UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
Commission file number:
(Exact Name of Registrant as Specified in its Charter)
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(State or other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices and Zip Code)
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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 |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of August 2, 2022, there were
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, |
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December 31, |
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2022 |
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2021 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, less allowance for doubtful accounts of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Goodwill |
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Intangible assets, net |
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Property and equipment, net, and other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
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$ |
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Other current liabilities |
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Current portion of notes payable |
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Total current liabilities |
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Notes payable, net |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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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)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Selling, general, and administrative |
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Depreciation and amortization |
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Total operating expenses |
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Operating income |
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Interest expense |
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Income (loss) before taxes |
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Income tax expense |
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Net income (loss) |
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Net income (loss) applicable to common stockholders |
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$ |
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$ |
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$ |
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$ |
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Net income (loss) per share applicable to common stockholders |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares outstanding |
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Basic |
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Diluted |
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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)
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Additional |
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Total |
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Common Stock |
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Paid-in |
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Accumulated |
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Stockholders’ |
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Shares |
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Par Value |
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Capital |
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Deficit |
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Equity |
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Balance, December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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Balance, March 31, 2022 |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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Stock option exercises |
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— |
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Shares issued for Employee Stock Purchase Plan options |
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— |
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Net income |
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— |
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— |
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— |
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Balance, June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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Additional |
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Total |
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Common Stock |
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Paid-in |
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Accumulated |
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Stockholders’ |
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Shares |
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Par Value |
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Capital |
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Deficit |
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Equity |
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Balance, December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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Stock option and warrant exercises |
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— |
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Net income |
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— |
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— |
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— |
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Balance, March 31, 2021 |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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Release of deferred stock units |
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— |
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— |
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Stock option and warrant exercises |
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— |
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Shares issued for Employee Stock Purchase Plan options |
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— |
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Net income |
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— |
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— |
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— |
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Balance, June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
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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)
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For the Six Months Ended June 30, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation |
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Amortization of intangibles |
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Amortization of debt issuance costs and discounts |
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Provision for doubtful accounts |
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Stock-based compensation |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Security deposits and other assets |
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Accounts payable and accrued liabilities |
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Other liabilities |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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Purchase of intangible assets |
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Acquisition, net of cash acquired |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Proceeds from credit facilities |
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Repayments of credit facilities |
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Proceeds from long-term debt |
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— |
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Repayments of long-term debt |
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Proceeds from shares issued for Employee Stock Purchase Plan |
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Proceeds from stock option exercises |
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Debt issuance costs |
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Net cash provided by (used in) financing activities |
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Net increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
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$ |
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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 March 2020, the World Health Organization categorized Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The waste management and recycling services we provide are currently designated an essential critical infrastructure business under the President’s COVID-19 guidance, the continued operation of which is vital for national public health, safety and national economic security. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and subcontractors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.
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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.
The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2022 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2021 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 six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year.
Recent Accounting Pronouncements
Adopted
On January 1, 2021, we adopted 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.
6
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. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for us on January 1, 2023. We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our consolidated financial statements.
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 $
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: |
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Cash (1) |
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$ |
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Other (2) |
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$ |
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Purchase price allocation: |
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Accounts receivable, net (3) |
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Other assets |
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Machinery and equipment, net |
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Intangible assets |
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Goodwill |
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Current liabilities |
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$ |
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(1) Financed with Monroe Capital term loan |
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(2) Net working capital |
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(3) Gross receivables of $ |
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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 six months ended June 30, 2022, which resulted in an increase to goodwill and current liabilities of approximately $
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.
7
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Three months ended |
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Six months ended |
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June 30, 2021 |
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June 30, 2021 |
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Pro Forma |
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(unaudited) |
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(unaudited) |
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Revenue |
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$ |
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$ |
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Net loss |
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$ |
( |
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$ |
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Net loss per share - basic and diluted |
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$ |
( |
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$ |
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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 $
4. Property and Equipment, net, and Other Assets
At June 30, 2022 and December 31, 2021, property and equipment, net, and other assets consisted of the following:
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June 30, |
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December 31, |
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2022 |
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2021 |
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(Unaudited) |
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Property and equipment, net of accumulated depreciation of $ |
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$ |
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$ |
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Right-of-use operating lease asset |
|
|
|
|
|
|
||
Security deposits and other assets |
|
|
|
|
|
|
||
Property and equipment, net, and other assets |
|
$ |
|
|
$ |
|
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 June 30, 2022 was $
We recorded right-of-use operating lease assets related to our office leases in accordance with ASC 842. Refer to Note 8, 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
8
5. Goodwill and Other Intangible Assets
The components of goodwill and other intangible assets were as follows:
June 30, 2022 (Unaudited) |
|
Estimated |
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Software |
|
|
|
|
|
|
|
|
|
|
||||
Trademarks |
|
|
|
|
|
|
|
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
||||
Total finite lived intangible assets |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
December 31, 2021 |
|
Estimated |
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Software |
|
|
|
|
|
|
|
|
|
|
||||
Trademarks |
|
|
|
|
|
|
|
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
||||
Total finite lived intangible assets |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
Carrying |
|
|
Changes in goodwill: |
|
|
|
|
|
|
Goodwill balance at December 31, 2021 |
|
|
|
$ |
|
|
Addition related to acquisition |
|
|
|
|
|
|
RWS purchase price allocation adjustment |
|
|
|
|
|
|
Goodwill balance at June 30, 2022 |
|
|
|
$ |
|
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 $
We have
We performed our annual impairment analysis for goodwill and other intangible assets in the third quarter of 2021 with
6. Current Liabilities
The components of Accounts payable and accrued liabilities were as follows:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
|
|
(Unaudited) |
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued taxes |
|
|
|
|
|
|
||
Employee compensation |
|
|
|
|
|
|
||
Operating lease liability - current portion |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
Refer to Note 8, Leases for additional disclosure related to the operating lease liability.
9
The components of Other current liabilities were as follows:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
|
|
(Unaudited) |
|
|
|
|
||
Deferred seller consideration, net |
|
$ |
|
|
$ |
|
||
Deferred consideration - earn-out |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
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 June 30, 2022 and December 31, 2021, the unamortized portion of OID on the deferred seller consideration was $
7. Notes Payable and Other Long-term Liabilities
Our debt obligations are as follows:
|
|
Interest Rate |
|
June 30, |
|
|
December 31, |
|
||
|
|
(1) |
|
2022 |
|
|
2021 |
|
||
|
|
|
|
(Unaudited) |
|
|
|
|
||
Monroe Term Loan (2) |
|
|
$ |
|
|
$ |
|
|||
Green Remedies Promissory Note (3) |
|
|
|
|
|
|
|
|||
PNC ABL Facility (4) |
|
|
|
|
|
|
|
|||
Total notes payable |
|
|
|
|
|
|
|
|
||
Less: Current portion of long-term debt |
|
|
|
|
( |
) |
|
|
( |
) |
Less: Unamortized debt issuance costs |
|
|
|
|
( |
) |
|
|
( |
) |
Less: Unamortized OID |
|
|
|
|
( |
) |
|
|
( |
) |
Less: Unamortized OID warrant |
|
|
|
|
( |
) |
|
|
( |
) |
Notes payable, net |
|
|
|
$ |
|
|
$ |
|
||
(1) Interest rates as of June 30, 2022 |
|
|
|
|
|
|
||||
(2) Bears interest at LIBOR rate plus Applicable Margin ranging from |
|
|
|
|
|
|
||||
(3) Stated interest rate of |
|
|
|
|
|
|
||||
(4) Bears interest at a Base rate, as defined, plus a margin of |
|
|
|
|
|
|
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.
|
|
|
|
June 30, |
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
(Unaudited) |
|
|
Debt issuance costs |
|
|
|
|
|
|
Beginning balance |
|
|
|
$ |
|
|
Financing costs deferred |
|
|
|
|
|
|
Less: Amortization expense |
|
|
|
|
( |
) |
Debt issuance costs, net of accumulated amortization |
|
|
|
$ |
|
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, 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:
10
The PNC Loan Agreement contains certain financial covenants, including a minimum fixed charge coverage ratio. In addition, the PNC Loan Agreement contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matter customarily restricted in such agreements. The PNC Loan Agreement also contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, change of control, and failure of any guaranty or security document supporting the PNC Loan Agreement to be in full force and effect. Upon the occurrence of an event of default, the outstanding obligations under the PNC Loan Agreement may be accelerated and become immediately due and payable.
As of June 30, 2022, the ABL Facility borrowing base availability was $
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 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, 2022 with 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
Green Remedies Promissory Note
On October 19, 2020, we issued an unsecured subordinated promissory note to Green Remedies in the aggregate principal amount of $
Interest Expense
The amount of interest expense related to borrowings for the three months ended June 30, 2022 and 2021 was $
Other long-term liabilities
|
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
|
(Unaudited) |
|
|
|
|
||
Deferred consideration - earn-out |
|
|
|
$ |
|
|
$ |
|
||
Operating lease liability - long-term portion |
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
||
|
|
|
|
$ |
|
|
$ |
|
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. Leases
Our leases are primarily related to office space and are classified as operating leases.
Lease Costs
For the three months ended June 30, 2022 and 2021 we recorded approximately $
Effective
Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the six months ended June 30, 2022 and 2021. We did not obtain any new operating lease right-of-use assets in the six months ended June 30, 2022.
12
The future minimum lease payments required under our office leases as of June 30, 2022 are as follows:
|
|
Amount |
|
|
2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Total lease payments |
|
|
|
|
Less: Interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
Balance Sheet Classification
The table below presents the lease related assets and liabilities recorded on the balance sheet. Right-of-use assets and related liabilities related to finance leases at June 30, 2022 are de minimis.
|
June 30, |
|
|
December 31, |
|
||
|
2022 |
|
|
2021 |
|
||
Operating Leases: |
(Unaudited) |
|
|
|
|
||
Right-of-use operating lease asset: |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Lease Liabilities: |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Total operating lease liabilities |
$ |
|
|
$ |
|
9. 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 are primarily generated from fees charged for our collection, transfer, disposal and recycling services and from sales of commodities by our recycling operations. 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 $
13
Disaggregation of Revenue
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Revenue Type: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Services |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Product sales and other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
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 June 30, 2022 and December 31, 2021, we had $
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 June 30, 2022 and December 31, 2021, we had $
10. Income Taxes
Our statutory income tax rate is anticipated to be
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 June 30, 2022 and December 31, 2021, and we had recorded a valuation allowance of $
11. 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. Stockholders’ Equity
Preferred Stock – Our authorized preferred stock consists of
Common Stock – Our authorized common stock consists of
14
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, we issued
Warrants –
Warrants Issued and Outstanding as of June 30, 2022 |
|
|||||||||||
|
|
Date of |
|
Exercise |
|
|
Shares of |
|
||||
Description |
|
Issuance |
|
Expiration |
|
|
|
|
Common Stock |
|
||
Exercisable Warrants |
|
|
|
$ |
|
|
|
|
||||
Exercisable Warrants |
|
|
|
$ |
|
|
|
|
||||
Total warrants issued and outstanding |
|
|
|
|
|
|
Stock Options – We recorded stock option expense of $
|
|
Stock Options |
|
|||||||
|
|
|
|
|
|
|
Weighted- |
|
||
|
|
|
|
|
Exercise |
|
Average |
|
||
|
|
Number |
|
|
Price Per |
|
Exercise Price |
|
||
|
|
of Shares |
|
|
Share |
|
Per Share |
|
||
Outstanding at December 31, 2021 |
|
|
|
|
$ |
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
$ |
|
||
Exercised |
|
|
( |
) |
|
$ |
|
$ |
|
|
Cancelled/Forfeited |
|
|
( |
) |
|
$ |
|
$ |
|
|
Outstanding at June 30, 2022 |
|
|
|
|
$ |
|
$ |
|
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 represents the right to receive
15
13. Net Income (Loss) per Share
We compute basic net income 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. 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) per share attributable to common stockholders is as follows:
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) applicable to common stockholders |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive common shares |
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Diluted |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Anti-dilutive securities excluded from diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
||||
Warrants |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total anti-dilutive securities excluded from net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
16
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 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, 2021 (the “2021 Annual Report”).
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., a leading 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 3 to our condensed consolidated financial statements for more information regarding the acquisitions. The results for the three and six months ended June 30, 2022 reflect the impact of the RWS acquisition, but the prior year period does not.
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 Quest (collectively, “we,” “us,” “our,” or “our company”).
17
Three and Six Months Ended June 30, 2022 and 2021 Operating Results
The following table summarizes our operating results for the three and six months ended June 30, 2022 and 2021:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Revenue |
|
$ |
76,904,788 |
|
|
$ |
36,858,083 |
|
|
$ |
148,426,956 |
|
|
$ |
71,960,074 |
|
Cost of revenue |
|
|
62,236,397 |
|
|
|
30,047,604 |
|
|
|
122,510,150 |
|
|
|
58,709,717 |
|
Gross profit |
|
|
14,668,391 |
|
|
|
6,810,479 |
|
|
|
25,916,806 |
|
|
|
13,250,357 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general, and administrative |
|
|
9,298,367 |
|
|
|
5,060,231 |
|
|
|
18,642,829 |
|
|
|
9,322,791 |
|
Depreciation and amortization |
|
|
2,470,390 |
|
|
|
408,652 |
|
|
|
4,835,252 |
|
|
|
815,935 |
|
Total operating expenses |
|
|
11,768,757 |
|
|
|
5,468,883 |
|
|
|
23,478,081 |
|
|
|
10,138,726 |
|
Operating income |
|
|
2,899,634 |
|
|
|
1,341,596 |
|
|
|
2,438,725 |
|
|
|
3,111,631 |
|
Interest expense |
|
|
(1,588,827 |
) |
|
|
(549,677 |
) |
|
|
(3,145,412 |
) |
|
|
(1,111,139 |
) |
Income (loss) before taxes |
|
|
1,310,807 |
|
|
|
791,919 |
|
|
|
(706,687 |
) |
|
|
2,000,492 |
|
Income tax expense |
|
|
160,576 |
|
|
|
92,613 |
|
|
|
327,391 |
|
|
|
154,446 |
|
Net income (loss) |
|
$ |
1,150,231 |
|
|
$ |
699,306 |
|
|
$ |
(1,034,078 |
) |
|
$ |
1,846,046 |
|
Three and Six Months Ended June 30, 2022 compared to Three and Six Months Ended June 30, 2021
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.
To date, we have experienced some limitations in employee resources resulting from travel restrictions and “stay at home” orders. Despite these restrictions, we continue to efficiently manage supply chain requirements of our customers and subcontractors. The waste management and recycling services we provide are currently designated an essential critical infrastructure business under the President’s COVID-19 guidance, the continued operation of which is vital for national public health, safety, and national economic security. 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 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 increase in interest rates could have a material adverse effect on our business, results of operations and financial condition.
Revenue
For the quarter ended June 30, 2022, revenue was $76.9 million, an increase of $40.0 million, or 109%, compared to $36.9 million for the quarter ended June 30, 2021. For the six months ended June 30, 2022, revenue was $148.4 million, an increase of $76.5 million, or 106%, compared to $72.0 million for the quarter ended June 30, 2021. The increase was primarily due to the impact of heightened customer production levels, increased value for recycled materials compared to a year ago, increased services from certain new and continuing customers, and revenue of $28.4 million for the quarter and $54.8 million for the six months ended June 30, 2022, respectively, from the acquired customer base related to the business acquisitions that occurred after June 30, 2021, partially offset by
18
lower levels of services due to reduced operations at certain other customers. See Note 3 to our condensed consolidated financial statements for a discussion of certain acquisitions during 2022 and 2021.
Cost of Revenue/Gross Profit
Cost of revenue increased $32.2 million to $62.2 million for the quarter ended June 30, 2022 from $30.0 million for the quarter ended June 30, 2021. The increase was primarily due to the same reasons impacting the increase in revenue including $22.5 million from the acquired customer base related to the business acquisitions in 2022 and 2021. Cost of revenue increased $63.8 million to $122.5 million for the six months ended June 30, 2022 from $58.7 million for the six months ended June 30, 2021. The increase was primarily due to the same reasons impacting the increase in revenue including $45.2 million for the six months ended June 30, 2022 from the acquired customer base related to the business acquisitions after June 30, 2021.
Gross profit for the quarter ended June 30, 2022 was $14.7 million, an increase of $7.9 million, compared to $6.8 million for the quarter ended June 30, 2021. The gross profit margin was 19.1% for the second quarter of 2022 compared with 18.5% for the second quarter of 2021. Gross profit for the six months ended June 30, 2022 was $25.9 million, an increase of $12.7 million, compared to $13.3 million for the six months ended June 30, 2021. The gross profit margin was 17.5% for the six months ended June 30, 2022 compared with 18.4% for the six months ended June 30, 2021. The changes in gross profit and gross profit margin percentage for the quarter and six months ended June 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 after June 30, 2021, 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.
Revenue, gross profit, and gross profit margins are affected period to period by the volumes of waste and recycling materials generated by our customers, the frequency and type of services provided, the price and mix of the services provided, commodity price changes for recycled materials, the cost and mix of subcontracted services provided in any one reporting period, and the timing of acquisitions. 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 million and $5.5 million for the quarters ended June 30, 2022 and 2021, respectively, an increase of $6.3 million. The increase in operating expenses was primarily related to the business operations acquired after the quarter ended June 30, 2021 and totaled $4.7 million for the quarter ended June 30, 2022. Operating expenses were approximately $23.5 million and $10.1 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $13.3 million. The increase in operating expenses was primarily related to the business operations acquired after June 30, 2021 and totaled $9.4 million for the six months ended June 30, 2022.
Selling, general, and administrative expenses were $9.3 million and $5.1 million for the quarters ended June 30, 2022 and 2021, respectively, an increase of approximately $4.2 million. The increase primarily relates to increases in labor related expenses of $2.7 million, acquisition/integration related expenses of $551,000, inclusive of professional fees of $524,000, travel/marketing expenses of $56,000 and other administrative expenses of $950,000. Selling, general, and administrative expenses were $18.6 million and $9.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of approximately $9.3 million. The increase primarily relates to increases in labor related expenses of $5.1 million, acquisition/integration related expenses of $1.8 million, inclusive of professional fees of $1.7 million, travel/marketing expenses of $104,000 and other administrative expenses of $1.7 million.
Operating expenses for the quarters ended June 30, 2022 and 2021 included depreciation and amortization of approximately $2.5 million and $409,000, respectively, an increase of approximately $2.1 million. The increase in depreciation and amortization was primarily related to the business operations acquired after the quarter ended June 30, 2021 and totaled $2.0 million for the quarter ended June 30, 2022. Operating expenses for the six months ended June 30, 2022 and 2021 included depreciation and amortization of approximately $4.8 million and $816,000, respectively, an increase of approximately $4.0 million. The increase in depreciation and amortization was primarily related to the business operations acquired after June 30, 2021 and totaled $3.9 million for the six months ended June 30, 2022.
Interest Expense
Interest expense was $1.6 million and $550,000 for the three months ended June 30, 2022 and 2021, respectively, an increase of approximately $1.0 million. Interest expense was $3.1 million and $1.1 million for the six months ended June 30, 2022 and 2021, respectively, an increase of approximately $2.0 million. The increase is due to an increase in debt, primarily related to the acquisitions in 2021 and 2022. We are amortizing debt issuance costs of $3.2 million and OID of $2.2 million to interest expense over the life of the related debt arrangements as discussed in Note 7 to our condensed consolidated financial statements.
19
Income Taxes
We recorded a provision for income tax of $161,000 and $93,000 for the three months ended June 30, 2022 and 2021, respectively. We recorded a provision for income tax of $327,000 and $154,000 for the six months ended June 30, 2022 and 2021, 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 June 30, 2022 and December 31, 2021. 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 taxable 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 income for the quarter ended June 30, 2022 was $1.15 million compared to net income of $699,000 for the quarter ended June 30, 2021. Net loss for the six months ended June 30, 2022 was $(1.0) million compared to net income of $1.8 million for the six months ended June 30, 2021. 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 recycled materials, the volumes and mix of services provided, as well as customer mix during the reporting period, and the timing of acquisitions.
Income (Loss) per Share
Net income per basic and diluted share attributable to common stockholders was $0.06 and $0.05, respectively, for the quarter ended June 30, 2022 compared to net income per basic and diluted share of $0.04 and $0.03, respectively, for the quarter ended June 30, 2021. Net loss per basic and diluted share attributable to common stockholders was $(0.05) per share for the six months ended June 30, 2022 compared to net income per basic and diluted share of $0.10 and $0.09, respectively, for the six months ended June 30, 2021.
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 18.8 million and 20.5 million, respectively, for the three months ended June 30, 2021. The basic and diluted weighted average number of shares of common stock outstanding was approximately 19.3 million for the six months ended June 30, 2022. The basic and diluted weighted average number of shares of common stock outstanding were approximately 18.7 million and 20.0 million, respectively, for the six months ended June 30, 2021.
Adjusted EBITDA
In the quarter ended June 30, 2022, Adjusted EBITDA, a non-GAAP financial measure, increased 161% to $6.6 million, from $2.5 million for the same period in 2021. For the six months ended June 30, 2022, Adjusted EBITDA increased 100% to $10.3 million from $5.1 million for the same period in 2021.
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 six months ended June 30, 2022 other adjustments of $113,000 and $309,000, respectively, included recruiting costs, project costs, and certain administrative fees related to borrowings. For the three and six months ended June 30, 2021 other adjustments of $64,000 and $117,000, respectively, included severance costs and certain administrative fees related to borrowings.
20
The following table reflects Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021:
RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA
(UNAUDITED)
|
|
As Reported |
|
|
As Reported |
|
||||||||||
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Net income (loss) |
|
$ |
1,150,231 |
|
|
$ |
699,306 |
|
|
$ |
(1,034,078 |
) |
|
$ |
1,846,046 |
|
Depreciation and amortization |
|
|
2,549,979 |
|
|
|
481,067 |
|
|
|
4,987,188 |
|
|
|
956,727 |
|
Interest expense |
|
|
1,588,827 |
|
|
|
549,677 |
|
|
|
3,145,412 |
|
|
|
1,111,139 |
|
Stock-based compensation expense |
|
|
326,894 |
|
|
|
506,391 |
|
|
|
585,532 |
|
|
|
816,001 |
|
Acquisition, integration and related costs |
|
|
668,047 |
|
|
|
116,513 |
|
|
|
1,973,982 |
|
|
|
135,989 |
|
Other adjustments |
|
|
113,017 |
|
|
|
64,093 |
|
|
|
308,876 |
|
|
|
117,435 |
|
Income tax expense |
|
|
160,576 |
|
|
|
92,613 |
|
|
|
327,391 |
|
|
|
154,446 |
|
Adjusted EBITDA |
|
$ |
6,557,571 |
|
|
$ |
2,509,660 |
|
|
$ |
10,294,303 |
|
|
$ |
5,137,783 |
|
Adjusted Net Income and Adjusted Net Income per Diluted Share
Adjusted net income, a non-GAAP financial measure, was $4.0 million for the quarter ended June 30, 2022, compared with $1.1 million for the quarter ended June 30, 2021. Adjusted net income, a non-GAAP financial measure, was $5.3 million for the six months ended June 30, 2022, compared with $2.6 million for the six months ended June 30, 2021. 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 quarter and the six months ended June 30, 2022 and 2021, are calculated as follows:
|
|
As Reported |
|
|
As Reported |
|
||||||||||
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Reported net income (loss) (a) |
|
$ |
1,150,231 |
|
|
$ |
699,306 |
|
|
$ |
(1,034,078 |
) |
|
$ |
1,846,046 |
|
Amortization of intangibles (b) |
|
|
2,221,364 |
|
|
|
289,037 |
|
|
|
4,395,819 |
|
|
|
577,680 |
|
Acquisition, integration and related costs (c) |
|
|
668,047 |
|
|
|
116,513 |
|
|
|
1,973,982 |
|
|
|
135,989 |
|
Adjusted net income |
|
$ |
4,039,642 |
|
|
$ |
1,104,856 |
|
|
$ |
5,335,723 |
|
|
$ |
2,559,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Reported net income (loss) |
|
$ |
0.05 |
|
|
$ |
0.03 |
|
|
$ |
(0.05 |
) |
|
$ |
0.09 |
|
Adjusted net income |
|
$ |
0.19 |
|
|
$ |
0.05 |
|
|
$ |
0.25 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted (d) |
|
|
21,348,821 |
|
|
|
20,500,624 |
|
|
|
21,541,344 |
|
|
|
20,044,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
(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 |
|
|
|
|
|
|
|
Liquidity and Capital Resources
As of June 30, 2022 and December 31, 2021, we had $4.2 million and $8.4 million in cash and cash equivalents, respectively. Working capital was $15.9 million and $12.6 million as of June 30, 2022 and December 31, 2021, respectively.
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,
21
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 $4.2 million, our borrowing availability under our $15.0 million ABL Facility (as defined and discussed in Note 7 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. 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 six months ended June 30, 2022 and 2021.
Cash Flows from Operating Activities
Net cash used in operating activities was $(3.8) million for the six months ended June 30, 2022 compared with net cash provided by operating activities of $5.2 million for the six months ended June 30, 2021.
Net cash used in operating activities for the six months ended June 30, 2022 related primarily to the net effect of the following:
Net cash provided by operating activities for the six months ended June 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, commodity 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 six months ended June 30, 2022 and 2021 was $3.9 million and $2.5 million, respectively. Cash used in 2022 relates mainly to the $3.1 million net purchase of the assets of a Northeast-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.
Cash Flows from Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2022 was $3.4 million compared to net cashed used in financing activities of $(113,000) for the six months ended June 30, 2021. Net cash provided by financing activities for the six months ended June 30, 2022 was primarily from term loan proceeds used to finance the February 2022 acquisition of an independent environmental services company and from net borrowings on our ABL Facility, partially offset by repayments of notes payable. Net cash used in financing activities for the six months ended June 30, 2021 was primarily related to net repayments on our ABL Facility. See Note 7 to our condensed consolidated financial statements for a discussion of the ABL Facility and other notes payable.
Inflation
We do not believe that inflation had a material impact on us during the six months ended June 30, 2022 and 2021. We believe that current inflationary increases in costs, such as fuel, 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
22
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.
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, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report. There have been no changes in our critical accounting policies during the first six months of 2022.
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 June 30, 2022.
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 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 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 2021 Annual Report and should be read in conjunction with the risk factors described in our 2021 Annual Report:
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
All of the borrowings under 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 because of our substantial debt.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On August 9, 2022, the Company and certain of its domestic subsidiaries entered into a letter agreement (the “Monroe Letter Agreement”) amendment the Credit Agreement, with Monroe Capital as the Administrative Agent for the Lenders, and the Lenders. Capitalized terms not otherwise defined herein have the meanings set forth in the Credit Agreement. Among other things, the Monroe Letter Agreement provides for the extension of the Term D Loan Availability Period (as defined in the Credit Agreement) through March 31, 2023 and increasing the threshold for unsecured debt under corporate credit cards for business related expenses in the ordinary course of business under the negative covenant regarding debt from $375,000 to $4,000,000. The foregoing summary of the Monroe Letter Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Monroe Letter Agreement, which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
Item 6. Exhibits
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Exhibit No. |
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Exhibit |
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10.1 |
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10.2 |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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32.1 |
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32.2 |
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101 |
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The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (unaudited), tagged as blocks of text and including detailed tags |
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104 |
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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.
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QUEST RESOURCE HOLDING CORPORATION |
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Date: August 15, 2022 |
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By: |
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/s/ S. Ray Hatch |
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S. Ray Hatch |
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President and Chief Executive Officer |
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Date: August 15, 2022 |
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By: |
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/s/ Laurie L. Latham |
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Laurie L. Latham |
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Senior Vice President and Chief Financial Officer |
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