Quest Resource Holding Corp. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 16, 2016. Quest provides outsourced recycling, waste-management and sustainability services, alongside Earth911 consumer recycling information and media platforms. Its business is asset-light and relies on third-party vendors for collection and processing.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $170.1 million | $174.5 million |
| Gross profit / margin | $13.6 million / 8.0% | $14.3 million / 8.2% |
| Operating loss | $7.2 million | $3.9 million |
| Net loss | $7.4 million | $9.9 million |
| Loss per share, basic and diluted | $0.07 | $0.10 |
| EBITDAS, non-GAAP | $(1.3) million | $1.4 million |
| Cash from (used in) operations | $2.7 million | $(8.6) million |
Cash and cash equivalents were $3.0 million at year-end, and working capital was $2.1 million, up from $1.3 million. The Regions Bank revolving facility had $4.0 million drawn and $11.0 million available under its $15.0 million commitment; it matures in 2018. Capital-lease obligations were $402,000. Total liabilities were $39.5 million. Management stated cash, available borrowing capacity, expected operating cash flow and securities placements should fund operations for the next 12 months, while noting future operations may require additional financing until sustained positive operating cash flow is achieved.
Changes and notable items
- Revenue declined 2.5%; management attributed this chiefly to an approximately $32.0 million decline in used-motor-oil and cooking-oil commodity values, largely offset by about $26.5 million from new and expanded customer services. Excluding the commodity decline, management reported 16% revenue growth.
- Gross profit fell about $627,000 and gross margin declined 0.2 percentage points, reflecting service mix, lower commodity prices and $498,000 of higher contracted-service costs in Q4.
- Operating expenses rose $2.7 million to $20.9 million, including higher costs to serve more customer locations, the 2015 office relocation, increased software amortization and a $566,000 charge associated with discontinuing Earth911’s e-commerce marketplace.
- Net loss narrowed primarily because 2014 included substantial interest, debt-discount amortization and a $1.7 million debt-extinguishment loss tied to retirement or conversion of $22.0 million in related-party notes. Interest expense was $218,000 in 2015 versus $4.3 million in 2014.
- Operating cash flow improved, but included an $8.3 million cash benefit from increased accounts payable and accrued liabilities. Investing activities used $1.6 million, primarily for equipment, software and headquarters improvements; financing activities used $1.2 million net.
- Accumulated deficit reached $82.9 million. Goodwill was $58.3 million and net intangible assets were $11.8 million. No impairment was recorded; management said year-end market capitalization exceeded carrying value by approximately $7.3 million, but further stock-price declines could trigger impairment testing and write-offs.
Outlook, risks and contingencies
- No quantified revenue, earnings or margin guidance is provided. Management’s stated priorities include customer diversification, expanding services and materials handled, growing sales and online offerings, and pursuing acquisitions.
- Customer concentration remains a major exposure: the largest customer generated approximately 44% of 2015 revenue, down from 59% in 2014; the two largest generated 60% in 2015. Customer contracts generally lack firm long-term volume commitments and may be reduced, delayed or cancelled.
- Commodity-price volatility can affect revenue and margins. The filing specifically identifies lower oil prices as adverse. Changes in service mix, customer volumes and vendor costs also drive quarterly results.
- The company depends on independent vendors for customer service delivery and may face operational disruption, vendor competition, or environmental liabilities and indemnification claims relating to vendor activity. The filing says insurance may be insufficient; no material legal proceeding was identified as of the filing date.
- Other disclosed risks include recurring losses, potential need for additional capital and dilution, classification of certain materials as “waste” restricting access to them, regulatory changes, and possible goodwill or intangible impairment. Management reported compliance with credit-facility financial covenants at year-end.
- Nasdaq notified the company in September 2015 that its share price did not meet the $1.00 minimum bid requirement. On March 1, 2016, after year-end, the company received an extension through August 29, 2016 and said it might use a reverse stock split to regain compliance. It gave no assurance of success.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2015. The independent auditor audited the financial statements but did not provide an internal-control attestation.
Important facts for investors to verify
- Whether customer additions continue to offset the largest customer’s share of revenue, and the durability and volume terms of major customer contracts.
- How commodity prices, particularly used-oil and cooking-oil values, and contracted-service costs affect gross margin and cash generation.
- Whether operating cash flow remains positive after the benefit from higher payables and accrued liabilities, and whether the $11.0 million borrowing availability remains accessible under facility terms and covenants.
- Progress toward Nasdaq’s bid-price requirement by August 29, 2016, including any reverse split or potential delisting consequences.
- Whether recurring losses or further share-price declines lead to additional financing needs, dilution, or impairment of goodwill and intangible assets.