Quest Resource Holding Corp. — Q2 2020 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2020, compared with the same periods in 2019. Quest provides waste collection, processing, recycling, disposal, and tracking services, primarily to larger, multi-location businesses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $22.0 million | $25.4 million | $47.3 million | $52.1 million |
| Gross profit / margin | $4.4 million / 19.9% | $4.7 million / 18.7% | $8.9 million / 18.9% | $9.3 million / 17.8% |
| Operating income (loss) | $63,000 | $196,000 | $(137,000) | $198,000 |
| Net income (loss) | $1.21 million | $27,000 | $977,000 | $(137,000) |
| Diluted EPS | $0.08 | $0.00 | $0.06 | $(0.01) |
- Q2 revenue decreased 13.7%; six-month revenue fell 9.2%. Management attributed the decline mainly to COVID-related customer shutdowns and reduced activity, partly offset by growth from existing and new customers.
- Gross margin improved year over year in both periods, which management attributed to the mix and level of services and lower costs for certain contracted services.
- Q2 operating expenses declined to $4.3 million from $4.6 million; six-month expenses were approximately flat at $9.1 million. Lower labor, professional-fee, and travel costs were partly offset by higher stock compensation, severance/PPP labor, and corporate-development costs.
- Net income included $1.258 million of other income from PPP proceeds used for eligible expenses. Operating income was only $63,000 in Q2 and was a loss for the six-month period. Adjusted EBITDA, a non-GAAP measure, was $1.14 million for Q2 and $1.67 million for the six months, versus $825,000 and $1.62 million, respectively, in 2019.
Cash, debt, and liquidity
- At June 30, cash was $4.0 million, versus $3.4 million at December 31, 2019; working capital was $6.5 million, versus $5.1 million.
- For the six months, operating cash flow was $1.53 million, investing cash use was $222,000, and financing cash use was $759,000, primarily net repayments on the revolving facility. Operating cash flow included the accounting benefit from PPP proceeds.
- The Citizens asset-based revolving facility had $3.949 million principal outstanding, $9.485 million of borrowing-base availability, and a February 2022 maturity. Its reported balance, net of debt issuance costs, was $3.793 million. The filing states the company believed cash, availability, and operating cash generation would fund operations for the next 12 months.
- The company received a $1.4 million PPP loan at 1% interest, with a two-year term. It had used $1.3 million for eligible payroll, rent, and utilities and recognized that amount as other income, expecting to meet forgiveness criteria; forgiveness was not assured.
Outlook, risks, and notable events
- No numerical earnings or revenue guidance was provided. Management said COVID-19’s duration and impact remained uncertain; reduced customer activity could continue to hurt revenue, while customer credit deterioration could delay collections or increase credit losses. The company’s services were designated essential, but some customers had shut down or scaled back.
- After quarter-end, on August 5, the company replaced the Citizens facility with a BBVA agreement providing a revolving facility of up to $15 million, an equipment facility of up to $2 million, and maturities in August 2025. The facilities carry financial and other restrictive covenants.
- After quarter-end, the company sold 2.95 million shares at $1.15 per share for gross proceeds of $3.39 million, intended for potential acquisitions and general corporate purposes. A 2016 warrant’s exercise price was adjusted from $3.88 to $1.15 under anti-dilution terms. The chairman-controlled largest stockholder bought 655,000 offering shares.
- Three customers represented 52.3% of Q2 2020 revenue and 53.2% of first-half revenue, indicating significant customer concentration. Management reported no material legal proceeding known to it and said disclosure controls were effective as of June 30.
Key facts for investors to verify
- Whether PPP forgiveness is obtained and how any remaining proceeds or related accounting are treated.
- COVID-19’s continuing effects on customer volumes, revenue, receivables, and credit losses.
- Current borrowing availability, covenant compliance, and terms under the post-quarter BBVA facilities.
- Customer concentration and the sustainability of improved gross margins amid lower revenue.
- The dilution and potential share overhang from the August offering, outstanding options, and repriced warrants.