Quest Resource Holding Corp. — FY 2018 Form 10-K
Business context and reporting period. Quest provides businesses with reuse, recycling, and waste-disposal services, generally using third-party subcontractors. This annual report covers the fiscal year ended December 31, 2018; comparisons are with FY 2017, not a standalone fourth quarter.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $103.8 million | $138.3 million |
| Gross profit | $16.9 million | $15.7 million |
| Gross margin | 16.2% | 11.4% |
| Operating loss | $2.0 million | $5.4 million |
| Net loss | $2.4 million | $5.8 million |
| Adjusted EBITDA (non-GAAP) | $2.3 million | $0.8 million |
| Operating cash flow | $3.0 million provided | $1.7 million used |
- Revenue declined 25.0%, primarily reflecting the exit from lower-margin services and changes in customer and service mix. Cost of revenue fell 29.1%, allowing gross profit to rise 7.3% despite lower sales.
- SG&A was $16.2 million, down from $17.1 million. Interest expense was $438,000; no income tax expense was recorded. Basic and diluted loss per share was $0.16 versus $0.38.
- Cash and cash equivalents were $2.1 million at year-end, versus $1.1 million a year earlier. Working capital was $4.0 million, down from $4.2 million.
- The company reported a $20 million asset-based revolving facility, with $5.2 million of borrowings net of unamortized issuance costs and $11.3 million of borrowing-base availability at year-end. It was in compliance with financial covenants. Net cash used in financing activities was $1.7 million, primarily from revolving-facility repayments.
- Investing activities used $240,000, mainly for software development and equipment. Year-end total assets were $81.6 million, including $58.2 million of goodwill; stockholders’ equity was $60.5 million.
Material changes, outlook, and risks
- Management attributed improved gross profit and margins to lower subcontractor costs, exiting lower-margin customer services, and growth in higher-margin services. It described the approach as a deliberate trade-off that reduced revenue but improved gross profit.
- Three customers represented 51% of FY 2018 revenue, compared with two customers representing 44% in FY 2017. The largest customers changed between years, and customer contracts generally lack firm long-term volume commitments.
- A customer bankruptcy led to a $610,000 bad-debt adjustment. Total bad-debt expense, net of recoveries, was $1.1 million for the year.
- In February 2018, Quest sold certain Earth911.com website-business assets for a 19% interest in Earth Media Partners, LLC and a potential earn-out of approximately $350,000. It had accrued $59,000 of the earn-out receivable by year-end.
- Management stated that cash, borrowing capacity, potential securities placements, and expected operating cash generation should fund operations for the next 12 months. No specific revenue or earnings guidance was provided.
- Key risks include recurring losses and the accumulated deficit of $99.2 million; reliance on a small number of customers; commodity-price and service-volume variability; dependence on subcontractors; environmental liabilities and regulation; competition from larger providers; and access to additional capital. Management reported no goodwill impairment in 2018 but warned that prolonged margin declines or lower expected revenue growth could lead to impairment.
- The financial statements received an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2018; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the improved gross margin and positive operating cash flow can persist as revenue remains substantially below FY 2017.
- Customer-level concentration, contract renewal and cancellation terms, and the effect of the bankrupt customer on receivables and collections.
- Current borrowing-base availability, facility covenants, and cash requirements beyond management’s stated 12-month outlook.
- The realization and valuation of the Earth Media Partners investment and remaining earn-out, as well as assumptions supporting the $58.2 million goodwill balance.
- The calculation and adjustments in non-GAAP Adjusted EBITDA, including the $662,000 of other adjustments in 2018.