Quest Resource Holding Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 16, 2020. Quest provides waste and recycling services, primarily to larger, multi-location businesses. Results exclude Green Remedies, acquired after quarter-end.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $23.70m | $23.93m | $71.00m | $76.02m |
| Gross profit / margin | $4.56m / 19.2% | $4.77m / 19.9% | $13.47m / 19.0% | $14.06m / 18.5% |
| Operating income (loss) | $0.12m | $0.22m | ($0.02m) | $0.42m |
| Net income (loss) | ($0.07m) | $0.05m | $0.91m | ($0.09m) |
| Adjusted EBITDA (non-GAAP) | $0.99m | $0.86m | $2.66m | $2.48m |
- Nine-month revenue fell 6.6%, primarily because COVID-19 shutdowns and reduced customer operations lowered service volumes; Q3 revenue declined 0.9% year over year.
- Q3 gross margin decreased 0.7 percentage points, while the nine-month margin improved 0.5 points. Management cited service and customer mix and lower costs for certain contracted services.
- Cash from operations was $0.84m for the first nine months, versus $1.17m a year earlier. Investing activities used $0.30m; financing activities provided $2.47m. Ending cash was $6.43m, up from $3.41m at December 31, 2019.
- At September 30, working capital was $9.89m; current assets were $22.92m and current liabilities $13.03m. Total assets were $84.59m and total liabilities $17.85m.
- Revolving-facility principal outstanding was $4.37m ($4.16m net of unamortized issuance costs); borrowing-base availability was $12.18m. The BBVA facility has a $15m revolving limit and a separate equipment-loan commitment of up to $2m.
Material changes, outlook and risks
- Quest received $1.4m under the PPP. It recognized $1.408m as other income over the nine-month period as qualifying costs were incurred, based on its conclusion that the proceeds represented grant assistance. Forgiveness was not assured.
- On August 7, the company completed a registered direct offering of 2.95m shares at $1.15 per share, generating $3.39m gross proceeds. Shares outstanding rose to 18.38m at September 30 from 15.37m at year-end. A warrant down-round adjustment caused a $205,014 deemed dividend to common stockholders; the quarter also included a $167,964 debt-extinguishment loss related to refinancing.
- On October 19, Quest acquired substantially all operating assets of Green Remedies for cash, a seller note, additional deferred consideration payable in cash or stock, and potential earn-out payments. The filing describes total potential consideration, including earn-out, of up to approximately $18.5m, subject to terms and adjustments. The acquisition’s results are not included in this quarter.
- Also on October 19, the company entered into a Monroe Capital agreement and drew an $11.5m term loan to support the acquisition. It provides access to a $12.5m delayed-draw facility and a $40m accordion facility for permitted acquisitions. The debt is secured and subject to financial and restrictive covenants. Warrants for 500,000 shares were issued, with another 350,000-share warrant to be issued upon specified conditions.
- Management said existing cash, BBVA borrowing availability and expected operating cash flow were expected to fund operations for the next 12 months. No quantified revenue or earnings guidance is provided.
- COVID-19 remained an uncertain risk: some customers curtailed or suspended operations, and further effects on demand, customer credit, collections and credit losses could not be predicted. Three customers represented 49.4% of Q3 revenue and 52.0% of nine-month revenue.
- Management reported effective disclosure controls at a reasonable-assurance level and no material change in internal control over financial reporting. The company reported no known legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether the PPP loan was ultimately forgiven and whether the accounting treatment or eligibility was challenged.
- Green Remedies’ finalized purchase accounting, post-acquisition results, integration costs and performance against any earn-out thresholds.
- Cash use, debt balances and covenant compliance following the Monroe borrowing and acquisition; confirm the facilities’ actual availability and terms.
- Whether customer activity and collections recovered from COVID-related disruption, given customer concentration and the increase in the doubtful-account allowance to $0.87m from $0.77m at year-end.
- The effect of the equity offering, warrant adjustments and Monroe warrants on diluted share count and per-share value.