QUEST RESOURCE HOLDING CORP, 10-Q filed on 5/14/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
May 01, 2020
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Trading Symbol QRHC  
Entity Registrant Name Quest Resource Holding Corporation  
Entity Central Index Key 0001442236  
Entity Current Reporting Status Yes  
Current Fiscal Year End Date --12-31  
Entity Filer Category Non-accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   15,372,905
Entity File Number 001-36451  
Entity Tax Identification Number 51-0665952  
Entity Address, Address Line One 3481 Plano Parkway  
Entity Address, City or Town The Colony  
Entity Address, State or Province TX  
Entity Address, Postal Zip Code 75056  
City Area Code 972  
Local Phone Number 464-0004  
Entity Interactive Data Current Yes  
Title of 12(b) Security Common stock  
Entity Incorporation, State or Country Code NV  
Security Exchange Name NASDAQ  
Document Quarterly Report true  
Document Transition Report false  
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 3,349,913 $ 3,411,108
Accounts receivable, less allowance for doubtful accounts of $797,344 and $767,464 as of March 31, 2020 and December 31, 2019, respectively 15,185,267 13,899,451
Prepaid expenses and other current assets 1,374,509 1,110,266
Total current assets 19,909,689 18,420,825
Goodwill 58,208,490 58,208,490
Intangible assets, net 1,304,371 1,590,524
Property and equipment, net, and other assets 2,260,480 2,436,094
Total assets 81,683,030 80,655,933
Current liabilities:    
Accounts payable and accrued liabilities 14,336,339 13,316,805
Deferred revenue and other current liabilities 22,610 19,644
Total current liabilities 14,358,949 13,336,449
Revolving credit facility, net 4,553,025 4,534,683
Other long-term liabilities 981,354 1,140,749
Total liabilities 19,893,328 19,011,881
Commitments and contingencies
Stockholders’ equity:    
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2020 and December 31, 2019
Common stock, $0.001 par value, 200,000,000 shares authorized, 15,372,905 shares issued and outstanding as of March 31, 2020 and December 31, 2019 15,373 15,373
Additional paid-in capital 161,235,389 160,858,072
Accumulated deficit (99,461,060) (99,229,393)
Total stockholders’ equity 61,789,702 61,644,052
Total liabilities and stockholders’ equity $ 81,683,030 $ 80,655,933
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (Unaudited) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts receivable $ 797,344 $ 767,464
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 15,372,905 15,372,905
Common stock, shares outstanding 15,372,905 15,372,905
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Income Statement [Abstract]    
Revenue $ 25,331,814 $ 26,649,041
Cost of revenue 20,788,816 22,106,196
Gross profit 4,542,998 4,542,845
Operating expenses:    
Selling, general, and administrative 4,409,323 4,214,230
Depreciation and amortization 333,753 325,787
Total operating expenses 4,743,076 4,540,017
Operating income (loss) (200,078) 2,828
Interest expense 84,321 111,811
Loss before taxes (284,399) (108,983)
Income tax expense (benefit) (52,732) 54,769
Net loss (231,667) (163,752)
Net loss applicable to common stockholders $ (231,667) $ (163,752)
Net loss per share applicable to common stockholders    
Basic $ (0.02) $ (0.01)
Diluted $ (0.02) $ (0.01)
Weighted average number of common shares outstanding    
Basic 15,396,703 15,328,870
Diluted 15,396,703 15,328,870
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - USD ($)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit [Member]
Beginning Balance at Dec. 31, 2018 $ 60,542,718 $ 15,329 $ 159,701,542 $ (99,174,153)
Beginning Balance, Shares at Dec. 31, 2018   15,328,870    
Stock-based compensation 204,031   204,031  
Net loss (163,752)     (163,752)
Ending Balance at Mar. 31, 2019 60,582,997 $ 15,329 159,905,573 (99,337,905)
Ending Balance, Shares at Mar. 31, 2019   15,328,870    
Beginning Balance at Dec. 31, 2019 61,644,052 $ 15,373 160,858,072 (99,229,393)
Beginning Balance, Shares at Dec. 31, 2019   15,372,905    
Stock-based compensation 377,317   377,317  
Net loss (231,667)     (231,667)
Ending Balance at Mar. 31, 2020 $ 61,789,702 $ 15,373 $ 161,235,389 $ (99,461,060)
Ending Balance, Shares at Mar. 31, 2020   15,372,905    
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Cash flows from operating activities:    
Net loss $ (231,667) $ (163,752)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation 50,220 67,516
Amortization of intangibles 297,351 291,769
Amortization of debt issuance costs 23,475 23,475
Provision for doubtful accounts 30,824 60,000
Stock-based compensation 377,317 204,031
Changes in operating assets and liabilities:    
Accounts receivable (1,316,640) (1,081,386)
Prepaid expenses and other current assets (264,243) (181,116)
Security deposits and other assets 13,005 (12,732)
Accounts payable and accrued liabilities 1,000,267 857,244
Deferred revenue and other liabilities 2,967 (19,205)
Net cash provided by (used in) operating activities (17,124) 45,844
Cash flows from investing activities:    
Purchase of property and equipment (27,740)  
Purchase of capitalized software development (11,198) (41,248)
Net cash used in investing activities (38,938) (41,248)
Cash flows from financing activities:    
Proceeds from credit facilities 23,630,642 25,526,171
Repayments of credit facilities (23,635,775) (25,586,575)
Repayments of finance lease obligations   (1,027)
Net cash used in financing activities (5,133) (61,431)
Net decrease in cash and cash equivalents (61,195) (56,835)
Cash and cash equivalents at beginning of period 3,411,108 2,122,297
Cash and cash equivalents at end of period 3,349,913 2,065,462
Supplemental cash flow information:    
Cash paid for interest 56,482 $ 95,171
Cash paid for income taxes $ 50,233  
v3.20.1
The Company and Description of Business
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
The Company and Description of Business

1. The Company and Description of Business

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

Operations – We are a national provider of waste and recycling services to customers from across multiple industry sectors that are typically larger, multi-location businesses.  We create customer-specific programs and perform the related services for the collection, processing, recycling, disposal, and tracking of waste streams and recyclables.

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.  The waste management and recycling services we provide are currently designated an essential critical infrastructure business under the President’s COVID-19 guidance, the continued operation of which is vital for national public health, safety and national economic security.  The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and subcontractors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.

v3.20.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2020
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, 2019. 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 March 31, 2020 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2019 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 three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

Adopted

On January 1, 2020, we adopted Accounting Standards Update (“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.  This guidance also requires entities to present the expense in the same line item in the statement of operations as the fees associated with the hosting arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The adoption of the standard did not have a material effect on our consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848):  Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  This standard provides operational guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate (LIBOR).  The amendments are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.  The expedients and exceptions provided by the amendments generally do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.  As further discussed in Note 6, our ABL facility provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable.   As such, we do not expect the transition away from LIBOR to have a material impact on our financial statements.

Pending Adoption

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes – (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions and amending guidance to improve consistent application of accounting over income taxes. This guidance is effective January 1, 2021 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.

v3.20.1
Property and Equipment, Net, and Other Assets
3 Months Ended
Mar. 31, 2020
Property Plant And Equipment [Abstract]  
Property and Equipment, Net, and Other Assets

3. Property and Equipment, net, and Other Assets

At March 31, 2020 and December 31, 2019, property and equipment, net, and other assets consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,044,540

     and $1,994,320 as of March 31, 2020 and December 31, 2019,

     respectively

 

$

511,985

 

 

$

534,465

 

Right-of-use operating lease asset

 

 

1,454,914

 

 

 

1,595,044

 

Security deposits and other assets

 

 

293,581

 

 

 

306,585

 

    Property and equipment, net, and other assets

 

$

2,260,480

 

 

$

2,436,094

 

 

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 March 31, 2020 was $50,220, including $13,818 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.  Depreciation expense for the three months ended March 31, 2019 was $67,516, including $33,498 of depreciation expense reflected within “Cost of revenue.”

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

On February 20, 2018 (the “Closing Date”), we entered into an Asset Purchase Agreement with Earth Media Partners, LLC to sell certain assets of our wholly owned subsidiary, Earth911, Inc., in exchange for a 19% interest in Earth Media Partners, LLC, which was recorded as an investment in the amount of $246,585 as of the Closing Date, and a potential future earn-out amount of approximately $350,000.  The net assets sold related to the Earth911.com website business and consisted primarily of the website and its content and customers, deferred revenue, and accounts receivable as of the Closing Date.  Earth911, Inc. was subsequently renamed Quest Sustainability Services, Inc.  The carrying amount of our investment in Earth Media Partners, LLC is included in “Security deposits and other assets” and we have an accrued receivable in the amount of $188,429 related to the earn-out included in “Accounts receivable” as of March 31, 2020.

v3.20.1
Goodwill and Other Intangible Assets
3 Months Ended
Mar. 31, 2020
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:

  

March 31, 2020 (Unaudited)

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,068

 

 

 

5,973,719

 

 

 

261,349

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,101,831

 

 

 

1,058,809

 

 

 

1,043,022

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,594,735

 

 

$

20,290,364

 

 

$

1,304,371

 

 

December 31, 2019

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,069

 

 

 

5,751,037

 

 

 

484,032

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,090,633

 

 

 

984,141

 

 

 

1,106,492

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,583,538

 

 

$

19,993,014

 

 

$

1,590,524

 

 

March 31, 2020 (Unaudited) and December 31, 2019

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,208,490

 

 

 

 

 

We compute amortization using the straight-line method over the estimated useful lives of the finite lived intangible assets. Amortization expense related to finite lived intangible assets was $297,351 and $291,769 for the three months ended March 31, 2020 and 2019, respectively.

 

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

 

We performed our annual impairment analysis for goodwill and other intangible assets in the third quarter of 2019 with no impairment recorded.  During the 2019 impairment assessment, our operations unit had a fair value substantially in excess of the carrying value.  In addition to the annual impairment test, we are required to regularly assess whether a triggering event has occurred which would require interim testing.  We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on our operations. Currently, we have determined that a triggering event has not occurred that would require an interim impairment test to be performed.  However, we refer you to our comment in Note 1 as it relates to the impact of COVID-19 and certain economic uncertainties.

v3.20.1
Accounts Payable and Accrued Liabilities
3 Months Ended
Mar. 31, 2020
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:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Accounts payable

 

$

12,558,057

 

 

$

10,436,715

 

Accrued taxes

 

 

652,356

 

 

 

716,545

 

Employee compensation

 

 

378,453

 

 

 

1,384,360

 

Operating lease liability - current portion

 

 

631,760

 

 

 

627,896

 

Other

 

 

115,713

 

 

 

151,289

 

 

 

$

14,336,339

 

 

$

13,316,805

 

 

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

v3.20.1
Notes Payable
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
Notes Payable

6. Notes Payable

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.

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% (4.50% as of March 31, 2020), or the LIBOR lending rate for the interest period in effect, plus a margin ranging from 2.0% to 2.5% (3.89% as of March 31, 2020). The maturity date of the ABL Facility is February 24, 2022.  

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

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 March 31, 2020 and 2019 was $60,845 and $86,742, respectively.  Debt issuance cost of $469,507 is being amortized to interest expense over the term of the ABL Facility.  As of March 31, 2020, the unamortized portion of the debt issuance costs was $179,978.  The amount of interest expense related to the amortization of the discount on the ABL Facility for the three months ended March 31, 2020 and 2019 was $23,475.  As of March 31, 2020, the ABL Facility borrowing base availability was $11,221,000, of which $4,733,003 principal was outstanding.  The outstanding liability as of March 31, 2020 was $4,553,025, net of unamortized debt issuance cost of $179,978.

As a result of the uncertainty surrounding the COVID-19 pandemic and its impact on our operating results, which cannot be reasonably estimated at this time, we applied for, and on May 5, 2020, we received loan proceeds of $1.4 million under the Paycheck Protection Program (“PPP”) under a promissory note from BMO Harris Bank National Association (the “PPP Loan”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration.  The PPP Loan has a two-year term and bears interest at an annual interest rate of 1%.  Monthly principal and interest payments are deferred for six months, and the maturity date is April 30, 2022.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP.  Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities.  However, no assurance is provided that forgiveness for any portion of the PPP Loan will be obtained.

v3.20.1
Leases
3 Months Ended
Mar. 31, 2020
Lessee Disclosure [Abstract]  
Leases

7. Leases

ASU 2016-02 Adoption

On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), and the related amendments.  We used the optional transition method of adoption, in which the cumulative effect of initially applying the new standard, as of January 1, 2019, to our existing leases was approximately $2.0 million and $2.2 million to record the operating lease right-of-use asset and the related liabilities, respectively, all of which relate to our corporate office lease.  Leases with terms of 12 months or less are not recorded on the balance sheet.

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

We lease certain equipment to a customer under a lease arrangement that expires in 2020.  The capital lease receivable amounts were approximately $2,400 and $5,000 at March 31, 2020 and December 31, 2019, respectively, the majority of which was included in Prepaid expenses and other current assets.  

Balance Sheet Classification

The table below presents the lease related assets and liabilities recorded on the balance sheet. Right-of-use assets and related liabilities related to finance leases at March 31, 2020 are de minimis and mature in less than 12 months.

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

Operating Leases:

 

(Unaudited)

 

 

 

 

 

 

Right-of-use operating lease asset:

 

 

 

 

 

 

 

   Property and equipment, net and other assets

$

1,454,914

 

 

$

1,595,044

 

 

 

 

 

 

 

 

 

Lease Liabilities:

 

 

 

 

 

 

 

   Accounts payable and accrued liabilities

$

631,760

 

 

$

627,896

 

   Other long-term liabilities

 

977,186

 

 

 

1,136,583

 

       Total operating lease liabilities

$

1,608,946

 

 

$

1,764,479

 

Lease Costs

For the three months ended March 31, 2020, we recorded approximately $150,000 of fixed cost operating lease expense.  Our operating lease expense is offset by a minimum annual incentive received from a local Economic Development Council, which is accrued monthly and will continue over the term of the lease through August 2022.  This minimum annual incentive is $63,000, which will increase to $93,600 for the annual incentive period starting September 2020 through the remainder of the lease term.

Effective December 1, 2019, we subleased a portion of our corporate office space to a single tenant.  The sublease agreement is accounted for as an operating lease and we recognize sublease income as an offset to operating lease expense on a straight-line basis over the term of the sublease agreement through August 2022.  Sublease income, net of amortized leasing costs, for the three months ended March 31, 2020 was approximately $11,000.    

Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the three months ended March 31, 2020.  We did not obtain any new operating lease right-of-use assets in the three months ended March 31, 2020.

Other Information

Our office lease had a remaining term of 2.5 years as of March 31, 2020, and we used an effective interest rate of 2.456%, which was our incremental borrowing rate in effect at the inception of the lease as our lease does not provide a readily determinable implicit rate.

The future minimum lease payments required under our office lease as of March 31, 2020 were as follows:    

 

 

Amount

 

2020

 

$

498,150

 

2021

 

 

664,200

 

2022

 

 

498,150

 

   Total lease payments

 

 

1,660,500

 

Less:  Interest

 

 

51,554

 

    Present value of lease liabilities

 

$

1,608,946

 

 

v3.20.1
Revenue
3 Months Ended
Mar. 31, 2020
Revenue From Contract With Customer [Abstract]  
Revenue

8. Revenue

Operating Revenues

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

Revenue Recognition

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

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

Disaggregation of Revenue

The following table presents our revenue disaggregated by source.  Three customers accounted for 54.0% of revenue for the three months ended March 31, 2020, and three customers accounted for 59.7% of revenue for the three months ended March 31, 2019. We operate primarily in the United States, with minor services in Canada.

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

Revenue Type:

 

 

 

 

 

 

 

 

Services

 

$

22,755,451

 

 

$

24,054,519

 

Product sales and other

 

 

2,576,363

 

 

 

2,594,522

 

   Total revenue

 

$

25,331,814

 

 

$

26,649,041

 

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 March 31, 2020 and December 31, 2019, we had $172,500 and $113,750, respectively, of deferred contract costs.  During the three months ended March 31, 2020, we amortized $56,250 of deferred contract costs to selling, general, and administrative expense.  During the three months ended March 31, 2019, we amortized $53,750 of deferred contract costs to selling, general, and administrative expense.

We bill certain customers in advance, and, accordingly, we defer recognition of related revenues as a contract liability until the services are provided and control is transferred to the customer.  As of March 31, 2020 and December 31, 2019, we had $22,610 and $19,644, respectively, of deferred revenue, the majority of which was classified in “Deferred revenue and other current liabilities.”

v3.20.1
Income Taxes
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

9. Income Taxes

Our statutory income tax rate is anticipated to be 27%.  We had an income tax benefit of $52,732 for the three months ended March 31, 2020 based on current estimated state tax apportionments, and income tax expense of $54,769 for the three months ended March 31, 2019, which was attributable to state tax obligations for states with no net operating loss carryforwards, and the reserve against the benefit of the net operating losses at the federal level.

We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance to reduce the amount of deferred tax assets that, based on available evidence, is more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of March 31, 2020 and December 31, 2019, and we had recorded a valuation allowance of $12,516,000 and $12,452,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of March 31, 2020 and December 31, 2019, we had federal income tax net operating loss carryforwards of approximately $16,800,000 and $17,200,000, respectively, which expire at various dates ranging from 2031-2037.

 

v3.20.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

10. Fair Value of Financial Instruments

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

 

v3.20.1
Stockholders' Equity
3 Months Ended
Mar. 31, 2020
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 15,372,905 shares were issued and outstanding as of March 31, 2020 and December 31, 2019.

Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved our 2014 Employee Stock Purchase Plan (“ESPP”).  We recorded expense of $6,667 and $6,557 related to the ESPP for the three months ended March 31, 2020 and 2019, respectively.

Warrants – At March 31, 2020, we had outstanding exercisable warrants to purchase 521,060 shares of common stock.

The following table summarizes the warrants issued and outstanding as of March 31, 2020:

 

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

ExercisableWarrants

 

3/30/2016

 

03/30/2021

 

$

3.88

 

 

 

521,060

 

Total warrants issued and outstanding

 

 

 

 

 

 

521,060

 

Stock Options – We recorded stock option expense of $294,661 and $197,474 for the three months ended March 31, 2020 and 2019, respectively.  The following table summarizes the stock option activity for the three months ended March 31, 2020:

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at December 31, 2019

 

 

2,445,453

 

 

$1.17 — $23.20

 

$

3.37

 

Granted

 

 

495,182

 

 

$1.35 —   $2.32

 

$

1.57

 

Canceled/Forfeited

 

 

(4,000

)

 

$1.51 — $16.40

 

$

7.88

 

Outstanding at March 31, 2020

 

 

2,936,635

 

 

$1.17 — $23.20

 

$

3.06

 

 

Deferred Stock Units – Effective September 1, 2019, nonemployee directors can elect to receive all or a portion of their annual retainers in the form of deferred stock units (“DSUs”).   The DSUs are recognized at their fair value on the date of grant.  Each DSU represents the right to receive one share of our common stock following the completion of a director’s service.  During the three months ended March 31, 2020, we granted 14,895 DSUs and recorded director compensation expense of $25,987 related to the grants.  In addition, during the three months ended March 31, 2020 we granted 39,684 DSUs to executive employees and recorded compensation expense of $50,002 related to the grants.

v3.20.1
Net Loss per Share
3 Months Ended
Mar. 31, 2020
Earnings Per Share [Abstract]  
Net Loss per Share

 


12. Net Loss per Share

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

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

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

 

(Unaudited)

 

Numerator:

 

 

 

 

 

 

 

     Net loss applicable to common stockholders

$

(231,667

)

 

$

(163,752

)

Denominator:

 

 

 

 

 

 

 

     Weighted average common shares outstanding, basic

 

15,396,703

 

 

 

15,328,870

 

     Effect of dilutive common shares

 

 

 

 

 

     Weighted average common shares outstanding, diluted

 

15,396,703

 

 

 

15,328,870

 

Net loss per share:

 

 

 

 

 

 

 

Basic

$

(0.02

)

 

$

(0.01

)

Diluted

$

(0.02

)

 

$

(0.01

)

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

 

 

 

 

 

 

 

Stock options

 

2,936,635

 

 

 

2,187,483

 

Warrants

 

521,060

 

 

 

1,733,565

 

Total anti-dilutive securities excluded from net loss per share

 

3,457,695

 

 

 

3,921,048

 

 

v3.20.1
Related Party Transactions
3 Months Ended
Mar. 31, 2020
Related Party Transactions [Abstract]  
Related Party Transactions

13.  Related Party Transactions

During the year ended December 31, 2019, three stockholders sold approximately 4.3 million shares of our common stock in a registered public offering.  In a separate private transaction, a certain selling stockholder sold 1,750,000 shares of our common stock.  The offering and private transaction, together the “Transactions”, closed on April 11, 2019.  We did not receive any proceeds from sales by the selling stockholders in the Transactions.  We incurred costs and expenses in connection with the Transactions, consisting of various registration, due diligence, printing, and professional service fees and expenses, and such costs, less amounts reimbursed by the selling stockholders at the closing of the Transactions, were approximately $248,000.  Of the $248,000, approximately $230,000 was included in selling, general, and administrative expense for the three months ended March 31, 2019.

v3.20.1
Summary of Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2020
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, 2019. 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 March 31, 2020 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2019 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 three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Adopted

On January 1, 2020, we adopted Accounting Standards Update (“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.  This guidance also requires entities to present the expense in the same line item in the statement of operations as the fees associated with the hosting arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The adoption of the standard did not have a material effect on our consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848):  Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  This standard provides operational guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate (LIBOR).  The amendments are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.  The expedients and exceptions provided by the amendments generally do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.  As further discussed in Note 6, our ABL facility provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable.   As such, we do not expect the transition away from LIBOR to have a material impact on our financial statements.

Pending Adoption

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes – (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions and amending guidance to improve consistent application of accounting over income taxes. This guidance is effective January 1, 2021 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.

v3.20.1
Property and Equipment, Net, and Other Assets (Tables)
3 Months Ended
Mar. 31, 2020
Property Plant And Equipment [Abstract]  
Components Property and Equipment, Net, and Other Assets

At March 31, 2020 and December 31, 2019, property and equipment, net, and other assets consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,044,540

     and $1,994,320 as of March 31, 2020 and December 31, 2019,

     respectively

 

$

511,985

 

 

$

534,465

 

Right-of-use operating lease asset

 

 

1,454,914

 

 

 

1,595,044

 

Security deposits and other assets

 

 

293,581

 

 

 

306,585

 

    Property and equipment, net, and other assets

 

$

2,260,480

 

 

$

2,436,094

 

v3.20.1
Goodwill and Other Intangible Assets (Tables)
3 Months Ended
Mar. 31, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Schedule of Finite-Lived Intangible Assets

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

  

March 31, 2020 (Unaudited)

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,068

 

 

 

5,973,719

 

 

 

261,349

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,101,831

 

 

 

1,058,809

 

 

 

1,043,022

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,594,735

 

 

$

20,290,364

 

 

$

1,304,371

 

 

December 31, 2019

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,069

 

 

 

5,751,037

 

 

 

484,032

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,090,633

 

 

 

984,141

 

 

 

1,106,492

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,583,538

 

 

$

19,993,014

 

 

$

1,590,524

 

Schedule of Indefinite-Lived Intangible Assets

 

March 31, 2020 (Unaudited) and December 31, 2019

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,208,490

 

 

 

 

 

v3.20.1
Accounts Payable and Accrued Liabilities (Tables)
3 Months Ended
Mar. 31, 2020
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:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Accounts payable

 

$

12,558,057

 

 

$

10,436,715

 

Accrued taxes

 

 

652,356

 

 

 

716,545

 

Employee compensation

 

 

378,453

 

 

 

1,384,360

 

Operating lease liability - current portion

 

 

631,760

 

 

 

627,896

 

Other

 

 

115,713

 

 

 

151,289

 

 

 

$

14,336,339

 

 

$

13,316,805

 

v3.20.1
Leases (Tables)
3 Months Ended
Mar. 31, 2020
Lessee Disclosure [Abstract]  
Summary of Lease Related Assets and Liabilities Recorded on Balance Sheet

The table below presents the lease related assets and liabilities recorded on the balance sheet. Right-of-use assets and related liabilities related to finance leases at March 31, 2020 are de minimis and mature in less than 12 months.

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

Operating Leases:

 

(Unaudited)

 

 

 

 

 

 

Right-of-use operating lease asset:

 

 

 

 

 

 

 

   Property and equipment, net and other assets

$

1,454,914

 

 

$

1,595,044

 

 

 

 

 

 

 

 

 

Lease Liabilities:

 

 

 

 

 

 

 

   Accounts payable and accrued liabilities

$

631,760

 

 

$

627,896

 

   Other long-term liabilities

 

977,186

 

 

 

1,136,583

 

       Total operating lease liabilities

$

1,608,946

 

 

$

1,764,479

 

Future Minimum Lease Payments Required Under Office Lease

The future minimum lease payments required under our office lease as of March 31, 2020 were as follows:    

 

 

Amount

 

2020

 

$

498,150

 

2021

 

 

664,200

 

2022

 

 

498,150

 

   Total lease payments

 

 

1,660,500

 

Less:  Interest

 

 

51,554

 

    Present value of lease liabilities

 

$

1,608,946

 

v3.20.1
Revenue (Tables)
3 Months Ended
Mar. 31, 2020
Revenue From Contract With Customer [Abstract]  
Summary of Revenue Disaggregated by Source The following table presents our revenue disaggregated by source.

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

Revenue Type:

 

 

 

 

 

 

 

 

Services

 

$

22,755,451

 

 

$

24,054,519

 

Product sales and other

 

 

2,576,363

 

 

 

2,594,522

 

   Total revenue

 

$

25,331,814

 

 

$

26,649,041

 

v3.20.1
Stockholders' Equity (Tables)
3 Months Ended
Mar. 31, 2020
Equity [Abstract]  
Summary of Warrants Issued and Outstanding

The following table summarizes the warrants issued and outstanding as of March 31, 2020:

 

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

ExercisableWarrants

 

3/30/2016

 

03/30/2021

 

$

3.88

 

 

 

521,060

 

Total warrants issued and outstanding

 

 

 

 

 

 

521,060

 

Summary of Stock Option Activity The following table summarizes the stock option activity for the three months ended March 31, 2020

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at December 31, 2019

 

 

2,445,453

 

 

$1.17 — $23.20

 

$

3.37

 

Granted

 

 

495,182

 

 

$1.35 —   $2.32

 

$

1.57

 

Canceled/Forfeited

 

 

(4,000

)

 

$1.51 — $16.40

 

$

7.88

 

Outstanding at March 31, 2020

 

 

2,936,635

 

 

$1.17 — $23.20

 

$

3.06

 

v3.20.1
Net Loss per Share (Tables)
3 Months Ended
Mar. 31, 2020
Earnings Per Share [Abstract]  
Computation of Basic and Diluted Net Income (Loss) per Share Attributable to Common Stockholders

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

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

 

(Unaudited)

 

Numerator:

 

 

 

 

 

 

 

     Net loss applicable to common stockholders

$

(231,667

)

 

$

(163,752

)

Denominator: