QUEST RESOURCE HOLDING CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

0
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, 2021 (the "2021
Annual Report").

Insight

We were incorporated in Nevada in July 2002 under the name BlueStar Financial
Group, Inc. On July 16, 2013, we acquired all of the issued and outstanding
membership interests of Quest Resource Management Group, LLC, or Quest, held by
Quest Resource Group LLC, or QRG, comprising 50% of the membership interests of
Quest, or the Quest Interests. Our wholly owned subsidiary, Quest Sustainability
Services, Inc., or QSS (formerly known as Earth911, Inc.), held the remaining
50% of the membership interests of Quest for several years. Concurrently with
our acquisition of the Quest Interests, we assigned the Quest Interests to QSS
so that QSS now holds 100% of the issued and outstanding membership interests of
Quest. On October 28, 2013, we changed our name to Quest Resource Holding
Corporation, or QRHC. On October 19, 2020, Quest acquired substantially all of
the assets used in the business of Green Remedies Waste and Recycling, Inc., a
leading provider of independent environmental services, particularly in
multi-family housing, located in Burlington, NC. On December 7, 2021, QSS
acquired all of the outstanding membership interests of RWS Facility Services,
LLC ("RWS"), a full-service management company engaged in the brokering of
recycling, waste and sustainability solutions, located in Chadds Ford, PA. See
Note 3 to our condensed consolidated financial statements for more information
regarding the acquisitions. The results for the three and nine months ended
September 30, 2022 reflect the impact of the RWS acquisition, but the prior year
period does not.

This “MD&A and Discussion of Financial Condition and Results of Operations” is based on and relates primarily to the operations of QRHC and Quest (collectively, “we”, “us”, “us” or “our society “).

                                       17

--------------------------------------------------------------------------------

Three and nine months ended September 30, 2022 and operating results 2021

The following table summarizes our operating results for the three and nine months ended September 30, 2022 and 2021:

                                         Three Months Ended September 30,          Nine Months Ended September 30,
                                             2022                  2021                2022                 2021
                                                    (Unaudited)                              (Unaudited)
Revenue                                $      73,358,293       $  37,366,740     $     221,785,249      $ 109,326,814
Cost of revenue                               61,174,960          30,514,034           183,685,111         89,223,751
Gross profit                                  12,183,333           6,852,706            38,100,138         20,103,063
Operating expenses:
Selling, general, and administrative           9,332,721           5,307,635            27,975,550         14,630,426
Depreciation and amortization                  2,473,339             508,456             7,308,591          1,324,391
Total operating expenses                      11,806,060           5,816,091            35,284,141         15,954,817
Operating income                                 377,273           1,036,615             2,815,997          4,148,246
Interest expense                              (1,911,989 )         

(542,848 ) (5,057,400 ) (1,653,987 ) Profit (loss) before tax

                    (1,534,716 )           493,767            (2,241,403 )        2,494,259
Income tax expense                               151,619             108,003               479,011            262,449
Net income (loss)                      $      (1,686,335 )     $     

385,764 ($2,720,414) $2,231,810

Three and nine months ended September 30, 2022 compared to the three and nine month periods September 30, 2021

Impact of the COVID-19 pandemic and global economic trends

In response to the global COVID-19 pandemic crisis, we have prioritized the
health and safety of our employees, customers and subcontractors and continue to
work to support their needs. While we continue to implement actions to mitigate
the effects of this crisis on our business and operations, the uncertainty
around the duration and economic impact of this crisis makes it difficult for
management to predict the future impact on our business operations and financial
performance.

Previously, we have experienced some limitations in employee resources resulting
from travel restrictions and "stay at home" orders. Despite these restrictions,
we continued to efficiently manage supply chain requirements of our customers
and subcontractors. The waste management and recycling services we provide are
designated an essential critical infrastructure business under the President's
COVID-19 guidance, the continued operation of which is vital for national public
health, safety, and national economic security. While some of our customers shut
down or scaled back their businesses in the short term, other customers
operating in the restaurant, grocery, automotive and certain specialty retail
industries, which may be considered as essential businesses in different
jurisdictions or who are more capable of working remotely than other industries,
have continued to operate.

The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will depend on future developments, including the severity
and duration of the crisis and the impact of actions taken and that will be
taken to contain COVID-19 or treat its impact. These future impacts are highly
uncertain and cannot be predicted with confidence. The economic impact from
COVID-19 or other global crises may adversely impact our results of operations
in the future and may affect the credit condition of some of our customers,
which could increase delays in customer payments and credit losses.

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, as noted above, the COVID-19
pandemic resulted in widespread unemployment, economic slowdown and extreme
volatility in the capital markets. Similarly, 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 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, 2022, revenue was $73.4 million, an increase
of $36.0 million, or 96%, compared to $37.4 million for the quarter ended
September 30, 2021. The increase for the quarter was primarily due to increased
demand including the impact of heightened customer production levels, increased
services from certain new and continuing customers, and revenue of $26.5 million
for the quarter from the acquired customer base related to the business
acquisitions, partially offset by lower values for certain recycled materials
compared to a year ago and lower levels of services due to reduced operations at
certain other customers. For the nine months ended September 30, 2022, revenue
was $221.8 million, an increase of $112.5 million, or 103%, compared to $109.3
                                       18

--------------------------------------------------------------------------------


million for the nine months ended September 30, 2021. The increase was primarily
due to increased demand including the impact of heightened customer production
levels, increased value for recycled materials compared to a year ago, increased
services from certain new and continuing customers, and revenue of $81.3 million
for the nine months ended September 30, 2022 from the acquired customer base
related to the business acquisitions, partially offset by lower levels of
services due to reduced operations at certain other customers. See Note 3 to our
condensed consolidated financial statements for a discussion of certain
acquisitions during 2022 and 2021.

Cost of revenue/gross profit

Cost of revenue increased $30.7 million to $61.2 million for the quarter ended
September 30, 2022 from $30.5 million for the quarter ended September 30, 2021.
The increase was primarily due to the same reasons impacting the increase in
revenue including $23.5 million from the acquired customer base related to the
business acquisitions in 2022 and 2021. Cost of revenue increased $94.5 million
to $183.7 million for the nine months ended September 30, 2022 from $89.2
million for the nine months ended September 30, 2021. The increase was primarily
due to the same reasons impacting the increase in revenue including $68.6
million for the nine months ended September 30, 2022 from the acquired customer
base related to the business acquisitions.

Gross profit for the quarter ended September 30, 2022 was $12.2 million, an
increase of $5.3 million, compared to $6.9 million for the quarter ended
September 30, 2021. The gross profit margin was 16.6% for the third quarter of
2022 compared with 18.3% for the third quarter of 2021. Gross profit for the
nine months ended September 30, 2022 was $38.1 million, an increase of $18.0
million, compared to $20.1 million for the nine months ended September 30, 2021.
The gross profit margin was 17.2% for the nine months ended September 30, 2022
compared with 18.4% for the nine months ended September 30, 2021. The changes in
gross profit and gross profit margin percentage for the quarter ended September
30, 2022 were primarily due to the net effect of the impact of increased
services from certain new and continuing customers, the business operations
acquired, change in the mix of services and relative gross profit margins from
new and acquired customer base, lower value for certain recycled materials
compared to a year ago, and reduced operations at certain other customers. The
changes in gross profit and gross profit margin percentage for the nine months
ended September 30, 2022 were primarily due to the net effect of the impact of
increased services from certain new and continuing customers, the business
operations acquired, change in the mix of services and relative gross profit
margins from new and acquired customer base, increased value for certain
recycled materials compared to a year ago, and reduced operations at certain
other customers.

Revenue, gross profit, and gross profit margins are affected period to period by
the volumes of waste and recycling materials generated by our customers, the
frequency and type of services provided, the price and mix of the services
provided, commodity price changes for recycled materials, 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. If the impact of these factors either individually or in the
aggregate cause a significant decline in the volume of waste and recycling
materials generated by our customers, it could have an adverse effect on our
revenues, gross profit, and gross profit margins.

Functionnary costs

Operating expenses were approximately $11.8 million and $5.8 million for the
quarters ended September 30, 2022 and 2021, respectively, an increase of $6.0
million. The increase in operating expenses was primarily related to the
business operations acquired and totaled $4.3 million for the quarter ended
September 30, 2022. Operating expenses were approximately $35.3 million and
$16.0 million for the nine months ended September 30, 2022 and 2021,
respectively, an increase of $19.3 million. The increase in operating expenses
was primarily related to the business operations acquired and totaled $13.7
million for the nine months ended September 30, 2022.

Selling, general, and administrative expenses were $9.3 million and $5.3 million
for the quarters ended September 30, 2022 and 2021, respectively, an increase of
approximately $4.0 million. The increase primarily relates to increases in labor
related expenses of $2.6 million, acquisition/integration related expenses of
$274,000, inclusive of professional fees of $226,000, travel/marketing expenses
of $182,000 and other administrative expenses of $753,000. Selling, general, and
administrative expenses were $28.0 million and $14.6 million for the nine months
ended September 30, 2022 and 2021, respectively, an increase of approximately
$13.3 million. The increase primarily relates to increases in labor related
expenses of $7.7 million, acquisition/integration related expenses of $1.6
million, inclusive of professional fees of $1.5 million, travel/marketing
expenses of $449,000 and other administrative expenses of $2.4 million.

Operating expenses for the quarters ended September 30, 2022 and 2021 included
depreciation and amortization of approximately $2.5 million and $509,000,
respectively, an increase of approximately $2.0 million. The increase in
depreciation and amortization was primarily related to the business operations
acquired and totaled $1.9 million for the quarter ended September 30, 2022.
Operating expenses for the nine months ended September 30, 2022 and 2021
included depreciation and amortization of approximately $7.3 million and $1.3
million, respectively, an increase of approximately $6.0 million. The increase
in depreciation and amortization was primarily related to the business
operations acquired and totaled $5.8 million for the nine months ended September
30, 2022.
                                       19

--------------------------------------------------------------------------------

Interest charges

Interest expense was $1.9 million and $543,000 for the three months ended
September 30, 2022 and 2021, respectively, an increase of approximately $1.4
million. Interest expense was $5.1 million and $1.7 million for the nine months
ended September 30, 2022 and 2021, respectively, an increase of approximately
$3.4 million. The increase is due to an increase in debt, primarily related to
the acquisitions in 2021 and 2022 and the increase in base interest rates. We
are amortizing debt issuance costs of $3.2 million and OID of $2.2 million to
interest expense over the life of the related debt arrangements as discussed in
Note 7 to our condensed consolidated financial statements.

Income taxes

We recorded a provision for income tax of $152,000 and $108,000 for the three
months ended September 30, 2022 and 2021, respectively. We recorded a provision
for income tax of $479,000 and $262,000 for the nine months ended September 30,
2022 and 2021, 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, 2022 and December 31, 2021. 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 taxable 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 Income (Loss)

Net loss for the quarter ended September 30, 2022 was $(1.7) million compared to
net income of $386,000 for the quarter ended September 30, 2021. Net loss for
the nine months ended September 30, 2022 was $(2.7) million compared to net
income of $2.2 million for the nine months ended September 30, 2021. The
explanations above detail the majority of the changes related to the change in
net results.

Our results of operations, including revenues, operating expenses and operating margins, will vary from period to period depending on the prices of recycled raw materials, volumes and the range of services provided. , as well as customers during the reference period and the time of acquisitions and integrations.

Income (Loss) per Share

Net loss per basic and diluted share attributable to common stockholders was
$(0.09), for the quarter ended September 30, 2022 compared to net income per
basic and diluted share of $0.02, for the quarter ended September 30, 2021. Net
loss per basic and diluted share attributable to common stockholders was $(0.14)
per share for the nine months ended September 30, 2022 compared to net income
per basic and diluted share of $0.12 and $0.11, respectively, for the nine
months ended September 30, 2021.

The basic and diluted weighted average number of shares of common stock
outstanding were approximately 19.4 million for the three months ended September
30, 2022. The basic and diluted weighted average number of shares of common
stock outstanding were approximately 19.0 million and 21.3 million,
respectively, for the three months ended September 30, 2021. The basic and
diluted weighted average number of shares of common stock outstanding was
approximately 19.3 million for the nine months ended September 30, 2022. The
basic and diluted weighted average number of shares of common stock outstanding
were approximately 18.8 million and 20.7 million, respectively, for the nine
months ended September 30, 2021.

Adjusted EBITDA

In the quarter ended September 30, 2022, Adjusted EBITDA, a non-GAAP financial
measure, increased 57% to $3.8 million, from $2.5 million for the same period in
2021. For the nine months ended September 30, 2022, Adjusted EBITDA increased
86% to $14.1 million from $7.6 million for the same period in 2021.

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, 2022 other adjustments of $176,000 and $484,000, respectively, included
severance costs, project costs, and certain administrative fees related to
borrowings. For the three and nine months ended September 30, 2021 other
adjustments of $42,000 and $160,000, respectively, included recruiting costs,
severance costs and certain administrative fees related to borrowings.
                                       20

--------------------------------------------------------------------------------

The following table reflects adjusted EBITDA for the three and nine months ended
September 30, 2022 and 2021:

             RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA
                                  (UNAUDITED)

                                                As Reported                                As Reported
                                      Three Months Ended September 30,           Nine Months Ended September 30,
                                        2022                    2021                 2022                  2021
                                                (Unaudited)                                (Unaudited)
Net income (loss)                 $      (1,686,335 )     $        385,764     $      (2,720,414 )     $  2,231,810
Depreciation and amortization             2,554,242                582,951             7,541,430          1,539,678
Interest expense                          1,911,989                542,848             5,057,400          1,653,987
Stock-based compensation
expense                                     412,715                325,739               998,247          1,141,740
Acquisition, integration and
related costs                               327,308                463,928             2,301,424            599,917
Other adjustments                           175,581                 42,189               484,343            159,624
Income tax expense                          151,619                108,003               479,011            262,449
Adjusted EBITDA                   $       3,847,119       $      2,451,422     $      14,141,441       $  7,589,205

Adjusted net earnings and adjusted net earnings per diluted share

Adjusted net income, a non-GAAP financial measure, was $863,000 for the quarter
ended September 30, 2022, compared with $1.2 million for the quarter ended
September 30, 2021. Adjusted net income was $6.2 million for the nine months
ended September 30, 2022, compared with $3.8 million for the nine months ended
September 30, 2021. 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 quarter and the nine months ended September 30, 2022 and
2021, are calculated as follows:

                                              As Reported                   

As reported

                                    Three Months Ended September 30,        

Nine month period ended September 30,

                                        2022                2021                2022                 2021

Reported net income (a) $(1,686,335) $385,764 $

     (2,720,414 )     $   2,231,810
Amortization of intangibles (b)         2,221,669             386,400            6,617,488             964,080
Acquisition, integration and
related costs (c)                         327,308             463,928            2,301,424             599,917
Adjusted net income                $      862,642       $   1,236,092     $      6,198,498       $   3,795,807
Diluted earnings (loss) per
share:
Reported net income (loss)         $        (0.09 )     $        0.02     $          (0.14 )     $        0.11
Adjusted net income                $         0.04       $        0.06     $           0.29       $        0.18

Weighted average number of
common shares outstanding:
Diluted (d)                            21,642,213          21,307,854      

21,575,003 20,704,270

(a) Applicable to ordinary shareholders

(b) Reflects the elimination of non-cash amortization of acquisition-related intangible assets

(c) Reflects the addition of acquisition/integration transaction costs

(d) Reflects dilution adjustment since adjusted net income is positive

Cash and capital resources

As of September 30, 2022 and December 31, 2021, we had $7.1 million and $8.4
million in cash and cash equivalents, respectively. Working capital was $20.7
million and $12.6 million as of September 30, 2022 and December 31, 2021,
respectively.

We derive our primary sources of funding to conduct our business from operating revenues; borrowings under our credit facilities; and the placement of our equity securities with investors. We require working capital primarily to accommodate accounts receivable,

                                       21

--------------------------------------------------------------------------------

servicing debt, purchasing capital assets, funding operating expenses, dealing with competitive threats or unforeseen technical issues, weathering adverse economic conditions, funding potential acquisition transactions, and pursuing objectives and strategies.

We believe our existing cash and cash equivalents of $7.1 million, our borrowing
availability under our $15.0 million ABL Facility (as defined and discussed in
Note 7 to our condensed consolidated financial statements), and cash expected to
be generated from operations will be sufficient to fund our operations for the
next 12 months 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 flow

The following discussion relates to the main components of our cash flows for the nine months ended September 30, 2022 and 2021.

Cash flow from operating activities

Net cash used in operating activities was $(4.3) million for the nine months
ended September 30, 2022 compared with net cash provided by operating activities
of $3.4 million for the nine months ended September 30, 2021.

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

net loss of ($2.7) million;

non-monetary items of $10.7 million, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, allowance for bad debts and stock-based compensation; and

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

Net cash provided by operating activities for the nine months ended September 30, 2021 mainly related to the net effect of the following items:

net income from $2.2 million;

non-monetary items of $3.3 million, which primarily related to depreciation, amortization of intangible assets and debt issuance costs, allowance for bad debts and stock-based compensation; and

net cash used in the net change in operating assets and liabilities of ($2.2) millionprimarily associated with relative changes in accounts receivable, accounts payable and accrued liabilities.

Our business, including revenue, operating expenses, and operating margins, may
vary depending on the blend of services we provide to our customers, the terms
of customer contracts, commodity contracts, and our business volume levels.
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 flow from investing activities

Cash used in investing activities for the nine months ended September 30, 2022
and 2021 was $4.4 million and $2.8 million, respectively. Cash used in 2022
relates mainly to the $3.1 million net purchase of the assets of a
Northeast-based independent environmental services company on February 10, 2022.
Cash used in 2021 related primarily to the $2.3 million purchase of the assets
of an Atlanta-based independent environmental services company on June 30, 2021.
Other investing activities are primarily from purchases of property and
equipment and intangible assets.

Cash flow from financing activities

Net cash provided by financing activities for the nine months ended September
30, 2022 was $7.4 million compared to net cash provided by financing activities
of $1.1 million for the nine months ended September 30, 2021. Net cash provided
by financing activities for the nine months ended September 30, 2022 was
primarily from term loan proceeds used to finance the February 2022 acquisition
of an independent environmental services company, net borrowings on our ABL
Facility, and proceeds from stock option exercises, partially offset by
repayments of notes payable. Net cash provided by financing activities for the
nine months ended September 30, 2021 was primarily related to net borrowings on
our ABL Facility and from proceeds from stock option exercises. See Note 7 to
our condensed consolidated financial statements for a discussion of the ABL
Facility and other notes payable.

Inflation

Although the overall economy has experienced some inflationary pressures, we do
not believe that inflation had a material impact on us during the nine months
ended September 30, 2022 and 2021. We believe that current inflationary
increases in costs, such as fuel,
                                       22

--------------------------------------------------------------------------------


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 I, Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
2021 Annual Report. There have been no changes in our critical accounting
policies during the first nine months of 2022.

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 or reflected in our reported results of operations or financial condition. We do not guarantee any third party debt.

© Edgar Online, source Previews

Share.

Comments are closed.