QUEST RESOURCE HOLDING CORP, 10-K filed on 4/2/2018
Annual Report
v3.8.0.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2017
Mar. 16, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2017    
Document Fiscal Year Focus 2017    
Document Fiscal Period Focus FY    
Trading Symbol QRHC    
Entity Registrant Name Quest Resource Holding Corporation    
Entity Central Index Key 0001442236    
Current Fiscal Year End Date --12-31    
Entity Filer Category Smaller Reporting Company    
Entity Well-known Seasoned Issuer No    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Common Stock, Shares Outstanding   15,302,455  
Entity Public Float     $ 14,949,214
v3.8.0.1
CONSOLIDATED BALANCE SHEETS - USD ($)
Dec. 31, 2017
Dec. 31, 2016
Current assets:    
Cash and cash equivalents $ 1,055,281 $ 1,328,174
Accounts receivable, less allowance for doubtful accounts of $699,102 and $333,578 as of December 31, 2017 and 2016, respectively 16,263,276 34,828,495
Prepaid expenses and other current assets 1,508,014 2,671,002
Total current assets 18,826,571 38,827,671
Goodwill 58,337,290 58,337,290
Intangible assets, net 5,031,595 8,489,586
Property and equipment, net, and other assets 1,320,342 2,414,921
Total assets 83,515,798 108,069,468
Current liabilities:    
Accounts payable and accrued liabilities 14,253,818 35,305,559
Deferred revenue and other current liabilities 328,763 406,057
Total current liabilities 14,582,581 35,711,616
Revolving credit facility, net 6,763,497 4,750,000
Other long-term liabilities 21,990 335,644
Total liabilities 21,368,068 40,797,260
Commitments and contingencies
Stockholders’ equity:    
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of December 31, 2017 and 2016
Common stock, $0.001 par value, 200,000,000 shares authorized, 15,302,455 and 15,272,575 shares issued and outstanding as of December 31, 2017 and 2016, respectively 15,302 15,273
Additional paid-in capital 158,867,600 158,171,831
Accumulated deficit (96,735,172) (90,914,896)
Total stockholders’ equity 62,147,730 67,272,208
Total liabilities and stockholders’ equity $ 83,515,798 $ 108,069,468
v3.8.0.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
Dec. 31, 2017
Dec. 31, 2016
Mar. 30, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]        
Allowance for doubtful accounts receivable $ 699,102 $ 333,578   $ 586,941
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 15,302,455 15,272,575 861,251  
Common stock, shares outstanding 15,302,455 15,272,575    
v3.8.0.1
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]    
Revenue $ 138,346,327 $ 183,811,398
Cost of revenue 122,633,815 169,401,718
Gross profit 15,712,512 14,409,680
Operating expenses:    
Selling, general, and administrative 17,078,033 18,170,371
Depreciation and amortization 3,986,725 4,044,097
Total operating expenses 21,064,758 22,214,468
Operating loss (5,352,246) (7,804,788)
Other expense:    
Interest expense (468,030) (240,798)
Total other expense, net (468,030) (240,798)
Loss before taxes (5,820,276) (8,045,586)
Net loss (5,820,276) (8,045,586)
Net loss applicable to common stockholders $ (5,820,276) $ (8,045,586)
Net loss per share    
Basic and Diluted $ (0.38) $ (0.55)
Weighted average number of common shares outstanding    
Basic and Diluted 15,280,617 14,737,885
v3.8.0.1
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, GIVEN RETROACTIVE EFFECT FOR THE 1-FOR-8 REVERSE STOCK SPLIT EFFECTIVE AUGUST 10, 2016 - USD ($)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit [Member]
Beginning Balance at Dec. 31, 2015 $ 69,492,036 $ 13,974 $ 152,347,372 $ (82,869,310)
Beginning Balance, Shares at Dec. 31, 2015   13,973,597    
Stock-based compensation 1,220,917   1,220,917  
Sales of common stock and warrants, net of issuance costs, Value $ 2,889,350 $ 861 2,888,489  
Sales of common stock and warrants, net of issuance costs, Shares 861,251 861,251    
Shares issued for Employee Stock Purchase Plan options, Value $ 40,491 $ 19 40,472  
Shares issued for Employee Stock Purchase Plan options, Shares 18,977 18,977    
Shares issued for consulting services, Value $ 1,675,000 $ 419 1,674,581  
Shares issued for consulting services, Shares 418,750 418,750    
Net loss $ (8,045,586)     (8,045,586)
Ending Balance at Dec. 31, 2016 67,272,208 $ 15,273 158,171,831 (90,914,896)
Ending Balance, Shares at Dec. 31, 2016   15,272,575    
Stock-based compensation 662,810   662,810  
Shares issued for Employee Stock Purchase Plan options, Value 32,988 $ 29 32,959  
Shares issued for Employee Stock Purchase Plan options, Shares   29,880    
Net loss (5,820,276)     (5,820,276)
Ending Balance at Dec. 31, 2017 $ 62,147,730 $ 15,302 $ 158,867,600 $ (96,735,172)
Ending Balance, Shares at Dec. 31, 2017   15,302,455    
v3.8.0.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities:    
Net loss $ (5,820,276) $ (8,045,586)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation 444,498 469,808
Amortization of intangibles 3,712,763 3,699,566
Amortization of debt issuance costs 78,251  
Provision for doubtful accounts 652,273 458,919
Stock-based compensation 1,709,685 1,849,042
Changes in operating assets and liabilities:    
Accounts receivable 17,912,946 (1,988,617)
Prepaid expenses and other current assets 116,113 (677,219)
Security deposits and other assets 710,596 (773,675)
Accounts payable and accrued liabilities (21,051,741) 458,200
Deferred revenue and other current liabilities (75,216) 89,469
Other long-term liabilities (42,143) 69,178
Net cash used in operating activities (1,652,251) (4,390,915)
Cash flows from investing activities:    
Purchase of property and equipment (60,514) (469,315)
Purchase of capitalized software development (254,772) (361,144)
Net cash used in investing activities (315,286) (830,459)
Cash flows from financing activities:    
Proceeds from credit facilities 108,571,721 23,500,000
Repayments of credit facilities (106,614,751) (22,750,000)
Proceeds from the sale of common stock and warrants, net of issuance costs   2,889,350
Proceeds from shares issued for Employee Stock Purchase Plan 32,988 40,491
Debt issuance costs (234,334)  
Repayments of capital lease obligations (60,980) (120,024)
Net cash provided by financing activities 1,694,644 3,559,817
Net decrease in cash and cash equivalents (272,893) (1,661,557)
Cash and cash equivalents at beginning of period 1,328,174 2,989,731
Cash and cash equivalents at end of period $ 1,055,281 $ 1,328,174
v3.8.0.1
The Company, Description of Business, and Liquidity
12 Months Ended
Dec. 31, 2017
Accounting Policies [Abstract]  
The Company, Description of Business, and Liquidity

1. The Company, Description of Business, and Liquidity

The accompanying consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”) and its subsidiaries, Earth911, Inc. (“Earth911”), Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC, (“LDI”), Youchange, Inc. (“Youchange”), Quest Vertigent Corporation (“QVC”), and Quest Vertigent One, LLC (“QV One”) (collectively, “we,” “us,” or “our company”).  As of February 20, 2018, Earth911, Inc. was renamed Quest Sustainability Services, Inc. as further discussed in Note 14.

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.   Our customers typically are multi-location businesses for which we create, implement, and manage customer-specific programs for the collection, processing, recycling, disposal, and tracking of waste streams and recyclables. We also provide information and data that tracks and reports the environmental results of our services and provides actionable data to improve business operations.  Two customers accounted for an aggregate of  44% and 56% of revenue for the years ended December 31, 2017 and 2016, respectively.  Our principal offices are located in The Colony, Texas.

Liquidity

As of December 31, 2017 and 2016, our working capital balance was $4,243,990 and $3,116,055, respectively.

v3.8.0.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2017
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principles of Presentation and Consolidation

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the operating activity of QRHC and its subsidiaries for the years ended December 31, 2017 and 2016.

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

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

Accounting Estimates

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

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

Revenue Recognition

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

persuasive evidence of an arrangement exists;

delivery has occurred or services have been rendered;

the fee for the arrangement is fixed or determinable; and

collectibility is reasonably assured.

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

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

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

Collectibility is Reasonably Assured – We assess collectibility on a customer by customer basis based on criteria developed by us.

We provide businesses with services to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their operations. We utilize third-party subcontractors to execute the collection and recycling or disposal of waste materials, including used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition - Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross.  We record amounts collected from customers for sales tax on a net basis. In situations in which we are not primarily obligated, or we do not have credit risk, we record the net amounts as management fees earned.  We had one contract accounted for as management fees with revenue of $78,145 and $307,571 for the years ended December 31, 2017 and 2016, respectively.  Our gross billings on this management fee contract were $2,173,022 and $5,042,696 for the years ended December 31, 2017 and 2016, respectively.  This management fee contract ended in the second quarter of 2017 and we no longer have any similar contracts.  

We derive a limited amount of revenue from advertising contracts, which we recognize ratably over the term that the advertisement appears on our website.

Cash and Cash Equivalents

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

Accounts Receivable

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

As of December 31, 2017 and 2016, we had established an allowance of $699,102 and $333,578, respectively, for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivable only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2017 and 2016 were as follows:

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

Beginning balance

 

$

333,578

 

 

$

586,941

 

Bad debt expense, net of recoveries

 

 

652,273

 

 

 

458,919

 

Uncollectible accounts written off

 

 

(286,749

)

 

 

(712,282

)

Ending balance

 

$

699,102

 

 

$

333,578

 

 

Fair Value Measurements

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

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

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

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

Stock Options

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

 

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

 

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

 

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

 

We recognize the effects of forfeitures in compensation cost when they occur.

Property and Equipment

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

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

 

Vehicles

 

5 to 7 years

Computer equipment

 

3 to 5 years

Office furniture and fixtures

 

5 to 7 years

Machinery and equipment

 

5 to 7 years

Leasehold improvements

 

5 to 7 years

 

Impairment of Long-Lived Assets

We analyze long-lived assets, including property and equipment and definite-lived intangible assets, which are held and used in our operations, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and estimated period of useful life at least at each balance sheet date. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. We did not recognize any impairment charges for long-lived assets during 2017 and 2016.        

Goodwill

We record as goodwill the excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree, and the acquisition date fair value of any previous equity interest in the acquired entity over the (ii) fair value of the net identifiable assets acquired. We do not amortize goodwill; however, annually, or whenever there is an indication that goodwill may be impaired, we evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. We performed our most recent goodwill impairment analysis in the second quarter of 2017, utilizing an income approach with no impairment recorded.  We believe that the discounted cash flow method best captures the significant value-creating activities we are undertaking.  The primary assumptions in our income approach included estimating cash flows and projections.  We determined that the fair value of our goodwill exceeded our carrying value, and consequently, no impairment was deemed to have occurred.  However, a continued or prolonged period of declining gross margins could result in the write-off of a portion or all of our goodwill and other intangible assets in future periods.

Net Loss Per Share

We compute basic net loss per share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2017 and 2016 would be anti-dilutive. These potentially dilutive securities include stock options and warrants and totaled 3,123,381 and 3,256,093 common shares at December 31, 2017 and 2016, respectively.

Concentrations

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade accounts receivable. We deposit our cash with commercial banks. Cash deposits at commercial banks are at risk to the extent that the balances exceed the Federal Deposit Insurance Corporation insured level per institution. The bank cash balances on deposit may periodically exceed federally insured limits, including $872,053 at December 31, 2017; however, we have never experienced any losses related to these balances.

We sell our services and products primarily to customers without requiring collateral; however, we routinely assess the financial condition of our customers and maintain allowances for anticipated losses.  From year to year, the customers that exceed 10% of our annual revenue, if any, may change. The following table discloses the number of customers that accounted for more than 10% of our annual revenue and their related receivable balances for the years ended December 31, 2017 and 2016:

 

 

 

Customers Exceeding 10%

of Revenue

 

Year

 

Number of

Customers

 

 

Revenue

Combined Percent

 

 

Accounts Receivable

Combined Percent

 

2017

 

 

2

 

 

 

44

%

 

 

21

%

2016

 

 

2

 

 

 

56

%

 

 

48

%

 

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

Income Taxes

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

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

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

Advertising

We charge our advertising costs to expense when incurred. During the years ended December 31, 2017 and 2016, advertising expense totaled $25,892 and $32,720, respectively.

Stock-Based Compensation

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

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

Recently Issued Accounting Pronouncements

Adopted

In January 2017, the FASB issued Accounting Standards Update (ASU) 2017-04, Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which aims to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  Previously, Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  Instead, under the new ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and a goodwill impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. In no circumstances would the loss recognized exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for us on January 1, 2020, with early adoption permitted.  We adopted this ASU in the second quarter of 2017 with our interim impairment test as further discussed in Note 4.

Pending Adoption

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This standard replaces existing revenue recognition guidance, which in many cases was tailored for specific industries, with a uniform accounting standard applicable to all industries and transactions. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to correlate with the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services.  The standard also requires enhanced disclosures regarding revenue recognition.  The new standard is effective for us on January 1, 2018.  We will adopt the standard on a full retrospective basis for each period presented, and we do not expect a significant impact on the timing of revenue recognition upon the adoption of the standard.  However, additional disclosures regarding disaggregated revenue, contract assets and liabilities and performance obligations are expected, and judgment will be used in applying the expanded disclosure requirements.  

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. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are still evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.  However, given the material amount of our future minimum payments under non-cancellable operating leases, primarily office rent, at December 31, 2017 discussed in Note 10, we expect to recognize a material right-of-use lease asset and lease liability upon adoption of the ASU.

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

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

v3.8.0.1
Property and Equipment, Net, and Other Assets
12 Months Ended
Dec. 31, 2017
Property Plant And Equipment [Abstract]  
Property and Equipment, net, and Other Assets

3. Property and Equipment, net, and Other Assets

At December 31, 2017 and 2016, Property and equipment, net, and other assets consisted of the following:

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Vehicles

 

$

544,984

 

 

$

544,984

 

Computer equipment

 

 

700,893

 

 

 

990,790

 

Office furniture and fixtures

 

 

541,464

 

 

 

634,547

 

Machinery and equipment

 

 

804,722

 

 

 

971,806

 

Leasehold improvements

 

 

558,035

 

 

 

641,272

 

    Property and equipment, gross

 

 

3,150,098

 

 

 

3,783,399

 

Accumulated depreciation

 

 

(2,193,231

)

 

 

(2,442,549

)

    Property and equipment, net

 

 

956,867

 

 

 

1,340,850

 

Security deposits and other assets

 

 

363,475

 

 

 

1,074,071

 

     Property and equipment, net, and other assets

 

$

1,320,342

 

 

$

2,414,921

 

 

We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment.  Depreciation expense for the year ended December 31, 2017 was $444,498, inclusive of $170,536 of depreciation expense reflected within Cost of Revenue in our consolidated statement of operations as it related to assets used directly in servicing customer contracts.  Depreciation expense for the year ended December 31, 2016 was $469,808, with $125,277 depreciation expense recorded in Cost of Revenue. At December 31, 2017, our capital lease assets were $243,778, net of $256,319 of accumulated depreciation.  At December 31, 2016, our capital lease assets were $347,135, net of $152,962 of accumulated depreciation.

v3.8.0.1
Goodwill and Other Intangible Assets
12 Months Ended
Dec. 31, 2017
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 are as follows:

 

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

 

 

December 31, 2016

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

8,798,000

 

 

$

3,922,000

 

Trademarks

 

7 years

 

 

6,242,055

 

 

 

3,078,845

 

 

 

3,163,210

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,649,507

 

 

 

307,989

 

 

 

1,341,518

 

Customer lists

 

5 years

 

 

307,153

 

 

 

244,295

 

 

 

62,858

 

Total finite lived intangible assets

 

 

 

$

21,149,398

 

 

$

12,659,812

 

 

$

8,489,586

 

 

 

December 31, 2017 and 2016

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,337,290

 

 

 

 

 

 

We compute amortization using the straight-line method over the estimated useful lives of the finite lived intangible assets. The amortization expense related to finite lived intangible assets was $3,712,763 and $3,699,566 for the years ended December 31, 2017 and 2016, respectively.  We expect amortization expense to be approximately $2.6 million for the year ending December 31, 2018, approximately $1.1 million for the year ending December 31, 2019, approximately $750,000 for the year ending December 31, 2020, approximately $260,000 for the year ending December 31, 2021, approximately $175,000 for the year ending December 31, 2022, and approximately $130,000 thereafter. We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes. As required by FASB ASC Topic 350, Intangibles – Goodwill and Other, we performed our goodwill impairment analysis in the second quarter of 2017 and in the third quarter of 2016 with no impairment recorded in either period.

 

v3.8.0.1
Accounts Payable and Accrued Liabilities
12 Months Ended
Dec. 31, 2017
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 are as follows:

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Accounts payable

 

$

12,739,117

 

 

$

32,944,202

 

Accrued taxes

 

 

807,037

 

 

 

1,272,832

 

Employee compensation

 

 

434,358

 

 

 

529,945

 

Other

 

 

273,306

 

 

 

558,580

 

 

 

$

14,253,818

 

 

$

35,305,559

 

 

v3.8.0.1
Revolving Credit Facility
12 Months Ended
Dec. 31, 2017
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.  Available borrowings on the ABL facility are based on formula-determined amounts of eligible trade receivables, as defined in the Citizens Loan Agreement, and are recalculated on a monthly basis.  The ABL Facility replaced our Revolving Credit Note and Loan Agreement with Regions Bank, which was paid off and terminated effective February 24, 2017.

Each loan under the ABL Facility bears interest, at our option, at either the Base Rate, as defined in the agreement, plus a margin ranging from 1.0% to 1.5% (6.0% as of December 31, 2017), or the LIBOR lending rate for the interest period in effect, plus a margin ranging from 2.0% to 2.5% (4.12% as of December 31, 2017). The maturity date of the revolving credit facility is February 24, 2022.  

Loans under the equipment loan facility may be requested at any time until February 24, 2019. Each loan under the equipment loan facility bears interest, at our option, at either the Base Rate, as defined in the 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. The minimum fixed charge coverage ratio covenant will not apply until May 15, 2018, when the trailing 12-month period ending March 31, 2018 has been reported. In addition, the ABL Facility contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, mergers and acquisitions, and other matters customarily restricted in such agreements.

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

The amount of interest expense related to credit facility borrowings for the years ended December 31, 2017 and 2016 was $378,826 and $221,424, respectively. Debt issuance cost of $469,507 is being amortized to interest expense over the life of the new revolving credit facility beginning March 1, 2017.  As of December 31, 2017, the unamortized portion of the debt issuance costs was $391,256.  The amount of interest expense related to the amortization of the discount on the revolving credit facility for the year ended December 31, 2017 was $78,251.  As of December 31, 2017, the ABL Facility borrowing base availability was $11,189,000 and the outstanding liability was $6,763,497, net of unamortized debt issuance cost of $391,256.  There were no draws made on the equipment loan facility as of December 31, 2017.

As of December 31, 2017 we were in compliance with the financial covenants included in the agreement.

v3.8.0.1
Capital Lease Obligations
12 Months Ended
Dec. 31, 2017
Debt Disclosure [Abstract]  
Capital Lease Obligations

7. Capital Lease Obligations

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

At December 31, 2017 and 2016, total capital lease obligations outstanding consisted of the following:

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Capital lease obligations, imputed interest of 4.88% to 13.29%, with

current monthly payments of approximately $6,000, expiring
through September 2019, secured by computer, telephone and office equipment

 

$

41,664

 

 

$

315,253

 

Total

 

 

41,664

 

 

 

315,253

 

Less: current maturities

 

 

(39,067

)

 

 

(106,184

)

Long-term portion

 

$

2,597

 

 

$

209,069

 

 

The amount of interest expense related to our capital leases for the years ended December 31, 2017 and 2016 was $5,897 and $14,414, respectively. The following table summarizes future maturities of our capital lease obligations, as of December 31, 2017:

 

Year Ending December 31,

 

Amount

 

2018

 

$

40,459

 

2019

 

 

2,701

 

Total minimum lease payments

 

 

43,160

 

Less:  amount representing interest

 

 

(1,496

)

Present value of net minimum lease payments

 

 

41,664

 

Less: current maturities

 

 

(39,067

)

Non-current maturities

 

$

2,597

 

 

v3.8.0.1
Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes

8. Income Taxes

We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of December 31, 2017 and 2016, and we have recorded a valuation allowance of $12,150,000 and $15,555,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.

The Tax Cuts and Jobs Act (the “2017 Act”) was signed into law on December 22, 2017 and is generally effective for tax years beginning January 1, 2018. The most significant impact to us of the 2017 Act was a decrease in the federal corporate income tax rate from 35% to 21%.  As a result of the decrease in the corporate income tax rate, we are required to recognize the effect of the corporate income tax rate change on our deferred tax assets and liabilities in the year ending December 31, 2017, the period in which the legislation was enacted.

The components of net deferred taxes are as follows:

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Deferred tax assets (liabilities):

 

 

 

 

 

 

 

 

Net operating loss

 

$

5,115,000

 

 

$

7,199,000

 

Depreciation and amortization

 

 

4,435,000

 

 

 

5,204,000

 

Stock-based compensation

 

 

2,627,000

 

 

 

3,683,000

 

Capitalized software costs

 

 

(244,000

)

 

 

(753,000

)

Accrued interest expense

 

 

52,000

 

 

 

14,000

 

Allowance for doubtful accounts

 

 

138,000

 

 

 

130,000

 

Deferred lease liability

 

 

27,000

 

 

 

78,000

 

Total deferred tax assets, net

 

 

12,150,000

 

 

 

15,555,000

 

Less: valuation allowance

 

 

(12,150,000

)

 

 

(15,555,000

)

Net deferred taxes

 

$

 

 

$

 

 

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

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

U.S. federal statutory rate applied to pretax income

 

$

(2,037,097

)

 

$

(2,735,499

)

Permanent differences

 

 

13,342

 

 

 

17,155

 

State taxes and other

 

 

(155,245

)

 

 

(523,656

)

Impact of 2017 Tax Act

 

 

5,584,000

 

 

 

 

Change in valuation allowance

 

 

(3,405,000

)

 

 

3,242,000

 

 

 

$

 

 

$

 

 

As of December 31, 2017 and 2016, we had federal income tax net operating loss carryforwards of approximately $19,700,000 and $18,500,000, respectively, which expire at various dates beginning in 2031. We are subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss. Such limitation of the net operating losses may have occurred, which we have not fully analyzed at this time as we have fully reserved the deferred tax asset.

As of December 31, 2017 and 2016, we did not recognize any assets or liabilities relative to uncertain tax positions, nor do we anticipate any significant unrecognized tax benefits will be recorded during 2018. It is our policy to classify interest and penalties on income taxes as interest expense or penalties expense.

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

 

an allocation or shift of income between taxing jurisdictions;

 

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

 

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

We are potentially subject to tax audits for federal and state tax returns for tax years ended 2014 to 2017. Tax audits by their very nature are often complex and can require several years to complete.

v3.8.0.1
Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

9. Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, deferred revenue, revolving credit 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 revolving credit facility, based on borrowing rates currently available to us for loans with similar terms and maturities.

v3.8.0.1
Commitments and Contingencies
12 Months Ended
Dec. 31, 2017
Commitments And Contingencies Disclosure [Abstract]  
Commitments and Contingencies

10. Commitments and Contingencies

Operating Leases

We lease corporate office space in The Colony, Texas under an 84-month, non-cancelable operating lease. The lease expires in October 2022. Lease expense totaled $610,797 and $614,951 for the years ended December 31, 2017 and 2016, respectively.

The following is a schedule, by year, of future minimum rental payments required under non-cancelable operating lease agreements as of December 31, 2017:

 

Year Ending December 31,

 

Amount

 

2018

 

$

606,780

 

2019

 

 

631,260

 

2020

 

 

664,200

 

2021

 

 

664,200

 

2022

 

 

498,150

 

Total

 

$

3,064,590

 

 

Indemnifications

During the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These may include (i) intellectual property indemnities to customers in connection with the use, sales, and/or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; and (iv) indemnities involving the representations and warranties in certain contracts. In addition, under our bylaws we are committed to our directors and officers for providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities and commitments do not provide for any limitation on the maximum potential for future payments that we could be obligated to make. We have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we had no liabilities recorded for these agreements as of December 31, 2017 and 2016.

Defined Contribution Plan

We maintain a defined contribution 401(k) plan covering substantially all full-time employees.  Employees are permitted to make voluntary contributions, which we match at a certain percentage, to the plan.  For the years ended December 31, 2017 and 2016, our plan contribution expense was $112,277 and $123,336, respectively.

v3.8.0.1
Stockholders' Equity
12 Months Ended
Dec. 31, 2017
Equity [Abstract]  
Stockholders' Equity

11. Stockholders’ Equity

Preferred Stock

Our authorized preferred stock includes 10,000,000 shares of preferred stock with a par value of $0.001, of which no shares have been issued or are outstanding as of December 31, 2017 and 2016.  Preferred stock is to be designated in classes or series and the number of each class or series and the voting powers, designations, preferences, limitations, restrictions, relative rights, and distinguishing designation of each class or series of stock as the Board of Directors shall determine in its sole discretion.

Common Stock

Our authorized common stock includes 200,000,000 shares of common stock with a par value of $0.001, of which 15,302,455 and 15,272,575 shares were issued and outstanding as of December 31, 2017 and 2016, respectively.

During the year ended December 31, 2017, we issued an aggregate 29,880 shares of common stock for $32,988, all to employees under our 2014 Employee Stock Purchase Plan (“ESPP”), as further discussed below.

Shares Issued for Employee Stock Purchase Plan Options

 

On May 23, 2017, we issued 8,749 shares to employees for $11,972 under our ESPP for options that vested and were exercised.    

 

On November 14, 2017, we issued 21,131 shares to employees for $21,016 under our ESPP for options that vested and were exercised.

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

 

 

 

Common Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

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

 

 

861,251

 

 

$

2,889,350

 

Shares issued for Employee Stock Purchase Plan options

 

 

18,977

 

 

 

40,491

 

Shares issued for consulting services

 

 

418,750

 

 

 

1,675,000

 

 

 

 

1,298,978

 

 

$

4,604,841

 

Sale of Common Stock and Warrants

 

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

Shares issued for Employee Stock Purchase Plan Options

 

On May 16, 2016, we issued 9,724 shares to employees for $27,435 under our ESPP for options that vested and were exercised.

 

On November 14, 2016, we issued 9,253 shares to employees for $13,056 under our 2014 ESPP for options that vested and were exercised.  

Shares Issued for Consulting Services

 

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

 


Warrants

During the year ended December 31, 2017, we did not issue any warrants, no holders exercised warrants, and warrants to purchase 205,126 shares of common stock expired.  During the year ended December 31, 2016, as noted above, we issued warrants to purchase 521,060 shares of common stock, no holders exercised warrants and warrants expired to purchase 56,250 shares of common stock. At December 31, 2017, 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 December 31, 2017:

 

Warrants Issued and Outstanding as of December 31, 2017

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

Exercisable warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

9/24/2014

 

9/24/2019

 

$

20.00

 

 

 

1,125,005

 

Warrants

 

10/20/2014

 

10/20/2019

 

$

20.00

 

 

 

87,500

 

Warrants

 

3/30/2016

 

3/30/2021

 

$

3.88

 

 

 

521,060

 

Total warrants issued and outstanding

 

 

 

 

 

 

1,733,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Compensation Plan

In October 2012, we adopted our 2012 Incentive Compensation Plan (the “2012 Plan”) as the sole plan for providing equity-based incentive compensation to our employees, non-employee directors, and other service providers. The plan allows for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, and other incentive awards to our employees, non-employee directors, and other service providers who are in a position to make a significant contribution to our success and our affiliates. The purpose of the plan is to attract and retain individuals, further align employee and stockholder interests, and closely link compensation with our performance. The plan is administered by the compensation committee of our board of directors. Our policy is to fulfill any exercise of options from common stock that is authorized and unissued. The maximum number of shares of common stock available for grant under the plan is 1,837,500. Stock compensation expense prior to October 2012 related to options granted prior to the Earth911 Merger that was superseded by the 2012 Plan at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to adjustment for certain corporate changes in accordance with the provisions of the plan.

Employee Stock Purchase Plan

On September 17, 2014, our stockholders approved the ESPP. We recorded expense of $25,930 and $37,844 related to the ESPP during the years ended December 31, 2017 and 2016, respectively.

Stock Options

The following table summarizes the stock option activity from January 1, 2016 through December 31, 2017:

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at January 1, 2016

 

 

742,997

 

 

$6.24 — $30.00

 

$

16.32

 

Granted

 

 

767,625

 

 

$2.08 — $6.40

 

$

3.84

 

Canceled/Forfeited

 

 

(193,220

)

 

$6.24 — $30.00

 

$

12.86

 

Outstanding at December 31, 2016

 

 

1,317,402

 

 

$2.08 — $26.00

 

$

9.09

 

Granted

 

 

117,500

 

 

$1.17  —  $2.71

 

$

2.07

 

Canceled/Forfeited

 

 

(45,086

)

 

$4.80 — $23.20

 

$

12.37

 

Outstanding at December 31, 2017

 

 

1,389,816

 

 

$1.17 — $26.00

 

$

8.39

 

 

The weighted-average grant-date fair value of options granted was $1.49 and $2.81 for the years ended December 31, 2017 and 2016, respectively.

For the years ended December 31, 2017 and 2016, the intrinsic value of options outstanding was approximately $59,000 and nil, respectively, and the intrinsic value of options exercisable was approximately $47,000 and nil, respectively.

The following additional information applies to options outstanding at December 31, 2017:

 

Range of

Exercise

Prices

 

Outstanding at

December 31, 2017

 

 

Weighted-

Average

Remaining

Contractual

Life

 

 

Weighted-

Average

Exercise

Price

 

 

Exercisable at

December 31, 2017

 

 

Weighted-

Average

Exercise

Price

 

$1.17 - $26.00

 

 

1,389,816

 

 

 

7.3

 

 

 

$8.39

 

 

 

766,858

 

 

 

$12.24

 

 

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

 

Range of

Exercise

Prices

 

Outstanding at

December 31, 2016

 

 

Weighted-

Average

Remaining

Contractual

Life

 

 

Weighted-

Average

Exercise

Price

 

 

Exercisable at

December 31, 2016

 

 

Weighted-

Average

Exercise

Price

 

$2.08 - $26.00

 

 

1,317,402

 

 

 

7.9

 

 

 

$9.09

 

 

 

603,956

 

 

 

$15.00

 

 

Stock-based compensation expense for stock-based incentive awards was $662,810 and $1,220,917 for the years ended December 31, 2017 and 2016, respectively. At December 31, 2017, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards was approximately $1.4 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 3 years.

Stock-Based Compensation - We account for all stock-based payment awards made to employees and directors, including stock options and employee stock purchases, based on estimated fair values. We estimate the fair value of share-based payment awards on the date of grant using an option-pricing model and the value of the portion of the award is recognized as expense over the requisite service period.  We recognize the effects of forfeitures in compensation cost when they occur.

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

The weighted-average estimated value of employee stock options granted during the years ended December 31, 2017 and 2016 were estimated using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

Expected volatility

 

 

91

%

 

 

100

%

Risk-free interest rate

 

 

1.81

%

 

 

1.38

%

Expected dividends

 

 

0.00

%

 

 

0.00

%

Expected term in years

 

 

4.8

 

 

 

6.1

 

 

v3.8.0.1
Net Loss per Share
12 Months Ended
Dec. 31, 2017
Earnings Per Share [Abstract]  
Net Loss per Share

12. Net Loss per Share

We compute basic loss per share by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. We have potentially dilutive securities outstanding that are not shown in a diluted loss per share calculation because their effect in both 2017 and 2016 would be anti-dilutive. These potentially dilutive securities include options and warrants and totaled 3,123,381 and 3,256,093 shares at December 31, 2017 and 2016, respectively.

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

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

1,389,816

 

 

 

1,317,402

 

Warrants

 

 

1,733,565

 

 

 

1,938,691

 

Total anti-dilutive securities excluded from diluted loss per share

 

 

3,123,381

 

 

 

3,256,093

 

 

v3.8.0.1
Supplemental Cash Flow Information
12 Months Ended
Dec. 31, 2017
Supplemental Cash Flow Elements [Abstract]  
Supplemental Cash Flow Information

13. Supplemental Cash Flow Information

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

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

346,658

 

 

$

218,309

 

Cash paid for income taxes

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash activities:

 

 

 

 

 

 

 

 

Draw on Citizens ABL facility

 

$

9,250,000

 

 

$

 

Repayment of Regions line of credit

 

$

(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

 

 

$

 

Common stock issued for consulting services

 

$

 

 

$

1,675,000

 

Acquisition of equipment under capital leases

 

$

 

 

$

33,107

 

 

v3.8.0.1
Subsequent Event
12 Months Ended
Dec. 31, 2017
Subsequent Events [Abstract]  
Subsequent Event

14.  Subsequent Event

On February 20, 2018 (“Closing Date”), we entered into an Asset Purchase Agreement with Earth Media Partners, LLC to sell certain assets of our wholly owned subsidiary, Earth 911, Inc., in exchange for an aggregate earn-out amount of approximately $350,000 and a 19% interest in Earth Media Partners, LLC.  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.  Earth911, Inc. was subsequently renamed Quest Sustainability Services, Inc.  The net assets sold were immaterial to our balance sheet as of December 31, 2017 and therefore are not shown separately as Assets Held for Sale.

 

v3.8.0.1
Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2017
Accounting Policies [Abstract]  
Principles of Presentation and Consolidation

Principles of Presentation and Consolidation

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the operating activity of QRHC and its subsidiaries for the years ended December 31, 2017 and 2016.

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

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

Accounting Estimates

Accounting Estimates

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

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

Revenue Recognition

Revenue Recognition

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

persuasive evidence of an arrangement exists;

delivery has occurred or services have been rendered;

the fee for the arrangement is fixed or determinable; and

collectibility is reasonably assured.

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

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

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

Collectibility is Reasonably Assured – We assess collectibility on a customer by customer basis based on criteria developed by us.

We provide businesses with services to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their operations. We utilize third-party subcontractors to execute the collection and recycling or disposal of waste materials, including used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition - Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross.  We record amounts collected from customers for sales tax on a net basis. In situations in which we are not primarily obligated, or we do not have credit risk, we record the net amounts as management fees earned.  We had one contract accounted for as management fees with revenue of $78,145 and $307,571 for the years ended December 31, 2017 and 2016, respectively.  Our gross billings on this management fee contract were $2,173,022 and $5,042,696 for the years ended December 31, 2017 and 2016, respectively.  This management fee contract ended in the second quarter of 2017 and we no longer have any similar contracts.  

We derive a limited amount of revenue from advertising contracts, which we recognize ratably over the term that the advertisement appears on our website.

Cash and Cash Equivalents

Cash and Cash Equivalents

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

Accounts Receivable

Accounts Receivable

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

As of December 31, 2017 and 2016, we had established an allowance of $699,102 and $333,578, respectively, for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivable only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2017 and 2016 were as follows:

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

Beginning balance

 

$

333,578

 

 

$

586,941

 

Bad debt expense, net of recoveries

 

 

652,273

 

 

 

458,919

 

Uncollectible accounts written off

 

 

(286,749

)

 

 

(712,282

)

Ending balance

 

$

699,102

 

 

$

333,578

 

 

Fair Value Measurements

Fair Value Measurements

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

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

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

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

Stock Options

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

 

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

 

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

 

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

 

We recognize the effects of forfeitures in compensation cost when they occur.

Property and Equipment

Property and Equipment

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

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

 

Vehicles

 

5 to 7 years

Computer equipment

 

3 to 5 years

Office furniture and fixtures

 

5 to 7 years

Machinery and equipment

 

5 to 7 years

Leasehold improvements

 

5 to 7 years

 

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

We analyze long-lived assets, including property and equipment and definite-lived intangible assets, which are held and used in our operations, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and estimated period of useful life at least at each balance sheet date. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. We did not recognize any impairment charges for long-lived assets during 2017 and 2016.        

Goodwill

Goodwill

We record as goodwill the excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree, and the acquisition date fair value of any previous equity interest in the acquired entity over the (ii) fair value of the net identifiable assets acquired. We do not amortize goodwill; however, annually, or whenever there is an indication that goodwill may be impaired, we evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. We performed our most recent goodwill impairment analysis in the second quarter of 2017, utilizing an income approach with no impairment recorded.  We believe that the discounted cash flow method best captures the significant value-creating activities we are undertaking.  The primary assumptions in our income approach included estimating cash flows and projections.  We determined that the fair value of our goodwill exceeded our carrying value, and consequently, no impairment was deemed to have occurred.  However, a continued or prolonged period of declining gross margins could result in the write-off of a portion or all of our goodwill and other intangible assets in future periods.

Net Loss Per Share

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 2017 and 2016 would be anti-dilutive. These potentially dilutive securities include stock options and warrants and totaled 3,123,381 and 3,256,093 common shares at December 31, 2017 and 2016, respectively.

Concentrations

Concentrations

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade accounts receivable. We deposit our cash with commercial banks. Cash deposits at commercial banks are at risk to the extent that the balances exceed the Federal Deposit Insurance Corporation insured level per institution. The bank cash balances on deposit may periodically exceed federally insured limits, including $872,053 at December 31, 2017; however, we have never experienced any losses related to these balances.

We sell our services and products primarily to customers without requiring collateral; however, we routinely assess the financial condition of our customers and maintain allowances for anticipated losses.  From year to year, the customers that exceed 10% of our annual revenue, if any, may change. The following table discloses the number of customers that accounted for more than 10% of our annual revenue and their related receivable balances for the years ended December 31, 2017 and 2016:

 

 

 

Customers Exceeding 10%

of Revenue

 

Year

 

Number of

Customers

 

 

Revenue

Combined Percent

 

 

Accounts Receivable

Combined Percent

 

2017

 

 

2

 

 

 

44

%

 

 

21

%

2016

 

 

2

 

 

 

56

%

 

 

48

%

 

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

Income Taxes

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the book and tax basis of as