QUEST RESOURCE HOLDING CORP, 10-K filed on 3/31/2014
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Mar. 14, 2014
Jun. 28, 2013
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
Document Fiscal Year Focus
2013 
 
 
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 Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Smaller Reporting Company 
 
 
Entity Common Stock, Shares Outstanding
 
95,837,766 
 
Entity Public Float
 
 
$ 29,951,729 
CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 2,676,984 
$ 485,728 
Accounts receivable, less allowance for doubtful accounts of $319,735 and $7,398 as of December 31, 2013 and 2012, respectively
20,849,140 
174,013 
Inventory
3,251 
4,292 
Prepaid expenses and other assets
401,537 
38,019 
Total current assets
23,930,912 
702,052 
Property and equipment, net
645,485 
156,688 
Goodwill
58,337,290 
 
Intangible assets, net
17,636,964 
128,800 
Investment in Quest Resource Management Group, LLC
 
4,047,615 
Security deposits and other assets
95,892 
226,794 
Total assets
100,646,543 
5,261,949 
Current liabilities:
 
 
Line of credit
2,750,000 
 
Accounts payable
23,589,755 
316,597 
Accrued liabilities
2,673,770 
648,153 
Deferred revenue
234,899 
166,362 
Long-term debt and capital lease obligations-current portion
16,096 
72,128 
Convertible notes payable-short term, net of discount of nil and $33,394 as of December 31, 2013 and 2012, respectively
25,000 
99,106 
Total current liabilities
29,289,520 
1,302,346 
Long-term capital lease obligations, less current maturities
33,067 
 
Long-term senior secured convertible notes-related parties, net of discount $4,656,934 and $1,313,897 as of December 31, 2013 and 2012, respectively
17,343,066 
686,103 
Warrant liability
 
20,233,338 
Total liabilities
46,665,653 
22,221,787 
Commitments and contingencies
   
   
Stockholders' equity (deficit):
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of December 31, 2013 and 2012
   
   
Common stock, $0.001 par value, 200,000,000 and 100,000,000 shares authorized, 95,814,565 and 58,040,230 shares issued and outstanding as of December 31, 2013 and 2012, respectively
95,815 
58,040 
Additional paid-in capital
119,410,777 
30,708,473 
Accumulated deficit
(65,525,702)
(47,726,351)
Total stockholders' equity (deficit)
53,980,890 
(16,959,838)
Total liabilities and stockholders' equity (deficit)
$ 100,646,543 
$ 5,261,949 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts receivable
$ 319,735 
$ 7,398 
Convertible notes payable - short term, discount
   
33,394 
Long term senior secured convertible note - related party, discount
$ 4,656,934 
$ 1,313,897 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
200,000,000 
100,000,000 
Common stock, shares issued
95,814,565 
58,040,230 
Common stock, shares outstanding
95,814,565 
58,040,230 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]
 
 
Revenue
$ 67,504,540 
$ 1,145,637 
Cost of revenue
62,430,670 
36,021 
Gross profit
5,073,870 
1,109,616 
Operating expenses:
 
 
Selling, general and administrative
12,675,261 
6,848,782 
Depreciation and amortization
1,817,802 
68,576 
Loss (gain) on sale of assets
(14,472)
406 
Gain on equity interest in Quest Resource Management Group, LLC
(23,449,372)
 
Impairment of goodwill
26,850,039 
17,636,569 
Total operating expenses
17,879,258 
24,554,333 
Operating loss
(12,805,388)
(23,444,717)
Other (expense):
 
 
Interest expense
(4,196,279)
(996,924)
Valuation expense-common stock warrants
 
(1,490,812)
Financing cost for senior convertible note-related parties
(1,465,000)
(17,242,526)
Total other expense, net
(5,661,279)
(19,730,262)
Loss before taxes and equity income
(18,466,667)
(43,174,979)
Equity in Quest Resource Management Group, LLC income
667,316 
1,964,540 
Loss before taxes
(17,799,351)
(41,210,439)
Income tax expense
 
941,054 
Net loss
(17,799,351)
(42,151,493)
Net loss applicable to common stockholders
$ (17,799,351)
$ (42,151,493)
Net loss per share
 
 
Basic and Diluted
$ (0.23)
$ (0.74)
Weighted average number of common shares outstanding
 
 
Basic and Diluted
77,055,327 
56,988,497 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (USD $)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit[Member]
Beginning Balance at Dec. 31, 2011
$ (3,323,359)
$ 46,848 
$ 2,204,651 
$ (5,574,858)
Beginning Balance, Shares at Dec. 31, 2011
 
46,847,631 
 
 
Stock-based compensation expense
1,661,673 
 
1,661,673 
 
Discount senior secured convertible note
500,000 
 
500,000 
 
Related party notes and interest conversions
6,389,042 
835 
6,388,207 
 
Related party notes and interest conversions, shares
 
835,409 
 
 
Deferred compensation converted to stock
260,000 
111 
259,889 
 
Deferred compensation converted to stock, Shares
 
110,490 
 
 
Mezzanine financing reclassified to equity
1,375,933 
687 
1,375,246 
 
Mezzanine financing reclassified to equity, Shares
 
687,051 
 
 
Rights offering, net of financing costs
414,300 
491 
413,809 
 
Rights offering, net of financing costs, Shares
 
491,430 
 
 
Common stock issued for loan fees
117,000 
138 
116,862 
 
Common stock issued for loan fees, Shares
 
138,112 
 
 
Shares issued to effect reverse merger
17,332,975 
8,666 
17,324,309 
 
Shares issued to effect reverse merger, Shares
 
8,666,488 
 
 
Common stock issued for services
249,025 
108 
248,917 
 
Common stock issued for services, Shares
 
108,083 
 
 
Note conversions and discounts
215,066 
156 
214,910 
 
Note conversions and discounts, Shares
 
155,536 
 
 
Net loss
(42,151,493)
 
 
(42,151,493)
Ending Balance at Dec. 31, 2012
(16,959,838)
58,040 
30,708,473 
(47,726,351)
Ending Balance, Shares at Dec. 31, 2012
 
58,040,230 
 
 
Stock-based compensation expense
2,194,390 
 
2,194,390 
 
Discount senior secured convertible note
6,500,000 
 
6,500,000 
 
Shares issued to effect reverse merger
55,000,000 
 
 
 
Common stock issued for services
198,858 
69 
198,789 
 
Common stock issued for services, Shares
69,017 
69,017 
 
 
Common stock issued for Quest Resource Management Group, LLC
55,000,000 
22,000 
54,978,000 
 
Common stock issued for Quest Resource Management Group, LLC, Shares
22,000,000 
22,000,000 
 
 
Note conversions and discounts
3,148,493 
8,473 
3,140,020 
 
Note conversions and discounts, Shares
8,472,539 
8,472,539 
 
 
Warrant conversions
21,698,338 
7,233 
21,691,105 
 
Warrant conversions, Shares
 
7,232,779 
 
 
Net loss
(17,799,351)
 
 
(17,799,351)
Ending Balance at Dec. 31, 2013
$ 53,980,890 
$ 95,815 
$ 119,410,777 
$ (65,525,702)
Ending Balance, Shares at Dec. 31, 2013
 
95,814,565 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities:
 
 
Net loss
$ (17,799,351)
$ (42,151,493)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation
209,375 
68,576 
Amortization of intangibles
1,608,427 
 
Amortization of debt discount and deferred financing costs
3,297,522 
754,396 
Loss on sale/disposition of property and equipment
(9,246)
406 
Equity in Quest Resource Management Group, LLC income
(667,316)
(1,964,540)
Deferred income taxes
 
932,700 
Provision for doubtful accounts
89,005 
7,398 
Stock-based compensation
2,393,248 
1,904,698 
Valuation expense common stock warrants
 
1,490,812 
Financing costs for senior convertible note-related parties
1,465,000 
17,242,526 
Gain on equity interest in Quest Resource Management Group, LLC
(23,449,372)
 
Impairment of goodwill
26,850,039 
17,636,569 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(5,246,794)
(105,932)
Inventory
1,041 
123 
Prepaid expenses and other assets
35,896 
(26,238)
Prepaid income tax
5,108 
84,460 
Security deposits and other assets
80,205 
3,684 
Accounts payable
5,274,322 
(26,160)
Accrued liabilities
1,350,919 
293,686 
Deferred revenue
68,537 
(77,884)
Accrued interest-related parties
 
112,145 
Net cash used in operating activities
(4,443,435)
(3,820,068)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(65,107)
(14,760)
Proceeds from sale of property and equipment
22,788 
100 
Proceeds from reverse merger with YouChange
 
25,269 
Acquisition of customer lists
(150,000)
 
Acquisition of cash - Quest Resource Management Group, LLC
4,235,671 
 
Distributions received from Quest Resource Management Group, LLC
1,114,304 
674,497 
Net cash provided by investing activities
5,157,656 
685,106 
Cash flows from financing activities:
 
 
Proceeds from senior related party secured convertible note
1,000,000 
2,000,000 
Proceeds from line of credit
500,000 
 
Proceeds (repayments) of notes payable
33,067 
(3,333)
Repayments capital lease obligations
(56,032)
(55,795)
Proceeds from issuance of stock
 
416,300 
Financing costs
 
(10,500)
Net cash provided by financing activities
1,477,035 
2,346,672 
Net increase (decrease) in cash and cash equivalents
2,191,256 
(788,290)
Cash and cash equivalents at beginning of period
485,728 
1,274,018 
Cash and cash equivalents at end of period
$ 2,676,984 
$ 485,728 
The Company and Description of Business and Future Liquidity Needs
The Company and Description of Business and Future Liquidity Needs

1. The Company and Description of Business and Future Liquidity Needs

The accompanying consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”), formerly Infinity Resources Holdings Corp., and its subsidiaries, Earth911, Inc. (“Earth911”), Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC, and Youchange, Inc. (“YouChange”) (collectively, “QRHC”, the “Company”, “we”, “us” or “our company”).

On October 17, 2012, immediately prior to closing a merger transaction with Earth911, we filed Amended and Restated Articles of Incorporation to (i) change our name to Infinity Resources Holdings Corp., (ii) increase the shares of common stock authorized for issuance to 100,000,000, (iii) authorize a total of 10,000,000 shares of preferred stock to be designated in series or classes as our board of directors may determine, (iv) effect a 1-for-5 reverse split of our common stock, and (v) divide our board of directors into three classes, as nearly equal in number as possible. On October 17, 2012, we closed the merger transaction (the “Earth911 Merger”) to acquire Earth911 as a wholly owned subsidiary and experienced a change in control in which the former stockholders of Earth911 acquired control of our company. Pursuant to the terms of the merger with Earth911, all outstanding common stock of Earth911 (the “Earth911 Shares”) was exchanged for shares of our common stock at a conversion ratio such that the former stockholders of Earth911 would hold an aggregate of 85% of our issued and outstanding common stock. Therefore, the merger for accounting purposes is considered a reverse merger, with Earth911 treated as the accounting acquirer. In addition, all outstanding Earth911 options and warrants were exchanged and converted into options and warrants for the purchase of our common stock. Pursuant to this conversion ratio, we subsequently (i) issued 49,110,123 shares of our common stock in exchange for the Earth911 Shares, (ii) reserved for issuance an aggregate of 1,831,115 shares issuable upon the exercise of the Earth911 options, and (iii) reserved for issuance an aggregate of 8,786,689 shares issuable upon the exercise of the Earth911 warrants. On December 11, 2012, our board of directors approved a change to our fiscal year end from June 30 to December 31.

On July 16, 2013, we acquired the membership interests of Quest held by Quest Resource Group LLC (“QRG”), comprising 50% of Quest (the “Quest Interests”). Our wholly owned subsidiary, Earth911, held the remaining 50% membership interest of Quest for several years, which is included in these financial statements as Investment in Quest Resource Management Group LLC, an equity method investment. Upon acquisition of the Quest Interests, we assigned the Quest Interests to Earth911 so that Earth911 now owns Quest. We consolidated Quest in these financial statements from July 16, 2013 to December 31, 2013.

On October 28, 2013, we changed our name to Quest Resource Holding Corporation, increased our shares of common stock authorized for issuance to 200,000,000, and changed our trading symbol to “QRHC.”

Operations – We are an environmental solutions company that serves as a single-source provider of full service recycling and waste stream management solutions, as well as environmental program services and information. We offer innovative, cost-effective, one-stop reuse, recycling, and waste disposal management programs designed to provide regional and national customers with a single point of contact for managing a variety of recyclables and disposables. We also own the Earth911.com website, offering original online environmental related content about reuse, recycling, and disposal of waste and recyclables, and we own a comprehensive online database of local recycling and proper disposal options. As of October 28, 2013, our principal offices are located in Frisco, Texas.

Liquidity – During 2013, we restructured and relocated operations of Earth911 and YouChange to reduce future operating expenses and streamline management. We expect that the acquisition of the Quest Interests will provide increased cash flow from operations. In addition, we plan to increase working capital by increasing sales, maintaining efficient operating expenses, and through other initiatives. In addition, our note payable obligations are contingent upon our cash flow requirements.

Pro forma Year Ended December 31, 2013 and 2012 Operating Results – As discussed above and in Note 10 to these financial statements, we previously accounted for Quest as an equity investment. On July 16, 2013, we acquired the remaining 50% membership interests of Quest, and now hold 100% of the membership interests of Quest. The accompanying financial statements consolidate the results of operations of Quest from the date of acquisition.

The following table summarizes our pro forma consolidated operating results for the years ended December 31, 2013 and 2012, assuming Quest had been a wholly owned subsidiary and 100% of Quest’s operations were included in the relevant periods:

     Pro forma  
     Years ended December 31,  
     2013     2012  
     (Unaudited)     (Unaudited)  

Consolidated operating statement information:

    

Net sales

   $ 136,361,242      $ 131,767,312   

Gross profit

     11,427,971        14,043,955   

Income (loss) from operations

     (11,798,709     (19,439,334

Net income (loss)

     (17,128,720     (40,232,245
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principals of Presentation, Consolidation and Reclassifications

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“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, 2013 and 2012, as well as the equity method accounting for its investment in Quest through July 15, 2013.

The Earth911 Merger, which closed on October 17, 2012, was deemed to be a reverse merger, with Earth911 as the accounting acquirer. As such, the operating activity of QRHC is consolidated into these consolidated financial statements for the year ended December 31, 2013, and included for the period after October 17, 2012 for the year ended December 31, 2012. Therefore, the accompanying financial statements include (i) the operating activity of QRHC for the period October 17, 2012 to December 31, 2013; (ii) the operating activities for Earth911 for the years ended December 31, 2013 and 2012 along with the equity method of accounting for our investment in Quest through July 16, 2013; and (iii) the operating activity of Quest subsequent to our acquisition of the Quest Interests on July 16, 2013 through December 31, 2013.

Through July 16, 2013, Quest was deemed to be a separate operating unit from Infinity and as such, there were no intercompany transactions that required elimination at that time. All other intercompany accounts and transactions have been eliminated in consolidation, including transactions between QRHC and Quest subsequent to July 16, 2013. Certain reclassifications have been made to prior year balances to conform to the current year presentation.

As Quest, Earth911, and YouChange are deemed to be operating as ecology based green service companies, no segment reporting was deemed necessary.

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 collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of goodwill and intangible assets, deferred tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible notes, 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

 

    collectability is reasonably assured.

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

 

Delivery Has Occurred or Services Have Been Performed – 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 or accepted customer purchase order.

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

Quest provides businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. Quest utilizes third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when Quest is primarily obligated in a transaction, has latitude in establishing prices and selecting suppliers, has credit risk, or has several but not all of these indicators, revenue is recorded gross and amounts collected from customers for sales tax are recorded on a net basis. In a situation in which Quest is not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we would record the net amounts as management fees earned. Currently, we have no contracts accounted for as management fees.

Earth911 revenue primarily represents licensing fees that are recognized ratably over the term of the license. We derive some revenue from advertising contracts, which is also recognized ratably, over the term that the advertisement appears on our website.

Cash and Cash Equivalents

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

Accounts Receivable

We follow the allowance method of recognizing uncollectible accounts receivable, which recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. Credit is extended based on evaluation of each customer’s financial condition and is generally unsecured. Accounts receivable are typically due within 30 days and are stated net of an allowance for doubtful accounts in the consolidated balance sheet. Accounts are considered 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 credit-worthiness 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. Payments subsequently received on such receivables are credited to bad debt expense in the period the payment is received.

As of December 31, 2013 and 2012, an allowance of $319,735 and $7,398, respectively, had been established for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivables only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2013 and 2012 were as follows:

 

     Years ended December 31,  
     2013     2012  

Beginning balance

   $ 7,398     $ —    

Allowance from Quest acquisition

     263,887     

Bad debt expense, net of recoveries

     62,017        7,398   

Uncollectible accounts written off

     (13,567     —    
  

 

 

   

 

 

 

Ending balance

   $ 319,735      $ 7,398   
  

 

 

   

 

 

 

Inventories

Inventories consist of used consumer electronics and computer devices and are stated at the lower of cost (average cost method which approximates first-in, first-out) or market. We determine cost based on our estimate of the “collection” value of each item, which is what we then pay the supplier. We establish reserves for inventory to reflect situations in which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory and current and expected market conditions. We recorded no provisions for inventory obsolescence as of December 31, 2013 and 2012.

 

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 is 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.

Fair value accounting has been applied to the valuation of stock-based compensation, warrants issued, intangible assets, and goodwill.

Stock Options - We estimate the fair value of stock options on grant date in accordance with ASC Topic 718 using the Black-Scholes-Merton valuation model. Significant Level 3 assumptions used in the calculation are as follows:

 

    Expected term is determined 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;

 

    Expected volatility is measured using the historical changes in the market price of our common stock, disregarding identifiable periods of time in which share price was extraordinarily volatile due to certain events that are not expected to recur during the expected term;

 

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

 

    Forfeitures are based on the history of cancellations of options granted by us and our analysis of potential future forfeitures.

Warrants - We estimate fair value of the warrant liability using Level 3 inputs for the initial valuation of the warrants using the Black-Scholes-Merton valuation model. The March 29, 2013 cashless exercise value was calculated using Level 1 and 3 inputs from the exercise of all warrants that were exercisable on that date and the quoted common stock market price. See Note 9.

Goodwill - The fair value of the reporting unit used in the goodwill impairment analysis performed in the current year was determined assuming the suspension of funding of future development activities of the reporting unit and anticipated continuing negative cash flows from operations. These were determined to be level 3 inputs.

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 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 to be disposed of, if any, at the lower of the carrying amount or fair value less costs to sell. Depreciation expense for the years ended December 31, 2013 and 2012 amounted to $209,375 and $68,576, respectively.

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

 

Computer equipment

     3 to 5 years   

Office furniture and equipment

     5 to 7 years   

Leasehold improvements

     5 to 7 years   

 

We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If we consider such assets to be impaired, we measure the impairment recognized by the amount by which the carrying amount of the assets exceeds the fair value of the assets. We determine fair value based on discounted cash flows or appraised values, depending on the nature of the asset.

Impairment of Long-Lived Assets

We analyze assets that are held and used for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and period at least at each balance sheet date. The effects of any revision are recorded 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 carry assets held for sale, if any, at the lower of carrying amount or fair value less selling costs. We did not recognize impairment charges for long-lived assets during 2013 and 2012.

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 over the (ii) fair value of the net identifiable assets acquired is recorded as goodwill. We do not amortize goodwill; however, we annually, or whenever there is an indication that goodwill may be impaired, evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. After evaluating these qualitative factors, an impairment loss was recorded in 2012 and 2013 because the carrying amount of the reporting unit’s assets exceeded the fair value determined. Future increases in the fair value amount will not result in an adjustment to the impairment loss recorded in our consolidated financial statements. See Note 18 regarding the impairment of goodwill recognized during 2013 and 2012.

Net Loss Per Share

We compute basic net 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. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2013 and 2012 would be dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes (see Note 15), and total 15,164,789 shares at December 31, 2013, and 17,270,346 shares at December 31, 2012.

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 (“FDIC”) insured level per institution. Cash balances on deposit have exceeded federally insured limits; however, we have never experienced any losses related to these balances.

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

 

     Customers Exceeding 10%
of Revenue
 

Year

   Number of
Customers
     Revenue
Combined Percent
    Accounts Receivable
Combined Percent
 

2013

     1         76     31

2012

     1         89     71

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

 

Investment in Quest

We account for investee companies that are not consolidated, but over which we exercise significant influence, under the equity method of accounting. Whether or not we exercise significant influence with respect to an investee depends on an evaluation of several factors, including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Prior to July 17, 2013, we accounted for the investment in Quest under the equity method of accounting, in which the investee company’s accounts are not consolidated within our consolidated balance sheet and statement of operations. Our share of earnings or losses of the investee company is reflected in the caption “Equity in Quest Resource Management Group, LLC income” in our consolidated statement of operations. Our carrying value in an equity method investee company is reflected in the caption “Investment in Quest Resources Management Group, LLC” in our consolidated balance sheet. Subsequent to our acquisition of the Quest Interests, the operational activity and the balance sheet are consolidated with QRHC.

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. All tax positions are first analyzed 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, the tax benefit is measured 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 the penalty was not recognized in the period when the position was initially taken, the expense is recognized 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, 2013 and 2012, advertising expense totaled $29,440 and $108,590, 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. 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 as equity instruments and recognize the vesting of the awards ratably over their respective terms. See Note 14 for a description of our share-based compensation plan and information related to awards granted under the plan.

Reverse Acquisition

We have accounted for the reverse acquisition of Earth911 discussed above in accordance with ASC Subtopics 805-40 (Reverse Acquisitions). The 8,666,488 shares (post-split) of QRHC outstanding immediately prior to the reverse acquisition represent the consideration transferred for the Earth 911 Merger.

Inventories
Inventories

3. Inventories

As of December 31, 2013 and 2012, finished goods inventories were $3,251 and $4,292, respectively, consisting of composite heaters at December 31, 2013 and used consumer electronics and computer devices at December 31, 2012, with no reserve for inventory obsolescence at either date.

Property and Equipment
Property and Equipment

4. Property and Equipment

At December 31, 2013 and December 31, 2012, property and equipment consisted of the following:

 

     As of December 31,  
     2013     2012  

Vehicles

   $ 544,984      $ —     

Computer equipment

     790,987        157,305   

Office furniture and fixtures

     239,662        209,026   

Machinery and equipment

     458,257        —     

Leasehold improvements

     12,363        6,261   
  

 

 

   

 

 

 
     2,046,253        372,592   

Less: accumulated depreciation

     (1,400,768     (215,904
  

 

 

   

 

 

 
   $ 645,485      $ 156,688   
  

 

 

   

 

 

 

We lease certain office furniture and fixtures under agreements that are classified as capital leases. The cost of equipment under these capital leases was $49,163 and $187,357 at December 31, 2013 and December 31, 2012, respectively, and is included in the consolidated financial statements as property and equipment. Accumulated depreciation of the leased equipment at December 31, 2013 and December 31, 2012 was $1,402 and $85,326, respectively.

Intangible Assets
Intangible Assets

5. Intangible Assets

The components of intangible assets are as follows:

 

December 31, 2013    Estimated
Useful Life
     Gross Carrying
Amount
     Accumulated
Amortization
     Net  

Finite lived intangible assets:

           

Customer relationships

     5 years       $ 12,720,000       $ 1,166,000       $ 11,554,000   

Trademarks

     7 years         6,230,000         407,917         5,822,083   

Patents

     7 years         230,683         216,951         13,732   

Customer lists

     5 years         307,153         60,004         247,149   
     

 

 

    

 

 

    

 

 

 

Total intangible assets

      $ 19,487,836       $ 1,850,872       $ 17,636,964   
     

 

 

    

 

 

    

 

 

 

Goodwill

     Indefinite       $ 58,337,290          $ 58,337,290   
     

 

 

       

 

 

 

We compute amortization using the straight-line method over the estimated useful lives of the assets. The amortization expense related to intangible assets subsequent to July 16, 2013 is $1,608,426 for the period ending December 31, 2013. We expect amortization expense to be approximately $3.5 million in the years ending 2014 through 2017 and approximately $2.1 million in the year ending 2018. We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes.

Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     As of December 31,  
     2013      2012  

Compensation

   $ 1,114,252       $ 191,393   

Deferred rent obligation

     930,274         138,926   

Sales and use tax

     484,134         —     

Professional fees

     40,241         302,818   

Insurance

     48,663         —     

Accrued interest and other

     56,206         15,016   
  

 

 

    

 

 

 
   $ 2,673,770       $ 648,153   
  

 

 

    

 

 

 
Line of Credit
Line of Credit

7. Line of Credit

On December 15, 2010, Quest entered into a Revolving Credit Note and Loan Agreement with Regions Bank (“Regions”), a national banking association. This agreement provides Quest with a loan facility up to $10,000,000 for working capital with advances generally limited to 60% of eligible accounts receivable from Quest’s largest customer and 85% of all other eligible accounts receivable. The interest on the outstanding principal amount accrues daily and is payable monthly based on a fluctuating interest rate per annum, which is the base rate plus 1.50% (4.75% as of December 31, 2013). The base rate for any day is the greater of (a) the Federal funds rate plus one-half of 1%, (b) Region’s published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. To secure the amounts due under the agreement, Quest granted Regions a security interest in all of its assets. Quest had $2,750,000 outstanding and approximately $7,250,000 available to be borrowed as of December 31, 2013. As of March 15, 2013, Quest and Regions have made amendments to the loan to extend the term to June 13, 2014.

Convertible Notes Payable
Convertible Notes Payable

8. Convertible Notes Payable

The activity from the date of the merger, October 17, 2012, to December 31, 2013 for convertible notes payable related to YouChange is summarized in the following paragraphs. During the year ended December 31, 2012, $142,218 of principal and $7,747 of interest were converted into 118,038 shares of our common stock. During the year ended December 31, 2013, $107,500 of principal and $6,493 of interest were converted into 89,942 shares of our common stock. As of December 31, 2012, the outstanding convertible notes payable and associated accrued interest described below were converted into a total of approximately 108,680 shares of our common stock. As of December 31, 2013, the outstanding convertible notes payable and associated accrued interest described below were convertible into a total of approximately 22,841 shares of our common stock.

The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.

The following convertible notes payable were outstanding as of December 31, 2013 and 2012:

 

     As of December 31,  
     2013      2012  

Convertible note payable to unrelated parties, issuance date of October 2011

   $ —         $ 10,000   

Convertible note payable to unrelated parties, issuance date of April 2012

     —           5,000   

Convertible note payable to unrelated parties, issuance date of August 2012

     —           10,000   

Convertible note payable to unrelated parties, issuance date of September 2012

     —           10,000   

Convertible note payable to unrelated parties, issuance date of September 2012

     —           12,500   

Convertible note payable to unrelated parties, issuance date of September 2012

     25,000         25,000   

Convertible note payable to unrelated parties, issuance date of October 2012

     —           25,000   

Convertible note payable to unrelated parties, issuance date of October 2012

     —           10,000   

Convertible note payable to unrelated parties, issuance date of October 2012

     —           25,000   
  

 

 

    

 

 

 

Total convertible notes payable—short term

     25,000         132,500   

Less: unamortized discounts due to beneficial conversions features

     —           (33,394
  

 

 

    

 

 

 

Total convertible notes payable—short term, net of discounts

   $ 25,000       $ 99,106   
  

 

 

    

 

 

 

Further details for the outstanding notes payable are as follows:

 

    During October 2011, we issued for cash a $10,000 convertible note to an unrelated, accredited third party. The note matured three months from the date of issuance and was extended for an additional 30 days. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $5,200 for this convertible note. The holder converted the note and its accrued interest during the year ended December 31, 2013 into 9,278 shares of common stock.

 

    During April 2012, we issued for cash a $5,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance and was extended for an additional 30 days. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.75 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $2,712 for this convertible note. The holder converted the note and its accrued interest during the year ended December 31, 2013 into 3,130 shares of common stock.

 

    During August 2012, we issued for cash a $10,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance but could be extended for an additional 30 days at our discretion. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $6,400 for this convertible note. The holder converted the note and its accrued interest during the year ended December 31, 2013 into 8,460 shares of common stock.

 

    During September 2012, we issued for cash a $10,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance but could be extended for an additional 30 days at our discretion. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $8,600 for this convertible note. The holder converted the note and its accrued interest during the year ended December 31, 2013 into 8,339 shares of common stock.

 

    During September 2012, we issued for cash a $12,500 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance but could be extended for an additional 30 days at our discretion. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $10,750 for this convertible note. The holder converted the note and its accrued interest during the year ended December 31, 2013 into 10,418 shares of common stock.

 

    During September 2012, we issued for cash a $25,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance but could be extended for an additional 30 days at our discretion. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $17,500 for this convertible note. Although this note was past its maturity at December 31, 2013 and 2012, the holder converted the note and its accrued interest subsequent to December 31, 2013 into 23,201 shares of common stock.

 

    During October 2012, we issued for cash a $25,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance but could be extended for an additional 30 days at our discretion. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $11,000 for this convertible note. During the period ended September 30, 2013, the holder converted the note and its accrued interest into 21,031 shares of common stock.

 

    During October 2012, we issued for cash a $10,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance but could be extended for an additional 30 days at our discretion. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $2,400 for this convertible note. During the year ended December 31, 2013, the holder converted the note and its accrued interest into 8,292 shares of common stock.

 

    During October 2012, we issued for cash a $25,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance but could be extended for an additional 30 days at our discretion. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $13,000 for this convertible note. During the period ended September 30, 2013, the holder converted the note and its accrued interest into 20,994 shares of common stock.
Long-Term Debt and Capital Lease Obligations
Long-Term Debt and Capital Lease Obligations

9. Long-Term Debt and Capital Lease Obligations

At December 31, 2013 and December 31, 2012, total long-term debt outstanding consisted of the following:

 

     As of December 31,  
     2013     2012  

Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, converted July 16, 2013 (Net of discount of nil and $1,313,897 as of December 31, 2013 and 2012, respectively)

     —          686,103   

Secured convertible notes payable to related parties, 7% interest due monthly in arrears, due July 2016, repayment provisions discussed further below (Net of discount of $4,656,934 and nil as of December 31, 2013 and 2012, respectively)

     17,343,066        —     

Capital lease obligations, imputed interest at 4.75 to 46.0%, with monthly payments of $1,507 and $8,540, through November 2016 and December 2013, secured by computer equipment and office furniture, respectively

     49,163        72,128   
  

 

 

   

 

 

 

Total

     17,392,229        758,231   

Less: current maturities

     (16,096     (72,128
  

 

 

   

 

 

 

Long-term portion

   $ 17,376,133      $ 686,103   
  

 

 

   

 

 

 

Stockbridge Senior Secured Convertible Note - On March 22, 2012, Earth911 entered into a securities purchase agreement with Stockbridge Enterprises, L.P., a related party (“Stockbridge”), pursuant to which Earth911 issued a senior secured convertible note (the “Convertible Note”) and four warrants to Stockbridge. The Convertible Note was secured by all the assets of Earth911. On each of October 10, 2012 and March 29, 2013, the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge (the “Allonge” and the “Second Allonge”). The Convertible Note and warrants were also adjusted for the Earth911 Merger in October 2012. On July 16, 2013, Stockbridge elected to convert $3,000,000 in principal and $34,500 of accrued interest of the Convertible Note into 8,382,597 shares of our common stock.

The amended Convertible Note provided for up to $3,000,000 principal with a maturity date of October 1, 2015, which was extendable under certain circumstances. As of June 30, 2013, the full amount of the principal had been drawn. The annual interest rate was adjusted in October 2012 to 9.0% from the original 6.0% and was due monthly in arrears. Reflecting the adjustment for the Earth911 Merger, the Convertible Note was convertible into shares of our common stock at $0.362 per share prior to the maturity date, subject to a downward formula-based adjustment for future issuances of common stock or stock equivalents under certain conditions whereby the issue price was lower than the conversion price in effect immediately prior to such issue or sale (the “Fixed Conversion Price”). As a result of the Earth911 Merger, our common stock is listed on a United States exchange (a “Triggering Event”); therefore the conversion price was the lower of the Fixed Conversion Price or the average closing bid price during the ten trading days immediately preceding the conversion date.

In connection with the Convertible Note, we issued five-year warrants that were subsequently adjusted for the Earth911 Merger and consisted of the following:

 

  (i) a warrant issued March 2012 to acquire up to 1,381,115 shares of our common stock, exercisable immediately upon execution of the Convertible Note (“Warrant 1-1”);

 

  (ii) three contingent warrants issued March 2012, exercisable only in the event that all outstanding principal and accrued interest on the Convertible Note was not paid in full at such dates, as follows: a warrant to acquire up to 345,278 shares of our common stock, exercisable at the conclusion of 42 months after the issuance date of the warrant (“Warrant 1-2”); a warrant to acquire up to 345,278 shares of our common stock, exercisable at the conclusion of 45 months after the issuance date of the warrant (“Warrant 1-3”); and a warrant to acquire up to 690,557 shares of our common stock, exercisable at the conclusion of 48 months after the issuance date of the warrant (“Warrant 1-4”);

 

  (iii) a warrant issued October 2012 upon execution of the Allonge to acquire up to 5,524,461 shares of our common stock, exercisable immediately (“Warrant 1-5”); and

 

  (iv) a warrant issued March 2013 upon execution of the Second Allonge to acquire up to 500,000 shares of our common stock, exercisable immediately (“Warrant 1-6”).

 

Warrant 1-1 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. Warrant 1-5 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. Warrant 1-6 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date.

Warrant 1-1, Warrant 1-5, and Warrant 1-6 were exercised in March 2013 as part of the Second Allonge using a cashless exercise formula.

If the contingent Warrant 1-2, Warrant 1-3, and Warrant 1-4 had become exercisable, the exercise price would have been the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. The exercise price for all of the warrants was also subject to a downward formula-based adjustment for future issuances of common stock or stock equivalents under certain conditions whereby the issue price is lower than the exercise price in effect immediately prior to such issue or sale. These warrants were cancelled when the Convertible Note was converted on July 16, 2013.

In connection with the issuance of the Convertible Note, Warrant 1-1 and Warrant 1-5 were initially valued and accounted for as a warrant liability of $18,742,526 and allocated as a discount to the Convertible Note of $1,500,000 with the remainder of $17,242,526 expensed as a financing cost. As of December 31, 2012, the warrants were valued at $20,233,338, increasing the warrant liability by $1,490,812 and recording a valuation loss of $1,490,812. See Note 12 regarding the valuations of the warrant liability.

The Convertible Note increased by another $1,000,000 draw during the twelve months ended December 31, 2013, which was accounted for as an additional discount and an adjustment to additional paid-in-capital. The Convertible Note discount total of $3,000,000, which is equal to the amount of the funds drawn on the Convertible Note, was being amortized to interest expense over the life of the Convertible Note beginning March 22, 2012. As of December 31, 2013 and December 31, 2012, the unamortized portion of the debt discount was nil and $1,313,897, respectively. The amount of interest expense related to the amortization of the discount on the Convertible Note for the years ended December 31, 2013 and 2012 was $2,313,897 and $492,696, respectively.

On March 29, 2013, Stockbridge elected to exercise Warrant 1-1, Warrant 1-5, and Warrant 1-6 with exercisable rights in total to purchase 7,405,576 shares of our common stock at $0.37 per share under the cashless exercise option of the Second Allonge. The company determined the net number of shares to issue using the “Cashless Exercise” formula, as amended and restated, as follows:

 

Net Number of Shares to be Issue =

  (A x B) – (A x C)  
               D  

For purposes of the foregoing formula as of March 29, 2013:

A = 7,406,576, the total number of warrant shares with respect to which these warrants were then being exercised.

B = $3.30, the closing price of our common stock plus 10.0% on the date of exercise of the warrant.

C = $0.37, the warrant exercise price then in effect for the applicable warrant shares at the time of such exercise.

D = $3.00, the closing price of our common stock on the date of exercise of the warrant.

Based on the cashless exercise formula, on March 29, 2013 Warrant 1-1, Warrant 1-5, and Warrant 1-6 yielded a net number of shares to be issued of 7,232,779 with a value of $21,698,338 based on the $3.00 closing price of the stock on the date of issue.

Convertible Secured Promissory Notes – Quest Acquisition - In connection with our acquisition of Quest on July 16, 2013, we issued convertible secured promissory notes with a total principal amount of $22,000,000 to the owners of QRG: the Chief Executive Officer of Quest and the former President of Quest, who are also related parties to QRHC. The convertible secured promissory notes (collectively, the “Sellers Notes”) are each secured by a first-priority security interest in a 25% membership interest held by Earth911 in Quest (comprising a total of 50% of the membership interests of Quest), as set forth in security and membership interest pledge agreements, by and between Earth911 and the sellers. The Sellers Notes accrue interest at a rate of 7% per annum and are payable on a monthly basis on the 5th day of the month beginning on September 5, 2013. The principal amount will be due and payable in one installment on July 16, 2016.

 

The Sellers Notes are convertible at any time, in the sole discretion of each holder, into shares of our common stock at a price of $2.00 per share. In addition, the Sellers Notes are convertible, in our sole discretion, into shares of our common stock at a price of $2.00 per share at any time (i) after the two year anniversary of the Notes, (ii) the principal amount of each Sellers Notes has been paid down by $5,000,000 as a result of the first capital raise, (iii) our common stock trades on the Nasdaq Stock Market, the New York Stock Exchange, or NYSE MKT, and (iv) our common stock has traded at four times the $2.00 conversion price, as adjusted for any stock splits, reverse stock splits, or both. If the holders converted the Seller’s Notes as of December 31, 2013, the value of the shares upon conversion would have exceeded the note original principal balance by $1.1 million. Based on our share price at the time the Sellers Notes agreement was entered into, we recognized a beneficial conversion feature of $5,500,000 and discounted the Sellers Notes. As of December 31, 2013, the unamortized discount on the Sellers Notes was $4,656,934. The amount of interest expense related to the Sellers Notes for the period from July 17, 2013 until December 31, 2013 was $708,822. The amount of interest expense related to the amortization of the discount on the Sellers Notes for the period from July 17, 2013 until December 31, 2013 was $843,066.

The following table summarizes future maturities of debt and capital lease obligations, as amended, as of December 31, 2013:

 

Year Ending December 31,

   Amount  

2014

   $ 16,096   

2015

     16,877   

2016

     22,016,190   
  

 

 

 

Subtotal (assuming repayment in cash)

     22,049,163   

Less discount on Convertible Note

     (4,656,934

Less current maturities

     (16,096
  

 

 

 

Total

   $ 17,376,133   
  

 

 

 
Investment in Quest Resource Management Group, LLC
Investment in Quest Resource Management Group, LLC

10. Investment in Quest Resource Management Group, LLC

Prior to July 16, 2013, we held a 50% ownership interest in Quest, which Earth911 acquired on August 21, 2008. Subsequent to the purchase of the Quest Interests on July 16, 2013, 100% of the operating activity of Quest was consolidated into the operations of QRHC and reflects the adjustments for the ownership purchase and valuation of goodwill.

On July 16, 2013, we acquired all of the Quest Interests, held by QRG, comprising 50% of the membership interests of Quest. The purchase price for the Quest Interests consisted of 22,000,000 shares of our common stock issued at a fair market value of $2.50 per share based on the closing price of the stock on the date of the transaction and the Sellers Notes in the aggregate principal amount of $22,000,000. The total purchase price of $77,000,000 was paid to the owners of QRG and related parties: the Chief Executive Officer of Quest and the President of Quest. After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer, and member of the Board of Directors of our company.

Concurrently with our acquisition of the Quest Interests, we assigned the Quest Interests to Earth911, our wholly owned subsidiary, which now holds 100% of Quest. We accounted for the acquisition of Quest under ASC Topic 805; thereby, the acquisition accounting for the acquired Quest Interests and the step up basis of the previously owned 50% interest resulted in the following total purchase price for Quest as follows:

 

Consideration paid for Quest Interest

   $ 77,000,000   

Non-controlling interest in the acquiree at the acquisition date fair value

     27,050,000   
  

 

 

 

Total Consideration

   $ 104,050,000   
  

 

 

 

We primarily employed two methodologies that yielded substantially the same results to determine the fair value of our preexisting equity interest in Quest, which was remeasured as a noncontrolling interest independent of the acquired controlling interest as of the effective date of the acquisition: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; and (ii) the present value of expected future cash flows of Quest, level 2 and level 3 inputs, respectively. In connection with the fair value adjustment to the Investment in Quest Resource Management Group, LLC due to the acquisition, the Company recorded a gain on investment in Quest Resource Management Group of $23,449,372, the difference between the fair value and the carrying amount of the asset on the date of the acquisition.

 

The purchase price allocation as of July 16, 2013 for the assets, liabilities, intangibles and goodwill totaling $104,050,000 was as follows:

 

Net assets and liabilities

   $ 1,214,804   

Customer relationships

     12,720,000   

Trademarks

     6,230,000   

Goodwill

     83,885,196   
  

 

 

 
   $ 104,050,000   
  

 

 

 

The financial condition and operating results of Quest for the relevant periods are presented below:

 

     Years ended December 31,  
     2013     2012  

Condensed operating statement information:

    

Net sales

   $ 135,211,874      $ 130,621,675   

Gross profit

     10,436,628        12,934,339   

Income (loss) from operations

     (3,684,856     4,005,383   

Net income (loss)

     (3,788,086     3,883,788   

Reported as part of the Quest operations for the relevant periods

    

Equity in Quest Resource Management Group, LLC income

    

50% ownership interest

   $ 667,316      $ 1,964,540   

Consolidated amounts subsequent to July 16, 2013

    

100% ownership interest

    

Net sales

   $ 66,335,172      $ —    

Gross margin

     4,082,526        —    

Income (loss) from operations

     (5,075,480     —    

Net income (loss)

     (5,126,033     —    

The balance sheet of Quest as of December 31, 2012 is present below:

 

     December 31,
2012
 

Condensed balance sheet information:

  

Current assets

   $ 20,718,638   

Long-term assets

     2,118,295   
  

 

 

 

Total assets

   $ 22,836,933   
  

 

 

 

Current liabilities

   $ 17,925,175   

Long-term liabilities

     —    

Equity

     4,911,758   
  

 

 

 

Total liabilities and members’ equity

   $ 22,836,933   
  

 

 

 

As of December 31, 2013, the condensed balance sheet and the operations reflect the allocation of the purchase price resulting in additional goodwill and intangible assets of $75,985,196 and the related amortization of the intangible assets of $1,608,426 for the period from July 16, 2013 to December 31, 2013, as well as the impairment of goodwill of $26,850,039, partially offset by a gain on the acquired assets of $23,449,372.

Income Taxes
Income Taxes

11. Income Taxes

We compute income taxes using the asset and liability method in accordance with ASC Topic 740. 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 measured using currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. In our opinion, realization of our net operating loss carry forward is not reasonably assured as of December 31, 2013 or 2012, and valuation allowances of $4,149,000 and $2,433,000, respectively, have been provided against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.

The components of net deferred taxes are as follows:

 

     As of December 31,  
     2013     2012  

Deferred tax assets (liabilities):

    

Net operating loss

   $ 4,212,000        1,029,000   

Stock-based compensation

     2,103,000        1,177,000   

Accrued interest expense

     150,000        155,000   

Allowance for doubtful accounts

     47,000        22,000   

Deferred lease liability

     70,000        50,000   
  

 

 

   

 

 

 

Total deferred tax assets

     6,582,000        2,433,000   

Less: valuation allowance

     (6,582,000     (2,433,000
  

 

 

   

 

 

 

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,  
     2013     2012  

U.S. federal statutory rate applied to pretax income

   $ (6,051,780   $ (11,713,000

Permanent differences

     2,739,048        10,344,000   

State taxes and other

     1,597,415        (123,000

Change in valuation allowance

     1,715,317        2,433,000   
  

 

 

   

 

 

 
   $ —       $ 941,000   
  

 

 

   

 

 

 

As of December 31, 2013, we had federal income tax net operating loss carry forwards of approximately $4,212,000, which expire at various dates beginning in 2032. We are subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss.

As of December 31, 2013, 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 2014. 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 2013 to 2011. Tax audits by their very nature are often complex and can require several years to complete. Prior to July 13, 2010, as a limited liability company, we were not a tax paying entity for federal and state income tax purposes. Accordingly, our taxable income or loss was allocated to our members in accordance with their respective percentage ownership.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

12. Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, convertible notes payable, notes payable, and warrant liability. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments. With the exception of the warrant liability, the fair values of these financial instruments approximates their carrying values using Level 3 inputs, based on their short maturities or for long-term debt based on borrowing rates currently available to us for loans with similar terms and maturities. Gains and losses recognized on changes in fair value of convertible notes and warrant liability are reported in other income (expense).

Our initial warrant valuation of the warrants issued in 2012 as described more fully in Note 9 was measured at fair value by applying the Black-Scholes-Merton option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes-Merton option valuation for the warrants are as follows: volatility of 66%; risk free interest rate of 1%; expected term of five years; and expected dividend yield of 0%. The grant date fair value of the initial warrant valuation described above was $2.56 per warrant. The risk free interest rate is based on U.S. Treasury rates with maturity dates approximating the expected term of the warrants. At the time of the initial warrant valuation, we were a private company and common stock transactions were too infrequent. Therefore, we could not practicably estimate the expected volatility of our own stock. Accordingly, we have substituted the historical volatility of a relevant sector index, which we have generated from companies that are publicly traded and do business within the industry we operate.

The March 29, 2013 and December 31, 2012 warrant valuations were measured at fair value by utilizing the quoted market price for our common stock and the valuation for the cashless exercise of Warrant 1-1, Warrant 1-5, and Warrant 1-6 in March 2013, which are Level 1 and Level 2 inputs. These inputs of (i) an observable warrant exercise transaction and (ii) publicly traded market price provided a reasonable basis for valuation for the warrants as of March 29, 2013 and December 31, 2012. Based on that valuation using the $3.00 closing market price and exercisable rights in total to purchase 6,905,576 shares of our common stock at $0.37 per share, Warrant 1-1 and Warrant 1-5 had a value of $20,233,338. Using the same valuation method, Warrant 1-6 had a value of $1,465,000 upon issuance on March 29, 2013. All three warrants were exercised on March 29, 2013. See Note 9 regarding the exercise of these warrants.

The following table summarizes the warrant liability valuation for the years ended December 31, 2013 and 2012:

 

Description

   Fair Value Measurements
Warrant Liability
 

Beginning balance, December 31, 2011

   $ —    

Issuances (Level 3)

     18,742,526   

Total (gains) or losses (Level 1 and 2)

     1,490,812   
  

 

 

 

Ending balance, December 31, 2012

   $ 20,233,338   

Issuances (Level 3)

     1,465,000   

Warrant conversion (Level 1 and 2)

     (21,698,338
  

 

 

 

Ending balance, December 31, 2013

   $ —    
  

 

 

 

Commitments and Contingencies
Commitments and Contingencies

13. Commitments and Contingencies

We lease corporate office space in Frisco, Texas under a 60 month, non-cancelable operating lease. The lease expires in September 2015. Additionally, we lease corporate office space in Scottsdale, Arizona under a 66 month, non-cancelable operating lease, which we fully reserved in 2013 during the restructuring and relocating of our Earth911 and YouChange operations. The lease expires in March 2017 and provides for a renewal option of 60 months. Lease expense totaled $271,383 and $287,806 for the years ended December 31, 2013 and 2012, respectively.

The following is a schedule, by year, of future minimum rental payments required under the operating lease agreement as of December 31, 2013:

 

Year Ended December 31,

   Amount  

2014

   $ 278,118   

2015

     218,178   

2016

     28,638   

2017

     28,638   
  

 

 

 
   $ 553,572   
  

 

 

 

 

Our operating lease agreement contains a provision that abate rent payments for a period of five months. The total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is charged to accrued liabilities in the accompanying balance sheets.

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 have no liabilities recorded for these agreements as of December 31, 2013 or 2012.

Stockholders' Equity
Stockholders' Equity

14. Stockholders’ Equity

Preferred Stock - Our 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 95,814,565 shares and 58,040,230 shares were issued and outstanding as of December 31, 2013 and 2012, respectively.

During the year ended December 31, 2013, we issued shares of common stock as follows:

 

     Common Stock
Shares
     Amount  

Common stock issued for services

     69,017       $ 198,858   

Common stock issued for Quest acquisition

     22,000,000         55,000,000   

Note and interest conversions

     8,472,539         3,148,493   

Warrant conversions

     7,232,779         21,698,338   
  

 

 

    

 

 

 
     37,774,335       $ 80,045,689   

Common Stock for Services - We issued 69,017 shares of common stock to employees and consultants during the year ended December 31, 2013 for $198,858 of services included in operating expenses.

Warrants – At December 31, 2012, we had outstanding exercisable warrants, as adjusted, to purchase 6,905,576 shares of common stock at $0.37 per share. On March 29, 2013, we issued an exercisable warrant to purchase 500,000 shares of common stock at $0.37 per share. As of December 31, 2013, there were no outstanding exercisable warrants remaining after the exercise of the warrants on March 29, 2013 for 7,405,576 shares. At December 31, 2012, we had outstanding contingent warrants, as adjusted, to purchase 1,381,113 shares of common stock at $0.37 per share, which were cancelled upon conversion of the Convertible Note on July 16, 2013. See the discussion under Note 9 for further details regarding the issued warrants related to the Convertible Note, subsequent amendment, and exercise of warrants.

 

The following table summarizes the warrants issued and outstanding as of December 31, 2013:

 

Warrants Issued and Outstanding as of December 31, 2013

 
     Date of      Exercise
Price
     Shares of  

Description

   Issuance      Expiration         Common Stock  

Exercisable warrants

           

Warrant 1-1

     03/22/12         03/21/17       $ 0.37         1,381,115   

Warrant 1-5

     10/10/12         10/09/17       $ 0.37         5,524,461   

Warrant 1-6

     03/29/13         03/21/17       $ 0.37         500,000   

Less warrants exercised

              (7,405,576
           

 

 

 

Total exercisable warrants

              —     

Contingent warrants

           

Warrant 1-2

     03/22/12         03/21/17       $ 0.37         345,278   

Warrant 1-3

     03/22/12         03/21/17       $ 0.37         345,278   

Warrant 1-4

     03/22/12         03/21/17       $ 0.37         690,557   

Less warrants cancelled

              (1,381,113
           

 

 

 

Total contingent warrants

              —     
           

 

 

 

Total warrants issued and outstanding

  

     —     
           

 

 

 

Stock Option 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 purposes of the plan are to attract and retain individuals, further align employee and stockholder interests, and closely link compensation with our performance. The plan is administered by our board of directors. Our policy is to fulfill any exercise of options from common stock that is authorized and unissued. The maximum number of shares of common stock available for grant under the plan is 7,500,000. Stock compensation expense prior to October 2012 related to options granted prior to the Earth911 Merger that was superseded by the 2012 Plan at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to adjustment for certain corporate changes in accordance with the provisions of the plan.

Following is a summary of stock option activity from January 1, 2012 through December 31, 2013:

 

     Stock Options  
     Number of
Shares
     Exercise
Price Per
Share
     Weighted-
Average
Exercise Price
Per Share
 

Outstanding at January 1, 2012

     1,381,115      $ 2.35      $ 2.35  

Granted

     1,969,000         2.00 – 2.79         2.10   

Canceled/Forfeited

     —          —          —    
  

 

 

       

Outstanding at December 31, 2012

     3,350,115         2.00 – 2.79         2.20   

Granted

     1,150,500         2.05 – 2.65         2.11   

Canceled/Forfeited

     358,667        2.10 – 2.79        2.18  
  

 

 

       

Outstanding at December 31, 2013

     4,141,948         2.00 – 3.25         2.48   
  

 

 

       

The weighted-average grant-date fair value of options granted was $1.69 and $2.10 for the years ended December 31, 2013 and 2012, respectively.

For the years ended December 31, 2013 and 2012, the intrinsic value of options outstanding was $72,125 and $2,331,698, respectively, and of options exercisable was $22,500 and $1,199,613, respectively.

 

The following additional information applies to options outstanding at December 31, 2013:

 

Ranges of

Exercise

Prices

   Outstanding at
December 31,
2013
     Weighted-
Average
Remaining
Contractual
Life
     Weighted-
Average
Exercise
Price
     Exercisable at
December 31,
2013
     Weighted-
Average
Exercise
Price
 

$2.00 – $3.25

     4,141,948         8.5       $ 2.48         2,939,448       $ 2.63   

The following additional information applies to options outstanding at December 31, 2012:

 

Ranges of

Exercise

Prices

   Outstanding at
December 31,
2012
     Weighted-
Average
Remaining
Contractual
Life
     Weighted-
Average
Exercise
Price
     Excercisable at
December 31,
2012
     Weighted-
Average
Exercise
Price
 

$2.00 – $2.79

     3,350,115         9.6       $ 2.20         1,922,782       $ 2.27   

Stock-based compensation expense for stock based incentive awards was $2,194,390 and $1,661,673 for the years ended December 31, 2013 and 2012, respectively. At December 31, 2013, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, was approximately $2,435,000. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.2 years.

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

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

The weighted-average estimated value of employee stock options granted during the years ended December 31, 2013 and 2012 were estimated using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

 

     Years Ended December 31,  
     2013     2012  

Expected volatility

     105     155

Risk-free interest rate

     1.51     0.70

Expected dividends

     0.00     0.00

Expected term in years

     5.8        5.4   

Net Loss per Share
Net Loss per Share

15. 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. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially dilutive securities outstanding that are not shown in a diluted loss per share calculation because their effect in both 2013 and 2012 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes and totaled 15,164,789 and 17,270,346 shares at December 31, 2013 and 2012, respectively.

The following table sets forth the computation of basic and diluted loss per share:

 

     Years ended December 31,  
     2013     2012  

Net loss applicable to common stockholders—numerator for basic and diluted earnings per share

   $ (17,799,351   $ (42,151,493
  

 

 

   

 

 

 

Weighted—average common shares outstanding—denominator for basic earnings per share

     77,055,327        56,988,497   

Net loss per share:

    

Basic and diluted

   $ (0.23   $ (0.74
  

 

 

   

 

 

 

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

 

Anti-dilutive securities excluded from diluted loss per share:

     

Stock options

     4,141,948         3,350,115   

Warrants

     —          8,286,689   

Convertible notes

     11,022,841         5,633,542   
Supplemental Cash Flow Information
Supplemental Cash Flow Information

16. Supplemental Cash Flow Information

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

 

     Years Ended December 31,  
     2013      2012  

Supplemental cash flow information:

     

Cash paid for interest

   $ 898,757       $ 114,266   

Cash flows from operating activities:

     

Common stock issued for deferred compensation

   $ —         $ 260,000   

Common stock issued for conversion of related party debt, including accrued interest

   $ —         $ 6,389,042   

Common stock issued for conversion of notes payable, including accrued interest

   $ 3,148,493       $ 187,466   

Common stock issued for services and loan fees

   $ 198,858       $ 366,025   

Common stock warrant liability and revaluations

   $ —         $ 20,233,338   

Common stock issued for warrant liability – cashless exercise

   $ 21,698,338       $ —     

Common stock issued for purchase of Quest Resource Management Group, LLC

   $ 55,000,000       $ —     

Long-term senior secured convertible notes – related parties

   $ 22,000,000       $ —     

Mezzanine financing reclassified to additional paid in capital

   $ —         $ 1,375,933     

Discount to senior convertible note-related party

   $ 6,500,000       $ 2,000,000   

Related Party Transactions
Related Party Transactions

17. Related Party Transactions

Stockbridge Convertible Note - In March 2012, we issued the Convertible Note to Stockbridge, a related party. In connection with the issuance of the Convertible Note, we issued four warrants (Warrants1-1 through 1-4) in March 2012. On July 16, 2013, Stockbridge elected to convert $3,000,000 in principal and $34,500 of accrued interest of the Convertible Note of into 8,382,597 shares of our common stock. With the conversion, the contingent Warrants 1-2, 1-3, and 1-4 were cancelled.

Allonge to the Convertible Note - In October 2012, we amended the Convertible Note. The original principal amount was increased to $3,000,000 from the original $1,000,000 amount. The maturity of the note was changed to October 1, 2014. The conversion rate of the Convertible Note was changed to $.50 per common share prior to the maturity date and $.25 per common share after the maturity, subject to certain adjustments. In connection with the amendment, we issued Warrant 1-5 in October 2012 and issued 100,000 shares of our common stock.

Second Allonge to the Convertible Note - On March 29, 2013, the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge. Under the amendment on March 29, 2013, Earth911 and Stockbridge entered into the Second Allonge, pursuant to which the parties agreed to (i) change all references to common stock, options, warrants, warrant shares, or

convertible securities of Earth911 in the original note documents and the Allonge documents to our common stock, options, warrants, warrant shares, or convertible securities, respectively, and (ii) expand all references to a “Triggering Event” in the original note documents and the Allonge documents to include any exchanges on which our common stock may be listed or quoted for trading. The parties also (i) amended how the fair market value of our common stock, on the date of exercise, would be defined in a formula used to calculate the net number of shares that Stockbridge would receive upon a cashless exercise, (ii) extended the maturity date of the Convertible Note to October 1, 2015, (iii) revised the terms of Warrant 1-5 to apply the conversion rate from the Earth911 to the number of shares of our common stock underlying Warrant 1-5 and the exercise price at which such shares would be issued upon the exercise date, and (iv) amended the exercisable dates of the contingent Warrant 1-2, the contingent Warrant 1-3, and the contingent Warrant 1-4 to be exercisable 42 months, 45 months, and 48 months, respectively, following the issuance date of the contingent warrants. Finally, Stockbridge retroactively agreed to waive its right to effect a partial conversion of the Convertible Note, with such waiver to be effective for a period of 12 months from October 17, 2012.

 

To effect the changes in the Second Allonge, we issued to Stockbridge an additional warrant to purchase 500,000 shares of our common stock (“Warrant 1-6”). Warrant 1-6 is exercisable at or after the date of the Second Allonge, and is in the same form as Warrant 1-5, as amended by the Second Allonge. Warrant 1-6 will expire five years from the date of issuance.

See Note 9 for a discussion of the Convertible Note and of the exercise of the related exercisable warrants in March 2013.

Acquisition of the Quest Interests - On July 16, 2013, we acquired all of the Quest Interests held by QRG, comprising 50% of the membership interests of Quest. The purchase price for the Quest Interests consisted of 22,000,000 shares of our common stock issued at a fair market value of $2.50 per share based on the closing price of the stock on the date of the transaction and the Sellers Notes as described in Note 9 in the aggregate principal amount of $22,000,000. The total purchase price of $77,000,000 was paid to the owners of QRG who at the time of the transaction were related parties: the Chief Executive Officer of Quest and the President of Quest. After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer and member of the Board of Directors of our company. Unpaid interest related to the Sellers Notes at December 31, 2013 was $132,878.

The Securities Purchase Agreement provides that QRG and its members may not engage or take a financial interest in any Competitive Business within the Restricted Territory (each as defined in the Securities Purchase Agreement) for a period of five years. The Securities Purchase Agreement also provides restrictions with respect to customers of Quest and non-solicitation of employees of Quest for a period of five years. The Securities Purchase Agreement further provides that if there is an event of default on the Sellers Notes, QRG and its members may compete with us and solicit customers, provided that they resign from all positions held with us first.

Goodwill Impairment
Goodwill Impairment

18. Goodwill Impairment

Goodwill is accounted for in accordance with ASC Topic 350 and is assigned to reporting units based on where the related acquired net assets are assigned and based on management’s expectations about which reporting units will benefit from the synergies of the acquired business. Goodwill is tested for impairment when events and circumstances warrant and at least annually. An impairment loss is recognized if the carrying amount of an asset or reporting unit exceeds its fair value. We primarily employ two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; or (ii) the present value of expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows.

During 2012, we recognized $17,636,569 of goodwill impairment based on our goodwill impairment testing. We determined that due to capital constraints, we curtailed the planned expansion of YouChange, and we were not able to quantify with any certainty the future cash flows and therefore the fair value of the reporting unit as of December 31, 2012 resulting in a full impairment of the goodwill.

For the year ending December 31, 2013, we recognized $26,850,039 of goodwill impairment based on our goodwill impairment testing. We determined that the carrying amount of the reporting unit exceeded the fair value and recorded a goodwill impairment charge. In connection with the acquisition that gave rise to the goodwill, we recorded in 2013 a $23,449,372 gain on our equity method based investment in Quest. The impact of the goodwill impairment and the gain on investment is a net expense of $3,400,667 included in the operating loss for the year ended December 31, 2013.

Subsequent Events
Subsequent Events

19. Subsequent Events

Line of Credit

As of March 15, 2014, Quest and Regions have amended the loan to extend the term to June 13, 2014.

Convertible Notes Payable

On February 24, 2014, the unrelated third-party holder of the YouChange convertible note payable issued in September 2012 converted the note and its accrued interest into 23,201 shares of common stock.

Summary of Significant Accounting Policies (Policies)

Principals of Presentation, Consolidation and Reclassifications

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“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, 2013 and 2012, as well as the equity method accounting for its investment in Quest through July 15, 2013.

The Earth911 Merger, which closed on October 17, 2012, was deemed to be a reverse merger, with Earth911 as the accounting acquirer. As such, the operating activity of QRHC is consolidated into these consolidated financial statements for the year ended December 31, 2013, and included for the period after October 17, 2012 for the year ended December 31, 2012. Therefore, the accompanying financial statements include (i) the operating activity of QRHC for the period October 17, 2012 to December 31, 2013; (ii) the operating activities for Earth911 for the years ended December 31, 2013 and 2012 along with the equity method of accounting for our investment in Quest through July 16, 2013; and (iii) the operating activity of Quest subsequent to our acquisition of the Quest Interests on July 16, 2013 through December 31, 2013.

Through July 16, 2013, Quest was deemed to be a separate operating unit from Infinity and as such, there were no intercompany transactions that required elimination at that time. All other intercompany accounts and transactions have been eliminated in consolidation, including transactions between QRHC and Quest subsequent to July 16, 2013. Certain reclassifications have been made to prior year balances to conform to the current year presentation.

As Quest, Earth911, and YouChange are deemed to be operating as ecology based green service companies, no segment reporting was deemed necessary.

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 collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of goodwill and intangible assets, deferred tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible notes, 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

 

   

collectability is reasonably assured.

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

Delivery Has Occurred or Services Have Been Performed – 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 or accepted customer purchase order.

 

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

Quest provides businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. Quest utilizes third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when Quest is primarily obligated in a transaction, has latitude in establishing prices and selecting suppliers, has credit risk, or has several but not all of these indicators, revenue is recorded gross and amounts collected from customers for sales tax are recorded on a net basis. In a situation in which Quest is not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we would record the net amounts as management fees earned. Currently, we have no contracts accounted for as management fees.

Earth911 revenue primarily represents licensing fees that are recognized ratably over the term of the license. We derive some revenue from advertising contracts, which is also recognized ratably, over the term that the advertisement appears on our website.

Cash and Cash Equivalents

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

Accounts Receivable

We follow the allowance method of recognizing uncollectible accounts receivable, which recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. Credit is extended based on evaluation of each customer’s financial condition and is generally unsecured. Accounts receivable are typically due within 30 days and are stated net of an allowance for doubtful accounts in the consolidated balance sheet. Accounts are considered 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 credit-worthiness 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. Payments subsequently received on such receivables are credited to bad debt expense in the period the payment is received.

As of December 31, 2013 and 2012, an allowance of $319,735 and $7,398, respectively, had been established for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivables only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2013 and 2012 were as follows:

 

     Years ended December 31,  
     2013     2012  

Beginning balance

   $ 7,398     $ —    

Allowance from Quest acquisition

     263,887     

Bad debt expense, net of recoveries

     62,017        7,398   

Uncollectible accounts written off

     (13,567     —    
  

 

 

   

 

 

 

Ending balance

   $ 319,735      $ 7,398   
  

 

 

   

 

 

 

Inventories

Inventories consist of used consumer electronics and computer devices and are stated at the lower of cost (average cost method which approximates first-in, first-out) or market. We determine cost based on our estimate of the “collection” value of each item, which is what we then pay the supplier. We establish reserves for inventory to reflect situations in which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory and current and expected market conditions. We recorded no provisions for inventory obsolescence as of December 31, 2013 and 2012.

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 is 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.

Fair value accounting has been applied to the valuation of stock-based compensation, warrants issued, intangible assets, and goodwill.

Stock Options - We estimate the fair value of stock options on grant date in accordance with ASC Topic 718 using the Black-Scholes-Merton valuation model. Significant Level 3 assumptions used in the calculation are as follows:

 

    Expected term is determined 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;

 

    Expected volatility is measured using the historical changes in the market price of our common stock, disregarding identifiable periods of time in which share price was extraordinarily volatile due to certain events that are not expected to recur during the expected term;

 

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

 

    Forfeitures are based on the history of cancellations of options granted by us and our analysis of potential future forfeitures.

Warrants - We estimate fair value of the warrant liability using Level 3 inputs for the initial valuation of the warrants using the Black-Scholes-Merton valuation model. The March 29, 2013 cashless exercise value was calculated using Level 1 and 3 inputs from the exercise of all warrants that were exercisable on that date and the quoted common stock market price. See Note 9.

Goodwill - The fair value of the reporting unit used in the goodwill impairment analysis performed in the current year was determined assuming the suspension of funding of future development activities of the reporting unit and anticipated continuing negative cash flows from operations. These were determined to be level 3 inputs.

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 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 to be disposed of, if any, at the lower of the carrying amount or fair value less costs to sell. Depreciation expense for the years ended December 31, 2013 and 2012 amounted to $209,375 and $68,576, respectively.

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

 

Computer equipment

     3 to 5 years   

Office furniture and equipment

     5 to 7 years   

Leasehold improvements

     5 to 7 years   

 

We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If we consider such assets to be impaired, we measure the impairment recognized by the amount by which the carrying amount of the assets exceeds the fair value of the assets. We determine fair value based on discounted cash flows or appraised values, depending on the nature of the asset.

Impairment of Long-Lived Assets

We analyze assets that are held and used for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and period at least at each balance sheet date. The effects of any revision are recorded 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 carry assets held for sale, if any, at the lower of carrying amount or fair value less selling costs. We did not recognize impairment charges for long-lived assets during 2013 and 2012.

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 over the (ii) fair value of the net identifiable assets acquired is recorded as goodwill. We do not amortize goodwill; however, we annually, or whenever there is an indication that goodwill may be impaired, evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. After evaluating these qualitative factors, an impairment loss was recorded in 2012 and 2013 because the carrying amount of the reporting unit’s assets exceeded the fair value determined. Future increases in the fair value amount will not result in an adjustment to the impairment loss recorded in our consolidated financial statements. See Note 18 regarding the impairment of goodwill recognized during 2013 and 2012.

Net Loss Per Share

We compute basic net 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. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2013 and 2012 would be dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes (see Note 15), and total 15,164,789 shares at December 31, 2013, and 17,270,346 shares at December 31, 2012.

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 (“FDIC”) insured level per institution. Cash balances on deposit have exceeded federally insured limits; however, we have never experienced any losses related to these balances.

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

 

     Customers Exceeding 10%
of Revenue
 

Year

   Number of
Customers
     Revenue
Combined Percent
    Accounts Receivable
Combined Percent
 

2013

     1         76     31

2012

     1         89     71

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

Investment in Quest

We account for investee companies that are not consolidated, but over which we exercise significant influence, under the equity method of accounting. Whether or not we exercise significant influence with respect to an investee depends on an evaluation of several factors, including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Prior to July 17, 2013, we accounted for the investment in Quest under the equity method of accounting, in which the investee company’s accounts are not consolidated within our consolidated balance sheet and statement of operations. Our share of earnings or losses of the investee company is reflected in the caption “Equity in Quest Resource Management Group, LLC income” in our consolidated statement of operations. Our carrying value in an equity method investee company is reflected in the caption “Investment in Quest Resources Management Group, LLC” in our consolidated balance sheet. Subsequent to our acquisition of the Quest Interests, the operational activity and the balance sheet are consolidated with QRHC.

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. All tax positions are first analyzed 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, the tax benefit is measured 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 the penalty was not recognized in the period when the position was initially taken, the expense is recognized 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, 2013 and 2012, advertising expense totaled $29,440 and $108,590, 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. 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 as equity instruments and recognize the vesting of the awards ratably over their respective terms. See Note 14 for a description of our share-based compensation plan and information related to awards granted under the plan.

Reverse Acquisition

We have accounted for the reverse acquisition of Earth911 discussed above in accordance with ASC Subtopics 805-40 (Reverse Acquisitions). The 8,666,488 shares (post-split) of QRHC outstanding immediately prior to the reverse acquisition represent the consideration transferred for the Earth 911 Merger.

The Company and Description of Business and Future Liquidity Needs (Tables)
Summarized Pro Forma Consolidated Operating Results

The following table summarizes our pro forma consolidated operating results for the years ended December 31, 2013 and 2012, assuming Quest had been a wholly owned subsidiary and 100% of Quest’s operations were included in the relevant periods:

     Pro forma  
     Years ended December 31,  
     2013     2012  
     (Unaudited)     (Unaudited)  

Consolidated operating statement information:

    

Net sales

   $ 136,361,242      $ 131,767,312   

Gross profit

     11,427,971        14,043,955   

Income (loss) from operations

     (11,798,709     (19,439,334

Net income (loss)

     (17,128,720     (40,232,245
Summary of Significant Accounting Policies (Tables)

The changes in our allowance for doubtful accounts for the years ended December 31, 2013 and 2012 were as follows:

 

     Years ended December 31,  
     2013     2012  

Beginning balance

   $ 7,398     $ —    

Allowance from Quest acquisition

     263,887     

Bad debt expense, net of recoveries

     62,017        7,398   

Uncollectible accounts written off

     (13,567     —    
  

 

 

   

 

 

 

Ending balance

   $ 319,735      $ 7,398   
  

 

 

   

 

 

 

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

 

Computer equipment

     3 to 5 years   

Office furniture and equipment

     5 to 7 years   

Leasehold improvements

     5 to 7 years   

The following table discloses the number of customers that accounted for more than 10% of our annual revenue and related receivable balances:

 

     Customers Exceeding 10%
of Revenue
 

Year

   Number of
Customers
     Revenue
Combined Percent
    Accounts Receivable
Combined Percent
 

2013

     1         76     31

2012

     1         89     71
Property and Equipment (Tables)
Components of Property and Equipment

At December 31, 2013 and December 31, 2012, property and equipment consisted of the following:

 

     As of December 31,  
     2013     2012  

Vehicles

   $ 544,984      $ —     

Computer equipment

     790,987        157,305   

Office furniture and fixtures

     239,662        209,026   

Machinery and equipment

     458,257        —     

Leasehold improvements

     12,363        6,261   
  

 

 

   

 

 

 
     2,046,253        372,592   

Less: accumulated depreciation

     (1,400,768     (215,904
  

 

 

   

 

 

 
   $ 645,485      $ 156,688   
  

 

 

   

 

 

 
Intangible Assets (Tables)
Schedule of Intangible Assets

The components of intangible assets are as follows:

 

December 31, 2013    Estimated
Useful Life
     Gross Carrying
Amount
     Accumulated
Amortization
     Net  

Finite lived intangible assets:

           

Customer relationships

     5 years       $ 12,720,000       $ 1,166,000       $ 11,554,000   

Trademarks

     7 years         6,230,000         407,917         5,822,083   

Patents

     7 years         230,683         216,951         13,732   

Customer lists

     5 years         307,153         60,004         247,149   
     

 

 

    

 

 

    

 

 

 

Total intangible assets

      $ 19,487,836       $ 1,850,872       $ 17,636,964   
     

 

 

    

 

 

    

 

 

 

Goodwill

     Indefinite       $ 58,337,290          $ 58,337,290   
     

 

 

       

 

 

 
Accrued Expenses and Other Current Liabilities (Tables)
Summary of Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     As of December 31,  
     2013      2012  

Compensation

   $ 1,114,252       $ 191,393   

Deferred rent obligation

     930,274         138,926   

Sales and use tax

     484,134         —     

Professional fees

     40,241         302,818   

Insurance

     48,663         —     

Accrued interest and other

     56,206         15,016   
  

 

 

    

 

 

 
   $ 2,673,770       $ 648,153   
  

 

 

    

 

 

 
Convertible Notes Payable (Tables)
Summary of Convertible Notes Payable Outstanding

The following convertible notes payable were outstanding as of December 31, 2013 and 2012:

     As of December 31,  
     2013      2012  

Convertible note payable to unrelated parties, issuance date of October 2011

   $ —         $ 10,000   

Convertible note payable to unrelated parties, issuance date of April 2012

     —           5,000   

Convertible note payable to unrelated parties, issuance date of August 2012

     —           10,000   

Convertible note payable to unrelated parties, issuance date of September 2012

     —           10,000   

Convertible note payable to unrelated parties, issuance date of September 2012

     —           12,500   

Convertible note payable to unrelated parties, issuance date of September 2012

     25,000         25,000   

Convertible note payable to unrelated parties, issuance date of October 2012

     —           25,000   

Convertible note payable to unrelated parties, issuance date of October 2012

     —           10,000   

Convertible note payable to unrelated parties, issuance date of October 2012

     —           25,000   
  

 

 

    

 

 

 

Total convertible notes payable—short term

     25,000         132,500   

Less: unamortized discounts due to beneficial conversions features

     —           (33,394
  

 

 

    

 

 

 

Total convertible notes payable—short term, net of discounts

   $ 25,000       $ 99,106   
  

 

 

    

 

 

 
Long-Term Debt and Capital Lease Obligations (Tables)

At December 31, 2013 and December 31, 2012, total long-term debt outstanding consisted of the following:

 

     As of December 31,  
     2013     2012  

Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, converted July 16, 2013 (Net of discount of nil and $1,313,897 as of December 31, 2013 and 2012, respectively)

     —          686,103   

Secured convertible notes payable to related parties, 7% interest due monthly in arrears, due July 2016, repayment provisions discussed further below (Net of discount of $4,656,934 and nil as of December 31, 2013 and 2012, respectively)

     17,343,066        —     

Capital lease obligations, imputed interest at 4.75 to 46.0%, with monthly payments of $1,507 and $8,540, through November 2016 and December 2013, secured by computer equipment and office furniture, respectively

     49,163        72,128   
  

 

 

   

 

 

 

Total

     17,392,229        758,231   

Less: current maturities

     (16,096     (72,128
  

 

 

   

 

 

 

Long-term portion

   $ 17,376,133      $ 686,103   
  

 

 

   

 

 

 

The following table summarizes future maturities of debt and capital lease obligations, as amended, as of December 31, 2013:

 

Year Ending December 31,

   Amount  

2014

   $ 16,096   

2015

     16,877   

2016

     22,016,190   
  

 

 

 

Subtotal (assuming repayment in cash)

     22,049,163   

Less discount on Convertible Note

     (4,656,934

Less current maturities

     (16,096
  

 

 

 

Total

   $ 17,376,133   
  

 

 

 
Investment in Quest Resource Management Group, LLC (Tables)

The following total purchase price for Quest as follows:

 

Consideration paid for Quest Interest

   $ 77,000,000   

Non-controlling interest in the acquiree at the acquisition date fair value

     27,050,000   
  

 

 

 

Total Consideration

   $ 104,050,000   
  

 

 

 

The acquisition accounting for the acquired Quest Interests and the step up basis of the previously owned 50% interest resulted in assets, liabilities, intangibles and goodwill totaling $77,200,000 as follows:

 

Net assets and liabilities

   $ 1,214,804   

Customer relationships

     12,720,000   

Trademarks

     6,230,000   

Goodwill

     57,035,196   
  

 

 

 
   $ 77,200,000   
  

 

 

 

The financial condition and operating results of Quest for the relevant periods are presented below:

 

     Years ended December 31,  
     2013     2012  

Condensed operating statement information:

    

Net sales

   $ 135,211,874      $ 130,621,675   

Gross profit

     10,436,628        12,934,339   

Income (loss) from operations

     (3,684,856     4,005,383   

Net income (loss)

     (3,788,086     3,929,080   

Reported as part of the Quest operations for the relevant periods

    

Equity in Quest Resource Management Group, LLC income

    

50% ownership interest

   $ 667,316      $ 1,964,540   

Consolidated amounts subsequent to July 16, 2013

    

100% ownership interest

    

Net sales

   $ 66,335,172      $ —    

Gross margin

     4,082,526        —    

Income (loss) from operations

     (5,075,480     —    

Net income (loss)

     (5,126,033     —    

 

The balance sheet of Quest as of December 31, 2012 is present below:

 

     December 31,
2012
 

Condensed balance sheet information:

  

Current assets

   $ 20,718,638   

Long-term assets

     2,118,295   
  

 

 

 

Total assets

   $ 22,836,933   
  

 

 

 

Current liabilities

   $ 17,925,175   

Long-term liabilities

     —    

Equity

     4,911,758   
  

 

 

 

Total liabilities and members’ equity

   $ 22,836,933   
  

 

 

 
Income Taxes (Tables)

The components of net deferred taxes are as follows:

 

     As of December 31,  
     2013     2012  

Deferred tax assets (liabilities):

    

Net operating loss

   $ 4,212,000        1,029,000   

Stock-based compensation

     2,103,000        1,177,000   

Accrued interest expense

     150,000        155,000   

Allowance for doubtful accounts

     47,000        22,000   

Deferred lease liability

     70,000        50,000   
  

 

 

   

 

 

 

Total deferred tax assets

     6,582,000        2,433,000   

Less: valuation allowance

     (6,582,000     (2,433,000
  

 

 

   

 

 

 

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,  
     2013     2012  

U.S. federal statutory rate applied to pretax income

   $ (6,051,780   $ (11,713,000

Permanent differences

     2,739,048        10,344,000   

State taxes and other

     1,597,415        (123,000

Change in valuation allowance

     1,715,317        2,433,000   
  

 

 

   

 

 

 
   $ —       $ 941,000   
  

 

 

   

 

 

 

Fair Value of Financial Instruments (Tables)
Summary of Company's Warrant Liability

The following table summarizes the warrant liability valuation for the years ended December 31, 2013 and 2012:

 

Description

   Fair Value Measurements
Warrant Liability
 

Beginning balance, December 31, 2011

   $ —    

Issuances (Level 3)

     18,742,526   

Total (gains) or losses (Level 1 and 2)

     1,490,812   
  

 

 

 

Ending balance, December 31, 2012

   $ 20,233,338   

Issuances (Level 3)

     1,465,000   

Warrant conversion (Level 1 and 2)

     (21,698,338
  

 

 

 

Ending balance, December 31, 2013

   $ —    
  

 

 

 

Commitments and Contingencies (Tables)
Schedule of Future Minimum Rental Payments for Operating Leases

The following is a schedule, by year, of future minimum rental payments required under the operating lease agreement as of December 31, 2013:

 

Year Ended December 31,

   Amount  

2014

   $ 278,118   

2015

     218,178   

2016

     28,638   

2017

     28,638   
  

 

 

 
   $ 553,572   
  

 

 

 

Stockholders' Equity (Tables)

During the year ended December 31, 2013, we issued shares of common stock as follows:

 

     Common Stock
Shares
     Amount  

Common stock issued for services

     69,017       $ 198,858   

Common stock issued for Quest acquisition

     22,000,000         55,000,000   

Note and interest conversions

     8,472,539         3,148,493   

Warrant conversions

     7,232,779         21,698,338   
  

 

 

    

 

 

 
     37,774,335       $ 80,045,689   

The following table summarizes the warrants issued and outstanding as of December 31, 2013:

 

Warrants Issued and Outstanding as of December 31, 2013

 
     Date of      Exercise
Price
     Shares of  

Description

   Issuance      Expiration         Common Stock  

Exercisable warrants

           

Warrant 1-1

     03/22/12         03/21/17       $ 0.37         1,381,115   

Warrant 1-5

     10/10/12         10/09/17       $ 0.37         5,524,461   

Warrant 1-6

     03/29/13         03/21/17       $ 0.37         500,000   

Less warrants exercised

              (7,405,576
           

 

 

 

Total exercisable warrants

              —     

Contingent warrants

           

Warrant 1-2

     03/22/12         03/21/17       $ 0.37         345,278   

Warrant 1-3

     03/22/12         03/21/17       $ 0.37         345,278   

Warrant 1-4

     03/22/12         03/21/17       $ 0.37         690,557   

Less warrants cancelled

              (1,381,113
           

 

 

 

Total contingent warrants

              —     
           

 

 

 

Total warrants issued and outstanding

  

     —     
           

 

 

 

Following is a summary of stock option activity from January 1, 2012 through December 31, 2013:

 

     Stock Options  
     Number
of Shares
     Exercise Price
Per Share
     Weighted-
Average
Exercise Price
Per Share
 

Outstanding at January 1, 2012

     1,381,115      $ 2.35      $ 2.35  

Granted

     1,969,000         2.00 – 2.79         2.10   

Canceled/Forfeited

     —          —          —    
  

 

 

       

Outstanding at December 31, 2012

     3,350,115         2.00 – 2.79         2.20   

Granted

     1,150,500         2.05 – 2.65         2.11   

Canceled/Forfeited

     358,667        2.10 – 2.79        2.18  
  

 

 

       

Outstanding at December 31, 2013

     4,141,948         2.00 – 3.25         2.48   
  

 

 

       

The following additional information applies to options outstanding at December 31, 2013:

 

Ranges of

Exercise

Prices

   Outstanding at
December 31,
2013
     Weighted-
Average
Remaining
Contractual
Life
     Weighted-
Average
Exercise
Price
     Exercisable at
December 31,
2013
     Weighted-
Average
Exercise
Price
 

$2.00 – $3.25

     4,141,948         8.5       $ 2.48         2,939,448       $ 2.63   

The following additional information applies to options outstanding at December 31, 2012:

 

Ranges of

Exercise

Prices

   Outstanding at
December 31,
2012
     Weighted-
Average
Remaining
Contractual
Life
     Weighted-
Average
Exercise
Price
     Excercisable at
December 31,
2012
     Weighted-
Average
Exercise
Price
 

$2.00 – $2.79

     3,350,115         9.6       $ 2.20         1,922,782       $ 2.27   

The weighted-average estimated value of employee stock options granted during the years ended December 31, 2013 and 2012 were estimated using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

 

     Years Ended December 31,  
     2013     2012  

Expected volatility

     105     155

Risk-free interest rate

     1.51     0.70

Expected dividends

     0.00     0.00

Expected term in years

     5.8        5.4   

Net Loss per Share (Tables)

The following table sets forth the computation of basic and diluted loss per share:

 

     Years ended December 31,  
     2013     2012  

Net loss applicable to common stockholders—numerator for basic and diluted earnings per share

   $ (17,799,351   $ (42,151,493
  

 

 

   

 

 

 

Weighted—average common shares outstanding—denominator for basic earnings per share

     77,055,327        56,988,497   

Net loss per share:

    

Basic and diluted

   $ (0.23   $ (0.74
  

 

 

   

 

 

 

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

 

Anti-dilutive securities excluded from diluted loss per share:

     

Stock options

     4,141,948         3,350,115   

Warrants

     —          8,286,689   

Convertible notes

     11,022,841         5,633,542   
Supplemental Cash Flow Information (Tables)
Summary of Supplemental Information to Consolidated Statements of Cash Flows

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

 

     Years Ended December 31,  
     2013      2012  

Supplemental cash flow information:

     

Cash paid for interest

   $ 898,757       $ 114,266   

Cash flows from operating activities:

     

Common stock issued for deferred compensation

   $ —         $ 260,000   

Common stock issued for conversion of related party debt, including accrued interest

   $ —         $ 6,389,042   

Common stock issued for conversion of notes payable, including accrued interest

   $ 3,148,493       $ 187,466   

Common stock issued for services and loan fees

   $ 198,858       $ 366,025   

Common stock warrant liability and revaluations

   $ —         $ 20,233,338   

Common stock issued for warrant liability – cashless exercise

   $ 21,698,338       $ —     

Common stock issued for purchase of Quest Resource Management Group, LLC

   $ 55,000,000       $ —     

Long-term senior secured convertible notes – related parties

   $ 22,000,000       $ —     

Mezzanine financing reclassified to additional paid in capital

   $ —         $ 1,375,933     

Discount to senior convertible note-related party

   $ 6,500,000       $ 2,000,000   

The Company and Description of Business and Future Liquidity Needs - Additional Information (Detail)
0 Months Ended 12 Months Ended
Jul. 16, 2013
Dec. 31, 2013
Directors
Oct. 28, 2013
Dec. 31, 2012
Oct. 17, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Common stock, shares authorized
 
200,000,000 
200,000,000 
100,000,000 
 
Preferred stock, shares authorized
 
10,000,000 
 
10,000,000 
 
Percentage of common stock held
 
 
 
 
85.00% 
Number of classes of directors
 
 
 
 
Percentage of ownership interest acquired
50.00% 
 
 
 
 
Percentage of ownership interest held by company
100.00% 
 
 
 
 
Common Stock [Member] |
Earth911 Inc [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Shares of common stock issued exchanged
 
49,110,123 
 
 
 
Options Held [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Reserved for issuance an aggregate of shares issuable upon the exercise of options and warrants
 
1,831,115 
 
 
 
Warrant [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Reserved for issuance an aggregate of shares issuable upon the exercise of options and warrants
 
8,786,689 
 
 
 
Amended And Restated [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Common stock, shares authorized
 
 
 
 
100,000,000 
Preferred stock, shares authorized
 
 
 
 
100,000,000 
Common Stock [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Reverse split for common stock
 
1:5 
 
 
 
Shares of common stock issued exchanged
 
7,232,779 
 
 
 
Quest Resource Management Group, LLC [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Percentage of remaining ownership interest
50.00% 
 
 
 
 
The Company and Description of Business and Future Liquidity Needs - Summarized Pro Forma Consolidated Operating Results (Detail) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
Net sales
$ 67,504,540 
$ 1,145,637 
Gross profit
5,073,870 
1,109,616 
Income (loss) from operations
(12,805,388)
(23,444,717)
Net income (loss)
(17,799,351)
(42,151,493)
Quest Resource Management Group, LLC [Member]
 
 
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
Net sales
135,211,874 
130,621,675 
Gross profit
10,436,628 
12,934,339 
Income (loss) from operations
(3,684,856)
4,005,383 
Net income (loss)
(3,788,086)
3,883,788 
Pro Forma [Member] |
Quest Resource Management Group, LLC [Member]
 
 
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
Net sales
136,361,242 
131,767,312 
Gross profit
11,427,971 
14,043,955 
Income (loss) from operations
(11,798,709)
(19,439,334)
Net income (loss)
$ (17,128,720)
$ (40,232,245)
Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Significant Accounting Policies [Line Items]
 
 
Accounts receivable, due period
30 days 
 
Allowance for accounts receivable
$ 319,735 
$ 7,398 
Provisions on inventories
Depreciation expense
209,375 
68,576 
Potentially dilutive securities include options, warrants, and convertible promissory notes
15,164,789 
17,270,346 
Tax benefit percentage of being realized upon ultimate settlement
50.00% 
 
Advertising expense
$ 29,440 
$ 108,590 
Infinity outstanding shares prior reverse acquisition
8,666,488 
 
Minimum [Member]
 
 
Significant Accounting Policies [Line Items]
 
 
Percentage of voting right
20.00% 
 
Maximum [Member]
 
 
Significant Accounting Policies [Line Items]
 
 
Percentage of voting right
50.00% 
 
Summary of Significant Accounting Policies - Changes in Allowance for Doubtful Accounts (Detail) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Regulatory Assets [Abstract]
 
 
Beginning balance
$ 7,398 
 
Allowance from Quest acquisition
263,887 
 
Bad debt expense (recoveries)
62,017 
7,398 
Uncollectible accounts written off
(13,567)
 
Ending balance
$ 319,735 
$ 7,398 
Summary of Significant Accounting Policies - Schedule of Property and Equipment Useful Lives (Detail)
12 Months Ended
Dec. 31, 2013
Minimum [Member] |
Computer equipment [Member]
 
Significant Accounting Policies [Line Items]
 
Useful lives of property and equipment
3 years 
Minimum [Member] |
Office furniture and equipment [Member]
 
Significant Accounting Policies [Line Items]
 
Useful lives of property and equipment
5 years 
Minimum [Member] |
Leasehold improvements [Member]
 
Significant Accounting Policies [Line Items]
 
Useful lives of property and equipment
5 years 
Maximum [Member] |
Computer equipment [Member]
 
Significant Accounting Policies [Line Items]
 
Useful lives of property and equipment
5 years 
Maximum [Member] |
Office furniture and equipment [Member]
 
Significant Accounting Policies [Line Items]
 
Useful lives of property and equipment
7 years 
Maximum [Member] |
Leasehold improvements [Member]
 
Significant Accounting Policies [Line Items]
 
Useful lives of property and equipment
7 years 
Summary of Significant Accounting Policies - Schedule of Number of Customers that Accounted for More than Ten Percentage of Annual Sales and Receivable Balances (Detail)
Dec. 31, 2013
Person
Dec. 31, 2012
Person
Regulatory Assets [Abstract]
 
 
Number of Customers
Customers Exceeding 10% of Revenue Revenue Combined Percent
76.00% 
89.00% 
Accounts Receivable Combined Percent
31.00% 
71.00% 
Inventories - Additional Information (Detail) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Inventory Disclosure [Abstract]
 
 
Finished goods inventory
$ 3,251 
$ 4,292 
Reserve for inventory obsolescence of consumer electronics and computer devices
$ 0 
 
Property and Equipment - Components of Property and Equipment (Detail) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 2,046,253 
$ 372,592 
Less: accumulated depreciation
(1,400,768)
(215,904)
Property plant and equipment Net
645,485 
156,688 
Vehicles [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
544,984 
   
Computer equipment [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
790,987 
157,305 
Office furniture and fixtures [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
239,662 
209,026 
Machinery and Equipment [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
458,257 
 
Leasehold improvements [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 12,363 
$ 6,261 
Property and Equipment - Additional Information (Detail) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Property, Plant and Equipment [Line Items]
 
 
Accumulated depreciation of leased equipment
$ 1,402 
$ 85,326 
Office furniture and equipment [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Capital leases is included in the financial Statements
$ 49,163 
$ 187,357 
Intangible Assets - Schedule of Intangible Assets (Detail) (USD $)
12 Months Ended
Dec. 31, 2013
Finite-Lived Intangible Assets [Line Items]
 
Gross Carrying Amount
$ 19,487,836 
Accumulated Amortization
1,850,872 
Net
17,636,964 
Goodwill Useful Life Description
Indefinite 
Goodwill Gross Carrying Amount
58,337,290 
Goodwill Net
58,337,290 
Customer relationships [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
5 years 
Gross Carrying Amount
12,720,000 
Accumulated Amortization
1,166,000 
Net
11,554,000 
Trademarks [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
7 years 
Gross Carrying Amount
6,230,000 
Accumulated Amortization
407,917 
Net
5,822,083 
Patents [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
7 years 
Gross Carrying Amount
230,683 
Accumulated Amortization
216,951 
Net
13,732 
Customer lists [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
5 years 
Gross Carrying Amount
307,153 
Accumulated Amortization
60,004 
Net
$ 247,149 
Intangible Assets - Additional Information (Detail) (USD $)
12 Months Ended
Dec. 31, 2013
Goodwill And Intangible Assets Disclosure [Abstract]
 
Amortization expense relates to intangible assets
$ 1,608,427 
Expected amortization expense, 2014 through 2017 relates to intangible assets
3.5 
Expected amortization expense 2018, relates to intangible assets
2,100,000 
Indefinite-lived intangible assets other than goodwill
$ 0 
Accrued Expenses and Other Current Liabilities - Summary of Accrued Expenses and Other Current Liabilities (Detail) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Payables And Accruals [Abstract]
 
 
Compensation
$ 1,114,252 
$ 191,393 
Deferred rent obligation
930,274 
138,926 
Sales and use tax
484,134 
 
Professional fees
40,241 
302,818 
Insurance
48,663 
 
Accrued interest and other
56,206 
15,016 
Accrued Liabilities, Total
$ 2,673,770 
$ 648,153 
Line of Credit - Additional Information (Detail) (Revolving Credit Facility [Member], USD $)
12 Months Ended
Dec. 31, 2013
Line of Credit Facility [Line Items]
 
Line of credit facility agreement date
Dec. 15, 2010 
Working capital from loan agreement with Regions Bank
$ 10,000,000 
Interest on outstanding principal amount
4.75% 
Fluctuating interest rate based on base rate
1.50% 
Outstanding principal amount on line of credit facility
2,750,000 
Amount available to be borrow under line of credit facility
$ 7,250,000 
Interest rate line of credit facility description
The base rate for any day is the greater of (a) the Federal funds rate plus one-half of 1%, (b) the Regions published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. 
Line of credit facility expiration date
Feb. 13, 2014 
Eligible Accounts Receivable [Member] |
Largest Customer [Member]
 
Line of Credit Facility [Line Items]
 
Percentage of accounts receivable form Quest's customers
60.00% 
Eligible Accounts Receivable [Member] |
Other Customer [Member]
 
Line of Credit Facility [Line Items]
 
Percentage of accounts receivable form Quest's customers
85.00% 
Convertible Notes Payable - Additional Information (Detail) (USD $)
12 Months Ended 1 Months Ended 12 Months Ended 1 Months Ended 12 Months Ended 1 Months Ended 12 Months Ended 1 Months Ended 12 Months Ended 1 Months Ended 12 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended 12 Months Ended 1 Months Ended 9 Months Ended 12 Months Ended 1 Months Ended 12 Months Ended
Dec. 31, 2013
Mar. 29, 2013
Dec. 31, 2012
Oct. 31, 2011
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
Dec. 31, 2013
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
Accrued Interest [Member]
Apr. 30, 2012
Convertible note payable to unrelated parties, issuance date of April 2012 [Member]
Dec. 31, 2013
Convertible note payable to unrelated parties, issuance date of April 2012 [Member]
Accrued Interest [Member]
Aug. 31, 2012
Convertible note payable to unrelated parties, issuance date of August 2012 [Member]
Dec. 31, 2013
Convertible note payable to unrelated parties, issuance date of August 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Dec. 31, 2013
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Dec. 31, 2013
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Dec. 31, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Dec. 31, 2013
Convertible Notes Payable [Member]
Dec. 31, 2012
Convertible Notes Payable [Member]
Dec. 31, 2013
Convertible Notes Payable [Member]
Accrued Interest [Member]
Dec. 31, 2012
Convertible Notes Payable [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Dec. 31, 2013
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Notes Payable [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument maturity, Starting date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oct. 17, 2012 
 
 
 
 
 
 
Debt instrument maturity, Ending date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dec. 31, 2013 
 
 
 
 
 
 
Debt instrument principal amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 107,500 
$ 142,218 
 
 
 
 
 
Debt instrument interest amount