NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION
AND Summary of Significant Accounting Policies-
BASIS
OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The
interim consolidated financial statements of Quest Solution, Inc. include the combined accounts of Quest Marketing, Inc., an Oregon
Corporation, and Quest Exchange Ltd. a Canadian based holding Company.
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, which was all collected at June 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:
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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.
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●
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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, receivable upon a liquidity event or a change
of control of Quest Solution Canada Inc. for a period of 7 years subsequent to the transaction.
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The
Company also has a right of first refusal for any offer to purchase Quest Solution Canada Inc. for a 7 year period.
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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.
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The
operations of Quest Solution Canada Inc. have been classified as a discontinued operation and the assets and liabilities of Quest
Solution Canada Inc. have been classified as held for disposal.
On
December 31, 2016, the Company merged BCS in Quest Marketing to form one US legal entity as part of its streamlining efforts.
The
interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting
principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary
for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in
conjunction with the financial statements of the Company for the year ended December 31, 2016 and notes thereto included in the
Company’s Form 10-K filed with the SEC on April 17, 2017. The Company follows the same accounting policies in the preparation
of interim reports.
Operating
results for the three months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year
ended December 31, 2017.
Summary
of Significant Accounting Policies
This
summary of significant accounting policies of Quest Solution, Inc. is presented to assist in understanding the Company’s
consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s
management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform
to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
Cash
Cash
consists of petty cash, checking, savings, and money market accounts. For the purpose of the statements of cash flows, all highly
liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash
equivalents as of June 30, 2017 and December 31, 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 June 30, 2017. 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.
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. For federal income tax purposes, depreciation is computed using the modified accelerated cost recovery system.
Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures
for maintenance and repairs are charged to expenses as incurred.
INTANGIBLE
ASSETS
Intangible
assets are stated at cost, net of accumulated amortization. The assets are being amortized on the straight-line method over useful
lives ranging from 3 to 10 years. Amortization expense for the period ending June 30, 2017 and December 31, 2016 was $850,857
and $1,701,700, respectively.
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June
30, 2017
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December
31,2016
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Goodwill
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$
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10,114,164
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$
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10,114,164
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Trade Names
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4,390,000
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4,390,000
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Customer Relationships
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9,190,000
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9,190,000
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Accumulated amortization
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(5,058,724
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)
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(4,207,867
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)
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Intangibles,
net
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$
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18,635,440
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$
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19,486,297
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The
future amortization expense on the Trade Names and Customer Relationships are as follows:
Years ending December 31,
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2017
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$
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850,857
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2018
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1,679,599
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2019
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1,471,714
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2020
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1,471,714
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2021
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1,405,791
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Thereafter
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1,641,601
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Total
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$
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8,521,276
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Goodwill
is not amortized, but is evaluated for impairment annually or when indicators of a potential impairment are present. Our 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
June 30, 2017 and December 31, 2016.
ADVERTISING
The
Company generally expenses advertising costs as incurred. During the six month periods ending June 30, 2017 and 2016, the Company
spent $92,629 and $42,046 on advertising (marketing, trade show and store front expense), net of co-operative rebates, respectively.
The Company received rebates on advertising from co-operative advertising agreements with several vendors and suppliers. These
rebates have been recorded as a reduction to the related advertising and marketing expense in the period earned.
INVENTORY
Substantially
all inventory consists of raw materials and finished goods and are valued based upon first-in first-out (“FIFO”) cost,
not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed
evaluation of inventory relative to any potential slow moving products or discontinued items as well as the market conditions
for the specific inventory items.
DEPRECIATION
AND AMORTIZATION
Depreciation
and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic
lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue
to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future
acquisitions.
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:
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Level
1 - Quoted prices in active markets for identical assets or liabilities.
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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.
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●
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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.
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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 period ending June 30, 2017 or fiscal year ending December 31, 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 the quarter ending June 30, 2017 and in the fiscal year ended December 31, 2016.
As
of June 30, 2017 and December 31, 2016, the Company does not have any unrecorded contingent liabilities.
NET
LOSS PER COMMON SHARE
Net
loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic net loss per common share
(“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding,
assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted-average number of common
shares outstanding for computing basic EPS for the six months ended June 30, 2017 and 2016 were 35,472,251 and 36,323,489, 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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As
of June 30,
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2017
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2016
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Options to purchase common
stock
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5,625,000
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|
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6,044,000
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Convertible preferred stock
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3,143,530
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10,082,560
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Convertible debentures
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553,000
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553,000
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Warrants to purchase common stock
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1,405,000
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|
|
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1,410,000
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Common stock
subject to repurchase
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(507,079
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)
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(2,157,079
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)
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Potential shares
excluded from diluted net loss per share
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10,219,451
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15,932,481
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GOODWILL
Goodwill
is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested annually
at December 31 for impairment. The annual qualitative or quantitative assessments involve determining an estimate of the fair
value of reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill exists. A qualitative
assessment evaluates whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount
before applying the two-step quantitative goodwill impairment test. The first step of a quantitative goodwill impairment test
compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of the reporting
unit exceeds its fair value, an impairment loss may be recognized. The amount of impairment loss is determined by comparing the
implied fair value of reporting unit goodwill with the carrying amount. If the carrying amount exceeds the implied fair value
then an impairment loss is recognized equal to that excess. No impairment charges have been recorded as a result of the Company’s
annual impairment assessments.
We
test our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more
frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of
goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date
for testing goodwill impairment is December 31, at which date we test our reporting units, which is currently our ownership in
Quest Solution, Inc.
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.
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
May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition
guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). The new standard focuses on creating a single
source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard
is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents
what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective
date by one year (ASU 2015-14). This ASU will now be effective for annual periods, and interim periods within those annual periods,
beginning on or after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15,
2016. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following:
1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on
identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10);
3) rescission of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); and 4) additional guidance and
practical expedients in response to identified implementation issues (ASU 2016-12). The new standard will be effective for us
beginning January 1, 2018 and we expect to implement the standard with the modified retrospective approach, which recognizes the
cumulative effect of application recognized on that date. We are evaluating the impact of adoption on our consolidated results
of operations, consolidated financial position and cash flows.
In
July 2015, the Financial Accounting Standard Board (“FASB”) issued ASU 2015-11 (ASC 330)
, Simplifying the Measurement
of Inventory
. This guidance requires companies to measure inventory using the lower of cost and net realizable value. It is
effective for annual reporting periods beginning after December 15, 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 early adopted ASU 2015-17 as of January 31, 2016 on a prospective basis. The
statement of financial position as of January 31, 2016 reflects the classification of deferred tax assets and liabilities as noncurrent.
In
February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees
to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified
as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease
payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S GAAP, the presentation
of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease.
The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty
of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing
activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2018 and requires modified retrospective application. Early adoption is permitted. We are currently evaluating the impact
of the new guidance on our consolidated financial statements and related disclosures.
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies
to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance
also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity
to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification
of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement
of cash flows, with retrospective application required. This ASU is effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the
new guidance on our consolidated financial statements and related disclosures.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
(“ASU 2016-08”). ASU 2016-08 does not change the core principle of Topic
606 but clarifies the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective for the annual
and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-08 on our consolidated
financial statements and results of operations.
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
(“ASU 2016-13”). ASU 2016-13
changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity
debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier
recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. 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 2017-04,
Intangibles – Goodwill and Other (Topic 350)
that will eliminate the requirement
to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, impairment charge will be based
on the excess of a reporting unit’s carrying amount over its fair value. The guidance is effective for the Company in the
first quarter of fiscal 2023. Early adoption is permitted. The Company does not anticipate the adoption of this guidance to have
a material impact on its consolidated financial statements, absent any goodwill impairment.
The
Company has evaluated other recent pronouncements and believes that none of them will have a material effect on the company’s
financial statements.
NOTE
2 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The Company has acquired a significant working capital deficit and issued a substantial amount of subordinated debt in connection
with its acquisitions. As of June 30, 2017, the Company had a working capital deficit of $14,940,888 and an accumulated deficit
of $33,808,344. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis to obtain additional debt or equity financing for working capital (i.e., vendor
trade credit extensions ) or refinancing (restructuring of subordinated debt) as may be required and, ultimately, to attain profitable
operations. Management is focused on reducing operating expenses. Management’s plan to eliminate the going concern situation
include, but are not limited to, the raise of additional capital through the issuance of debt and equity, improved cash flow management,
aggressive cost reductions, and the creation of additional sales and profits across its product lines. One initiative to reduce
operating expense and start the path to attaining profitability was the sale of Quest Solution Canada Inc. primarily because it
had incurred significant operating losses and negative cash flow. In order to mitigate the risk related with this uncertainty,
the Company may issue additional shares of common and preferred stock for cash and services during the next 12 months.
NOTE
3 – CONCENTRATIONS
Financial
instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, accounts receivable,
and accounts payable. Beginning January 1, 2015, all of our cash balances were insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250,000 per depositor at each financial institution. This coverage is available at all FDIC member
institutions. The Company uses Wells Fargo Bank, which are FDIC insured institutions. The restricted cash in the amount of $684,610
at June 30, 2017 is in excess of the FDIC limit.
For
the six months and year ending June 30, 2017 and December 31, 2016, one customer accounted for 16.3% and 23.1% of the Company’s
revenues, respectively.
Accounts
receivable at June 30, 2017 and December 31, 2016 are made up of trade receivables due from customers in the ordinary course of
business. One customer made up 23.7% and another customer 33.1% of the trade accounts receivable balances at June 30, 2017 and
December 31, 2016, respectively.
Accounts
payable are made up of payables due to vendors in the ordinary course of business at June 30, 2017 and December 31, 2016. One
vendor made up 80.5% and 76.4%, respectively of the outstanding balance, which represented greater than 10% of accounts payable
at June 30, 2017 and December 31, 2016, respectively.
NOTE
4 –DISCONTINUED OPERATIONS – DIVESTURE OF QUEST SOLUTION CANADA, INC.
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, which was all collected at June 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:
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●
|
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, receivable 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 has 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:
|
|
For
the three months
|
|
|
For
the six months
|
|
|
|
ending
June 30, 2016
|
|
|
ending
June 30, 2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,895,938
|
|
|
$
|
7,415,348
|
|
Cost of goods
sold
|
|
|
(3,107,354
|
)
|
|
|
(5,762,918
|
)
|
Gross profit
|
|
|
788,584
|
|
|
|
1,652,430
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(275,894
|
)
|
|
|
(559,418
|
)
|
Salary and employee benefits
|
|
|
(675,594
|
)
|
|
|
(1,385,859
|
)
|
Depreciation and amortization
|
|
|
(58,578
|
)
|
|
|
(116,993
|
)
|
Professional fees
|
|
|
(18,189
|
)
|
|
|
(36,751
|
)
|
Goodwill impairment
|
|
|
(2,300,000
|
)
|
|
|
(2,300,000
|
)
|
Total operating
expenses
|
|
|
(3,328,255
|
)
|
|
|
(4,399,021
|
)
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,539,671
|
)
|
|
|
(2,746,591
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Restructuring expenses
|
|
|
(108,637
|
)
|
|
|
(108,637
|
)
|
Gain (loss) on foreign currency
|
|
|
(67,826
|
)
|
|
|
272,686
|
|
Interest expense
|
|
|
(188,919
|
)
|
|
|
(356,402
|
)
|
Other (expenses)
income
|
|
|
19
|
|
|
|
103
|
|
Total other income
(expenses)
|
|
|
(365,363
|
)
|
|
|
(192,250
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Before Income Taxes
|
|
|
(2,905,034
|
)
|
|
|
(2,938,841
|
)
|
|
|
|
|
|
|
|
|
|
Provision for
Current Income Taxes
|
|
|
6,141
|
|
|
|
6,141
|
|
|
|
|
|
|
|
|
|
|
Net Loss from
discontinued operations
|
|
$
|
(2,898,893
|
)
|
|
$
|
(2,932,700
|
)
|
The
major classes of assets and liabilities of Quest Solution Canada Inc. were classified as held for disposal as at June 30, 2016,
as follows:
|
|
As
at
|
|
|
|
June
30, 2016
|
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
Cash
|
|
$
|
(56,118
|
)
|
Accounts receivable,
net
|
|
|
2,569,998
|
|
Inventory, net
|
|
|
2,585,199
|
|
Prepaid expenses
|
|
|
91,496
|
|
Other
current assets
|
|
|
14,216
|
|
Total
current assets
|
|
|
5,204,791
|
|
|
|
|
|
|
Fixed assets
|
|
|
1,187,653
|
|
Goodwill
|
|
|
8,837,860
|
|
|
|
|
|
|
Total
assets
|
|
$
|
15,230,304
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
and accrued liabilities
|
|
$
|
4,861,433
|
|
Line of credit
|
|
|
1,356,593
|
|
Accrued payroll
and sales tax
|
|
|
479,882
|
|
Deferred revenue,
net
|
|
|
120,625
|
|
Notes payable, related
parties, current portion
|
|
|
1,452,696
|
|
Other
current liabilities
|
|
|
49,537
|
|
Total current liabilities
|
|
|
8,320,766
|
|
|
|
|
|
|
Long term liabilities
|
|
|
|
|
Other
long term liabilities
|
|
|
7,670
|
|
Total
liabilities
|
|
$
|
8,328,436
|
|
|
|
|
|
|
Net
Assets held for disposal
|
|
$
|
6,901,868
|
|
The
net cash flows incurred by Quest Solution Canada Inc. for the six months ended June 30, 2016 are presented below:
|
|
For
the six months
|
|
|
|
ending
June 30, 2016
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
(541,500
|
)
|
|
|
|
|
|
Net cash provided in investing activities
|
|
|
26,180
|
|
|
|
|
|
|
Net cash used
in financing activities
|
|
|
(1,552,850
|
)
|
|
|
|
|
|
Net Cash Outflow
from discontinued operations
|
|
$
|
(2,068,170
|
)
|
NOTE
5 – ACCOUNTS RECEIVABLE
At
June 30, 2017 and December 31, 2016, accounts receivable consisted of the following:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Trade Accounts Receivable
|
|
$
|
6.698.375
|
|
|
$
|
10,607,378
|
|
Less Allowance
for doubtful accounts
|
|
|
(12,501
|
)
|
|
|
(17,701
|
)
|
Total Accounts
Receivable (net)
|
|
$
|
6,685,874
|
|
|
$
|
10,589,677
|
|
NOTE
6 – INVENTORY
At
June 30, 2017 and December 31, 2016, inventories consisted of the following:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Equipment and clearing service
|
|
$
|
391,761
|
|
|
$
|
375,863
|
|
Raw Materials
|
|
|
28,857
|
|
|
|
119,922
|
|
Finished Goods
|
|
|
91,977
|
|
|
|
35,808
|
|
Total inventories
|
|
$
|
512,595
|
|
|
$
|
531,593
|
|
NOTE
7 – FIXED ASSETS
Fixed
assets are stated at cost, net of accumulated depreciation. Depreciation expense for period ending June 30, 2017 and December
31, 2016 was $33,055 and $90,626, respectively
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Equipment
|
|
$
|
2,900,449
|
|
|
|
2,892,512
|
|
Furniture and Fixtures
|
|
|
316,792
|
|
|
|
316,792
|
|
Leasehold improvements
|
|
|
151,553
|
|
|
|
151,553
|
|
Accumulated depreciation
|
|
|
(3,257,077
|
)
|
|
|
(3,224,022
|
)
|
Fixed Assets,
net
|
|
$
|
111,777
|
|
|
|
136,835
|
|
NOTE
8 – OTHER LIABILITIES
At
June 30, 2017 and December 31, 2016, other liabilities consisted of the following:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Unearned Incentive from
credit Cards
|
|
$
|
123,105
|
|
|
$
|
123,105
|
|
Key Man life Insurance liability
|
|
|
150,145
|
|
|
|
208,091
|
|
Dividend payable
|
|
|
194,606
|
|
|
|
101,075
|
|
Others
|
|
|
64,354
|
|
|
|
127,931
|
|
|
|
|
532,210
|
|
|
|
560,202
|
|
Less Current
Portion
|
|
|
(164,354
|
)
|
|
|
(227,932
|
)
|
Total long term
other liabilities
|
|
$
|
367,856
|
|
|
$
|
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.
At
June 30, 2017, the balance of amount of premium financed note are $2,158,475 and the cash value of the policy as of this date
is $1,945,726, with a net negative cash value of the policies of $212,749.
On
June 10, 2016, the Company entered into an assignment and whereby three insured will assume the key man insurance policies sometime
in 2017. The agreement states that the Company will be assigning the policy over to the insured and the insured will assume all
the obligations under the premium financed note in place. At June 30, 2017, two of the three life insurance policies and premium
financed notes have been transferred to the insured.
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
9 – 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 recognized into the results of operations over the related periods on a straight line
basis, normally 1-5 years with 3 years being the average term.
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Deferred Revenue
|
|
$
|
8,215,110
|
|
|
$
|
8,721,725
|
|
Less Deferred Costs & Expenses
|
|
|
(6,916,906
|
)
|
|
|
(7,277,276
|
)
|
Net Deferred Revenue
|
|
|
1,298,204
|
|
|
|
1,444,449
|
|
Less Current Portion
|
|
|
(876,247
|
)
|
|
|
(879,026
|
)
|
Total Long Term net Deferred Revenue
|
|
$
|
421,957
|
|
|
$
|
565,423
|
|
Expected
future recognition of net deferred revenue as of June 30, 2017, is as follows;
2017
|
|
|
$
|
421,957
|
|
2018
|
|
|
|
280,399
|
|
2019
|
|
|
|
219,062
|
|
2020
|
|
|
|
192,774
|
|
2021
|
|
|
|
184,012
|
|
Total
|
|
|
$
|
1,298,204
|
|
NOTE
10 – CREDIT FACILITIES AND LINE OF CREDIT
On
July 1, 2016, the Company entered into a Factoring and Security Agreement (the “FASA”) with Action Capital Corporation
(“Action”) to establish a sale of accounts facility, whereby the Company may obtain short-term financing by selling
and assigning to Action acceptable accounts receivable. Pursuant to the FASA, the outstanding principal amount of advances made
by Action to the Company at any time shall not exceed $5,000,000. Action will reserve and withhold an amount in a reserve account
equal to 10% of the face amount of each account purchased under the FASA. The balance at June 30, 2017 was $3,142,490 and at December
31, 2016 $5,059,292 which includes accrued interest.
The
per annum interest rate with respect to the daily average balance of unpaid advances outstanding under the FASA (computed on a
monthly basis) will be equal to the “Prime Rate” of Wells Fargo Bank N.A. plus 2%, plus a monthly fee equal to 0.75%
of such average outstanding balance. The Company shall also pay all other costs incurred by Action under the FASA, including all
bank fees. The FASA will continue in full force and effect unless terminated by either party upon 30 days’ prior written
notice. Performance of the Company’s obligations under the FASA is secured by a security interest in certain collateral
of the Company. The FASA includes customary representations and warranties and default provisions for transactions of this type.
NOTE
11 - NOTES PAYABLE
Notes
payable at June 30, 2017 and December 31, 2016, consists of the following:
|
|
June 31, 2017
|
|
|
December 31, 2016
|
|
Supplier Note Payable
|
|
$
|
6,524,007
|
|
|
$
|
9,414,352
|
|
Insurance Note
|
|
|
-
|
|
|
|
19,502
|
|
All Other
|
|
|
391,032
|
|
|
|
479,365
|
|
Total
|
|
|
6,915,039
|
|
|
|
9,913,219
|
|
Less current portion
|
|
|
(6,784,745
|
)
|
|
|
(9,782,925
|
)
|
Long Term Notes Payable
|
|
$
|
130,294
|
|
|
$
|
130,294
|
|
Future
maturities of notes payable as of June 30, 2017 are as follows;
|
2017
|
|
|
$
|
6,784,745
|
|
|
2018
|
|
|
|
-
|
|
|
2019
|
|
|
|
-
|
|
|
2020
|
|
|
|
-
|
|
|
2021
|
|
|
|
-
|
|
|
Thereafter
|
|
|
|
130,294
|
|
|
Total
|
|
|
$
|
6,915,039
|
|
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 June 30, 2017 was $0 and the monthly payments
are current. The Directors and Officers Liability Insurance is renewed annually is paid in four equal installments of $17,121
at 3.25% interest. The outstanding balance at June 30, 2017 was $0 and the monthly payments are current.
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 June 30,
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
June 30, 2017, 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 due and payable
on September 30, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and
accrued interest in a minimum principal amount of $400,000 each. The balance on this note at June 30, 2017 was $6,524,007.
On
July 31, 2016 as part of the Separation Agreement with Mr. Ross, the Company issued a promissory note in the amount of $59,500
in connection with the redemption by the Company of 350,000 shares of restricted common stock. The promissory note will be repaid
in 12 monthly installments commencing October 1, 2016 and this transaction was recorded as a restructuring charge in the amount
of $84,317 in the third quarter of 2016. In addition, the Company restated a promissory note in favor of Mr. Ross and will repay
the balance of the $102,000 over 12 monthly installments commencing October 1, 2016. The balance on these two notes at June 30,
2017 was $40,248 which is all classified as current.
NOTE
12 – SUBORDINATED NOTES PAYABLE
Notes
and loans payable consisted of the following:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Note payable - acquisition of Quest
|
|
$
|
5,967,137
|
|
|
$
|
5,967,137
|
|
Note payable – acquisition of BCS
|
|
|
10,348,808
|
|
|
|
10,348,808
|
|
Quest Preferred Stock note payable
|
|
|
1,199,400
|
|
|
|
1,199,400
|
|
Total notes payable
|
|
|
17,515,345
|
|
|
|
17,515,345
|
|
For
the six months ended June 30, 2017 and 2016, the Company recorded interest expense in connection with these notes in the amount
of $160,790 and $159,095, 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 June 30, 2017 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 June 30, 2017 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 June 30, 2017 were
all classified as long term.
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 June 30, 2017 is as follows:
2017
|
|
|
|
-
|
|
2018
|
|
|
|
-
|
|
2019
|
|
|
|
-
|
|
2020
|
|
|
|
-
|
|
2021
|
|
|
|
-
|
|
Thereafter
|
|
|
|
17,515,345
|
|
Total
|
|
|
$
|
17,515,345
|
|
NOTE
13 – STOCKHOLDERS’ DEFICIT
PREFERRED
STOCK
Series
A
As
of June 30, 2017, 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 June 30, 2017 there was 1 preferred share designated and 0 preferred shares outstanding. Effective on September 30, 2016, with
the divestiture of Quest Solution Canada Inc., the one share was redeemed by the Company and retired.
Series
C
As
of June 30, 2017, there were 15,000,000 Series C preferred shares authorized and 3,143,530 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. Each Series C preferred share outstanding is convertible into one (1) share of common
stock of Quest Solution, Inc.
COMMON
STOCK
For
the six month period ended June 30, 2017, the Company issued 87,500 shares to board members in relation to the vesting schedule
agreed to during 4
th
quarter 2015, which is based on an annual grant of 100,000 restricted shares every October and
vesting over 8 quarters per independent board member as compensation. The shares were valued at $9,501.
In
addition, pursuant to the Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration
statement, 196,440 shares of Common Stock were issued for proceeds of $14,390.
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
As
of June 30, 2017 the Company had 36,089,703 common shares outstanding.
Warrants
and Stock Options
Warrants
- The following table summarizes information about warrants granted during the six month periods ended June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Number of
warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
1,405,000
|
|
|
|
0.52
|
|
|
|
1,410,000
|
|
|
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants cancelled, forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
1,405,000
|
|
|
|
0.52
|
|
|
|
1,410,000
|
|
|
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable warrants
|
|
|
1,405,000
|
|
|
|
0.52
|
|
|
|
1,410,000
|
|
|
|
0.52
|
|
Outstanding
warrants as of June 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.25
|
|
|
|
0.75
|
|
|
|
900,000
|
|
|
|
0.25
|
|
|
|
900,000
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.00
|
|
|
|
0.84
|
|
|
|
505,000
|
|
|
|
1.00
|
|
|
|
505,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.25 to 1.00
|
|
|
|
0.78
|
|
|
|
1,405,000
|
|
|
|
0.52
|
|
|
|
1,405,000
|
|
|
|
0.52
|
|
Warrants
outstanding at June 30, 2017 and 2016 have the following expiry date and exercise prices:
Expiry Date
|
|
Exercise Prices
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
July 10, 2016
|
|
|
1.00
|
|
|
|
-
|
|
|
|
5,000
|
|
March 22, 2018
|
|
|
1.00
|
|
|
|
300,000
|
|
|
|
300,000
|
|
April 1, 2018
|
|
|
0.25
|
|
|
|
900,000
|
|
|
|
900,000
|
|
April 30, 2018
|
|
|
1.00
|
|
|
|
5,000
|
|
|
|
5,000
|
|
July 10, 2018
|
|
|
1.00
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,405,000
|
|
|
|
1,410,000
|
|
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 June 30, 2017, the Company had issued options,
allowing for the subscription of 5,625,000 common shares of its share capital.
Stock
Options
- The following table summarizes information about stock options granted during the three months ended June 30, 2017
and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Number of
stock options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
stock options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
2,644,000
|
|
|
|
0.49
|
|
|
|
6,044,000
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
2,981,000
|
|
|
|
0.09
|
|
|
|
-
|
|
|
|
-
|
|
Stock options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock options cancelled, forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
5,625,000
|
|
|
|
0.28
|
|
|
|
6,044,000
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable stock options
|
|
|
3,339,750
|
|
|
|
0.34
|
|
|
|
2,237,750
|
|
|
|
0.49
|
|
For
the six months ended June 30, 2017, the Company granted a total of 2,981,000 stock options, 700,000 stock options were granted
to two Board members and 2,281,000 stock options were granted to the Chief Executive Officer pursuant to his Employment Contract.
Outstanding
stock options as of June 30, 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
|
|
|
|
4.66
|
|
|
|
2,981,000
|
|
|
|
0.09
|
|
|
|
1,227,000
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.33 to 0.38
|
|
|
|
0.79
|
|
|
|
144,000
|
|
|
|
0.36
|
|
|
|
144,000
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.50
|
|
|
|
7.45
|
|
|
|
2,500,000
|
|
|
|
0.50
|
|
|
|
1,968,750
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.075 to 0.50
|
|
|
|
5.78
|
|
|
|
5,625,000
|
|
|
|
0.28
|
|
|
|
3,339,750
|
|
|
|
0.34
|
|
Stock
options outstanding at June 30, 2017 and 2016 have the following expiry date and exercise prices:
Expiry Date
|
|
Exercise Prices
|
|
|
June 30, 2017
|
|
|
June 30, 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
|
|
February 17, 2022
|
|
|
0.075
|
|
|
|
760,333
|
|
|
|
-
|
|
February 17, 2022
|
|
|
0.09
|
|
|
|
1,520,667
|
|
|
|
-
|
|
March 30, 2022
|
|
|
0.09
|
|
|
|
700,000
|
|
|
|
-
|
|
November 20, 2024
|
|
|
0.50
|
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,625,000
|
|
|
|
2,644,000
|
|
For
the period ending June 30, 2017 and 2016, the Company recorded stock compensation expense relating to the vesting of stock options
as follows;
|
|
For the six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Board compensation expense
|
|
$
|
9,501
|
|
|
|
19,500
|
|
Stock compensation
|
|
|
56,400
|
|
|
|
7,800
|
|
Stock Option vesting
|
|
|
83,144
|
|
|
|
177,142
|
|
Total
|
|
$
|
149,045
|
|
|
|
204,442
|
|
NOTE
14 – LITIGATION
As
of June 30, 2017, the Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal,
state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management,
no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the
Company’s Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.
NOTE
15 – 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.
NOTE
16 – SUBSEQUENT EVENTS
On
August 2, 2017 the Board of Directors approved the grant of 3,500,000 stock options to the following individuals;
Name
|
|
Function
|
|
Amount
|
|
Shai S. Lustgarten
|
|
President and CEO
|
|
|
1,500,000
|
|
Niv Nissenson
|
|
Board Member
|
|
|
500,000
|
|
Yaron Shalem
|
|
Board Member
|
|
|
500,000
|
|
Andrew MacMillan
|
|
Board Member
|
|
|
500,000
|
|
Arthur Marcus
|
|
Legal Consultant
|
|
|
500,000
|
|
|
|
|
|
|
3,500,000
|
|
The
stock options have an exercise price of $0.11 per option, have a 4 year life and
vest over
12 months in 4 quarterly and equal installments, subject to the option holders’ continuous service to the Company.
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
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,
the 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 1
st
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, the
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
|
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have filed with the Securities and Exchange Commission this Form 10-Q, including exhibits. You may read and copy all or any portion
of the registration statement or any reports, statements or other information in the files at SEC’s Public Reference Room
located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.
You
can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission
at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration
statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov.
We
intend to furnish our stockholders with annual reports which will be filed electronically with the SEC containing consolidated
financial statements audited by our independent auditors, and to make available to our stockholders quarterly reports for the
first three quarters of each year containing unaudited interim consolidated financial statements.
Quest’s
website is located at
http://www.QuestSolution.com
. The Company’s website and the information to be contained on
that site, or connected to that site, is not part of or incorporated by reference into this filing.