SOURCE: Quest Solution, Inc.

Quest Solution, Inc.

August 23, 2016 07:00 ET

Quest Solution Reports Second Quarter Results

Revenues Increase 39% to $18.9 Million; Company Continues to Improve Balance Sheet

EUGENE, OR--(Marketwired - Aug 23, 2016) - Quest Solution, Inc, "The Company" (OTCQB: QUES), today announced financial results for the three and six months ended June 30, 2016.

Second Quarter and Subsequent Highlights

  • Net revenues of $18.9 million, an increase of 39% compared to the prior year period
  • Cash flow from operations for the first six months of 2016 of $2.6 million compared to $1.6 million for the first six months of 2015
  • Strengthened the balance sheet by converting approximately $4.5 million of outstanding debt into new Series C Preferred Stock
  • Additional debt reductions of $0.6 million from forbearances
  • Continuation of the restructuring plan that will result in additional cost savings of $0.9 million
  • Net loss for the three months ended June 30, 2016 of $4.4 million
  • Adjusted EBITDA for the three months ended June 30, 2016 of $0.4 million representing 2.1% of net revenues, an improvement of $0.5 million over Q1-2016

Second Quarter and Year-to-Date 2016 - Select Financial Results
(In thousands, except share and per share data)

    Three Months Ended 6/30/2016     Three Months Ended 6/30/2015     Six Months Ended 6/30/2016     Six Months Ended 6/30/2015  
Revenues   $ 18,896,354     $ 13,557,615     $ 37,290,916     $ 24,233,585  
Gross profit   $ 3,971,164     $ 3,330,810     $ 7,789,178     $ 18,508,170  
  Gross profit margin     21.0 %     24.6 %     20.9 %     23.6 %
Net loss   $ (4,317,518 )   $ (285,449 )   $ (5,820,247 )   $ (707,531 )
Adjusted EBITDA   $ 399,597     $ 600,912     $ 247,870     $ 638,222  
                                 
EPS - basic   $ (0.12 )   $ (0.01 )   $ (0.16 )   $ (0.02 )
Weighted average shares outstanding - basic     36,842,209       35,414,484       36,885,105       35,224,128  
                                 

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.

"We continue to grow our customer base and deepen our market penetration, as revenues increased by 39%," stated Gilles Gaudreault, Chief Executive Officer of Quest Solution, Inc. "We remain focused on driving sales and realizing cost efficiencies across the enterprise, and I am encouraged with our progress so far this year."

In the second quarter, the Company took significant action to reduce executive overhead and implemented further cost rationalization initiatives by initiating the transfer of the Montreal ribbon production facility to Ajax, Ontario. In effect, the Montreal facility will become a distribution center for the northeast market and this decision will result in eventual savings of $0.3 million on an annualized basis. This move will be completed in the later part of the third quarter. In addition, the Company will further reduce its headcount to right-size the Company's cost structure, reduce its rental expenses, and eliminate certain redundancies caused by the multiple past business acquisitions. The cost savings from the headcount reduction is $0.6 million on an annualized basis. As a result, the Company recorded a restructuring charge of $0.6 million in the second quarter to realize the streamlining initiatives. The streamlining efforts will continue for the second half of the year as well. In addition, for the period ended June 30, 2016, the goodwill in relation to the Company's investments in ViascanQdata was impaired by $2.3 million. The impairment charge is non cash and was driven by certain economic factors related to the operations of ViascanQdata. The Company expects to retain the services of an independent valuation firm to determine the fair value of these identifiable intangible assets acquired as part of the business acquisition.

"We also took proactive steps to improve our balance sheet and capital structure," added Mr. Gaudreault. "The conversion of $4.5 million in debt into a new Series C Preferred Stock and the forbearance of $0.6 million in notes helped to reduce the debt load and improve the debt to equity ratio of the Company. The debt reduction efforts were completed in the latter part of June, so we expect to report reductions in our interest expense in the second half of the year. With an increasingly solid balance sheet, a streamlined capital structure and strong sales and delivery organizations, we are well-positioned to grow our business profitably."

Second Quarter and Year-to-Date Financial Results

Revenues
Revenues for the three months ended June 30, 2016 increased 39% to $18.9 million compared to $13.6 million for the three months ended June 30, 2015. Approximately $3.9 million of the increase came from the ViascanQData acquisition and the balance of the increase was due to significant enterprise account wins that occurred within the quarter. Revenue for both periods was generated from the sales of hardware, software, consumables (labels, tags and ribbons) and related services by the Company to its customers. Net Revenues for the six-month period ended June 30, 2016 increased 54% to $37.3 million compared to $24.2 million for the six months ended June 30, 2015. Approximately $7.4 million of the increase came from the ViascanQData acquisition.

Gross Margin
Gross profit margin for the three months ended June 30, 2016 was 21.0% of revenue compared to 24.6% for the three months ended June 30, 2015 with the decrease the result of the product and customer mix. For the first six months of 2016, gross profit margin was 20.9% of total revenues compared to 23.6% in the first six months of 2015.

Net loss
Net loss for the three-month period ended June 30, 2016 was $4.4 million compared to $0.3 million for the three months ended June 30, 2015. The increase in the net loss is primarily attributable to a goodwill impairment charge of $2.3 million related to the ViascanQdata acquisition, the restructuring charge of $0.6 million related to the cost reduction program and $0.8 million from non-cash charges of amortization and interest costs. Net loss for the six-month period ended June 30, 2016 was $5.8 million compared to $0.7 million for the six months ended June 30, 2015. The increase in net loss is attributable to same factors as for the quarter.

EBITDA
The company's operating expenses during both the three and six month periods ended June 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 June 30, 2016 was $0.4 million compared to $0.6 million for the three months ended June 30, 2015. Adjusted EBITDA for the six months ended June 30, 2016 was $0.3 million compared to $0.6 million for the six months ended June 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 $7.8 million and deferred costs of $6.4 million. This net deferred revenue of $1.4 million at June 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.

On June 17, 2016, the Company completed the conversion of approximately $4.5 million of outstanding debt into the newly created Series C Preferred Stock, $0.001 par value at a conversion rate of one share for each $1.00 of principal and accrued but unpaid interest due on the debt.

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 and Canada.

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.

Investor Contact:

Joey Trombino
CFO
(514) 744-1000 ext. 1228
jtrombino@questsolution.com

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 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 business growth, driving sales, realization of cost efficiencies and cost rationalization initiatives. 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 six months  
    ending June 30,     ending June 30,  
    2016     2015     2016     2015  
Revenues                                
    Total Revenues     18,896,354       13,557,615       37,290,916       24,233,585  
                                 
Cost of goods sold                                
  Cost of goods sold     14,925,190       10,226,805       29,501,738       18,508,170  
                                 
Gross profit     3,971,164       3,330,810       7,789,178       5,725,415  
                                 
Operating expenses                                
  General and administrative     730,360       600,008       1,624,617       1,456,608  
  Salary and employee benefits     2,859,411       2,469,891       5,985,812       3,988,791  
  Depreciation and amortization     526,055       20,368       1,021,642       45,864  
  Professional fees     217,672       108,083       447,127       196,563  
  Goodwill impairment     2,300,000       -       2,300,000       -  
Total operating expenses     6,633,498       3,198,400       11,379,198       5,687,876  
                                 
Income (loss) from operations     (2,662,334 )     132,410       (3,590,020 )     37,539  
                                 
Other income (expenses):                                
  Restructuring expenses     (569,261 )     -       (569,261 )     -  
  Gain on foreign currency     151,978       -       492,490       -  
  Interest expense     (1,133,189 )     (342,794 )     (2,048,578 )     (738,066 )
  Other expenses     -       (38,093 )     (166 )     (38,485 )
  Other income     4,075       27,350       4,075       95,690  
Total other expenses     (1,546,397 )     (353,537 )     (2,121,440 )     (680,861 )
                                 
Net Income Before Income Taxes     (4,208,731 )     (221,127 )     (5,711,460 )     (643,322 )
                                 
Provision for Income Taxes     (108,787 )     (64,322 )     (108,787 )     (64,209 )
                                 
Net loss   $ (4,317,518 )   $ (285,449 )   $ (5,820,247 )   $ (707,531 )
                                 
Other Comprehensive Loss                                
  Foreign Currency Adjustments     (54,526 )     -       (482,077 )     -  
Comprehensive Loss from Operations   $ (4,372,044 )   $ (285,449 )   $ (6,302,324 )   $ (707,531 )
                                 
                                 
                                 
QUEST SOLUTION, INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS  
(UNAUDITED)  
   
    As of  
    June 30, 2016     December 31, 2015  
ASSETS                
Current assets                
  Cash   $ 492,141     $ 842,715  
  Restricted Cash     774,098       690,850  
  Accounts receivable, net     10,249,173       11,409,258  
  Inventory, net     3,419,397       2,731,612  
  Prepaid expenses     1,709,557       730,591  
  Deferred tax asset, current portion     160,545       160,545  
  Other current assets     307,731       396,775  
    Total current assets     17,112,642       16,962,346  
                 
  Fixed assets, net of accumulated depreciation of $2,133,289 and $1,962,497, respectively     1,361,275       1,450,660  
  Deferred tax asset     433,997       433,997  
  Goodwill     18,952,024       21,252,024  
  Trade name     3,224,981       3,513,481  
  Intangibles, net     -       8,250  
  Customer Relationships     6,998,002       7,560,352  
  Other assets     597,979       689,347  
                 
Total assets   $ 48,680,900     $ 51,870,457  
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT)                
Current liabilities                
  Accounts payable and accrued liabilities   $ 22,815,436     $ 19,849,978  
  Accounts payable and accrued liabilities, related party     299,535       177,776  
  Line of credit     3,823,989       5,450,657  
  Advances, related party     200,000       400,000  
  Accrued payroll and sales tax     2,463,005       1,598,335  
  Deferred revenue, net     946,023       742,976  
  Current portion of note payable     1,551,789       1,255,477  
  Notes payable, related parties, current portion     8,183,439       7,146,820  
  Other current liabilities     286,200       433,784  
    Total current liabilities     40,569,416       37,055,803  
                 
Long term liabilities                
  Note payable, related party, net of debt discount     8,936,204       13,910,768  
  Long term portion of note payable     76,638       569,477  
  Deferred revenue, net     454,812       533,874  
  Other long term liabilities     468,119       271,902  
Total liabilities     50,505,189       52,341,824  
                 
Stockholders' deficit                
  Series A Preferred stock; $0.001 par value; 1,000,000 shares authorized 0, outstanding as of June 30, 2016 and December 31, 2015, respectively.     -       -  
  Series B Preferred stock; $0.001 par value; 1 share authorized and 1 share outstanding as of June 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 4,882,560 shares outstanding as of June 30, 2016 and 0 shares outstanding at December 31, 2015, with a dividend of $0.06 per share payable quarterly.     4,883       -  
  Common stock; $0.001 par value; 100,000,000 shares authorized; 35,985,478 and 36,871,478 shares outstanding of June 30, 2016 and December 31, 2015, respectively.     35,985       36,871  
  Additional paid-in capital     22,899,636       17,943,798  
  Accumulated Other Comprehensive Loss     (482,077 )     -  
  Accumulated deficit     (24,287,916 )     (18,457,236 )
    Total stockholders' deficit     (1,824,289 )     (471,367 )
Total liabilities and stockholders' deficit   $ 48,680,900     $ 51,870,457  
                 
                 
                 
QUEST SOLUTION, INC.  
RECONCILIATION OF GAAP MEASURES TO NON-GAAP MEASURES  
(UNAUDITED)  
   
    Three Months Ending June 30,     Six Months Ending June 30,  
    2016     2015     2016     2015  
EBITDA Calculation:                                
Net loss     (4,317,518 )     (285,449 )     (5,820,247 )     (707,531 )
Income Taxes     108,787       64,322       108,787       64,322  
Depreciation & Amortization     526,055       20,368       1,021,642       45,864  
Goodwill impairment     2,300,000       -       2,300,000       -  
Interest Expense     1,133,189       342,794       2,048,578       738,066  
Non-admissible foreign exchange gain     (15,321 )     -       (251,251 )     -  
EBITDA     (264,808 )     142,035       (592,491 )     140,721  
                                 
Adjusted EBITDA Calculation:                                
                                 
EBITDA     (264,808 )     142,035       (592,491 )     140,721  
                                 
Non Cash stock compensation     55,431       458,877       204,442       497,501  
Restructuring expenses     569,261       -       569,261       -  
Merger related costs     16,488       -       28,188       -  
One time nonrecurring costs     23,225       -       41,470       -  
Adjusted EBITDA     399,597       600,912       250,870       638,222  
                                 
Net Revenue   $ 18,896,354     $ 13,557,615     $ 37,290,916     $ 24,233,585  
                                 
Adjusted EBITDA as a % of Net Revenue     2.1 %     4.4 %     0.7 %     2.6 %

The merger related costs are fees from an independent valuation firm and legal firm which are related to the business acquisitions.

Contact Information