UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 22, 2016
QUEST SOLUTION, INC.
(Exact name of registrant as specified in charter)
Delaware | 000-09047 | 20-3454263 |
(State or other jurisdiction | (Commission | (IRS Employer |
of incorporation) | File Number) | Identification No.) |
860 Conger Street, Eugene, OR 97402 |
(Address of Principal Executive Offices) (Zip Code) |
(514) 744-1000 |
(Registrant’s Telephone Number, Including Area Code) |
Not Applicable |
(Former Name or Former Address, If Changed Since Last Report) |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):
[ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
[ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
[ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
[ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02. Results of Operations and Financial Condition.
On November 22, 2016, Quest Solution, Inc. (the “Company”) issued a press release (the “Q3 Results Press Release”) announcing financial results for the three and nine months ended September 30, 2016 and selected third quarter and subsequent highlights. A copy of the Q3 Results Press Release is attached hereto as Exhibit 99.1 and incorporated into this Item 2.02 by reference.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the information in this Item 2.02 disclosure, including Exhibit 99.1, and the information set forth therein, is deemed to have been furnished and shall not be deemed to be “filed” under the Securities Exchange Act of 1934.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit | ||
Number | Description | |
99.1 | Q3 Results Press Release, dated November 22, 2016 |
2 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: November 22, 2016 | ||
QUEST SOLUTION, INC. | ||
By: | /s/ Thomas O. Miller | |
Thomas O. Miller | ||
Interim Chief Executive Officer |
3 |
EXHIBIT INDEX
Exhibit Number |
Description |
|
99.1 | Q3 Results Press Release, dated November 22, 2016 |
4 |
Quest Solution Reports Third Quarter Results
Company plans to dispose of Canadian operations underway;
Net revenues of $43.4 million for the nine months ended September 30, 2016
EUGENE, Ore., November 22, 2016 — Quest Solution, Inc, “The Company” (OTCBB: QUES), today announced financial results for the three and nine months ended September 30, 2016.
Third Quarter and Subsequent Highlights
● | Net revenues of $43.4 million for the nine months ended September 30, 2016, an increase of 6% compared to the prior year period for the same operating entities | |
● | Cash flow from operations for the first nine months of 2016 of $5.4 million compared to $2.2 million for the first nine months of 2015 | |
● | Company secures trade extension agreement with a key supplier and converts $12.4 million of accounts payable into a promissory note | |
● | Net loss from continuing operations for the three months ended September 30, 2016 of $2.5 million | |
● | Adjusted EBITDA for the three months ended September 30, 2016 of $0.2 million | |
● | Redemption of 3,042,500 common shares for the nine months ended September 30, 2016 |
Third Quarter and Year-to-Date 2016- Select Financial Results from Continuing Operations (1)
(In thousands, except share and per share data)
Three Months Ended 9/30/2016 |
Three Months Ended 9/30/2015 |
Nine Months Ended 9/30/2016 |
Nine Months Ended 9/30/2015 |
|||||||||||||
Revenues | 13,564,151 | 16,711,339 | 43,439,719 | 40,944,924 | ||||||||||||
Gross profit | 2,654,062 | 3,187,795 | 8,790,810 | 8,913,210 | ||||||||||||
Gross profit margin | 19.6 | % | 19.1 | % | 20.2 | % | 21.8 | % | ||||||||
Net (loss) income from continuing operations | (2,467,290 | ) | 697,415 | (5,354,837 | ) | (10,116 | ) | |||||||||
Adjusted EBITDA | 190,437 | 753,256 | 503,338 | 1,352,854 | ||||||||||||
EPS from continuing operations - basic | (0.07 | ) | 0.02 | (0.15 | ) | (0.00 | ) | |||||||||
Weighted average shares outstanding - basic | 35,762,326 | 36,637,523 | 36,323,489 | 35,702,188 |
Please refer to the Company’s filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and the financial tables included below for the Company’s GAAP financial statements and a reconciliation of GAAP results to Non-GAAP measures.
“Included in the net loss from continuing operations of $2.5 million in the third quarter, were $1.2 million of non-recurring charges. The one-time charges include a $0.5 million loss on asset write-off, $0.5 million financing charges related to the early termination of the line of credit, $0.1 million in restructuring charges, and $0.1 million in foreign exchange loss” stated Tom Miller, Interim Chief Executive Officer. Miller continued, “For Q4 we will remain focused on continuing to drive sales and realizing additional cost efficiencies across the enterprise.”
(1) All the assets and liabilities attributable to the pending divestiture of Quest Solution Canada Inc. have been reclassified into the “held for disposal” asset and liability categories on the balance sheet. On the statement of operations, the financial results of Quest Solution Canada Inc. have been reclassified out of the activity from continuing operations, and disclosed separately in the category for discontinued operations.
In the third quarter, the Company announced the decision to dispose of all its shares of its wholly owned subsidiary, Quest Solution Canada Inc., to Viascan Group Inc. 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. All the negotiations for the final agreement have been substantially completed and the transaction is expected to close in the 4 th quarter of 2016 with an effective date of September 30, 2016. The Canadian operation has been generating operating losses and has generated negative cash flows. The disposal of the Canadian business will allow for the simplification of the operations and will provide management greater flexibility to affect operational and financial initiatives. This transaction should help us refocus on the Company’s strengths in mobile computing and data collection, reduce our costs and accelerate our path to profitability.
In addition the Company started to put into effect its cost reduction program in order to right-size the Company’s cost structure, and eliminate certain redundancies caused by the multiple past business acquisitions. The cost savings from the headcount reduction to date is $0.4 million on an annualized basis . The cost reduction program has started to show results in that the Company has realized a positive Adjusted EBITDA for the second consecutive quarter. The streamlining efforts should continue for the remainder of the year as well.
In July, the Company secured a new credit extension agreement with a key supplier to ensure an uninterrupted supply of product. With this extension agreement, $12.4 million of accounts payable was converted into a secured promissory note with scheduled payments until December 31, 2016. The Company is working with the supplier to negotiate the extension of the maturity date of the promissory note.
Third Quarter and Year-to-Date Financial Results
Revenues
For the three months ended September 30, 2016 and 2015, the Company generated net revenues in the amount of $13,564,151 and $16,711,339, respectively. This represents a decrease of approximately $3.2 million or 18.8%, and is a result of timing of orders from our customers which moved into the fourth quarter. For the nine months ended September 30, 2016 and 2015, the Company generated net revenues in the amount of $43.4 million and $40.9 million, respectively. This represents an organic growth of 6% for 2016. We will continue to grow our revenues by providing additional value added services.
Gross Margin
Gross profit margin for the three months ended September 30, 2016 was 19.6% of revenue compared to 19.1% for the three months ended September 30, 2015. For the first nine months of 2016, gross profit margin was 20.2% of total revenues compared to 21.8% in the first nine months of 2015. The decrease in the gross margin percentage is a result of the product and customer mix. The Company has been able to maintain stable gross margin in light of the very competitive market conditions which exemplifies its strong relationships with its customer base.
Net loss from continuing operations
Net loss for the three-month period ended September 30, 2016 was $2.5 million compared to a net income of $0.7 million for the three months ended September 30, 2015. The increase in the net loss is primarily attributable to a write-off of other assets of $0.5 million, the restructuring charge of $0.1 million related to the cost reduction program, $0.4 million from non-cash charges of amortization and $0.9 million in interest costs of which the early termination fee to FGI accounts for $0.5 million. Net loss for the nine-month period ended September 30, 2016 was $5.4 million compared to $0.0 million for the nine months ended September 30, 2015. The increase in net loss is attributable to same factors as for the quarter.
Net loss from discontinued operations
The Company realized a net loss from discontinued operations of $3.9 million for the three months ended September 30, 2016 and a net loss from discontinued operations of $6.9 million for the nine months ended September 30, 2016.
EBITDA
The Company’s operating expenses during both the three and nine month periods ended September 30, 2016 and 2015 included non-cash expenses including depreciation, amortization of acquisition intangibles and stock-based compensation for employee and director stock options and one-time non recurring costs.
Without the effect of these non-cash expenses, the Adjusted Earnings Before Interest, Taxes and Depreciation and Amortization (“Adjusted EBITDA”) for the three months ended September 30, 2016 was $0.2 million compared to $0.8 million for the three months ended September 30, 2015. Adjusted EBITDA for the nine months ended September 30, 2016 was $0.5 million compared to $1.4 million for the nine months ended September 30, 2015.
Please refer to the financial tables included below for a reconciliation of generally accepted accounting principles in the United States (“GAAP”) to non-GAAP financial results. Please refer to the financial tables included below for a reconciliation of GAAP to non-GAAP results.
Balance Sheet Summary
Net 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. As stated in the footnotes to the financials, the Company had deferred revenue of $8.0 million and deferred costs of $6.7 million. This net deferred revenue of $1.3 million at September 30, 2016 will be recognized in income over the term of the contracts, normally one to five years, with three years being the average term.
About Quest Solution, Inc.
Quest Solution is a Specialty Systems Integrator focused on Field and Supply Chain Mobility. We are also a manufacturer and distributor of consumables (labels, tags, and ribbons), RFID solutions, and barcoding printers. Founded in 1994, Quest is headquartered in Eugene, Oregon, with offices in the United States.
Rated in the Top 1% of global solution providers, Quest specializes in the design, deployment and management of enterprise mobility solutions including Automatic Identification and Data Capture (AIDC), Mobile Cloud Analytics, RFID (Radio Frequency Identification), and proprietary Mobility software. Our mobility products and services offering is designed to identify, track, trace, share and connect data to enterprise systems such as CRM or ERP solutions. Our customers are leading Fortune 500 companies from several sectors including manufacturing, retail, distribution, food / beverage, transportation and logistics, health care and chemicals / gas / oil.
Information about Forward-Looking Statements
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Statements in this press release relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. This release contains “forward-looking statements” that include information relating to future events and future financial and operating performance. The words “may,” “would,” “will,” “expect,” “estimate,” “can,” “believe,” “potential” and similar expressions and variations thereof are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to: fluctuations in demand for Quest Solution, Inc.’s products, the introduction of new products, the Company’s ability to maintain customer and strategic business relationships, the impact of competitive products and pricing, growth in targeted markets, the adequacy of the Company’s liquidity and financial strength to support its growth, the Company’s ability to manage credit and debt structures from vendors, debt holders and secured lenders, the Company’s ability to successfully integrate its acquisitions, risks related to the proposed sale of Quest Solution Canada Inc. to Viascan Group Inc. and other information that may be detailed from time-to-time in Quest Solution Inc.’s filings with the United States Securities and Exchange Commission. Examples of such forward looking statements in this release include, among others, statements regarding revenue growth, driving sales, operational and financial initiatives, cost reduction and profitability, and simplification of operations. For a more detailed description of the risk factors and uncertainties affecting Quest Solution, Inc. please refer to the Company’s recent Securities and Exchange Commission filings, which are available at http://www.sec.gov. Quest Solution, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless otherwise required by law.
Financial Tables Follow
QUEST SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
For the three months | For the nine months | |||||||||||||||
ending September 30, | ending September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenues | ||||||||||||||||
Total Revenues | 13,564,151 | 16,711,339 | 43,439,719 | 40,944,924 | ||||||||||||
Cost of goods sold | ||||||||||||||||
Cost of goods sold | 10,910,089 | 13,523,544 | 34,648,909 | 32,031,714 | ||||||||||||
Gross profit | 2,654,062 | 3,187,795 | 8,790,810 | 8,913,210 | ||||||||||||
Operating expenses | ||||||||||||||||
General and administrative | 505,903 | 597,269 | 1,571,102 | 2,053,868 | ||||||||||||
Salary and employee benefits | 1,871,610 | 1,836,929 | 6,471,563 | 5,825,720 | ||||||||||||
Depreciation and amortization | 442,428 | 24,052 | 1,347,077 | 69,916 | ||||||||||||
Professional fees | 192,814 | 92,359 | 603,190 | 288,922 | ||||||||||||
Total operating expenses | 3,012,755 | 2,550,609 | 9,992,932 | 8,238,426 | ||||||||||||
Income (loss) from operations | (358,693 | ) | 637,186 | (1,202,122 | ) | 674,784 | ||||||||||
Other income (expenses): | ||||||||||||||||
Restructuring expenses | (84,317 | ) | - | (544,941 | ) | - | ||||||||||
Gain on foreign currency | (90,215 | ) | - | 129,589 | - | |||||||||||
Interest expense | (1,110,804 | ) | (274,349 | ) | (2,802,980 | ) | (1,012,415 | ) | ||||||||
Write-off of other assets | (450,000 | ) | - | (450,000 | ) | - | ||||||||||
Gain on intangible license settlement | - | 374,500 | - | 374,500 | ||||||||||||
Other (expenses) income | 3,065 | (39,981 | ) | 6,871 | 17,224 | |||||||||||
Total other expenses | (1,732,271 | ) | 60,170 | (3,661,461 | ) | (620,691 | ) | |||||||||
Net Income Before Income Taxes | (2,090,964 | ) | 697,415 | (4,863,583 | ) | 54,093 | ||||||||||
Provision for Income Taxes | (376,326 | ) | - | (491,254 | ) | (64,209 | ) | |||||||||
Net loss from continuing operations | (2,467,290 | ) | 697,415 | (5,354,837 | ) | (10,116 | ) | |||||||||
Net loss from discontinued operations | (3,919,175 | ) | - | (6,851,875 | ) | - | ||||||||||
Net Income (Loss) | (6,386,465 | ) | 697,415 | (12,206,712 | ) | (10,116 | ) | |||||||||
Other Comprehensive Loss | ||||||||||||||||
Foreign Currency Adjustments | 120,333 | - | (361,744 | ) | - | |||||||||||
Comprehensive Loss from Operations | (6,266,132 | ) | 697,415 | (12,568,456 | ) | (10,116 | ) |
QUEST SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of | ||||||||
September 30, 2016 | December 31, 2015 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 321,888 | $ | 823,391 | ||||
Restricted Cash | 767,688 | 690,850 | ||||||
Accounts receivable, net | 7,629,822 | 7,903,338 | ||||||
Inventory, net | 595,913 | 471,479 | ||||||
Prepaid expenses | 561,123 | 649,123 | ||||||
Deferred tax asset, current portion | 160,545 | 160,545 | ||||||
Other current assets | 84,623 | 395,642 | ||||||
Assets held for disposal | 11,650,973 | 18,254,601 | ||||||
Total current assets | 21,772,575 | 29,348,969 | ||||||
Fixed assets | 155,858 | 201,897 | ||||||
Deferred tax asset | 433,997 | 433,997 | ||||||
Goodwill | 10,114,164 | 10,114,164 | ||||||
Trade name | 3,080,731 | 3,513,481 | ||||||
Intangibles, net | - | 8,250 | ||||||
Customer Relationships | 6,716,827 | 7,560,352 | ||||||
Other assets | 174,696 | 689,347 | ||||||
Total assets | $ | 42,448,848 | 51,870,457 | |||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 7,626,126 | 14,360,980 | |||||
Accounts payable and accrued liabilities, related party | 468,839 | 177,776 | ||||||
Line of credit | 4,194,719 | 2,960,342 | ||||||
Advances, related party | 100,000 | 400,000 | ||||||
Accrued payroll and sales tax | 2,047,476 | 1,322,188 | ||||||
Deferred revenue, net | 825,534 | 685,317 | ||||||
Current portion of note payable | 11,879,131 | - | ||||||
Notes payable, related parties, current portion | 8,207,637 | 6,790,148 | ||||||
Other current liabilities | 220,980 | 369,609 | ||||||
Liabilities held for disposal | 5,598,343 | 10,795,906 | ||||||
Total current liabilities | 41,168,785 | 37,862,266 | ||||||
Long term liabilities | ||||||||
Note payable, related party, net of debt discount | 8,936,204 | 13,546,840 | ||||||
Long term portion of note payable | 76,638 | 126,942 | ||||||
Deferred revenue, net | 482,870 | 533,874 | ||||||
Other long term liabilities | 646,030 | 271,902 | ||||||
Total liabilities | 51,310,527 | 52,341,824 | ||||||
Stockholders’ deficit | ||||||||
Series A Preferred stock; $0.001 par value; 1,000,000 shares authorized, 0 outstanding as of September 30, 2016 and December 31, 2015, respectively. | - | - | ||||||
Series B Preferred stock; $0.001 par value; 1 share authorized and 1 share outstanding as of September 30, 2016 and December 31, 2015, respectively, representing 5,200,000 votes. | 5,200 | 5,200 | ||||||
Series C Preferred stock; $0.001 par value; 15,000,000 shares authorized and 4,982,560 shares outstanding as of September 30, 2016 and 0 shares outstanding at December 31, 2015, with a dividend of $0.06 per share payable quarterly. | 4,983 | - | ||||||
Common stock; $0.001 par value; 100,000,000 shares authorized; 33,980,478 and 36,871,478 shares outstanding of September 30, 2016 and December 31, 2015, respectively. | 33,980 | 36,871 | ||||||
Additional paid-in capital | 22,205,127 | 17,943,798 | ||||||
Accumulated Other Comprehensive Loss | (361,744 | ) | - | |||||
Accumulated deficit | (30,749,225 | ) | (18,457,236 | ) | ||||
Total stockholders’ deficit | (8,861,679 | ) | (471,367 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 42,448,848 | 51,870,457 |
QUEST SOLUTION, INC.
RECONCILIATION OF GAAP MEASURES TO NON-GAAP MEASURES
(UNAUDITED)
Three Months Ending September 30, |
Nine Months Ending September 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
EBITDA Calculation: | ||||||||||||||||
Net (loss) income | (6,386,465 | ) | 697,415 | (12,206,712 | ) | (10,116 | ) | |||||||||
Net loss from discontinuing operations | 3,919,175 | - | 6,851,875 | - | ||||||||||||
Income Taxes | 376,326 | - | 491,254 | 64,322 | ||||||||||||
Depreciation & Amortization | 442,428 | 24,052 | 1,347,077 | 69,916 | ||||||||||||
Interest Expense | 1,110,804 | 274,349 | 2,802,980 | 1,012,415 | ||||||||||||
Non-admissible foreign exchange (gain) loss | 90,215 | - | (129,589 | ) | - | |||||||||||
EBITDA | (447,517 | ) | 995,816 | (843,115 | ) | 1,136,537 | ||||||||||
Adjusted EBITDA Calculation: | ||||||||||||||||
EBITDA | (447,517 | ) | 995,816 | (843,115 | ) | 1,136,537 | ||||||||||
Non Cash stock compensation | 103,637 | 131,940 | 308,079 | 590,817 | ||||||||||||
Write-off of other assets | 450,000 | - | 450,000 | - | ||||||||||||
Gain on intangible license settlement | - | (374,500 | ) | - | (374,500 | ) | ||||||||||
Restructuring expenses | 84,317 | - | 544,941 | - | ||||||||||||
Merger related costs | - | - | 25,188 | - | ||||||||||||
One time nonrecurring costs | - | - | 18,245 | - | ||||||||||||
Adjusted EBITDA | 190,437 | 753,256 | 503,338 | 1,352,854 | ||||||||||||
Net Revenue | 13,564,151 | 16,711,339 | 43,439,719 | 40,944,924 | ||||||||||||
Adjusted EBITDA as a % of Net Revenue | 1.4 | % | 4.5 | % | 1.2 | % | 3.3 | % |
The merger related costs are fees from an independent valuation firm and legal firm which are related to the business acquisitions.
Investor Contact:
Joey Trombino, CFO
(514) 744-1000 ext. 1228
jtrombino@questsolution.com