Quest Resource Holding Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Quest provides waste collection, recycling, disposal and related services, primarily to larger multi-location businesses. Results include Green Remedies, acquired in October 2020; the Atlanta-area asset acquisition closed June 30, 2021 and was reported as immaterial to results.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $36.9 million | $22.0 million | $72.0 million | $47.3 million |
| Gross profit / margin | $6.8 million / 18.5% | $4.4 million / 19.9% | $13.3 million / 18.4% | $8.9 million / 18.9% |
| Operating income (loss) | $1.34 million | $0.06 million | $3.11 million | $(0.14) million |
| Net income | $0.70 million | $1.21 million | $1.85 million | $0.98 million |
| Net income per diluted share | $0.03 | $0.08 | $0.09 | $0.06 |
| Adjusted EBITDA (non-GAAP) | $2.51 million | $1.14 million | $5.14 million | $1.67 million |
Revenue grew 67.8% in Q2 and 52.1% in the first half. Operating income improved in both comparisons, while Q2 net income declined: Q2 2020 included $1.26 million of PPP-related other income, absent in 2021. First-half net income improved despite higher interest expense. Management attributes revenue growth to customer recovery from pandemic disruptions, higher activity at a large industrial customer, improved recycled-material values, new and continuing customers, and Green Remedies; other customer shutdowns and reduced operations partly offset growth. Gross margin declined year over year in both periods.
Cash, liquidity and debt
- Cash was $10.0 million at June 30, versus $7.5 million at year-end 2020. Working capital was $10.0 million, up from $8.7 million; current assets were $35.4 million and current liabilities $25.4 million.
- First-half operating cash flow was $5.18 million, compared with $1.53 million in 2020. Investing used $2.54 million, including $2.32 million for the Atlanta-area acquisition; financing used $0.11 million. Cash increased $2.53 million.
- Notes payable totaled $18.04 million before unamortized discounts and issuance costs; reported net notes payable were $14.79 million, including $0.65 million current. Debt includes an $11.44 million Monroe term loan at 8.75%, a $2.44 million Green Remedies seller note, and $4.15 million outstanding under the BBVA ABL facility. First-half interest expense was $1.11 million, versus $0.17 million.
- The ABL facility has a stated $15 million maximum. The filing says borrowing-base availability was $15 million while also reporting $4.15 million outstanding; management likewise cites $15 million borrowing availability. Clarification of actual undrawn availability is important.
Outlook, risks and notable items
- Management believes cash, borrowing capacity and operating cash generation will fund operations for the next 12 months; no specific revenue or earnings guidance is provided.
- COVID-19 effects remain uncertain. Customer activity, payment delays and credit losses could be affected. Revenue and margins also vary with service volumes and mix, subcontractor costs, and recycled-commodity prices.
- Two customers represented 45.4% of Q2 2021 revenue and 46.1% of first-half revenue, indicating customer concentration.
- Debt agreements include financial covenants and restrictions; covenant breaches or other defaults could permit acceleration. The Monroe loan bears interest based on LIBOR, whose discontinuation may affect borrowing costs; the filing provides for a replacement rate but gives no assurance it will be as favorable.
- The company maintains a full valuation allowance against deferred tax assets, but says sufficient positive evidence could permit a significant release within 12 months; timing and amount are uncertain.
- The Green Remedies acquisition includes deferred seller consideration and a performance-based earn-out, whose fair value is subject to remeasurement. Management reported no known legal proceedings expected to have a material adverse effect. Disclosure controls were deemed effective at a reasonable-assurance level.
Key facts for investors to verify
- Actual available ABL borrowing capacity, given the filing’s stated $15 million availability and $4.15 million outstanding.
- Customer concentration, retention and payment trends, including the significant accounts-receivable increase from year-end.
- Whether revenue growth and gross-margin performance persist as pandemic-related comparisons normalize and commodity prices and service mix change.
- Debt covenant compliance, interest costs, and the consequences of the LIBOR transition.
- Acquisition performance, remaining seller consideration, and potential earn-out remeasurement; also confirm diluted share figures, as MD&A weighted-average share counts differ from the financial statements.