Quest Resource Holding Corp

Previous wording

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”).

Current wording

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on and relates primarily to the operations of Quest Resource Holding Corporation and Quest Resource Management Group, LLC (collectively, “we,” “us,” “our,” or “our company”).

Previous wording

Three Months Ended March 31, 2024 and 2023 Operating Results

Current wording

Three and Six Months Ended June 30, 2024 and 2023 Operating Results

Previous wording

The following table summarizes our operating results for the three months ended March 31, 2024 and 2023:

Current wording

The following table summarizes our operating results for the three and six months ended June 30, 2024 and 2023:

Previous wording

Three Months Ended March 31, 2024, compared to Three Months Ended March 31, 2023

Current wording

Three and Six Months Ended June 30, 2024, compared to Three and Six Months Ended June 30, 2023

Previous wording

The slight decline in revenue was attributable to lower volumes from three customers, whose margins were lower overall than the rest of the business, resulting in a decrease of revenues of approximately $7 million. This was partially offset by strong overall demand for the remaining business which contributed approximately $5 million in additional revenue, an increase of 8% from the same period in 2023.

Current wording

The decline in revenue for the quarter ended June 30, 2024 was attributable to lower volumes from four customers, whose margins were lower overall than the rest of the business, resulting in a decrease of revenues of approximately $11 million, which includes lower than expected production volumes at one of our largest customers due to soft conditions in their end market. This was mostly offset by both newly added customers in the quarter ended June 30, 2024 and strong overall demand for the remaining business which, in total, contributed approximately $10 million in additional revenue, an increase of 18% from the same period in 2023.

Previous wording

Cost of revenue decreased $2.9 million to $58.6 million for the quarter ended March 31, 2024 from $61.5 million for the quarter ended March 31, 2023. The changes were primarily due to the same reasons impacting the decrease in revenue.

Current wording

Cost of revenue decreased $1.4 million to $59.6 million for the quarter ended June 30, 2024 from $61.0 million for the quarter ended June 30, 2023. Cost of revenue decreased $4.3 million to $118.2 million for the six months ended June 30, 2024 compared to $122.5 million for the six months ended June 30, 2023. The changes were primarily due to the same reasons impacting the decrease in revenue.

Previous wording

Gross profit for the quarter ended March 31, 2024 was $14.0 million, an increase of $1.4 million, compared to $12.6 million for the quarter ended March 31, 2023. The gross profit margin was 19.3% for the quarter ended March 31, 2024 compared to 17.0% for the same quarter of 2023. The changes in gross profit and gross profit margin percentage for the quarter were primarily due to the net impacts of the changes in both revenue and cost of revenue combined with broad margin gains across most of our business.

Current wording

Gross profit for the quarter ended June 30, 2024 was $13.5 million, compared to $13.5 million for the quarter ended June 30, 2023. The gross profit margin was 18.5% for the quarter ended June 30, 2024, compared to 18.1% for the same quarter of 2023. Gross profit for the six months ended June 30, 2024 was $27.6 million, compared to $26.1 million for the six months ended June 30, 2023. The gross profit margin was 18.9% for the six months ended June 30, 2024, compared to 17.6% for the six months ended June 30, 2023. The changes in gross profit and gross profit margin percentage for the quarter and year to date periods were primarily due to the net impacts of the changes in both revenue and cost of revenue combined with broad margin gains across most of our business.

Previous wording

Operating expenses for the quarters ended March 31, 2024 and 2023 included depreciation and amortization of $2.4 million and $2.4 million, respectively.

Current wording

Operating expenses for the quarters ended June 30, 2024 and 2023 included depreciation and amortization of $2.4 million and $2.5 million, respectively. Operating expenses for the six months ended June 30, 2024 and 2023 included depreciation and amortization of $4.7 million and $4.9 million, respectively.

Previous wording

Interest expense was $2.5 million and $2.4 million for the quarters ended March 31, 2024 and 2023, respectively. The slight increase is primarily due to increases in base interest rates, partially offset by reduced borrowings from voluntary paydowns on the term loan in 2023. We are amortizing debt issuance costs of $3.7 million and OID of $1.8 million to interest expense over the life of the related debt arrangements as discussed in Note 7 to our condensed consolidated financial statements.

Current wording

Interest expense was $2.6 million and $2.6 million for the quarters ended June 30, 2024 and 2023, respectively. Interest expense was $5.1 million and $5.0 million for the six months ended June 30, 2024 and 2023, respectively. The slight increase is primarily due to increases in base interest rates, increased borrowings under our revolving credit facility, partially offset by reduced borrowings from voluntary paydowns on the term loan in 2023. We are amortizing debt issuance costs of $3.7 million and OID of $1.8 million to interest expense over the life of the related debt arrangements as discussed in Note 7 to our condensed consolidated financial statements.

Previous wording

We recorded a provision for income tax of $59,348 and $368,504 for the quarters ended March 31, 2024 and 2023, 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.

Current wording

We recorded a provision for income tax of $684,113 and $170,779 for the quarters ended June 30, 2024 and 2023, respectively. We recorded a provision for income tax of $743,461 and $539,283 for the six months ended June 30, 2024 and 2023, 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, federal income tax after anticipated utilization of all federal net operating loss carryforwards by year end, and other timing differences.

Previous wording

Net loss for the quarter ended March 31, 2024 was $(0.7) million compared to net loss of $(2.0) million for the quarter ended March 31, 2023. The explanations above detail the majority of the changes related to the change in net results.

Current wording

Net loss for the quarter ended June 30, 2024 was $(1.5) million, compared to net loss of $(0.9) million for the quarter ended June 30, 2023. Net loss for the six months ended June 30, 2024 was $(2.2) million, compared to net loss of $(2.9) million for the six months ended June 30, 2023. The explanations above detail the majority of the changes related to the change in net results.

Previous wording

Net loss per basic and diluted share attributable to common stockholders was $(0.03) and $(0.10) for the quarters ended March 31, 2024 and 2023, respectively.

Current wording

Net loss per basic and diluted share attributable to common stockholders was $(0.07) and $(0.04) for the quarters ended June 30, 2024 and 2023, respectively. Net loss per basic and diluted share attributable to common stockholders was $(0.11) and $(0.15) for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

The basic and diluted weighted average number of shares of common stock outstanding were approximately 20.4 million and 19.9 million for the three months ended March 31, 2024 and 2023, respectively.

Current wording

The basic and diluted weighted average number of shares of common stock outstanding were approximately 20.5 million and 20.0 million for the three months ended June 30, 2024 and 2023, respectively. The basic and diluted weighted average number of shares of common stock outstanding were approximately 20.4 million and 19.9 million for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

For the three months ended March 31, 2024, Adjusted EBITDA (as defined below), a non-GAAP financial measure, increased 28.4% to $5.1 million from $4.0 million for the three months ended March 31, 2023.

Current wording

For the three months ended June 30, 2024, Adjusted EBITDA (as defined below), a non-GAAP financial measure, increased 2.1% to $5.1 million from $5.0 million for the three months ended June 30, 2023. For the six months ended June 30, 2024, Adjusted EBITDA increased 13.7% to $10.3 million from $9.0 million for the same period in 2023.

Previous wording

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 months ended March 31, 2024, other adjustments included certain professional fees as well as certain administrative fees related to borrowings. For the three months ended March 31, 2023, other adjustments included earn-out adjustments, severance and project costs as well as certain administrative costs related to borrowings.

Current wording

We use the non-GAAP measurement of earnings before interest, taxes, depreciation, amortization, stock-related compensation charges, and other adjustments, or “Adjusted EBITDA,” to evaluate our performance. Adjusted EBITDA is a non-GAAP measure that is also frequently used by analysts, investors and other interested parties to evaluate the market value of companies considered to be in similar businesses. We suggest that Adjusted EBITDA be viewed in conjunction with our reported financial results or other financial information prepared in accordance with GAAP. For the three and six months ended June 30, 2024, other adjustments included certain professional fees as well as certain administrative fees related to borrowings. For the three and six months ended June 30, 2023, other adjustments included severance and project costs as well as certain administrative costs related to borrowings.

Previous wording

The following table reflects the reconciliation of net loss to Adjusted EBITDA for the three months ended March 31, 2024 and 2023:

Current wording

The following table reflects the reconciliation of net loss to Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023:

Previous wording

Adjusted net income, a non-GAAP financial measure, was $1.7 million for the three months ended March 31, 2024, compared with $0.6 million for the three months ended March 31, 2023. 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 two 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 months ended March 31, 2024 and 2023 are calculated as follows:

Current wording

Adjusted net income, a non-GAAP financial measure, was $0.7 million for the three months ended June 30, 2024, compared with $1.5 million for the three months ended June 30, 2023. Adjusted net income was $2.3 million for the six months ended June 30, 2024, compared with $2.1 million for the six months ended June 30, 2023. 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 two 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 six months ended June 30, 2024 and 2023 are calculated as follows:

Previous wording

As of March 31, 2024 and December 31, 2023, we had $0.6 million and $0.3 million in cash and cash equivalents, respectively. Working capital was $19.8 million and $15.7 million as of March 31, 2024 and December 31, 2023, respectively.

Current wording

As of June 30, 2024 and December 31, 2023, we had $1.0 million and $0.3 million in cash and cash equivalents, respectively. Working capital was $21.6 million and $15.7 million as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

We believe our existing cash and cash equivalents of $0.6 million, our borrowing availability under our $35.0 million ABL Facility (as defined and discussed in Note 7 to our condensed consolidated financial statements), and cash expected to be generated from operations will be sufficient to fund our operations for the next 12 months and thereafter for the foreseeable future. Our known current- and long-term uses of cash include, among other possible demands, capital expenditures, lease payments and repayments to service debt and other long-term obligations. We have no agreements, commitments, or understandings with respect to any such placements of our securities and any such placements could be dilutive to our stockholders.

Current wording

We believe our existing cash and cash equivalents of $1.0 million, our borrowing availability under our $35.0 million ABL Facility (as defined and discussed in Note 7 to our condensed consolidated financial statements), and cash expected to be generated from operations will be sufficient to fund our operations for the next 12 months and thereafter for the foreseeable future. Our known current- and long-term uses of cash include, among other possible demands, capital expenditures, lease payments and repayments to service debt and other long-term obligations. We have no agreements, commitments, or understandings with respect to any such placements of our securities and any such placements could be dilutive to our stockholders.

Previous wording

The following discussion relates to the major components of our cash flows for the three months ended March 31, 2024 and 2023.

Current wording

The following discussion relates to the major components of our cash flows for the six months ended June 30, 2024 and 2023.

Previous wording

Net cash used in operating activities was $(1.7) million for the three months ended March 31, 2024 compared with net cash provided by operating activities of $3.0 million for the three months ended March 31, 2023.

Current wording

Net cash used in operating activities was $(0.8) million for the six months ended June 30, 2024 compared with net cash provided by operating activities of $6.3 million for the six months ended June 30, 2023.

Previous wording

Net cash used in operating activities for the three months ended March 31, 2024 related primarily to the net effect of the following:

Current wording

Net cash used in operating activities for the six months ended June 30, 2024 related primarily to the net effect of the following:

Previous wording

non-cash items of $3.7 million, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, provision for doubtful accounts, and stock-based compensation; and

Current wording

non-cash items of $6.9 million, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, provision for doubtful accounts, and stock-based compensation; and

Previous wording

net cash used in the net change in operating assets and liabilities of $(4.7) million, primarily associated with relative changes in accounts receivable, accounts payable, and accrued liabilities. This includes an earn-out payment of $(1.0) million.

Current wording

net cash used in the net change in operating assets and liabilities of $(5.6) million, primarily associated with relative changes in accounts receivable, accounts payable, and accrued liabilities. This includes an earn-out payment of $(1.0) million.

Previous wording

Net cash provided by operating activities for the three months ended March 31, 2023 related primarily to the net effect of the following:

Current wording

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

Previous wording

non-cash items of $3.3 million, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, provision for doubtful accounts, and stock-based compensation; and

Current wording

non-cash items of $6.9 million, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, provision for doubtful accounts, and stock-based compensation; and

Previous wording

net cash provided by the net change in operating assets and liabilities of $1.7 million, primarily associated with relative changes in accounts receivable, accounts payable, and accrued liabilities.

Current wording

net cash provided by the net change in operating assets and liabilities of $2.4 million, primarily associated with relative changes in accounts receivable, accounts payable, and accrued liabilities.

Previous wording

Cash used in investing activities for the three months ended March 31, 2024 was $(2.3) million and primarily related to the purchase of $(1.6) million in compactors and related equipment. Cash used in investing activities for the three months ended March 31, 2023 was $(0.2) million. Other investing activities are primarily from purchases of intangible assets such as software development costs and other property and equipment.

Current wording

Cash used in investing activities for the six months ended June 30, 2024 was $(4.8) million and primarily related to the purchase of $(3.1) million in compactors and related equipment. Cash used in investing activities for the six months ended June 30, 2023 was $(0.8) million. Other investing activities are primarily from purchases of intangible assets such as software development costs and other property and equipment.

Previous wording

Net cash provided by financing activities for the three months ended March 31, 2024 was $4.2 million, primarily from net borrowings of $4.2 million on our ABL Facility. Net cash used in financing activities for the three months ended March 31, 2023 was $(2.5) million, primarily from net repayments of $2.3 million on our ABL Facility. See Note 7 to our condensed consolidated financial statements for a discussion of the ABL Facility and other notes payable.

Current wording

Net cash provided by financing activities for the six months ended June 30, 2024 was $6.3 million, primarily from net borrowings of $4.0 million on our ABL Facility and $2.5 million borrowings from our PNC equipment term loan. Net cash used in financing activities for the six months ended June 30, 2023 was $(12.1) million, primarily from net repayments of $(6.8) million on our ABL Facility and $(5.5) million repayment of long-term debt. See Note 7 to our condensed consolidated financial statements for a discussion of the ABL Facility and other notes payable.

Previous wording

Although the overall economy has experienced some inflationary pressures, we do not believe that inflation had a material impact on us during the three months ended March 31, 2024 and 2023. We believe that current inflationary increases in costs, such as fuel, labor, and certain capital items, can be addressed by our flexible pricing structures and cost recovery fees allowing us to recover certain of the cost of inflation from our customer base. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers or adjust pricing. Although we believe that we should be able to offset many cost increases that result from inflation in the ordinary course of business, we may be required to absorb at least part of these costs increases due to competitive pressures or delays in timing of rate increases. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation and increases in interest rates.

Current wording

Although the overall economy has experienced some inflationary pressures, we do not believe that inflation had a material impact on us during the six months ended June 30, 2024 and 2023. We believe that current inflationary increases in costs, such as fuel, labor, and certain capital items, can be addressed by our flexible pricing structures and cost recovery fees allowing us to recover certain of the cost of inflation from our customer base. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers or adjust pricing. Although we believe that we should be able to offset many cost increases that result from inflation in the ordinary course of business, we may be required to absorb at least part of these costs increases due to competitive pressures or delays in timing of rate increases. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation and increases in interest rates.

Previous wording

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 2023 Annual Report. There have been no significant changes in our critical accounting policies during the three months ended March 31, 2024.

Current wording

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 2023 Annual Report. There have been no significant changes in our critical accounting policies during the six months ended June 30, 2024.