QUEST RESOURCE HOLDING CORP, 10-Q filed on 11/14/2019
Quarterly Report
v3.19.3
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2019
Nov. 01, 2019
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Trading Symbol QRHC  
Entity Registrant Name Quest Resource Holding Corporation  
Entity Central Index Key 0001442236  
Entity Current Reporting Status Yes  
Current Fiscal Year End Date --12-31  
Entity Filer Category Non-accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   15,350,153
Entity File Number 001-36451  
Entity Tax Identification Number 51-0665952  
Entity Address, Address Line One 3481 Plano Parkway  
Entity Address, City or Town The Colony  
Entity Address, State or Province TX  
Entity Address, Postal Zip Code 75056  
City Area Code 972  
Local Phone Number 464-0004  
Entity Interactive Data Current Yes  
Title of 12(b) Security Common stock  
Entity Incorporation, State or Country Code NV  
Security Exchange Name NASDAQ  
Document Quarterly Report true  
Document Transition Report false  
v3.19.3
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
Sep. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 2,068,999 $ 2,122,297
Accounts receivable, less allowance for doubtful accounts of $751,352 and $929,339 as of September 30, 2019 and December 31, 2018, respectively 14,237,314 16,711,809
Prepaid expenses and other current assets 1,238,665 965,755
Total current assets 17,544,978 19,799,861
Goodwill 58,208,490 58,208,490
Intangible assets, net 1,853,279 2,610,921
Property and equipment, net, and other assets 2,687,629 968,025
Total assets 80,294,376 81,587,297
Current liabilities:    
Accounts payable and accrued liabilities 13,514,157 15,777,921
Deferred revenue and other current liabilities 15,516 71,717
Total current liabilities 13,529,673 15,849,638
Revolving credit facility, net 4,228,255 5,194,588
Other long-term liabilities 1,295,004 353
Total liabilities 19,052,932 21,044,579
Commitments and contingencies
Stockholders’ equity:    
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2019 and December 31, 2018
Common stock, $0.001 par value, 200,000,000 shares authorized,15,350,153 and 15,328,870 shares issued and outstanding as of September 30, 2019 and December 31, 2018 15,350 15,329
Additional paid-in capital 160,489,898 159,701,542
Accumulated deficit (99,263,804) (99,174,153)
Total stockholders’ equity 61,241,444 60,542,718
Total liabilities and stockholders’ equity $ 80,294,376 $ 81,587,297
v3.19.3
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (Unaudited) - USD ($)
Sep. 30, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts receivable $ 751,352 $ 929,339
Preferred stock, par value $ 0.001 $ 0.001
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 15,350,153 15,328,870
Common stock, shares outstanding 15,350,153 15,328,870
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Income Statement [Abstract]        
Revenue $ 23,925,431 $ 25,920,215 $ 76,019,845 $ 78,544,764
Cost of revenue 19,154,129 21,449,658 61,956,123 66,098,602
Gross profit 4,771,302 4,470,557 14,063,722 12,446,162
Operating expenses:        
Selling, general, and administrative 4,221,339 4,638,585 12,662,481 12,269,625
Depreciation and amortization 329,541 406,726 982,421 2,372,916
Total operating expenses 4,550,880 5,045,311 13,644,902 14,642,541
Operating income (loss) 220,422 (574,754) 418,820 (2,196,379)
Interest expense 118,652 106,140 344,160 335,576
Income (loss) before taxes 101,770 (680,894) 74,660 (2,531,955)
Income tax expense 54,771   164,311  
Net income (loss) 46,999 (680,894) (89,651) (2,531,955)
Net income (loss) applicable to common stockholders $ 46,999 $ (680,894) $ (89,651) $ (2,531,955)
Net income (loss) per share applicable to common stockholders        
Basic $ 0.00 $ (0.04) $ (0.01) $ (0.17)
Diluted $ 0.00 $ (0.04) $ (0.01) $ (0.17)
Weighted average number of common shares outstanding        
Basic 15,350,153 15,313,383 15,339,706 15,307,939
Diluted 15,398,839 15,313,383 15,339,706 15,307,939
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - USD ($)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit [Member]
Beginning Balance at Dec. 31, 2017 $ 62,147,730 $ 15,302 $ 158,867,600 $ (96,735,172)
Beginning Balance, Shares at Dec. 31, 2017   15,302,455    
Stock-based compensation 224,133   224,133  
Net income (loss) (1,312,519)     (1,312,519)
Ending Balance at Mar. 31, 2018 61,059,344 $ 15,302 159,091,733 (98,047,691)
Ending Balance, Shares at Mar. 31, 2018   15,302,455    
Beginning Balance at Dec. 31, 2017 62,147,730 $ 15,302 158,867,600 (96,735,172)
Beginning Balance, Shares at Dec. 31, 2017   15,302,455    
Net income (loss) (2,531,955)      
Ending Balance at Sep. 30, 2018 60,227,692 $ 15,313 159,479,506 (99,267,127)
Ending Balance, Shares at Sep. 30, 2018   15,313,383    
Beginning Balance at Mar. 31, 2018 61,059,344 $ 15,302 159,091,733 (98,047,691)
Beginning Balance, Shares at Mar. 31, 2018   15,302,455    
Stock-based compensation 182,582   182,582  
Shares issued for Employee Stock Purchase Plan options, Value 18,396 $ 11 18,385  
Shares issued for Employee Stock Purchase Plan options, Shares   10,928    
Net income (loss) (538,542)     (538,542)
Ending Balance at Jun. 30, 2018 60,721,780 $ 15,313 159,292,700 (98,586,233)
Ending Balance, Shares at Jun. 30, 2018   15,313,383    
Stock-based compensation 186,806   186,806  
Net income (loss) (680,894)     (680,894)
Ending Balance at Sep. 30, 2018 60,227,692 $ 15,313 159,479,506 (99,267,127)
Ending Balance, Shares at Sep. 30, 2018   15,313,383    
Beginning Balance at Dec. 31, 2018 60,542,718 $ 15,329 159,701,542 (99,174,153)
Beginning Balance, Shares at Dec. 31, 2018   15,328,870    
Stock-based compensation 204,031   204,031  
Net income (loss) (163,752)     (163,752)
Ending Balance at Mar. 31, 2019 60,582,997 $ 15,329 159,905,573 (99,337,905)
Ending Balance, Shares at Mar. 31, 2019   15,328,870    
Beginning Balance at Dec. 31, 2018 60,542,718 $ 15,329 159,701,542 (99,174,153)
Beginning Balance, Shares at Dec. 31, 2018   15,328,870    
Net income (loss) (89,651)      
Ending Balance at Sep. 30, 2019 61,241,444 $ 15,350 160,489,898 (99,263,804)
Ending Balance, Shares at Sep. 30, 2019   15,350,153    
Beginning Balance at Mar. 31, 2019 60,582,997 $ 15,329 159,905,573 (99,337,905)
Beginning Balance, Shares at Mar. 31, 2019   15,328,870    
Stock-based compensation 269,201   269,201  
Shares issued for Employee Stock Purchase Plan options, Value 29,669 $ 21 29,648  
Shares issued for Employee Stock Purchase Plan options, Shares   21,283    
Net income (loss) 27,102     27,102
Ending Balance at Jun. 30, 2019 60,908,969 $ 15,350 160,204,422 (99,310,803)
Ending Balance, Shares at Jun. 30, 2019   15,350,153    
Stock-based compensation 276,816   276,816  
Issuance of deferred common stock units 8,660   8,660  
Net income (loss) 46,999     46,999
Ending Balance at Sep. 30, 2019 $ 61,241,444 $ 15,350 $ 160,489,898 $ (99,263,804)
Ending Balance, Shares at Sep. 30, 2019   15,350,153    
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Cash flows from operating activities:    
Net loss $ (89,651) $ (2,531,955)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation 175,562 301,651
Amortization of intangibles 880,564 2,207,840
Amortization of debt issuance costs 70,426 70,426
Provision for doubtful accounts 45,000 1,005,622
Stock-based compensation 758,708 593,521
Changes in operating assets and liabilities:    
Accounts receivable 2,429,495 (1,895,297)
Prepaid expenses and other current assets (272,910) 63,194
Security deposits and other assets (73,979) 264,868
Accounts payable and accrued liabilities (2,702,982) 2,253,156
Deferred revenue and other liabilities (53,957) (220,098)
Net cash provided by operating activities 1,166,276 2,112,928
Cash flows from investing activities:    
Purchase of property and equipment (86,965) (43,371)
Purchase of capitalized software development (122,922) (159,930)
Net cash used in investing activities (209,887) (203,301)
Cash flows from financing activities:    
Proceeds from credit facilities 76,320,336 74,818,231
Repayments of credit facilities (77,357,095) (76,717,277)
Proceeds from shares issued for Employee Stock Purchase Plan 29,669 18,396
Repayments of finance lease obligations (2,597) (36,001)
Net cash used in financing activities (1,009,687) (1,916,651)
Net decrease in cash and cash equivalents (53,298) (7,024)
Cash and cash equivalents at beginning of period 2,122,297 1,055,281
Cash and cash equivalents at end of period 2,068,999 1,048,257
Supplemental cash flow information:    
Cash paid for interest 282,716 271,620
Cash paid for income taxes $ 47,810  
Supplemental non-cash activities:    
Sale of goodwill and intangible assets   246,585
Investment in Earth Media Partners, LLC   $ (246,585)
v3.19.3
The Company and Description of Business
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
The Company and Description of Business

1. The Company and Description of Business

The accompanying condensed consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”) and its subsidiaries, Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC (“LDI”), Youchange, Inc. (“Youchange”), Quest Vertigent Corporation (“QVC”), Quest Vertigent One, LLC (“QV One”), and Quest Sustainability Services, Inc. (“QSS”) (collectively, “we,” “us,” “our,” or “our company”).  

Operations – We are a national provider of reuse, recycling, and disposal services that enable our customers to achieve and satisfy their environmental and sustainability goals and responsibilities.  We provide businesses across multiple industry sectors with single source solutions for the reuse, recycling, and disposal of a wide variety of waste streams and recyclables generated by their operations.

v3.19.3
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principles of Presentation and Consolidation

The condensed consolidated financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended December 31, 2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2019 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2018 condensed consolidated balance sheet data from audited financial statements; however, we did not include all disclosures required by GAAP. As QRHC, Quest, LDI, Youchange, QVC, QV One, and QSS each operate as environmental-based service companies, we did not deem segment reporting necessary.

All intercompany accounts and transactions have been eliminated in consolidation. Interim results are subject to seasonal variations, and the results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

Adopted

On January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), using a modified retrospective approach with an effective date as of January 1, 2019.  Accordingly, prior year financial statement data is presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented.  We elected the package of practical expedients, which allowed us to carryforward our historical assessment of (1) whether contracts are or contain leases, (2) lease classification, and (3) initial direct costs.  As of January 1, 2019, we recognized an operating right-of-use asset of approximately $2.0 million and corresponding operating lease liabilities of approximately $2.2 million.  Finance lease assets were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding assets were already recorded on the balance sheet under ASC 840.  The adoption did not materially impact our results of operations or cash flows and no cumulative adjustment to accumulated deficit was necessary as of January 1, 2019.  Refer to Note 7, Leases for additional information and enhanced disclosures related to this amended guidance.

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective approach for all ongoing customer contracts.  Refer to Note 8, Revenue for additional information and disclosures related to this amended guidance.

Pending Adoption

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments.  The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates.  ASU 2016-13 is effective for us on January 1, 2023.  We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our consolidated financial statements.

There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.

v3.19.3
Property and Equipment, Net, and Other Assets
9 Months Ended
Sep. 30, 2019
Property Plant And Equipment [Abstract]  
Property and Equipment, Net, and Other Assets

3. Property and Equipment, net, and Other Assets

At September 30, 2019 and December 31, 2018, property and equipment, net, and other assets consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,348,954

     and $2,523,700 as of September 30, 2019 and December 31, 2018,

     respectively

 

$

525,921

 

 

$

614,518

 

Right-of-use operating lease asset

 

 

1,734,222

 

 

 

 

Security deposits and other assets

 

 

427,486

 

 

 

353,507

 

    Property and equipment, net, and other assets

 

$

2,687,629

 

 

$

968,025

 

 

We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment. Depreciation expense for the three months ended September 30, 2019 was $58,933, including $24,695 of depreciation expense reflected within “Cost of revenue” in our condensed consolidated statements of operations as it related to assets used in directly servicing customer contracts, and was $175,562 for the nine months ended September 30, 2019, including $73,704 of depreciation expense reflected within “Cost of revenue.”  Depreciation expense for the three months ended September 30, 2018 was $97,679, including $45,576 of depreciation expense reflected within “Cost of revenue,” and was $301,651 for the nine months ended September 30, 2018, including $136,574 reflected within “Cost of revenue.”  

We recorded a right-of-use operating lease asset of $2.0 million related to our corporate office lease upon the adoption of ASC 842 effective January 1, 2019.  Refer to Note 7, Leases for additional information.

On February 20, 2018 (the “Closing Date”), we entered into an Asset Purchase Agreement with Earth Media Partners, LLC to sell certain assets of our wholly owned subsidiary, Earth911, Inc., in exchange for a 19% interest in Earth Media Partners, LLC, which was recorded as an investment in the amount of $246,585 as of the Closing Date, and a potential future earn-out amount of approximately $350,000.  The net assets sold related to the Earth911.com website business and consisted primarily of the website and its content and customers, deferred revenue, and accounts receivable as of the Closing Date.  Earth911, Inc. was subsequently renamed Quest Sustainability Services, Inc.  In addition to our investment in Earth Media Partners, LLC, we accrued a receivable in the amount of $134,926 related to the earn-out as of September 30, 2019.  The carrying amount of our investment and the accrued earn-out receivable are included in other assets.

v3.19.3
Goodwill and Other Intangible Assets
9 Months Ended
Sep. 30, 2019
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets

 


4. Goodwill and Other Intangible Assets

The components of goodwill and other intangible assets were as follows:

  

September 30, 2019 (Unaudited)

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,068

 

 

 

5,528,354

 

 

 

706,714

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,057,230

 

 

 

910,665

 

 

 

1,146,565

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,550,134

 

 

$

19,696,855

 

 

$

1,853,279

 

 

December 31, 2018

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,068

 

 

 

4,860,305

 

 

 

1,374,763

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,934,308

 

 

 

698,150

 

 

 

1,236,158

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,427,212

 

 

$

18,816,291

 

 

$

2,610,921

 

 

September 30, 2019 (Unaudited) and December 31, 2018

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,208,490

 

 

 

 

 

We compute amortization using the straight-line method over the estimated useful lives of the finite lived intangible assets. Amortization expense related to finite lived intangible assets was $295,304 and $354,623 for the three months ended September 30, 2019 and 2018, respectively.  Amortization expense related to finite lived intangible assets was $880,564 and $2,207,840 for the nine months ended September 30, 2019 and 2018, respectively.

 

We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes.  

 

We performed our annual impairment analysis for goodwill and other intangible assets in the third quarter of 2019 with no impairment recorded.

v3.19.3
Accounts Payable and Accrued Liabilities
9 Months Ended
Sep. 30, 2019
Accounts Payable And Accrued Liabilities Current [Abstract]  
Accounts Payable and Accrued Liabilities

5.  Accounts Payable and Accrued Liabilities

The components of Accounts payable and accrued liabilities were as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Accounts payable

 

$

10,990,219

 

 

$

14,025,221

 

Accrued taxes

 

 

791,914

 

 

 

548,126

 

Employee compensation

 

 

937,354

 

 

 

910,796

 

Operating lease liability - current portion

 

 

624,056

 

 

 

 

Other

 

 

170,614

 

 

 

293,778

 

 

 

$

13,514,157

 

 

$

15,777,921

 

 

Refer to Note 7, Leases for additional disclosure related to the operating lease liability recorded upon the adoption of ASC 842 Leases.

v3.19.3
Revolving Credit Facility
9 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Revolving Credit Facility

6. Revolving Credit Facility

We entered into a Loan, Security and Guaranty Agreement (the “Citizens Loan Agreement”), dated as of February 24, 2017, with Citizens Bank, National Association as a lender, and as administrative agent, collateral agent, and issuing bank, which provides for an asset-based revolving credit facility (the “ABL Facility”) of up to $20 million and an equipment loan facility in the maximum principal amount of $2.0 million.

Each loan under the ABL Facility bears interest, at our option, at either the Base Rate, as defined in the Citizens Loan Agreement, plus a margin ranging from 1.0% to 1.5% (6.25% as of September 30, 2019), or the LIBOR lending rate for the interest period in effect, plus a margin ranging from 2.0% to 2.5% (4.37% as of September 30, 2019). The maturity date of the ABL Facility is February 24, 2022.  

LIBOR is expected to be discontinued after 2021. The ABL Facility provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable. However, there can be no assurances as to whether such replacement or alternative rate will be more or less favorable than LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and will work with Citizens Bank, National Association to ensure any transition away from LIBOR will have minimal impact on our financial condition. We however can provide no assurances regarding the impact of the discontinuation of LIBOR on the interest rate that we would be required to pay or on our financial condition.

We had no borrowings under the equipment loan facility, which were required to be requested no later than February 24, 2019.  

The ABL Facility contains certain specific financial covenants regarding a minimum liquidity requirement and a minimum fixed charge coverage ratio.  In addition, the ABL Facility contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, mergers and acquisitions, and other matters customarily restricted in such agreements.

The amount of interest expense related to borrowings for the three months ended September 30, 2019 and 2018 was $86,765 and $81,644, respectively.  The amount of interest expense related to borrowings for the nine months ended September 30, 2019 and 2018  was $263,542 and $247,071, respectively.  Debt issuance cost of $469,507 is being amortized to interest expense over the term of the ABL Facility.  As of September 30, 2019, the unamortized portion of the debt issuance costs was $226,928.  The amount of interest expense related to the amortization of the discount on the ABL Facility for the nine months ended September 30, 2019 and 2018 was $70,426.  As of September 30, 2019, the ABL Facility borrowing base availability was $9,625,000, of which $4,455,183 was outstanding.  The outstanding liability as of September 30, 2019 was $4,228,255, net of unamortized debt issuance cost of $226,928.

v3.19.3
Leases
9 Months Ended
Sep. 30, 2019
Lessee Disclosure [Abstract]  
Leases

7. Leases

ASU 2016-02 Adoption

On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), and the related amendments (collectively “ASC 842”).  We used the optional transition method of adoption, in which the cumulative effect of initially applying the new standard, as of January 1, 2109, to our existing leases was approximately $2.0 million and $2.2 million to record the operating lease right-of-use asset and the related liabilities, respectively, all of which relate to our corporate office lease.  Under this method of adoption, the comparative information in the condensed consolidated financial statements has not been revised and continues to be reported under the previous applicable lease accounting guidance (ASC 840).  Leases with terms of 12 months or less are not recorded on the balance sheet.

When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and if it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease.

As of December 31, 2018, leases classified as capital leases under ASC 840 were included in Property and equipment, net and represented almost fully depreciated office equipment with a negligible book value.

We lease certain equipment to a customer under a lease arrangement that expires in 2020.  The capital lease receivable amounts are approximately $8,000 at September 30, 2019, the majority of which is included in Prepaid expenses and other current assets.  

Balance Sheet Classification

The table below presents the lease related assets and liabilities recorded on the balance sheet. Right-of-use assets and related liabilities related to finance leases at September 30, 2019 are de minimis and mature in less than 12 months.

 

 

September 30,

 

 

2019

 

Operating Leases:

 

 

 

Right-of-use operating lease asset:

 

 

 

   Property and equipment, net and other assets

$

1,734,222

 

 

 

 

 

Lease Liabilities:

 

 

 

   Accounts payable and accrued liabilities

$

624,056

 

   Other long-term liabilities

 

1,295,004

 

       Total operating lease liabilities

$

1,919,060

 

Lease Costs

For the three and nine months ended September 30, 2019, we recorded approximately $150,000 and $450,000 of fixed cost operating lease expense, respectively.  Our operating lease expense is offset by a minimum annual incentive received from a local Economic Development Council, which is accrued monthly and will continue over the term of the lease through August 2022.  This minimum annual incentive is $63,000, which will increase to $93,600 for the annual incentive period starting September 2020.  

Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the three and nine months ended September 30, 2019.  We did not obtain any new operating lease right-of-use assets in the nine months ended September 30, 2019.

Other Information

Our office lease had a remaining term of 3 years as of September 30, 2019, and we used an effective interest rate of 2.456%, which was our incremental borrowing rate in effect at the inception of the lease as our lease does not provide a readily determinable implicit rate.

The future minimum lease payments required under our office lease as of September 30, 2019 were as follows:    

Year Ending December 31,

 

Amount

 

2019

 

$

166,050

 

2020

 

 

664,200

 

2021

 

 

664,200

 

2022

 

 

498,150

 

   Total lease payments

 

 

1,992,600

 

Less:  Interest

 

 

73,540

 

    Present value of lease liabilities

 

$

1,919,060

 

 

v3.19.3
Revenue
9 Months Ended
Sep. 30, 2019
Revenue From Contract With Customer [Abstract]  
Revenue

8. Revenue

Operating Revenues

We provide businesses with services to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their operations.  In addition, we have product sales and other revenue primarily from sales of products, such as antifreeze and windshield washer fluid, as well as minor ancillary services.  

Revenue Recognition

We recognize revenue as services are performed or products are delivered.  For example, we recognize revenue as waste and recyclable material are collected or when products are delivered.  We recognize revenue net of any contracted pricing discounts or rebate arrangements.    

We generally recognize revenue for the gross amount of consideration received as we are generally the primary obligor (or principal) in our contracts with customers as we hold complete responsibility to the customer for contract fulfillment.  We record amounts collected from customers for sales tax on a net basis.

Disaggregation of Revenue

The following table presents our revenue disaggregated by source.  Three customers accounted for 49.4% of revenue for the three months ended September 30, 2019, and three customers accounted for 48.6% of revenue for the three months ended September 30, 2018.  Three customers accounted for 54.6% of revenue for the nine months ended September 30, 2019, and three customers accounted for 50.1% of revenue for the nine months ended September 30, 2018. We operate primarily in the United States, with minor services in Canada.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenue Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

21,422,455

 

 

$

23,412,066

 

 

$

68,244,033

 

 

$

70,742,475

 

Product sales and other

 

 

2,502,976

 

 

 

2,508,149

 

 

 

7,775,812

 

 

 

7,802,289

 

   Total revenue

 

$

23,925,431

 

 

$

25,920,215

 

 

$

76,019,845

 

 

$

78,544,764

 

Contract Balances

Our incremental direct costs of obtaining a customer contract are generally deferred and amortized to selling, general, and administrative expense or as a reduction to revenue (depending on the nature of the cost) over the estimated life of the customer contract.  We classify our contract acquisition costs as current or noncurrent based on the timing of when we expect to recognize the amortization and are included in other assets.

As of September 30, 2019 and December 31, 2018, we had $67,500 and $7,448, respectively, of deferred contract costs.  During the three months ended September 30, 2019, we amortized $53,750 of deferred contract costs to selling, general, and administrative expense.  During the three months ended September 30, 2018, we amortized $53,750 of deferred contract costs to selling, general, and administrative expense.  During the nine months ended September 30, 2019, we amortized $161,250 of deferred contract costs to selling, general, and administrative expense.  During the nine months ended September 30, 2018, we amortized $157,500 and $36,139 of deferred contract costs to selling, general, and administrative expense and as a reduction to income, respectively.

We bill certain customers in advance, and, accordingly, we defer recognition of related revenues as a contract liability until the services are provided and control is transferred to the customer.  As of September 30, 2019 and December 31, 2018, we had $15,516 and $69,473, respectively, of deferred revenue, the majority of which was classified in “Deferred revenue and other current liabilities.”

v3.19.3
Income Taxes
9 Months Ended
Sep. 30, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

9. Income Taxes

Our statutory income tax rate is anticipated to be 27%.  However, we had income tax expense of $164,311 for the nine months ended September 30, 2019, which is attributable to state tax obligations for states with no net operating loss carryforwards, and the continued reserve against the benefit of the net operating losses at the federal level.

We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance to reduce the amount of deferred tax assets that, based on available evidence, is more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of September 30, 2019 and December 31, 2018, and we had recorded a valuation allowance of $12,075,000 and $12,202,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of September 30, 2019 and December 31, 2018, we had federal income tax net operating loss carryforwards of approximately $17,900,000 and $18,900,000, respectively, which expire at various dates ranging from 2031-2037.

 

v3.19.3
Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

10. Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, deferred revenue, and the ABL Facility. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments.  The fair values of these financial instruments approximate their carrying values using Level 3 inputs, based on their short maturities or, for the ABL Facility, based on borrowing rates currently available to us for loans with similar terms and maturities.

 

v3.19.3
Stockholders' Equity
9 Months Ended
Sep. 30, 2019
Equity [Abstract]  
Stockholders' Equity

11. Stockholders’ Equity

Preferred StockOur authorized preferred stock consists of 10,000,000 shares of preferred stock with a par value of $0.001, of which no shares have been issued or are outstanding.

Common Stock – Our authorized common stock consists of 200,000,000 shares of common stock with a par value of $0.001, of which 15,350,153 and 15,328,870 shares were issued and outstanding as of September 30, 2019 and December 31, 2018, respectively.

Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved our 2014 Employee Stock Purchase Plan (“ESPP”).  On May 14, 2019, we issued 21,283 shares to employees for $29,669 under our ESPP for options that vested and were exercised.  We recorded expense of $20,617 and $9,317 related to the ESPP for the nine months ended September 30, 2019 and 2018, respectively.

Warrants – At September 30, 2019, we had outstanding exercisable warrants to purchase 608,560 shares of common stock.  Warrants to purchase 1,125,005 shares of common stock expired on September 24, 2019.  

The following table summarizes the warrants issued and outstanding as of September 30, 2019:

 

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

Exercisable warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

10/20/2014

 

10/20/2019

 

$

20.00

 

 

 

87,500

 

Warrants

 

3/30/2016

 

03/30/2021

 

$

3.88

 

 

 

521,060

 

Total warrants issued and outstanding

 

 

 

 

 

 

608,560

 

Stock Options – We recorded stock option expense of $729,431 and $584,204 for the nine months ended September 30, 2019 and 2018, respectively.  The following table summarizes the stock option activity for the nine months ended September 30, 2019:

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at December 31, 2018

 

 

1,773,066

 

 

$1.17 — $26.00

 

$

7.02

 

Granted

 

 

1,004,015

 

 

$1.51 —   $3.12

 

$

1.90

 

Canceled/Forfeited

 

 

(132,967

)

 

$1.51 — $16.40

 

$

2.62

 

Outstanding at September 30, 2019

 

 

2,644,114

 

 

$1.17 — $26.00

 

$

5.30

 

 

Deferred Stock Units – Effective September 1, 2019, nonemployee directors can elect to receive all or a portion of their annual retainers in the form of deferred stock units (“DSUs”).   The DSUs are recognized at their fair value on the date of grant.  Each DSU represents the right to receive one share of our common stock following the completion of a director’s service.  During the nine months ended September 30, 2019, we granted 3,464 DSUs and recorded director compensation expense of $8,660 related to the grants.

v3.19.3
Net Income (Loss) per Share
9 Months Ended
Sep. 30, 2019
Earnings Per Share [Abstract]  
Net Income (Loss) per Share

12. Net Income (Loss) per Share

We compute basic net income (loss) per share using the weighted average number of shares of common stock outstanding plus the number of common stock equivalents for DSUs during the period. We compute diluted net income (loss) per share using the weighted average number of shares of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents.  In periods where losses are reported, the weighted average number of shares of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.  Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options.  Dilutive potential securities are excluded from the computation of earnings per share if their effect is antidilutive.  The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method.  Deferred stock units (see Note 11) are included in both basic and diluted earnings per share computations.  

The computation of basic and diluted net income (loss) per share attributable to common stockholders is as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

(Unaudited)

 

 

(Unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Net income (loss) applicable to common stockholders

$

46,999

 

 

$

(680,894

)

 

$

(89,651

)

 

$

(2,531,955

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Weighted average common shares outstanding, basic

 

15,350,153

 

 

 

15,313,383

 

 

 

15,339,706

 

 

 

15,307,939

 

     Effect of dilutive common shares

 

48,686

 

 

 

 

 

 

 

 

 

 

     Weighted average common shares outstanding, diluted

 

15,398,839

 

 

 

15,313,383

 

 

 

15,339,706

 

 

 

15,307,939

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.00

 

 

$

(0.04

)

 

$

(0.01

)

 

$

(0.17

)

Diluted

$

0.00

 

 

$

(0.04

)

 

$

(0.01

)

 

$

(0.17

)

Anti-dilutive securities excluded from diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

2,595,428

 

 

 

1,752,566

 

 

 

2,644,114

 

 

 

1,752,566

 

Warrants

 

608,560

 

 

 

1,733,565

 

 

 

608,560

 

 

 

1,733,565

 

Total anti-dilutive securities excluded from net income (loss) per share

 

3,203,988

 

 

 

3,486,131

 

 

 

3,252,674

 

 

 

3,486,131

 

 

v3.19.3
Related Party Transactions
9 Months Ended
Sep. 30, 2019
Related Party Transactions [Abstract]  
Related Party Transactions

13.  Related Party Transactions

During the quarter ended June 30, 2019, three stockholders sold approximately 4.3 million shares of our common stock in a registered public offering that closed on April 11, 2019.  In a separate private transaction, a certain selling stockholder sold 1,750,000 shares of our common stock.  The offering and private transaction, together the “Transactions”, closed on April 11, 2019.  We did not receive any proceeds from sales by the selling stockholders in the Transactions.  We incurred costs and expenses in connection with the Transactions, consisting of various registration, due diligence, printing, and professional service fees and expenses, and such costs, less amounts reimbursed by the selling stockholders at the closing of the Transactions, were approximately $248,000, and is included in selling, general, and administrative expense for the nine months ended September 30, 2019.

 

v3.19.3
Summary of Significant Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Principles of Presentation and Consolidation

Principles of Presentation and Consolidation

The condensed consolidated financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended December 31, 2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2019 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2018 condensed consolidated balance sheet data from audited financial statements; however, we did not include all disclosures required by GAAP. As QRHC, Quest, LDI, Youchange, QVC, QV One, and QSS each operate as environmental-based service companies, we did not deem segment reporting necessary.

All intercompany accounts and transactions have been eliminated in consolidation. Interim results are subject to seasonal variations, and the results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Adopted

On January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), using a modified retrospective approach with an effective date as of January 1, 2019.  Accordingly, prior year financial statement data is presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented.  We elected the package of practical expedients, which allowed us to carryforward our historical assessment of (1) whether contracts are or contain leases, (2) lease classification, and (3) initial direct costs.  As of January 1, 2019, we recognized an operating right-of-use asset of approximately $2.0 million and corresponding operating lease liabilities of approximately $2.2 million.  Finance lease assets were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding assets were already recorded on the balance sheet under ASC 840.  The adoption did not materially impact our results of operations or cash flows and no cumulative adjustment to accumulated deficit was necessary as of January 1, 2019.  Refer to Note 7, Leases for additional information and enhanced disclosures related to this amended guidance.

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective approach for all ongoing customer contracts.  Refer to Note 8, Revenue for additional information and disclosures related to this amended guidance.

Pending Adoption

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments.  The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates.  ASU 2016-13 is effective for us on January 1, 2023.  We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our consolidated financial statements.

There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.

v3.19.3
Property and Equipment, Net, and Other Assets (Tables)
9 Months Ended
Sep. 30, 2019
Property Plant And Equipment [Abstract]  
Components Property and Equipment, Net, and Other Assets

At September 30, 2019 and December 31, 2018, property and equipment, net, and other assets consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,348,954

     and $2,523,700 as of September 30, 2019 and December 31, 2018,

     respectively

 

$

525,921

 

 

$

614,518

 

Right-of-use operating lease asset

 

 

1,734,222

 

 

 

 

Security deposits and other assets

 

 

427,486

 

 

 

353,507

 

    Property and equipment, net, and other assets

 

$

2,687,629

 

 

$

968,025

 

v3.19.3
Goodwill and Other Intangible Assets (Tables)
9 Months Ended
Sep. 30, 2019
Goodwill And Intangible Assets Disclosure [Abstract]  
Schedule of Finite-Lived Intangible Assets

The components of goodwill and other intangible assets were as follows:

  

September 30, 2019 (Unaudited)

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,068

 

 

 

5,528,354

 

 

 

706,714

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,057,230

 

 

 

910,665

 

 

 

1,146,565

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,550,134

 

 

$

19,696,855

 

 

$

1,853,279

 

 

December 31, 2018

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,068

 

 

 

4,860,305

 

 

 

1,374,763

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,934,308

 

 

 

698,150

 

 

 

1,236,158

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,427,212

 

 

$

18,816,291

 

 

$

2,610,921

 

Schedule of Indefinite-Lived Intangible Assets

 

September 30, 2019 (Unaudited) and December 31, 2018

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,208,490

 

 

 

 

 

v3.19.3
Accounts Payable and Accrued Liabilities (Tables)
9 Months Ended
Sep. 30, 2019
Accounts Payable And Accrued Liabilities Current [Abstract]  
Components of Accounts Payable and Accrued Liabilities

The components of Accounts payable and accrued liabilities were as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Accounts payable

 

$

10,990,219

 

 

$

14,025,221

 

Accrued taxes

 

 

791,914

 

 

 

548,126

 

Employee compensation

 

 

937,354

 

 

 

910,796

 

Operating lease liability - current portion

 

 

624,056

 

 

 

 

Other

 

 

170,614

 

 

 

293,778

 

 

 

$

13,514,157

 

 

$

15,777,921

 

v3.19.3
Leases (Tables)
9 Months Ended
Sep. 30, 2019
Lessee Disclosure [Abstract]  
Summary of Lease Related Assets and Liabilities Recorded on Balance Sheet

The table below presents the lease related assets and liabilities recorded on the balance sheet. Right-of-use assets and related liabilities related to finance leases at September 30, 2019 are de minimis and mature in less than 12 months.

 

 

September 30,

 

 

2019

 

Operating Leases:

 

 

 

Right-of-use operating lease asset:

 

 

 

   Property and equipment, net and other assets

$

1,734,222

 

 

 

 

 

Lease Liabilities:

 

 

 

   Accounts payable and accrued liabilities

$

624,056

 

   Other long-term liabilities

 

1,295,004

 

       Total operating lease liabilities

$

1,919,060

 

Future Minimum Lease Payments Required Under Office Lease

The future minimum lease payments required under our office lease as of September 30, 2019 were as follows:    

Year Ending December 31,

 

Amount

 

2019

 

$

166,050

 

2020

 

 

664,200

 

2021

 

 

664,200

 

2022

 

 

498,150

 

   Total lease payments

 

 

1,992,600

 

Less:  Interest

 

 

73,540

 

    Present value of lease liabilities

 

$

1,919,060

 

v3.19.3
Revenue (Tables)
9 Months Ended
Sep. 30, 2019
Revenue From Contract With Customer [Abstract]  
Summary of Revenue Disaggregated by Source The following table presents our revenue disaggregated by source.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenue Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

21,422,455

 

 

$

23,412,066

 

 

$

68,244,033

 

 

$

70,742,475