QUEST RESOURCE HOLDING CORP, 10-K filed on 3/31/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Mar. 16, 2015
Jun. 30, 2014
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
QRHC 
 
 
Entity Registrant Name
Quest Resource Holding Corporation 
 
 
Entity Central Index Key
0001442236 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Smaller Reporting Company 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Common Stock, Shares Outstanding
 
111,657,804 
 
Entity Public Float
 
 
$ 70,821,489 
CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 3,154,540 
$ 2,676,984 
Accounts receivable, less allowance for doubtful accounts of $760,917 and $319,735 as of December 31, 2014 and 2013, respectively
29,631,843 
20,849,140 
Prepaid expenses and other current assets
684,032 
404,788 
Total current assets
33,470,415 
23,930,912 
Goodwill
58,337,290 
58,337,290 
Intangible assets, net
15,115,617 
17,636,964 
Property and equipment, net, and other assets
753,493 
741,377 
Total assets
107,676,815 
100,646,543 
Current liabilities:
 
 
Line of credit
5,250,000 
2,750,000 
Accounts payable and accrued liabilities
26,621,907 
26,263,525 
Deferred revenue and other current liabilities
282,189 
275,995 
Total current liabilities
32,154,096 
29,289,520 
Long-term senior secured convertible notes - related parties, net of $4,656,934 discount as of December 31, 2013
 
17,343,066 
Other long-term liabilities
45,206 
33,067 
Total liabilities
32,199,302 
46,665,653 
Commitments and contingencies
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of December 31, 2014 and 2013
   
   
Common stock, $0.001 par value, 200,000,000 shares authorized, 111,601,304 and 95,814,565 shares issued and outstanding as of December 31, 2014 and 2013, respectively
111,601 
95,815 
Additional paid-in capital
150,789,292 
119,410,777 
Accumulated deficit
(75,423,380)
(65,525,702)
Total stockholders’ equity
75,477,513 
53,980,890 
Total liabilities and stockholders’ equity
$ 107,676,815 
$ 100,646,543 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2014
Sep. 24, 2014
Dec. 31, 2013
Oct. 28, 2013
Statement Of Financial Position [Abstract]
 
 
 
 
Allowance for doubtful accounts receivable
$ 760,917 
 
$ 319,735 
 
Long-term senior secured convertible notes-related parties, net of discount
 
 
$ 4,656,934 
 
Preferred stock, par value
$ 0.001 
 
$ 0.001 
 
Preferred stock, shares authorized
10,000,000 
 
10,000,000 
 
Preferred stock, shares issued
 
 
Preferred stock, shares outstanding
 
 
Common stock, par value
$ 0.001 
 
$ 0.001 
 
Common stock, shares authorized
200,000,000 
 
200,000,000 
200,000,000 
Common stock, shares issued
111,601,304 
9,000,000 
95,814,565 
 
Common stock, shares outstanding
111,601,304 
 
95,814,565 
 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Income Statement [Abstract]
 
 
Revenue
$ 174,453,667 
$ 67,504,540 
Cost of revenue
160,185,976 
62,430,670 
Gross profit
14,267,691 
5,073,870 
Operating expenses:
 
 
Selling, general and administrative
14,383,540 
12,660,789 
Depreciation and amortization
3,827,128 
1,817,802 
Gain on equity interest in Quest Resource Management Group, LLC
 
(23,449,372)
Impairment of goodwill
 
26,850,039 
Total operating expenses
18,210,668 
17,879,258 
Operating loss
(3,942,977)
(12,805,388)
Other expense:
 
 
Interest expense
(4,296,170)
(4,196,279)
Loss on extinguishment of debt
(1,658,531)
 
Financing cost for senior convertible note - related parties
 
(1,465,000)
Total other expense, net
(5,954,701)
(5,661,279)
Loss before taxes and equity income
(9,897,678)
(18,466,667)
Equity in Quest Resource Management Group, LLC income
 
667,316 
Loss before taxes
(9,897,678)
(17,799,351)
Net loss
(9,897,678)
(17,799,351)
Net loss applicable to common stockholders
$ (9,897,678)
$ (17,799,351)
Net loss per share
 
 
Basic and Diluted
$ (0.10)
$ (0.23)
Weighted average number of common shares outstanding
 
 
Basic and Diluted
100,554,314 
77,055,327 
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
2,194,390 
 
2,194,390 
 
Discount senior secured convertible note – related parties
6,500,000 
 
6,500,000 
 
Common stock issued for services
198,858 
69 
198,789 
 
Common stock issued for services, Shares
 
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 
 
 
Note conversions, accrued interest and discounts conversions
3,148,493 
8,473 
3,140,020 
 
Note conversions, accrued interest and discounts conversions, Shares
 
8,472,539 
 
 
Warrant conversions
21,698,338 
7,233 
21,691,105 
 
Warrant conversions, Shares
 
7,232,779 
 
 
Net loss
(17,799,351)
 
 
(17,799,351)
Ending Balance at Dec. 31, 2013
53,980,890 
95,815 
119,410,777 
(65,525,702)
Ending Balance, Shares at Dec. 31, 2013
 
95,814,565 
 
 
Stock-based compensation
1,637,022 
 
1,637,022 
 
Sale of common stock and warrants, net of issuance costs
18,577,018 
10,192 
18,566,826 
 
Sale of common stock and warrants, net of issuance costs, Shares
10,192,500 
10,192,500 
 
 
Common stock issued for services
50,000 
20 
49,980 
 
Common stock issued for services, Shares
20,408 
20,408 
 
 
Note conversions, accrued interest and discounts conversions
11,130,261 
5,574 
11,124,687 
 
Note conversions, accrued interest and discounts conversions, Shares
5,573,831 
5,573,831 
 
 
Net loss
(9,897,678)
 
 
(9,897,678)
Ending Balance at Dec. 31, 2014
$ 75,477,513 
$ 111,601 
$ 150,789,292 
$ (75,423,380)
Ending Balance, Shares at Dec. 31, 2014
 
111,601,304 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Cash flows from operating activities:
 
 
Net loss
$ (9,897,678)
$ (17,799,351)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation
292,067 
209,375 
Amortization of intangibles
3,535,061 
1,608,427 
Amortization of debt discount and deferred financing costs
2,998,403 
3,297,522 
Loss on extinguishment of debt
1,658,531 
 
Interest converted to common stock
105,261 
 
Loss on sale/disposition of property and equipment
 
(9,246)
Equity in Quest Resource Management Group, LLC income
 
(667,316)
Provision for doubtful accounts
441,338 
89,005 
Stock-based compensation
1,547,769 
2,393,248 
Financing costs for senior convertible note - related parties
 
1,465,000 
Gain on equity interest in Quest Resource Management Group, LLC
 
(23,449,372)
Impairment of goodwill
 
26,850,039 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(9,224,041)
(5,246,794)
Prepaid expenses and other current assets
(279,244)
42,045 
Security deposits and other assets
(123,764)
80,205 
Accounts payable and accrued liabilities
358,382 
6,625,241 
Deferred revenue and other current liabilities
(3,662)
68,537 
Other long-term liabilities
32,154 
 
Net cash used in operating activities
(8,559,423)
(4,443,435)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(180,419)
(65,107)
Proceeds from sale of property and equipment
 
22,788 
Capitalized software development
(839,605)
 
Acquisition of customer lists
 
(150,000)
Purchase of interest – Quest Resource Management Group, LLC
 
4,235,671 
Distributions received from Quest Resource Management Group, LLC
 
1,114,304 
Net cash (used in) provided by investing activities
(1,020,024)
5,157,656 
Cash flows from financing activities:
 
 
Proceeds from senior related party secured convertible note
 
1,000,000 
Proceeds from line of credit
2,500,000 
500,000 
Proceeds from sale of capital stock, net of issuance costs
18,577,018 
 
Repayments of notes payable
 
33,067 
Repayments capital lease obligations
(20,015)
(56,032)
Repayments of senior convertible notes – related party
(11,000,000)
 
Net cash provided by financing activities
10,057,003 
1,477,035 
Net increase in cash and cash equivalents
477,556 
2,191,256 
Cash and cash equivalents at beginning of period
2,676,984 
485,728 
Cash and cash equivalents at end of period
$ 3,154,540 
$ 2,676,984 
The Company, Description of Business, and Future Liquidity Needs
The Company, Description of Business, and Future Liquidity Needs

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

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

On July 16, 2013, we acquired the membership interests of Quest held by Quest Resource Group LLC (“QRG”), comprising 50% of Quest (the “Quest Interests”).  Prior to July 16, 2013, our wholly owned subsidiary, Earth911, held the remaining 50% membership interest of Quest.  Upon acquisition of the Quest Interests, we assigned the Quest Interests to Earth911 so that Earth911 now owns Quest, and Quest is now our indirect wholly owned subsidiary. We consolidated Quest in these financial statements for the period from July 16, 2013 to December 31, 2013 and for the year ended December 31, 2014.

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

Operations – We are an environmental solutions company that serves as a single-source provider of full service recycling and waste stream management solutions, as well as environmental program services and information provider. 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. One customer accounted for 59% and 76% of revenue for the years ended December 31, 2014 and 2013, respectively.  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.  Our principal offices are located in Frisco, Texas.

Liquidity – During 2013, we restructured and relocated operations of Earth911 and YouChange to reduce future operating expenses and streamline management. On April 18, 2014 and September 24, 2014, we issued 1,192,500 and 9,000,000 shares of common stock, respectively, to third-parties for an aggregate of $18,577,018.  See Note 12 for a discussion of the equity sales.  We expect that the acquisition of the Quest Interests will provide increased cash flow from operations. In addition, we plan to increase working capital by increasing sales, maintaining efficient operating expenses, and through other initiatives.  

Pro forma Year Ended December 31, 2013 Operating Results – As discussed above and in Note 8 to these financial statements, we previously accounted for Quest as an equity investment. On July 16, 2013, we acquired the remaining 50% membership interests of Quest, and now hold 100% of the membership interests of Quest. The accompanying financial statements consolidate the results of operations of Quest from the date of acquisition.

The following table summarizes our pro forma consolidated operating results for the year ended December 31, 2013, assuming Quest had been a wholly owned subsidiary since January 1, 2013 and 100% of Quest’s operations were included:

 

 

 

Pro forma

 

 

 

Year ended December 31,

 

 

 

2013

 

 

 

(Unaudited)

 

Consolidated operating statement information:

 

 

 

 

Net sales

 

$

136,361,242

 

Gross profit

 

$

11,427,971

 

Loss from operations

 

$

(11,798,709

)

Net loss

 

$

(17,128,720

)

 

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principals of Presentation, Consolidation and Reclassifications

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the operating activity of QRHC and its subsidiaries for the years ended December 31, 2014 and 2013, as well as the equity method accounting for its investment in Quest through July 15, 2013.

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

Through July 16, 2013, Quest was deemed to be a separate operating company, and as such, there were no intercompany transactions that required elimination at that time. All other intercompany accounts and transactions have been eliminated in consolidation, including transactions between QRHC and Quest subsequent to July 16, 2013. Certain reclassifications have been made to prior year balances to conform to the current year presentation that did not have an effect on our net loss or net loss per share.

Accounting Estimates

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

We use significant estimates when accounting for the collectability of accounts receivable, depreciable lives of fixed assets and intangible 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

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 service agreement or 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, service agreement, or accepted customer purchase order.

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

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

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

Cash and Cash Equivalents

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

Accounts Receivable

We follow the allowance method of recognizing uncollectible accounts receivable, which recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. Credit is extended based on evaluation of each customer’s financial condition and is generally unsecured. Accounts receivable are typically due within 30 days and are stated net of an allowance for doubtful accounts in the consolidated balance sheet. Accounts are considered past due if outstanding longer than contractual payment terms. We record an allowance based on consideration of a number of factors, including the length of time trade accounts are past due, our previous loss history, the credit-worthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We charge-off accounts receivable after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period we receive the payment.

As of December 31, 2014 and 2013, we have established an allowance of $760,917 and $319,735, respectively, for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivables only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2014 and 2013 were as follows:

 

 

 

Years ended December 31,

 

 

 

2014

 

 

2013

 

Beginning balance

 

$

319,735

 

 

$

7,398

 

Allowance from Quest acquisition

 

 

 

 

 

263,887

 

Bad debt expense, net of recoveries

 

 

441,338

 

 

 

62,017

 

Uncollectible accounts written off

 

 

(156

)

 

 

(13,567

)

Ending balance

 

$

760,917

 

 

$

319,735

 

 

Inventories

Inventories consist of used consumer electronics and computer devices and are stated at the lower of cost (average cost method which approximates first-in, first-out) or market. We determine cost based on our estimate of the “collection” value of each item, which is what we then pay the supplier. We establish reserves for inventory to reflect situations in which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory and current and expected market conditions. We record inventories within “Prepaid expenses and other current assets” within our consolidated balance sheet.  As of December 31, 2014 and 2013, finished goods inventories were $30,759 and $3,251, respectively, consisting of a waste compactor at December 31, 2014 and composite heaters at December 31, 2013, with no reserve for inventory obsolescence at either date.

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.

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

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

Expected volatility is measured using the historical changes in the market price of our common stock and applicable comparison companies;

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

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

Warrants - We estimate fair value of the warrant liability using Level 3 inputs for the initial valuation of the warrants using the Black-Scholes-Merton valuation model. The March 29, 2013 cashless exercise value was calculated using Level 1 and 3 inputs from the exercise of all warrants that were exercisable on that date and the quoted common stock market price. See Note 10.

Goodwill and Other Intangible Assets - The fair value of the reporting unit used in the goodwill and other intangible assets impairment analysis performed during 2013 was determined assuming the suspension of funding of future development activities of the reporting unit and anticipated continuing negative cash flows from operations. These were determined to be level 3 inputs.

Property and Equipment

We record property and equipment at cost. We provide for depreciation on the straight-line method, over the estimated useful lives of the assets. We amortize leasehold improvements over the shorter of the useful life or the remaining term of the related leases. We charge expenditures for repairs and maintenance to operations as incurred; we capitalize renewals and betterments when they extend the useful life of the asset. We record gains and losses on the disposition of property and equipment in the period incurred. We report assets to be disposed of, if any, at the lower of the carrying amount or fair value less costs to sell. Depreciation expense for the years ended December 31, 2014 and 2013 amounted to $292,067, and $209,375, respectively.

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

 

Vehicles

 

5 to 7 years

Computer equipment

 

3 to 5 years

Office furniture and fixtures

 

5 to 7 years

Machinery and equipment

 

5 to 7 years

Leasehold improvements

 

5 to 7 years

 

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

Impairment of Long-Lived Assets

We analyze assets that are held and used for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and period at least at each balance sheet date.  The effects of any revision are recorded to operations when the change arises.  We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. We carry assets held for sale, if any, at the lower of carrying amount or fair value less selling costs. We did not recognize any impairment charges for long-lived assets during 2014 and 2013.

Goodwill

The excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquired entity over the (ii) fair value of the net identifiable assets acquired is recorded as goodwill.  We do not amortize goodwill; however, annually, or whenever there is an indication that goodwill may be impaired, we evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. After evaluating these qualitative factors, an impairment loss was recorded in 2013 because the carrying amount of the reporting unit’s assets exceeded the fair value determined. Any future increases in the fair value amount will not result in an adjustment to the impairment loss recorded in our consolidated financial statements.  See Note 16 regarding the impairment of goodwill recognized during 2013.  We performed our Step 1 goodwill impairment analysis in the third quarter 2014 with no impairment recorded.

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. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2014 and 2013 would be anti-dilutive. These potentially dilutive securities include options, restricted stock units, warrants, and convertible promissory notes (see Notes 7 and 12), and total 18,130,132 shares and 15,164,789 shares at December 31, 2014 and December 31, 2013, respectively.

Concentrations

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade accounts receivable. We deposit our cash with commercial banks. Cash deposits at commercial banks are at risk to the extent that the balances exceed the Federal Deposit Insurance Corporation (“FDIC”) insured level per institution. The bank cash balances on deposit have exceeded federally insured limits, including $4,635,398 at December 31, 2014; however, we have never experienced any losses related to these balances.  

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

 

 

 

Customers Exceeding 10%

of Revenue

 

Year

 

Number of

Customers

 

 

Revenue

Combined Percent

 

 

Accounts Receivable

Combined Percent

 

2014

 

 

2

 

 

 

73

%

 

 

36

%

2013

 

 

1

 

 

 

76

%

 

 

31

%

 

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

Investment in Quest

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

Income Taxes

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

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

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

Advertising

We charge our advertising costs to expense when incurred. During the years ended December 31, 2014 and 2013, advertising expense totaled $72,241 and $29,440, respectively.

Stock-Based Compensation

We expense all share-based grants to employees, including grants of employee stock options, based on their estimated fair values at grant date, in accordance with ASC Topic 718, Stock Compensation. We record compensation expense for stock options over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes-Merton model. We classify all share-based awards to employees as equity instruments and recognize the vesting of the awards ratably over their respective terms. See Note 12 for a description of our share-based compensation plan and information related to awards granted under the plan.

Property and Equipment
Property and Equipment

3. Property and Equipment

At December 31, 2014 and 2013, property and equipment consisted of the following:

 

 

 

As of December 31,

 

 

 

2014

 

 

2013

 

Vehicles

 

$

544,984

 

 

$

544,984

 

Computer equipment

 

 

793,109

 

 

 

790,987

 

Office furniture and fixtures

 

 

329,210

 

 

 

239,662

 

Machinery and equipment

 

 

458,257

 

 

 

458,257

 

Leasehold improvements

 

 

101,112

 

 

 

12,363

 

     Property, plant, and equipment, gross

 

 

2,226,672

 

 

 

2,046,253

 

Accumulated depreciation

 

 

(1,692,835

)

 

 

(1,400,768

)

     Property, plant, and equipment, net

 

 

533,837

 

 

 

645,485

 

Security deposits and other assets

 

 

219,656

 

 

 

95,892

 

     Property and equipment, net, and other assets

 

$

753,493

 

 

$

741,377

 

 

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

4. Goodwill and Other Intangible Assets

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

 

December 31, 2014

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

3,710,000

 

 

$

9,010,000

 

Trademarks

 

7 years

 

 

6,230,000

 

 

 

1,297,917

 

 

 

4,932,083

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,013,714

 

 

 

25,899

 

 

 

987,815

 

Customer lists

 

5 years

 

 

307,153

 

 

 

121,434

 

 

 

185,719

 

Total finite lived intangible assets

 

 

 

$

20,501,550

 

 

$

5,385,933

 

 

$

15,115,617

 

 

December 31, 2013

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

1,166,000

 

 

$

11,554,000

 

Trademarks

 

7 years

 

 

6,230,000

 

 

 

407,917

 

 

 

5,822,083

 

Patents

 

7 years

 

 

230,683

 

 

 

216,951

 

 

 

13,732

 

Customer lists

 

5 years

 

 

307,153

 

 

 

60,004

 

 

 

247,149

 

Total finite lived intangible assets

 

 

 

$

19,487,836

 

 

$

1,850,872

 

 

$

17,636,964

 

 

 

December 31, 2014 and 2013

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,337,290

 

 

 

 

 

 

We compute amortization using the straight-line method over the estimated useful lives of the finite lived intangible assets. The amortization expense related to finite lived intangible assets was $3,535,061 and $1,608,427 for the years ended December 31, 2014 and 2013, respectively. We expect amortization expense to be approximately $3.6 million in the years ending 2015 through 2017, approximately $2.4 million in the year ending 2018, and approximately $1.8 million in the year thereafter.  We have no indefinite-lived intangible assets other than goodwill.  The goodwill is not deductible for tax purposes.

Line of Credit
Line Of Credit

5. Line of Credit

On December 15, 2010, Quest entered into a Revolving Credit Note and Loan Agreement with Regions Bank (“Regions”), a national banking association. This agreement, as amended, provides Quest with a loan facility up to $10,000,000 for working capital with advances generally limited to 80% of eligible accounts receivable from Quest’s largest customer and 85% of all other eligible accounts receivable. The interest on the outstanding principal amount accrues daily and is payable monthly based on a fluctuating interest rate per annum, which is the base rate plus 1.50% (2.66% as of December 31, 2014). The base rate for any day is the greater of (a) the federal funds rate plus one-half of 1%, (b) Region’s published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. To secure the amounts due under the agreement, Quest granted Regions a security interest in all of its assets. Quest had $5,250,000 outstanding and $4,750,000 available to be borrowed as of December 31, 2014.  The amount of interest expense related to the Regions line of credit for the years ended December 31, 2014 and 2013 was $163,607 and $103,031, respectively.

During the year ended December 31, 2014, Quest entered into a Sixth Amendment to the Loan Agreement with Regions. The loan agreement was amended to, among other things, (i) add a $5.0 million accordion feature, (ii) increase the borrowing base, (iii) reduce the applicable margin for eurodollar rate loans by 1.0% per annum, (iv) add an unused fee of 0.25% per annum, (v) extend the maturity date to May 31, 2015, (vi) release the guaranty of our Chief Executive Officer previously executed in favor of Regions, (vii) add our company and our wholly owned subsidiary, Earth911, as guarantors, (viii) allow for permitted acquisitions, and (ix) delete two of the financial covenants and modify the other financial covenants in certain respects.  As of December 31, 2014, we were in compliance with the financial covenants.

In connection with the Sixth Amendment, on May 9, 2014, we and Earth911entered into a Guaranty (the “Guaranty”) for the benefit of Regions to guarantee the obligations of Quest under the loan agreement and other loan documents. In addition, on May 9, 2014, Earth911 entered into a Pledge Agreement with Regions, pursuant to which Earth911 pledged to Regions 50% of the membership interests in Quest held by Earth911 to secure the prompt and complete payment and performance of the obligations of Quest and the Guarantors under the loan agreement and other loan documents.

Convertible Notes Payable
Convertible Notes Payable

6. Convertible Notes Payable

During the year ended December 31, 2013, $107,500 of principal and $6,493 of interest were converted into 89,942 shares of our common stock.  During the year ended December 31, 2014, $25,000 of principal and $4,001 of interest were converted into 23,201 shares of our common stock.  As of December 31, 2013, the outstanding convertible notes payable and associated accrued interest described below were convertible into approximately 22,841 shares of our common stock. There were no outstanding convertible notes payable as of December 31, 2014.  The amount of interest expense related to the convertible notes payable for the years ended December 31, 2014 and 2013 was $450 and $5,153, respectively.

The following convertible notes payable included within “Deferred revenue and other current liabilities” in our consolidated balance sheets were outstanding as of December 31, 2014 and 2013:

 

 

 

As of December 31,

 

 

 

2014

 

 

2013

 

Convertible note payable to unrelated parties, issuance date of

   September 2012

 

$

 

 

$

25,000

 

Total convertible notes payable - short term

 

 

 

 

 

25,000

 

Less: unamortized discounts due to beneficial conversion

   features

 

 

 

 

 

 

Total convertible notes payable - short term, net of discounts

 

$

 

 

$

25,000

 

 

Long-Term Debt and Capital Lease Obligations
Long-Term Debt and Capital Lease Obligations

7. Long-Term Debt and Capital Lease Obligations

At December 31, 2014 and 2013, total long-term debt and capital lease obligations outstanding consisted of the following:

 

 

 

As of December 31,

 

 

 

2014

 

 

2013

 

Secured convertible notes payable to related parties, 7%

   interest due monthly in arrears, due July 2016,

   repayment provisions discussed further below

   (Net of discount of $4,656,934 as of December 31, 2013)

 

$

 

 

$

17,343,066

 

 

 

 

 

 

 

 

 

 

Capital lease obligations, imputed interest of 2.65% to 4.75%,

   with monthly payments of $2,041 and $1,507, respectively,

  through June 2017, secured by computer equipment

 

 

47,250

 

 

 

49,163

 

 

 

 

 

 

 

 

 

 

Total

 

 

47,250

 

 

 

17,392,229

 

Less: current maturities

 

 

(22,853

)

 

 

(16,096

)

Long-term portion

 

$

24,397

 

 

$

17,376,133

 

 

Convertible Secured Promissory Notes – Quest Acquisition - In connection with our acquisition of Quest on July 16, 2013, we issued convertible secured promissory notes with a total principal amount of $22,000,000 to the owners of QRG and related parties: the Chief Executive Officer of Quest and the former President of Quest.  After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer, and a member of the Board of Directors of our company. The convertible secured promissory notes (collectively, the “Sellers Notes”) were each secured by a first-priority security interest in a 25% membership interest held by Earth911 in Quest (comprising a total of 0.5% of the membership interests of Quest), as set forth in security and membership interest pledge agreements, by and between Earth911 and the sellers. The Sellers Notes accrued interest at a rate of 7% per annum and were payable on a monthly basis on the 5th day of the month beginning on September 5, 2013. The principal amount was due and payable in one installment on July 16, 2016.

The Sellers Notes were convertible at any time, in the sole discretion of the holders, into shares of our common stock at a price of $2.00 per share. In addition, the Sellers Notes were convertible, in our sole discretion, into shares of our common stock at a price of $2.00 per share at any time after (i) the two year anniversary of the Notes, (ii) the principal amount of each Sellers Note 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 we entered into the Sellers Notes agreement, we recognized a beneficial conversion feature (“BCF”) of $5,500,000 and discounted the Sellers Notes.

On September 24, 2014, we repaid $11,000,000 of the Sellers Notes using proceeds from our public offering. Additionally, the holders converted the remaining $11,000,000 of Sellers Notes, plus accrued interest through September 24, 2014 of $101,260, into 5,550,630 shares of our common stock. In accordance with FASB ASC Topic 740-20, Debt with Conversion and Other Options, for the portion of the Sellers Notes retired through conversion to our common stock, the remaining unamortized BCF of $1,658,531 at the time of conversion is reflected as “Interest expense” in our consolidated statement of operations.  Additionally, for the portion of the Sellers Notes repaid in cash, we did not allocate the consideration paid to the BCF, as we determined the intrinsic value was zero as of the extinguishment date, and we recorded the $1,658,531 difference between the carrying amount of the remaining Sellers Notes and the consideration paid as “Loss on extinguishment of debt” in our consolidated statement of operations. Therefore, as of December 31, 2014, the unamortized discount on the Sellers Notes was nil. The amount of interest expense related to the Sellers Notes for the years ended December 31, 2014 and 2013 was $1,126,521 and $708,822, respectively. The amount of interest expense related to the amortization of the discount on the Sellers Notes for the years ended December 31, 2014 and 2013 was $2,998,403 and $843,066, respectively.

Stockbridge Senior Secured Convertible Note - Earth911 had entered into a securities purchase agreement with Stockbridge Enterprises, L.P., a related party (“Stockbridge”), pursuant to which Earth911 issued a senior secured convertible note (the “Convertible Note”) and four warrants to Stockbridge as of March 22, 2012 and as amended on October 10, 2012 and March 29, 2013.  Under the amendments the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge (the “Allonge” and the “Second Allonge”). The Convertible Note and warrants were also adjusted for the Earth911 Merger in October 2012. On July 16, 2013, Stockbridge elected to convert $3,000,000 in principal and $34,500 of accrued interest 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. The annual amended interest rate was 9.0% 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, a United States exchange listed our common stock, which was a Triggering Event under the Convertible Note; therefore the conversion price was the lower of the Fixed Conversion Price or the average closing bid price during the ten trading days immediately preceding the conversion date.

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

(i)

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

(ii)

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

(iii)

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

(iv)

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

Warrant 1-1, Warrant 1-5, and Warrant 1-6 were 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. See Note 10 regarding the valuations of the warrant liability.

The Convertible Note increased by another $1,000,000 draw during the twelve months ended December 31, 2013, which was accounted for as an additional discount and an adjustment to additional paid-in-capital. The Convertible Note discount total of $3,000,000, which is equal to the amount of the funds drawn on the Convertible Note, was being amortized to interest expense over the life of the Convertible Note beginning March 22, 2012.

As of December 31, 2013, the unamortized portion of the debt discount was nil. The amount of interest expense related to the amortization of the discount on the Convertible Note for the year ended December 31, 2013 was $2,313,897.

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. We determined the net number of shares to issue using the “Cashless Exercise” formula, as amended and restated, as follows:

 

Net Number of Shares to be Issue =

 

(A x B) – (A x C)

 

 

D

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

A = 7,405,576, 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 0.1% on the date of exercise of the warrant.

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

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

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

Capital Leases - Our capital leases are included within “Deferred revenue and other current liabilities” and “Other long-term liabilities” in our consolidated balance sheets.  The amount of interest expense related to our capital leases for the years ended December 31, 2014 and 2013 was $2,406 and $200, respectively.  The following table summarizes future maturities of our capital lease obligations, as of December 31, 2014:

 

Year Ending December 31,

 

Amount

 

2015

 

$

22,853

 

2016

 

 

22,317

 

2017

 

 

2,080

 

 

 

 

 

 

Subtotal

 

 

47,250

 

Less: current maturities

 

 

(22,853

)

Total

 

$

24,397

 

 

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

8. Investment in Quest Resource Management Group, LLC

Prior to July 16, 2013, we held a 50% ownership interest in Quest, which Earth911 acquired on August 21, 2008. On July 16, 2013, we acquired all of the Quest Interests, held by QRG, comprising 50% of the membership interests of Quest. The purchase price for the Quest Interests consisted of 22,000,000 shares of our common stock issued at a fair market value of $2.50 per share based on the closing price of the stock on the date of the transaction and the Sellers Notes in the aggregate principal amount of $22,000,000.  We paid the total purchase price of $77,000,000 to the owners of QRG and related parties: the Chief Executive Officer of Quest and the former President of Quest.  After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer, and a member of the Board of Directors of our company.  Subsequent to our purchase of the Quest Interests on July 16, 2013, we consolidated 100% of the operating activity of Quest into the operations of our company and reflected the adjustments for the ownership purchase and valuation of goodwill.

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

 

Consideration paid for Quest Interests

 

$

77,000,000

 

Non-controlling interest in the acquiree at the acquisition date

   fair value

 

 

27,050,000

 

Total consideration

 

$

104,050,000

 

 

We primarily employed two methodologies that yielded substantially the same results to determine the fair value of our preexisting equity interest in Quest, which we re-measured as a non-controlling interest independent of the acquired controlling interest as of the effective date of the acquisition: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; and (ii) the present value of expected future cash flows of Quest; which are level 2 and level 3 inputs, respectively.

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

 

Net assets and liabilities

 

$

1,214,804

 

Customer relationships

 

 

12,720,000

 

Trademarks

 

 

6,230,000

 

Goodwill

 

 

83,885,196

 

 

 

$

104,050,000

 

 

In connection with the fair value adjustment to the investment in Quest due to the acquisition, we recorded in 2013 a gain on investment in Quest of $23,449,372, equal to the difference between the fair value and the carrying amount of the asset on the date of the acquisition. In addition, we recognized $26,850,039 of goodwill impairment based on our goodwill impairment testing. We determined that the carrying amount of the reporting unit exceeded the fair value and recorded a goodwill impairment charge. The impact of the goodwill impairment and the gain on investment was a net expense of $3,400,667, which was included in the operating loss for the year ended December 31, 2013.

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

 

 

 

Years ended December 31,

 

 

 

2014

 

 

2013

 

Operating statement information:

 

 

 

 

 

 

 

 

Net sales

 

$

173,749,078

 

 

$

135,211,874

 

Gross profit

 

$

13,567,651

 

 

$

10,436,628

 

Loss from operations

 

$

(873,829

)

 

$

(3,684,856

)

Net loss

 

$

(1,044,299

)

 

$

(3,788,086

)

Reported as part of the Quest operations for the relevant

   periods

 

 

 

 

 

 

 

 

Equity in Quest Resource Management Group, LLC

   income

 

 

 

 

 

 

 

 

50% ownership interest

 

$

 

 

$

667,316

 

Consolidated amounts subsequent to July 16, 2013

 

 

 

 

 

 

 

 

100% ownership interest

 

 

 

 

 

 

 

 

Net sales

 

$

 

 

$

66,335,172

 

Gross margin

 

$

 

 

$

4,082,526

 

Loss from operations

 

$

 

 

$

(5,075,480

)

Net loss

 

$

 

 

$

(5,126,033

)

 

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

Income Taxes
Income Taxes

9. Income Taxes

We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. In our opinion, realization of our net operating loss carryforward is not reasonably assured as of December 31, 2014 and 2013, and we have recorded a valuation allowance of $9,108,000 and $6,582,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.

The components of net deferred taxes are as follows:

 

 

 

As of December 31,

 

 

 

2014

 

 

2013

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss

 

$

5,938,000

 

 

$

4,212,000

 

Stock-based compensation

 

 

2,702,000

 

 

 

2,103,000

 

Accrued interest expense

 

 

155,000

 

 

 

150,000

 

Allowance for doubtful accounts

 

 

224,000

 

 

 

47,000

 

Deferred lease liability

 

 

89,000

 

 

 

70,000

 

Total deferred tax assets

 

 

9,108,000

 

 

 

6,582,000

 

Less: valuation allowance

 

 

(9,108,000

)

 

 

(6,582,000

)

Net deferred taxes

 

$

 

 

$

 

 

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

 

 

 

Years Ended December 31,

 

 

 

2014

 

 

2013

 

U.S. federal statutory rate applied to pretax income

 

$

(3,365,211

)

 

$

(6,051,780

)

Permanent differences

 

 

455,557

 

 

 

2,739,048

 

State taxes and other

 

 

383,654

 

 

 

1,597,415

 

Change in valuation allowance

 

 

2,526,000

 

 

 

1,715,317

 

 

 

$

 

 

$

 

 

As of December 31, 2014, we had federal income tax net operating loss carry forwards of approximately $14,800,000, 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.  Such limitation of the net operating losses may have occurred, which we have not fully analyzed at this time as we have fully reserved the deferred tax asset.

As of December 31, 2014, 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 2015. It is our policy to classify interest and penalties on income taxes as interest expense or penalties expense.

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

an allocation or shift of income between taxing jurisdictions;

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

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

We are potentially subject to tax audits for federal and state tax returns for tax years ended 2012 to 2014. Tax audits by their very nature are often complex and can require several years to complete.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

10. 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, capital lease obligations, 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 approximate their carrying values using Level 3 inputs, based on their short maturities or, for long-term debt and long-term portions of capital lease obligations, based on borrowing rates currently available to us for loans with similar terms and maturities.

On May 7, 2014, we issued aggregate of 200,000 warrants to purchase shares of our common stock in exchange for services rendered during the year ended December 31, 2014. 100,000 warrants vested immediately, while the remaining 100,000 warrants vest on May 7, 2015.  We measured the warrants at fair value by applying the Black-Scholes-Merton option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes-Merton valuation for the warrants that immediately vested on May 7, 2014 were as follows: volatility of 97.6%; risk free interest rate of 0.9%; expected term of 3 years; and expected dividend yield of 0%. The grant date fair value of the initial warrant valuation described above was $1.61 per warrant. As of December 31, 2014, the assumptions used in the Black-Scholes-Merton valuation for the 100,000 warrant liability for the warrants that vest on May 7, 2015 were as follows:  volatility of 89.5%; risk free interest rate of 0.8%; expected term of 2.4 years; and expected dividend yield of 0%.  The fair value of the warrant liability as of December 31, 2014 was $0.52 per warrant.  We based the risk free interest rate on U.S. Treasury rates with maturity dates approximating the expected term of the warrants. We determined the historical volatility using the historical changes in the market price of our common stock and applicable comparison companies.

On May 28, 2014, we issued aggregate 1,650,000 contingent warrants to a third party to purchase shares of our common stock in exchange for services rendered during the year ended December 31, 2014.  450,000 of these warrants vested during 2014, while the remaining 1,200,000 contingent warrants have not yet vested, and we deemed the probability of vesting as remote.  We measured the 450,000 vested warrants during the year ended December 31, 2014 at fair value by applying the Black-Scholes-Merton valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes-Merton option valuation for the warrants are as follows: volatility of 93.5%; risk free interest rate of 0.5%; expected term of 2.0 years; and expected dividend yield of 0%. The fair value of the warrant described above as of December 31, 2014 was $0.39 per warrant. We based the risk free interest rate on U.S. Treasury rates with maturity dates approximating the expected term of the warrants. We determined the historical volatility using the historical changes in the market price of our common stock and applicable comparison companies.

We measured the March 29, 2013 fair value of the warrants issued in connection with the Stockbridge Senior Secured Convertible notes 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. 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 7 for further discussion regarding the cashless exercise of these warrants.

The following table summarizes the warrant liability valuation for the two years ended December 31, 2014:

 

Description

 

Fair Value Measurements

Warrant Liability

 

Beginning balance, December 31, 2012

 

$

20,233,338

 

Issuances (Level 3)

 

 

1,465,000

 

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

 

 

(21,698,338

)

Ending balance, December 31, 2013

 

$

 

     Issuances (Level 3)

 

 

34,857

 

Ending balance, December 31, 2014

 

$

34,857

 

 

Commitments and Contingencies
Commitments and Contingencies

11. Commitments and Contingencies

We lease corporate office space in Frisco, Texas under a 60 month, non-cancelable operating lease.  The lease expires in September 2015.  Additionally, we sublease corporate office space in Frisco, Texas under a 16 month, non-cancelable operating sublease.  Finally, we lease corporate office space in Scottsdale, Arizona under a 66 month, non-cancelable operating lease, which we fully reserved in 2013 during the restructuring and relocation of our Earth911 and YouChange operations. The lease expires in March 2017 and provides for a renewal option of 60 months, and was subleased during 2014.  Lease expense totaled $352,670 and $271,383 for the years ended December 31, 2014 and 2013, respectively.

The following is a schedule, by year, of future minimum rental payments required under the operating lease agreements as of December 31, 2014:

 

Year Ending December 31,

 

Amount

 

2015

 

$

121,336

 

2016

 

 

49,365

 

2017

 

 

13,769

 

 

 

$

184,470

 

 

Our Frisco operating lease agreement and sublease agreement contain provisions that abate rent payments for a period of five months and two months, respectively. The total amount of rental payments due over the lease term is being charged to rent expense using the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is charged to accrued liabilities in the accompanying balance sheets.

Indemnifications

During the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These may include (i) intellectual property indemnities to customers in connection with the use, sales, and/or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; and (iv) indemnities involving the representations and warranties in certain contracts. In addition, under our bylaws we are committed to our directors and officers for providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities and commitments do not provide for any limitation on the maximum potential for future payments that we could be obligated to make. We have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2014 and 2013.

Stockholders' Equity
Stockholders' Equity

12. Stockholders’ Equity

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

Common Stock - Our authorized common stock includes 200,000,000 shares of common stock with a par value of $0.001, of which 111,601,304 shares and 95,814,565 shares were issued and outstanding as of December 31, 2014 and 2013, respectively.

During the year ended December 31, 2014, we issued shares of common stock as follows:

 

 

 

Common Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

Sale of common stock and warrants

 

 

10,192,500

 

 

$

18,577,018

 

Note and interest conversions

 

 

5,573,831

 

 

 

11,130,261

 

Common stock for services

 

 

20,408

 

 

 

50,000

 

 

 

 

15,786,739

 

 

$

29,757,279

 

 

·

Sale of common stock and warrants

o

On April 18, 2014, we issued an aggregate of 1,192,500 units (the “Units”) to accredited investors, for an aggregate purchase price of $2,385,000, with each Unit consisting of one share of our common stock and a warrant to purchase one share of our common stock for $2.00 per share. Additionally, we issued an additional 248,500 warrants to third-parties for services provided related to the issuance.  

o

On September 24, 2014, we issued an aggregate of 9,000,000 shares of our common stock at a price per share of $1.99, together with warrants to purchase 9,000,000 shares of our common stock at a price per warrant of $0.01, for a total of $2.00 for one share and one warrant, generating $18,000,000 in gross proceeds.

·

Note and interest conversions

o

The holders of the Sellers Notes converted $11,000,000 of principal, plus accrued interest through September 24, 2014 of $101,260, into 5,550,630 shares of our common stock.  See Note 7 for a discussion of the conversion.

o

During the year ended December 31, 2014, $25,000 of principal and $4,001 of interest were converted into 23,201 shares of our common stock.  See Note 6 for a discussion of the conversion.

·

Common stock for services

o

We issued 20,408 shares of common stock to consultants for $50,000 of services during the year ended December 31, 2014. 

Warrants During the year ended December 31, 2014, we issued 12,991,000 warrants, no holders exercised warrants, and no warrants expired.  There were 11,241,000 exercisable warrants and 1,750,000 contingent warrants outstanding as of December 31, 2014.  There were no warrants outstanding as of January 31, 2013.

·

Warrants issued in conjunction with sale of common stock

o

On April 18, 2014, we issued 1,192,500 warrants to accredited investors to purchase one share of our common stock for $2.00 per share as part of a Unit that included a share of our common stock. Additionally, we issued an additional 248,500 warrants to third-parties for services provided related to the issuance.  Each warrant may be exercised by the holder thereof, in such holder’s sole discretion, in whole or in part, any time prior to April 1, 2017.

o

On September 24, 2014, we issued 9,000,000 warrants to purchase 9,000,000 shares of our common stock at a price per warrant of $0.01, as part of the sale of 9,000,000 shares of common stock. We also granted to the underwriters a 45-day option to acquire up to 700,000 additional shares of common stock and/or additional warrants to acquire up to 700,000 shares of common stock. On October 20, 2014, the underwriters exercised their option and acquired additional 700,000 warrants.  The warrants may be exercised for a period of five years at an exercise price of $2.50 per share.

·

Warrants for services

o

On May 7, 2014, we issued to a third party for services rendered an aggregate of 200,000 warrants to purchase one share of our common stock for $2.65 per share. Of the 200,000 warrants, 100,000 were exercisable immediately and the remaining become exercisable one year from the date of grant based on the achievement of performance conditions. We recorded stock-based compensation expense of $195,814 for the year ended December 31, 2014 related to these warrants.  See Note 10 for a discussion of our Black-Scholes-Merton valuation assumptions.  

o

On May 28, 2014, we issued to a third party for services rendered an aggregate of 1,650,000 contingent warrants to purchase one share of our common stock for $4.31 per share. The warrants become exercisable at various times after achieving future performance conditions related to services and revenue targets for Earth911. As these warrants related to internally developed software, we recorded $174,109 to intangible assets for the year ended December 31, 2014 as the third party satisfied the first vesting condition.  Due to the uncertainty of attaining any of the remaining performance conditions, we did not recognize any additional activity for the remaining warrants for the year ended December 31, 2014. See Note 10 for a discussion of our Black-Scholes-Merton valuation assumptions.  

The following table summarizes the warrants issued and outstanding as of December 31, 2014:

 

Warrants Issued and Outstanding as of December 31, 2014

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

Exercisable warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

04/18/2014

 

04/01/2017

 

$

2.00

 

 

 

1,441,000

 

Warrant

 

05/07/2014

 

05/07/2017

 

$

2.65

 

 

 

100,000

 

Warrants

 

09/24/2014

 

09/24/2019

 

$

2.50

 

 

 

9,000,000

 

Warrants

 

10/20/2014

 

10/20/2019

 

$

2.50

 

 

 

700,000

 

Total exercisable warrants

 

 

 

 

 

 

 

 

 

 

11,241,000

 

Contingent warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrant

 

05/07/2014

 

05/07/2017

 

$

2.65

 

 

 

100,000

 

Warrant

 

05/28/2014

 

10/31/2016

 

$

4.31

 

 

 

450,000

 

Warrants

 

05/28/2014

 

10/31/2018

 

$

4.31

 

 

 

1,200,000

 

Total contingent warrants

 

 

 

 

 

 

 

 

 

 

1,750,000

 

Total warrants issued and outstanding

 

 

 

 

 

 

12,991,000

 

 

Incentive Compensation Plan - In October 2012, we adopted our 2012 Incentive Compensation Plan (the “2012 Plan”) as the sole plan for providing equity-based incentive compensation to our employees, non-employee directors, and other service providers. The plan allows for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, and other incentive awards to our employees, non-employee directors, and other service providers who are in a position to make a significant contribution to our success and our affiliates. The purposes of the plan are to attract and retain individuals, further align employee and stockholder interests, and closely link compensation with our performance. The plan is administered by our board of directors. Our policy is to fulfill any exercise of options from common stock that is authorized and unissued. The maximum number of shares of common stock available for grant under the plan is 7,500,000. Stock compensation expense prior to October 2012 related to options granted prior to the Earth911 Merger that was superseded by the 2012 Plan at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to adjustment for certain corporate changes in accordance with the provisions of the plan.

Restricted Stock Units – During the year ended December 31, 2014, we granted restricted stock units representing 132,600 hypothetical shares of common stock under the 2012 Incentive Compensation Plan. The restricted stock units vest based on a combination of financial performance factors and continued service. The financial performance factors are based on the revenue generated by new business activity of one of our subsidiaries. All payouts of restricted stock units that vest will be exercisable immediately and will be paid in the form of common stock. While we do not anticipate issuing dividends, the restricted stock unit awards will not participate in any dividends prior to vesting.

We determined the fair value of the restricted stock unit awards granted based on the market value of our common stock on the date of grant, which was $3.75 per share. We assumed a forfeiture rate of 0%. We recorded $211,875 of stock-based compensation expense for the year ended December 31, 2014 related to these warrants as the third party satisfied the first vesting condition.  Due to the uncertainty of attaining any of the remaining performance conditions, we recorded no additional stock-based compensation expense for the remaining performance conditions for the year ended December 31, 2014.

Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved the Quest Resource Holding Corporation 2014 Employee Stock Purchase Plan (the “ESPP”). We recorded expense of $4,863 related to the ESPP during the year ended December 31, 2014.

Stock Options – The following table summarizes the stock option activity from January 1, 2013 through December 31, 2014:

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at January 1, 2013

 

 

3,350,115

 

 

2.00 — 2.79

 

 

2.20

 

Granted

 

 

1,150,500

 

 

2.05 — 2.65

 

 

2.11

 

Canceled/Forfeited

 

 

(358,667

)

 

2.10 — 2.79

 

 

2.18

 

Outstanding at December 31, 2013

 

 

4,141,948

 

 

2.00 — 3.25

 

 

2.48

 

Granted

 

 

1,305,000

 

 

1.45 — 3.75

 

 

2.77

 

Canceled/Forfeited

 

 

(440,416

)

 

2.05 — 2.10

 

 

2.09

 

Outstanding at December 31, 2014

 

 

5,006,532

 

 

1.45 — 3.75

 

 

2.66

 

 

The weighted-average grant-date fair value of options granted was $1.41 and $1.69 for the years ended December 31, 2014 and 2013, respectively.

For the years ended December 31, 2014 and 2013, the intrinsic value of options outstanding was nil and $72,125, respectively, and of options exercisable was nil and $22,500, respectively.

The following additional information applies to options outstanding at December 31, 2014:

 

Ranges of

Exercise

Prices

 

Outstanding at

December 31,

2014

 

 

Weighted-

Average

Remaining

Contractual

Life

 

 

Weighted-

Average

Exercise

Price

 

 

Exercisable at

December 31,

2014

 

 

Weighted-

Average

Exercise

Price

 

$1.45 - $3.75

 

 

5,006,532

 

 

 

6.5

 

 

$

2.66

 

 

 

3,301,532

 

 

$

2.58

 

 

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

 

Ranges of

Exercise

Prices

 

Outstanding at

December 31,

2013

 

 

Weighted-

Average

Remaining

Contractual

Life

 

 

Weighted-

Average

Exercise

Price

 

 

Exercisable at

December 31,

2013

 

 

Weighted-

Average

Exercise

Price

 

$2.00 - $3.25

 

 

4,141,948

 

 

 

8.5

 

 

$

2.48

 

 

 

2,939,448

 

 

$

2.63

 

 

Stock-based compensation expense for stock based incentive awards was $1,085,217 and $2,194,390 for the years ended December 31, 2014 and 2013, respectively. At December 31, 2014, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, was approximately $2,551,531. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 3 years.

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

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

The weighted-average estimated value of employee stock options granted during the years ended December 31, 2014 and 2013 were estimated using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

 

 

 

Years Ended December 31,

 

 

 

2014

 

 

2013

 

Expected volatility

 

 

94

%

 

 

105

%

Risk-free interest rate

 

 

0.92

%

 

 

1.51

%

Expected dividends

 

 

0.00

%

 

 

0.00

%

Expected term in years

 

 

3.4

 

 

 

5.8

 

 

Net Loss per Share
Net Loss per Share

13. Net Loss per Share

We compute basic loss per share by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. We have other potentially dilutive securities outstanding that are not shown in a diluted loss per share calculation because their effect in both 2014 and 2013 would be anti-dilutive.  These potentially dilutive securities include options, restricted stock units, warrants, and convertible promissory notes and totaled 18,130,132 and 15,164,789 shares at December 31, 2014 and 2013, respectively.

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

 

 

 

Years ended December 31,

 

 

 

2014

 

 

2013

 

Net loss applicable to common stockholders - numerator for

   basic and diluted earnings per share

 

$

(9,897,678

)

 

$

(17,799,351

)

Weighted - average common shares outstanding -

   denominator for basic and diluted earnings per share

 

 

100,554,314

 

 

 

77,055,327

 

Net loss per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.10

)

 

$

(0.23

)

 

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

 

 

 

Years ended December 31,

 

 

 

2014

 

 

2013

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

5,006,532

 

 

 

4,141,948

 

Restricted stock units

 

 

132,600

 

 

 

 

Warrants

 

 

12,991,000

 

 

 

 

Convertible notes

 

 

 

 

 

11,022,841

 

 

Supplemental Cash Flow Information
Supplemental Cash Flow Information

14. Supplemental Cash Flow Information

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

 

 

 

Years Ended December 31,

 

 

 

2014

 

 

2013

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,153,275

 

 

$

898,757

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash flow activities:

 

 

 

 

 

 

 

 

Common stock issued for conversion of notes payable

 

$

11,025,000

 

 

$

3,148,493

 

Common stock issued for services and loan fees

 

$

50,000

 

 

$

198,858

 

Warrant liability issued for services

 

$

34,857

 

 

$

 

Warrants issued for capitalized software purchases

 

$

174,109

 

 

$

 

Common stock issued for warrant liability – cashless

   exercise

 

$

 

 

$

21,698,338

 

Common stock issued for purchase of Quest Resource

   Management Group, LLC

 

$

 

 

$

55,000,000

 

Long-term senior secured convertible notes – related party

 

$

 

 

$

22,000,000

 

Discount to senior convertible note-related party

 

$

 

 

$

6,500,000

 

 

Related Party Transactions
Related Party Transactions

15. Related Party Transactions

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

Allonge to the Convertible Note - In October 2012, we amended the Convertible Note. We increased the original principal amount to $3,000,000 from the original $1,000,000 amount. We changed the maturity of the note to October 1, 2014. We changed the conversion rate of the Convertible Note to $0.50 per common share prior to the maturity date and $0.25 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 shares of 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 was exercisable at or after the date of the Second Allonge, and was in the same form as Warrant 1-5, as amended by the Second Allonge. Warrant 1-6 would expire five years from the date of issuance.

The Convertible Note was converted and the all of the warrants were either exercised or cancelled in 2013.  See Note 7 for a discussion of the Convertible Note and of the exercise of the related exercisable warrants in 2013.

Acquisition of the Quest Interests - On July 16, 2013, we acquired all of the Quest Interests held by QRG, comprising 50% of the membership interests of Quest.  The purchase price for the Quest Interests consisted of 22,000,000 shares of our common stock issued at a fair market value of $2.50 per share based on the closing price of the stock on the date of the transaction and the Sellers Notes as described in Note 7 in the aggregate principal amount of $22,000,000.  The total purchase price of $77,000,000 was paid to the owners of QRG who at the time of the transaction were related parties: the Chief Executive Officer of Quest and the former President of Quest.  After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer and member of the Board of Directors of our company.  As described in Note 7, on September 24, 2014, we paid $11,000,000 to the holders of the Sellers Notes and such holders converted the remaining $11,000,000 of principal, plus accrued interest through September 24, 2014 of $101,260, into 5,550,630 shares of our common stock. Unpaid interest related to the Sellers Notes at December 31, 2014 and 2013 is nil and $132,878 respectively.

Goodwill Impairment
Goodwill Impairment

16. Goodwill Impairment

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

For the year ending December 31, 2013, we recognized $26,850,039 of goodwill impairment based on our goodwill impairment testing.  We determined that the carrying amount of the reporting unit exceeded the fair value and recorded a goodwill impairment charge.  In connection with the acquisition that gave rise to the goodwill, we recorded in 2013 a $23,449,372 gain on our equity method based investment in Quest. The impact of the goodwill impairment and the gain on investment is a net expense of $3,400,667 included in the operating loss for the year ended December 31, 2013.  As required by FASB ASC Topic 350, Intangibles – Goodwill and Other, we performed our goodwill impairment analysis for 2014 with no impairment recorded.

Summary of Significant Accounting Policies (Policies)

Principals of Presentation, Consolidation and Reclassifications

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the operating activity of QRHC and its subsidiaries for the years ended December 31, 2014 and 2013, as well as the equity method accounting for its investment in Quest through July 15, 2013.

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

Through July 16, 2013, Quest was deemed to be a separate operating company, and as such, there were no intercompany transactions that required elimination at that time. All other intercompany accounts and transactions have been eliminated in consolidation, including transactions between QRHC and Quest subsequent to July 16, 2013. Certain reclassifications have been made to prior year balances to conform to the current year presentation that did not have an effect on our net loss or net loss per share.

Accounting Estimates

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

We use significant estimates when accounting for the collectability of accounts receivable, depreciable lives of fixed assets and intangible 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

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 service agreement or 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, service agreement, or accepted customer purchase order.

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

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

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

Cash and Cash Equivalents

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

Accounts Receivable

We follow the allowance method of recognizing uncollectible accounts receivable, which recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. Credit is extended based on evaluation of each customer’s financial condition and is generally unsecured. Accounts receivable are typically due within 30 days and are stated net of an allowance for doubtful accounts in the consolidated balance sheet. Accounts are considered past due if outstanding longer than contractual payment terms. We record an allowance based on consideration of a number of factors, including the length of time trade accounts are past due, our previous loss history, the credit-worthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We charge-off accounts receivable after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period we receive the payment.

As of December 31, 2014 and 2013, we have established an allowance of $760,917 and $319,735, respectively, for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivables only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2014 and 2013 were as follows:

 

 

 

Years ended December 31,

 

 

 

2014

 

 

2013

 

Beginning balance

 

$

319,735

 

 

$

7,398

 

Allowance from Quest acquisition