Quest Resource Holding Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Quest provides waste, recycling, and environmental services, primarily to larger, multi-location businesses. Results include acquisitions made after June 30, 2021, including RWS; the prior-year periods do not.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $76.9 million | $36.9 million | $148.4 million | $72.0 million |
| Gross profit / margin | $14.7 million / 19.1% | $6.8 million / 18.5% | $25.9 million / 17.5% | $13.3 million / 18.4% |
| Operating income | $2.9 million | $1.3 million | $2.4 million | $3.1 million |
| Net income (loss) | $1.15 million | $0.70 million | $(1.03) million | $1.85 million |
| Diluted EPS | $0.05 | $0.03 | $(0.05) | $0.09 |
| Adjusted EBITDA (non-GAAP) | $6.6 million | $2.5 million | $10.3 million | $5.1 million |
- Q2 revenue rose 109%; first-half revenue rose 106%. Management attributed growth to acquisitions, higher customer production, increased value for recycled materials, and services for new and continuing customers. Acquired businesses contributed $28.4 million of Q2 revenue and $54.8 million in the first half.
- Q2 gross margin improved year over year, while first-half margin declined. Management cited customer and service mix, acquired operations, commodity values, and reduced activity at certain customers as influences on margins.
- First-half operating expenses rose to $23.5 million from $10.1 million, including higher labor, acquisition and integration costs, and depreciation and amortization. First-half interest expense increased to $3.1 million from $1.1 million, primarily reflecting acquisition-related debt.
Cash, liquidity, and debt
- Cash was $4.2 million at June 30, 2022, down from $8.4 million at December 31, 2021. Working capital was $15.9 million, versus $12.6 million at year-end.
- First-half operating cash flow was negative $3.8 million, compared with positive $5.2 million a year earlier. The filing attributes the outflow chiefly to changes in operating assets and liabilities, including accounts receivable. Investing cash use was $3.9 million, primarily for an acquisition; financing provided $3.4 million.
- Notes payable totaled $71.2 million gross ($66.4 million net of current portion and specified discounts and costs), compared with $67.9 million gross at year-end. The Monroe term loan carried an 8.06% rate at June 30; the PNC ABL balance was $7.9 million, with $15.0 million of borrowing-base availability reported.
- Management said cash, ABL borrowing availability, and expected operating cash generation should fund operations for the next 12 months. Debt facilities have financial covenants, including fixed-charge coverage requirements; the Monroe facility also includes a senior net leverage covenant.
Outlook, risks, and notable items
- No quantified revenue or earnings guidance is provided. Management cautioned that results vary with customer volumes, service mix, commodity prices, subcontractor costs, and acquisition timing.
- Management said inflation had not materially affected the first half and cited flexible pricing and cost-recovery provisions, while warning that competitive pressure or timing could prevent full recovery of cost increases.
- Variable-rate debt exposes the company to rising interest rates; management warned that higher rates could increase debt service and reduce net income and cash flow. The filing also discusses economic, inflation, supply-chain, and COVID-19 uncertainties.
- The company recorded a first-half net loss despite higher revenue and Adjusted EBITDA. Acquisition-related amortization, interest expense, integration costs, and working-capital movements are important context when assessing reported results and cash generation.
- On August 9, 2022, after quarter-end, the company amended its Monroe credit agreement, extending the delayed-draw availability period through March 31, 2023 and increasing the permitted unsecured corporate-card debt threshold from $375,000 to $4.0 million.
- Management reported effective disclosure controls at June 30, 2022 and no known legal proceedings believed likely to have a material adverse effect. A full valuation allowance remained against deferred tax assets; management said a significant release might become possible within 12–24 months, subject to actual profitability.
Important facts for investors to verify
- How much of revenue and earnings growth reflects acquired operations versus organic growth, and whether acquired businesses sustain margins.
- Accounts-receivable collections, the increase in the doubtful-account allowance to $1.73 million from $0.84 million at year-end, and the effect of working capital on operating cash flow.
- Debt balances, variable-rate exposure, covenant compliance, remaining borrowing availability, and the terms and effects of the August 9 amendment.
- The reconciliation and assumptions behind Adjusted EBITDA and adjusted net income, which are non-GAAP measures, and the gap between those measures and GAAP net income.
- Whether inflation and commodity-price changes can be passed through to customers, and whether customer concentration or reduced customer activity affects future results.