Quest Resource Holding Corp. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Quest provides reuse, recycling, and disposal services to businesses, primarily in the United States.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $27.9 million | $41.4 million | $52.6 million | $83.9 million |
| Gross profit | $4.4 million | $4.4 million | $8.0 million | $8.6 million |
| Gross margin | 15.9% | 10.8% | 15.2% | 10.3% |
| Operating loss | $0.4 million | $1.1 million | $1.6 million | $2.9 million |
| Net loss | $0.5 million | $1.3 million | $1.9 million | $3.2 million |
| Adjusted EBITDA (non-GAAP) | $0.8 million | $0.5 million | $0.9 million | $0.6 million |
- Q2 basic and diluted loss per share was $0.04, versus $0.08; H1 was $0.12, versus $0.21.
- H1 operating cash flow was $2.1 million, compared with cash used of $0.9 million in H1 2017. Investing used $0.1 million and financing used $1.9 million, primarily from net credit-facility repayments. Cash ended at $1.1 million.
- At June 30, cash was $1.1 million, working capital was $3.1 million, and total liabilities were $22.5 million. The revolving facility liability was $4.9 million net of unamortized issuance costs; borrowing-base availability was $12.1 million. The facility provides up to $20 million and matures in February 2022.
Material changes and notable items
- Revenue declined 32.5% in Q2 and 37.3% in H1 year over year. Management attributed the decrease mainly to changes in service mix and reduced services for certain customers following its 2017 strategic transition; increased activity from continuing and new customers partly offset the decline.
- Gross profit was broadly stable in Q2 despite lower revenue, while gross margin improved. Management cited lower subcontracted-service costs and exiting lower-margin customer services. H1 gross profit declined $0.7 million.
- Operating expenses fell $0.7 million in Q2 and $2.0 million in H1, with lower stock compensation and labor costs contributing. H1 SG&A also benefited from lower severance costs.
- In February 2018, the company sold certain Earth911 website-business assets for a 19% interest in Earth Media Partners, recorded at $246,585, and a potential earn-out of approximately $350,000. It recorded a $22,155 earn-out receivable at June 30.
- Three customers represented 53.0% of Q2 revenue and 50.8% of H1 revenue, indicating significant customer concentration.
Outlook, risks, and other disclosures
- No specific earnings or revenue guidance was provided. Management said cash, available ABL borrowing capacity, and expected operating cash generation should fund operations for the next 12 months; it also noted possible future need for debt or equity financing depending on operating levels.
- Results may vary with customer volumes, service frequency, commodity prices and adjustments, contract terms, subcontractor costs, and service mix. The company also noted seasonal variation and that interim results may not indicate full-year results.
- The ABL facility includes minimum liquidity and fixed-charge-coverage covenants and restrictions on additional debt, asset sales, investments, and other activities. Management reported no significant financial-instrument market risk. No material-adverse-effect legal proceedings were known as of the filing; risk factors were listed as not applicable.
- Management expected adoption of the new lease standard to result in a material right-of-use asset and lease liability, citing future operating-lease commitments. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether the improved gross margin and lower operating costs can be sustained as revenue remains substantially below prior-year levels.
- Customer retention, service volumes, and concentration, including the contribution of new and continuing customers.
- Receivables and working-capital trends: accounts receivable was $17.9 million and accounts payable and accrued liabilities were $17.5 million at June 30.
- ABL borrowing availability, covenant compliance, and cash-generation assumptions underlying management’s 12-month liquidity assessment.
- Terms, collectability, and valuation of the Earth Media Partners investment and potential earn-out; also assess potential dilution from outstanding options and warrants.