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1. The Company, Description of Business, and Liquidity
The accompanying condensed consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”) and its subsidiaries, Earth911, Inc. (“Earth911”), Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC (“LDI”), Youchange, Inc. (“Youchange”), Quest Vertigent Corporation (“QVC”), and Quest Vertigent One, LLC (“QV One”) (collectively, “we,” “us,” “our,” or “our company”).
Operations – We provide businesses with one-stop management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their businesses. Our comprehensive reuse, recycling, and proper disposal management programs are designed to enable regional and national customers to have a single point of contact for managing a variety of waste streams and recyclables. This business generates substantially all of our revenue. We also operate environmentally based social media and online data platforms that contain information and instructions necessary to empower consumers and consumer product companies to recycle or properly dispose of household products and materials. Our directory of local recycling and proper disposal options empowers consumers directly and enables consumer product companies to empower their customers by giving them the guidance necessary for the proper recycling or disposal of a wide range of household products and materials, including the “why, where, and how” of recycling. Three customers accounted for 52.0% and two customers accounted for 55.6% of revenue for the three months ended September 30, 2017 and 2016, respectively. Three customers accounted for 57.8% and two customers accounted for 55.5% of revenue for the nine months ended September 30, 2017 and 2016, respectively.
Liquidity – As of September 30, 2017 and December 31, 2016, our working capital balance was $4,482,715 and $3,116,055, respectively.
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2. Summary of Significant Accounting Policies
Principles of Presentation and Consolidation
The condensed consolidated financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended December 31, 2016. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.
The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2017 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2016 condensed consolidated balance sheet data from audited financial statements, but did not include all disclosures required by GAAP. As Quest, Earth911, LDI, Youchange, QVC, and QV One each operate as ecology-based green service companies, we did not deem segment reporting necessary.
All intercompany accounts and transactions have been eliminated in consolidation. Interim results are subject to seasonal variations, and the results of operations for the three months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.
Revenue Recognition
We recognize revenue only when all of the following criteria have been met:
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• |
persuasive evidence of an arrangement exists; |
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• |
delivery has occurred or services have been rendered; |
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• |
the fee for the arrangement is fixed or determinable; and |
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• |
collectibility is reasonably assured. |
Persuasive Evidence of an Arrangement Exists – We document all terms of an arrangement in a service agreement or quote signed or confirmed by the customer prior to recognizing revenue.
Delivery Has Occurred or Services Have Been Rendered – We perform all services or deliver all products prior to recognizing revenue. We deem services to be performed when the services have been completed.
The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote, service agreement, or accepted customer purchase order.
Collectibility Is Reasonably Assured – We assess collectibility on a customer by customer basis based on criteria developed by us.
We provide businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. We utilize third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross. We record amounts collected from customers for sales tax on a net basis. In situations in which we are not primarily obligated, we do not have credit risk, or we determine amounts earned using fixed percentage or fixed payment schedules, we record the net amounts as management fees earned. Through the second quarter of 2017, we had one contract accounted for as management fees with revenue of nil and $88,997 for the three months ended September 30, 2017 and 2016, respectively, and revenue of $78,145 and $239,723 for the nine months ended September 30, 2017 and 2016, respectively. Our gross billings on this management fee contract were nil and $1,523,282 for the three months ended September 30, 2017 and 2016, respectively, and $2,173,022 and $3,788,592 for the nine months ended September 30, 2017 and 2016, respectively. This management fee contract ended in the second quarter of 2017 and we no longer have any similar contracts.
We recognize licensing fees ratably over the term of the license. We derive some revenue from advertising contracts, which we recognize ratably over the term that the advertisement appears on our website.
Net Loss Per Share
We compute basic net loss per share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2017 and 2016 would be anti-dilutive. These potentially dilutive securities include stock options and warrants and totaled 3,094,321 and 3,266,799 shares at September 30, 2017 and 2016, respectively.
The following table sets forth the anti-dilutive securities excluded from diluted loss per share:
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September 30, |
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2017 |
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2016 |
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(Unaudited) |
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(Unaudited) |
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Anti-dilutive securities excluded from diluted loss per share: |
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|
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Stock options |
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1,360,756 |
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|
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1,271,858 |
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Warrants |
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1,733,565 |
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|
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1,994,941 |
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Total anti-dilutive securities excluded from diluted loss per share |
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3,094,321 |
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3,266,799 |
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Inventories
We record inventories within “Prepaid expenses and other current assets” in our condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, all inventories consisted of waste disposal equipment with cost balances of $11,271 and $12,996, respectively, with no reserve for inventory obsolescence at either date.
Recent Accounting Pronouncements
Adopted
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which aims to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Previously, Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the new ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and a goodwill impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. In no circumstances would the loss recognized exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for us on January 1, 2020, with early adoption permitted. We adopted this ASU in the second quarter of 2017 with our interim impairment test as further discussed in Note 4.
Pending Adoption
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This standard replaces existing revenue recognition guidance, which in many cases was tailored for specific industries, with a uniform accounting standard applicable to all industries and transactions. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to correlate with the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures regarding revenue recognition. This new standard, as amended, will be effective for us on January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. While we are still evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements, we currently do not expect it to have a material impact on the timing of revenue recognition. We anticipate adopting the standard on a full retrospective basis.
To assess the impact of the standard, we are using internal resources to lead the implementation efforts. Our internal resources reviewed the amended guidance, attended training classes and consulted with other accounting professionals to assist with interpretation of the amended guidance. We completed an impact assessment of the guidance changes affecting our company and developed an approach to address each change. We are in the process of reviewing our portfolio of service contracts and documenting key contract terms for areas impacted by the amended guidance. In addition, we are assessing the effect this guidance may have on the timing of the recognition of costs we incur to obtain and fulfill our contracts. Changes to processes and internal controls are being identified to meet the standard’s reporting and disclosure requirements. We continue to work through an analysis of the increased disclosures required by the new guidance.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update improves financial reporting about leasing transactions by requiring a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are still evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements, but given the material amount of our future minimum payments under non-cancellable operating leases, primarily office rent, at September 30, 2017, we expect to recognize a material right-of-use lease asset and lease liability upon adoption of the ASU.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for us on January 1, 2020, with early adoption permitted on January 1, 2019. We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. The adoption of ASU 2016-15 will be required on a retrospective basis beginning January 1, 2018, with early adoption permitted. We have not yet determined when we will adopt ASU 2016-15. The adoption of the standard is not expected to have a material effect on our consolidated financial statements.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance to us.
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3. Property and Equipment, Net, and Other Assets
At September 30, 2017 and December 31, 2016, property and equipment, net, and other assets consisted of the following:
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September 30, |
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December 31, |
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2017 |
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2016 |
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(Unaudited) |
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Property and equipment, net of accumulated depreciation of $2,089,097 and $2,442,549 as of September 30, 2017 and December 31, 2016, respectively |
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$ |
1,041,745 |
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$ |
1,340,850 |
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Security deposits and other assets |
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540,261 |
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1,074,071 |
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Property and equipment, net, and other assets |
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$ |
1,582,006 |
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$ |
2,414,921 |
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We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment. Depreciation expense for the three months ended September 30, 2017 was $110,582, inclusive of $43,462 of depreciation expense reflected within “Cost of revenue” in our condensed consolidated statement of operations as it related to assets used in directly servicing customer contracts, and was $339,272 for the nine months ended September 30, 2017, inclusive of $126,761 of depreciation expense reflected within “Cost of revenue.” Depreciation expense for the three months ended September 30, 2016 was $123,283, inclusive of $38,490 of depreciation expense reflected within “Cost of revenue,” and was $354,495 for the nine months ended September 30, 2016, inclusive of $86,754 reflected within “Cost of revenue.” At September 30, 2017, the carrying value of our capital lease assets was $269,598, net of $230,499 of accumulated depreciation. At December 31, 2016, the carrying value of our capital lease assets was $347,135, net of $152,962 of accumulated depreciation.
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4. Goodwill and Other Intangible Assets
The components of goodwill and other intangible assets were as follows:
September 30, 2017 (Unaudited) |
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Estimated Useful Life |
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Gross Carrying Amount |
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Accumulated Amortization |
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Net |
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Finite lived intangible assets: |
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Customer relationships |
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5 years |
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$ |
12,720,000 |
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$ |
10,706,000 |
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$ |
2,014,000 |
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Trademarks |
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7 years |
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6,242,055 |
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3,746,893 |
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2,495,162 |
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Patents |
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7 years |
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230,683 |
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230,683 |
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|
|
— |
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Software |
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7 years |
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1,857,396 |
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|
|
488,819 |
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1,368,577 |
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Customer lists |
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5 years |
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307,153 |
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274,653 |
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|
32,500 |
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Total finite lived intangible assets |
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$ |
21,357,287 |
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$ |
15,447,048 |
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$ |
5,910,239 |
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December 31, 2016 |
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Estimated Useful Life |
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Gross Carrying Amount |
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Accumulated Amortization |
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Net |
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Finite lived intangible assets: |
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|
|
|
|
|
|
|
|
|
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|
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Customer relationships |
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5 years |
|
$ |
12,720,000 |
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|
$ |
8,798,000 |
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$ |
3,922,000 |
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Trademarks |
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7 years |
|
|
6,242,055 |
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|
|
3,078,845 |
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|
|
3,163,210 |
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Patents |
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7 years |
|
|
230,683 |
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|
|
230,683 |
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|
|
— |
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Software |
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7 years |
|
|
1,649,507 |
|
|
|
307,989 |
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|
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1,341,518 |
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Customer lists |
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5 years |
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307,153 |
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|
|
244,295 |
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|
|
62,858 |
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Total finite lived intangible assets |
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|
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$ |
21,149,398 |
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|
$ |
12,659,812 |
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$ |
8,489,586 |
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September 30, 2017 (Unaudited) and December 31, 2016 |
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Estimated Useful Life |
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Carrying Amount |
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Indefinite lived intangible asset: |
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|
|
|
|
|
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Goodwill |
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Indefinite |
|
$ |
58,337,290 |
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We compute amortization using the straight-line method over the estimated useful lives of the finite lived intangible assets. Amortization expense related to finite lived intangible assets was $935,567 and $928,431 for the three months ended September 30, 2017 and 2016, respectively. Amortization expense related to finite lived intangible assets was $2,787,236 and $2,771,912 for the nine months ended September 30, 2017 and 2016, respectively. We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes.
We performed our annual impairment analysis for goodwill and other intangible assets in the second quarter of 2017 with no impairment recorded.
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5. Accounts Payable and Accrued Liabilities
The components of Accounts payable and accrued liabilities are as follows:
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September 30, |
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December 31, |
|
||
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2017 |
|
|
2016 |
|
||
|
|
(Unaudited) |
|
|
|
|
|
|
Accounts payable |
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$ |
16,220,566 |
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$ |
32,944,202 |
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Accrued taxes |
|
|
959,743 |
|
|
|
1,272,832 |
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Employee compensation |
|
|
405,326 |
|
|
|
529,945 |
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Other |
|
|
237,106 |
|
|
|
558,580 |
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|
|
$ |
17,822,741 |
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|
$ |
35,305,559 |
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6. Revolving Credit Facility
We entered into a Loan, Security and Guaranty Agreement (the “Citizens Loan Agreement”), dated as of February 24, 2017, with Citizens Bank, National Association as a lender, and as administrative agent, collateral agent, and issuing bank, which provides for an asset-based revolving credit facility (the “ABL Facility”) of up to $20 million, and an equipment loan facility in the maximum principal amount of $2.0 million. The ABL Facility replaced our Revolving Credit Note and Loan Agreement with Regions Bank, which was paid off and terminated effective February 24, 2017.
Each loan under the ABL Facility bears interest, at our option, at either the Base Rate, as defined in the agreement, plus a margin ranging from 1.0% to 1.5% (5.75% as of September 30, 2017), or the LIBOR lending rate for the interest period in effect, plus a margin ranging from 2.0% to 2.5% (3.54% as of September 30, 2017). The maturity date of the revolving credit facility is February 24, 2022.
Loans under the equipment loan facility may be requested at any time until February 24, 2019. Each loan under the equipment loan facility bears interest, at our option, at either the Base Rate, as defined in the agreement, plus 2.00%, or the LIBOR lending rate for the interest period in effect, plus 3.00%. The maturity date of the equipment loan facility is February 24, 2022.
The ABL Facility contains certain specific financial covenants regarding a minimum liquidity requirement and a minimum fixed charge coverage ratio. The minimum fixed charge coverage ratio covenant will not apply until May 15, 2018, when the trailing 12-month period ending March 31, 2018 has been reported. In addition, the ABL Facility contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, mergers and acquisitions, and other matters customarily restricted in such agreements.
The amount of interest expense related to borrowings for the three months ended September 30, 2017 and 2016 was $100,511 and $57,331, respectively. The amount of interest expense related to borrowings for the nine months ended September 30, 2017 and 2016 was $297,870 and $161,642, respectively. Debt issuance cost of $469,507 is being amortized to interest expense over the life of the new revolving credit facility beginning March 1, 2017. As of September 30, 2017, the unamortized portion of the debt issuance costs was $414,732. The amount of interest expense related to the amortization of the discount on the revolving credit facility for the nine months ended September 30, 2017 was $54,775. The ABL Facility liability was $6,730,893, net of unamortized debt issuance cost of $414,732, with approximately $4,151,000 of additional availability as of September 30, 2017. There were no draws made on the equipment loan facility as of September 30, 2017.
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7. Capital Lease Obligations
At September 30, 2017 and December 31, 2016, total capital lease obligations outstanding consisted of the following:
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September 30, |
|
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December 31, |
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||
|
|
2017 |
|
|
2016 |
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||
|
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(Unaudited) |
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|
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Capital lease obligations, imputed interest at 3.00% to 13.29%, with monthly payments of approximately $6,000, expiring through November 2020, secured by computer and telephone equipment |
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$ |
54,438 |
|
|
$ |
315,253 |
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Total |
|
|
54,438 |
|
|
|
315,253 |
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Less: current maturities |
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|
(48,775 |
) |
|
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(106,184 |
) |
Long-term portion |
|
$ |
5,663 |
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|
$ |
209,069 |
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Our capital lease obligations are included within “Deferred revenue and other current liabilities” and “Other long-term liabilities” in our condensed consolidated balance sheets. The amount of interest expense related to our capital leases for the three months ended September 30, 2017 and 2016 was $992 and $3,464, respectively. The amount of interest expense related to our capital leases for the nine months ended September 30, 2017 and 2016 was $5,090 and $11,117, respectively.
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8. Income Taxes
We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of September 30, 2017 and December 31, 2016, and we have recorded a valuation allowance of $17,400,000 and $15,555,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of September 30, 2017 and December 31, 2016, we had federal income tax net operating loss carryforwards of approximately $19,300,000 and $18,500,000, respectively, which expire at various dates beginning in 2031.
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9. Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, deferred revenue, revolving credit facility, and capital lease obligations. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values using Level 3 inputs, based on their short maturities or, for long-term portions of capital lease obligations and revolving credit facility, based on borrowing rates currently available to us for loans with similar terms and maturities.
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10. Stockholders’ Equity
Preferred Stock – Our authorized preferred stock includes 10,000,000 shares of preferred stock with a par value of $0.001, of which no shares have been issued or are outstanding.
Common Stock – Our authorized common stock includes 200,000,000 shares of common stock with a par value of $0.001, of which 15,281,324 and 15,272,575 shares were issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.
Shares Issued for Employee Stock Purchase Plan Options – On May 23, 2017, we issued 8,749 shares to employees for $11,972 under our 2014 Employee Stock Purchase Plan (“ESPP”) for options that vested and were exercised.
Shares Issued for Consulting Services – On September 28, 2016, we issued 418,750 fully vested restricted shares of our common stock to a third party for consulting services under a one-year contract. We recorded an expense of $1,046,875 for the nine months ended September 30, 2017 within “Selling, general, and administrative” expenses in our condensed consolidated statement of operations. The prepaid asset associated with this consulting services contract was fully amortized as of September 30, 2017.
Warrants – During 2016, we issued warrants to purchase 521,060 shares, and no holders have exercised warrants. At September 30, 2017, we had outstanding exercisable warrants to purchase 1,733,565 shares of common stock.
The following table summarizes the warrants issued and outstanding as of September 30, 2017:
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Date of |
|
Exercise |
|
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Shares of |
|
||||
Description |
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Issuance |
|
Expiration |
|
Price |
|
|
Common Stock |
|
||
Exercisable warrants |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
09/24/2014 |
|
09/24/2019 |
|
$ |
20.00 |
|
|
|
1,125,005 |
|
Warrants |
|
10/20/2014 |
|
10/20/2019 |
|
$ |
20.00 |
|
|
|
87,500 |
|
Warrants |
|
3/30/2016 |
|
03/30/2021 |
|
$ |
3.88 |
|
|
|
521,060 |
|
Total warrants issued and outstanding |
|
|
|
|
|
|
1,733,565 |
|
Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved our 2014 ESPP. We recorded expense of $14,686 and $28,200 related to the ESPP during the nine months ended September 30, 2017 and 2016, respectively.
Stock Options – We recorded stock option expense of $479,256 and $1,623,029 for the nine months ended September 30, 2017 and 2016, respectively. The following table summarizes the stock option activity for the nine month period ended September 30, 2017:
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|
Stock Options |
|
|||||||
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Exercise |
|
Average |
|
|
|
|
Number |
|
|
Price Per |
|
Exercise Price |
|
||
|
|
of Shares |
|
|
Share |
|
Per Share |
|
||
Outstanding at December 31, 2016 |
|
|
1,317,402 |
|
|
$2.08 — $26.00 |
|
$ |
9.09 |
|
Granted |
|
|
79,500 |
|
|
$2.13 — $2.71 |
|
$ |
2.50 |
|
Canceled/Forfeited |
|
|
(36,146 |
) |
|
$6.40 — $23.20 |
|
$ |
12.35 |
|
Outstanding at September 30, 2017 |
|
|
1,360,756 |
|
|
$2.08 — $26.00 |
|
$ |
8.62 |
|
|
Principles of Presentation and Consolidation
The condensed consolidated financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended December 31, 2016. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.
The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2017 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2016 condensed consolidated balance sheet data from audited financial statements, but did not include all disclosures required by GAAP. As Quest, Earth911, LDI, Youchange, QVC, and QV One each operate as ecology-based green service companies, we did not deem segment reporting necessary.
All intercompany accounts and transactions have been eliminated in consolidation. Interim results are subject to seasonal variations, and the results of operations for the three months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.
Revenue Recognition
We recognize revenue only when all of the following criteria have been met:
|
• |
persuasive evidence of an arrangement exists; |
|
• |
delivery has occurred or services have been rendered; |
|
• |
the fee for the arrangement is fixed or determinable; and |
|
• |
collectibility is reasonably assured. |
Persuasive Evidence of an Arrangement Exists – We document all terms of an arrangement in a service agreement or quote signed or confirmed by the customer prior to recognizing revenue.
Delivery Has Occurred or Services Have Been Rendered – We perform all services or deliver all products prior to recognizing revenue. We deem services to be performed when the services have been completed.
The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote, service agreement, or accepted customer purchase order.
Collectibility Is Reasonably Assured – We assess collectibility on a customer by customer basis based on criteria developed by us.
We provide businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. We utilize third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross. We record amounts collected from customers for sales tax on a net basis. In situations in which we are not primarily obligated, we do not have credit risk, or we determine amounts earned using fixed percentage or fixed payment schedules, we record the net amounts as management fees earned. Through the second quarter of 2017, we had one contract accounted for as management fees with revenue of nil and $88,997 for the three months ended September 30, 2017 and 2016, respectively, and revenue of $78,145 and $239,723 for the nine months ended September 30, 2017 and 2016, respectively. Our gross billings on this management fee contract were nil and $1,523,282 for the three months ended September 30, 2017 and 2016, respectively, and $2,173,022 and $3,788,592 for the nine months ended September 30, 2017 and 2016, respectively. This management fee contract ended in the second quarter of 2017 and we no longer have any similar contracts.
We recognize licensing fees ratably over the term of the license. We derive some revenue from advertising contracts, which we recognize ratably over the term that the advertisement appears on our website.
Net Loss Per Share
We compute basic net loss per share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2017 and 2016 would be anti-dilutive. These potentially dilutive securities include stock options and warrants and totaled 3,094,321 and 3,266,799 shares at September 30, 2017 and 2016, respectively.
The following table sets forth the anti-dilutive securities excluded from diluted loss per share:
|
|
September 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||
Anti-dilutive securities excluded from diluted loss per share: |
|
|
|
|
|
|
|
|
Stock options |
|
|
1,360,756 |
|
|
|
1,271,858 |
|
Warrants |
|
|
1,733,565 |
|
|
|
1,994,941 |
|
Total anti-dilutive securities excluded from diluted loss per share |
|
|
3,094,321 |
|
|
|
3,266,799 |
|
Inventories
We record inventories within “Prepaid expenses and other current assets” in our condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, all inventories consisted of waste disposal equipment with cost balances of $11,271 and $12,996, respectively, with no reserve for inventory obsolescence at either date.
Recent Accounting Pronouncements
Adopted
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which aims to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Previously, Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the new ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and a goodwill impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. In no circumstances would the loss recognized exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for us on January 1, 2020, with early adoption permitted. We adopted this ASU in the second quarter of 2017 with our interim impairment test as further discussed in Note 4.
Pending Adoption
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This standard replaces existing revenue recognition guidance, which in many cases was tailored for specific industries, with a uniform accounting standard applicable to all industries and transactions. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to correlate with the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures regarding revenue recognition. This new standard, as amended, will be effective for us on January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. While we are still evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements, we currently do not expect it to have a material impact on the timing of revenue recognition. We anticipate adopting the standard on a full retrospective basis.
To assess the impact of the standard, we are using internal resources to lead the implementation efforts. Our internal resources reviewed the amended guidance, attended training classes and consulted with other accounting professionals to assist with interpretation of the amended guidance. We completed an impact assessment of the guidance changes affecting our company and developed an approach to address each change. We are in the process of reviewing our portfolio of service contracts and documenting key contract terms for areas impacted by the amended guidance. In addition, we are assessing the effect this guidance may have on the timing of the recognition of costs we incur to obtain and fulfill our contracts. Changes to processes and internal controls are being identified to meet the standard’s reporting and disclosure requirements. We continue to work through an analysis of the increased disclosures required by the new guidance.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update improves financial reporting about leasing transactions by requiring a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are still evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements, but given the material amount of our future minimum payments under non-cancellable operating leases, primarily office rent, at September 30, 2017, we expect to recognize a material right-of-use lease asset and lease liability upon adoption of the ASU.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for us on January 1, 2020, with early adoption permitted on January 1, 2019. We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. The adoption of ASU 2016-15 will be required on a retrospective basis beginning January 1, 2018, with early adoption permitted. We have not yet determined when we will adopt ASU 2016-15. The adoption of the standard is not expected to have a material effect on our consolidated financial statements.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance to us.
|
The following table sets forth the anti-dilutive securities excluded from diluted loss per share:
|
|
September 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||
Anti-dilutive securities excluded from diluted loss per share: |
|
|
|
|
|
|
|
|
Stock options |
|
|
1,360,756 |
|
|
|
1,271,858 |
|
Warrants |
|
|
1,733,565 |
|
|
|
1,994,941 |
|
Total anti-dilutive securities excluded from diluted loss per share |
|
|
3,094,321 |
|
|
|
3,266,799 |
|
|
At September 30, 2017 and December 31, 2016, property and equipment, net, and other assets consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(Unaudited) |
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $2,089,097 and $2,442,549 as of September 30, 2017 and December 31, 2016, respectively |
|
$ |
1,041,745 |
|
|
$ |
1,340,850 |
|
Security deposits and other assets |
|
|
540,261 |
|
|
|
1,074,071 |
|
Property and equipment, net, and other assets |
|
$ |
1,582,006 |
|
|
$ |
2,414,921 |
|
|
The components of goodwill and other intangible assets were as follows:
September 30, 2017 (Unaudited) |
|
Estimated Useful Life |
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
|||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
5 years |
|
$ |
12,720,000 |
|
|
$ |
10,706,000 |
|
|
$ |
2,014,000 |
|
Trademarks |
|
7 years |
|
|
6,242,055 |
|
|
|
3,746,893 |
|
|
|
2,495,162 |
|
Patents |
|
7 years |
|
|
230,683 |
|
|
|
230,683 |
|
|
|
— |
|
Software |
|
7 years |
|
|
1,857,396 |
|
|
|
488,819 |
|
|
|
1,368,577 |
|
Customer lists |
|
5 years |
|
|
307,153 |
|
|
|
274,653 |
|
|
|
32,500 |
|
Total finite lived intangible assets |
|
|
|
$ |
21,357,287 |
|
|
$ |
15,447,048 |
|
|
$ |
5,910,239 |
|
December 31, 2016 |
|
Estimated Useful Life |
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
|||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
5 years |
|
$ |
12,720,000 |
|
|
$ |
8,798,000 |
|
|
$ |
3,922,000 |
|
Trademarks |
|
7 years |
|
|
6,242,055 |
|
|
|
3,078,845 |
|
|
|
3,163,210 |
|
Patents |
|
7 years |
|
|
230,683 |
|
|
|
230,683 |
|
|
|
— |
|
Software |
|
7 years |
|
|
1,649,507 |
|
|
|
307,989 |
|
|
|
1,341,518 |
|
Customer lists |
|
5 years |
|
|
307,153 |
|
|
|
244,295 |
|
|
|
62,858 |
|
Total finite lived intangible assets |
|
|
|
$ |
21,149,398 |
|
|
$ |
12,659,812 |
|
|
$ |
8,489,586 |
|
September 30, 2017 (Unaudited) and December 31, 2016 |
|
Estimated Useful Life |
|
Carrying Amount |
|
||
Indefinite lived intangible asset: |
|
|
|
|
|
|
|
Goodwill |
|
Indefinite |
|
$ |
58,337,290 |
|
|
The components of Accounts payable and accrued liabilities are as follows:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(Unaudited) |
|
|
|
|
|
|
Accounts payable |
|
$ |
16,220,566 |
|
|
$ |
32,944,202 |
|
Accrued taxes |
|
|
959,743 |
|
|
|
1,272,832 |
|
Employee compensation |
|
|
405,326 |
|
|
|
529,945 |
|
Other |
|
|
237,106 |
|
|
|
558,580 |
|
|
|
$ |
17,822,741 |
|
|
$ |
35,305,559 |
|
|
At September 30, 2017 and December 31, 2016, total capital lease obligations outstanding consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(Unaudited) |
|
|
|
|
|
|
Capital lease obligations, imputed interest at 3.00% to 13.29%, with monthly payments of approximately $6,000, expiring through November 2020, secured by computer and telephone equipment |
|
$ |
54,438 |
|
|
$ |
315,253 |
|
Total |
|
|
54,438 |
|
|
|
315,253 |
|
Less: current maturities |
|
|
(48,775 |
) |
|
|
(106,184 |
) |
Long-term portion |
|
$ |
5,663 |
|
|
$ |
209,069 |
|
|
The following table summarizes the warrants issued and outstanding as of September 30, 2017:
|
|
|||||||||||
|
|
Date of |
|
Exercise |
|
|
Shares of |
|
||||
Description |
|
Issuance |
|
Expiration |
|
Price |
|
|
Common Stock |
|
||
Exercisable warrants |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
09/24/2014 |
|
09/24/2019 |
|
$ |
20.00 |
|
|
|
1,125,005 |
|
Warrants |
|
10/20/2014 |
|
10/20/2019 |
|
$ |
20.00 |
|
|
|
87,500 |
|
Warrants |
|
3/30/2016 |
|
03/30/2021 |
|
$ |
3.88 |
|
|
|
521,060 |
|
Total warrants issued and outstanding |
|
|
|
|
|
|
1,733,565 |
|
Stock Options – We recorded stock option expense of $479,256 and $1,623,029 for the nine months ended September 30, 2017 and 2016, respectively. The following table summarizes the stock option activity for the nine month period ended September 30, 2017:
|
|
Stock Options |
|
|||||||
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Exercise |
|
Average |
|
|
|
|
Number |
|
|
Price Per |
|
Exercise Price |
|
||
|
|
of Shares |
|
|
Share |
|
Per Share |
|
||
Outstanding at December 31, 2016 |
|
|
1,317,402 |
|
|
$2.08 — $26.00 |
|
$ |
9.09 |
|
Granted |
|
|
79,500 |
|
|
$2.13 — $2.71 |
|
$ |
2.50 |
|
Canceled/Forfeited |
|
|
(36,146 |
) |
|
$6.40 — $23.20 |
|
$ |
12.35 |
|
Outstanding at September 30, 2017 |
|
|
1,360,756 |
|
|
$2.08 — $26.00 |
|
$ |
8.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|