Quest Resource Holding Corporation — Q3 2022 Form 10-Q
Business and period: Quest provides waste, recycling, and environmental services, primarily to larger, multi-location businesses. This unaudited report covers the three and nine months ended September 30, 2022; comparisons are with the same 2021 periods. Results include acquired businesses, including RWS, whose results were not included in the comparable 2021 reported periods.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $73.4 million | $37.4 million | $221.8 million | $109.3 million |
| Gross profit / margin | $12.2 million / 16.6% | $6.9 million / 18.3% | $38.1 million / 17.2% | $20.1 million / 18.4% |
| Operating income | $0.4 million | $1.0 million | $2.8 million | $4.1 million |
| Net income (loss) | $(1.7) million | $0.4 million | $(2.7) million | $2.2 million |
| Adjusted EBITDA (non-GAAP) | $3.8 million | $2.5 million | $14.1 million | $7.6 million |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(4.3) million | $3.4 million |
Balance sheet and liquidity: At September 30, 2022, cash was $7.1 million, working capital was $20.7 million, and total assets were $186.3 million. Notes payable were $74.9 million gross ($70.3 million net of debt discounts and issuance costs), versus $67.9 million gross at December 31, 2021. The $15.0 million asset-based revolving facility had $11.9 million outstanding; the filing does not clearly state remaining borrowing availability after borrowing-base limitations. Management said cash, borrowing capacity, and expected operating cash generation should fund operations for the next 12 months and foreseeable future.
Changes and management commentary
- Revenue rose 96% in Q3 and 103% for the nine-month period. Management attributed growth to acquired customer bases, higher customer production and demand, and services for new and continuing customers. Acquired businesses contributed $26.5 million of Q3 revenue and $81.3 million for the nine-month period.
- Gross profit increased, but gross margin declined year over year in both periods. Management cited service and customer mix, acquired operations, lower prices for certain recycled materials in Q3, and reduced activity at some customers.
- Operating expenses rose substantially, reflecting acquisitions, higher labor costs, and increased depreciation and amortization. Interest expense also increased, due to higher debt and interest rates.
- Operating cash flow turned negative, primarily reflecting a $13.1 million use of cash from accounts receivable changes and other operating asset and liability movements. Cash declined $1.3 million from year-end.
- Management reported that annual goodwill and intangible-asset impairment testing in Q3 resulted in no impairment. The filing also describes a full valuation allowance against deferred tax assets, while noting that a significant release may be possible within 12–24 months if sufficient evidence of profitability emerges; timing and amount are uncertain.
Outlook, risks, and notable items
- No numerical revenue or earnings guidance was provided. Management expects existing cash, borrowing capacity, and cash generated from operations to support the business over the next 12 months.
- All borrowings under senior secured credit facilities carry variable rates. The company identifies rising rates as a material risk to debt service, net income, and cash flow; the Monroe term loan was reported at 9.06% and the ABL borrowing rate at 4.56% as of September 30.
- Other cited risks include inflation and higher operating costs, customer production and service volumes, recycled-commodity prices, customer payment delays and credit losses, acquisition integration, and economic disruption related to COVID-19 and the Russia-Ukraine conflict. Results may be seasonal.
- On October 19, 2022, after quarter-end, the company issued 166,516 shares valued at $1.34 million to Green Remedies as the second installment of acquisition consideration. The company said no known legal proceeding was expected to have a material adverse effect. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether accounts receivable growth, the increased doubtful-account provision, and negative operating cash flow are temporary or indicate slower collections or higher credit risk.
- Actual available borrowing capacity, covenant compliance, debt maturities, and exposure to further variable-rate increases.
- Whether acquired businesses can sustain revenue and improve margins, given lower reported gross margins and rising operating costs.
- The effect of customer concentration: two customers represented 21.0% of Q3 revenue; one customer represented 14.5% of nine-month revenue.
- Any future evidence supporting a deferred-tax valuation allowance release, and the effects of share issuance and other acquisition-related obligations on dilution and liquidity.