QUEST RESOURCE HOLDING CORP, 10-K filed on 3/31/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Mar. 16, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
QRHC 
 
 
Entity Registrant Name
Quest Resource Holding Corporation 
 
 
Entity Central Index Key
0001442236 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Smaller Reporting Company 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Common Stock, Shares Outstanding
 
15,272,575 
 
Entity Public Float
 
 
$ 13,047,975 
CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 1,328,174 
$ 2,989,731 
Accounts receivable, less allowance for doubtful accounts of $333,578 and $586,941 as of December 31, 2016 and 2015, respectively
34,828,495 
33,298,797 
Prepaid expenses and other current assets
2,671,002 
946,908 
Total current assets
38,827,671 
37,235,436 
Goodwill
58,337,290 
58,337,290 
Intangible assets, net
8,489,586 
11,828,008 
Property and equipment, net, and other assets
2,414,921 
1,608,632 
Total assets
108,069,468 
109,009,366 
Current liabilities:
 
 
Accounts payable and accrued liabilities
35,305,559 
34,847,359 
Deferred revenue and other current liabilities
406,057 
328,829 
Total current liabilities
35,711,616 
35,176,188 
Line of credit
4,750,000 
4,000,000 
Other long-term liabilities
335,644 
341,142 
Total liabilities
40,797,260 
39,517,330 
Commitments and contingencies
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of December 31, 2016 and 2015
   
   
Common stock, $0.001 par value, 200,000,000 shares authorized, 15,272,575 and 13,973,597 shares issued and outstanding as of December 31, 2016 and 2015, respectively, given retroactive effect to the 1-for-8 reverse stock split effective August 10, 2016
15,273 
13,974 
Additional paid-in capital
158,171,831 
152,347,372 
Accumulated deficit
(90,914,896)
(82,869,310)
Total stockholders’ equity
67,272,208 
69,492,036 
Total liabilities and stockholders’ equity
$ 108,069,468 
$ 109,009,366 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
0 Months Ended
Aug. 10, 2016
Dec. 31, 2016
Mar. 30, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement Of Financial Position [Abstract]
 
 
 
 
 
Allowance for doubtful accounts receivable
 
$ 333,578 
 
$ 586,941 
$ 760,917 
Preferred stock, par value
 
$ 0.001 
 
$ 0.001 
 
Preferred stock, shares authorized
 
10,000,000 
 
10,000,000 
 
Preferred stock, shares issued
 
 
 
Preferred stock, shares outstanding
 
 
 
Common stock, par value
 
$ 0.001 
 
$ 0.001 
 
Common stock, shares authorized
 
200,000,000 
 
200,000,000 
 
Common stock, shares issued
 
15,272,575 
861,251 
13,973,597 
 
Common stock, shares outstanding
 
15,272,575 
 
13,973,597 
 
Reverse stock split ratio of common stock
0.125 
 
 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
Revenue
$ 183,811,398 
$ 170,139,049 
Cost of revenue
169,401,718 
156,498,149 
Gross profit
14,409,680 
13,640,900 
Operating expenses:
 
 
Selling, general, and administrative
18,170,371 
16,300,453 
Depreciation and amortization
4,044,097 
4,568,102 
Total operating expenses
22,214,468 
20,868,555 
Operating loss
(7,804,788)
(7,227,655)
Other expense:
 
 
Interest expense
(240,798)
(218,275)
Total other expense, net
(240,798)
(218,275)
Loss before taxes
(8,045,586)
(7,445,930)
Net loss
(8,045,586)
(7,445,930)
Net loss applicable to common stockholders
$ (8,045,586)
$ (7,445,930)
Net loss per share
 
 
Basic and Diluted
$ (0.55)
$ (0.53)
Weighted average number of common shares outstanding, given retroactive effect to the 1-for-8 reverse stock split effective August 10, 2016
 
 
Basic and Diluted
14,737,885 
13,961,617 
CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical)
0 Months Ended
Aug. 10, 2016
Income Statement [Abstract]
 
Reverse stock split ratio of common stock
0.125 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, GIVEN RETROACTIVE EFFECT FOR THE 1-FOR-8 REVERSE STOCK SPLIT EFFECTIVE AUGUST 10, 2016 (USD $)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit [Member]
Beginning Balance at Dec. 31, 2014
$ 75,477,513 
$ 13,951 
$ 150,886,942 
$ (75,423,380)
Beginning Balance, Shares at Dec. 31, 2014
 
13,950,231 
 
 
Stock-based compensation
1,350,387 
 
1,350,387 
 
Shares issued for vested restricted stock units, Value
 
(7)
 
Shares issued for vested restricted stock units, Shares
7,063 
7,063 
 
 
Shares issued for Employee Stock Purchase Plan options, Value
110,066 
16 
110,050 
 
Shares issued for Employee Stock Purchase Plan options, Shares
16,303 
16,303 
 
 
Net loss
(7,445,930)
 
 
(7,445,930)
Ending Balance at Dec. 31, 2015
69,492,036 
13,974 
152,347,372 
(82,869,310)
Ending Balance, Shares at Dec. 31, 2015
 
13,973,597 
 
 
Stock-based compensation
1,220,917 
 
1,220,917 
 
Sale of common stock and warrants, net of issuance costs, Value
2,889,350 
861 
2,888,489 
 
Sale of common stock and warrants, net of issuance costs, Shares
861,251 
861,251 
 
 
Shares issued for Employee Stock Purchase Plan options, Value
40,491 
19 
40,472 
 
Shares issued for Employee Stock Purchase Plan options, Shares
18,977 
18,977 
 
 
Shares issued for consulting services, Value
1,675,000 
419 
1,674,581 
 
Shares issued for consulting services, Shares
418,750 
418,750 
 
 
Net loss
(8,045,586)
 
 
(8,045,586)
Ending Balance at Dec. 31, 2016
$ 67,272,208 
$ 15,273 
$ 158,171,831 
$ (90,914,896)
Ending Balance, Shares at Dec. 31, 2016
 
15,272,575 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
 
 
Net loss
$ (8,045,586)
$ (7,445,930)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
Depreciation
469,808 
314,178 
Amortization of intangibles
3,699,566 
4,257,565 
Gain on disposal of property and equipment
 
(15,646)
Provision for doubtful accounts
458,919 
265,176 
Stock-based compensation
1,849,042 
1,315,530 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(1,988,617)
(3,932,130)
Prepaid expenses and other current assets
(677,219)
(262,876)
Security deposits and other assets
(773,675)
(80,740)
Accounts payable and accrued liabilities
458,200 
8,260,309 
Deferred revenue and other current liabilities
89,469 
(46,559)
Other long-term liabilities
69,178 
30,157 
Net cash provided by (used in) operating activities
(4,390,915)
2,659,034 
Cash flows from investing activities:
 
 
Purchase of property and equipment
(469,315)
(674,675)
Purchase of capitalized software and trademark development
(361,144)
(969,956)
Net cash used in investing activities
(830,459)
(1,644,631)
Cash flows from financing activities:
 
 
Proceeds from line of credit
23,500,000 
8,700,000 
Repayments to line of credit
(22,750,000)
(9,950,000)
Proceeds from the sale of common stock and warrants, net of issuance costs
2,889,350 
 
Proceeds from shares issued for Employee Stock Purchase Plan
40,491 
110,066 
Repayments of capital lease obligations
(120,024)
(39,278)
Net cash provided by (used in) financing activities
3,559,817 
(1,179,212)
Net decrease in cash and cash equivalents
(1,661,557)
(164,809)
Cash and cash equivalents at beginning of period
2,989,731 
3,154,540 
Cash and cash equivalents at end of period
$ 1,328,174 
$ 2,989,731 
The Company, Description of Business, and Future Liquidity Needs
The Company, Description of Business, and Liquidity

1. The Company, Description of Business, and Liquidity

The accompanying consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”) and its subsidiaries, Earth911, Inc. (“Earth911”), Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC, (“LDI”), Youchange, Inc. (“Youchange”), Quest Vertigent Corporation (“QVC”), and Quest Vertigent One, LLC (“QV One”) (collectively, “we,” “us,” or “our company”).

Operations

We provide businesses with one-stop management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their businesses.  Our comprehensive reuse, recycling, and proper disposal management programs are designed to enable regional and national customers to have a single point of contact for managing a variety of waste streams and recyclables.  This business generates substantially all of our revenue.  We also operate environmentally based social media and online data platforms that contain information and instructions necessary to empower consumers and consumer product companies to recycle or properly dispose of household products and materials.  Our directory of local recycling and proper disposal options empowers consumers directly and enables consumer product companies to empower their customers by giving them the guidance necessary for the proper recycling or disposal of a wide range of household products and materials, including the “why, where, and how” of recycling.  Two customers accounted for 56% and 60% of revenue for the years ended December 31, 2016 and 2015, respectively.  Our principal offices are located in The Colony, Texas.

Liquidity

As of December 31, 2016 and 2015, our working capital balance was $3,116,055 and $2,059,248, respectively.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principles of Presentation and Consolidation

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the operating activity of QRHC and its subsidiaries for the years ended December 31, 2016 and 2015.

As Quest, Earth911, LDI, Youchange, QVC, and QV One each operate as ecology based green service companies, we did not deem segment reporting necessary.

On August 10, 2016, we filed amended and restated articles of incorporation with the Secretary of State of the state of Nevada to effect a 1-for-8 reverse stock split of our common stock.  The reverse split became effective as of 5:00 p.m. Eastern Time on Wednesday, August 10, 2016, or the Effective Time.  At the Effective Time, each lot of eight shares of common stock issued and outstanding immediately prior to the Effective Time were, automatically and without any further action on the part of our stockholders, converted into and became one share of common stock, and each certificate which, immediately prior to the Effective Time represented pre-reverse split shares, was deemed cancelled and, for all corporate purposes, was deemed to evidence ownership of post-reverse split shares.  In lieu of issuing any fractional shares, we rounded up to the nearest whole share in the event that a stockholder was entitled to receive less than one share of common stock.  As required by GAAP, we retroactively adjusted all share and per share amounts in our consolidated financial statements and notes thereto to reflect the 1-for-8 reverse stock split.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

We use significant estimates when accounting for the carrying amounts of accounts receivable, long-lived assets, goodwill and other intangible assets, stock-based compensation expense, accrued liabilities, and deferred taxes, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

We recognize revenue only when all of the following criteria have been met:

persuasive evidence of an arrangement exists;

delivery has occurred or services have been rendered;

the fee for the arrangement is fixed or determinable; and

collectability is reasonably assured.

Persuasive Evidence of an Arrangement Exists – We document all terms of an arrangement in a service agreement or quote signed or confirmed by the customer prior to recognizing revenue.

Delivery Has Occurred or Services Have Been Rendered – We perform all services or deliver all products prior to recognizing revenue. Services are deemed to be performed when the services are complete.

The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote, service agreement, or accepted customer purchase order.

Collectability Is Reasonably Assured – We assess collectability on a customer by customer basis based on criteria developed by us.

We provide businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. We utilize third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross.  We record amounts collected from customers for sales tax on a net basis. In situations in which we are not primarily obligated, we do not have credit risk, or we determine amounts earned using fixed percentage or fixed payment schedules, we record the net amounts as management fees earned. Currently, we have one contract accounted for as management fees with revenue of $307,571 and $109,846 for the years ended December 31, 2016 and 2015, respectively.  Our gross billings on this management fee contract were $5,042,696 and $1,437,579 for the years ended December 31, 2016 and 2015, respectively.  

We recognize licensing fees ratably over the term of the license. We derive some revenue from advertising contracts, which we recognize ratably over the term that the advertisement appears on our website.

Cash and Cash Equivalents

We consider all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable

We follow the allowance method of recognizing uncollectible accounts receivable, which recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. Credit is extended based on evaluation of each customer’s financial condition and is generally unsecured. Accounts receivable are typically due within 30 days and are stated net of an allowance for doubtful accounts in the consolidated balance sheets. We consider accounts past due if outstanding longer than contractual payment terms. We record an allowance based on consideration of a number of factors, including the length of time trade accounts are past due, our previous loss history, the creditworthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We charge-off accounts receivable after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period we receive the payment.

As of December 31, 2016 and 2015, we had established an allowance of $333,578 and $586,941, respectively, for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivables only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2016 and 2015 were as follows:

 

 

 

Years ended December 31,

 

 

 

2016

 

 

2015

 

Beginning balance

 

$

586,941

 

 

$

760,917

 

Bad debt expense, net of recoveries

 

 

458,919

 

 

 

265,176

 

Uncollectible accounts written off

 

 

(712,282

)

 

 

(439,152

)

Ending balance

 

$

333,578

 

 

$

586,941

 

 

Inventories

Inventories consist of waste disposal and recycling equipment and are stated at the lower of cost (average cost method which approximates first-in, first-out) or market. If required, we establish reserves for inventory to reflect situations in which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory, and current and expected market conditions. We record inventories within “Prepaid expenses and other current assets” in our consolidated balance sheets. As of December 31, 2016 and 2015, all inventories were finished goods with balances of $12,996 and $54,473, respectively, with no reserve for inventory obsolescence at either date.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.

Stock Options

We estimate the fair value of stock options on grant date in accordance with ASC Topic 718, Stock Compensation, using the Black-Scholes-Merton valuation model. Significant assumptions used in the calculation are as follows:

 

We determine the expected term in accordance with SEC Staff Accounting Bulletin No. 107 using the simplified method for plain vanilla options by the average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;

 

We measure the expected volatility using the historical changes in the market price of our common stock and applicable comparison companies;

 

We use the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards to approximate the risk-free interest rate; and

 

We base forfeitures on the history of cancellations of options granted by us and our analysis of potential future forfeitures.

Property and Equipment

We record property and equipment at cost. We provide for depreciation on the straight-line method, over the estimated useful lives of the assets. We amortize leasehold improvements over the shorter of the estimated useful life or the remaining term of the related leases. We charge expenditures for repairs and maintenance to operations as incurred; we capitalize renewals and betterments when they extend the useful life of the asset. We record gains and losses on the disposition of property and equipment in the period incurred. We report assets held for sale, if any, at the lower of the carrying amount or fair value less costs to sell.

The useful lives of property and equipment for purposes of computing depreciation are as follows:

 

Vehicles

 

5 to 7 years

Computer equipment

 

3 to 5 years

Office furniture and fixtures

 

5 to 7 years

Machinery and equipment

 

5 to 7 years

Leasehold improvements

 

5 to 7 years

 

Impairment of Long-Lived Assets

We analyze long-lived assets, including property and equipment and definite-lived intangible assets, that are held and used for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and period at least at each balance sheet date. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. We did not recognize any impairment charges for long-lived assets during 2016 and 2015.        

Goodwill

We record as goodwill the excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree, and the acquisition date fair value of any previous equity interest in the acquired entity over the (ii) fair value of the net identifiable assets acquired. We do not amortize goodwill; however, annually, or whenever there is an indication that goodwill may be impaired, we evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. We performed our Step 1 goodwill impairment analysis in the third quarter of 2016 utilizing an income approach with no impairment recorded.  We believe that the discounted cash flow method best captures the significant value creating activities we are undertaking.  The primary assumptions in our Step 1 income approach included estimating cash flows and projections based on management’s expectations.  We determined that the fair value of our goodwill exceeds our carrying value, and consequently, no impairment was deemed to have occurred.  However, a continued or prolonged period of declining gross margins could result in the write off of a portion or all of our goodwill and other intangible assets in future periods.

Net Loss Per Share

We compute basic net loss per share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2016 and 2015 would be anti-dilutive. These potentially dilutive securities include stock options and warrants and totaled 3,256,093 and 2,216,878 common shares at December 31, 2016 and December 31, 2015, respectively.

Concentrations

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade accounts receivable. We deposit our cash with commercial banks. Cash deposits at commercial banks are at risk to the extent that the balances exceed the Federal Deposit Insurance Corporation insured level per institution. The bank cash balances on deposit may periodically exceed federally insured limits, including $1,320,788 at December 31, 2016; however, we have never experienced any losses related to these balances.

We sell our products and services primarily to consumers, advertisers, and businesses without requiring collateral; however, we routinely assess the financial condition of our customers and maintain allowances for anticipated losses. The following table discloses the number of customers that accounted for more than 10% of our annual revenue and their related receivable balances for the years ended December 31, 2016 and 2015:

 

 

 

Customers Exceeding 10%

of Revenue

 

Year

 

Number of

Customers

 

 

Revenue

Combined Percent

 

 

Accounts Receivable

Combined Percent

 

2016

 

 

2

 

 

 

56

%

 

 

48

%

2015

 

 

2

 

 

 

60

%

 

 

41

%

 

We believe we have no significant credit risk in excess of recorded reserves.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We establish valuation allowances to reduce a deferred tax asset to the amount expected to be realized. We assess our ability to realize deferred tax assets based on current earnings performance and on projections of future taxable income in the relevant tax jurisdictions. These projections do not include taxable income from the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation. We review our estimates of future taxable income annually. We first analyze all tax positions to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, we measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.

If we are required to pay interest on the underpayment of income taxes, we recognize interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.

If we are subject to payment of penalties, we recognize an expense for the amount of the statutory penalty in the period when the position is taken on the income tax return. If we did not recognize the penalty in the period when the position was initially taken, we recognize the expense in the period when we change our judgment about meeting minimum statutory thresholds related to the initial position taken.

Advertising

We charge our advertising costs to expense when incurred. During the years ended December 31, 2016 and 2015, advertising expense totaled $32,720 and $43,670, respectively.

Stock-Based Compensation

We expense all share-based grants to employees, including grants of employee stock options, based on their estimated fair values at grant date, in accordance with ASC Topic 718, Stock Compensation. We record compensation expense for stock options over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes-Merton model. We classify all share-based awards to employees as equity instruments and recognize the vesting of the awards ratably over their respective terms. See Note 11 for a description of our share-based compensation plan and information related to awards granted under the plan.

Share-based payment transactions with non-employees are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, in accordance with ASC Topic 505-50, Equity-Based Payments to Non-Employees.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This standard replaces existing revenue recognition guidance, which in many cases was tailored for specific industries, with a uniform accounting standard applicable to all industries and transactions. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to correlate with the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This new standard, as amended, will be effective for us on January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. While we are still evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements, we currently do not expect it to have a material impact on operating revenues.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in ASU 2014-15 became effective for annual reporting periods ending after December 15, 2016 and interim periods thereafter. The adoption of ASU 2014-15 did not have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases.  The update improves financial reporting about leasing transactions by requiring a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are still evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements, but given the material amount of our future minimum payments under non-cancellable operating leases (primarily office rent) at December 31, 2016 discussed in Note 10, we expect to recognize a material right-of-use lease asset and lease liability upon adoption of the ASU.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The purpose of ASU 2016-09 is to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of such activity on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. We are evaluating the impact of adopting ASU 2016-09 on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. The adoption of ASU 2016-15 will be required on a retrospective basis beginning January 1, 2018, with early adoption permitted. We have not yet determined when we will adopt ASU 2016-15.  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 of potential significance to us.

Property and Equipment, Net, and Other Assets
Property and Equipment, Net, and Other Assets

3. Property and Equipment, Net, and Other Assets

At December 31, 2016 and 2015, Property and equipment, net, and other assets consisted of the following:

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

Vehicles

 

$

544,984

 

 

$

544,984

 

Computer equipment

 

 

990,790

 

 

 

946,929

 

Office furniture and fixtures

 

 

634,547

 

 

 

634,547

 

Machinery and equipment

 

 

971,806

 

 

 

514,042

 

Leasehold improvements

 

 

641,272

 

 

 

641,272

 

    Property and equipment, gross

 

 

3,783,399

 

 

 

3,281,774

 

Accumulated depreciation

 

 

(2,442,549

)

 

 

(1,973,538

)

    Property and equipment, net

 

 

1,340,850

 

 

 

1,308,236

 

Security deposits and other assets

 

 

1,074,071

 

 

 

300,396

 

     Property and equipment, net, and other assets

 

$

2,414,921

 

 

$

1,608,632

 

 

We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment.  Depreciation expense for the year ended December 31, 2016 was $469,808, inclusive of $125,277 of depreciation expense reflected within Cost of Revenue in our consolidated statement of operations as it related to assets used in directly servicing customer contracts.  Depreciation expense for the year ended December 31, 2015 was $314,178, with $3,641 depreciation expense recorded in Cost of Revenue. At December 31, 2016, our capital lease assets were $347,135, net of $152,962 of accumulated depreciation.  At December 31, 2015, our capital lease assets were $426,757, net of $34,041 of accumulated depreciation.

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

4. Goodwill and Other Intangible Assets

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

 

December 31, 2016

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

8,798,000

 

 

$

3,922,000

 

Trademarks

 

7 years

 

 

6,242,055

 

 

 

3,078,845

 

 

 

3,163,210

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,649,507

 

 

 

307,989

 

 

 

1,341,518

 

Customer lists

 

5 years

 

 

307,153

 

 

 

244,295

 

 

 

62,858

 

Total finite lived intangible assets

 

 

 

$

21,149,398

 

 

$

12,659,812

 

 

$

8,489,586

 

 

December 31, 2015

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

6,254,000

 

 

$

6,466,000

 

Trademarks

 

7 years

 

 

6,239,950

 

 

 

2,188,129

 

 

 

4,051,821

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,290,468

 

 

 

104,570

 

 

 

1,185,898

 

Customer lists

 

5 years

 

 

307,153

 

 

 

182,864

 

 

 

124,289

 

Total finite lived intangible assets

 

 

 

$

20,788,254

 

 

$

8,960,246

 

 

$

11,828,008

 

 

 

December 31, 2016 and 2015

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,337,290

 

 

 

 

 

 

We compute amortization using the straight-line method over the estimated useful lives of the finite lived intangible assets. The amortization expense related to finite lived intangible assets was $3,699,566 and $4,257,565 for the years ended December 31, 2016 and 2015, respectively. Our amortization expense for the year ended December 31, 2015 includes $566,000 related to the cessation of the Earth911 e-commerce marketplace website during the fourth quarter of 2015. We expect amortization expense to be approximately $3.7 million for the year ending December 31, 2017, approximately $2.5 million for the year ending December 31, 2018, approximately $1.1 million for the year ending December 31, 2019, approximately $710,000 for the year ending December 31, 2020, approximately $230,000 for the year ending December 31, 2021, and approximately $210,000 thereafter. We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes. As required by FASB ASC Topic 350, Intangibles – Goodwill and Other, we performed our goodwill impairment analysis in the third quarter of 2016 and 2015 with no impairment recorded in either period.

 

Line of Credit
Line of Credit

5. Line of Credit

On December 15, 2010, Quest entered into a Revolving Credit Note and Loan Agreement with Regions Bank (“Regions”), a national banking association. This agreement, as amended, provides Quest with a loan facility of up to $15,000,000 for working capital with advances generally limited to 80% of eligible accounts receivable from Quest’s largest customer and 85% of all other eligible accounts receivable. The interest on the outstanding principal amount accrues daily and is payable monthly based on a fluctuating interest rate per annum, which is the base rate plus 1.50% (2.93% as of December 31, 2016). The base rate for any day is the greater of (a) the federal funds rate plus one-half of 1%, (b) Region’s published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. To secure the amounts due under the agreement, Quest granted Regions a security interest in all of its assets with guarantees from QRHC and Earth911. Quest had $4,750,000 outstanding and approximately $9,031,000 available to be borrowed as of December 31, 2016. The amount of interest expense related to the Regions line of credit for the years ended December 31, 2016 and 2015 was $221,424 and $204,984, respectively. As of December 31, 2016 we were in compliance with the financial covenants included in the agreement.

During the year ended December 31, 2015, Quest entered into two amendments with Regions. On May 13, 2015, Quest entered into a Seventh Amendment to Loan Agreement with Regions. The loan agreement was amended to, among other things, (i) reduce the applicable margin for eurodollar rate loans by 0.25% per annum, (ii) extend the maturity date to May 31, 2018, and (iii) modify the permitted acquisitions in certain respects. On July 7, 2015, Quest entered into an Eighth Amendment to Loan Agreement with Regions. The loan agreement was amended to, among other things, increase the aggregate revolving credit commitment to $15.0 million by exercising the $5.0 million accordion feature in the loan agreement.

On February 24, 2017, Quest entered into a Loan, Security and Guaranty 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. The ABL Facility replaced Quest’s Revolving Credit Note and Loan Agreement with Regions, which was paid off and terminated effective February 24, 2017.  See Note 14 for additional details.

 

Accounts Payable and Accrued Liabilities
Accounts Payable and Accrued Liabilities

6. Accounts Payable and Accrued Liabilities

 

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

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

Accounts payable

 

$

32,944,202

 

 

$

30,825,655

 

Accrued taxes

 

 

1,272,832

 

 

 

827,901

 

Employee compensation

 

 

529,945

 

 

 

386,255

 

Other

 

 

558,580

 

 

 

2,807,548

 

 

 

$

35,305,559

 

 

$

34,847,359

 

 

Capital Lease Obligations
Capital Lease Obligations

7. Capital Lease Obligations

Our capital lease obligations are included within Deferred revenue and other current liabilities and Other long-term liabilities in our consolidated balance sheets.

At December 31, 2016 and 2015, total capital lease obligations outstanding consisted of the following:

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

Capital lease obligations, imputed interest of 2.65% to 13.29%, with

current monthly payments of approximately $11,000, expiring

through November 2020, secured by computer, telephone and office equipment

 

$

315,253

 

 

$

402,170

 

Total

 

 

315,253

 

 

 

402,170

 

Less: current maturities

 

 

(106,184

)

 

 

(112,125

)

Long-term portion

 

$

209,069

 

 

$

290,045

 

 

The amount of interest expense related to our capital leases for the years ended December 31, 2016 and 2015 was $14,414 and $4,080, respectively. The following table summarizes future maturities of our capital lease obligations, as of December 31, 2016:

 

Year Ending December 31,

 

Amount

 

2017

 

$

116,434

 

2018

 

 

100,474

 

2019

 

 

62,717

 

2020

 

 

55,014

 

Total minimum lease payments

 

 

334,639

 

Less:  amount representing interest

 

 

(19,386

)

Present value of net minimum lease payments

 

 

315,253

 

Less: current maturities

 

 

(106,184

)

Non-current maturities

 

$

209,069

 

 

Income Taxes
Income Taxes

8. Income Taxes

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 for the amount of deferred tax assets that, based on available evidence, are more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of December 31, 2016 and 2015, and we have recorded a valuation allowance of $15,555,000 and $12,313,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.

The components of net deferred taxes are as follows:

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

Deferred tax assets (liabilities):

 

 

 

 

 

 

 

 

Net operating loss

 

$

7,199,000

 

 

$

5,670,000

 

Amortization

 

 

5,204,000

 

 

 

3,761,000

 

Stock-based compensation

 

 

3,683,000

 

 

 

3,215,000

 

Capitalized software costs

 

 

(753,000

)

 

 

(612,000

)

Accrued interest expense

 

 

14,000

 

 

 

9,000

 

Allowance for doubtful accounts

 

 

130,000

 

 

 

229,000

 

Deferred lease liability

 

 

78,000

 

 

 

41,000

 

Total deferred tax assets (liabilities), net

 

 

15,555,000

 

 

 

12,313,000

 

Less: valuation allowance

 

 

(15,555,000

)

 

 

(12,313,000

)

Net deferred taxes

 

$

 

 

$

 

 

The reconciliation between the income tax expense (benefit) calculated by applying statutory rates to net loss and the income tax benefit reported in the accompanying consolidated financial statements is as follows:

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

U.S. federal statutory rate applied to pretax income

 

$

(2,735,499

)

 

$

(2,531,616

)

Permanent differences

 

 

17,155

 

 

 

17,155

 

State taxes and other

 

 

(523,656

)

 

 

(690,539

)

Change in valuation allowance

 

 

3,242,000

 

 

 

3,205,000

 

 

 

$

 

 

$

 

 

As of December 31, 2016 and 2015, we had federal income tax net operating loss carryforwards of approximately $18,500,000 and $14,500,000, respectively, which expire at various dates beginning in 2031. We are subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss. Such limitation of the net operating losses may have occurred, which we have not fully analyzed at this time as we have fully reserved the deferred tax asset.

As of December 31, 2016 and 2015, we did not recognize any assets or liabilities relative to uncertain tax positions, nor do we anticipate any significant unrecognized tax benefits will be recorded during 2017. It is our policy to classify interest and penalties on income taxes as interest expense or penalties expense.

Tax positions are positions taken in a previously filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. Tax positions include the following:

 

an allocation or shift of income between taxing jurisdictions;

 

the characterization of income or a decision to exclude reportable taxable income in a tax return; or

 

a decision to classify a transaction, entity, or other position in a tax return as tax exempt.

We are potentially subject to tax audits for federal and state tax returns for tax years ended 2014 to 2016. Tax audits by their very nature are often complex and can require several years to complete.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

9. Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, line of credit and capital lease obligations. 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 long-term portions of capital lease obligations and line of credit, based on borrowing rates currently available to us for loans with similar terms and maturities.

 

Commitments and Contingencies
Commitments and Contingencies

10. Commitments and Contingencies

Operating Leases

We lease corporate office space in The Colony, Texas under an 84 month, non-cancelable operating lease. The lease expires in October 2022. We also lease corporate office space in Scottsdale, Arizona under a 66 month, non-cancelable operating lease. The lease, which expired in March 2017, was subleased beginning in 2014. The total amount of minimum rentals we expect to receive on this sublease is $63,770 as of December 31, 2016.  Combined lease expense totaled $614,951 and $509,586 for the years ended December 31, 2016 and 2015, respectively.

The following is a schedule, by year, of future minimum rental payments required under non-cancelable operating lease agreements as of December 31, 2016:

 

Year Ending December 31,

 

Amount

 

2017

 

$

665,038

 

2018

 

 

606,780

 

2019

 

 

631,260

 

2020

 

 

664,200

 

2021

 

 

664,200

 

Thereafter

 

 

498,150

 

Total

 

$

3,729,628

 

 

Indemnifications

During the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These may include (i) intellectual property indemnities to customers in connection with the use, sales, and/or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; and (iv) indemnities involving the representations and warranties in certain contracts. In addition, under our bylaws we are committed to our directors and officers for providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities and commitments do not provide for any limitation on the maximum potential for future payments that we could be obligated to make. We have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we had no liabilities recorded for these agreements as of December 31, 2016 and 2015.

Defined Contribution Plan

We maintain a defined contribution 401(k) plan covering substantially all full-time employees.  Employees are permitted to make voluntary contributions, which we match at a certain percentage, to the Plan.  For the years ended December 31, 2016 and 2015, plan contributions made by the Company were $123,336 and $138,201, respectively.

Stockholders' Equity
Stockholders' Equity

 

11. Stockholders’ Equity

Preferred Stock

Our authorized preferred stock includes 10,000,000 shares of preferred stock with a par value of $0.001, of which no shares have been issued or are outstanding as of December 31, 2016 and 2015.  Preferred stock is to be designated in classes or series and the number of each class or series and the voting powers, designations, preferences, limitations, restrictions, relative rights, and distinguishing designation of each class or series of stock as the Board of Directors shall determine in its sole discretion.

Common Stock

Our authorized common stock includes 200,000,000 shares of common stock with a par value of $0.001, of which 15,272,575 and 13,973,597 shares were issued and outstanding as of December 31, 2016 and 2015, respectively.

During the year ended December 31, 2016, we issued shares of common stock as follows:

  

 

 

Common Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

Sale of common stock and warrants, net of issuance costs of $452,300

 

 

861,251

 

 

$

2,889,350

 

Shares issued for Employee Stock Purchase Plan options

 

 

18,977

 

 

 

40,491

 

Shares issued for consulting services

 

 

418,750

 

 

 

1,675,000

 

 

 

 

1,298,978

 

 

$

4,604,841

 

 

Sale of Common Stock and Warrants

 

On March 30, 2016, we issued 861,251 shares of our common stock, together with warrants to purchase 430,628 shares of our common stock, at a price per share and warrant of $3.88 in a stock offering.  We also issued the underwriters warrants to purchase 90,432 shares of our common stock.  The warrants may be exercised for a period of five years at an initial exercise price of $3.88 per share, subject to adjustment for certain dilutive events.

Shares Issued for Employee Stock Purchase Plan Options

 

On May 16, 2016, we issued 9,724 shares to employees for $27,435 under our 2014 Employee Stock Purchase Plan (“ESPP”) for options that vested and were exercised.    

 

On November 14, 2016, we issued 9,253 shares to employees for $13,056 under our ESPP for options that vested and were exercised.

Shares Issued for Consulting Services

 

On September 28, 2016, we issued 418,750 fully vested restricted shares of our common stock to a third party for consulting services under a one-year contract.  We recorded expense of $628,125 in 2016 within Selling, general, and administrative expenses in our consolidated statement of operations.  The balance recorded within Prepaid expenses and other current assets in our consolidated balance sheets at December 31, 2016 was $1,046,875, which we will expense ratably through August 2017.

During the year ended December 31, 2015, we issued shares of common stock as follows:

 

 

 

Common Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

Shares issued for vested restricted stock units

 

 

7,063

 

 

 

 

Shares issued for Employee Stock Purchase Plan options

 

 

16,303

 

 

 

110,066

 

 

 

 

23,366

 

 

$

110,066

 

 

Shares issued for vested restricted stock units

 

On March 5, 2015, we issued 7,063 shares to an employee related to restricted stock units that vested and were expensed during fiscal year 2014.

Shares issued for Employee Stock Purchase Plan Options

 

On May 15, 2015, we issued 7,142 shares to employees for $60,705 under our ESPP for options that vested and were exercised.

 

On November 15, 2015, we issued 9,161 shares to employees for $49,361 under our 2014 ESPP for options that vested and were exercised.   

Warrants

During the year ended December 31, 2016, as noted above, we issued warrants to purchase 521,060 shares of common stock , no holders exercised warrants and warrants to purchase 56,250 shares of common stock expired. At December 31, 2016, we had outstanding exercisable warrants to purchase 1,938,691 shares of common stock.

The following table summarizes the warrants issued and outstanding as of December 31, 2016:

 

Warrants Issued and Outstanding as of December 31, 2016

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

Exercisable warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

4/18/2014

 

4/01/2017

 

$

16.00

 

 

 

180,126

 

Warrant

 

5/07/2014

 

5/07/2017

 

$

21.20

 

 

 

25,000

 

Warrants

 

9/24/2014

 

9/24/2019

 

$

20.00

 

 

 

1,125,005

 

Warrants

 

10/20/2014

 

10/20/2019

 

$

20.00

 

 

 

87,500

 

Warrants

 

3/30/2016

 

3/30/2021

 

$

3.88

 

 

 

521,060

 

Total warrants issued and outstanding

 

 

 

 

 

 

1,938,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Compensation Plan

In October 2012, we adopted our 2012 Incentive Compensation Plan (the “2012 Plan”) as the sole plan for providing equity-based incentive compensation to our employees, non-employee directors, and other service providers. The plan allows for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, and other incentive awards to our employees, non-employee directors, and other service providers who are in a position to make a significant contribution to our success and our affiliates. The purpose of the plan is to attract and retain individuals, further align employee and stockholder interests, and closely link compensation with our performance. The plan is administered by the compensation committee of our board of directors. Our policy is to fulfill any exercise of options from common stock that is authorized and unissued. The maximum number of shares of common stock available for grant under the plan is 7,500,000. Stock compensation expense prior to October 2012 related to options granted prior to the Earth911 Merger that was superseded by the 2012 Plan at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to adjustment for certain corporate changes in accordance with the provisions of the plan.

Employee Stock Purchase Plan

On September 17, 2014, our stockholders approved the ESPP. We recorded expense of $37,844 and $61,023 related to the ESPP during the years ended December 31, 2016 and 2015, respectively.

Stock Options

The following table summarizes the stock option activity from January 1, 2015 through December 31, 2016:

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at January 1, 2015

 

 

625,825

 

 

$11.60 — $30.00

 

$

21.28

 

Granted

 

 

280,328

 

 

$6.24 — $11.68

 

$

6.64

 

Canceled/Forfeited

 

 

(163,156

)

 

$10.24 — $30.00

 

$

20.16

 

Outstanding at December 31, 2015

 

 

742,997

 

 

$6.24 — $30.00

 

$

16.32

 

Granted

 

 

767,625

 

 

$2.08  —  $6.40

 

$

3.84

 

Canceled/Forfeited

 

 

(193,220

)

 

$6.24 — $30.00

 

$

12.86

 

Outstanding at December 31, 2016

 

 

1,317,402

 

 

$2.08 — $26.00

 

$

9.09

 

 

The weighted-average grant-date fair value of options granted was $2.81 and $4.40 for the years ended December 31, 2016 and 2015, respectively.

For each of the years ended December 31, 2016 and 2015, the intrinsic value of options outstanding was nil and the intrinsic value of options exercisable was nil.

The following additional information applies to options outstanding at December 31, 2016:

 

Ranges of

Exercise

Prices

 

Outstanding at

December 31,

2016

 

 

Weighted-

Average

Remaining

Contractual

Life

 

 

Weighted-

Average

Exercise

Price

 

 

Exercisable at

December 31,

2016

 

 

Weighted-

Average

Exercise

Price

 

$2.08 - $26.00

 

 

1,317,402

 

 

 

7.9

 

 

$

9.09

 

 

 

603,956

 

 

$

15.00

 

 

The following additional information applies to options outstanding at December 31, 2015:

 

Ranges of

Exercise

Prices

 

Outstanding at

December 31,

2015

 

 

Weighted-

Average

Remaining

Contractual

Life

 

 

Weighted-

Average

Exercise

Price

 

 

Exercisable at

December 31,

2015

 

 

Weighted-

Average

Exercise

Price

 

$6.24 - $30.00

 

 

742,997

 

 

 

6.8

 

 

$

16.32

 

 

 

455,465

 

 

$

19.52

 

 

Stock-based compensation expense for stock based incentive awards was $1,220,917 and $1,315,530 for the years ended December 31, 2016 and 2015, respectively. At December 31, 2016, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, was approximately $1.9 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 3.5 years.

Stock-Based Compensation - We account for all stock-based payment awards made to employees and directors, including stock options and employee stock purchases, based on estimated fair values. We estimate the fair value of share-based payment awards on the date of grant using an option-pricing model and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period, net of forfeitures.

We use the Black-Scholes-Merton option-pricing model as our method of valuation. The fair value is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair value of share-based payment awards on the date of grant as determined by the Black-Scholes-Merton model is affected by our stock price as well as other assumptions. These assumptions include the expected stock price volatility over the term of the awards, the actual and projected employee stock option exercise behaviors, and an estimated forfeiture rate.

The weighted-average estimated value of employee stock options granted during the years ended December 31, 2016 and 2015 were estimated using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

Expected volatility

 

 

100

%

 

 

94

%

Risk-free interest rate

 

 

1.38

%

 

 

1.45

%

Expected dividends

 

 

0.00

%

 

 

0.00

%

Expected term in years

 

 

6.1

 

 

 

4.3

 

 

Net Loss per Share
Net Loss per Share

12. Net Loss per Share

We compute basic loss per share by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. We have potentially dilutive securities outstanding that are not shown in a diluted loss per share calculation because their effect in both 2016 and 2015 would be anti-dilutive. These potentially dilutive securities include options, restricted stock units, and warrants and totaled 3,256,093 and 2,216,878 shares at December 31, 2016 and 2015, respectively.

The following table sets forth the anti-dilutive securities excluded from diluted loss per share:

 

 

 

Years ended December 31,

 

 

 

2016

 

 

2015

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

1,317,402

 

 

 

742,997

 

Warrants

 

 

1,938,691

 

 

 

1,473,881

 

Total anti-dilutive securities excluded from diluted loss per share

 

 

3,256,093

 

 

 

2,216,878

 

 

Supplemental Cash Flow Information
Supplemental Cash Flow Information

13. Supplemental Cash Flow Information

The following is provided as supplemental information to the consolidated statements of cash flows:

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

218,309

 

 

$

221,585

 

Cash paid for income taxes

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash flow activities:

 

 

 

 

 

 

 

 

Common stock issued for consulting services

 

$

1,675,000

 

 

$

 

Warrant liability issued for services

 

$

 

 

$

144

 

Vesting of warrant liability

 

$

 

 

$

(35,001

)

Acquisition of equipment under capital leases

 

$

33,107

 

 

$

398,256

 

 

Subsequent Events
Subsequent Event

 14.  Subsequent Event

On February 24, 2017, Quest 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. The ABL Facility replaces Quest’s Revolving Credit Note and Loan Agreement with Regions, which was paid off and terminated effective February 24, 2017.

Each loan under the ABL Facility bears interest, at the borrowers’ option, at either the base rate, as defined in the agreement, plus a margin ranging from 1.0% to 1.5%, or the LIBOR lending rate for the interest period in effect, plus a margin ranging from 2.0% to 2.5%. The maturity date of the revolving credit facility is February 24, 2022.  

Loans under the equipment loan facility may be requested at any time until February 24, 2019. Each loan under the equipment loan facility bears interest, at the borrower’s option, at either the Base Rate, plus 2.00%, or the LIBOR Lending Rate for the interest period in effect, plus 3.00%. The maturity date of the equipment loan facility is February 24, 2022.

The ABL Facility contains certain specific financial covenants regarding a minimum liquidity requirement and a minimum fixed charge coverage ratio. The minimum fixed charge coverage ratio covenant will not apply until the trailing twelve month period ending as of March 31, 2018. 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.

Quest and LDI are the borrowers under the Citizens Loan Agreement. QRHC and Earth911 are guarantors under the Citizens Loan Agreement.  In addition, obligations under the facility are secured by certain first-priority security interests in substantially all of the tangible and intangible personal property of the borrowers, including a pledge of the capital stock and membership interests, as applicable, of certain of their direct and indirect subsidiaries. The guarantors under the Citizens Loan Agreement have granted a first priority lien on the capital stock and membership interests, as applicable, of certain of their direct and indirect subsidiaries.

Summary of Significant Accounting Policies (Policies)

Principles of Presentation and Consolidation

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the operating activity of QRHC and its subsidiaries for the years ended December 31, 2016 and 2015.

As Quest, Earth911, LDI, Youchange, QVC, and QV One each operate as ecology based green service companies, we did not deem segment reporting necessary.

On August 10, 2016, we filed amended and restated articles of incorporation with the Secretary of State of the state of Nevada to effect a 1-for-8 reverse stock split of our common stock.  The reverse split became effective as of 5:00 p.m. Eastern Time on Wednesday, August 10, 2016, or the Effective Time.  At the Effective Time, each lot of eight shares of common stock issued and outstanding immediately prior to the Effective Time were, automatically and without any further action on the part of our stockholders, converted into and became one share of common stock, and each certificate which, immediately prior to the Effective Time represented pre-reverse split shares, was deemed cancelled and, for all corporate purposes, was deemed to evidence ownership of post-reverse split shares.  In lieu of issuing any fractional shares, we rounded up to the nearest whole share in the event that a stockholder was entitled to receive less than one share of common stock.  As required by GAAP, we retroactively adjusted all share and per share amounts in our consolidated financial statements and notes thereto to reflect the 1-for-8 reverse stock split.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

We use significant estimates when accounting for the carrying amounts of accounts receivable, long-lived assets, goodwill and other intangible assets, stock-based compensation expense, accrued liabilities, and deferred taxes, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

We recognize revenue only when all of the following criteria have been met:

persuasive evidence of an arrangement exists;

delivery has occurred or services have been rendered;

the fee for the arrangement is fixed or determinable; and

collectability is reasonably assured.

Persuasive Evidence of an Arrangement Exists – We document all terms of an arrangement in a service agreement or quote signed or confirmed by the customer prior to recognizing revenue.

Delivery Has Occurred or Services Have Been Rendered – We perform all services or deliver all products prior to recognizing revenue. Services are deemed to be performed when the services are complete.

The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote, service agreement, or accepted customer purchase order.

Collectability Is Reasonably Assured – We assess collectability on a customer by customer basis based on criteria developed by us.

We provide businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. We utilize third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross.  We record amounts collected from customers for sales tax on a net basis. In situations in which we are not primarily obligated, we do not have credit risk, or we determine amounts earned using fixed percentage or fixed payment schedules, we record the net amounts as management fees earned. Currently, we have one contract accounted for as management fees with revenue of $307,571 and $109,846 for the years ended December 31, 2016 and 2015, respectively.  Our gross billings on this management fee contract were $5,042,696 and $1,437,579 for the years ended December 31, 2016 and 2015, respectively.  

We recognize licensing fees ratably over the term of the license. We derive some revenue from advertising contracts, which we recognize ratably over the term that the advertisement appears on our website.

Cash and Cash Equivalents

We consider all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable

We follow the allowance method of recognizing uncollectible accounts receivable, which recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. Credit is extended based on evaluation of each customer’s financial condition and is generally unsecured. Accounts receivable are typically due within 30 days and are stated net of an allowance for doubtful accounts in the consolidated balance sheets. We consider accounts past due if outstanding longer than contractual payment terms. We record an allowance based on consideration of a number of factors, including the length of time trade accounts are past due, our previous loss history, the creditworthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We charge-off accounts receivable after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period we receive the payment.

As of December 31, 2016 and 2015, we had established an allowance of $333,578 and $586,941, respectively, for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivables only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2016 and 2015 were as follows:

 

 

 

Years ended December 31,

 

 

 

2016

 

 

2015

 

Beginning balance

 

$

586,941

 

 

$

760,917

 

Bad debt expense, net of recoveries

 

 

458,919

 

 

 

265,176

 

Uncollectible accounts written off

 

 

(712,282

)

 

 

(439,152

)

Ending balance

 

$

333,578

 

 

$

586,941

 

 

Inventories

Inventories consist of waste disposal and recycling equipment and are stated at the lower of cost (average cost method which approximates first-in, first-out) or market. If required, we establish reserves for inventory to reflect situations in which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory, and current and expected market conditions. We record inventories within “Prepaid expenses and other current assets” in our consolidated balance sheets. As of December 31, 2016 and 2015, all inventories were finished goods with balances of $12,996 and $54,473, respectively, with no reserve for inventory obsolescence at either date.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.

Stock Options

We estimate the fair value of stock options on grant date in accordance with ASC Topic 718, Stock Compensation, using the Black-Scholes-Merton valuation model. Significant assumptions used in the calculation are as follows:

 

We determine the expected term in accordance with SEC Staff Accounting Bulletin No. 107 using the simplified method for plain vanilla options by the average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;

 

We measure the expected volatility using the historical changes in the market price of our common stock and applicable comparison companies;

 

We use the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards to approximate the risk-free interest rate; and

 

We base forfeitures on the history of cancellations of options granted by us and our analysis of potential future forfeitures.

Property and Equipment

We record property and equipment at cost. We provide for depreciation on the straight-line method, over the estimated useful lives of the assets. We amortize leasehold improvements over the shorter of the estimated useful life or the remaining term of the related leases. We charge expenditures for repairs and maintenance to operations as incurred; we capitalize renewals and betterments when they extend the useful life of the asset. We record gains and losses on the disposition of property and equipment in the period incurred. We report assets held for sale, if any, at the lower of the carrying amount or fair value less costs to sell.

The useful lives of property and equipment for purposes of computing depreciation are as follows:

 

Vehicles

 

5 to 7 years

Computer equipment

 

3 to 5 years

Office furniture and fixtures

 

5 to 7 years

Machinery and equipment

 

5 to 7 years

Leasehold improvements

 

5 to 7 years

 

Impairment of Long-Lived Assets

We analyze long-lived assets, including property and equipment and definite-lived intangible assets, that are held and used for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and period at least at each balance sheet date. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. We did not recognize any impairment charges for long-lived assets during 2016 and 2015.        

Goodwill

We record as goodwill the excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree, and the acquisition date fair value of any previous equity interest in the acquired entity over the (ii) fair value of the net identifiable assets acquired. We do not amortize goodwill; however, annually, or whenever there is an indication that goodwill may be impaired, we evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. We performed our Step 1 goodwill impairment analysis in the third quarter of 2016 utilizing an income approach with no impairment recorded.  We believe that the discounted cash flow method best captures the significant value creating activities we are undertaking.  The primary assumptions in our Step 1 income approach included estimating cash flows and projections based on management’s expectations.  We determined that the fair value of our goodwill exceeds our carrying value, and consequently, no impairment was deemed to have occurred.  However, a continued or prolonged period of declining gross margins could result in the write off of a portion or all of our goodwill and other intangible assets in future periods.

Net Loss Per Share

We compute basic net loss per share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2016 and 2015 would be anti-dilutive. These potentially dilutive securities include stock options and warrants and totaled 3,256,093 and 2,216,878 common shares at December 31, 2016 and December 31, 2015, respectively.

Concentrations

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade accounts receivable. We deposit our cash with commercial banks. Cash deposits at commercial banks are at risk to the extent that the balances exceed the Federal Deposit Insurance Corporation insured level per institution. The bank cash balances on deposit may periodically exceed federally insured limits, including $1,320,788 at December 31, 2016; however, we have never experienced any losses related to these balances.

We sell our products and services primarily to consumers, advertisers, and businesses without requiring collateral; however, we routinely assess the financial condition of our customers and maintain allowances for anticipated losses. The following table discloses the number of customers that accounted for more than 10% of our annual revenue and their related receivable balances for the years ended December 31, 2016 and 2015:

 

 

 

Customers Exceeding 10%

of Revenue

 

Year

 

Number of

Customers

 

 

Revenue

Combined Percent

 

 

Accounts Receivable

Combined Percent

 

2016

 

 

2

 

 

 

56

%

 

 

48

%

2015

 

 

2

 

 

 

60

%

 

 

41

%

 

We believe we have no significant credit risk in excess of recorded reserves.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We establish valuation allowances to reduce a deferred tax asset to the amount expected to be realized. We assess our ability to realize deferred tax assets based on current earnings performance and on projections of future taxable income in the relevant tax jurisdictions. These projections do not include taxable income from the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation. We review our estimates of future taxable income annually. We first analyze all tax positions to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, we measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.

If we are required to pay interest on the underpayment of income taxes, we recognize interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.

If we are subject to payment of penalties, we recognize an expense for the amount of the statutory penalty in the period when the position is taken on the income tax return. If we did not recognize the penalty in the period when the position was initially taken, we recognize the expense in the period when we change our judgment about meeting minimum statutory thresholds related to the initial position taken.

Advertising

We charge our advertising costs to expense when incurred. During the years ended December 31, 2016 and 2015, advertising expense totaled $32,720 and $43,670, respectively.

Stock-Based Compensation

We expense all share-based grants to employees, including grants of employee stock options, based on their estimated fair values at grant date, in accordance with ASC Topic 718, Stock Compensation. We record compensation expense for stock options over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes-Merton model. We classify all share-based awards to employees as equity instruments and recognize the vesting of the awards ratably over their respective terms. See Note 11 for a description of our share-based compensation plan and information related to awards granted under the plan.

Share-based payment transactions with non-employees are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, in accordance with ASC Topic 505-50, Equity-Based Payments to Non-Employees.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This standard replaces existing revenue recognition guidance, which in many cases was tailored for specific industries, with a uniform accounting standard applicable to all industries and transactions. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to correlate with the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This new standard, as amended, will be effective for us on January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. While we are still evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements, we currently do not expect it to have a material impact on operating revenues.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in ASU 2014-15 became effective for annual reporting periods ending after December 15, 2016 and interim periods thereafter. The adoption of ASU 2014-15 did not have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases.  The update improves financial reporting about leasing transactions by requiring a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are still evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements, but given the material amount of our future minimum payments under non-cancellable operating leases (primarily office rent) at December 31, 2016 discussed in Note 10, we expect to recognize a material right-of-use lease asset and lease liability upon adoption of the ASU.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The purpose of ASU 2016-09 is to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of such activity on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. We are evaluating the impact of adopting ASU 2016-09 on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. The adoption of ASU 2016-15 will be required on a retrospective basis beginning January 1, 2018, with early adoption permitted. We have not yet determined when we will adopt ASU 2016-15.  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 of potential significance to us.

Summary of Significant Accounting Policies (Tables)

The changes in our allowance for doubtful accounts for the years ended December 31, 2016 and 2015 were as follows:

 

 

 

Years ended December 31,

 

 

 

2016

 

 

2015

 

Beginning balance

 

$

586,941

 

 

$

760,917

 

Bad debt expense, net of recoveries

 

 

458,919

 

 

 

265,176

 

Uncollectible accounts written off

 

 

(712,282

)

 

 

(439,152

)

Ending balance

 

$

333,578

 

 

$

586,941

 

 

The useful lives of property and equipment for purposes of computing depreciation are as follows:

 

Vehicles

 

5 to 7 years

Computer equipment

 

3 to 5 years

Office furniture and fixtures

 

5 to 7 years

Machinery and equipment

 

5 to 7 years

Leasehold improvements

 

5 to 7 years

 

The following table discloses the number of customers that accounted for more than 10% of our annual revenue and their related receivable balances for the years ended December 31, 2016 and 2015:

 

 

 

Customers Exceeding 10%

of Revenue

 

Year

 

Number of

Customers

 

 

Revenue

Combined Percent

 

 

Accounts Receivable

Combined Percent

 

2016

 

 

2

 

 

 

56

%

 

 

48

%

2015

 

 

2

 

 

 

60

%

 

 

41

%

 

Property and Equipment, Net, and Other Assets (Tables)
Components Property and Equipment, Net, and Other Assets

At December 31, 2016 and 2015, Property and equipment, net, and other assets consisted of the following:

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

Vehicles

 

$

544,984

 

 

$

544,984

 

Computer equipment

 

 

990,790

 

 

 

946,929

 

Office furniture and fixtures

 

 

634,547

 

 

 

634,547

 

Machinery and equipment

 

 

971,806

 

 

 

514,042

 

Leasehold improvements

 

 

641,272

 

 

 

641,272

 

    Property and equipment, gross

 

 

3,783,399

 

 

 

3,281,774

 

Accumulated depreciation

 

 

(2,442,549

)

 

 

(1,973,538

)

    Property and equipment, net

 

 

1,340,850

 

 

 

1,308,236

 

Security deposits and other assets

 

 

1,074,071

 

 

 

300,396

 

     Property and equipment, net, and other assets

 

$

2,414,921

 

 

$

1,608,632

 

 

Goodwill and Other Intangible Assets (Tables)

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

 

December 31, 2016

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

8,798,000

 

 

$

3,922,000

 

Trademarks

 

7 years