Quest Resource Holding Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Quest provides waste, recycling, and environmental services, primarily to larger, multi-location businesses. Results include acquisitions completed in 2021 and 2022; the prior-year period did not include RWS.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $71.5 million | $35.1 million |
| Gross profit / margin | $11.2 million / 15.7% | $6.4 million / 18.3% |
| Operating income (loss) | $(0.5) million | $1.8 million |
| Net income (loss) | $(2.2) million | $1.1 million |
| Basic and diluted EPS | $(0.11) | $0.06 |
| Adjusted EBITDA (non-GAAP) | $3.7 million | $2.6 million |
| Adjusted net income (non-GAAP) | $1.3 million | $1.5 million |
| Cash from operating activities | $(0.4) million | $4.0 million |
- Revenue rose 103.8%, including $26.4 million attributed to acquired customer bases, higher customer production, improved recycled-material values, and increased services from certain customers. Cost of revenue also increased, including $22.6 million related to acquired operations.
- Gross profit increased, but gross margin fell 2.6 percentage points. Management cited acquisition and customer/service mix, along with varying service levels and commodity prices.
- Operating expenses rose to $11.7 million from $4.7 million, reflecting acquired operations, higher labor costs, acquisition and integration costs, and increased depreciation and amortization. Interest expense rose to $1.6 million from $0.6 million, largely due to acquisition-related debt.
Balance sheet, debt, and liquidity
- At March 31, 2022, cash was $7.9 million; working capital was $12.9 million. Total current assets were $56.5 million and current liabilities $43.6 million.
- Notes payable totaled $71.3 million before unamortized discounts and costs; reported net notes payable were $65.7 million. The Monroe term loan was $62.0 million, and the PNC ABL balance was $7.2 million. The term loan and senior secured facilities have variable rates; the Monroe loan rate was 7.5% at quarter-end.
- The PNC revolving facility has a $15.0 million maximum principal amount and matures in April 2025. The filing reports $7.2 million outstanding and $15.0 million of borrowing-base availability; the precise unused availability is not clearly stated in the filing text.
- Cash declined $0.5 million during the quarter. Investing used $3.5 million, mainly for the February acquisition; financing provided $3.3 million, primarily from term-loan proceeds.
- Management believes cash, borrowing capacity, and expected operating cash flows will fund operations for the next 12 months. Operating cash flow was negative in Q1, with receivables growth a significant use of cash.
Outlook, risks, and notable items
- No specific revenue, earnings, or other quantitative guidance is provided. Management says results can fluctuate with customer activity and service mix, commodity prices, subcontractor costs, and acquisition timing.
- The February 10 acquisition of a Northeast environmental-services business cost approximately $3.35 million and was financed with a term-loan draw. The RWS acquisition, completed in late 2021, materially affects comparability. Goodwill and acquired intangible balances are significant; the RWS purchase-price allocation remained preliminary.
- Management discussed uncertainty from COVID-19, inflation, higher interest rates, the Russia-Ukraine conflict, and related supply-chain and market disruption. It said inflation had not materially affected the quarter and cited contractual pricing and cost-recovery mechanisms, while noting some increases may need to be absorbed.
- Variable-rate debt exposes the company to higher interest expense if rates rise. Credit agreements include financial covenants and customary default provisions; a default could accelerate repayment. The company also noted uncertainty around transition from LIBOR to a replacement rate.
- Management maintains a full valuation allowance against deferred tax assets, including a $11.6 million allowance. It said a significant release may become possible within 12 months if profitability provides sufficient positive evidence; timing and amount are uncertain.
- Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting. The company reported no known legal proceedings it believed could have a material adverse effect.
Key facts investors should verify
- How much of revenue growth and future earnings is attributable to acquisitions versus organic growth, and whether acquired operations can sustain margins.
- Whether working-capital demands, particularly receivables growth, improve and support positive operating cash flow.
- Actual unused ABL capacity, covenant headroom, and sensitivity of interest costs to rate increases.
- Progress integrating acquisitions, final purchase-price allocations, and the potential for goodwill or intangible-asset impairment.
- Whether profitability supports any deferred-tax-asset valuation-allowance release, and the amount and timing if recognized.
- How customer concentration, recycled-commodity prices, inflation, and customer activity affect margins and cash generation.