QUEST RESOURCE HOLDING CORP, 10-Q filed on 11/13/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Nov. 01, 2018
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
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 Non-accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   15,313,383
v3.10.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 1,048,257 $ 1,055,281
Accounts receivable, less allowance for doubtful accounts of $874,828 and $699,102 as of September 30, 2018 and December 31, 2017, respectively 17,152,951 16,263,276
Prepaid expenses and other current assets 1,444,820 1,508,014
Total current assets 19,646,028 18,826,571
Goodwill 58,208,490 58,337,290
Intangible assets, net 2,865,900 5,031,595
Property and equipment, net, and other assets 1,043,779 1,320,342
Total assets 81,764,197 83,515,798
Current liabilities:    
Accounts payable and accrued liabilities 16,506,974 14,253,818
Deferred revenue and other current liabilities 93,919 328,763
Total current liabilities 16,600,893 14,582,581
Revolving credit facility, net 4,934,877 6,763,497
Other long-term liabilities 735 21,990
Total liabilities 21,536,505 21,368,068
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, 2018 and December 31, 2017
Common stock, $0.001 par value, 200,000,000 shares authorized, 15,313,383 and 15,302,455 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively 15,313 15,302
Additional paid-in capital 159,479,506 158,867,600
Accumulated deficit (99,267,127) (96,735,172)
Total stockholders’ equity 60,227,692 62,147,730
Total liabilities and stockholders’ equity $ 81,764,197 $ 83,515,798
v3.10.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (Unaudited) - USD ($)
Sep. 30, 2018
Dec. 31, 2017
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts receivable $ 874,828 $ 699,102
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 15,313,383 15,302,455
Common stock, shares outstanding 15,313,383 15,302,455
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Income Statement [Abstract]        
Revenue $ 25,920,215 $ 31,930,550 $ 78,544,764 $ 115,840,966
Cost of revenue 21,449,658 27,904,006 66,098,602 103,180,609
Gross profit 4,470,557 4,026,544 12,446,162 12,660,357
Operating expenses:        
Selling, general, and administrative 4,638,585 3,977,662 12,269,625 13,539,654
Depreciation and amortization 406,726 1,002,687 2,372,916 2,999,747
Total operating expenses 5,045,311 4,980,349 14,642,541 16,539,401
Operating loss (574,754) (953,805) (2,196,379) (3,879,044)
Other expense:        
Interest expense (106,140) (126,507) (335,576) (361,273)
Total other expense (106,140) (126,507) (335,576) (361,273)
Loss before taxes (680,894) (1,080,312) (2,531,955) (4,240,317)
Net loss (680,894) (1,080,312) (2,531,955) (4,240,317)
Net loss applicable to common stockholders $ (680,894) $ (1,080,312) $ (2,531,955) $ (4,240,317)
Net loss per share        
Basic and diluted $ (0.04) $ (0.07) $ (0.17) $ (0.28)
Weighted average number of common shares outstanding        
Basic and diluted 15,313,383 15,281,324 15,307,939 15,276,741
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - 9 months ended Sep. 30, 2018 - 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 593,521   593,521  
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 loss (2,531,955)     (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    
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities:    
Net loss $ (2,531,955) $ (4,240,317)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation 301,651 339,272
Amortization of intangibles 2,207,840 2,787,236
Amortization of debt issuance costs 70,426 54,775
Provision for doubtful accounts 1,005,622 618,939
Stock-based compensation 593,521 1,540,817
Changes in operating assets and liabilities:    
Accounts receivable (1,895,297) 14,179,492
Prepaid expenses and other current assets 63,194 140,431
Security deposits and other assets 264,868 533,810
Accounts payable and accrued liabilities 2,253,156 (17,482,818)
Deferred revenue and other liabilities (220,098) (113,269)
Net cash provided by (used in) operating activities 2,112,928 (1,641,632)
Cash flows from investing activities:    
Purchase of property and equipment (43,371) (40,167)
Purchase of capitalized software development (159,930) (207,889)
Net cash used in investing activities (203,301) (248,056)
Cash flows from financing activities:    
Proceeds from credit facilities 74,818,231 81,939,205
Repayments of credit facilities (76,717,277) (79,991,362)
Debt issuance costs   (234,334)
Proceeds from shares issued for Employee Stock Purchase Plan 18,396 11,972
Repayments of capital lease obligations (36,001) (48,206)
Net cash provided by (used in) financing activities (1,916,651) 1,677,275
Net decrease in cash and cash equivalents (7,024) (212,413)
Cash and cash equivalents at beginning of period 1,055,281 1,328,174
Cash and cash equivalents at end of period 1,048,257 1,115,761
Supplemental cash flow information:    
Cash paid for interest 271,620 270,094
Supplemental non-cash activities:    
Sale of goodwill and intangible assets 246,585  
Investment in Earth Media Partners, LLC (246,585)  
Repayment of Regions line of credit   (9,250,000)
ABL Facility [Member]    
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Amortization of debt issuance costs $ 70,426  
Supplemental non-cash activities:    
Draw on Citizens ABL facility   9,250,000
Draw on Citizens ABL facility for repayment of capital lease obligation   212,609
Debt issuance costs financed with Citizens ABL facility   $ 235,173
v3.10.0.1
The Company, Description of Business, and Liquidity
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
The Company, Description of Business, and Liquidity

1. The Company, Description of Business, and Liquidity

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.  

Liquidity – As of September 30, 2018 and December 31, 2017, our working capital balance was $3,045,135 and $4,243,990, respectively.

v3.10.0.1
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2018
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, 2017. 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, 2018 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2017 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, 2018 are not necessarily indicative of the results to be expected for the full year.

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 2018 and 2017 would be anti-dilutive. These potentially dilutive securities include stock options and warrants and totaled 3,486,131 and 3,094,321 shares at September 30, 2018 and 2017, respectively.

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

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

1,752,566

 

 

 

1,360,756

 

Warrants

 

 

1,733,565

 

 

 

1,733,565

 

Total anti-dilutive securities excluded from diluted loss per share

 

 

3,486,131

 

 

 

3,094,321

 

 

Recent Accounting Pronouncements

Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). On January 1, 2018, we adopted ASU 2014-09 using the full retrospective approach for all ongoing customer contracts.  There was no impact to our financial statements as a result of adopting ASU 2014-09 for the nine months ended September 30, 2018 and 2017.  See Note 8 for additional information and disclosures related to this amended guidance.

Pending Adoption

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  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. We will adopt ASU 2016-02 in the first quarter of 2019 and are in the process of aggregating and evaluating lease arrangements and implementing new processes.  Although we are still in the process of evaluating the impact of adoption of the ASU on our consolidated financial statements, we currently believe that the most significant change will be related to the recognition of a right-of-use asset and lease liability on our balance sheet for our real estate operating lease.  The impact on our results of operations and cash flows is not expected to be material.

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, 2020, with early adoption permitted on January 1, 2019.  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.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40).  The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, with early adoption permitted.  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.

v3.10.0.1
Property and Equipment, Net, and Other Assets
9 Months Ended
Sep. 30, 2018
Property Plant And Equipment [Abstract]  
Property and Equipment, Net, and Other Assets

3. Property and Equipment, net, and Other Assets

At September 30, 2018 and December 31, 2017, property and equipment, net, and other assets consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,446,746

     and $2,193,231 as of September 30, 2018 and December 31, 2017,

     respectively

 

$

698,587

 

 

$

956,867

 

Security deposits and other assets

 

 

345,192

 

 

 

363,475

 

    Property and equipment, net, and other assets

 

$

1,043,779

 

 

$

1,320,342

 

 

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, 2018 was $97,679, including $45,576 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 $301,651 for the nine months ended September 30, 2018, including $136,574 of depreciation expense reflected within “Cost of revenue.”  Depreciation expense for the three months ended September 30, 2017 was $110,582, including $43,462 of depreciation expense reflected within “Cost of revenue,” and was $339,272 for the nine months ended September 30, 2017, including $126,761 of depreciation expense reflected within “Cost of revenue.”  At September 30, 2018, the carrying value of our capital lease assets was $165,630, net of $334,467 of accumulated depreciation. At December 31, 2017, the carrying value of our capital lease assets was $243,778, net of $256,319 of accumulated depreciation.

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 revenues, and accounts receivable as of the Closing Date.  Following 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 $39,521 related to the earn-out as of September 30, 2018.  The carrying amount of our investment and the accrued earn-out receivable are included in other assets.  

v3.10.0.1
Goodwill and Other Intangible Assets
9 Months Ended
Sep. 30, 2018
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, 2018 (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

 

 

6,242,055

 

 

 

4,637,624

 

 

 

1,604,431

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,890,791

 

 

 

631,822

 

 

 

1,258,969

 

Customer lists

 

5 years

 

 

307,153

 

 

 

304,653

 

 

 

2,500

 

Total finite lived intangible assets

 

 

 

$

21,390,682

 

 

$

18,524,782

 

 

$

2,865,900

 

 

December 31, 2017

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

11,342,000

 

 

$

1,378,000

 

Trademarks

 

7 years

 

 

6,242,055

 

 

 

3,969,576

 

 

 

2,272,479

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,904,279

 

 

 

548,163

 

 

 

1,356,116

 

Customer lists

 

5 years

 

 

307,153

 

 

 

282,153

 

 

 

25,000

 

Total finite lived intangible assets

 

 

 

$

21,404,170

 

 

$

16,372,575

 

 

$

5,031,595

 

 

 

 

 

 

Carrying

Amount

 

Changes in goodwill:

 

 

 

 

 

 

Goodwill balance at December 31, 2017

 

 

 

$

58,337,290

 

Adjustment related to Earth911, Inc. asset sale

 

 

 

 

(128,800

)

Goodwill balance at September 30, 2018

 

 

 

$

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 $354,623 and $935,567 for the three months ended September 30, 2018 and 2017, respectively. Amortization expense related to finite lived intangible assets was $2,207,840 and $2,787,236 for the nine months ended September 30, 2018 and 2017, respectively.

 

We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes.  See Note 3 for discussion of sale of certain assets related to Earth911, Inc.

 

We performed our annual impairment analysis for goodwill and other intangible assets in the third quarter of 2018 with no impairment recorded.

v3.10.0.1
Accounts Payable and Accrued Liabilities
9 Months Ended
Sep. 30, 2018
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,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Accounts payable

 

$

14,857,300

 

 

$

12,739,117

 

Accrued taxes

 

 

599,755

 

 

 

807,037

 

Employee compensation

 

 

610,998

 

 

 

434,358

 

Other

 

 

438,921

 

 

 

273,306

 

 

 

$

16,506,974

 

 

$

14,253,818

 

 


v3.10.0.1
Revolving Credit Facility
9 Months Ended
Sep. 30, 2018
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% (6.50% as of September 30, 2018), or the LIBOR lending rate for the interest period in effect, plus a margin ranging from 2.0% to 2.5% (4.46% as of September 30, 2018). The maturity date of the ABL 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 our option, at either the Base Rate, as defined in the Citizens Loan Agreement, 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.  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, 2018 and 2017 was $81,644 and $100,511, respectively.  The amount of interest expense related to borrowings for the nine months ended September 30, 2018 and 2017 was $247,071 and $297,870, respectively.  Debt issuance cost of $469,507 is being amortized to interest expense over the life of the ABL Facility beginning March 1, 2017.  As of September 30, 2018, the unamortized portion of the debt issuance costs was $320,830.  The amount of interest expense related to the amortization of the discount on the ABL Facility for the nine months ended September 30, 2018 was $70,426.  As of September 30, 2018, the ABL Facility borrowing base availability was $11,974,000 and the outstanding liability was $4,934,877, net of unamortized debt issuance cost of $320,830. There were no draws made on the equipment loan facility as of September 30, 2018.

v3.10.0.1
Capital Lease Obligations
9 Months Ended
Sep. 30, 2018
Debt Disclosure [Abstract]  
Capital Lease Obligations

7. Capital Lease Obligations

At September 30, 2018 and December 31, 2017, total capital lease obligations outstanding consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Capital lease obligations, imputed interest at 4.99% to 13.29%, with monthly payments of approximately $6,000, expiring through September 2019, secured by computer and office equipment

 

$

5,663

 

 

$

41,664

 

Total

 

 

5,663

 

 

 

41,664

 

Less: current maturities

 

 

(5,663

)

 

 

(39,067

)

Long-term portion

 

$

 

 

$

2,597

 

 

Our capital lease obligations are included within “Deferred revenue and other current liabilities” and “Other long-term liabilities” in our condensed consolidated balance sheets.  The amount of interest expense related to our capital leases for the three months ended September 30, 2018 and 2017 was $232 and $992, respectively.  The amount of interest expense related to our capital leases for the nine months ended September 30, 2018 and 2017 was $1,275 and $5,090, respectively.

v3.10.0.1
Revenue
9 Months Ended
Sep. 30, 2018
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.  We previously had a contract accounted for as a net basis management fee contract, with revenue of $78,145 and gross billings of $2,173,022 for the nine months ended September 30, 2017.  This management fee contract ended in the second quarter of 2017, and we currently have no other net basis contracts.

Disaggregation of Revenue

The following table presents our revenue disaggregated by source.  Sales and usage-based taxes are excluded from revenue.  Three customers accounted for 48.6% of revenue for the three months ended September 30, 2018, and three customers accounted for 52.0% of revenue for the three months ended September 30, 2017.  Three customers accounted for 50.1% of revenue for the nine months ended September 30, 2018, and three customers accounted for 57.8% of revenue for the nine months ended September 30, 2017.  We operate primarily in the United States, with minor services in Canada.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenue Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

23,412,066

 

 

$

29,128,182

 

 

$

70,742,475

 

 

$

107,044,434

 

Product sales and other

 

 

2,508,149

 

 

 

2,802,368

 

 

 

7,802,289

 

 

 

8,796,532

 

   Total revenue

 

$

25,920,215

 

 

$

31,930,550

 

 

$

78,544,764

 

 

$

115,840,966

 

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, 2018 and December 31, 2017, we had $61,200 and $136,139, respectively, of deferred contract costs.  During the three months ended September 30, 2018, we amortized $53,750 and nil of deferred contract costs to selling, general, and administrative expense and as a reduction to income, respectively.  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.  During the three months ended September 30, 2017, we amortized nil and $18,070 of deferred contract costs to selling, general, and administrative expense and as a reduction to income, respectively.  During the nine months ended September 30, 2017, we amortized $110,000 and $54,208 of deferred contract costs to selling, general, and administrative expense and as a reduction to income, respectively.

Certain customers are billed in advance, and, accordingly, recognition of related revenues is deferred as a contract liability until the services are provided and control transferred to the customer.  As of September 30, 2018 and December 31, 2017, we had $88,991 and $309,089, respectively, of deferred revenue, the majority of which was classified in “Deferred revenue and other current liabilities.”

v3.10.0.1
Income Taxes
9 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

9. 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 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, 2018 and December 31, 2017, and we have recorded a valuation allowance of $11,980,000 and $12,150,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of September 30, 2018 and December 31, 2017, we had federal income tax net operating loss carryforwards of approximately $19,500,000 and $19,700,000, which expire at various dates beginning in 2031.

On December 22, 2017, The Tax Cuts and Jobs Act (the “2017 Act”) was enacted. The most significant impact to us of the 2017 Act was a decrease in the federal corporate income tax rate from 35% to 21% beginning in 2018.

 

v3.10.0.1
Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2018
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, the ABL Facility, 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 the ABL Facility, based on borrowing rates currently available to us for loans with similar terms and maturities.

 

v3.10.0.1
Stockholders' Equity
9 Months Ended
Sep. 30, 2018
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 15,313,383 and 15,302,455 shares were issued and outstanding as of September 30, 2018 and December 31, 2017, respectively.

Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved our 2014 Employee Stock Purchase Plan (“ESPP”).  On May 16, 2018, we issued 10,928 shares of common stock to employees for $18,396 under our ESPP for options that vested and were exercised.  We recorded expense of $9,317 and $14,686 related to the ESPP for the nine months ended September 30, 2018 and 2017, respectively.

Warrants – At September 30, 2018, we had outstanding exercisable warrants to purchase 1,733,565 shares of common stock.  

The following table summarizes the warrants issued and outstanding as of September 30, 2018:

 

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

Exercisable warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

09/24/2014

 

09/24/2019

 

$

20.00

 

 

 

1,125,005

 

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

 

 

 

 

 

 

1,733,565

 

Stock Options – We recorded stock option expense of $584,204 and $479,256 for the nine months ended September 30, 2018 and 2017, respectively.  The following table summarizes the stock option activity for the nine months ended September 30, 2018:

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at December 31, 2017

 

 

1,389,816

 

 

$1.17 — $26.00

 

$

8.39

 

Granted

 

 

400,000

 

 

$2.39  —  $2.47

 

$

2.39

 

Canceled/Forfeited

 

 

(37,250

)

 

$2.39 — $23.20

 

$

5.98

 

Outstanding at September 30, 2018

 

 

1,752,566

 

 

$1.17 — $26.00

 

$

7.07

 

 

v3.10.0.1
Summary of Significant Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2018
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, 2017. 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, 2018 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2017 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, 2018 are not necessarily indicative of the results to be expected for the full year.

Net Loss Per Share

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 2018 and 2017 would be anti-dilutive. These potentially dilutive securities include stock options and warrants and totaled 3,486,131 and 3,094,321 shares at September 30, 2018 and 2017, respectively.

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

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

1,752,566

 

 

 

1,360,756

 

Warrants

 

 

1,733,565

 

 

 

1,733,565

 

Total anti-dilutive securities excluded from diluted loss per share

 

 

3,486,131

 

 

 

3,094,321

 

 

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). On January 1, 2018, we adopted ASU 2014-09 using the full retrospective approach for all ongoing customer contracts.  There was no impact to our financial statements as a result of adopting ASU 2014-09 for the nine months ended September 30, 2018 and 2017.  See Note 8 for additional information and disclosures related to this amended guidance.

Pending Adoption

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  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. We will adopt ASU 2016-02 in the first quarter of 2019 and are in the process of aggregating and evaluating lease arrangements and implementing new processes.  Although we are still in the process of evaluating the impact of adoption of the ASU on our consolidated financial statements, we currently believe that the most significant change will be related to the recognition of a right-of-use asset and lease liability on our balance sheet for our real estate operating lease.  The impact on our results of operations and cash flows is not expected to be material.

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, 2020, with early adoption permitted on January 1, 2019.  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.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40).  The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, with early adoption permitted.  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.

v3.10.0.1
Summary of Significant Accounting Policies (Tables)
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
Schedule of Anti-dilutive Securities Excluded from Diluted Loss Per Share

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

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

1,752,566

 

 

 

1,360,756

 

Warrants

 

 

1,733,565

 

 

 

1,733,565

 

Total anti-dilutive securities excluded from diluted loss per share

 

 

3,486,131

 

 

 

3,094,321

 

 

v3.10.0.1
Property and Equipment, Net, and Other Assets (Tables)
9 Months Ended
Sep. 30, 2018
Property Plant And Equipment [Abstract]  
Components Property and Equipment, Net, and Other Assets

At September 30, 2018 and December 31, 2017, property and equipment, net, and other assets consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,446,746

     and $2,193,231 as of September 30, 2018 and December 31, 2017,

     respectively

 

$

698,587

 

 

$

956,867

 

Security deposits and other assets

 

 

345,192

 

 

 

363,475

 

    Property and equipment, net, and other assets

 

$

1,043,779

 

 

$

1,320,342

 

 

v3.10.0.1
Goodwill and Other Intangible Assets (Tables)
9 Months Ended
Sep. 30, 2018
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, 2018 (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

 

 

6,242,055

 

 

 

4,637,624

 

 

 

1,604,431

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,890,791

 

 

 

631,822

 

 

 

1,258,969

 

Customer lists

 

5 years

 

 

307,153

 

 

 

304,653

 

 

 

2,500

 

Total finite lived intangible assets

 

 

 

$

21,390,682

 

 

$

18,524,782

 

 

$

2,865,900

 

 

December 31, 2017

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

11,342,000

 

 

$

1,378,000

 

Trademarks

 

7 years

 

 

6,242,055

 

 

 

3,969,576

 

 

 

2,272,479

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,904,279

 

 

 

548,163

 

 

 

1,356,116

 

Customer lists

 

5 years

 

 

307,153

 

 

 

282,153

 

 

 

25,000

 

Total finite lived intangible assets

 

 

 

$

21,404,170

 

 

$

16,372,575

 

 

$

5,031,595

 

 

Schedule of Changes in Goodwill

 

 

 

 

 

Carrying

Amount

 

Changes in goodwill:

 

 

 

 

 

 

Goodwill balance at December 31, 2017

 

 

 

$

58,337,290

 

Adjustment related to Earth911, Inc. asset sale

 

 

 

 

(128,800

)

Goodwill balance at September 30, 2018

 

 

 

$

58,208,490

 

 

v3.10.0.1
Accounts Payable and Accrued Liabilities (Tables)
9 Months Ended
Sep. 30, 2018
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,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Accounts payable

 

$

14,857,300

 

 

$

12,739,117

 

Accrued taxes

 

 

599,755

 

 

 

807,037

 

Employee compensation

 

 

610,998

 

 

 

434,358

 

Other

 

 

438,921

 

 

 

273,306

 

 

 

$

16,506,974

 

 

$

14,253,818

 

 

v3.10.0.1
Capital Lease Obligations (Tables)
9 Months Ended
Sep. 30, 2018
Debt Disclosure [Abstract]  
Summary of Capital Lease Obligations

At September 30, 2018 and December 31, 2017, total capital lease obligations outstanding consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Capital lease obligations, imputed interest at 4.99% to 13.29%, with monthly payments of approximately $6,000, expiring through September 2019, secured by computer and office equipment

 

$

5,663

 

 

$

41,664

 

Total

 

 

5,663

 

 

 

41,664

 

Less: current maturities

 

 

(5,663

)

 

 

(39,067

)

Long-term portion

 

$

 

 

$

2,597

 

 

v3.10.0.1
Revenue (Tables)
9 Months Ended
Sep. 30, 2018
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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenue Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

23,412,066

 

 

$

29,128,182

 

 

$

70,742,475

 

 

$

107,044,434

 

Product sales and other

 

 

2,508,149

 

 

 

2,802,368

 

 

 

7,802,289

 

 

 

8,796,532

 

   Total revenue

 

$

25,920,215

 

 

$

31,930,550

 

 

$

78,544,764

 

 

$

115,840,966

 

 

v3.10.0.1
Stockholders' Equity (Tables)
9 Months Ended
Sep. 30, 2018
Equity [Abstract]  
Summary of Warrants Issued and Outstanding

The following table summarizes the warrants issued and outstanding as of September 30, 2018:

 

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

Exercisable warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

09/24/2014

 

09/24/2019

 

$

20.00

 

 

 

1,125,005

 

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

 

 

 

 

 

 

1,733,565

 

 

Summary of Stock Option Activity

The following table summarizes the stock option activity for the nine months ended September 30, 2018

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at December 31, 2017

 

 

1,389,816

 

 

$1.17 — $26.00

 

$

8.39

 

Granted

 

 

400,000

 

 

$2.39  —  $2.47

 

$

2.39

 

Canceled/Forfeited

 

 

(37,250

)

 

$2.39 — $23.20

 

$

5.98

 

Outstanding at September 30, 2018

 

 

1,752,566

 

 

$1.17 — $26.00

 

$

7.07

 

 

v3.10.0.1
The Company, Description of Business, and Liquidity - Additional Information (Detail) - USD ($)
Sep. 30, 2018