Quest Resource (QRHC) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Quest Resource Holding Corporation's unaudited condensed consolidated financial statements and related notes for the quarter ended March 31, 2023 Item 1. Financial Statements (Unaudited) This section provides the unaudited condensed consolidated financial statements and comprehensive notes for Quest Resource Holding Corporation for Q1 2023 Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of March 31, 2023, and December 31, 2022 | Metric | March 31, 2023 (Unaudited) | December 31, 2022 | | :-------------------------------- | :--------------------------- | :------------------ | | Total Assets | $177,084,799 | $181,491,049 | | Total Current Assets | $55,790,596 | $57,765,276 | | Cash and Cash Equivalents | $9,805,228 | $9,563,709 | | Accounts Receivable, net | $43,578,263 | $45,891,144 | | Total Liabilities | $107,608,825 | $110,352,001 | | Total Current Liabilities | $37,710,968 | $38,054,866 | | Total Stockholders' Equity | $69,475,974 | $71,139,048 | - Total assets decreased by approximately $4.4 million from December 31, 2022, to March 31, 2023, primarily driven by a decrease in accounts receivable and intangible assets[9] - Total liabilities decreased by approximately $2.7 million, mainly due to a reduction in notes payable and other current liabilities[9] Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including revenue, gross profit, and net loss for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Revenue | $74,113,703 | $71,522,168 | +3.6% | | Cost of Revenue | $61,483,944 | $60,273,753 | +2.0% | | Gross Profit | $12,629,759 | $11,248,415 | +12.3% | | Operating Income (Loss) | $787,479 | $(460,909) | N/A (swing to profit) | | Net Loss | $(2,024,053) | $(2,184,309) | -7.3% | | Basic Net Loss per Share | $(0.10) | $(0.11) | -9.1% | | Diluted Net Loss per Share | $(0.10) | $(0.11) | -9.1% | - The company achieved operating income of $787,479 in Q1 2023, a significant improvement from an operating loss of $(460,909) in Q1 2022[11] - Despite increased interest expense, net loss decreased by 7.3% year-over-year, indicating improved operational efficiency[11] Condensed Consolidated Statements of Changes in Stockholders' Equity This section details changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit for Q1 2023 | Metric | Balance, Dec 31, 2022 | Stock-based Compensation | Stock Option Exercises | Net Loss | Balance, Mar 31, 2023 | | :----------------------- | :-------------------- | :----------------------- | :--------------------- | :--------- | :-------------------- | | Common Stock Shares | 19,696,006 | — | 28,166 | — | 19,724,172 | | Common Stock Par Value | $19,696 | — | $28 | — | $19,724 | | Additional Paid-in Capital | $173,876,319 | $298,431 | $62,520 | — | $174,237,270 | | Accumulated Deficit | $(102,756,967) | — | — | $(2,024,053) | $(104,781,020) | | Total Stockholders' Equity | $71,139,048 | $298,431 | $62,548 | $(2,024,053) | $69,475,974 | - Total stockholders' equity decreased by approximately $1.66 million from December 31, 2022, to March 31, 2023, primarily due to the net loss incurred during the quarter, partially offset by stock-based compensation and stock option exercises[12] Condensed Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2023 and 2022 | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Cash Provided by (Used in) Operating Activities | $2,977,461 | $(391,562) | | Net Cash Used in Investing Activities | $(240,721) | $(3,460,752) | | Net Cash Provided by (Used in) Financing Activities | $(2,495,221) | $3,346,043 | | Net Increase (Decrease) in Cash and Cash Equivalents | $241,519 | $(506,271) | | Cash and Cash Equivalents at End of Period | $9,805,228 | $7,921,587 | - Operating activities generated $3.0 million in cash in Q1 2023, a significant improvement from cash used in operating activities of $(0.4) million in Q1 2022[14] - Cash used in investing activities decreased substantially from $(3.5) million in Q1 2022 (due to an acquisition) to $(0.2) million in Q1 2023[14] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of significant accounting policies, financial instrument fair values, and other relevant financial disclosures 1. The Company and Description of Business This note describes Quest Resource Holding Corporation's business, focusing on national waste and recycling services for multi-location businesses - Quest Resource Holding Corporation (QRHC) and its subsidiaries provide national waste and recycling services to large, multi-location businesses, including collection, processing, recycling, disposal, and tracking of waste streams and recyclables[16][17] - The company also offers products like antifreeze and windshield washer fluid and provides data for environmental and sustainability goal tracking[17] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and policies applied in preparing the condensed consolidated financial statements - The condensed consolidated financial statements are unaudited and prepared in accordance with SEC rules, omitting some GAAP disclosures[19] - The company adopted ASU 2016-13 (Financial Instruments – Credit Losses) on January 1, 2023, which did not materially impact its financial statements[22] 3. Acquisitions This note details the company's acquisition activities, including the purchase of an environmental services company in February 2022 - On February 10, 2022, the company acquired an independent environmental services company in the northeast U.S. for approximately $3.35 million, financed by a term loan draw-down[24] 4. Accounts receivable, net of allowance for doubtful accounts This note provides details on accounts receivable and the allowance for doubtful accounts, including changes during the reporting period | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Beginning balance | $2,176,010 | $840,522 | | Bad debt expense | $243,909 | $261,973 | | Uncollectible accounts written off, net | $(145,379) | $(48,130) | | Ending balance | $2,274,540 | $1,054,365 | - The allowance for doubtful accounts increased to $2,274,540 as of March 31, 2023, from $2,176,010 at December 31, 2022[9][27] 5. Property and Equipment, net, and Other Assets This note presents the carrying values of property and equipment, right-of-use assets, and other assets, along with related depreciation | Asset Category | March 31, 2023 (Unaudited) | December 31, 2022 | | :-------------------------------- | :--------------------------- | :------------------ | | Property and equipment, net | $2,414,747 | $2,623,704 | | Right-of-use operating lease asset | $2,278,547 | $2,385,870 | | Security deposits and other assets | $845,653 | $901,653 | | Total Property and equipment, net, and other assets | $5,538,947 | $5,911,227 | - Depreciation expense for the three months ended March 31, 2023, was $238,163, including $84,123 related to cost of revenue[28] 6. Goodwill and Other Intangible Assets This note details the company's goodwill and finite-lived intangible assets, including customer relationships, software, and trademarks | Intangible Asset | March 31, 2023 Net | December 31, 2022 Net | | :----------------------- | :----------------- | :-------------------- | | Customer relationships | $27,478,645 | $29,441,145 | | Software | $1,230,348 | $1,067,874 | | Trademarks | $1,567,502 | $1,639,266 | | Non-compete agreements | $1,220,555 | $1,408,055 | | Total finite lived intangible assets | $31,497,050 | $33,556,340 | | Goodwill | $84,258,206 | $84,258,206 | - Amortization expense for finite-lived intangible assets was approximately $2.3 million for both Q1 2023 and Q1 2022[30] - The company performed its annual impairment analysis for goodwill and other intangible assets in Q3 2022, with no impairment recorded[31] 7. Current Liabilities This note provides a breakdown of current liabilities, including accounts payable, accrued taxes, and deferred consideration | Current Liability | March 31, 2023 (Unaudited) | December 31, 2022 | | :-------------------------- | :--------------------------- | :------------------ | | Accounts payable | $30,008,906 | $28,744,858 | | Accrued taxes | $676,277 | $331,936 | | Employee compensation | $1,808,456 | $1,812,028 | | Operating lease liability - current portion | $494,767 | $489,938 | | Other (Accounts payable and accrued liabilities) | $329,213 | $828,701 | | Deferred consideration - earn-out | $680,503 | $1,957,255 | | Deferred revenue | $2,554,046 | $2,731,350 | - A $1.2 million earn-out payment related to an acquisition was made in the first quarter of 2023, significantly reducing deferred consideration[33] 8. Notes Payable This note details the company's debt obligations, including the Monroe Term Loan, Green Remedies Promissory Note, and PNC ABL Facility | Debt Obligation | Interest Rate (as of Mar 31, 2023) | March 31, 2023 (Unaudited) | December 31, 2022 | | :-------------------------- | :--------------------------------- | :--------------------------- | :------------------ | | Monroe Term Loan | 11.67% | $60,917,651 | $61,073,151 | | Green Remedies Promissory Note | 3.00% | $1,503,757 | $1,637,970 | | PNC ABL Facility | 6.95% | $9,969,976 | $12,238,034 | | Total notes payable | | $72,391,384 | $74,949,155 | | Notes payable, net | | $68,306,916 | $70,572,891 | - The PNC ABL Facility had $9,969,976 principal outstanding as of March 31, 2023, with a borrowing base availability of $19,044,729[38] - Interest expense related to borrowings increased to $1,956,089 for Q1 2023 from $1,233,319 for Q1 2022, primarily due to additional borrowing and increased base interest rates[42] 9. Leases This note outlines the company's operating lease arrangements, including lease expense and future minimum lease payments - Operating lease expense for office leases was approximately $190,000 for Q1 2023, down from $245,000 in Q1 2022[44] Future Minimum Lease Payments | Year | Future Minimum Lease Payments | | :--- | :---------------------------- | | 2023 | $445,142 | | 2024 | $525,237 | | 2025 | $495,161 | | 2026 | $484,441 | | 2027 | $387,909 | | Total Lease Payments | $2,337,890 | | Present Value of Lease Liabilities | $2,085,708 | 10. Revenue This note describes the company's revenue streams, primarily from waste and recycling services and commodity sales - Revenue is primarily generated from fees for waste and recycling services and sales of commodities, with additional product sales (e.g., antifreeze) and ancillary services[48] Revenue by Type | Revenue Type | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------- | :-------------------------------- | :-------------------------------- | | Services | $71,306,740 | $68,721,608 | | Product sales and other | $2,806,963 | $2,800,560 | | Total Revenue | $74,113,703 | $71,522,168 | - Two customers accounted for 26.3% of revenue in Q1 2023, while one customer accounted for 16.5% in Q1 2022[51] 11. Income Taxes This note details income tax expense, deferred tax assets, and the valuation allowance, reflecting the company's tax position Income Tax Expense | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------- | :-------------------------------- | :-------------------------------- | | Income Tax Expense | $368,504 | $166,815 | - The company recorded a full valuation allowance against all deferred tax assets, totaling $14,604,000 as of March 31, 2023, due to uncertainty of realization[56] - Federal income tax net operating loss carryforwards were approximately $5.5 million as of March 31, 2023[56] 12. Fair Value of Financial Instruments This note discusses the fair value of financial instruments and the company's exposure to interest rate risk from variable rate debt - The fair values of financial instruments (cash, receivables, payables, notes payable) approximate their carrying values due to short maturities or similar borrowing rates[57] - The company is exposed to interest rate risk due to variable rate indebtedness under its senior secured credit facilities[57] 13. Stockholders' Equity This note provides details on common stock, warrants, stock options, and deferred stock units, along with stock-based compensation expense Equity Instruments Outstanding | Equity Instrument | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Common Stock Shares Outstanding | 19,724,172 | 19,696,006 | | Warrants Outstanding | 850,000 | 850,000 | | Stock Options Outstanding | 3,129,139 | 3,179,388 | | Deferred Stock Units (DSUs) Outstanding | 215,231 | 211,415 | - Stock-based compensation expense for Q1 2023 included $22,910 for ESPP, $250,254 for stock options, and $25,267 for DSUs[60][61] 14. Net Loss per Share This note presents the calculation of basic and diluted net loss per share, including factors affecting anti-dilutive securities Net Loss per Share Calculation | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Loss Applicable to Common Stockholders | $(2,024,053) | $(2,184,309) | | Weighted Average Common Shares Outstanding, Basic | 19,931,711 | 19,244,634 | | Weighted Average Common Shares Outstanding, Diluted | 19,931,711 | 19,244,634 | | Basic Net Loss per Share | $(0.10) | $(0.11) | | Diluted Net Loss per Share | $(0.10) | $(0.11) | - Stock options and warrants were excluded from diluted net loss per share calculation as their inclusion would be anti-dilutive due to the net loss[62][64] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operating results for the three months ended March 31, 2023, compared to the prior year Overview This section provides a brief history of Quest Resource Holding Corporation and its growth through strategic acquisitions - Quest Resource Holding Corporation (QRHC) was incorporated in Nevada in 2002 and has grown through acquisitions, including QRMG (2013), Green Remedies Waste and Recycling, Inc. (2020), and RWS Facility Services, LLC (2021)[67] Three Months Ended March 31, 2023 and 2022 Operating Results This section summarizes key operating results, including revenue, gross profit, operating income, and net loss for Q1 2023 and Q1 2022 | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $74,113,703 | $71,522,168 | | Gross Profit | $12,629,759 | $11,248,415 | | Operating Income (Loss) | $787,479 | $(460,909) | | Net Loss | $(2,024,053) | $(2,184,309) | Global Economic Trends This section discusses the impact of global economic volatility, inflation, and geopolitical conflicts on the company's operations and financial condition - The global economy has experienced volatility and disruptions, including increased inflation rates and interest rates, which could adversely affect the company's costs and financial condition[70] - The company acknowledges potential adverse consequences from geopolitical conflicts (e.g., Ukraine-Russia) on global supply chains and energy markets[70] Revenue This section analyzes the drivers of revenue growth, including increased demand and customer production, and offsetting factors like commodity values - Revenue for Q1 2023 increased by $2.6 million (3.6%) to $74.1 million, driven by increased demand, heightened customer production levels, and new/continuing customers[71] - The increase was partially offset by lower service levels at some customers and reduced commodity values[71] Cost of Revenue/Gross Profit This section examines changes in cost of revenue, gross profit, and gross profit margin, influenced by service mix and commodity prices - Gross profit increased by $1.4 million to $12.6 million in Q1 2023, with the gross profit margin improving to 17.0% from 15.7% in Q1 2022[73] - Changes in gross profit and margin were influenced by increased services from new/continuing customers, changes in service mix, and commodity price fluctuations[73][74] Operating Expenses This section reviews total operating expenses, highlighting changes in selling, general, and administrative costs - Total operating expenses slightly increased to $11.8 million in Q1 2023 from $11.7 million in Q1 2022[76] - Selling, general, and administrative (SG&A) expenses increased by $72,974, primarily due to higher labor-related expenses, partially offset by reduced professional fees[76] Interest Expense This section analyzes the increase in interest expense due to additional borrowing and rising base interest rates - Interest expense increased by approximately $0.9 million to $2.4 million in Q1 2023, compared to $1.6 million in Q1 2022[78] - The increase was attributed to additional borrowing for the 2022 acquisition and rising base interest rates[78] Income Taxes This section discusses income tax expense, the valuation allowance against deferred tax assets, and future profitability expectations - Income tax expense was $368,504 in Q1 2023, primarily due to state tax obligations[79] - The company maintains a full valuation allowance against deferred tax assets but anticipates a reasonable possibility of reversal within 12-24 months, contingent on achieving sufficient profitability[80] Net Loss This section reports the net loss for the period, noting an improvement compared to the prior year - Net loss for Q1 2023 was $(2.0) million, an improvement from $(2.2) million in Q1 2022[81] Loss per Share This section details the basic and diluted net loss per share, indicating an improvement year-over-year - Basic and diluted net loss per share improved to $(0.10) in Q1 2023 from $(0.11) in Q1 2022[83] Adjusted EBITDA This section presents Adjusted EBITDA, a non-GAAP measure, and its reconciliation to net loss, showing an increase for Q1 2023 - Adjusted EBITDA, a non-GAAP measure, increased by 6.7% to $4.0 million in Q1 2023 from $3.7 million in Q1 2022[84] Adjusted EBITDA Reconciliation | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(2,024,053) | $(2,184,309) | | Depreciation and amortization | $2,508,967 | $2,437,209 | | Interest expense | $2,443,028 | $1,556,585 | | Stock-based compensation expense | $298,431 | $258,638 | | Acquisition, integration and related costs | $477,601 | $1,305,936 | | Other adjustments | $(85,593) | $195,858 | | Income tax expense | $368,504 | $166,815 | | Adjusted EBITDA | $3,986,885 | $3,736,732 | Adjusted Net Income and Adjusted Net Income per Diluted Share This section provides Adjusted Net Income and Adjusted Net Income per Diluted Share, non-GAAP measures, and their reconciliation - Adjusted net income, a non-GAAP measure, decreased to $0.6 million in Q1 2023 from $1.3 million in Q1 2022[88] Adjusted Net Income Reconciliation | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Reported net loss | $(2,024,053) | $(2,184,309) | | Amortization of intangibles | $2,221,669 | $2,174,455 | | Acquisition, integration and related costs | $477,601 | $1,305,936 | | Other adjustments | $(76,326) | — | | Adjusted net income | $598,891 | $1,296,082 | | Adjusted net income per diluted share | $0.03 | $0.06 | | Diluted weighted average shares outstanding | 22,158,132 | 21,715,982 | Liquidity and Capital Resources This section assesses the company's liquidity position, including cash, working capital, and borrowing capacity to fund future operations Key Liquidity Metrics | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Cash and Cash Equivalents | $9.8 million | $9.6 million | | Working Capital | $18.1 million | $19.7 million | - The company believes its existing cash, borrowing capacity under its $25.0 million ABL Facility, and cash from operations will be sufficient to fund operations for the next 12 months and the foreseeable future[92] Cash Flows This section analyzes cash flows from operating, investing, and financing activities, highlighting significant year-over-year changes - Net cash provided by operating activities was $3.0 million in Q1 2023, a significant improvement from net cash used of $(0.4) million in Q1 2022[94] - Net cash used in investing activities decreased to $(0.2) million in Q1 2023 from $(3.5) million in Q1 2022, primarily due to the absence of a large acquisition[95] - Net cash used in financing activities was $(2.5) million in Q1 2023, mainly due to net repayments on the ABL Facility, contrasting with $3.3 million provided in Q1 2022 from acquisition financing[96] Inflation This section discusses the impact of inflation on the company and its strategies for mitigating cost increases through flexible pricing - The company does not believe inflation had a material impact in Q1 2023 or Q1 2022[98] - Flexible pricing structures and cost recovery fees in contracts are expected to help offset inflationary cost increases (fuel, labor, capital items)[98][99] Critical Accounting Estimates and Policies This section identifies key accounting estimates and policies, noting no significant changes other than a new ASU adoption - Key accounting estimates include accounts receivable, goodwill and other intangible assets, stock-based compensation, deferred taxes, and fair value of acquired assets/liabilities[100] - No significant changes in critical accounting policies occurred during Q1 2023, other than the adoption of ASU 2016-13[100] Recent Accounting Pronouncements This section refers to Note 2 for details on recently adopted accounting pronouncements, specifically ASU 2016-13 - Refer to Note 2 for details on recent accounting pronouncements, specifically the adoption of ASU 2016-13[101] Off-Balance Sheet Arrangements This section confirms the absence of off-balance sheet debt, similar obligations, or undisclosed related-party transactions - The company has no off-balance sheet debt, similar obligations, or undisclosed related-party transactions[102] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - The company states that this item is not applicable[103] Item 4. Controls and Procedures This section details management's evaluation of the company's disclosure controls and procedures and internal control over financial reporting, concluding on their effectiveness and acknowledging inherent limitations Evaluation of Disclosure Controls and Procedures This section presents management's conclusion on the effectiveness of disclosure controls and procedures as of March 31, 2023 - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2023[104] Changes in Internal Control Over Financial Reporting This section confirms no material changes in internal control over financial reporting during the first quarter of 2023 - There were no changes in internal control over financial reporting during Q1 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[105] Limitations on Effectiveness of Controls and Procedures This section acknowledges the inherent limitations of control systems, providing only reasonable assurance against misstatements - Management acknowledges that control systems provide only reasonable, not absolute, assurance and are subject to inherent limitations such as faulty judgments, simple errors, circumvention by individuals, or management override[106] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings This section states that the company is not aware of any legal proceedings that could have a material adverse effect on its business - The company is not aware of any material legal proceedings as of the filing date[109] Item 1A. Risk Factors This section introduces a new risk factor concerning the instability of financial institutions and its potential adverse impacts on the company's vendors, customers, and access to cash/borrowings - A new risk factor highlights potential adverse impacts from financial institution instability on vendors, customers, and the company's ability to access cash deposits and borrowings[110] - Tight credit conditions resulting from financial instability could lead to an economic slowdown and reduced demand for the company's services[110] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds occurred during the period[111] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities - There were no defaults upon senior securities[112] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[113] Item 5. Other Information This section discloses a new Severance and Change in Control Agreement with the CFO, Brett W. Johnston, outlining terms for termination, change in control, and non-compete/non-solicitation clauses - A Severance and Change in Control Agreement was entered into with CFO Brett W. Johnston, effective May 12, 2023[114] - The agreement provides for 12 months of salary and a pro-rata cash incentive bonus upon termination without good cause or voluntary termination for good reason[114] - In a change in control scenario, if Mr. Johnston terminates employment or is terminated without good cause, he receives 12 months of base salary, an average cash bonus, and accelerated vesting of unvested stock options and restricted stock units[114] - The agreement includes a 12-month non-compete clause and a 24-month non-solicitation clause for employees following termination[114] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Severance and Change in Control Agreement, CEO/CFO certifications, and XBRL financial statements - Key exhibits include the Severance and Change in Control Agreement (Exhibit 10.1), CEO/CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2), and Inline XBRL financial statements (Exhibit 101)[115] SIGNATURES This section contains the official signatures of the company's President, CEO, and CFO, certifying the report's accuracy - The report is signed by S. Ray Hatch, President and Chief Executive Officer, and Brett W. Johnston, Senior Vice President and Chief Financial Officer, on May 15, 2023[118]