Quest Resource Holding Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Quest provides waste, recycling, disposal, and related sustainability services, primarily to larger multi-location businesses. Comparisons are with the three months ended March 31, 2022, unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $74.1 million | $71.5 million |
| Gross profit / margin | $12.6 million / 17.0% | $11.2 million / 15.7% |
| Operating income (loss) | $0.8 million | $(0.5) million |
| Interest expense | $2.4 million | $1.6 million |
| Net loss / diluted loss per share | $(2.0) million / $(0.10) | $(2.2) million / $(0.11) |
| Adjusted EBITDA (non-GAAP) | $4.0 million | $3.7 million |
| Adjusted net income (non-GAAP) | $0.6 million | $1.3 million |
| Cash from operating activities | $3.0 million | $(0.4) million |
Revenue increased 3.6%, mainly from higher customer production and services from certain new and continuing customers, partly offset by reduced activity at some customers and lower commodity values. Gross profit and margin improved; management attributed the changes to customer and service mix and other volume and commodity effects. Operating expenses were broadly stable. Higher interest expense reflected increased borrowing associated primarily with the 2022 acquisition and higher base rates.
Liquidity, debt, and balance sheet
- Cash was $9.8 million at March 31, 2023, versus $9.6 million at year-end 2022. Working capital was $18.1 million, down from $19.7 million.
- Notes payable totaled $72.4 million before unamortized debt costs and discounts; reported current notes payable were $1.2 million and long-term notes payable, net, were $68.3 million. The Monroe term loan bore a stated rate of 11.67% at quarter-end; borrowings are variable-rate.
- The $25 million ABL revolving facility had $10.0 million outstanding. The filing reports borrowing-base availability of $19.0 million. The facility matures in April 2025; the Monroe term loan matures in October 2025.
- Financing activities used $2.5 million, primarily from net ABL repayments. Investing activities used $0.2 million. Cash increased $0.2 million during the quarter.
- Management said cash, ABL borrowing capacity, and expected operating cash flows would be sufficient for operations for the next 12 months and thereafter for the foreseeable future. In May 2023, the company made an additional $5.0 million principal payment on the Monroe facility.
Outlook, risks, and other notable items
- No specific revenue, earnings, or other numerical guidance was provided. Management noted that results may vary with customer volumes and mix, commodity prices, subcontracted service costs, acquisitions, and integration.
- Management said inflation had not materially affected the quarter and cited flexible pricing and cost-recovery mechanisms, while cautioning that competitive pressures or delays could leave some cost increases unrecovered.
- Two customers accounted for 26.3% of Q1 2023 revenue, compared with one customer at 16.5% in Q1 2022, creating customer-concentration exposure.
- The company identified variable-rate debt and higher interest rates, economic and credit-market uncertainty, inflation, commodity-price changes, and potential disruption affecting customers, vendors, or access to cash and borrowing as risks.
- A full valuation allowance remained against deferred tax assets. Management said improved profitability could support a significant release within 12 to 24 months, but timing and amount are uncertain.
- There were no material legal proceedings identified. Management concluded disclosure controls were effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.
- On May 12, 2023, the company entered into a severance and change-in-control agreement with its CFO, including specified salary, bonus, and equity-vesting provisions in certain termination or change-in-control circumstances.
Important facts for investors to verify
- Whether revenue growth and improved gross margin are sustainable, given customer mix and lower commodity values.
- The company’s ability to manage floating-rate debt costs and meet debt maturities, including the effect of the subsequent $5.0 million Monroe principal payment on liquidity.
- Customer concentration and the timing and collection of receivables; net accounts receivable was $43.6 million and the doubtful-account allowance was $2.3 million.
- Whether operating cash generation continues to support working-capital needs, debt service, and management’s liquidity outlook.
- The basis and progress for any future release of the deferred-tax-asset valuation allowance, and the assumptions underlying non-GAAP Adjusted EBITDA and adjusted net income.