Quest Resource Holding Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Quest provides businesses with waste reuse, recycling, and disposal management services, which generate substantially all revenue, and operates environmental information platforms.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $46.84 million | $42.33 million | $92.61 million | $82.34 million |
| Gross profit | $3.65 million | $3.42 million | $7.14 million | $6.70 million |
| Gross margin | 7.8% | 8.1% | 7.7% | 8.1% |
| Operating loss | $(1.99) million | $(1.46) million | $(4.18) million | $(2.93) million |
| Net loss | $(2.05) million | $(1.50) million | $(4.29) million | $(3.02) million |
| Basic and diluted loss per share | $(0.14) | $(0.11) | $(0.30) | $(0.22) |
For the first half, cash used in operating activities was $3.23 million, versus $3.95 million in 2015; investing activities used $0.59 million, versus $0.72 million. Financing activities provided $2.86 million, mainly from the stock-and-warrant offering. Cash declined by $0.96 million to $2.03 million.
At June 30, cash was $2.03 million, working capital was $2.76 million, and total assets were $110.20 million. The company had $4.00 million drawn on its $15 million revolving credit facility, with $10.65 million available; it reported compliance with financial covenants. Capital lease obligations totaled $0.37 million. Total liabilities were $41.00 million.
Changes and management commentary
- Revenue grew 10.7% in Q2 and 12.5% in the first half, mainly from new and expanded customer services added after Q2 2015.
- Gross profit increased, but gross margin declined by 0.3 percentage points in Q2 and 0.4 points for the first half. Management attributed the decline to service mix and higher costs for certain contracted services.
- Operating expenses rose to $5.65 million in Q2 and $11.32 million in the first half. Higher SG&A reflected increased stock compensation and costs to integrate and service additional customer locations.
- Net losses widened year over year. Management’s non-GAAP EBITDAS was a loss of $0.39 million in Q2 and $1.01 million for the first half, compared with losses of $0.15 million and $0.36 million, respectively.
Outlook, risks and unusual items
- Management said cash, available credit, expected operating cash, and securities placements should fund operations for the next 12 months. It also cautioned that continued operations may require additional debt or equity financing until sustained positive operating cash flow is achieved.
- Customer concentration is significant: two customers generated 55.6% of Q2 revenue and 55.4% of first-half revenue.
- The company reported that its share price decline after the March offering left market capitalization below carrying value at the period end. Management did not consider an impairment test necessary at that time, but said continued share-price weakness or failure to recover could prompt a future goodwill and intangible-asset impairment assessment. Goodwill was $58.34 million.
- On August 10, 2016, after quarter-end, the company effected a 1-for-8 reverse stock split; share and per-share figures were retroactively adjusted. A March offering of common stock and warrants generated $2.89 million net proceeds; the company also issued warrants and reported 1.99 million warrants outstanding at June 30.
- The filing reports no material legal proceeding known to the company, no off-balance-sheet debt, and effective disclosure controls as of June 30. Management stated that results may vary with commodity prices, service mix, customer contract terms, and volumes. No specific revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether revenue growth translates into improved margins and sustained positive operating cash flow.
- Customer retention and the impact of the two largest customers’ concentration on revenue and receivables.
- Availability of the revolving facility, covenant compliance, and the company’s ability to fund operations without further equity or debt financing.
- Any subsequent share-price recovery or goodwill and intangible-asset impairment assessment.
- The effect of the reverse split and outstanding warrants and options on the post-split share count and potential dilution.