Quest Resource Holding Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Quest provides businesses with reuse, recycling, and waste-disposal services. The financial statements are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $25.45 million | $27.93 million | $52.09 million | $52.62 million |
| Gross profit / margin | $4.75 million / 18.7% | $4.43 million / 15.9% | $9.29 million / 17.8% | $7.98 million / 15.2% |
| Operating income (loss) | $196,000 | $(433,000) | $198,000 | $(1.62) million |
| Net income (loss) | $27,000 | $(539,000) | $(137,000) | $(1.85) million |
| Adjusted EBITDA (non-GAAP) | $825,000 | $780,000 | $1.62 million | $894,000 |
Q2 basic and diluted earnings per share were $0.00; six-month loss per share was $0.01. Q2 SG&A increased by about $348,000 year over year, while operating expenses overall fell by about $307,000, principally reflecting lower amortization of intangible assets that were fully amortized by July 2018.
Liquidity, cash flow, and debt
- At June 30, cash was $2.09 million, working capital was approximately $4.1 million, and current assets were $19.35 million versus current liabilities of $15.27 million.
- Six-month operating cash flow was $454,000, compared with $2.07 million in 2018. Investing cash outflow was $136,000; financing cash outflow was $352,000, primarily reflecting net repayments on the revolving facility. Cash declined by $35,000 over the six months.
- The ABL revolving facility had a $20 million limit, $11.63 million of borrowing-base availability, and $4.86 million outstanding net of unamortized issuance costs at June 30. It matures February 24, 2022, and includes minimum liquidity and fixed-charge coverage covenants.
- Total liabilities were $21.59 million. Adoption of lease accounting in January 2019 resulted in recognition of a $1.87 million operating right-of-use asset and $2.06 million in operating lease liabilities, principally for the corporate office.
Changes, outlook, and risks
- Revenue declined 8.9% in Q2 and 1.0% for the first half. Management attributed the decreases mainly to a production slowdown at a major industrial customer and the exit from a low-margin service, partly offset by increased work from existing and new customers.
- Gross profit and margins improved in both periods, which management attributed to customer/service mix and lower costs for certain contracted services. Results also depend on customer volumes, service mix, recycled-commodity pricing, and subcontractor costs.
- Management said existing cash, available ABL borrowing capacity, and expected operating cash generation should fund operations for the next 12 months. No numerical earnings or revenue guidance was provided. Management noted that future operations could require debt or equity financing; potential equity placements could dilute shareholders.
- Customer concentration is significant: three customers generated 54.1% of Q2 revenue and 57.0% of first-half revenue. Interim results may be seasonal and are not necessarily indicative of full-year results.
- Income-tax expense was $109,540 for the first half despite a pretax loss, mainly due to state tax obligations and a federal valuation allowance. The company reported approximately $18.3 million of federal net operating loss carryforwards and a $12.15 million valuation allowance against deferred tax assets.
- In April, stockholders sold approximately 4.3 million shares in a registered offering and one stockholder sold 1.75 million shares in a separate private transaction. The company received no proceeds and recorded about $248,000 of related costs for the first half. Outstanding warrants and stock options also represent potential dilution.
- The company reported no known legal proceedings believed likely to have a material adverse effect, no off-balance-sheet debt, and effective disclosure controls at June 30, 2019. It identified no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the major customer’s production slowdown persists and how customer concentration affects future revenue.
- Whether operating cash generation improves and the company maintains compliance with ABL liquidity and fixed-charge covenants.
- How gross-margin gains, SG&A growth, and the remaining amortization burden develop in subsequent periods.
- The terms and potential dilution from outstanding options and warrants, and any future financing needs.
- The assumptions supporting management’s 12-month liquidity assessment and the recoverability of receivables and deferred tax assets.