UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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Name of each exchange on which registered |
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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 November 1, 2021, 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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September 30, |
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December 31, |
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2021 |
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2020 |
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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, net |
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Total liabilities |
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Commitments and contingencies |
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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 September 30, |
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Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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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 (loss) |
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Other income |
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— |
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— |
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Interest expense |
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Loss on extinguishment of debt |
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— |
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— |
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Income before taxes |
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Income tax expense |
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Net income (loss) |
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Deemed dividend for warrant down round feature |
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— |
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— |
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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, 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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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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Net income |
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— |
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— |
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— |
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Balance, September 30, 2021 |
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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, 2019 |
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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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( |
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( |
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Balance, March 31, 2020 |
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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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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, 2020 |
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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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— |
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Sale of common stock, net of issuance costs |
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— |
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Deemed dividend |
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— |
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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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( |
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( |
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Balance, September 30, 2020 |
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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 Nine Months Ended September 30, |
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2021 |
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2020 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by 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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Loss on extinguishment of debt |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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Prepaid expenses and other current assets |
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( |
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( |
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Security deposits and other assets |
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( |
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Accounts payable and accrued liabilities |
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Other liabilities |
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Net cash provided by 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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( |
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Acquisition, net of cash acquired |
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— |
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Net cash used in investing activities |
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( |
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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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( |
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( |
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Repayments of notes payable |
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( |
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— |
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Proceeds from stock option exercises |
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Proceeds from shares issued for Employee Stock Purchase Plan |
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Proceeds from the sale of common stock, net of issuance costs |
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— |
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Debt issuance costs |
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— |
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Net cash provided by financing activities |
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Net increase 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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Supplemental non-cash investing and financing activities: |
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Repayment of Citizens ABL |
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$ |
— |
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$ |
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Debt issuance costs |
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$ |
— |
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$ |
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Deemed dividend for warrant down round feature |
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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”), and Quest Sustainability Services, Inc. (“QSS”) (collectively, “we,” “us,” “our,” or “our company”).
Operations – We are a national provider of waste and recycling services to customers from across multiple industry sectors that are typically larger, multi-location businesses. We create customer-specific programs and perform the related services for the collection, processing, recycling, disposal, and tracking of waste streams and recyclables.
In March 2020, the World Health Organization categorized Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The waste management and recycling services we provide are currently designated an essential critical infrastructure business under the President’s COVID-19 guidance, the continued operation of which is vital for national public health, safety and national economic security. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and subcontractors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.
On
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, 2020. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.
The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2021 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2020 condensed consolidated balance sheet data from audited financial statements; however, we did not include all disclosures required by GAAP. As QRHC, Quest, LDI, Youchange, QVC, QV One, and QSS each operate as environmental-based service companies, we did not deem segment reporting necessary.
All intercompany accounts and transactions have been eliminated in consolidation. Interim results are subject to seasonal variations, and the results of operations for the nine months ended September 30, 2021 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.
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
6
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
On October 19, 2020, we acquired substantially all of the assets of Green Remedies (the “Green Remedies Assets”) pursuant to the Asset Purchase Agreement (the “Asset Purchase Agreement”), dated as of October 19, 2020, among the Company, Green Remedies and Alan Allred (the “Acquisition”). Green Remedies is a leading provider of independent environmental services, particularly in the multi-family housing market, and is located in Burlington, NC. The Acquisition strengthens our presence across key markets, particularly in multi-family housing. The total purchase price for the Green Remedies Assets was approximately $
The following table sets forth the purchase price allocation amount of assets acquired and liabilities assumed as of the acquisition date:
Purchase price allocation: |
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|
|
|
Accounts receivable, net |
|
$ |
|
|
Machinery and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Goodwill |
|
|
|
|
Current liabilities |
|
|
( |
) |
|
|
$ |
|
|
The purchase price was allocated based on an estimate of the fair value of assets acquired and liabilities assumed as of the acquisition date.
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 Green Remedies Assets is deductible for income tax purposes.
Deferred consideration payable to Green Remedies includes (i) $
The following table presents unaudited pro forma information for the three and nine months ended September 30, 2020 as if the Acquisition had occurred at the beginning of our 2020 fiscal year. The unaudited pro forma information includes adjustments for amortization expense on definite lived intangible assets acquired, interest expense on debt incurred related to the Acquisition, and the related income tax effects.
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 Acquisition had been effected on the dates previously set forth, nor is it indicative of the future operating results or financial position in combination.
7
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Three months ended |
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Nine months ended |
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September 30, 2020 |
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September 30, 2020 |
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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 income (loss) |
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$ |
( |
) |
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$ |
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Income per share - basic and diluted |
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$ |
( |
) |
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$ |
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|
On June 30, 2021, we acquired substantially all of the assets of an Atlanta-based independent environmental services company. On November 5, 2021, we acquired substantially all of the assets of a Kentucky-based independent environmental services company. Neither acquisition had a material impact on our financial position or results of operations and are not reflected in the above pro forma presentation.
4. Property and Equipment, net, and Other Assets
At September 30, 2021 and December 31, 2020, property and equipment, net, and other assets consisted of the following:
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September 30, |
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December 31, |
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||
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2021 |
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2020 |
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(Unaudited) |
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Property and equipment, net of accumulated depreciation of $ and $ respectively |
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$ |
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$ |
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Right-of-use operating lease asset |
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Security deposits and other assets |
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Property and equipment, net, and other assets |
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$ |
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$ |
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We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment. Depreciation expense for the three months ended September 30, 2021 was $
We recorded right-of-use operating lease assets related to our corporate office lease and the office lease space in Burlington, NC 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
5. Goodwill and Other Intangible Assets
The components of goodwill and other intangible assets were as follows:
September 30, 2021 (Unaudited) |
|
Estimated Useful Life |
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Gross Carrying Amount |
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Accumulated Amortization |
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Net |
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Finite lived intangible assets: |
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|
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Customer lists |
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$ |
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$ |
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$ |
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Software |
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Trademarks |
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Non-compete agreement |
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Patents |
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|
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— |
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Total finite lived intangible assets |
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$ |
|
|
|
$ |
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$ |
|
|
8
December 31, 2020 |
|
Estimated Useful Life |
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Gross Carrying Amount |
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Accumulated Amortization |
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Net |
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Finite lived intangible assets: |
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|
|
|
|
|
Customer lists |
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$ |
|
|
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$ |
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$ |
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|
Software |
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|
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Trademarks |
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Patents |
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|
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|
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— |
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Total finite lived intangible assets |
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|
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$ |
|
|
|
$ |
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$ |
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|
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Carrying Amount |
|
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Changes in goodwill: |
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Goodwill balance at December 31, 2020 |
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|
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$ |
|
|
Addition related to acquisition |
|
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|
|
Goodwill balance at September 30, 2021 |
|
|
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$ |
|
|
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:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
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(Unaudited) |
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|
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|
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Accounts payable |
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$ |
|
|
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$ |
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Accrued taxes |
|
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Employee compensation |
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Operating lease liability - current portion |
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Other |
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|
|
|
|
|
|
|
|
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$ |
|
|
|
$ |
|
|
Refer to Note 8, Leases for additional disclosure related to the operating lease liability.
The components of Other current liabilities were as follows:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
(Unaudited) |
|
|
|
|
|
|
Deferred seller consideration, current |
|
$ |
|
|
|
$ |
|
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Deferred revenue |
|
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|
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|
|
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$ |
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$ |
|
|
Refer to Note 3, Acquisitions for additional disclosure related to the deferred seller consideration related to the Acquisition.
7. Notes Payable and Other Long-term Liabilities, net
Our debt obligations are as follows:
9
|
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Interest Rate |
|
September 30, |
|
|
December 31, |
|
||
|
|
(1) |
|
2021 |
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2020 |
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||
|
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(Unaudited) |
|
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|
|
|
|
Monroe Term Loan (2) |
|
|
|
$ |
|
|
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$ |
|
|
Green Remedies Promissory Note (3) |
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PNC ABL Facility (4) |
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Total notes payable |
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Less: Current portion of long-term debt |
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( |
) |
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( |
) |
Less: Unamortized debt issuance costs |
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( |
) |
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( |
) |
Less: Unamortized OID |
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( |
) |
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|
( |
) |
Less: Unamortized OID warrant |
|
|
|
|
( |
) |
|
|
( |
) |
Notes payable, net |
|
|
|
$ |
|
|
|
$ |
|
|
(1) Interest rates as of September 30, 2021 |
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|
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(2) Bears interest at LIBOR rate plus Applicable Margin ranging from |
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(3) Stated interest rate of |
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(4) Bears interest at a Base rate, as defined, plus a margin of |
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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.
|
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September 30, |
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2021 |
|
|
|
|
|
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(Unaudited) |
|
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Debt issuance costs |
|
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|
|
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|
Beginning balance |
|
|
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$ |
|
|
Less: Amortization expense |
|
|
|
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( |
) |
Debt issuance costs, net of accumulated amortization |
|
|
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$ |
|
|
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, 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:
|
• |
An asset-based revolving credit facility in the maximum principal amount of $ |
|
• |
An equipment loan facility in the maximum principal amount of $ |
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 September 30, 2021, the ABL Facility borrowing base availability was $
10
LIBOR is expected to be discontinued after 2021. The ABL Facility provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable. However, there can be no assurances as to whether such replacement or alternative rate will be more or less favorable than LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and will work with 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, 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:
|
• |
A senior secured term loan facility in the principal amount of $ |
|
• |
A delayed draw term loan facility in the maximum principal amount of $ |
|
• |
An accordion term loan facility in the maximum principal amount of $ |
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 $
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 September 30, 2021 and 2020 was $
11
was $
Other long-term liabilities, net
|
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|
September 30, |
|
|
December 31, |
|
||
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2021 |
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|
2020 |
|
||
|
|
|
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(Unaudited) |
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|
|
|
|
Deferred seller consideration, net |
|
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|
$ |
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|
|
$ |
|
|
Deferred consideration - earn-out |
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|
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Operating lease liability - long-term portion |
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Other |
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|
|
|
|
|
|
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|
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$ |
|
|
|
$ |
|
|
We recorded deferred consideration in connection with the Acquisition as further described in Note 3. At September 30, 2021 and December 31, 2020 the unamortized portion of OID on the deferred consideration was $
8. Leases
We lease corporate office space in The Colony, Texas under an
In connection with our acquisition of the Green Remedies Assets, we entered into a lease for office space in Burlington, NC. We recorded a right-of-use asset associated with this lease of approximately $
The future minimum lease payments required under our office leases as of September 30, 2021 are as follows:
|
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Amount |
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2021 |
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$ |
|
|
2022 |
|
|
|
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2023 |
|
|
|
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Total lease payments |
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Less: Interest |
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( |
) |
Present value of lease liabilities |
|
$ |
|
|
12
Balance Sheet Classification
The table below presents the lease related assets and liabilities recorded on the balance sheet. Right-of-use assets and related liabilities related to finance leases at September 30, 2021 are de minimis.
|
September 30, |
|
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December 31, |
|
||
|
2021 |
|
|
2020 |
|
||
Operating Leases: |
(Unaudited) |
|
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|
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|
|
Right-of-use operating lease asset: |
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|
|
|
|
|
Property and equipment, net and other assets |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
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|
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Lease Liabilities: |
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|
|
Accounts payable and accrued liabilities |
$ |
|
|
|
$ |
|
|
Other long-term liabilities |
|
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|
|
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|
|
Total operating lease liabilities |
$ |
|
|
|
$ |
|
|
Lease Costs
For the three and nine months ended September 30, 2021, we recorded approximately $
Effective
Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the nine months ended September 30, 2021 and 2020. We did not obtain any new operating lease right-of-use assets in the nine months ended September 30, 2021.
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, as well as minor ancillary services.
Revenue Recognition
We recognize revenue as services are performed or products are delivered. For example, we recognize revenue as waste and recyclable material are collected or when products are delivered. We recognize revenue net of any contracted pricing discounts or rebate arrangements.
We generally recognize revenue for the gross amount of consideration received as we are generally the primary obligor (or principal) in our contracts with customers as we hold complete responsibility to the customer for contract fulfillment. We record amounts collected from customers for sales tax on a net basis.
Disaggregation of Revenue
13
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
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2021 |
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2020 |
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2021 |
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2020 |
|
||||
|
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(Unaudited) |
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|
(Unaudited) |
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||||||||||
Revenue Type: |
|
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|
|
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|
|
|
|
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|
|
Services |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Product sales and other |
|
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|
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|
|
|
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Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
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|
$ |
|
|
Contract Balances
Our incremental direct costs of obtaining a customer contract are generally deferred and amortized to selling, general, and administrative expense or as a reduction to revenue (depending on the nature of the cost) over the estimated life of the customer contract. We classify our contract acquisition costs as current or noncurrent based on the timing of when we expect to recognize the amortization and are included in other assets.
As of September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, 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 interest, currency, or credit risks arising from these financial instruments. The fair values of these 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 3, Acquisitions.
12. Stockholders’ Equity
Preferred Stock – Our authorized preferred stock consists of
Common Stock – Our authorized common stock consists of
Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved our 2014 Employee Stock Purchase Plan (as amended, the “ESPP”). On May 14, 2021, we issued
14
and were exercised. We recorded expense of $
Warrants –
Warrant activity for the nine months ended September 30, 2021 was as follows:
|
|
Warrants |
|
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|
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Weighted- |
|
|
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|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Number |
|
|
Exercise Price |
|
|
Exercise Price |
|
|||
|
|
of Shares |
|
|
per Share |
|
|
Per Share |
|
|||
Outstanding at December 31, 2020 |
|
|
|
|
|
$1.15 — $3.88 |
|
|
$ |
|
|
|
Exercised |
|
|
( |
) |
|
$1.15 — $3.88 |
|
|
$ |
|
|
|
Canceled/Forfeited |
|
|
( |
) |
|
$1.15 — $3.88 |
|
|
$ |
|
|
|
Outstanding at September 30, 2021 |
|
|
|
|
|
|
$1.50 |
|
|
$ |
|
|
The following table summarizes the warrants issued and outstanding as of September 30, 2021:
|
|
|||||||||||
|
|
Date of |
|
|
|
|
Shares of |
|
||||
Description |
|
Issuance |
|
Expiration |
|
Exercise Price |
|
|
Common Stock |
|
||
Exercisable Warrants |
|
|
|
|
|
$ |
|
|
|
|
|
|
Stock Options – We recorded stock option expense of $
|
|
Stock Options |
|
|||||||
|
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Weighted- |
|
|
|
|
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|
|
|
Exercise |
|
Average |
|
|
|
|
Number |
|
|
Price Per |
|
Exercise Price |
|
||
|
|
of Shares |
|
|
Share |
|
Per Share |
|
||
Outstanding at December 31, 2020 |
|
|
|
|
|
$1.17 — $23.20 |
|
$ |
|
|
Granted |
|
|
|
|
|
$3.01 — $3.98 |
|
$ |
|
|
Exercised |
|
|
( |
) |
|
$1.48 — $6.40 |
|
$ |
|
|
Cancelled/Forfeited |
|
|
( |
) |
|
$1.48 — $16.80 |
|
$ |
|
|
Outstanding at September 30, 2021 |
|
|
|
|
|
$1.17 — $23.20 |
|
$ |
|
|
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 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 3. 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 per share attributable to common stockholders is as follows:
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
Deemed dividend for warrant down round provision |
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
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 per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Total anti-dilutive securities excluded from net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Subsequent Events
On October 21, 2021, we issued
On November 5, 2021, Quest acquired substantially all of the assets of a Kentucky-based independent environmental services company, which did not have a material impact on our financial position or results of operations.
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 asset acquisition of Green Remedies Waste and Recycling, Inc. (“Green Remedies”) on future results, 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, 2020 (the “2020 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, a leading provider of independent environmental services, particularly in multi-family housing, located in Burlington, NC. On June 30, 2021, Quest acquired substantially all of the assets of an Atlanta-based independent environmental services company, which did not have a material impact on our financial position or results of operations. On November 5, 2021, Quest acquired substantially all of the assets of a Kentucky-based independent environmental services company, which did not have a material impact on our financial position or results of operations. See Note 3 to our condensed consolidated financial statements for more information regarding the acquisitions. The results for the nine months ended September 30, 2021 reflect the impact of the Green Remedies 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 Nine Months Ended September 30, 2021 and 2020 Operating Results
The following table summarizes our operating results for the three and nine months ended September 30, 2021 and 2020:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Revenue |
|
$ |
37,366,740 |
|
|
$ |
23,701,226 |
|
|
$ |
109,326,814 |
|
|
$ |
71,002,281 |
|
Cost of revenue |
|
|
30,514,034 |
|
|
|
19,144,292 |
|
|
|
89,223,751 |
|
|
|
57,527,714 |
|
Gross profit |
|
|
6,852,706 |
|
|
|
4,556,934 |
|
|
|
20,103,063 |
|
|
|
13,474,567 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative |
|
|
5,307,635 |
|
|
|
4,290,697 |
|
|
|
14,630,426 |
|
|
|
12,677,873 |
|
Depreciation and amortization |
|
|
508,456 |
|
|
|
150,170 |
|
|
|
1,324,391 |
|
|
|
818,060 |
|
Total operating expenses |
|
|
5,816,091 |
|
|
|
4,440,867 |
|
|
|
15,954,817 |
|
|
|
13,495,933 |
|
Operating income (loss) |
|
|
1,036,615 |
|
|
|
116,067 |
|
|
|
4,148,246 |
|
|
|
(21,366 |
) |
Other income |
|
|
— |
|
|
|
149,932 |
|
|
|
— |
|
|
|
1,408,000 |
|
Interest expense |
|
|
(542,848 |
) |
|
|
(72,578 |
) |
|
|
(1,653,987 |
) |
|
|
(244,123 |
) |
Loss on extinguishment of debt |
|
|
— |
|
|
|
(167,964 |
) |
|
|
— |
|
|
|
(167,964 |
) |
Income before taxes |
|
|
493,767 |
|
|
|
25,457 |
|
|
|
2,494,259 |
|
|
|
974,547 |
|
Income tax expense |
|
|
108,003 |
|
|
|
92,046 |
|
|
|
262,449 |
|
|
|
63,800 |
|
Net income (loss) |
|
$ |
385,764 |
|
|
$ |
(66,589 |
) |
|
$ |
2,231,810 |
|
|
$ |
910,747 |
|
Three and Nine Months Ended September 30, 2021 compared to Three and Nine Months Ended September 30, 2020
Impact of the COVID-19 Pandemic
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 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.
Revenue
For the quarter ended September 30, 2021, revenue was $37.4 million, an increase of $13.7 million, or 57.7%, compared to $23.7 million for the quarter ended September 30, 2020. For the nine months ended September 30, 2021, revenue was $109.3 million, an increase of $38.3 million, or 54.0% compared to $71.0 million for the nine months ended September 30, 2020. The increase was primarily due to the impact of customers’ business recovery compared with the COVID-19 impacted levels a year ago, heightened customer production levels, increased value for recycled materials compared to a year ago, increased services from certain continuing and new customers, and contribution from the acquired customer base related to the Green Remedies asset acquisition in October 2020, partially offset by lower levels of services due to COVID-19 related shutdowns or reduced operations at certain other customers. See Note 3 to our condensed consolidated financial statements for a discussion of the Green Remedies acquisition.
Cost of Revenue/Gross Profit
Cost of revenue increased $11.4 million to $30.5 million for the quarter ended September 30, 2021 from $19.1 million for the quarter ended September 30, 2020. Cost of revenue increased $31.7 million to $89.2 million for the nine months ended September 30, 2021 from $57.5 million for the nine months ended September 30, 2020. The increase was primarily due to the same reasons impacting the increase in revenue, partially offset by lower costs related to certain contracted services.
18
Gross profit for the quarter ended September 30, 2021 was $6.9 million, an increase of $2.3 million, compared to $4.6 million for the quarter ended September 30, 2020. The gross profit margin was 18.3% for the third quarter of 2021 compared with 19.2% for the third quarter of 2020. Gross profit for the nine months ended September 30, 2021 was $20.1 million, an increase of $6.6 million from $13.5 million for the nine months ended September 30, 2020. The gross profit margin was 18.4% for the nine months ended September 30, 2021 compared to 19.0% for the nine months ended September 30, 2020. The change in gross profit and gross profit margin percentage for the three and nine months ended September 30, 2021 were primarily due to the net effect of the impact of customers’ business recovery compared with the COVID-19 impacted levels a year ago, a production ramp up at one of our largest industrial customers, increased value for certain recycled materials compared to a year ago, increased services from certain continuing and new customers, the acquired customer base related to the Green Remedies asset acquisition in October 2020, lower costs related to certain contracted services, and lower levels of services due to COVID-19 related shutdowns or 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, and the cost and mix of subcontracted services provided in any one reporting period. 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 $5.8 million and $4.4 million for the quarters ended September 30, 2021 and 2020, respectively, an increase of $1.4 million. Operating expenses were $16.0 million and $13.5 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of $2.5 million.
Selling, general, and administrative expenses were $5.3 million and $4.3 million for the quarters ended September 30, 2021 and 2020, respectively, an increase of approximately $1.0 million. The increase primarily relates to increases in labor related expenses of $711,000, professional fees of $92,000, travel expenses of $12,000, tradeshow/advertising expenses of $30,000, other administrative expenses of $63,000, and acquisition/integration related expenses of $109,000.
Selling, general, and administrative expenses were $14.6 million and $12.7 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of approximately $1.9 million. The increase primarily relates to increases in labor related expenses of $1.6 million, professional fees of $382,000, stock related compensation of $40,000, and other administrative expenses of $175,000, partially offset by decreases in travel expenses of $77,000, tradeshow/advertising expenses of $15,000, and acquisition/integration related expenses of $63,000.
Operating expenses for the quarters ended September 30, 2021 and 2020 included depreciation and amortization of approximately $508,000 and $150,000, respectively, an increase of approximately $358,000. Operating expenses for the nine months ended September 30, 2021 and 2020 included depreciation and amortization of approximately $1.3 million and $818,000, respectively, an increase of approximately $506,000. The increase in depreciation and amortization was primarily related to the Green Remedies asset acquisition in October 2020.
Other Income
There was no other income for the three and nine months ended September 30, 2021. Other income was $150,000 and $1.4 million for the three and nine months ended September 30, 2020, respectively, and represented the use of proceeds received under the Paycheck Protection Program (“PPP”) under a promissory note from BMO Harris Bank National Association (the “PPP Loan”) to fund eligible payroll, rent and utility expenses.
Interest Expense
Interest expense was $543,000 and $73,000 for the three months ended September 30, 2021 and 2020, respectively, an increase of approximately $470,000. Interest expense was $1.7 million and $244,000 for the nine months ended September 30, 2021 and 2020, respectively, an increase of approximately $1.4 million. The increase is due to an increase in debt, primarily related to the Green Remedies asset acquisition. We are amortizing debt issuance costs of $1.8 million to interest expense over the life of the related debt arrangements as discussed in Note 7 to our condensed consolidated financial statements.
In the third quarter of 2020, the PNC Loan Agreement (as defined in Note 7 to our condensed consolidated financial statements) replaced a prior loan agreement with Citizens bank, which was paid off and terminated effective August 5, 2020. We recorded $168,000 in loss on extinguishment of debt in connection with this loan termination, including the write-off of the unamortized portion of debt issuance costs and fees directly associated with the loan payoff.
19
Income Taxes
We recorded a provision for income tax of $108,000 and $92,000 for the three months ended September 30, 2021 and 2020, respectively. We recorded a provision for income tax of $262,000 and $64,000 for the nine months ended September 30, 2021 and 2020, 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 September 30, 2021 and December 31, 2020. 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 earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 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 September 30, 2021 was $386,000 compared to a net loss of $(67,000) for the quarter ended September 30, 2020. Net income for the nine months ended September 30, 2021 was $2.2 million compared to $911,000 for the nine months ended September 30, 2020. The explanations above detail the majority of the changes related to the improvement 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 volume and mix of services provided, as well as customer mix during the reporting period, and the level of corporate development activities.
Income (Loss) per Share
Net income per basic and diluted share attributable to common stockholders was $0.02 per share for the quarter ended September 30, 2021 compared with net loss per basic and diluted share of $(0.02) for the quarter ended September 30, 2020. Net income per basic and diluted share attributable to common stockholders was $0.12 and $0.11, respectively, for the nine months ended September 30, 2021 compared to net income per basic and diluted share of $0.04 for the nine months ended September 30, 2020. Net income (loss) attributable to common stockholders in the three and nine months ended September 30, 2020 included a deemed dividend of $205,014 as a result of the triggering of a down round provision in certain outstanding warrants.
The basic and diluted weighted average number of shares of common stock outstanding were approximately 19.0 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 were approximately 17.3 million for the three months ended September 30, 2020. The basic and diluted weighted average number of shares of common stock outstanding were approximately 18.8 million and 20.7 million for the nine months ended September 30, 2021, respectively. The basic and diluted weighted average number of shares of common stock outstanding were approximately 16.1 million for the nine months ended September 30, 2020. The increase in the weighted average number of shares outstanding is primarily due to the registered direct offering of 2,950,000 shares of common stock that closed on August 7, 2020 and to the exercise of stock options in the 2021 periods.
Adjusted EBITDA
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 nine months ended September 30, 2021, other adjustments of $42,000 and $160,000, respectively, included certain recruiting and severance costs and certain administrative fees related to borrowings. For the three months ended September 30, 2020, other adjustments of $37,000 included loss on extinguishment of debt of $168,000, partially offset by $(150,000) use of PPP Loan proceeds and certain severance and COVID-recall labor costs. For the nine months ended September 30, 2020, other adjustments of $(1,065,000) included $(1,408,000) use of PPP Loan proceeds, partially offset by certain severance and COVID-recall labor costs, and loss on extinguishment of debt of $168,000.
20
The following table reflects Adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020:
RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA
(UNAUDITED)
|
|
As Reported |
|
|
As Reported |
|
||||||||||
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Net income (loss) |
|
$ |
385,764 |
|
|
$ |
(66,589 |
) |
|
$ |
2,231,810 |
|
|
$ |
910,747 |
|
Depreciation and amortization |
|
|
582,951 |
|
|
|
175,768 |
|
|
|
1,539,678 |
|
|
|
871,931 |
|
Interest expense |
|
|
542,848 |
|
|
|
72,578 |
|
|
|
1,653,987 |
|
|
|
244,123 |
|
Stock-based compensation expense |
|
|
325,739 |
|
|
|
323,750 |
|
|
|
1,141,740 |
|
|
|
1,101,428 |
|
Acquisition, integration and related costs |
|
|
463,928 |
|
|
|
354,540 |
|
|
|
599,917 |
|
|
|
536,789 |
|
Other adjustments |
|
|
42,189 |
|
|
|
37,252 |
|
|
|
159,624 |
|
|
|
(1,065,053 |
) |
Income tax expense |
|
|
108,003 |
|
|
|
92,046 |
|
|
|
262,449 |
|
|
|
63,800 |
|
Adjusted EBITDA |
|
$ |
2,451,422 |
|
|
$ |
989,345 |
|
|
$ |
7,589,205 |
|
|
$ |
2,663,765 |
|
Liquidity and Capital Resources
As of September 30, 2021 and December 31, 2020, we had $9.1 million and $7.5 million in cash and cash equivalents, respectively. Working capital was $12.0 million and $8.7 million as of September 30, 2021 and December 31, 2020, 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, 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 $9.1 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 nine months ended September 30, 2021 and 2020.
Cash Flows from Operating Activities
Net cash provided by operating activities was $3.4 million for the nine months ended September 30, 2021 compared with net cash provided by operating activities of $0.8 million for the nine months ended September 30, 2020.
Net cash provided by operating activities for the nine months ended September 30, 2021 related primarily to the net effect of the following:
|
• |
net income of $2,232,000; |
|
• |
non-cash items of $3,326,000, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, provision for doubtful accounts, and stock-based compensation; and |
|
• |
offset by net cash used in the net change in operating assets and liabilities of $2,191,000, primarily associated with relative changes in accounts receivable, accounts payable, and accrued liabilities. |
Net cash provided by operating activities for the nine months ended September 30, 2020 related primarily to the net effect of the following:
|
• |
net income of $911,000; which included other income of $1,408,000 for the use of PPP Loan proceeds; |
|
• |
non-cash items of $2,295,000, which primarily related to depreciation, amortization of intangible assets, provision for doubtful accounts, loss on extinguishment of debt, and stock-based compensation; and |
|
• |
offset by net cash used in the net change in operating assets and liabilities of $2,361,000, primarily associated with relative changes in accounts receivable, accounts payable, and accrued liabilities. |
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. 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.
21
Cash Flows from Investing Activities
Cash used in investing activities for the nine months ended September 30, 2021 and 2020 was $2.8 million and $304,000, respectively. Cash used in 2021 relates mainly 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 nine months ended September 30, 2021 and 2020 was $1.1 million and $2.5 million, respectively. Net cash provided by financing activities for the nine months ended September 30, 2021 was primarily from proceeds from stock option exercises and net borrowings on our ABL Facility, partially offset by repayments of notes payable. Net cash provided by financing activities for the nine months ended September 30, 2020 included $3,047,000 net proceeds from the sale of common stock in a registered direct offering that closed on August 7, 2020. 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 nine months ended September 30, 2021 and 2020. 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 2020 Annual Report. There have been no changes in our critical accounting policies during the first nine months of 2021.
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 September 30, 2021.
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.
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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
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 21, 2021, we issued 218,587 shares of common stock 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 first 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 Green Remedies acquisition. Such issuance was made pursuant to the exemption contained in Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On November 5, 2021, Quest acquired substantially all of the assets of a Kentucky-based independent environmental services company, which did not have a material impact on our financial position or results of operations.
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Item 6. Exhibits
Exhibit No. |
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Exhibit |
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10.1 |
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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 September 30, 2021, 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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(1) |
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Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 9, 2021.
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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: November 15, 2021 |
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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: November 15, 2021 |
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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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