Quest Resource Holding Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company provides waste and recycling services, related reporting and data, and certain products to primarily large, multi-location businesses. Financial statements are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $74.5 million | $76.9 million | $148.6 million | $148.4 million |
| Gross profit / margin | $13.5 million / 18.1% | $14.7 million / 19.1% | $26.1 million / 17.6% | $25.9 million / 17.5% |
| Operating income | $1.8 million | $2.9 million | $2.6 million | $2.4 million |
| Interest expense | $2.6 million | $1.6 million | $5.0 million | $3.1 million |
| Net income (loss) | $(0.9) million | $1.2 million | $(2.9) million | $(1.0) million |
| Adjusted EBITDA (non-GAAP) | $5.0 million | $6.6 million | $9.0 million | $10.3 million |
Financial position and cash flow
- At June 30, cash was $3.0 million, down from $9.6 million at December 31, 2022. Working capital was $10.5 million, versus $19.7 million.
- Six-month operating cash flow was $6.3 million, compared with cash used of $3.8 million in 2022. Investing used $0.8 million; financing used $12.1 million, mainly from debt repayments. Cash declined by $6.6 million over the period.
- Notes payable principal totaled $62.7 million; balance-sheet carrying value, including current debt, was approximately $60.0 million. The Monroe term loan carried a 12.27% rate at quarter-end and matures in October 2025. The PNC ABL had $5.5 million outstanding and $20.5 million of borrowing-base availability; its stated maximum revolving amount is $25 million, with maturity in April 2025.
- Debt bears variable rates. The company made a $5.0 million voluntary debt prepayment during Q2 and an additional $2.0 million payment in July 2023.
Material changes and management commentary
- Q2 revenue fell 3.1%; first-half revenue was nearly flat. Management attributed Q2 softness mainly to approximately $3 million lower recyclable-material revenue and approximately $5 million lower revenue from a prior acquisition, partly offset by nearly $6 million of increased non-recyclable services demand. For the first half, approximately $11 million of added non-recyclable services revenue was largely offset by lower recyclable-material and acquired-business revenue.
- Q2 gross profit declined $1.2 million and margin fell one percentage point. Management cited customer and service mix, reduced activity at certain customers, and recyclable-material values. First-half gross profit and margin were slightly higher year over year.
- Interest expense rose approximately $1.0 million in Q2 and $1.9 million in the first half, primarily due to higher base rates; reduced borrowings partly offset the increase. Adjusted EBITDA declined 23.3% in Q2 and 12.4% for the first half.
- Management said it expects cash, borrowing availability, and operating cash generation to fund operations for the next 12 months and thereafter for the foreseeable future. It provided no specific revenue or earnings guidance in this filing.
Risks, contingencies, and other items
- Management identifies economic volatility, inflation, higher interest rates, credit availability, customer demand, labor and fuel costs, recyclable-material prices, and acquisition integration as potential pressures. It says pricing structures and cost-recovery provisions may offset some inflation, but competitive pressure or timing may require the company to absorb costs.
- Two customers represented 29.9% of Q2 revenue and 28.1% of first-half revenue, indicating customer concentration. Variable-rate debt increases exposure to rising rates.
- The company reported a full valuation allowance against deferred tax assets and noted a possibility that sufficient positive evidence could support releasing a significant portion within 12–24 months; timing and amount are uncertain.
- Management reported no known legal proceedings expected to have a material adverse effect, no off-balance-sheet debt arrangements, and effective disclosure controls at a reasonable-assurance level. No material change in internal control was reported.
- After quarter-end, the company announced higher non-employee director retainers effective August 16, 2023, including a $75,000 annual equity retainer in RSUs. An additional $10,000 monthly retainer was approved for Mr. Friedberg, subject to periodic review.
Important facts for investors to verify
- Whether operating cash generation can be sustained while cash balances and working capital are lower and debt repayments continue.
- The sensitivity of interest expense and liquidity to variable rates, and the terms, covenants, and availability of the credit facilities.
- Whether growth in non-recyclable services can offset lower recyclable-material revenue and declines at acquired or other customer accounts.
- The durability of gross margins, the concentration of revenue among major customers, and the basis for non-GAAP Adjusted EBITDA and adjusted net income.
- Whether profitability supports any deferred-tax valuation-allowance release; the filing does not establish its timing or amount.