QUEST RESOURCE HOLDING CORP, 10-Q filed on 11/14/2013
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2013
Nov. 1, 2013
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
QRHC 
 
Entity Registrant Name
Quest Resource Holding Corporation 
 
Entity Central Index Key
0001442236 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
95,814,565 
CONSOLIDATED BALANCE SHEETS (USD $)
Sep. 30, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 3,629,970 
$ 485,728 
Accounts receivable, less allowance for doubtful accounts of $296,184 and $7,398 as of September 30, 2013 and December 31, 2012, respectively
17,709,367 
174,013 
Inventory
 
4,292 
Prepaid expenses and other current assets
367,123 
38,019 
Total current assets
21,706,460 
702,052 
Property and equipment, net
706,661 
156,688 
Goodwill
57,937,290 
 
Intangible assets, net
18,724,893 
128,800 
Investment in Quest Resource Management Group, LLC
 
4,047,615 
Prepaid income taxes
5,440 
5,440 
Security deposits and other assets
109,277 
221,354 
Total assets
99,190,021 
5,261,949 
Current liabilities:
 
 
Accounts payable
20,093,262 
316,597 
Accrued liabilities
2,994,132 
648,153 
Deferred revenue
268,947 
166,362 
Long term debt and capital lease obligations - current portion
10,845 
72,128 
Convertible notes payable - short term, net of discount of nil and $33,394 as of September 30, 2013 and December 31, 2012, respectively
25,000 
99,106 
Line of credit
2,250,000 
 
Total current liabilities
25,642,186 
1,302,346 
Long term senior secured convertible notes - related parties, net of discount $5,118,613 and $1,313,897 as of September 30, 2013 and December 31, 2012, respectively
16,881,387 
686,103 
Warrant liability
 
20,233,338 
Total liabilities
42,523,573 
22,221,787 
Stockholders' equity (deficit):
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2013 and December 31, 2012
   
   
Common stock, $0.001 par value, 100,000,000 shares authorized, 95,814,565 and 58,040,230 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively
95,815 
58,040 
Additional paid-in capital
119,154,862 
30,708,473 
Accumulated deficit
(62,584,229)
(47,726,351)
Total stockholders' equity (deficit)
56,666,448 
(16,959,838)
Total liabilities and stockholders' equity (deficit)
$ 99,190,021 
$ 5,261,949 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts receivable
$ 296,184 
$ 7,398 
Convertible notes payable - short term, discount
   
33,394 
Long term senior secured convertible note - related party, discount
$ 5,118,613 
$ 1,313,897 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
95,814,565 
58,040,230 
Common stock, shares outstanding
95,814,565 
58,040,230 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Income Statement [Abstract]
 
 
 
 
Revenues
$ 28,898,614 
$ 335,886 
$ 29,614,116 
$ 790,244 
Cost of revenue
26,232,969 
 
26,381,289 
 
Gross profit
2,665,645 
335,886 
3,232,827 
790,244 
Operating expenses:
 
 
 
 
Selling, general and administrative
5,027,303 
1,170,192 
9,684,837 
4,386,325 
Depreciation and amortization
850,918 
8,497 
880,711 
53,777 
Loss on sale of assets
5,227 
 
5,227 
407 
Impairment of goodwill
3,400,667 
 
3,400,667 
 
Total operating expenses
9,284,115 
1,178,689 
13,971,442 
4,440,509 
Operating loss
(6,618,470)
(842,803)
(10,738,615)
(3,650,265)
Other expense:
 
 
 
 
Interest expense
(2,720,945)
(299,550)
(3,321,579)
(674,286)
Valuation gain (expense) - common stock warrants
 
20,924 
 
46,495 
Financing cost for senior secured convertible note - related parties
 
 
(1,465,000)
(2,055,855)
Total other expense, net
(2,720,945)
(278,626)
(4,786,579)
(2,683,646)
Loss before taxes and equity income
(9,339,415)
(1,121,429)
(15,525,194)
(6,333,911)
Equity in Quest Resource Management Group, LLC income
88,365 
422,579 
667,316 
1,548,908 
Loss before taxes
(9,251,050)
(698,850)
(14,857,878)
(4,785,003)
Income tax expense (benefit)
 
(177,330)
   
(877,230)
Net loss
(9,251,050)
(521,520)
(14,857,878)
(3,907,773)
Net loss applicable to common stockholders
$ (9,251,050)
$ (521,520)
$ (14,857,878)
$ (3,907,773)
Net loss per share
 
 
 
 
Basic and diluted
$ (0.10)
$ (0.01)
$ (0.21)
$ (0.08)
Weighted average number of common shares outstanding
 
 
 
 
Basic and Diluted
88,537,546 
48,480,581 
70,733,534 
47,852,282 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (USD $)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit[Member]
Beginning Balance at Dec. 31, 2012
$ (16,959,838)
$ 58,040 
$ 30,708,473 
$ (47,726,351)
Beginning Balance, Shares at Dec. 31, 2012
 
58,040,230 
 
 
Stock-based compensation expense
1,938,475 
 
1,938,475 
 
Discount senior secured convertible note-related party
6,500,000 
 
6,500,000 
 
Common stock issued for services
198,858 
69 
198,789 
 
Common stock issued for services, Shares
69,017 
69,017 
 
 
Common stock issued for Quest Resource Management Group, LLC
55,000,000 
22,000 
54,978,000 
 
Common stock issued for Quest Resource Management Group, LLC, Shares
22,000,000 
22,000,000 
 
 
Note conversions and discounts
3,148,493 
8,473 
3,140,020 
 
Note conversions and discounts, Shares
8,472,539 
8,472,539 
 
 
Warrant conversions
21,698,338 
7,233 
21,691,105 
 
Warrant conversions, Shares
 
7,232,779 
 
 
Net loss
(14,857,878)
 
 
(14,857,878)
Ending Balance at Sep. 30, 2013
$ 56,666,448 
$ 95,815 
$ 119,154,862 
$ (62,584,229)
Ending Balance, Shares at Sep. 30, 2013
 
95,814,565 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Cash flows from operating activities:
 
 
Net loss
$ (14,857,878)
$ (3,907,773)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation
110,214 
53,777 
Amortization of intangibles
770,497 
 
Amortization of debt discount and deferred financing costs
2,835,843 
497,191 
Loss on sale/disposition of property and equipment
5,227 
407 
Equity in Quest Resource Management Group, LLC income
(667,316)
(1,548,908)
Deferred income taxes
 
(811,087)
Provision (benefit) for doubtful accounts
26,988 
 
Stock-based compensation
2,137,333 
848,636 
Valuation expense common stock warrants
 
(46,495)
Financing costs for senior convertible note - related party
1,465,000 
2,055,855 
Impairment of goodwill
3,400,667 
 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(2,045,004)
(147,739)
Inventory
4,292 
 
Prepaid expenses and other assets
70,310 
(15,116)
Prepaid income tax
 
84,460 
Security deposits and other assets
66,488 
3,684 
Accounts payable
1,777,829 
78,920 
Accrued liabilities
1,671,281 
124,918 
Deferred revenue
102,585 
9,508 
Accrued interest - related parties
 
112,145 
Net cash used in operating activities
(3,125,644)
(2,607,618)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(23,427)
(14,141)
Proceeds from sale of property and equipment
4,621 
100 
Purchase of interest - Quest Resource Management Group, LLC
4,235,671 
 
Distributions received from Quest Resource Management Group, LLC
1,114,304 
600,000 
Net cash provided by investing activities
5,331,169 
585,959 
Cash flows from financing activities:
 
 
Proceeds from senior related party secured convertible notes
1,000,000 
1,000,000 
Proceeds from line of credit
   
   
Repayments capital lease obligations
(61,283)
(42,800)
Proceeds from issuance of stock
 
60,200 
Financing costs
 
(8,500)
Net cash provided by financing activities
938,717 
1,008,900 
Net increase (decrease) in cash and cash equivalents
3,144,242 
(1,012,759)
Cash and cash equivalents at beginning of period
485,728 
1,274,018 
Cash and cash equivalents at end of period
3,629,970 
261,259 
Supplemental cash flow information:
 
 
Cash paid for interest
434,076 
64,951 
Supplemental non-cash flow activities:
 
 
Common stock issued for deferred compensation
 
260,000 
Common stock issued for services and loan fees
198,858 
 
Common stock issued for warrant liability - cashless exercise
21,698,338 
 
Common stock issued for purchase of Quest Resource Management Group, LLC
55,000,000 
 
Secured convertible notes - related party
22,000,000 
 
Mezzanine financing reclassed to additional paid in capital
 
1,375,933 
Warrant liability
 
2,555,855 
Discount to senior convertible note-related party
6,500,000 
1,000,000 
Related Party [Member]
 
 
Supplemental non-cash flow activities:
 
 
Common stock issued for conversion of notes payable, including accrued interest
 
6,389,042 
Secured convertible notes - related party
22,000,000 
 
Notes Payable [Member]
 
 
Supplemental non-cash flow activities:
 
 
Common stock issued for conversion of notes payable, including accrued interest
$ 3,148,493 
 
The Company and Description of Business and Future Liquidity Needs
The Company and Description of Business and Future Liquidity Needs

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

The accompanying consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”), formerly Infinity Resources Holdings Corp., and its subsidiaries, Earth911, Inc. (“Earth911”), Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC, and Youchange, Inc. (“Youchange”) (collectively, “QRHC,” the “Company,” “we,” “us,” or “our”). Effective October 28, 2013, we changed our name to Quest Resource Holding Corporation, increased the shares of common stock authorized for issuance to 200,000,000, and changed our trading symbol to “QRHC.”

On July 16, 2013, we acquired all of the issued and outstanding membership interests of Quest held by Quest Resource Group LLC (“QRG”), comprising 50% of the membership interests of Quest (the “Quest Interests”). Our wholly owned subsidiary, Earth911, has held the remaining 50% of the membership interests of Quest for several years. Concurrently with our acquisition of the Quest Interests, we assigned the Quest Interests to Earth911 so that Earth911 now holds 100% of the issued and outstanding membership interests of Quest.

On October 17, 2012, we closed a merger transaction (the “Earth911 Merger”) to acquire Earth911 as a wholly owned subsidiary and experienced a change in control in which the former stockholders of Earth911 acquired control of our company. On December 11, 2012, our board of directors approved a change to our fiscal year end from June 30 to December 31. Pursuant to the terms of the merger agreement, in which we acquired Earth911, the stockholders of Earth911 exchanged their common stock for 85% of the common stock of the post-merger entity. Therefore, the merger for accounting purposes is considered a reverse merger, with Earth911 treated as the accounting acquirer.

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

Liquidity We have restructured and relocated operations of Earth911 and Youchange during the quarter ending September 30, 2013 to reduce future operating expenses. We expect that the acquisition of the Quest Interests will provide increased cash flow from operations. In, addition, we plan to obtain additional working capital by increasing sales, maintaining efficient operating expenses, and through other initiatives. As of December 31, 2012, our independent registered public accounting firm had expressed an uncertainty about our ability to continue as a going concern in its opinion attached to our consolidated financial statements for the year ended December 31, 2012, which is more fully discussed in our audited consolidated financial statements for the year ended December 31, 2012. As of September 30, 2013, we believe that with the restructuring of Earth911 and Youchange and the acquisition of the Quest Interests, we should be able to generate sufficient liquidity for current business operations.

Pro forma Three and Nine Months Ended September 30, 2013 Operating Results As discussed in footnote 10 to these financial statements, the Company previously owned a 50% ownership interest in Quest, which was accounted for as an equity investment. Effective July 16, 2013 the Company acquired the remaining 50% ownership interest, and now holds 100% of the ownership of Quest. The accompanying financial statements consolidate the results of operations of Quest solely from the date of acquisition, July 16, 2013. The following presentation represents the pro forma consolidated operations as if Quest had been a wholly owned subsidiary for all the respective periods presented.

The following table summarizes our pro forma consolidated operating results for the three and nine months ended September 30, 2013 and 2012, assuming 100% of Quest’s operations were included in the relevant periods:

 

     Proforma     Proforma  
     Three Months ended September 30,     Nine Months ended September 30,  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Consolidated operating statement information:

        

Net sales

   $ 34,850,463      $ 33,175,764      $ 98,470,818      $ 99,757,822   

Gross profit

     3,150,339        3,585,371        9,586,929        10,855,368   

Income (loss) from operations

     (6,433,785     46,269        (9,347,991     384,147   

Net income (loss)

     (9,159,331     (96,206     (14,187,247     (2,358,864 )
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principals of Presentation, Consolidation, and Reclassifications

The consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements for the year ended December 31, 2012. 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 Earth911 Merger, which closed on October 17, 2012, was deemed to be a reverse merger, with Earth911 as the accounting acquirer. As such, the operating activity of QRHC is consolidated into these consolidated financial statements for the three and nine months ended September 30, 2013, and excluded from the three and nine months ended September 30, 2012, which occurred prior to the date of the Earth911 Merger. Therefore the accompanying consolidated financial statements include (i) the operating activity of QRHC for the three and nine months ended September 30, 2013; (ii) the operating activities for Earth911 for the three and nine months ended September 30, 2013 and 2012 along with the equity method of accounting for our investment in Quest through July 16, 2013; and (iii) the operating activity of Quest subsequent to our acquisition of the Quest Interests on July 16, 2013 through September 30, 2013.

The consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2013, and the results of our operations and cash flows for the periods presented. The December 31, 2012 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Interim results are subject to seasonal variations and the results of operations for the nine months ended September 30, 2013, are not necessarily indicative of the results to be expected for the full year.

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

Accounting Estimates

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

Significant estimates are used when accounting for the collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of goodwill and intangible assets, deferred tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible notes, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

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

 

    persuasive evidence of an arrangement exists;

 

    delivery has occurred or services have been rendered;

 

    the fee for the arrangement is fixed or determinable; and

 

    collectability is reasonably assured.

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

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

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

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

 

Subsequent to July 16, 2013, the revenues reported include operations from Quest, which provides businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. Quest utilizes third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) ASC Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenues and related costs or the net amount earned as management fees. Generally, when Quest is primarily obligated in a transaction, has latitude in establishing prices and selecting suppliers, has credit risk, or has several but not all of these indicators, revenue is recorded gross. In a situation where Quest is not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we would record the net amounts as management fees earned. Currently, we have no net contracts. At this time, amounts collected from customers for sales tax are recorded on a net basis.

In addition, the revenues reported in 2013 and 2012 include the operations of Earth911 and represent licensing rights. These revenues are recognized ratably over the term of the license. Some revenues are derived from advertising contracts, which are also recognized ratably, over the term that the advertisement appears on our website. In addition, advertising revenues are not recognized until such time as persuasive evidence of an agreement exists, the price is fixed or determinable, and collectability is reasonably assured.

Cash and Cash Equivalents

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

Fair Value Measurements

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

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

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

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

Fair value accounting has been applied to the valuation of stock-based compensation, warrants issued, intangible assets and goodwill. The valuation methodologies and inputs used are discussed in the respective footnotes.

Stock Options - We estimate the fair value of stock options using the Black-Scholes valuation model. Significant Level 3 assumptions used in the calculation were determined as follows:

 

    Expected term is determined under the simplified method using an average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;

 

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

 

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

 

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

Net Loss Per Share

We compute basic net loss per share by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2013 and 2012 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes and totaled 14,090,282 shares at September 30, 2013, and 6,905,774 shares at September 30, 2012.

 

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

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

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

   $ (9,251,050   $ (521,520   $ (14,857,878   $ (3,907,773
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     88,537,546        48,480,581        70,733,534        47,852,282   

Net loss per share:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted

   $ (0.10   $ (0.01   $ (0.21   $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     As of September 30,  
     2013      2012  
     (Unaudited)      (Unaudited)  

Anti-dilutive securities excluded from diluted earnings per share:

     

Stock options

     3,090,282         1,381,115   

Warrants

     —           2,762,228   

Convertible notes

     11,000,000         2,762,431   
  

 

 

    

 

 

 
     14,090,282         6,905,774   
  

 

 

    

 

 

 

Investment in Quest

Investee companies that are not consolidated, but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to an investee depends on an evaluation of several factors, including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Prior to July 17, 2013, we accounted for the investment in Quest under the equity method of accounting, where the investee company’s accounts are not reflected within our balance sheet and statement of operations; however, our share of earnings or losses of the investee company is reflected in the caption “Equity in Quest Resource Management Group, LLC income” in our statement of operations. Our carrying value in an equity method investee company is reflected in the caption “Investment in Quest Resources Management Group, LLC” in our balance sheets. Subsequent to our acquisition of the Quest Interests on July 16, 2013, the operational activity after July 16, 2013 to September 30, 2013 and the balance sheet as of September 30, 2013 of Quest are consolidated with QRHC.

Income Taxes

Deferred tax assets and liabilities are recognized 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. Valuation allowances are established 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. Our estimates of future taxable income are reviewed annually. All tax positions are first analyzed to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.

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

 

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

Stock-Based Compensation

All share-based payments to employees, including grants of employee stock options, are expensed based on their estimated fair values at grant date, in accordance with ASC 718. Compensation expense for stock options is recorded over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes model. We classify all share-based awards as equity instruments and recognize the vesting of the awards ratably over their respective terms.

Inventories
Inventories

3. Inventories

As of September 30, 2013 and December 31, 2012, finished goods inventories were nil and $4,292, respectively, and consisted of used consumer electronics and computer devices with no reserve for inventory obsolescence.

Property and Equipment
Property and Equipment

4. Property and Equipment

At September 30, 2013 and December 31, 2012, property and equipment consisted of the following:

 

     September 30,     December 31,  
     2013     2012  
     (Unaudited)        

Vehicles

   $ 559,984      $ —     

Computer equipment

     814,636        157,305   

Office furniture and equipment

     825,051        209,026   

Leasehold improvements

     18,624        6,261   
  

 

 

   

 

 

 
     2,218,295        372,592   

Less: accumulated depreciation

     (1,511,634     (215,904
  

 

 

   

 

 

 
   $ 706,661      $ 156,688   
  

 

 

   

 

 

 

We lease certain furniture and fixtures under agreements that are classified as capital leases. The cost of equipment under these capital leases was $187,356 at September 30, 2013 and December 31, 2012 and is included in the consolidated financial statements as property and equipment. Accumulated depreciation of the leased equipment at September 30, 2013 and December 31, 2012 was $105,328 and $85,337, respectively. Interest expense in the amount of approximately $637 is expected to be recognized over the remainder of the lease term.

Intangible Assets
Intangible Assets

5. Intangible Assets

The components of intangible assets are as follows:

 

September 30, 2013    Estimated
Useful Life
   Gross Carrying
Amount
     Accumulated
Amortization
     Net  

Finite lived intangible assets:

           

Customer relationships

   5 years    $ 12,720,000       $ 530,000       $ 12,190,000   

Trademarks

   7 years      6,230,000         185,417         6,044,583   

Non-compete agreements

   2 years      400,000         41,666         358,334   

Patents

   7 years      230,683         208,714         21,969   

Customer lists

   5 years      157,153         47,146         110,007   
     

 

 

    

 

 

    

 

 

 

Total intangible assets

      $ 19,737,836       $ 1,012,943       $ 18,724,893   
     

 

 

    

 

 

    

 

 

 

Goodwill

   Indefinite    $ 57,937,290          $ 57,937,290   

 

The Company has no indefinite-lived intangible assets other than goodwill. Amortization is computed using the straight-line method over the estimated useful lives. The intangible assets are related to Quest and the amortization expense related to intangible assets subsequent to July 16, 2013 is $770,497 for the period ending September 30, 2013. Goodwill is not deductible for tax purposes.

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

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     September 30,      December 31,  
     2013      2012  
     (Unaudited)         

Compensation

   $ 1,172,591       $ 191,393   

Deferred rent obligation

     1,003,325         138,926   

Professional fees

     676,670         302,818   

Insurance

     99,602         —     

Accrued interest and other

     41,944         15,016   
  

 

 

    

 

 

 
   $ 2,994,132       $ 648,153   
  

 

 

    

 

 

 
Line of Credit
Line of Credit

7. Line of Credit

On December 15, 2010, Quest had entered into a Revolving Credit Note and Loan Agreement with Regions Bank (“Regions”), a national banking association. This agreement provides Quest with a loan facility up to $10,000,000 to provide a source of working capital with advances generally limited to 60% of eligible accounts receivable from Quest’s largest customer and 85% of all other eligible accounts receivable. The interest on the outstanding principal amount will accrue daily and be paid monthly based on a fluctuating interest rate per annum, which is the base rate plus 1.50% (4.75% as of September 30, 2013). The base rate for any day is the greater of (a) the Federal funds rate plus one-half of 1%, (b) the Regions published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. To secure the amounts due under the agreement, Quest granted Regions a security interest in all of its assets. Quest had $2,250,000 outstanding and approximately $7,750,000 available to be borrowed as of September 30, 2013. Any amount remaining outstanding on December 15, 2013, will become due on that date.

Convertible Notes Payable - Current
Convertible Notes Payable - Current

8. Convertible Notes Payable - Current

The activity from December 31, 2012 to September 30, 2013 for convertible notes payable related to Youchange is summarized in the following paragraphs.

During the period ended September 30, 2013, $107,500 of principal and $6,493 of interest was converted into 89,942 shares of our common stock. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.

 

The following convertible notes payable were outstanding as of September 30, 2013 and December 31, 2012:

 

     September 30,      December 31,  
     2013      2012  
     (Unaudited)         

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

   $ —         $ 10,000   

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

     —           5,000   

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

     —           10,000   

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

     —           10,000   

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

     —           12,500   

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

     25,000         25,000   

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

     —           25,000   

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

     —           10,000   

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

     —           25,000   
  

 

 

    

 

 

 

Total convertible notes payable - short term

     25,000         132,500   

Less: unamortized discounts due to beneficial conversion features

     —           (33,394
  

 

 

    

 

 

 

Total convertible notes payable - short term, net of discounts

   $ 25,000       $ 99,106   
  

 

 

    

 

 

 

Further details for the outstanding notes payable are as follows:

 

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

 

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

 

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

 

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

 

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

 

    During September 2012, we issued a $25,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $17,500 for this convertible note. As of September 30, 2013, the convertible note payable and associated accrued interest was convertible into a total of approximately 21,641 shares of our common stock. Although this note is past its maturity in the period ended September 30, 2013, the holder is expected to exercise the conversion feature.

 

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

 

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

 

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

9. Long Term Debt and Capital Lease Obligations

At September 30, 2013 and December 31, 2012, total long-term debt outstanding consisted of the following:

 

     September 30,     December 31,  
     2013     2012  
     (Unaudited)        

Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, converted July 16, 2013 (Net of discount of nil and $1,313,897 as of September 30, 2013 and December 31, 2012, respectively)

   $ —        $ 686,103   

Secured convertible notes payable to related parties, 7% interest due monthly in arrears, due July 2016, repayment provisions discussed further below (Net of discount of $5,118,613 and nil as of September 30, 2013 and December 31, 2012, respectively)

     16,881,387        —     

Capital lease obligations, imputed interest at 43.0% to 46.0%, with monthly payments of $8,540 through December 2013, secured by office furniture and fixtures

     10,845        72,128   
  

 

 

   

 

 

 

Total

     16,892,232        758,231   

Less: current maturities

     (10,845     (72,128
  

 

 

   

 

 

 

Long-term portion

   $ 16,881,387      $ 686,103   
  

 

 

   

 

 

 

 

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

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

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

 

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

 

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

 

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

 

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

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

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

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

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

 

The Convertible Note increased by another $1,000,000 draw during the nine months ended September 30, 2013, which was accounted for as an additional discount and an adjustment to additional paid-in-capital. The Convertible Note discount total of $3,000,000, which is equal to the amount of the funds drawn on the Convertible Note, was being amortized to interest expense over the life of the Convertible Note beginning March 22, 2012. As of September 30, 2013 and December 31, 2012, the unamortized portion of the debt discount was nil and $1,313,897, respectively. The amount of interest expense related to the amortization of the discount on the Convertible Note for the nine months ended September 30, 2013 and September 30, 2012 was $2,313,897 and $492,696, respectively.

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

Net Number = (A x B) – (A x C)

                                               D

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

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

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

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

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

Based on the cashless exercise formula, on March 29, 2013 Warrant 1-1, Warrant 1-5, and Warrant 1-6 yielded a net number value of $21,698,338. The net number value equaled 7,232,779 shares of our common stock issued at $3.00 per share under the cashless exercise option.

Convertible Secured Promissory Notes – Quest Acquisition - In connection with our acquisition of Quest on July 16, 2013, a convertible secured promissory note in the principal amount of $11,000,000 payable to each of Brian Dick, an owner of QRG, and Chief Executive Officer of Quest; and Jeffrey Forte, an owner of QRG and President of Quest. The secured convertible promissory notes issued to each of Messrs. Dick and Forte (collectively, the “Sellers Notes”) are each secured by a first-priority security interest in a 25% membership interest held by Earth911 in Quest (comprising a total of 50% of the membership interests of Quest), as set forth in security and membership interest pledge agreements, by and between Earth911 and each of Messrs. Dick and Forte. The Sellers Notes accrue interest at a rate of 7% per annum and are payable on a monthly basis on the 5th day of the month beginning on September 5, 2013. The principal amount will be due and payable in one installment on July 16, 2016.

The Sellers Notes are convertible at any time, in the sole discretion of each holder, into shares of our common stock at a price of $2.00 per share. In addition, the Sellers Notes are convertible, in our sole discretion, into shares of our common stock at a price of $2.00 per share at any time (i) after the two year anniversary of the Notes, (ii) the principal amount of each Sellers Notes has been paid down by $5,000,000 as a result of the first capital raise, (iii) our common stock trades on the Nasdaq Stock Market, the New York Stock Exchange, or NYSE MKT, and (iv) our common stock has traded at four times the $2.00 conversion price, as adjusted for any stock splits, reverse stock splits, or both. Based on our share price at the time the Sellers Notes agreement was entered into, we recognized a beneficial conversion feature of $5,500,000 and discounted the Sellers Notes. As of September 30, 2013, the unamortized discount on the Sellers Notes was $5,118,613. The amount of interest expense related to the Sellers Notes for the period from July 17, 2013 until September 30, 2013 was $324,876. The amount of interest expense related to the amortization of the discount on the Sellers Notes for the period from July 17, 2013 until September 30, 2013 was $381,387.

Investment in Quest Resource Management Group, LLC and Acquisition of Quest Interests
Investment in Quest Resource Management Group, LLC and Acquisition of Quest Interests

10. Investment in Quest Resource Management Group, LLC and Acquisition of Quest Interests

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

On July 16, 2013, we acquired all of the Quest Interests, held by QRG, comprising 50% of the membership interests of Quest. Concurrently with our acquisition of the Quest Interests, we assigned the Quest Interests to Earth911, our wholly owned subsidiary, so that Earth911 now holds 100% of the issued and outstanding membership interests of Quest.

 

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

 

Net assets and liabilities

   $ 1,214,804   

Customer Relationships

     12,720,000   

Trademarks

     6,230,000   

NonCompetes

     400,000   

Goodwill

     56,635,196   
  

 

 

 
   $ 77,200,000   
  

 

 

 

The purchase price for the Quest Interests consisted of the following: (i) 12,000,000 shares of QRHC common stock issued to Brian Dick, a 50% owner of QRG and Chief Executive Officer of Quest; (ii) 10,000,000 shares of QRHC common stock issued to Jeff Forte, a 50% owner of QRG and President of Quest; and (iii) the Sellers Notes in the aggregate principal amount of $22,000,000. The Sellers Notes are each secured by a first-priority security interest in a 25% membership interest held by Earth911 in Quest (comprising a total of 50% of the membership interests of Quest), as set forth in security and membership interest pledge agreements, by and between Earth911 and each of Messrs. Dick and Forte.

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

 

     Three Months ended September 30,      Nine Months ended September 30,  
     2013     2012      2013     2012  
     (Unaudited)     (Unaudited)      (Unaudited)     (Unaudited)  

Condensed operating statement information:

         

Net sales

   $ 34,561,241      $ 32,839,878       $ 97,466,094      $ 98,967,578   

Gross profit

     2,870,821        3,249,485         8,740,229        10,065,124   

Income (loss) from operations

     (3,530,830     889,072         (2,324,891     4,034,412   

Net income (loss)

     (3,558,472     847,893         (2,400,609     3,097,817   

Reported as part of the Quest operations for the relevant periods

         

Equity in Quest Resource Management Group, LLC income

         

50% ownership interest

   $ 88,365      $ 422,579       $ 667,316      $ 1,548,908   

Consolidated amounts subsequent to July 16, 2013

         

100% ownership interest

         

Net sales

   $ 28,609,392      $ —         $ 28,609,392      $ —     

Gross margin

     2,386,127        —           2,386,127        —     

Income (loss) from operations

     (3,715,515     —           (3,715,515     —     

Net income (loss)

     (3,738,556     —           (3,738,556     —     

The three months and nine months ended September 30, 2013 shown above include the non-recurring impairment of goodwill of $3,400,667 and the additional amortization of intangible assets of $757,083 related to the acquisition of the Quest Interests.

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

 

     December 31,
2012
 

Condensed balance sheet information:

  

Current assets

   $ 20,718,638   

Long-term assets

     2,118,295   
  

 

 

 

Total Assets

   $ 22,836,933   
  

 

 

 

Current liabilities

   $ 17,925,175   

Long-term liabilities

     —     

Equity

     4,911,758   
  

 

 

 

Total liabilities and members’ equity

   $ 22,836,933   
  

 

 

 

As of September 30, 2013, the condensed balance sheet and the operations reflect the allocation of the purchase price resulting in additional goodwill and intangible assets of $75,985,196, the impairment of goodwill of $3,400,667, and the related amortization of the intangible assets of $770,497 for the period from July 16, 2013 to September 30, 2013.

Income Taxes
Income Taxes

11. Income Taxes

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. In our opinion, realization of our net operating loss carry forward is not reasonably assured as of September 30, 2013 and December 31, 2012, and valuation allowances of $5,551,000 and $2,433,000, respectively, have been provided against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.

The components of net deferred taxes are as follows:

 

     September 30,
2013
    December 31,
2012
 
     (Unaudited)        

Deferred tax assets (liabilities):

    

Net operating loss

   $ 2,933,000      $ 1,029,000   

Stock-based compensation

     2,032,000        1,177,000   

Accrued interest expense

     150,000        155,000   

Allowance for doubtful accounts

     46,000        22,000   

Deferred lease liability

     390,000        50,000   
  

 

 

   

 

 

 

Total deferred tax assets

     5,551,000        2,433,000   

Less: valuation allowance

     (5,551,000     (2,433,000
  

 

 

   

 

 

 

Net deferred taxes

     —          —     
  

 

 

   

 

 

 

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

 

     September 30,     December 31,  
     2013     2012  
     (Unaudited)        

U.S. federal statutory rate applied to pretax income

   $ (5,052,000   $ (11,713,000

Permanent differences

     2,582,000        10,344,000   

State taxes and other

     (648,000     (123,000

Change in valuation allowance

     3,118,000        2,433,000   
  

 

 

   

 

 

 
   $ —        $ 941,000   
  

 

 

   

 

 

 

As of December 31, 2012, we had federal income tax net operating loss carry forwards of approximately $2,600,000, which expire at various dates beginning in 2031. We are subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss.

As of December 31, 2012, we did not recognize any assets or liabilities relative to uncertain tax positions, nor do we anticipate any significant unrecognized tax benefits will be recorded during 2013. It is our policy to classify interest and penalties on income taxes as interest expense or penalties expense.

Tax positions are positions taken in a previously filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. Tax positions include, but are not limited to, the following:

 

    an allocation or shift of income between taxing jurisdictions;

 

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

 

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

 

We are potentially subject to tax audits for federal and state tax returns for tax years ended 2012 to 2010. Tax audits by their very nature are often complex and can require several years to complete. Prior to July 13, 2010, as a limited liability company, we were not a tax paying entity for federal and state income tax purposes. Accordingly, our taxable income or loss was allocated to our members in accordance with their respective percentage ownership.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

12. Fair Value of Financial Instruments

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

Our initial warrant valuation was measured at fair value by applying the Black-Scholes option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes option valuation for the warrants are as follows: volatility of 66%; risk free interest rate of 1%; expected term of 5 years; and expected dividend yield of 0%. The grant date fair value of the initial warrant valuation described above was $2.56 per warrant. The risk free interest rate is based on United States Treasury rates with maturity dates approximating the expected term of the warrants. At the time of the initial warrant valuation, we were a private company and common stock transactions were too infrequent, therefore we could not practicably estimate the expected volatility of our own stock. Accordingly, we have substituted the historical volatility of a relevant sector index, which we have generated from companies that are publicly traded and do business within the industry we operate.

The March 29, 2013 and December 31, 2012 valuations were measured at fair value by utilizing the quoted market price for our common stock and the valuation for the cashless exercise of Warrant 1-1, Warrant 1-5, and Warrant 1-6 in March 2013, which are Level 1 and Level 2 inputs. These inputs of (i) an observable warrant exercise transaction and (ii) publicly traded market price provided a reasonable basis for valuation for the warrants as of March 29, 2013 and December 31, 2012. Based on that valuation using the $3.00 closing market price and exercisable rights in total to purchase 6,905,576 shares of our common stock at $0.37 per share, Warrant 1-1 and Warrant 1-5 had a net number value of $20,233,338. Using the same valuation method, Warrant 1-6 had a net number value of $1,465,000 upon issuance on March 29, 2013. All three warrants were exercised on March 29, 2013. See Note 9 and Note 13 for further discussion regarding the cashless exercise of these warrants.

The following table summarizes the warranty liability valuation for the nine months ended September 30, 2013:

 

     Fair Value Measurements  

Description

   Warrant Liability  

Beginning balance, December 31, 2012

   $ 20,233,338   

Issuances (Level 1 & 2)

     1,465,000   

Less exercise of warrants

     (21,698,338
  

 

 

 

Ending balance, September 30, 2013

   $ —     
  

 

 

 
Stockholders' Equity
Stockholders' Equity

13. Stockholders’ Equity

Preferred Stock - Our authorized preferred stock consists of 10,000,000 shares of preferred stock with a par value of $0.001, of which no shares have been issued or outstanding.

Common Stock - Our authorized common stock consists of 100,000,000 shares of common stock with a par value of $0.001 with 95,814,565 shares and 58,040,230 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively.

 

During the nine months ended September 30, 2013, we issued shares of common stock as follows:

 

     Common Stock         
     Shares      Amount  

Common stock issued for services

     69,017       $ 198,858   

Common stock issued for Quest

     22,000,000         55,000,000   

Note and interest conversions

     8,472,539         3,148,493   

Warrant conversions

     7,232,779         21,698,338   
  

 

 

    

 

 

 
     37,774,335       $ 80,045,689   
  

 

 

    

 

 

 

Common Stock for Services - We issued 69,017 shares of common stock to employees and consultants during the nine months ended September 30, 2013 for $198,858 of services.

Warrants - At December 31, 2012, we had outstanding exercisable warrants, as adjusted, to purchase 6,905,576 shares of common stock at $0.37 per share. On March 29, 2013, we issued an exercisable warrant to purchase 500,000 shares of common stock at $0.37 per share. As of September 30, 2013, there were no outstanding exercisable warrants remaining after the exercise of the warrants on March 29, 2013. At December 31, 2012, we had outstanding contingent warrants, as adjusted, to purchase 1,381,113 shares of common stock at $0.37 per share, which were cancelled upon conversion of the Convertible Note on July 16, 2013. See the discussion under Note 9 for further details regarding the issued warrants related to the Convertible Note, subsequent amendment, and exercise of warrants.

 

Warrants Issued and Outstanding as of September 30, 2013

 
     Date of    Exercise      Shares of  

Description

   Issuance    Expiration    Price      Common Stock  

Exercisable warrants

           

Warrant 1-1

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

Warrant 1-5

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

Warrant 1-6

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

Less warrants exercised

              (7,405,576
           

 

 

 

Total exercisable warrants

              —     

Contingent warrants

           

Warrant 1-2

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

Warrant 1-3

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

Warrant 1-4

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

Less warrants cancelled

              (1,381,113
           

 

 

 

Total contingent warrants

              —     
           

 

 

 

Total warrants issued and outstanding

        —     
           

 

 

 

Stock Option Plan - In October 2012, we adopted our 2012 Incentive Compensation Plan (the “2012 Plan”) as the sole plan for providing equity-based incentive compensation to our employees, non-employee directors, and other service providers. The maximum number of shares of common stock available for grant under the plan is 7,500,000. Stock compensation expense prior to October 2012 is related to options granted prior to the Earth911 Merger that was superseded by the 2012 Plan at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to adjustment for certain corporate changes in accordance with the provisions of the plan. Stock-based compensation expense was $2,137,333 and $848,637 for the nine months ended September 30, 2013 and 2012, respectively.

 

Following is a summary of stock option activity subsequent to December 31, 2012 through September 30, 2013:

 

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

Outstanding at December 31, 2012

     3,350,115        2.00 - 2.79         2.20   

Granted

     108,000        2.65 - 2.65         2.65   

Canceled/Forfeited

     (367,833     2.10 - 2.79         2.24   
  

 

 

      

Outstanding at September 30, 2013

     3,090,282        2.65 - 2.65         2.22   
  

 

 

      

As of September 30, 2013, the intrinsic value of options outstanding was $299,584 and the intrinsic value of options exercisable was $240,844.

The following additional information applies to options outstanding at September 30, 2013:

 

            Weighted-                       
            Average      Weighted-             Weighted-  
Ranges of    Outstanding at      Remaining      Average      Excercisable at      Average  
Exercise    September 30,      Contractual      Exercise      September 30,      Exercise  
Prices    2013      Life      Price      2013      Price  
$2.00 - $2.79      3,090,282         5.3       $ 2.22         2,872,782       $ 2.21   

At September 30, 2013, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, was approximately $587,098.

Goodwill and Valuation Impairment
Goodwill and Valuation Impairment

14. Goodwill and Valuation Impairment

We primarily employ two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; or (ii) the present value of expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows.

In connection with the acquisition of all of the Quest Interests, we recognized $56,365,196 of goodwill after an impairment of $3,400,667.

Related Party Transactions
Related Party Transactions

15. Related Party Transactions

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

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

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

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

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

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

See Note 13 for a discussion regarding conversion of convertible note and interest.

Acquisition of the Quest Interests - We entered into a securities purchase agreement (the “Securities Purchase Agreement”) with QRG, pursuant to which we acquired all of the Quest Interests, held by QRG, comprising 50% of the membership interests of Quest . Earth911 has held the remaining 50% of the membership interests of Quest for several years. Concurrently with our acquisition of the Quest Interests, we assigned the Quest Interests to Earth911 so that Earth911 now holds 100% of the issued and outstanding membership interests of Quest. Quest engages in the business of recycling management for large and mid-size corporations in the automotive aftermarket, fleet, municipal, food service, hospitality, retail, office building, construction, hospital, and manufacturing industries.

The purchase price for the Quest Interests consisted of the following: (i) 12,000,000 shares of our common stock issued to Brian Dick, a 50% owner of QRG and Chief Executive Officer of Quest; (ii) 10,000,000 shares of our common stock issued to Jeff Forte, a 50% owner of QRG and President of Quest; and (iii) the Sellers Notes with an aggregate principal amount of $22,000,000. The Sellers Notes are each secured by a first-priority security interest in a 25% membership interest held by Earth911 in Quest (comprising a total of 50% of the membership interests of Quest), as set forth in security and membership interest pledge agreements, by and between Earth911 and each of Messrs. Dick and Forte. The notes are for three years and accrue interest at an annual rate of 7%.

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

Subsequent Events
Subsequent Events

16. Subsequent Events

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

Summary of Significant Accounting Policies (Policies)

Principals of Presentation, Consolidation, and Reclassifications

The consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements for the year ended December 31, 2012. 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 Earth911 Merger, which closed on October 17, 2012, was deemed to be a reverse merger, with Earth911 as the accounting acquirer. As such, the operating activity of QRHC is consolidated into these consolidated financial statements for the three and nine months ended September 30, 2013, and excluded from the three and nine months ended September 30, 2012, which occurred prior to the date of the Earth911 Merger. Therefore the accompanying consolidated financial statements include (i) the operating activity of QRHC for the three and nine months ended September 30, 2013; (ii) the operating activities for Earth911 for the three and nine months ended September 30, 2013 and 2012 along with the equity method of accounting for our investment in Quest through July 16, 2013; and (iii) the operating activity of Quest subsequent to our acquisition of the Quest Interests on July 16, 2013 through September 30, 2013.

The consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2013, and the results of our operations and cash flows for the periods presented. The December 31, 2012 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Interim results are subject to seasonal variations and the results of operations for the nine months ended September 30, 2013, are not necessarily indicative of the results to be expected for the full year.

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

Accounting Estimates

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

Significant estimates are used when accounting for the collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of goodwill and intangible assets, deferred tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible notes, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

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

 

    persuasive evidence of an arrangement exists;

 

    delivery has occurred or services have been rendered;

 

    the fee for the arrangement is fixed or determinable; and

 

    collectability is reasonably assured.

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

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

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

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

 

Subsequent to July 16, 2013 the revenues reported include operations from Quest, which provides businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. Quest utilizes third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) ASC Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenues and related costs or the net amount earned as management fees. Generally, when Quest is primarily obligated in a transaction, has latitude in establishing prices and selecting suppliers, has credit risk, or has several but not all of these indicators, revenue is recorded gross. In a situation where Quest is not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we would record the net amounts as management fees earned. Currently, we have no net contracts. At this time, amounts collected from customers for sales tax are recorded on a net basis.

In addition, the revenues reported in 2013 and 2012 include the operations of Earth911 and represent licensing rights. These revenues are recognized ratably over the term of the license. Some revenues are derived from advertising contracts, which are also recognized ratably, over the term that the advertisement appears on our website. In addition, advertising revenues are not recognized until such time as persuasive evidence of an agreement exists, the price is fixed or determinable, and collectability is reasonably assured.

Cash and Cash Equivalents

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

Fair Value Measurements

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

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

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

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

Fair value accounting has been applied to the valuation of stock-based compensation, warrants issued, intangible assets and goodwill. The valuation methodologies and inputs used are discussed in the respective footnotes.

Stock Options - We estimate the fair value of stock options using the Black-Scholes valuation model. Significant Level 3 assumptions used in the calculation were determined as follows:

 

    Expected term is determined under the simplified method using an average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;

 

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

 

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

 

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

Net Loss Per Share

We compute basic net loss per share by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2013 and 2012 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes and totaled 14,090,282 shares at September 30, 2013, and 6,905,774 shares at September 30, 2012.

 

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

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

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

   $ (9,251,050   $ (521,520   $ (14,857,878   $ (3,907,773
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     88,537,546        48,480,581        70,733,534        47,852,282   

Net loss per share:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted

   $ (0.10   $ (0.01   $ (0.21   $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     As of September 30,  
     2013      2012  
     (Unaudited)      (Unaudited)  

Anti-dilutive securities excluded from diluted earnings per share:

     

Stock options

     3,090,282         1,381,115   

Warrants

     —           2,762,228   

Convertible notes

     11,000,000         2,762,431   
  

 

 

    

 

 

 
     14,090,282         6,905,774   
  

 

 

    

 

 

 

Investment in Quest

Investee companies that are not consolidated, but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to an investee depends on an evaluation of several factors, including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Prior to July 17, 2013, we accounted for the investment in Quest under the equity method of accounting, where the investee company’s accounts are not reflected within our balance sheet and statement of operations; however, our share of earnings or losses of the investee company is reflected in the caption “Equity in Quest Resource Management Group, LLC income” in our statement of operations. Our carrying value in an equity method investee company is reflected in the caption “Investment in Quest Resources Management Group, LLC” in our balance sheets. Subsequent to our acquisition of the Quest Interests on July 16, 2013, the operational activity after July 16, 2013 to September 30, 2013 and the balance sheet as of September 30, 2013 of Quest are consolidated with QRHC.

Income Taxes

Deferred tax assets and liabilities are recognized 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. Valuation allowances are established 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. Our estimates of future taxable income are reviewed annually. All tax positions are first analyzed to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.

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

 

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

Stock-Based Compensation

All share-based payments to employees, including grants of employee stock options, are expensed based on their estimated fair values at grant date, in accordance with ASC 718. Compensation expense for stock options is recorded over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes model. We classify all share-based awards as equity instruments and recognize the vesting of the awards ratably over their respective terms.

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

The following table summarizes our pro forma consolidated operating results for the three and nine months ended September 30, 2013 and 2012, assuming 100% of Quest’s operations were included in the relevant periods:

 

     Proforma     Proforma  
     Three Months ended September 30,     Nine Months ended September 30,  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Consolidated operating statement information:

        

Net sales

   $ 34,850,463      $ 33,175,764      $ 98,470,818      $ 99,757,822   

Gross profit

     3,150,339        3,585,371        9,586,929        10,855,368   

Income (loss) from operations

     (6,433,785     46,269        (9,347,991     384,147   

Net income (loss)

     (9,159,331     (96,206     (14,187,247     (2,358,864
Summary of Significant Accounting Policies (Tables)

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

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

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

   $ (9,251,050   $ (521,520   $ (14,857,878   $ (3,907,773
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     88,537,546        48,480,581        70,733,534        47,852,282   

Net loss per share:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted

   $ (0.10   $ (0.01   $ (0.21   $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     As of September 30,  
     2013      2012  
     (Unaudited)      (Unaudited)  

Anti-dilutive securities excluded from diluted earnings per share:

     

Stock options

     3,090,282         1,381,115   

Warrants

     —           2,762,228   

Convertible notes

     11,000,000         2,762,431   
  

 

 

    

 

 

 
     14,090,282         6,905,774   
  

 

 

    

 

 

 
Property and Equipment (Tables)
Components of Property and Equipment

At September 30, 2013 and December 31, 2012, property and equipment consisted of the following:

 

     September 30,     December 31,  
     2013     2012  
     (Unaudited)        

Vehicles

   $ 559,984      $ —     

Computer equipment

     814,636        157,305   

Office furniture and equipment

     825,051        209,026   

Leasehold improvements

     18,624        6,261   
  

 

 

   

 

 

 
     2,218,295        372,592   

Less: accumulated depreciation

     (1,511,634     (215,904
  

 

 

   

 

 

 
   $ 706,661      $ 156,688   
  

 

 

   

 

 

 
Intangible Assets (Tables)
Schedule of Intangible Assets

The components of intangible assets are as follows:

 

September 30, 2013    Estimated
Useful Life
   Gross Carrying
Amount
     Accumulated
Amortization
     Net  

Finite lived intangible assets:

           

Customer relationships

   5 years    $ 12,720,000       $ 530,000       $ 12,190,000   

Trademarks

   7 years      6,230,000         185,417         6,044,583   

Non-compete agreements

   2 years      400,000         41,666         358,334   

Patents

   7 years      230,683         208,714         21,969   

Customer lists

   5 years      157,153         47,146         110,007   
     

 

 

    

 

 

    

 

 

 

Total intangible assets

      $ 19,737,836       $ 1,012,943       $ 18,724,893   
     

 

 

    

 

 

    

 

 

 

Goodwill

   Indefinite    $ 57,937,290          $ 57,937,290   
Accrued Expenses and Other Current Liabilities (Tables)
Summary of Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     September 30,      December 31,  
     2013      2012  
     (Unaudited)         

Compensation

   $ 1,172,591       $ 191,393   

Deferred rent obligation

     1,003,325         138,926   

Professional fees

     676,670         302,818   

Insurance

     99,602         —     

Accrued interest and other

     41,944         15,016   
  

 

 

    

 

 

 
   $ 2,994,132       $ 648,153   
  

 

 

    

 

 

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

The following convertible notes payable were outstanding as of September 30, 2013 and December 31, 2012:

 

     September 30,      December 31,  
     2013      2012  
     (Unaudited)         

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

   $ —         $ 10,000   

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

     —           5,000   

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

     —           10,000   

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

     —           10,000   

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

     —           12,500   

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

     25,000         25,000   

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

     —           25,000   

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

     —           10,000   

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

     —           25,000   
  

 

 

    

 

 

 

Total convertible notes payable - short term

     25,000         132,500   

Less: unamortized discounts due to beneficial conversion features

     —           (33,394
  

 

 

    

 

 

 

Total convertible notes payable - short term, net of discounts

   $ 25,000       $ 99,106   
  

 

 

    

 

 

 
Long Term Debt and Capital Lease Obligations (Tables)
Summary of Long Term Debt

At September 30, 2013 and December 31, 2012, total long-term debt outstanding consisted of the following:

 

     September 30,     December 31,  
     2013     2012  
     (Unaudited)        

Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, converted July 16, 2013 (Net of discount of nil and $1,313,897 as of September 30, 2013 and December 31, 2012, respectively)

   $ —        $ 686,103   

Secured convertible notes payable to related parties, 7% interest due monthly in arrears, due July 2016, repayment provisions discussed further below (Net of discount of $5,118,613 and nil as of September 30, 2013 and December 31, 2012, respectively)

     16,881,387        —     

Capital lease obligations, imputed interest at 43.0% to 46.0%, with monthly payments of $8,540 through December 2013, secured by office furniture and fixtures

     10,845        72,128   
  

 

 

   

 

 

 

Total

     16,892,232        758,231   

Less: current maturities

     (10,845     (72,128
  

 

 

   

 

 

 

Long-term portion

   $ 16,881,387      $ 686,103   
  

 

 

   

 

 

 
Investment in Quest Resource Management Group, LLC and Acquisition of Quest Interests (Tables)

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

 

Net assets and liabilities

   $ 1,214,804   

Customer Relationships

     12,720,000   

Trademarks

     6,230,000   

NonCompetes

     400,000   

Goodwill

     56,635,196   
  

 

 

 
   $ 77,200,000   
  

 

 

 

 

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

 

     Three Months ended September 30,      Nine Months ended September 30,  
     2013     2012      2013     2012  
     (Unaudited)     (Unaudited)      (Unaudited)     (Unaudited)  

Condensed operating statement information:

         

Net sales

   $ 34,561,241      $ 32,839,878       $ 97,466,094      $ 98,967,578   

Gross profit

     2,870,821        3,249,485         8,740,229        10,065,124   

Income (loss) from operations

     (3,530,830     889,072         (2,324,891     4,034,412   

Net income (loss)

     (3,558,472     847,893         (2,400,609     3,097,817   

Reported as part of the Quest operations for the relevant periods

         

Equity in Quest Resource Management Group, LLC income

         

50% ownership interest

   $ 88,365      $ 422,579       $ 667,316      $ 1,548,908   

Consolidated amounts subsequent to July 16, 2013

         

100% ownership interest

         

Net sales

   $ 28,609,392      $ —         $ 28,609,392      $ —     

Gross margin

     2,386,127        —           2,386,127        —     

Income (loss) from operations

     (3,715,515     —           (3,715,515     —     

Net income (loss)

     (3,738,556     —           (3,738,556     —     

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

 

     December 31,
2012
 

Condensed balance sheet information:

  

Current assets

   $ 20,718,638   

Long-term assets

     2,118,295   
  

 

 

 

Total Assets

   $ 22,836,933   
  

 

 

 

Current liabilities

   $ 17,925,175   

Long-term liabilities

     —     

Equity

     4,911,758   
  

 

 

 

Total liabilities and members’ equity

   $ 22,836,933   
  

 

 

 
Income Taxes (Tables)

The components of net deferred taxes are as follows:

 

     September 30,
2013
    December 31,
2012
 
     (Unaudited)        

Deferred tax assets (liabilities):

    

Net operating loss

   $ 2,933,000      $ 1,029,000   

Stock-based compensation

     2,032,000        1,177,000   

Accrued interest expense

     150,000        155,000   

Allowance for doubtful accounts

     46,000        22,000   

Deferred lease liability

     390,000        50,000   
  

 

 

   

 

 

 

Total deferred tax assets

     5,551,000        2,433,000   

Less: valuation allowance

     (5,551,000     (2,433,000
  

 

 

   

 

 

 

Net deferred taxes

     —          —     
  

 

 

   

 

 

 

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

 

     September 30,     December 31,  
     2013     2012  
     (Unaudited)        

U.S. federal statutory rate applied to pretax income

   $ (5,052,000   $ (11,713,000

Permanent differences

     2,582,000        10,344,000   

State taxes and other

     (648,000     (123,000

Change in valuation allowance

     3,118,000        2,433,000   
  

 

 

   

 

 

 
   $ —        $ 941,000   
  

 

 

   

 

 

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

The following table summarizes the warranty liability valuation for the nine months ended September 30, 2013:

 

     Fair Value Measurements  

Description

   Warrant Liability  

Beginning balance, December 31, 2012

   $ 20,233,338   

Issuances (Level 1 & 2)

     1,465,000   

Less exercise of warrants

     (21,698,338
  

 

 

 

Ending balance, September 30, 2013

   $ —     
  

 

 

 
Stockholders' Equity (Tables)

During the nine months ended September 30, 2013, we issued shares of common stock as follows:

 

     Common Stock         
     Shares      Amount  

Common stock issued for services

     69,017       $ 198,858   

Common stock issued for Quest

     22,000,000         55,000,000   

Note and interest conversions

     8,472,539         3,148,493   

Warrant conversions

     7,232,779         21,698,338   
  

 

 

    

 

 

 
     37,774,335       $ 80,045,689   
  

 

 

    

 

 

 

Warrants Issued and Outstanding as of September 30, 2013

 
     Date of    Exercise      Shares of  

Description

   Issuance    Expiration    Price      Common Stock  

Exercisable warrants

           

Warrant 1-1

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

Warrant 1-5

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

Warrant 1-6

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

Less warrants exercised

              (7,405,576
           

 

 

 

Total exercisable warrants

              —     

Contingent warrants

           

Warrant 1-2

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

Warrant 1-3

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

Warrant 1-4

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

Less warrants cancelled

              (1,381,113
           

 

 

 

Total contingent warrants

              —     
           

 

 

 

Total warrants issued and outstanding

        —     
           

 

 

 

Following is a summary of stock option activity subsequent to December 31, 2012 through September 30, 2013:

 

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

Outstanding at December 31, 2012

     3,350,115        2.00 - 2.79         2.20   

Granted

     108,000        2.65 - 2.65         2.65   

Canceled/Forfeited

     (367,833     2.10 - 2.79         2.24   
  

 

 

      

Outstanding at September 30, 2013

     3,090,282        2.65 - 2.65         2.22   
  

 

 

      

The following additional information applies to options outstanding at September 30, 2013:

 

            Weighted-                       
            Average      Weighted-             Weighted-  
Ranges of    Outstanding at      Remaining      Average      Excercisable at      Average  
Exercise    September 30,      Contractual      Exercise      September 30,      Exercise  
Prices    2013      Life      Price      2013      Price  
$2.00 - $2.79      3,090,282         5.3       $ 2.22         2,872,782       $ 2.21   
The Company and Description of Business and Future Liquidity Needs - Additional Information (Detail)
1 Months Ended 9 Months Ended
Jul. 16, 2013
Sep. 30, 2013
Dec. 31, 2012
Jul. 16, 2013
Quest Resource Management Group, LLC [Member]
Oct. 28, 2013
Subsequent Event [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Increased common stock shares authorized
 
100,000,000 
100,000,000 
 
200,000,000 
Entity name changing effective date
 
Oct. 28, 2013 
 
 
 
Former entity name
 
Infinity Resources Holdings Corp. 
 
 
 
Percentage of ownership interest acquired
50.00% 
 
 
 
 
Percentage of remaining ownership interest
 
 
 
50.00% 
 
Percentage of ownership interest held by company
100.00% 
 
 
 
 
Percentage of common stock held
 
 
85.00% 
 
 
The Company and Description of Business and Future Liquidity Needs - Summarized Pro Forma Consolidated Operating Results (Detail) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
 
 
Net sales
$ 28,898,614 
$ 335,886 
$ 29,614,116 
$ 790,244 
Gross profit
2,665,645 
335,886 
3,232,827 
790,244 
Income (loss) from operations
(6,618,470)
(842,803)
(10,738,615)
(3,650,265)
Net income (loss)
(9,251,050)
(521,520)
(14,857,878)
(3,907,773)
Quest Resource Management Group, LLC [Member]
 
 
 
 
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
 
 
Net sales
34,561,241 
32,839,878 
97,466,094 
98,967,578 
Gross profit
2,870,821 
3,249,485 
8,740,229 
10,065,124 
Income (loss) from operations
(3,530,830)
889,072 
(2,324,891)
4,034,412 
Net income (loss)
(3,738,556)
847,893 
(2,400,609)
3,097,817 
Pro Forma [Member] |
Quest Resource Management Group, LLC [Member]
 
 
 
 
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
 
 
Net sales
34,850,463 
33,175,764 
98,470,818 
99,757,822 
Gross profit
3,150,339 
3,585,371 
9,586,929 
10,855,368 
Income (loss) from operations
(6,433,785)
46,269 
(9,347,991)
384,147 
Net income (loss)
$ (9,159,331)
$ (96,206)
$ (14,187,247)
$ (2,358,864)
Summary of Significant Accounting Policies - Additional Information (Detail)
9 Months Ended 12 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Dec. 31, 2012
Minimum [Member]
Dec. 31, 2012
Maximum [Member]
Significant Accounting Policies [Line Items]
 
 
 
 
Potentially dilutive securities include options, warrants, and convertible promissory notes
14,090,282 
6,905,774 
 
 
Percentage of voting right
 
 
20.00% 
50.00% 
Tax benefit percentage of being realized upon ultimate settlement
50.00% 
 
 
 
Summary of Significant Accounting Policies - Schedule of Computation of Basic and Diluted Earnings Per Share (Detail) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Earnings Per Share [Abstract]
 
 
 
 
Net loss applicable to common stockholders - numerator for basic and diluted earnings per share
$ (9,251,050)
$ (521,520)
$ (14,857,878)
$ (3,907,773)
Weighted - average common shares outstanding - denominator for basic earnings per share
88,537,546 
48,480,581 
70,733,534 
47,852,282 
Basic and diluted
$ (0.10)
$ (0.01)
$ (0.21)
$ (0.08)
Summary of Significant Accounting Policies - Schedule of Anti-dilutive Securities Excluded from Diluted Earnings Per Share (Detail)
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
14,090,282 
6,905,774 
Stock Option [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
3,090,282 
1,381,115 
Warrants [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
   
2,762,228 
Convertible Notes [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
11,000,000 
2,762,431 
Inventories - Additional Information (Detail) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Inventory Disclosure [Abstract]
 
 
Finished goods inventory
 
$ 4,292 
Reserve for inventory obsolescence of consumer electronics and computer devices
$ 0 
 
Property and Equipment - Components of Property and Equipment (Detail) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 2,218,295 
$ 372,592 
Less: accumulated depreciation
(1,511,634)
(215,904)
Property plant and equipment Net
706,661 
156,688 
Vehicles [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
559,984 
   
Computer equipment [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
814,636 
157,305 
Office furniture and equipment [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
825,051 
209,026 
Leasehold improvements [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 18,624 
$ 6,261 
Property and Equipment - Additional Information (Detail) (USD $)
9 Months Ended
Sep. 30, 2013
Dec. 31, 2012
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Accumulated depreciation of leased equipment
$ 105,328 
$ 85,337 
Interest expense
637 
 
Office furniture and equipment [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Capital leases is included in the financial Statements
$ 187,356 
$ 187,356 
Intangible Assets - Schedule of Intangible Assets (Detail) (USD $)
9 Months Ended
Sep. 30, 2013
Finite-Lived Intangible Assets [Line Items]
 
Gross Carrying Amount
$ 19,737,836 
Accumulated Amortization
1,012,943 
Net
18,724,893 
Goodwill Useful Life Description
Indefinite 
Goodwill Gross Carrying Amount
57,937,290 
Goodwill Net
57,937,290 
Customer relationships [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
5 years 
Gross Carrying Amount
12,720,000 
Accumulated Amortization
530,000 
Net
12,190,000 
Trademarks [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
7 years 
Gross Carrying Amount
6,230,000 
Accumulated Amortization
185,417 
Net
6,044,583 
NonCompetes [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
2 years 
Gross Carrying Amount
400,000 
Accumulated Amortization
41,666 
Net
358,334 
Patents [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
7 years 
Gross Carrying Amount
230,683 
Accumulated Amortization
208,714 
Net
21,969 
Customer lists [Member]
 
Finite-Lived Intangible Assets [Line Items]
 
Estimated Useful Life
5 years 
Gross Carrying Amount
157,153 
Accumulated Amortization
47,146 
Net
$ 110,007 
Intangible Assets - Additional Information (Detail) (USD $)
9 Months Ended
Sep. 30, 2013
Goodwill And Intangible Assets Disclosure [Abstract]
 
Indefinite-lived intangible assets other than goodwill
$ 0 
Amortization expense relates to intangible assets
$ 770,497 
Accrued Expenses and Other Current Liabilities - Summary of Accrued Expenses and Other Current Liabilities (Detail) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Payables And Accruals [Abstract]
 
 
Compensation
$ 1,172,591 
$ 191,393 
Deferred rent obligation
1,003,325 
138,926 
Professional fees
676,670 
302,818 
Insurance
99,602 
 
Accrued interest and other
41,944 
15,016 
Accrued Liabilities, Total
$ 2,994,132 
$ 648,153 
Line of Credit - Additional Information (Detail) (USD $)
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Credit Facilities [Line Items]
 
 
Working capital from loan agreement with Regions Bank
   
   
Revolving Credit Facility [Member]
 
 
Credit Facilities [Line Items]
 
 
Line of credit facility agreement date
Dec. 15, 2010 
 
Working capital from loan agreement with Regions Bank
10,000,000 
 
Interest on outstanding principal amount
4.75% 
 
Fluctuating interest rate based on base rate
1.50% 
 
Outstanding principal amount on line of credit facility
2,250,000 
 
Amount available to be borrow under line of credit facility
$ 7,750,000 
 
Interest rate line of credit facility description
The base rate for any day is the greater of (a) the Federal funds rate plus one-half of 1%, (b) the Regions published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. 
 
Eligible Accounts Receivable [Member] |
Revolving Credit Facility [Member] |
Largest Customer [Member]
 
 
Credit Facilities [Line Items]
 
 
Percentage of accounts receivable form Quest's customers
60.00% 
 
Eligible Accounts Receivable [Member] |
Revolving Credit Facility [Member] |
Other Customer [Member]
 
 
Credit Facilities [Line Items]
 
 
Percentage of accounts receivable form Quest's customers
85.00% 
 
Convertible Notes Payable - Additional Information (Detail) (USD $)
9 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended
Sep. 30, 2013
Mar. 29, 2013
Dec. 31, 2012
Oct. 31, 2011
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
Accrued Interest [Member]
Apr. 30, 2012
Convertible note payable to unrelated parties, issuance date of April 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of April 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2013
Convertible Notes Payable [Member]
Aug. 31, 2012
Convertible note payable to unrelated parties, issuance date of August 2012 [Member]
Sep. 30, 2013
Convertible note payable to unrelated parties, issuance date of August 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Notes Payable [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument maturity, Starting date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dec. 31, 2012 
 
 
 
 
Debt instrument maturity, Ending date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sep. 30, 2013 
 
 
 
 
Debt instrument principal amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 107,500 
 
 
 
 
Debt instrument interest amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,493 
 
 
 
 
Number of shares converted in to common stock
 
 
 
 
9,278 
 
3,130 
 
8,339 
 
10,418 
 
21,031 
 
8,292 
 
20,994 
89,942 
 
8,460 
 
21,641 
Convertible notes issued during the period
 
 
 
10,000 
 
5,000 
 
10,000 
 
12,500 
 
25,000 
 
10,000 
 
25,000 
 
 
10,000 
 
25,000 
 
Debt instrument maturity date extended
 
 
 
30 days 
 
30 days 
 
30 days 
 
30 days 
 
30 days 
 
30 days 
 
30 days 
 
 
30 days 
 
30 days 
 
Debt instrument interest rate
 
 
 
10.00% 
 
10.00% 
 
10.00% 
 
10.00% 
 
10.00% 
 
10.00% 
 
10.00% 
 
 
10.00% 
 
10.00% 
 
Common Stock value per share
$ 0.001 
$ 3.00 
$ 0.001 
$ 1.25 
 
$ 1.75 
 
$ 1.25 
 
$ 1.25 
 
$ 1.25 
 
$ 1.25 
 
$ 1.25 
 
 
$ 1.25 
 
$ 1.25 
 
Debt instrument beneficial conversion feature amount
$ 5,500,000 
 
 
$ 5,200 
 
$ 2,712 
 
$ 8,600 
 
$ 10,750 
 
$ 11,000 
 
$ 2,400 
 
$ 13,000 
 
 
$ 6,400 
 
$ 17,500 
 
Convertible Notes Payable - Summary of Convertible Notes Payable Outstanding (Detail) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
$ 25,000 
$ 132,500 
Less: unamortized discounts due to beneficial conversion features
   
(33,394)
Total convertible notes payable - short term, net of discounts
25,000 
99,106 
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
   
10,000 
Convertible note payable to unrelated parties, issuance date of April 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
   
5,000 
Convertible note payable to unrelated parties, issuance date of August 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
   
10,000 
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
   
10,000 
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
   
12,500 
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
25,000 
25,000 
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
   
25,000 
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
   
10,000 
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
    
$ 25,000 
Long Term Debt and Capital Lease Obligations - Summary of Long Term Debt (Detail) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Long Term Debt And Equity Financings [Line Items]
 
 
Debt and Capital lease obligation, Total
$ 16,892,232 
$ 758,231 
Less: current maturities
(10,845)
(72,128)
Long-term portion
16,881,387 
686,103 
Nine Percent Senior Secured Notes Due Two Thousand Thirteen [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Secured convertible notes payable to related parties
   
686,103 
Seven Percent Secured Notes Due Two Thousand Sixteen [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Secured convertible notes payable to related parties
16,881,387 
   
Capital lease obligations, Imputed interest at 43.0% to 46.0% [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Capital lease obligations, imputed interest at 43.0% to 46.0%, with monthly payments of $8,540 through December 2013, secured by office furniture and fixtures
$ 10,845 
$ 72,128 
Long Term Debt and Capital Lease Obligations - Summary of Long Term Debt (Parenthetical) (Detail) (USD $)
9 Months Ended
Sep. 30, 2013
Dec. 31, 2012
Long Term Debt And Equity Financings [Line Items]
 
 
Interest rate on convertible notes
7.00% 
 
Imputed interest rate for capital lease obligation, minimum
43.00% 
 
Imputed interest rate for capital lease obligation, maximum
46.00% 
 
Monthly installment capital lease obligation
$ 8,540 
 
Nine Percent Senior Secured Notes Due Two Thousand Thirteen [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Interest rate on convertible notes
9.00% 
 
Debt instrument converted date
Jul. 16, 2013 
 
Debt instrument, net of discount
1,313,897 
   
Seven Percent Secured Notes Due Two Thousand Sixteen [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Interest rate on convertible notes
7.00% 
 
Debt instrument, maturity date
July 2016 
 
Debt instrument, net of discount
$ 5,118,613 
    
Long Term Debt and Capital Lease Obligations - Additional Information (Detail) (USD $)
1 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended 0 Months Ended 0 Months Ended 9 Months Ended 9 Months Ended 0 Months Ended 9 Months Ended 0 Months Ended 1 Months Ended 9 Months Ended 3 Months Ended 3 Months Ended 3 Months Ended 6 Months Ended 12 Months Ended 9 Months Ended
Mar. 29, 2013
Sep. 30, 2013
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Dec. 31, 2012
Mar. 31, 2012
Warrant
Sep. 30, 2013
Convertible Notes Payable [Member]
Jul. 16, 2013
Convertible Secured Promissory Notes [Member]
Mar. 31, 2012
Forty Two Month Warrant [Member]
Mar. 31, 2012
Forty Five Month Warrant [Member]
Mar. 31, 2012
Forty Eight Month Warrant [Member]
Jul. 16, 2013
Stockbridge Senior Secured Convertible Note [Member]
Sep. 30, 2013
Convertible Debt [Member]
Sep. 30, 2012
Convertible Debt [Member]
Dec. 31, 2012
Convertible Debt [Member]
Sep. 30, 2013
Brian Dick [Member]
Jul. 16, 2013
Brian Dick [Member]
Convertible Secured Promissory Notes [Member]
Sep. 30, 2013
Jeff Forte [Member]
Jul. 16, 2013
Jeff Forte [Member]
Convertible Secured Promissory Notes [Member]
Mar. 29, 2013
Stockbridge Enterprises, LP [Member]
Sep. 30, 2013
Stockbridge Enterprises, LP [Member]
Sep. 30, 2013
Stockbridge Enterprises, LP [Member]
Convertible Notes Payable [Member]
Sep. 30, 2013
Stockbridge Enterprises, LP [Member]
Convertible Notes Payable [Member]
Amendment [Member]
Sep. 30, 2013
Before Maturity Period [Member]
Oct. 31, 2012
Before Maturity Period [Member]
Mar. 31, 2013
Warrant 1-1 [Member]
Mar. 31, 2012
Warrant 1-1 [Member]
Mar. 31, 2013
Warrant 1-5 [Member]
Oct. 31, 2012
Warrant 1-5 [Member]
Mar. 31, 2013
Warrant 1-6 [Member]
Mar. 29, 2013
Warrant 1-6 [Member]
Mar. 31, 2013
Warrant [Member]
Dec. 31, 2012
Warrant [Member]
Sep. 30, 2013
Warrant 1-2 [Member]
Sep. 30, 2013
Warrant 1-3 [Member]
Sep. 30, 2013
Warrant 1-4 [Member]
Long Term Debt Maturity [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 3,000,000 
 
 
 
 
 
 
 
 
$ 3,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note accrued interest
 
 
 
 
 
 
 
 
 
 
 
 
 
34,500 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note converted into common stock
 
 
 
 
 
 
 
 
89,942 
 
 
 
 
8,382,597 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note maturity period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oct. 01, 2015 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annual interest rate on convertible note
 
7.00% 
7.00% 
 
7.00% 
 
 
 
 
7.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
9.00% 
6.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion price of notes to common stock
 
$ 2.00 
$ 2.00 
 
$ 2.00