Good day, and welcome to the Quest Resource Holding Corporation's Third Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I'd now turn the call over to Mr. Dave [indiscernible], Investor Relations. Please go ahead.

Thank you, Kevin. 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 trend; 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, changing market conditions, reduced demand, and 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, 2016. 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 Web site 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 could include 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 has not independently verified the reliability of the sources or the accuracy of the information. In addition, Quest's observation and views 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 the presentation of these non-GAAP financial measures is useful to its investors' understanding and 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 in this call will be on a non-GAAP basis. Full reconciliations of non-GAAP to 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 everybody on the call to discuss the third quarter results. Joining me today is Laurie Latham, our Senior Vice President and Chief Financial Officer. Overall we had a very solid quarter that was in line with our expectations. We saw a decline in revenue and that was expected. This is consistent with our strategy that we have discussed in previous quarters. Most importantly, we delivered a 12% year-over-year growth in gross profit dollars and another positive adjusted EBITDA quarter. We've made tremendous progress in our strategies and we've completed the bulk of the transition in our revenue profile. This strategy will continue to translate into improvements in profitability. And by the end of 2018 we will begin to translate into double digit revenue comparisons. Overall, I am very optimistic about our future. We're expanding our business with our current and new customers, growing our pipeline and we will continue to gain traction – and we continue to gain traction on our newer vertical markets. At the same time, we're making significant strides him prove our profitability. We have a lot to be excited about. Before I get into further details on the progress with our initiatives, I’ll now turn the call over to Laurie to review the financials. Laurie?

Thank you Ray. And good afternoon to everyone on the call. Third quarter revenue decreased 31% year-over-year to $32 million, compared to the corresponding period in 2016. The decrease was primarily due to reductions of services of certain customers, including a portion of services with two of our larger customers that we discussed in last quarter's call. We anticipate that in 2018 revenue will be positively impacted by expansions with current customers and the addition of new customers. The decrease in revenue was more than offset by a 34% decrease in the cost of contracted services, resulting in improved gross margin and gross profit dollars. Third quarter 2017’s gross profit dollars increased $432,000 to $4 million, compared to $3.6 million for the third quarter 2016. The gross margin percentage for the third quarter of 2017 was a record at 12.6% of sales, a 4.8 percentage point improvement from the 7.8% for the third quarter of last year. The improvement in gross margin was inline with our expectations and was a result of optimizing our procurement to align volume and market efficiencies, resulting in decreased cost of subcontractor services and exiting lower margin services to certain customers. Operating expenses decreased by $1 million to $5 million, which was primarily related to a reduction in overhead related to our lower service volume him and lower stock based compensation. The loss per basic and diluted share was $0.07 for the third quarter of 2017, compared with the loss per basic and diluted share of $0.16 for the third quarter of 2016. Our earnings before interest, taxes, depreciation, amortization, stock-related compensation charges and other adjustments also known as adjusted EBITDA was $513,000 for the third quarter of 2017, which is an improvement of $786,000 relative to the same period last year. The improvement was primarily driven by the increase in gross profit and the reduction in operating expenses. The recent third quarter marks our fifth consecutive quarter of year-over-year improvement. We compute adjusted EBITDA, which is a non-GAAP financial measure, to provide additional insight into our financial performance. Please refer to the table in today's press release for a reconciliation to GAAP. Turning to our balance sheet, we had $1.1 million in cash at the end of the third quarter as compared to $1.3 million at the end of the last year. Working capital as of September 30, 2017 was $4.5 7 million, an increase from the $3.1 million of working capital as of December 31, 2016. As of September 30, 2017, our total long-term debt was $6.8 million, compared with $5.1 million as of December 31, 2016. Our $20 million credit facility, which we entered into the past February, continues to add significant financial flexibility and provides incremental borrowing capacity to support our long-term growth plans and associated working capital. So at this time Ray will discuss our initiatives and future outlook.

Thank you, Laurie. I’ll now take some time to review the progress we made with several of our key initiatives. One of key initiatives is both to renew and to add the right business with the right customers that can help us achieve our overall financial goals, not just grow revenue for the sake of revenue. This isn't about increasing price, it's about delivering the services that can add the most value to our customers and give us the opportunity to show our competitive differentiation. With that comes more value to the customer. In turn our company will become more profitable and has more sustainable growth. At the time we initiated this strategy we fully expected to encounter a lower revenue comparisons during the transitional period. And in fact this is that is what has happened. However, we knew that we could drive significant improvements in profitability which we have. We’re posting record levels of profitability at the gross profit line and we've gone from negative to positive at the adjusted EBITDA line. And as Laurie said that this is our fifth consecutive quarter of year-over-year improvement in profitability. Our results reflect tremendous progress that has been accomplished with the execution of our strategic plan. We know this transition period will not last forever and we’ll be able to resume growth from a solid and sustainable level of revenue. We now see that the bulk of this transition will be behind us by the end of 2017. It's important to note that while we continue to expect improvements in profitability there is a lag effect in our revenue comparisons as the transactional revenue we’re exiting rolls off our P&L. Before the full effect of our strategic shift is reflected commencing in 2018 we anticipate that earnings for the transitional fourth…

Thank you. [Operator Instructions] We’ll take our first question from Gerry Sweeney with Roth Capital. Please go ahead.

Hey good afternoon Ray and Laurie.

Hi Gerry.

Hi.

A couple of questions, but starting on the revenue front, it sounds like the majority of the bad revenue has been exited. Just looking for a little bit more granularity is there a still several million left to go in a fourth quarter and that’s being offset by new business that’s being on boarded or are we just sort of in between is the fourth quarter board just let's just say this is a steady state from the third quarter in terms of business.

Are you speaking to specific revenue on that question Gerry?

Yes on revenue, I'm just curious if how much actually I mean the real question is how much bad revenue really is left and what that margin – what those margins really look like for the fourth quarter?

Gerry we see that there’ll still be some impact of some of the changes we have in services but we’re considering the transition revenue that we also have new customers, and new services coming on. And it's going to vary slightly because of the timing we can't quite predict exactly when all that new revenue will be coming in. So we do anticipate there’ll be some effects of transitional revenue still. But I think the emphasis has been on expecting more like flat earnings when we look at fourth quarter to third quarter.

Okay.

So we have a bit more of a challenge and we have to estimate the revenue, but…

Got it.

So that’s what we see, some effect of both.

Did you have any hurricane impact to the quarter, with Florida, then the Gulf Coast. You have I think a decent amount of operations down there?

Yes Gerry we did. I mean yes I'm sure any business that services a lot of locations which we do, a lot of our clients have got quite a few locations particularly, I think, the used scenario is the most impact and many of those locations will close for an extended period time. So there is a near term negative impact there like many companies. But unlike many companies one of the things we get to participate in down the line is we also participate in clean up in the construction side. So I don't know if it's an offset or not, I mean it's obviously well yes but we do get to participate by the nature of our business on the other side of those type of terrible situation.

Yes in fact, that's right. We have in these kinds of situations we been winded putting a lot of special request services there are two.

Yes.

So maybe with our regularly scheduled services may have been impacted for a short period of time. The request for such services then start rolling in and can sort of provide some offset to expense.

Yes, I think, some offsets is a good term words. We don’t know exactly where it is. And there's a lag effect as well too. So I guess the answer to your question is Gerry is yes there's an impact and we think it will be mitigated over time with the opportunities on the cleanup and construction side.

Got it. And then if I may I’m not sure if you want to go into the set granularity, but when you’re looking at the margin profile on business that you're looking to pursue. I mean it would – can you give us sort of like what you're targeting in terms of percentages even looking at your guidance, or potential guidance for next year, we're looking at gross margins likely in excess of 13, 13.5 spend but if you could may be comment on that?

Sure we'd be happy to. Our goal is to absolutely maintain a double digit revenue portfolio. As we add different clients in there’s definitely going to have variances that based on the different services. And so we still have a wide range of percentages, but we believe that we’ll be able to maintain that double digit base of revenue and that's what our profile looks like. We want to make sure that we maintain that double digit portfolio of revenue.

Got it. And then I wanted two more quick ones, then I’ll turn back in queue. SG&A obviously you made some adjustments to, I think, your headcount and personnel [ph] some of the revenue transitioned out. How do we look at SG&A next year when we start to re-accelerate growth.

Well SG&A as you know Gerry, now Laurie will jump in as well as in accounting trend is small in just headcount. There's a lot of contributors to that. But from a Level 4 standpoint, we're approaching or have reached the stage, I believe that we're looking to leverage our SG&A not necessarily bring it down, but as a percentage of revenue it would naturally go down. We've really got some great growth opportunities, we don't want to choke that by not having resources available. But in the past, we had to bring in on a lot of more resources maybe than we need to – than we would like to support revenue growth. And we think we’re better, much better position we know how much better position today to support revenue growth without having to add nearly as much on the resource side. Is that fair to stay with us?

Well that’s right we’re looking for not only using some of the technology that's starting to take hold we're looking for those kinds of client situations that we have a most established ability to match-up our current resources to what the services are delivered for. And I would say the other area that we might increase is our sales opportunities are growing.

Right.

So there we might have some ability to we doing efficient more and more in our operations. That will go up if revenue goes up, but in a more efficient way. And I would say the areas where we're going to invest in continues to be an expanding sales and potentially some areas in technology.

Precisely, revenue generation would – we don't want to choke there, we’re excited about brining these new clients, and new verticals and expanding our ability to reach them with the right personnel, as evidenced by the recent hire of Ric Hobby. He’s not the end of that, we want to continue to invest and take our salesforce and bring it to the highest level.

Got it, perfect. I’ll jump back in queue. Thanks a lot.

Thanks Gerry.

We go next to Sameer Joshi with H.C. Wainwright. Please go ahead.

Good afternoon Ray and Laurie. Thanks for taking my questions.

Hi.

Hi, how are you?

Fine, how are you? Just to follow-up on Jerry's question, would you comment on the individual sectors that your targeting and the profitability at the gross level from each of those? I know you mentioned the automotive sector getting stronger. And then looking at new customers in the industrial and contraction, is there some variability within those sectors as far gross margins were?

You would think that based on certain sectors there might be then some strange or different kind of guidance we can give on that percentage margin, but actually it's really more driven by the services. So within all those various market sectors, we provide a variety of services and therefore we have a variety of gross margins. But in all of those sectors we can still target a double digit gross margin profile for those kinds of customers. So I maybe you want to make it a comment to that Ray, but I think that's still what I've observed [indiscernible].

No absolutely, I guess Laurie makes you a great point, the verticals themselves have services that we provide to them. And let's just pick on industrial, for example, it's one of the growth verticals for us. It's not the margins associated with accounts within an industrial, it's the services they provide. So for example, there's a lot more complexity associated with the services that we provide them, but it goes far beyond just picking up their trash. So I guess what I would go back to is what Laurie has shared a while ago is double digit growth areas and part of that is because these verticals obviously have a yield is the upper double or in the double digit range, or it wouldn’t be supporting where our thresholds are for profit. But these two categories and primarily it’s construction – and it's construction and industrial have much higher contribution.

Understood. And also in terms of visibility on the revenue and your outlook, what gives the confidence? And I'm not questioning your confidence, it’s just how do you track revenues at what kind of pipeline do you have? Do you have any backlog for service, going forward, going into next year?

Oh yes, I'll be happy to speak to that because obviously the guidance we gave comes from the conference we have in our pipeline and the improvements in our business operations. Our pipeline is really strong. But one of the beautiful things I think we want to emphasize is because it may be a difference for folks on the phone to hear. It's not just the growth within by bringing on your clients, although that's obviously always going to be a part of the business, and we're doing so and we're excited about it. We actually have some really, really serious runway opportunities with existing client that which we already have contracted, we're already doing business with and we're moving to an expansion to their portfolio of locations and offerings. So we feel really good about our pipeline because frankly a big chunk of our growth is already – within existing clients. And we just have to execute and continue to execute within that. Does that answer your question Sameer.

Yes sort of. And does it also mean and maybe you want to answer this question, does it also mean that potentially new clients’ climb could create upside to your revenue outlook for 2018?

Well absolutely. You bet. Yes I'm happy to answer that question. We were counting on that we just don’t know exact where those all are as we move forward. But that goes back to our sales force, our pipeline, opportunities within that which continue to come to Quest, we’re really thankful for that, that we have an opportunity to – or that we are in a position where we have opportunities where a lot of these things are coming out of. So yes, new clients is a big part of that.

And we have a well established process to the move new customer prospects through a process of making sure that they are one of the top companies out that that we get approached for bid and opportunities. And so that process give us insight into obviously our pipeline is much larger than what we gave guidance for. And that combined with our current customer base and our expansions our new customers is what gave us support for our outlook at the moment.

One last one from me. Will you remind us now with the hiring of Ric Hobby how does the sales organization look? And what is the headcount and how it is organized?

Well Ric is an addition and we continue to add as appropriate. I'll just say that we have a really nice representation and it is organized typically around to your question and other we spoke about before Sameer is we like to have our salesforce organized around the verticals that they track as opposed to geography. So right now we have folks represented in all of our verticals that we go after. And we want to continue to expand it. With even getting into detail on a number of heads, it's not as much as we'd like. And they're deployed more in a vertical sense rather than geographical.

Got it. Thanks a lot. And all the best.

You bet, thank you.

[Operator Instructions] We go next to Avi Fisher with Long Cast Advisers. Please go ahead.

You wish your guidance – you could wised your guidance that half of it. And I think people would have been excited. I'm just curious sort of what drives your decision on putting the stake in the ground that’s so robust for next year. I wonder if you could talk about that.

Well, hi Avi. Yes I’d be happy to. And you're probably right that we’ve got an aggressive approach to our business model and we’re sure the market is very receptive. And we've gone through a really successful year from executing, I guess, our strategies and lining our business up in a way that we feel is – it sets us up for the account success we described in the guidance. So we've been very aggressive and we feel confident that our business as it stands today, our company and is prepared to perform to that guidance level.

Is it, I mean do you view it as a challenge that you're aiming for or what you believe you can step over easily.

I probably want to qualify it as a layup for challenge there. It’s what we feel we can achieve as a company and that's what we feel the market will support, Avi. I mean, I think, I’d take it as it's written.

Yes I mean certainly you guys have been doing an excellent job, right. There's no doubt about that. And I'm struck by even when you talk about 4Q, I mean, you have headwind from 3Q from the hurricane. And yet you're talking about 4Q being flat. So why would 4Q be flat if 3Q is negatively impacted by hurricane?

We said 4Q would be flat in earnings year-over-year within that, not necessarily revenue we starting to have headwinds on revenue discussed in 4Q. So there’s a difference there.

Yes, okay, was a little confused by that. And it sounds like when we talk about next year is it still back half loaded?

No the nature of the math I guess I tend to not going to use the term so much but as we lapped that's the word we’ve used before, so I’ll use it that again as we lapped the business that's transitioned out of our portfolio and the new business comes in against it, it’s obviously the comparative numbers will be back loaded, but the growth isn't. I mean bringing on the new business and it came up as a cumulative throughout the course of the year. But the way the math would show it, I guess you could say that. Does that make sense Avi?

I think so, but I think what we’re expecting then is just continued sequential growth as well in earnings and revenue.

That’s the way to think about it because we build on the base that we will be rolling into from the fourth quarter. And as that base starts to bring on some additional new clients, new locations with the existing clients adding services, it’s a layer of cake. We keep now building back up those layers. And so you start to build up, what I would call, eventually a higher run rate each quarter as you add more of that business to our base.

Got it. And then what has to happen for cash flow to look like EBITDA next year? Are you going to be able to – are you going to be able to generate cash, as well, not assuming the capital?

Well certainly there's a lot more opportunity with those kinds of results. And we have a lot of variables though to look at. So we are not really in a position yet to want to give any guidance from that perspective, but we think that we will certainly have a lot more opportunities to either invest in the business. We certainly have our line of credit to work with us on our growth, with our business from an AR working capital perspective. So really that’s as much as we can comment at this time.

That’s fair enough. And speaking about receivables and DSOs there’s obviously a huge decline in receivables which I think suspect is because of the termination of certain services. Should we expect AR as you grow, to grow as well? Should DSOs stay below 60 or are they going to go 60? Just trying to think it through the working capital management which is a big part your business.

Well clearly receivables will grow in line, it’s the revenue growth. I mean that's certainly linked very directly. And as we bring on clients depending on the size of the receivables of any one client in our particular payment terms we’re always trying to manage that spread between our client payment terms, and our vendor payment terms and that's a constant area that we monitor and work with.

Yes Avi to that I'd like to say that’s obviously as they say a process not an event. I mean, as we reach client we manage turn the beginning to the inception of the client relationship. One of the key elements is the terms that we are associated with the AP. And then also on the AR side, I mean, so I guess on the AP – or excuse me AR side, is for the client, AP with the vendors we’re constantly managing that as well. [Indiscernible]

I guess finally – sorry.

Go ahead.

Just finally moving on from AR, can you talk a little bit in some specifics about the kind of technology you expect Rick to bring, or to deliver or implement for your client how that might change? And also brought in obviously leveraged some technology, provide more value to your customer versus what you are currently doing?

Actually what we're currently doing, we've been developing and implementing quite a bit of technology. But as you know selling a service, or selling a technologically enabled service requires even better skill set and that's what Rick brings to the table. It's not new technology that he’s bringing in with him, it’s the ability to create effective sales presentations and introductions of the technologies we're already developing relative to client data and all the other things. The company that he came from and the experience he’s had in the past is relating with technology and following his service, that’s going to help us a little bit, I think, as we move down our path of evolution. Yes, for sure, he’s hired, I think, it’s pretty exciting based on what you and I talked about in the past. I mean delivering technological solutions in more – meeting the customer where they want value they needed in managing their cycle.

Right well thank you very much.

Thank you. We’ll take our next question from Nelson Obus with Wynnefield. Please go ahead.

Actually my questions were answered. I think – I don't think I could have asked the question better than Avi. This is a really bold reach. And good luck.

Well thank you for that Nelson. I appreciate it.

I mean it is unusual to have a company with this type of projection. So just come close, okay.

Yes sir, we’ll do our best.

Alright, thank you. We’ll go next to Mike Vermut with Newland Capital. Please go ahead.

Yes guys congrats. Forgetting about the guidance it’s just a great progress you've made so far.

Thank you.

Thank you.

Some general questions, when we're going out for these bids, forgetting about what I guess, our legacy customers are growing with. What’s what the competition like they were going up again? And I find it hard to believe that there’s many competitors that have the knowledge, the technology, the database that we have. So what's it like when we're going out there for when we're moving into construction? And to industrial those verticals or are we just competing against internal processes?

To talk about Mike that's a great question because the competitive question is and especially in our case, in Quest case that’s not a simple one. Many times we're competing with people that only work in that vertical, companies that only service that vertical which is we go across numerous ones. So we have many different competitors that have nothing to do with each other because of the breadth of our service. But really in many cases we’re competing against the status quo. Self manage situations, I mean let's face it all these waste streams something was happening to them before we came along. And so they're managing them or dealing with them in whatever way they could. So we’ll we're really out there doing it many times, not at all by any stress, but in many times we’re out there showing why Quest can bring a better solution to the table than frankly they are able to. I mean if your X, Y, D company and you make widgets, our goal is it to help you focus on making widgets, the best widgets you can and compete in your marketplace by taking care of these other things for you. And that's the selling process in and of itself.

Excellent. I’ll move on to another question. When you make some good money reselling the oil. When does that start to kick in again? Oil has been moving up nicely, recently. What's the point where we can start to incrementally add to the oil revenue there and that becomes incremental margin to us.

I think our observation so far has been and I think this is just a sigh of relief across anyone dealing with oil that there's just been not a continuation of a downward trend, there's been some forming up of prices. It's not really at a level yet that people can hit the golden ring and say we're at a place where everyone is paying for used motor oils, certain segments out there utilize these motor oil for processes, for energy re-refining that they also have the offsetting costs. So I think we're getting the benefit and starting to see some firming in that area of oil and some of the other commodities but not yet to the point where we can say there's a great newfound wealth from the used motor oil. I think most people – we can hear not set around is it above 80 somewhere in that range and certainly we're not close to that right now.

[Indiscernible]

If I remember correctly if it is around 60 was the number they always used a couple of years ago. I don't know if that true anymore.

Well I think that there's always a reluctance going down and there's a reluctance going back up. So it’s…

Especially [ph] with most recent experiences.

Yes.

There’s a lot of caution associated with that as you can image.

Yes so I think that you’ll find very wide observations in this area, but we certainly are not there yet.

Thanks. And then obviously we’ve always discussed the, I guess the non-asset intensive nature of this business. And I know you kind of touched on it before, what revenue can you really add without going back and adding more that fixed cost?

More fixed cost?

You have – the more fixed cost, correct.

Okay, yes. That’s a good question, I mean just really look at fixed cost, I think, we have a tremendous amount of leverage here.

Yes.

I mean we have relatively achieved cost. Our cost traditionally go into the variable until we invest in more technology. And we have a nice technology investment today, we’d like to make some more. But our platform has got a lot of room for growth as it exists today, Mike. I think as we are headed you want to know about our build into leverage growth with our existing platform. And I don't know that we've ever been a better position, I think, to leverage growth against a relatively flat SG&A line and definitely on the fixed cost side, definitely.

Right. Actually that was I was getting, that there's not a lot of incremental account pack involved with incremental revenue dollars until you want to technology or what not great.

Yes you should bring in new structure platforms, things like that. But we just see and I keep using the term headwind within our existing resources, from a fixed cost standpoint we got a lot of headwinds. But I don’t want to imply that we don’t want invest in technology. It is truly got opportunities for ourselves we’re expanding and growing the business down.

Right. Well great job to date on getting the company turned around so far.

Thank you Mike.

Appreciative it.

Thanks.

And at this time I’d like to turn the call back over to management for any additional or closing comments.

Thank you all for participating in the call. And our numbers are in the bottom of the press release. If you have any follow-up questions feel free to give us a call.