QUEST RESOURCE HOLDING CORP, 10-K filed on 3/11/2021
Annual Report
v3.20.4
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2020
Mar. 01, 2021
Jun. 30, 2020
Cover [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2020    
Document Fiscal Year Focus 2020    
Document Fiscal Period Focus FY    
Trading Symbol QRHC    
Entity Registrant Name Quest Resource Holding Corporation    
Entity Central Index Key 0001442236    
Current Fiscal Year End Date --12-31    
Entity Filer Category Non-accelerated Filer    
Entity Shell Company false    
Entity Small Business true    
Entity Emerging Growth Company false    
Entity Well-known Seasoned Issuer No    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Common Stock, Shares Outstanding   18,413,419  
Entity Public Float     $ 13,132,156
Entity File Number 001-36451    
Entity Tax Identification Number 51-0665952    
Entity Address, Address Line One 3481 Plano Parkway    
Entity Address, City or Town The Colony    
Entity Address, State or Province TX    
Entity Address, Postal Zip Code 75056    
City Area Code 972    
Local Phone Number 464-0004    
Entity Interactive Data Current Yes    
Title of 12(b) Security Common Stock, par value $.001 per share    
Entity Incorporation, State or Country Code NV    
Security Exchange Name NASDAQ    
Document Annual Report true    
Document Transition Report false    
ICFR Auditor Attestation Flag false    
Documents Incorporated by Reference

None

   
v3.20.4
CONSOLIDATED BALANCE SHEETS - USD ($)
Dec. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 7,516,260 $ 3,411,108
Accounts receivable, less allowance for doubtful accounts of $935,261 and $767,464 as of December 31, 2020 and 2019, respectively 17,420,889 13,899,451
Prepaid expenses and other current assets 1,069,238 1,110,266
Total current assets 26,006,387 18,420,825
Goodwill 66,310,385 58,208,490
Intangible assets, net 6,528,330 1,590,524
Property and equipment, net, and other assets 3,384,055 2,436,094
Total assets 102,229,157 80,655,933
Current liabilities:    
Accounts payable and accrued liabilities 15,246,839 13,316,805
Other current liabilities 1,392,579 19,644
Current portion of notes payable 624,383  
Total current liabilities 17,263,801 13,336,449
Notes payable, net 14,948,625 4,534,683
Other long-term liabilities, net 1,973,759 1,140,749
Total liabilities 34,186,185 19,011,881
Commitments and contingencies
Stockholders’ equity:    
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of December 31, 2020 and 2019
Common stock, $0.001 par value, 200,000,000 shares authorized, 18,413,419 and 15,372,905 shares issued and outstanding as of December 31, 2020 and 2019, respectively 18,413 15,373
Additional paid-in capital 166,424,597 160,858,072
Accumulated deficit (98,400,038) (99,229,393)
Total stockholders’ equity 68,042,972 61,644,052
Total liabilities and stockholders’ equity $ 102,229,157 $ 80,655,933
v3.20.4
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]      
Allowance for doubtful accounts receivable $ 935,261 $ 767,464 $ 929,339
Preferred stock, par value $ 0.001 $ 0.001  
Preferred stock, shares authorized 10,000,000 10,000,000  
Preferred stock, shares issued 0 0  
Preferred stock, shares outstanding 0 0  
Common stock, par value $ 0.001 $ 0.001  
Common stock, shares authorized 200,000,000 200,000,000  
Common stock, shares issued 18,413,419 15,372,905  
Common stock, shares outstanding 18,413,419 15,372,905  
v3.20.4
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Income Statement [Abstract]    
Revenue $ 98,660,035 $ 98,979,140
Cost of revenue 79,604,958 80,253,172
Gross profit 19,055,077 18,725,968
Operating expenses:    
Selling, general, and administrative 17,140,996 16,815,767
Depreciation and amortization 1,163,812 1,314,731
Total operating expenses 18,304,808 18,130,498
Operating income 750,269 595,470
Other income 1,408,000  
Interest expense (701,932) (431,628)
Loss on extinguishment of debt (167,964)  
Income before taxes 1,288,373 163,842
Income tax expense 254,004 219,082
Net income (loss) 1,034,369 (55,240)
Deemed dividend for warrant down round feature (205,014)  
Net income (loss) applicable to common stockholders $ 829,355 $ (55,240)
Net income (loss) per share applicable to common stockholders    
Basic $ 0.05 $ 0.00
Diluted $ 0.05 $ 0.00
Weighted average number of common shares outstanding    
Basic 16,661,472 15,347,039
Diluted 16,755,560 15,347,039
v3.20.4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit [Member]
Beginning Balance at Dec. 31, 2018 $ 60,542,718 $ 15,329 $ 159,701,542 $ (99,174,153)
Beginning Balance, Shares at Dec. 31, 2018   15,328,870    
Stock-based compensation 1,085,906   1,085,906  
Shares issued for Employee Stock Purchase Plan options 70,668 $ 44 70,624  
Shares issued for Employee Stock Purchase Plan options, Shares   44,035    
Net income (loss) (55,240)     (55,240)
Ending Balance at Dec. 31, 2019 61,644,052 $ 15,373 160,858,072 (99,229,393)
Ending Balance, Shares at Dec. 31, 2019   15,372,905    
Stock-based compensation 1,488,177   1,488,177  
Release of deferred stock units   $ 28 (28)  
Release of deferred stock units, Shares   28,116    
Shares issued for Employee Stock Purchase Plan options 63,149 $ 62 63,087  
Shares issued for Employee Stock Purchase Plan options, Shares   62,398    
Sale of common stock, net of issuance costs 3,047,547 $ 2,950 3,044,597  
Sale of common stock, net of issuance costs, shares   2,950,000    
Warrant issued with note payable 765,678   765,678  
Deemed dividend (205,014)   205,014 (205,014)
Net income (loss) 1,034,369     1,034,369
Ending Balance at Dec. 31, 2020 $ 68,042,972 $ 18,413 $ 166,424,597 $ (98,400,038)
Ending Balance, Shares at Dec. 31, 2020   18,413,419    
v3.20.4
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Cash flows from operating activities:    
Net income (loss) $ 1,034,369 $ (55,240)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Depreciation 261,809 225,061
Amortization of intangibles 1,014,622 1,176,722
Amortization of debt issuance costs and discounts 201,424 93,901
Provision for doubtful accounts 120,936 60,000
Stock-based compensation 1,488,177 1,085,906
Loss on extinguishment of debt 167,964  
Changes in operating assets and liabilities:    
Accounts receivable (2,311,184) 2,752,358
Prepaid expenses and other current assets 82,332 (144,511)
Security deposits and other assets (66,312) 46,922
Accounts payable and accrued liabilities 1,280,418 (2,919,577)
Deferred revenue and other liabilities (176,898) (45,663)
Net cash provided by operating activities 3,097,657 2,275,879
Cash flows from investing activities:    
Purchase of property and equipment (443,644) (145,008)
Purchase of capitalized software development (62,428) (156,325)
Net cash used in investing activities (506,072) (301,333)
Cash flows from financing activities:    
Proceeds from credit facilities 71,126,110 99,403,848
Repayments of credit facilities (71,666,261) (100,157,654)
Debt issuance costs (1,056,978)  
Proceeds from shares issued for Employee Stock Purchase Plan 63,149 70,668
Proceeds from the sale of common stock, net of issuance costs 3,047,547  
Repayments of capital lease obligations   (2,597)
Net cash provided by (used in) financing activities 1,513,567 (685,735)
Net increase in cash and cash equivalents 4,105,152 1,288,811
Cash and cash equivalents at beginning of period 3,411,108 2,122,297
Cash and cash equivalents at end of period $ 7,516,260 $ 3,411,108
v3.20.4
The Company and Description of Business
12 Months Ended
Dec. 31, 2020
Accounting Policies [Abstract]  
The Company and Description of Business

1. The Company and Description of Business

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

Operations

We are a national provider of waste and recycling services to customers from across multiple industry sectors that are typically larger, multi-location businesses.  We create customer-specific programs and perform the related services for the collection, processing, recycling, disposal, and tracking of waste streams and recyclables.  In addition, we offer products such as antifreeze and windshield washer fluid and other minor ancillary services.  We also provide information and data that tracks and reports the detailed transactional and environmental results of our services and provides actionable data to improve business operations.  The data we generate also enables our customers to address their environmental and sustainability goals and responsibilities.  Our principal office is located in The Colony, Texas within the Dallas metroplex.

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

On October 19, 2020, Quest acquired substantially all of the assets used in the business of Green Remedies Waste and Recycling, Inc. (“Green Remedies”), a leading provider of independent environmental services, particularly in multi-family housing, located in Burlington, NC. See Note 3 for more information regarding the acquisition.

v3.20.4
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2020
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principles of Presentation and Consolidation

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the operating activity of QRHC and its subsidiaries for the years ended December 31, 2020 and 2019.

As QRHC, Quest, LDI, Youchange, QVC, QV One, and QSS each operate as environmental-based service companies, we did not deem segment reporting 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 carrying amounts of accounts receivable, goodwill and other intangible assets, stock-based compensation expense, deferred taxes, and the fair value of assets and liabilities acquired in asset acquisitions, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

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

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

Cash and Cash Equivalents

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

Accounts Receivable

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

As of December 31, 2020 and 2019, we had established an allowance of $935,261 and $767,464, respectively, for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivable only if they are collected.

In the year ended December 31, 2020 we recorded a $47,940 increase in our allowance for doubtful accounts related to certain receivables acquired in the Green Remedies acquisition as further described in Note 3.

The changes in our allowance for doubtful accounts for the years ended December 31, 2020 and 2019 were as follows:

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

Beginning balance

 

$

767,464

 

 

$

929,339

 

Bad debt expense

 

 

120,936

 

 

 

60,000

 

Uncollectible accounts written off, net

 

 

(1,079

)

 

 

(221,875

)

Addition related to acquisition

 

 

47,940

 

 

 

 

Ending balance

 

$

935,261

 

 

$

767,464

 

 

Fair Value Measurements

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

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

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

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

Property and Equipment

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

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

 

Vehicles

 

5 to 7 years

Computer equipment

 

3 to 5 years

Office furniture and fixtures

 

5 to 7 years

Machinery and equipment

 

5 to 7 years

Leasehold improvements

 

5 to 7 years

 

Impairment of Long-Lived Assets

We analyze long-lived assets, including property and equipment and definite-lived intangible assets, which are held and used in our operations, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and estimated period of useful life at least at each balance sheet date. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. We did not recognize any impairment charges for long-lived assets during 2020 and 2019.        

Goodwill

We record as goodwill the excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree, and the acquisition date fair value of any previous equity interest in the acquired entity over the (ii) fair value of the net identifiable assets acquired. We do not amortize goodwill; however, annually, or whenever there is an indication that goodwill may be impaired, we evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. We performed our most recent goodwill impairment analysis in the third quarter of 2020, utilizing an income approach with no impairment recorded.  We believe that the discounted cash flow method best captures the significant value-creating activities we are undertaking.  The primary assumptions in our income approach included estimating cash flows and projections.  We determined that the fair value of our goodwill exceeded our carrying value, and consequently, no impairment was deemed to have occurred.  However, a prolonged period of declining gross margins or a significant decrease in our anticipated revenue growth could result in the write-off of a portion or all of our goodwill and other intangible assets in future periods.

Net Income (Loss) per Share

We compute basic net income (loss) per share using the weighted average number of shares of common stock outstanding plus the number of common stock equivalents for Deferred Stock Units, or “DSUs”, during the period. We compute diluted net income (loss) per share using the weighted average number of shares of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents.  Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options.  Dilutive potential securities are excluded from the computation of earnings per share if their effect is antidilutive.  The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method.  

Concentrations

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade accounts receivable. We deposit our cash with commercial banks. Cash deposits at commercial banks are at risk to the extent that the balances exceed the Federal Deposit Insurance Corporation insured level per institution. The bank cash balances on deposit may periodically exceed federally insured limits, such as $6,875,321 at December 31, 2020; however, we have never experienced any losses related to these balances.

We sell our services and products primarily to customers without requiring collateral; however, we routinely assess the financial condition of our customers and maintain allowances for anticipated losses.  From year to year, the customers that exceed 10% of our annual revenue, if any, may change. The following table discloses the number of customers that accounted for more than 10% of our annual revenue and their related receivable balances for the years ended December 31, 2020 and 2019:

 

 

 

Customers Exceeding 10%

of Revenue

 

Year

 

Number of

Customers

 

 

Revenue

Combined Percent

 

 

Accounts Receivable

Combined Percent

 

2020

 

 

3

 

 

 

51

%

 

 

27

%

2019

 

 

3

 

 

 

53

%

 

 

36

%

 

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

 

Leases

 

We determine if an arrangement is a lease at inception.  Operating leases are included in operating lease right-of-use (“ROU”) assets and current and long-term operating lease liabilities on our consolidated balance sheets.  We currently do not have any material finance lease arrangements.

Operating lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.  As most of our leases do not provide an implicit rate, we use our incremental borrowing rate in effect at the commencement date of the lease in determining the present value of future payments.

When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and if it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease.  Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Income Taxes

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

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

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

Advertising

We charge our advertising costs to expense when incurred. During the years ended December 31, 2020 and 2019, advertising expense totaled $51,247 and $20,364, respectively.

Stock-Based Compensation

We measure all share-based payments, including grants of options to purchase common stock and the issuance of deferred stock units to employees, third parties and board members, using a fair value-based method, in accordance with ASC Topic 718, Stock Compensation. We classify all share-based awards as equity instruments and recognize the vesting of the awards ratably over their respective terms.  See Note 13 for a description of our share-based compensation plan and information related to awards granted under the plan.

We estimate the fair value of stock options using the Black-Scholes-Merton valuation model. Significant assumptions used in the calculation are as follows:

 

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

 

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

 

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

 

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

Deferred Stock Units

Effective September 1, 2019, nonemployee directors can elect to receive all or a portion of their annual retainers in the form of DSUs.  The DSUs are recognized at their fair value on the date of grant.  Director fees deferred into stock units are calculated and expensed each month by taking fees earned during the month and dividing by the closing price of our common stock on the last trading day of the month, rounded down to the nearest whole share.  Each DSU represents the right to receive one share of our common stock following the completion of a director’s service.

Business Combinations

Our acquisition of the assets of Green Remedies was accounted for in accordance with ASC Topic 805, Business Combinations.  In purchase accounting, identifiable assets acquired and liabilities assumed are recognized at their estimated fair values at the acquisition date, and any remaining purchase price is recorded as goodwill.  In determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions, particularly with respect to long-lived tangible and intangible assets.  Critical estimates used in valuing tangible and intangible assets include, but are not limited to, future expected cash flows, discount rates, market prices and asset lives.  See Note 3 for more information related to our acquisition.

Our consolidated financial statements include the results of operations from the date of the acquisition.

We expense all acquisition-related costs as incurred in selling, general and administrative expenses in the consolidated statements of operations.

Recently Issued Accounting Pronouncements

Adopted

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-11 Earnings per Share (Topic 260). The amendments in Part I of this ASU changed the classification analysis of certain equity-linked financial instruments with down round features.  When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.  The amendments also clarify existing disclosure requirements for equity-classified instruments.  As a result, a freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.  For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered.  That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.  A deemed dividend of $205,014 was recorded in the year ended December 31, 2020 as a result of the down round provision in certain outstanding warrants.  See Notes 13 and 14.

On January 1, 2020, we adopted ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40).  The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised.  This guidance also requires entities to present the expense in the same line item in the statement of operations as the fees associated with the hosting arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The adoption of the standard did not have a material effect on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):  Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  This standard provides operational guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate (“LIBOR”).  The amendments are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.  The expedients and exceptions provided by the amendments generally do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.  As further discussed in Note 7, our ABL Facility provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable.   As such, we do not expect the transition away from LIBOR to have a material impact on our consolidated financial statements.

Pending Adoption

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes – (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions and amending guidance to improve consistent application of accounting over income taxes. This guidance is effective January 1, 2021 with early adoption permitted. The adoption of the standard is not expected to have a material effect on our consolidated financial statements.

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

v3.20.4
Acquisition
12 Months Ended
Dec. 31, 2020
Business Combinations [Abstract]  
Acquisition

3.  Acquisition

On October 19, 2020, we acquired substantially all of the assets of Green Remedies (the “Green Remedies Assets”) pursuant to the Asset Purchase Agreement (the “Asset Purchase Agreement”), dated as of October 19, 2020, among the Company, Green Remedies and Alan Allred (the “Acquisition”). Green Remedies is a leading provider of independent environmental services, particularly in the multi-family housing market, and is located in Burlington, NC.  The acquisition strengthens our presence across key markets, particularly in multi-family housing.  The total purchase price for the Green Remedies Assets was approximately $16.1 million at close, which includes an earn out estimate tied to future performance over the next three years.  As of December 31, 2020, we paid $10.9 million in cash and recorded $5.2 million in accrued liabilities for deferred payments due to the previous owner.  We funded the acquisition primarily with a term note to Monroe Capital, as further discussed in Note 7, which is secured by a first priority lien on substantially all of QRHC’s tangible and intangible assets.

The following table sets forth the purchase consideration paid and the amount of assets acquired and liabilities assumed as of the acquisition date:

Sources of consideration paid:

 

 

 

 

Cash (1)

 

$

10,869,599

 

Payable to seller (2)

 

 

296,284

 

Seller's Note, net (3)

 

 

2,170,000

 

Deferred seller consideration (4)

 

 

2,290,000

 

Deferred consideration - earn out

 

 

440,000

 

 

 

$

16,065,883

 

 

 

 

 

 

Purchase price allocation:

 

 

 

 

Accounts receivable, net

 

 

1,331,190

 

Machinery and equipment

 

 

1,270,705

 

Intangible assets

 

 

5,890,000

 

Goodwill

 

 

8,101,895

 

Current liabilities

 

 

(527,907

)

 

 

$

16,065,883

 

(1) Financed with Monroe Loan

 

(2) Working capital adjustment

 

(3) Gross principal is $2,684,250, recorded net of OID calculated using discounted cash flow method

 

(4) Gross consideration is $2,684,250, recorded at fair value using discounted cash flow method

 

The purchase price has been allocated based on an estimate of the fair value of assets acquired and liabilities assumed as of the acquisition date.

The intangible assets acquired were valued using an income approach; specifically, the multi-period excess earnings method for valuing the customer list and the relief from royalty method for valuing the trademark.  The key assumptions used to value the customer list at $5,480,000 included, among others, attrition rates, average customer life, and discount rate.  The key assumptions used to value the trademark at $410,000 included, among others, revenue projection, pretax royalty rate, and discount rate.

Goodwill represents the amount by which the purchase price exceeds the estimated fair value of the net assets acquired and primarily reflects future synergies.  The goodwill related to the Green Remedies assets is deductible for income tax purposes.

Deferred consideration payable to the seller includes $2,290,000 net payable in either cash or shares of our common stock, and an earn-out not to exceed $2,250,000 over an earn-out period, as defined in the Asset Purchase Agreement.  We valued the earn-out liability at $440,000 using a Monte Carlo simulation.  As the earn-out liability is a contingent consideration arrangement, it is subject to periodic revaluation in accordance with ASC 820 Fair Value Measurement.

We incurred acquisition and integration costs of approximately $550,000, which is included in Selling, General and Administrative expense in the year ended December 31, 2020.

The following table presents unaudited pro forma information for the years ended December 31, 2020 and 2019 as if the Acquisition had occurred at the beginning of our 2019 fiscal year.  The unaudited pro forma information includes adjustments for amortization expense on definite lived intangible assets acquired, interest expense on debt incurred related to the acquisition, and the related income tax effects.  

The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Acquisition had been effected on the dates previously set forth, nor is it indicative of the future operating results or financial position in combination.

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Revenue

 

$

108,350,773

 

 

$

109,796,405

 

Net income (loss)

 

$

942,746

 

 

$

(578,226

)

Income (loss) per share - basic and diluted

 

$

0.06

 

 

$

(0.04

)

Included in our Consolidated Statement of Operations as of December 31, 2020 related to Green Remedies, is revenue of approximately $2.6 million and net income of approximately $550,000 since the acquisition date of October 19, 2020.

v3.20.4
Property and Equipment, Net, and Other Assets
12 Months Ended
Dec. 31, 2020
Property Plant And Equipment [Abstract]  
Property and Equipment, Net, and Other Assets

4. Property and Equipment, net, and Other Assets

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

 

 

 

As of December 31,

 

 

 

2020

 

 

2019

 

Vehicles

 

$

493,373

 

 

$

493,373

 

Computer equipment

 

 

306,122

 

 

 

247,776

 

Office furniture and fixtures

 

 

545,897

 

 

 

541,464

 

Machinery and equipment

 

 

2,278,777

 

 

 

688,137

 

Leasehold improvements

 

 

558,035

 

 

 

558,035

 

    Property and equipment, gross

 

 

4,182,204

 

 

 

2,528,785

 

Accumulated depreciation

 

 

(2,195,198

)

 

 

(1,994,320

)

    Property and equipment, net

 

 

1,987,006

 

 

 

534,465

 

Right-of-use operating lease assets

 

 

1,103,761

 

 

 

1,595,044

 

Security deposits and other assets

 

 

293,288

 

 

 

306,585

 

    Property and equipment, net, and other assets

 

$

3,384,055

 

 

$

2,436,094

 

 

We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment.  Depreciation expense for the year ended December 31, 2020 was $261,809, including $112,619 of depreciation expense reflected within “Cost of revenue” in our consolidated statement of operations as it related to assets used directly in servicing customer contracts.  Depreciation expense for the year ended December 31, 2019 was $225,061, including $87,053 depreciation expense recorded in “Cost of revenue.”  

We recorded right-of-use operating lease assets related to our corporate office lease and the office lease space in Burlington, NC in accordance with ASC 842.  Refer to Note 8, Leases for additional information.

On February 20, 2018 (the “Closing Date”), we entered into an Asset Purchase Agreement with Earth Media Partners, LLC to sell certain assets of our wholly owned subsidiary, Earth911, Inc., in exchange for a 19% interest in Earth Media Partners, LLC, which was recorded as an investment in the amount of $246,585 as of the Closing Date, and a potential future earn-out amount of approximately $350,000.  The net assets sold related to the Earth911.com website business and consisted primarily of the website and its content and customers, deferred revenues, and accounts receivable as of the Closing Date.  Earth911, Inc. was subsequently renamed Quest Sustainability Services, Inc.  The carrying amount of our investment in Earth Media Partners, LLC is included in “Security deposits and other assets” and we have an accrued receivable in the amount of $259,017 and $163,781 related to the earn-out included in “Accounts receivable” as of December 31, 2020 and December 31, 2019, respectively.

v3.20.4
Goodwill and Other Intangible Assets
12 Months Ended
Dec. 31, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets

5. Goodwill and Other Intangible Assets

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

 

December 31, 2020

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists

 

5 years

 

$

5,480,000

 

 

$

218,022

 

 

$

5,261,978

 

Software

 

7 years

 

 

2,153,061

 

 

 

1,285,058

 

 

 

868,003

 

Trademarks

 

7 years

 

 

410,000

 

 

 

11,651

 

 

 

398,349

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Total finite lived intangible assets

 

 

 

$

8,273,744

 

 

$

1,745,414

 

 

$

6,528,330

 

 

December 31, 2019

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,069

 

 

 

5,751,037

 

 

 

484,032

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,090,633

 

 

 

984,141

 

 

 

1,106,492

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,583,538

 

 

$

19,993,014

 

 

$

1,590,524

 

 

 

 

 

 

 

Carrying

Amount

 

Changes in goodwill:

 

 

 

 

 

 

Goodwill balance at December 31, 2019

 

 

 

$

58,208,490

 

Additional goodwill related to Green Remedies asset purchase

 

 

 

 

8,101,895

 

Goodwill balance at December 31, 2020

 

 

 

$

66,310,385

 

We compute amortization using the straight-line method over the estimated useful lives of the finite lived intangible assets. The amortization expense related to finite lived intangible assets was $1,014,622 and $1,176,722 for the years ended December 31, 2020 and 2019, respectively.  We expect amortization expense to be approximately $1.45 million for the year ending December 31, 2021, approximately $1.4 million for the year ending December 31, 2022, approximately $1.3 million for the year ending December 31, 2023, approximately $1.25 million for the year ending December 31, 2024, approximately $1.0 million for the year ending December 31, 2025, and approximately $130,000 thereafter. We have no indefinite-lived intangible assets other than goodwill. $58.2 million of the goodwill is not deductible for tax purposes, while $8.1 million of goodwill added in the Green Remedies asset acquisition is deductible over its tax-basis life. As required by FASB ASC Topic 350, Intangibles – Goodwill and Other, we performed our goodwill impairment analysis in the third quarter of 2020 and 2019 with no impairment recorded in either period.

In October 2020, we recorded $8.1 million in goodwill and $5.9 million of intangible assets as part of the Green Remedies asset acquisition.  See Note 3 for more information on the acquisition.

v3.20.4
Current Liabilities
12 Months Ended
Dec. 31, 2020
Current Liabilities Disclosure [Abstract]  
Current Liabilities

6. Current liabilities

 

The components of Accounts payable and accrued liabilities are as follows:

 

 

 

As of December 31,

 

 

 

2020

 

 

2019

 

Accounts payable

 

$

12,511,678

 

 

$

10,436,715

 

Accrued taxes

 

 

837,443

 

 

 

716,545

 

Employee compensation

 

 

1,003,365

 

 

 

1,384,360

 

Operating lease liability - current portion

 

 

668,019

 

 

 

627,896

 

Other

 

 

226,334

 

 

 

151,289

 

 

 

$

15,246,839

 

 

$

13,316,805

 

Refer to Note 8 for additional disclosure related to the operating lease liability recorded in accordance with ASC 842.

The components of Other current liabilities is as follows:

 

 

As of December 31,

 

 

 

2020

 

 

2019

 

Deferred seller consideration, current

 

$

1,342,125

 

 

$

 

Deferred revenue

 

 

50,454

 

 

 

19,644

 

 

 

$

1,392,579

 

 

$

19,644

 

Refer to Note 3 for additional disclosure related to the deferred seller consideration related to the Green Remedies asset acquisition.

v3.20.4
Notes Payable and Other Long-Term Liabilities, Net
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Notes Payable and Other Long-Term Liabilities, Net

7. Notes payable and Other long-term liabilities, net

Our debt obligations are as follows:

 

 

 

 

 

 

Years ended December 31,

 

 

 

Interest Rate (1)

 

 

2020

 

 

2019

 

Monroe Term Loan (2)

 

9.75%

 

 

$

11,500,000

 

 

$

 

Green Remedies Promissory Note (3)

 

3.0%

 

 

 

2,684,250

 

 

 

 

BBVA ABL Facility (4)

 

3.0%

 

 

 

4,299,333

 

 

 

 

Citizens Bank ABL Facility

 

 

 

 

 

 

 

 

4,738,136

 

Total notes payable

 

 

 

 

 

 

18,483,583

 

 

 

4,738,136

 

Less: Current portion of long-term debt

 

 

 

 

 

 

(624,383

)

 

 

 

Less: Unamortized debt issuance costs

 

 

 

 

 

 

(1,670,529

)

 

 

(203,453

)

Less: Unamortized OID

 

 

 

 

 

 

(494,343

)

 

 

 

Less: Unamortized OID warrant

 

 

 

 

 

 

(745,703

)

 

 

 

Notes payable, net

 

 

 

 

 

$

14,948,625

 

 

$

4,534,683

 

(1) Interest rates as of December 31, 2020

 

 

 

 

 

 

 

 

 

(2) Bears interest at LIBOR rate plus Applicable Margin ranging from 7.5%-10.5%

 

 

 

 

 

 

 

 

 

(3) Stated interest rate of 3.0%, discounted cash flow rate of 13%

 

 

 

 

 

 

 

 

 

(4) Bears interest at a Base rate, as defined, plus a margin of 0.75% to 1.25%

 

 

 

 

 

 

 

 

 

The future minimum principal payments as of December 31, 2020 are as follows:  

Year Ending December 31,

 

Amount

 

2021

 

$

624,383

 

2022

 

 

651,897

 

2023

 

 

651,850

 

2024

 

 

651,850

 

2025

 

 

15,903,603

 

Total

 

$

18,483,583

 

We capitalize financing costs we incur related to implementing our debt arrangements.  We record these debt issuance costs associated with our revolving credit facility and our term loan as a reduction of long-term debt, net and amortize them over the contractual life of the related debt arrangements.  The table below summarizes changes in debt issuance costs.

 

 

 

 

December 31,

 

 

 

 

 

2020

 

 

2019

 

Debt issuance costs

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

$

203,453

 

 

$

297,354

 

Financing costs deferred

 

 

 

 

1,757,856

 

 

 

 

Less: Amortization expense

 

 

 

 

(143,365

)

 

 

(93,901

)

Less: Write-offs

 

 

 

 

(147,415

)

 

 

 

Debt issuance costs, net of accumulated amortization

 

 

 

$

1,670,529

 

 

$

203,453

 

 


Revolving Credit Facility

On August 5, 2020 and then as amended on October 19, 2020, QRHC and certain of its domestic subsidiaries entered into a Loan, Security and Guaranty Agreement (the “BBVA Loan Agreement”) with BBVA USA, as a lender, and as administrative agent, collateral agent, and issuing bank, which provides for a credit facility (the “ABL Facility”) comprising the following:

 

An asset-based revolving credit facility in the maximum principal amount of $15.0 million with a sublimit for issuance of letters of credit of up to 10% of the maximum principal amount of the revolving credit facility. Each loan under the revolving credit facility bears interest, at the borrowers’ option, at either the Base Rate, plus the Applicable Margin, or the LIBOR Lending Rate for the Interest Period in effect, plus the Applicable Margin, in each case as defined in the BBVA Loan Agreement. The maturity date of the revolving credit facility is April 19, 2025. The revolving credit facility contains an accordion feature permitting the revolving credit facility to be increased by up to $10 million.

 

An equipment loan facility in the maximum principal amount of $2.0 million. Loans under the equipment loan facility may be requested at any time until August 5, 2023. Each loan under the equipment loan facility bears interest, at the borrowers’ option, at either the Base Rate, plus 1.75%, or the LIBOR Lending Rate for the Interest Period in effect, plus 2.75%. The maturity date of the equipment loan facility is April 19, 2025.

Certain of QRHC’s domestic subsidiaries are the borrowers under the BBVA Loan Agreement. QRHC and one of its domestic subsidiaries are guarantors under the BBVA Loan Agreement. As security for the obligations of the borrowers under the BBVA Loan Agreement, (i) the borrowers under the BBVA Loan Agreement have granted a first priority lien on substantially all of their tangible and intangible personal property, including a pledge of the capital stock and membership interests, as applicable, of certain of QRHC’s direct and indirect subsidiaries, and (ii) the guarantors under the BBVA Loan Agreement have granted a first priority lien on the capital stock and membership interests, as applicable, of certain of QRHC’s direct and indirect domestic subsidiaries.

The BBVA Loan Agreement contains certain financial covenants, including a minimum fixed charge coverage ratio. In addition, the BBVA Loan Agreement contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matter customarily restricted in such agreements. The BBVA Loan Agreement also contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, change of control, and failure of any guaranty or security document supporting the BBVA Loan Agreement to be in full force and effect. Upon the occurrence of an event of default, the outstanding obligations under the BBVA Loan Agreement may be accelerated and become immediately due and payable.

The ABL Facility bears interest, at our option, at either the Base Rate, as defined in the BBVA Loan Agreement, plus a margin ranging from 0.75% to 1.25% (3.0% as of December 31, 2020), or the LIBOR Lending Rate for the interest period in effect, plus a margin ranging from 1.75% to 2.25% (no borrowings as of December 31, 2020).

The BBVA Loan Agreement replaced our Loan, Security and Guaranty Agreement, dated as of February 24, 2017, with Citizens Bank, National Association (the “Citizens Bank Loan Agreement”), which was paid off and terminated effective August 5, 2020.  We recorded $167,964 in loss on extinguishment of debt in connection with this loan termination, including the write-off of the unamortized portion of debt issuance costs and fees directly associated with the loan payoff.

As of December 31, 2020, the ABL Facility borrowing base availability was $12,816,237, of which $4,299,333 principal was outstanding.

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

PPP Loan

As a result of the uncertainty surrounding the COVID-19 pandemic and its impact on our operating results, we applied for and, on May 5, 2020, we received loan proceeds of $1.4 million under the Paycheck Protection Program (“PPP”) under a promissory note from BMO Harris Bank National Association (the “PPP Loan”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”).  The PPP Loan has a two-year term and bears interest at an annual interest rate of 1%.  Monthly principal and interest payments are deferred for six months, and the maturity date is April 30, 2022.

We used the $1.4 million of loan proceeds to fund eligible payroll, rent and utility expenses under the terms of the PPP Loan.  As a result, we met the PPP eligibility criteria for forgiveness and have concluded that the PPP Loan represents, in substance, funds provided under a government grant.  We received confirmation from BMO Harris Bank of the full loan forgiveness and repayment by the SBA effective December 28, 2020.  As such, in accordance with IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance,” we have recognized the use of $1.4 million of the loan proceeds as of December 31, 2020 as Other Income.

Monroe Term Loan

On October 19, 2020, QRHC and certain of its domestic subsidiaries entered into a Credit Agreement (the “Credit Agreement”), dated as of October 19, 2020, with Monroe Capital, as administrative agent for the lenders thereto.  Among other things, the Credit Agreement provides for the following:

 

A senior secured term loan facility in the principal amount of $11.5 million. The senior secured term loan at the LIBOR Rate for LIBOR Loans plus the Applicable Margin; provided, that if the provision of LIBOR Loans becomes unlawful or unavailable, then interest will be payable at a rate per annum equal to the Base Rate from time to time in effect plus the Applicable Margin for Base Rate Loans. The maturity date of the term loan facility is October 19, 2025 (the "Maturity Date").  The senior secured term loan will amortize in aggregate annual amounts equal to 1.00% of the original principal amount of the senior secured term loan facility with the balance payable on the Maturity Date.  Proceeds of the senior secured term loan were permitted to be used in connection with the acquisition.

 

A delayed draw term loan facility in the maximum principal amount of $12.5 million. Loans under the delayed draw term loan facility may be requested at any time until October 19, 2021.  Pricing and maturity for the outstanding principal amount of the delayed draw term loan shall be the same as for the senior secured term loan.  Proceeds of the delayed draw term loan are to be used for Permitted Acquisitions (as defined in the Credit Agreement).

 

An accordion term loan facility in the maximum principal amount of $40.0 million.  Loans under the accordion loan facility may be requested at any time until the Maturity Date. Each accordion term loan shall be on the same terms as those applicable to the senior secured term loan.  Proceeds of accordion term loans are permitted to be used for Permitted Acquisitions.

Certain of QRHC’s domestic subsidiaries are the borrowers under the Credit Agreement.  QRHC is the guarantor under the Credit Agreement.  As security for the obligations of the borrowers under the Credit Agreement, (i) the borrowers under the Credit Agreement have granted a first priority lien on substantially all of their tangible and intangible personal property, including a pledge of the capital stock and membership interests, as applicable, of certain of QRHC’s direct and indirect subsidiaries, and (ii) the guarantors under the Credit Agreement have granted a first priority lien on the capital stock and membership interests, as applicable, of QRHC’s direct and indirect domestic subsidiaries.

The Credit Agreement contains certain financial covenants, including a minimum fixed charge coverage ratio and a senior net leverage ratio.  In addition, the Credit Agreement contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements.  The Credit Agreement also contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, change of control, and failure of any guaranty or security document supporting the Credit Agreement to be in full force and effect. Upon the occurrence of an event of default, the outstanding obligations under the Credit Agreement may be accelerated and become immediately due and payable.

At the same time as the borrowing of the $11.5 million under the Credit Agreement, in a separate agreement, we issued Monroe Capital a warrant to purchase 500,000 shares of QRHC’s common stock exercisable immediately.  For the $12.5 million delayed draw term loan facility, we will issue a separate warrant to purchase 350,000 shares upon drawing on this facility or on October 19, 2021, whichever occurs first, or upon certain other events.  Both warrants have an exercise price of $1.50 per share and an expiration date of March 19, 2028.  We estimated the value of the 500,000-share warrant issued using the Black Scholes option pricing model and recorded a debt discount of approximately $766,000 which will be amortized over the term of the Credit Agreement.  We also executed a letter agreement that provides that the warrant holder will receive minimum net proceeds of $1 million less any net proceeds received from the sale of the warrant shares, which is conditional on the full exercise and sale of all the warrant shares at the same time and upon a date two years after the closing date of the agreement.

Green Remedies Promissory Note

On October 19, 2020, we issued an unsecured subordinated promissory note to the seller of Green Remedies in the aggregate principal amount of $2,684,250, payable commencing on January 1, 2021 in quarterly installments through October 1, 2025 and subject to an interest rate of 3.0% per annum.

Interest Expense

The amount of interest expense related to borrowings for the years ended December 31, 2020 and 2019 was $475,071 and $326,212, respectively. Debt issuance cost of $1,757,856 is being amortized to interest expense over the lives of the related debt arrangements.  As of December 31, 2020, the unamortized portion of the debt issuance costs was $1,670,529.  The amount of interest expense related to the amortization of debt issuance costs for the years ended December 31, 2020 and 2019 was $143,365 and $93,901, respectively.  Debt discount (“OID”) of $1,674,178 is being amortized to interest expense over the lives of the related debt and consideration arrangements.  As of December 31, 2020, the unamortized portion of OIDs was $1,596,144.  The amount of interest expense related to the amortization of OID costs for the years ended December 31, 2020 and 2019 is $78,034 and nil, respectively.

Other long-term liabilities, net

 

 

 

 

December 31,

 

 

 

 

 

2020

 

 

2019

 

Deferred seller consideration, net of discount

 

 

 

$

986,028

 

 

$

 

Deferred consideration - earn-out

 

 

 

 

440,000

 

 

 

 

Other

 

 

 

 

547,731

 

 

 

1,140,749

 

 

 

 

 

$

1,973,759

 

 

$

1,140,749

 

We recorded deferred consideration in connection with the Green Remedies asset purchase as further described in Note 3.  The non-current portion of deferred consideration payable to the seller is payable in either cash or shares of our common stock.  The earn-out is not to exceed $2,250,000 over an earn-out period, as defined in the Asset Purchase Agreement.  We valued the earn-out liability at $440,000 using a Monte Carlo simulation.

v3.20.4
Leases
12 Months Ended
Dec. 31, 2020
Lessee Disclosure [Abstract]  
Leases

8. Leases

We lease corporate office space in The Colony, Texas under an 84-month, non-cancelable operating lease.  Upon the adoption of ASC 842 on January 1, 2019, we recorded approximately $2.0 million and $2.2 million to record the operating lease right-of-use asset and the related liabilities, respectively. The lease expires in October 2022.  Our office lease has a remaining term of 1.75 years as of December 31, 2020, and we used an effective interest rate of 2.456%, which was our incremental borrowing rate in effect at the inception of the lease as our lease does not provide a readily determinable implicit rate.

In connection with our acquisition of the assets of Green Remedies, we entered into a lease for office space in Burlington, NC.  We recorded a right of use asset associated with this lease of approximately $80,000.  The lease expires in October 2023.  This office lease had a remaining term of 2.8 years as of December 31, 2020, and we used an effective interest rate of 9.50%, which was our incremental borrowing rate in effect at the inception of the lease as our lease does not provide a readily determinable implicit rate.  This lease may be terminated under certain conditions as defined in the lease agreement.  The lessor is a related party that is owned by the seller of Green Remedies and is employed by us.

The future minimum lease payments required under our office leases as of December 31, 2020 are as follows:    

Year Ending December 31,

 

Amount

 

2021

 

$

694,800

 

2022

 

 

528,750

 

2023

 

 

24,513

 

Total lease payments

 

 

1,248,063

 

Less:  Interest

 

 

(36,480

)

Present value of lease payments

 

 

1,211,583

 

We leased certain equipment to a customer under a lease arrangement that expired in 2020.  The capital lease receivable amounts are approximately $5,000 at December 31, 2019, which was included in Prepaid expenses and other current assets.

Balance Sheet Classification

The table below presents the lease related assets and liabilities recorded on the balance sheet.  Right-of-use assets and related liabilities related to finance leases at December 31, 2020 are de minimis.

 

 

As of December 31,

 

 

 

2020

 

 

2019

 

Operating Leases

 

 

 

 

 

 

 

 

Right-of-use operating lease assets:

 

 

 

 

 

 

 

 

   Property and equipment, net and other assets

 

$

1,103,761

 

 

$

1,595,044

 

 

 

 

 

 

 

 

 

 

Lease Liabilities:

 

 

 

 

 

 

 

 

   Accounts payable and accrued liabilities

 

$

668,019

 

 

$

627,896

 

   Other long-term liabilities

 

 

543,564

 

 

 

1,136,583

 

       Total operating lease liabilities

 

$

1,211,583

 

 

$

1,764,479

 

Lease Costs

For the years ended December 31, 2020 and 2019, we recorded $608,674 and $602,587, respectively, of fixed cost operating lease expense.  Our operating lease expense is offset by a minimum annual incentive received from a local Economic Development Council, which is accrued monthly and will continue over the term of the lease through August 2022.  This minimum annual incentive is $63,000, which increased to $93,600 for the annual incentive period starting September 2020 through the remainder of the lease term.  

Effective December 1, 2019, we subleased a portion of our corporate office space to a single tenant.  The sublease agreement is accounted for as an operating lease and we recognize sublease income as an offset to operating lease expense on a straight-line basis over the term of the sublease agreement through August 2022.  Sublease income, net of amortized leasing costs, for the year ended December 31, 2020 and 2019 was approximately $49,000 and $4,000, respectively.  

Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the years ended December 31, 2020 and 2019.

v3.20.4
Revenue
12 Months Ended
Dec. 31, 2020
Revenue From Contract With Customer [Abstract]  
Revenue

9. Revenue

Operating Revenues

We provide businesses with services to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their operations.  Service revenues are primarily generated from fees charged for our collection, transfer, disposal and recycling services and from sales of commodities by our recycling operations.  In addition, we have product sales and other revenue primarily from sales of products such as antifreeze and windshield washer fluid, as well as minor ancillary services.  

Revenue Recognition

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

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

Disaggregation of Revenue

The following table presents our revenue disaggregated by source.  Three customers accounted for 51% of revenue for the year ended December 31, 2020, and three customers accounted for 53% of revenue for the year ended December 31, 2019.  We operate primarily in the United States, with minor services in Canada.

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Revenue Type:

 

 

 

 

 

 

 

 

Services

 

$

90,088,862

 

 

$

88,841,868

 

Product sales and other

 

 

8,571,173

 

 

 

10,137,272

 

   Total revenue

 

$

98,660,035

 

 

$

98,979,140

 

 

Contract Balances

Our incremental direct costs of obtaining a customer contract are generally deferred and amortized to selling, general, and administrative expense or as a reduction to revenue (depending on the nature of the cost) over the estimated life of the customer contract.  We classify our contract acquisition costs as current or noncurrent based on the timing of when we expect to recognize the amortization and are included in other assets.

As of December 31, 2020 and 2019 we had $100,000 and $113,750, respectively, of deferred contract costs.  During the year ended December 31, 2020, we amortized $203,750 deferred contract costs to selling, general, and administrative expense.  During the year ended December 31, 2019, we amortized $215,000 deferred contract costs to selling, general, and administrative expense.

Certain customers are billed in advance, and, accordingly, recognition of related revenues is deferred as a contract liability until the services are provided and control transferred to the customer.  As of December 31, 2020 and 2019, we had $50,454 and $19,644, respectively, of deferred revenue, which was classified in “Other current liabilities.”

v3.20.4
Income Taxes
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

10. Income Taxes      

We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of December 31, 2020 and 2019, and we have recorded a valuation allowance of $12,533,000 and $12,452,000, respectively, 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,

 

 

 

2020

 

 

2019

 

Deferred tax assets (liabilities):

 

 

 

 

 

 

 

 

Net operating loss

 

$

3,961,000

 

 

$

4,616,000

 

Depreciation and amortization

 

 

4,829,000

 

 

 

5,002,000

 

Stock-based compensation

 

 

3,442,000

 

 

 

3,113,000

 

Capitalized software costs

 

 

(237,000

)

 

 

(561,000

)

Bonus accrual

 

 

221,000

 

 

 

 

Allowance for doubtful accounts

 

 

255,000

 

 

 

206,000

 

Other

 

 

62,000

 

 

 

76,000

 

Total deferred tax assets, net

 

 

12,533,000

 

 

 

12,452,000

 

Less: valuation allowance

 

 

(12,533,000

)

 

 

(12,452,000

)

Net deferred taxes

 

$

 

 

$

 

 

Our statutory income tax rate is expected to be approximately 27%.  We had state income tax expense of $254,004 and $219,082 for the years ended December 31, 2020 and 2019, respectively, which is attributable to state obligations for states with no net operating loss carryforwards, and the continued reserve against the benefit of the net operating losses at the federal level.  The provision for income taxes consisted of the following:

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

Current

 

$

254,004

 

 

$

219,082

 

Deferred