Quest Resource Holding Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results. Quest provides recycling and waste-management services; Earth911 operates environmental information and recycling platforms. Quest became wholly owned in July 2013, making year-over-year comparisons materially affected by the change in consolidation.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $47.0 million | $28.9 million | $127.7 million | $29.6 million |
| Gross profit | $3.9 million | $2.7 million | $10.7 million | $3.2 million |
| Gross margin | 8.2% | 9.2% | 8.4% | 10.9% |
| Operating loss | $(0.6) million | $(6.6) million | $(2.1) million | $(10.7) million |
| Net loss | $(4.7) million | $(9.3) million | $(8.1) million | $(14.9) million |
| Loss per share, basic and diluted | $(0.05) | $(0.10) | $(0.08) | $(0.21) |
| EBITDAS, non-GAAP | $0.9 million | $(5.1) million | $1.8 million | $(7.1) million |
- Reported revenue rose substantially as Quest’s revenue was consolidated: Quest contributed $46.8 million in Q3 and $127.1 million for the nine-month period. For context, the filing gives 2013 pro forma revenue, assuming full-period consolidation, of $34.9 million for Q3 and $98.5 million for nine months.
- Management attributed the Q3 sequential revenue increase of $4.5 million, or 10.5%, primarily to new customers. Gross margins declined year over year, which management linked mainly to the 2014 sales mix, including a larger share of recycling, waste services and commodity sales.
- Nine-month operating cash use was $5.1 million, versus $3.1 million in 2013. Investing cash use was $1.0 million; financing provided $10.1 million. Cash increased to $6.7 million from $2.7 million at year-end 2013.
Liquidity, debt and capital
- At September 30, current assets were $35.3 million and current liabilities $33.4 million, a $1.9 million working-capital surplus. Accounts receivable were $28.0 million.
- The Regions revolving credit facility had $5.25 million outstanding and $4.75 million available under its $10 million facility. The stated rate was 2.65%; maturity was extended to May 31, 2015. The company reported compliance with financial covenants.
- The $22 million Sellers Notes were retired in September: $11 million was repaid in cash and $11 million, plus accrued interest, converted into 5.55 million shares. A $1.66 million loss on extinguishment and a separate $1.66 million interest expense related to the transaction were recorded. Long-term debt at period-end was limited to $52,824 of capital lease obligations.
- 2014 equity issuances generated $18.6 million net proceeds. Shares outstanding were 111.6 million at September 30; warrants and options create additional potential dilution.
Outlook, risks and other items
- Management said cash, available credit and expected operating cash generation should fund operations for the next 12 months. No quantified revenue or earnings guidance was provided. The company also stated that operations may require additional cash until it generates positive operating cash flow.
- Key business risks cited include customer and service mix, commodity prices, service volumes and costs, working-capital needs, growth and integration demands, and the ability to execute its strategy. One customer generated 58% of Q3 revenue and 60% of nine-month revenue.
- Goodwill was $58.3 million; the third-quarter 2014 impairment test recorded no impairment. The company had reported a $26.9 million goodwill impairment in 2013. Deferred tax assets remained subject to a valuation allowance; no income tax expense was recorded in the periods shown.
- Management reported effective disclosure controls as of September 30, 2014. The company reported no known legal proceedings expected to have a material adverse effect and no material off-balance-sheet debt.
- After quarter-end, underwriters exercised an option for 700,000 warrants, exercisable at $2.50 per share for five years. Any proceeds depend on warrant exercise.
Investor verification priorities
- Assess the comparability of reported growth against the 2013 pro forma results, given Quest’s July 2013 consolidation.
- Review the sustainability of gross margins and operating cash flow, including the effects of receivables growth and customer concentration.
- Confirm credit-facility availability, covenant compliance and refinancing or repayment plans ahead of its May 2015 maturity.
- Evaluate the dilution implications of issued shares, outstanding warrants, options and the Sellers Notes conversion.
- Examine assumptions supporting goodwill and intangible-asset valuations and management’s 12-month liquidity assessment.