Quest Resource Holding Corporation — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 14, 2019. Quest provides businesses with reuse, recycling, and waste-disposal services, primarily in the United States.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $23.93 million | $25.92 million | $76.02 million | $78.54 million |
| Gross profit | $4.77 million | $4.47 million | $14.06 million | $12.45 million |
| Gross margin | 19.9% | 17.2% | 18.5% | 15.8% |
| Operating income (loss) | $220,422 | $(574,754) | $418,820 | $(2.20) million |
| Net income (loss) | $46,999 | $(680,894) | $(89,651) | $(2.53) million |
| Adjusted EBITDA (non-GAAP) | $860,135 | $674,626 | $2.48 million | $1.57 million |
- For the nine months, operating cash flow was $1.17 million, investing cash flow was $(210,000), and financing cash flow was $(1.01) million, mainly reflecting net repayments on the revolving facility. Cash decreased $53,298 to $2.07 million.
- At September 30, cash was $2.07 million; working capital was reported as $4.0 million. The company reported $4.46 million outstanding under its asset-based revolving facility, with $9.63 million of borrowing-base availability. The balance sheet presents the facility net of debt issuance costs at $4.23 million.
- Total assets were $80.29 million and total liabilities were $19.05 million. The company reported no equipment-loan borrowings.
Changes versus prior periods
- Revenue declined 7.7% in Q3 and 3.2% year to date. Management attributed the decline primarily to exiting a low-margin customer service business in late 2018, partly offset by growth in generally higher-value services from continuing and new customers.
- Gross profit and gross margin increased in both comparison periods, which management attributed to a more favorable service mix and lower costs for certain contracted services.
- Q3 returned to modest profitability from a year-earlier loss; the nine-month net loss narrowed substantially. Lower amortization, including from intangible assets fully amortized by July 2018, contributed to reduced depreciation and amortization expense.
- Operating cash flow was lower than the prior-year period ($1.17 million versus $2.11 million), despite the smaller net loss; working-capital movements affected cash generation.
Outlook, risks, and notable items
- No specific revenue, earnings, or margin guidance is provided. Management stated that cash, available facility capacity, and expected operating cash generation should fund operations for the next 12 months; it also noted possible future need for debt or equity funding depending on operating levels.
- Results can vary with customer waste volumes, service frequency and mix, recycled-material commodity prices and index adjustments, and subcontracted-service costs. Three customers represented 49.4% of Q3 revenue and 54.6% of nine-month revenue, indicating material customer concentration.
- The facility includes minimum-liquidity and fixed-charge-coverage covenants. Its LIBOR-based pricing may be affected by the expected discontinuation of LIBOR after 2021; the company said the replacement rate’s effect is uncertain.
- The company recorded $164,311 of income tax expense for the nine months, principally state taxes, despite a small pretax profit. It maintained a $12.08 million valuation allowance against deferred tax assets; federal net operating loss carryforwards were approximately $17.9 million.
- Adoption of lease accounting guidance in January 2019 resulted in a $1.73 million operating right-of-use asset and $1.92 million operating lease liabilities at quarter-end. The company reported no goodwill impairment from its third-quarter annual review.
- In April, stockholders sold shares in registered and private transactions; the company received no proceeds and incurred approximately $248,000 of related net costs. The filing reports no known legal proceedings believed likely to have a material adverse effect and no off-balance-sheet debt arrangements.
Important facts for investors to verify
- Whether higher gross margins and growth in higher-value services can offset lower revenue following the exit from the low-margin customer business.
- Customer concentration, including the revenue contribution and retention outlook for the three largest customers.
- Cash conversion, working-capital requirements, borrowing-base availability, and continued compliance with credit-facility covenants.
- The composition and sustainability of Adjusted EBITDA improvements, including the non-GAAP adjustments and prior-year bad-debt-related adjustment.
- Potential effects of LIBOR replacement terms, state tax obligations, and realization of deferred tax assets.