Good day, and welcome to the Quest Resource Holding Corporation Third Quarter 2018 Earnings Call. Please note that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Mossberg, Investor Relations. Please go ahead, sir..

Thank you, John. And thank you, everyone for joining us on the call. Before we begin, I'd like to remind everyone that this conference call may contain predictions, estimates and other forward-looking statements regarding future events or future performance of Quest.

Use of words like anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify those forward-looking statements.

Forward-looking statements also include statements regarding Quest's future opportunities for growth; Quest's expectations for revenue, margins, and profitability in future periods; Quest's industry position and industry trends; Quest's prospects, outlook and business strategies going forward; and Quest's belief regarding progress and timing.

Such forward-looking statements are based on Quest's current expectations, estimates, projections, beliefs, and assumptions and involve significant risks and uncertainties.

Actual results -- or Quest's results could differ materially from those discussed in the forward-looking statements as a result of various factors, including changes in market trends, reduced demand and the competitive nature of Quest’s industries discussed in greater detail in Quest's filings with the Securities and Exchange Commission, including its report on Form 10-K for the year ended December 31, 2017.

You are cautioned not to place undue reliance on such statements and to consult our SEC filings for additional risks and uncertainties. You can find those documents on Quest's website at qrhc.com. Quest's forward-looking statements are presented as of the date made, and we disclaim any duty to update such statements unless required to do so by law.

In addition, in this call, we will include a substantial amount of industry and market data and other statistical information, as well as Quest's observations and views about industry conditions and developments.

The data and information are based on Quest's estimates, independent publications, government publications and reports by market research firms and other sources.

Although, Quest believes these sources are reliable and the data and other information are accurate, we caution that Quest does not independently verify the reliability of the sources or the accuracy of the information.

In addition, Quest's observations and view about industry conditions and developments are its own and may be supported or agreed with by other industry participants or observers. Certain non-GAAP financial measures will also be discussed during this call.

These non-GAAP measures are used by the management to make strategic decisions, forecast future results and evaluate the Company's current performance.

Management believes the presentation of these non-GAAP financial measures is useful for investors understanding and the assessment of the Company's ongoing core operations and prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed on this call will be on a non-GAAP basis.

Full reconciliations of non-GAAP and GAAP financial measures are included in today's earnings release. With all that said, I'll now turn the call over to Ray Hatch, President and Chief Executive Officer..

Thank you, Dave. And welcome to everyone on our call to discuss our third quarter financial results. Joining me today is Laurie Latham, our Senior Vice President and Chief Financial Officer. First off, the strategic plan that we implemented a couple of years ago is working and working well.

Importantly, customers increasingly view us as a turnkey strategic partner that can help them meet their sustainability goal and not just a vendor that picks up their waste. This change is showing up in our numbers. Third quarter was a record in terms of gross profit dollars and a third highest EBITDA in our history.

And as a result of those changes, we are set to have a most profitable year in the history of our Company. With the foundation for sustainable profitability firmly in place, we’re now focused on reigniting the growth engine of the Company.

We’ve invested in experienced sales talent, we’ve built a strong pipeline, and we’re gaining a better understanding of the sales cycle and have opportunities to move through that pipeline. Before I get into more detail on overview of our initiatives, I am going to turn the call over to Laurie to review the financials..

Thank you, Ray, and good afternoon to everyone on the call. Starting with the revenue comparison. Third quarter revenue was $25.9 million, which compares to $31.9 million during the third quarter last year.

The year-over-year decrease reflected our disciplined approach to customer acquisition and renewal, which included discontinuing certain services with some customers during 2017 that we discussed on previous calls. On a sequential basis, our revenue decreased 7% from the second quarter of 2018.

Anticipated improvement in sequential financial performance was affected by numerous factors. We had fluctuation in services revenue from the industrial market. Revenue levels in this market can vary from quarter-to-quarter depending on the timing of plant maintenance, changes in the mix and quantities of waste streams and other factors.

Sequential revenue comparisons were also affected by the major hurricanes experienced this fall, which impacted the operations of current customers and delayed the decision process of several new opportunities in our pipeline. Gross profit in the third quarter was $4.5 million, which was an all-time record for the Company.

This was quite an accomplishment considering that we delivered an 11% growth in gross profit dollars compared to third quarter of 2017, despite having a revenue base that was almost 20% lower. Our gross margin percentage for the third quarter was 17.2%, a 4.6 percentage-point improvement compared to last year.

This percentage represents the highest gross margin level in the Company’s history and is above the top end of our gross margin targeted range. The improvements in gross margin and gross margin are primarily related to our strategy to focus on customer business where we can demonstrate our value add.

In addition, we have worked with our customers to better align service levels with our customers’ needs, thereby increasing asset utilization and lowering costs.

I do want to remind everyone that we are managing our business to deliver a target gross margin in the low to mid teen but our gross margin will vary from period-to-period, depending on the sales mix of services, volumes and other factors. Going forward, we expect gross margin will remain within our target range.

At $5 million, our operating expenses during the second quarter were essentially flat year-over-year. However, operating expense included a onetime bad debt expense charge of $610,000 to reserve for accounts receivable related to a customer’s recent Chapter 11 bankruptcy filing.

Excluding this charge, operating expenses would have decreased 11% year-over-year. Depreciation and amortization expense decreased $596,000 year-over-year which was related to certain intangible assets that were fully amortized in June 2018. I want to comment on the bad debt expenses past quarter.

We have a customer base that is mostly larger Fortune 1000 type businesses, which usually have a great payment history. Therefore, it was not typical for us to take sizable charge to bad debt experience for a customer. As a percentage of revenue, our expense for bad debt has historically been very low, less than 1%.

Our net loss per share was $0.04 for the third quarter, which is an improvement from a net loss per share of $0.07 for the same quarter last year. For the third quarter, adjusted EBITDA was $675,000, a 32% improvement from third quarter last year. Adjusted EBITDA margin was 2.6% of sales.

These results reflect our significant strides to improve profitability, increase adjusted EBITDA, and move towards our adjusted EBITDA margin target of 4% to 6% of sales.

We have significant operating leverage within our business model, and we expect to continue to grow adjusted EBITDA and profitability at a faster than the top line in the coming quarters. Turning to our balance sheet and cash flow.

We generated $2.1 million in cash flow from operations during the first nine months and used most of the cash generated to pay down our line of credit. Our net line of credit was $4.9 million as of September 30, 2018, versus $6.8 million at the end of 2017.

We had approximately $1 million in cash at the end of the third, which was comparable to the end of the 2017 year. Under our $20 million credit facility, we had $12 million available as of September 30th. And at this time, we will have Ray discuss our initiatives and outlook..

Thank you, Laurie. Two years ago, we embarked on a plan to transform our business into a sustainable growth company that will produce attractive profitability and above average returns on capital. There were three key pieces of that puzzle necessary to complete the transformation.

The first piece was to make sure that we’re going after the right business with the right margin profile; the second piece was to make sure that we had a right culture and operations in place that would allow us to consistently improve our cost structure as well as our customer service levels; before we could step on the gas and grow revenue as a third piece to the puzzle, we had to make sure that we were targeting the right business and we had the right back office in place to execute.

As evidenced by the positive change in our revenue mix and our improved profitability, the first two pieces of the puzzle are now firmly in place. In recent quarters, we launched initiatives to reignite revenue growth and put the final piece of the puzzle in place. Today, I’ll focus my comments on these growth initiatives.

First, as we’ve discussed before, we’ve expanded our addressable market by adding several new end-market verticals, and particular we’ve had initial success in adding customers in the industrial market and construction and demolition markets.

The added complexity of multiple waste streams, high service levels required in the this market allow us to deliver tremendous value add to our customers through the cost savings, efficiencies and the actionable data that we can provide.

We expect the more value we provide, creates sustainable customer relationships and the ability to earn a higher margin. Second, we’ve expanded into existing market verticals. In our existing market for automotive waste, we recently had a win to service and manage oil and other waste streams for company that provide fleet service to third parties.

Every year we recycle millions of gallons of oil along with large quantities of oil filters and other automotive waste streams, primarily for automotive service providers. In addition, our market extends to companies with large fleet in multiple locations throughout the country.

We must perform maintenance services, either in-house or through fleet service companies. Our national footprint and experience with a wide scope of waste streams makes us a great solution and value added partner for these vehicle fleets and it’s a natural component of the market that we already serve.

Another example of expanding business markets is the targeting of food manufacturers. We’re leveraging our scale, scope, and our expertise of handling food waste programs for national retailers and restaurants. We have several natural food manufacturers in our pipeline and have recently received a win in this category.

We expect that success of this food waste program could lay the opportunities to handle the other waste streams for these customers as well. Another key initiative to reignite growth required an overall overhaul of our sales force.

We changed the culture of our sales team so that it is clearly aligned with our strategic direction, which means selling based on value, not just price. In addition, it means we’re selling more as a comprehensive consultant versus a single point solution. We also made changes to the structure of the sales force.

We’ve established a clear delineation between farmers and the hunters in our organization. This requires separation of these functions, so that we have a customer service team focused on expanding within our existing customer base, and a sales team that can focus on new customer acquisitions.

More recently, we’ve added additional horsepower to our sales team. Several talented sales executives with vertical market expertise have joined Quest. Those are not just sales reps making cold calls, they are seasoned professionals with 15 to 20 years of experience, and importantly with existing relationships in those specific verticals.

As a result of these initiatives, we've seen a significant increase in the size of our pipeline. Obviously pipeline represents the potential for future sales and does not necessarily directly correlate with future sales trends. Nevertheless, I can tell you the amount of proposal activity has more than doubled in the past year.

As we said in the press release, we’re now expecting $2 million to $2.5 million of adjusted EBITDA for 2018.

While the major hurricanes played a role in delaying customers decisions and are clearly part of our lower forecast, we’ve also learned the converting the sales pipeline would take a longer than anticipated, and especially in light of the restructuring and the sales team.

Also in new markets we’ve observed that some customers need additional time to evaluate the program that we’re proposing. We’re introducing new ideas and innovative ways for them to recycle, and it simply takes longer for the customer review.

The good news is that we’re making progress moving the existing opportunities through the pipeline while also continuing to increase in size. We’re disciplined but the ramp in revenue has been pushed out. And I think it’s important to put in perspective the significant improvement that we have accomplished.

Achieving the midpoint of updated adjusted EBITDA guidance will equate to an approximately 175% increase over last year and set a record for annual performance. I’m confident we have the right team and strategies in place to reignited the growth and expect to deliver meaningful top line growth next year.

We’re approaching GAAP breakeven on a quarterly basis. And with the operating leverage in our business model as we grow revenue, we should achieve GAAP profitability next year for the first time in the Company's history. I’m very proud of the work our team has done to position the Company to return to profitability and sustainable growth.

We now have a firm foundation in place with the ability to scale to a much larger company over time. We have a multibillion dollar addressable market. Our compelling customer value proposition and our asset light model means we have limited capital constraints as it relates to growth. And with that, we will open up the call for questions.

Operator?.

[Operator Instructions] Our first question comes from Gerry Sweeney of Roth Capital..

Hey. Good morning, Ray -- or good afternoon, Ray and Laurie. Thanks for taking my call. I wanted to talk a little bit about the revenue obviously down sequentially quarter-over-quarter, which was little bit of surprise.

You went through and you talked about the hurricane delaying or pushing out and reducing the gain in quarter as well as just a little bit longer onboarding at times.

But, have there been any business losses or customers changing the number of locations or reducing the number of locations for services they wanted to provide or anything like that?.

No, not significantly, Gerry, in any way. It’s exactly what you just referenced. I mean, quarter-over-quarter, it’s difficult from revenue forecasting obviously for us in this case. But, Gerry, we had a seasonal impact relative to the storms like we mentioned -- like you just mentioned.

You also have again calendar issues relative to some timing and continued rollouts with existing customers, and some also rollout and implementation on new clients and new client locations. So, it’s really a timing issues there. That’s where the takedown came from. It wasn’t driven by a significant change that would occur..

And then just on visibility. It seems like there’s less visibility than we would have anticipated in the past.

Can that improve as you build out that pipeline?.

Yes. I was going to say yes, it can definitely improve and we expect it to. We’ve gone through so much transition that every day our understanding, as we go through this, our visibility improves. But, it’s a continued work in progress, Gerry.

When you look at the controllables and the relative uncontrollables, and the uncontrollables have to do with timing on revenues and decisions on implementations and rollouts that while it may influence and we don’t control.

Those are the type of things that as we grow these clients and we become a more and more integrated part of their business and it's clear to us, I think we have better visibility. But there’s always going to be a significant element of uncontrollable relative to that on the new roll-up.

And to a point, to your question, I do believe it’ll improve and I think it’s improving now..

And on the controllables, certainly, yes..

And to Laurie’s point, on the controllable, to emphasize, I would say the execution is at a 100% on a strategic initiatives than rather controllables. And those are around things like gross margin strategies, client targeting, internal processes, procurement strategies all those elements, the controllables I think have been at 100%.

But, on the non-controllable, that’s where we’ve got to continue to improve..

And then, just on the sales front. So, obviously we’ve talked about this in the past, you’re bringing on higher quality sales people with deeper role with access that are able to sale in a much better value add fashion.

How -- at what point was the sales revamp complete? Because generally, I would say, it takes at least nine months if not longer for the sales people to sort of ramp up and start to add value. So, curious as to when maybe some of these guys started to come on and just so we get a rough sketch of what....

Yes. I think, it really initiated, Gerry, -- and first of all I don’t disagree at all with what you’re saying. I mean there’s time associated with that. It started maybe as early as couple of quarters ago, but it wasn’t a one-time deal, it was with one individual and then more and more.

And I would say now -- and we actually just made an addition last week….

Couple of weeks….

In the last couple of weeks, we’ve made yet another addition to the team. So, it’s an ongoing process. But, the initial parts of the group were in probably three to five months ago. That’s where it really initiated, and then it’s continued. So, you’re right, there’s some time lag there.

But, I mentioned the pipeline earlier in the scripted comments, and I really, really feel good about that. I mean, it’s not like we’re at zero. We definitely have a relatively mature pipeline with a considerable amount of increased proposal activity in it today.

And I feel really good about near and longer term execution, moving these things to the pipeline for sure..

And just final question, we previously talked about you think Quest could grow at 15%, I believe but perhaps I’m wrong But as we look at the 2019 with the pipeline you have, I mean what do you think the realistic gross percentage is for Quest?.

You know what, Gerry, I firmly believe we’re going to grow because we’ve done the right things. And we obviously have a significant addressable market with a lot of headroom. I’m hesitant to put percentages on it at this point. I think it’s --- I think that’s understandable.

But I think I would answer your question with an overall high confidence rate in our ability to grow. And I think we will see over the near term how that’s playing out. But we’re really growing, I’m just not ready to put a percentage around it at this point..

Our next question comes from Jamie Deyoung from Goudy Park..

Thanks for taking my question. I apologize, I missed the earlier part of your remarks. I just want to be clear. I think I saw a couple weeks ago you filed the shelf and just how much cash left on the balance sheet.

So I just want to get understanding for capital needs, what we should expect for the remainder of this year and first half of next year?.

Jamie, that’s -- we filed an S-3 as we have a prior S-3 that expired. We needed to make sure that it was -- a new one was put in place really in support of some warrants that we still have outstanding, just good practice to have that in place. And so, at this time, there is no particular utilization.

It was just to make sure we have such a thing in place. It’s best practice to have that available to a public company. Our cash at the moment -- I think I’ve explained in prior calls that our line of credit works with the sweep. We want to minimize our interest expense to the extent we can.

And so, we sort of paved our cash balance just around that $1 million base, that’s why it showed a $1 million this quarter. Our level of debt comparison to our borrowing base somewhere running around the third roughly of what we had availability $12 million. And we have a complete facility of $20 million in place and that was a prior year facility.

So, we feel like we have ample liquidity for our growth currently and through next year But that S-3 filing was just to clean up some -- least that we should have that S-3 out there and that’s simply what it is..

Yes. And to the balance sheet, Jamie, and I’m sure you know -- I know you’ve been following the Company for a number of quarters. I mean, the strength of the balance sheet continues. And a lot of this is cash position based on sweep, but this Company has generated positive cash flow and it is continuing to improve on that.

And it’s very encouraging to us that our business practice, because we’re able to do that. So, hopefully, that explains the filing, what our purpose is for the balance sheet..

That’s helpful.

And then, could you -- all in, including warrants options, what’s the fully diluted share count at this time?.

Sure. It’s about 18.8 million fully diluted, there is about 1.2 million in warrants that expire next year. And the exercise price is $20, there’s another about 0.5 million of warrants that expire in 2021..

And then, I just had one more question, please.

As the business continues to scale and now you’re showing revenue growth, and if we look out say the 2019, 2020 when you approach a $100 million in revenue, kind of what’s your thought on where you can get EBITDA margins to for the business as you’re able to start to show some leverage off that G&A?.

Well, the $100 million I think our run rate as of now, but as you look at 2019, basically your question, we’ve talked about I think in the past maybe, and it’s not changed, Jamie. As we look out on that timeframe, you’re talking about 4% to 6% EBITDA margin, we feel good about. And...

No, that’s out in the future, not….

That’s out in the future. That’s not….

We’ve already reached over 2% in our most [multiple speakers]. So, that’s our target 4% to 6%..

Yes. Based on the timeframe you talked about that’s where we’re at. And again, we now have a nice position EBITDA trend today. And I want to reiterate -- I don’t know if it’s necessarily tied to your question. But, I am really proud of the fact that we’re talking about how big our EBITDA growth is going to be at this point.

I mean, we’ve moved into that discussion as opposed when we’re going to have positive EBITDA. And this Company has achieved a significant turnaround internally to be able to generate the positive returns at the end of day.

And it adds excitement to me as we ignite the revenue growth again, how that’s going to create such a positive picture for the Company as we go forward. And I think that does feed in your question relative to EBITDA percent. So, I hope that answers it, Jamie..

Yes. Just to complete the thought, what’s important to me is not what you do this quarter, what you’re doing next quarter, it’s really the trajectory. And so, there’s a little bit of a slowdown here between Q3, Q4 and what the numbers are going to be for this year.

But, if you continue to ramp the revenue $100 million this year, $115 million say in ‘19; by 2020, I don’t know why you wouldn’t be doing an 8 million EBITDA, as I see this trajectory going out to 2020, 2021, you’re on that kind of 2.5, 4, 6, 8, 10 trajectory as long as you’re able to grow the revenue, 8% to 12% a year.

So, I think that is -- what would keep you from being able to achieve that because I am not in this for a quarter.

But I got to see that kind of two or three-year visibility to make this worthwhile that gets you to a 8 million to 10 million?.

Yes. I get your question. And so, the core of your question is what would keep us from doing it. And the only thing I could think of would be a lack of addressable market that would limit us, and we don’t have that at all. I don’t see any barriers -- let me make -- I’ll answer your question more simply.

I don’t see significant barriers of any type that would keep us from achieving -- continuing a level of achievement year-over-year.

We have a significant addressable market, we have growing tailwind -- significant tailwind relative to sustainability trends and corporate awareness, the society that’s driving suitability performance and businesses that we serve that are looking for answers on how to enhance their sustainability and our opposition in marketplace to execute against that.

So, as long as we have a significant, a sustainable -- excuse me, addressable market and we have the ability to execute internally which we’ve enhanced greatly and I feel very confident about, I don’t see barriers to our growth, near or mid-term..

Our business model also doesn’t require the larger CapEx requirements that some businesses had as a governor on their growth too. I think you’re aware of that Jamie that our business model -- that’s an advantage for us in our growth..

So, you and I, Jamie, share same vision longer term, not quarter-to-quarter difference. But the trends, and I think the trajectory is the word you use. And I totally agree with you, and I feel great about our trajectory because I don’t see any significant limiters, to Laurie’s point just now for being able to achieve that levels you’re talking about..

And then, there is no reason to raise equity capital, so we shouldn’t see any dilution along the way either, correct?.

As Laurie pointed out a moment ago, while we filed shelf and what our current cash situation is and what our plans are, I mean I can only speak to that. No, I don’t have current plans to that. But, that’s kind of where we’re. You got to have a shelf in place, we do. It’s not a part of strategic plan to dilute or do that.

Our plan is to continue with this business model to generate more and more cash and create more and more value for our clients and our shareholders at that point..

That does conclude our Q&A session today. At this time, I would like to return the call back to management..

Thank you, operator. And I would like to close this call with -- kind of reiterate some of the things that we’ve already mentioned to the questions. Thanks for everybody for attending the call, thanks for the questions and thanks for the continued support of Quest.

We are very optimistic about what we've done as a company and how we’ve restructured our ability is to generate margins at a significant level, our ability to be efficient internally and the scalability we’ve created.

In my mind, I’m very, very optimistic about what our -- as we add the revenue growth that we know it’s going to come to the mix that rest of these are going to give us a really nice yield and a continued good call.

Just to reiterate, record gross profit quarter, our third highest EBITDA in our history, and we’re trending toward obviously the highest profitability in the history of the Company.

And with the new changes we’ve made in the revenue generation segment of our Company, you add that to what we’ve already accomplished as a company, I think the results are going to be tremendous going forward. And that’s how we feel. So, I want to reiterate my thanks to all the shareholders and all of you participating on the call.

And we look forward to future communications..

Ladies and gentlemen, that does conclude our conference today. On behalf of Quest Resource, we do appreciate your participation. Have a great day. You may disconnect at this time..