Quest Resource Holding Corporation (NASDAQ: QRHC) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Quest provides waste and recycling services to businesses, including multi-location customers. Financial statements are unaudited. Year-over-year comparisons reflect the Green Remedies acquisition in 2021 but not in the 2020 reported period; operating results also benefited from customer recovery from pandemic-affected levels.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $37.37 million | $23.70 million | $109.33 million | $71.00 million |
| Gross profit / margin | $6.85 million / 18.3% | $4.56 million / 19.2% | $20.10 million / 18.4% | $13.47 million / 19.0% |
| Operating income (loss) | $1.04 million | $0.12 million | $4.15 million | $(0.02) million |
| Net income (loss) | $0.39 million | $(0.07) million | $2.23 million | $0.91 million |
| Diluted EPS | $0.02 | $(0.02) | $0.11 | $0.04 |
| Adjusted EBITDA (non-GAAP) | $2.45 million | $0.99 million | $7.59 million | $2.66 million |
- Revenue rose 57.7% in Q3 and 54.0% for the nine-month period. Management attributed growth to customer business recovery and production, higher recycled-material values, new and continuing customer services, and Green Remedies, partly offset by COVID-related customer shutdowns or reduced operations.
- Gross profit increased, but gross margin declined year over year in both periods. Management cited a mix of customer activity, services and subcontracted costs, commodity prices, and acquired business contribution as factors affecting margins.
- SG&A increased to $5.31 million in Q3 and $14.63 million for nine months, primarily reflecting higher labor costs. Depreciation and amortization also increased, mainly due to Green Remedies.
- Interest expense increased to $0.54 million in Q3 and $1.65 million for nine months, primarily due to higher debt associated with the Green Remedies acquisition. Q3 2020 included $0.15 million of PPP-related other income; nine-month 2020 other income was $1.41 million. 2020 results also included a $0.17 million debt-extinguishment loss and a $0.21 million deemed dividend affecting common-stockholder earnings.
Cash, liquidity and debt
- Cash was $9.10 million at September 30, 2021, up from $7.52 million at December 31, 2020. Working capital was $12.0 million, versus $8.7 million at year-end.
- Nine-month operating cash flow was $3.37 million, compared with $0.84 million in 2020. The company used $2.84 million in investing activities, including $2.32 million for the Atlanta-area acquisition, and generated $1.05 million from financing activities. Accounts receivable growth was a significant operating cash use.
- Debt principal totaled $18.97 million: $11.41 million under the Monroe term loan, $5.25 million under the PNC ABL facility, and $2.31 million under the Green Remedies note. The balance sheet reports $15.88 million of notes payable net, plus a $0.65 million current portion. Monroe term debt bears LIBOR-based interest with an applicable margin of 7.5%–10.5%; the ABL rate was 3.0% at quarter-end.
- The PNC ABL facility has a $15.0 million maximum principal amount and $5.25 million outstanding at quarter-end. Management said cash, borrowing capacity and expected operating cash flows should be sufficient for the next 12 months. Credit agreements contain financial covenants, including fixed-charge coverage requirements; the Monroe agreement also includes a senior net leverage ratio covenant.
Changes, outlook and risks
- Quest acquired Atlanta-area environmental-services assets on June 30, 2021. A Kentucky-based acquisition closed November 5, after quarter-end; the company said it did not materially affect financial position or results. The first Green Remedies deferred-consideration installment was settled with 218,587 shares on October 21.
- No quantified revenue, earnings or margin guidance is provided. Management noted that results vary with customer waste volumes, customer production and demand, labor and supply-chain conditions, service and customer mix, and recycled-commodity prices.
- COVID-19 remains a source of uncertainty, including possible effects on customer activity, subcontractors, collections and credit losses. Management stated it had not experienced a material inflation impact in the periods reported but gave no assurance about future inflation effects.
- The company carried a full valuation allowance against deferred tax assets. Management said sufficient positive evidence might become available within 12 months to support releasing a significant portion, but timing and amount depend on achieved profitability.
- LIBOR discontinuation may affect borrowing rates; the ABL agreement provides for a replacement rate, but management could not assure whether it would be more or less favorable. The annual goodwill and intangible-asset impairment review recorded no impairment.
- Management reported effective disclosure controls at a reasonable-assurance level and no material change in internal control over financial reporting. It reported no known legal proceeding believed to have a material adverse effect; the filing lists no new risk factors.
Important facts for investors to verify
- How much of reported growth reflects organic customer recovery and pricing versus acquisitions, and whether the lower gross margin persists.
- Customer concentration: two customers represented 39.4% of Q3 revenue and 43.8% of nine-month revenue.
- Receivables, collections and working-capital needs, given the increase in accounts receivable and its cash-flow impact.
- Debt covenant compliance, actual undrawn ABL availability, borrowing costs and the impact of the LIBOR transition.
- Acquisition performance, deferred consideration and earn-out exposure; the Green Remedies earn-out is estimated at $0.44 million and can be revalued.
- Whether earnings support any deferred-tax valuation-allowance release; such a release is uncertain and could reduce tax expense in the period recognized.