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 SeptemberJune 30, 20222023
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, Suite 100
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 NovemberAugust 1, 2022,2023, there were 19,755,51119,782,060 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, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (Unaudited) |
|
|
|
|
| (Unaudited) |
|
|
|
| ||||
ASSETS | ASSETS |
| ASSETS |
| ||||||||||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 7,093,892 |
|
| $ | 8,427,858 |
|
| $ | 2,979,757 |
|
| $ | 9,563,709 |
|
Accounts receivable, less allowance for doubtful accounts of $2,077,647 and $840,522 as of September 30, 2022 and December 31, 2021, respectively |
|
| 52,062,227 |
|
|
| 39,948,973 |
| ||||||||
Accounts receivable, less allowance for doubtful accounts of $2,095,947 |
|
| 45,476,603 |
|
|
| 45,891,144 |
| ||||||||
Prepaid expenses and other current assets |
|
| 3,066,114 |
|
|
| 1,952,566 |
|
|
| 3,153,501 |
|
|
| 2,310,423 |
|
Total current assets |
|
| 62,222,233 |
|
|
| 50,329,397 |
|
|
| 51,609,861 |
|
|
| 57,765,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
|
| 82,479,469 |
|
|
| 80,621,503 |
|
|
| 84,258,206 |
|
|
| 84,258,206 |
|
Intangible assets, net |
|
| 35,580,863 |
|
|
| 39,118,940 |
|
|
| 29,672,721 |
|
|
| 33,556,340 |
|
Property and equipment, net, and other assets |
|
| 5,985,649 |
|
|
| 5,596,566 |
|
|
| 5,090,166 |
|
|
| 5,911,227 |
|
Total assets |
| $ | 186,268,214 |
|
| $ | 175,666,406 |
|
| $ | 170,630,954 |
|
| $ | 181,491,049 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| ||||||||||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accounts payable and accrued liabilities |
| $ | 34,541,040 |
|
| $ | 30,195,696 |
|
| $ | 36,609,233 |
|
| $ | 32,207,461 |
|
Other current liabilities |
|
| 5,791,000 |
|
|
| 6,195,170 |
|
|
| 3,362,018 |
|
|
| 4,688,605 |
|
Current portion of notes payable |
|
| 1,158,800 |
|
|
| 1,329,109 |
|
|
| 1,158,800 |
|
|
| 1,158,800 |
|
Total current liabilities |
|
| 41,490,840 |
|
|
| 37,719,975 |
|
|
| 41,130,051 |
|
|
| 38,054,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Notes payable, net |
|
| 70,315,054 |
|
|
| 62,409,201 |
|
|
| 58,867,552 |
|
|
| 70,572,891 |
|
Other long-term liabilities |
|
| 2,079,709 |
|
|
| 1,908,966 |
|
|
| 1,521,787 |
|
|
| 1,724,244 |
|
Total liabilities |
|
| 113,885,603 |
|
|
| 102,038,142 |
|
|
| 101,519,390 |
|
|
| 110,352,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
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, 2022 and December 31, 2021 |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 19,290,925 and 19,045,988 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively |
|
| 19,291 |
|
|
| 19,046 |
| ||||||||
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, |
|
| 19,782 |
|
|
| 19,696 |
| ||||||||
Additional paid-in capital |
|
| 171,792,714 |
|
|
| 170,318,199 |
|
|
| 174,759,383 |
|
|
| 173,876,319 |
|
Accumulated deficit |
|
| (99,429,394 | ) |
|
| (96,708,981 | ) |
|
| (105,667,601 | ) |
|
| (102,756,967 | ) |
Total stockholders’ equity |
|
| 72,382,611 |
|
|
| 73,628,264 |
|
|
| 69,111,564 |
|
|
| 71,139,048 |
|
Total liabilities and stockholders’ equity |
| $ | 186,268,214 |
|
| $ | 175,666,406 |
|
| $ | 170,630,954 |
|
| $ | 181,491,049 |
|
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, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||
Revenue |
| $ | 73,358,293 |
|
| $ | 37,366,740 |
|
| $ | 221,785,249 |
|
| $ | 109,326,814 |
|
| $ | 74,497,295 |
|
| $ | 76,904,788 |
|
| $ | 148,610,998 |
|
| $ | 148,426,956 |
|
Cost of revenue |
|
| 61,174,960 |
|
|
| 30,514,034 |
|
|
| 183,685,111 |
|
|
| 89,223,751 |
|
|
| 60,992,466 |
|
|
| 62,236,397 |
|
|
| 122,476,410 |
|
|
| 122,510,150 |
|
Gross profit |
|
| 12,183,333 |
|
|
| 6,852,706 |
|
|
| 38,100,138 |
|
|
| 20,103,063 |
|
|
| 13,504,829 |
|
|
| 14,668,391 |
|
|
| 26,134,588 |
|
|
| 25,916,806 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Selling, general, and administrative |
|
| 9,332,721 |
|
|
| 5,307,635 |
|
|
| 27,975,550 |
|
|
| 14,630,426 |
|
|
| 9,212,270 |
|
|
| 9,298,367 |
|
|
| 18,629,706 |
|
|
| 18,642,829 |
|
Depreciation and amortization |
|
| 2,473,339 |
|
|
| 508,456 |
|
|
| 7,308,591 |
|
|
| 1,324,391 |
|
|
| 2,452,258 |
|
|
| 2,470,390 |
|
|
| 4,877,102 |
|
|
| 4,835,252 |
|
Total operating expenses |
|
| 11,806,060 |
|
|
| 5,816,091 |
|
|
| 35,284,141 |
|
|
| 15,954,817 |
|
|
| 11,664,528 |
|
|
| 11,768,757 |
|
|
| 23,506,808 |
|
|
| 23,478,081 |
|
Operating income |
|
| 377,273 |
|
|
| 1,036,615 |
|
|
| 2,815,997 |
|
|
| 4,148,246 |
|
|
| 1,840,301 |
|
|
| 2,899,634 |
|
|
| 2,627,780 |
|
|
| 2,438,725 |
|
Interest expense |
|
| (1,911,989 | ) |
|
| (542,848 | ) |
|
| (5,057,400 | ) |
|
| (1,653,987 | ) |
|
| (2,556,103 | ) |
|
| (1,588,827 | ) |
|
| (4,999,131 | ) |
|
| (3,145,412 | ) |
Income (loss) before taxes |
|
| (1,534,716 | ) |
|
| 493,767 |
|
|
| (2,241,403 | ) |
|
| 2,494,259 |
|
|
| (715,802 | ) |
|
| 1,310,807 |
|
|
| (2,371,351 | ) |
|
| (706,687 | ) |
Income tax expense |
|
| 151,619 |
|
|
| 108,003 |
|
|
| 479,011 |
|
|
| 262,449 |
|
|
| 170,779 |
|
|
| 160,576 |
|
|
| 539,283 |
|
|
| 327,391 |
|
Net income (loss) |
|
| (1,686,335 | ) |
|
| 385,764 |
|
|
| (2,720,414 | ) |
|
| 2,231,810 |
|
| $ | (886,581 | ) |
| $ | 1,150,231 |
|
| $ | (2,910,634 | ) |
| $ | (1,034,078 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) applicable to common stockholders |
| $ | (1,686,335 | ) |
| $ | 385,764 |
|
| $ | (2,720,414 | ) |
| $ | 2,231,810 |
|
| $ | (886,581 | ) |
| $ | 1,150,231 |
|
| $ | (2,910,634 | ) |
| $ | (1,034,078 | ) |
Net income (loss) per share applicable to common stockholders |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net income (loss) per share applicable to common shareholders |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Basic |
| $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.14 | ) |
| $ | 0.12 |
|
| $ | (0.04 | ) |
| $ | 0.06 |
|
| $ | (0.15 | ) |
| $ | (0.05 | ) |
Diluted |
| $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.14 | ) |
| $ | 0.11 |
|
| $ | (0.04 | ) |
| $ | 0.05 |
|
| $ | (0.15 | ) |
| $ | (0.05 | ) |
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
|
| 19,368,192 |
|
|
| 18,984,979 |
|
|
| 19,297,636 |
|
|
| 18,784,722 |
|
|
| 19,962,031 |
|
|
| 19,278,730 |
|
|
| 19,946,954 |
|
|
| 19,261,775 |
|
Diluted |
|
| 19,368,192 |
|
|
| 21,307,854 |
|
|
| 19,297,636 |
|
|
| 20,704,270 |
|
|
| 19,962,031 |
|
|
| 21,348,821 |
|
|
| 19,946,954 |
|
|
| 19,261,775 |
|
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 |
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Total |
| ||||||||||
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
| Stockholders’ |
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
| Stockholders’ |
| ||||||||||||||||
|
| Shares |
|
| Par Value |
|
| Capital |
|
| Deficit |
|
| Equity |
|
| Shares |
|
| Par Value |
|
| Capital |
|
| Deficit |
|
| Equity |
| ||||||||||
Balance, December 31, 2021 |
|
| 19,045,988 |
|
| $ | 19,046 |
|
| $ | 170,318,199 |
|
| $ | (96,708,981 | ) |
| $ | 73,628,264 |
| ||||||||||||||||||||
Balance, December 31 2022 |
|
| 19,696,006 |
|
| $ | 19,696 |
|
| $ | 173,876,319 |
|
| $ | (102,756,967 | ) |
| $ | 71,139,048 |
| ||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 258,638 |
|
|
| — |
|
|
| 258,638 |
|
|
| — |
|
|
| — |
|
|
| 298,431 |
|
|
| — |
|
|
| 298,431 |
|
Stock option exercises |
|
| 28,166 |
|
|
| 28 |
|
|
| 62,520 |
|
|
| — |
|
|
| 62,548 |
| ||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,184,309 | ) |
|
| (2,184,309 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,024,053 | ) |
|
| (2,024,053 | ) |
Balance, March 31, 2022 |
|
| 19,045,988 |
|
|
| 19,046 |
|
|
| 170,576,837 |
|
|
| (98,893,290 | ) |
|
| 71,702,593 |
| ||||||||||||||||||||
Balance, March 31, 2023 |
|
| 19,724,172 |
|
|
| 19,724 |
|
|
| 174,237,270 |
|
|
| (104,781,020 | ) |
|
| 69,475,974 |
| ||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 326,894 |
|
|
| — |
|
|
| 326,894 |
|
|
| — |
|
|
| — |
|
|
| 362,319 |
|
|
| — |
|
|
| 362,319 |
|
Stock option exercises |
|
| 53,465 |
|
|
| 53 |
|
|
| 92,375 |
|
|
| — |
|
|
| 92,428 |
|
|
| 35,000 |
|
|
| 35 |
|
|
| 52,815 |
|
|
| — |
|
|
| 52,850 |
|
Shares issued for Employee Stock Purchase Plan options |
|
| 17,720 |
|
|
| 18 |
|
|
| 76,648 |
|
|
| — |
|
|
| 76,666 |
|
|
| 22,888 |
|
|
| 23 |
|
|
| 106,979 |
|
|
| — |
|
|
| 107,002 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,150,231 |
|
|
| 1,150,231 |
| ||||||||||||||||||||
Balance, June 30, 2022 |
|
| 19,117,173 |
|
|
| 19,117 |
|
|
| 171,072,754 |
|
|
| (97,743,059 | ) |
|
| 73,348,812 |
| ||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 412,715 |
|
|
| — |
|
|
| 412,715 |
| ||||||||||||||||||||
Release of deferred stock units |
|
| 28,650 |
|
|
| 29 |
|
|
| (29 | ) |
|
| — |
|
|
| — |
| ||||||||||||||||||||
Stock option exercises |
|
| 145,102 |
|
|
| 145 |
|
|
| 307,274 |
|
|
| — |
|
|
| 307,419 |
| ||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,686,335 | ) |
|
| (1,686,335 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (886,581 | ) |
|
| (886,581 | ) |
Balance, September 30, 2022 |
|
| 19,290,925 |
|
| $ | 19,291 |
|
| $ | 171,792,714 |
|
| $ | (99,429,394 | ) |
| $ | 72,382,611 |
| ||||||||||||||||||||
Balance, June 30, 2023 |
|
| 19,782,060 |
|
| $ | 19,782 |
|
| $ | 174,759,383 |
|
| $ | (105,667,601 | ) |
| $ | 69,111,564 |
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Total |
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Total |
| ||||||||||
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
| Stockholders’ |
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
| Stockholders’ |
| ||||||||||||||||
|
| Shares |
|
| Par Value |
|
| Capital |
|
| Deficit |
|
| Equity |
|
| Shares |
|
| Par Value |
|
| Capital |
|
| Deficit |
|
| Equity |
| ||||||||||
Balance, December 31, 2020 |
|
| 18,413,419 |
|
| $ | 18,413 |
|
| $ | 166,424,597 |
|
| $ | (98,400,038 | ) |
| $ | 68,042,972 |
| ||||||||||||||||||||
Balance, December 31, 2021 |
|
| 19,045,988 |
|
| $ | 19,046 |
|
| $ | 170,318,199 |
|
| $ | (96,708,981 | ) |
| $ | 73,628,264 |
| ||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 309,610 |
|
|
| — |
|
|
| 309,610 |
|
|
| — |
|
|
| — |
|
|
| 258,638 |
|
|
| — |
|
|
| 258,638 |
|
Stock option and warrant exercises |
|
| 276,388 |
|
|
| 277 |
|
|
| 253,112 |
|
|
| — |
|
|
| 253,389 |
| ||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,146,740 |
|
|
| 1,146,740 |
| ||||||||||||||||||||
Balance, March 31, 2021 |
|
| 18,689,807 |
|
|
| 18,690 |
|
|
| 166,987,319 |
|
|
| (97,253,298 | ) |
|
| 69,752,711 |
| ||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,184,309 | ) |
|
| (2,184,309 | ) | ||||||||||||||||||||
Balance, March 31, 2022 |
|
| 19,045,988 |
|
|
| 19,046 |
|
|
| 170,576,837 |
|
|
| (98,893,290 | ) |
|
| 71,702,593 |
| ||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 506,391 |
|
|
| — |
|
|
| 506,391 |
|
|
| — |
|
|
| — |
|
|
| 326,894 |
|
|
| — |
|
|
| 326,894 |
|
Release of deferred stock units |
|
| 7,742 |
|
|
| 8 |
|
|
| (8 | ) |
|
| — |
|
|
| — |
| ||||||||||||||||||||
Stock option and warrant exercises |
|
| 19,167 |
|
|
| 19 |
|
|
| 41,103 |
|
|
| — |
|
|
| 41,122 |
| ||||||||||||||||||||
Stock option exercises |
|
| 53,465 |
|
|
| 53 |
|
|
| 92,375 |
|
|
| — |
|
|
| 92,428 |
| ||||||||||||||||||||
Shares issued for Employee Stock Purchase Plan options |
|
| 22,937 |
|
|
| 23 |
|
|
| 38,965 |
|
|
| — |
|
|
| 38,988 |
|
|
| 17,720 |
|
|
| 18 |
|
|
| 76,648 |
|
|
| — |
|
|
| 76,666 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 699,306 |
|
|
| 699,306 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,150,231 |
|
|
| 1,150,231 |
|
Balance, June 30, 2021 |
|
| 18,739,653 |
|
|
| 18,740 |
|
|
| 167,573,770 |
|
|
| (96,553,992 | ) |
|
| 71,038,518 |
| ||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 325,739 |
|
|
| — |
|
|
| 325,739 |
| ||||||||||||||||||||
Stock option exercises |
|
| 62,706 |
|
|
| 62 |
|
|
| 231,044 |
|
|
| — |
|
|
| 231,106 |
| ||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 385,764 |
|
|
| 385,764 |
| ||||||||||||||||||||
Balance, September 30, 2021 |
|
| 18,802,359 |
|
| $ | 18,802 |
|
| $ | 168,130,553 |
|
| $ | (96,168,228 | ) |
| $ | 71,981,127 |
| ||||||||||||||||||||
Balance, June 30, 2022 |
|
| 19,117,173 |
|
| $ | 19,117 |
|
| $ | 171,072,754 |
|
| $ | (97,743,059 | ) |
| $ | 73,348,812 |
|
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, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (2,720,414 | ) |
| $ | 2,231,810 |
| ||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
| ||||||||||
Net loss |
| $ | (2,910,634 | ) |
| $ | (1,034,078 | ) | ||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
| ||||||||||
Depreciation |
|
| 571,738 |
|
|
| 345,463 |
|
|
| 494,453 |
|
|
| 370,393 |
|
Amortization of intangibles |
|
| 6,969,692 |
|
|
| 1,194,215 |
|
|
| 4,553,486 |
|
|
| 4,616,795 |
|
Amortization of debt issuance costs and discounts |
|
| 978,386 |
|
|
| 615,570 |
|
|
| 583,589 |
|
|
| 650,664 |
|
Provision for doubtful accounts |
|
| 1,143,757 |
|
|
| 28,550 |
|
|
| 570,359 |
|
|
| 731,955 |
|
Stock-based compensation |
|
| 998,247 |
|
|
| 1,141,740 |
|
|
| 660,750 |
|
|
| 585,532 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable |
|
| (13,079,923 | ) |
|
| (8,440,187 | ) |
|
| (155,818 | ) |
|
| (11,255,199 | ) |
Prepaid expenses and other current assets |
|
| (1,110,912 | ) |
|
| (393,504 | ) |
|
| (843,078 | ) |
|
| (918,076 | ) |
Security deposits and other assets |
|
| (850,290 | ) |
|
| (341,792 | ) |
|
| 220,666 |
|
|
| 701,209 |
|
Accounts payable and accrued liabilities |
|
| 3,076,785 |
|
|
| 6,698,584 |
|
|
| 4,426,971 |
|
|
| 3,619,871 |
|
Other liabilities |
|
| (295,959 | ) |
|
| 285,791 |
|
|
| (1,282,948 | ) |
|
| (1,866,667 | ) |
Net cash provided by (used in) operating activities |
|
| (4,318,893 | ) |
|
| 3,366,240 |
|
|
| 6,317,796 |
|
|
| (3,797,601 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Purchase of property and equipment |
|
| (627,216 | ) |
|
| (436,438 | ) |
|
| (165,353 | ) |
|
| (402,025 | ) |
Purchase of intangible assets |
|
| (631,615 | ) |
|
| (79,215 | ) |
|
| (669,867 | ) |
|
| (311,532 | ) |
Acquisition, net of cash acquired |
|
| (3,137,758 | ) |
|
| (2,319,977 | ) |
|
| — |
|
|
| (3,137,758 | ) |
Net cash used in investing activities |
|
| (4,396,589 | ) |
|
| (2,835,630 | ) |
|
| (835,220 | ) |
|
| (3,851,315 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from credit facilities |
|
| 59,023,146 |
|
|
| 48,448,941 |
|
|
| 40,145,428 |
|
|
| 36,046,989 |
|
Repayments of credit facilities |
|
| (54,353,819 | ) |
|
| (47,498,738 | ) |
|
| (46,904,436 | ) |
|
| (35,396,710 | ) |
Proceeds from long-term debt |
|
| 3,500,000 |
|
|
| — |
|
|
| — |
|
|
| 3,500,000 |
|
Repayments of long-term debt |
|
| (1,124,774 | ) |
|
| (461,468 | ) |
|
| (5,529,920 | ) |
|
| (835,061 | ) |
Proceeds from shares issued for Employee Stock Purchase Plan |
|
| 76,666 |
|
|
| 38,988 |
|
|
| 107,002 |
|
|
| 76,666 |
|
Proceeds from stock option and warrant exercises |
|
| 399,847 |
|
|
| 525,617 |
| ||||||||
Proceeds from stock option exercises |
|
| 115,398 |
|
|
| 92,428 |
| ||||||||
Debt issuance costs |
|
| (139,550 | ) |
|
| — |
|
|
| — |
|
|
| (45,800 | ) |
Net cash provided by financing activities |
|
| 7,381,516 |
|
|
| 1,053,340 |
| ||||||||
Net cash provided by (used in) financing activities |
|
| (12,066,528 | ) |
|
| 3,438,512 |
| ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| (1,333,966 | ) |
|
| 1,583,950 |
|
|
| (6,583,952 | ) |
|
| (4,210,404 | ) |
Cash and cash equivalents at beginning of period |
|
| 8,427,858 |
|
|
| 7,516,260 |
|
|
| 9,563,709 |
|
|
| 8,427,858 |
|
Cash and cash equivalents at end of period |
| $ | 7,093,892 |
|
| $ | 9,100,210 |
|
| $ | 2,979,757 |
|
| $ | 4,217,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash paid for interest |
| $ | 3,918,191 |
|
| $ | 1,057,476 |
|
| $ | 4,401,300 |
|
| $ | 2,403,567 |
|
Cash paid for income taxes |
| $ | 359,327 |
|
| $ | 294,101 |
| ||||||||
Cash paid for income taxes, net |
| $ | 285,996 |
|
| $ | 214,060 |
|
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”), Quest Sustainability Services, Inc. (“QSS”), RWS Facility Services, LLC (“RWS”), Sustainable Solutions Group, LLC (“SSG”), and Sequoia Waste Management Solutions, LLC (“Sequoia”) (collectively, “we,” “us,” 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 addition, we offer products such as antifreeze and windshield washer fluid and other minor ancillary services. We also provide information and data that tracks and reports the detailed transactional and environmental results of our services and provides actionable data to improve business operations. The data we generate also enables our customers to address their environmental and sustainability goals and responsibilities.
We made significant strategic acquisitions in 2021, including the November 30, 2021 acquisition of the membership interests of RWS, a Chadds Ford, PA-based environmental services company. On February 10, 2022, we acquired an independent environmental services company that primarily services customers in the northeast region of the United States. See Note 3 for more information regarding the acquisitions.
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, 2021.2022. 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 SeptemberJune 30, 20222023 and the results of our operations and cash flows for the periods presented. We derived the December 31, 20212022 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, QSS, RWS, SSG, and Sequoia 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 ninesix months ended SeptemberJune 30, 20222023 are not necessarily indicative of the results to be expected for the full year.
Recent Accounting Pronouncements
Adopted
On January 1, 2021, we adoptedIn June 2016, the Financial Accounting Standards Board, (“FASB”) issued Accounting Standards Update (“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. The adoption of the standard did not have a material effect on our consolidated financial statements.
In March 2020, the Financial Accounting Standards Board (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 7, 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 consolidated 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.instruments, including trade receivables. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflectsnew forward-looking approach to estimate expected credit losses and requires a broader range
6
of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for uslosses. We adopted the new standard on January 1, 2023. We are assessing the provisions of this amended guidance; however, theThe adoption of the new standard isdid not expected to have a material effectimpact on our condensed consolidated financial statements.statements as pre-existing processes for estimating expected credit losses for trade receivables generally aligned with the expected credit loss model.
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. Acquisitions
RWS
On December 7, 2021, QSS, a wholly-owned subsidiary of Quest, entered into a Membership Interest Purchase Agreement (the "MIPA"), effective as of November 30, 2021, among QSS, Rome Holdings, LLC, M&A Business Consulting, Inc., and solely for purposes of Section 5.3(a) of the MIPA, Anthony J. DiIenno, Sr., RWS Investors, LLC and ATAR RWS Investors, LLC, pursuant to which QSS acquired all of the outstanding membership interests of RWS. RWS is a provider of independent environmental services, particularly in the commercial property and industrial markets and is located in Chadds Ford, PA. The RWS acquisition strengthens our presence across key markets, particularly in commercial property management and adds to our industrial market base. The total purchase price for RWS was $33.0 million in cash subject to certain adjustments set forth in the MIPA. We funded the acquisition primarily with a term note to Monroe Capital Management Advisors, LLC (“Monroe Capital”), as further discussed in Note 7, which is secured by a first priority lien on substantially all of QRHC's tangible and intangible assets.
The following table sets forth the purchase consideration paid and the amount of assets acquired and liabilities assumed as of the acquisition date:
Sources of consideration paid: |
|
|
| |
Cash (1) |
| $ | 32,048,438 |
|
Other (2) |
|
| 1,964,562 |
|
|
| $ | 34,013,000 |
|
Purchase price allocation: |
|
|
| |
Accounts receivable, net (3) |
|
| 7,888,586 |
|
Other assets |
|
| 1,103,253 |
|
Machinery and equipment, net |
|
| 494,614 |
|
Intangible assets |
|
| 25,390,000 |
|
Goodwill |
|
| 8,216,325 |
|
Current liabilities |
|
| (9,079,778 | ) |
|
| $ | 34,013,000 |
|
|
|
|
| |
(1) Financed with Monroe Capital term loan |
| |||
(2) Net working capital |
| |||
(3) Gross receivables of $10,359,526, net of allowance of $2,470,940 |
|
The purchase price allocation is preliminary and was based on information existing at the acquisition date. Accordingly, the purchase price allocation is subject to change. The purchase price allocation was adjusted in the nine months ended September 30, 2022, which resulted in an increase to goodwill and current liabilities of approximately $1.3 million. We expect to complete our purchase price allocation as soon as reasonably possible, not to exceed one year from the acquisition date. Further adjustments could be made to our preliminary estimates of accounts receivable, other assets, current liabilities and goodwill.
Goodwill represents the amount by which the purchase price exceeds the estimated fair value of the net assets acquired and primarily reflects future synergies. The goodwill related to the RWS acquisition is not deductible for income tax purposes.
The following table presents unaudited pro forma information for the three and nine months ended September 30, 2021 as if the RWS acquisition had occurred at the beginning of our 2021 fiscal year. The unaudited pro forma information includes adjustments for amortizationexpense on definite lived intangible assets acquired, interest expense on debt incurred related to the acquisition, certain management adjustments, and the related income tax effects.
|
| Three months ended |
|
| Nine months ended |
| ||
|
| September 30, 2021 |
|
| September 30, 2021 |
| ||
Pro Forma |
| (unaudited) |
|
| (unaudited) |
| ||
Revenue |
| $ | 51,155,885 |
|
| $ | 148,057,851 |
|
Net loss |
| $ | (846,442 | ) |
| $ | (2,201,155 | ) |
Net loss per share - basic and diluted |
| $ | (0.05 | ) |
| $ | (0.12 | ) |
7
The unaudited pro forma 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 RWS acquisition had been effected on the dates previously set forth, nor is it indicative of the future operating results or financial position in combination.
Other
On February 10, 2022, we acquired an independent environmental services company that primarily services customers in the northeast region of the United States for approximately $3.35 million. This acquisition was paid in cash and was financed with a draw down on the term loan pursuant to the Credit Agreement (as defined in Note 7)8). The purchase price was allocated to the acquired assets, primarily customer relationship intangibles and goodwill.
4. Accounts receivable, net of allowance for doubtful accounts
Our receivables, which are recorded when billed or when services are performed, are claims against third parties that will generally be settled in cash. The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net
6
realizable value. We estimate our allowance for doubtful accounts based on consideration of a number of factors, including the length of time trade accounts are past due, our previous loss history, the creditworthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We write off past-due receivable balances after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period we receive the payment.
The following table reflects the activity in our allowance for doubtful accounts of trade receivables for the three and six months ended June 30, 2023 and 2022:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
Beginning balance |
| $ | 2,274,540 |
|
| $ | 1,054,365 |
|
| $ | 2,176,010 |
|
| $ | 840,522 |
|
Bad debt expense |
|
| 326,450 |
|
|
| 469,982 |
|
|
| 570,359 |
|
|
| 731,955 |
|
Uncollectible accounts written off, net of recoveries |
|
| (505,043 | ) |
|
| 204,627 |
|
|
| (650,422 | ) |
|
| 156,497 |
|
Ending balance |
| $ | 2,095,947 |
|
| $ | 1,728,974 |
|
| $ | 2,095,947 |
|
| $ | 1,728,974 |
|
5. Property and Equipment, net, and Other Assets
At SeptemberJune 30, 20222023 and December 31, 2021,2022, property and equipment, net, and other assets consisted of the following:
|
| September 30, |
|
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (Unaudited) |
|
|
|
|
| (Unaudited) |
|
|
|
| ||||
Property and equipment, net of accumulated depreciation of $2,326,677 |
| $ | 2,584,301 |
|
| $ | 2,542,120 |
| ||||||||
Right-of-use operating lease asset |
|
| 2,448,531 |
|
|
| 1,945,438 |
| ||||||||
Property and equipment, net of accumulated depreciation of $2,934,878 |
| $ | 2,348,579 |
|
| $ | 2,623,704 |
| ||||||||
Right-of-use operating lease assets |
|
| 2,139,700 |
|
|
| 2,385,870 |
| ||||||||
Security deposits and other assets |
|
| 952,817 |
|
|
| 1,109,008 |
|
|
| 601,887 |
|
|
| 901,653 |
|
Property and equipment, net, and other assets |
| $ | 5,985,649 |
|
| $ | 5,596,566 |
|
| $ | 5,090,166 |
|
| $ | 5,911,227 |
|
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 SeptemberJune 30, 20222023 was $201,345256,291, including $80,90386,714 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 $571,738494,453 for the ninesix months ended SeptemberJune 30, 2022,2023, including $232,839170,837 of depreciation expense reflected within “Cost of revenue.” Depreciation expense for the three months ended SeptemberJune 30, 20212022 was $119,865196,820, including $74,49579,588 of depreciation expense reflected within “Cost of revenue,” and was $345,463370,393 for the ninesix months ended SeptemberJune 30, 2021,2022, including $215,287151,936 reflected withinin “Cost of revenue.”
We recorded right-of-use operating lease assets related to our office leases in accordance with ASC 842. Refer to Note 8,9, 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 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” above and we have an accrued receivable in the amount of $327,667 and $339,667 related to the earn-out included as of September 30, 2022 and December 31, 2021, respectively.
5.6. Goodwill and Other Intangible Assets
The components of goodwill and other intangible assets were as follows:
September 30, 2022 (Unaudited) |
| Estimated |
| Gross Carrying |
|
| Accumulated |
|
| Net |
| |||||||||||||||||
June 30, 2023 (Unaudited) |
| Estimated |
| Gross Carrying |
|
| Accumulated |
|
| Net |
| |||||||||||||||||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Customer relationships |
| 5 years |
| $ | 39,250,000 |
|
| $ | 7,846,356 |
|
| $ | 31,403,644 |
|
| 5 years |
| $ | 39,250,000 |
|
| $ | 13,733,855 |
|
| $ | 25,516,145 |
|
Software |
| 7 years |
|
| 2,641,435 |
|
|
| 1,768,842 |
|
|
| 872,593 |
|
| 7 years |
|
| 3,273,181 |
|
|
| 1,651,312 |
|
|
| 1,621,869 |
|
Trademarks |
| 7 years |
|
| 2,007,468 |
|
|
| 298,397 |
|
|
| 1,709,071 |
|
| 7 years |
|
| 2,015,463 |
|
|
| 513,811 |
|
|
| 1,501,652 |
|
Non-compete agreements |
| 3 years |
|
| 2,250,000 |
|
|
| 654,445 |
|
|
| 1,595,555 |
|
| 3 years |
|
| 2,250,000 |
|
|
| 1,216,945 |
|
|
| 1,033,055 |
|
Total finite lived intangible assets |
|
|
| $ | 46,148,903 |
|
| $ | 10,568,040 |
|
| $ | 35,580,863 |
|
|
|
| $ | 46,788,644 |
|
| $ | 17,115,923 |
|
| $ | 29,672,721 |
|
December 31, 2022 |
| Estimated |
| Gross Carrying |
|
| Accumulated |
|
| Net |
| |||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
| |||
Customer relationships |
| 5 years |
| $ | 39,250,000 |
|
| $ | 9,808,855 |
|
| $ | 29,441,145 |
|
Software |
| 7 years |
|
| 2,609,374 |
|
|
| 1,541,500 |
|
|
| 1,067,874 |
|
Trademarks |
| 7 years |
|
| 2,009,403 |
|
|
| 370,137 |
|
|
| 1,639,266 |
|
Non-compete agreements |
| 3 years |
|
| 2,250,000 |
|
|
| 841,945 |
|
|
| 1,408,055 |
|
Total finite lived intangible assets |
|
|
| $ | 46,118,777 |
|
| $ | 12,562,437 |
|
| $ | 33,556,340 |
|
8
7
December 31, 2021 |
| Estimated |
| Gross Carrying |
|
| Accumulated |
|
| Net |
| |||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
| |||
Customer relationships |
| 5 years |
| $ | 36,820,000 |
|
| $ | 1,999,355 |
|
| $ | 34,820,645 |
|
Software |
| 7 years |
|
| 2,030,754 |
|
|
| 1,416,638 |
|
|
| 614,116 |
|
Trademarks |
| 7 years |
|
| 1,716,533 |
|
|
| 87,632 |
|
|
| 1,628,901 |
|
Non-compete agreements |
| 3 years |
|
| 2,150,000 |
|
|
| 94,722 |
|
|
| 2,055,278 |
|
Total finite lived intangible assets |
|
|
| $ | 42,717,287 |
|
| $ | 3,598,347 |
|
| $ | 39,118,940 |
|
|
|
|
| Carrying |
| |
Changes in goodwill: |
|
|
|
|
| |
Goodwill balance at December 31, 2021 |
|
|
| $ | 80,621,503 |
|
Addition related to acquisition |
|
|
|
| 543,397 |
|
RWS purchase price allocation adjustment |
|
|
|
| 1,314,569 |
|
Goodwill balance at September 30, 2022 |
|
|
| $ | 82,479,469 |
|
June 30, 2023 (Unaudited) and December 31, 2022 |
| Estimated |
| Carrying |
| |
Indefinite lived intangible asset: |
|
|
|
|
| |
Goodwill |
| Indefinite |
| $ | 84,258,206 |
|
We compute amortization using the straight-line method over the useful lives of the finite lived intangible assets. Amortization expense related to finite lived intangible assets was $2,352,8972.3 million and $463,0872.4 million for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Amortization expense related to finite lived intangible assets was $6,969,6924.6 million and $1,194,2154.6 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.
We have no indefinite-lived intangible assets other than goodwill. $67.069.2 million of the goodwill is not deductible for tax purposes, while $15.515.0 million of goodwill is deductible over its tax-basis life.
We performed our annual impairment analysis for goodwill and other intangible assets in the third quarter of 2022 with no impairment recorded.
6.7. Current Liabilities
The components of Accounts payable and accrued liabilities were as follows:
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (Unaudited) |
|
|
|
|
| (Unaudited) |
|
|
|
| ||||
Accounts payable |
| $ | 29,885,211 |
|
| $ | 26,434,732 |
|
| $ | 33,415,068 |
|
| $ | 28,744,858 |
|
Accrued taxes |
|
| 1,118,346 |
|
|
| 797,394 |
|
|
| 856,144 |
|
|
| 331,936 |
|
Employee compensation |
|
| 2,159,764 |
|
|
| 1,864,145 |
|
|
| 1,125,930 |
|
|
| 1,812,028 |
|
Operating lease liability - current portion |
|
| 416,709 |
|
|
| 868,799 |
| ||||||||
Other |
|
| 961,010 |
|
|
| 230,626 |
| ||||||||
Operating lease liabilities - current portion |
|
| 490,696 |
|
|
| 489,938 |
| ||||||||
Miscellaneous |
|
| 721,395 |
|
|
| 828,701 |
| ||||||||
|
| $ | 34,541,040 |
|
| $ | 30,195,696 |
|
| $ | 36,609,233 |
|
| $ | 32,207,461 |
|
Refer to Note 8,9, Leases for additional disclosure related to the operating lease liability.liabilities.
The components of Other current liabilities were as follows:
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (Unaudited) |
|
|
|
| ||
Deferred seller consideration, net |
| $ | 1,330,997 |
|
| $ | 1,183,153 |
|
Deferred consideration - earn-out |
|
| 1,846,000 |
|
|
| 1,290,000 |
|
Deferred revenue |
|
| 2,614,003 |
|
|
| 3,722,017 |
|
|
| $ | 5,791,000 |
|
| $ | 6,195,170 |
|
|
| June 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (Unaudited) |
|
|
|
| ||
Deferred consideration - earn-out |
| $ | 680,502 |
|
|
| 1,957,255 |
|
Deferred revenue |
|
| 2,681,516 |
|
|
| 2,731,350 |
|
|
| $ | 3,362,018 |
|
| $ | 4,688,605 |
|
Deferred seller consideration in connection with our 2020 acquisition of Green Remedies Waste and Recycling, Inc. (“Green Remedies”) is payable in either cash or shares of our common stock, at our option, in October 2022. As of September 30, 2022 and December 31, 2021, the unamortized portion of OID on the deferred seller consideration wasWe made a $11,1281.2 and $158,972, respectively.
9
The current portionmillion earn-out payment in the first quarter of earn-out consideration2023 related to other acquisitions was $1,846,000 as of September 30, 2022 and $1,290,000 at December 31, 2021.an acquisition.
7.8. Notes Payable and Other Long-term Liabilities
Our debt obligations arewere as follows:
|
| Interest Rate |
| September 30, |
| December 31, |
|
| Interest |
| June 30, |
| December 31, |
| ||||||
|
| (1) |
| 2022 |
|
| 2021 |
|
| Rate (1) |
| 2023 |
|
| 2022 |
| ||||
|
|
| (Unaudited) |
|
|
|
|
|
| (Unaudited) |
|
|
|
| ||||||
Monroe Term Loan (2) |
| 9.06% |
| $ | 61,228,651 |
|
| $ | 58,585,000 |
|
| 12.27% |
| $ | 55,811,656 |
|
| $ | 61,073,151 |
|
Green Remedies Promissory Note (3) |
| 3.00% |
|
| 1,772,182 |
|
|
| 2,040,607 |
|
| 3.00% |
|
| 1,369,545 |
|
|
| 1,637,970 |
|
PNC ABL Facility (4) |
| 4.56% |
|
| 11,904,062 |
|
|
| 7,234,737 |
|
| 7.54% |
|
| 5,479,025 |
|
|
| 12,238,034 |
|
Total notes payable |
|
| 74,904,895 |
|
|
| 67,860,344 |
|
|
| 62,660,226 |
|
|
| 74,949,155 |
| ||||
Less: Current portion of long-term debt |
|
| (1,158,800 | ) |
|
| (1,329,109 | ) |
|
| (1,158,800 | ) |
|
| (1,158,800 | ) | ||||
Less: Unamortized debt issuance costs |
|
| (2,238,842 | ) |
|
| (2,637,483 | ) |
|
| (1,734,027 | ) |
|
| (2,122,715 | ) | ||||
Less: Unamortized OID |
|
| (314,356 | ) |
|
| (391,493 | ) |
|
| (237,218 | ) |
|
| (288,643 | ) | ||||
Less: Unamortized OID warrant |
|
| (877,843 | ) |
|
| (1,093,058 | ) |
|
| (662,629 | ) |
|
| (806,106 | ) | ||||
Notes payable, net |
|
| $ | 70,315,054 |
|
| $ | 62,409,201 |
|
| $ | 58,867,552 |
|
| $ | 70,572,891 |
| |||
(1) Interest rates as of September 30, 2022 |
|
|
|
|
| |||||||||||||||
(2) Bears interest at LIBOR rate plus Applicable Margin ranging from 5.5%-7.5% |
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
| ||||||||||||||
(1) Interest rates as of June 30, 2023 | (1) Interest rates as of June 30, 2023 |
|
|
|
|
| ||||||||||||||
(2) Bears interest based on SOFR plus Applicable Margin ranging from 5.5% to 7.5% | (2) Bears interest based on SOFR plus Applicable Margin ranging from 5.5% to 7.5% |
| ||||||||||||||||||
(3) Stated interest rate of 3.0%, discounted cash flow rate of 13% | (3) Stated interest rate of 3.0%, discounted cash flow rate of 13% |
|
|
|
|
| (3) Stated interest rate of 3.0%, discounted cash flow rate of 13% |
|
|
|
|
| ||||||||
(4) Bears interest at a Base rate, as defined, plus a margin of 0.75% to 1.25% |
|
|
|
|
| |||||||||||||||
(4) Bears interest based on SOFR plus a margin ranging from 1.75% to 2.25% | (4) Bears interest based on SOFR plus a margin ranging from 1.75% to 2.25% |
|
|
|
|
|
8
We capitalize financing costs we incur related to implementing our debt arrangements. We record these debt issuance costs associated with our revolving credit facility and our term loan as a reduction of long-term debt, net and amortize them over the contractual life of the related debt arrangements. The table below summarizes changes in debt issuance costs.
|
|
|
| September 30, |
| |
|
|
|
| 2022 |
| |
|
|
|
| (Unaudited) |
| |
Debt issuance costs |
|
|
|
|
| |
Beginning balance |
|
|
| $ | 2,637,483 |
|
Financing costs deferred |
|
|
|
| 139,550 |
|
Less: Amortization expense |
|
|
|
| (538,191 | ) |
Debt issuance costs, net of accumulated amortization |
|
|
| $ | 2,238,842 |
|
|
|
|
| June 30, |
| |
|
|
|
| 2023 |
| |
|
|
|
|
|
| |
Debt issuance costs, net of accumulated amortization |
|
|
|
|
| |
Balance at December 31, 2022 |
|
|
| $ | 2,122,715 |
|
Less: Amortization expense |
|
|
|
| (388,688 | ) |
Balance at June 30, 2023 (Unaudited) |
|
|
| $ | 1,734,027 |
|
Revolving Credit Facility
On August 5, 2020, QRHC and certain of its domestic subsidiaries entered into a Loan, Security and Guaranty Agreement (the “PNC Loan Agreement”), which was subsequently amended on October 19, 2020, and December 7, 2021, August 9, 2022 and December 2, 2022, with BBVA USA (which was subsequently succeeded in interest by PNC Bank, National Association (“PNC”)), as a lender, and as administrative agent, collateral agent, and issuing bank, which provides for a credit facility (the “ABL Facility”) comprising the following:
As of SeptemberJune 30, 2022,2023, the ABL Facility borrowing base availability was $15,000,00020,537,536, of which $11,904,0625,479,025 principal was outstanding.
It is possible that LIBOR may be phased out beginning in 2023. 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 beginning in 2023 and will work with PNC to ensure any transition away from LIBOR will have minimal
10
impact on our 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.
Monroe Term Loan
On October 19, 2020, QRHC and certain of its domestic subsidiaries entered into a Credit Agreement (the “Credit Agreement”), dated as of October 19, 2020, which was subsequently amended on September 3, 2021, December 1, 2021, December 7, 2021, and August 9,December 2, 2022, with Monroe Capital Management Advisors, LLC (“Monroe Capital”), as administrative agent for the lenders thereto. Among other things, the Credit Agreement provides for the following:
The Credit Agreement contains certain financial covenants, including a minimum fixed charge coverage ratio and a senior net leverage ratio. In addition, the Credit 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 matters customarily restricted in such agreements. The Credit 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 Credit Agreement to be in full force and effect. Upon the occurrence of an event of default, the outstanding obligations under the Credit Agreement may be accelerated and become immediately due and payable.
At the same time as the borrowing of the initial $11.5 million under the Credit Agreement in October 2020, in a separate agreement, we issued Monroe Capital a warrant to purchase 500,000 shares of QRHC’s common stock exercisable immediately. For the delayed draw term loan facility, we issued a separate warrant to purchase 350,000 shares upon drawing on this facility on October 19, 2021. Both warrants have an exercise price of $1.50 per share and an expiration date of March 19, 2028. We estimated the value of the warrants issued using the Black Scholes option pricing model and recorded a debt discount (“OID”) of approximately $766,000 in 2020 for the 500,000-share warrant and $536,000 in 2021 for the 350,000-share warrant which are being amortized over the term of the Credit Agreement. We also executed a letter agreement that provides that the warrant holder will receive minimum net proceeds
9
of $1 million less any net proceeds received from the sale of the warrant shares, which is conditional on the full exercise and sale of all the warrant shares at the same time and upon a date two years after the closing date of such agreement.
Green Remedies Promissory Note
On October 19, 2020, we issued an unsecured subordinated promissory note to Green Remedies in the aggregate principal amount of $2,684,250, payable commencing on January 1, 2021 in quarterly installments through October 1, 2025 and subject to an interest rate of 3.0% per annum.
Interest Expense
The amount of interest expense related to borrowings for the three months ended SeptemberJune 30, 20222023 and 20212022 was $1,577,6692,073,078 and $334,9461,286,412, respectively. The amount of interest expense related to borrowings for the ninesix months ended SeptemberJune 30, 20222023 and 20212022 was $4,097,4004,029,167 and $1,030,3772,519,731, respectively. Debt issuance costs of $3,248,906 are being amortized to interest expense over the lives of the related debt arrangements. As of September 30, 2022, the unamortized portion of the debt issuance costs was $2,238,842. The amount of interestInterest expense related to the amortization of debt issuance fees, and debt discount costs for the nine months ended September 30, 2022 and 2021 wasas well as interest related to vendor supply chain financing programs totaled $538,191483,025 and $266,153302,415, respectively. Debt discount (“OID”) of $2,210,148 is being amortized to interest expense overrespectively, for the lives of the related debtthree months ended June 30, 2023 and consideration arrangements. As of September 30, 2022, the unamortized portion
11
of OIDs was $1,192,199. The amount of interest2022. Interest expense related to the amortization of OIDdebt issuance fees, and debt discount costs for the nine months ended September 30, 2022 and 2021 isas well as interest related to vendor supply chain financing programs totaled $440,196969,963 and $349,418625,681, respectively.respectively, for the six months ended June 30, 2023 and 2022.
Other long-term liabilities
|
|
|
| September 30, |
|
| December 31, |
| ||
|
|
|
| 2022 |
|
| 2021 |
| ||
|
|
|
| (Unaudited) |
|
|
|
| ||
Deferred consideration - earn-out |
|
|
| $ | 225,000 |
|
| $ | 781,000 |
|
Operating lease liability - long-term portion |
|
|
|
| 1,850,542 |
|
|
| 1,123,799 |
|
Other |
|
|
|
| 4,167 |
|
|
| 4,167 |
|
|
|
|
| $ | 2,079,709 |
|
| $ | 1,908,966 |
|
We recorded deferred consideration in connection with certain business acquisitions. We valued the earn-out liability using a Monte Carlo simulation. The inputs used in estimating the fair value of the earn-out liability represent Level 3 inputs under the fair value hierarchy.
8.9. Leases
Our leases are primarily related to office space and are classified as operating leases.
On September 29, 2022, we executed an amendment to our corporate office lease in The Colony, TX, pursuant to which we reduced the amount of square space rented to approximately 16,200 square feet and extended the term of the office lease from October 2022 to December 31, 2027.
Lease Costs
For the three months ended SeptemberJune 30, 20222023 and 20212022 we recorded approximately $207,000185,000 and $158,000215,000, respectively, of fixed cost operating lease expense. For the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022 we recorded approximately $669,000375,000 and $475,000460,000, respectively, of fixed cost operating lease expense. Our operating lease expense is offset by a minimum annual incentive of $93,600 received from a local Economic Development Council, which was accrued monthly over the term of the initial corporate office lease through August 2022.
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 recognized 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, 2022 was approximately $39,000.
Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the ninesix months ended SeptemberJune 30, 20222023 and 2021.2022. We did not obtain any new operating lease right-of-use assets in the ninesix months ended SeptemberJune 30, 2022.2023.
The future minimum lease payments required under our office leases as of SeptemberJune 30, 20222023 are as follows:
|
| Amount |
|
| Amount |
| ||
2022 |
| $ | 80,781 |
| ||||
2023 |
|
| 593,696 |
|
| $ | 294,869 |
|
2024 |
|
| 572,212 |
|
|
| 573,965 |
|
2025 |
|
| 493,364 |
|
|
| 495,161 |
|
2026 |
|
| 482,604 |
|
|
| 484,441 |
|
2027 |
|
| 357,303 |
|
|
| 387,909 |
|
Total lease payments |
|
| 2,579,960 |
|
|
| 2,236,345 |
|
Less: Interest |
|
| (312,709 | ) |
|
| (223,862 | ) |
Present value of lease liabilities |
| $ | 2,267,251 |
|
| $ | 2,012,483 |
|
Balance Sheet Classification
12
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 SeptemberJune 30, 20222023 are de minimis.
| September 30, |
|
| December 31, |
| June 30, |
|
| December 31, |
| ||||
| 2022 |
|
| 2021 |
| 2023 |
|
| 2022 |
| ||||
Operating Leases: | (Unaudited) |
|
|
|
| |||||||||
Right-of-use operating lease asset: |
|
|
|
| ||||||||||
Operating leases: | (Unaudited) |
|
|
|
| |||||||||
Right-of-use operating lease assets: |
|
|
|
| ||||||||||
Property and equipment, net and other assets | $ | 2,448,531 |
|
| $ | 1,945,438 |
| $ | 2,139,700 |
|
| $ | 2,385,870 |
|
|
|
|
|
|
|
|
|
| ||||||
Lease Liabilities: |
|
|
|
| ||||||||||
Lease liabilities: |
|
|
|
| ||||||||||
Accounts payable and accrued liabilities | $ | 416,709 |
|
| $ | 868,799 |
| $ | 490,696 |
|
| $ | 489,938 |
|
Other long-term liabilities |
| 1,850,542 |
|
|
| 1,123,799 |
|
| 1,521,787 |
|
|
| 1,724,244 |
|
Total operating lease liabilities | $ | 2,267,251 |
|
| $ | 1,992,598 |
| $ | 2,012,483 |
|
| $ | 2,214,182 |
|
10
9.10. 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. Service revenues areOur service revenue is primarily generated from fees charged for ourthe collection, transfer, processing and disposal of both solid waste and recycling servicesrecyclable materials and from sales of commodities by our recycling operations.recyclable materials. In addition, we have product sales and other revenue primarily from sales of products such as antifreeze and windshield washer fluid, equipment, 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. Depending on the key terms of the arrangement, which may include situations in which we are not primarily obligated, we do not have credit risk, or we determine amounts earned using fixed percentage or fixed fee schedules, we may record the revenue net of certain cost amounts. We had certain management fee contracts accounted for under the net basis method with net revenue of $92,47585,418 and $0139,656 for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. We had net revenue from management fee contracts accounted for under the net basis revenue method of $392,451156,654 and $0299,976 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. 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. Two customers accounted for 21.029.9% of revenue for the three months ended SeptemberJune 30, 20222023 and one customer accounted for 14.515.9% of revenue for the ninethree months ended SeptemberJune 30, 2022. Two customers accounted for 39.4% and 43.828.1% of revenue for the three and ninesix months ended SeptemberJune 30, 2021, respectively.2023 and one customer accounted for 16.2% of revenue for the six months ended June 30, 2022. We operate primarily in the United States, with minor services in Canada.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||||||||||||
Revenue Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Services |
| $ | 70,895,554 |
|
| $ | 35,267,085 |
|
| $ | 213,934,853 |
|
| $ | 102,567,569 |
|
| $ | 71,642,776 |
|
| $ | 74,317,692 |
|
| $ | 142,949,516 |
|
| $ | 143,039,300 |
|
Product sales and other |
|
| 2,462,739 |
|
|
| 2,099,655 |
|
|
| 7,850,396 |
|
|
| 6,759,245 |
|
|
| 2,854,519 |
|
|
| 2,587,096 |
|
|
| 5,661,482 |
|
|
| 5,387,656 |
|
Total revenue |
| $ | 73,358,293 |
|
| $ | 37,366,740 |
|
| $ | 221,785,249 |
|
| $ | 109,326,814 |
|
| $ | 74,497,295 |
|
| $ | 76,904,788 |
|
| $ | 148,610,998 |
|
| $ | 148,426,956 |
|
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 SeptemberJune 30, 20222023 and December 31, 2021,2022, we had $5$67,500466,667 and $775,000566,667 of deferred contract costs, respectively. During the three and nine months ended SeptemberJune 30, 2023 and 2022, we amortized $102,500100,000 and $307,500, respectively, of deferred contract costs to
13
selling, general, and administrative expense. During the three and nine months ended September 30, 2021, we amortized $50,000 and $150,000102,500, respectively, of deferred contract costs to selling, general, and administrative expense. During the six months ended June 30, 2023 and 2022, we amortized $200,000 and $205,000, respectively, of deferred contract costs to selling, general, and administrative expense.
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 SeptemberJune 30, 20222023 and December 31, 2021,2022, we had $2,614,0032,681,516 and $3,722,0172,731,350, respectively, of deferred revenue which was classified in “Other current liabilities.”
11
10.11. Income Taxes
Our statutory income tax rate is anticipated to be approximately 2726%. We had income tax expense of $479,011539,283 and $262,449327,391 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, 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 utilizationcontinuing reserve against the benefit of net operating loss carryforwards 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 SeptemberJune 30, 20222023 and December 31, 2021,2022, and we had recorded a valuation allowance of $11,104,00015,408,000 and $11,138,00013,999,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we had federal income tax net operating loss carryforwards of approximately $8,100,0005,500,000 and $10,100,0005,600,000, respectively, which expire at various dates ranging from 2034-2037.
11.12. Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, deferred revenue, and notes payable. We do not believe that we are exposed to significant currency or credit risks arising from these financial instruments. Our variable rate indebtedness subjects us to interest rate risk as all of the borrowings under the senior secured credit facilities bear interest at variable rates. The fair values of our financial instruments approximate their carrying values, based on their short maturities or, for notes payable, based on borrowing rates currently available to us for loans with similar terms and maturities. Contingent liabilities are measured at fair value on a recurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy. See discussion of the contingent earn-out liability in Note 7.
12.13. Stockholders’ Equity
Preferred Stock – Our 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 19,290,92519,782,060 and 19,045,98819,696,006 shares were issued and outstanding as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved our 2014 Employee Stock Purchase Plan (as amended, the “ESPP”). On May 16, 2022,2023, we issued 17,72022,888 shares to employees for $76,666107,002 under our ESPP for options that vested and were exercised. We recorded expense of $63,36965,440 and $24,58641,031 related to the ESPP for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.
Warrants – The following table summarizes the warrants issued and outstanding as of SeptemberJune 30, 2022:2023:
Warrants Issued and Outstanding as of September 30, 2022 |
| |||||||||||
|
| Date of |
| Exercise |
|
| Shares of |
| ||||
Description |
| Issuance |
| Expiration |
|
|
|
| Common Stock |
| ||
Exercisable Warrants |
| 10/19/2020 |
| 3/19/2028 |
| $ | 1.50 |
|
|
| 500,000 |
|
Exercisable Warrants |
| 10/19/2021 |
| 3/19/2028 |
| $ | 1.50 |
|
|
| 350,000 |
|
Total warrants issued and outstanding |
|
|
|
|
| 850,000 |
|
14
Warrants Issued and Outstanding as of June 30, 2023 |
| |||||||||||
|
| Date of |
| Exercise |
|
| Shares of |
| ||||
Description |
| Issuance |
| Expiration |
|
|
|
| Common Stock |
| ||
Exercisable Warrants |
| 10/19/2020 |
| 3/19/2028 |
| $ | 1.50 |
|
|
| 500,000 |
|
Exercisable Warrants |
| 10/19/2021 |
| 3/19/2028 |
| $ | 1.50 |
|
|
| 350,000 |
|
Total warrants issued and outstanding (Unaudited) |
|
|
|
|
| 850,000 |
|
Stock Options – We recorded stock option expense of $730,037490,159 and $575,437379,168 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The following table summarizes the stock option activity for the ninesix months ended SeptemberJune 30, 2022:2023:
|
| Stock Options |
|
| Stock Options |
| ||||||||||||||
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
| Weighted- |
| ||||
|
|
|
|
| Exercise |
| Average |
|
|
|
|
| Exercise |
| Average |
| ||||
|
| Number |
|
| Price Per |
| Exercise Price |
|
| Number |
|
| Price Per |
| Exercise Price |
| ||||
|
| of Shares |
|
| Share |
| Per Share |
|
| of Shares |
|
| Share |
| Per Share |
| ||||
Outstanding at December 31, 2021 |
|
| 3,280,585 |
|
| $1.17 — $23.20 |
| $ | 2.87 |
| ||||||||||
Outstanding at December 31, 2022 |
|
| 3,179,388 |
|
| $1.17 — $23.20 |
| $ | 3.23 |
| ||||||||||
Granted |
|
| 359,889 |
|
| $4.08 — $7.20 |
| $ | 4.99 |
|
|
| 152,500 |
|
| $5.50 |
| $ | 5.50 |
|
Exercised |
|
| (198,567 | ) |
| $1.51 — $6.40 |
| $ | 2.01 |
|
|
| (63,166 | ) |
| $1.51 — $3.98 |
| $ | 1.83 |
|
Cancelled/Forfeited |
|
| (58,001 | ) |
| $1.94 — $6.06 |
| $ | 5.35 |
|
|
| (22,083 | ) |
| $1.51 — $21.20 |
| $ | 13.87 |
|
Outstanding at September 30, 2022 |
|
| 3,383,906 |
|
| $1.17 — $23.20 |
| $ | 3.10 |
| ||||||||||
Outstanding at June 30, 2023 (Unaudited) |
|
| 3,246,639 |
|
| $1.17 — $23.20 |
| $ | 3.29 |
|
Deferred Stock Units – Effective September 1, 2019, nonemployee directors can elect to receive all or a portion of their annual retainers in the form of deferred stock units (“DSUs”). The DSUs are recognized at their fair value on the date of grant. Each DSU
12
represents the right to receive one share of our common stock following the completion of a director’s service. During the ninesix months ended SeptemberJune 30, 2022,2023, we granted 5,3173,245 DSUs and recorded director compensation expense of $29,21119,865 related to the grants. In addition, during the ninesix months ended SeptemberJune 30, 20222023, we granted 35,20114,089 DSUs to executive employees and recorded compensation expense of $175,62985,286, which includes an accrual of anticipated bonus expense to be paid in DSUs for certain executive employees.
During the six months ended June 30, 2022, we granted 3,610 DSUs and recorded director compensation expense of $19,280 related to the grants. In addition, during the six months ended June 30, 2022, we granted 8,170 DSUs to executive employees and recorded compensation expense of $146,053, which includes an accrual of anticipated bonus expense to be paid in DSUs for certain executive employees. During the nine months ended September 30, 2021, we granted 81,249 DSUs and recorded director compensation expense of $384,708 related to the grants. In addition, during the nine months ended September 30, 2021, we granted 49,775 DSUs to executive employees and recorded compensation expense of $157,009. We had 210,013228,749 and 198,145211,415 DSUs outstanding at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
15
13.14. Net Income (Loss)Loss per Share
We compute basic net incomeloss per share using the weighted average number of shares of common stock outstanding plus the number of common stock equivalents for DSUs during the period. We compute diluted net income per share using the weighted average number of shares of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods where losses are reported, the weighted average number of shares of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options warrants and shares issued pursuant to a Consideration Agreement as discussed in Note 6.warrants. Dilutive potential securities are excluded from the computation of earnings per share if their effect is antidilutive. The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method.
The computation of basic and diluted net income (loss)loss per share attributable to common stockholders is as follows:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||
| (Unaudited) |
|
| (Unaudited) |
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) applicable to common stockholders | $ | (1,686,335 | ) |
| $ | 385,764 |
|
| $ | (2,720,414 | ) |
| $ | 2,231,810 |
| $ | (886,581 | ) |
| $ | 1,150,231 |
|
| $ | (2,910,634 | ) |
| $ | (1,034,078 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average common shares outstanding, basic |
| 19,368,192 |
|
|
| 18,984,979 |
|
|
| 19,297,636 |
|
|
| 18,784,722 |
|
| 19,962,031 |
|
|
| 19,278,730 |
|
|
| 19,946,954 |
|
|
| 19,261,775 |
|
Effect of dilutive common shares |
| — |
|
|
| 2,322,875 |
|
|
| — |
|
|
| 1,919,548 |
|
| — |
|
|
| 2,070,091 |
|
|
| — |
|
|
| — |
|
Weighted average common shares outstanding, diluted |
| 19,368,192 |
|
|
| 21,307,854 |
|
|
| 19,297,636 |
|
|
| 20,704,270 |
|
| 19,962,031 |
|
|
| 21,348,821 |
|
|
| 19,946,954 |
|
|
| 19,261,775 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic | $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.14 | ) |
| $ | 0.12 |
| $ | (0.04 | ) |
| $ | 0.06 |
|
| $ | (0.15 | ) |
| $ | (0.05 | ) |
Diluted | $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.14 | ) |
| $ | 0.11 |
| $ | (0.04 | ) |
| $ | 0.05 |
|
| $ | (0.15 | ) |
| $ | (0.05 | ) |
Anti-dilutive securities excluded from diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Stock options |
| 318,157 |
|
|
| 413,518 |
|
|
| 318,157 |
|
|
| 151,018 |
|
| 323,657 |
|
|
| 638,157 |
|
|
| 323,657 |
|
|
| 375,657 |
|
Warrants |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total anti-dilutive securities excluded from net income (loss) per share |
| 318,157 |
|
|
| 413,518 |
|
|
| 318,157 |
|
|
| 151,018 |
|
| 323,657 |
|
|
| 638,157 |
|
|
| 323,657 |
|
|
| 375,657 |
|
14. Subsequent Event
On October 19, 2022, we issued 166,516 shares of common stock, with a market value of $1,342,125, to Green Remedies pursuant to that certain Consideration Agreement, dated October 19, 2020, between QRHC and Green Remedies, entered into in connection with the Green Remedies acquisition. This issuance reflects the second of two equal installments payable to Green Remedies in either cash or shares of QRHC’s common stock, at our option, on the first and second anniversaries of the closing date of the acquisition.
16
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in or incorporated by reference into this Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, and markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Form 10-Q include statements regarding the impact, if any, of the adoption of the ASU on our consolidated financial statements; the impact of the Coronavirus Disease 2019 (”(“COVID-19”) pandemic on our results of operations and any changes to inflation rates; exposure to significant interest, currency, or credit risks arising from our financial instruments; and sufficiency of our cash and cash equivalents, borrowing capacity, and cash generated from operations to fund our operations for the next 12 months. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Form 10-Q reflect our views as of the date of this Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors, including the impact of our business acquisitions in 2022 and 2021 on future results, the state of the U.S. economy in general, general economic conditions and the potential effect of inflationary pressures and increased interest rates on our cost of doing business, could cause actual results to differ materially from those indicated by the forward-looking statements and other risks detailed from time to time in our reports to the SEC, including our Annual Report on Form 10-K for the year ended December 31, 20212022 (the “2021“2022 Annual Report”).
Business Overview
We were incorporated in Nevada in July 2002 under the name BlueStar Financial Group, Inc. On July 16, 2013, we acquired all of the issued and outstanding membership interests of Quest Resource Management Group, LLC, or Quest, held by Quest Resource Group LLC, or QRG, comprising 50% of the membership interests of Quest, or the Quest Interests. Our wholly owned subsidiary, Quest Sustainability Services, Inc., or QSS (formerly known as Earth911, Inc.), held the remaining 50% of the membership interests of Quest for several years. Concurrently with our acquisition of the Quest Interests, we assigned the Quest Interests to QSS so that QSS now holds 100% of the issued and outstanding membership interests of Quest. On October 28, 2013, we changed our name to Quest Resource Holding Corporation, or QRHC. On October 19, 2020, Quest acquired substantially all of the assets used in the business of Green Remedies Waste and Recycling, Inc.,are a leadingnational provider of independent environmental services, particularly in multi-family housing, located in Burlington, NC. On December 7, 2021, QSS acquired all of the outstanding membership interests of RWS Facility Services, LLC (“RWS”), a full-service management company engaged in the brokering of recycling, waste and sustainability solutions, located in Chadds Ford, PA. See Note 3recycling services to our condensed consolidated financial statements for more information regardingcustomers from across multiple industry sectors that are typically larger, multi-location businesses. We create customer-specific programs and perform the acquisitions. The resultsrelated services for the threecollection, processing, recycling, disposal, and nine months ended September 30, 2022 reflecttracking of waste streams and recyclables. We also provide information and data that tracks and reports the impactdetailed transactional and environmental results of the RWS acquisition, but the prior year period does not.our services and provides actionable data to improve business operations. The data we generate also enables our customers to address their business, sustainability, environmental, social and governance goals and responsibilities.
Our revenue is primarily generated from fees charged for our collection, transfer, disposal and services for both solid waste and recyclable materials and from sales of recyclable materials. 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.
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on and relates primarily to the operations of QRHC and QuestQRMG (collectively, “we,” “us,” “our,” or “our company”).
17
Three and NineSix Months Ended SeptemberJune 30, 20222023 and 20212022 Operating Results
The following table summarizes our operating results for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||
|
| (Unaudited) |
| (Unaudited) |
|
| (Unaudited) |
| (Unaudited) |
| ||||||||||||||||||||||
Revenue |
| $ | 73,358,293 |
|
| $ | 37,366,740 |
|
| $ | 221,785,249 |
|
| $ | 109,326,814 |
|
| $ | 74,497,295 |
|
| $ | 76,904,788 |
|
| $ | 148,610,998 |
|
| $ | 148,426,956 |
|
Cost of revenue |
|
| 61,174,960 |
|
|
| 30,514,034 |
|
|
| 183,685,111 |
|
|
| 89,223,751 |
|
|
| 60,992,466 |
|
|
| 62,236,397 |
|
|
| 122,476,410 |
|
|
| 122,510,150 |
|
Gross profit |
|
| 12,183,333 |
|
|
| 6,852,706 |
|
|
| 38,100,138 |
|
|
| 20,103,063 |
|
|
| 13,504,829 |
|
|
| 14,668,391 |
|
|
| 26,134,588 |
|
|
| 25,916,806 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Selling, general, and administrative |
|
| 9,332,721 |
|
|
| 5,307,635 |
|
|
| 27,975,550 |
|
|
| 14,630,426 |
|
|
| 9,212,270 |
|
|
| 9,298,367 |
|
|
| 18,629,706 |
|
|
| 18,642,829 |
|
Depreciation and amortization |
|
| 2,473,339 |
|
|
| 508,456 |
|
|
| 7,308,591 |
|
|
| 1,324,391 |
|
|
| 2,452,258 |
|
|
| 2,470,390 |
|
|
| 4,877,102 |
|
|
| 4,835,252 |
|
Total operating expenses |
|
| 11,806,060 |
|
|
| 5,816,091 |
|
|
| 35,284,141 |
|
|
| 15,954,817 |
|
|
| 11,664,528 |
|
|
| 11,768,757 |
|
|
| 23,506,808 |
|
|
| 23,478,081 |
|
Operating income |
|
| 377,273 |
|
|
| 1,036,615 |
|
|
| 2,815,997 |
|
|
| 4,148,246 |
|
|
| 1,840,301 |
|
|
| 2,899,634 |
|
|
| 2,627,780 |
|
|
| 2,438,725 |
|
Interest expense |
|
| (1,911,989 | ) |
|
| (542,848 | ) |
|
| (5,057,400 | ) |
|
| (1,653,987 | ) |
|
| (2,556,103 | ) |
|
| (1,588,827 | ) |
|
| (4,999,131 | ) |
|
| (3,145,412 | ) |
Income (loss) before taxes |
|
| (1,534,716 | ) |
|
| 493,767 |
|
|
| (2,241,403 | ) |
|
| 2,494,259 |
|
|
| (715,802 | ) |
|
| 1,310,807 |
|
|
| (2,371,351 | ) |
|
| (706,687 | ) |
Income tax expense |
|
| 151,619 |
|
|
| 108,003 |
|
|
| 479,011 |
|
|
| 262,449 |
|
|
| 170,779 |
|
|
| 160,576 |
|
|
| 539,283 |
|
|
| 327,391 |
|
Net income (loss) |
| $ | (1,686,335 | ) |
| $ | 385,764 |
|
| $ | (2,720,414 | ) |
| $ | 2,231,810 |
|
| $ | (886,581 | ) |
| $ | 1,150,231 |
|
| $ | (2,910,634 | ) |
| $ | (1,034,078 | ) |
14
Three and NineSix Months Ended SeptemberJune 30, 20222023 compared to Three and NineSix Months Ended SeptemberJune 30, 20212022
Impact of the COVID-19 Pandemic and Global Economic Trends
In response to the global COVID-19 pandemic crisis, we have prioritized the health and safety of our employees, customers and subcontractors and continue to work to support their needs. While we continue to implement actions to mitigate the effects of this crisis on our business and operations, the uncertainty around the duration and economic impact of this crisis makes it difficult for management to predict the future impact on our business operations and financial performance.
Previously, we have experienced some limitations in employee resources resulting from travel restrictions and “stay at home” orders. Despite these restrictions, we continued to efficiently manage supply chain requirements of our customers and subcontractors. The waste management and recycling services we provide are 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. While some of our customers shut down or scaled back their businesses in the short term, other customers operating in the restaurant, grocery, automotive and certain specialty retail industries, which may be considered as essential businesses in different jurisdictions or who are more capable of working remotely than other industries, have continued to operate.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the severity and duration of the crisis and the impact of actions taken and that will be taken to contain COVID-19 or treat its impact. These future impacts are highly uncertain and cannot be predicted with confidence. The economic impact from COVID-19 or other global crises may adversely impact our results of operations in the future and may affect the credit condition of some of our customers, which could increase delays in customer payments and credit losses.
The global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates and uncertainty about economic stability. For example, as noted above, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility in the capital markets. Similarly, the current conflict between Ukraine and Russia has created extreme volatility in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets continue to deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive. Inflation can adversely affect us by increasing our costs, including salary costs. Any significant increases in inflation and related increases in interest rates could have a material adverse effect on our business, results of operations and financial condition.
Revenue
For the quarter ended SeptemberJune 30, 2022,2023, revenue was $73.4$74.5 million, an increasea decrease of $36.0$2.4 million, or 96%3.1%, compared to $37.4$76.9 million for the quarter ended SeptemberJune 30, 2021. 2022. For the six months ended June 30, 2023, revenue was $148.6 million, an increase of $0.2 million, or 0.1%, compared to $148.4 million for the six months ended June 30, 2022.
The increasedecrease for the quarter was primarily due to increasedan approximately $3 million decrease in recyclable materials revenues and also due to an approximately $5 million decrease in revenues from a certain 2021 acquisition. These declines were offset by an overall strong increase in demand including the impact of heightened customer production levels, increasedfor non-recyclable materials services from certainboth new and continuing customers and revenue of $26.5resulting in almost $6 million for the quarter from the acquired customer base related to the business acquisitions, partially offset by lower values for certain recycled materials compared to a year ago and lower levels of services due to reduced operations at certain other customers. For the nine months ended September 30, 2022, revenue was $221.8 million, an increase of $112.5 million, or 103%, compared to $109.3in additional revenues.
18
million forFor the ninesix months ended SeptemberJune 30, 2021. The2023, revenues were mostly flat as an approximately $11 million increase was primarily due to increasedin overall demand including the impact of heightened customer production levels, increased value for recyclednon-recyclable materials compared to a year ago, increased services from certainboth new and continuing customers and revenue of $81.3 million for the nine months ended September 30, 2022 from the acquired customer base related to the business acquisitions, partiallywere almost fully offset by lower levels of services due to reduced operations atan approximately $5 million decrease in recyclable materials revenues and declines in revenues from a certain other customers. See Note 3 to our condensed consolidated financial statements for a discussion of certain acquisitions during 2022 and 2021.2021 acquisition.
Cost of Revenue/Gross Profit
Cost of revenue increased $30.7decreased $1.2 million to $61.2$61.0 million for the quarter ended SeptemberJune 30, 20222023 from $30.5$62.2 million for the quarter ended SeptemberJune 30, 2021.2022. Cost of revenue remained flat at $122.5 million for the six months ended June 30, 2023 compared to $122.5 million for the six months ended June 30, 2022. The increase waschanges were primarily due to the same reasons impacting the increasedecrease in revenue including $23.5 million from the acquired customer base related to the business acquisitions in 2022 and 2021. Cost of revenue increased $94.5 million to $183.7 million for the nine months ended September 30, 2022 from $89.2 million for the nine months ended September 30, 2021. The increase was primarily due to the same reasons impacting the increase in revenue including $68.6 million for the nine months ended September 30, 2022 from the acquired customer base related to the business acquisitions.revenue.
Gross profit for the quarter ended SeptemberJune 30, 20222023 was $12.2$13.5 million, an increasea decrease of $5.3$1.2 million, compared to $6.9$14.7 million for the quarter ended SeptemberJune 30, 2021.2022. The gross profit margin was 16.6%18.1% for the thirdquarter ended June 30, 2023 compared to 19.1% for the same quarter of 2022 compared with 18.3% for the third quarter of 2021.2022. Gross profit for the ninesix months ended SeptemberJune 30, 20222023 was $38.1 million, an increase of $18.0$26.1 million, compared to $20.1$25.9 million for the ninesix months ended SeptemberJune 30, 2021.2022. The gross profit margin was 17.2%17.6% for the ninesix months ended SeptemberJune 30, 20222023, compared with 18.4%to 17.5% for the ninesix months ended SeptemberJune 30, 2021.2022. The changes in gross profit and gross profit margin percentage for the quarter ended September 30, 2022 were primarily due to the net effect of the impact of increased services from certain new and continuing customers, the business operations acquired, change in the mix of services and relative gross profit margins from new and acquired customer base, lower value for certain recycled materials compared to a year ago, and reduced operations at certain other customers. Thecustomers, and changes in gross profit and gross profit margin percentagevalues for the nine months ended September 30, 2022 were primarily due to the net effect of the impact of increased services from certain new and continuing customers, the business operations acquired, change in the mix of services and relative gross profit margins from new and acquired customer base, increased value for certain recycled materials compared to a year ago, and reduced operations at certain other customers.recyclable materials.
Revenue, gross profit, and gross profit margins are affected period to period by the volumes of waste and recyclingrecyclable materials generated by our customers, the frequency and type of services provided, the price and mix of the services provided, commodity price changes for recycledrecyclable materials, the cost and mix of subcontracted services provided in any one reporting period, and the timing of acquisitions and integration. Volumes of waste and recycling materials generated by our customers is impacted period to period based on several factors including their production or sales levels, demand of their product or services in the market, supply chain reliability, and labor force stability, among other business factors. If the impact of these factors either individually or in the aggregate cause a significant decline in the volume of waste and recycling materials generated by our customers, it could have an adverse effect on our revenues, gross profit, and gross profit margins.
Operating Expenses
Operating expenses were approximately $11.8$11.7 million and $5.8$11.8 million for the quarters ended SeptemberJune 30, 2023 and 2022, respectively. Operating expenses were $23.5 million and 2021, respectively, an increase of $6.0 million. The increase in operating expenses was primarily related to the business operations acquired and totaled $4.3$23.5 million for the quarter ended September 30, 2022. Operating expenses were approximately $35.3 million and $16.0 million for the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increase of $19.3 million. The increase in operating expenses was primarily related to the business operations acquired and totaled $13.7 million for the nine months ended September 30, 2022.respectively.
Selling, general, and administrative expenses were $9.3$9.2 million and $5.3$9.3 million for the quarters ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea slight decrease of approximately $4.0 million.$(86,097). The increasedecrease primarily relates to a $0.3 million reduction in professional fees and a $0.1 million reduction in bad debt expense mostly offset by increases in labor related expenses of $2.6 million, acquisition/integration related expenses of $274,000, inclusive of professional fees of $226,000, travel/marketing expenses of $182,000 and other administrative expenses of $753,000.expenses. Selling, general, and administrative expenses were $28.0$18.6 million and $14.6$18.6 million for the ninesix months ended SeptemberJune 30, 2023 and 2022, respectively. Expenses remained flat primarily due to $0.9 million reductions in professional fees and 2021, respectively, an$0.2 million reduction in bad debt expense mostly offset by a $0.9 million increase of approximately $13.3 million. The increase primarily relates to increases in labor related expenses of $7.7 million, acquisition/integration related expenses of $1.6 million, inclusive of professional fees of $1.5 million, travel/marketing expenses of $449,000 and other administrative expenses of $2.4 million.expenses.
15
Operating expenses for the quarters ended SeptemberJune 30, 20222023 and 20212022 included depreciation and amortization of approximately $2.5 million and $509,000,$2.5 million, respectively. Operating expenses for the six months ended June 30, 2023 and 2022 included depreciation and amortization of $4.9 million and $4.8 million, respectively.
Interest expense was $2.6 million and $1.6 million for the quarters ended June 30, 2023 and 2022, respectively, an increase of approximately $2.0$1.0 million. The increase in depreciationInterest expense was $5.0 million and amortization was primarily related to the business operations acquired and totaled $1.9$3.1 million for the quarter ended September 30, 2022. Operating expenses for the ninesix months ended SeptemberJune 30, 20222023 and 2021 included depreciation and amortization of approximately $7.3 million and $1.3 million,2022, respectively, an increase of approximately $6.0 million. The increase in depreciation and amortization was primarily related to the business operations acquired and totaled $5.8 million for the nine months ended September 30, 2022.
19
Interest Expense
Interest expense was $1.9 million and $543,000 for the three months ended September 30, 2022 and 2021, respectively, an increase of approximately $1.4 million. Interest expense was $5.1 million and $1.7 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of approximately $3.4 million. The increase is primarily due to an increase in debt, primarily related to the acquisitions in 2021 and 2022 and the increaseincreases in base interest rates.rates which is partially offset by reduced borrowings from a voluntary paydown in the term loan in the quarter ended June 30, 2023. We are amortizing debt issuance costs of $3.2$3.3 million and OID of $2.2 million to interest expense over the life of the related debt arrangements as discussed in Note 78 to our condensed consolidated financial statements.
Income Taxes
We recorded a provision for income tax of $152,000$170,779 and $108,000$160,576 for the three monthsquarters ended SeptemberJune 30, 20222023 and 2021,2022, respectively. We recorded a provision for income tax of $479,000$539,283 and $262,000$327,391 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The provision for income tax is primarily attributable to state tax obligations based on current estimated state tax apportionments for states with no net operating loss carryforwards.
We recorded a full valuation allowance against all our deferred tax assets (“DTAs”) as of both SeptemberJune 30, 20222023 and December 31, 2021.2022. We intend on maintaining a full valuation allowance on our DTAs until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current taxableearnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 to 24 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain DTAs and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the level of profitability that we are able to actually achieve.
Net Income (Loss)
Net loss for the quarterthree months ended SeptemberJune 30, 20222023 was $(1.7)$(0.9) million compared to net income of $386,000$1.2 million for the quarterthree months ended SeptemberJune 30, 2021.2022. Net loss for the ninesix months ended SeptemberJune 30, 20222023 was $(2.7)$(2.9) million compared to net incomeloss of $2.2 million$(1.0) for the ninesix months ended SeptemberJune 30, 2021.2022. The explanations above detail the majority of the changes related to the change in net results.
Our operating results, including revenue, operating expenses, and operating margins, will vary from period to period depending on commodity prices of recycledrecyclable materials, the volumes and mix of services provided, as well as customer mix during the reporting period, and the timing of acquisitions and integration.
Income (Loss) per Share
Net loss per basic and diluted share attributable to common stockholders was $(0.09),$(0.04) for the quarter ended SeptemberJune 30, 20222023 compared to net income per basic and diluted share of $0.02,$0.06 and $0.05, respectively, for the quarter ended SeptemberJune 30, 2021.2022. Net loss per basic and diluted share attributable to common stockholders was $(0.14) per share$(0.15) and $(0.05) for the ninesix months ended SeptemberJune 30, 2023 and 2022, compared to net income per basic and diluted share of $0.12 and $0.11, respectively, for the nine months ended September 30, 2021.respectively.
The basic and diluted weighted average number of shares of common stock outstanding were approximately 19.420.0 million for the three months ended SeptemberJune 30, 2023. The basic and diluted weighted average number of shares of common stock outstanding were approximately 19.3 million and 21.3 million, respectively, for the three months ended June 30, 2022. The basic and diluted weighted average number of shares of common stock outstanding were approximately 19.019.9 million and 21.3 million, respectively, for the three months ended September 30, 2021. The basic and diluted weighted average number of shares of common stock outstanding was approximately 19.3 million for the ninesix months ended SeptemberJune 30, 2022. The basic2023 and diluted weighted average number of shares of common stock outstanding were approximately 18.8 million and 20.7 million, respectively, for the nine months ended September 30, 2021.2022, respectively.
Adjusted EBITDA
InFor the quarterthree months ended SeptemberJune 30, 2022,2023, Adjusted EBITDA, a non-GAAP financial measure, increased 57% decreased (23.3)%to $3.8$5.0 million from $2.5$6.6 million for the three months ended June 30, 2022. For the six months ended June 30, 2023, Adjusted EBITDA decreased (12.4)% to $9.0 million from $10.3 million for the same period in 2021. For the nine months ended September 30, 2022, Adjusted EBITDA increased 86% to $14.1 million from $7.6 million for the same period in 2021.2022.
We use the non-GAAP measurement of earnings before interest, taxes, depreciation, amortization, stock-related compensation charges, and other adjustments, or “Adjusted EBITDA,” to evaluate our performance. Adjusted EBITDA is a non-GAAP measure that is also frequently used by analysts, investors and other interested parties to evaluate the market value of companies considered to be in similar businesses. We suggest that Adjusted EBITDA be viewed in conjunction with our reported financial results or other financial information prepared in accordance with GAAP. For the three and ninesix months ended SeptemberJune 30, 20222023, other adjustments of $176,000 and $484,000, respectively, included severance costs,and project costs andas well as certain administrative fees related to borrowings. For the three and ninesix months ended SeptemberJune 30, 20212022, other adjustments of $42,000 and $160,000, respectively, included recruiting costs, severanceproject costs and certain administrative feescosts related to borrowings.
2016
The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:
RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA
(UNAUDITED)
|
| As Reported |
| As Reported |
|
| As Reported |
| As Reported |
| ||||||||||||||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||
|
| (Unaudited) |
| (Unaudited) |
|
| (Unaudited) |
| (Unaudited) |
| ||||||||||||||||||||||
Net income (loss) |
| $ | (1,686,335 | ) |
| $ | 385,764 |
|
| $ | (2,720,414 | ) |
| $ | 2,231,810 |
|
| $ | (886,581 | ) |
| $ | 1,150,231 |
|
| $ | (2,910,634 | ) |
| $ | (1,034,078 | ) |
Depreciation and amortization |
|
| 2,554,242 |
|
|
| 582,951 |
|
|
| 7,541,430 |
|
|
| 1,539,678 |
|
|
| 2,538,972 |
|
|
| 2,549,979 |
|
|
| 5,047,939 |
|
|
| 4,987,188 |
|
Interest expense |
|
| 1,911,989 |
|
|
| 542,848 |
|
|
| 5,057,400 |
|
|
| 1,653,987 |
|
|
| 2,556,103 |
|
|
| 1,588,827 |
|
|
| 4,999,131 |
|
|
| 3,145,412 |
|
Stock-based compensation expense |
|
| 412,715 |
|
|
| 325,739 |
|
|
| 998,247 |
|
|
| 1,141,740 |
|
|
| 362,319 |
|
|
| 326,894 |
|
|
| 660,750 |
|
|
| 585,532 |
|
Acquisition, integration and related costs |
|
| 327,308 |
|
|
| 463,928 |
|
|
| 2,301,424 |
|
|
| 599,917 |
|
|
| 174,691 |
|
|
| 668,047 |
|
|
| 652,290 |
|
|
| 1,973,982 |
|
Other adjustments |
|
| 175,581 |
|
|
| 42,189 |
|
|
| 484,343 |
|
|
| 159,624 |
|
|
| 116,449 |
|
|
| 113,017 |
|
|
| 30,855 |
|
|
| 308,876 |
|
Income tax expense |
|
| 151,619 |
|
|
| 108,003 |
|
|
| 479,011 |
|
|
| 262,449 |
|
|
| 170,779 |
|
|
| 160,576 |
|
|
| 539,283 |
|
|
| 327,391 |
|
Adjusted EBITDA |
| $ | 3,847,119 |
|
| $ | 2,451,422 |
|
| $ | 14,141,441 |
|
| $ | 7,589,205 |
|
| $ | 5,032,732 |
|
| $ | 6,557,571 |
|
| $ | 9,019,614 |
|
| $ | 10,294,303 |
|
Adjusted Net Income and Adjusted Net Income per Diluted Share
Adjusted net income, a non-GAAP financial measure, was $863,000 for the quarter ended September 30, 2022, compared with $1.2$1.5 million for the quarterthree months ended SeptemberJune 30, 2021.2023, compared with $4.0 million for the three months ended June 30, 2022. Adjusted net income was $6.2$2.1 million for the ninesix months ended SeptemberJune 30, 2022,2023, compared with $3.8$5.3 million for the ninesix months ended SeptemberJune 30, 2021.2022. We present adjusted net income and adjusted net income per diluted share, both non-GAAP financial measures, supplementally because they are widely used by investors as a valuation measure in the solid waste industry. Management uses adjusted net income and adjusted net income per diluted share as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We provide adjusted net income to exclude the effects of items management believes impact the comparability of operating results between periods. Adjusted net income has limitations due to the fact that it excludes items that have an impact on our financial condition and results of operations. Adjusted net income and adjusted net income per diluted share are not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate these non-GAAP financial measures differently. Our adjusted net income and adjusted net income per diluted share for the quarterthree and the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022 are calculated as follows:
|
| As Reported |
|
| As Reported |
| ||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Reported net income (loss) (a) |
| $ | (1,686,335 | ) |
| $ | 385,764 |
|
| $ | (2,720,414 | ) |
| $ | 2,231,810 |
|
Amortization of intangibles (b) |
|
| 2,221,669 |
|
|
| 386,400 |
|
|
| 6,617,488 |
|
|
| 964,080 |
|
Acquisition, integration and related costs (c) |
|
| 327,308 |
|
|
| 463,928 |
|
|
| 2,301,424 |
|
|
| 599,917 |
|
Adjusted net income |
| $ | 862,642 |
|
| $ | 1,236,092 |
|
| $ | 6,198,498 |
|
| $ | 3,795,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Reported net income (loss) |
| $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.14 | ) |
| $ | 0.11 |
|
Adjusted net income |
| $ | 0.04 |
|
| $ | 0.06 |
|
| $ | 0.29 |
|
| $ | 0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted (d) |
|
| 21,642,213 |
|
|
| 21,307,854 |
|
|
| 21,575,003 |
|
|
| 20,704,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
(a) Applicable to common stockholders |
|
|
|
|
|
|
| |||||||||
(b) Reflects the elimination of the non-cash amortization of acquisition-related intangible assets |
|
|
|
|
|
|
| |||||||||
(c) Reflects the add back of acquisition/integration related transaction costs |
|
|
|
|
|
|
| |||||||||
(d) Reflects adjustment for dilution as adjusted net income is positive |
|
|
|
|
|
|
|
|
| As Reported |
|
| As Reported |
| ||||||||||
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
Reported net income (loss) (a) |
| $ | (886,581 | ) |
| $ | 1,150,231 |
|
| $ | (2,910,634 | ) |
| $ | (1,034,078 | ) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of intangibles (b) |
|
| 2,221,909 |
|
|
| 2,221,364 |
|
|
| 4,443,604 |
|
|
| 4,395,819 |
|
Acquisition, integration and related costs (c) |
|
| 174,691 |
|
|
| 668,047 |
|
|
| 652,290 |
|
|
| 1,973,982 |
|
Other adjustments (d) |
|
| — |
|
|
| — |
|
|
| (76,326 | ) |
|
| — |
|
Adjusted net income |
| $ | 1,510,019 |
|
| $ | 4,039,642 |
|
| $ | 2,108,934 |
|
| $ | 5,335,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Reported net income (loss) |
| $ | (0.04 | ) |
| $ | 0.05 |
|
| $ | (0.15 | ) |
| $ | (0.05 | ) |
Adjusted net income |
| $ | 0.07 |
|
| $ | 0.19 |
|
| $ | 0.10 |
|
| $ | 0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted (e) |
|
| 22,036,949 |
|
|
| 21,348,821 |
|
|
| 22,100,614 |
|
|
| 21,541,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
(a) Applicable to common stockholders |
|
|
|
|
|
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(b) Reflects the elimination of the non-cash amortization of acquisition-related intangible assets |
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(c) Reflects the add back of acquisition/integration related transaction costs |
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(d) Reflects adjustments to earn-out fair value |
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(e) Reflects adjustment for dilution as adjusted net income is positive |
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Liquidity and Capital Resources
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we had $7.1$3.0 million and $8.4$9.6 million in cash and cash equivalents, respectively. Working capital was $20.7$10.5 million and $12.6$19.7 million as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively. As part of our
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working capital management and in light of increasing interest rates, we made a $5.0 million prepayment toward our variable rate debt in the quarter ended June 30, 2023, utilizing excess cash. We made an additional prepayment of $2.0 million in July 2023.
We derive our primary sources of funds for conducting our business activities from operating revenues; borrowings under our credit facilities; and the placement of our equity securities to investors. We require working capital primarily to carry accounts receivable,
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service debt, purchase capital assets, fund operating expenses, address unanticipated competitive threats or technical problems, withstand adverse economic conditions, fund potential acquisition transactions, and pursue goals and strategies.
We believe our existing cash and cash equivalents of $7.1$3.0 million, our borrowing availability under our $15.0$25.0 million ABL Facility (as defined and discussed in Note 78 to our condensed consolidated financial statements), and cash expected to be generated from operations will be sufficient to fund our operations for the next 12 months and thereafter for the foreseeable future. Our known current- and long-term uses of cash include, among other possible demands, capital expenditures, lease payments and repayments to service debt and other long-term obligations. We have no agreements, commitments, or understandings with respect to any such placements of our securities and any such placements could be dilutive to our stockholders.
Cash Flows
The following discussion relates to the major components of our cash flows for the ninesix months ended SeptemberJune 30, 20222023 and 2021.2022.
Cash Flows from Operating Activities
Net cash used inprovided by operating activities was $(4.3)$6.3 million for the ninesix months ended SeptemberJune 30, 20222023 compared with net cash used in by operating activities of $(3.8) million for the six months ended June 30, 2022.
Net cash provided by operating activities of $3.4 million for the ninesix months ended SeptemberJune 30, 2021.2023 related primarily to the net effect of the following:
Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 2022 related primarily to the net effect of the following:
Net cash provided by operating activities for the nine months ended September 30, 2021 related primarily to the net effect of the following:
Our business, including revenue, operating expenses, and operating margins, may vary depending on the blend of services we provide to our customers, the terms of customer contracts, commodityrecyclable materials contracts, and our business volume levels. Fluctuations in net accounts receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers, and the inception, increase, modification, or termination of customer relationships. Our operating activities may require additional cash in the future from our debt facilities and/or equity financings depending on the level of our operations.
Cash Flows from Investing Activities
Cash used in investing activities for the ninesix months ended SeptemberJune 30, 2022 and 20212023 was $4.4 million and $2.8 million, respectively.$(0.8) million. Cash used in investing activities for the six months ended June 30, 2022 relates mainlywas $(3.9) million and primarily related to the $3.1 million net purchase of the assets of a Northeast-basednortheast-based independent environmental services company on February 10, 2022. Cash used in 2021 related primarily to the $2.3 million purchase of the assets of an Atlanta-based independent environmental services company on June 30, 2021. Other investing activities are primarily from purchases of property and equipment and intangible assets.assets such as software development costs.
Cash Flows from Financing Activities
Net cash provided byused in financing activities for the ninesix months ended SeptemberJune 30, 20222023 was $7.4$(12.1) million, compared toprimarily from net cash provided by financing activitiesrepayments of $1.1$(6.8) million for the nine months ended September 30, 2021.on our ABL Facility and $(5.5) million repayment of long-term debt. Net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2022 was $3.4 million, primarily from term loan proceedsborrowings of $3.5 million from the Credit Agreement with Monroe Capital used to finance the February 2022 acquisition of an independent environmental services company, net borrowings on our ABL Facility, and proceeds from stock option exercises, partially offset by repayments of notes payable. Net cash provided by financing activities for the nine months ended September 30, 2021 was primarily related to net borrowings on our ABL Facility and from proceeds from stock option exercises.company. See Note 78 to our condensed consolidated financial statements for a discussion of the ABL Facility and other notes payable.
We made an additional $2.0 million principal payment on our Monroe Capital credit facility in July 2023.
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Inflation
Although the overall economy has experienced some inflationary pressures, we do not believe that inflation had a material impact on us during the ninesix months ended SeptemberJune 30, 20222023 and 2021.2022. We believe that current inflationary increases in costs, such as fuel,
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labor, and certain capital items, can be addressed by our flexible pricing structures and cost recovery fees allowing us to recover certain of the cost of inflation from our customer base. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers or adjust pricing. Although we believe that we should be able to offset many cost increases that result from inflation in the ordinary course of business, we may be required to absorb at least part of these costs increases due to competitive pressures or delays in timing of rate increases. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation and increases in interest rates.
Critical Accounting Estimates and Policies
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include carrying amounts of accounts receivable, goodwill and other intangible assets, stock-based compensation expense, deferred taxes and the fair value of assets and liabilities acquired in asset acquisitions. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated. For a discussion of our critical accounting policies, refer to Part I,II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20212022 Annual Report. ThereOther than the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) as discussed in Note 2 to our condensed consolidated financial statements, there have been no significant changes in our critical accounting policies during the first ninesix months of 2022.ended June 30, 2023.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet debt or similar obligations. We have no transactions or obligations with related parties that are not disclosed, consolidated into, or reflected in our reported results of operations or financial position. We do not guarantee any third-party debt.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of SeptemberJune 30, 2022.2023.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our Company have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision making can be faulty and that
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breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. We base the design of any system of controls in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are
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subject to risks. Over time, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We may be subject to legal proceedings in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not aware of any legal proceedings to which we are a party that we believe could have a material adverse effect on us.
Item 1A. Risk Factors
The following risk factor supplements the risk factors described in Item 1A of our 20212022 Annual Report and should be read in conjunction with the risk factors described in our 20212022 Annual Report:
Our variable rate indebtedness subjects usThe instability of certain financial institutions may have adverse impacts on certain of our vendors and customers and/or on our ability to interest rate risk,access our cash deposits and make borrowings, which could causenegatively impact our debt service obligations to increase significantly.financial condition, results of operations and cash flows.
AllIn 2023, there have been public reports of instability at certain financial institutions. Although we do not hold material deposits or investments at these financial institutions, and despite the steps taken to date by U.S. and foreign agencies and institutions to protect depositors, the follow-on effects of the borrowings underevents surrounding recent bank failures and pressure on other financial institutions are unknown, could include failures of other financial institutions to which we face direct or indirect exposure, and may lead to disruptions to the Company’s senior secured credit facilities bear interest at variable rates. As a result, an increase in interest rates, whether due to an increase in market interest rates or an increase in our own cost of borrowing, would increase the cost of servicing our debt even though the amount borrowed remained the same resulting in our net income and cash flows, including cash available for servicing our indebtedness, to decrease correspondingly. The impact of such an increase would be more significant than it would be for some other companies becauseoperations and financial condition of our substantial debt.vendors, customers, and/or us. Additionally, tight credit conditions could generally result in economic slowdown and reduced demand for our services.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 19, 2022, we issued 166,516 shares of common stock, with a market value of $1,342,125, to Green Remedies pursuant to that certain Consideration Agreement, dated October 19, 2020, between QRHC and Green Remedies, entered into in connection with the Green Remedies acquisition. This issuance reflects the second of two equal installments payable to Green Remedies in either cash or shares of QRHC’s common stock, at our option, on the first and second anniversaries of the closing date of the acquisition.None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.On August 10, 2023, the Compensation Committee of the Board (the “Committee”) approved certain changes in the compensation program for non-employee directors of the Company. Effective as of August 16, 2023, each non-employee director will receive an annual cash retainer equal to $40,000, paid monthly (previously $37,474), and, in addition to such annual retainer: the non-employee Chairman of the Board will continue to receive an annual cash retainer equal to $173,040 per year (unchanged from the current fee schedule); the non-employee Chair of the Audit Committee will receive a $15,000 retainer per year (previously $8,517 per year); the non-employee Chair of the Compensation Committee will receive a $10,000 retainer per year (previously $5,678 per year); the non-employee Chair of the Nominations and Corporate Governance Committee will receive a $7,500 retainer per year (previously $2,839 per year); the non-employee Chair of the Strategic Planning Committee will receive a $10,000 retainer per year (previously $5,678 per year); the non-Chair members of the Audit Committee will each receive a $7,500 retainer per year (previously $2,271 per year); the non-Chair members of the Compensation Committee will each receive a $5,000 retainer per year (previously $1,703 per year); the non-Chair members of the Nominations and Corporate Governance Committee will each receive a $3,750 retainer per year (previously $1,136 per year); and the non-Chair members of the Strategic Planning Committee will each receive a $5,000 retainer per year (previously $1,703 per year). The non-employee directors will also receive an annual equity retainer equal to $75,000, to be paid in the form of RSUs subject to one-year vesting terms.
In addition, in connection with increased responsibilities related to setting and implementing Company strategy, the Committee approved an additional monthly cash retainer for Mr. Friedberg equal to $10,000 per month, with such additional retainer to be subject to the Committee’s periodic review.
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Item 6. Exhibits
Exhibit No. | Exhibit | ||
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31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | ||
32.1 | |||
32.2 | |||
101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended | ||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) | ||
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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 thereunto duly authorized.
QUEST RESOURCE HOLDING CORPORATION | ||||
Date: | By: | /s/ S. Ray Hatch | ||
S. Ray Hatch | ||||
President and Chief Executive Officer | ||||
Date: | By: | /s/ Brett W. Johnston | ||
Brett W. Johnston | ||||
Senior Vice President and Chief Financial Officer |
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