Quest Resource Holding Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company provides businesses with waste reuse, recycling, and disposal management services; this business generates substantially all revenue. Results are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $41.4 million | $46.8 million | $83.9 million | $92.6 million |
| Gross profit | $4.45 million | $3.65 million | $8.63 million | $7.14 million |
| Gross margin | 10.8% | 7.8% | 10.3% | 7.7% |
| Operating loss | $(1.13) million | $(1.99) million | $(2.93) million | $(4.18) million |
| Net loss | $(1.25) million | $(2.05) million | $(3.16) million | $(4.29) million |
| Net loss per share, diluted | $(0.08) | $(0.14) | $(0.21) | $(0.30) |
| Adjusted EBITDA (non-GAAP) | $0.48 million | $(0.39) million | $0.58 million | $(1.01) million |
Revenue declined 11.7% in Q2 and 9.4% in the first half, mainly because of service-mix changes and reduced services for certain customers. Higher gross profit and margins reflected lower costs for certain contracted services and changes in customer and service mix. First-half SG&A rose to $9.6 million from $9.3 million, including about $244,000 of severance and higher stock-related compensation. First-half interest expense increased to $235,000 from $114,000, reflecting higher rates and average borrowings and amortization of new-facility issuance costs.
Cash, liquidity, and debt
- Cash was $1.40 million at June 30, 2017, versus $1.33 million at December 31, 2016. Working capital was $3.72 million, up from $3.12 million.
- For the first half, operating cash use was $0.88 million, compared with $3.23 million in 2016; investing cash use was $0.20 million versus $0.59 million. Financing provided $1.15 million, primarily from net revolving-credit draws.
- The Citizens asset-based revolving facility replaced the Regions line in February 2017. At June 30, the facility liability was $6.17 million, net of unamortized issuance costs, with approximately $12.79 million of additional availability. The $20 million ABL matures in 2022; no equipment-facility loans had been drawn.
- Management stated that cash, available borrowing capacity, and expected operating cash generation should fund operations for the next 12 months. The facility includes minimum-liquidity and fixed-charge-coverage covenants; the latter begins applying in 2018.
Outlook, risks, and notable items
- Management expected second-half 2017 revenue to decrease approximately 20% from the first half, with cost of sales down approximately 22%, resulting in an estimated 2% decline in gross profit dollars versus the first half. The company cited discontinued or reduced services, including portions of business with its two largest customers.
- Two customers represented 51.8% of Q2 revenue and 53.5% of first-half revenue, making customer retention and service levels significant risks.
- Results can vary with commodity prices, waste and recycling volumes, service frequency and pricing, contracted-service costs, and sales mix. Management warned that prolonged gross-margin declines could lead to future impairment of goodwill or other intangible assets.
- The company performed a second-quarter goodwill impairment test in response to first-half revenue declines and recorded no impairment. Goodwill was $58.3 million. The doubtful-account allowance was $720,695 at June 30, compared with $333,578 at year-end.
- Deferred tax assets were fully reserved; the company reported approximately $19 million of federal net operating loss carryforwards. No material adverse legal proceedings were identified. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether the forecast second-half revenue decline and expected gross-profit impact materialized, particularly as services with major customers changed.
- Customer concentration, receivable aging and collections, and the increase in the doubtful-account allowance.
- Actual borrowing availability and compliance with the Citizens facility’s liquidity and other covenants.
- Whether margins and cash generation support the carrying value of goodwill and the company’s stated 12-month liquidity outlook.