Business context and reporting period
Quarterly report for the three and six months ended June 30, 2013. The filing is by Infinity Resources Holdings Corp.; the request names Quest Resource Holding Corp., so confirm the intended issuer. Infinity provides recycling, waste-management and environmental information services through Earth911 and Youchange, and held a 50% equity-method interest in Quest Resource Management Group, LLC at quarter-end. Following the October 2012 reverse merger, Earth911 is the accounting acquirer; Youchange results are included only after the merger, limiting comparability with 2012.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $402,014 | $236,585 | $715,502 | $454,357 |
| Gross profit | $293,386 | $236,585 | $567,181 | $454,357 |
| Operating loss | $(2,120,158) | $(1,380,895) | $(4,120,145) | $(2,807,462) |
| Net loss | $(2,309,223) | $(724,893) | $(5,606,828) | $(3,386,253) |
| Basic and diluted loss per share | $(0.04) | $(0.02) | $(0.09) | $(0.07) |
Q2 gross margin was about 73%; six-month gross margin was about 79%. The 2012 comparison shows no cost of revenue, so gross-margin comparisons are not directly meaningful. Quest equity income was $103,155 in Q2 and $578,951 for the half-year, down from $521,771 and $1,126,329, respectively. Quest itself reported six-month sales of $62.9 million and net income of $1.16 million.
- Cash flow: Six-month operating cash use was $2.05 million, investing cash provided $793,507 (primarily Quest distributions), and financing cash provided $961,429. Cash fell by $293,228 to $192,500.
- Liquidity: Current assets were $391,791 and current liabilities $1,693,856, a $1.30 million working-capital deficit. The company reported substantial doubt about its ability to continue as a going concern.
- Debt: At June 30, the related-party senior secured convertible note had $3 million principal outstanding, presented net of a $1.89 million discount at $1.11 million. Current convertible notes were $25,000; current capital-lease obligations were $33,557. Interest expense for the half-year was $600,634.
- Other items: Six-month SG&A was $4.66 million, including $1.57 million of stock-based compensation. Reported EBITDAS, a company-defined non-GAAP measure, was $1.94 million for the half-year versus negative $787,216 in 2012; it included adjustments for stock compensation and other expense.
Material changes, outlook and risks
- Revenue rose 69.9% in Q2 and 57.5% for the first half, attributed to Youchange recycled-electronics sales and increased Earth911 advertising. The added Youchange operations and merger-related professional fees also contributed to higher expenses; management cited increased payroll, consulting, hosting and platform costs.
- Net loss widened by $1.58 million in Q2 and $2.22 million for the half-year. Quest equity income declined materially, which management attributed in part to contract and billing adjustments, recyclable commodity-price fluctuations, and higher investments in sales, IT and client services.
- In March, a cashless exercise of related-party warrants issued 7.23 million shares and eliminated the warrant liability. On July 17, after quarter-end, the $3 million Stockbridge note and $34,500 accrued interest converted into 8,382,597 shares; related contingent warrants were cancelled.
- Also after quarter-end, the company acquired the remaining 50% of Quest, making it wholly owned through Earth911. Consideration included 22 million common shares and two secured convertible notes of $11 million each. The notes are secured by Quest interests and require specified interest-reserve and liquidity arrangements, including maintaining a $1.5 million reserve under a line of credit.
- Management plans to pursue sales growth, cost discipline, Quest distributions and additional financing to fund operations and growth initiatives. It cautioned that financing may not be available on acceptable terms; equity financing could dilute shareholders, and failure to obtain capital could require asset sales or curtailment of activities. No numerical revenue or earnings guidance is provided.
- Management said disclosure controls were effective at a reasonable-assurance level and that a prior material weakness was remediated after hiring a new CFO. The company reported no material legal proceedings known to it and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity and the intended relationship between Quest Resource Holding Corp. and the filing registrant, Infinity Resources Holdings Corp.
- Review the post-quarter Quest acquisition terms, note covenants, collateral, interest funding requirements and the company’s ability to meet them.
- Assess the going-concern warning against cash of $192,500, negative working capital of $1.30 million and continuing operating cash burn.
- Verify post-transaction share count and dilution: 95,807,463 common shares were reported outstanding as of August 1, 2013, after significant conversions and issuance consideration.
- Evaluate the underlying performance of Quest and the sustainability of distributions, given its lower 2013 sales, margins and net income versus the comparable period.