Quest Resource Holding Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 14, 2015. Financial statements are unaudited. Quest provides waste and recycling management services and environmental information services, including the Earth911.com website.
Financial performance and position
- Q2 revenue: $42.33 million, down 0.4% from $42.51 million. Gross profit was $3.42 million versus $3.51 million; gross margin was 8.1%, down from 8.3%.
- Q2 results: Operating loss was $1.46 million, compared with $0.94 million. Net loss improved to $1.50 million from $1.83 million, primarily reflecting lower interest expense. Basic and diluted loss per share was $0.01 versus $0.02.
- First-half revenue: $82.34 million, up 2.1% from $80.67 million. Gross profit was $6.70 million versus $6.84 million; gross margin fell to 8.1% from 8.5%.
- First-half results: Operating loss widened to $2.93 million from $1.55 million. Net loss improved to $3.02 million from $3.32 million, as interest expense declined to $0.09 million from $1.77 million. Loss per share was $0.03 in both periods.
- EBITDAS (non-GAAP): Q2 was negative $0.15 million versus positive $0.43 million; first-half EBITDAS was negative $0.36 million versus positive $0.94 million.
- Cash flow, first half: Operating activities used $3.95 million, investing activities used $0.72 million, and financing activities provided $2.05 million. Cash declined by $2.61 million to $0.54 million.
- Balance sheet at June 30: Working capital was $7.48 million, versus $1.32 million at year-end 2014. Accounts receivable were $31.90 million. Total liabilities were $33.40 million and stockholders’ equity was $73.18 million.
- Debt and liquidity: The Regions Bank revolving facility had $7.25 million outstanding and $2.75 million available at quarter-end, excluding its $5 million accordion. The filing reports no current line-of-credit balance and $7.25 million as long-term debt, following a maturity extension. Capital lease obligations were $35,916.
Changes and management commentary
- First-half revenue growth reflected new and expanded customer services, partly offset by lower commodity values. Q2 revenue was slightly lower year over year.
- Management attributed lower gross margins to service mix, declining commodity prices, and higher costs for certain contracted services. SG&A rose by $0.41 million in Q2 and $1.20 million in the first half, primarily to support more customer locations.
- Interest expense fell sharply because $22 million of related-party promissory notes were retired in September 2014, eliminating related interest and debt-discount amortization.
- Customer concentration remains substantial: two customers accounted for 59.3% of Q2 revenue and 60.3% of first-half revenue, down from 75.7% and 75.9%, respectively, in 2014.
Outlook, risks, and unusual items
- Management believed cash on hand, borrowing capacity, and expected operating cash generation would fund operations for the next 12 months. The company also cautioned that operations may require additional debt or equity financing until positive operating cash flow is achieved.
- On July 7, 2015, the company exercised the facility’s $5 million accordion, increasing the revolving commitment to $15 million. This occurred after quarter-end.
- Key operating sensitivities include commodity prices, customer waste and recycling volumes, service mix, contract terms, contracted-service costs, and advertising rates. Results may vary seasonally.
- The company reported a full valuation allowance against deferred tax assets; federal net operating loss carryforwards were approximately $17.1 million. Goodwill was $58.34 million, and the filing describes annual impairment testing but reports no impairment charge in the periods presented.
- Management reported effective disclosure controls as of June 30, 2015. It reported no material legal proceedings known to it, no defaults upon senior securities, and no off-balance-sheet debt or similar obligations.
Important facts for investors to verify
- Whether operating cash use and negative EBITDAS persist, and whether the company reaches positive operating cash flow.
- Customer concentration, receivable collection, and the effect of commodity-price and service-mix changes on margins.
- Availability and borrowing-base constraints under the $15 million credit facility, including covenant compliance and terms of the July amendment.
- Potential dilution from approximately 11.79 million outstanding warrants and 5.04 million stock options; potentially dilutive securities were excluded from loss per share as anti-dilutive.
- Whether goodwill and finite-lived intangible assets remain recoverable given recurring operating losses and the company’s cash-flow outlook.