QUEST RESOURCE HOLDING CORP, 10-Q filed on 8/14/2015
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2015
Aug. 1, 2015
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2015 
 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
QRHC 
 
Entity Registrant Name
Quest Resource Holding Corporation 
 
Entity Central Index Key
0001442236 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
111,714,938 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $)
Jun. 30, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 541,798 
$ 3,154,540 
Accounts receivable, less allowance for doubtful accounts of $537,766 and $760,917 as of June 30, 2015 and December 31, 2014, respectively
31,904,463 
29,631,843 
Prepaid expenses and other current assets
1,152,475 
684,032 
Total current assets
33,598,736 
33,470,415 
Goodwill
58,337,290 
58,337,290 
Intangible assets, net
13,792,127 
15,115,617 
Property and equipment, net, and other assets
850,399 
753,493 
Total assets
106,578,552 
107,676,815 
Current liabilities:
 
 
Line of credit
 
5,250,000 
Accounts payable and accrued liabilities
25,868,318 
26,621,907 
Deferred revenue and other current liabilities
249,696 
282,189 
Total current liabilities
26,118,014 
32,154,096 
Line of credit
7,250,000 
 
Other long-term liabilities
35,232 
45,206 
Total liabilities
33,403,246 
32,199,302 
Commitments and contingencies
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of June 30, 2015 and December 31, 2014, respectively
   
   
Common stock, $0.001 par value, 200,000,000 shares authorized, 111,714,938 and 111,601,304 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
111,715 
111,601 
Additional paid-in capital
151,510,248 
150,789,292 
Accumulated deficit
(78,446,657)
(75,423,380)
Total stockholders’ equity
73,175,306 
75,477,513 
Total liabilities and stockholders’ equity
$ 106,578,552 
$ 107,676,815 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (Unaudited) (USD $)
Jun. 30, 2015
Dec. 31, 2014
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts receivable
$ 537,766 
$ 760,917 
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 
Common stock, shares issued
111,714,938 
111,601,304 
Common stock, shares outstanding
111,714,938 
111,601,304 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Income Statement [Abstract]
 
 
 
 
Revenue
$ 42,330,214 
$ 42,514,265 
$ 82,338,823 
$ 80,674,315 
Cost of revenue
38,913,605 
39,005,550 
75,636,538 
73,833,185 
Gross profit
3,416,609 
3,508,715 
6,702,285 
6,841,130 
Operating expenses:
 
 
 
 
Selling, general, and administrative
3,906,276 
3,491,507 
7,683,258 
6,485,215 
Depreciation and amortization
972,334 
953,499 
1,951,471 
1,905,162 
Total operating expenses
4,878,610 
4,445,006 
9,634,729 
8,390,377 
Operating loss
(1,462,001)
(936,291)
(2,932,444)
(1,549,247)
Other expense:
 
 
 
 
Interest expense
(42,236)
(890,453)
(90,833)
(1,765,920)
Total other expense
(42,236)
(890,453)
(90,833)
(1,765,920)
Loss before taxes
(1,504,237)
(1,826,744)
(3,023,277)
(3,315,167)
Net loss
(1,504,237)
(1,826,744)
(3,023,277)
(3,315,167)
Net loss applicable to common stockholders
$ (1,504,237)
$ (1,826,744)
$ (3,023,277)
$ (3,315,167)
Net loss per share
 
 
 
 
Basic and diluted
$ (0.01)
$ (0.02)
$ (0.03)
$ (0.03)
Weighted average number of common shares outstanding
 
 
 
 
Basic and diluted
111,686,685 
96,649,466 
111,652,346 
96,237,784 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (USD $)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit[Member]
Beginning Balance at Dec. 31, 2014
$ 75,477,513 
$ 111,601 
$ 150,789,292 
$ (75,423,380)
Beginning Balance, Shares at Dec. 31, 2014
 
11,601,304 
 
 
Stock-based compensation
660,365 
 
660,365 
 
Shares issued for vested restricted stock units, Value
 
57 
(57)
 
Shares issued for vested restricted stock units, Shares
56,500 
56,500 
 
 
Shares issued for Employee Stock Purchase Plan options, Value
60,705 
57 
60,648 
 
Shares issued for Employee Stock Purchase Plan options, Shares
57,134 
57,134 
 
 
Net loss
(3,023,277)
 
 
(3,023,277)
Ending Balance at Jun. 30, 2015
$ 73,175,306 
$ 111,715 
$ 151,510,248 
$ (78,446,657)
Ending Balance, Shares at Jun. 30, 2015
 
111,714,938 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $)
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Cash flows from operating activities:
 
 
Net loss
$ (3,023,277)
$ (3,315,167)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation
146,381 
142,461 
Amortization of intangibles
1,805,090 
1,762,701 
Amortization of debt discount and deferred financing costs
 
908,303 
Provision for doubtful accounts
2,972 
41,338 
Stock-based compensation
625,508 
580,573 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(2,275,592)
(3,412,367)
Prepaid expenses and other current assets
(468,443)
(304,610)
Security deposits and other assets
(7,991)
(15,717)
Accounts payable and accrued liabilities
(718,732)
(501,335)
Deferred revenue and other current liabilities
(32,493)
247,059 
Other long-term liabilities
1,360 
 
Net cash used in operating activities
(3,945,217)
(3,866,761)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(235,296)
(52,554)
Purchase of capitalized software development
(481,600)
(437,840)
Net cash used in investing activities
(716,896)
(490,394)
Cash flows from financing activities:
 
 
Proceeds from line of credit
2,000,000 
2,500,000 
Proceeds from the sale of capital stock
60,705 
2,385,000 
Repayments of capital lease obligations
(11,334)
(7,952)
Net cash provided by financing activities
2,049,371 
4,877,048 
Net increase (decrease) in cash and cash equivalents
(2,612,742)
519,893 
Cash and cash equivalents at beginning of period
3,154,540 
2,676,984 
Cash and cash equivalents at end of period
541,798 
3,196,877 
Supplemental cash flow information:
 
 
Cash paid for interest
96,459 
732,018 
Supplemental non-cash flow activities:
 
 
Common stock issued for services and loan fees
 
33,333 
Warrant liability issued for services
34,857 
26,826 
Notes Payable [Member]
 
 
Supplemental non-cash flow activities:
 
 
Common stock issued for conversion of notes payable
 
29,001 
Restricted Stock Units [Member]
 
 
Supplemental non-cash flow activities:
 
 
Common stock issued
$ 57 
 
The Company, Description of Business, and Future Liquidity Needs
The Company, Description of Business, and Future Liquidity Needs

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

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

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 an 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. Two customers accounted for 59.3% and 75.7% of revenue for the three months ended June 30, 2015 and 2014, respectively.  Two customers accounted for 60.3% and 75.9% of revenue for the six months ended June 30, 2015 and 2014, 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 – As of June 30, 2015 and December 31, 2014, our working capital balance was $7,480,722 and $1,316,319, respectively.   

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principals of Presentation, Consolidation, and Reclassifications

The condensed consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended December 31, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2015 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2014 condensed consolidated balance sheet data from audited financial statements, but did not include all disclosures required by GAAP. As Quest, Earth911, and YouChange each operate as ecology based green service companies, we did not deem segment reporting necessary.

All intercompany accounts and transactions have been eliminated in consolidation. 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. Interim results are subject to seasonal variations, and the results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year.

Revenue Recognition

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

·

persuasive evidence of an arrangement exists;

·

delivery has occurred or services have been rendered;

·

the fee for the arrangement is fixed or determinable; and

·

collectability is reasonably assured.

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

Delivery Has Occurred or Services Have Been Rendered – We perform all services or deliver all products prior to recognizing revenue. 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, we do not have credit risk, or we determine amounts earned using fixed percentage or fixed payment schedules, we record the net amounts as management fees earned. Currently, we have no contracts accounted for as management fees.

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

Net Loss Per Share

We compute basic net loss per share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2015 and 2014 would be anti-dilutive. These potentially dilutive securities include options, restricted stock units, warrants, and convertible promissory notes, and totaled 16,908,173 and 19,287,215 shares at June 30, 2015 and 2014, respectively.

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net loss applicable to common stockholders - numerator for

   basic and diluted earnings per share

 

$

(1,504,237

)

 

$

(1,826,744

)

 

$

(3,023,277

)

 

$

(3,315,167

)

Weighted average common shares outstanding -

   denominator for basic and diluted earnings per share

 

 

111,686,685

 

 

 

96,649,466

 

 

 

111,652,346

 

 

 

96,237,784

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.01

)

 

$

(0.02

)

 

$

(0.03

)

 

$

(0.03

)

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

 

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

5,041,073

 

 

 

4,996,215

 

Restricted stock units

 

 

76,100

 

 

 

 

Warrants

 

 

11,791,000

 

 

 

3,291,000

 

Convertible notes

 

 

 

 

 

11,000,000

 

 

 

 

16,908,173

 

 

 

19,287,215

 

 

Inventories

We record inventories within “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.  As of June 30, 2015 and December 31, 2014, all inventories were finished goods with a balance of $13,827 and $30,759, respectively, and consisted of waste disposal equipment, with no reserve for inventory obsolescence at either date.

 

Property and Equipment, Net, and Other Assets
Property and Equipment, Net, and Other Assets

3. Property and Equipment, Net, and Other Assets

At June 30, 2015 and December 31, 2014, property and equipment, net, and other assets consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $1,839,216

     and $1,692,835 as of June 30, 2015 and December 31, 2014,

     respectively

 

$

622,752

 

 

$

533,837

 

Security deposits and other assets

 

 

227,647

 

 

 

219,656

 

    Property and equipment, net, and other assets

 

$

850,399

 

 

$

753,493

 

 

We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment. The depreciation expense related to property and equipment was $70,335 and $72,894 for the three months ended June 30, 2015 and 2014, respectively.  The depreciation expense related to property and equipment was $146,381 and $142,461 for the six months ended June 30, 2015 and 2014, respectively.

 

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

4. Goodwill and Other Intangible Assets

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

  

June 30, 2015 (Unaudited)

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

4,982,000

 

 

$

7,738,000

 

Trademarks

 

7 years

 

 

6,230,000

 

 

 

1,742,917

 

 

 

4,487,083

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,495,314

 

 

 

83,273

 

 

 

1,412,041

 

Customer lists

 

5 years

 

 

307,153

 

 

 

152,150

 

 

 

155,003

 

Total finite lived intangible assets

 

 

 

$

20,983,150

 

 

$

7,191,023

 

 

$

13,792,127

 

 

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

 

 

June 30, 2015 (Unaudited) and December 31, 2014

 

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 $901,998 and $880,605 for the three months ended June 30, 2015 and 2014, respectively. The amortization expense related to finite lived intangible assets was $1,805,090 and $1,762,701 for the six months ended June 30, 2015 and 2014, respectively.  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% (2.44% as of June 30, 2015). 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 $7,250,000 outstanding and $2,750,000 available to be borrowed as of June 30, 2015, excluding the $5,000,000 accordion. The amount of interest expense related to the Regions line of credit for the three months ended June 30, 2015 and 2014 was $53,479 and $49,304, respectively.  The amount of interest expense related to the Regions line of credit for the six months ended June 30, 2015 and 2014 was $88,529 and $92,384, respectively.  

On May 9, 2014, Quest entered into a Sixth Amendment to 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 (collectively, the “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 June 30, 2015, we were in compliance with the financial covenants.

In connection with the Sixth Amendment, on May 9, 2014, the “Guarantors” entered 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.

During the six months ended June 30, 2015, Quest entered into a Seventh Amendment to Loan Agreement with Regions. The loan agreement was amended to, among other things, (i) reduce the applicable margin for eurodollar rate loans by 0.25% per annum, (ii) extend the maturity date to May 13, 2018, and (iii) modify the permitted acquisitions in certain respects.

On July 7, 2015, Quest entered into an Eighth Amendment to Loan Agreement with Regions as discussed in Note 11 — Material Subsequent Events.

Capital Lease Obligations
Capital Lease Obligations

6. Capital Lease Obligations

At June 30, 2015 and December 31, 2014, total capital lease obligations outstanding consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

Capital lease obligations, imputed interest at 4.75%, with monthly payments of $1,507, through November 2016, secured by computer equipment

 

$

35,916

 

 

$

47,250

 

Total

 

 

35,916

 

 

 

47,250

 

Less: current maturities

 

 

(23,426

)

 

 

(22,853

)

Long-term portion

 

$

12,490

 

 

$

24,397

 

 

Our capital lease obligations are included within “Deferred revenue and other current liabilities” and “other long-term liabilities” in our condensed consolidated balance sheets.  The amount of interest expense related to our capital leases for the three months ended June 30, 2015 and 2014 was $426 and $452, respectively.  The amount of interest expense related to our capital leases for the six months ended June 30, 2015 and 2014 was $913 and $1,090, respectively.  

 

Income Taxes
Income Taxes

7. Income Taxes

We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are more likely than not expected to be realized. Realization of our net operating loss carryforward was not reasonably assured as of June 30, 2015 and December 31, 2014, and we have recorded a valuation allowance of $10,308,000 and $9,108,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of June 30, 2015 and December 31, 2014, we had federal income tax net operating loss carryforwards of approximately $17,100,000 and $14,800,000, respectively, which expire at various dates beginning in 2031.

 

Fair Value of Financial Instruments
Fair Value of Financial Instruments

8. Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, line of credit, 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 portions of capital lease obligations and line of credit, based on borrowing rates currently available to us for loans with similar terms and maturities.

On May 7, 2014, we issued an aggregate of 200,000 warrants to purchase shares of our common stock to a consultant in exchange for services rendered during 2014.  Of these warrants, 100,000 vested immediately and resulted in no expense recorded for the three months ended June 30, 2015.  The remaining 100,000 warrants, which we had classified as a liability, vested on May 7, 2015, subject to performance conditions.  We measured the warrants at fair value by applying the Black-Scholes-Merton valuation model, which utilizes Level 3 inputs. As of May 7, 2015, the assumptions used in the Black-Scholes-Merton valuation for the 100,000 warrants that vested on May 7, 2015 were as follows: volatility of 88.5%; risk free interest rate of 0.63%; expected term of two years; and expected dividend yield of 0%. The grant date fair value of the warrant valuation described above was $0.35 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 comparable companies.  We report the warrant liability in “Accounts payable and accrued liabilities” within our balance sheets.  Our warrant liability was nil and $34,857 at June 30, 2015 and December 31, 2014, respectively. On the May 7, 2015 vesting date, we reclassified the $35,001 estimated fair value of the warrants to stockholders’ equity.

 

Stockholders' Equity
Stockholders' Equity

9. Stockholders’ Equity

Preferred StockOur 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 111,714,938 and 111,601,304 shares were issued and outstanding as of June 30, 2015 and December 31, 2014, respectively.

 

During the six months ended June 30, 2015, we issued shares of common stock as follows:

 

 

 

Common Stock

 

 

 

Shares

 

 

Amount

 

Shares issued for vested restricted stock units

 

 

56,500

 

 

$

 

Shares issued for Employee Stock Purchase Plan options

 

 

57,134

 

 

 

60,705

 

 

 

 

113,634

 

 

$

60,705

 

·

Shares Issued for Vested Restricted Stock Units

o

On March 5, 2015, we issued 56,500 shares to an employee for the restricted stock units that vested and were expensed during fiscal year 2014.  

·

Shares Issued for Employee Stock Purchase Plan Options

o

On May 15, 2015, we issued 57,134 shares to employees for the Employee Stock Purchase Plan options that vested and were exercised.  

During the six months ended June 30, 2014, we issued shares of common stock as follows:

 

 

 

Common Stock

 

 

 

Shares

 

 

Amount

 

Sale of common stock and warrants

 

 

1,192,500

 

 

$

2,385,000

 

Shares issued upon conversion of note

 

 

23,201

 

 

 

29,001

 

Common stock issued for services

 

 

20,408

 

 

 

50,000

 

 

 

 

1,236,109

 

 

$

2,464,001

 

·

Sale of Common Stock and Warrants 

o

On April 18, 2014, we issued an aggregate of 1,192,500 units (the “Units”) to several 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. Additional warrants to purchase 248,500 shares of our common stock were issued as finder’s fees to third parties. Therefore, in total we issued 1,192,500 shares of common stock and warrants to purchase 1,441,000 shares of our common stock for $2.00 per share. 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.

·

Shares Issued Upon Conversion of Note

o

During September 2012, we issued a convertible note payable to an unrelated party.  During the six months ended June 30, 2014, $25,000 of principal and $4,001 of interest were converted into 23,201 shares of our common stock.

·

Common Stock for Services 

o

We issued 20,408 shares of common stock to consultants for $50,000 of services, of which $33,333 was expensed during the six months ended June 30, 2014 and $16,667 was prepaid for services in the subsequent period. We did not issue stock for services during the six months ended June 30, 2015.

Warrants – During the six months ended June 30, 2015 and 2014, we did not issue any warrants and no holders exercised warrants.  During the six months ended June 30, 2015, a third party forfeited 1,200,000 contingent warrants, with no corresponding expirations during the six months ended June 30, 2014.  At June 30, 2015, we had outstanding exercisable warrants to purchase 11,791,000 shares of common stock.  

·

Warrants for Services

o

On May 7, 2014, we issued to a third party for services rendered warrants to purchase an aggregate of 200,000 shares of our common stock at $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 $187,783 for the three and six months ended June 30, 2014.  Due to the decline in the fair value of these warrants, we recorded an increase of stock-based compensation expense of $6,081 and $141 for the three and six months ended June 30, 2015, respectively, related to these warrants. See Note 8 for a discussion of our Black-Scholes-Merton valuation assumptions.  

o

On May 28, 2014, we issued to a third party for services rendered contingent warrants to purchase an aggregate of 1,650,000 shares of our common stock at $4.31 per share. The warrants become exercisable at various times after achieving future performance conditions related to services and revenue targets for Earth911. During the six months ended June 30, 2014, we recorded no stock-based compensation expense for the three months ended June 30, 2014 related to these warrants due to the uncertainty of attaining any of the performance conditions. During the six months ended June 30, 2015, we terminated the contract with the third party, resulting in the forfeiture of 1,200,000 unvested warrants.  Due to the uncertainty of attaining any of the performance conditions, we had not recognized any additional expense for the non-vested warrants.  As these warrants related to internally developed software, we did not capitalize any costs or recognize any expense for the six months ended June 30, 2015.

The following table summarizes the warrants issued and outstanding as of June 30, 2015:

 

Warrants Issued and Outstanding as of June 30, 2015

 

 

 

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

 

 

 

200,000

 

Warrant

 

05/28/2014

 

10/31/2016

 

$

4.31

 

 

 

450,000

 

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

 

 

 

 

 

 

 

 

 

 

11,791,000

 

Contingent warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

05/28/2014

 

10/31/2018

 

$

4.31

 

 

 

1,200,000

 

Less warrants cancelled

 

 

 

 

 

 

 

 

 

 

(1,200,000

)

Total contingent warrants

 

 

 

 

 

 

 

 

 

 

 

Total warrants issued and outstanding

 

 

 

 

 

 

11,791,000

 

Restricted Stock Units – During April 2014, we granted restricted stock units representing 132,600 shares of common stock under our 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%. 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 six months ended June 30, 2015. We issued 56,500 shares during the six months ended June 30, 2015 for the restricted stock units that vested during 2014.  As of June 30, 2015 and December 31, 2014, outstanding restricted stock units totaled 76,100 and 132,600, respectively.  

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 $25,102 and $36,924 related to the ESPP during the three and six months ended June 30, 2015, respectively.  On May 15, 2015, we issued 57,134 shares to employees for the ESPP options that vested and were exercised.    

Stock Options – The following table summarizes the stock option activity for the six month period ended June 30, 2015:

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Number

 

 

Price Per

 

Exercise Price

 

 

 

of Shares

 

 

Share

 

Per Share

 

Outstanding at December 31, 2014

 

 

5,006,532

 

 

$    1.45 — 3.75

 

$

2.66

 

Granted

 

 

145,625

 

 

$    1.11 — 1.46

 

$

1.25

 

Canceled/Forfeited

 

 

(111,084

)

 

$    1.45 — 2.10

 

$

2.04

 

Outstanding at June 30, 2015

 

 

5,041,073

 

 

$    1.11 — 3.75

 

$

2.56

 

 

Related Party Transactions
Related Party Transactions

10. Related Party Transactions

Acquisition of the Quest Interests – On July 16, 2013, we acquired all of the issued and outstanding membership interests of Quest held by Quest Resource Group LLC (“QRG”), comprising 50% of the membership interests of Quest (the “Quest Interests”). 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 convertible secured promissory notes (collectively, the “Sellers’ Notes”) in the aggregate principal amount of $22,000,000. The total purchase price of $77,000,000 was paid to the owners of QRG 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. 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. For the three and six months ended June 30, 2014, we recognized interest expense of $383,945 and $763,671, respectively. The amount of interest expense related to the amortization of the discount on the Sellers’ Notes for the three and six months ended June 30, 2014 was $456,661 and $908,303, respectively.  We recognized no comparable interest expense or amortization of the discount on the Sellers’ Notes for the three and six months ended June 30, 2015 due to the retirement of the Sellers’ Notes in September 2014.

Material Subsequent Events
Material Subsequent Events

11. Material Subsequent Events

 

On July 7, 2015, Quest entered into an Eighth Amendment to Loan Agreement with Regions.   The loan agreement was amended to, among other things, increase the aggregate revolving credit commitment to $15.0 million by exercising the $5.0 million accordion feature in the loan agreement.

 

Summary of Significant Accounting Policies (Policies)

Principals of Presentation, Consolidation, and Reclassifications

The condensed consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended December 31, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2015 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2014 condensed consolidated balance sheet data from audited financial statements, but did not include all disclosures required by GAAP. As Quest, Earth911, and YouChange each operate as ecology based green service companies, we did not deem segment reporting necessary.

All intercompany accounts and transactions have been eliminated in consolidation. 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. Interim results are subject to seasonal variations, and the results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year.

Revenue Recognition

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

·

persuasive evidence of an arrangement exists;

·

delivery has occurred or services have been rendered;

·

the fee for the arrangement is fixed or determinable; and

·

collectability is reasonably assured.

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

Delivery Has Occurred or Services Have Been Rendered – We perform all services or deliver all products prior to recognizing revenue. 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, we do not have credit risk, or we determine amounts earned using fixed percentage or fixed payment schedules, we record the net amounts as management fees earned. Currently, we have no contracts accounted for as management fees.

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

Net Loss Per Share

We compute basic net loss per share by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2015 and 2014 would be anti-dilutive. These potentially dilutive securities include options, restricted stock units, warrants, and convertible promissory notes, and totaled 16,908,173 and 19,287,215 shares at June 30, 2015 and 2014, respectively.

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net loss applicable to common stockholders - numerator for

   basic and diluted earnings per share

 

$

(1,504,237

)

 

$

(1,826,744

)

 

$

(3,023,277

)

 

$

(3,315,167

)

Weighted average common shares outstanding -

   denominator for basic and diluted earnings per share

 

 

111,686,685

 

 

 

96,649,466

 

 

 

111,652,346

 

 

 

96,237,784

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.01

)

 

$

(0.02

)

 

$

(0.03

)

 

$

(0.03

)

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

 

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

5,041,073

 

 

 

4,996,215

 

Restricted stock units

 

 

76,100

 

 

 

 

Warrants

 

 

11,791,000

 

 

 

3,291,000

 

Convertible notes

 

 

 

 

 

11,000,000

 

 

 

 

16,908,173

 

 

 

19,287,215

 

 

Inventories

We record inventories within “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.  As of June 30, 2015 and December 31, 2014, all inventories were finished goods with a balance of $13,827 and $30,759, respectively, and consisted of waste disposal equipment, with no reserve for inventory obsolescence at either date.

Summary of Significant Accounting Policies (Tables)

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net loss applicable to common stockholders - numerator for

   basic and diluted earnings per share

 

$

(1,504,237

)

 

$

(1,826,744

)

 

$

(3,023,277

)

 

$

(3,315,167

)

Weighted average common shares outstanding -

   denominator for basic and diluted earnings per share

 

 

111,686,685

 

 

 

96,649,466

 

 

 

111,652,346

 

 

 

96,237,784

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.01

)

 

$

(0.02

)

 

$

(0.03

)

 

$

(0.03

)

 

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

 

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Anti-dilutive securities excluded from diluted loss per share:

 

 

 

 

 

 

 

 

Stock options

 

 

5,041,073

 

 

 

4,996,215

 

Restricted stock units

 

 

76,100

 

 

 

 

Warrants

 

 

11,791,000

 

 

 

3,291,000

 

Convertible notes

 

 

 

 

 

11,000,000

 

 

 

 

16,908,173

 

 

 

19,287,215

 

 

Property and Equipment, Net, and Other Assets (Tables)
Components Property and Equipment, net, and other assets

At June 30, 2015 and December 31, 2014, property and equipment, net, and other assets consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $1,839,216

     and $1,692,835 as of June 30, 2015 and December 31, 2014,

     respectively

 

$

622,752

 

 

$

533,837

 

Security deposits and other assets

 

 

227,647

 

 

 

219,656

 

    Property and equipment, net, and other assets

 

$

850,399

 

 

$

753,493

 

 

Goodwill and Other Intangible Assets (Tables)

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

  

June 30, 2015 (Unaudited)

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

4,982,000

 

 

$

7,738,000

 

Trademarks

 

7 years

 

 

6,230,000

 

 

 

1,742,917

 

 

 

4,487,083

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

1,495,314

 

 

 

83,273

 

 

 

1,412,041

 

Customer lists

 

5 years

 

 

307,153

 

 

 

152,150

 

 

 

155,003

 

Total finite lived intangible assets

 

 

 

$

20,983,150

 

 

$

7,191,023

 

 

$

13,792,127

 

 

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

 

 

June 30, 2015 (Unaudited) and December 31, 2014

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,337,290

 

 

 

 

 

 

Capital Lease Obligations (Tables)
Summary of Capital Lease Obligations

At June 30, 2015 and December 31, 2014, total capital lease obligations outstanding consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

Capital lease obligations, imputed interest at 4.75%, with monthly payments of $1,507, through November 2016, secured by computer equipment

 

$

35,916

 

 

$

47,250

 

Total

 

 

35,916

 

 

 

47,250

 

Less: current maturities

 

 

(23,426

)

 

 

(22,853

)

Long-term portion

 

$

12,490

 

 

$

24,397

 

 

Stockholders' Equity (Tables)

During the six months ended June 30, 2015, we issued shares of common stock as follows:

 

 

 

Common Stock

 

 

 

Shares

 

 

Amount

 

Shares issued for vested restricted stock units

 

 

56,500

 

 

$

 

Shares issued for Employee Stock Purchase Plan options

 

 

57,134

 

 

 

60,705

 

 

 

 

113,634

 

 

$

60,705

 

 

During the six months ended June 30, 2014, we issued shares of common stock as follows:

 

 

 

Common Stock

 

 

 

Shares

 

 

Amount

 

Sale of common stock and warrants

 

 

1,192,500

 

 

$

2,385,000

 

Shares issued upon conversion of note

 

 

23,201

 

 

 

29,001

 

Common stock issued for services

 

 

20,408

 

 

 

50,000

 

 

 

 

1,236,109

 

 

$

2,464,001

 

 

The following table summarizes the warrants issued and outstanding as of June 30, 2015:

 

Warrants Issued and Outstanding as of June 30, 2015

 

 

 

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

 

 

 

200,000

 

Warrant

 

05/28/2014

 

10/31/2016

 

$

4.31

 

 

 

450,000

 

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

 

 

 

 

 

 

 

 

 

 

11,791,000

 

Contingent warrants

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

05/28/2014

 

10/31/2018

 

$

4.31

 

 

 

1,200,000

 

Less warrants cancelled

 

 

 

 

 

 

 

 

 

 

(1,200,000

)

Total contingent warrants

 

 

 

 

 

 

 

 

 

 

 

Total warrants issued and outstanding

 

 

 

 

 

 

11,791,000

 

 

Stock Options – The following table summarizes the stock option activity for the six month period ended June 30, 2015:

 

 

 

Stock Options