Quest Resource Holding Corporation — Q3 2018 Form 10-Q
Business and period: National provider of reuse, recycling, and disposal services. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $25.9 million | $31.9 million | $78.5 million | $115.8 million |
| Gross profit | $4.5 million | $4.0 million | $12.4 million | $12.7 million |
| Gross margin | 17.2% | 12.6% | 15.8% | 10.9% |
| Operating loss | $(0.6) million | $(1.0) million | $(2.2) million | $(3.9) million |
| Net loss | $(0.7) million | $(1.1) million | $(2.5) million | $(4.2) million |
| Loss per share, basic and diluted | $(0.04) | $(0.07) | $(0.17) | $(0.28) |
| Adjusted EBITDA, non-GAAP | $0.7 million | $0.5 million | $1.6 million | $1.1 million |
Cash flow and liquidity: Nine-month operating cash flow was $2.1 million, versus cash used of $1.6 million in 2017. Investing activities used $0.2 million; financing activities used $1.9 million, primarily from net repayments of the revolving facility. Cash was $1.05 million at September 30, 2018. Working capital was $3.0 million, down from $4.2 million at year-end 2017.
Debt: The revolving ABL facility had a $4.9 million net carrying liability and $12.0 million borrowing-base availability at September 30, 2018. The facility provides up to $20 million and matures in February 2022; it includes minimum liquidity and fixed-charge-coverage covenants. No equipment-facility borrowing was outstanding. Capital lease obligations were $5,663.
Changes and notable items
- Revenue fell 18.8% in Q3 and 32.2% for the nine months. Management attributed the decline mainly to exiting less-profitable services for certain customers as part of its strategy to improve operating and financial performance; increased work from continuing and new customers partly offset the decline.
- Despite lower revenue, gross margin improved substantially, reflecting service mix changes, lower subcontracted-service costs, and the exit from lower-margin work. Nine-month gross profit was slightly lower year over year.
- Q3 SG&A increased by approximately $0.7 million, including a $0.6 million bad-debt charge related to management’s assessment of receivables from a customer that filed for bankruptcy. The charge was also included in the company’s Adjusted EBITDA add-backs.
- Nine-month operating expenses declined by $1.9 million, including lower stock compensation, labor, travel, severance, and amortization. Intangible amortization declined as certain assets became fully amortized by July 2018.
- On February 20, 2018, the company transferred certain Earth911 website assets for a 19% interest in Earth Media Partners, LLC, recorded at $246,585, plus a potential earn-out of approximately $350,000. A $39,521 earn-out receivable was accrued at September 30. The third-quarter goodwill and intangible-asset impairment analysis recorded no impairment.
Outlook, risks, and other disclosures
- Management stated it expects cash, ABL borrowing capacity, and cash generated from operations to fund operations for the next 12 months; it also cited potential access to capital markets. This is an expectation, not specific earnings guidance.
- Results may vary with customer volumes and mix, service frequency and pricing, recycled-commodity prices and adjustments, subcontractor costs, and customer-contract terms. Three customers represented 48.6% of Q3 revenue and 50.1% of nine-month revenue.
- The company identified the bankruptcy-related receivable assessment as a material credit concern. It reported no significant financial-instrument market risk and no off-balance-sheet debt or similar obligations.
- Management expects adoption of the lease accounting standard in 2019 to add a right-of-use asset and lease liability, principally for its real-estate operating lease; it did not expect a material effect on results or cash flows. Other discussed pending accounting standards were not expected to have material effects.
- Disclosure controls were judged effective at the reasonable-assurance level. The company reported no known legal proceeding it believed could have a material adverse effect and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Collection prospects and recoverability of receivables tied to the bankrupt customer, including the $0.6 million bad-debt assessment.
- Whether improved gross margins can be sustained while revenue remains below prior-year levels, and the contribution from new and continuing customers.
- Customer concentration, working-capital requirements, cash generation, borrowing-base availability, and compliance with ABL covenants.
- Realization and timing of the potential Earth Media Partners earn-out and the value of the company’s 19% investment.
- Adjusted EBITDA is a non-GAAP measure; review the filing’s reconciliation and the adjustments included.