Quest Resource Holding Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. Quest provides businesses with waste reuse, recycling, and disposal management services, as well as recycling-related online platforms. The business-services operation generated substantially all revenue.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $45.77 million | $40.01 million | Up 14.4% |
| Gross profit | $3.49 million | $3.29 million | Up about $0.20 million |
| Gross margin | 7.6% | 8.2% | Down 0.6 percentage points |
| Operating expenses | $5.67 million | $4.76 million | Up about $0.92 million |
| Operating loss | $(2.19) million | $(1.47) million | Loss widened |
| Net loss | $(2.24) million | $(1.52) million | Loss widened |
| Basic and diluted loss per share | $(0.02) | $(0.01) | — |
| EBITDAS, non-GAAP | $(0.62) million | $(0.21) million | Loss widened |
| Cash from operating activities | $(1.12) million | $0.48 million | Turned negative |
Revenue growth was attributed primarily to new and expanded customer services; reported service locations increased to approximately 95,000 from 80,000. Cost of revenue rose with the additional service volume. Management attributed lower gross margin to service mix and higher costs for certain contracted services. SG&A increased about $0.88 million, including higher stock compensation and costs to integrate and serve more customer locations. Interest expense also increased modestly.
Financial position and liquidity
- At March 31, 2016, cash and cash equivalents were $3.91 million, versus $2.99 million at December 31, 2015. Working capital was $3.44 million, versus $2.06 million.
- Accounts receivable were $35.12 million, net of a $0.71 million doubtful-account allowance. Goodwill was $58.34 million and net intangible assets were $11.07 million.
- Total liabilities were $40.38 million. The revolving credit line had $3.50 million outstanding, with $9.12 million available; it matures May 2018 and carried a 2.69% rate at quarter-end. The company reported compliance with financial covenants. Capital lease obligations totaled $0.39 million.
- Investing activities used $0.32 million, primarily for property and equipment and capitalized software. Financing activities provided $2.36 million, including net proceeds from an equity-and-warrant offering, partly offset by net line-of-credit repayments.
Material changes, outlook, and risks
- On March 30, 2016, the company issued 6.89 million common shares and warrants for net proceeds of approximately $2.89 million. The transaction included warrants to purchase 3.45 million shares and underwriter warrants for 0.72 million shares. Outstanding common shares were 118.68 million at March 31, up from 111.79 million at year-end; additional dilution is possible from warrants and options.
- Management stated that cash, available credit, securities placements, and expected operating cash flows should fund operations for the next 12 months. It also cautioned that additional debt or equity financing may be needed until sustained positive operating cash flow is achieved. The filing provides no specific revenue or earnings guidance.
- Two customers accounted for 55.3% of Q1 revenue, compared with 61.5% in Q1 2015. Customer concentration and collection of receivables are material areas to monitor.
- The company noted that results can vary with commodity prices, service mix, contract terms, and customer volumes, and that interim results may be seasonal. It warned that continued weakness or failure to recover in its stock price could trigger a future goodwill and intangible-asset impairment assessment; no impairment was recorded in the quarter.
- Federal net operating loss carryforwards were approximately $15 million, but a full valuation allowance was maintained against deferred tax assets. The filing reported no known legal proceedings expected to have a material adverse effect; Part II risk factors were marked “Not Applicable.”
Important facts for investors to verify
- Whether customer growth translates into improved gross margins and sustainable positive operating cash flow.
- Customer concentration, accounts-receivable aging, and the adequacy of the doubtful-account allowance.
- Available borrowing capacity and covenant compliance as working-capital needs evolve.
- The potential dilution from outstanding warrants and options, and the use of proceeds from the March offering.
- Whether stock-price performance or operating results lead to a goodwill or intangible-asset impairment test or charge.