OMNIQ Corp. - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-09047

Quest Solution, Inc.

(Exact name of Registrant as specified in its charter)

860 Conger Street

Eugene, OR 97402
(Address of principal executive offices)

(714) 899-4800

(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.001 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company,  indicate  by  check mark if  the registrant  has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided  pursuant  to Section  7(a)(2)(B) of  the Securities Act . [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes [X] No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2016, was $4,561,407.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 35,214,826 shares of common stock were outstanding as of April 14, 2017.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Annual Report on Form 10-K that are not historical facts are “forward-looking statements,” which can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Annual Report on Form 10-K, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:

All written and oral forward-looking statements made in connection with this Annual Report on Form 10-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements. Except as may be required under applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result more information, future events or occurrences.

PART I

ITEM 1. BUSINESS

General

Quest Solution, Inc., a Delaware corporation, formerly Amerigo Energy, Inc., together with its two wholly owned subsidiaries, referred to herein as “we,” “us,” and “our” (“Quest” or the “Company”), was incorporated in 1973. Since its incorporation, the Company has been involved in various lines of business.

In January 2014, the Company had determined it was in the best interest of stockholders to focus on operating companies with a track record of positive cash flows and larger existing revenue bases. The Company’s strategy developed into leveraging management’s relationships in the business world for investments for the Company. On January 10, 2014, the Company entered into that certain Share Purchase Agreement with Quest Solution, Inc., an Oregon corporation (“Quest Solution”), in the technology, software, and mobile data collection systems business, in order to acquire Quest Solution for a purchase price of $16,000,000, payable in the form of (i) a promissory note for $4,969,000; and (ii) a promissory note for $11,031,000.

In May 2014, our Board of Directors voted to change the name of the Company from Amerigo Energy, Inc. to Quest Solution, Inc., and the Company received the approval from a majority of its stockholders and filed the amendment to its Articles of Incorporation with the Secretary of State for the State of Delaware. The name change became effective by the State of Delaware on May 30, 2014. The Company also requested a new stock symbol as a result of the name change and we were assigned our new trading symbol “QUES” on the OTCQB.

On November 19, 2014, the Company entered into a Stock Purchase Agreement with Bar Code Specialties, Inc., a California corporation (“BCS”), and David Marin, the sole stockholder of BCS, pursuant to which the Company agreed to purchase all outstanding shares of common stock of BCS held by the Mr. Marin for an aggregate purchase price of $10,396,316, payable in the form of a five-year secured subordinated convertible promissory note. BCS is a company specializing in systems integration and data collection. Initially the company focused on the distribution vertical, but quickly grew its operational focus to include retail, manufacturing, food, and healthcare.

Effective October 1, 2015, the Company acquired the interest in ViascanQdata, Inc. (“ViascanQData”), a Canadian based operation in the same business line as Quest and their CEO, Gilles Gaudreault, was appointed the CEO of Quest, with our then CEO, Tom Miller, remaining as President and Chairman of the Board. The purchase price for the shares of ViascanQdata was 5,200,000 shares of Series B Preferred Stock (which are convertible on a 1:1 basis into common shares, with no other preferential rights) as well as a promissory note of one million five hundred thousand dollars ($1,500,000). In 2016, ViascanQData changed its legal corporate name to Quest Solution Canada Inc.

Effective September 30, 2016, the Company sold all of the outstanding shares of Quest Solution Canada Inc., and the consideration received was $1.0 million in cash of which $575,000 was received at closing and the balance is to be received before April 30, 2017. In addition, the Company has redeemed 1 share of Preferred Class B Stock and 1,839,030 shares of Preferred Class C Stock of the Company, as well as the accrued dividend of $31,742 thereon. Lastly, Quest Exchange Ltd., a wholly owned subsidiary of the Company, redeemed 5,200,000 exchangeable shares as part of the divestiture.

Additionally, as part of the transaction, Viascan Group Inc., the acquirer, assumed $1.0 million of liabilities which the Company had at September 30, 2016. Other consideration that is part of the transaction includes:

History

Between 2008 and 2013, the Company was in the business of developing oil and gas reserves while increasing the production rate base and cash flow. The plan was to continue acquiring oil and gas leases for drilling and to take advantage of other opportunities and strategic alliances. Due to declines in production with respect to the Company’s oil and gas leases, the Company sought to explore its position in the oil industry. As the operational leases for the Company were not providing sufficient cash flow from operations to allow management to expand its investment in this industry, other potential opportunities were evaluated.

In February 2013, the Company acquired the rights to a spirits line of business and compiled a team of beverage, entertainment, retail and consumer product industry professionals. On January 10, 2014, the Company came to agreement with the original owners of the spirits brand, to cancel the previous agreement and the license was returned to them. The cancellation of a Consulting Agreement between the Company and the previous owners resulted in the return and cancellation 1,765,000 of the shares of common stock of the Company that had previously been issued.

Strategy

Following the divestiture of Quest Solution Canada Inc., the Company’s strategy is to focus on operational excellence and cost reduction, addressing the balance sheet debt load and putting together a business plan that is based on modest revenue growth. The Company will continue to identify synergies within the Company to offer a more complete offering of products, services and solutions to customers throughout the United States. Furthermore, the market in which Quest operates is undergoing consolidation and Quest will start identifying profitable, strategic companies in the data collection and mobile systems integration market for potential future acquisition in order to become the leading specialty integrator within our served markets.

The Company is a systems integrator within the United States with a focus on design, delivery, deployment and support of fully integrated mobile and automatic identification data collection solutions. The Company is also a manufacturer and/or distributor of labels, tags, ribbons and RFID identification tags. Quest takes a consultative approach by offering end-to-end solutions that include hardware, service contracts, software, communications and full lifecycle management services. Quest simplifies the integration process with its experienced team of professionals. The Company delivers problem solving solutions backed by numerous customer references. The Company offers comprehensive packaged and configurable software some of which is developed by Quest and some from 3^rd parties. Quest is also a leading providing of bar code labels and ribbons (media) to companies in Southern California. Quest provides consultative services to companies to select design and manufacture the right label for their product offering. Once a company selects the product, sales are highly repeatable on a regular basis.

Quest’s experienced team of consulting and integration professionals guide companies through the entire development and deployment process, from selecting technology to the successful company-wide rollout of a customized solution that fits a company’s unique requirements. After performing a thorough technical evaluation of the client’s current operations and specific operational problems, Quest’s team determines the optimal hardware and software solutions to optimize the client’s operational workflow. Quest delivers, ongoing services provided throughout the deployment process and throughout the entire product life cycle. Quest also delivers full installation services for all mobile, data collection computers and printing equipment including full staging and kitting of the equipment.

Quest has been successful by delivering mission critical mobile computing and data collection solutions for over two decades for Fortune 1000 companies. The requirements and needs of our customers continue to evolve as they require new mobile and wireless technologies and services to make their business more competitive and profitable. The result is a continuous flow of opportunities for Quest to assist customers to evaluate, choose, implement, and support the right mobile and data collection solutions. As we focus on what we do best, we believe that there is more than adequate market size, growth and opportunity available to the Company to succeed.

Core to the solutions offered by Quest is a full suite of configurable packaged software solutions that were internally developed and provide customers with unique solutions with significant business Return on Investment (“ROI”), including:

Order Entry: Software designed to increase productivity in the field. Remote workers increasingly demand rapid access to real-time information and up to date data to facilitate and streamline their job functions in the field Quest’s Order Entry Software is the answer.

DSD and Route: Software packages designed to increase overall productivity. In the fourth quarter 2016, Quest introduced the next generation of Direct Store Delivery (DSD) and Proof of Delivery software called Route Edge ^TM. The Quest DSD and Route Edge ^TM software packages include proprietary applications for portable devices, computer servers and management dashboards that extend the power of existing systems out to field associates to enhance routing and delivery efficiency.

Intelligent Order Entry: Adds intelligence to aging order entry system to maximize profits. The hand held industry is a vital link in getting remote orders from the field to corporate. Quest’s Intelligent Order Entry Software adds this capability to aging order entry systems.

ITrack: Track Device Deployment. iTrack, an Internet Tracking System, is a management tool that tracks the deployment of hardware devices in the field and their repair history.

Warehouse: Enhance efficiency in distribution and manufacturing environments. Warehouse is a collection of applications for portable devices that extend the power of your existing system out to the warehouse floor and dock doors.

Proof of Delivery: Enhances document delivery performance. Quest offers proof-of-delivery capabilities as part of its Mobility Suite that gives companies an edge over competitors by improving customer service.

WTMiP: Extends business beyond four walls. WTMiP provides the link between corporate and the mobile worker. WTMiP servers allow files and data to seamlessly synchronize between the corporate host and laptops, hand held devices and Windows CE or Windows Mobile devices.

Easy Order: Easy order on-line purchasing portal. Quest’s Easy Order Solution offers companies a customized portal that streamlines and simplifies ordering by providing clients with their own unique private on-line store.

QTSaaS (Quest Total Solutions as a Service): QTSaaS is a complete mobile services offering that includes hardware, software, services and wireless data in a bundled subscription payment offering over a period of time. Quest’s partnership with Hyperion Partners and wireless carriers allows Quest to offer mobility solutions to our customers on platforms that extend the market into new mobile applications that previously were not being automated.

Media and Label Business: Repeatable easy order online purchasing portal. The largest segment of data collection opportunity for Quest is the barcode label market providing ongoing and repeatable purchasing business. Quest intends to continue in the label business in the United States to drive business growth and increased margins.

Target Markets

Based on its expertise, competence, success and software solution set, Quest focuses on markets that represent high-return mobile line of business applications. Quest believes it can further develop its existing and substantial installed base of customers who are in need of replacement of legacy systems with a go-to-market strategy that leverages our field sales and system resources, telemarketing, customer portals and vertical market and barcode label specialists. Quest also believes that its base of industry leading customers are candidates for the Company’s barcode label and ribbon (media) offerings for the Company’s core markets of manufacturing, distribution, transportation and logistics, retail and healthcare sectors. Quest has been successful by integrating mission critical mobile computing and data collection solutions for over two decades for Fortune 1000 companies. The requirements and needs of our customers continue to evolve as they require new mobile and wireless technologies and services to make their business more competitive and profitable. The result is a continuous flow of opportunities for Quest to assist customers to evaluate, choose, implement, and support the right mobile and data collection solutions. As we focus on what we do best there is more than adequate market size, growth and opportunity available to the Company to succeed.

Competitive overview

The mobile system integration market is characterized by a limited number of large competitors and numerous smaller niche players. Quest typically pursues larger accounts and national customers, competing most often with the larger channel partners, including Stratix, Peak Technologies, Lowry, and Barcoding Inc. For specific solutions the Company also competes with niche players that are often focused on a single industry. Hardware sales are often pressured by competition from online retailers, but Quest’s consultative, integrated solutions approach is a clear differentiator for most prospective customers.

Sales Strategy

The Company’s current direct sales teams are supported by systems engineers averaging over twenty (20) years of experience in the mobile industry. The sales organization’s growth in size and reach mirrors the Company’s addition of new products and services. Sales team members are organized by industry areas of opportunity, areas of expertise and territory. Quest’s sales teams are organized to address national accounts offering a broad array of unique solutions for key line of business applications, which allows for upsell and cross sell opportunities within each client. For the barcode label (media) business, Quest utilizes a specialty sales force and well as resellers and distributors of Quest manufactured label products to serve the market.

Sales persons are supported internally by sales support personnel who coordinate quotes and logistics and by members of the systems engineering group and software teams.

The normal sales cycle is six (6) to nine (9) months, and typically involves the development of a scope of work and preparation of a ROI analysis. Quest prepares templates for this purpose which reduces the sales cycle. The analyses and proposals include information on leasing and other financing options, which helps differentiate the Company from its competitors. The label business sales cycles are shorter with purchases made more frequently on a transactional basis.

General Discussion of Operations

Concentrations

NOTE 4 – CONCENTRATIONS

For the years ended December 31, 2016 and 2015, one customer accounted for 17.3% and 13.1%, respectively, of the Company’s revenues.

Accounts receivable at December 31, 2016 and 2015 are made up of trade receivables due from customers in the ordinary course of business.

One customer made up 33.1% and 20.8% of the balance for 2016 and 2015, which represented greater than 10% of accounts receivable at December 31, 2016 and 2015, respectively.

Accounts payable are made up of payable due to vendors in the ordinary course of business at December 31, 2016 and 2015. One vendor made up 76.4% and 86.6% of the balance, which represented greater than 10% of accounts payable at December 31, 2016 and 2015, respectively.

Employees and Consultants

As of December 31, 2016, we had a total of 63 full time employees and 1 part time employee.

As of April 14, 2017, we had a total of 62 full time employees and 1 part time employee.

Expected Significant Changes In The Number Of Employees

The Company anticipates some minor change in the number of employees over the next twelve months as administrative functions are consolidated. Management has instituted a cost reduction program that included a reduction in labor and related payroll expenses. Should the Company be approached with an accretive acquisition that the Company determines is a positive return on investment and/or weighted average cost of capital, then there will likely be increases in employees who come with the acquired company.

Quest’s website is located at www.QuestSolution.com. The Company’s website and the information to be contained on that site, or connected to that site, are not part of or incorporated by reference into this filing.

ITEM 1A. RISK FACTORS

This section is not required for smaller reporting companies.

ITEM 1B. UNRESOLVED STAFF COMMENTS

This section is not required for smaller reporting companies.

ITEM 2. PROPERTIES

The corporate offices of the Company are currently located at 860 Conger Street, Eugene, Oregon 97402. In April 2012, Quest Marketing, Inc. signed an operating lease at 860 Conger Street, Eugene, Oregon 97402. The premises consist of approximately 7,000 square feet of warehouse and office space. The lease provides for monthly payments of $3,837 through March 2013, and is adjusted annually to reflect changes in the cost of living for the remainder of the lease term. In no event shall the monthly rent be increased by more than 2% in any one year. The lease expired on March 31, 2017 and the Company extended the term of the lease for an additional two year with the same cost of living increase. This location handles administrative functions as well as having an operations team, inside sales, warehouse and support center for Quest’s sales team.

The lease at the Company’s Ohio location, signed by Quest Marketing, Inc. in July 2011, provides for monthly payments of $2,587 through June 2012, and $2,691 thereafter. The lease is due to expire June 30, 2018. This location is used by the Company’s engineers for assistance with its sales team.

The Company has a commercial real estate operating lease with the former owner of BCS for the Company’s office and warehouse location in Garden Grove, California. The Company pays rent at the rate of $9,000 per month and the lease expires January 2022. This location houses the original BCS operations team, which was acquired in November 2014, as well as the label production facility, administrative and finance for the Company.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than 5% 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.

ITEM 4. MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Quest shares of common stock are not traded on an established market. Quest’s common stock is traded through broker/dealers and in private transactions, and quotations are reported on the OTCQB under the symbol “QUES”. OTCQB quotations reflect interdealer prices, without mark-up, mark-down or commission and may not represent actual transactions. The table below sets forth the range of high and low prices paid for transactions in Quest’s common stock as reported on the OTCQB for the periods indicated. No dividends have been declared or paid on Quest’s common stock and none are likely to be declared or paid in the near future.

In the event a public market for our common stock is sustained in the future, sales of our common stock may be made by holders of our public float or by holders of restricted securities in compliance with the provisions of Rule 144 of the Securities Act of 1933. In general, under Rule 144, a non-affiliated person who has satisfied a six-month holding period in a fully reporting company under the Securities Exchange Act of 1934, as amended, may, sell their restricted Common Stock without volume limitation, so long as the issuer is current with all reports under the Exchange Act in order for there to be adequate common public information. Affiliated persons may also sell their common shares held for at least six months, but affiliated persons will be required to meet certain other requirements, including manner of sale, notice requirements and volume limitations. Non-affiliated persons who hold their common shares for at least one year will be able to sell their common stock without the need for there to be current public information in the hands of the public. Future sales of shares of our public float or by restricted common stock made in compliance with Rule 144 may have an adverse effect on the then prevailing market price, if any, of our common stock. See “Risk Factors.”

Equity Compensation Plan Information

Dividends and other Distributions

Quest has never declared or paid any cash dividends on its common stock. The Company currently plans to retain future earnings to finance growth and development of its business and does not anticipate paying any cash dividends in the foreseeable future. Quest may incur indebtedness in the future which may prohibit or effectively restrict the payment of dividends, although the Company has no current plans to do so. Any future determination to pay cash dividends will be at the discretion of Quest’s board of directors.

Recent Sales of Unregistered Securities

In January 2014, concurrent with the cancellation of the license agreement with Le Flav Spirits, the Company cancelled two consulting agreements previously entered into during April 2013, in which shares previously issued were returned to the Company, a total of 1,765,000 shares were returned and canceled in full settlement, the shares were not repurchased by the Company but were voluntarily returned by the consultant.

On March 1, 2014, the Company issued a total of 100,000 shares valued at $41,000 to the then Chief Operating Officer, Doug Zorn, for services. During 2014, those shares were returned and canceled in exchange for agreement to compensate the individual with $30,000, deferred until successful completion of an equity fundraising. The shares were not repurchased by the Company but voluntarily returned by the individual.

During January 2014, the Company issued warrants to the sellers of Quest Marketing, Inc. vesting with the following milestones. When the warrants vest the Company will have consulting costs charged to operations.

During 2015, the latter three warrants were voluntarily canceled.

On May 9, 2014, the Company issued a total of 240,000 shares; consulting costs charged to operations were $124,800 for marketing services to an outside Consultant.

On August 8, 2014, the Company issued 250,000 shares of stock related to warrants which were exercised by a prior Consultant.

On September 25, 2014, the Company sold 50,000 restricted common stock valued at $25,000 to a private investor.

On November 10, 2014, the Company issued 900,000 shares valued at $387,000 to settle $450,000 of debt due to the then Company President, Kurt Thomet. These shares were redeemed by the Company in December 2015.

In December 2014, the Company issued a total of 419,079 shares valued at $159,250 to settle debts owed to the then CEO (69,079 shares) and our CFO (350,000 shares), and a total of $30,000 was recognized as forgiveness of salary for the CEO in the year ending December 31, 2014.

On July 1, 2014, the Company issued a consultant a total of 200,000 warrants valued at $113,548 for services to be performed. The value of these warrants was estimated by using the Black-Scholes option pricing model with the following assumptions: exercise price of $1.50, term of 2 years; risk free interest rate of 0.47%; dividend yield of 0% and expected volatility of 283%. As of December 31, 2014, the agreement with this consultant was canceled; a total of $14,194 had been recognized as expense.

On July 1, 2014, the Company issued an advisory board member a total of 200,000 warrants valued at $109,999 for services to be performed. The value of these warrants was estimated by using the Black-Scholes option pricing model with the following assumptions: exercise price of $1.00, term of 4 years; risk free interest rate of 1.70%; dividend yield of 0% and expected volatility of 441%. As of December 31, 2014 a total of $13,750 had been recognized as expense.

During November 2014, concurrent with the acquisition of BCS, the Company granted two stock options to purchase an aggregate of 2,500,000 shares of common stock: (i) a time-vested options to purchase 1,500,000 shares based on the duration of the BCS stockholder’s service with the Company to that Executive with an exercise price of $0.50 per share, which expire on November 20, 2024. The options vest in over the next four (4) years, with the first vesting of 12.5% of the balance at six (6) months from the date of issuance. (ii) a performance stock option to purchase 1,000,000 shares based on the achievement of specified revenue and net income milestones to an Executive with an exercise price of $0.50 per share, which expire on November 20, 2024. The options vest after completion of nine (9) years of service with the Company or on having consolidated revenues greater than $45 million. 1,000,000 shares vested during 2015, but have not been exercised.

During November 2014, with the acquisition of BCS, the Company issued two service-based stock options to purchase 1,200,000 shares of common stock each. These Options vests with respect to 200,000 shares on November 20, 2014, and the balance will vest in a series of twenty (20) equal installments on the last day of each complete calendar quarter over the five (5)-year period commencing on January 1, 2015, subject to their continuous service with the Company. On November 20, 2014, the Company vested a total of 400,000 options valued at $183,662. The value of these warrants was estimated by using the Black-Scholes option pricing model with the following assumptions: exercise price of $0.50, term of 5 years; risk free interest rate of 1.64%; dividend yield of 0% and expected volatility of 154%. As of December 31, 2014 a total value of these 400,000 options had been recognized as a non-cash expense related to these options. In 2015, 1,200,000 of these stock options were canceled.

During November 2014, with the acquisition of BCS, the Company issued two performance-based stock options to purchase 2,200,000 shares of Common Stock each. These options will vest and become exercisable for all of the shares on November 21, 2023, provided that the Executives remain in continuous service with the Company on such date. The shares subject to the option will vest as follows: (a) if the Company achieves annual net revenues between $100 million and $150 million in any given year, an additional 200,000 shares shall immediately vest; (b) if the Company achieves net revenues between $150 million and $200 million in any given year, an additional 400,000 shares shall immediately vest; (c) if the Company achieves annual net revenues between $200 million and $300 million in any given year, an additional 600,000 shares shall immediately vest; and (d) if the Company achieves annual net revenues in excess of $300 million in any given year, an additional 1,000,000 shares shall immediately vest (until, in each case, the option is fully vested). In the event of any vesting event in (a) through (d) above where net income as a percentage of net revenues exceeds 10%, the shares vesting on such event shall be increased by 50%. In the event net income as a percentage of net revenues for such year is less than 5%, the shares vesting on such event shall be decreased by 50%. In 2015, 2,200,000 of these stock options were canceled.

On May 19, 2015, Quest entered into a Security Purchase Agreement (the “SPA”) with an accredited investor, who is also a subordinated debt holder and an employee of Quest, pursuant to which Quest issued 667,000 shares of Common Stock in exchange for $200,000.

On June 24, 2015, Quest issued subordinated promissory notes (the “Promissory Notes”) to three investors (who are also Quest employees) in the aggregate principal amount of $400,000 in exchange for an aggregate 170,000 shares of Quest’s restricted common stock, par value $0.001 per share. The Company recorded an interest expense of $62,731 relative to this issuance.

During the quarter ended June 30, 2015, the Company issued 650,000 shares of restricted common stock to consultants of the Company relative to a 12 month contract. The Company has the option to repurchase 550,000 of the shares issued within the 12 month period. The Company also issued 100,000 shares to the Chief Executive Officer in connection with his employment contract on May 1, 2015. The Company recorded a $288,880 expense related to the consulting contracts to be amortized over the period of these contracts.

During the quarter ended September 30, 2015, a stockholder of the Company voluntarily returned 2,517 shares of Common Stock, which were canceled from the Company’s issued and outstanding shares.

During the quarter ended December 31, 2015, the Compensation Committee of the board of directors agreed to quarterly issuance / vesting of 12,500 common shares per independent board member as compensation. During the 4th quarter, 37,500 shares were issued in conjunction with this agreement at a value of $15,375. In addition, the Company issued 100,000 common shares to a consultant for services valued at $22,000 and 20,000 common shares to an employee valued at $4,600.

For the year ended December 31, 2016, the Company issued 150,000 shares to the board members in relation to the vesting schedule agreed to during 4^th quarter 2015, which provides 12,500 common shares per independent board member as compensation. The shares were valued at $28,800.

In addition, 39,000 shares were issued to certain employees in the first quarter of 2016 that had a value of $7,800.

On June 17, 2016, the Company entered into a Stock Redemption Agreement whereby it redeemed 1,000,000 shares of restricted common stock in exchange for 357,000 shares of Series C preferred stock.

On July 31, 2016 as part of the Separation Agreement with Mr. Ross, the Company issued a promissory note in the amount of $59,500 in connection with the redemption by the Company of 350,000 shares of restricted common stock. In addition, the Company issued 100,000 shares of Series C preferred stock pursuant to the same Separation Agreement in exchange for the redemption of 42,500 restricted common shares.

In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 1,650,000 shares of common stock for $750,000 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. On September 30, 2016, the Company completed the redemption of 1,650,000 shares of common stock.

In January 2016, the Company entered into a Stock Redemption Agreement whereby the Company would repurchase 507,079 shares of common stock for $230,490 on an installment basis which was recorded as a note on the transaction date carrying interest at 9%. As at December 31, 2016, the Company did not complete the redemption of 507,079 shares of common stock and the remaining balance of the note and accrued interest is $241,159.

In November 2016, the Company issued 131,000 shares to an employee as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $8,449.

In December 2016, the Company issued 708,000 shares to the Chief Financial Officer as a signing bonus and performance bonus, respectively, under his Employment Agreement. The shares were valued at $48,498.

For the year ended December 31, 2016, pursuant to the Employee Stock Purchase Program (“ESPP”) for which the Company filed an S-8 registration statement, 238,785 shares of Common Stock were issued for proceeds of $20,058.

Issuer Purchases of Equity Securities

Related Party

In 2015, Quest redeemed 900,000 shares of common stock from Thomet pursuant to the Settlement Agreement.

In the third quarter of 2015, the Company issued 1,000,000 shares of restricted common stock to a note holder pursuant to the Settlement Agreement valued at $357,000.

As of December 31, 2016, the Company had 35,095,763 common shares outstanding.

The foregoing issuances of securities were exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)(2) as transactions not involving a public offering.

ITEM 6. SELECTED FINANCIAL DATA

This section is not required for smaller reporting companies.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the Company’s results of operations and its financial condition together with its consolidated subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. Historical results and percentage relationships set forth in the statement of operations, including trends which might appear, are not necessarily indicative of future operations.

OVERVIEW

In 2016, the Company announced strategic actions to streamline its operations, drive future growth and accelerate value creation for shareholders. These repositioning actions resulted in agreements to sell the Canadian operations. The operations of the Canadian subsidiary have been reported within discontinued operations for all years presented.

The Company’s sales from continuing operations for 2016 were $60.0 million, an increase of $1.4 million, or 2.5%. Net sales related to discontinued operations were $11.3 million for 2016 compared with $5.3 million in 2015 (there were 9 months of operations in fiscal 2016 and 3 months in fiscal 2015).

The loss from continuing operations for common stockholders was $7.5 million in 2016, an increase of $6 million compared with prior year loss of $1.5 million. Basic and Diluted loss per share from continuing operations were $0.21 versus $0.04 per share in 2015.

Loss from discontinued operations for 2016 was $$6.9 million ($0.19 per share).compared to $0.2 million in 2015 ($0.01 per share).

GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has acquired a significant working capital deficit and issued a substantial amount of subordinated debt in connection with its acquisitions. As of December 31, 2016, the Company had a working capital deficit of $15,323,313 and an accumulated deficit of $32,935,199. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis to obtain additional debt or equity financing for working capital (i.e., vendor trade credit extensions ) or refinancing (restructuring of subordinated debt) as may be required and, ultimately, to attain profitable operations. Management is focused on reducing operating expenses. Management’s plan to eliminate the going concern situation include, but are not limited to, the raise of additional capital through issuance of debt and equity, improved cash flow management, aggressive cost reductions, and the creation of additional sales and profits across its product lines. On initiative to reduce operating expense and start the path to attain profitability was the sale of Quest Solution Canada Inc. primarily because it had incurred significant operating losses and negative cash flow. In order to mitigate the risk related with this uncertainty, the Company may issue additional shares of common stock for cash and services during the next 12 months.

These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated 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.

Overview - Results of Operations

The following table sets forth certain selected condensed statement of operations data for the periods indicated in dollars. In addition, we note that the period-to-period comparison may not be indicative of future performance.

n/m; not meaningful

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. Revenue for 2016 and 2015 was generated from the sales of hardware, service contracts, software, labels and ribbons and related services provided by the Company to its customers.

Cost of Goods Sold

For the years ended December 31, 2016 and 2015, the Company recognized a total of $47,952,579 and $46,650,277, respectively, of cost of goods sold. Cost of goods sold were 80.9% of net revenues at for 2016 and 80.4% for 2015. The gross margin percentage remained stable in an industry that is putting a lot of pressure on the gross margin.

Operating expenses

For the years ended December 31, 2016 and 2015, operating expenses related to continuing operations were $13,283,849 and $14,044,203, respectively. This represents a decrease of $760,354, or 5.4%, which is due to management focus on expense reduction and streamlining operations.

Salary and benefits – Salary, commissions and employee benefits for the year ended December 31, 2016 totaled $8,409,223, compared to $8,220,135 for the year ended December 31, 2015. Included in salary and benefits is a stock based compensation expense of $374,451 for the year ended December 31, 2016 compared to $751,054 for the year ended December 31, 2016. The decrease in the stock compensation, which is non-cash, is a result of fewer shares and less options being granted. The increase in salary and benefits is attributable in part to the related increases of sales commissions associated with increased net revenues of the Company and the increase in headcount for the first half of the 2016 year.

General and Administrative – General and administrative expenses were $2,327,889 for the year ended December 31, 2016, compared to $2,813,984 for the year ended December 31, 2015. The decrease is a result of the cost containment efforts that have been put in place to realize the synergies of the combined entities.

Professional Fees – Professional fees for the year ended December 31, 2016 were $754,411 compared to $411,261 for the period year ended December 31, 2015. The increase was related to the complexity of the business that resulted in the increased use of outside consultants and specifically legal fees attributable to the divestiture of Quest Solution Canada. In addition, the increase was related to cost of being a public company resulting in an increase of professional accounting, consulting, fees for the independent Board of Directors and attorney fees.

Stock based compensation expense – Stock based compensation expenses for the year ended December 31, 2016 were $374,451, compared to $751,054 for the year ended December 31, 2015. This decrease in 2016 relates to the Company issuing less net shares for services, the decrease in vesting of incentive stock options and the decrease in stock price during the period.

Other income and expenses

The Company incurred $4,531,263 in interest expense for year ended December 31, 2016, compared to $1,438,422 for the year ended December 31, 2015. The interest expense in 2016 is comprised of the interest on the credit facilities as well as the financing fees and cancellation fees related to the facilities, interest on the notes, supplier financing and the debt discount on the promissory notes which are non-cash. The following are the factors that explain the increase; $0.5 million related to the increase in the average line of credit balance and the interest rate on the facility, $0.4 million related to the cancellation of the FGI line of credit, $0.2 million in financing fees related to the different credit facilities, $0.3 million increase related to the increase in the Promissory note balances, $0.3 million increase related to the supplier financing and $1.4 million increase in the debt discount which is non cash.

Restructuring Expense - During the second quarter, the Company took steps to streamline and simplify its operations in North America. The Employees to be separated from the Company as a result of these streamlining initiatives were offered severance or working notices. As a result, the Company has recorded a restructuring charge of $544,941 for the year ended December 31, 2016 to realize the streamlining initiatives. The restructuring charges include severance pay, legal costs to execute contract terminations, and cost of stock redemptions.

In 2016 the Company recognized a loss of $450,000 for the write-off of assets which it determined to have no future economic benefit. In addition in 2016, the Company realized a gain on the forgiveness of a contingent liability of $150,000. In 2015, the Company realized a $374,500 gain on sale of technology licenses and trade agreements that were transferred to a former employee and shareholder in the ordinary course of business as part of an omnibus settlement agreement.

Foreign currency transactions

The Company uses the temporal method to translate its foreign currency transactions. Under this method, monetary assets and liabilities are translated at the exchange rate in effect at the consolidated balance sheet date. Other assets and liabilities are translated at the exchange rate in effect at the transaction date. Items appearing in the current year’s consolidated statement of loss, except for cost of inventory and amortization, which are translated using the historical rate, are translated at average yearly rates. Foreign exchange gains and losses are included in the consolidated statement of loss. The Company recorded a gain on foreign currency of $129,589 in 2016 due to the weakening of the Canadian dollar in relation to the United States dollar.

Provision for income taxes

During the year ended December 31, 2016, the Company recognized a total income tax expense of $1,068,352 which is comprised of $298,719 of current taxes and $769,633 of deferred taxes. Management’s analysis of the future utilization of the cumulative net operating loss carryforwards determined that it does not meet the more likely than not criteria regarding the utilization of the net operating losses prior to their expiration. Accordingly, the valuation allowance on the deferred tax asset is 100% during the year ended December 31, 2016. For the year ended December 31, 2015, the Company recognized a tax benefit of $1,797,977 related to the deferred tax asset true net operating losses carryforward.

Net loss from continuing operations

The Company realized net loss from continuing operations of $7,493,270 for the year ended December 31, 2016, compared to a net loss from continuing operations of $1,475,124 for the year ended December 31, 2015. The increase in the net is attributable to the numerous one-time expenses in the current year.

Net loss from discontinued operations

Effective September 30, 2015, the Company sold the 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 in 2015. 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.

Liquidity and capital resources

For the year ended December 31, 2016, the Company had cash in the amount of $954,700 of which $665,220 is on deposit and restricted as collateral for a letter of credit and a corporate purchasing card, and a working capital deficit of $15,323,313, compared to cash in the amount of $1,514,241, of which $690,850 is restricted, and a working capital deficit of $9,181,844 excluding the current portion of subordinated notes payable and the net asset held for disposal, for the year ended December 31, 2015. In addition, the Company’s stockholder’s deficit of $13,750,714 and $471,367 for the years ended December 31, 2016 and 2015, respectively.

The Company’s accumulated deficit is $32,935,199 and $18,457,236 for the years ended December 31, 2016 and 2015, respectively.

The Company’s operations provided net cash of $5,652,679 and $9,300,222 for the years ended December 31, 2016 and 2015, respectively, a decrease of $3,647,543. The decrease is a result of a large net loss from continued operations and a decrease in the non-cash working capital items of $1.8 million in 2016 compared to 2015. Non-cash changes in working capital items in 2016 included an $8,881,651 increase in accounts payable

The Company’s cash generated from investing activities was $584,908 for the year ended December 31, 2016 compared to cash used of $778,741 from investing activities for the year ended December 31, 2015. In 2016, the Company received cash in the amount of $0.6 million in the divestiture of Quest Solution Canada Inc., whereas in 2015, $0.7 million of cash was used to provide the letters of credit contained in the restricted cash.

The Company’s financing activities used $2,176,424 of cash during the year ended December 31, 2016, and $4,935,039 during the year ended December 31, 2015, a decrease in usage of $2,758,615. During the year ended December 31, 2016, $3,083,784 was paid down on the Supplier Secured Promissory note, $750,000 was used to redeem 1,650,000 common shares, and to offset the uses of cash, the Company received proceeds of $2,098,950 from the line of credit. During the year ended December 31, 2015, $6,626,036 was paid down on notes payable to the Company as part of the acquisitions, as well, the Company received proceeds of $1,140,997 from the line of credit.

The Company’s results of operations have not been affected by inflation and management does not expect inflation to have a material impact on the Company’s operations in the future.

Contractual Obligations

The significant contractual obligations as of December 31, 2016, were as follows:

Off-Balance Sheet Arrangements

The Company currently does not have any off-balance sheet arrangements.

Critical Accounting Policies

Preparation of the Company’s financial statements requires management to make judgments, assumptions and estimates regarding uncertainties that could affect reported revenue, expenses, assets, liabilities and equity. Note 1 describes the significant accounting policies used in preparation of the consolidated financial statements. The most significant areas where management judgments and estimates impact the primary financial statements are described below. Actual results in these areas could differ materially from management’s estimates under different assumptions or conditions.

REVENUE RECOGNITION

The Company recognizes nearly all revenue through the sale of products and services, and records the sale when products are shipped or delivered, title and risk of loss pass to the customer, and collection is reasonably assured. The vast majority of deliverables are tangible products, with a smaller portion attributable to installation, service or maintenance. Revenue related to maintenance is recognized ratably over the contractual term. Management believes that all relevant criteria and conditions are considered when recognizing revenue.

ACCOUNTS RECEIVABLE

The Company’s management performs ongoing credit evaluations of our customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of their current credit information. Management continuously monitors collections and payments from its customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection issues that were identified. If the actual uncollected amounts significantly exceed the estimated allowance, the Company’s operating results would be significantly adversely affected. While such credit losses have historically been within management’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.

INVENTORIES

Inventories are stated at the lower of cost or market and are principally valued on a first-in, first-out basis. The Company’s management reviews inventory for obsolescence, make appropriate provisions and dispose of obsolete inventory on a regular basis. Various factors are considered in these reviews, including sales history and recent trends, industry conditions and general economic conditions. If actual circumstances indicate a decline in any of these factors, particularly an abrupt change in economic conditions, the Company could incur an obsolescence expense. Management’s estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess, obsolete and unmarketable inventories. In the future, if our inventories are determined to be overvalued, we would be required to recognize such costs in its cost of goods sold at the time of such determination.

LONG-LIVED ASSETS

Long-lived assets, which include property, equipment, goodwill and identifiable intangible assets, are reviewed for impairment whenever events or changes in business circumstances indicate impairment may exist. If the Company determines that the carrying value of a long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. The Company’s management reviews for possible goodwill impairment at least annually, in the fourth quarter. If an initial assessment indicates it is more likely than not an impairment may exist, it is evaluated by comparing the unit’s estimated fair value to its carrying value. Fair value is generally estimated using an income approach that discounts estimated future cash flows using discount rates judged by management to be commensurate with the applicable risk. Estimates of future sales, operating results, cash flows and discount rates are subject to changes in the economic environment, including such factors as the general level of market interest rates, expected equity market returns and the volatility of markets served, particularly when recessionary economic circumstances continue for an extended period of time. Management believes the estimates of future cash flows and fair values are reasonable; however, changes in estimates due to variance from assumptions could materially affect the evaluations.

INCOME TAXES

Income tax expense and tax assets and liabilities reflect management’s assessment of taxes paid or expected to be paid (received) on items included in the financial statements. Deferred tax assets and liabilities arise from temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and consideration of operating loss and tax credit carryforwards. Deferred income taxes are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are provided to reduce deferred tax assets to the amount that will more likely than not be realized. This requires management to make judgments and estimates regarding the amount and timing of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies.

STOCK BASED COMPENSATION

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by FASB where the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

Recent Accounting Pronouncements

See Note 3 of the consolidated financial statement for management’s discussion of recent accounting pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This section is not required for smaller reporting companies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this Item are included as a separate section of this report commencing on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure and Control Procedures

The Company maintains “disclosure controls and procedures”, as such terms are defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosures. The Company acknowledges that any controls and procedures can provide only reasonable assurances of achieving the desired control objectives.

We have carried out an evaluation as required by Rule 13a-15(d) under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedure as of December 31, 2016. Based upon their evaluation, the Chief Executive Officer and Principal Accounting Officer concluded that, as of December 31, 2016, the Company’s disclosure controls and procedures were not effective. Although we have determined that the existing controls and procedures are not effective, the deficiencies identified have not been deemed material to our reporting disclosures.

(b) Management’s Report on Internal Controls over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting cannot provide absolute assurance of achieving their objectives. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgement and breakdowns resulting from human failures. Due to their inherent limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. It is possible to design safeguards to reduce, but not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

Management has used the framework set forth in the report entitled Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), known as COSO, to evaluate the effectiveness of our internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on such evaluation, our CEO and Principal Financial Officer have concluded that, as of December 31, 2016, our internal controls over financial reporting were not effective.

As a result of our evaluation, we identified a material weakness in our controls related to segregation of duties and other immaterial weaknesses in several areas of data management and documentation.

The Company’s management is composed of a small number of professionals resulting in a situation where limitations on segregation of duties exist. Accordingly, as a result of the material weakness identified above, we have concluded that the control deficiencies result in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented on a timely basis by the Company’s internal controls. The Company continues to employ and refine a structure in which critical accounting policies, issues and estimates are identified, and together with other complex areas, are subject to multiple reviews by executives. In addition, the Company evaluates and assesses its internal controls and procedures regarding its financial reporting, utilizing standards incorporating applicable portions of the Public Company Accounting Oversight Board’s 2009 Guidance for Smaller Public Companies in Auditing Internal Controls Over Financial Reporting as necessary on an on-going basis. The Company has committed to hiring additional finance department staff during the year ending December 31, 2017 which will allow for a higher level of segregation and improve the Company’s overall compliance with COSO. The hiring of additional staff is dependent upon the Company obtaining sufficient cash flows from operations or financings.

While the material weakness set forth above were the result of the scale of the Company’s operations and is intrinsic to its small size, the Company believes the risk of material misstatements relative to financial reporting are minimal.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by its registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits the Company to provide only management’s report in this annual report.

(c) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information called for by this item is incorporated herein by reference to the definitive Proxy Statement, which will be filed with the Commission pursuant to Regulation 14A under the Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is incorporated herein by reference to the definitive Proxy Statement, which will be filed with the Commission pursuant to Regulation 14A under the Exchange Act.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information called for by this item is incorporated herein by reference to the definitive Proxy Statement, which will be filed with the Commission pursuant to Regulation 14a under the Exchange Act.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information called for by this item is incorporated herein by reference to the definitive Proxy Statement, which will be filed with the Commission pursuant to Regulation 14A under the Exchange Act.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by this item is incorporated herein by reference to the definitive Proxy Statement, which will be filed with the Commission pursuant to Regulation 14A under the Exchange Act.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Commission this Annual Report on Form 10-K including exhibits. You may read and copy all or any portion of any reports, statements or other information in the files at Commission’s Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.

You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. The Company’s filings, including this Annual Report on Form 10-K, will also be available to you on the website maintained by the Commission at http://www.sec.gov.

The Company’s website is located at http://www.QuestSolution.com. The Company’s website and the information to be contained on that site, or connected to that site, are not part of or incorporated by reference into this filing.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) The following documents are filed under pages F-1 through F-26 and are included as part of this Form 10-K:

(a)(2) Financial statement schedules are omitted as they are not applicable.

(a)(3) Exhibits required by Item 601 of Regulation S-K are incorporated herein by reference and are listed on the attached Exhibit Index, which begins immediately following the financial statements of this Annual Report on Form 10-K.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: April 17, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

QUEST SOLUTION, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

To The Board of Directors and Stockholders of

Quest Solution, Inc.

We have audited the accompanying consolidated balance sheets of Quest Solution, Inc. and subsidiaries (“The Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows, for the years ended December 31, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quest Solution, Inc. and subsidiaries, as of December 31, 2016 and 2015 and the results of its operations, and its cash flows for the years ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a working capital deficiency and significant subordinated debt resulting from acquisitions. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

RBSM, LLP

Larkspur, CA

April 17, 2017

QUEST SOLUTION, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes to the financials should be read in conjunction with these financial statements.

QUEST SOLUTION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes to the financials should be read in conjunction with these financial statements.

QUEST SOLUTION, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)