Quest Resource Holding Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited. Quest provides recycling, waste-stream management, and environmental information services. Two customers accounted for 60.0% of quarterly revenue and 60.2% of nine-month revenue, indicating significant customer concentration.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $43.6 million | $47.0 million | $125.9 million | $127.7 million |
| Gross profit / margin | $3.5 million / 8.1% | $3.9 million / 8.2% | $10.2 million / 8.1% | $10.7 million / 8.4% |
| Operating loss | $(1.6) million | $(0.6) million | $(4.5) million | $(2.1) million |
| Net loss | $(1.7) million | $(4.7) million | $(4.7) million | $(8.1) million |
| Loss per share | $(0.01) | $(0.05) | $(0.04) | $(0.08) |
- For the first nine months, operating cash flow was $5.7 million, versus cash used of $5.1 million in 2014. The 2015 inflow included a $7.3 million increase in accounts payable and accrued liabilities.
- Investing cash outflow was $1.6 million, including $819,608 for property and equipment and $740,571 for software development. Financing cash outflow was $2.2 million. Cash increased $1.9 million to $5.1 million.
- At September 30, cash was $5.1 million and working capital was $2.0 million, compared with $1.3 million at December 31, 2014. Current assets were $36.1 million and current liabilities $34.1 million.
- Debt included $3.0 million outstanding on the Regions Bank revolving facility, with $12.0 million available under its $15.0 million commitment; the facility matures May 2018. The company reported compliance with financial covenants. Capital lease obligations totaled $143,025.
- Total assets were $109.0 million, total liabilities $37.2 million, and stockholders’ equity $71.8 million. Goodwill was $58.3 million; finite-lived intangible assets were $13.1 million.
Changes and management commentary
- Revenue declined 7.3% in Q3 and 1.4% for the nine-month period. Management attributed the changes primarily to lower motor- and cooking-oil commodity values, partly offset by new and expanded customer services. It cited commodity-value declines of approximately $9 million for Q3 and $25 million for nine months.
- Gross margin eased to 8.1% from 8.2% in Q3 and to 8.1% from 8.4% for nine months. Management cited service mix, lower commodity prices, and higher costs for certain contracted services.
- Operating expenses rose $0.7 million in Q3 and $1.9 million for nine months, mainly due to servicing more customer locations and September office-relocation costs. The 2014 comparison also included an approximately $570,000 benefit from subleasing the former headquarters.
- Net loss narrowed year over year, principally because 2014 included substantial interest and debt-extinguishment charges following retirement of $22 million of related-party notes. In contrast, operating loss widened in both 2015 comparisons.
- Management said existing cash, available credit, and expected operating cash flows should fund operations for the next 12 months, while also noting future operations may require additional debt or equity financing until sustained positive operating cash flow is achieved. No revenue or earnings guidance was provided.
Outlook, risks, and unusual items
- Results and margins may vary with commodity prices, customer waste volumes, service mix, contract terms, contracted-service costs, and advertising rates. The company disclosed substantial dependence on two customers.
- Management completed its third-quarter goodwill impairment analysis and recorded no impairment. The company had approximately $12.0 million of federal net operating loss carryforwards and a full valuation allowance against deferred tax assets.
- The filing states that Quest’s CEO resigned in October 2015. The filing does not describe the circumstances or any expected operational impact.
- Management reported effective disclosure controls as of September 30, 2015 and no material changes in internal control over financial reporting. It reported no known legal proceedings believed likely to have a material adverse effect and no off-balance-sheet debt arrangements.
Important facts for investors to verify
- Whether customer concentration changes, and whether new or expanded customer services offset commodity-price-related revenue pressure.
- Whether operating cash flow remains positive without relying on increases in accounts payable and accrued liabilities.
- Availability under the borrowing-base facility, covenant compliance, and future liquidity needs.
- Reasons for the October 2015 CEO resignation and any effects on management or operations.
- Potential dilution: 11.8 million exercisable warrants and 4.4 million outstanding stock options were excluded from diluted loss per share as anti-dilutive.