8-K/A
Quest Resource Holding Corp (QRHC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
| CURRENT REPORT<br><br>Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934<br><br><br><br>Date of report (Date of earliest event reported): December 1, 2021<br><br><br><br>QUEST RESOURCE HOLDING CORPORATION | ||
|---|---|---|
| (Exact Name of Registrant as Specified in Its Charter) | ||
| Nevada | 001-36451 | 51-0665952 |
| --- | --- | --- |
| (State or other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
| 3481 Plano Parkway, The Colony, Texas | 75056 | |
| --- | --- | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (972) 464-0004
| (Former name or former address if changed since last report) |
|---|
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the follow provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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, $0.001 par value | QRHC | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.
EXPLANATORY NOTE
On December 8, 2021, Quest Resource Holding Corporation (the “Company”) filed a Current Report on Form 8-K Original Report”) reporting, among other things, that, on December 7, 2021, the Company’s wholly-owned subsidiary, Quest Sustainability Services, Inc. (“Buyer”), entered into a membership interest purchase agreement (the “MIPA”) by and among Buyer, Rome Holdings, LLC, M&A Business Consulting, Inc., and solely for purposes of Section 5.3(a) therein, Anthony J. DiIenno, Sr., RWS Investors, LLC and ATAR RWS Investors, LLC, and completed the acquisition of all of the outstanding membership interests of RWS Facility Services, LLC (the “Business”) as set forth in the MIPA. The Company is filing this Amendment No. 1 on Form 8-K/A (this “Amendment”) to amend the Original Report to include certain financial statements of the Business and certain pro forma financial information of the Company, as required by Item 9.01(a) and Item 9.01(b), respectively, of Form 8-K.
The Original Report also indicated that pursuant to Items 9.01(a) and 9.01(b), the Company would file financial statements of InStream Environmental, LLC (“InStream”) following the Company’s acquisition of the assets of InStream on December 3, 2022, together with pro forma financial information. Upon further analysis of the financial statements of InStream for the fiscal year ended December 31, 2020, the Company has determined that financial statements of InStream and pro forma financial information giving effect to the acquisition of InStream are no longer required to be filed pursuant to Item 9.01 of Form 8-K. Accordingly, the Company hereby amends the Original Report to eliminate the references to the subsequent filing of financial statements of InStream and pro forma financial information giving effect to the acquisition of InStream.
Except as described in this Explanatory Note, this Amendment does not amend or otherwise update the Original Report. Therefore, this Amendment should be read in conjunction with the Original Report.
Item 9.01. Financial Statements and Exhibits.
(a)
Financial Statements of Business Acquired.
Rome Holdings, LLC and Subsidiary's audited financial statements as of and for the year ended December 31, 2020, and the accompanying notes thereto, and unaudited condensed financial statements as of and for the nine months ended September 30, 2021 are attached as Exhibits 99.1 and 99.2, respectively, to this Amendment and are incorporated herein by reference.
(b)
Pro Forma Financial Information.
The Company’s unaudited pro forma combined financial information for the year ended December 31, 2020, and as of and for the nine months ended September 30, 2021, and the accompanying notes thereto, are attached as Exhibit 99.3 to this Amendment and are incorporated herein by reference.
(d)
Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| QUEST RESOURCE HOLDING CORPORATION | |||
|---|---|---|---|
| Dated: February 22, 2022 | By: | /s/ Laurie L. Latham | |
| Name: | Laurie L. Latham | ||
| Title: | Senior Vice President and Chief Financial Officer |
EX-23.1
Exhibit 23.1
Consent of Independent Auditor
We consent to the incorporation by reference in in the Registration Statements on Form S-3 (333-227800), S-8 (No. 333-193134), S-8 (No. 333-256207), and Form S-8 (No. 333-258858) of Quest Resource Holding Corporation of our report dated April 27, 2021, except for the restatement described in Note 15 as to which the date is February 22, 2022, relating to the consolidated financial statements of Rome Holdings, LLC and Subsidiary, appearing in this Current Report on Form 8-K/A.
Blue Bell, Pennsylvania
February 22, 2022
EX-99.1
Exhibit 99.1
Rome Holdings, LLC and Subsidiary
Consolidated Financial Report
December 31, 2020
Contents
| Independent auditor’s report | 1-2 |
|---|---|
| Financial statements | |
| Consolidated balance sheet | 3 |
| Consolidated statement of income | 4 |
| Consolidated statement of members’ equity | 5 |
| Consolidated statement of cash flows | 6 |
| Notes to consolidated financial statements | 7-15 |
Independent Auditor’s Report
Board of Managers
Rome Holdings, LLC and Subsidiary
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Rome Holdings, LLC and Subsidiary (the Company), which comprise the consolidated balance sheet as of December 31, 2020, the related consolidated statement of income, members’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rome Holdings, LLC and Subsidiary as of December 31, 2020, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 15 to the financial statements, the 2020 financial statements have been restated as a result of the Company’s reversal of accounting guidance under Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other; Accounting for Goodwill. Our opinion is not modified with respect to this matter.
Blue Bell, Pennsylvania
April 27, 2021, except for Note 15 as to
which the date is February 22, 2022
Rome Holdings, LLC and Subsidiary
Consolidated Balance Sheet
December 31, 2020 (As restated)
| Assets | ||
|---|---|---|
| Current assets: | ||
| Cash | $ | 3,860,012 |
| Accounts receivable, net | 13,001,332 | |
| Prepaid expenses | 79,355 | |
| Contract asset, current portion | 200,000 | |
| Total current assets | 17,140,699 | |
| Long term contract asset, net of current portion | 666,667 | |
| Equipment and leasehold improvements, net | 1,575,104 | |
| Goodwill | 6,553,179 | |
| 1,816,369 | ||
| Total assets | $ | 27,752,018 |
| Liabilities and Members’ Equity | ||
| Current liabilities: | ||
| Accounts payable | $ | 14,424,348 |
| Accrued expenses | 521,542 | |
| Deferred revenue | 3,870,990 | |
| Current maturities of notes payable | 633,618 | |
| Current maturities of capital lease obligations | 584,567 | |
| Total current liabilities | 20,035,065 | |
| Notes payable, net of current portion | 1,416,809 | |
| Capital lease obligations, net of current portion | 754,639 | |
| 22,206,513 | ||
| Commitments (Note 12) | ||
| Members’ equity | 5,545,505 | |
| Total liabilities and members’ equity | $ | 27,752,018 |
See notes to consolidated financial statements.
Rome Holdings, LLC and Subsidiary
Consolidated Statement of Income
Year Ended December 31, 2020 (As restated)
| Revenue | $ | 50,190,343 | |
|---|---|---|---|
| Cost of revenue | 37,927,794 | ||
| Gross profit | 12,262,549 | ||
| Operating expenses: | |||
| General and administrative | 10,624,743 | ||
| Depreciation and amortization | 792,317 | ||
| Management fees | 500,000 | ||
| Operating income | 345,489 | ||
| Interest expense | (327,379 | ) | |
| Net income | $ | 18,110 |
See notes to consolidated financial statements.
Rome Holdings, LLC and Subsidiary
Consolidated Statement of Members’ Equity
Year Ended December 31, 2020 (As restated)
| Balance at January 1, 2020, as previously reported | $ | 4,592,217 | |
|---|---|---|---|
| Change in accounting, (Note 15) | 1,001,317 | ||
| Distributions | (66,139 | ) | |
| Net income | 18,110 | ||
| Balance at December 31, 2020 | $ | 5,545,505 |
See notes to consolidated financial statements.
Rome Holdings, LLC and Subsidiary
Consolidated Statement of Cash Flows
Years Ended December 31, 2020 (As restated)
| Cash flows from operations: | |||
|---|---|---|---|
| Net income | $ | 18,110 | |
| Adjustments to reconcile net income to net cash | |||
| provided by operating activities: | |||
| Depreciation and amortization | 792,317 | ||
| Provision for doubtful accounts | 2,821,413 | ||
| Accretion of notes payable | 49,359 | ||
| Change in assets and liabilities: | |||
| Accounts receivable | (3,902,306 | ) | |
| Prepaid expenses and other assets | 20,699 | ||
| Accounts payable and accrued expenses | 2,731,928 | ||
| Contract asset | (866,667 | ) | |
| Deferred revenue | 1,336,232 | ||
| Net cash provided by operating activities | 3,001,085 | ||
| Cash flows from investing activities: | |||
| Purchase of equipment | (26,432 | ) | |
| Net cash used in investing activities | (26,432 | ) | |
| Cash flows from financing activities: | |||
| Member distributions | (66,139 | ) | |
| Repayment of related party advance | (500,000 | ) | |
| Borrowings of notes payable | 2,600,426 | ||
| Repayment of notes payable | (1,414,587 | ) | |
| Repayments of capital lease obligations | (152,000 | ) | |
| Net cash provided by financing activities | 467,700 | ||
| Net increase in cash | 3,442,353 | ||
| Cash: | |||
| Beginning of year | 417,659 | ||
| End of year | $ | 3,860,012 | |
| Supplemental disclosure of cash flow information: | |||
| Cash paid for interest | $ | 278,020 | |
| Supplemental disclosure of noncash financing activities: | |||
| Property and equipment acquired through capital leases | $ | 1,149,520 |
See notes to consolidated financial statements.
Rome Holdings, LLC and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Summary of Accounting Policies
Nature of business: Rome Holdings, LLC (Holdings) and its wholly owned subsidiary, Recycling and Waste Solutions, LLC (RWS) (collectively, the Company), were organized pursuant to Delaware Limited Liability Company laws and commenced operations on August 31, 2017. The consolidated financial statements include the accountings of Holdings and RWS. RWS is a full-service management company for recycling, waste and sustainability solutions. RWS is headquartered in Chadds Ford, Pennsylvania, and serves customers in the United States. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
A summary of the Company’s significant accounting policies is as follows:
Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash: Cash includes bank demand deposit accounts. The Company maintains its cash in bank deposit accounts at financial institutions whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. The Company may have balances above this limit at various times during the year ending December 31, 2020. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Accounts receivables: Accounts receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a quarterly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history, as well as current general economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Generally, a trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is not charged on past due receivables. At December 31, 2020, the allowance for doubtful accounts was $4,261,461.
Equipment and Leasehold Improvements: Equipment and leasehold improvements acquired through acquisition are recorded at fair value at the date of the acquisition. Additions are recorded at cost. Depreciation is provided using primarily the straight-line method over the estimated useful lives of the related assets, principally three to five years, and the lesser of of the estimated useful live and the remaining lease term for leasehold improvements.
Goodwill: Goodwill reflects the excess of the purchase price over the fair value of identifiable net assets acquired in purchase transactions. The Company does not amortize goodwill, but tests it at least annually for recoverability. No impairments have occurred to date.
Intangibles: Intangible assets consist of customer contracts, trademarks, customer relationships and developed technology. Intangible assets are amortized over their estimated lives using the straight-line method.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 1. Nature of Business and Summary of Accounting Policies (Continued)
Impairment of long-lived assets: The Company reviews long-lived assets, which include definite-lived intangible assets and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. The Company has not identified any impairments to date.
Revenue recognition: The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, which provides a five-step model for recognizing revenue from contracts with customers as follows:
• Identify the contract with a customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the contract
• Recognize revenue when or as performance obligations are satisfied
As the initial adoption of the standard did not have a material impact on the Company’s financial condition or results of operations, no cumulative effect was recognized at the date of initial application. The Company also had no significant changes to systems, processes or controls.
A large portion of the Company’s revenue is generated by providing waste and disposal services to our customers. The Company’s services are marketed and sold primarily to end-user commercial customers in the United States. Sales of services are subject to economic conditions and may fluctuate based on changes in the industry, trade policies and financial markets.
The Company’s service arrangements are generally invoiced based on the contractual agreement between the parties, typically on a bi-weekly, monthly or milestone-driven basis, with 30 to 120 day terms. In these contracts, the Company’s right to consideration from the customer directly corresponds to the value received by the customer from the entity’s performance completed to date. The Company assesses the contract term as the period in which the parties to the contract have presently enforceable rights and obligations. Customer contracts generally are standardized and non-cancellable for the duration of the stated contract term.
The Company earns revenue when waste and disposal services coordinated with haulers and the services have been provided. The Company also provides commodity recycling services whereby revenue is recognized when scrap and other materials are sold to recycling facilities. The Company commences revenue recognition when all of the following conditions are satisfied: there is a fully executed agreement, the service is provided to the customer, the collection of fees is reasonably assured, and the amount of fees to be paid by the customer is fixed or determinable. All services provided by the Company are recognized at a point in time.
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring services to the customer. Revenue is recorded based on the transaction price.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 1. Nature of Business and Summary of Accounting Policies (Continued)
The Company’s contracts with customers may include service level agreements that entitle the customer to receive service credits, and in certain cases, service refunds, when defined service levels are not met. These arrangements represent a form of variable consideration, which is considered in the calculation of the transaction price. The Company estimates the amount of variable consideration at the expected value based on its assessment of legal enforceability, anticipated performance and a review of specific transactions, historical experience and market and economic conditions. The Company historically has not experienced any significant incidents affecting the defined levels of reliability and performance as required by the contracts.
Variable consideration also may include expense reimbursements. Reimbursements that are billable to clients in a fixed-fee arrangement are included in the estimation of the total transaction price. In time-and-material billing arrangements, the Company recognizes all reimbursable expenses as revenue as the related services are provided, using the right-to-invoice practical expedient. Reimbursable expenses are recognized as expenses in the period in which the expense is incurred.
The Company has elected the practical expedient that permits an entity not to recognize a significant financing component if the time between the transfer of a good or service and payment is one year or less. Contract incentive payments and commissions paid to internal sales personnel, as well as associated payroll taxes that are incremental to the acquisition of customer contracts are capitalized as deferred contract costs on the balance sheet when the period of benefit is determined to be greater than one year, The Company has elected to apply the practical expedient to expense sales commissions and associated costs as incurred when the expected amortization period is one year or less. The Company determines the period of benefit for contract incentives, sales commissions, and associated costs for the acquisition of the initial contract by taking into consideration the initial estimated customer life. Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition.
The Company periodically reviews these deferred costs to determine whether events or changes in circumstance have occurred that could affect the period of benefit of the these deferred contract acquisition costs. There were no impairment recorded during the year ended December 31, 2020.
Income taxes: As a limited liability company, the Company is treated as a partnership for federal and state income tax purposes. Accordingly, no provision for federal income tax is included in the accompanying consolidated financial statements as federal income taxes, if any, are payable by the members. The Company intends to make distributions in amounts that allow the members to pay their income taxes arising from taxable income of the Company.
U.S. GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by taxing authorities. Management evaluated the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 1. Nature of Business and Summary of Accounting Policies (Continued)
Recently issued accounting guidance: In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (ASU) 2016-02, Leases. ASU 2016-02 (as amended) was issued in three parts: Section A, Leases: Amendments to the FASB Accounting Standards Codification, Section B, Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification, and Section C, Background Information and Basis for Conclusions. Under the new standard, the lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. The updated standard will be effective for annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which creates a new credit impairment standard for financial assets measured at amortized cost and available-for-sale debt securities. The ASU requires financial assets measured at amortized cost (including loans, trade receivables and held-to-maturity debt securities) to be presented at the net amount expected to be collected, through an allowance for credit losses that are expected to occur over the remaining life of the asset, rather than incurred losses. The ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down. The measurement of credit losses for newly recognized financial assets (other than certain purchased assets) and subsequent changes in the allowance for credit losses are recorded in the statement of income as the amounts expected to be collected change. The ASU is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
Note 2. Equipment and Leasehold Improvements
Equipment consists of the following at December 31, 2020:
| Office furniture and fixtures | $ | 85,812 |
|---|---|---|
| Computers, equipment, and software | 1,273,572 | |
| Leasehold improvements | 924,485 | |
| 2,283,869 | ||
| Less accumulated depreciation | 708,765 | |
| $ | 1,575,104 |
Depreciation expense was approximately $286,000 for the year ending December 31, 2020. Accumulated amortization of property and equipment under capital leases was $412,000 at December 31, 2020.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 3. Intangibles
Intangible assets consist of the following at December 31, 2020:
| Original | Accumulated | Net Book | ||||
|---|---|---|---|---|---|---|
| Balance | Amortization | Value | ||||
| Intangible assets: | ||||||
| Customer contracts | $ | 915,000 | $ | 911,250 | $ | 3,750 |
| Trademark | 390,000 | 156,310 | 233,690 | |||
| Developed technology | 550,000 | 303,333 | 246,667 | |||
| Customer relationships | 2,280,000 | 947,738 | 1,332,262 | |||
| $ | 4,135,000 | $ | 2,318,631 | $ | 1,816,369 |
Amortization expense was approximately $506,000 for the year ending December 31, 2020.
Amortization of intangible assets for the years subsequent to the year ended December 31, 2020, is as follows:
| 2021 | $ | 495,179 |
|---|---|---|
| 2022 | 468,095 | |
| 2023 | 421,429 | |
| 2024 | 299,524 | |
| 2025 | 105,714 | |
| Thereafter | 26,428 | |
| $ | 1,816,369 |
Note 4. Factoring and Security Agreement
On August 31, 2017, the Company entered into a Factoring and Security Agreement (the Agreement) with United Capital Funding Group, LLC (UCF), in which the Company may sell, transfer and assign certain eligible receivables to UCF in exchange for payment of the net value of the purchased receivables after deducting applicable fees, adjustments and reserves.
The Agreement is for a term of two years from closing and provides for a purchase commitment of up to $6 million of eligible receivables. Pursuant to the terms of the Agreement, the Company will sell its trade accounts receivable to UCF on a pre-approved, recourse basis. The accounts are sold at the invoice amount subject to a closing fee of 0.50% and other miscellaneous fees. Upon collection, UCF trade accounts receivable not sold to UCF remain in the Company’s custody and control and the Company maintains all credit risk on those accounts. On August 31, 2019, the Agreement was extended for an additional two-year term through August 2021.
In connection with the Agreement, customers also make payments on non-purchased outstanding accounts receivable directly to UCF. Cash received by UCF for non-purchased customer invoices are held solely for the benefit of the Company.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 1. Factoring and Security Agreement (Continued)
As of December 31, 2020, UCF held approximately $2,273,000 of the Company’s cash as a result of activities related to the Agreement and the Purchase agreement, have been sold with recourse to UCF.
For the year ended December 31, 2020, the Company incurred approximately $144,000 in fees related to the Agreement which are included in general and administrative expenses in the consolidated statements of operations.
Note 5. Notes Payable
Notes payable consisted of the following as of December 31, 2021:
| Promissory notes payable to related parties due in February 2023 | $ | 1,100,000 | |
|---|---|---|---|
| PPP loan payable due in April 2022 | 950,427 | ||
| Total notes payable | 2,050,427 | ||
| Less current portion | (633,618 | ) | |
| Long-term portion | $ | 1,416,809 |
Aggregate maturities of long-term debt due subsequent to December 31, 2020, are as follows:
| Years ending December 31: | ||
|---|---|---|
| 2021 | $ | 633,618 |
| 2022 | 316,809 | |
| 2023 | 1,100,000 | |
| $ | 2,050,427 |
In connection with the original acquisition in 2017, the Company issued promissory notes (the Notes) to the former owners totaling $1,250,000. During 2020, these notes were paid in full. For the year ended December 31, 2020, amortization expense related to the debt discount and interest expense on the principal amount of the Notes approximated $49,000 and $33,000, respectively.
On February 10, 2020, the Company obtained new promissory notes totaling $1,650,000. The promissory notes mature on February 10, 2023, and bear interest at an annual rate of 5%. The full balance is due at maturity. Prepayments on the balance are permitted. For the year ended December 31, 2020, interest expense on the principal amount of the promissory notes approximated $58,000.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 5. Notes Payable (Continued)
On April 23, 2020, the Company was approved for and received a loan under the Payroll Protection Program (the PPP) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in the amount of $950,427. In accordance with the requirements of the CARES Act, the Company used proceeds from the loans to cover qualified expenses, including payroll costs, rent and utility costs. Interest accrues on each of the loans at a rate of 1.00% per annum. During 2021, the loan was forgiven in full by the bank and approved by the SBA. The loan forgiveness is subject to audit by the SBA for a period of up to six years after the forgiveness was granted.
Note 6. Capital Lease Obligations
The Company has capital lease obligations which are payable in monthly installments ranging from $275 to $25,000 through January 2025. Interest rates for capital leases range from 5.1% to 6.0%
The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments are as follows:
| Years ending December 31: | |||
|---|---|---|---|
| 2021 | $ | 613,181 | |
| 2022 | 467,727 | ||
| 2023 | 278,150 | ||
| 2024 | 68,140 | ||
| 2025 | 5,485 | ||
| Total minimum lease payments | 1,432,683 | ||
| Amount representing interest | (93,477 | ) | |
| Present value of net minimum lease payments | 1,339,206 | ||
| Current maturities of capital lease obligations | (584,567 | ) | |
| Noncurrent portion of capital lease obligations | $ | 754,639 |
Note 7. Members’ Equity
Members’ equity consists of five common units (see Note 8) and 95 preferred units. The common units are nonvoting units; however, each common member is entitled to receive distributions and allocations of profits and losses in accordance with such common member’s membership percentage. Each preferred member is entitled to vote and to receive a distribution of a preferred annual return and accrued and unpaid preferred returns and allocations of profits and losses. Distributions are at the discretion of the Board of Managers. Preferred members are also entitled to be repaid the net invested capital with respect to the preferred units and amounts upon liquidation of the Company or liquidation of a member’s interest, as provided in the Company’s operating agreement.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 8. Unit-Based Compensation
The Company granted five restricted common compensatory units to one employee on August 31, 2017 (Grant Date). The units vest in equal increments, with 20% vested on the first anniversary of the Grant Date, and an additional 20% annually until the fifth anniversary of the Grant Date. The Company can repurchase the vested units, at the lower of cost ($0 for units granted as incentive equity) or fair value, whenever an employee or employer terminates employment, except if the termination is without cause. The units, which vest through 2022, were determined to have a Grant Date fair value of $138,000. The fair value of the units was determined to be de minimis, and therefore no compensation expense has been recognized.
Note 9. Major Customers
The Company’s major customers consist of large retailers, manufacturers and restaurant chains located in the United States. For the year ended December 31, 2020, the Company had two customers that accounted for 21% of the total revenue. Accounts receivable from these customers approximated 19% of accounts receivable at December 31, 2020.
Note 10. Employee Benefits
The Company and its employees participate in a defined contribution retirement plan. The plan is a contributory plan in which all employees who have reached the age of 21 may participate. The Company temporarily suspended the 401(k) match due to the coronavirus outbreak (COVID-19). Employees were still eligible to make contributions to the plan in 2020.
Note 11. Related-Party Transactions
An affiliate of the Company’s majority member provides management services to the Company for an annual management fee plus reimbursable expenses. For the year ended December 31, 2020, amounts paid under this agreement approximated $500,000.
On October 5, 2019, an affiliate of the Company’s majority member provided an advance of $500,000 bearing interest of 2% compounded annually and due on or before April 30, 2020. The advance was repaid February 28, 2020.
Note 12. Commitments
The Company leases office space under an operating lease with an original termination date of May 31, 2020. On August 31, 2018, the Company extended the lease agreement for seven years through October 31, 2025. The Company recorded rent expense, related to its operating leases, of approximately $383,000 for the year ended December 31, 2020.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows as of December 31:
| Years ending December 31: | ||
|---|---|---|
| 2021 | $ | 343,872 |
| 2022 | 351,321 | |
| 2023 | 358,769 | |
| 2024 | 366,218 | |
| 2025 | 310,354 | |
| $ | 1,730,534 |
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 13. Litigation
The Company has certain claims and legal proceedings incidental to the ordinary course of business. After consulting with legal counsel, management believes the ultimate resolution of the proceedings will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Note 14. Risk and Uncertainty
During the year ended December 31, 2020, the World Health Organization declared COVID-19 a pandemic. COVID-19 could negatively impact the Company’s operations. The extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and actions taken to contain it or its impact, among other factors.
Note 15. Restatement
The Company has restated the previously issued consolidated financial statements in order to remove the effects of the previous adoption of Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other; Accounting for Goodwill. See below for the effects of the restatement on each financial statement caption affected as of and for the year ended December 31, 2020:
| As Previously | |||||||
|---|---|---|---|---|---|---|---|
| Reported | Restatement | As Restated | |||||
| Goodwill | $ | 6,250,345 | $ | 302,834 | $ | 6,553,179 | |
| Intangibles, net | 530,297 | 1,286,072 | 1,816,369 | ||||
| Accrued expenses | 469,997 | (51,545 | ) | 521,542 | |||
| Members’ equity | 4,008,144 | 1,537,361 | 5,545,505 | ||||
| General and administrative | 10,573,198 | 51,545 | 10,624,743 | ||||
| Depreciation and amortization | 1,379,906 | (587,589 | ) | 792,317 |
Note 16. Subsequent Events
The Company originally evaluated subsequent events for recognition or disclosure through April 27, 2021, the date the consolidated financial statements were originally available to be issued and updated the evaluation through February 22, 2022.
On March 4, 2021, the Company entered into a $826,670 term note with a bank pursuant to the PPP of the CARES Act. The term note was subsequently forgiven on November 21, 2021.
On December 8, 2021, The Company was acquired by Quest Resource Holding Corp. for a total estimated purchase price of approximately $33,000,000.
EX-99.2
Exhibit 99.2
Rome Holdings, LLC and Subsidiary
Consolidated Financial Report
(Reviewed)
September 30, 2021
Contents
| Financial statements | |
|---|---|
| Consolidated balance sheet | 1 |
| Consolidated statement of operations | 2 |
| Consolidated statement of members’ equity | 3 |
| Consolidated statement of cash flows | 4 |
| Notes to consolidated financial statements | 5-12 |
Rome Holdings, LLC and Subsidiary
Consolidated Balance Sheet
September 30, 2021
| Assets | ||
|---|---|---|
| Current assets: | ||
| Cash | $ | 1,124,364 |
| Accounts receivable, net | 11,347,014 | |
| Prepaid expenses and other current assets | 120,936 | |
| Contract asset, current portion | 200,000 | |
| Total current assets | 12,792,314 | |
| Long term contract asset, net of current portion | 516,667 | |
| Equipment and leasehold improvements, net | 1,488,292 | |
| Goodwill | 6,553,179 | |
| Intangibles, net | 1,444,046 | |
| Total assets | $ | 22,794,498 |
| Liabilities and Members’ Equity | ||
| Current liabilities: | ||
| Accounts payable | $ | 11,545,257 |
| Accrued expenses | 687,072 | |
| Deferred revenue | 3,263,958 | |
| Current maturities of capital lease obligations | 718,712 | |
| Total current liabilities | 16,214,999 | |
| Notes payable | 1,926,670 | |
| Capital lease obligations, net of current portion | 453,001 | |
| 18,594,670 | ||
| Commitments (Note 12) | ||
| Members’ equity | 4,199,828 | |
| Total liabilities and members’ equity | $ | 22,794,498 |
See notes to consolidated financial statements.
Rome Holdings, LLC and Subsidiary
Consolidated Statement of Operations
Period Ended September 30, 2021
| Revenue | $ | 38,731,037 | |
|---|---|---|---|
| Cost of revenue | 31,431,720 | ||
| Gross profit | 7,299,317 | ||
| Operating expenses: | |||
| General and administrative | 7,172,367 | ||
| Depreciation and amortization | 647,787 | ||
| Management fees | 562,500 | ||
| Operating loss | (1,083,337 | ) | |
| Interest expense | (146,628 | ) | |
| Other income—forgiveness of Paycheck Protection Program note | 950,427 | ||
| Net loss | $ | (279,538 | ) |
See notes to consolidated financial statements.
Rome Holdings, LLC and Subsidiary
Consolidated Statement of Members’ Equity
Period Ended September 30, 2021
| Balance at December 31, 2020 | $ | 5,545,505 | |
|---|---|---|---|
| Distributions | (1,066,139 | ) | |
| Net loss | (279,538 | ) | |
| Balance at September 30, 2021 | $ | 4,199,828 |
See notes to consolidated financial statements.
Rome Holdings, LLC and Subsidiary
Consolidated Statement of Cash Flows
Period Ended September 30, 2021
| Cash flows from operations: | |||
|---|---|---|---|
| Net loss | $ | (279,538 | ) |
| Adjustments to reconcile net loss to net cash | |||
| provided by operating activities: | |||
| Depreciation and amortization | 647,787 | ||
| Provision for doubtful accounts | 870,374 | ||
| Other income—forgiveness of note payable Paycheck Protection Program | (950,427 | ) | |
| Change in assets and liabilities: | |||
| Accounts receivable | 783,944 | ||
| Prepaid expenses and other current assets | (41,581 | ) | |
| Accounts payable and accrued expenses | (2,713,561 | ) | |
| Contract asset | 150,000 | ||
| Deferred revenue | (607,032 | ) | |
| Net cash used in operating activities | (2,140,034 | ) | |
| Cash flows from investing activities: | |||
| Purchase of equipment | (188,652 | ) | |
| Net cash used in investing activities | (188,652 | ) | |
| Cash flows from financing activities: | |||
| Member distributions | (1,066,139 | ) | |
| Proceeds from note payable, Paycheck Protection Program | 826,670 | ||
| Repayments of capital lease obligations | (167,493 | ) | |
| Net cash used in financing activities | (406,962 | ) | |
| Net decrease in cash | (2,735,648 | ) | |
| Cash: | |||
| Beginning of year | 3,860,012 | ||
| End of year | $ | 1,124,364 | |
| Supplemental disclosure of cash flow information: | |||
| Cash paid for interest | $ | 146,628 |
See notes to consolidated financial statements.
Rome Holdings, LLC and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Summary of Accounting Policies
Nature of business: Rome Holdings, LLC (Holdings) and its wholly owned subsidiary, Recycling and Waste Solutions, LLC (RWS) (collectively, the Company), were organized pursuant to Delaware limited liability company laws and commenced operations on August 31, 2017. The consolidated financial statements include the accountings of Holdings and RWS. RWS is a full-service management company for recycling, waste and sustainability solutions. RWS is headquartered in Chadds Ford, Pennsylvania, and serves customers in the United States. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
A summary of the Company’s significant accounting policies is as follows:
Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash: Cash includes bank demand deposit accounts. The Company maintains its cash in bank deposit accounts at financial institutions whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. The Company may have balances above this limit at various times during the nine-month period ended September 30, 2021. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Accounts receivables: Accounts receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a quarterly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history, as well as current general economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Generally, a trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is not charged on past due receivables. At September 30, 2021, the allowance for doubtful accounts was $3,097,117.
Equipment and Leasehold Improvements: Equipment and leasehold improvements acquired through acquisition are recorded at fair value at the date of the acquisition. Additions are recorded at cost. Depreciation is provided using primarily the straight-line method over the estimated useful lives of the related assets, principally three to five years, and the lesser of of the estimated useful live and the remaining lease term for leasehold improvements.
Goodwill: Goodwill reflects the excess of the purchase price over the fair value of identifiable net assets acquired in purchase transactions. The Company does not amortize goodwill but tests it at least annually for recoverability. No impairments have occurred to date.
Intangibles: Intangible assets consist of customer contracts, trademarks, customer relationships and developed technology. Intangible assets are amortized over their estimated lives using the straight-line method.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 1. Nature of Business and Summary of Accounting Policies (Continued)
Impairment of long-lived assets: The Company reviews long-lived assets, which include definite-lived intangible assets and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. The Company has not identified any impairments to date.
Revenue recognition: The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, which provides a five-step model for recognizing revenue from contracts with customers as follows:
• Identify the contract with a customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the contract
• Recognize revenue when or as performance obligations are satisfied
As the initial adoption of the standard did not have a material impact on the Company’s financial condition or results of operations, no cumulative effect was recognized at the date of initial application. The Company also had no significant changes to systems, processes or controls.
A large portion of the Company’s revenue is generated by providing waste and disposal services to our customers. The Company’s services are marketed and sold primarily to end-user commercial customers in the United States. Sales of services are subject to economic conditions and may fluctuate based on changes in the industry, trade policies and financial markets.
The Company’s service arrangements are generally invoiced based on the contractual agreement between the parties, typically on a bi-weekly, monthly or milestone-driven basis, with 30 to 120-day terms. In these contracts, the Company’s right to consideration from the customer directly corresponds to the value received by the customer from the entity’s performance completed to date. The Company assesses the contract term as the period in which the parties to the contract have presently enforceable rights and obligations. Customer contracts generally are standardized and non-cancellable for the duration of the stated contract term.
The Company earns revenue when waste and disposal services are coordinated with haulers and the services have been provided. The Company also provides commodity recycling services whereby revenue is recognized when scrap and other materials are sold to recycling facilities. The Company commences revenue recognition when all of the following conditions are satisfied: there is a fully executed agreement, the service is provided to the customer, the collection of fees is reasonably assured and the amount of fees to be paid by the customer is fixed or determinable. All services provided by the Company are recognized at a point in time.
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring services to the customer. Revenue is recorded based on the transaction price.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 1. Nature of Business and Summary of Accounting Policies (Continued)
The Company’s contracts with customers may include service level agreements that entitle the customer to receive service credits, and in certain cases, service refunds, when defined service levels are not met. These arrangements represent a form of variable consideration, which is considered in the calculation of the transaction price. The Company estimates the amount of variable consideration at the expected value based on its assessment of legal enforceability, anticipated performance and a review of specific transactions, historical experience and market and economic conditions. The Company historically has not experienced any significant incidents affecting the defined levels of reliability and performance as required by the contracts.
Variable consideration also may include expense reimbursements. Reimbursements that are billable to clients in a fixed-fee arrangement are included in the estimation of the total transaction price. In time and material billing arrangements, the Company recognizes all reimbursable expenses as revenue as the related services are provided, using the right to invoice practical expedient. Reimbursable expenses are recognized as expenses in the period in which the expense is incurred.
The Company has elected the practical expedient that permits an entity not to recognize a significant financing component if the time between the transfer of a good or service and payment is one year or less. Contract incentive payments and commissions paid to internal sales personnel, as well as associated payroll taxes that are incremental to the acquisition of customer contracts are capitalized as deferred contract costs on the balance sheet when the period of benefit is determined to be greater than one year. The Company has elected to apply the practical expedient to expense sales commissions and associated costs as incurred when the expected amortization period is one year or less. The Company determines the period of benefit for contract incentives, sales commissions and associated costs for the acquisition of the initial contract by taking into consideration the initial estimated customer life. Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition.
The Company periodically reviews these deferred costs to determine whether events or changes in circumstance have occurred that could affect the period of benefit of the deferred contract acquisition costs. There was no impairment recorded during the nine-month period ended September 30, 2021.
Income taxes: As a limited liability company, the Company is treated as a partnership for federal and state income tax purposes. Accordingly, no provision for federal income tax is included in the accompanying financial statements as federal income taxes, if any, are payable by the members. The Company intends to make distributions in amounts that allow the members to pay their income taxes arising from taxable income of the Company.
U.S. GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by taxing authorities. Management evaluated the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 1. Nature of Business and Summary of Accounting Policies (Continued)
Recently issued accounting guidance: In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (ASU) 2016-02, Leases. ASU 2016-02 (as amended) was issued in three parts: Section A, Leases: Amendments to the FASB Accounting Standards Codification, Section B, Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification, and Section C, Background Information and Basis for Conclusions. Under the new standard, the lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. The updated standard will be effective for annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which creates a new credit impairment standard for financial assets measured at amortized cost and available-for-sale debt securities. The ASU requires financial assets measured at amortized cost (including loans, trade receivables, and held-to-maturity debt securities) to be presented at the net amount expected to be collected, through an allowance for credit losses that are expected to occur over the remaining life of the asset, rather than incurred losses. The ASU requires that credit losses on available for sale debt securities be presented as an allowance rather than as a direct write-down. The measurement of credit losses for newly recognized financial assets (other than certain purchased assets) and subsequent changes in the allowance for credit losses are recorded in the statement of income as the amounts expected to be collected change. The ASU is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
Note 2. Equipment and leasehold improvements
Equipment consists of the following at September 30:
| Office furniture and fixtures | $ | 85,812 |
|---|---|---|
| Computers, equipment and software | 1,462,224 | |
| Leasehold improvements | 924,485 | |
| 2,472,521 | ||
| Less accumulated depreciation | 984,229 | |
| $ | 1,488,292 |
Depreciation expense was $275,464 for the nine-month period ended September 30, 2021. Accumulated amortization of property and equipment under capital leases was $662,000 at September 30, 2021.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 3. Intangibles
Intangible assets consist of the following at September 30:
| Original | Accumulated | Net Book | ||||
|---|---|---|---|---|---|---|
| Balance | Amortization | Value | ||||
| Intangible assets: | ||||||
| Customer list | $ | 2,280,000 | $ | 1,192,024 | $ | 1,087,976 |
| Customer contracts | 915,000 | 915,000 | - | |||
| Trademark | 390,000 | 198,096 | 191,904 | |||
| Developed technology | 550,000 | 385,834 | 164,166 | |||
| $ | 4,135,000 | $ | 2,690,954 | $ | 1,444,046 |
Amortization expense was $372,323 for the nine-month period ended September 30, 2021.
Amortization of intangibles for the years subsequent to the nine-month period ended September 30, 2021, is as follows:
| 2022 | $ | 468,095 |
|---|---|---|
| 2023 | 438,929 | |
| 2024 | 378,452 | |
| 2025 | 105,714 | |
| 2026 | 52,856 | |
| $ | 1,444,046 |
Note 4. Factoring and Security Agreement
On August 31, 2017, the Company entered into a Factoring and Security Agreement (the Agreement) with United Capital Funding Group, LLC (UCF), in which the Company may sell, transfer and assign certain eligible receivables to UCF in exchange for payment of the net value of the purchased receivables after deducting applicable fees, adjustments and reserves.
The Agreement is for a term of two years from closing and provides for a purchase commitment of up to $6 million of eligible receivables. Pursuant to the terms of the Agreement, the Company will sell its trade accounts receivable to UCF on a pre-approved, recourse basis. The accounts are sold at the invoice amount subject to a closing fee of 0.50% and other miscellaneous fees. Upon collection, UCF trade accounts receivable not sold to UCF remain in the Company’s custody and control and the Company maintains all credit risk on those accounts. On August 31, 2019, the Agreement was extended for an additional two-year term through August 2021.
In connection with the Agreement, customers also make payments on non-purchased outstanding accounts receivable directly to UCF. Cash received by UCF for non-purchased customer invoices are held solely for the benefit of the Company.
As of September 30, 2021, UCF held approximately $7,000 of the Company’s cash as a result of activities related to the Agreement and the Purchase agreement, has been sold with recourse to UCF.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 4. Factoring and Security Agreement (Consolidated)
For the nine-month period ended September 30, 2021, the Company incurred approximately $78,000 in fees related to the Agreement, which are included in general and administrative expenses in the consolidated statements of operations.
Note 5. Notes Payable
Notes payable consisted of the following as of September 30, 2021:
| Promissory notes payable to related parties due in February 2023. | $ | 1,100,000 |
|---|---|---|
| Note payable, Paycheck Protection Program (the PPP). This loan was forgiven in full | ||
| on November 19, 2021, as such, it is classified as noncurrent. | 826,670 | |
| Total notes payable | 1,926,670 | |
| Less current portion | - | |
| Long-term portion | $ | 1,926,670 |
Aggregate maturities of long-term debt due subsequent to September 30, 2021, are as follows:
| Years ending September 30: | ||
|---|---|---|
| 2022 | $ | - |
| 2023 | 826,670 | |
| 2024 | 1,100,000 | |
| $ | 1,926,670 |
On February 10, 2020, the Company obtained promissory notes totaling $1,650,000. The promissory notes mature on February 10, 2023, and bear interest at an annual rate of 5%. The full balance is due at maturity. Prepayments on the balance are permitted. For the nine-month period ended September 30, 2021, interest expense on the principal amount of the promissory notes approximated $41,000.
On April 23, 2020, the Company was approved for and received a loan pursuant to the PPP of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) administered by the U.S. Small Business Administration (SBA). The principal amount of the note was $950,427. In accordance with the requirements of the PPP, the Company used proceeds from the note to cover qualified expenses, including payroll costs, rent and utility costs. Interest accrued on the note at a rate of 1.00% per annum. During 2021, the loan was forgiven in full by the bank and approved by the SBA. The loan forgiveness is subject to audit by the SBA for a period of up to six years after the forgiveness was granted.
On March 4, 2021, the Company entered into a $826,670 term note with a bank pursuant to the PPP of the CARES Act further amended, modified and supplemented by the Consolidated Appropriations Act, 2021 administered by the SBA. Interest accrues on the note at the rate of 1.00% per annum. In accordance with the requirements of the PPP, the Company used the proceeds from the note to cover certain qualified expenses, including payroll costs and other eligible costs. The Company applied for forgiveness, in an amount equal to the sum of qualified expenses under the PPP, incurred during the 24 weeks following disbursement. Subject to any forgiveness under the PPP, the note matures five years following the date of issuance of the note and includes a deferment of payments of interest and principal until the date on which loan forgiveness is determined. On November 19, 2021, the loan was forgiven in full by the bank and approved by the SBA.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 6. Capital Lease Obligations
The Company has capital lease obligations which are payable in monthly installments ranging from $275 to $25,000 through January 2025. Interest rates for capital leases range from 5.1% to 6.0%
The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments are as follows:
| Years ending September 30: | |||
|---|---|---|---|
| 2022 | $ | 734,199 | |
| 2023 | 395,800 | ||
| 2024 | 81,059 | ||
| 2025 | 27,425 | ||
| Total minimum lease payments | 1,238,483 | ||
| Amount representing interest | (66,770 | ) | |
| Present value of net minimum lease payments | 1,171,713 | ||
| Current maturities of capital lease obligations | (718,712 | ) | |
| Capital lease obligations, net of current portion | $ | 453,001 |
Note 7. Members’ Equity
Members’ equity consists of five common units (see Note 9) and 95 preferred units. The common units are nonvoting units; however, each common member is entitled to receive distributions and allocations of profits and losses in accordance with such common member’s membership percentage. Each preferred member is entitled to vote and to receive a distribution of a preferred annual return and accrued and unpaid preferred returns and allocations of profits and losses. Distributions are at the discretion of the Board of Managers. Preferred members are also entitled to be repaid the net invested capital with respect to the preferred units and amounts upon liquidation of the Company or liquidation of a member’s interest, as provided in the Company’s operating agreement.
Note 8. Unit-Based Compensation
The Company granted five restricted common compensatory units to one employee on August 31, 2017 (Grant Date). The units vest in equal increments, with 20% vested on the first anniversary of the Grant Date, and an additional 20% annually until the fifth anniversary of the Grant Date. The Company can repurchase the vested units, at the lower of cost ($0 for units granted as incentive equity) or fair value, whenever an employee or employer terminates employment, except if the termination is without cause. The units, which vest through 2022, were determined to have a Grant Date fair value of $138,000. The fair value of the units was determined to be de minimis and, therefore, no compensation expense has been recognized.
Note 9. Major Customer
For the nine-month period ended September 30, 2021, the Company had one customer that accounted for 15% of the total revenue. Accounts receivable from this customer approximated 15% of accounts receivable at September 30, 2021.
Rome Holdings, LLC and Subsidiary
Notes to the Consolidated Financial Statements
Note 10. Employee Benefits
The Company and its employees participate in a defined contribution retirement plan. The plan is a contributory plan in which all employees who have reached the age of 21 may participate. The Company temporarily suspended the 401(k) match due to the coronavirus outbreak (COVID-19). Employees were still eligible to make contributions to the plan during 2021.
Note 11. Related-Party Transactions
An affiliate of the Company’s majority member provides management services to the Company for an annual management fee plus reimbursable expenses. For the nine-month period ended September 30, 2021, amounts paid under this agreement approximated $563,000.
Note 12. Commitments
The Company leases office space under an operating lease with an original termination date of May 31, 2020. On August 31, 2018, the Company extended the lease agreement for seven years through October 31, 2025. The Company recorded rent expense, related to its operating leases, of approximately $270,000 for the nine-month period ended September 30, 2021.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows as of September 30:
| Years ending September 30: | ||
|---|---|---|
| 2022 | $ | 349,459 |
| 2023 | 256,907 | |
| 2024 | 364,356 | |
| 2025 | 371,804 | |
| 2026 | 31,035 | |
| $ | 1,373,561 |
Note 13. Litigation
The Company has certain claims and legal proceedings incidental to the ordinary course of business. After consulting with legal counsel, management believes the ultimate resolution of the proceedings will not have a material adverse effect on the Company’s financial position or results of operations.
Note 14. Risk and Uncertainty
On January 30, 2020, the World Health Organization declared COVID-19 a pandemic. COVID-19 could negatively impact the Company’s operations. The extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and actions taken to contain it or its impact, among other factors.
Note 15. Subsequent Events
The Company has evaluated subsequent events for recognition or disclosure through February 22, 2022, the date the consolidated financial statements were available to be issued.
On December 8, 2021, the Company was acquired by Quest Resource Holding Corp. for a total estimated purchase price of approximately $33,000,000.
EX-99.3
Exhibit 99.3
QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On December 7, 2021, Rome Holdings, LLC and M&A Business Consulting, Inc. (collectively, the “Sellers”) entered into a membership interest purchase agreement (the “MIPA”) by and among Quest Sustainability Services, Inc. (“Buyer”) (QSSI), a wholly-owned subsidiary of the Company, RWS Facility Services, LLC (the “Business”) (RWS) and completed the acquisition by Buyer of the Business as set forth in the MIPA. Whereas, Sellers collectively owned (100%) of all of the issued and outstanding membership interest of the Business, which is a full-service management company engaged in the brokering of recycling, waste and sustainability solutions, located in Chadds Ford, PA.
As consideration for the Acquisition, under the MIPA, the Seller received a purchase price of $33,000,000 in cash subject to certain adjustments set forth in the MIPA at the closing of the Acquisition.
As of the date of acquisition, the total value of the purchase was estimated to be $34,013,000. The net tangible assets acquired had a value of $1,721,000 with the remainder of the purchase price, $32,292,000, allocated by the appraiser to intangible assets as follows: customer relationships - $24,590,000, trademark $760,000, non-compete $40,000 and the remainder associated with cost-in-excess of these assets, or goodwill, of $6,902,000. It was estimated that customer relationships, trademark and the non-compete would have an estimated life of five (5) years, seven (7) years and three (3) years, respectively. Goodwill would be subject to impairment valuations periodically in accordance with accounting principles generally accepted in the United States and other authoritative literature associated with goodwill impairment.
In order to facilitate the purchase of RWS, Buyer, and certain of its domestic subsidiaries modified an existing credit agreement, originally dated as of October 19, 2020, with Monroe Capital. Among other things, the modified Credit Agreement provides for a senior secured term loan facility in the principal amount of $34.7 million. The senior secured term loan at the LIBOR Rate for LIBOR Loans plus the Applicable Margin (as defined); provided, that if the provision of LIBOR Loans becomes unlawful or unavailable, then interest will be payable at a rate per annum equal to the Base Rate (as defined) from time to time in effect plus the Applicable Margin for Base Rate Loans (as defined). The maturity date of the revolving credit facility is October 19, 2025 (the "Maturity Date"). The senior secured term loan will amortize in aggregate annual amounts equal to 1.00% of the original principal amount of the senior secured term loan facility with the balance payable on the Maturity Date. Proceeds of the senior secured term loan were permitted to be used in connection with the Acquisition.
The following unaudited pro forma condensed combined financial information present the historical condensed combined financial information of QRHC and Subsidiaries and RWS, after giving effect to the Acquisition. The acquisition was accounted for under the purchase method of accounting in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”), with the excess purchase price over the fair value of the assets acquired and liabilities assumed allocated to goodwill.
The fair value of assets acquired and liabilities assumed was based upon a preliminary valuation and the Company’s estimates and assumptions are subject to change within the measurement period. The estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
The unaudited pro forma condensed combined financial information is presented for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Acquisition had been affected on the dates previously set forth, nor is it indicative of the future operating results or financial position in combination.
The unaudited pro forma condensed combined balance sheet shown on these unaudited pro forma statements is based upon the historical figures for all of the combined entities at September 30, 2021, as if the acquisition had taken place on the balance sheet date. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and year ended December 31, 2020, assumes the acquisition took place on the first day of the fiscal year. The unaudited pro forma condensed combined financial statements may not be indicative of the actual results of the acquisition and merger of the operations. In particular, the unaudited pro forma condensed combined financial statements are based upon management’s current estimate of the allocation of the purchase price, the final allocation of which may differ.
The accompanying unaudited pro forma condensed combined financial statements should be read in connection with the historical financial statements of QRHC and RWS (under Rome Holdings, LLC), including the related notes and other financial information included in the filing. Management adjustments are, in the opinion of management, necessary to a fair statement of pro forma financial information presented.
Pro forma adjustments (unaudited):
| Credit | ||||
|---|---|---|---|---|
| A | Cash | 34,700,000 | ||
| Notes payable - current portion | $ | 347,000 | ||
| Notes payable - long-term | $ | 34,353,000 | ||
| Notes payable - discount for warrants | 535,970 | |||
| APIC - discount for warrants | $ | 535,970 | ||
| Notes payable - discount for debt issuance costs | 1,269,000 | |||
| Cash | $ | 1,269,000 | ||
| To record the Monroe financing | ||||
| B | Intangibles – customer contracts | 24,590,000 | ||
| Intangibles – trademark | 760,000 | |||
| Intangibles – non-compete | 40,000 | |||
| Goodwill | 1,175,491 | |||
| Intangibles – pre-acquisition | $ | 1,444,046 | ||
| Members’ equity | 4,199,828 | |||
| Cash | $ | 29,321,273 | ||
| To record the membership purchase and adjust balance of RWS equity | ||||
| C | Notes payable – non-current portion | 1,926,670 | ||
| Other current liabilities | 718,712 | |||
| Other long-term liabilities | 453,001 | |||
| Property and equipment, net | $ | 511,367 | ||
| Goodwill | $ | 826,670 | ||
| Cash | $ | 1,760,346 | ||
| To record payoff of RWS debt, capital leases and PPP loans in conjunction with the purchase | ||||
| D | Nine months ended September 30, 2021 | 2,276,000 | ||
| Year ended December 31, 2020 | 3,038,000 | |||
| To record interest expense with Monroe Capital Management calculated at 7.5% per annum | ||||
| E | Nine months ended September 30, 2021 | 3,739,000 | ||
| Year ended December 31, 2020 | 5,007,000 | |||
| To record amortization of definite lived intangibles | ||||
| F | Nine months ended September 30, 2021 | $ | 1,640,000 | |
| Year ended December 31, 2020 | $ | 1,744,000 | ||
| To record income tax expense (benefit) at a 27.0% statutory tax rate | ||||
| G | Nine months ended September 30, 2021 | $ | 1,131,000 | |
| Year ended December 31, 2020 | $ | 1,508,000 | ||
| To reverse prior owners management fees and compensation | ||||
| H | Nine months ended September 30, 2021 | $ | 41,000 | |
| Year ended December 31, 2020 | $ | 58,000 | ||
| To record interest benefit related to payoff of RWS notes | ||||
| I | Nine months ended September 30, 2021 | 950,427 | ||
| Year ended December 31, 2020 | NA | |||
| To reverse Paycheck Protection Program benefit | ||||
| Adjustments G and I are management adjustments that had the effect of improving pro forma earnings per share by 0.01 for the nine months ended September 30, 2021 and by 0.07 for the year ended December 31, 2020. |
All values are in US Dollars.
QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
BALANCE SHEET
AS OF SEPTEMBER 30, 2021
(UNAUDITED)
| RWS Facility Services, LLC | Pro Forma<br><br>Transactional Adjustments | Notes | Combined Pro Forma | ||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | 9,100,210 | $ | 1,124,364 | $ | 2,349,381 | (A) (B) & (C) | $ | 12,573,955 | |||
| Accounts receivable, net | 25,918,812 | 11,347,014 | — | 37,265,826 | |||||||
| Prepaid expenses and other current assets | 1,462,742 | 320,936 | — | 1,783,678 | |||||||
| Total current assets | 36,481,764 | 12,792,314 | 2,349,381 | 51,623,459 | |||||||
| Goodwill | 66,794,747 | 6,553,179 | 348,821 | (B) & (C) | 73,696,747 | ||||||
| Intangible assets, net | 7,263,330 | 1,444,046 | 23,945,954 | (B) | 32,653,330 | ||||||
| Property and equipment, net, and other assets | 3,363,720 | 1,488,292 | (511,367) | (C) | 4,340,645 | ||||||
| Deposits and other | — | 516,667 | — | 516,667 | |||||||
| Total assets | 113,903,561 | $ | 22,794,498 | $ | 26,132,789 | $ | 162,830,848 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | 22,106,060 | $ | 12,232,329 | — | $ | 34,338,389 | |||||
| Deferred revenue and other current liabilities | 1,678,370 | 3,982,670 | (718,712) | (C) | 4,942,328 | ||||||
| Notes payable - current portion | 651,800 | — | 347,000 | 998,800 | |||||||
| Total current liabilities | 24,436,230 | 16,214,999 | (371,712) | 40,279,517 | |||||||
| Notes payable – non-current portion, net | 15,877,669 | 1,926,670 | 30,621,360 | (A) & (C) | 48,425,699 | ||||||
| Other long-term liabilities | 1,608,535 | 453,001 | (453,001) | (C) | 1,608,535 | ||||||
| Total liabilities | 41,922,434 | 18,594,670 | 29,796,647 | 90,313,751 | |||||||
| 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, 2021 and December 31, 2020 | — | — | — | — | |||||||
| Common stock, 0.001 par value, 200,000,000 shares authorized, 18,802,539 and 18,413,419 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 18,802 | — | — | 18,802 | |||||||
| Members’ equity | — | 4,199,828 | (4,199,828) | (B) | — | ||||||
| Additional paid-in capital | 168,130,553 | — | 535,970 | (A) | 168,666,523 | ||||||
| Accumulated earnings (deficit) | (96,168,228 | ) | — | — | (96,168,228 | ) | |||||
| Total stockholders’ equity | 71,981,127 | 4,199,828 | (3,663,858 | ) | 72,517,097 | ||||||
| Total liabilities and stockholders’ equity | 113,903,561 | $ | 22,794,498 | $ | 26,132,789 | $ | 162,830,848 |
All values are in US Dollars.
QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
(UNAUDITED)
| Historical | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quest Resource Holding Corporation | RWS Facility Services, LLC | Pro Forma Transactional Adjustments | Pro Forma Management Adjustments | Notes | Combined Pro Forma | ||||||||
| Revenue | $ | 109,326,814 | $ | 38,731,037 | $ | — | $ | — | $ | 148,057,851 | |||
| Cost of revenue | 89,223,751 | 31,431,720 | — | — | 120,655,471 | ||||||||
| Gross profit | 20,103,063 | 7,299,317 | — | — | 27,402,380 | ||||||||
| Operating expenses: | |||||||||||||
| Selling, general, and administrative | 14,630,426 | 7,734,867 | — | (1,131,000) | (G) | 21,234,293 | |||||||
| Depreciation and amortization | 1,324,391 | 647,787 | 3,739,000 | — | (E) | 5,711,178 | |||||||
| Total operating expenses | 15,954,817 | 8,382,654 | 3,739,000 | (1,131,000) | 26,945,471 | ||||||||
| Operating income (loss) | 4,148,246 | (1,083,337 | ) | (3,739,000 | ) | 1,131,000 | 456,909 | ||||||
| Other (income) expense, net | — | (950,427 | ) | — | 950,427 | (I) | — | ||||||
| Interest expense | 1,653,987 | 146,628 | 2,235,000 | — | (D) & (H) | 4,035,615 | |||||||
| Loss on extinguishment of debt | — | — | — | — | — | ||||||||
| Income (loss) before taxes | 2,494,259 | (279,538) | (5,974,000 | ) | 180,573 | (3,578,706) | |||||||
| Income tax expense (benefit) | 262,449 | — | (1,689,000 | ) | 49,000 | (F) | (1,377,551) | ||||||
| Net income (loss) | $ | 2,231,810 | $ | (279,538) | $ | (4,285,000 | ) | $ | 131,573 | $ | (2,201,155) | ||
| Net income (loss) applicable to common stockholders | $ | 2,231,810 | $ | (2,201,155) | |||||||||
| Net income (loss) per share applicable to common stockholders | |||||||||||||
| Basic | $ | 0.12 | $ | (0.12) | |||||||||
| Diluted | $ | 0.11 | $ | (0.12) | |||||||||
| Weighted average number of common shares outstanding | |||||||||||||
| Basic | 18,784,722 | 18,784,722 | |||||||||||
| Diluted | 20,704,270 | 18,784,722 |
QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
(UNAUDITED)
| Historical | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quest Resource Holding Corporation | RWS Facility Services, LLC | Pro Forma Transactional Adjustments | Pro Forma Management Adjustments | Notes | Combined Pro Forma | ||||||||
| Revenue | $ | 98,660,035 | $ | 50,190,343 | $ | — | $ | — | $ | 148,850,378 | |||
| Cost of revenue | 79,604,958 | 37,927,794 | — | — | 117,532,752 | ||||||||
| Gross profit | 19,055,077 | 12,262,549 | — | — | 31,317,626 | ||||||||
| Operating expenses: | |||||||||||||
| Selling, general, and administrative | 17,140,996 | 11,124,743 | — | (1,508,000) | (G) | 26,757,739 | |||||||
| Depreciation and amortization | 1,163,812 | 792,317 | 5,007,000 | — | (E) | 6,963,129 | |||||||
| Total operating expenses | 18,304,808 | 11,917,060 | 5,007,000 | (1,508,000) | 33,720,868 | ||||||||
| Operating income (loss) | 750,269 | 345,489 | (5,007,000 | ) | 1,508,000 | (2,403,242 | ) | ||||||
| Other (income) expense, net | (1,408,000) | — | — | — | (1,408,000 | ) | |||||||
| Interest expense | 701,932 | 327,379 | 2,980,000 | — | (D) & (H) | 4,009,311 | |||||||
| Loss on extinguishment of debt | 167,964 | — | — | — | 167,964 | ||||||||
| Income (loss) before taxes | 1,288,373 | 18,110 | (7,987,000 | ) | 1,508,000 | (5,172,517 | ) | ||||||
| Income tax expense (benefit) | 254,004 | — | (2,151,000 | ) | 407,000 | (F) | (1,489,996 | ) | |||||
| Net income (loss) | $ | 1,034,369 | $ | 18,110 | $ | (5,836,000 | ) | $ | 1,101,000 | $ | (3,682,521 | ) | |
| Deemed dividend for warrant down round feature | (205,014) | (205,014) | |||||||||||
| Net income (loss) applicable to common stockholders | $ | 829,355 | $ | (3,887,535 | ) | ||||||||
| Net income (loss) per share applicable to common stockholders | |||||||||||||
| Basic | $ | 0.05 | $ | (0.23 | ) | ||||||||
| Diluted | $ | 0.05 | $ | (0.23 | ) | ||||||||
| Weighted average number of common shares outstanding | |||||||||||||
| Basic | 16,661,472 | 16,661,472 | |||||||||||
| Diluted | 16,755,560 | 16,661,472 |