Good day and welcome to the Quest Resource Holding Corporation first quarter 2019 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Mossberg, Investor Relations. Please go ahead, sir..

Thank you Luke and thank you everyone for joining us on the call today. Before we begin, I would 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 events or Quest's results could differ materially from those discussed in the forward-looking statements as a result of various factors, including change in market trends, reduced demand and the competitive nature of Quest's industries discussed in greater detail on Quest's filings with the Securities and Exchange Commission, including its report on Form 10-K for the year ended December 31, 2018.

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 these 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.

In addition, in this call, we may include 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 those 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 not be supported or agreed with by other industry participants or observers. Certain non-GAAP financial measures will be discussed during this call.

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

Management believes that the presentation of these non-GAAP financial measures is useful for investors' understanding and assessment of the company's ongoing core operations and prospects for future results. 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 to GAAP financial results are included in today's earnings release. With all that said, I will 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 first quarter financial results. Joining me today is Laurie Latham, our Senior Vice President and Chief Financial Officer. The company is now steadily seeing the benefits of the difficult restructuring undertaken over the last two-plus years.

The organization is energized and committed to be the premier solution provider in the waste industry. I am grateful for their loyalty and passion. The client services team is fully engaged with our customers, demonstrating ways to increase efficiency, lower cost and support sustainability goals.

The sales force continues to improve the quality of the pipeline and find ways to provide value in our segment of focus. We are seeing steady results from these efforts. Our customers continue to our greatest asset. We are very appreciative of their continued trust which has translated into expand relationship with them.

As a result of this effort, we are able to announce another good quarter. Gross margin dollars grew by 28% and gross margin grew to 17%. Revenue grew by 7.9%. And both gross profit dollars of $4.5 million and adjusted EBITDA of $796,000 were record levels for the quarter.

We also saw major transformation of the stockholder base and in our Board of Directors. About 40% of our stock ownership changed hands through the combination of an underwritten offering and a private transaction. Our stockholder base diversified.

Hampstead Park Capital Management made a significant commitment to the company becoming our largest stockholder and is sitting two seats on the Board. One is Chairman which reflects two incoming Board members. Before I get into more detail, I am going to turn the call over to Laurie to review the financials.

Laurie?.

Thank you Ray and good afternoon to everyone on the call. First quarter revenue was $26.6 million, a 7.9% increase compared with $24.7 million in the first quarter last year. Gross profit was a record for the first quarter increasing 28% to $4.5 million, compared with $3.5 million last year.

The improvement in gross profit was the combination of increased services from both our continuing and new customer base, changes in our mix of services and lower cost of certain contracted services. Gross margin for the first quarter was 17%, a 2.6 percentage point improvement compared with the first quarter last year.

Gross margin have been above our targeted range for the last several quarters. However I wanted to remind everyone that gross margin could vary significantly from quarter-to-quarter depending on our revenue mix and other factors.

Going forward, we expect to continue to grow gross profit dollars and intend to continue to manage the business to generate gross margin within our targeted range of low to mid teens. First quarter operating expenses decreased 4.1% to $4.5 million, compared to $4.7 million during the same period last year.

The decrease in operating expenses was primarily related to lower amortization expense as certain of our intangible assets were fully amortized as of July 2018. The lower amortization expense was partially offset by an increase in SG&A. SG&A expenses increased by $462,000 to $4.2 million.

Approximately $240,00 or half of this increase was for professional fees and expenses related to selling stockholder transaction that closed in April 2019. And the remaining increase was related to labor and other SG&A expenses.

The net loss per basic and diluted share was $0.01 for the first quarter of 2019, compared with the loss per basic and diluted share of $0.09 for the first quarter of 2018. Our adjusted EBITDA was a record for the first quarter increasing to $796,000 which was a significant improvement compared to $114,000 during the same period last year.

Adjusted EBITDA margin was 3% of sales and reflect our progress towards our future adjusted EBITDA margin target of 4% to 6% of sales. We have operating leverage in our business model which should allow growth in adjusted EBITDA and profitability at a faster pace than the topline as we move forward.

We computed adjusted EBITDA which is a non-GAAP financial measure, to provide additional insight to our financial performance and I would refer you to the table in today's press release for a reconciliation to GAAP. Turning to the balance sheet.

Our cash balance was $2.1 million at the end of the first quarter which is an increase of approximately $1 million relative to the end of the first quarter last year and was relatively unchanged compared to the beginning of the year. We had $5.2 million drawn on our $20 million credit facility, which was unchanged from the beginning of the year.

A noteworthy change on our balance sheet this period is a $2 million right of use operating lease asset in property and equipment and the corresponding operating lease liability of $2.2 million which was due to the recent changes in lease accounting rule under roles ASU 2016-02, Leases (Topic 842).

The changes had no material impact on our statement of operation or cash flow. Before I hand the call back to Ray, I will review the details of the stock sale by three of our largest stockholders that we announced in early April.

To clarify, Quest did not issue shares of stock and did not receive any proceeds from the sales of the selling stockholder stock. As is customary in the sale of company's stock by a large stockholders, Quest agreed to pay for a portion of the cost and expenses in connection with the transaction. And such cost were approximately $245,000.

Of the $245,000, approximately $230,000 is included SG&A expenses for the three months ended March 31, 2019 with the remaining $15,000 to be reported in April 2019. Three existing stockholders, including our former Chairman, sold approximately 4.3 million shares of common stock of Quest at a registered public operating that closed on April 11, 2019.

The offering was only subscribed in the stockholders place with batch of investors, the majority of which were new. In a separate transactional on the same day, an affiliate of Hampstead Park Capital Management acquired 1.75 million shares of common stock at $2 per share from our former Chairman and previously the largest beneficial stockholder.

The transaction price represented a significant premium relative to the market proceeding the transaction. So at this time, I will turn the call back to Ray and he will discuss our initiatives and outlook..

Thank you Laurie. Before I review our strategies and outlook, I want to put in perspective the equity transaction that we just completed. With about 40% of shareholder base changing hands, shares that were once owned by three investors are now owned more than a dozen investors.

We believe this has a long term implication for our liquidity and our valuation. I want to thank our former Board members, both of which remain substantial shareholders, for their contribution to the company. I also want to welcome our new Board members, Stephen Nolan and new Chairman Daniel Friedberg.

Dan is the founder and managing partner at Hampstead Park Capital Management, which is now our largest beneficial shareholder. I want to thank Dan and Hampstead Park for their substantial investment and belief in the company. Dan and his team undertook extensive due diligence and purchased stock at a premium to the market.

What I have learned during the short period of time during that Dan and Stephen have been involved is that they share a common vision with our executive management team for the future of Quest and the significant opportunities to grow and have stockholder value.

I have also learned and appreciate that they are committed to Quest and as Board members will provide significant contribution to help guide the company's strategy, corporate governance and pass along long-term increase shareholder value. I also want to welcome our new stockholders. We are excited about the future of Quest.

There is a lot of growth opportunities that sits on front of us. There are significant and disruptive choices in how companies think about are underway. Large environmentally and socially responsible companies are increasingly looking for economical ways to recycle, instead of sending waste to the landfills.

Quest is well-positioned to benefit and take a leadership role in affecting this secular growth. First, Quest has tremendous efficiencies of scale and scope. We believe we are unique in the market due to our national footprint and broad services offering that includes virtually all waste streams. This provides significant competitive differentiation.

Second, we have a strong brand with a reputation of solving customer problems, by utilizing us customers can focus on their core business. And finally, we have an asset-lite business model that gives us the ability to scale rapidly with less need for growth capital.

Since we are not tied to specific assets such as landfills, our asset-lite model give us greater flexibility in terms of finding the best solutions to meet the sustainability goals for customers. We are also at a turning point in the history of our company.

Over the past several years, the whole organization has worked together to manage through a difficult restructuring whereby we recalled on our profitable business, improved operations, changed our sales and marketing strategies.

We have fundamentally changed how we compensate our employees aligning ourselves with a value add we provide to our customers and in doing so, transforming the culture of our organization.

As a result, we believe we have further enhanced our relationships with our customers being instructed to develop solutions with them across services and waste streams.

Through these actions and because of the trust that customers place with us, we have seen a sustained improvement in our gross profit dollar contribution which we believe is evidence of the success and execution of our plan. We are also seeing the result from the changes we made in our sales engine and beginning to see growth on the topline.

There is a lot of work to be done but we remain pleased with our progress, are confident in our plan and we expect to see continued improvement our financial performance during 2019 and thereafter. I want to spend the balance of my prepared remarks talking about our strategic initiatives.

We have focused on marketing and sales efforts on market verticals and services that give us the opportunity to bring added value to our customers across the waste stream and to the vision and the opportunity to expand the services we provide to these customers.

As we have discussed on previous calls, we are identifying and making progress expanding in markets such as industrial, improved manufacturing, improved service, construction and demolition. Our standard service offering in markets that provides several benefits to our customers. First is becoming strategic partners with our customers.

This creates a stronger customer relationships and higher renewal rate, which in turn adds to the recurring nature of our revenue. As we demonstrate our ability to deliver added value by providing solutions and higher levels of customer service, we are entrusted with more opportunities to work with existing customers expanding our relationship.

It makes sense for our customers to consolidate the management and location and waste streams with one long term partner such as Quest. We do not take this responsibility lightly. We believe there are tremendous growth opportunities within our base of existing customers just as we expect that growth will also come from new customer acquisition.

The focus on markets and services with the ability to demonstrate our value proposition also help us to differentiate from our competitors. Focusing on value-added services gives us the opportunity to earn the gross margin that we have demonstrated in our gross margin improvement.

For example, when we renew the contract with one of the large retailers in the U.S. for an additional three years while providing them operational and economic improvement, allowing the quality contract's extension we were also able to add a new organics program for the client. Another strategic initiative is in the area of operational efficiency.

We have recently hired a new Senior VP of IT and continue to invest in technology. Our continued focus in IT is more efficient by improving operating efficiencies, to bring down our cost to serve and to improve our added value by generating timely and highly valued data to our customers.

Before I open the call to questions, I want to reiterate our outlook. We believe growth from our existing customer base and our pipeline of new business will support our topline growth with our national average annual targeted range of 10% to 15% per year.

While gross margins are likely to fluctuate from quarter-to-quarter, we continue to manage the business focused on growing gross profit dollars, which we believe is a key indicator of success we are having in building our customer relationship.

While we continue to make investments in sales and technology, we expect operating expense growth will continue at a slower pace than revenue growth and demonstrate the operating leverage in our business model. As a result, the bottomline should grow at a faster pace than the topline.

We are excited about the prospects, outlook and the business opportunities going forward. We expect the pace at which we add and renew business will continue to improve. We believe that our stronger foundation will allow for sustainable business that will consistently grow revenue, profitability and long term stockholder value.

I look forward to keeping you updated on our progress. We would now like the operator to provide instruction on how listeners can queue up for questions.

Operator?.

[Operator Instructions]. We will take our first question from Gerry Sweeney with ROTH Capital. Please go ahead, Gerry..

Good afternoon Laurie and Ray and to David, if he is there. But the question on, you probably commented, enhancing the sales engine or something along those lines. Can you expand a little bit more on that? Obviously, you have been working on expanding our sales force but also, I will use the term, updating it as well.

And this has been a process, I think, over the course of the last year. And you also talked about expanding potential pipeline earlier in the prepared remarks.

How should we look at that as we move through this year?.

Well, the opportunities continue to powering the pipeline. Going just back to the sales engine, to me when you look at sales engine, it is more than just sales individuals.

It's an overall approach to the sales cycle, which included enhancing our marketing tools and efforts to broaden the net and being more targeted and ideally more efficient on the time our sales people spend so they are talking to the right target, enabling us to hopefully move more quickly.

So our pipeline is starting to look more with type of activity as well. So when I think of sales engine, that's actually what I am referencing. The sales people are continuing to, we all know there is significant sales cycle associated with it. But the pipeline is a good indicator as they move through them. And the stuff is moving through the pipeline.

I mean, that's the best way to put it. So as we look at this year, we should some new account acquisition that we have ever seen on recent history..

These might come from the sales opportunities relative to our existing customers too initiative ramp..

Yes. That's a great point. Laura just mentioned that basically the account penetration, Gerry, when you talked about that, land and expand, it's really, it's taken off, it's quite taken off. It's really accelerated opportunities with our existing client. It's not just account renewals.

It's the opportunity for more business opportunities within existing happy clients. So we have a number of what we call, internally projects that our existing clients are choking us with to look at ways to deal with waste streams that is incremental revenue to us on top of the baseline business..

Got it. When I look at revenue, I look at new accounts, but also will say service is essentially which I think you were just discussing..

Yes..

Okay. More locations, more services, et cetera. There is also a little bit of a seasonality component. And I know this is may be developing, changing as you add new people or new accounts on to the platform.

But any sense on the seasonality as for the rest of this year as well?.

You know what, Gerry, I would love to give a great answer on that, but some of our seasonality, as you recall, are driven by, in the past was driven some service inroads, storms and things like that, not predictable.

And the reason why I am hesitant to talk about seasonality is, we have added new services and new locations that may or may not be effective on the same seasonality. So it moves a little. It's definitely a moving target. But it shouldn't be a huge departure from previous trends..

Okay. That's fair. And I appreciate that. And then maybe just two quick questions. This maybe a little bit more for Laurie. Laurie, what was it, almost you have got $1,000 in EBITDA but $45,000 of operating cash flow.

I didn't really get a chance to look at Q, but is that accounts receivable, working capital changing? Maybe what the driver is for that low conversion?.

It was an increase in accounts receivable which utilized a little over $1 million of the cash flow. And that reserve was the biggest impact there..

Okay. And that's, I mean, is a good thing, right? Because your revenue was going up and more service, et cetera. So as you grow that should cash consumed short term..

That's correct..

Okay. Got it. And then SG&A, can we assume on a run rate, maybe back out some of those professional fees and is that sort of a good run rate for the rest of the year? Obviously, you always have increasing healthcare and things that sort of inflationary pressures year-over-year but I wondered if that would a good run rate..

No. Well, I think we talked about this before. I think that the amount that we have for the quarter maybe indicative of potentially the rate we have. We did have those transactional expenses. We don't particularly expect to have those again. But we do have other expenses that come into play each quarter.

Once again, we are not expecting that to grow dramatically, certainly from the revenue, right. But we see and anticipate making some investment in technology and make some sales initiative.

So I don't I would generally remark on just taking out all those transactional expenses but we don't anticipate anything particularly or as addition in the amount that we have this quarter..

Got it. Okay. I appreciate it. I will jump back in line. Thank you..

Thanks Gerry..

[Operator Instructions]. I think we have our next question from Sameer Joshi with H.C. Wainwright & Co. Please go ahead, Samir..

Thanks for taking my question. In your prepared remarks, Ray, you mentioned you hired a new senior VP of IT. And as part of the impact that this position will have, you mentioned increasing value-added services.

Did I hear you correct?.

Yes. Increase in value-added services, yes, we would anticipate that. Obviously, well, I will go ahead and jump ahead, Sameer, if I am not answering your question. We are looking to do is, there is several packets of value created from that position.

One, of course, is as we mentioned internal efficiencies and continuing to upgrade how we do business internally. But the customer facing piece is something that we want to continue to enhance as well. We improve the value, the targeted nature of the data. So that's a huge differentiator for Quest because nobody else really doing that.

And so a big part of Brad's role is to help us enhance those efforts that are already underway and to accelerate them going forward..

Thanks for that explanation. It's really helpful. In terms of your targeted 105 to 15% topline growth, I know you mentioned and reiterated again on this call your strategy of increasing sales, new locations offering and customers.

But in terms of individual sectors, are you seeing more activity or response from a particular sector or industry or construction vertical?.

I want to make sure I am clear.

Did you ask which are those sectors that are contributing the most or is that where we see a lot of the growth?.

Yes.

What is going to drive the 10% to 15% growth? Which of these sectors?.

Well, I will tell you that well, first of all, with an existing client base, we have got a lot smart with the sectors we take today due to performance with these clients and have them trust us more, frankly. But on new account acquisition, we are looking for contributions from all of them.

But when you look for example, food service, restaurants, our penetration today is relatively small. We have some real quality sales dedicated tot hat. Tremendous opportunities are tremendously. So based on the size of that market and our relatively small penetration and the sales talent we have on it, we are really looking for growth there.

And then also the industrial sector why we have grown tremendously within the industrial segment. We are still really small from a penetration standpoint. Future opportunities for us there as we continue to improve our offering and learn and understand who have focus better in that space. So I look at two of those just off the top of my head.

But I do believe we have contribution opportunities on all of our sectors..

Understood.

Is there any gross margin variance between these sectors? Or does it vary by services?.

It's really more by services. That's a good read. Because sectors, they depend on what services are being utilized. And I think we have talked about that in the past. When you have something that, I call it, crowded space like just pure solid raised MSW. Margins are positioned quite low, as we know.

When you look at some of the more specialty waste streams that we handle, particularly at our industrial, the margins are typically a little higher, considerably higher. So it's more related to service than it is to customer segment, I think..

So then a corollary question is, now you have three quarters of 17%-plus gross margin, yet you have maintained the low to mid teen gross margin outlook.

Are you being conservative? Or do you see like a service distribution over the next few quarters that makes you think that the margins could be in mid or lower teen?.

We don't have anything specific to answer that. We are seeing consistent with that because I think our really our gross profit dollars is what we look at every day and of course, work towards. That percentage is, as we know mathematically, is enough to add.

So I wouldn't call it, we definitely don't have foreshadowing that something's going to lower it. But we also just want to realistic and I guess fair in our assessment, focus on profit dollars can yield from quarter-to-quarter some variances in the GP percentage perspective and that's why we are staying with that..

Understood. Thanks for taking my question today..

You bet. Thank you very much..

[Operator Instructions]. We don't have any further questions at this time. I would like to turn the call back over to David Mossberg for any final or closing comments..

All right. Thank you all for again for your interest in the company. And we look forward to the coming back to our next quarter with results. If you have any questions, our contract information is on the bottom of the press release. Happy to help you..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..