NOTES
TO CONDENSED CONSOLIDATED 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.
On
December 31, 2016, the Company merged BCS in Quest Marketing to form one US legal entity as part of its streamlining efforts.
The
interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting
principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary
for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in
conjunction with the financial statements of the Company for the year ended December 31, 2017 and notes thereto included in the
Company’s Form 10-K filed with the SEC on May 8, 2018. The Company follows the same accounting policies in the preparation
of interim reports, except for the adoption of ASC Topic 606, Revenue from Contracts with Customers. The Company operates in one
segment.
Operating
results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2018.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies of Quest Solution, Inc. is presented to assist in understanding the Company’s
consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s
management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform
to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
Adoption
of New Accounting Pronouncement in Fiscal 2018
In
May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that supersedes the existing revenue recognition
guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). The new standard, ASC Topic 606, focuses on
creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective
of ASC Topic 606, the new standard, is for companies to recognize revenue when it transfers the promised goods or services to
its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services.
Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1)
clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying
performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission
of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); and 4) additional guidance and practical expedients
in response to identified implementation issues (ASU 2016-12). The Company took into the guidance provided in these ASUs related
to revenue recognition.
Accordingly,
the Company has adopted ASC Topic 606 as of January 1, 2018 using the modified retrospective transition approach, in which the
cumulative effect of applying the standard would be recognized at the date of initial application. An adjustment to decrease deferred
revenue in the amount of $1,213,218 was established on the date of adoption relating to amounts deferred related to extended service
contract sales through December 31, 2017. Prior to adoption of ASC Topic 606 net revenue from the sales of these contracts would
be recognized immediately since the Company has no continuing obligation related to the sale of these products if the new guidance
had been applied in the past. As a result of the adoption the Company recognizes revenue from extended service contracts on a
net versus gross basis in the consolidated statements of operations. The Company recognized the cumulative effect of initially
applying ASC Topic 606 as an adjustment of $1,213,218 of net deferred revenue to the opening balance of accumulated deficit.
Deferred
net revenue on December 31, 2017
|
|
$
|
1,213,217
|
|
|
|
|
|
|
Accumulated
deficit on December 31, 2017
|
|
$
|
(35,554,994
|
)
|
|
|
|
|
|
Accumulated
deficit on January 1, 2018
|
|
$
|
(34,341,777
|
)
|
|
|
|
|
|
Net
loss on September 30, 2018
|
|
$
|
(4,336,747
|
)
|
Less:
Preferred stock - Series C dividend
|
|
$
|
(142,490
|
)
|
|
|
|
|
|
Accumulated
deficit on September 30, 2018
|
|
$
|
(38,821,014
|
)
|
Under
this approach, revenue for 2017 is reported in the consolidated statements of operations and comprehensive income on the historical
basis, and revenue for 2018 is reported in the consolidated statements of operations and comprehensive income under ASC Topic
606. A comparison of revenue for 2018 periods to the historical basis is included below. The Company acknowledges that the required
adoption of ASC Topic 606 could have a material effect on annual revenue or net income from continuing operations on an ongoing
basis.
|
|
For
the nine months ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Topic
606
|
|
|
Topic
605
|
|
|
|
Topic
606
2018
|
|
|
Topic
605
2018
|
|
|
%
|
|
|
2017
|
|
|
Variance
from 2017
|
|
|
Variance
from 2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
42,368,904
|
|
|
|
41,640,159
|
|
|
|
1.72
|
%
|
|
|
40,886,754
|
|
|
|
1,482,150
|
|
|
|
753,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs of goods sold
|
|
|
33,687,461
|
|
|
|
33,364,061
|
|
|
|
(.96
|
%)
|
|
|
32,263,124
|
|
|
|
1,424,337
|
|
|
|
1,100,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,681,443
|
|
|
|
8,276,098
|
|
|
|
4.90
|
%
|
|
|
8,623,630
|
|
|
|
57,813
|
|
|
|
347,532
|
|
RECENT
ACCOUNTING PRONOUNCEMENTS
In
July 2018, the FASB issued ASU 2018-10
Leases (Topic 842),Codification Improvements
and ASU 2018-11
Leases (Topic 842),
Targeted Improvements
, to provide additional guidance for the adoption of Topic 842
.
ASU 2018-10 clarifies certain
provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of
lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders’
equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the
adoption of Topic 842
.
In February 2016, the FASB issued ASU 2016-02
Leases (Topic 842)
which requires an entity
to recognize assets and liabilities arising from a lease for both financing and operating leases with terms greater than 12 months.
ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, “the new lease standards”) are effective for fiscal years
beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect the new lease
standards will have on its Condensed Consolidated Financial Statements; however, the Company anticipates recognizing assets and
liabilities arising from any leases that meet the requirements under the new lease standards on the adoption date and including
qualitative and quantitative disclosures in the Company’s Notes to the Condensed Consolidated Financial Statements.
In
July 2018, the FASB issued ASU 2018-09,
Codification Improvements.
The amendments in ASU 2018-09 affect a wide variety
of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The
Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740,
Compensation-Stock
Compensation-Income Taxes,
are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related
to Topic 718-740,
Compensation-Stock Compensation-Income Taxes,
clarify that an entity should recognize excess tax benefits
related to stock compensation transactions in the period in which the amount of the deduction is determined. The amendments in
ASU 2018-09 related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted.
The Company does not expect the adoption of the new standard to have a material impact on the Company’s Condensed Consolidated
Financial Statements.
In
June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting,
to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services
from nonemployees and supersedes the guidance in Subtopic 505-50,
Equity - Equity-Based Payments to Non-Employees
. Under
ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date.
The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment
awards with such conditions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, with early adoption
permitted. The Company is currently evaluating the impact of the new standard on the Company’s Condensed Consolidated Financial
Statements.
In
March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting
for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows
companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This
standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting
for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made
a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance. The Company determined that
the $62.9 million recorded in connection with the re-measurement of certain deferred tax assets and liabilities, and corresponding
valuation allowance was a provisional amount and a reasonable estimate at December 31, 2017. The Company has not completed the
accounting with regard to the tax effects associated with an intra-entity transfer of certain intellectual property rights with
the enactment of Tax Reform Act. Our accounting for the intra-entity transfer reflects the utilization of net operating losses
on the basis of the laws in effect before the Tax Reform Act. The Company is evaluating the impact under Tax Reform Act on the
Company’s global business structure. In all aspects, the Company will continue to make and refine calculations as additional
analysis is completed. The Company expects to complete the accounting assessment during the one year measurement period provided
by SAB 118.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350)
that will eliminate the requirement
to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, impairment charge will be based
on the excess of a reporting unit’s carrying amount over its fair value. The guidance is effective for the Company in the
first quarter of fiscal 2023. Early adoption is permitted. The early adoption of this guidance did not have a material impact
on its consolidated financial statements, absent any goodwill impairment.
In
January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This
new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities
is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed
of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This
new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application
to any business development transaction.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and
Cash Payments
(“ASU 2016-15”). ASU 2016-15 reduces diversity in practice in how certain transactions are classified
in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment
or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates
that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after
a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life
insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods
beginning after December 15, 2017. The adoption did not materially impact our consolidated financial statements and results of
operations
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
(“ASU 2016-13”). ASU 2016-13
changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity
debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier
recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including
interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment
to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing
the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
(“ASU 2016-13”). ASU 2016-13
changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity
debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier
recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including
interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment
to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing
the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.
In
February 2016, the FASB issued ASU 2016-02 amended the existing accounting standards for lease accounting and requiring lessees
to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified
as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease
payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S GAAP, the presentation
of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease.
The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty
of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing
activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2018 and requires modified retrospective application. Early adoption is permitted. We are currently evaluating the impact
of the new guidance on our consolidated financial statements and related disclosures.
The
Company has evaluated other recent pronouncements and believes that none of them will have a material effect on the Company’s
financial statements.
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 September 30, 2018 and December 31, 2017.
The
Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.
The
Company has restricted cash on deposit with a federally insured bank in the amount of $531,888 at September 30, 2018. This
cash is security and collateral for a corporate credit card agreement with a bank and for deposit against a letter of credit issued
for executive life insurance policies owned by the Company.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially
different amounts could have been reported under different conditions, or if different assumptions had been used. The Company
evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions
that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and
assumptions used in preparation of the consolidated financial statements.
ACCOUNTS
RECEIVABLE
Accounts
receivable are carried at their estimated collectible amounts. The Company provides allowances for uncollectible accounts receivable
equal to the estimated collection losses that will be incurred in collection of all receivables. Accounts receivable are periodically
evaluated for collectability based on past credit history with customers and their current financial condition. The Company’s
management determines which accounts are past due and if deemed uncollectible, the Company charges off the receivable in the period
the determination is made. The Company generally requires no collateral to secure its ordinary accounts receivable. Based on management’s
evaluation, accounts receivable has a balance in the allowance for doubtful accounts of $12,501 and $12,501 for the nine months
ended September 30, 2018 and for the year ended December 31, 2017, respectively.
GOODWILL
AND INTANGIBLE ASSETS
Intangible
assets are stated at cost, net of accumulated amortization. The assets are being amortized on the straight-line method over useful
lives ranging from 3 to 10 years. Amortization expense for the periods ended September 30, 2018 and December 31, 2017 was
$1,276,286 and $1,701,714, respectively.
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Goodwill
|
|
$
|
10,114,164
|
|
|
$
|
10,114,164
|
|
Trade
Names
|
|
|
4,390,000
|
|
|
|
4,390,000
|
|
Customer
Relationships
|
|
|
9,190,000
|
|
|
|
9,190,000
|
|
Accumulated
amortization
|
|
|
(7,185,867
|
)
|
|
|
(5,909,581
|
)
|
Intangibles,
net
|
|
$
|
16,508,297
|
|
|
$
|
17,784,583
|
|
The
future amortization expense on the Trade Names and Customer Relationships are as follows:
Years
ended December 31,
|
|
|
|
2018
|
|
$
|
403,313
|
|
2019
|
|
|
1,471,714
|
|
2020
|
|
|
1,471,714
|
|
2021
|
|
|
1,405,792
|
|
2022
|
|
|
786,000
|
|
Thereafter
|
|
|
855,600
|
|
Total
|
|
$
|
6,394,133
|
|
Goodwill
Goodwill
is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested annually
at December 31 for impairment. The annual qualitative or quantitative assessments involve determining an estimate of the fair
value of reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill exists. A qualitative
assessment evaluates whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount
before applying the two-step quantitative goodwill impairment test. The first step of a quantitative goodwill impairment test
compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of the reporting
unit exceeds its fair value, an impairment loss may be recognized. The amount of impairment loss is determined by comparing the
implied fair value of the reporting unit’s goodwill with the carrying amount. If the carrying amount exceeds the implied
fair value then an impairment loss is recognized equal to that excess. No impairment charges have been recorded as a result of
the Company’s annual impairment assessments. The Company has adopted the provisions of ASU 2017-04—Intangibles—Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires goodwill impairments to be measured
on the basis of the fair value of a reporting unit relative to the reporting unit’s carrying amount rather than on the basis
of the implied amount of goodwill relative to the goodwill balance of the reporting unit. Thus, ASU 2017-04 permits an entity
to record a goodwill impairment that is entirely or partly due to a decline in the fair value of other assets that, under existing
GAAP, would not be impaired or have a reduced carrying amount. Furthermore, the ASU removes “the requirements for any reporting
unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform
Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount
will apply the same impairment test. Accordingly, the goodwill of reporting unit or entity with zero or negative carrying values
will not be impaired, even when conditions underlying the reporting unit/entity may indicate that goodwill is impaired.
We
test our goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances
indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded
amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is December 31.
None
of the goodwill is deductible for income tax purposes.
Intangibles
Intangible
assets with finite useful lives consist of Trademark and customer lists and are amortized on a straight-line basis over their
estimated useful lives, which range from two to seven years. The estimated useful lives associated with finite-lived intangible
assets are consistent with the estimated lives of the associated products and may be modified when circumstances warrant. Such
assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable.
An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset
and its eventual disposition are less than its carrying amount. The amount of any impairment is measured as the difference between
the carrying amount and the fair value of the impaired asset. There was no impairment recorded for the nine months ended September
30, 2018.
ADVERTISING
The
Company generally expenses advertising costs as incurred. During the nine month periods ended September 30, 2018 and 2017, the
Company spent $117,144 and $183,301 on advertising (marketing, trade show and store front expense), net of co-operative
rebates, respectively. The Company received rebates on advertising from co-operative advertising agreements with several vendors
and suppliers. These rebates have been recorded as a reduction to the related advertising and marketing expense in the periods
they are received.
INVENTORY
Substantially
all inventory consists of raw materials and finished goods and are valued based upon first-in first-out (“FIFO”) cost,
not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed
evaluation of inventory relative to any potential slow moving products or discontinued items as well as the market conditions
for the specific inventory items.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Fair
value is the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement
date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable
inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be
used to measure fair value are as follows:
|
●
|
Level
1 - Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in
Markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all
significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
|
|
|
|
|
●
|
Level
3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions
and judgments made by the Company.
|
Assets
and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company
reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification
of assets and liabilities within the three levels of the hierarchy outlined above.
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 nine months ended September 30, 2018 and 2017 were 42,592,783 and 35,587,238,
respectively. Diluted net loss per share of common stock is the same as basic net loss per share of common stock because the effects
of potentially dilutive securities are antidilutive.
Dilutive
securities are excluded from the computation of diluted net loss per share because such securities have no anti-dilutive impact
due to losses reported.
FOREIGN
CURRENCY TRANSLATION
The
consolidated financial statements of the Company are presented in U.S. dollars. The functional currency for the Company is U.S.
dollars. Transactions in currencies other than the functional currency are recorded using the appropriate exchange rate at the
time of the transaction. All of the Company’s continuing operations are conducted in U.S. dollars. The Company owns a non-operating
subsidiary in Canada, from which it has no activity since October 1, 2016.
Reclassifications
and adjustments
— Certain prior year amounts in the condensed consolidated interim financial statements have been
reclassified to conform to current year presentation. The impact of the reclassifications made to prior year amounts is not material
and did not affect net loss.
NOTE
2 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As of September 30, 2018, the Company had a working capital deficit of $15,004,770 and an accumulated deficit of $38,821,014.
The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis. Management’s plan to eliminate the going concern situation includes, but is not limited to,
the continuation of improving cash flow, maintaining moderate cost reductions (subsequent to aggressive cost reduction actions
already taken in 2017 and in the first quarter of 2018), the creation of additional sales and profits across its product lines,
and the obtaining of sufficient financing to restructure current debt in a manner more in line with the Company’s improving
cash flow and cost reduction successes.
The
matters that resulted in 2017, and a net loss for the nine months ended September 30, 2018, which create substantial doubt
about the Company’s ability to continue as a going concern, have been somewhat mitigated by the successful debt reduction
settlements finalized in December of 2017 as detailed in the Company’s Annual Report on Form 10-K filed on May 8, 2018.
The Company was also able to settle anther liability to a related party by the issuance of common stock during the nine months
ended September 30, 2018. The Company also has had modest growth in revenue during the nine months ended September 30, 2018 in
comparison to the prior period. The condensed financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
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 Zions National Bank, which is an FDIC insured institution. The restricted cash in the amount
of $531,888 at September 30, 2018 is in excess of the FDIC limit.
For
the nine months and year ended September 30, 2018 and December 31, 2017, one customer accounted for 21.99% and 15.7% of
the Company’s revenues, respectively.
Accounts
receivable at September 30, 2018 and December 31, 2017 are made up of trade receivables due from customers in the ordinary course
of business. One customer made up 13.29% and another customer 15.7% of the trade accounts receivable balances at September
30, 2018 and December 31, 2017, respectively.
Accounts
payable are made up of payables due to vendors in the ordinary course of business at September 30, 2018 and December 31, 2017.
One vendor made up 65.7%% and 70.1%, respectively of the outstanding balance, which represented greater than 10% of accounts
payable at September 30, 2018 and December 31, 2017, respectively.
NOTE
4 – ACCOUNTS RECEIVABLE
At
September 30, 2018 and December 31, 2017, accounts receivable consisted of the following:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Trade
Accounts Receivable
|
|
$
|
10,681,790
|
|
|
$
|
6,400,235
|
|
Less
Allowance for doubtful accounts
|
|
|
(12,501
|
)
|
|
|
(12,501
|
)
|
Total
Accounts Receivable (net)
|
|
$
|
10,669,289
|
|
|
$
|
6,387,734
|
|
NOTE
5 – INVENTORY
At
September 30, 2018 and December 31, 2017, inventories consisted of the following:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Equipment
and clearing service
|
|
$
|
1,009,537
|
|
|
$
|
329,003
|
|
Raw
Materials
|
|
|
1,784
|
|
|
|
31,697
|
|
Finished
Goods
|
|
|
46,827
|
|
|
|
79,020
|
|
Total
inventories
|
|
$
|
1,058,148
|
|
|
$
|
439,720
|
|
NOTE
6 – FIXED ASSETS
Fixed
assets are stated at cost, net of accumulated depreciation. Depreciation expense for the period ended September 30, 2018 and December
31, 2017 was $35,932 and $48,058, respectively
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Equipment
|
|
$
|
1,762,683
|
|
|
|
2,909,642
|
|
Furniture
and Fixtures
|
|
|
194,432
|
|
|
|
316,853
|
|
Leasehold
improvements
|
|
|
24,329
|
|
|
|
151,553
|
|
Accumulated
depreciation
|
|
|
(1,917,343
|
)
|
|
|
(3,285,245
|
)
|
Fixed
Assets, net
|
|
$
|
64,101
|
|
|
|
92,803
|
|
NOTE
7 – OTHER LIABILITIES
At
September 30, 2018 and December 31, 2017, other liabilities consisted of the following:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Unearned
Incentive from credit cards
|
|
$
|
-
|
|
|
$
|
77,307
|
|
Key
Man life Insurance liability
|
|
|
-
|
|
|
|
150,146
|
|
Dividend
payable
|
|
|
430,758
|
|
|
|
289,687
|
|
Others
|
|
|
119,235
|
|
|
|
43,811
|
|
|
|
|
549,993
|
|
|
|
560,951
|
|
Less
Current Portion
|
|
|
(119,235
|
)
|
|
|
(121,118
|
)
|
Total
long term other liabilities
|
|
$
|
430,758
|
|
|
$
|
439,833
|
|
NOTE
8 – CREDIT FACILITIES AND LINE OF CREDIT
On
July 1, 2016, the Company entered into a Factoring and Security Agreement (the “FASA”) with Action Capital Corporation
(“Action”) to establish a sale of accounts facility, whereby the Company may obtain short-term financing by selling
and assigning to Action acceptable accounts receivable. Pursuant to the FASA, the outstanding principal amount of advances made
by Action to the Company at any time shall not exceed $5,000,000. Action will reserve and withhold an amount in a reserve account
equal to 5% of the face amount of each account purchased under the FASA. The balance outstanding under the Action credit line
at September 30, 2018 was $4,636,680 and at December 31, 2017 $3,667,417 which includes accrued interest.
The
per annum interest rate with respect to the daily average balance of unpaid advances outstanding under the FASA (computed on a
monthly basis) will be equal to the “Prime Rate” of Wells Fargo Bank N.A. plus 2%, plus a monthly fee equal to 0.75%
of such average outstanding balance. The Company shall also pay all other costs incurred by Action under the FASA, including all
bank fees. The FASA will continue in full force and effect unless terminated by either party upon 30 days’ prior written
notice. Performance of the Company’s obligations under the FASA is secured by a security interest in certain collateral
of the Company. The FASA includes customary representations and warranties and default provisions for transactions of this type.
NOTE
9 - NOTES PAYABLE
Notes
payable at September 30, 2018 and December 31, 2017, consists of the following:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Supplier
Note Payable
|
|
$
|
8,690,465
|
|
|
$
|
3,208,534
|
|
Insurance
Note
|
|
|
19,687
|
|
|
|
-
|
|
All
Other
|
|
|
171,666
|
|
|
|
350,785
|
|
Total
|
|
|
8,881,818
|
|
|
|
3,559,319
|
|
Less
current portion
|
|
|
(8,751,524
|
)
|
|
|
(3,429,025
|
)
|
Long
Term Notes Payable
|
|
$
|
130,294
|
|
|
$
|
130,294
|
|
Future
maturities of notes payable as of September 30, 2018 are as follows;
2018
|
|
$
|
2,062,940
|
|
2019
|
|
|
130,294
|
|
Total
|
|
$
|
2,193,234
|
|
In
connection with the BCS’ acquisition the Company assumed a related party note payable to the former CTO of the RFID division
of BCS. The note is payable in equal monthly installments of $4,758 beginning October 31, 2014 and ended October 2018. The loan
bears interest at 1.89% and is unsecured and subordinated to the Company’s bank debt. The balance on this loan at September
30, 2018 was $130,294 of which all of it was classified as long term. In July 2016, the holder of the note signed a subordination
agreement with the Supplier of the Secured Promissory Note and Action Capital, whereby the noteholder agrees to subordinate its
right to payment of capital and interest until the Supplier with the Secured Promissory Note is reimbursed in full.
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 September 30, 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 September 30, 2017. The
Amendment also provides that the Company will make an additional principal payment of $300,000 by December 15, 2016.
|
|
|
|
|
●
|
On
September 30, 2017, the Company entered into a Second Amendment Agreement to the secured Promissory Note whereby the maturity
date was extended to September 30, 2017 whereby any remaining principal and accrued interest is due and payable on September
30, 2017. The Amendment also provides that the Company will continue to make monthly installments of principal and accrued
interest in a minimum principal amount of $400,000 each.
|
|
|
|
|
●
|
On
September 30, 2017, the Company entered into a Third Amendment Agreement to the secured Promissory Note whereby the maturity
date was extended to October 31, 2017. The Amendment also provides that the Company will continue to make monthly installments
of principal and accrued interest in a minimum principal amount of $600,000 each.
|
|
|
|
|
●
|
On
November 15
th
, 2017, the Company entered into a Fourth Amendment extending the maturity date to December 31
st
,
and this Fourth Amendment is effective on October 31
st
, whereby any remaining principal and accrued interest is
due and payable on December 31, 2017. The Amendment also provides that the Company will continue to make monthly installments
of principal and accrued interest in a minimum principal amount of $600,000 each.
|
|
|
|
|
●
|
On
February 14, 2018, the Company entered into a Fifth Amendment extending the maturity date to June 30
st
,
and this Fifth Amendment is effective on December 31, 2017 whereby any remaining principal and accrued interest is due and
payable on March 31, 2018. The Amendment also provides that the Company will continue to make monthly installments of principal
and accrued interest in a minimum principal amount of $400,000 each.
|
|
|
|
|
|
On
September 7, 2018, the Company entered into a Sixth Amendment extending the maturity date to January 31, 2019. The Amendment
also increases the principal amount to $8,690,464.72, an increase of $6,763,549.41, by rolling the Company’s existing
outstanding accounts payable into the note by the previously mentioned amount of increase. The Company will continue to make
monthly payments in the amount of $300,000 for the first three monthly payments, and also in the amount of $500,000 for the
last two monthly payments prior to the notes maturity.
|
NOTE
10 – SUBORDINATED NOTES PAYABLE
Notes
and loans payable consisted of the following:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Note
payable – Quest acquisition restructure
|
|
$
|
930,000
|
|
|
$
|
930,000
|
|
Note
payable – BCS acquisition restructure
|
|
|
1,200,000
|
|
|
|
1,200,000
|
|
Quest
Preferred Stock note payable
|
|
|
-
|
|
|
|
1,199,400
|
|
Total
notes payable
|
|
$
|
2,130,000
|
|
|
$
|
3,329,400
|
|
For
the nine months ended September 30, 2018, the Company extinguished all recorded interest expense in connection with these notes,
and on December 31, 2017, the Company recorded interest expense in connection with these notes in the amount of $160,790.
The
note payable for acquisition of Quest was issued on January 9, 2014 in conjunction with the acquisition of Quest Marketing, Inc.
The initial interest rate was 1.89%, subsequent to December 31, 2015; the interest was increased to 6% and is due in 2018. Principal
and interest payments have been postponed. In addition, on June 17, 2016, the Company entered into promissory note conversion
agreement with one of the Noteholders whereby $684,000 of the promissory note was converted into 684,000 shares of Series C Preferred
Stock. As part of the transaction, the related debt discount of $171,000 was recorded against Additional paid in capital. As part
of the acquisition of Quest Marketing, the Company engaged an independent valuation analysis to do a valuation of the purchase
accounting. In July 2016, the holders of the notes signed subordination agreements with the Supplier of the Secured Promissory
Note and Action, whereby the noteholders agree to subordinate their rights and payments until the Supplier with the Secured Promissory
Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at December 31, 2016 were all classified
as long term.
The
note payable for acquisition of BCS was issued on November 21, 2014 in conjunction with the acquisition of BCS. The current interest
is at 1.89% and is due in 2018. This note is convertible into Common Stock at $2.00 per share, subject to board approval such
that no debt holder can own more than 5% of the outstanding shares. Principal and interest payments have been postponed. In July
2016, the holders of the notes signed subordination agreements with the Supplier of the Secured Promissory Note and Action, whereby
the noteholder agree to subordinate its right and payment of capital and interest until the Supplier with the Secured Promissory
Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at December 31, 2016 were all classified
as long term.
The
Quest preferred stock 6% note payable is in conjunction with the promissory note issued in October 2015 related to the redemption
and cancelation of 100% of the issued and outstanding Series A preferred stock as well as 3,400,000 stock options that had been
issued to a now former employee. The principal payments have been postponed. In June 2016, the holder of the note granted the
Company a forgiveness of debt in the amount of $75,000 which was recorded as an increase in the additional paid in capital because
it was a related party transaction. In addition, on June 17, 2016, the Company entered into a Promissory Note Conversion Agreement
with the Noteholder whereby $1,800,000 of the promissory note was converted into 1,800,000 shares of Series C Preferred Stock.
In July 2016, the holders of the notes signed subordination agreements with the Supplier of the Secured Promissory Note and Action,
whereby the noteholder agree to subordinate its right and payment of capital and interest until the Supplier with the Secured
Promissory Note is reimbursed in full. As a result, the balance on this loan and related accrued interest at December 31, 2016
were all classified as long term.
On
February 28, 2018, the Company finalized two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”)
which have an effective date of December 30, 2017. Pursuant to the first Marin Settlement Agreement (the “Marin Settlement
Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock
of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the
Company had issued David Marin a promissory note for $11,000,000 of which an aggregate of $10,696,465.17 (the “Owed Amount”)
was outstanding as of February 26, 2018 which includes accrued interest earned but not paid. Pursuant to the Marin Settlement
Agreement I, the amount of the indebtedness owed to Marin was reduced by $9,495,465.17 bringing the total amount owed to $1,201,000.
Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20,000 each
commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc., currently
in the amount of $2,800,000 is satisfied and all amounts currently in default under the credit agreement with Scansource (currently
approximately $ 6.0 Million) is reduced to $2.0 million. The Marins agreed to release their security interest against the Company.
In connection with the $9,495,465.17 reduction in the purchase price, the Company issued the Marins 3 year warrants to purchase
an aggregate of 3,000,000 shares of Common Stock at an exercise price of $0.20 per share.
On
February 28, 2018, the Company finalized an additional settlement agreement with the Marins (the “Marin Settlement Agreement
II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 which
currently had a balance of $111,064.69 in its entirety in exchange for an aggregate of 85,000 shares of the Company’s Series
C Preferred Stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share and automatically
converts into Common Stock at $1.00 per share in the event that the Company’s common stock has a closing price of $1.50
per share for 20 consecutive trading days. The preferred stock pays a 6% dividend commencing two years from issuance. During the
first two years, the Series C Preferred stock shall neither pay nor accrue the dividend. The Company also agreed to transfer title
to a vehicle that was being utilized by Mr. Marin to David Marin. In exchange therefor, the $100,000 Note and the accrued interest
thereon was cancelled in its entirety. The effective date of the agreement is December 30, 2017.
On
February 22, 2018, the Company finalized a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness
to Mr. Thomet in the current amount of $5,437,136.40 in full in exchange for 60 monthly payments of $12,500 each commencing the
earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource,
Inc. currently in the amount of $21,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource
(currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of
500,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions
as described above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30,
2017.
On
February 19, 2018, the Company finalized a settlement agreement with George Zicman whereby the Company settled its indebtedness
to Mr. Zicman in the current amount of $1,304,198.55 in full in exchange for 60 monthly payments of $3,000 each commencing the
earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource,
Inc. currently in the amount of $2,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource
(currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of
100,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described
above in the description of the Marin Settlement Agreement II. The effective date of the agreement is December 30, 2017.
On
June 7, 2018, the Company authorized the issuance of 8,600,000 shares of common stock to Jason Griffith. The issuance was part
of a convertible provision in an existing note held by Jason Griffith. With the issuance of stock, the debt of $1,199,400 and
all accrued interest was extinguished.
The
repayment of the subordinated notes payable at September 30, 2018 is as follows:
2018
|
|
$
|
106,500
|
|
2018
|
|
|
426,000
|
|
2019
|
|
|
426,000
|
|
2020
|
|
|
426,000
|
|
Thereafter
|
|
|
745,500
|
|
Total
|
|
$
|
2,130,000
|
|
NOTE
11 – STOCKHOLDERS’ DEFICIT
PREFERRED
STOCK
Series
A
As
of September 30, 2018, there were 1,000,000 Series A preferred shares designated and 0 Series A preferred shares outstanding.
The board of directors had previously set the voting rights for the preferred stock at 1 share of preferred to 250 common shares.
Series
B
As
of September 30, 2018, there was 1 preferred share designated and 0 preferred shares outstanding. Effective on September
30, 2016, with the divestiture of Quest Solution Canada Inc., the one share was redeemed by the Company and retired.
Series
C
As
of September 30, 2018, there were 15,000,000 Series C preferred share authorized and 4,828,530 Series C preferred share outstanding.
It has preferential rights above common shares and the Series B preferred shares and is entitled to receive a quarterly dividend
at a rate of $0.06 per share per annum. As part of a debt settlement agreement effective December 30, 2017, 1,685,000 shares were
issued with the quarterly dividend at a rate of $.06 per share per annum were waived for a period of 24 months, with no dividends
being accrued or paid. Each Series C preferred share outstanding is convertible into one (1) share of common stock of Quest Solution,
Inc.
COMMON
STOCK
In
April 2017, the Company issued 640,000 shares to the Chief Executive Officer as a signing bonus under his Employment Agreement.
In addition, the Company issued 70,000 shares to the Chief Financial Officer as additional fees pursuant to his Contractor Agreement.
On
September 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.
On
August 2, 2017, the Company authorized the issuance of 600,000 shares of common stock as part of a consulting agreement with Carlos
Jaime Nissensohn. The shares were issued in November, 2017.
On
December 30, 2017, the Company authorized the issuance of 600,000 shares of common stock valued at $59,400, as part of a debt
extinguishment agreement with two related parties. The common shares were issued on June 9, 2018.
On
March 08, 2018 and pursuant to the Plan, the Company granted a grand total of 1,700,000 Shares, as well as options to purchase
up to 7,000,000 Shares (the “Options”) with an exercise price equal to the closing price of the Company’s common
stock on Wednesday, March 07, 2018, $0.12 per share. A total of 1,000,000 Shares and 3,200,000 Options were issued to the Company’s
Board of Directors as follows:
|
●
|
Shai
Lustgarten (Chairman of the Board) received 1,000,000 Shares and 2,000,000 Options;
|
|
●
|
Andrew
J. Macmillan received 400,000 Options;
|
|
●
|
Yaron
Shalem received 400,000 Options; and
|
|
●
|
Niv
Nissenson received 400,000 Options.
|
On
March 08, 2018 and pursuant to the Plan, the Company granted 500,000 Shares to its Chief Financial Officer Benjamin Kemper.
On
March 08, 2018, the Company issued 500,000 shares of the Company’s common stock, par value $0.001, to Mr. Carlos J Nissensohn,
who is the father of Niv Nissensohn, a director of the Company, pursuant to a consulting agreement (the “Consulting Agreement”)
dated August 02, 2017 which was previously filed with the SEC on the Company’s Form 8-K dated August, 04, 2017.
On
March 08, 2018, the Company issued 200,000 shares of the Company’s common stock to the JSM SOC-DIG LP.
On
June 7, 2018, the Company authorized the issuance of 8,600,000 shares of common stock to Jason Griffith valued at $2,666,000.
The issuance was part of a convertible provision in an existing note held by Jason Griffith. With the issuance of stock, the debt
and accrued interest was extinguished. The Company recognized a loss from the conversion in the amount of $1,264,237.
On
June 26
th
, 2018, the Company issued 150,000 shares of stock, valued at $45,000, to Maren Life Reinsurance LTD as part
of a debt settlement agreement.
On
August 1
st
, 2018, the Company issued 200,000 shares of restricted stock, valued at $22,000, to John Nesbett as payment
for services.
On
August 1
st
, 2018, the Company issued 64,516 shares of restricted stock, valued at $20,000, to the Company’s legal
team Sichenzia Ross Ference Kesner LLP as payment for services.
As
of September 30, 2018, the Company had 48,709,773 common shares outstanding.
Warrants
and Stock Options
On
March 08, 2018, the Company adopted an Equity Incentive Plan (the “Plan”), as an incentive, to retain in the employ
of and as directors, officers, consultants, advisors and employees to the Company. Ten million (10,000,000) shares of the Corporation’s
common stock, par value $0.001 (the “Shares”), was set aside and reserved for issuance pursuant to the Plan.
Warrants
- The following table summarizes information about warrants granted during the nine month periods ended September 30, 2018
and 2017:
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
|
Number
of
warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
of
warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
4,900,000
|
|
|
$
|
0.21
|
|
|
|
1,405,000
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
granted
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
0.11
|
|
Warrants
expired
|
|
|
(200,000
|
)
|
|
|
1.00
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
cancelled, forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of period
|
|
|
4,700,000
|
|
|
$
|
0.17
|
|
|
|
2,905,000
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
warrants
|
|
|
4,700,000
|
|
|
$
|
0.17
|
|
|
|
2,905,000
|
|
|
$
|
0.31
|
|
Outstanding
warrants as of September 30, 2018 are as follows:
Range
of
Exercise Prices
|
|
|
Weighted
Average
residual life
span
(in years)
|
|
|
Outstanding
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Exercisable
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.11
|
|
|
|
2.84
|
|
|
|
1,500,000
|
|
|
$
|
0.11
|
|
|
|
1,500,000
|
|
|
$
|
0.11
|
|
$
|
0.20
|
|
|
|
2.25
|
|
|
|
3,000,000
|
|
|
$
|
0.20
|
|
|
|
3,000,000
|
|
|
$
|
0.20
|
|
$
|
0.28
|
|
|
|
1.74
|
|
|
|
200,000
|
|
|
$
|
0.28
|
|
|
|
200,000
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.11
to 0.28
|
|
|
|
2.42
|
|
|
|
4,700,000
|
|
|
$
|
0.17
|
|
|
|
4,700,000
|
|
|
$
|
0.17
|
|
Warrants
outstanding at September 30, 2018 and 2017 have the following expiry date and exercise prices:
Expiry
Date
|
|
Exercise
Prices
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
June
22,2018
|
|
$
|
1.00
|
|
|
|
-
|
|
|
|
300,000
|
|
April
1, 2018
|
|
$
|
0.25
|
|
|
|
-
|
|
|
|
900,000
|
|
April
30, 2018
|
|
$
|
0.25
|
|
|
|
-
|
|
|
|
5,000
|
|
July
1, 2018
|
|
$
|
1.00
|
|
|
|
-
|
|
|
|
200,000
|
|
June
26, 2020
|
|
$
|
0.28
|
|
|
|
200.000
|
|
|
|
-
|
|
December
30, 2020
|
|
$
|
0.20
|
|
|
|
3,000,000
|
|
|
|
-
|
|
August
2, 2021
|
|
$
|
0.11
|
|
|
|
1,500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.700,000
|
|
|
|
1,405,000
|
|
Share
Purchase Option Plan
The
Company has a stock option plan adopted in on November 17, 2014, whereby the Board of Directors, may grant to directors, officers,
employees, or consultants of the Company shares of common stock as well as options to acquire common shares. The Board of Directors
of the Company has the authority to determine the terms, limits, restrictions and conditions of the grant of options, to interpret
the plan and make all decisions relating thereto. The plan was adopted by the Company’s Board of Directors in order to provide
an inducement and serve as a long-term incentive program. The maximum number of common shares that may be reserved for issuance
under the Plan was set at 10,000,000.
The
Company adopted an equity incentive plan on March 8, 2018, whereby the Board of Directors, may grant to directors, officers, employees,
or consultants of the Company shares of common stock as well as options to acquire common shares. The Board of Directors of the
Company has the authority to determine the terms, limits, restrictions and conditions of the grant of options, to interpret the
plan and make all decisions relating thereto. The plan was adopted by the Company’s Board of Directors in order to provide
an inducement and serve as a long-term incentive program. The maximum number of common shares that may be reserved for issuance
under the plan was set at 10,000,000. On November 15, 2018, the Company’s Board of Directors approved an increase in
the amount of shares available under the Plan to 16,000,000.
The
equity incentive plan adopted on March 8, 2018 and amended on November 15, 2018, is a separate, additional plan to the
Company’s stock option plan adopted on November 17, 2014.
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 16,000,000 of the Company’s common shares which
may be issued pursuant to the exercise of share options granted under the Plan. As of September 30, 2018, the Company had issued
aggregate options, allowing for the subscription of 16,281,000 common shares of its share capital pursuant to
the 2014 and 2018 stock incentive plans.
Stock
Options
- The following table summarizes information about stock options granted during the nine months ended September 30,
2017 and 2016:
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
|
Number
of
stock options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
of
stock options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
16,317,000
|
|
|
$
|
0.17
|
|
|
|
5,625,000
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
3,500,000
|
|
|
$
|
-
|
|
Stock
options expired
|
|
|
36,000
|
|
|
$
|
0.33
|
|
|
|
-
|
|
|
|
-
|
|
Stock
options cancelled, forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock
options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of period
|
|
|
16,281,000
|
|
|
$
|
0.17
|
|
|
|
9,125,000
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
stock options
|
|
|
13,689,416
|
|
|
$
|
0.18
|
|
|
|
3,339,750
|
|
|
$
|
0.34
|
|
Outstanding
stock options as of September 30, 2018 are as follows:
Range
of
Exercise Prices
|
|
|
Weighted
Average
residual life
span
(in years)
|
|
|
Outstanding
Stock Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Exercisable
Stock Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.075
to 0.09
|
|
|
|
3.41
|
|
|
|
2,981,000
|
|
|
$
|
0.08
|
|
|
|
2,220,666
|
|
|
$
|
0.08
|
|
$
|
0.11
|
|
|
|
2.84
|
|
|
|
3,500,000
|
|
|
$
|
0.11
|
|
|
|
3,500,000
|
|
|
$
|
0.11
|
|
$
|
0.12
|
|
|
|
4.43
|
|
|
|
6,800,000
|
|
|
$
|
0.12
|
|
|
|
5,000,000
|
|
|
$
|
0.12
|
|
$
|
0.145
|
|
|
|
9.01
|
|
|
|
500,000
|
|
|
$
|
0.145
|
|
|
|
500,000
|
|
|
$
|
0.145
|
|
$
|
0.50
|
|
|
|
6.15
|
|
|
|
2,500,000
|
|
|
$
|
0.50
|
|
|
|
2,468,750
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.075
to 0.50
|
|
|
|
4.31
|
|
|
|
16,281,000
|
|
|
$
|
0.17
|
|
|
|
13,689,41
6
|
|
|
$
|
0.18
|
|
Stock
options outstanding at September 30, 2018, and 2017 have the following expiry date and exercise prices:
Expiry
Date
|
|
Exercise
Prices
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
February
26, 2018
|
|
$
|
0.37
|
|
|
|
-
|
|
|
|
72,000
|
|
April
27, 2018
|
|
$
|
0.38
|
|
|
|
-
|
|
|
|
36,000
|
|
July
9, 2018
|
|
$
|
0.33
|
|
|
|
-
|
|
|
|
36,000
|
|
August
2, 2021
|
|
$
|
0.11
|
|
|
|
3,500,000
|
|
|
|
3,500,000
|
|
February
17, 2022
|
|
$
|
0.075
|
|
|
|
760,333
|
|
|
|
760,333
|
|
February
17, 2022
|
|
$
|
0.09
|
|
|
|
1,520,667
|
|
|
|
1,520,667
|
|
September
30, 2022
|
|
$
|
0.09
|
|
|
|
700,000
|
|
|
|
700,000
|
|
June
5, 2023
|
|
$
|
0.12
|
|
|
|
6,800,000
|
|
|
|
-
|
|
November
20, 2024
|
|
$
|
0.50
|
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
October
2, 2027
|
|
$
|
0.145
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,281,000
|
|
|
|
9,125,000
|
|
Stock
compensation expense is $1,124,553 for the nine months ended September 30, 2018 and $565,593 for the nine months
ended September 30, 2017.
NOTE
12 – LITIGATION
The
Company is not a party to any other pending material legal proceeding. To the knowledge of management, no federal, state or local
governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director,
executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the Company’s
Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.
NOTE
13 – RELATED PARTY TRANSACTIONS
The
Company leased a building from the former owner of BCS for $9,000 per month, the lease was terminated on April 30, 2018.
In addition,
on August 2, 2017, the Company entered into a Consulting agreement with Carlos J. Nissensohn, a family member of a Director of
the Company. The terms and condition of the contract are as follows:
|
●
|
24
month term with 90 day termination notice by the Company
|
|
|
|
|
●
|
A
monthly fee of $15,000 and a one-time signatory fee of 600,000 restricted shares
|
|
|
|
|
●
|
1,500,000
warrants to buy shares at $0.11 having a four year life and a vesting period of
12 months
in 4 quarterly and equal installments, subject to
Mr. Nissensohn’s
continuous
service to the Company
|
|
|
|
|
●
|
In
case the Company procures debt financing during the term of this agreement, without any equity component, Mr. Nissensohn shall
be entitled to 3% of the gross funds raised, however if the Company is required to pay a success fee to another external entity,
then Mr. Nissensohn shall be entitled to only 2% of the gross funds raised
|
|
|
|
|
●
|
In
addition to the above, in the event of an equity financing resulting in gross proceeds of at least $3,000,000 to the Company
within 24 months of the date the contract, Mr. Nissensohn shall further be entitled to certain warrants to be granted by the
Company which upon their exercise pursuant to their terms, Mr. Nissensohn shall be entitled to receive QUEST shares which
represent 3% of the QUEST issued share capital immediately prior to the consummation of such investment. The warrants will
carry an exercise price per warrant/share representing 100% of the closing price per share as closed in the equity financing.
This section and the issue of the warrant by QUEST are subject to the approval of the Board of Directors of QUEST. However,
if the Board does not approve the issuance of warrants; then Mr. Nissensohn will be entitled to a fee with the equivalent
value based on a Black Scholes valuation
|
|
|
|
|
●
|
In
addition to the above, Mr. Nissensohn will be entitled to a
$
50,000 onetime payment which shall be paid on the 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, Mr.
Nissensohn shall be entitled to a success fee in the amount equal to 3% of the total transaction price, in any combination
of cash and shares that will be determined by QUEST
|
On
February 28, 2018, the Company finalized two settlement agreements with David and Kathy Marin (the “Marin Settlement Agreements”)
which have an effective date of December 30, 2017. Pursuant to the first Marin Settlement Agreement (the “Marin Settlement
Agreement I”), the Company and the Marins agreed to reduce the Company’s purchase price for all of the capital stock
of Bar Code Specialties, Inc., which was acquired by the Company from the Marins in November 2014. In the 2014 acquisition, the
Company had issued David Marin a promissory note for $11,000,000 of which an aggregate of $10,696,465.17 (the “Owed Amount”)
was outstanding as of February 26, 2018 which includes accrued interest earned but not paid. Pursuant to the Marin Settlement
I Agreement, the amount of the indebtedness owed to Marin was reduced by $9,495,465.17 bringing the total amount owed to $1,201,000.
Section 3.1 of the original note was amended to provide that the Company shall pay the Marins 60 monthly payments of $20,000 each
commencing the earlier of (i) October 26, 2018 and (ii) the date that the Company’s obligation to Scansource, Inc., currently
in the amount of $2,800,000 is satisfied and all amounts currently in default under the credit agreement with Scansource (currently
approximately $ 6.0 Million) is reduced to $2.0 million. The Marins have agreed to release their security interest against the
Company. In connection with the $9,495,465.17 reduction in the purchase price, the Company issued the Marins 3 year warrants to
purchase an aggregate of 3,000,000 shares of Common Stock at an exercise price of $0.20 per-share.
On
February 28, 2018, the Company finalized an additional settlement agreement with the Marins (the “Marin Settlement Agreement
II”) whereby the Company settled a promissory note owed to the Marins in the original principal amount of $100,000 which
currently had a balance of $111,064.69 in its entirety in exchange for an aggregate of 85,000 shares of the Company’s Series
C Preferred Stock. The Series C Preferred Stock has a liquidation value and conversion price of $1.00 per share and automatically
converts into Common Stock at $1.00 per share in the event that the Company’s common stock has a closing price of $1.50
per share for 20 consecutive trading days. The preferred stock pays a 6% dividend commencing two years from issuance. During the
first two years, the Series C Preferred stock shall neither pay nor accrue the dividend. The Company also agreed to transfer title
to a vehicle that was being utilized by Mr. Marin to David Marin. In exchange therefor, the $100,000 Note and the accrued interest
thereon was cancelled in its entirety. The effective date of the agreement is December 30, 2017.
On
February 22, 2018, the Company finalized a settlement agreement with Kurt Thomet whereby the Company settled its indebtedness
to Mr. Thomet in the current amount of $5,437,136.40 in full in exchange for 60 monthly payments of $12,500 each commencing the
earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource,
Inc. currently in the amount of $21,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource
(currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Thomet an aggregate of
500,000 shares of restricted common stock and 1,000,000 shares of Series C Preferred Stock with the same rights and restrictions
as described above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30,
2017.
On
February 19, 2018, the Company finalized a settlement agreement with George Zicman whereby the Company settled its indebtedness
to Mr. Zicman in the current amount of $1,304,198.55 in full in exchange for 60 monthly payments of $3,000 each commencing the
earlier of (i) October 26, 2018 or (ii) the date when the Company’s obligation under its promissory note with Scansource,
Inc. currently in the amount of $2,800,000 is satisfied and all amounts currently due under the credit agreement with Scansource
(currently approximately $6.0 million) is reduced to $2.0 million. In addition, the Company issued Mr. Zicman an aggregate of
100,000 shares of common stock and 600,000 shares of Series C Preferred Stock with the same rights and restrictions as described
above in the description of the Marin Settlement II Agreement. The effective date of the agreement is December 30, 2017.
Each
of the Marins, Thomet and Zicman entered into a voting agreement with the Company whereby they agreed to vote any shares of common
stock beneficially owned by them as directed by the Company’s CEO and also agreed to a leakout restriction whereby they
each agreed not to sell more than 10% of the common stock beneficially owned during any 30-day period.
On
June 7, 2018, the Company authorized the issuance of 8,600,000 shares of common stock to Jason Griffith. The issuance was part
of a convertible provision in an existing note held by Jason Griffith. With the issuance of stock the debt and accrued interest
was extinguished. The Company recorded a loss of $1,264,237 on the settlement of this debt.
NOTE
14 – SUBSEQUENT EVENTS
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
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.
On October 9, 2018, the Company issued
105,932 shares to Sichenzia Ross Ference LLP, 100,000 shares to Three Rivers Consulting and 100,000 shares to Corporate Profile
LLC in exchange for services. The shares had an estimated value of $72,200.
On October 10, 2018, the Company issued
150,000 shares to Orion Capital Advisors LLC in exchange for services. The shares had an estimated value of $36,000.
On
November 15, 2018, the Company’s Board of Directors approved an increase in the amount of shares eligible for great under
the Plan adopted in March 2018 to 16,000,000.