Quest Resource Holding Corporation (NASDAQ: QRHC) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. Quest provides waste and recycling services, products, and related data to primarily large, multi-location businesses. Comparisons are against the same 2022 periods.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $70.4M | $73.4M | $219.0M | $221.8M |
| Gross profit / margin | $12.4M / 17.7% | $12.2M / 16.6% | $38.6M / 17.6% | $38.1M / 17.2% |
| Operating income | $0.5M | $0.4M | $3.1M | $2.8M |
| Net loss | $(2.1)M | $(1.7)M | $(5.0)M | $(2.7)M |
| Loss per diluted share | $(0.10) | $(0.09) | $(0.25) | $(0.14) |
| Adjusted EBITDA (non-GAAP) | $3.7M | $3.8M | $12.7M | $14.1M |
| Adjusted net income (non-GAAP) | $0.5M | $0.9M | $2.7M | $6.2M |
Liquidity, cash flow, and debt
- Nine-month operating cash flow was $6.7M, versus cash used of $4.3M in 2022. Investing used $1.3M and financing used $14.1M, resulting in an $8.7M decline in cash.
- Cash was $0.9M at September 30, down from $9.6M at year-end 2022. Working capital was $9.0M, compared with $19.7M at year-end.
- Gross notes payable were $60.3M, down from $74.9M at December 31, 2022; notes payable, net of unamortized costs and discounts, were $56.8M, plus $1.2M current portion. Management reported $7.0M of voluntary prepayments on variable-rate debt during the first nine months.
- The Monroe term loan was $53.7M at a disclosed 11.94% rate and matures October 2025. The PNC ABL facility had $5.4M outstanding and reported borrowing-base availability of $21.8M; its $25.0M facility matures April 2025.
- Management expects cash, ABL borrowing capacity, and operating cash generation to fund operations for the next 12 months and thereafter. Interest expense rose to $7.4M for the nine months from $5.1M, primarily reflecting higher base rates.
Material changes and management commentary
- Q3 revenue fell 4.0%; nine-month revenue fell 1.2%. Management attributed the Q3 decline largely to approximately $6M lower RWS revenue, partly offset by about $4M of additional non-recyclable-material services revenue. For nine months, growth of about $15.5M in non-recyclable services was offset by approximately $7M lower recyclable-material revenue and $11M lower RWS revenue.
- Gross margin improved year over year in both periods. Management cited service mix, customer mix, and recyclable-material values as factors affecting gross profit and margins.
- Nine-month adjusted EBITDA declined 10.0%; adjusted net income declined from $6.2M to $2.7M. These are non-GAAP measures and should be considered alongside GAAP results.
- Accounts receivable rose to $49.9M from $45.9M at year-end; the allowance for doubtful accounts was $2.36M. Two customers represented 28.2% of Q3 revenue and 28.1% of nine-month revenue.
Outlook, risks, and other notable items
- The filing provides no specific revenue, earnings, or margin guidance. Management says inflation’s impact was not material in the reported nine-month periods, but cautions that fuel, labor, and other costs may rise and that competitive pressures or timing could limit cost recovery.
- Variable-rate debt exposes the company to interest-rate risk. The filing also discusses economic, credit-market, supply-chain, and financial-institution instability risks, including potential effects on customers, vendors, cash access, and financing.
- The company recorded a full valuation allowance against deferred tax assets. Management said sufficient evidence could emerge within 12–24 months to support releasing a significant portion, but timing and amount depend on achieved profitability.
- No goodwill impairment was recorded in the third-quarter 2023 annual impairment analysis. The company reported no legal proceedings believed to have a material adverse effect and no off-balance-sheet debt arrangements.
Important facts for investors to verify
- Whether operating cash generation is sustainable, particularly given the sharp cash balance decline and working-capital reduction.
- Customer retention, collection performance, bad-debt trends, and revenue concentration among the largest customers.
- Progress in stabilizing RWS-related revenue and the mix and margins of non-recyclable versus recyclable services.
- Variable-rate borrowing costs, ABL availability, debt maturities in 2025, and compliance with applicable credit-facility terms.
- Whether profitability supports any deferred-tax-asset valuation-allowance release; such a release is uncertain and is not assured.