Good day, everyone, and welcome to the Quest Resource Holding Corporation’s Fourth Quarter and Fiscal Year 2017 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Mossberg, Investor Relations Representative. Please go ahead, sir.

Thank you, Rebecca, and thank you, everyone, for joining us on today’s call. Before we begin, I’d like to remind everyone that this conference call may contain predictions, estimates and other forward-looking statements regarding the 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 that 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 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 by law to do so. 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 has not independently verified the reliability of the sources or the accuracy of the information. In addition, Quest’s observations and view about industry conditions and developments are not – 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 the 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 are useful to 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 financials discussed in 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 fourth quarter year-end financial results. Joining me today is Laurie Latham, our Senior Vice President and Chief Financial Officer. We accomplished a lot during 2017. We delivered 9% growth in gross profit dollars. We had adjusted EBITDA improvement from $1.5 million loss to over $800,000 in profit. We did this while exiting a substantial amount of non-contributing revenue. Fourth quarter marked a turning point in our transition plan. As anticipated, fourth quarter represented the bottom in terms of revenue performance as we exited transactional business and began replacing it with new business that better fits our value-added service offerings. We also had some large opportunity to shift from fourth quarter into 2018, which resulted in a lower than expected revenue in Q4 2017. I’m excited about the work we’ve done in 2017 to reposition the company and the opportunities for profitable growth in 2018 and beyond. Looking forward, I’m very optimistic about 2018 and our future. We are expanding our business with current new customers, growing our pipeline and we continue to gain traction in our new vertical markets. At the same time, we continue to make significant strides to improve our profitability. We have a lot to be excited about. Before I get into further detail and progress with our initiatives, I will now turn the call over to Laurie to review the financials.

Thank you, Ray, and good afternoon to, everyone, on the call. Starting with the 2017 fourth quarter, revenue was $22.5 million, compared with $45 million in fourth quarter last year. The year-over-year decrease reflected our new disciplined approach to customer acquisition and renewal, which included discontinuing services with some customers, including a portion of services with two of our largest customers that we have discussed on previous calls. This revenue was typically transactional in nature and did not meet our margin standards. In addition, fourth quarter revenue for 2017 declined due to unexpected seasonal weakness and, as we stated in the press release, delays in the implementation of new business that was subsequently moved into 2018. We currently anticipate a modest sequential increase in quarterly revenue in the coming quarters and expect sequential comparisons will accelerate during the second-half of the year. Gross profit was $3.1 million, compared to $3.7 million last year. The decrease is related to lower transactional sales revenue volumes. Gross margin for the fourth quarter was 13.6%, a 5.4% improvement compared to last year. We intend to manage the business to maintain double-digit gross margin, but advise that the gross margin can vary considerably from period-to-period. Operating expenses decreased 9% overall. The loss per basic and diluted share was $0.10 for the fourth quarter of 2017, compared with the loss per basic and diluted share of $0.09 for the fourth quarter of 2016. Our earnings before interest, taxes, depreciation and amortization, stock-related compensation charges and other adjustments or adjusted EBITDA was a loss of $273,000 for the fourth quarter of 2017, which was relatively flat with our $234,000 loss during the same period last year. For the full-year 2017, revenue decreased to $138 million versus $184 million a year ago. The decrease was primarily due to…

Thank you, Laurie. Before we move on to review of our strategies, I’d like to remind everyone why we’re so excited about the future here at Quest. Quest has tremendous efficiencies of scale and scope. We processed over 1 million tons of wastes during 2017 in every state across the U.S. We’re the only vendor with a national footprint and a service offering that includes almost all waste streams. This provides significant competitive differentiation. We have a strong brand with a reputation of solving customer problems and allowing them to focus on our core business. We have a large opportunity to penetrate our existing base. One of the largest cost of any company is account acquisition, because we already have a substantial installed base of customers. We have the opportunity to expand services without these initial acquisition costs. We provide a great value proposition for our customers and our subcontractors. For our customers, Quest provides a single point-of-contact. We are flexible, solution-driven partner and we provide comprehensive reporting with actionable data. For our subcontractors, Quest helps them grow their business and by increasing route density and assay utilization. We help them improve their profitability. We have an asset live business model that provides us with a flexibility to provide right services to fit our customers needs now and in the future. Opportunities to leverage our footprint in core competencies to enter new vertical markets and expand the size of our addressable market. And finally, there are significant disruptive choices in how companies think about handling their waste. We’ve seen [status standing] [ph] waste to landfill companies of finding ways to economically recycle. Quest is well-positioned to benefit and in some cases take a leadership role in effecting these changes. So let’s move on to to talk about the key elements…

Thank you. [Operator Instructions] And your first question will come from Gerry Sweeney with ROTH Capital.

Hey, good afternoon, Ray and Laurie.

Hi, Gerry.

I want to touch upon, I guess, the on-boarding of facilities and the revenue related to that. It sounds like, it was going a little bit. It was slower than expected. Can you give us a little bit more details of what is causing the slowdown as it is, I suspect, it is not question internally, but rather maybe some other customers’ varying plan, maybe a little bit more details on what the bottleneck is?

Yes, Gerry, just a – it’s a great question, because it’s not a limitation that we have internally at all. It’s – when you are dealing with these large clients with lot of multiple locations, there’s timing of these calendars are constantly shifting. And so what’s positive really is our clients ability to adjust the change possible as they roll through and it’s moving on, it’s just not. They were obviously, pretty optimistic about timing and things get pushed back. So a real key point to your question is, the businesses is there. It’s just – the calendar move-outs are evidently part of the process with some of these larger clients as they move and we continue to roll out just not at the pace that we originally anticipated.

And I mean, you also highlighted, I guess, the 17% cost savings that you had with some of your industrial guys. At what point, does upper management of your clients recognize that savings that may be speed that calendar up? I mean, there’s obvious cost savings and benefit that you are providing, will that start to shine through potentially?

No question, Gerry. So we started with these accounts. The ability to have this for senior management to add visibility, those savings takes a little while.

Yes.

I don’t want to speak for our clients. But I mean, logic tells us and they know those numbers. I think there is a really strong appetite to get and move just quickly as possible. There is just some inherent things, I guess, that is slowing down. But I will tell you that just recently we’ve got back on the calendar and feels like we’re ramping back at a speed we originally thought, yes, and that is very encouraging. And possibly, it’s because of what you just mentioned on the performance, because it’s not just a dollar savings that we are able to offer these clients. There’s finally a real recognition of what the value of the data we’re going to put it back to this. And obviously, the faster they roll through that we’ll be able to role through the implementation faster than realized one with savings and two more comprehensive data with which to help their business.

Okay. And then, is there any more – are you done calling the revenue, but we absolutely through that phase, or is there, I mean, good management always look at revenue and contract. But are you – are we at the stage, where the majority of the, let’s say, underperforming revenues has been excited or is there still some tag ends?

Yes, Gerry, I mean, honestly, I think, we were done a little while back, but it takes a while for us to flow through.

Okay.

So we haven’t been and that’s the important thing. As it flows through and shows up on the quarters, you’ve got notification periods, you’ve got this any other drag amount. But I don’t anticipate anything else as a matter of fact. What we’re bringing on is meeting our profile. We are really excited about it and you just saw the tail end in Q4 of – with significant ramp down or calling as you called it.

And then, looking at the future, I mean, obviously, Quest has come a long way in the last couple of years. But you – I think, it’s suffice to say, you pretty much revamped the entire revenue base. You factored the poor revenue or the poor contracts, streamlines of operation internally. How much this is putting you in a position to add sales, add growth? How much will the additional salespeople add to potential growth? I know, it’s several quarters away and take salespeople trying to ramp up. But as you have more ability to reinvest in sales, it should eventually drive better revenue and may be short on some of those, I guess, all reporting times or sales cycles?

Absolutely, Gerry. I mean, I think, it’s a combination. Our existing sales reps that we have now understand and are much better at targeting the right customer and it’s a different sales profile, as you know, when you are selling something different and just price typically. And so, I guess, what I’m saying is one, we have existing salespeople with [indiscernible] that we’re going to market with a different maybe sales mentality possibly. The additional folks we brought on the nice thing about those, these are experienced people, these are industry experienced people that one of the key reasons we did that to invest in sales with experienced people is that, they can hit the ground running much more quickly. So to your point, we are very focused on that cycle, trying to shorten as as much as possible. So that’s what we’ve done to do so, and we feel really good about and we are not done with that either. We want to continue to invest and employing the right people that can accelerate our business more quickly and more importantly, that understand where we are today versus what we’re trying to do a couple of years ago.

Okay. Two more questions – two quick questions. One on the guidance, right? So you’ve obviously widened it out and you have been very consistent saying in the past, it’s the on-boarding of locations that has created the variability in your potential revenue and profitability. But as I look at the guidance, how much of that guidance is achievable by, let’s say, contracts that you have in place today versus adding additional accounts? In other words, if you on-boarded at a reasonable pace, is that guidance achievable with what you have already signed?

I’d love that to be the case. But I would say the answer to your question, I don’t have a percentage, Gerry, but I would say substantial within our existing clients, that’s one of the nice things about this business. When you get these large multiunit clients, the good news is you keep adding new revenue, but you don’t have to go out and resell it every time. So a substantial part of that what will contribute to the guidance is with our existing client base, but we also have, I want to talk about pipeline, I mentioned it in the script. We are really happy about what our pipeline looks like now in various stages. And so those are always elements of that pipeline that we are really optimistic about and we factor in part of that in there as well. You never dump everything in there, but we definitely have factored sum of the things we felt stronger about in the pipeline as well. And I have to add, as we look at, for example, you mentioned that one example, there is a lot of examples I said when we were able to pull double-digit savings in for clients, and that helps us for that confidence to and working to accelerate it, as you mentioned a while ago. So the answer to your question is, no, we wouldn’t achieve our guidance without adding any new business at all. But we currently plan to add a considerable amount there and we have a substantial piece of that that exists within our already contracted business.

Got it. That’s helpful. And then just a real quick on that, I mean, with the 6.4 or I think 7, when I look at that, I look at more as if it expands, it’s driven really by working capital and increasing revenue. So I would expect, we see marginal increases in sequential revenue growth and we’re not looking at a tremendous uptick instead on a go-forward basis unless revenue really starts to accelerate, is that a fair way to look at that?

Can you address on this?

Yes, Gerry, the debt levels overly fluctuate along with our revenue levels. And so it’s – that’s why it’s such a great vehicle for us. We have ample room in it, and it would then allow us to let that level come up some as our revenue levels go up.

Okay, great. I’ll jump in back in queue. Thank you.

Thanks, Gerry.

And from H.C. Wainwright, we’ll hear from Amit Dayal.

Thank you. Good afternoon, guys. On the revenue and deals that were pushed on in the fourth quarter, did you recognize most of them in the first quarter of 2018, or are these deals are pending?

I’m sorry, Amit. Could you ask again, please?

Yes, I was asking about the deals that were pushed out in the fourth quarter, that caused fourth quarter revenues to come in a bit lower. I was wondering, if those revenues and those deals were needed in the first quarter of 2018, or are they still pending?

Oh, okay. So the question again pushed up. Some of them are still pending into next. But yes, we anticipate while that goes in the fourth, as you mentioned. And I would just say that, I mean, I guess, the Quest…

Ray, one of – some of those new customer that we thought would launch in December…

And they have launched.

…which launched in Q1. And some of those additional locations were current customers and all of those have been coming on later in Q1 into Q2. And we’ll just continue to see a stream of those throughout the year.

So yes. I mean, the way I look at this is on a – the new basis we anticipate that you’ve got pushed out. It basically just pushes out all the way just kind of linearity well, because most of it is locations on existing customers and on-boarding those locations, if you want. So they’ll continue to go and actually have. We’ve done quite a bit of that already in Q1.

Got it, I understood. And in terms of gross margins and margins are improving a pretty. So the levels we saw for the fourth quarter, are they still going to be reflective of what we may see in 2018, or do you have sort of more room to keep improving margins?

Well, I think, we talked about it some during our comments. Our margins, the range among our services are for single-digit up to over 20%. So in any quarter, depending on the types of services we’re doing and what new customers are coming on with what types of services they have, we can see our margins vary. And therefore, we are managing the business. We continue to manage it to have double-digit margins. And so I think we believe that there’s room over time to continue to increase on average. But we also believe that there’s going to be some swings quarter-to-quarter. So we’re on a long-term average, yes, we see that there’s certainly room for improvement. But when you look from quarter-to-quarter, you may see some swings in the amounts of that margin percentage.

Understood. And in regards to this new channel partner that helps you sort of go after maybe some smaller customers. What do we need to sort of bring to the table in terms of resources to this effort, or is this primarily going to be sort of handled by the partner in terms of you’re getting customers better?

It’s a great question, and it’s all about, I mean, it’s not handled by the partner, we end up facilitating. But I think, I mentioned in the opening remarks, it’s highly inefficient for us and our business model to go after customers with handful of locations. But this very large national opportunity we have with them is to bundle with them and they bring their client base to us as an offering to their client base. Yes, we manage and facilitate and it’s really exciting, because it’s a very large base, meaning, that mid to small tier client in that – those space that we can touch before. So it originates with the partner. We have the bundle offering and then we take it from there and close it.

It provides a joint marketing…

Yes.

…arrangement, where we provide sort of the other side of that 360 if you think about new products and then it becomes used product and it sort of completes that for their customer base. And so we’re excited about it, because they have their field sales force that is extensive across the nation. And by us having a joint marketing agreement through them, it really provides us some exposure…

Large area.

…just a large amount of new potential clients.

It extends our reach dramatically and it gives us some efficient way to tap a very large segment of the marketplace. Thanks for asking about that. It’s really an important part of that. As we move into the phases we’re in today, we’re changing our business model a little bit, in fact, the partnerships are invaluable to our ability to grow the business to right way.

So has this been – has the – has this already – is this already underway, or is this going to be implemented soon or?

It’s – it will be implemented soon and we haven’t made an announcement yet. We’ll be able to talk more about it very soon with the release, and then there’ll be more information then. We’ll be happy to update you at that point.

All right. I appreciate.

It’s kind of limited right now about what we can say on it, but other than we’re really excited.

Yes, yes. That’s all I have, guys. Thank you so much.

Thank you, Amit.

From Wynnefield Capital Nelson Obus.

Yes. Hi, there.

Hi, Nelson.

Hello.

Yes, hi. I just had a couple of questions. One is, what’s our liquidity?

What’s our liquidity?

What’s our liquidity?

Yes. I mean the reason I’m asking it is, because in the projections that you gave, you put the caveat out there that it was based on the current number of shares outstanding, which was a little bit unusual. So I was wondering, what our liquidity is and if you feel there might be a need for more equity here as we move into a different business model?

Okay. So no, at this time based on what we’re talking about as far as our outlook, we’re not looking to raise any additional capital, where our liquidity as we grow is coming from our line of credit. But we have a $20 million of line of credit. We’ll be able to utilize that to help us with our working capital as we grow.

Okay. And how much is that – I’m just looking at the balance sheet, is there about $15 million left on that, or am I looking at it wrong?

Well, yes.

So it’s out there.

So the line of credit, it goes up and down every single day. So we’re at around $6.7 million at the end of the year, but the very next day, it goes down, it goes up. We average somewhere around $4 million to $6 million.

Okay. So there’s plenty of this headroom there. The other question, I mean, look, I’m just listening to you. I just – it may seem like an unfriendly question. But I just feel help me understand things a little bit. We’ve gone through an effort here to get rid of business wasn’t profitable and the implication is that we’re not taking any business that isn’t profitable, meaning, that we – we’ve established standards. With that in mind, why the – why some of the – why the repetitive caveats that gross margins could vary so extensively from quarter-to-quarter?

I’ll take that note. The vision that caveat there is, our focus is on gross profit dollars as we’ve discussed, not on GP percent necessarily. And the way I look at it, I look at an opportunity of this business, the GP percent is less significant than the amount of gross profit dollars we generated minus one incremental cost drive to go through, i.e., SG&A or anything else to support it. = So if we can drive and this is theoretical, but if we can drive September lot of gross profit dollars maybe had a low gross margin, but large volume and large large GP dollars. And I don’t have to add any SG&A to support it, it fall straight to the EBITDA line and I don’t want to preclude ourselves from something that might makes sense for the business as we look at opportunities down the line. So when I – when we talk about return, to me it’s more about the gross profit dollars minus any SG&A we have to attribute to it. So I just didn’t want to limit us, this is really we’re always coming from on that.

No, I think, that’s a good answer, absolutely. I mean, it tells me how you’re running the business and it shows the continuity between the bigger picture and what you’re doing, how you look at it specifically?

Thank you.

So that’s helpful.

[Operator Instructions] [indiscernible]

Hi, good afternoon. Thanks for taking my question, Ray and Laurie.

Thank you.

First question I have is, can you just – could you just expand a little bit on the pipeline in terms of the scope of some of these larger opportunities that you’re pursuing get a better sense of what the the ultimate revenue opportunity is from some of these larger deals?

Well, our pipeline and – basically, our pipeline looks like a funnel. And on the top end of the funnel, it’s fully down the path or not fully down the path in terms of bottoming. We have a lot of things either sign contracts, in negotiations about to be signed, all the way up to prospects that we’ve talked to and we see a lot, there’s a good business match. Within that, the opportunity is really significant. I think, we mentioned earlier, there’s – there are between one and roughly $20 million in….

It’s just a general range.

It’s general range and that’s typically what our pipeline looks like any specific dollars to be difficult. But I can tell you that, there’s a lot of dollars in it based on that, but they’re all in various stages. So it’s difficult to kind of factor that for you at this point.

Those individual particular accounts in our pipeline reflect our customer base, which are typically larger or large regional customers. And so we therefore have the ability depending on the timing of one of those accounts, right?

Yes.

But because top with the addition of one of those larger accounts or the engagement of several smaller ones and that’s what helps drives our growth on the sales side.

The important thing about our space that is less coming on the pipeline is, the sales cycle isn’t instantaneous, I mean. And so your pipeline is vital that we have it in there and the cycle can be longer or mid-term short, but it doesn’t happen overnight. So my confidence factor that our pipeline is sufficient is very high, but it’s less about the dollar amount of tribalism than the fit associated. I give you an example. We can have somebody in the pipeline that’s going out for RFP request for proposal to our very large dollar amount Quest account, okay. The fact of the matter is, we’re probably not as likely as some other folks to win and no value-add Quest account RFP. So when you factor on, there’s just lot of things that go into besides just a total dollar volume at your likelihood of a match with your business model as well.

Yes, we could well with our recycling goals too some of those accounts there in that stage whether it’s going to change and want to focus more on what we do well for our customer too so.

Right. Just building on that on the virtue of deals that on your pipeline, are those more full-service type of opportunities, where they take new advantage of your complete array of services, or some of the larger opportunities specifically geared to certain services?

I would say, it’s a broader piece, you mentioned in the past. That’s what we’re looking forward, they need more and our ability to drive the gross margin we’ve been talking about some yesterday is driven by our ability to do is driven almost entirely by having a need value add. And in fact, that we can cover numerous waste streams. It’s our point of differentiation, while that differentiation you don’t get margin. And so we’re very cognizant of that as we target these accounts to filling our pipeline. So I would say, definitely, there’s multiple points of entry for us in the accounts that are in our pipeline.

Okay. And then my last question is, on these renewed accounts that you’re pursuing particularly on the larger. And are they still following within that one to three-year contract terms? And what’s the renewal rate when these contracts are coming out?

Yes, that’s a great question. And yes, they are within that, I’d say, more likely two to three. It’s a majority, I have put the one in there, because that’s occasional. But our typical contracts is more two to three years and they are following in that pocket. And what is your second part of your question?

What’s your line on the renewed?

Renewal? The renewal percentage is actually quite high. We obviously have situations with that change as we transitioned. But a lot of that is, because the business models were matching up. That goes back to rise some important targeted customer in the first place. One, you can maximize your client satisfaction by doing a good job; two, you can make better margin; and three, they’re much more likely to be a long-term client when your business models match. So the renewal rate on this new accounts we expect it to be very high.

Many of our customers see us now as a strategic partner versus just doing a transactional service because of the data and the combination of the operational change too. It’s so substantial they quite often – we feel like we barely started even at three years. We have many clients who’ve been with us the full 10 years. So we had a good track record with that.

Jamie, let me – I’m going to give you another piece for everybody on the call. There’s an example that I had in my notes here. There’s a large, large account. We’ve actually had quite a while. And there’s some of the services that we’re not proper in that account that we don’t do anymore, but we have a great relationship with that accounts. As a matter of fact, it’s improved. Our revenue has gone down. Our relationships improve, because we become more strategic to Laurie’s point. We’re able to – by going back and looking at and doing some optimization and more landfill diversion form, I think we get 13% savings in the new structure. And we’re able to do that, while maintaining our profitability as well. So that is really the key to retention and continue to establish our presence as a value-add provider in the space.

Great. Those are very helpful. I appreciate it. Thank you for taking my question.

You bet. Thank you, Jamie.

And ladies and gentlemen, that does conclude today’s question-and-answer session. At this time, I would like to turn the call back over to management for any additional or concluding remarks.

Thank you, operator. This is Ray. I just want to close by saying that, again, I’m very optimistic about 2018 and our future. We’re expanding our business with current new customers, growing our pipeline and we’re continuing to gain traction in our new and vertical markets. At the same time, we continue to make significant strides to improve our profitability. We have a lot to be excited about. If you have any further questions, our numbers are on the press release, let us know, and thank you all.

Ladies and gentlemen, that does conclude today’s presentation. We do thank, everyone, for your participation, and you may now disconnect.