Executive Summary / Key Takeaways

• Operational Transformation Underway: Quest Resource is executing a comprehensive "Operational Excellence Initiative" under new leadership, addressing past inefficiencies and driving a cultural shift towards metric-driven performance across its entire value chain.
• Differentiated Asset-Light Model & AI-Powered Technology: The company's core asset-light business model, focused on specialized waste and recycling solutions, is bolstered by a proprietary AI-powered vendor management system that audits 100% of invoices, offering a significant competitive moat and an estimated $2 million to $3 million in recurring cost savings.
• Improving Financial Discipline: Quest generated $3.9 million in operating cash flow in Q2 2025 and reduced debt by $6.6 million year-to-date, with a clear priority on aggressive debt reduction and improving Days Sales Outstanding (DSOs) to the mid-60s by next year.

• Growth Amidst Headwinds: Despite ongoing softness in the industrial end market and temporary margin pressures from renewals, Quest is seeing strong organic growth from new client wins and significant "share of wallet" expansions, with an outlook for sequential gross profit growth by Q4 2025.
• Strategic Positioning for Long-Term Value: By shedding its non-core mall business, enhancing operational efficiency, and leveraging its technological edge, Quest is positioning itself for sustainable, profitable growth, capitalizing on the increasing demand for cost-effective sustainability solutions.

The Quest for Efficiency and Value: Setting the Scene

Quest Resource Holding Corporation (NASDAQ: QRHC) operates as a national provider of asset-light waste and recycling services, catering to larger, multi-location businesses across diverse industry sectors. The company's core strategy revolves around crafting customer-specific programs that maximize resource utilization, thereby helping clients achieve their business sustainability and environmental, social, and governance (ESG) objectives. This model is particularly compelling in a competitive industry where demand for both cost savings and robust sustainability solutions is intensifying.

QRHC's journey has been marked by periods of rapid expansion, notably following the mid-2021 acquisition of RWS, which significantly broadened its operational scale. However, this rapid growth, while adding substantial revenue, also exposed weaknesses in the company's internal processes and systems, leading to operational disruptions and temporary cost increases. This candid assessment of past challenges underpins the company's current aggressive push for fundamental change.

A cornerstone of Quest's competitive advantage lies in its differentiated technology platform, particularly its new automated vendor management solution. This system is designed to audit 100% of vendor invoices at the line item level, utilizing artificial intelligence. It meticulously matches every invoice charge back to the client's agreement and business rules, ensuring consistency and continuity. This capability is a significant differentiator, with management stating it is "the first in the industry" to offer such a fully digital process. The tangible benefits are substantial: the technology is expected to realize $2 million to $3 million in recurring cost savings at the current run rate, significantly reduce error rates, and enable faster, more accurate billing. For investors, this technological moat enhances Quest's value proposition, bolsters its reputation for precision, drives internal efficiency, lowers operating costs, and ultimately improves customer service, laying a strong foundation for future scalability and profitability.

A Shifting Landscape: Competitive Dynamics and Market Drivers

Quest operates in a dynamic waste management and recycling sector, where it carves out a niche against larger, integrated players like Waste Management Inc. (WM) and Republic Services (RSG). While WM and RSG benefit from immense scale, extensive national networks, and robust profitability, Quest differentiates itself through agility, specialization in diverse waste streams (such as automotive and food waste), and a strong emphasis on landfill diversion. This allows Quest to compete effectively by offering tailored, high-value solutions that larger competitors, with their broader, more generalized services, may not provide with the same level of granular expertise.

Compared to its larger rivals, Quest's financial performance, as reflected in its latest TTM Gross Profit Margin of 16.40% and Operating Profit Margin of -5.87%, lags behind WM's 29% and 19%, and RSG's 42% and 20%, respectively. This highlights the scale advantage of the industry giants in achieving cost efficiencies. However, Quest's competitive wins are often based on the quality of its service execution and client advocacy, rather than merely price, demonstrating the resonance of its value proposition. For instance, Quest was chosen over a large integrated waste provider by a new restaurant industry client due to its "value proposition and client advocacy approach."

The broader industry landscape is also evolving. Macroeconomic uncertainty and geopolitical concerns are prompting clients to prioritize cost savings, even over pure sustainability objectives, though landfill diversion remains a critical goal. This shift plays directly into Quest's strengths, as its model is designed to deliver both efficiency and environmental benefits. The difficulty in permitting new landfills and the decreasing number of existing ones further underscore the growing importance of Quest's diversion and recycling services. Additionally, trends like the potential onshoring of production could benefit Quest's U.S.-focused operations, while the expansion of AI data centers may create new waste streams, offering fresh opportunities for specialized solutions.

Operational Reset: From Disappointment to Discipline

Acknowledging that past results were "extremely disappointing" due to "self-inflicted operational issues," Quest has embarked on a significant operational overhaul. Under the new leadership of CEO Perry Moss and SVP of Operations Nick Ober, the company launched an "Operational Excellence Initiative" in early 2025. This initiative is not merely a departmental effort but a fundamental cultural shift, applying metric-driven discipline across the entire value chain, from vendor management to customer billing.

The initial results of this initiative are promising. Through its market alignment project, Quest has seen a 200% improvement in the cost of sales. In its procure-to-pay process, the company achieved a 46% improvement in paying haulers on time and an 83% improvement in vendor bill processing on time, coupled with a 30% reduction in exceptions since March 2025. On the order-to-cash side, the percentage of customers billed within 30 days improved from 69% to 75% by June 2025. Furthermore, a massive cleanup of purchase orders (POs) and sales orders (SOs) resulted in an 84% improvement in POs and a 78% improvement in SOs, enabling faster billing and reducing financial variability. Management believes these efforts place them in the "bottom of the fourth inning" of operational improvement, indicating substantial runway for further gains.

Financial Performance: Navigating Headwinds, Building Momentum

Quest's recent financial performance reflects both ongoing market headwinds and the early benefits of its operational transformation. For the second quarter ended June 30, 2025, revenue was $59.5 million, an 18.6% decrease year-over-year, and for the six months ended June 30, 2025, revenue stood at $128.0 million, down 12.2% from the prior year. This decline was primarily attributable to the divestiture of the non-core mall-related business (reducing 6M 2025 revenue by approximately $9 million) and persistent softness in the industrial end market (reducing 6M 2025 revenue by approximately $17 million). These impacts were partially offset by incremental revenue from new clients, contributing approximately $8 million year-over-year for the six-month period. Despite the revenue decrease, gross profit dollars in Q2 2025 were $11.0 million, up slightly sequentially, demonstrating that optimization efforts are beginning to outweigh margin pressures. The gross profit margin for Q2 2025 remained flat at 18.5% year-over-year, though the six-month margin declined to 17.2% from 18.9% in the prior year, largely due to higher costs associated with implementing new customers. Selling, general, and administrative (SG&A) expenses decreased sequentially by $2.1 million to $9.3 million in Q2 2025, reflecting the impact of workforce reductions and cost-cutting initiatives. The company also recognized a $4.5 million loss on the sale of assets and a $1.7 million impairment charge in the first half of 2025, primarily related to the divested mall business and customer relationship intangibles. Adjusted EBITDA for Q2 2025 was $2.7 million, a 47.8% decrease year-over-year, and $4.2 million for the six months ended June 30, 2025, down 58.7% year-over-year.

From a liquidity perspective, Quest is making notable strides. Working capital stood at $16.9 million as of June 30, 2025. The company generated $3.9 million in operating cash flow in Q2 2025, contributing to a $6.6 million reduction in debt year-to-date. Net notes payable decreased to $69.7 million from $76.3 million at the beginning of the year. Quest also has approximately $19 million of available borrowing capacity on its $45 million ABL Facility. The refinancing of debt in Q4 2024, which lowered interest expense by approximately $1 million annually and extended maturities, along with the recent waiver of Q1 2025 covenant violations, provides increased financial flexibility as the operational improvements take hold.

Growth Vectors and Future Outlook

Quest's management is confident in its trajectory, driven by multiple organic growth vectors. The company is intensely focused on expanding its "share of wallet" with existing clients, as evidenced by doubling the number of locations serviced for a large retailer through a competitive win. New client acquisition remains robust, with a strong pipeline that includes a recently secured multinational restaurant chain client. While the pace of new client additions has slowed due to broader economic uncertainty, Quest is attracting prospects new to its model, drawn by the emphasis on cost savings and efficiencies. New business onboarded in 2025 is also coming in at a higher gross profit percentage than in the previous year.

Management's outlook for the remainder of 2025 reflects a cautious but optimistic view. They anticipate sequential comparisons for gross profit dollars to be flat to slightly down in Q3 2025, but expect a resumption of sequential growth in Q4 2025. SG&A costs are projected to be mostly flat in Q3 and Q4 2025 compared to Q2, with an expectation of approximately $9.5 million per quarter in the second half of the year, reflecting the full realization of $3 million in annualized cost savings from a 15% headcount reduction. The company expects to generate significant operating cash flows in the second half of 2025, which will be aggressively applied to debt reduction. Days Sales Outstanding (DSOs) are targeted to improve significantly, potentially reaching the mid-60s by next year. Overall, Quest expects to show "both top and bottom line growth" for 2025 and "resume more meaningful growth as we exit the year."

These projections are underpinned by several key assumptions: the continued, albeit temporary, weakness in the industrial end market; the abatement of temporary costs associated with new client onboarding and system implementations; the successful optimization of margins for new and existing clients; and the sustained impact of the "Operational Excellence Initiative."

Risks and Challenges

Despite the positive outlook, Quest faces several pertinent risks. Macroeconomic uncertainty, including fluctuations in inflation and interest rates, poses a continuous challenge, potentially impacting client spending and the company's cost structure. The ongoing softness in the industrial end market, while not leading to client attrition, continues to affect volumes and revenue. Margin pressures from client renewals, particularly in cost-sensitive sectors, could temporarily impact profitability. The pace of new client acquisition may also remain slower than desired due to economic uncertainty prolonging decision cycles. Furthermore, Quest has a degree of customer concentration, with one customer accounting for 22% of Q2 2025 revenue. While a recent goodwill impairment test in Q2 2025 found no impairment, the company will continue to monitor its share price and market capitalization for potential future triggering events.

Conclusion

Quest Resource Holding Corporation is undergoing a profound transformation, leveraging its asset-light business model and differentiated AI-powered technology to drive a new era of operational excellence and financial discipline. The company's strategic decision to divest underperforming assets, coupled with aggressive cost-cutting and a renewed focus on process improvement, is already yielding tangible benefits in cash flow generation and debt reduction. While facing macroeconomic headwinds and competitive pressures from industry giants, Quest's specialized service offerings, client advocacy, and technological edge position it to capture growth in a market increasingly demanding both cost efficiency and robust sustainability solutions.

The path ahead involves sustained execution of its "Operational Excellence Initiative" and continued expansion of its client base through both new wins and "share of wallet" growth. With clear guidance towards sequential gross profit growth by Q4 2025, a stable SG&A profile, and a firm commitment to debt reduction, Quest is building a more resilient and profitable enterprise. Investors should monitor the continued improvement in DSOs, the realization of anticipated cost savings from its technology platform, and the company's ability to convert its robust sales pipeline into profitable new business, as these will be critical indicators of its success in forging sustainable value.