Quest Resource Holding Corp. — FY2019 Form 10-K
Business context and reporting period. Quest provides outsourced waste collection, recycling, disposal, and reporting services, mainly to larger, multi-location businesses. It relies on third-party providers rather than owning significant operating assets. This annual report covers the fiscal year ended December 31, 2019; comparisons are with FY2018, not a standalone fourth quarter.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $99.0 million | $103.8 million |
| Gross profit | $18.7 million; 18.9% margin | $16.9 million; 16.2% margin |
| Operating income (loss) | $595,000 | $(2.0) million |
| Net loss | $(55,000) | $(2.4) million |
| Adjusted EBITDA (non-GAAP) | $3.3 million | $2.3 million |
| Cash from operating activities | $2.3 million | $3.0 million |
- Revenue declined 4.7%, largely because Quest exited lower-margin customer work in late 2018. Cost of revenue fell 7.7%, more than offsetting the revenue decline and lifting gross profit by 11.1%.
- SG&A increased to $16.8 million from $16.2 million; lower amortization reduced total operating expenses to $18.1 million from $18.9 million. Interest expense was $432,000. A $219,000 state income tax provision contributed to the FY2019 net loss despite positive pretax income.
- Cash and cash equivalents were $3.4 million at year-end, versus $2.1 million a year earlier; working capital was $5.1 million versus $4.0 million. Investing activities used $301,000, and financing activities used $686,000, primarily for net ABL repayments.
- The asset-based revolving facility is capped at $20 million, subject to a receivables-based borrowing formula, and matures February 24, 2022. Principal outstanding was $4.738 million; the balance-sheet amount, net of unamortized issuance costs, was $4.535 million. The filing reports approximately $9.8 million of borrowing capacity/availability at year-end. Quest reported compliance with financial covenants.
- Adoption of lease accounting added a $1.595 million operating right-of-use asset and $1.764 million of operating lease liabilities at year-end. Total assets were $80.7 million and total liabilities $19.0 million.
Changes, outlook, and risks
- Management attributed improved margins and gross profit to a shift toward higher-value services and lower costs for certain contracted services. It says disciplined customer acquisition and renewals may support profitable growth, while acknowledging the strategy reduced FY2019 revenue.
- No quantified revenue, earnings, or cash-flow guidance is provided. Management believed cash, reported borrowing capacity, and expected operating cash generation would fund operations for the next 12 months; it also noted potential securities placements could dilute shareholders.
- Customer concentration remains significant: three customers generated 53% of FY2019 revenue, compared with 51% in FY2018. Customer contracts are typically two to three years, but generally lack firm long-term volume commitments and may be reduced, delayed, or canceled.
- Other material risks include dependence on subcontractors; volatile recycled-commodity prices; competition from larger waste companies; environmental, indemnification, and regulatory exposure; and uncertainty over whether some materials may be classified as regulated waste. A prolonged decline in margins or expected revenue growth could impair goodwill; goodwill was $58.2 million and no impairment was recorded in 2019.
- The filing discusses the coronavirus outbreak emerging in early 2020 as a potential risk to demand, commodity prices, customers, and business activity; its impact was uncertain. LIBOR discontinuation after 2021 could also affect loan rates, depending on the replacement benchmark.
- In April 2019, stockholders sold approximately 4.3 million shares in a registered offering and another 1.75 million in a private transaction. Quest received no sale proceeds and recorded approximately $248,000 of related net costs in SG&A. The company reported recurring net losses and an accumulated deficit of $99.2 million.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not provide an internal-control attestation.
Key facts for investors to verify
- Whether higher-value services can sustain margin improvement and restore revenue growth after the low-margin business exit.
- Retention, volume, and renewal terms for the three customers representing 53% of revenue, and progress in diversifying the customer base.
- Actual borrowing availability under the receivables-based ABL formula, covenant headroom, and the distinction between facility size, availability, and outstanding principal.
- Cash conversion and working-capital movements, particularly receivables, payables, and the reported decline in operating cash flow.
- Goodwill valuation assumptions and potential impairment exposure if revenue growth or gross margins weaken.
- Effects of commodity-price shifts, subcontractor service or cost changes, environmental claims, and the evolving coronavirus impact on customers and operations.