal to the difference between carrying value and the fair value of the asset.
Income Taxes – The Company is a C Corporation and files income tax returns with the U.S. Federal and Utah state jurisdictions. The Company accounts for income taxes under the provisions of ASC 715-60, “Accounting for Income Taxes”, requiring companies to account for deferred income taxes using the asset and liability method. Under such practices, the Company recognizes deferred tax assets and liabilities related to the future tax consequences attributable to ongoing differences between the financial statement carrying amount and tax basis of existing assets and liabilities. The effect of income tax credits, loss carry-forwards and changes in statutory tax rates are recognized in the periods that such amounts are expected to be realized.
The Company adopted the provisions of ASC 740-10, “Accounting for Uncertainty in Income Taxes”. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 requires a company to determine whether it is more-likely-than-not that a tax position will be sustained “when challenged” or “when examined” by the applicable taxing authority based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of ASC 740-10, management performed a review of its material tax positions and determined that there were no unrecognized tax benefits which would materially affect the effective tax rate if recognized.
10 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
Notes to Financial Statements (Continued)
December 31, 2017
2. | Summary of Significant Accounting Policies (continued) |
Income Taxes (continued)- The Company will include interest and penalties arising from the underpayment of income taxes in the statements of income in the provision for income taxes. As of December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions. Tax years that remain subject to examination are years 2016 and forward.
Revenue Recognition - The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, and collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment.
Fair Value of Financial Instruments - The carrying amounts reported in the accompanying financial statements for cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company’s debt obligations approximate fair value based on current interest rates for instruments with similar terms.
Concentrations - The Company has one major customer whose sales and accounts receivable balances at year end consist of 97% and 99% of the total sales and accounts receivable balances, respectively.
During the year ended December 31, 2017 the Company had one major supplier. As of December 31, 2017, purchases from this major supplier amounted to 35% of total purchases. Total accounts payable for this supplier at December 31, 2017 was 25% of accounts payable.
New Accounting Standards - In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. The objective of this update is to provide a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance. This update is effective in annual reporting periods beginning after December 15, 2018 and the interim periods within that year. The Company is evaluating the impact of this update on the Company’s financial statements.
In February of 2016, the FASB issued ASU 2016-02 Leases. Under the new guidance, lessees will be required to recognize so called right of use assets and liabilities for most leases having lease terms of 12 months or more. This update is effective in annual reporting periods beginning after December 31, 2019 and the interim periods starting thereafter. The Company is evaluating the impact of this update on the Company’s financial statements.
11 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
Notes to Financial Statements (Continued)
December 31, 2017
3. | Inventories |
Inventories consist of the following:
December 31, | 2017 | |||
Raw materials | $ | 719,195 | ||
Work-in-process | 81,887 | |||
Total inventories | $ | 801,082 |
4. | Property and Equipment |
Property and equipment consisted of the following:
December 31, | 2017 | |||
Production equipment | $ | 87,422 | ||
Office Equipment | 7,045 | |||
Vehicles | 62,791 | |||
Accumulated depreciation | (46,937 | ) | ||
Property and equipment, net | $ | 110,321 |
5. | Stockholders’ Equity |
The Company is authorized to issue 1,000,000 shares of $.001 par common stock. As of December 31, 2017, there were 1,000,000 shares issued, and outstanding.
6. | Notes Payable |
As of December 31, 2017, the Company owed $1,362,166 on two loans payable to a non-related party. The loans are non-interest bearing and are due in monthly installments of $3,643. The Company’s equipment is held as collateral on the notes. The following is a schedule by years of future minimum payments at December 31, 2017:
December 31, | 2017 | |||
2018 | $ | 1,378,359 | ||
2019 | 10,928 | |||
2020 | - | |||
2021 | - | |||
2022 | - | |||
Total | $ | 1,389,287 |
12 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
Notes to Financial Statements (Continued)
December 31, 2017
7. | Income Taxes |
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax liabilities consist of the following components as of December 31, 2017:
December 31 | 2017 | |||
Deferred tax assets: | ||||
Capitalized acquisition costs | $ | 175,676 | ||
Deferred tax liabilities | ||||
Depreciation | (15,259 | ) | ||
Valuation allowance | (175,676 | ) | ||
Net deferred tax liabilities | $ | (15,259 | ) |
The income tax provision differs from the amount of income tax determined by applying the U.S federal income tax rate to pretax income from continuing operations for the year ended December 31, 2017 due to the following:
December 31 | 2017 | |||
Book income | $ | 518 | ||
Meals & entertainment | 777 | |||
Change in acquisition costs | 98,913 | |||
Change in depreciation | 8,579 | |||
Change in tax rates | 5,403 | |||
Valuation allowance | - | |||
Total | $ | 114,190 |
Deferred income taxes result from temporary or permanent differences between the recognition of certain income and expense items for income tax reporting purposes and financial purposes. The deferred tax balance is primarily the result of differences in accelerated depreciation methods for tax purposes and capitalized acquisition costs.
Deferred tax assets (liabilities) in the accompanying balance sheet are comprised of the following:
December 31 | 2017 | |||
Capitalized Acquisition Costs | 114,190 | |||
Less valuation allowance | - | |||
Net deferred tax assets | $ | 114,190 |
As of December 31, 2017 and 2016, the Company had no net operating loss carry forwards for tax purposes available to offset future taxable income.
The Company’s total deferred tax asset and deferred tax liabilities as of December 31, 2017 as follows:
December 31 | 2017 | |||
Total deferred tax assets | $ | - | ||
Total deferred tax liabilities | (15,259 | ) | ||
Total deferred tax liabilities | $ | (15,259 | ) |
As of December 31, 2017 and 2016, the Company had no net operating loss carry forwards for tax purposes available to offset future taxable income.
13 |
HTS Image Processing, Inc.
(formerly Teamtronics, Inc.)
Notes to Financial Statements (Continued)
December 31, 2017
8. | Retirement Plan |
The Company has a defined contribution plan covering substantially all employees. The plan allows employees to make contributions to the plan with the Company making discretionary matching contributions up to 3% of employee compensation. As of December 31, 2017, the Company provided matching contributions to the defined contribution plan in the amount of $10,018 respectively.
10. | Commitments and Contingencies |
The Company is subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of the Company’s management, the ultimate liability with respect to these proceedings and claims will not have a material adverse effect upon the Company’s financial position or results of operations.
11. | Subsequent Events |
The Company evaluated all events or transactions that occurred after December 31, 2017 through December 21, 2018, the date the Company issued these financial statements and noted the following events:
Effective January 1, 2018, the Company purchased Hi-Tech Solutions, ltd, an Israeli Limited Liability Company for $4,300,000. The purchase price is being paid In cash over a 9 month period with $2,100,000 being paid at closing, $1,000,000 being paid three months after closing and the balance paid in tranches over the next nine months.
The Company is currently evaluating the fair values to assign to the acquired, identifiable assets and liabilities. The purchase was entered into for purposes of acquiring additional technology and manufacturing capacity associated with computer vision imaging processing. The Company expects that approximately $1,700,000 will be allocated to identifiable assets and liabilities and that the balance of the purchase price will be allocated to Intellectual Property and to Goodwill.
On September 24, 2018, the Company changed its name from Teamtronics, Inc. to HTS Image Processing, Inc.
On October 05, 2018, Quest Solution, Inc. (Quest) entered into a purchase agreement (the “Purchase Agreement”) with the share holders of the Company who are Walefar Investments, Ltd. (“Walefar”), and Campbeltown Consulting, Ltd., (“Campbeltown”), (Walefar and Campbeltown are collectively referred to as the “Sellers”). Pursuant to the Agreement, Quest purchased 100% of the capital stock of HTS Image Processing, Inc., a Delaware company (“HTS”) from the Sellers. As consideration, Quest (i) issued to the Sellers 22,452,954 shares of its common stock (“Common Stock”), having a value of $5,298,897 based on the average closing price of the common stock for the 20 days’ preceding the Purchase Agreement (the “Per Share Value”), (ii) cash in the amount of $300,000, and (iii) a 12 month convertible promissory note with a principal amount of $700,000 and an interest rate of six percent (6%) per annum (the “Note”). The Note also provides the Sellers the right to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of Quest’s common stock at a conversion price of $0.236. HTS is now a wholly owned subsidiary of Quest.
Subsequent to year end, the Company entered into an agreement with Beijer Electronics, Inc. wherein amounts previously recorded as an accounts payable was converted into a note payable. The balance converted from accounts payable was $1,267,527. The terms of the note are as follows: $400,000 payment made at the time of the agreement and the balance paid over a 12 month period of time with an interest rate to be determined later. The Company has reported a note payable on the balance sheet as of December 31, 2017 as this would have been the balance at the time.
14 |
HTS IMAGE PROCESSING, INC
CONDENSED COMBINED BALANCE SHEET
September 30, | December 31, | |||||||
(In thousands) | 2018 | 2017 | ||||||
Unaudited | Audited | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 770 | $ | 101 | ||||
Accounts receivable, net | 3,435 | 869 | ||||||
Inventories, net | 1,421 | 801 | ||||||
Prepaid expenses and other current assets | 171 | 78 | ||||||
TOTAL CURRENT ASSETS | 5,797 | 1,849 | ||||||
Fixed assets, net | 179 | 110 | ||||||
Goodwill | 2,684 | - | ||||||
TOTAL ASSETS | $ | 8,660 | $ | 1,959 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 2,466 | $ | 428 | ||||
Accrued payroll and sales tax | 137 | 281 | ||||||
Deferred tax Liability | - | 15 | ||||||
Notes payable, related party | 127 | - | ||||||
Other current liabilities | 3,965 | 11 | ||||||
TOTAL CURRENT LIABILITIES | 6,695 | 735 | ||||||
LONG TERM LIABILITIES | ||||||||
Other long term liabilities | 2,556 | 1,378 | ||||||
TOTAL LIABILITIES | $ | 9,252 | $ | 2,113 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EARNINGS (DEFICIT) | ||||||||
Series C Preferred stock | $ | - | $ | - | ||||
Common stock | 2 | 1 | ||||||
Accumulated earnings (deficit) | (544 | ) | (155 | ) | ||||
TOTAL STOCKHOLDERS’ EARNINGS (DEFICIT) | (542 | ) | (154 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 8,710 | $ | 1,959 |
HTS IMAGE PROCESSING, INC
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
FOR THE 9-MONTH PERIOD ENDED SEPTEMBER 30, 2018
(In thousands except per share data) | Unaudited | |||
Revenue | $ | 6,419 | ||
Cost of revenue | 3,581 | |||
Gross profit (loss) | 2,838 | |||
Operating expenses | ||||
General and administrative | 167 | |||
Salary and employee benefits | 1,668 | |||
Research and development | 43 | |||
Professional fees | 440 | |||
Total operating expenses | 2,318 | |||
Income from operations | 520 | |||
Other income (expenses) | (335 | ) | ||
Income before income taxes | 185 | |||
Income tax benefit (provision) | (127 | ) | ||
Net income available to common stockholders | $ | 58 | ||
Basic and diluted net loss per common share | $ | 0.58 | ||
Basic and diluted weighted average common shares outstanding | 100,000 |
NOTE 1 — DESCRIPTION OF BUSINESS
Overview
HTS Image Processing, Inc (formerly Teamtronics, Inc.) (a Delaware C corporation - the Company) was organized on September 20, 2016 to manufacture and sell portable rugged computerized equipment for industrial and field automation.
HTS a technological world leader in computer vision image processing-based solutions for Security, Safe Cities, Traffic Management, Parking Management, Law Enforcement, Surveillance and Access Control. HTS’ groundbreaking AI-based vision solutions are currently in use for sensitive Homeland Security anti-terror projects and discerning customers including: the Brookhaven National Laboratory for access control, JFK Airport, Newark Airport, La Guardia Airport, Boston’s Logan Airport, the U.S. Department of Transportation for readers at the US/Mexico border crossing, as well as a Florida municipality, and a Middle Eastern Homeland Security authority for the automated monitoring of sensitive zones.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting - The financial statements of the Company are prepared on the accrual basis of accounting and in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents are defined as cash and investments that have a maturity of less than three months. As of December 31, 2017, the Company had no cash equivalents in banks in excess of FDIC insurance of $250,000.
Accounts Receivable - Accounts receivable are stated net of an allowance for doubtful accounts. The Company estimates the allowance based on historical write-offs and management experience. As of September 30, 2018, management estimated all accounts receivable were collectible in full and accordingly, no allowance has been provided.
Inventory - The Company’s inventories are stated at the lower of cost (using the first-in first-out method - FIFO) or market. Inventories include raw materials (hardware, computer accessories etc.), and work-in-process. Work-in-process have standard overhead and labor costs allocated based on a percentage determined by management.
Property & Equipment - Property and equipment are recorded at cost. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives, generally from three to fifteen years. Maintenance, repairs and minor renewals are expensed as incurred. The cost of property sold or otherwise disposed of and the related accumulated depreciation is relieved from the accounts, and any gains or losses arising from sale or disposal are included in income.
Paid Time Off - The Company provides paid time off for vacation, sick and personal time for its employees. Employees do not have the option of cashing out unused paid time off. The Company expenses the paid time off as incurred. No accrual has been made at year end due to the immateriality of the balance.
Impairment of long-lived assets - Management reviews net carrying value of all property and equipment and other long-lived assets on a periodic basis or whenever events or circumstances indicate that the carrying value of those assets may not be recoverable.
An impairment loss is recognized when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows. In this circumstance, the Company would recognize an impairment loss equal to the difference between carrying value and the fair value of the asset.
Income Taxes – The Company is a C Corporation and files income tax returns with the U.S. Federal and Utah state jurisdictions. The Company accounts for income taxes under the provisions of ASC 715-60, “Accounting for Income Taxes”, requiring companies to account for deferred income taxes using the asset and liability method. Under such practices, the Company recognizes deferred tax assets and liabilities related to the future tax consequences attributable to ongoing differences between the financial statement carrying amount and tax basis of existing assets and liabilities. The effect of income tax credits, loss carry-forwards and changes in statutory tax rates are recognized in the periods that such amounts are expected to be realized.
The Company adopted the provisions of ASC 740-10, “Accounting for Uncertainty in Income Taxes”. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 requires a company to determine whether it is more-likely-than-not that a tax position will be sustained “when challenged” or “when examined” by the applicable taxing authority based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of ASC 740-10, management performed a review of its material tax positions and determined that there were no unrecognized tax benefits which would materially affect the effective tax rate if recognized.
The Company will include interest and penalties arising from the underpayment of income taxes in the statements of income in the provision for income taxes. As of December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions. Tax years that remain subject to examination are years 2016 and forward.
Income Tax of subsidiary – The Company adopts the laws of the country in which the subsidiary is located in accordance with the tax laws of the country.
Revenue Recognition - The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, and collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment.
Advertising - Advertising, promotions and marketing costs are charged to operations as incurred. Advertising expense for the year ended September 30, 2018 was $0.
Fair Value of Financial Instruments - The carrying amounts reported in the accompanying financial statements for cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company’s debt obligations approximate fair value based on current interest rates for instruments with similar terms.
NOTE 3 — ACCOUNTS RECEIVABLE, NET
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
accounts receivable | $ | 3,435 | $ | 869 | ||||
Allowance for Doubtful Accounts | — | — | ||||||
accounts receivable, net | $ | 3,435 | $ | 869 |
NOTE 4 — INVENTORIES
Inventories are stated at the lower of cost or market, computed using the first-in, first-out method. Inventories consist of the following:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Raw materials | $ | 1,372 | $ | 719 | ||||
Working-in-process | 49 | 82 | ||||||
Total inventories | $ | 1,421 | $ | 801 |
NOTE 5 — PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Production equipment | $ | 190 | $ | 87 | ||||
Office Equipment | 23 | 7 | ||||||
Vehicles | 63 | 63 | ||||||
accumulated depreciation | (97 | ) | (47 | ) | ||||
Property and equipment, net | $ | 179 | $ | 110 |
QUEST SOLUTION, INC. AND HTS IMAGE PROCESSING, INC
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENTS OF INCOME AND
COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2017
Historical | Pro Forma | |||||||||||||||
Quest | HTS | Adjustments | Combined | |||||||||||||
(In thousands except per share data) | ||||||||||||||||
Revenue | $ | 54,459 | $ | 4,851 | $ | - | $ | 59,310 | ||||||||
Cost of revenue | 43,089 | 3,820 | - | 46,909 | ||||||||||||
Gross profit (loss) | 11,370 | 1,031 | - | 12,401 | ||||||||||||
Operating expenses | ||||||||||||||||
General and administrative | 1,859 | 408 | - | 2,267 | ||||||||||||
Salary and employee benefits | 7,952 | 193 | - | 8,145 | ||||||||||||
Professional fees | 674 | 40 | 714 | |||||||||||||
Depreciation and amortization | 1,763 | - | - | 1,763 | ||||||||||||
Total operating expenses | 12,248 | 641 | - | 12,889 | ||||||||||||
Income (loss) from operations | (878 | ) | 390 | - | (488 | ) | ||||||||||
Other income (expenses) | (1,553 | ) | (389 | ) | - | (1,942 | ) | |||||||||
Loss before income taxes | (2,431 | ) | 1 | - | (2,430 | ) | ||||||||||
Income tax benefit (provision) | - | (182 | ) | - | (182 | ) | ||||||||||
Net income (loss) | (2,431 | ) | (181 | ) | - | (2,612 | ) | |||||||||
Less: Preferred stock - Series C dividend | (290 | ) | - | - | (290 | ) | ||||||||||
Net income (loss) available to common stockholders | $ | (2,141 | ) | $ | (181 | ) | $ | - | $ | (2,322 | ) | |||||
Basic and diluted net loss per common share | $ | (0.06 | ) | $ | (1.81 | ) | $ | - | $ | (0.06 | ) | |||||
Basic and diluted weighted average common shares outstanding | 35,814,751 | 100,000 | 35,814,751 |
QUEST SOLUTION, INC. AND HTS IMAGE PROCESSING, INC
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENTS OF INCOME AND
COMPREHENSIVE LOSS
FOR THE 9-MONTH PERIOD ENDED SEPTEMBER 30, 2018
Historical | Pro Forma | |||||||||||||||
Quest | HTS | Adjustments | Combined | |||||||||||||
(In thousands except per share data) | ||||||||||||||||
Revenue | $ | 42,368 | $ | 6,419 | $ | (2,913 | ) (a1) | $ | 45,874 | |||||||
Cost of revenue | 33,687 | 3,581 | (2,635 | ) (a1) | 34,633 | |||||||||||
Gross profit (loss) | 8,681 | 2,838 | (278 | ) | 11,241 | |||||||||||
Operating expenses | ||||||||||||||||
General and administrative | 1,724 | 117 | - | 1,841 | ||||||||||||
Salary and employee benefits | 6,426 | 1,668 | - | 8,094 | ||||||||||||
Research and development | 43 | 43 | ||||||||||||||
Professional fees | 1,168 | 440 | (278 | ) (a1) | 1,330 | |||||||||||
Depreciation and amortization | 1,312 | 50 | - | 1,362 | ||||||||||||
Total operating expenses | 10,630 | 2,317 | (278 | ) | 12,669 | |||||||||||
Income (loss) from operations | (1,949 | ) | 520 | - | (1,429 | ) | ||||||||||
Other income (expenses) | (2,344 | ) | (336 | ) | - | (2,680 | ) | |||||||||
Loss before income taxes | (4,293 | ) | 185 | - | (4,108 | ) | ||||||||||
Income tax benefit (provision) | (44 | ) | (127 | ) | - | (171 | ) | |||||||||
Net income (loss) | (4,337 | ) | 58 | - | (4,279 | ) | ||||||||||
Less: Preferred stock - Series C dividend | (142 | ) | - | - | (142 | ) | ||||||||||
Net income (loss) available to common stockholders | $ | (4,479 | ) | $ | 58 | $ | - | $ | (4,137 | ) | ||||||
Basic and diluted net loss per common share | $ | (0.11 | ) | $ | 0.58 | $ | - | $ | (0.06 | ) | ||||||
Basic and diluted weighted average common shares outstanding | 42,592,783 | 100,000 | 22,352,954 | 65,045,737 |
(a1) | The Pro Forma Income Statement has been adjusted to eliminate certain intercompany items. |
QUEST SOLUTION, INC. AND HTS IMAGE PROCESSING, INC
UNAUDITED PROFORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2018
Historical | Pro Forma | |||||||||||||||
(In thousands) | Quest | HTS | Adjustments | Combined | ||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 56 | $ | 770 | $ | $ | 826 | |||||||||
Restricted cash | 532 | - | 532 | |||||||||||||
Accounts receivable, net | 10,669 | 3,435 | (1,909 | )(a4) | 12,195 | |||||||||||
Inventories, net | 1,058 | 1,421 | 2,479 | |||||||||||||
Prepaid expenses and other current assets | 413 | 171 | 584 | |||||||||||||
TOTAL CURRENT ASSETS | 12,728 | 5,797 | (1,909 | ) | 16,616 | |||||||||||
Fixed assets, net | 64 | 179 | 243 | |||||||||||||
Goodwill | 10,114 | 2,684 | 6,901 | (a) | 19,699 | |||||||||||
Trade name, net | 1,927 | - | 1,927 | |||||||||||||
Customer relationships, net | 4,467 | - | 4,467 | |||||||||||||
Other assets | 33 | - | 33 | |||||||||||||
TOTAL ASSETS | $ | 29,333 | $ | 8,660 | $ | 4,992 | $ | 42,985 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts payable and accrued expenses | $ | 11,409 | $ | 2,466 | $ | (578 | )(a4) | $ | 13,297 | |||||||
Line of credit | 4,637 | - | 4,637 | |||||||||||||
Accrued payroll and salestax | 2,381 | 137 | 2,518 | |||||||||||||
Deferred revenue, net | 9 | - | 9 | |||||||||||||
Current portion of note payable | 8,752 | - | 8,752 | |||||||||||||
Notes payable, related party | 426 | 127 | 553 | |||||||||||||
Other current liabilities | 119 | 3,975 | (1,331 | )(a4) | 2,763 | |||||||||||
TOTAL CURRENT LIABILITIES | 27,733 | 6,705 | (1,909 | ) | 32,529 | |||||||||||
LONG TERM LIABILITIES | ||||||||||||||||
Note payable, related party | 1,704 | - | 1,000 | (a2) | 2,704 | |||||||||||
Accrued interest, related party | 5 | - | 5 | |||||||||||||
Long term portion of note payable | 130 | - | 130 | |||||||||||||
Other long term liabilities | 431 | 2,556 | 2,987 | |||||||||||||
TOTAL LIABILITIES | $ | 30,003 | $ | 9,262 | $ | (909 | ) | $ | 38,356 | |||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
STOCKHOLDERS’ EARNINGS (DEFICIT) | ||||||||||||||||
Series C Preferred stock | $ | 5 | $ | - | $ | $ | 5 | |||||||||
Common stock | 49 | 2 | 18 | (a1), (a3) | 69 | |||||||||||
Common stock to be repurchased by the Company | (231 | ) | - | (231 | ) | |||||||||||
Additional paid-in capital | 38,328 | - | 5,279 | (a3) | 43,607 | |||||||||||
Accumulated earnings (deficit) | (38,821 | ) | (604 | ) | 604 | (a1) | (38,821 | ) | ||||||||
TOTAL STOCKHOLDERS’ EARNINGS (DEFICIT) | (670 | ) | (602 | ) | 5,901 | 4,629 | ||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 29,333 | $ | 8,660 | $ | 4,992 | $ | 42,925 |
Notes:
(a) | This entry reflects the preliminary allocation of the purchase price to identifiable net assets acquired and the excess purchase price to Goodwill as follows: |
Book value of net assets acquired | ||||
HTS’s equity | (602 | ) | ||
Preliminary fair value adjustment of HTS | ||||
Preliminary estimate of fair value of identifiable net assets (liabilities) acquired | (602 | ) | ||
Goodwill | 6,901 |
(a1) | The Pro Forma Balance Sheet has been adjusted to eliminate the historical shareholders’ equity accounts of HTS. |
(a2) | The Pro Forma Balance Sheet has been adjusted by the amount of cash investment required pursuant to the terms of the Asset Purchase Agreement. |
(a3) | The Pro Forma Balance Sheet has been adjusted by the amount of common stock issued to the sellers pursuant to the terms of the Asset Purchase Agreement. |
(a4) | The Pro Forma Balance Sheet has been adjusted by the amount of related party balances. |