Quest Resource Holding Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Quest provides businesses with waste reuse, recycling, and disposal management services; this business generated substantially all revenue. Results are unaudited and may be affected by seasonal variations.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $42.54 million | $45.77 million |
| Gross profit / margin | $4.19 million / 9.8% | $3.49 million / 7.6% |
| Operating loss | $(1.80) million | $(2.19) million |
| Net loss | $(1.91) million | $(2.24) million |
| Basic and diluted loss per share | $(0.13) | $(0.16) |
| Adjusted EBITDA (non-GAAP) | $105,368 | $(620,689) |
| Cash used in operating activities | $2.12 million | $1.12 million |
Revenue fell 7.1%, which management attributed primarily to changes in customer and service mix. Cost of revenue declined faster than sales, increasing gross profit by about $699,000 and gross margin by 2.2 percentage points. Selling, general and administrative expenses rose about $325,000, mainly due to stock-related compensation, trade-show marketing, and severance; lower legal and professional fees partly offset the increase. Interest expense rose to $114,000, primarily reflecting higher average borrowings and new facility issuance-cost amortization.
Cash, liquidity, and debt
- Cash was $2.13 million at March 31, up from $1.33 million at year-end. Working capital was $5.59 million, compared with $3.12 million at December 31, 2016.
- Operating cash use increased year over year, with a $4.17 million reduction in accounts payable and accrued liabilities among the principal cash-flow movements. Investing cash use was $109,000; financing provided $3.03 million, primarily from net credit-facility draws.
- In February 2017, the company replaced its Regions Bank facility with a Citizens Bank asset-based revolver of up to $20 million and an equipment-loan facility of up to $2 million. At quarter-end, the revolving facility was $8.02 million net of issuance costs, with approximately $8 million of additional availability; no equipment-facility borrowing had been drawn.
- The revolver matures in February 2022 and includes minimum-liquidity and fixed-charge-coverage covenants; the fixed-charge-coverage test does not apply until the period ending March 31, 2018 is reported. Capital lease obligations were $80,476.
Outlook, risks, and other disclosures
- Management said cash, available credit, and expected operating cash generation should fund operations for the next 12 months. No numerical revenue or earnings guidance was provided.
- Two customers represented 55.1% of Q1 2017 revenue, creating significant customer-concentration exposure. Management also noted that margins can vary with commodity prices, service mix, customer volumes, contract terms, and contracted-service costs.
- Management warned that continued or prolonged gross-margin declines could lead to impairment of some or all goodwill and other intangible assets. Goodwill was $58.34 million; no impairment was recorded in the 2016 annual test.
- The company had approximately $19 million of federal net operating loss carryforwards and a full valuation allowance against deferred tax assets. Management expected the new lease accounting standard to result in a material right-of-use asset and lease liability upon adoption.
- Management reported effective disclosure controls as of March 31, 2017 and no material changes in internal control. It reported no known legal proceedings expected to have a material adverse effect and no off-balance-sheet debt.
Important facts for investors to verify
- Whether the improved gross margin can persist despite lower revenue and customer/service mix changes.
- Customer concentration, particularly the revenue contribution and retention risk of the two largest customers.
- Operating cash conversion and the drivers of increased cash use, including changes in payables and accrued liabilities.
- Compliance with Citizens facility liquidity covenants, borrowing availability, and future debt-service needs.
- Goodwill and intangible-asset recoverability if margins or operating performance weaken.