Quest Resource Holding Corp. — Q1 2020 Form 10-Q
Business and period: Quest provides waste and recycling services, primarily to large, multi-location businesses. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $25.33 million | $26.65 million |
| Gross profit / margin | $4.54 million / 17.9% | $4.54 million / 17.0% |
| Operating income (loss) | $(200,000) | $3,000 |
| Net loss | $(232,000), or $(0.02) per share | $(164,000), or $(0.01) per share |
| Adjusted EBITDA (non-GAAP) | $534,000 | $796,000 |
| Cash from operations | $(17,000) | $46,000 |
| Cash and cash equivalents | $3.35 million | $3.41 million at Dec. 31, 2019 |
| Working capital | $5.6 million | $5.1 million at Dec. 31, 2019 |
| ABL borrowings | $4.73 million principal; $11.22 million borrowing-base availability | Facility limit: $20 million; maturity Feb. 24, 2022 |
Accounts receivable was $15.19 million and accounts payable and accrued liabilities were $14.34 million at quarter-end. The balance-sheet ABL liability was $4.55 million, net of $180,000 in unamortized debt issuance costs. Cash declined by $61,000 during the quarter; investing activities used $39,000 and financing activities used $5,000.
Changes and management commentary
- Revenue fell 4.9%, primarily because of lower production in a commodity waste stream at one large industrial customer; management said the impact on gross profit was negligible. Increased services from existing and new customers partly offset the decline.
- Gross profit was nearly unchanged, while gross margin rose to 17.9% from 17.0%, attributed to service mix and lower costs for certain contracted services.
- Operating expenses increased about $203,000, including higher labor, stock compensation, and corporate development costs. Lower professional fees partly offset those increases.
- Net loss widened as higher operating expenses more than offset lower interest expense and the income tax benefit. Adjusted EBITDA decreased from the prior-year quarter.
- Three customers accounted for 54.0% of Q1 2020 revenue, compared with 59.7% in Q1 2019.
Outlook, risks, and unusual items
- Management said cash, ABL borrowing availability, and expected operating cash generation should fund operations for the next 12 months. No numerical revenue or earnings guidance was provided.
- Quest’s services were designated essential under federal COVID-19 guidance. Management said Q1 results and operations were not materially adversely affected, but some customers had shut down after quarter-end. The duration and effects of the pandemic, including impacts on customers, subcontractors, and future results, remained uncertain.
- On May 5, 2020, after quarter-end, the company received a $1.4 million Paycheck Protection Program loan at 1% interest, with a two-year term and payments deferred for six months. Forgiveness is subject to eligibility and use-of-proceeds requirements; the company gave no assurance that any amount would be forgiven.
- The ABL facility includes minimum-liquidity and fixed-charge-coverage covenants. LIBOR is expected to be discontinued after 2021; the facility provides for a replacement rate, but its relative cost is uncertain.
- Goodwill was $58.2 million. Management reported no COVID-related triggering event requiring an interim impairment test as of the filing, though economic uncertainty could change that assessment.
- The company reported no material legal proceedings known to it and no off-balance-sheet debt or similar obligations. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- How COVID-19 affected customer activity, service volumes, collections, and results in subsequent quarters—particularly given customer concentration.
- Whether the stated $11.22 million of ABL borrowing-base availability and covenant headroom remain adequate as operating conditions change.
- PPP loan eligibility, use of proceeds, and any eventual forgiveness; the loan was received after March 31, 2020.
- Accounts receivable quality and cash conversion, including the effect of the quarter’s receivables increase and operating cash outflow.
- Whether revenue and gross-margin trends persist, and how non-GAAP Adjusted EBITDA reconciles with reported GAAP losses.