Quest Resource Holding Corp. — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter report. Quest provides outsourced waste and recycling services, primarily to larger, multi-location businesses, using a network of third-party providers.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $98.66 million | $98.98 million |
| Gross profit / margin | $19.06 million / 19.3% | $18.73 million / 18.9% |
| Operating income | $750,000 | $595,000 |
| Net income (loss) | $1.03 million | ($55,000) |
| Adjusted EBITDA (non-GAAP) | $4.45 million | $3.33 million |
| Cash from operations | $3.10 million | $2.28 million |
| Cash and working capital at year-end | $7.52 million; $8.7 million | $3.41 million; $5.1 million |
Revenue declined 0.3%, as customer shutdowns and reduced activity related to COVID-19 were partly offset by existing and new customers and the Green Remedies acquisition. Gross profit and margin improved, reflecting lower contracted-service costs and the acquired business, among other factors. Net income included $1.408 million of PPP proceeds recognized as other income after the loan was forgiven; operating income was $750,000.
Liquidity, debt and financing
- Year-end notes payable were $18.48 million before unamortized issuance costs and discounts, and $14.95 million net on the balance sheet, versus $4.53 million net in 2019. Debt includes an $11.5 million Monroe term loan, a $4.30 million BBVA ABL balance and a $2.68 million seller note.
- The BBVA revolving facility has a $15 million maximum; reported borrowing-base availability at year-end was $12.82 million, including $4.30 million outstanding. The filing also cites $12.8 million of borrowing capacity. Facility availability is subject to borrowing-base terms.
- Management said cash, ABL borrowing capacity and expected operating cash flow were sufficient for the next 12 months. Debt agreements include financial covenants, liens on substantially all relevant assets, and restrictions on additional debt, dividends, acquisitions and other actions.
- Cash from financing activities was $1.51 million, including approximately $3.05 million net proceeds from an August 2020 registered offering of 2.95 million shares. The company also issued a 500,000-share warrant to Monroe in connection with the term loan.
Acquisition, unusual items and outlook
- Quest acquired substantially all Green Remedies operating assets on October 19, 2020, expanding its multi-family housing presence. Purchase consideration was approximately $16.1 million, including $10.9 million cash, seller financing and deferred consideration, plus an earn-out of up to $2.25 million. The acquired business contributed approximately $2.6 million revenue and $550,000 net income from acquisition through year-end.
- Quest financed the acquisition primarily with the Monroe term loan. The filing reports $743,000 of acquisition, integration and related costs in adjusted EBITDA reconciliation; separately, acquisition and integration costs in the acquisition note are approximately $550,000.
- Net income also reflects a $168,000 loss on extinguishment of debt and a $205,000 deemed dividend from a warrant down-round provision. The full valuation allowance on deferred tax assets remained in place; management said a significant release might become supportable within 12 months, depending on actual profitability.
- Management provided no specific revenue, earnings or margin guidance. It described plans to grow through customer and service expansion, acquisitions and an asset-light subcontractor model. COVID-19’s duration and effects on customers, collections and operations remained uncertain.
Material risks and investor verification points
- Customer concentration is significant: three customers accounted for 51% of 2020 revenue, compared with 53% in 2019. Contracts generally lack firm long-term volume commitments and customers may reduce or cancel services.
- Quest relies on subcontractors for collection, processing and disposal; disruptions, higher costs, service failures or environmental liabilities could affect results. Recycled-commodity prices, competition, and regulation are additional exposures.
- Goodwill was $66.3 million at year-end, including $8.1 million from Green Remedies. No impairment was recorded, but the auditor identified goodwill impairment testing and acquired customer-list valuation as critical audit matters involving significant assumptions.
- Verify the actual availability and covenant headroom under both credit agreements; repayment and interest terms; and the status and economics of Green Remedies deferred consideration and earn-out obligations.
- Verify whether customer concentration, COVID-related volume effects and cash collections improved after year-end, and whether acquired operations delivered the expected performance.
- Assess the sustainability of reported profitability apart from the forgiven PPP benefit, the impact of stock compensation and acquisition costs, and the potential dilution from outstanding options and warrants.