Quest Resource Holding 10Q 2023 Q3 Quarterly report

Quest Resource Holding (QRHC) 10-Q2023 Q3 Quarterly report

Content analysis

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

Commission file number: 001-36451

Quest Resource Holding Corporation

(Exact Name of Registrant as Specified in its Charter)

Nevada

51-0665952

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

3481 Plano Parkway, Suite 100

The Colony, Texas 75056

(Address of Principal Executive Offices and Zip Code)

(972) 464-0004

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol

Name of each exchange on which registered

Common stock

QRHC

NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 1, 2023, there were 20,059,947 shares of the registrant’s common stock, $0.001 par value, outstanding.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)		2

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures About Market Risk		19

Item 4. Controls and Procedures		19

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		21

Item 1A. Risk Factors		21

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		21

Item 3. Defaults Upon Senior Securities		21

Item 4. Mine Safety Disclosures		21

Item 5. Other Information		21

Item 6. Exhibits		22

Signatures		23

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2023			2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	870,233		$	9,563,709
Accounts receivable, less allowance for doubtful accounts of $2,357,345 and $2,176,010 as of September 30, 2023 and December 31, 2022, respectively		49,932,053			45,891,144
Prepaid expenses and other current assets		2,745,946			2,310,423
Total current assets		53,548,232			57,765,276

Goodwill		84,258,206			84,258,206
Intangible assets, net		27,767,759			33,556,340
Property and equipment, net, and other assets		4,865,721			5,911,227
Total assets	$	170,439,918		$	181,491,049
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	40,916,726		$	32,207,461
Other current liabilities		2,497,832			4,688,605
Current portion of notes payable		1,158,800			1,158,800
Total current liabilities		44,573,358			38,054,866

Notes payable, net		56,786,013			70,572,891
Other long-term liabilities		1,395,607			1,724,244
Total liabilities		102,754,978			110,352,001

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2023 and December 31, 2022		—			—
Common stock, $0.001 par value, 200,000,000 shares authorized, 19,959,677 and 19,696,006 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		19,960			19,696
Additional paid-in capital		175,383,223			173,876,319
Accumulated deficit		(107,718,243	)		(102,756,967	)
Total stockholders’ equity		67,684,940			71,139,048
Total liabilities and stockholders’ equity	$	170,439,918		$	181,491,049

The accompanying notes are an integral part of these condensed consolidated financial statements.

QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue	$	70,425,425		$	73,358,293		$	219,036,423		$	221,785,249
Cost of revenue		57,995,192			61,174,960			180,471,602			183,685,111
Gross profit		12,430,233			12,183,333			38,564,821			38,100,138
Operating expenses:
Selling, general, and administrative		9,620,114			9,332,721			28,249,820			27,975,550
Depreciation and amortization		2,341,581			2,473,339			7,218,683			7,308,591
Total operating expenses		11,961,695			11,806,060			35,468,503			35,284,141
Operating income		468,538			377,273			3,096,318			2,815,997
Interest expense		(2,408,076	)		(1,911,989	)		(7,407,207	)		(5,057,400	)
Loss before taxes		(1,939,538	)		(1,534,716	)		(4,310,889	)		(2,241,403	)
Income tax expense		111,104			151,619			650,387			479,011
Net loss	$	(2,050,642	)	$	(1,686,335	)	$	(4,961,276	)	$	(2,720,414	)

Net loss applicable to common stockholders	$	(2,050,642	)	$	(1,686,335	)	$	(4,961,276	)	$	(2,720,414	)
Net loss per share applicable to common shareholders
Basic	$	(0.10	)	$	(0.09	)	$	(0.25	)	$	(0.14	)
Diluted	$	(0.10	)	$	(0.09	)	$	(0.25	)	$	(0.14	)
Weighted average number of common shares outstanding
Basic		20,059,528			19,368,192			19,984,890			19,297,636
Diluted		20,059,528			19,368,192			19,984,890			19,297,636

The accompanying notes are an integral part of these condensed consolidated financial statements.

QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


					Additional					Total
	Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Par Value		Capital		Deficit			Equity
Balance, December 31 2022		19,696,006	$	19,696	$	173,876,319	$	(102,756,967	)	$	71,139,048
Stock-based compensation		—		—		298,431		—			298,431
Stock option exercises		28,166		28		62,520		—			62,548
Net loss		—		—		—		(2,024,053	)		(2,024,053	)
Balance, March 31, 2023		19,724,172		19,724		174,237,270		(104,781,020	)		69,475,974
Stock-based compensation		—		—		362,319		—			362,319
Stock option exercises		35,000		35		52,815		—			52,850
Shares issued for Employee Stock Purchase Plan options		22,888		23		106,979		—			107,002
Net loss		—		—		—		(886,581	)		(886,581	)
Balance, June 30, 2023		19,782,060		19,782		174,759,383		(105,667,601	)		69,111,564
Stock-based compensation		—		—		288,563		—			288,563
Stock option exercises		177,617		178		335,277		—			335,455
Net loss		—		—		—		(2,050,642	)		(2,050,642	)
Balance, September 30, 2023		19,959,677	$	19,960	$	175,383,223	$	(107,718,243	)	$	67,684,940


					Additional						Total
	Common Stock				Paid-in			Accumulated			Stockholders’
	Shares		Par Value		Capital			Deficit			Equity
Balance, December 31, 2021		19,045,988	$	19,046	$	170,318,199		$	(96,708,981	)	$	73,628,264
Stock-based compensation		—		—		258,638			—			258,638
Net loss		—		—		—			(2,184,309	)		(2,184,309	)
Balance, March 31, 2022		19,045,988		19,046		170,576,837			(98,893,290	)		71,702,593
Stock-based compensation		—		—		326,894			—			326,894
Stock option exercises		53,465		53		92,375			—			92,428
Shares issued for Employee Stock Purchase Plan options		17,720		18		76,648			—			76,666
Net income		—		—		—			1,150,231			1,150,231
Balance, June 30, 2022		19,117,173		19,117		171,072,754			(97,743,059	)		73,348,812
Stock-based compensation		—		—		412,715			—			412,715
Release of deferred stock units		28,650		29		(29	)		—			—
Stock option exercises		145,102		145		307,274			—			307,419
Net loss		—		—		—			(1,686,335	)		(1,686,335	)
Balance, September 30, 2022		19,290,925	$	19,291	$	171,792,714		$	(99,429,394	)	$	72,382,611

The accompanying notes are an integral part of these condensed consolidated financial statements.

QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	For the Nine Months Ended September 30,
	2023			2022
Cash flows from operating activities:
Net loss	$	(4,961,276	)	$	(2,720,414	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		645,047			571,738
Amortization of intangibles		6,840,559			6,969,692
Amortization of debt issuance costs and discounts		875,385			978,386
Provision for doubtful accounts		1,210,179			1,143,757
Stock-based compensation		949,313			998,247
Changes in operating assets and liabilities:
Accounts receivable		(5,251,088	)		(13,079,923	)
Prepaid expenses and other current assets		(435,523	)		(1,110,912	)
Security deposits and other assets		195,634			(850,290	)
Accounts payable and accrued liabilities		8,747,102			3,076,785
Other liabilities		(2,147,507	)		(295,959	)
Net cash provided by (used in) operating activities		6,667,825			(4,318,893	)
Cash flows from investing activities:
Purchase of property and equipment		(204,915	)		(627,216	)
Purchase of intangible assets		(1,051,978	)		(631,615	)
Acquisition, net of cash acquired		—			(3,137,758	)
Net cash used in investing activities		(1,256,893	)		(4,396,589	)
Cash flows from financing activities:
Proceeds from credit facilities		63,672,337			59,023,146
Repayments of credit facilities		(70,514,967	)		(54,353,819	)
Proceeds from long-term debt		—			3,500,000
Repayments of long-term debt		(7,819,633	)		(1,124,774	)
Proceeds from shares issued for Employee Stock Purchase Plan		107,002			76,666
Proceeds from stock option exercises		450,853			399,847
Debt issuance costs		—			(139,550	)
Net cash provided by (used in) financing activities		(14,104,408	)		7,381,516
Net decrease in cash and cash equivalents		(8,693,476	)		(1,333,966	)
Cash and cash equivalents at beginning of period		9,563,709			8,427,858
Cash and cash equivalents at end of period	$	870,233		$	7,093,892

Supplemental cash flow information:
Cash paid for interest	$	6,575,490		$	3,918,191
Cash paid for income taxes, net	$	328,098		$	359,327

The accompanying notes are an integral part of these condensed consolidated financial statements.

QUEST RESOURCE HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. The Company and Description of Business

The accompanying condensed consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”) and its subsidiaries, Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC (“LDI”), Youchange, Inc. (“Youchange”), Quest Vertigent Corporation (“QVC”), Quest Vertigent One, LLC (“QV One”), Quest Sustainability Services, Inc. (“QSS”), and Sequoia Waste Management Solutions, LLC (“Sequoia”) (collectively, “we,” “us,” or “our company”). The subsidiaries RWS Facility Services, LLC (“RWS”) and Sustainable Solutions Group (“SSG”) were merged into Quest in 2023 and were subsequently dissolved as separate legal entities.

Operations – We are a national provider of waste and recycling services to customers from across multiple industry sectors that are typically larger, multi-location businesses. We create customer-specific programs and perform the related services for the collection, processing, recycling, disposal, and tracking of waste streams and recyclables. In addition, we offer products such as antifreeze and windshield washer fluid and other minor ancillary services. We also provide information and data that tracks and reports the detailed transactional and environmental results of our services and provides actionable data to improve business operations. The data we generate also enables our customers to address their environmental and sustainability goals and responsibilities.

On February 10, 2022, we acquired an independent environmental services company that primarily services customers in the northeast region of the United States. See Note 3 for more information regarding the acquisition.

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, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying condensed consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2023 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2022 condensed consolidated balance sheet data from audited financial statements; however, we did not include all disclosures required by GAAP. As QRHC, Quest, LDI, Youchange, QVC, QV One, QSS, and Sequoia each operate as environmental-based service companies, we did not deem segment reporting necessary.

All intercompany accounts and transactions have been eliminated in consolidation. Interim results are subject to seasonal variations, and the results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments, including trade receivables. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a new forward-looking approach to estimate expected credit losses. We adopted the new standard on January 1, 2023. The adoption of the new standard did not have a material impact on our condensed consolidated financial statements as pre-existing processes for estimating expected credit losses for trade receivables generally aligned with the expected credit loss model.

There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.

3. Acquisition

On February 10, 2022, we acquired an independent environmental services company that primarily services customers in the northeast region of the United States for approximately $3.35 million. This acquisition was paid in cash and was financed with a draw down on the term loan pursuant to the Credit Agreement (as defined in Note 8). The purchase price was allocated to the acquired assets, primarily customer relationship intangibles and goodwill.

4. Accounts Receivable, Net of Allowance for Doubtful Accounts

Our receivables, which are recorded when billed or when services are performed, are claims against third parties that will generally be settled in cash. The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net realizable value. We estimate our allowance for doubtful accounts based on consideration of a number of factors, including the length of time trade accounts are past due, our previous loss history, the creditworthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We write off past-due receivable balances after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period we receive the payment.

The following table reflects the activity in our allowance for doubtful accounts of trade receivables for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(Unaudited)						(Unaudited)
Beginning balance	$	2,095,947		$	1,728,974		$	2,176,010		$	840,522
Bad debt expense		639,820			411,802			1,210,179			1,143,757
Uncollectible accounts written off, net of recoveries		(378,422	)		(63,129	)		(1,028,844	)		93,368
Ending balance	$	2,357,345		$	2,077,647		$	2,357,345		$	2,077,647

5. Property and Equipment, Net, and Other Assets

At September 30, 2023 and December 31, 2022, property and equipment, net, and other assets consisted of the following:


	September 30,		December 31,
	2023		2022
	(Unaudited)
Property and equipment, net of accumulated depreciation of $3,085,471 and $2,499,797 as of September 30, 2023 and December 31, 2022, respectively	$	2,237,547	$	2,623,704
Right-of-use operating lease assets		1,998,975		2,385,870
Security deposits and other assets		629,199		901,653
Property and equipment, net, and other assets	$	4,865,721	$	5,911,227

We compute depreciation using the straight-line method over the estimated useful lives of the property and equipment. Depreciation expense for the three months ended September 30, 2023 was $150,594, including $96,086 of depreciation expense reflected within “Cost of revenue” in our condensed consolidated statements of operations as it related to assets used in directly servicing customer contracts and was $645,047 for the nine months ended September 30, 2023, including $266,923 of depreciation expense reflected within “Cost of revenue.” Depreciation expense for the three months ended September 30, 2022 was $201,345, including $80,903 of depreciation expense reflected within “Cost of revenue,” and was $571,738 for the nine months ended September 30, 2022, including $232,839 reflected in “Cost of revenue.”

We recorded right-of-use operating lease assets related to our office leases in accordance with ASC 842. Refer to Note 9, Leases for additional information.

6. Goodwill and Other Intangible Assets

The components of goodwill and other intangible assets were as follows:


September 30, 2023 (Unaudited)	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net
Finite lived intangible assets:
Customer relationships	5 years	$	39,250,000	$	15,696,355	$	23,553,645
Software	7 years		3,651,144		1,716,339		1,934,805
Trademarks	7 years		2,019,612		585,858		1,433,754
Non-compete agreements	3 years		2,250,000		1,404,445		845,555
Total finite lived intangible assets		$	47,170,756	$	19,402,997	$	27,767,759


December 31, 2022	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net
Finite lived intangible assets:
Customer relationships	5 years	$	39,250,000	$	9,808,855	$	29,441,145
Software	7 years		2,609,374		1,541,500		1,067,874
Trademarks	7 years		2,009,403		370,137		1,639,266
Non-compete agreements	3 years		2,250,000		841,945		1,408,055
Total finite lived intangible assets		$	46,118,777	$	12,562,437	$	33,556,340

We compute amortization using the straight-line method over the useful lives of the finite lived intangible assets. Amortization expense related to finite lived intangible assets was $2.3 million and $2.4 million for the three months ended September 30, 2023 and 2022, respectively. Amortization expense related to finite lived intangible assets was $6.8 million and $7.0 million for the nine months ended September 30, 2023 and 2022, respectively.

We have no indefinite-lived intangible assets other than goodwill. $69.2 million of the goodwill is not deductible for tax purposes, while $15.0 million of goodwill is deductible over its tax-basis life.

We performed our annual impairment analysis for goodwill and other intangible assets in the third quarter of 2023 with no impairment recorded.

7. Current Liabilities

The components of Accounts payable and accrued liabilities were as follows:


	September 30,		December 31,
	2023		2022
	(Unaudited)
Accounts payable	$	37,120,877	$	28,744,858
Accrued taxes		963,580		331,936
Employee compensation		1,709,313		1,812,028
Operating lease liabilities - current portion		493,048		489,938
Miscellaneous		629,908		828,701
	$	40,916,726	$	32,207,461

Refer to Note 9, Leases for additional disclosure related to the operating lease liabilities.

The components of Other current liabilities were as follows:


	September 30,		December 31,
	2023		2022
	(Unaudited)
Deferred consideration - earn-out	$	680,502		1,957,255
Deferred revenue		1,817,330		2,731,350
	$	2,497,832	$	4,688,605

We made a $1.2 million earn-out payment in the first quarter of 2023 related to an acquisition.

8. Notes Payable

Our debt obligations were as follows:


	Interest	September 30,			December 31,
	Rate (1)	2023			2022
		(Unaudited)
Monroe Term Loan (2)	11.94%	$	53,656,156		$	61,073,151
Green Remedies Promissory Note (3)	3.00%		1,235,332			1,637,970
PNC ABL Facility (4)	7.47%		5,395,404			12,238,034
Total notes payable			60,286,892			74,949,155
Less: Current portion of long-term debt			(1,158,800	)		(1,158,800	)
Less: Unamortized debt issuance costs			(1,539,682	)		(2,122,715	)
Less: Unamortized OID			(211,506	)		(288,643	)
Less: Unamortized OID warrant			(590,891	)		(806,106	)
Notes payable, net		$	56,786,013		$	70,572,891

(1) Interest rates as of September 30, 2023
(2) Bears interest based on SOFR plus Applicable Margin ranging from 5.5% to 7.5%
(3) Stated interest rate of 3.0%
(4) Bears interest based on Adjusted Term SOFR plus a margin ranging from 1.75% to 2.25%

We capitalize financing costs we incur related to implementing our debt arrangements. We record these debt issuance costs associated with our revolving credit facility and our term loan as a reduction of long-term debt, net and amortize them over the contractual life of the related debt arrangements. The table below summarizes changes in debt issuance costs.


	September 30,
	2023

Debt issuance costs, net of accumulated amortization
Balance at December 31, 2022	$	2,122,715
Less: Amortization expense		(583,033	)
Balance at September 30, 2023 (Unaudited)	$	1,539,682

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 and December 2, 2022, with BBVA USA (which was subsequently succeeded in interest by PNC Bank, National Association (“PNC”)), as a lender, and as administrative agent, collateral agent, and issuing bank, which provides for a credit facility (the “ABL Facility”) comprising an asset-based revolving credit facility in the maximum principal amount of $25.0 million with a sublimit for issuance of letters of credit of up to 10% of the maximum principal amount of the revolving credit facility. The revolving credit facility bears interest, at the borrowers’ option, at either the Base Rate, plus a margin ranging from 0.75% to 1.25% (no borrowings as of September 30, 2023), or the Adjusted Term SOFR Rate for the interest period in effect plus a margin ranging from 1.75% to 2.25% (7.47% as of September 30, 2023). The maturity date of the revolving credit facility is April 19, 2025. The revolving credit facility contains an accordion feature permitting the revolving credit facility to be increased by up to $10 million.

As of September 30, 2023, the ABL Facility borrowing base availability was $21,843,961, of which $5,395,404 principal was outstanding.

Monroe Term Loan

On October 19, 2020, QRHC and certain of its domestic subsidiaries entered into a Credit Agreement (the “Credit Agreement”), dated as of October 19, 2020, which was subsequently amended on September 3, 2021, December 1, 2021, December 7, 2021, and December 2, 2022, with Monroe Capital Management Advisors, LLC (“Monroe Capital”), as administrative agent for the lenders thereto. Among other things, the Credit Agreement provides for the following:

•

A senior secured term loan facility in the principal amount of $53.7 million as of September 30, 2023. The senior secured term loan accrues interest at the SOFR Rate for SOFR Loans plus the Applicable Margin; provided, that if the provision of SOFR Loans becomes unlawful or unavailable, then interest will be payable at a rate per annum equal to the Base Rate from time to time in effect plus the Applicable Margin for Base Rate Loans. The maturity date of the term loan facility is October 19, 2025 (the “Maturity Date”). The senior secured term loan will amortize in aggregate annual amounts equal to 1.00% of the original principal amount of the senior secured term loan facility with the balance payable on the Maturity Date. Proceeds of the senior secured term loan are permitted to be used for Permitted Acquisitions (as defined in the Credit Agreement).

•

An accordion term loan facility in the maximum principal amount of $5.3 million. Loans under the accordion loan facility may be requested at any time until the Maturity Date. Each accordion term loan shall be on the same terms as those

applicable to the senior secured term loan. Proceeds of accordion term loans are permitted to be used for Permitted Acquisitions.

At the same time as the borrowing of the initial $11.5 million under the Credit Agreement in October 2020, in a separate agreement, we issued Monroe Capital a warrant to purchase 500,000 shares of QRHC’s common stock exercisable immediately. For the delayed draw term loan facility, we issued a separate warrant to purchase 350,000 shares upon drawing on this facility on October 19, 2021. Both warrants have an exercise price of $1.50 per share and an expiration date of March 19, 2028. We estimated the value of the warrants issued using the Black Scholes option pricing model and recorded a debt discount (“OID”) of approximately $766,000 in 2020 for the 500,000-share warrant and $536,000 in 2021 for the 350,000-share warrant which are being amortized over the term of the Credit Agreement. We also executed a letter agreement that provides that the warrant holder will receive minimum net proceeds of $1 million less any net proceeds received from the sale of the warrant shares, which is conditional on the full exercise and sale of all the warrant shares at the same time and upon a date two years after the closing date of such agreement.

Green Remedies Promissory Note

On October 19, 2020, we issued an unsecured subordinated promissory note to Green Remedies in the aggregate principal amount of $2,684,250, payable commencing on January 1, 2021 in quarterly installments through October 1, 2025 and subject to an interest rate of 3.0% per annum.

Interest Expense

The amount of interest expense related to borrowings for the three months ended September 30, 2023 and 2022 was $1,915,631 and $1,577,669, respectively. The amount of interest expense related to borrowings for the nine months ended September 30, 2023 and 2022 was $5,944,798 and $4,097,400, respectively. Interest expense related to amortization of debt issuance fees, and debt discount costs as well as interest related to vendor supply chain financing programs totaled $492,445 and $334,320, respectively, for the three months ended September 30, 2023 and 2022. Interest expense related to amortization of debt issuance fees, and debt discount costs as well as interest related to vendor supply chain financing programs totaled $1,462,408 and $960,001, respectively, for the nine months ended September 30, 2023 and 2022.

9. Leases

Our leases are primarily related to office space and are classified as operating leases.

Lease Costs

For the three months ended September 30, 2023 and 2022, we recorded approximately $186,000 and $207,000, respectively, of fixed cost operating lease expense. For the nine months ended September 30, 2023 and 2022, we recorded approximately $561,000 and $669,000, respectively, of fixed cost operating lease expense.

Cash paid for operating leases approximated operating lease expense and non-cash right of use asset amortization for the nine months ended September 30, 2023 and 2022. We did not obtain any new operating lease right-of-use assets in the nine months ended September 30, 2023.

Balance Sheet Classification

The table below presents the lease related assets and liabilities recorded on the balance sheet. Right-of-use assets and related liabilities related to finance leases at September 30, 2023 are de minimis.


	September 30,		December 31,
	2023		2022
Operating leases:	(Unaudited)
Right-of-use operating lease assets:
Property and equipment, net and other assets	$	1,998,975	$	2,385,870

Lease liabilities:
Accounts payable and accrued liabilities	$	493,048	$	489,938
Other long-term liabilities		1,395,607		1,724,244
Total operating lease liabilities	$	1,888,655	$	2,214,182

10. Revenue

Operating Revenues

We provide businesses with services to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their operations. Our service revenue is primarily generated from fees charged for the collection, transfer, processing and disposal of 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.

Revenue Recognition

We recognize revenue as services are performed or products are delivered. For example, we recognize revenue as waste and recyclable material are collected or when products are delivered. We recognize revenue net of any contracted pricing discounts or rebate arrangements.

We generally recognize revenue for the gross amount of consideration received as we are generally the primary obligor (or principal) in our contracts with customers as we hold complete responsibility to the customer for contract fulfillment. Depending on the key terms of the arrangement, which may include situations in which we are not primarily obligated, we do not have credit risk, or we determine amounts earned using fixed percentage or fixed fee schedules, we may record the revenue net of certain cost amounts. We had certain management fee contracts accounted for under the net basis method with net revenue of $120,467 and $92,475 for the three months ended September 30, 2023 and 2022, respectively. We had net revenue from management fee contracts accounted for under the net basis revenue method of $277,121 and $392,451 for the nine months ended September 30, 2023 and 2022, respectively. We record amounts collected from customers for sales tax on a net basis.

Disaggregation of Revenue

The following table presents our revenue disaggregated by source. Two customers accounted for an aggregate of 28.2% of revenue for the three months ended September 30, 2023 and two customers accounted for 21.0% of revenue for the three months ended September 30, 2022. Two customers accounted for an aggregate of 28.1% of revenue for the nine months ended September 30, 2023 and one customer accounted for 14.5% of revenue for the nine months ended September 30, 2022. We operate primarily in the United States, with minor services in Canada.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(Unaudited)				(Unaudited)
Revenue Type:
Services	$	67,672,666	$	70,895,554	$	210,622,181	$	213,934,853
Product sales and other		2,752,759		2,462,739		8,414,242		7,850,396
Total revenue	$	70,425,425	$	73,358,293	$	219,036,423	$	221,785,249

Contract Balances

Our incremental direct costs of obtaining a customer contract are generally deferred and amortized to selling, general, and administrative expense or as a reduction to revenue (depending on the nature of the cost) over the estimated life of the customer contract. We classify our contract acquisition costs as current or noncurrent based on the timing of when we expect to recognize the amortization and are included in other assets.

As of September 30, 2023 and December 31, 2022, we had $50,000 and $566,667 of deferred contract costs, respectively. During the three months ended September 30, 2023 and 2022, we amortized $83,333 and $102,500, respectively, of deferred contract costs to selling, general, and administrative expense. During the nine months ended September 30, 2023 and 2022, we amortized $283,333 and $307,500, respectively, of deferred contract costs to selling, general, and administrative expense.

We bill certain customers one month in advance, and, accordingly, we defer recognition of related revenues as a contract liability until the services are provided and control is transferred to the customer. As of September 30, 2023 and December 31, 2022, we had $1,817,330 and $2,731,350, respectively, of deferred revenue which was classified in “Other current liabilities.”

11. Income Taxes

Our statutory income tax rate is anticipated to be approximately 26%. We had income tax expense of $650,387 and $479,011 for the nine months ended September 30, 2023 and 2022, respectively, which was attributable to state tax obligations for states with no net operating loss carryforwards, and the continuing reserve against the benefit of net operating loss carryforwards at the federal level.

We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance to reduce the amount of deferred tax assets that, based on available evidence, is more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of September 30, 2023 and December 31, 2022, and we had recorded a valuation allowance of $15,942,000 and $13,999,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed consolidated financial statements. As of September 30, 2023 and December 31, 2022, we had federal income tax net operating loss carryforwards of approximately $6,900,000 and $5,600,000, respectively, which expire at various dates ranging from 2034-2037.

12. Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, deferred revenue, and notes payable. We do not believe that we are exposed to significant currency or credit risks arising from these financial instruments. Our variable rate indebtedness subjects us to interest rate risk as all of the borrowings under the senior secured credit facilities bear interest at variable rates. The fair values of our financial instruments approximate their carrying values, based on their short maturities or, for notes payable, based on borrowing rates currently available to us for loans with similar terms and maturities. Contingent liabilities are measured at fair value on a recurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy.

13. Stockholders’ Equity

Preferred Stock – Our authorized preferred stock consists of 10,000,000 shares of preferred stock with a par value of $0.001, of which no shares have been issued or are outstanding.

Common Stock – Our authorized common stock consists of 200,000,000 shares of common stock with a par value of $0.001, of which 19,959,677 and 19,696,006 shares were issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.

Employee Stock Purchase Plan – On September 17, 2014, our stockholders approved our 2014 Employee Stock Purchase Plan (as amended, the “ESPP”). On May 16, 2023, we issued 22,888 shares to employees for $107,002 under our ESPP for options that vested and were exercised. We recorded expense of $79,993 and $63,369 related to the ESPP for the nine months ended September 30, 2023 and 2022, respectively.

Warrants – The following table summarizes the warrants issued and outstanding as of September 30, 2023:

Warrants Issued and Outstanding as of September 30, 2023

Date of

Exercise

Shares of

Description

Issuance

Expiration

Common Stock

Exercisable Warrants

10/19/2020

3/19/2028

1.50

500,000

Exercisable Warrants

10/19/2021

3/19/2028

1.50

350,000

Total warrants issued and outstanding (Unaudited)

850,000

Stock Options – We recorded stock option expense of $664,629 and $730,037 for the nine months ended September 30, 2023 and 2022, respectively. The following table summarizes the stock option activity for the nine months ended September 30, 2023:


	Stock Options
					Weighted-
				Exercise	Average
	Number			Price Per	Exercise Price
	of Shares			Share	Per Share
Outstanding at December 31, 2022		3,179,388		$1.17 — $23.20	$	3.23
Granted		152,500		$5.50	$	5.50
Exercised		(240,783	)	$1.17 — $4.08	$	1.87
Cancelled/Forfeited		(25,021	)	$1.51 — $21.20	$	12.89
Outstanding at September 30, 2023 (Unaudited)		3,066,084		$1.17 — $23.20	$	3.37

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 one

share of our common stock following the completion of a director’s service. During the nine months ended September 30, 2023, we granted 4,662 DSUs and recorded director compensation expense of $30,128 related to the grants. In addition, during the nine months ended September 30, 2023, we granted 14,089 DSUs to executive employees and recorded compensation expense of $118,162, which includes an accrual of anticipated bonus expense to be paid in DSUs for certain executive employees.

During the nine months ended September 30, 2022, we granted 5,317 DSUs and recorded director compensation expense of $29,211 related to the grants. In addition, during the nine months ended September 30, 2022, we granted 35,201 DSUs to executive employees and recorded compensation expense of $175,629, which includes an accrual of anticipated bonus expense to be paid in DSUs for certain executive employees. We had 230,166 and 211,415 DSUs outstanding at September 30, 2023 and December 31, 2022, respectively.

Restricted Stock Units - During the nine months ended September 30, 2023, we granted restricted stock units (“RSUs”) to nonemployee directors as part of their annual board compensation. The RSUs are recognized at their fair value on the date of grant. Each RSU represents the right to receive one share of our common stock once fully vested. During the nine months ended September 30, 2023, we granted 61,056 RSUs and recorded director compensation expense of $56,401 related to the grants. These RSUs were not vested at September 30, 2023.

14. 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 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:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(Unaudited)						(Unaudited)
Numerator:
Net loss applicable to common stockholders	$	(2,050,642	)	$	(1,686,335	)	$	(4,961,276	)	$	(2,720,414	)
Denominator:
Weighted average common shares outstanding, basic		20,059,528			19,368,192			19,984,890			19,297,636
Effect of dilutive common shares		—			—			—			—
Weighted average common shares outstanding, diluted		20,059,528			19,368,192			19,984,890			19,297,636
Net loss per share:
Basic	$	(0.10	)	$	(0.09	)	$	(0.25	)	$	(0.14	)
Diluted	$	(0.10	)	$	(0.09	)	$	(0.25	)	$	(0.14	)
Anti-dilutive securities excluded from diluted net loss per share:
Stock options		68,455			318,157			82,344			318,157
Warrants		—			—			—			—
Total anti-dilutive securities excluded from net loss per share		68,455			318,157			82,344			318,157

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in or incorporated by reference into this Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, and markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Form 10-Q include statements regarding the impact, if any, of the adoption of the ASU on our consolidated financial statements; the impact of the Coronavirus Disease 2019 (“COVID-19”) pandemic on our results of operations and any changes to inflation rates; exposure to significant interest, currency, or credit risks arising from our financial instruments; and sufficiency of our cash and cash equivalents, borrowing capacity, and cash generated from operations to fund our operations for the next 12 months. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Form 10-Q reflect our views as of the date of this Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors, including the impact of our business acquisitions in 2022 and 2021 on future results, the state of the U.S. economy in general, general economic conditions and the potential effect of inflationary pressures and increased interest rates on our cost of doing business, could cause actual results to differ materially from those indicated by the forward-looking statements and other risks detailed from time to time in our reports to the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 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 QRHC and QRMG (collectively, “we,” “us,” “our,” or “our company”).

Three and Nine Months Ended September 30, 2023 and 2022 Operating Results

The following table summarizes our operating results for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(Unaudited)						(Unaudited)
Revenue	$	70,425,425		$	73,358,293		$	219,036,423		$	221,785,249
Cost of revenue		57,995,192			61,174,960			180,471,602			183,685,111
Gross profit		12,430,233			12,183,333			38,564,821			38,100,138
Operating expenses:
Selling, general, and administrative		9,620,114			9,332,721			28,249,820			27,975,550
Depreciation and amortization		2,341,581			2,473,339			7,218,683			7,308,591
Total operating expenses		11,961,695			11,806,060			35,468,503			35,284,141
Operating income		468,538			377,273			3,096,318			2,815,997
Interest expense		(2,408,076	)		(1,911,989	)		(7,407,207	)		(5,057,400	)
Loss before taxes		(1,939,538	)		(1,534,716	)		(4,310,889	)		(2,241,403	)
Income tax expense		111,104			151,619			650,387			479,011
Net loss	$	(2,050,642	)	$	(1,686,335	)	$	(4,961,276	)	$	(2,720,414	)

Three and Nine Months Ended September 30, 2023 compared to Three and Nine Months Ended September 30, 2022

Global Economic Trends

The global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates and uncertainty about economic stability. For example, the current conflict between Ukraine and Russia has created extreme volatility in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets continue to deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive. Inflation can adversely affect us by increasing our costs, including salary costs. Any significant increases in inflation and related increases in interest rates could have a material adverse effect on our business, results of operations and financial condition.

Revenue

For the quarter ended September 30, 2023, revenue was $70.4 million, a decrease of $2.9 million, or 4.0%, compared to $73.4 million for the quarter ended September 30, 2022. For the nine months ended September 30, 2023, revenue was $219.0 million, a decrease of $2.7 million, or 1.2%, compared to $221.8 million for the nine months ended September 30, 2022.

The decrease for the quarter was primarily due to an approximately $6 million decrease in revenues at RWS, which was acquired in 2021. These declines were partially offset by an overall strong increase in demand for non-recyclable materials services from both new and continuing customers resulting in approximately $4 million in additional revenues, which includes an approximately $0.4 million negative billing adjustment for a large customer. Recyclable materials revenues decreased approximately $1 million in the quarter compared to the prior year.

For the nine months ended September 30, 2023, revenues declined slightly as an approximately $15.5 million increase in overall demand for non-recyclable materials services from both new and continuing customers were offset by an approximately $7 million decrease in recyclable materials revenues and an approximately $11 million decline in revenues from RWS.

Cost of Revenue/Gross Profit

Cost of revenue decreased $3.2 million to $58.0 million for the quarter ended September 30, 2023 from $61.2 million for the quarter ended September 30, 2022. Cost of revenue decreased $3.2 million to $180.5 million for the nine months ended September 30, 2023 compared to $183.7 million for the nine months ended September 30, 2022. The changes were primarily due to the same reasons impacting the decrease in revenue and also includes an unfavorable adjustment to cost of revenues of approximately $0.5 million related to RWS.

Gross profit for the quarter ended September 30, 2023 was $12.4 million, an increase of $0.2 million, compared to $12.2 million for the quarter ended September 30, 2022. The gross profit margin was 17.7% for the quarter ended September 30, 2023 compared to 16.6% for the same quarter of 2022. Gross profit for the nine months ended September 30, 2023 was $38.6 million, compared to $38.1 million for the nine months ended September 30, 2022. The gross profit margin was 17.6% for the nine months ended September 30, 2023, compared to 17.2% for the nine months ended September 30, 2022. The changes in gross profit and gross profit margin percentage for the quarter were primarily due to the net effect of the impact of increased services from certain new and continuing customers, change in the mix of services and relative gross profit margins from new and acquired customer base, reduced operations at certain other customers, and changes in values for recyclable materials.

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 recycling materials generated by our customers is impacted period to period based on several factors including their production or sales levels, demand of their product or services in the market, supply chain reliability, and labor force stability, among other business factors.

Operating Expenses

Operating expenses were $12.0 million and $11.8 million for the quarters ended September 30, 2023 and 2022, respectively. Operating expenses were $35.5 million and $35.3 million for the nine months ended September 30, 2023 and 2022, respectively.

Selling, general, and administrative expenses were $9.6 million and $9.3 million for the quarters ended September 30, 2023 and 2022, respectively. Selling, general, and administrative expenses were $28.2 million and $28.0 million for the nine months ended September 30, 2023 and 2022, respectively. Selling, general, and administrative expenses for both the quarter and nine months were mostly flat compared to the prior year periods.

Operating expenses for the quarters ended September 30, 2023 and 2022 included depreciation and amortization of $2.3 million and $2.5 million, respectively. Operating expenses for the nine months ended September 30, 2023 and 2022 included depreciation and amortization of $7.2 million and $7.3 million, respectively.

Interest Expense

Interest expense was $2.4 million and $1.9 million for the quarters ended September 30, 2023 and 2022, respectively, an increase of approximately $0.5 million. Interest expense was $7.4 million and $5.1 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of approximately $2.3 million. The increase is primarily due to increases in base interest rates which is partially offset by reduced borrowings from voluntary paydowns on the term loan in the first nine months of 2023. We are amortizing debt issuance costs of $3.3 million and OID of $2.2 million to interest expense over the life of the related debt arrangements as discussed in Note 8 to our condensed consolidated financial statements.

Income Taxes

We recorded a provision for income tax of $111,104 and $151,619 for the quarters ended September 30, 2023 and 2022, respectively. We recorded a provision for income tax of $650,387 and $479,011 for the nine months ended September 30, 2023 and 2022, respectively. The provision for income tax is primarily attributable to state tax obligations based on current estimated state tax apportionments for states with no net operating loss carryforwards.

We recorded a full valuation allowance against all our deferred tax assets (“DTAs”) as of both September 30, 2023 and December 31, 2022. We intend on maintaining a full valuation allowance on our DTAs until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current 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, 2023 was $(2.1) million compared to net loss of $(1.7) million for the quarter ended September 30, 2022. Net loss for the nine months ended September 30, 2023 was $(5.0) million compared to net loss of $(2.7) million for the nine months ended September 30, 2022. The explanations above detail the majority of the changes related to the change in net results.

Our operating results, including revenue, operating expenses, and operating margins, will vary from period to period depending on commodity prices of 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 $(0.10) and $(0.09)for the quarters ended September 30, 2023 and 2022, respectively. Net loss per basic and diluted share attributable to common stockholders was $(0.25) and $(0.14) for the nine months ended September 30, 2023 and 2022, respectively.

The basic and diluted weighted average number of shares of common stock outstanding were approximately 20.1 million and 19.4 million for the three months ended September 30, 2023 and 2022, respectively. The basic and diluted weighted average number of shares of common stock outstanding were approximately 20.0 million and 19.3 million for the nine months ended September 30, 2023 and 2022, respectively.

Adjusted EBITDA

For the three months ended September 30, 2023, Adjusted EBITDA, a non-GAAP financial measure, decreased (3.6)% to $3.7 million from $3.8 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, Adjusted EBITDA decreased (10.0)% to $12.7 million from $14.1 million for the same period in 2022.

We use the non-GAAP measurement of earnings before interest, taxes, depreciation, amortization, stock-related compensation charges, and other adjustments, or “Adjusted EBITDA,” to evaluate our performance. Adjusted EBITDA is a non-GAAP measure that is also frequently used by analysts, investors and other interested parties to evaluate the market value of companies considered to be in similar businesses. We suggest that Adjusted EBITDA be viewed in conjunction with our reported financial results or other financial information prepared in accordance with GAAP. For the three and nine months ended September 30, 2023, other adjustments included severance and project costs as well as certain administrative fees related to borrowings. For the three and nine months ended September 30, 2022, other adjustments included severance costs, project costs and certain administrative costs related to borrowings.

The following table reflects the reconciliation of net loss to Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022:


	As Reported						As Reported
	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(Unaudited)						(Unaudited)
Net loss	$	(2,050,642	)	$	(1,686,335	)	$	(4,961,276	)	$	(2,720,414	)
Depreciation and amortization		2,437,667			2,554,242			7,485,606			7,541,430
Interest expense		2,408,076			1,911,989			7,407,207			5,057,400
Stock-based compensation expense		288,563			412,715			949,313			998,247
Acquisition, integration and related costs		374,035			327,308			1,026,325			2,301,424
Other adjustments		141,231			175,581			172,086			484,343
Income tax expense		111,104			151,619			650,387			479,011
Adjusted EBITDA	$	3,710,034		$	3,847,119		$	12,729,648		$	14,141,441

Adjusted Net Income and Adjusted Net Income per Diluted Share

Adjusted net income, a non-GAAP financial measure, was $0.5 million for the three months ended September 30, 2023, compared with $0.9 million for the three months ended September 30, 2022. Adjusted net income was $2.7 million for the nine months ended September 30, 2023, compared with $6.2 million for the nine months ended September 30, 2022. We present adjusted net income and adjusted net income per diluted share, both non-GAAP financial measures, supplementally because they are widely used by investors as a valuation measure in the solid waste industry. Management uses adjusted net income and adjusted net income per diluted share as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We provide adjusted net income to exclude the effects of items management believes impact the comparability of operating results between periods. Adjusted net income has limitations due to the fact that it excludes items that have an impact on our financial condition and results of operations. Adjusted net income and adjusted net income per diluted share are not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate these non-GAAP financial measures differently. Our adjusted net income and adjusted net income per diluted share for the three and nine months ended September 30, 2023 and 2022 are calculated as follows:


	As Reported						As Reported
	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(Unaudited)						(Unaudited)
Reported net loss (a)	$	(2,050,642	)	$	(1,686,335	)	$	(4,961,276	)	$	(2,720,414	)
Adjustments:
Amortization of intangibles (b)		2,224,210			2,221,669			6,667,814			6,617,488
Acquisition, integration and related costs (c)		374,035			327,308			1,026,325			2,301,424
Other adjustments (d)		1,721			—			(74,605	)		—
Adjusted net income	$	549,324		$	862,642		$	2,658,258		$	6,198,498

Diluted earnings per share:
Reported net loss	$	(0.10	)	$	(0.09	)	$	(0.25	)	$	(0.14	)
Adjusted net income	$	0.02		$	0.04		$	0.12		$	0.29

Weighted average number of common shares outstanding:
Diluted (e)		22,425,421			21,642,213			22,218,274			21,575,003

(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 as adjusted net income is positive

Liquidity and Capital Resources

As of September 30, 2023 and December 31, 2022, we had $0.9 million and $9.6 million in cash and cash equivalents, respectively. Working capital was $9.0 million and $19.7 million as of September 30, 2023 and December 31, 2022, respectively. As part of our

working capital management and in light of increasing interest rates, we made $7.0 million in prepayments toward our variable rate debt in the first nine months of 2023, utilizing excess cash.

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 $0.9 million, our borrowing availability under our $25.0 million ABL Facility (as defined and discussed in Note 8 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, 2023 and 2022.

Cash Flows from Operating Activities

Net cash provided by operating activities was $6.7 million for the nine months ended September 30, 2023 compared with net cash used in operating activities of $(4.3) million for the nine months ended September 30, 2022.

Net cash provided by operating activities for the nine months ended September 30, 2023 related primarily to the net effect of the following:

•

net loss of $(5.0) million;

•

non-cash items of $10.5 million, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, provision for doubtful accounts, and stock-based compensation; and

•

net cash provided by the net change in operating assets and liabilities of $1.1 million, primarily associated with relative changes in accounts receivable, accounts payable, and accrued liabilities.

Net cash used in operating activities for the nine months ended September 30, 2022 related primarily to the net effect of the following:

•

net loss of $(2.7) million;

•

non-cash items of $10.7 million, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, provision for doubtful accounts, and stock-based compensation; and

•

net cash used in the net change in operating assets and liabilities of $(12.3) million, primarily associated with relative changes in accounts receivable, accounts payable, and accrued liabilities.

Our business, including revenue, operating expenses, and operating margins, may vary depending on the blend of services we provide to our customers, the terms of customer contracts, 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, 2023 was $(1.3) million. Cash used in investing activities for the nine months ended September 30, 2022 was $(4.4) million and primarily related to the $3.1 million net purchase of the assets of a northeast-based independent environmental services company on February 10, 2022. Other investing activities are primarily from purchases of property and equipment and intangible assets such as software development costs.

Cash Flows from Financing Activities

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. Net cash provided by financing activities for the nine months ended September 30, 2022 was $7.4 million, primarily from net borrowings of $4.7 million on our ABL Facility and borrowings of $3.5 million from the Credit Agreement with Monroe Capital used to finance the February 2022 acquisition of an independent environmental services company. See Note 8 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, 2023 and 2022. 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 asset acquisitions. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated. For a discussion of our critical accounting policies, refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report. Other than the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) as discussed in Note 2 to our condensed consolidated financial statements, there have been no significant changes in our critical accounting policies during the nine months ended September 30, 2023.

Recent Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements.

Off-Balance Sheet Arrangements

We have no off-balance sheet debt or similar obligations. We have no transactions or obligations with related parties that are not disclosed, consolidated into, or reflected in our reported results of operations or financial position. We do not guarantee any third-party debt.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our Company have been or will

be prevented or detected. These inherent limitations include the realities that judgments in decision making can be faulty and that 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We may be subject to legal proceedings in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not aware of any legal proceedings to which we are a party that we believe could have a material adverse effect on us.

Item 1A. Risk Factors

The following risk factor supplements the risk factors described in Item 1A of our 2022 Annual Report and should be read in conjunction with the risk factors described in our 2022 Annual Report:

The instability of certain financial institutions may have adverse impacts on certain of our vendors and customers and/or on our ability to access our cash deposits and make borrowings, which could negatively impact our financial condition, results of operations and cash flows.

In 2023, there have been public reports of instability at certain financial institutions. Although we do not hold material deposits or investments at these financial institutions, and despite the steps taken to date by U.S. and foreign agencies and institutions to protect depositors, the follow-on effects of the events surrounding recent bank failures and pressure on other financial institutions are unknown, could include failures of other financial institutions to which we face direct or indirect exposure, and may lead to disruptions to the cash flows, operations and financial condition of our vendors, customers, and/or us. Additionally, tight credit conditions could generally result in economic slowdown and reduced demand for our services.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.	Exhibit
10.1†	Form of Quest Resource Holding Corporation Restricted Stock Unit Agreement
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	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer
101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, 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)

†		Indicates management contract or compensatory plan or arrangement.

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 14, 2023	By:	/s/ S. Ray Hatch
	S. Ray Hatch
	President and Chief Executive Officer

Date: November 14, 2023	By:	/s/ Brett W. Johnston
	Brett W. Johnston
	Senior Vice President and Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

September 30, 2023 (Unaudited) and December 31, 2022

Estimated
Useful Life

Carrying
Amount

Indefinite lived intangible asset:

Indefinite