Quest Resource Holding Corp. — Q3 2016 Form 10-Q
Business and period: Unaudited results for the quarter and nine months ended September 30, 2016. Quest provides businesses with waste reuse, recycling, and disposal management services; these services generate substantially all revenue. Its operations also include recycling-related online platforms.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $46.2 million | $43.6 million | $138.8 million | $125.9 million |
| Gross profit / margin | $3.6 million / 7.8% | $3.5 million / 8.1% | $10.7 million / 7.7% | $10.2 million / 8.1% |
| Operating loss | $(2.3) million | $(1.6) million | $(6.5) million | $(4.5) million |
| Net loss | $(2.4) million | $(1.7) million | $(6.7) million | $(4.7) million |
| Adjusted EBITDA (non-GAAP) | $(0.3) million | $(0.3) million | $(1.2) million | $(0.6) million |
Basic and diluted loss per share was $0.16 for Q3 and $0.46 for the nine-month period, versus $0.12 and $0.34, respectively, in 2015. All share and per-share amounts reflect the August 10, 2016 1-for-8 reverse split.
Cash flow and liquidity: Nine-month operating cash flow was negative $2.5 million, compared with positive $5.7 million in 2015. Investing cash outflow was $0.7 million, and financing cash inflow was $2.1 million, including $2.9 million net proceeds from a stock-and-warrant offering. Cash declined to $1.9 million from $3.0 million at year-end 2015. Working capital was $2.4 million. The Regions revolving facility had $3.25 million drawn and $9.04 million available; it matures in May 2018 and carried a 2.78% rate at quarter-end. Capital lease obligations totaled $0.345 million. The company reported covenant compliance.
Total assets were $107.5 million, including $58.3 million of goodwill and $9.3 million of net intangible assets; total liabilities were $38.5 million. The company recorded no income tax expense and maintained a full valuation allowance against deferred tax assets.
Changes and management commentary
- Revenue rose 5.9% in Q3 and 10.2% for the nine months, primarily from customers added after Q3 2015 and expanded services to existing customers.
- Gross margin declined year over year in both periods. Management attributed the decrease to service mix and higher or fluctuating contracted-service costs.
- SG&A rose $0.8 million in Q3 and $2.4 million year to date. Drivers included higher stock compensation, professional fees, severance, and costs of integrating and servicing more customer locations.
- Management believes cash, available credit, securities placements, and expected operating cash generation should fund operations for the next 12 months. It also cautioned that additional debt or equity financing may be needed until sustained positive operating cash flow is achieved.
Risks, contingencies, and unusual items
- Two customers represented 55.6% of Q3 revenue and 55.5% of nine-month revenue, creating material customer concentration.
- Management warned that continued or prolonged gross-margin declines could lead to impairment of some or all goodwill and intangible assets. The third-quarter goodwill test found no impairment.
- The company issued 861,251 shares and warrants in a March offering and 418,750 fully vested shares for consulting services in September; it also reported 1,994,941 warrants outstanding at September 30. The consulting shares were valued at $1.675 million, with most of the related expense to be recognized through August 2017.
- Management reported effective disclosure controls at quarter-end. It was not aware of legal proceedings expected to have a material adverse effect; no material off-balance-sheet debt was reported.
Important facts for investors to verify
- Whether revenue growth can translate into improved gross margins and sustained positive operating cash flow.
- Customer retention and the financial effect of the two largest customers’ concentration.
- Available borrowing capacity, covenant compliance, and the stated 12-month liquidity outlook.
- Potential dilution from outstanding warrants and other equity-linked awards, and the timing of consulting-related expense recognition.
- Goodwill and intangible-asset recoverability if margins or operating performance weaken further.