SOURCE: Quest Solution, Inc.

Quest Solution, Inc.

April 18, 2017 08:14 ET

Quest Solution Reports Year End and Q4 Results

Cash Availability Performance Improvement Validates Canadian Divestiture

EUGENE, OR--(Marketwired - Apr 18, 2017) -  Quest Solution, Inc. (OTCQB: QUES), is pleased to announce its financial results for the year ended December 31, 2016.

Year End and Subsequent Highlights

  • Net revenues of $60.0 million for the year ended December 31, 2016, an increase of 2.5% compared to the prior year period;
  • Company secures trade extension agreement with a key supplier and converts $12.4 million of accounts payable into a promissory note and extends the maturity to September 30, 2017
  • Company completes divesture of its Canadian operations
  • Net loss from continuing operations for the year ended December 31, 2016 of $7.5 million
  • Adjusted EBITDA for the year and three months ended December 31, 2016 of $1.1 million and $0.6 million, respectively
  • Redemption of 3,042,500 common shares for the year ended December 31, 2016
  • Appointment of Shai Lustgarten as President and CEO
   
Fourth Quarter and Year-end 2016- Select Financial Results from Continuing Operations(1)  
   
    Three Months Ended 12/31/2016     Three Months Ended 12/31/2015     Year Ended 12/31/2016     Year Ended 12/31/2015  
Revenues   16,607,405     17,653,607     60,047,124     58,598,531  
Gross profit   3,303,735     3,035,044     12,094,545     11,948,254  
  Gross profit margin   19.9 %   17.2 %   20.1 %   20.4 %
Net loss from continuing operations   (2,138,433 )   (1,704,964 )   (7,493,270 )   (1,475,524 )
Adjusted EBITDA   631,104     54,311     1,134,442     1,153,131  
  Adjusted EBITDA   3.8 %   0.3 %   1.9 %   2.0 %
                         
Loss per share from continuing operations - basic   (0.06 )   (0.04 )   (0.21 )   (0.04 )
Weighted average shares outstanding - basic   34,742,996     37,725,736     35,947,523     36,195,065  
                         

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, 2016, and the financial tables included below for the Company's GAAP financial statements and a reconciliation of GAAP results to Non-GAAP measures.

(1) All the assets and liabilities attributable to the 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.

Q4-2016 Revenue Increased and Expenses Decreased Over Q3-2016

In the fourth quarter Company revenue increased by 22% from $13.56M in Q3 to $16.6M. There were significant wins of a million dollars or more in Retail, Transportation and Logistics and Pharmaceutical. For the quarter, there were shipments greater than $100,000 to over 30 accounts in multiple industries demonstrating the strength of the Company's sales organization. Some of these accounts have rollouts that will continue into 2017 positioning the Company for future growth.

For Q4-2016, G&A expenses, comprised of general and administrative, salary and employee benefits and professional fees, as a percentage of net revenues, was 17.1% compared to 18.9% in Q3-2016 as the Company began to realize benefits from cost reduction programs. 

Result is Adjusted EBITDA Increased to 3.8% in Q4-2016 from 1.4% in Q3-2016

"In the fourth quarter of 2016, the Company concluded the carve out of Quest Solution Canada Inc., with an effective date of September 30, 2016, as such Q4-2016 was the first full quarter of operations post divestiture of the Canadian operations and the benefits have already started to be felt. The Adjusted EBITDA as a percentage of net revenues increased from 1.4% in Q-3 2016 to 3.8% in Q4-2016". Q4-2016 represented 56% of the year's Adjusted EBITDA providing evidence that the Company's actions are beginning to show early results. Tom Miller, Chairman of the Board stated, "We believe Q4 represents an important turning point for the Company and we will continue to show improvement throughout 2017. We will remain focused on continuing to drive sales, creating a more favorable product and services mix to improve margins and realizing additional cost efficiencies across the enterprise".

Significant Progress on Note Reduction

In Q4-2016, the Company was able to reduce the Supplier Promissory Note by $2.2 million to $9.4 million as compared to $12.4M in July 2016. At the end of March 2017, the note was further reduced to $7.8 million representing a reduction of 37% since July 2016. This was possible because the Company did not have to fund the negative cash flow of the Canadian operations and is using those funds to accelerate the pay down of the Supplier Note.

2017 Outlook

Management believes that the decisions taken in Q3 and Q4 2016 which included the divestiture of Canada, write off of non-performing assets, cost reductions and restructuring charges and a return of Quest to its core business with a simplified business model, provides the foundation for significantly improved Company performance in 2017. The Company is undertaking further steps in 2017 to consolidate operations and reduce G&A expenses. With the introduction of the new Route Edge mobile software in Q1-2017, an expansion of new business partner relationships and an increasing emphasis on providing professional and managed services the Company expects revenue growth in 2017. During 2017 as financial performance improves the Company intends to further reduce debt and associated interest expense. Tom Miller, Chairman of the Board stated, "I am enthusiastic about the appointment of Shai Lustgarten as President and CEO beginning April 2017. He is an experienced executive with demonstrated success in developing technology businesses."

Year End Financial Results

Revenues
For the years ended December 31, 2016 and 2015, the Company recognized $60,047,124 and $58,598,531 in net revenues, respectively. This represents an increase of 2.5% attributable to organic growth. The growth rate is in line with that of the industry. We will continue to grow our revenues by providing additional value added services.

Gross Margin
Gross profit margin for the year ended December 31, 2016 was 20.1% of revenue compared to 20.4% for the year ended December 31, 2015. 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
Included in the net loss from continuing operations of $7.5 million for the 2016 fiscal year, were $3.5 million of non-recurring charges, most of which were non-cash. The one-time charges include a $0.3 million net loss on asset write-off and settlement of contingent liability, $0.6 million financing charges related to the early termination of the line of credit, $0.5 million in restructuring charges, $0.8 million in the increase of the valuation allowance for the deferred income tax assets and $1.3 million in interest expense from the acceleration of the accretion of the debt discount. In addition, the interest expense included $0.8 million of accretion of debt discount which will not continue in 2017 as the entire balance has been accredited at December 31, 2016 and will have a favorable impact on the profitability of the Company going forward. The net loss from continuing operations for the year ended December 31, 2015 was $1.5 million.

Net loss from discontinued operations
The Company realized a net loss from discontinued operations of $6,851,875 for the year ended December 31, 2016, which represents nine months of operations, and a net loss from discontinued operations of $239,956 for the year ended December 31, 2015, which represents three months of operations.

EBITDA
The Company's operating expenses during both the years ended December 31, 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 year ended December 31, 2016 was $1.1 million compared to $1.2 million for the year ended December 31, 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 $8.7 million and deferred costs of $7.3 million. This net deferred revenue of $1.4 million at December 31, 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 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  
   
    For the three months     For the years  
    ending December 31,     ending December 31,  
    2016     2015     2016     2015  
Revenues                        
  Total Revenues   16,607,405     17,653,607     60,047,124     58,598,531  
                         
Cost of goods sold                        
  Cost of goods sold   13,303,670     14,618,563     47,952,579     46,650,277  
                         
Gross profit   3,303,735     3,035,044     12,094,545     11,948,254  
                         
Operating expenses                        
  General and administrative   518,241     760,116     2,327,889     2,813,984  
  Salary and employee benefits   2,176,206     2,394,415     8,409,223     8,220,135  
  Depreciation and amortization   445,249     2,528,907     1,792,326     2,598,823  
  Professional fees   151,221     122,339     754,411     411,261  
Total operating expenses   3,290,917     5,805,777     13,283,849     14,044,203  
                         
Income (loss) from operations   12,818     (2,770,733 )   (1,189,304 )   (2,905,949 )
                         
Other income (expenses):                        
  Restructuring expenses   -     -     (544,941 )   -  
  Gain on foreign currency   -     -     129,589     -  
  Interest expense   (1,728,283 )   (426,007 )   (4,531,263 )   (1,438,422 )
  Write-off of other assets   -     -     (450,000 )   -  
  Gain on intangible license settlement   -     -     -     374,500  
  Gain on extinguishment of other liabilities   150,000     -     150,000     -  
  Other (expenses) income   4,130     (118,001 )   11,001     (100,777 )
Total other expenses   (1,574,153 )   (544,008 )   5,235,614     (1,164,699 )
                         
Net loss Before Income Taxes   (1,561,335 )   (3,314,741 )   (6,424,918 )   (3,260,648 )
                         
(Provision) benefit for Income Taxes                        
  Deferred   (769,633 )   1,797,977     (769,633 )   1,797,977  
  Current   192,535     51,756     (298,719 )   (12,453 )
    (577,098 )   1,849,733     (1,068,352 )   1,785,524  
                         
Net loss from continuing operations   (2,138,433 )   (1,465,008 )   (7,493,270 )   (1,475,124 )
                         
Net loss from discontinued operations   -     (239,956 )   (6,851,875 )   (239,956 )
                         
Net Loss   (2,138,433 )   (1,704,964 )   (14,345,145 )   (1,715,080 )
                         
                         
                         
QUEST SOLUTION, INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS  
   
    As of  
    December 31, 2016     December 31, 2015  
ASSETS                
Current assets                
  Cash   $ 289,480     $ 823,391  
  Restricted Cash     665,220       690,850  
  Accounts receivable, net     10,589,677       7,903,338  
  Inventory, net     531,593       471,479  
  Prepaid expenses     272,926       649,123  
  Deferred tax asset, current portion     -       160,545  
  Other current assets     772,966       395,642  
  Assets held for disposal     -       18,254,601  
    Total current assets     13,121,862       29,348,969  
                 
  Fixed assets     136,835       201,897  
  Deferred tax asset     -       433,997  
  Goodwill     10,114,164       10,114,164  
  Trade name     2,936,481       3,513,481  
  Intangibles, net     -       8,250  
  Customer Relationships     6,435,652       7,560,352  
  Other assets     47,563       689,347  
Total assets   $ 32,792,557       51,870,457  
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT)                
Current liabilities                
  Accounts payable and accrued liabilities   $ 10,566,066       14,360,980  
  Accrued interest and accrued liabilities, related party     -       177,776  
  Line of credit     5,059,292       2,960,342  
  Advances, related party     100,000       400,000  
  Accrued payroll and sales tax     1,829,934       1,322,188  
  Deferred revenue, net     879,026       685,317  
  Current portion of note payable     9,782,925       -  
  Notes payable, related parties, current portion     -       6,790,148  
  Other current liabilities     227,932       369,609  
  Liabilities held for disposal     -       10,795,906  
    Total current liabilities     28,445,175       37,862,266  
                 
Long term liabilities                
  Note payable, related party, net of debt discount     17,515,345       13,546,840  
  Accrued interest and accrued liabilities, related party     629,238       -  
  Long term portion of note payable     130,294       126,942  
  Deferred revenue, net     565,423       533,874  
  Other long term liabilities     332,270       271,902  
Total liabilities     47,617,745       52,341,824  
                 
Stockholders' deficit                
  Series A Preferred stock; $0.001 par value; 1,000,000 shares designated, 0 shares issued and outstanding as of December 31, 2016 and 2015, respectively.     -       -  
  Series B Preferred stock; $0.001 par value; 1 share designated, 0 shares and 1 share issued and outstanding as of December 31, 2016 and 2015, respectively.     -       1  
  Series C Preferred stock; $0.001 par value; 15,000,000 shares designated, 3,143,530 and 0 shares issued and outstanding as of December 31, 2016 and 2015, respectively, liquidation preference of $1 per share and a cumulative dividend of $0.06 per share     3,144       -  
  Common stock; $0.001 par value; 100,000,000 shares authorized; 35,095,763 and 36,871,478 shares issued and outstanding of December 31, 2016 and 2015 respectively..     35,095       36,871  
  Common stock to be repurchased by the Company     (230,490 )     -  
  Additional paid-in capital     18,302,262       17,948,997  
  Accumulated deficit     (32,935,199 )     (18,457,236 )
    Total stockholders' deficit     (14,825,188 )     (471,367 )
Total liabilities and stockholders' deficit   $ 32,792,557       51,870,457  
                 
                 
                 
QUEST SOLUTION, INC.  
RECONCILIATION OF GAAP MEASURES TO NON-GAAP MEASURES  
   
    For the three months     For the years  
    ending December 31,     ending December 31,  
EBITDA Calculation:   2016     2015     2016     2015  
                         
Net loss income   (2,138,433 )   (1,704,964 )   (14,345,145 )   (1,715,080 )
Net loss from discontinuing operations   -     239,956     6,851,875     239,956  
Income Taxes   577,098     (1,849,733 )   1,068,352     (1,785,524 )
Depreciation & Amortization   445,249     2,528,907     1,792,326     2,598,823  
Interest Expense   1,728,283     426,007     4,531,263     1,438,422  
Non-admissible foreign exchange (gain) loss   -     -     (129,589 )   -  
EBITDA   612,197     (359,827 )   (230,918 )   776,597  
                         
Adjusted EBITDA Calculation:                        
                         
EBITDA   612,197     (359,827 )   (230,918 )   776,597  
                         
Non Cash stock compensation   66,372     414,138     374,451     751,034  
Write-off of other assets   -     -     450,000     -  
Gain on intangible license settlement   -     -     -     (374,500 )
Restructuring expenses   -     -     544,941     -  
Divestiture related costs   102,535     -     102,535     -  
Merger related costs   -     -     25,188     -  
Gain on extinguishment of other liabilities   (150,000 )   -     (150,000 )   -  
One time nonrecurring costs   -     -     18,245     -  
Adjusted EBITDA   631,104     54,311     1,134,442     1,153,131  
                         
Net Revenue   16,607,405     17,653,607     60,047,124     58,598,531  
                         
Adjusted EBITDA as a % of Net Revenue   3.8 %   0.3 %   1.9 %   2.0 %
                         

The merger related costs are fees from an independent valuation firm and legal firm which are related to the business acquisitions. The divestiture related costs are fees from a legal firm which are related to the divestiture of Quest Solution Canada Inc.

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