0001564590-20-054165.txt : 20201116 0001564590-20-054165.hdr.sgml : 20201116 20201116160059 ACCESSION NUMBER: 0001564590-20-054165 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 71 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201116 DATE AS OF CHANGE: 20201116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Quest Resource Holding Corp CENTRAL INDEX KEY: 0001442236 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 510665952 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36451 FILM NUMBER: 201316550 BUSINESS ADDRESS: STREET 1: 3481 PLANO PARKWAY CITY: THE COLONY STATE: TX ZIP: 75056 BUSINESS PHONE: 972-464-0004 MAIL ADDRESS: STREET 1: 3481 PLANO PARKWAY CITY: THE COLONY STATE: TX ZIP: 75056 FORMER COMPANY: FORMER CONFORMED NAME: Infinity Resources Holdings Corp. DATE OF NAME CHANGE: 20121030 FORMER COMPANY: FORMER CONFORMED NAME: YouChange Holdings Corp DATE OF NAME CHANGE: 20100824 FORMER COMPANY: FORMER CONFORMED NAME: BlueStar Financial Group, Inc. DATE OF NAME CHANGE: 20080806 10-Q 1 qrhc-10q_20200930.htm 10-Q qrhc-10q_20200930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

Commission file number: 001-36451

 

Quest Resource Holding Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Nevada

 

51-0665952

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3481 Plano Parkway

The Colony, Texas 75056

(Address of Principal Executive Offices and Zip Code)

(972) 464-0004

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol

 

Name of each exchange on which registered

Common stock

 

QRHC

 

NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 2, 2020, there were outstanding 18,381,227 shares of the registrant’s common stock, $0.001 par value, outstanding.


 

TABLE OF CONTENTS

 

 

 

 

1

 


PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (Unaudited)

QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,427,020

 

 

$

3,411,108

 

Accounts receivable, less allowance for doubtful accounts of $872,860 and $767,464 as of September 30, 2020 and December 31, 2019, respectively

 

 

15,151,305

 

 

 

13,899,451

 

Prepaid expenses and other current assets

 

 

1,342,905

 

 

 

1,110,266

 

Total current assets

 

 

22,921,230

 

 

 

18,420,825

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

58,208,490

 

 

 

58,208,490

 

Intangible assets, net

 

 

914,234

 

 

 

1,590,524

 

Property and equipment, net, and other assets

 

 

2,544,753

 

 

 

2,436,094

 

Total assets

 

$

84,588,707

 

 

$

80,655,933

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

13,010,919

 

 

$

13,316,805

 

Deferred revenue and other current liabilities

 

 

21,721

 

 

 

19,644

 

Total current liabilities

 

 

13,032,640

 

 

 

13,336,449

 

 

 

 

 

 

 

 

 

 

Revolving credit facility, net

 

 

4,162,641

 

 

 

4,534,683

 

Other long-term liabilities

 

 

659,612

 

 

 

1,140,749

 

Total liabilities

 

 

17,854,893

 

 

 

19,011,881

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.001 par value, 200,000,000 shares authorized, 18,381,227 and 15,372,905 shares issued and outstanding as of September 30, 2020 and December 31, 2019

 

 

18,381

 

 

 

15,373

 

Additional paid-in capital

 

 

165,239,093

 

 

 

160,858,072

 

Accumulated deficit

 

 

(98,523,660

)

 

 

(99,229,393

)

Total stockholders’ equity

 

 

66,733,814

 

 

 

61,644,052

 

Total liabilities and stockholders’ equity

 

$

84,588,707

 

 

$

80,655,933

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 


QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

$

23,701,226

 

 

$

23,925,431

 

 

$

71,002,281

 

 

$

76,019,845

 

Cost of revenue

 

 

19,144,292

 

 

 

19,154,129

 

 

 

57,527,714

 

 

 

61,956,123

 

Gross profit

 

 

4,556,934

 

 

 

4,771,302

 

 

 

13,474,567

 

 

 

14,063,722

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

 

4,290,697

 

 

 

4,221,339

 

 

 

12,677,873

 

 

 

12,662,481

 

Depreciation and amortization

 

 

150,170

 

 

 

329,541

 

 

 

818,060

 

 

 

982,421

 

Total operating expenses

 

 

4,440,867

 

 

 

4,550,880

 

 

 

13,495,933

 

 

 

13,644,902

 

Operating income (loss)

 

 

116,067

 

 

 

220,422

 

 

 

(21,366

)

 

 

418,820

 

Other income

 

 

149,932

 

 

 

 

 

 

1,408,000

 

 

 

 

Interest expense

 

 

(72,578

)

 

 

(118,652

)

 

 

(244,123

)

 

 

(344,160

)

Loss on extinguishment of debt

 

 

(167,964

)

 

 

 

 

 

(167,964

)

 

 

 

Income before taxes

 

 

25,457

 

 

 

101,770

 

 

 

974,547

 

 

 

74,660

 

Income tax expense

 

 

92,046

 

 

 

54,771

 

 

 

63,800

 

 

 

164,311

 

Net income (loss)

 

$

(66,589

)

 

$

46,999

 

 

$

910,747

 

 

$

(89,651

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deemed dividend for warrant down round feature

 

 

(205,014

)

 

 

 

 

 

(205,014

)

 

 

 

Net income (loss) applicable to common stockholders

 

$

(271,603

)

 

$

46,999

 

 

$

705,733

 

 

$

(89,651

)

Net income (loss) per share applicable to common     stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.02

)

 

$

0.00

 

 

$

0.04

 

 

$

(0.01

)

Diluted

 

$

(0.02

)

 

$

0.00

 

 

$

0.04

 

 

$

(0.01

)

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,290,447

 

 

 

15,350,153

 

 

 

16,055,110

 

 

 

15,339,706

 

Diluted

 

 

17,290,447

 

 

 

15,398,839

 

 

 

16,070,275

 

 

 

15,339,706

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 


QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2019

 

 

15,372,905

 

 

$

15,373

 

 

$

160,858,072

 

 

$

(99,229,393

)

 

$

61,644,052

 

Stock-based compensation

 

 

 

 

 

 

 

 

377,317

 

 

 

 

 

 

377,317

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(231,667

)

 

 

(231,667

)

Balance, March 31, 2020

 

 

15,372,905

 

 

 

15,373

 

 

 

161,235,389

 

 

 

(99,461,060

)

 

 

61,789,702

 

Stock-based compensation

 

 

 

 

 

 

 

 

400,361

 

 

 

 

 

 

400,361

 

Shares issued for Employee Stock Purchase Plan options

 

 

30,206

 

 

 

30

 

 

 

30,010

 

 

 

 

 

 

30,040

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,209,003

 

 

 

1,209,003

 

Balance, June 30, 2020

 

 

15,403,111

 

 

 

15,403

 

 

 

161,665,760

 

 

 

(98,252,057

)

 

 

63,429,106

 

Stock-based compensation

 

 

 

 

 

 

 

 

323,750

 

 

 

 

 

 

323,750

 

Release of deferred stock units

 

 

28,116

 

 

 

28

 

 

 

(28

)

 

 

 

 

 

 

Sale of common stock, net of issuance costs

 

 

2,950,000

 

 

 

2,950

 

 

 

3,044,597

 

 

 

 

 

 

3,047,547

 

Deemed dividend

 

 

 

 

 

 

 

 

205,014

 

 

 

(205,014

)

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(66,589

)

 

 

(66,589

)

Balance, September 30, 2020

 

 

18,381,227

 

 

$

18,381

 

 

$

165,239,093

 

 

$

(98,523,660

)

 

$

66,733,814

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2018

 

 

15,328,870

 

 

$

15,329

 

 

$

159,701,542

 

 

$

(99,174,153

)

 

$

60,542,718

 

Stock-based compensation

 

 

 

 

 

 

 

 

204,031

 

 

 

 

 

 

204,031

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(163,752

)

 

 

(163,752

)

Balance, March 31, 2019

 

 

15,328,870

 

 

 

15,329

 

 

 

159,905,573

 

 

 

(99,337,905

)

 

 

60,582,997

 

Stock-based compensation

 

 

 

 

 

 

 

 

269,201

 

 

 

 

 

 

269,201

 

Shares issued for Employee Stock Purchase Plan options

 

 

21,283

 

 

 

21

 

 

 

29,648

 

 

 

 

 

 

29,669

 

Net income

 

 

 

 

 

 

 

 

 

 

 

27,102

 

 

 

27,102

 

Balance, June 30, 2019

 

 

15,350,153

 

 

 

15,350

 

 

 

160,204,422

 

 

 

(99,310,803

)

 

 

60,908,969

 

Stock-based compensation

 

 

 

 

 

 

 

 

285,476

 

 

 

 

 

 

285,476

 

Net income

 

 

 

 

 

 

 

 

 

 

 

46,999

 

 

 

46,999

 

Balance, September 30, 2019

 

 

15,350,153

 

 

$

15,350

 

 

$

160,489,898

 

 

$

(99,263,804

)

 

$

61,241,444

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

 


QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

910,747

 

 

$

(89,651

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

164,156

 

 

 

175,562

 

Amortization of intangibles

 

 

707,775

 

 

 

880,564

 

Amortization of debt issuance costs

 

 

62,684

 

 

 

70,426

 

Provision for doubtful accounts

 

 

90,844

 

 

 

45,000

 

Stock-based compensation

 

 

1,101,428

 

 

 

758,708

 

Loss on extinguishment of debt

 

 

167,964

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,342,698

)

 

 

2,429,495

 

Prepaid expenses and other current assets

 

 

(232,639

)

 

 

(272,910

)

Security deposits and other assets

 

 

(423,798

)

 

 

(73,979

)

Accounts payable and accrued liabilities

 

 

(363,758

)

 

 

(2,702,982

)

Deferred revenue and other liabilities

 

 

2,077

 

 

 

(53,957

)

Net cash provided by operating activities

 

 

844,782

 

 

 

1,166,276

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(272,282

)

 

 

(86,965

)

Purchase of capitalized software development

 

 

(31,485

)

 

 

(122,922

)

Net cash used in investing activities

 

 

(303,767

)

 

 

(209,887

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from credit facilities

 

 

59,192,785

 

 

 

76,320,336

 

Repayments of credit facilities

 

 

(59,664,147

)

 

 

(77,357,095

)

Debt issuance costs

 

 

(131,328

)

 

 

 

Proceeds from the sale of common stock, net of issuance costs

 

 

3,047,547

 

 

 

 

Proceeds from shares issued for Employee Stock Purchase Plan

 

 

30,040

 

 

 

29,669

 

Repayments of finance lease obligations

 

 

 

 

 

(2,597

)

Net cash provided by (used in) financing activities

 

 

2,474,897

 

 

 

(1,009,687

)

Net increase (decrease) in cash and cash equivalents

 

 

3,015,912

 

 

 

(53,298

)

Cash and cash equivalents at beginning of period

 

 

3,411,108

 

 

 

2,122,297

 

Cash and cash equivalents at end of period

 

$

6,427,020

 

 

$

2,068,999

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

177,285

 

 

$

282,716

 

Cash paid for income taxes

 

 

147,120

 

 

 

47,810

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Repayment of Citizens ABL

 

$

3,385,560

 

 

$

 

Debt issuance costs

 

 

85,549

 

 

 

 

Deemed dividend for warrant down round feature

 

 

205,014

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5

 


 

QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. The Company and Description of Business

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

Operations – We are a national provider of waste and recycling services to customers from across multiple industry sectors that are typically larger, multi-location businesses.  We create customer-specific programs and perform the related services for the collection, processing, recycling, disposal, and tracking of waste streams and recyclables.

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

On October 19, 2020, Quest acquired substantially all of the assets used in the business of Green Remedies Waste and Recycling, Inc., a leading provider of independent environmental services, particularly in multi-family housing, located in Elon, NC. See Note 14 for more information regarding the acquisition.

 

2. Summary of Significant Accounting Policies

Principles 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, 2019. 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, 2020 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2019 condensed consolidated balance sheet data from audited financial statements; however, we did not include all disclosures required by GAAP. As QRHC, Quest, LDI, Youchange, QVC, QV One, and QSS each operate as environmental-based 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 nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

Adopted

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-11 Earnings per Share (Topic 260). The amendments in Part I of this ASU changed the classification analysis of certain equity-linked financial instruments with down round features.  When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.  The amendments also clarify existing disclosure requirements for equity-classified instruments.  As a result, a freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.  For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered.  That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.  A deemed dividend of $205,014 was recorded in the three months ended September 30, 2020 as a result of the down round provision in certain outstanding warrants.  See Notes 11 and 12.

6

 


 

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

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):  Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  This standard provides operational guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate (LIBOR).  The amendments are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.  The expedients and exceptions provided by the amendments generally do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.  As further discussed in Note 6, our ABL facility provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable.   As such, we do not expect the transition away from LIBOR to have a material impact on our financial statements.

Pending Adoption

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

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

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

3. Property and Equipment, net, and Other Assets

At September 30, 2020 and December 31, 2019, property and equipment, net, and other assets consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,097,545

     and $1,994,320 as of September 30, 2020 and December 31, 2019,

     respectively

 

$

642,591

 

 

$

534,465

 

Right-of-use operating lease asset

 

 

1,171,779

 

 

 

1,595,044

 

Security deposits and other assets

 

 

730,383

 

 

 

306,585

 

    Property and equipment, net, and other assets

 

$

2,544,753

 

 

$

2,436,094

 

 

We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment. Depreciation expense for the three months ended September 30, 2020 was $63,089, including $25,597 of depreciation expense reflected within “Cost of revenue” in our condensed consolidated statements of operations as it related to assets used in directly servicing customer contracts and was $164,156 for the nine months ended September 30, 2020, including $53,871 of depreciation expense reflected within “Cost of revenue.”  Depreciation expense for the three months ended September 30, 2019 was $58,933, including $24,695 of depreciation expense reflected within “Cost of revenue,” and was $175,562 for the nine months ended September 30, 2019, including $73,704 reflected within “Cost of revenue.”

We recorded a right-of-use operating lease asset related to our corporate office lease upon the adoption of Accounting Standards Codification (“ASC”) 842 effective January 1, 2019.  Refer to Note 7, Leases for additional information.

On February 20, 2018 (the “Closing Date”), we entered into an Asset Purchase Agreement with Earth Media Partners, LLC to sell certain assets of our wholly owned subsidiary, Earth911, Inc., in exchange for a 19% interest in Earth Media Partners, LLC, which was recorded as an investment in the amount of $246,585 as of the Closing Date, and a potential future earn-out amount of

7

 


 

approximately $350,000.  The net assets sold related to the Earth911.com website business and consisted primarily of the website and its content and customers, deferred revenue, and accounts receivable as of the Closing Date.  Earth911, Inc. was subsequently renamed Quest Sustainability Services, Inc.  The carrying amount of our investment in Earth Media Partners, LLC is included in “Security deposits and other assets” and we have an accrued receivable in the amount of $235,164 related to the earn-out included in “Accounts receivable” as of September 30, 2020.

4. Goodwill and Other Intangible Assets

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

  

September 30, 2020 (Unaudited)

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,069

 

 

 

6,233,668

 

 

 

1,401

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,122,119

 

 

 

1,209,286

 

 

 

912,833

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,615,024

 

 

$

20,700,790

 

 

$

914,234

 

 

December 31, 2019

 

Estimated

Useful Life

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

5 years

 

$

12,720,000

 

 

$

12,720,000

 

 

$

 

Trademarks

 

7 years

 

 

6,235,069

 

 

 

5,751,037

 

 

 

484,032

 

Patents

 

7 years

 

 

230,683

 

 

 

230,683

 

 

 

 

Software

 

7 years

 

 

2,090,633

 

 

 

984,141

 

 

 

1,106,492

 

Customer lists

 

5 years

 

 

307,153

 

 

 

307,153

 

 

 

 

Total finite lived intangible assets

 

 

 

$

21,583,538

 

 

$

19,993,014

 

 

$

1,590,524

 

 

September 30, 2020 (Unaudited) and December 31, 2019

 

Estimated

Useful Life

 

Carrying

Amount

 

 

 

 

 

Indefinite lived intangible asset:

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$

58,208,490

 

 

 

 

 

We compute amortization using the straight-line method over the estimated useful lives of the finite lived intangible assets. Amortization expense related to finite lived intangible assets was $112,679 and $295,304 for the three months ended September 30, 2020 and 2019, respectively.  Amortization expense related to finite lived intangible assets was $707,775 and $880,564 for the nine months ended September 30, 2020 and 2019, respectively.

 

We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes.  

 

We performed our annual impairment analysis for goodwill and other intangible assets in the third quarter of 2020 with no impairment recorded.

5. Accounts Payable and Accrued Liabilities

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Accounts payable

 

$

10,604,499

 

 

$

10,436,715

 

Accrued taxes

 

 

793,193

 

 

 

716,545

 

Employee compensation

 

 

773,854

 

 

 

1,384,360

 

Operating lease liability - current portion

 

 

639,559

 

 

 

627,896

 

Other

 

 

199,814

 

 

 

151,289

 

 

 

$

13,010,919

 

 

$

13,316,805

 

8

 


 

 

Refer to Note 7, Leases for additional disclosure related to the operating lease liability recorded upon the adoption of ASC 842, Leases.

6. Notes Payable

Revolving Credit Facility

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

 

An asset-based revolving credit facility in the maximum principal amount of $15.0 million with a sublimit for issuance of letters of credit of up to 10% of the maximum principal amount of the revolving credit facility. Each loan under the revolving credit facility bears interest, at the borrowers’ option, at either the Base Rate, plus the Applicable Margin, or the LIBOR Lending Rate for the Interest Period in effect, plus the Applicable Margin, in each case as defined in the BBVA Loan Agreement. The maturity date of the revolving credit facility is August 5, 2025. The revolving credit facility contains an accordion feature permitting the revolving credit facility to be increased by up to $10 million.

 

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

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

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

The ABL Facility bears interest, at our option, at either the Base Rate, as defined in the BBVA Loan Agreement, plus a margin ranging from 0.75% to 1.25% (3.0% as of September 30, 2020), or the LIBOR Lending Rate for the interest period in effect, plus a margin ranging from 1.75% to 2.25% (no borrowings as of September 30, 2020).

In connection with the ABL Facility, we paid BBVA USA a fee of $50,000 and incurred other direct costs of approximately $166,877, which are being amortized over the life of the ABL Facility.

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

The amount of interest expense related to borrowings for the three months ended September 30, 2020 and 2019 was $56,845 and $86,765, respectively.  The amount of interest expense related to borrowings for the nine months ended September 30, 2020 and 2019 was $181,439 and $263,542, respectively.  Debt issuance cost of $216,877 is being amortized to interest expense over the term of the ABL Facility.  As of September 30, 2020, the unamortized portion of the debt issuance costs was $210,231.  The amount of interest expense related to the amortization of the discount on our ABL Facility and our prior credit facility under the Citizens Bank Loan Agreement for the nine months ended September 30, 2020 and 2019 was $62,684 and $70,426, respectively.  As of September 30, 2020, the ABL Facility borrowing base availability was $12,183,852, of which $4,372,872 principal was outstanding.  The outstanding liability as of September 30, 2020 was $4,162,641, net of unamortized debt issuance cost of $210,231.

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

9

 


 

financial condition.  We however can provide no assurances regarding the impact of the discontinuation of LIBOR on the interest rate that we would be required to pay or on our financial condition.

PPP Loan

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

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan and accrued interest.  Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, utilities, and retention of employees and maintaining salary levels.  However, no assurance is provided that forgiveness for any portion of the PPP Loan will be obtained.

As of September 30, 2020, we have used the $1.4 million of loan proceeds to fund eligible payroll, rent and utility expenses under the terms of the PPP Loan.  As a result, we believe and expect that we will meet the PPP eligibility criteria for forgiveness and have concluded that the PPP Loan represents, in substance, funds provided under a government grant.  As such, in accordance with IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance,” we have recognized the use of $1.4 million of the loan proceeds as of September 30, 2020 as Other Income.

Term Loan

On October 19, 2020, we entered into a Credit Agreement, dated as of October 19, 2020, with Monroe Capital Management Advisors, LLC (“Monroe Capital”), as administrative agent for the lenders thereto (the “Credit Agreement”).  The Credit Agreement provides for a term loan in the principal amount of $11.5 million drawn at closing as well as access to $52.5 million in additional term debt financing, subject to the terms and conditions of the Credit Agreement, through a combination of a delayed draw term loan and an accordion facility to support our growth plans.  See Note 14 for additional details.

7. Leases

ASU 2016-02 Adoption

On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), and the related amendments.  We used the optional transition method of adoption, in which the cumulative effect of initially applying the new standard, as of January 1, 2019, to our existing leases was approximately $2.0 million and $2.2 million to record the operating lease right-of-use asset and the related liabilities, respectively, all of which relate to our corporate office lease.  Leases with terms of 12 months or less are not recorded on the balance sheet.

When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and if it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease.

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

Balance Sheet Classification

The table below presents the lease related assets and liabilities recorded on the balance sheet. Right-of-use assets and related liabilities related to finance leases at September 30, 2020 are de minimis and mature in less than 12 months.

 

 

September 30,

 

 

December 31,

 

 

2020

 

 

2019

 

Operating Leases:

(Unaudited)

 

 

 

 

 

Right-of-use operating lease asset:

 

 

 

 

 

 

 

   Property and equipment, net and other assets

$

1,171,779

 

 

$

1,595,044

 

 

 

 

 

 

 

 

 

Lease Liabilities:

 

 

 

 

 

 

 

   Accounts payable and accrued liabilities

$

639,559

 

 

$

627,896

 

   Other long-term liabilities

 

655,446

 

 

 

1,136,583

 

       Total operating lease liabilities

$

1,295,005

 

 

$

1,764,479

 

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Lease Costs

For the three and nine months ended September 30, 2020, we recorded approximately $150,000 and $450,000 of fixed cost operating lease expense.  For the three and nine months ended September 30, 2019, we recorded approximately $150,000 and $450,000 of fixed cost operating lease expense, respectively.  Our operating lease expense is offset by a minimum annual incentive received from a local Economic Development Council, which is accrued monthly and will continue over the term of the lease through August 2022.  This minimum annual incentive is $63,000, which increased to $93,600 for the annual incentive period starting September 2020 through the remainder of the lease term.

Effective December 1, 2019, we subleased a portion of our corporate office space to a single tenant.  The sublease agreement is accounted for as an operating lease and we recognize sublease income as an offset to operating lease expense on a straight-line basis over the term of the sublease agreement through August 2022.  Sublease income, net of amortized leasing costs, for the nine months ended September 30, 2020 was approximately $36,000.    

Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the nine months ended September 30, 2020.  We did not obtain any new operating lease right-of-use assets in the nine months ended September 30, 2020.

Other Information

Our office lease had a remaining term of 2.0 years as of September 30, 2020, and we used an effective interest rate of 2.456%, which was our incremental borrowing rate in effect at the inception of the lease as our lease does not provide a readily determinable implicit rate.

The future minimum lease payments required under our office lease as of September 30, 2020 were as follows:    

 

 

Amount

 

2020

 

$

166,050

 

2021

 

 

664,200

 

2022

 

 

498,150

 

   Total lease payments

 

 

1,328,400

 

Less:  Interest

 

 

(33,395

)

    Present value of lease liabilities

 

$

1,295,005

 

 

8. Revenue

Operating Revenues

We provide businesses with services to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their operations.  In addition, we have product sales and other revenue primarily from sales of products, such as antifreeze and windshield washer fluid, as well as minor ancillary services.  

Revenue Recognition

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

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

Disaggregation of Revenue

The following table presents our revenue disaggregated by source.  Three customers accounted for 49.4% of revenue for the three months ended September 30, 2020, and three customers accounted for 49.4% of revenue for the three months ended September 30, 2019.  Three customers accounted for 52.0% of revenue for the nine months ended September 30, 2020, and three customers accounted for 54.6% of revenue for the nine months ended September 30, 2019. We operate primarily in the United States, with minor services in Canada.

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Three Months Ended September 30,

 

 

Nine Months Ended  September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenue Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

21,554,215

 

 

$

21,422,455

 

 

$

64,539,439

 

 

$

68,244,033

 

Product sales and other

 

 

2,147,011

 

 

 

2,502,976

 

 

 

6,462,842

 

 

 

7,775,812

 

   Total revenue

 

$

23,701,226

 

 

$

23,925,431

 

 

$

71,002,281

 

 

$

76,019,845

 

Contract Balances

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

As of September 30, 2020 and December 31, 2019, we had $52,500 and $113,750, respectively, of deferred contract costs.  During the three and nine months ended September 30, 2020, we amortized $52,500 and $161,250 of deferred contract costs to selling, general, and administrative expense, respectively.  During the three and nine months ended September 30, 2019, we amortized $53,750 and $161,250 of deferred contract costs to selling, general, and administrative expense, respectively.

We bill certain customers in advance, and, accordingly, we defer recognition of related revenues as a contract liability until the services are provided and control is transferred to the customer.  As of September 30, 2020 and December 31, 2019, we had $16,570 and $19,644, respectively, of deferred revenue which was classified in “Deferred revenue and other current liabilities.”

9. Income Taxes

Our statutory income tax rate is anticipated to be 27%.  We had income tax expense of $63,800 and $164,311 for the nine months ended September 30, 2020 and September 30, 2019, respectively, which was attributable to state tax obligations based on current estimated state tax apportionments for states with no net operating loss carryforwards, and the reserve against the benefit of the net operating losses at the federal level.

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 to reduce the amount of deferred tax assets that, based on available evidence, is more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of September 30, 2020 and December 31, 2019, and we had recorded a valuation allowance of $12,471,000 and $12,452,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of September 30, 2020 and December 31, 2019, we had federal income tax net operating loss carryforwards of approximately $14,800,000 and $17,200,000, respectively, which expire at various dates ranging from 2032-2037.

 

10. Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, deferred revenue, and the ABL Facility. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments.  The fair values of these financial instruments approximate their carrying values using Level 3 inputs, based on their short maturities or, for the ABL Facility, based on borrowing rates currently available to us for loans with similar terms and maturities.

 

11. Stockholders’ Equity

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

Common Stock – Our authorized common stock consists of 200,000,000 shares of common stock with a par value of $0.001, of which 18,381,227 and 15,372,905 shares were issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.

 

Equity Offering - On August 5, 2020, QRHC sold 2,950,000 shares of common stock, par value $0.001 per share, at a price of $1.15 per share, pursuant to a registered direct offering (the “Offering”).  The gross proceeds of the Offering were $3,392,500, before deducting fees and other estimated offering expenses, and closed on August 7, 2020.  The use of the net proceeds from this Offering is intended to finance potential future acquisitions and for general corporate purposes.   QRHC’s largest stockholder, which is controlled by the Chairman of the Board, purchased 655,000 shares of our common stock in the

12

 


 

 

Offering at a price of $1.15, subject to the same placement agent discounts and commissions with respect to such shares as purchased by other stockholders in the Offering.

Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved our 2014 Employee Stock Purchase Plan (“ESPP”).  On May 14, 2020, we issued 30,206 shares to employees for $30,040 under our ESPP for options that vested and were exercised.  We recorded expense of $25,280 and $20,617 related to the ESPP for the nine months ended September 30, 2020 and 2019, respectively.

Warrants – At September 30, 2020, we had outstanding exercisable warrants to purchase 521,060 shares of common stock.

The following table summarizes the warrants issued and outstanding as of September 30, 2020:

 

 

 

 

Date of

 

Exercise

 

 

Shares of

 

Description

 

Issuance

 

Expiration

 

Price

 

 

Common Stock

 

Exercisable Warrants

 

3/30/2016

 

03/30/2021

 

$

3.88