Omniq Corp (OMQS) 2015 Q2 法說會逐字稿

Greetings and welcome to the Quest Solution's second-quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Cameron Donahue at Hayden IR. Thank you, Mr. Donohue. You may begin.

Thank you, operator. Good afternoon, everyone, and thanks for joining Quest Solution's second-quarter 2015 earnings conference call. Joining me on the call today are Tom Miller, Chairman and Chief Executive Officer; and Scott Ross, Chief Financial Officer.

Before we start, I'd like to remind everyone of the Safe Harbor statement included in the earnings press release. The Private Securities Legislation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements, including statements made during the course of this call. These forward-looking statements are based on the Company's current expectations and beliefs concerning the future developments and the potential effects on the Company.

A number of these factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company, and are subject to the changes based upon various future factors. For a more detailed discussion of some of the ongoing risks and uncertainties in the Company's business, I refer you to the Company's filings with the Securities and Exchange Commission, including our Form 10-Q for the second quarter of 2015 that was filed last Thursday, August 13, 2015.

During this conference call, we will also disclose non-GAAP financial measures as defined by SEC Regulation G, including adjusted revenue, adjusted gross margins, and adjusted EBITDA, which we define as net income for interest, taxes, depreciation and amortization, adjustments for acquisition-related and integration terms, asset impairment charges, purchase price accounting items recorded as part of our acquisitions, and certain other items that we believe do not reflect our core operating performance. The comparable GAAP financial information, including operating income, the GAAP measurement most directly comparable to adjusted EBITDA, and reconciliations, are provided in the financial tables at the end of the second-quarter 2015 earnings press release.

At this time, I'd like to turn the call over to Mr. Tom Miller, Chairman and Chief Executive Officer.

Thank you, Cameron, and good afternoon, everyone. The second quarter was one of great progress for us as a company, both financially and operationally. Consistent with our guidance, we delivered positive adjusted EBITDA of $1.1 million, which represents 8% of revenue for the second quarter. We grew our revenues by 27% over first quarter, both organically and from acquisitions. And we signed a number of key business contracts, all while we continue to extract operational synergies from recent business combinations to streamline our cost structure, and we continue to invest in our sales organization to fuel future growth.

The $1.1 million in adjusted EBITDA that we reported for the quarter was driven by an increase in higher gross margin revenue due to higher-margin services, as well as effective management of our operating costs, with a reduction of 25% over Q1 in general and administrative expenses. This compares quite favorably to the negative adjusted EBITDA we reported in the year-ago quarter.

The strategies we have put in place to grow faster than our industry are taking hold as we exploit operational synergies. By increasing scale and increasing our base of recurring revenue, we see that this is beginning to take hold.

Let me speak to the market for a few minutes. Market demand for our services and solutions remains strong. And with the ubiquity of handheld tablet and mobile devices, and the ever-increasing globalization of the workforce, businesses are constantly looking for opportunities to deploy mobile technologies for the betterment of their businesses.

The increasing power and complexity of these devices makes the role that we play that of the integrator even more critical to the success of mobile technology deployment. Within our existing core customers, we are seeing new opportunities for new line of business applications, as customers extend mobility beyond the traditional rugged mobile computer technology to enterprise-grade tablets and smartphones.

In response to customer needs, Quest is responding with a specific program we refer to as the Quest Total Solution-as-a-Service that bundles a full solution for these types of devices in an easy monthly payment for the customer. This opens up a new segment of business opportunity previously unserved.

In the retail market, we are seeing increasing demand for mobile technology and related service, and it's being driven by the widespread adoption by companies for multichannel retailing. This is referred to as omnichannel. And retailers are using this to reach customers via in-store sales, online sales where products are shipped directly to the consumer or picked up in the store, or even through mobile store sales.

The drive by certain companies to implement next-day and same-day home delivery is stressing their existing distribution systems. And this is requiring retailers and wholesale distributors and third-party logistic companies to invest in expanding the performance and the capabilities of their logistic and distribution systems.

This is leading to a significant refresh cycle of existing data collection technology to incorporate capabilities such as voice and 2-D imaging, RFID, and other mobile technologies. The result is, market demand for new data collection systems remains strong within retail, manufacturing, and distribution, and it is showing no signs of slowing down.

So, you know, in light of the current and anticipated market conditions, we are investing considerable time and resources to develop resources and relationships and partnering arrangements with other leaders in the industry that have the capability to generate future business opportunities. So, partnering and teaming with leading technology companies, as we have, is speeding our time-to-market with innovative mobile and cloud-based solutions to drive quick returns on investment for our customers, and further establish our recurring revenue model.

So in the second quarter, we announced a patent license agreement with NCR, the global leader in consumer transaction technologies. And this agreement will enable us to develop a location-specific, smart-targeted advertising platform utilizing voice recognition technology to generate custom marketing messages to in-store customers, very similar to keywords generating specific advertisements during an Internet search, like Google ad words for brick-and-mortar locations, or the suggested marketing of products based on past orders utilized by almost every large web retailer.

So, under this agreement, we have first-mover advantage, which will differentiate our offerings from our competitors, while at the same time provide revenue streams from the ads and in-store displays. So, by working in partnership with NCR, we are looking to the future by developing additional future revenue source for both companies. We expect this line of service will generate strong margins and recurring cash flows over time, as we develop and prove our expectations for strong cash-on-cash returns for both advertisers and merchants.

Earlier, I referred to our teaming arrangement on Quest Total Solution. Now, that teaming arrangement is with Hyperion Partners. And together, we created the new Quest Total Solution-as-a-Service concept. And this offers customers a simple and a complete solution for managing all enterprisewide mobile technology.

The offering allows us to provide both new and existing customers with comprehensive mobile lifecycle management solutions for enterprise-grade hardware devices, including tablets and smartphones, as well as a bundled comprehensive package of software, applications, connectivity, and technical support, all in a single package and purchased as a monthly subscription. What this means is our customers no longer need to find wireless access for the mobile devices we are providing as part of our solution.

And for Quest, what this means is now we are able to participate in the monthly reoccurring revenue model. And more importantly, we have monthly touchpoints with our customers in relation to any support and other service needs. By partnering with Hyperion, we are moving further up the value chain to offer a unified best-of-breed solution to our customers, and serve as the sole primary point of contact for all of our customers' mobile needs.

Adding Quest Total Solution-as-a-Service increases opportunities to grow our recurring monthly revenue, and elongate customer relationships by serving as an integrated solutions provider. In the near future, we will be announcing some of these new additional partnerships for companies that come under the umbrella of Total Solution-as-a-Service.

Given the growing market demand for mobility and related services, and in order to support the increasing number of opportunities and increase market share and market penetration, we are investing in expanding sales coverage and services capabilities. We began expanding our sales and field systems organization at the end of last year in both New York and Chicago. And we have added these strategically important locations with industry-leading technology experts with a strong desire and a strong drive to sell and build customer relationships in these key markets.

We have also invested in resources in our Technical Services group as a result of the increasing services business we are experiencing. While we are taking steps to further reduce G&A expenses, it is our intent to continue to invest in field sales, system and technical services to take advantage of growing market demand, as well as to take market share from competition.

The teams are focused specifically on developing a robust pipeline of bundled Solutions-and-Services projects that support our goal of increasing our base of recurring revenue. A recent win with a leading PVC piping component manufacturer is a perfect example of our team's ingenuity and deep understanding of this long-time customer's business, is expected to lead to a larger share of their technology spend. Working with this customer puts our solution to work in one of the country's largest home supply retailers, and expands our opportunities to leverage our knowledge and experience for additional growth.

Overall, our backlog is up sequentially at $4.5 million, indicating solid new sales growth that is building a longer-term book of business. During Q2, we continue to progress our enterprise account sales activity and performance. Out of approximately 300 accounts that we did business with in Q2, the top seven comprised 42% of Company revenue.

These accounts demonstrate the diversification and the capabilities of Quest Solution capabilities and the broad-based strength of our business. These included a major healthcare provider that is rolling out mobile computers to capture remote monitoring of patients' heart conditions. It included an industry-leading distributor of pharmaceuticals that is upgrading their distribution centers with new computers and wireless infrastructure.

It also included a leading food retailer, which is putting in new data collection systems as they upgrade in-store scanning and pharmaceutical systems with new functionality, as well as providing the capability to support home delivery of goods from their new stores. It also included the upgrade of the wireless infrastructure for a leading hardware chain.

A second quarter, we completed Phase II of a three-phase multiyear/multimillion-dollar project with one of the largest automotive manufacturers in the world. Q2 also included implementation of wireless wearable solutions for a leading logistics provider, and a rollout of a large direct store delivery account.

Now, in addition to the sale of hardware to these accounts, Quest provided value-added project management and managed services. In second quarter, Quest also closed significant account opportunities that will be delivered in the second half of the year. One of the opportunities closed is a global fashion retailer in which Quest will handle the sale, the staging, and logistics services for installation in stores in over 20 countries. The customer schedule calls for a pilot of a yet-to-be-determined number of stores to commence this quarter, with a rollout in the coming months to follow.

Other opportunities closed include a leading retailer of books for label printers; one of the nation's largest specialty and home stores retailer; and a well-known freight company which is implementing not only hardware, but also rolling out Quest's proof of delivery software. Our core markets are retail, transportation and logistics, warehousing, and healthcare. And we are pleased with not only our base of accounts who are rolling out additional applications with Quest, but also these new accounts that are selecting Quest.

We are not only selling hardware, but we also sell software, configuration, implementation services, and project management. So, while major steps are being taken to grow our business organically, as we have stated in the past, we are also pursuing opportunities to grow our business through acquisitions.

During the second quarter, we announced that we had signed a letter of intent to acquire ViascanQData or simply Viascan, a leading provider of data collection and label ribbon converter services and technology. As one of the largest suppliers of label and ribbons in Canada, and one of the main suppliers of data collection products and services in all of Canada, Viascan provides us with additional scale, purchasing power, and access to the Canadian market, as well as a stronger presence on the East Coast of the United States.

The combination of the two businesses will expand sales coverage and account penetration, and it will further strengthen our operations and sales management teams, adding experienced professionals. We expect the synergies across the two entities will provide us each with increased access to cross-border markets, create additional selling opportunities with a more robust line of products offerings, and a combined purchasing power that can be leveraged to obtain better volume pricing.

Viascan's 2014 annual revenues were approximately -- in US dollars -- $24 million and generated positive adjusted EBITDA. On a pro forma basis, our combined revenues would have been approximately $83 million to $85 million for 2014. Our due diligence continues, and we remain on target for closing the transaction during this current third quarter of 2015.

Since this transaction is still pending, and due diligence is underway, we cannot include our expectations for Viascan's financial results in our full-year guidance. At present, we expect this acquisition will contribute incremental revenue of $22 million to $25 million, and be positive EBITDA and accretive to our adjusted EBITDA during the latter portion of 2015. Viascan shareholders will receive approximately 5.2 million restricted shares of Quest Solution's common stock as consideration for the transaction.

Our business model is direct, straightforward and can be summed up in three points. First, we aim to grow our top line revenue faster than industry market growth. That industry market growth today is 5% to 7%. In order to gain market share, as we do this, we also intend to increase our gross margins beyond current levels.

Second, we expect to fuel this revenue growth and margin expansion by gaining operational and competitive advantages from increased scale; a shift in our business mix towards more solutions and services; and with the Viascan acquisition, a substantially larger media business, which, like services, carries recurring revenues.

And third, we aim to reduce our operating expenses as a percentage of sales, as we see the effects of reduced headcount and the ending of one-time integration expenses. At the same time, we see a large opportunity to take market share and accelerate sales, and fully intend on investing selectively in our field sales organization.

I do want to point out that there is a seasonal effect on our business. There is a much larger percentage of revenue that occurs in the second half of the year. The impact from this means we expect to deliver double-digit adjusted EBITDA and continued improved performance through the balance of the year.

We saw the improvement in the second-quarter results. We expect modest improvements in our gross margin and improvements in our EBITDA in the third and fourth quarters. And Scott Ross will fill you in on more details in just a moment. But we are pleased with the results for the quarter, and we are encouraged about what lies ahead.

At this time, I will turn the call over to Scott Ross, our Chief Financial Officer, for a review of our financial results for the quarter and year-to-date. Scott?

Thank you, Tom, and good afternoon, everybody. The second-quarter and year-to-date 2015 results we issued in our press release, and that we are discussing today, are being presented on a pro forma basis, which includes adjustments to our unaudited GAAP results, related primarily to stock-based compensation, stock options, non-cash interest expense, and net deferred revenue.

We believe this presentation provides a clearer view into the underlying operating performance of our business. These adjustments are shown in the reconciliation contained in the earnings release we issued and Form 10-Q that we filed last week.

But before we get started, I wanted to clarify a comment we made in our press release last week, as I believe it created some confusion. When you compare the 2014 pro forma revenue for Quest, including BCS before it was merged with Quest, to our combined 2015 company revenue, including the deferred revenue, the increase was $4.4 million from organic growth. Our press release stated 23% increase, which was actually an 18% gain from the 2014 unaudited pro forma, and a $4.4 million increase.

The press release quote noted that $4.8 million in organic growth on an apples-and-apples comparison of what the combined companies would have looked like in 2014 compared to 2015. To make it clear, we should have included an analysis table in the release. This will now be included in the copy of the script of this conference call in our Form 8-K filing that will follow this call.

Our total, pro forma, unaudited revenue for the second quarter of 2015 increased to $13.6 million from total pro forma revenue of $7.4 million in the second quarter of 2014, an increase of 82% year-over-year. On a sequential basis, second-quarter 2015 pro forma revenue increased 27% over first-quarter. Pro forma gross profit was $3.3 million or 24.6% of pro forma revenue for the second quarter of 2015 compared to pro forma gross profit of $1.4 million or 18.3% of pro forma revenue in the year-ago period, and compared to $2.4 million or 22.4% of the pro forma revenue in the first-quarter 2015.

Pro forma gross margin for the quarter was higher due to more professional services sold during the quarter. Our second-quarter 2015 net loss was approximately $285,000 compared to a net loss of $262,000 in the second quarter of 2014. Our net income excludes several nonrecurring items, including approximately $200,000 of non-cash charges to interest expense for the original issue discount on the subordinated debt issued in the Quest Marketing, Inc. acquisition, and $420,000 of non-cash stock-based compensation charges for the three months ending June 30, 2015.

Additionally, we were able to reduce our general and administrative expenses during the second quarter from approximately $1 million in Q1 to $795,000 in Q2, which is an almost 26% reduction. On a pro forma basis, our operating expenses included non-cash expenses, including depreciation, amortization of acquisition intangibles and stock-based compensation for employee and director stock options. Without the effect of these non-cash expenses, the pro forma earnings before interest, taxes, depreciation and amortization or EBITDA for the second quarter of 2015 was $1.4 million, which is in line with our guidance for positive adjusted EBITDA for the quarter, compared to a negative $253,000 in the second quarter of 2014.

We used pro forma EBITDA as a key non-GAAP earnings measure of the underlying operations of our core business. On a sequential basis, pro forma EBITDA improved from $37,000 in the first quarter of 2015 as a result of additional revenues and stronger gross margins on a fixed cost operating base.

Turning to the year-to-date results, total pro forma revenue for the six months of 2015 increased to $24.2 million from total pro forma revenue of $17.1 million in the same period last year, an increase of 42% year-over-year. Pro forma gross profit was $5.7 million or 23.6% of pro forma revenue for the first six months of 2015 compared to pro forma gross profit of $3.3 million or 19.6% of pro forma revenue in the year-ago period; 2015 year-to-date pro forma net loss of approximately $708,000 compared to a pro forma net loss of $16,000 in the first six months of 2014.

The pro forma net income excludes several nonrecurring items, including $400,000 in non-cash accounting interest on the debt resulting from recent acquisitions, and $458,000 of stock-based compensation expense. On a pro forma basis, our operating expenses included non-cash expenses for depreciation, amortization of acquisition intangibles, and the stock-based compensation for employee and director stock options. Without the effect of these non-cash charges, the pro forma earnings before interest, taxes, depreciation and amortization or EBITDA for the first six months of 2015 was $1.4 million, in line with our guidance for positive adjusted EBITDA for the quarter, compared to $26,000 in the year-ago period.

Turning to our balance sheet for just a moment, we ended the second quarter of 2015 with $322,000 in cash compared to $234,000 at December 31, 2014. Our debt at the end of June -- the quarter ended June stood at $22 million compared to $23.3 million at December 31, 2014. As of June 30, 2015, net deferred revenue was $805,000 compared to $297,000 at December 31, 2014, and $827,000 at March 31, 2015.

The deferred revenue consists of prepaid third-party hardware service agreements, software maintenance service contracts, and the related cost and expenses recorded net of the revenue invoiced to customers. The Company had deferred revenue of approximately $7.3 million and deferred costs of approximately $6.5 million as of June 30, 2015 for a net deferred revenue of $805,000. This revenue will be recognized in the income statement over the term of the contracts as it is earned, normally one to five years, with three years being the average contract term.

If you remember at the end of the first quarter, we had approximately $2.7 million of deferred revenue and $1.9 million of deferred expenses. During the second quarter, we increased the deferred revenue sales as well as the deferred expenses, giving us an end-of-quarter deferred revenue of $7.2 million with deferred costs of $6.4 million or a net deferred revenue of $805,000.

The main piece to remember is that this is a moving target. It's not a simple straight-line amortization of the net amount. The net deferred revenue is made up of hundreds of software contracts and thousands of maintenance contracts. The gross margins before commissions are usually in the 10% to 40% range, while occasionally we sell them as low as 10%.

We don't book new business at a loss, but the growth or decline of net deferred revenue becomes an issue more related to timing, whether it's a one, two, three, or even five-year contract as to when it's recognized. At the end of June, our backlog of signed, contracted orders with customers was approximately 4.5 million. The backlog reflects orders expected to be delivered during the next six months of our fiscal year 2015.

Today, we are reiterating our financial guidance for full-year 2015, which includes the following -- revenue of $62 million to $68 million, representing topline growth between 5% and 15%; gross margin as a percentage of sales for the full-year 2015 to continue to show slight improvement as the Company exits the year; positive adjusted double-digit EBITDA in the third and fourth quarters, with improvement each quarter for the remainder of the year. Our financial guidance excludes any impact from the Viascan acquisition.

Tom, I will now turn the call back over to you.

Thank you, Scott. As you can see, we've made progress. There's much work to be done. We certainly are going to continue to drive this Company to higher levels of performance, driving increased revenue, work on improving gross margins, work on bringing expenses down.

And with that, I will now turn the call over to the operator for questions and answers.

(Operator Instructions) J.D. Padgett, ALMAK.

-- full discussion in the script. Appreciate that. Just a couple of points to clarify with you, if I could. The revenue guidance for the year is $62 million to $86 million, I believe. But that's not going to -- that doesn't equate to the reported revenue guidance, correct?

The $62 million to $68 million will be our GAAP guidance.

But that is a -- so that will line up with the $13.6 million that you just reported for this quarter and the $24.2 million for the first half results?

Correct.

Okay. I guess I was kind of looking at that differently, that maybe from that, we needed to take out the deferred revenue to get to -- I can't remember what you guys had previously called -- like book-to-revenue or something like that?

Well, as we take out the deferred revenue that's currently sold in the quarter, we are also amortizing in the revenue from prior quarters and prior years into the current-year results. So it's a net-netting process.

Right. Seems, though, that we are such in early stages of that, the net effect is probably somewhat of a headwind until you get to two or three years out where those two opposing dynamics kind of offset, right?

Well, BCS, prior to the acquisition by Quest -- or the merger with Quest, had been accounting for deferred revenue for the previous three years. So, the headwind is related only to Quest marketing which adopted this policy on January 1. So, the $297,000 of net deferred revenue that's on the balance sheet at December 31 of 2014 is related to the deferred revenue and costs that have been on the BCS books at the acquisition date.

Okay. So they were already using that accounting treatment?

For the prior three years. So BCS has three years of tailwind moving into the Quest future, and Quest has headwind moving into future quarters and future years of 2016 and 2017. We put a table in Footnote 8 of the 10-Q to try to illustrate the forward amortization of the deferred revenue to give investors, shareholders and analysts more visibility into the accounting for the deferred revenue.

Okay. I'll refer to that. But suffice to say you did $24 million in the first half and reported revenue in the back half, you expect to report enough to get you up another -- at the midpoint, I guess, $40 million?

Yes, J.D., this is Tom. If you look at the historical practices not only of Quest but also the industry, the second half of the year is considerably stronger than the first half. You know roughly 55% to 60% of the revenue of Quest has come in the second half of the year. The market outlook looks pretty strong. The business opportunities are strong for us. We anticipate stronger revenue in the second half of the year.

That's great. And then the comment about adjusted EBITDA at double-digits, is that a double-digit margin percentage? Or I guess that would be the only interpretation?

Yes.

Okay.

EBITDA double-digit on net revenues.

Right, as a percentage of margin.

Yes.

Okay. And then the one other thing just to kind of level-set my modeling is, the deferred revenue add-back to get to the adjusted EBITDA, you added back the $507,000 in the second quarter. And I see that's derived by -- it looks like the end of June balance, less the balance at the end of last year. Was that the change in that net deferred revenue? Is that correct?

That's correct. That's a net number.

Shouldn't some of that be applied to Q1, though?

Whatever was applied to Q1 was adjusted through Q1 and that number.

Okay.

The cumulative adjustment.

Okay. Makes sense. And then I guess one other question that I had. Was there any big one-time expenses related to the Via acquisition in this quarter?

Most of the Viascan due diligence expenses occurred in July. There were very few due diligence costs in June, other than some travel.

Travel. There was a little bit of legal expense.

Not significant.

So, once we close that, you guys will strip out what was kind of more nonrecurring in nature?

That's correct.

Okay. And then another one or two just about some of the stock issuance and repurchase that you talked about in the Q. I think you guys issued a note to retire some shares from some current shareholders. Is there an obligation to continue to do that going forward on any additional shares?

Well, I believe we'll do it when it makes financial sense to the Company. Regarding contractual obligations, I would say no.

Okay. When does it make sense to do it for the Company? Because I think the per-share valuation on that implied was above $2.00? Spending was $400,000 for 170,000 shares?

That was issued in connection with some notes. Those shares were issued in connection with notes, I believe, J.D.

Okay. And then the issuance of some additional shares to consultants and some other employees, will that be an ongoing activity? Or that was kind of just more one-time in nature?

I believe those were one-time in nature. They were stock for services.

Okay, perfect. Well, good developing story there. So keep up the great work.

Yes, just a footnote. In all of 2014, we issued approximately 100,000 shares of stock for services. So it's not been a recurring practice for us. It has to provide value to the Company for us to consider doing it.

(Operator Instructions) Dallas Salazar, Mathis Consulting.

Great quarter. You guys are starting to get to that point of pro forma revenues where you are not exactly a microcap any more, I guess, in my opinion, looking at sort of the pro forma top line. The question I have is -- and you guys have executed well on expanding the Company without being hyper-dilutive and getting into some of these toxic financings that are pretty typical of the space.

At what point, I guess expansion-wise or top line-wise, do you guys see sort of the net income expanding? You know, you guys see your model really starting to leverage out to where you become a story of -- I guess that it is a little bit easier to tell, right? So I know this is kind of a broad question, but just give me your first take on that.

Well, there's no question that for the size company we are and the story that we have, that it has been somewhat difficult for some shareholders to understand. I think we need to step back and take a look at the formulation of Quest.

You had two private companies that came into a public entity, neither of which company had the experience or the setup to be a public entity. And so as a result of that, one company had been on the cash basis, the other on accrual. So there was a lot of integration efforts and adjustments that had to be made to deal with that.

The -- and so as we look at what we need to do to really translate into positive net income, first of all, our emphasis has been on getting operationally more efficient. We believe that we can do some things with respect to our G&A. We believe that we can further reduce the general and administrative expenses. There was some adjustment that had to be made as a public company.

We also believe that there is a lot of low-hanging fruit here that we can take care of. So, for example, we had two different insurances. We had two different 401(k) plans. We had two of everything. That's all getting consolidated and taken care of.

We also believe that as we look at it, as we look at the balance sheet, and we look at the debt on the balance sheet, there are things that we have in the plan and underway that can alleviate that which will have a positive impact on the net income. Now, we are not prepared to discuss that today. I can assure you, though, that we have a plan as it associates with that, which would have a positive impact on a lot of that non-cash expenses that we are incurring.

So, you are right. I mean, we are not -- as the size of the Company we are and where we are going organically, we do believe that we can be more efficient. We do believe there's some streamlining we can do. And we do believe that -- and we are going to be taking actions with respect to our balance sheet that will strengthen that, which will have a positive impact.

I don't know, Scott, is there anything you want to add to that?

No, Tom, I think you've summed it up.

Yes. No, look, I appreciate that answer. I mean, that was kind of what I was hoping for. No -- and you're right. Coming from a guy who's owned the stock, who has put people into the stock, it does sort of seem like it's one big company, but everybody sort of has all the different verticals have a different logo on. And so to kind of see everybody wearing the same Polo, that's going to be nice.

So just some other questions I would have would be -- and obviously you are not going to -- you couldn't elaborate on if you guys have done -- expanding the acquisition or if you are going to continue to do that. But what I will ask is if the Company is looking to still be opportunistic to grow the acquisition, is it going to be towards these sort of what have been labeled higher-margin opportunities, like in the tech side of the business it looks like it's being put together?

Or does it really matter at this point? Is it just simply we want to grow as long as it's accretive, as long as it makes sense, we'll grow whatever sort of direction the prevailing winds take the Company?

There is the aspect of strategic acquisitions which are going to be associated with software and services. And there are areas where we can add capabilities. Again, if we step back and look at this industry, this is a 30-year-old industry. And you've got a lot of companies out there and individuals that have started their businesses that are looking to exit. And we get -- we literally every week get inquiries from some of these individuals about their businesses.

And it's not -- as we look at it, we say what's going to be the criteria? Do we want to simply do a rollup? And the answer to that is, you look at, does it add to our geography? Does it add to the value of the services that we are providing? Is it additional things that we can provide?

And if it's not doing that, then we pretty much would eliminate that. What we don't need to do is acquire a reseller of hardware, and that hardware reseller is doing their business at 10% to 12% margin, and even though it may add something to the top line, it doesn't really increase the value of the Company. So, we truly are looking at those companies that have certain unique services value-add.

And on the second aspect, though, there are opportunistic situations that will come along. And if they come along, and they are at the right value and the right pricing to be accretive, we'll take a look at it. But yes, we are actively looking at it. Jason Griffith, he is our Executive Vice President for M&A and Acquisitions. And we are looking at each of those. But I think one of the bottom lines, it has to add to the profitability of the Company -- strength and value -- and give us additional services that we can bring to the market.

All right, thank you. And then, guys, just a last one. I've pushed you too far already. But last one if I can. So, the Company -- when I look at it, I think that there is a ton of shareholder value to be unlocked. How you do that -- that's why you guys are kind of running the show and I'm not.

But I guess the final question I would have is, the Company as is, do you see this as sort of the final form? Or are there parts of the business that the Company is open to saying, look, the valuations get frothy. If somebody else in this space wants this part of our business, we'll divest it to sort of streamline ourselves.

Because I see some of these bigger players in the space making moves and sort of positioning themselves. And you guys are starting to look more and more attractive, when I kind of just survey the landscape, as a rollup to a much bigger player. But at this point, I would say, if I was on their side, hey, maybe there's some things we can do to streamline it.

So just in general, are you guys happy with sort of the way that the Company moves altogether? Or are there some pieces where you are kind of considering -- look, it may not be optimized for what we have as a go-forward strategy?

And then I'll sign off, guys. Thanks a bunch.

Oh, that's a good question. There are some pieces of the Company that aren't necessarily core to the value of the business we are in, that we would consider or look at if the right opportunity comes along to potentially divest. But more importantly right now, we need to add some additional value and services for the market that we are in. And I think that's one of the key drivers of the Company.

I do want to take this as an opportunity to say, down the road, how do we get positioned? We are what I would call a specialty integrator. And if you think about it, we are the people that work with companies that provide the mobile, the front-end data that feeds the massive IT, the data analytic packages, the back-end systems of really Fortune 1,000 companies.

We are the front-end, we are the specialty integrator. We are the ones that are working with them on their whole mobile deployment strategy. As we grow this business, as we become bigger, as that specialty integrator, we will attract major attention from the larger IT integrators.

As we build the scale of our business and we become significant, we become a player, because it allows them -- the larger IT integrator -- to extend their business out through a specialty integrator such as Quest. And so that is a major part of our strategy going forward, is to build ourselves up to be more value on that front-end mobile side. And also, you can look to us to add in certain types of software value that tie us in potentially a little easier into the supporting systems in an IT environment.

J.D. Padgett, ALMAK.

Just a couple of follow-ups, if I could, kind of building on that first question on the last questioner's list there. In terms of simplifying the story, if -- is deferred revenue in the future -- is the net deferred revenue balance going to grow dramatically? And if not, maybe it really doesn't make sense to get investors distracted significantly by different metrics on that front.

Hey, J.D., this is Scott. It will grow to a point where you've got a -- our average contract length is 36 months -- where you've got a 36-month tailwind and a 36-month headwind, as you said, and it starts to flat out, and it becomes less of a distraction from an investor perspective.

I think it becomes more predictable. I think the real issue was it wasn't done in the past by Quest, by the Company. So implementing it for the first few quarters has been somewhat confusing and almost puzzling to some people. But I think it becomes predictable after we get into three, four quarters, and it just is part of the story.

No doubt it's going to be a benefit at some point just having that contracted revenue to deliver against for future visibility and so forth. But I would just advise trying -- don't share so many metrics that people aren't sure what they are tracking and what they are holding your feet to the fire for.

We've had a lot of discussion around that, J.D., how much to share or not share. But that's a point well-taken.

Okay. And then I thought in the script you talked about -- like you presented the adjusted EBITDA in the press release. And then in the script, you talked about some additional add-backs that even makes -- I forgot the exact numbers, but the $1.1 million, for instance, look like $1.4 million for the quarter. Was that just the debt amortization that you are adding back then, too?

We do add back the debt amortization. It's an original issue discount. We add back all non-cash items.

And that's what gets us from the $1.8 million to whatever -- or the $1.1 million in the press release to whatever you said in the script?

Yes. Correct.

Okay. But presumably, that's below the line anyway. So that wouldn't be added back to EBITDA, right?

The debt amortization comes into the P&L as interest expense. So it's operating income and is an add-back to operating income to get to EBITDA.

So, it does hit? It hits above the line?

The debt amortization -- no. It hits interest expense. It's below the line.

Okay. So then the $1.1 million is accurate, right? There shouldn't be anything else we need to add back to that? Or am I missing some other add-backs?

No, the $1.1 million -- the only thing that's above the line is depreciation, amortization, stock comp, and then everything else is below the line.

Right. Okay. So is the right number $1.1 million? Or is the right number what you said in the script -- $1.4 million or whatever it is?

It's $1.1 million. It's on the table to the press release.

Yes, okay. Yes, I thought the script had said something different so I just wanted to clarify.

Thank you for clarifying that. It's $1.1 million as in the back table on the press release.

Okay, perfect. And then final question. The revenue range for the second half year with the $4 million -- I think there was like a $4 million delta in there, is that -- between $62 million and $68 million -- is that just a wider range because you could have any number of large projects that either hit or don't, that kind of move that around? Or what's the swing factor within that?

No, I mean, you are exactly correct, J.D. This is, as you can tell, we had seven accounts that accounted for 42% of our revenue in the second quarter out of 300 companies we did business with. This is a big deal business. We look -- we work with Fortune 500, Fortune 1,000 companies, and so that's why we have a range in there.

Okay, perfect. Thank you.

At this time, there are no further questions. I would now like to turn the conference back over to management for closing remarks.

Well, I want to give my thanks to everyone who has dialed in today, participated in the call. Thank you for both of you who invested in us. We look forward to continued success in the future as our Company continues to improve and grow into the strong industry leader it will. Thank you. Everyone have a good evening. Good night.