Quest Resource Holding Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 31, 2014. This is an annual report, not a standalone fourth-quarter report. The year-over-year comparison is significantly affected by the July 16, 2013 acquisition of the remaining 50% of Quest Resource Management Group (Quest); Quest’s results were consolidated only from that date. The filing does not provide clear standalone Q4 results.
Business context
Quest provides recycling, waste-stream management and disposal services, generally using third-party vendors rather than owning collection or processing assets. The company also operates Earth911.com, an environmental information and recycling-directory platform. It reported managing more than 15,000 customer locations. Quest was acquired for $77 million, comprising $55 million in stock and $22 million in related-party seller notes; the company also remeasured its previously held Quest interest.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $67.5 million | $1.1 million |
| Gross profit / margin | $5.1 million / 7.5% | $1.1 million / 96.9% |
| Operating loss | $12.8 million | $23.4 million |
| Net loss | $17.8 million | $42.2 million |
| Loss per share, basic and diluted | $0.23 | $0.74 |
| EBITDAS, company-defined non-GAAP | $(7.9) million | $(19.5) million |
| Cash used in operating activities | $4.4 million | $3.8 million |
- Reported revenue rose sharply because Quest contributed approximately $66.4 million after acquisition; the filing also cites lower Earth911 advertising revenue and lower YouChange recycled-electronics sales.
- Reported gross margin fell as the consolidated mix shifted toward lower-margin recycling and waste services. Management expected 2014 gross margins to average around 2013 levels, with program margins generally ranging from 5% to 20%; it anticipated improvement as new clients were added. Actual results would depend on service and sales mix, volumes, commodity prices, and vendor costs.
- Pro forma, unaudited results assuming 100% ownership of Quest for both years show sales of $136.4 million in 2013 versus $131.8 million in 2012, gross profit of $11.4 million versus $14.0 million, and net loss of $17.1 million versus $40.2 million. Pro forma EBITDAS was $(7.0) million versus positive $17.1 million.
- At year-end, cash was $2.7 million, current assets $23.9 million, and current liabilities $29.3 million, a working-capital deficit of $5.4 million. Accounts receivable were $20.8 million.
- Debt included $22.0 million face value of related-party seller notes due July 2016, bearing 7% interest, and $2.75 million drawn on a $10 million asset-based line of credit. The seller notes were recorded net of a $4.7 million discount. The line bore 4.75% interest at year-end and was extended to June 13, 2014.
- Cash provided by investing activities was $5.2 million, primarily reflecting cash acquired with Quest and distributions from Quest. Financing activities provided $1.5 million.
Material changes and unusual items
- The Quest acquisition increased the share count: 22 million shares were issued to sellers, and common shares outstanding rose to 95.8 million from 58.0 million at year-end 2012.
- Acquisition accounting produced a $23.4 million gain on the previously held Quest interest and a $26.9 million goodwill impairment charge, a net $3.4 million expense. Goodwill was $58.3 million at year-end.
- 2013 selling, general and administrative expense included approximately $1.7 million of restructuring charges. Interest expense rose, partly because of the seller notes; reported financing costs were far lower than in 2012, which included substantial Stockbridge note financing costs and warrant valuation expense.
- The largest customer represented approximately 76% of 2013 revenue, down from 89% in 2012. The company stated it was seeking to diversify, but provided no assurance that reliance would decline.
Outlook, risks and controls
- Management planned to grow recycling services and customer diversity, expand materials and digital offerings, and pursue acquisitions. It expected continued significant losses while investing in expansion and did not assure near-term or eventual profitability.
- Management identified financing and liquidity needs: continued losses or inability to obtain additional capital could impair the company’s ability to meet obligations or continue operating. The company relied on customer payments, credit facilities, and equity financing.
- Key risks include dependence on one major customer; limited firm volume commitments and customer cancellation rights; third-party vendor service and capacity; volatile recyclable commodity prices; environmental liability and insurance exposure; regulation; competition; and potential dilution from equity or convertible financing.
- Management reported disclosure controls and internal control over financial reporting effective as of December 31, 2013, and stated a previously identified staffing-related material weakness had been remediated. The auditor did not attest to internal-control effectiveness. The financial statements received an unqualified audit opinion.
- No material legal proceedings were reported as of the filing date. No cash dividends were anticipated in the foreseeable future.
Most important facts for investors to verify
- Whether the company can fund operations and service the seller notes and line of credit, including the line’s extension and borrowing availability.
- Whether the major customer’s revenue share continues to decline and whether customer contracts provide durable volume and revenue.
- Quest’s underlying margins, cash generation and receivables collection; reported 2013 figures include Quest only after the acquisition, while pro forma results show a loss and declining gross profit.
- The assumptions supporting the $58.3 million goodwill balance after the impairment, and the carrying value and amortization of acquired intangible assets.
- The dilution and related-party implications of the Quest purchase, seller notes, options and potential note conversion; also verify post-year-end share counts and conversions.