Quest Resource Holding Corp. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Quest provides businesses with waste reuse, recycling, and disposal management services. The filing was signed November 14, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $31.9 million | $46.2 million | $115.8 million | $138.8 million |
| Gross profit | $4.0 million | $3.6 million | $12.7 million | $10.7 million |
| Gross margin | 12.6% | 7.8% | 10.9% | 7.7% |
| Operating loss | $(1.0) million | $(2.3) million | $(3.9) million | $(6.5) million |
| Net loss | $(1.1) million | $(2.4) million | $(4.2) million | $(6.7) million |
| Loss per share, basic and diluted | $(0.07) | $(0.16) | $(0.28) | $(0.46) |
| Adjusted EBITDA, non-GAAP | $0.5 million | $(0.3) million | $1.1 million | $(1.2) million |
Revenue fell 30.8% in Q3 and 16.5% for the nine-month period, primarily from reduced services for certain customers. Higher gross profit and margins reflected lower subcontracted-service costs and the exit of lower-margin customer services. SG&A declined year over year, including lower stock compensation and labor costs. Interest expense increased, driven by higher borrowing costs and balances and amortization of debt issuance costs.
Cash, liquidity, and debt
- Cash was $1.1 million at September 30, 2017, versus $1.3 million at December 31, 2016. Working capital was $4.5 million, up from $3.1 million.
- For the first nine months, operating cash use was $1.6 million, investing cash use was $0.2 million, and financing provided $1.7 million. Cash decreased $0.2 million overall.
- The Citizens asset-based revolving facility, entered into in February 2017, provides up to $20 million, with a separate equipment facility of up to $2 million. The reported revolving balance was $6.7 million, net of unamortized issuance costs, with approximately $4.2 million of additional availability. No equipment-facility borrowings were outstanding.
- The revolving facility matures in February 2022 and includes minimum-liquidity and fixed-charge-coverage covenants; the coverage covenant was not scheduled to apply until May 2018. Capital lease obligations were $54,000.
- Management believed cash, available borrowing capacity, and expected operating cash generation would fund operations for the next 12 months, while noting that operations may require additional debt or equity financing depending on business levels.
Changes, outlook, and risks
- Management anticipated that 2018 revenue would benefit from expansions with existing customers and additions of new customers; the filing gives no quantified revenue or earnings guidance.
- Customer concentration remained high: three customers represented 52.0% of Q3 revenue and 57.8% of nine-month revenue in 2017.
- Accounts receivable was $20.0 million, down from $34.8 million at year-end, while the doubtful-account allowance rose to $824,000 from $334,000. Management identifies receivable collectibility as a significant estimate.
- Goodwill was $58.3 million. The company reported no impairment from its June 2017 analysis, but warned that prolonged gross-margin declines could lead to impairment of goodwill or other intangibles. Finite-lived intangible assets were $5.9 million, down from $8.5 million at year-end.
- A full valuation allowance was maintained against deferred tax assets; federal net operating loss carryforwards were approximately $19.3 million. The company expected lease accounting adoption to result in a material right-of-use asset and lease liability.
- Three customers accounted for a majority of revenue, creating customer-retention and concentration exposure. The company also cited variability from commodity prices, service mix, contract terms, and service volumes. It reported no known legal proceedings believed likely to have a material adverse effect and no off-balance-sheet debt.
Important facts for investors to verify
- Whether customer service reductions stabilize and the expected 2018 expansions and new-customer additions materialize.
- Whether gross-margin gains are sustainable and not solely attributable to exiting lower-margin services.
- Receivable aging, collections, and the adequacy of the increased doubtful-account allowance.
- Availability under the Citizens facility, compliance with liquidity requirements, and the company’s ability to fund operations if cash use continues.
- Goodwill impairment assumptions and the potential balance-sheet effects of lease-standard adoption.