Quest Resource Holding Corp. — FY2021 Form 10-K
Business context and reporting period
Annual report for the year ended December 31, 2021, compared with FY2020. Quest provides outsourced waste, recycling, disposal and sustainability services, primarily to large, multi-location businesses. Its asset-light model relies on third-party service providers. The filing reports full-year results, not a standalone fourth-quarter summary.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $155.7 million | $98.7 million |
| Gross profit / gross margin | $28.8 million / 18.5% | $19.1 million / 19.3% |
| Operating income | $4.6 million | $0.8 million |
| Net income | $1.7 million | $1.0 million |
| Diluted earnings per share | $0.08 | $0.05 |
| Net cash provided by operating activities | $2.6 million | $3.1 million |
Revenue increased 57.8%, reflecting customer business recovery and higher production, improved recycled-material values, growth from existing and new customers, and acquired businesses. The filing does not quantify the separate contribution of organic growth and acquisitions. Gross profit rose 51.3%, but gross margin declined 0.8 percentage points. Interest expense increased to $2.5 million from $0.7 million, primarily due to acquisition-related borrowing. Adjusted EBITDA, a non-GAAP measure, was $10.9 million versus $4.5 million; adjusted net income was $5.6 million versus $0.8 million. These measures include adjustments and should be considered alongside GAAP results.
Liquidity, debt and financial position
At December 31, 2021, cash and cash equivalents were $8.4 million and working capital was $12.6 million, compared with $7.5 million and $8.7 million, respectively, a year earlier. Total notes payable were $67.9 million before unamortized issuance costs and discounts; the balance-sheet carrying amount, net of those items, was $62.4 million. Debt included a $58.6 million Monroe term loan and $7.2 million outstanding on the PNC asset-based revolver. The revolver facility limit was $15.0 million; the filing describes $15.0 million as borrowing-base availability, of which $7.2 million was outstanding. Management said cash, borrowing capacity and expected operating cash flows should fund operations for the next 12 months.
Operating cash flow was lower year over year, while acquisition spending drove investing cash outflow to $16.9 million, including $16.3 million of cash paid for acquisitions. Financing activities provided $15.3 million, including $12.5 million of Monroe borrowings and $2.9 million of net revolver borrowings. The Monroe term loan matures in October 2025, with most principal due at maturity; both the Monroe and PNC facilities are secured and subject to financial and other covenants.
Material changes, acquisitions and unusual items
- Quest acquired RWS Facility Services, effective November 30, 2021, for approximately $34.0 million of consideration, primarily cash. It contributed approximately $5.5 million of revenue and a net loss of approximately $0.1 million after acquisition through year-end.
- Three other environmental-services acquisitions were completed in 2021 for total consideration of approximately $16.7 million. Acquisition accounting remained preliminary at filing.
- The 2021 results included RWS only from November 30. In February 2022, Quest acquired another Northeast-focused provider for approximately $3.35 million, funded with a term-loan draw.
- FY2020 net income included $1.4 million of income from forgiveness of the PPP loan. FY2021 included a $116,000 earn-out fair-value adjustment recorded as other expense. FY2020 also included a $168,000 loss on extinguishment of debt and a $205,000 deemed dividend from a warrant down-round feature.
- Deferred tax assets remained fully offset by a valuation allowance. Management stated that future earnings could provide evidence to release some of the allowance, but timing and amount were uncertain.
Outlook, commentary and principal risks
Management’s stated strategy is to expand its customer base, service offerings and industry reach, pursue acquisitions and technologies, and continue its asset-light operating model. No quantified revenue, earnings or margin guidance is provided. The company identified customer concentration as significant: two customers represented 38% of FY2021 revenue, compared with three customers representing 51% in FY2020. Multi-year customer contracts generally do not require firm long-term volumes and may be cancelled, reduced or delayed.
Key disclosed risks include acquisition integration and valuation uncertainty; increased debt, interest costs and covenant compliance; reliance on subcontractors; commodity-price volatility; customer concentration; competition from larger providers; environmental liability and regulatory changes; inflation and cost pass-through limits; COVID-19 impacts; and potential loss of business if certain materials are classified as solid waste. The company reported no known legal proceedings expected to have a material adverse effect. Management concluded disclosure controls were effective, but excluded controls over RWS and InStream from its internal-control effectiveness conclusion because they were acquired in December 2021; the auditor did not attest to internal controls.
Important facts for investors to verify
- How much of revenue and Adjusted EBITDA growth reflects acquired businesses versus comparable-customer or organic growth, and the acquired businesses’ ongoing margins and cash generation.
- Debt balances, borrowing-base availability, interest-rate exposure, covenant headroom and the substantial principal due at the Monroe loan’s 2025 maturity.
- The durability of growth and gross margins given customer concentration, commodity prices, subcontractor costs and customers’ limited volume commitments.
- Final purchase-price allocations, goodwill and intangible-asset assumptions for 2021 acquisitions, including the estimated future amortization burden.
- Whether operating cash flow can support working-capital needs, debt service and further acquisitions, and whether any deferred-tax valuation allowance is released.