Quest Resource Holding Corporation — Q1 2018 10-Q
Business and period: Quest provides businesses with reuse, recycling, and disposal services. This unaudited filing covers the three months ended March 31, 2018; comparative results are for Q1 2017. Management cautions that interim results may be seasonal and are not necessarily indicative of the full year.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $24.7 million | $42.5 million |
| Gross profit / margin | $3.55 million / 14.4% | $4.19 million / 9.8% |
| Operating loss | $1.19 million | $1.80 million |
| Net loss | $1.31 million | $1.91 million |
| Basic and diluted loss per share | $0.09 | $0.13 |
| Adjusted EBITDA | $114,331 | $105,368 |
| Cash from (used in) operations | $1.79 million | ($2.12 million) |
| Cash and cash equivalents | $1.08 million | $1.06 million at Dec. 31, 2017 |
| Working capital | $2.58 million | $4.24 million at Dec. 31, 2017 |
| Revolving credit facility, net | $5.10 million | $6.76 million at Dec. 31, 2017 |
Revenue fell 42.0% year over year. Service revenue was $22.0 million, versus $39.8 million; product sales and other revenue were $2.69 million, versus $2.70 million. Cost of revenue was $21.15 million, compared with $38.35 million. Selling, general and administrative expense declined to $3.75 million from $4.98 million; depreciation and amortization was $985,000. Interest expense was $124,000, and no income tax expense was recorded. Total assets were $83.4 million and total liabilities were $22.35 million at quarter-end.
Operating cash flow improved, with a $1.8 million net cash contribution from changes in operating assets and liabilities, principally accounts payable and accrued liabilities. Investing used $60,000, primarily for equipment and software development. Financing used $1.70 million, mainly for net repayments on the revolving facility; cash increased $28,294 during the quarter.
Changes, outlook, and risks
- Management’s explanation: The revenue decline primarily reflected a changed service mix and reduced services for certain customers following actions in 2017 to improve procurement and pursue disciplined customer acquisition and renewal. Lower-margin services were exited and subcontracted-service costs declined, contributing to a higher gross margin despite lower gross profit.
- Costs and earnings: SG&A fell by about $1.2 million, principally due to lower stock compensation, labor expense, and severance costs. Net loss narrowed by about $597,000. Adjusted EBITDA rose modestly; it is a company-defined non-GAAP measure.
- Liquidity and borrowing: The $20 million asset-based revolving facility had $11.545 million of borrowing-base availability at March 31, 2018. The facility includes minimum-liquidity and fixed-charge-coverage covenants; the fixed-charge-coverage test was to begin applying when the trailing 12-month period ending March 31, 2018 was reported, commencing May 15, 2018. Management stated that cash, facility capacity, and expected operating cash generation should fund operations for the next 12 months, and said it believed equity markets could also be accessed.
- Asset sale: On February 20, 2018, the company sold certain Earth911 website-related assets for a 19% interest in Earth Media Partners, LLC, recorded at $246,585, plus a potential earn-out of approximately $350,000. An $8,086 earn-out receivable was accrued at quarter-end. The filing reports $48,845 of Q1 adjusted EBITDA “other adjustments,” including legal fees related to the sale.
- Customer and operating risks: Three customers represented 48.4% of Q1 revenue, versus two customers representing 55.1% in Q1 2017. Results may vary with customer volumes, service frequency and mix, pricing and commodity-index adjustments, subcontractor costs, and contract terms. Management also noted that operations could require additional debt or equity funding depending on activity levels.
- Other disclosures: The company reported no material-adverse legal proceedings known to it, no off-balance-sheet debt or similar obligations, and effective disclosure controls at March 31, 2018. It expected adoption of the new lease standard to create a material right-of-use asset and lease liability, given future operating-lease payments. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Whether the sharp revenue decline and customer service reductions continued after Q1, and how customer concentration evolved.
- Actual borrowing availability and compliance with minimum-liquidity and fixed-charge-coverage covenants, including the first applicable coverage test.
- Whether operating cash flow remains positive and whether the reduction in working capital affects the company’s stated 12-month liquidity outlook.
- Collection of the Earth Media Partners earn-out and the value and prospects of the 19% investment.
- The assumptions behind improved gross margin and modestly positive Adjusted EBITDA, including the adjustments used in that non-GAAP measure.