Quest Resource Holding Corporation — Q1 2021 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Quest provides waste collection, recycling, disposal, and related services to businesses, primarily larger multi-location customers. Q1 2021 includes Green Remedies, acquired in October 2020; Q1 2020 does not.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $35.1 million | $25.3 million |
| Gross profit / margin | $6.44 million / 18.3% | $4.54 million / 17.9% |
| Operating income (loss) | $1.77 million | ($0.20 million) |
| Interest expense | $0.56 million | $0.08 million |
| Net income (loss) | $1.15 million | ($0.23 million) |
| Diluted EPS | $0.06 | ($0.02) |
| Adjusted EBITDA (non-GAAP) | $2.63 million | $0.53 million |
Revenue rose 38.6%. Services revenue increased to $32.7 million from $22.8 million; product and other revenue declined to $2.4 million from $2.6 million. Gross margin improved 0.4 percentage points to 18.3%; net margin was approximately 3.3%. Operating expenses were nearly flat at $4.67 million.
Cash provided by operations was $3.95 million, versus cash used of $17,000 in Q1 2020. The 2021 result included a $5.04 million increase in accounts payable and accrued liabilities, partly offset by a $3.34 million increase in accounts receivable. Investing activities used $159,000 and financing activities used $557,000. Cash increased $3.24 million to $10.75 million.
At March 31, 2021, working capital was $10.1 million and the current ratio was approximately 1.45. Total liabilities were $38.66 million. Debt obligations totaled $17.67 million before unamortized financing costs and discounts; notes payable, net, was $14.30 million. The ABL facility had $3.62 million outstanding against a stated $15.0 million facility. Management reported $15.0 million of borrowing availability, a figure investors may wish to reconcile with outstanding borrowings and borrowing-base terms.
Changes, outlook, and risks
- Management attributed higher revenue principally to increased production at a large industrial customer, growth from continuing and new customers, and Green Remedies. COVID-related shutdowns or reduced operations at certain customers partly offset growth. Because of the acquisition, reported year-over-year growth is not fully comparable; the filing does not quantify organic growth.
- Interest expense increased approximately $477,000, primarily because of acquisition-related debt and amortization of financing costs. The Monroe term loan bears a stated rate of 9.75% as of quarter-end; the Green Remedies note and ABL facility rates were 3.0%.
- Management believes cash, borrowing availability, and expected operating cash flow will fund operations for the next 12 months. No specific revenue or earnings guidance is provided.
- COVID-19 effects remain uncertain, including potential customer payment delays and credit losses. Two customers represented 46.9% of Q1 2021 revenue, compared with three customers representing 54.0% in Q1 2020.
- Debt agreements include financial covenants, negative covenants, and acceleration provisions upon default. LIBOR transition may affect borrowing costs; the filing does not assure that a replacement rate will be equally favorable.
- The company maintained a full valuation allowance against deferred tax assets. Management said a significant release might become supportable within 12 months, depending on profitability; timing and amount remain uncertain.
- The Green Remedies acquisition included contingent earn-out consideration valued at $440,000, subject to remeasurement, and deferred seller consideration payable in cash or shares at the company’s option. The acquisition added $8.1 million of tax-deductible goodwill.
- Management reported no material legal proceedings known to it, no defaults on senior securities, and effective disclosure controls as of March 31, 2021. The filing lists no new risk factors.
Important facts for investors to verify
- How much of revenue and margin growth reflects organic expansion versus Green Remedies and the large industrial customer ramp-up.
- Actual ABL borrowing-base availability and compliance with minimum fixed-charge and leverage covenants.
- Customer concentration, receivable collections, and whether operating cash flow remains strong without the quarter’s increase in payables and accruals.
- Debt service costs, LIBOR replacement terms, and potential dilution from outstanding options, warrants, and seller consideration payable in shares.
- Whether sustained profitability supports release of the deferred-tax valuation allowance and whether the earn-out estimate changes.