Business context and reporting period
Quest Resource Holding Corporation filed this Form 10-K for the fiscal year ended December 31, 2016. The filing reports annual results; it does not provide clear standalone fourth-quarter financial results. Quest provides businesses with waste reuse, recycling, and disposal management services, primarily through third-party subcontractors, and also operates environmental information and data platforms.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $183.8 million | $170.1 million |
| Gross profit | $14.4 million | $13.6 million |
| Gross margin | 7.8% | 8.0% |
| Operating loss | $7.8 million | $7.2 million |
| Net loss | $8.0 million | $7.4 million |
| Adjusted EBITDA (non-GAAP) | $(1.5) million | $(1.3) million |
| Cash from (used in) operating activities | $(4.4) million | $2.7 million |
At year-end, cash and cash equivalents were $1.3 million and working capital was $3.1 million. The company had $4.75 million outstanding on its Regions credit line, with approximately $9.0 million available, and $315,000 of capital lease obligations. Total liabilities were $40.8 million. Quest reported no income tax expense and a $90.9 million accumulated deficit.
Material changes versus 2015
- Revenue rose 8.0%, mainly from approximately $19.3 million of new or expanded customer business, partly offset by $5.4 million from ending a declining-margin commodity service contract.
- Gross profit increased, but gross margin declined from 8.0% to 7.8%, which management attributed primarily to service mix and changes in contracted-service costs.
- SG&A increased by $1.9 million, including higher stock-based compensation, professional fees, and costs of servicing additional customer locations. Net loss widened by about $600,000.
- Operating cash flow shifted from $2.7 million provided to $4.4 million used, primarily reflecting the net loss and working-capital movements. Cash fell from $3.0 million to $1.3 million.
- The company completed a 1-for-8 reverse stock split in August 2016. It also issued shares and warrants in a March offering, and issued 418,750 shares for consulting services. Outstanding common shares increased to 15.3 million at year-end.
Outlook, risks, and unusual items
- Management said existing cash, borrowing availability, expected operating cash generation, and securities placements were expected to fund operations for the next 12 months. This is a management expectation, not quantified earnings guidance; the filing also cautions that additional financing may be needed until sustained positive operating cash flow is achieved.
- In February 2017, Quest replaced the Regions facility with a Citizens asset-based revolving facility of up to $20 million and an equipment loan facility of up to $2 million. The revolving facility matures in 2022 and includes liquidity and other covenants; the fixed-charge coverage covenant begins to apply for the period ending March 31, 2018. These are post-year-end events.
- Customer concentration remains significant: the largest customer generated approximately 44% of 2016 revenue, and the two largest generated 56%. Customer contracts generally do not guarantee long-term service volumes, and customers may reduce or cancel services.
- Other key risks include recurring losses, reliance on subcontractors, commodity-price volatility, competition from larger waste companies, environmental and regulatory exposure, and potential impairment of goodwill if gross margins continue to decline. Goodwill was $58.3 million; the 2016 annual impairment test recorded no impairment.
- The company reported no legal proceedings believed likely to have a material adverse effect, no off-balance-sheet debt arrangements, and effective management-assessed disclosure controls and internal control over financial reporting. The auditor did not attest to internal control effectiveness.
- Unusual equity compensation: the company issued consulting shares valued at $1.675 million under a one-year contract; $628,125 was expensed in 2016 and $1,046,875 remained prepaid for future expense recognition.
Most important facts for investors to verify
- Whether operating cash flow improves and the company can fund operations without further dilutive equity issuance or increased borrowing.
- Whether customer diversification reduces dependence on the largest account, and whether reported additions translate into recurring, profitable revenue.
- Whether gross margin stabilizes or improves despite contracted-service costs and commodity-market changes.
- The Citizens facility’s borrowing availability, covenant headroom, interest costs, and compliance as operating results evolve.
- The terms, remaining expense recognition, and expected benefit of the consulting-share arrangement, as well as potential dilution from outstanding options and warrants.