Quest Resource Holding Corp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Quest provides recycling, waste-management and environmental information services. The reported year-over-year comparison is not like-for-like: Quest became a wholly owned subsidiary in July 2013, so Q1 2014 includes its consolidated operations, while reported Q1 2013 largely does not.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $38.16 million | $313,489 |
| Gross profit / margin | $3.33 million / 8.7% | $273,796 / 87.3% |
| Operating loss | $612,956 | $2.00 million |
| Net loss | $1.49 million | $3.30 million |
| Basic and diluted loss per share | $0.02 | $0.06 |
| Cash used in operating activities | $3.51 million | $949,263 |
| EBITDAS (non-GAAP) | $501,702 | $(725,105) |
Q1 2014 revenue included approximately $38.0 million from Quest. For a more comparable view, pro forma Q1 2013 consolidated net sales were $30.96 million, gross profit $3.57 million, operating loss $924,938 and net loss $2.82 million. Quest’s own sales increased to $37.97 million from $30.65 million, while its gross profit declined to $3.15 million from $3.30 million and operating income fell to $21,583 from $1.08 million.
Management attributed the lower reported gross margin to the shift toward Quest’s recycling, waste-service and commodity sales, which carry lower margins than the advertising and recycled-electronics revenue prominent in 2013. SG&A was $2.99 million; depreciation and amortization was $951,663, including substantial amortization of acquisition-related intangibles. Interest expense was $875,467. No income tax expense was recorded.
Balance sheet, cash flow and debt
- At March 31, cash was $1.08 million, down from $2.68 million at year-end. Current assets were $23.23 million and current liabilities $28.57 million, a working-capital deficit of approximately $5.34 million.
- Accounts receivable was $21.59 million, compared with accounts payable of $21.42 million. Operating cash use reflected working-capital movements, including lower accounts payable and accrued liabilities.
- The company used $3.51 million in operating activities and $84,123 in investing activities; financing provided $2.00 million, from additional line-of-credit borrowing.
- The Regions Bank revolving facility had $4.75 million outstanding and approximately $5.25 million available at March 31, at a stated 4.75% rate. The facility is secured by Quest assets.
- Long-term related-party secured convertible notes had a $22 million principal amount, 7% interest and a July 2016 maturity; their March 31 carrying value was $17.79 million, net of unamortized discount. Capital-lease obligations totaled $45,211.
Changes, outlook and risks
- Net loss narrowed year over year, but the comparison reflects the acquisition and consolidation of Quest. The weighted-average share count rose to 95.8 million from 58.0 million, primarily due to the Quest acquisition.
- Management expected 2014 gross margins to average around Q4 2013 levels, with margins generally ranging from 5% to 20% across recycling, waste and commodity programs; advertising and consulting may fall outside that range. Results are sensitive to commodity prices, volumes, service mix, contracted-service costs and advertising rates.
- Management said additional working capital may be required until operations generate positive cash flow. The company planned to pursue sales growth, cost efficiency and other initiatives, but provided no quantified revenue or earnings guidance.
- After quarter-end, the company raised $2.385 million in an April 18 stock-and-warrant offering. On May 9, Regions amended and extended the credit facility to May 31, 2015, added a $5 million accordion feature and changed borrowing-base, pricing and covenant provisions. The company and Earth911 became guarantors, and Earth911 pledged 50% of Quest’s membership interests.
- Other material considerations include substantial goodwill and acquisition-related intangibles, a full valuation allowance against deferred tax assets, related-party acquisition notes, and execution and integration risks. The company reported no legal proceedings it believed would have a material adverse effect and said disclosure controls were effective at a reasonable-assurance level.
Investor facts to verify
- Use the pro forma comparison, not reported Q1 2013 revenue alone, to assess underlying growth and profitability.
- Track cash conversion, receivable collections, working-capital needs and remaining availability under the amended credit facility and its covenants.
- Review the $22 million related-party seller notes, conversion terms, interest burden and repayment capacity.
- Monitor Quest’s gross profit and margins against commodity prices, service mix and management’s stated range.
- Assess potential dilution from the April offering and warrants; the filing reported 97,030,266 common shares outstanding as of May 1, 2014.