Quest Resource Holding Corp. — Q1 2019 Form 10-Q
Business and period: Quest provides businesses with reuse, recycling, and waste-disposal services, plus related product sales. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018. Results may vary seasonally and are not necessarily indicative of full-year performance.
Financial performance
- Revenue: $26.65 million, up 7.9% from $24.70 million. Service revenue was $24.05 million; product sales and other revenue were $2.59 million.
- Gross profit and margin: $4.54 million and 17.0%, versus $3.55 million and 14.4%. Management attributed the improvement to service volumes and mix, including lower costs for certain subcontracted services.
- Operating results: Operating income was $2,828, versus an operating loss of $1.19 million. SG&A rose about $462,000 to $4.21 million; depreciation and amortization expense fell about $659,000, mainly because certain intangibles were fully amortized in 2018.
- Net loss: $163,752, or $0.01 per share, compared with $1.31 million, or $0.09 per share. Q1 2019 included $54,769 of income tax expense despite a pretax loss, primarily due to state taxes and the federal deferred-tax valuation allowance.
- Adjusted EBITDA: $796,355 versus $114,331. This is a non-GAAP measure; Q1 2019 included $230,211 of other adjustments, primarily costs related to selling-stockholder transactions.
- Cash flow: Operating cash flow was $45,844, down from $1.79 million. Investing cash outflow was $41,248, primarily for software development; financing cash outflow was $61,431, primarily reflecting net repayments on the revolving facility. Cash declined $56,835 to $2.07 million.
Financial position and liquidity
- At March 31, cash was $2.07 million; current assets were $20.95 million and current liabilities were $17.09 million, giving working capital of approximately $3.86 million, compared with $3.95 million at year-end 2018.
- Accounts receivable was $17.73 million, net of a $992,447 allowance for doubtful accounts.
- The asset-based revolving facility provides up to $20 million and matures February 24, 2022. Availability was $12.81 million; the reported liability was $5.16 million, net of unamortized issuance costs. The facility has minimum-liquidity and fixed-charge-coverage covenants. No equipment-facility borrowings were outstanding.
- Adoption of lease accounting on January 1, 2019 added an operating right-of-use asset of $2.01 million and operating lease liabilities of $2.20 million. Total liabilities were $23.85 million; stockholders’ equity was $60.58 million.
Changes, outlook, and risks
- Revenue increased 7.9% year over year, while gross margin improved 2.6 percentage points and net loss narrowed substantially. Operating cash flow, however, fell to $46,000 from $1.79 million.
- Three customers represented 59.7% of Q1 2019 revenue, up from 48.4% in Q1 2018, indicating increased customer concentration.
- Management said cash, borrowing capacity, and expected operating cash generation should be sufficient to fund operations for the next 12 months; it gave no specific earnings or revenue guidance. Management also noted that results vary with service volumes and mix, customer mix, recycled-material commodity prices, and subcontractor costs.
- Management cited possible future need for debt or equity financing depending on operating levels. The company reported no off-balance-sheet debt, no known legal proceeding believed likely to have a material adverse effect, and effective disclosure controls at a reasonable-assurance level.
- After quarter-end, stockholders sold approximately 4.3 million shares in a registered offering and another 1.75 million shares in a private transaction, both closing April 11, 2019. The company received no proceeds and recorded approximately $230,000 of related costs in Q1 SG&A, with about $15,000 to be recorded in April. The company’s reported share count was 15,328,870 at March 31.
Most important facts for investors to verify
- Whether customer concentration remains elevated and how changes in major-customer activity affect revenue and margins.
- Cash conversion and collections: operating cash flow was low relative to the quarter’s revenue, and accounts receivable was $17.73 million.
- Available borrowing capacity and compliance with the ABL facility’s liquidity and fixed-charge-coverage covenants.
- The recurring versus one-time nature of Adjusted EBITDA adjustments and the costs and market effects of the secondary share sales.
- Potential dilution: 2,187,483 stock options and 1,733,565 warrants were outstanding and excluded from diluted loss per share as anti-dilutive.