UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
Commission file number:
(Exact Name of Registrant as Specified in its Charter)
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(State or other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices and Zip Code)
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol |
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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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Non-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 ☐ No
As of October 29, 2024, 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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2024 |
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2023 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, less allowance for doubtful accounts of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Goodwill |
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Intangible assets, net |
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Property and equipment, net, and other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
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$ |
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Other current liabilities |
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Current portion of notes payable |
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Total current liabilities |
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Notes payable, net |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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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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Interest expense |
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Loss before taxes |
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Income tax expense (benefit) |
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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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Net 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 2023 |
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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 exercises |
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— |
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Net loss |
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— |
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— |
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— |
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Balance, March 31, 2024 |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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Stock option exercises |
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— |
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Shares issued for Employee Stock Purchase Plan options |
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— |
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Net loss |
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— |
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— |
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— |
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Balance, June 30, 2024 |
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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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Release of restricted and deferred stock units |
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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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Balance, September 30, 2024 |
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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, 2022 |
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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 exercises |
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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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Balance, March 31, 2023 |
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Stock-based compensation |
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— |
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— |
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— |
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Stock option exercises |
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— |
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Shares issued for Employee Stock Purchase Plan options |
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— |
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Net loss |
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— |
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— |
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— |
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Balance, June 30, 2023 |
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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 loss |
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— |
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— |
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— |
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( |
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Balance, September 30, 2023 |
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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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2024 |
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2023 |
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Cash flows from operating activities: |
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Net loss |
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$ |
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$ |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation |
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Amortization of intangibles |
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Amortization of debt issuance costs and discounts |
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Provision for doubtful accounts |
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Stock-based compensation |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Security deposits and other assets |
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Accounts payable and accrued liabilities |
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Other liabilities |
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( |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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Purchase of intangible assets |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Proceeds from credit facilities |
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Repayments of credit facilities |
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Proceeds from long-term debt |
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— |
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Repayments of long-term debt |
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Proceeds from stock option exercises |
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Proceeds from shares issued for Employee Stock Purchase Plan |
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Debt issuance costs |
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Net cash provided (used in) by financing activities |
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Net increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes, net |
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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”), Quest Equipment, LLC (“QE”), formerly known as Landfill Diversion Innovations, LLC, Youchange, Inc. (“Youchange”), Quest Vertigent Corporation (“QVC”), Quest Vertigent One, LLC (“QV One”), and Quest Sustainability Services, Inc. (“QSS”) (collectively, “we”, “us”, or “our company”).
We are a national provider of waste and recycling services to customers from across multiple industry sectors that are typically larger, multi-location businesses. We create customer-specific programs and perform the related services for the collection, processing, recycling, disposal, and tracking of waste streams and recyclables. In addition, we offer products such as antifreeze and windshield washer fluid and other minor ancillary services. We also provide information and data that tracks and reports the detailed transactional and environmental results of our services and provides actionable data to improve business operations. The data we generate also enables our customers to address their environmental and sustainability goals and responsibilities.
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, 2023. 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, 2024 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2023 condensed consolidated balance sheet data from audited financial statements. As QRHC, Quest, QE, Youchange, QVC, QV One, and QSS each operate as an environmental-based service company, we do 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, 2024 are not necessarily indicative of the results to be expected for the full year.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires incremental disclosures related to reportable segments, including significant segment expense categories and amounts for each reportable segment. Entities with a single reportable segment are required to provide the new disclosures required under Accounting Standards Codification (“ASC”) 280. This authoritative guidance is required to be applied retrospectively and will be effective for our annual disclosures beginning in 2024 and interim periods starting 2025. This guidance is only related to disclosures and is not expected to have a significant impact on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires entities to provide additional disclosure related to the transparency and decision usefulness of income tax disclosures, including additional disclosure around the rate reconciliation and income taxes paid. The authoritative guidance should be applied prospectively and will be effective for us starting in 2025. Retrospective application is permitted. This guidance is only related to disclosures and is not expected to have a significant impact 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. Accounts Receivable, Net of Allowance for Doubtful Accounts
Our receivables, which are recorded when billed or when services are performed, are claims against third parties that will generally be settled in cash. The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net realizable value. We estimate our allowance for doubtful accounts based on consideration of a number of factors, including the length of time trade accounts are past due, our previous loss history, the creditworthiness of individual customers, economic conditions
6
affecting specific customer industries, and economic conditions in general. We write off past-due receivable balances after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period we receive the payment.
The following table reflects the activity in our allowance for doubtful accounts of trade receivables for the three and nine months ended September 30, 2024 and 2023:
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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(Unaudited) |
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(Unaudited) |
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Beginning balance |
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$ |
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$ |
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$ |
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$ |
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Bad debt expense |
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Uncollectible accounts written off, net of recoveries |
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( |
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( |
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( |
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( |
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Ending balance |
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$ |
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$ |
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$ |
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$ |
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4. Property and Equipment, Net, and Other Assets
At September 30, 2024 and December 31, 2023, 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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2024 |
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2023 |
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(Unaudited) |
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Property and equipment, net of accumulated depreciation of $ |
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$ |
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$ |
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Right-of-use operating lease assets |
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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, 2024 was $
During the nine months ended September 30, 2024, we purchased
Right-of-use operating lease assets related to our office leases are recognized in accordance with ASC 842. Refer to Note 8, Leases for additional information.
7
5. Goodwill and Other Intangible Assets
The components of goodwill and other intangible assets were as follows:
September 30, 2024 (Unaudited) |
|
Estimated |
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Software |
|
|
|
|
|
|
|
|
|
|
||||
Trademarks |
|
|
|
|
|
|
|
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
||||
Total finite lived intangible assets |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
December 31, 2023 |
|
Estimated |
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Software |
|
|
|
|
|
|
|
|
|
|
||||
Trademarks |
|
|
|
|
|
|
|
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
||||
Total finite lived intangible assets |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
September 30, 2024 (Unaudited) and December 31, 2023 |
|
Estimated |
|
Carrying |
|
|
Indefinite lived intangible asset: |
|
|
|
|
|
|
Goodwill |
|
|
$ |
|
||
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 2024 with
8
6. Current Liabilities
The components of Accounts payable and accrued liabilities were as follows:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
|
|
(Unaudited) |
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued taxes |
|
|
|
|
|
|
||
Employee compensation |
|
|
|
|
|
|
||
Operating lease liabilities - current portion |
|
|
|
|
|
|
||
Miscellaneous |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Refer to Note 8, Leases for additional disclosure related to the operating lease liabilities.
The components of Other current liabilities were as follows:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
|
|
(Unaudited) |
|
|
|
|
||
Deferred revenue |
|
$ |
|
|
$ |
|
||
Deferred consideration - earn-out |
|
|
— |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||
We made a $
9
7. Notes Payable
Our debt obligations were as follows:
|
|
Interest |
|
September 30, |
|
|
December 31, |
|
||
|
|
Rate (1) |
|
2024 |
|
|
2023 |
|
||
|
|
|
|
(Unaudited) |
|
|
|
|
||
Monroe Term Loan (2) |
|
|
$ |
|
|
$ |
|
|||
PNC ABL Facility (3) |
|
|
|
|
|
|
|
|||
PNC Equipment Term Loan (4) |
|
|
|
|
|
|
— |
|
||
Green Remedies Promissory Note (5) |
|
|
|
|
|
|
|
|||
Total notes payable |
|
|
|
|
|
|
|
|
||
Less: Current portion of long-term debt |
|
|
|
|
( |
) |
|
|
( |
) |
Less: Unamortized debt issuance costs |
|
|
|
|
( |
) |
|
|
( |
) |
Less: Unamortized OID |
|
|
|
|
( |
) |
|
|
( |
) |
Less: Unamortized OID warrant |
|
|
|
|
( |
) |
|
|
( |
) |
Notes payable, net |
|
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
||
(1) Interest rates as of September 30, 2024 |
|
|
|
|
|
|
||||
(2) Bears interest based on SOFR plus Applicable Margin ranging from |
|
|||||||||
(3) Bears interest based on Term SOFR plus a margin of |
|
|
|
|
|
|
||||
(4) Bears interest based on Term SOFR plus a margin of |
|
|
|
|
|
|
|
|
||
(5) Stated interest rate of |
|
|
|
|
|
|
||||
We capitalize financing costs we incur related to implementing our debt arrangements. We record these debt issuance costs associated with our revolving credit facility and our term loan as a reduction of long-term debt, net and amortize them over the contractual life of the related debt arrangements.
|
|
|
|
September 30, |
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
Debt issuance costs, net of accumulated amortization |
|
|
|
|
|
|
Balance at December 31, 2023 |
|
|
|
$ |
|
|
Financing costs deferred |
|
|
|
|
|
|
Less: Amortization expense |
|
|
|
|
( |
) |
Balance at September 30, 2024 (Unaudited) |
|
|
|
$ |
|
|
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, December 7, 2021, August 9, 2022, December 2, 2022, and March 29, 2024 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, and which provides for a credit facility (the “ABL Facility”) comprising an asset-based revolving credit facility in the maximum principal amount of $
As of September 30, 2024, the ABL Facility borrowing base availability was $
Monroe Term Loan
On October 19, 2020, QRHC and certain of its domestic subsidiaries entered into a Credit Agreement (the “Credit Agreement”), which was subsequently amended on September 3, 2021, December 1, 2021, December 7, 2021, December 2, 2022, and March 29, 2024 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:
10
At the same time as the borrowing of the initial $
Green Remedies Promissory Note
On October 19, 2020, we issued an unsecured subordinated promissory note to Green Remedies Waste and Recycling, Inc. in the aggregate principal amount of $
Interest Expense
The amount of interest expense related to borrowings for the three months ended September 30, 2024 and 2023 was $
8. Leases
Our leases are primarily related to office space and are classified as operating leases.
Lease Costs
For the three months ended September 30, 2024 and 2023, we recorded approximately $
Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the nine months ended September 30, 2024 and 2023. We did not obtain any new operating lease right-of-use assets in the nine months ended September 30, 2024.
Balance Sheet Classification
The table below presents the lease related assets and liabilities recorded on the balance sheet.
|
September 30, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
Operating leases: |
(Unaudited) |
|
|
|
|
||
Right-of-use operating lease assets: |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Lease liabilities: |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Total operating lease liabilities |
$ |
|
|
$ |
|
||
11
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. Our service revenue is primarily generated from fees charged for the 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 when we hold complete responsibility to the customer for contract fulfillment, making us the primary obligor (or principal). Depending on the key terms of the arrangement, which may include situations in which we are not the primary obligor, do not have credit risk, or we determine amounts earned using fixed percentage or fixed fee schedules, we may record the revenue net of certain cost amounts. During the three months ended September 30, 2024 and 2023, we had certain management fee contracts accounted for under the net basis method with net revenue totaling $
Disaggregation of Revenue
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Revenue Type: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Services |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Product sales and other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Deferred Revenue
We bill certain customers
10. Income Taxes
Our statutory income tax rate is anticipated to be approximately
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 deferred tax assets was not reasonably assured as of September 30, 2024 and December 31, 2023, and we had recorded a valuation allowance of $
12
11. Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, deferred revenue, and notes payable. We do not believe that we are exposed to significant currency or credit risks arising from these financial instruments. Our variable rate indebtedness subjects us to interest rate risk as all of the borrowings under the senior secured credit facilities bear interest at variable rates. The fair values of our financial instruments approximate their carrying values, based on their short maturities or, for notes payable, based on borrowing rates currently available to us for loans with similar terms and maturities. Contingent liabilities are measured at fair value on a recurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy.
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 “2014 ESPP”). On May 14, 2024, we issued
Warrants –
Warrants Issued and Outstanding as of September 30, 2024 |
|
|||||||||||
|
|
Date of |
|
Exercise |
|
|
Shares of |
|
||||
Description |
|
Issuance |
|
Expiration |
|
|
|
|
Common Stock |
|
||
Exercisable Warrants |
|
|
|
$ |
|
|
|
|
||||
Exercisable Warrants |
|
|
|
$ |
|
|
|
|
||||
Total warrants issued and outstanding (Unaudited) |
|
|
|
|
|
|
||||||
Incentive Compensation Plan – In October 2012, we adopted our 2012 Incentive Compensation Plan, as amended (the “2012 Plan”), as the sole plan for providing equity-based incentive compensation to our employees, directors and service providers. The 2012 Plan allows for the grant of stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, performance awards, and other incentive awards to our employees, directors and service providers. The purpose of the 2012 Plan is to attract and retain these individuals and further align their interests with the interests of our stockholders by linking their compensation with our performance. The 2012 Plan is administered by the compensation committee of our board of directors.
On July 8, 2024, our stockholders approved the adoption of our 2024 Incentive Compensation Plan (the “2024 Plan”), which replaced the 2012 Plan for all future grants. Awards previously granted under the 2012 Plan are unaffected by the adoption of the 2024 Plan and remain outstanding under the terms pursuant to which they were granted. The 2024 Plan allows for the grant of stock options (both nonqualified stock options and incentive stock options), stock appreciation rights, restricted stock, RSUs, bonus stock, dividend equivalents, other stock-based awards, and performance awards that may be settled in cash, stock, or other property in our sole discretion. The purpose of our 2024 Plan is to assist us and our Designated Subsidiaries (as such term is defined in the 2024 Plan) in attracting, motivating, retaining, and rewarding high-quality executives and other employees, officers, directors, and individual consultants who provide services to us or our Designated Subsidiaries, by enabling such persons to acquire or increase a proprietary interest in our company in order to strengthen the mutuality of interests between such persons and our stockholders, and providing such persons with performance incentives to expend their maximum efforts in the creation of stockholder value. There are
13
Stock Options – We recorded stock option expense of $
|
|
Stock Options |
|
|||||||
|
|
|
|
|
|
|
Weighted- |
|
||
|
|
|
|
|
Exercise |
|
Average |
|
||
|
|
Number |
|
|
Price Per |
|
Exercise Price |
|
||
|
|
of Shares |
|
|
Share |
|
Per Share |
|
||
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
$ |
|
||
Exercised |
|
|
( |
) |
|
$ |
|
$ |
|
|
Cancelled/Forfeited |
|
|
( |
) |
|
$ |
|
$ |
|
|
Outstanding at September 30, 2024 (Unaudited) |
|
|
|
|
$ |
|
$ |
|
||
Deferred Stock Units – 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
During the nine months ended September 30, 2023, we granted
Restricted Stock Units - RSUs are recognized at their fair value on the date of grant. Each RSU represents the right to receive
During the nine months ended September 30, 2023, we granted
Performance Stock Units - During the nine months ended September 30, 2024, we granted
The PSUs are recognized at their fair value on the date of grant, based on the probable issuance at the end of the performance period. We will evaluate the probable share of common stock issuance and will adjust the expense as appropriate. We recorded compensation expense of $
13. Net Loss per Share
We compute basic net loss 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 (loss) 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 and warrants. 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 loss per share attributable to common stockholders is as follows:
14
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss applicable to common stockholders |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive common shares |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Anti-dilutive securities excluded from diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
||||
15
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 an ASU on our consolidated financial statements; 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 state of the U.S. economy, general economic conditions and the potential effect of inflationary pressures and increased interest rates on our cost of doing business, could cause actual results to differ materially from those indicated by the forward-looking statements and other risks detailed from time to time in our reports to the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”).
Business Overview
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. We also provide information and data that tracks and reports the detailed transactional and environmental results of our services and provides actionable data to improve business operations. The data we generate also enables our customers to address their business, sustainability, environmental, social and governance goals and responsibilities.
Our revenue is primarily generated from fees charged for our collection, transfer, disposal and services for both solid waste and recyclable materials and from sales of recyclable materials. In addition, we have product sales and other revenue primarily from sales of products such as antifreeze and windshield washer fluid, as well as minor ancillary services.
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on and relates primarily to the operations of Quest Resource Holding Corporation and Quest Resource Management Group, LLC (collectively, “we,” “us,” “our,” or “our company”).
Three and Nine Months Ended September 30, 2024 and 2023 Operating Results
The following table summarizes our operating results for the three and nine months ended September 30, 2024 and 2023:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Revenue |
|
$ |
72,765,415 |
|
|
$ |
70,425,425 |
|
|
$ |
218,561,988 |
|
|
$ |
219,036,423 |
|
Cost of revenue |
|
|
61,065,266 |
|
|
|
57,995,192 |
|
|
|
179,293,559 |
|
|
|
180,471,602 |
|
Gross profit |
|
|
11,700,149 |
|
|
|
12,430,233 |
|
|
|
39,268,429 |
|
|
|
38,564,821 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general, and administrative |
|
|
10,272,870 |
|
|
|
9,620,114 |
|
|
|
29,456,728 |
|
|
|
28,249,820 |
|
Depreciation and amortization |
|
|
2,367,594 |
|
|
|
2,341,581 |
|
|
|
7,094,337 |
|
|
|
7,218,683 |
|
Total operating expenses |
|
|
12,640,464 |
|
|
|
11,961,695 |
|
|
|
36,551,065 |
|
|
|
35,468,503 |
|
Operating income (loss) |
|
|
(940,315 |
) |
|
|
468,538 |
|
|
|
2,717,364 |
|
|
|
3,096,318 |
|
Interest expense |
|
|
(2,723,579 |
) |
|
|
(2,408,076 |
) |
|
|
(7,807,531 |
) |
|
|
(7,407,207 |
) |
Loss before taxes |
|
|
(3,663,894 |
) |
|
|
(1,939,538 |
) |
|
|
(5,090,167 |
) |
|
|
(4,310,889 |
) |
Income tax expense (benefit) |
|
|
(278,336 |
) |
|
|
111,104 |
|
|
|
465,125 |
|
|
|
650,387 |
|
Net loss |
|
$ |
(3,385,558 |
) |
|
$ |
(2,050,642 |
) |
|
$ |
(5,555,292 |
) |
|
$ |
(4,961,276 |
) |
16
Three and Nine Months Ended September 30, 2024, compared to Three and Nine Months Ended September 30, 2023
Global Economic Trends
There has been heightened uncertainty in the macroeconomic environment, and concerns that the U.S. economy may fall into a recession since the Federal Reserve began aggressively raising interest rates in March 2022 to address persistently high inflation. There are also significant geopolitical concerns, including the current conflict between Ukraine and Russia and the Israel-Hamas war, which have created extreme volatility in the global capital markets and are expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets continue to deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive. Inflation can adversely affect us by increasing our costs, including salary costs. Any significant increases in inflation and related increases in interest rates could have a material adverse effect on our business, results of operations and financial condition.
Revenue
For the quarter ended September 30, 2024, revenue was $72.8 million, an increase of $2.4 million, or 3.3%, compared to $70.4 million for the quarter ended September 30, 2023. For the nine months ended September 30, 2024, revenue was $218.6 million, a decrease of $0.4 million, or 0.2%, compared to $219.0 million for the nine months ended September 30, 2023.
The increase in revenue for the quarter ended September 30, 2024 was attributable to newly added customers in the quarter ended September 30, 2024 and strong overall demand in existing customer base which, in total, contributed approximately $16 million in additional revenue, an increase of 32% from the same period in 2023. This was partially offset by lower volumes due to lost customers and to soft conditions in certain customer end markets, resulting in a decrease of revenues of approximately $13 million.
For the nine months ended September 30, 2024, the decrease in revenue was attributable to lower volumes from lost customers, whose margins were lower overall than the rest of the business, resulting in a decrease of revenues of approximately $33 million, which includes lower than expected production volumes at one of our largest customers due to soft conditions in their end market. This was mostly offset by both newly added customers in the current quarter and strong overall demand for the remaining business which, in total, contributed approximately $33 million in additional revenue, an increase of 22% from the same period in 2023.
Cost of Revenue/Gross Profit
Cost of revenue increased $3.1 million to $61.1 million for the quarter ended September 30, 2024 from $58.0 million for the quarter ended September 30, 2023. We experienced higher cost of revenue as a percentage of revenue in the quarter ended September 30, 2024 due to onboarding and ramping up of new customers. Cost of revenue decreased $1.2 million to $179.3 million for the nine months ended September 30, 2024, compared to $180.5 million for the nine months ended September 30, 2023. The changes were primarily due to the same reasons impacting the decrease in revenue.
Gross profit for the quarter ended September 30, 2024 was $11.7 million, compared to $12.4 million for the quarter ended September 30, 2023. The gross profit margin was 16.1% for the quarter ended September 30, 2024, compared to 17.7% for the same quarter of 2023. Gross profit margin was negatively impacted in the quarter ended September 30, 2024 by approximately 2% due to a combination of temporarily lower revenues and higher cost of revenue for an isolated group of customers in a specific end market. Additionally, margins were impacted in the quarter by approximately 1% as new customers typically come on board at lower margins and can take multiple quarters to ramp. Gross profit for the nine months ended September 30, 2024 was $39.3 million, compared to $38.6 million for the nine months ended September 30, 2023. The gross profit margin was 18.0% for the nine months ended September 30, 2024, compared to 17.6% for the nine months ended September 30, 2023. The changes in gross profit and gross profit margin percentage for the quarter and year to date periods were primarily due to the net impacts of the changes in both revenue and cost of revenue combined with broad margin gains across most of our business.
Revenue, gross profit, and gross profit margins are affected period to period by the volumes of waste and recyclable materials generated by our customers, the frequency and type of services provided, the price and mix of the services provided, price changes for recyclable materials, the cost and mix of subcontracted services provided in any one reporting period, and the timing of acquisitions and integration. Volumes of waste and recyclable 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.
Operating Expenses
Operating expenses were $12.6 million and $12.0 million for the quarters ended September 30, 2024 and 2023, respectively. Operating expenses were $36.6 million and $35.5 million for the nine months ended September 30, 2024 and 2023, respectively.
Selling, general, and administrative expenses were $10.3 million and $9.6 million for the quarters ended September 30, 2024 and 2023, respectively. The increase primarily relates to increases in labor related expenses. Selling, general, and administrative expenses
17
were $29.5 million and $28.2 million for the nine months ended September 30, 2024 and 2023, respectively. The increase primarily relates to increases in labor related expenses and certain professional fees.
Operating expenses for the quarters ended September 30, 2024 and 2023 included depreciation and amortization of $2.4 million and $2.3 million, respectively. Operating expenses for the nine months ended September 30, 2024 and 2023 included depreciation and amortization of $7.1 million and $7.2 million, respectively.
Interest Expense
Interest expense was $2.7 million and $2.4 million for the quarters ended September 30, 2024 and 2023, respectively. Interest expense was $7.8 million and $7.4 million for the nine months ended September 30, 2024 and 2023, respectively. The increase is primarily due to increased borrowings under our revolving credit facility and our equipment term loan, partially offset by reduced borrowings from voluntary paydowns on the term loan in 2023. We are amortizing debt issuance costs of $3.8 million and OID 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.
Income Taxes
We recorded an income tax benefit of $(0.3) million and a provision for income taxes of $0.1 million for the quarters ended September 30, 2024 and 2023, respectively. We recorded a provision for income tax of $0.5 million and $0.7 million for the nine months ended September 30, 2024 and 2023, respectively. The provision/(benefit) 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, federal income tax after anticipated utilization of all federal net operating loss carryforwards by year end, and other timing differences.
We recorded a full valuation allowance against all our deferred tax assets (“DTAs”) as of both September 30, 2024 and December 31, 2023. 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 to 24 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain DTAs and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the level of profitability that we are able to actually achieve.
Net Loss
Net loss for the quarter ended September 30, 2024 was $(3.4) million, compared to net loss of $(2.1) million for the quarter ended September 30, 2023. Net loss for the nine months ended September 30, 2024 was $(5.6) million, compared to net loss of $(5.0) million for the nine months ended September 30, 2023. The explanations above detail the majority of the changes related to the change in net results.
Our operating results, including revenue, operating expenses, and operating margins, will vary from period to period depending on commodity prices of recyclable materials, the volumes and mix of services provided, as well as customer mix during the reporting period, and the timing of acquisitions and integration.
Loss per Share
Net loss per basic and diluted share attributable to common stockholders was $(0.16) and $(0.10) for the quarters ended September 30, 2024 and 2023, respectively. Net loss per basic and diluted share attributable to common stockholders was $(0.27) and $(0.25) for the nine months ended September 30, 2024 and 2023, respectively.
The basic and diluted weighted average number of shares of common stock outstanding were approximately 20.7 million and 20.1 million for the three months ended September 30, 2024 and 2023, respectively. The basic and diluted weighted average number of shares of common stock outstanding were approximately 20.5 million and 20.0 million for the nine months ended September 30, 2024 and 2023, respectively.
Adjusted EBITDA
For the three months ended September 30, 2024, Adjusted EBITDA (as defined below), a non-GAAP financial measure, decreased 31.7% to $2.5 million from $3.7 million for the three months ended September 30, 2023. For the nine months ended September 30, 2024, Adjusted EBITDA increased 0.5% to $12.8 million from $12.7 million for the same period in 2023.
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.
18
The following table reflects the reconciliation of net loss to Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023:
|
|
As Reported |
|
|
As Reported |
|
||||||||||
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Net loss |
|
$ |
(3,385,558 |
) |
|
$ |
(2,050,642 |
) |
|
$ |
(5,555,292 |
) |
|
$ |
(4,961,276 |
) |
Depreciation and amortization |
|
|
2,612,190 |
|
|
|
2,437,667 |
|
|
|
7,713,680 |
|
|
|
7,485,606 |
|
Interest expense |
|
|
2,723,579 |
|
|
|
2,408,076 |
|
|
|
7,807,531 |
|
|
|
7,407,207 |
|
Stock-based compensation expense |
|
|
571,205 |
|
|
|
288,563 |
|
|
|
1,290,942 |
|
|
|
949,313 |
|
Acquisition, integration and related costs |
|
|
29,799 |
|
|
|
374,035 |
|
|
|
91,156 |
|
|
|
1,026,325 |
|
Other adjustments |
|
|
260,860 |
|
|
|
141,231 |
|
|
|
979,757 |
|
|
|
172,086 |
|
Income tax expense (benefit) |
|
|
(278,336 |
) |
|
|
111,104 |
|
|
|
465,125 |
|
|
|
650,387 |
|
Adjusted EBITDA |
|
$ |
2,533,739 |
|
|
$ |
3,710,034 |
|
|
$ |
12,792,899 |
|
|
$ |
12,729,648 |
|
For the three and nine months ended September 30, 2024, other adjustments included certain professional fees as well as certain administrative fees related to borrowings. For the three and nine months ended September 30, 2023, other adjustments included severance and project costs, as well as certain administrative costs related to borrowings.
Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share
Adjusted net income (loss), a non-GAAP financial measure, was $(1.1) million for the three months ended September 30, 2024, compared with $0.5 million for the three months ended September 30, 2023. Adjusted net income was $1.2 million for the nine months ended September 30, 2024, compared with $2.7 million for the nine months ended September 30, 2023. We present adjusted net income (loss) and adjusted net income (loss) per diluted share, both non-GAAP financial measures, supplementally because they are widely used by investors as a valuation measure in the solid waste industry. Management uses adjusted net income (loss) and adjusted net income (loss) per diluted share as two of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We provide adjusted net income (loss) to exclude the effects of items management believes impact the comparability of operating results between periods. Adjusted net income (loss) has limitations due to the fact that it excludes items that have an impact on our financial condition and results of operations. Adjusted net income (loss) and adjusted net income (loss) per diluted share are not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate these non-GAAP financial measures differently. Our adjusted net income (loss) and adjusted net income (loss) per diluted share for the three and nine months ended September 30, 2024 and 2023 are calculated as follows:
19
|
|
As Reported |
|
|
As Reported |
|
||||||||||
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||||||||
Reported net loss (a) |
|
$ |
(3,385,558 |
) |
|
$ |
(2,050,642 |
) |
|
$ |
(5,555,292 |
) |
|
$ |
(4,961,276 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of intangibles (b) |
|
|
2,208,861 |
|
|
|
2,224,210 |
|
|
|
6,649,917 |
|
|
|
6,667,814 |
|
Acquisition, integration and related costs (c) |
|
|
29,799 |
|
|
|
374,035 |
|
|
|
91,156 |
|
|
|
1,026,325 |
|
Other adjustments (d) |
|
|
— |
|
|
|
1,721 |
|
|
|
— |
|
|
|
(74,605 |
) |
Adjusted net income (loss) |
|
$ |
(1,146,898 |
) |
|
$ |
549,324 |
|
|
$ |
1,185,781 |
|
|
$ |
2,658,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings (loss)per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Reported net loss |
|
$ |
(0.16 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.25 |
) |
Adjusted net income (loss) |
|
$ |
(0.06 |
) |
|
$ |
0.02 |
|
|
$ |
0.05 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted (e) |
|
|
20,665,681 |
|
|
|
22,425,421 |
|
|
|
22,872,519 |
|
|
|
22,218,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
(a) Applicable to common stockholders |
|
|
|
|
|
|
|
|||||||||
(b) Reflects the elimination of the non-cash amortization of acquisition-related intangible assets |
|
|
|
|
|
|
|
|||||||||
(c) Reflects the add back of acquisition/integration related transaction costs |
|
|
|
|
|
|
|
|||||||||
(d) Reflects adjustments to earn-out fair value |
|
|
|
|
|
|
|
|||||||||
(e) Reflects adjustment for dilution when adjusted net income is positive |
|
|
|
|
|
|
|
|||||||||
Liquidity and Capital Resources
As of September 30, 2024 and December 31, 2023, we had $1.1 million and $0.3 million in cash and cash equivalents, respectively. Working capital was $22.0 million and $15.7 million as of September 30, 2024 and December 31, 2023, 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 $1.1 million, our borrowing availability under our $35.0 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 and thereafter for the foreseeable future. Our known current- and long-term uses of cash include, among other possible demands, capital expenditures, lease payments and repayments to service debt and other long-term obligations. We have no agreements, commitments, or understandings with respect to any such placements of our securities and any such placements could be dilutive to our stockholders.
Cash Flows
The following discussion relates to the major components of our cash flows for the nine months ended September 30, 2024 and 2023.
Cash Flows from Operating Activities
Net cash used in operating activities was $(1.3) million for the nine months ended September 30, 2024 compared with net cash provided by operating activities of $6.7 million for the nine months ended September 30, 2023.
Net cash used in operating activities for the nine months ended September 30, 2024 related primarily to the net effect of the following:
Net cash provided by operating activities for the nine months ended September 30, 2023 related primarily to the net effect of the following:
20
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, recyclable materials contracts, and our business volume levels. Fluctuations in net accounts receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers, and the inception, increase, modification, or termination of customer relationships. Our operating activities may require additional cash in the future from our debt facilities and/or equity financings depending on the level of our operations.
Cash Flows from Investing Activities
Cash used in investing activities for the nine months ended September 30, 2024 was $(5.2) million and primarily related to the purchase of compactors and related equipment. Cash used in investing activities for the nine months ended September 30, 2023 was $(1.3) million. Other investing activities are primarily from purchases of intangible assets such as software development costs and other property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2024 was $7.3 million, primarily from net borrowings of $5.3 million on our ABL Facility and $2.5 million borrowings from our PNC equipment term loan. Net cash used in financing activities for the nine months ended September 30, 2023 was $(14.1) million, primarily from net repayments of $(6.8) million on our ABL Facility and $(7.8) million repayment of long-term debt. See Note 7 to our condensed consolidated financial statements for a discussion of the ABL Facility and other notes payable.
Inflation
Although the overall economy has experienced some inflationary pressures, we do not believe that inflation had a material impact on us during the nine months ended September 30, 2024 and 2023. We believe that current inflationary increases in costs, such as fuel, labor, and certain capital items, can be addressed by our flexible pricing structures and cost recovery fees allowing us to recover certain of the cost of inflation from our customer base. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers or adjust pricing. Although we believe that we should be able to offset many cost increases that result from inflation in the ordinary course of business, we may be required to absorb at least part of these costs increases due to competitive pressures or delays in timing of rate increases. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation and increases in interest rates.
Critical Accounting Estimates and Policies
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include carrying amounts of accounts receivable, goodwill and other intangible assets, stock-based compensation expense, deferred taxes and the fair value of assets and liabilities acquired in business 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 II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report. There have been no significant changes in our critical accounting policies during the nine months ended September 30, 2024.
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.
21
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, 2024.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our company have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. We base the design of any system of controls in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
22
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
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5.
Our board of directors approved the Company’s Third Amended and Restated Bylaws (the “Third Amended and Restated Bylaws”), effective November 7, 2024. The Third Amended and Restated Bylaws incorporate certain amendments to, among other things: (i) permit only our board of directors to call a special meeting of stockholders; (ii) revise the time period during which notices of director nominations or proposals of other business for an annual meeting of stockholders shall be delivered, such that any such notice must be received by the Company not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting; (iii) enhance the disclosure requirements for director nominations or proposals of other business such that additional information is now required to be included in the stockholder’s notice (these include, but are not limited to, (a) requiring certain representations, (b) requiring additional disclosures (as to certain material interests or relationships, voting arrangements, agreement, arrangement or understanding and derivative instruments), (c) expanding the disclosure requirements to include any beneficial owners, affiliates or others acting in concert and (d) updating the procedural requirements); and (iv) remove the limitation on expanding the number of directors to above eight (8) directors without the unanimous consent of our board of directors.
The foregoing description of the Third Amended and Restated Bylaws is qualified in its entirety by reference to the copy of the Third Amended and Restated Bylaws which is filed as Exhibit 3.1 to this Quarterly Report on Form 10-Q.
23
Item 6. Exhibits
Exhibit No. |
|
Exhibit |
|
3.1 |
|
Third Amended and Restated Bylaws of Quest Resource Holding Corporation |
|
10.1 |
|
Form of Performance Stock Unit Award Agreement (incorporated by reference to the Company’s Form 8-K, filed with the Commission on August 16, 2024). |
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
32.1 |
|
|
|
32.2 |
|
|
|
101 |
|
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, 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 |
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
|
|
|
|
|
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
QUEST RESOURCE HOLDING CORPORATION |
||
|
|
|
||
Date: November 7, 2024 |
|
By: |
|
/s/ S. Ray Hatch |
|
|
S. Ray Hatch |
||
|
|
President and Chief Executive Officer |
||
|
|
|
||
Date: November 7, 2024 |
|
By: |
|
/s/ Brett W. Johnston |
|
|
Brett W. Johnston |
||
|
|
Senior Vice President and Chief Financial Officer |
||
25