Source: http://d1lge852tjjqow.cloudfront.net/CIK-0001442236/138f40f4-1f6f-4ebc-9893-60642b77e637.html
Timestamp: 2020-01-24 15:24:57
Document Index: 16633935

Matched Legal Cases: ['arty\n34', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911']

QUEST RESOURCE HOLDING CORP, 10-Q filed on 11/16/2015
111,714,938�
$�5,054,120�
Accounts receivable, less allowance for doubtful accounts of $535,289 and $760,917 as of September 30, 2015 and December 31, 2014, respectively
29,785,568�
1,270,534�
36,110,222�
13,133,837�
1,463,035�
109,044,384�
33,861,459�
249,231�
34,110,690�
105,776�
37,216,466�
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 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 September 30, 2015 and December 31, 2014, respectively
111,715�
151,816,614�
(80,100,411)
71,827,918�
$�109,044,384�
$�535,289�
111,673,440�
966,731�
60,648�
57,134�
$�71,827,918�
$�111,715�
$�151,816,614�
$�(80,100,411)
Repayment of senior convertible notes - related party
34,857�
26,826�
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 60.0% and 72.2% of revenue for the three months ended September 30, 2015 and 2014, respectively. Two customers accounted for 60.2% and 73.7% of revenue for the nine months ended September 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 The Colony, Texas.
Liquidity – As of September 30, 2015 and December 31, 2014, our working capital balance was $1,999,532 and $1,316,319, respectively.
Principals of Presentation and Consolidation
The condensed consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended December 31, 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 September 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. Interim results are subject to seasonal variations, and the results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year.
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 one contract accounted for as management fees.
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, and warrants and totaled 16,269,839 and 17,122,532 shares at September 30, 2015 and 2014, respectively.
4,402,739
16,269,839
We record inventories within “Prepaid expenses and other current assets” in our condensed consolidated balance sheets. As of September 30, 2015 and December 31, 2014, all inventories were finished goods with a balance of $13,377 and $30,759, respectively, and consisted of waste disposal equipment, with no reserve for inventory obsolescence at either date.
At September 30, 2015 and December 31, 2014, property and equipment, net, and other assets consisted of the following:
Property and equipment, net of accumulated depreciation of $1,895,096
and $1,692,835 as of September 30, 2015 and December 31, 2014,
1,463,035
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 $71,844 and $81,038 for the three months ended September 30, 2015 and 2014, respectively. The depreciation expense related to property and equipment was $218,225 and $223,499 for the nine months ended September 30, 2015 and 2014, respectively.
4,264,583
21,242,121
8,108,284
13,133,837
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 $917,261 and $875,740 for the three months ended September 30, 2015 and 2014, respectively. The amortization expense related to finite lived intangible assets was $2,722,351 and $2,638,441 for the nine months ended September 30, 2015 and 2014, respectively. We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes. As required by FASB ASC Topic 350, Intangibles – Goodwill and Other, we performed our goodwill impairment analysis in the third quarter with no impairment recorded.
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 $15,000,000 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 facility matures May 13, 2018. 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% (2.46% as of September 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 with guarantees from QRHC and Earth911. Quest had $3,000,000 outstanding and $12,000,000 available to be borrowed as of September 30, 2015. The amount of interest expense related to the Regions line of credit for the three months ended September 30, 2015 and 2014 was $65,026 and $35,607, respectively. The amount of interest expense related to the Regions line of credit for the nine months ended September 30, 2015 and 2014 was $153,555 and $127,991, respectively. As of September 30, 2015, we were in compliance with the financial covenants.
During the nine months ended September 30, 2015, Quest entered into two amendments with Regions. On May 13, 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. 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.
At September 30, 2015 and December 31, 2014, total capital lease obligations outstanding consisted of the following:
Capital lease obligations, imputed interest at 4.75% to 4.87%, with monthly payments of $5,507, through August 2018, secured by computer and telephone equipment
Our capital lease obligations are included within “Deferred revenue and other current liabilities” and “Other long-term liabilities” in our condensed consolidated balance sheets. The amount of interest expense related to our capital leases for the three months ended September 30, 2015 and 2014 was $833 and $767, respectively. The amount of interest expense related to our capital leases for the nine months ended September 30, 2015 and 2014 was $1,746 and $1,857, respectively.
Convertible Secured Promissory Notes – Quest Acquisition – In connection with our acquisition of Quest from Quest Resource Group LLC (“QRG”) on July 16, 2013, we issued convertible secured promissory notes with a total principal amount of $22,000,000 to the owners of QRG who 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 a member of the Board of Directors of our company until his resignation in October 2015, and the former President of Quest became 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 50% 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 had 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 condensed 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 condensed 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 nine months ended September 30, 2015 and 2014 was nil and $1,126,521, respectively. The amount of interest expense related to the amortization of the discount on the Sellers Notes for the nine months ended September 30, 2015 and 2014 was nil and $2,998,403, respectively.
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 September 30, 2015 and December 31, 2014, and we have recorded a valuation allowance of $8,400,000 and $9,108,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of September 30, 2015 and December 31, 2014, we had federal income tax net operating loss carryforwards of approximately $12,000,000 and $14,800,000, respectively, which expire at various dates beginning in 2031.
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 September 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 September 30, 2015 and December 31, 2014, respectively. Due to the decline in the fair value of these warrants, we recorded an increase of stock-based compensation expense of nil and $144 for the three and nine months ended September 30, 2015, respectively, related to these warrants. On the May 7, 2015 vesting date, we reclassified the $35,001 estimated fair value of the warrants to stockholders’ equity.
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 September 30, 2015 and December 31, 2014, respectively.
During the nine months ended September 30, 2015, we issued shares of common stock as follows:
On May 15, 2015, we issued 57,134 shares to employees for the Employee Stock Purchase Plan options that vested and were exercised.
Warrants – During the nine months ended September 30, 2015, we did not issue any warrants and no holders exercised warrants. During the nine months ended September 30, 2014, we issued 12,291,000 warrants. During the nine months ended September 30, 2015, a third party forfeited 1,200,000 contingent warrants, with no corresponding forfeitures or expirations during the nine months ended September 30, 2014. 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 nine months ended September 30, 2015. At September 30, 2015, we had outstanding exercisable warrants to purchase 11,791,000 shares of common stock.
The following table summarizes the warrants issued and outstanding as of September 30, 2015:
Warrants Issued and Outstanding as of September 30, 2015
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. 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 nine months ended September 30, 2015. We issued 56,500 shares during the nine months ended September 30, 2015 for the restricted stock units that vested during 2014. As of September 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 $17,723 and $54,647 related to the ESPP during the three and nine months ended September 30, 2015, respectively, with no corresponding expense during the three and nine months ended September 30, 2014. 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 nine month period ended September 30, 2015:
$ 1.45 — 3.75
$ 0.93 — 1.46
(759,418
$ 1.28 — 2.10
$ 0.93 — 3.75
Acquisition of the Quest Interests – On July 16, 2013, we acquired all of the issued and outstanding membership interests of Quest held by 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 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 were related parties: the Chief Executive Officer of Quest and the former President of Quest until his resignation in October 2015, and the former President of Quest became a member of the Board of Directors of our company. 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. See Note 6 for a discussion of the conversion.
Principals of Presentation and Consolidation�
72.20%�
73.70%�
$�1,999,532�
16,269,839�
17,122,532�
$�13,377�
4,402,739�
4,831,532�
12,291,000�
$�1,253,093�
209,942�
$�1,463,035�
$�1,895,096�
$�81,038�
$�223,499�
$�21,242,121�
8,108,284�
5,618,000�
7,102,000�
1,965,417�
4,264,583�
1,754,285�
126,677�
1,627,608�
167,507�
$�139,646�
$�875,740�
$�2,638,441�
3 Months Ended 9 Months Ended 0 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended
Seventh Amendment to Loan Agreement with Regions Bank [Member]
Eighth Amendment To Loan Agreement with Regions [Member]
2.46%�
2,494,060�
4,259,980�
65,026�
35,607�
153,555�
127,991�
Decrease in applicable margin rate of loans during the period
Long-Term Debt and Capital Lease Obligations - Summary of Capital Lease Obligations (Detail)�(USD $)
$�143,025�
$�47,250�
47,250�
$�82,433�
$�24,397�
Long-Term Debt and Capital Lease Obligations - Summary of Capital Lease Obligations (Parenthetical) (Detail) (Capital lease obligations, imputed interest at 4.75% to 4.87% [Member], USD $)
Capital lease obligations, imputed interest at 4.75% to 4.87% [Member]
$�5,507�
Long-Term Debt and Capital Lease Obligations - Additional Information (Detail)�(USD $)
0 Months Ended 3 Months Ended 9 Months Ended 0 Months Ended 9 Months Ended 0 Months Ended
Chief Executive Officer of Quest and Former President of Quest [Member]
Sellers Notes [Member]
Convertible Secured Promissory Notes [Member]
$�767�
$�1,857�
Convertible secured promissory note principle amount payable
Percentage of Security interest, secured
Percentage of ownership by officials before acquisition
Notes accrue interest payable beginning
Sep. 05, 2013�
Notes accrue interest payable in one installment
Jul. 16, 2016�