Quest Resource Holding Corp. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparative figures are for FY2016. Quest provides outsourced reuse, recycling, and disposal services to businesses, primarily through third-party subcontractors. Its asset-light model serves about 20,000 locations in the U.S., Puerto Rico, and Canada.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $138.3 million | $183.8 million | Down 24.7% |
| Gross profit | $15.7 million | $14.4 million | Up 9.0% |
| Gross margin | 11.4% | 7.8% | Up 3.6 percentage points |
| Operating loss | $(5.4) million | $(7.8) million | Loss narrowed |
| Net loss | $(5.8) million | $(8.0) million | Loss narrowed |
| Basic and diluted loss per share | $(0.38) | $(0.55) | Improved |
| Adjusted EBITDA | $0.8 million | $(1.5) million | Improved |
| Net cash used in operating activities | $(1.7) million | $(4.4) million | Cash use declined |
Gross margin improved as lower subcontractor costs, the exit from certain lower-margin services, and growth in higher-margin work more than offset lower revenue. SG&A declined to $17.1 million from $18.2 million; interest expense rose to $468,000 from $241,000, reflecting higher rates, borrowing, and debt issuance cost amortization. Adjusted EBITDA is a non-GAAP measure; FY2017 adjustments included $307,860 of severance costs.
Liquidity, debt, and balance sheet
- Cash was $1.1 million at year-end, and working capital was $4.24 million, up from $3.12 million at December 31, 2016.
- The Citizens asset-based revolving facility provides up to $20 million and matures February 24, 2022. Year-end borrowing-base availability was $11.19 million; the balance-sheet liability was $6.76 million, net of unamortized issuance costs. No equipment-facility borrowings were outstanding.
- The company reported compliance with facility covenants at year-end. The minimum fixed-charge coverage covenant was scheduled to apply beginning May 15, 2018, subject to the specified trailing-period reporting.
- Total assets were $83.5 million, including $58.3 million of goodwill. Stockholders’ equity was $62.1 million; accumulated deficit was $96.7 million.
Management stated that cash, available credit, potential securities placements, and expected operating cash generation should fund operations for the next 12 months. This expectation is subject to ongoing operating losses and financing risks.
Material changes, outlook, and risks
- Revenue fell partly because Quest discontinued or reduced services for certain customers, including portions of work for its two largest customers. Two customers together represented 44% of FY2017 revenue, down from 56% in FY2016.
- Management emphasized procurement improvements and disciplined customer acquisition and renewal, prioritizing profitable contribution over revenue growth. The company nevertheless recorded a $5.8 million net loss and reported recurring losses and a $96.7 million accumulated deficit.
- No specific numerical FY2018 revenue, earnings, or cash-flow guidance is provided. Management’s stated strategy includes expanding customer and service offerings, improving procurement, pursuing acquisitions and strategic alliances, and continuing the asset-light approach.
- Key risks include customer concentration and customers’ ability to reduce or cancel services; dependence on subcontractors; volatility in recyclable commodity prices; competition; environmental and regulatory exposure; and the need for additional capital. Quest also warns that continued or prolonged gross-margin declines could trigger impairment of goodwill or other intangible assets. No goodwill impairment was recorded in the 2017 test.
- The company reported no legal proceedings believed to have a material adverse effect and no off-balance-sheet debt or similar obligations. The financial statement audit opinion was unqualified; management concluded disclosure controls and internal control over financial reporting were effective, without an auditor attestation of internal controls.
- Subsequent event: On February 20, 2018, Quest agreed to sell certain Earth911.com website-business assets for an earn-out of approximately $350,000 and a 19% interest in Earth Media Partners, LLC. The filing says the assets sold were immaterial to the December 31, 2017 balance sheet.
- The 2017 Tax Act lowered the federal corporate tax rate to 21%; the resulting deferred-tax effects were offset by the company’s full valuation allowance, and no income tax expense was reported for 2017.
Important facts for investors to verify
- Whether gross-margin gains persist and translate into positive operating cash flow and eventual profitability despite the significant revenue decline.
- Current customer concentration, renewal terms, and the contribution margins and volumes from new and continuing customers.
- Actual borrowing-base availability, covenant headroom, and liquidity needs as the fixed-charge coverage covenant becomes applicable.
- Recoverability of the $58.3 million goodwill balance and finite-lived intangible assets, especially if margins weaken.
- Collection quality and receivables exposure: the doubtful-account allowance increased to $699,000 from $334,000, while the filing reports significant working-capital movements.
- Final consideration and any continuing obligations or financial effects from the Earth911.com asset sale.