Good day, and welcome to the Quest Resource Holding Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to David Mossberg, Investor Relations. Please go ahead, sir.

Thank you, Justin, and thank you everyone for joining us on this 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 words like anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify those forward-looking statements. Such forward-looking statements are based on Quest's current expectations, estimates, projections, beliefs and assumptions and involve certain significant risks and uncertainties. Actual events or Quest results could differ materially from those discussed in the forward-looking statements as a result of various factors, which are discussed in greater detail in Quest filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on such statements and to consult our SEC filings for additional risks and uncertainties. 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 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 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. 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 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 of that said, I'll now turn the call over to Ray Hatch, President and Chief Executive Officer.

Thank you, Dave. Thanks, everyone for your interest in Quest. We had great momentum coming into the year, and that momentum continued during the second quarter and thus far into the third. The second quarter's financial performance was exceptional across all metrics. Top-line growth was 68% relative to last year, which was due to a combination of organic growth, post-pandemic recovery and M&A. Organic revenue growth, which excludes M&A, was more than 50% year-over-year. I'll point out that strong organic growth performance was not just related to post pandemic recovery. To provide another reference point, if we compare the second quarter of 2021 to the second quarter of 2019, revenue increased over 30% organically compared to that period. Again, this is organic growth excluding the acquisitive growth in the comparison. Gross profit dollars grew by more than 55% year-over-year and grew 6% sequentially. The key attributes of our value proposition are clearly resonating with clients and prospects. In turn, they're rewarding us with new business and expanding their scope of services. M&A was also a significant contributor to year-over-year growth with the acquisition of Green Remedies continuing to perform as expected. We also closed on a similar acquisition on June 30, which we expect will contribute to future growth, adding more than $500,000 to our annual run rate. During the second quarter, we also showed strong improvement in profitability. EBITDA increased by 120% to $2.5 million. For perspective, EBITDA grew at more than twice the rate of gross profit dollars, which illustrates the earnings leverage and the scalability of our platform. Before I go into a review of market trends and strategic initiatives, I'm going to turn the call over to Laurie Latham, our Chief Financial Officer, to provide an overview of the financials.

Thank you, Ray, and good afternoon to everyone. Second quarter revenue was $36.9 million, an increase of 68% compared to the second quarter last year. Keep in mind that comparisons are against the peak of the pandemic last year. As Ray mentioned, we showed solid organic growth year-over-year from both new and existing clients as well as the incremental contribution from the acquisition of Green Remedies, which we completed during the fourth quarter of last year. As we discussed last quarter, the heightened activity levels at our industrial clients' locations in the first quarter of 2021 continued during the second quarter compared to the COVID-related constraints last year. Additional drivers for the increase were split between the incremental contribution from the Green Remedies acquisition and growth of new and existing clients. Sequentially, revenue increased 6% from the first quarter primarily from the initial onboarding activity with several new client wins and from the addition of new multi-family housing clients. Also, I would point out that the acquisition we announced in June was completed on June 30 and therefore was not a contributor to second quarter results. The second quarter gross profit was $6.8 million, an increase of 56% when compared with the second quarter last year, an increase of 6% sequentially from the first quarter of this year. Gross margin for the second quarter was 18.5% of revenue, which was 140 basis points lower than last year, but within our targeted range. The year-over-year decrease in gross margin was related to the service mix, which will fluctuate from quarter to quarter. SG&A expenses were $5.1 million during the second quarter, an increase of $1.1 million compared to the same period last year. More than half of the year-over-year increase was related to the rebound in our business from last year, when we took significant cost-cutting initiatives related to COVID. As you might expect with the recovery of business activity, we have increased labor costs, marketing, tradeshow, travel and other costs related to SG&A. The remaining portion of the increase was related to costs associated with IT project consultants, as well as a timing difference in the accrual for stock-based compensation compared to last year. Overall, SG&A costs grew at 27% year-over-year, which is less than half of the rate of revenue and gross profit dollar growth for the second quarter. We anticipate that SG&A will increase primarily as we add to the national accounts sales staff and other personnel to support growth. We also plan to increase investment in technology that is expected to enhance operations and add scalability to our platform. During the second quarter, interest expense increased to $550,000 from $87,000 last year. The increase is primarily related to debt financing for the Green Remedies acquisition. Net income attributable to common stockholders was $0.04 per basic share, or $0.03 per diluted share for the second quarter compared to EPS of $0.08 per basic and diluted share for the same period last year. As a reminder, last year second quarter included $1.3 million or about $0.08 per share in other income related to the benefits from PPP funds. Adjusted EBITDA increased by 120% year-over-year for the second quarter to $2.5 million. Looking at the cash flow and balance sheet, we generated $1.2 million in operating cash flow during the second quarter, and $5.2 million for the first half of 2021. The increase in cash flow was due to the combination of strong net income performance, as well as positive working capital changes. The half of the operating cash flow was added to our cash balance, which was $10 million at the end of the quarter, up from $7.5 million at the beginning of the year. In addition, we utilized approximately $2.3 million in cash to finance the acquisition that closed on June 30th. The end of the quarter debt levels were relatively unchanged at $18 million versus $18.5 million at the end of 2020. So at this time, I'll turn the call back to Ray.

Thank you, Laurie. Before I get into a review of our strategies, I want to give an update on some of the trends that are positively affecting our business. First, we continue to see post-pandemic recovery in all of our end-markets. The industrial end-markets stood out again this quarter and exceeded our expectations, both from existing clients and the earlier than expected onboarding of a major new client in June. All of our other end-markets showed modest sequential improvement, which we expect will continue throughout the balance of the year. The second trend that is positively affecting our business is sustainability and sustainability reporting. I believe we're at a tipping point where clients are feeling pressure from multiple stakeholders to divert more waste from the landfill. Everyone on this call is aware of the growing demand for public companies to report sustainability metrics. Our capabilities in this area were a clear differentiating factor and why we were chosen for the recent win we discussed last quarter with a publicly traded company in the industrial end-market. This client had previously hired an outside consultant who was ultimately unable to satisfy their needs. We created a data portal for this client with the ability to provide a uniform and auditable data set across multiple waste streams for use in sustainability and operational reporting. We have begun onboarding this client recently, and they have given us positive feedback on the visibility that they did not have before. Sustainability is not just important for investors, it's also important for all stakeholders. We've recently created a video for a client in the automotive service market to show their customers, their employees, and other stakeholders. The video highlights in several ways in which Quest is able to help our client recycle or otherwise divert waste from the landfill. I would encourage you to look at the video on our website, or on our social media, as it's a great example of how we help customers become more sustainable with multiple waste streams. I won't go into all the details, but in summary, we helped this client recycle 27 million pounds of waste from multiple waste streams last year. That volume prevented 38,000 metric tons of CO2 emissions, which would take all the trees in Central Park 46 years to do the same. I would also note that sustainability achievements we helped this client make are not unique. These types of improvements are widespread amongst our client base. The final trend I'd like to discuss is how the major vertically integrated waste providers are implementing price increases, and how the increasing price of landfill costs are making recycling and our services an increasingly viable solution financially. Let me give you a bit of background. In some cases, the cost of recycling is greater than disposing of waste in a landfill, which has historically been a hurdle for adoption of our services. However, when you take into account the commodity value of some of the waste streams, it can significantly offset costs. Not only do our services help clients maximize the value received from commodities, we also help our clients optimize the efficiency of waste collection. And we have the scale that gives us greater buying power with vendors. I would also point out that one of our largest profit centers for most vertically integrated waste providers is their landfill operations. Since we don't have landfill operations, we're financially aligned to help our clients achieve the most sustainable and cost-efficient method to divert more waste from landfills. Using these levers, we can often help clients save money by recycling waste streams, and diverting waste from the landfill. With increasing prices and increasing pressure to be more sustainable, clients are more willing to have discussions about improving their sustainability, which is lowering the hurdle for the adoption of our services. Moving on to a review of our strategic growth initiatives. Our multiyear effort in building our sales and client service capabilities is showing ongoing positive results. Our organic growth increased at an annual double-digit pace compared to 2019. And of equal importance, the pace of securing and onboarding new clients is accelerating. This success is a reflection of our clients' belief in our ability to add value to their processes and we appreciate their trust. Based on the recent success of our go-to-market strategy, we're actively increasing the size of our client-facing staff responsible for producing gross profit. This includes both hunters and farmers in our Salesforce, client solutions team members as well as vendor management personnel. Overall, even with this incremental investment, we continue to expect 50% of incremental gross profit dollars to flow through to EBITDA. Let me explain how adding our vendor management team contributes to our gross profit growth by lowering our cost of service. Basically, we help our vendors add new business that they would not have been able to keep competitive for individually. This incremental business helps them optimize loads and pickup routes, essentially increasing their utilization and making them more efficient. The more we help our vendors add revenue and improve profitability, the more value we add for them, which translates into better service for our clients, and better economics for all parties involved. In addition to creating greater efficiencies, our vendor management team is also tasked with finding new service providers and adding new types of service. This drives greater client satisfaction and expands our service offerings. To drive gross profit dollar growth, we're also increasing the size of our client services team. These folks are tasked with servicing our existing clients as well as adding more locations and service lines to them. There are plenty of opportunities to continue to grow with our existing client base, which has and should continue to provide us with a stable source of growth going forward. The key is to continue to provide exceptional service and our team has a great track record in this regard. We're also adding to numerous national account representatives recently hired and we recently hired an experienced professional to focus on the grocery end-market in our newly developed organic waste program called Proganics. As we discussed in our last earnings call, grocery chains are increasingly implementing sustainability goals and facing increasing regulation regarding food waste. Proganics' ability to recycle both non-packaged and packaged food in a cost-effective manner is a significant and key differentiator for us. We have our first client in place interactively educating the market about this program and building a pipeline. We think there's significant opportunity to expand the service and expect it to help us garner new client wins along with expanding relationships with existing clients. Next, I'll address our M&A strategy. As I mentioned earlier, we closed on a small acquisition on June 30, which we expect will add more than $500,000 to our EBITDA run rate. This company is in the multifamily housing market and is a nice complement to the acquisition of Green Remedies last year. In addition to this acquisition, we've been very active during the first half of the year, evaluating several acquisition candidates. We expect M&A will continue to be an important part of our growth going forward. Regarding new business wins in the second quarter, of note was an expansion with an existing client; the expansion is adding seven figures to annual revenue and will increase the size of their footprint. I would also note that we saw strong organic growth with new clients in the multifamily housing end-market during the second quarter. Regarding our outlook, our end-markets are strong and they continue to recover. We continue to view inflation as net neutral to our business, as our contracts have mechanisms in place to adjust. Pressure to improve sustainability and increasing cost of landfills are lowering the bar for adoption of our recycling services. The contribution from new client wins will continue to provide incremental growth as we onboard these programs throughout the balance of the year. We have seen increased movement and opportunities in our pipeline and the pace of organic growth is picking up. As such, we continue to have success adding new clients and/or extending business with existing clients. We're investing in personnel to further grow gross profit dollars. We expect acquisitions to continue to be a significant contributor to our growth. Based on all these factors in the business that we have in hand, we're optimistic we'll continue to deliver strong growth in gross profit for the balance of the year. And we're well positioned to deliver robust organic growth for next year. We expect EBITDA profitability will continue to outpace top line growth as we benefit from greater scale and operating leverage inherent in our business. I look forward to keeping you updated on our progress. We'd now like the operator to provide instruction on how listeners can queue up for questions, operator?

Thank you. And our first question comes from Gerry Sweeney with ROTH Capital.

Hey, good afternoon, Ray and Laurie. Thanks for taking my call.

Hi, Gerry.

Hi.

I apologize, I joined a little bit late. So hopefully my question makes sense but maybe not covered earlier, but obviously you're making a little bit more of a push into the sales aspect and historically this has been a little bit of a challenge. I think you've gone through some iterations. Do you feel as though you have everything in place to start incrementally adding to the sales and the sales force, I guess?

Yes, everything is a big word Gerry. We definitely feel like we've made a lot of progress in that area. And I think you're seeing the results in new account acquisition. But we continue to look to complement that effort. So everything—I know we're definitely moving in the right direction. We're excited about where we're heading.

Got you. That's fair. I mean, we're seeing a nice pickup. And then how much has increased, I guess, disposal costs at landfills? How much has that changed over the maybe the last two to three years? And how much has that bar load? I know that sort of a qualitative comment that you made. But I'm just curious if you could expand on that a little bit. And just for edification I guess?

Yes, it's hard to put a percentage on it because there are obviously several players in that space. But I don't think a quarter has gone by, Gerry, in the last couple of years, if not more, that there hasn't been price increases going into place. Sometimes regional, sometimes they're—all regional, but they're consistently going forward. I've yet to see an announcement about landfill cost reduction, and don't know that I will. So it's been a cumulative effect, Gerry, and I think it's gained a lot of momentum over the past year and continues to increase. So just right there, that tells us that our prices are not. So I think that obviously refers to a lower bar we mentioned, but it's been pretty consistent.

Got you. And then one more question. I think you'd mentioned you reduced emissions by 38,000 tons of CO2. Are you getting more requests for hard data from companies, because what we're seeing with a lot of ESG related companies is some investors are saying, show me how much you're reducing your carbon footprint or emissions by? I'm curious if you're starting to see this request from your clients for more detail so they can pass along?

What we've been able to do, for example, what we measure, of course, is that what we measure is the actual materials being diverted, and how they're handled. And from those volume measurements, there are formulas that create those measures. What I was talking about in that earlier piece was really just one client. And that one client was we gave them a marketing tool to use internally for themselves about their sustainability. And that's why we reflected in things like trees in Central Park and stuff like that.

Yes.

And so yes, there’s that request specifically was how can they portray themselves in the sustainable way that they operate? How can they communicate that more effectively to their customers? And that's where that tool came from. But yeah, Gerry we get asked quite a bit about obviously, quite a bit and reporting about the materials and the volume of materials that are diverted from their locations. And from that we can create those calculations or those illustrations we talked about.

I can't imagine at some point that that becomes an increasing selling tool for you, just for companies trying to position themselves from an ESG standpoint, some of the moves they've made is, is that a fair sort of characterization?

Yes, I think it's very fair, Gerry. And it's even more than just ESG reporting, like—and that's an example I gave you, it was—it's a very environmentally responsible company that wanted to find the best way to illustrate that to their customers to help as opposed to just ESG reporting. But yeah, it's becoming more and more prevalent. I think we mentioned one of the key reasons we're able to get that industrial win that we started that we mentioned last quarter and we started doing business with this quarter is because of the visibility that our reporting gets. All of that ESG reporting and all that—it's all about visibility. You can't create that reporting unless you actually see the data. And we collect the data and report it back in a readable fashion. And again, I think I mentioned they had a consultant before that really wasn't able to effectively do that. And with us, they've been able to do that. And that's a big piece in getting that business, frankly, I believe.

Got it. I appreciate it. That's it for me, and I apologize I got on late. So thank you.

No problem. Good to talk to you, Gerry. Thank you.

Thank you. Our next question will come from George Melas with MKH Management.

Hi, Ray. Hi, Laurie. Congrats on another really good quarter.

Well, thank you.

Yes, congrats. Very excited to see the organic growth rate. And can you tell us a little bit more about it? I mean, an easier way to sort of look at the growth and say how much is coming from Green Remedies? How much is coming from existing clients? And maybe how much is coming from new clients?

Well, George, I can tell you, none of it came from Green Remedies because organic growth in our measurement specifically excludes acquisitions, so…

Okay.

Yes, it did. We've had some organic growth with Green Remedies already that was included. But the acquisition portion, that bump was totally excluded out of the numbers we gave you.

Yes, the acquisition was about the growth they had, and they did have growth; major players have 3% to 5% increases announced and our sequential comparison was 6% sequential. And that was all organic with no acquisition knowledge. But as far as breaking it out, existing clients and new clients, it really—we've had new client growth for the first time really significantly in quite a while. And it's really helpful, quite a bit of it is.

Okay. And do you get, I mean, based on, but you were saying in Gerry's question, seems like you have acquired some momentum in new client acquisitions and help us understand what explains that, what you've done right to be able to achieve that. And anyway, are you expecting that to continue?

Yes. Well, I think what we've done right is we have the right people telling the right message to the right customer. I mean, I know that sounds trite, but it's not as easy as it sounds. These clients that we have in that new account acquisition, they've been—we've been working with these folks for a long, long time. It's been a long cycle. And it's coming together now. I think all the things we mentioned earlier, the tailwinds that we have relative to increasing costs, visibility to sustainable practices, and our ability to execute against our needs, it's finally starting to pay, I guess, is the best easiest way to put it. But I am very proud of the work that's been done by our internal operations team and our external sales team to identify the needs and to satisfy those needs.

Okay. And then when you look into your sales pipeline, do you see sort of continue—do you see sort of growth continuing in terms of signing up new clients? I mean, do you have several people in late stages in your new sales pipeline?

Yes, we do, George. These folks are the ones that we've got right now, we're setting life stages for a while as we went through the process, and we've got some in there now. So I definitely expect continued new account additions as you move forward.

Yes, and I think another thing to emphasize is that even the new accounts that have come on, they are the size of accounts that keep growing every month, George. So yes, the size and the complexity, which we talk about a lot, is there with a lot of these new clients. So we're seeing the full results of those are going to be continuing throughout the year. And then when we see some of these new accounts that we're just bringing on, when we annualize that next year, that will be another big contributor to next year's organic growth also.

Yes, great point.

So it's—once you land that those nice big accounts, they just continue to drive our growth for several months as we roll out and continue to optimize them.

Does that help, George?

Yes, it actually did. Just will leave the question-and-answer queue.

And our next question will come from Greg Kitt with Pinnacle Fund.

Hi, Ray and Laurie, congratulations on the great quarter. Thank you for your hard work.

Thanks, Greg. Appreciate it.

I was really encouraged to hear that you're continuing to benefit from this economic reflation. But you were also—that you also had an opportunity to grow even if economic growth slows as you expand the number of waste streams that you're managing for your existing customers, and continue to add new customers. As you look at the opportunity with your existing customers, do you think there could be an opportunity to add $50 million of revenue over the next five years or is there a way to think about what that opportunity is with your existing relationships?

That's probably pretty hard to quantify, Greg, at this point in time. I think our existing clients have been responsible for the majority of our move north in gross profit dollars over the last several years. I expect the pace to continue kind of what we've been doing the last couple of years with these guys, you look at the GP dollar growth. And now you can add in these new accounts and the ramping that Laurie just referred to on top of it.

Thank you very much. I was wondering if you can help me understand when you think we could start to see results from some hires on the client services team and national sales/new account focused reps?

Well, I think we're already seeing some results from the National, excuse me, the client solutions services team, because they're managing some of this onboarding and helping expand some of the growth that we have going on right now, the organic growth you've seen, and you'll continue to see that in organic growth. That's how you'll see the results. I think we're seeing it today. The expanded Salesforce has already—our pipeline has got some great stuff from them in there, Greg, we should be seeing some new stuff from them quite shortly, hopefully, get those executed. And we have already started to implement expansions in the client, or excuse me, in the vendor relations side that we mentioned last quarter. And that's helping us a lot in supporting these new customers and onboarding, with better services from clients services and expanded service lines as well.

One more for me, if I may, I think one of the reasons that it sounds like you're winning new customers is because you have a solution, and you're solving a need that the customer needs. It's not just, hey, we can—it's not just a bake-off based on price, you're providing services that are helping meet the customer's need, and you're providing all the data and reporting for that customer. Maybe you could help me understand is that accurate? And what do you think is resonating so much with customers that you're winning large new customers at a rate that I don't think you've won them at in the past couple of years?

Now, you're absolutely right; the rate we're bringing on new business right now, I couldn't be more pleased with the change from past couple of years. In the past couple of years, our GP dollar growth was—we were entirely focused on existing client base and driving efficiencies, improving costs and service. And that's where you're seeing that, there are new clients coming on board. I really do believe that some of the tailwinds we've been talking about for a long time—whether it's the ability to divert from landfill and track that ability to divert from landfill, the value of optimizing the value of the commodities they are producing, which we've done a great job, my team has. I think in many cases, the simple solutions they've been offered before are under serving their current needs. I really think as an overarching view, we can bring a whole myriad of solutions to these larger clients. And these ones we're talking about, these are fairly significant new clients, and our diversity, both in geographic and the variety of services. And the fact of the matter is, every company out there is struggling away, whether it's with labor, whatever the strange economic times. So if we can create a situation where they have one less thing to worry about, I think it makes us much more attractive. And I think all of those things have gone into and probably more that I didn't describe have gone into this recent change. And I'm happy to see it and I expect it to continue.

Thank you. And one last comment and maybe just to clarify my understanding, even with some of these investments that you're planning to make to prepare the company to scale and serve some of these larger customers, you still expect 50% of incremental gross profit dollars to fall through to the EBITDA. So if you added $5 million of gross profit, that could be $2.5 million of EBITDA approximately, is that right?

Yes, that's the formula. And we feel really good about it, the business model and dealing it today. It has consistently, we expect it to continue to.

Awesome. Thank you so much. We're so excited. And we can't wait to see what you do over the next couple of years.

Thank you, Greg. We appreciate all your support.

Thank you.

Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

Thank you, operator. I just want to again thank everybody for their continued interest in Quest and following this; and I want to take this moment to thank the Quest team for yet another consecutive, hardworking, productive quarter. These folks have been working very hard, and we appreciate that. And it's starting to show really in the results, so thanks to everybody. That's all I have operator.

Well, thank you, and that does conclude today's conference. We do thank you for your participation. Have an excellent day.