Good day and welcome to the Quest Resource Holding Corporation Fourth Quarter and Year-End 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dave Mossberg, Investor Relations. Please go ahead, sir.

Thank you, operator, 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 and future performance of Quest. Use of the words like anticipate, project, estimate, expect, intend, believe and other similar expressions are identified -- 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; plus industry position and industry trends; Quest's prospects, outlook and business strategies going forward; and Quest's beliefs 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 result -- 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 trends, reduced demand, the competitive nature of Quest's industries and other -- and major health crises such the coronavirus, which can cause disruptions such as government employees' travel restrictions, supply chain disruptions and extend -- continued shutdown of businesses, which are discussed in greater detail in Quest's filings with the Securities and Exchange Commission, including in its -- on our report on Form 10-K for the year-ended December 31, 2019. 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 qhrc.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 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 resources. 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 sources of the information and 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 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 is useful for investors' understanding in 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 in this call will be on a non-GAAP basis. Full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release.I'll now turn the call over to Ray Hatch, President and Chief Executive Officer.

Thank you, Dave, and welcome to everyone on the call to discuss the fourth quarter and 2019 financial results. Joining me today is Laurie Latham, our Senior Vice President and Chief Financial Officer.We delivered another year of solid improvement in profitability during 2019. Now I would note that this is the most profitable year in terms of EBITDA in the history of the company. We posted record gross profit. We had a 42% growth in adjusted EBITDA, strong cash flow generation, and excluding onetime costs, we had positive net income. These improvements are a direct result of solid execution and the strategic plan that we implemented a couple of years ago. Our plan is working well and we expect will continue to drive improvements in the future financial performance.Before we go through the results for 2019 and review our strategies in more detail, I want to address the coronavirus. The destruction caused by this virus will be real, and our thoughts go out to all the people and families affected by this. This is obviously a dynamic situation. And in light of recent developments in the pandemic and its impact both on a human and economic scale, we are dealing with unchartered waters. It's likely that our near-term financial performance will be negatively impacted. We are concerned about the potential disruption to supply chains and consumer spending, and it is likely to temporarily impact our customer activity across all end markets. As a B2B service provider, most of our services are volume-based, which means that near-term disruptions in customer activity could lead to lower volumes and weakness in near-term revenue performance. In addition, disruptions caused by the outbreak may temporarily make it difficult for our vendor partners to timely service our account.On the positive side, I would also note that…

Thank you, Ray, and good afternoon to everyone. Fourth quarter revenue was $23 million, a decrease of 9.1% compared with fourth quarter last year. For fiscal 2019, revenue was $99 million, a decrease of 4.7% year-over-year. The decrease in both periods was primarily due to our transition away from lower value-added services and, as discussed in prior calls, a slowdown in production occurred at one of our largest industrial customers, reducing volumes and associated revenue of a low-margin waste stream.Moving down the income statement. Fourth quarter gross profit increased 5.5% year-over-year to $4.7 million. For fiscal 2019, gross profit was $18.7 million, 11.1% growth year-over-year. Gross margin was 20.3% during the fourth quarter and 18.9% for the fiscal 2019, reflecting more than 2.5 percentage points of year-over-year improvement during both periods. The improvement in gross profit dollars and gross margin were primarily due to the net effect of increased added value services changing the service mix and lower cost of certain subcontracted services. Our gross margin has been above targeted range for the last several quarters. And as we have said previously, we expect gross margins will vary from quarter-to-quarter, depending on our revenue mix and other factors.Fourth quarter operating expenses increased $264,000 year-over-year to $4.5 million. The increase was primarily related to increased stock-based compensation of $127,000 and labor and related expenses of $56,000. For fiscal 2019, operating expenses decreased $773,000 or 3.9% to $18.1 million. The decrease in operating expenses during 2019 was primarily related to lower depreciation and amortization of $1.4 million, lower bad debt expense of $1 million, which was partially offset by increases in labor-related expenses of $624,000, transaction costs of $248,000 related to the April 2019 equity offering by our selling shareholders, stock-based compensation of $292,000 and increased advertising and trade show expenses of…

Thank you, Laurie. I want to take a minute to review the transformation of our business and explain why I believe that we are well positioned to become a major player in helping large companies optimize their waste streams, divert more waste from landfill and ultimately improve their sustainability.First, we're targeting the right business. Several years ago, much of our revenue is derived from simple non-value-added services, which put us in a position of competing on a one-dimensional basis, price. Although this generates significant amount of revenue, it wasn't a good business in terms of margin returns and it was not sustainable. Instead, we now compete based on a national scale with a broad scope of service offerings, data reporting, analytic capabilities and excellent customer service. These attributes are very valuable to our customers, and competing both on these factors allows us to create stronger customer relationships.Second, we've significantly diversified our end markets mix with a high-end market mix. Several years ago, we almost lost -- almost all our revenue came from 2 end markets: Retail and automotive. Today, we have 3 major end markets: Retail, automotive and industrial, and restaurants is quickly becoming a significant pool. The transformation of our business is evident in the improved financial performance. Since 2016, we've shrunk the revenue base by about 45%, eliminating business that didn't makes sense for us and adding business that can sustainably produce attractive margin and returns. During that same time period, we grew gross profit dollars at a compound annual rate of 15%. We've had 2 years of improvement in adjusted EBITDA, and we are producing operating and net income profitability.I'll also note that we've substantially changed our ownership base and our corporate governance. In April 2019, about 30% of our shareholder base changed scheme. Shares that were…

[Operator Instructions] We can now take our first question from Gerry Sweeney of Roth Capital.

Ray, well, one, 2019, yes, it's obviously a great year. And then two, I just want to say thanks for the up-front assessment with what's going on in the world. Appreciate your sort of hitting that right out of the gate, just giving us your view and what your thoughts are. So I appreciate that you called this and skimping over it so. I will touch on that. But for you, let's stay with the core business for a minute here. You talked a little bit about the sales restructuring, go-to-market strategy, and 2 questions on that front. What have you changed? And also, maybe what did you sort of think or discover that has been an impediment to growth or signing new business?

Well, in terms of the first question, I think we talked in Q4, Gerry -- excuse me, that's in Q3, about new leadership that we got in, and with that is a new way of deployment, new processes and, in that sense, a change in how we go to market. So I would say, new leadership and adjustments that typically come with new leadership is what we're seeing, and we're expecting a lot of good things out of that.The second piece, what's been the impediment, I really -- Gerry, I guess that's a tough one because I have absolute and total confidence in the value of our offering. And it's evidenced by the relationships we have with existing customers, our ability to raise gross profit. You can't raise gross profit if you're not bringing the value sustainably, and we've been able do that. So I really think maybe it's just continuing to bang on doors. Maybe the sales cycle is, in many cases, have been longer than we thought it would be, as we direct towards more complex waste streams as opposed to just pure commodity price sale offer. So I'm sure it's a number of that, and this continued to be -- I believe there's a paradigm shift that's happening relative to working with a different company like Quest that goes across all those different waste streams and platforms. It's just different than what people have done in the past. So maybe it takes them a longer adjustment. But all of those are guesses, Gerry. I mean, we're getting a lot of positive feedback on the existing pipeline and the folks that we're talking to, and we're encouraged by that and feel good about the future in that regard.

Got it. And then just a question on the pipeline. Is there any way you could, qualitatively or even quantitatively, what's the pipeline look like today versus either 3, 6, 9 months ago, just are there more opportunities? Just curious -- just so we can get a little bit of vision or thoughts on that.

I don't know that there are more opportunities, Gerry. But I will tell you that there's -- I think they're better ones. And I believe that the activity within those -- one of the things is -- or one of the disciplines in the pipeline, as you look at aging, we always think of aging like on accounts receivable, if you look at a pipeline from an aging perspective as well, and when you're seeing enough movement, more consistent movement, you feel better about how that pipeline is acting. So I think the better way to classify the pipeline isn't the size of it but the activity within it and the movement over. That's how I would describe it, Gerry.

Okay. And that's fair. Actually, that's helpful actually a good point. And then, you signed Buffalo Wild Wings last year and then I think -- as well as another restaurant group. And I think the restaurant group is starting, I believe, in the fourth quarter. Was that fully impact -- fully on-boarded in the fourth quarter? How do we look at that and just any thoughts on that front?

A marginal impact. A marginal impact, Gerry, and 4 quarters rolling stock till December in our launch, we think December, followed by that second group. Obviously, we're fully implemented now moving forward. But Q4 impact was minimal on profit.

Got it. And then one last question and I'll jump back on. Obviously, okay, we talked about corona in the beginning and you did -- and lots of variable costs. What would be sort of like a scaled-down type of cost structure at Quest? I'm not sure if you can necessarily answer that question. But if, let's say, activity slowed 40% for a full quarter or 2, do you have any idea of what -- how quickly you could scale down your cost structure? And would that be mostly like commissions? Or how would you address a situation like that?

Well, it's a great question and it's obviously something we've been working on. It's one of the benefits, I think I mentioned earlier in the call, of being an asset-light business model itself because we have variable costs. We have -- we're very okay with flex, is what I would say, up and down with the space, and we can do it much more quickly. Now if we have to deal with idle assets sitting around based on that, it'll be a much more challenging situation. So I would say we're positioned quite well to -- within a certain degree, to adjust to the movements in the marketplace.

We can now take our next question from Max Batzer of Wynnefield Capital.

It's nice to see you hitting the targets that you set out to go for and particularly in the margins. My question revolves around the -- you had articulated waste streams that you were able to expand in the business and to mitigate their dependence on a couple of segments. And I'm wondering if you see any others that, with your expanded sales capability, you can go after. And it relates also to your comment about the complexity of waste streams, particularly the increasing now of electronic waste and difficulty of dealing with that. Do you have anything that you could comment on with respect to them?

In a general sense, I can for sure, Max. I mean, in general sense, we continue to work on waste streams that our customers feel is a pain point for them. There's an obvious reason for that. Well, if there's a real pain point, it creates a situation where we can generate a profitable solution. And so it's less about waste streams and more about the type of customer in relation to these. So for example, complex industrial opportunities exist for us out there to expand our industrial space, not very crowded, I mean it's now competitively. So we're -- and the industrial involves a lot of different waste streams, and it tends to churn complexity in that regard. And e-waste is something that, what you mentioned is, that's something that's out there as a possibility. It's something that we don't have an offering today as of yet. So it's definitely a pain point, along with other things. I'm just giving just some examples to illustrate it. For example, in the foodservice business, [indiscernible] are a pain point, having those cleaning services [indiscernible]. They are a pain point if you're a restaurant operator. And we've recently come to market with a solution in that category, and it's complementary to what we're doing in our primary waste stream. So I guess -- so expansion is prevalent to the [indiscernible] and also waste streams that those folks view as pain points in terms of solution.

Well, that's really the point of what you're doing. When you find a pain point and you can solve it, you can get the kind of business you're after. I had a question about -- in the press release, you mentioned, since you talked about industrial, one of your large industrial customers and then low-margin waste stream, and you just mentioned that there's some opportunities in industrial. Are the waste streams that are coming more complicated? Or are there more complicated industrial customers that you think you can get with your new sales effort?

I think we can definitely get new customers from the sales effort. I want to specifically address, Max, that low-margin waste stream. That's not indicative of this segment at all. It's actually indicative of one situation that happens to -- they have a lot of revenue and a correspondingly smaller percentage of gross profit. But the segment in and of itself is really a great opportunity for us to have profitable growth. And they do have, for example, expanded capability in our sales force now in the industrial segment that we didn't have a few months back.

Well, those were -- thank you for clarifying that Those were my -- that was my question. And with respect to the low-margin waste stream, I'm sure you spend a little time thinking about how you can nudge that up a little bit, and you've done a good job with your margins. So we'll leave it to you, and thank you very much.

Thank you, Max. I've got a great team. We've did a great job finding ways to optimize margins that we're seeing.

We'll take our next question from George Melas of MKH Management.

I want to ask you a question about -- I don't know how you do view this. And so if I think about the durability of revenue, if you look at your customers and with your program, what kind of retention rate are you expecting in 2020?

So George, your question's relating to the durability of our revenue and our ability to retain customers, correct?

Right. So for example, if you have a previous customer [assigned to this] program, normally or with the visibility that you have, what percentage or what number of those did you expect to retain in 2020?

We're having a little bit of difficulty hearing you. But one of the things I wanted to talk about as far as durability, and, Ray, you could chime in, is that a majority of our services are recurring services. And many in them are services that are not optional. They are related to waste streams that must be disposed of in an appropriate way. And therefore, as far as the reoccurring and the expectation of that recurring revenue is very high among our customers, we've had a good history of not only continuing our relationships with our customers but expanding with those customers, as evidenced by our results that we've had this past year. Do you want to add anything to that, Ray?

Yes. I would just say that almost all of that spend is required. It's an existing spend, which is also bringing a better solution, which we already did. And good, excellent customer service, I have a tendency to not mention that, for documenting that on this call. But one of the key attributes of the excellent customer service is we keep getting told that we have. But again, we don't hear you very well, George. I mean, is that addressing your question? You asked something about a percentage. I couldn't catch it.

Okay. I'm sorry. I seem to have a bad line. But thank you for the answer.

There are no further questions on the telephone queue. I will hand the call back for any additional or closing remarks.

Yes. I just -- again, I want to thank everybody, one, for the support of Quest and for the interest today. And it's a challenging time. And we feel we're up to the challenge and ready to adapt and do whatever this very questionable and changing market brings us. So -- and I've got a good team to do that.So with that, I want to thank everybody again and see you next time.

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