ALJ Regional Holdings Inc (ALJJ) 2021 Q3 法說會逐字稿

Good day, and welcome to the ALJ Regional Holdings, Inc. Fiscal Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brian Hartman, Chief Financial Officer. Please go ahead, sir.

Welcome, and thank you for participating in today's teleconference and for being investors in ALJ Regional Holdings. My name is Brian Hartman, and I'm the CFO for ALJ. With me is Jess Ravich, our CEO and Chairman.

Before we begin, I would like to ask everyone listening to this investor conference call to review the risk factors presented in our latest Form 10-K that was filed with the Securities and Exchange Commission on December 18, 2020. With respect to forward-looking statements, it is important to note that today's investor conference call as well as our earnings release and related communications contain forward-looking statements within the meaning of the federal security laws.

Such statements, including information regarding our expectations, goals, intentions regarding the future, including, but not limited to, statements about our financial projections, business growth, the impact of acquisitions, cost-cutting measures, integration measures and other statements, including the words, will and expect and similar expressions.

You should not place undue reliance on these statements as they involve certain risks and uncertainties and actual performance may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially are discussed in our Forms 10-Q and 10-K filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements made during this investor conference call.

During the course of this call, we will also reference historical non-GAAP financial measures. Management reviews non-GAAP financial information in evaluating our historical and projected financial performance, and believes it may assist investors in assessing our ongoing operations. The presentation of this additional information is not meant to be considered in isolation or as a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

For a reconciliation of historical non-GAAP to GAAP financial measures, please see our latest Form 10-K that was filed with the Securities and Exchange Commission on December 18, 2020. In addition, we will reference certain forward-looking non-GAAP financial information, including fiscal year 2021 adjusted EBITDA.

We are unable to reconcile this forward-looking non-GAAP financial information to corresponding forward-looking GAAP measures because we are unable to estimate without unreasonable efforts, certain forward-looking GAAP revenue, expenses and other income items. We will provide a financial update for the fiscal quarter and year ended June 30, 2021, and then we'll provide high-level guidance for the fiscal full year 2021.

ALJ recognized consolidated revenue of $103.5 million for the 3 months ended June 30, 2021, an increase of $17.4 million or 20.2% compared to $86.1 million for the 3 months ended June 30, 2020.

The increase was driven by the start of production of new contracts in health care and transportation verticals at Faneuil and improved volumes for trade components and books and Phoenix. ALJ recognized a net loss from continuing operations of $3.5 million, and loss per share from continuing operations of $0.08 for the 3 months ended June 30, 2021, compared to a net loss from continuing operations of $2.2 million and net loss per share from continuing operations of $0.05 for the 3 months ended June 30, 2020.

The increase in net loss is due to the write-off of deferred financing costs and certain related expenses related to refinancing efforts, which are included in loss on debt extinguishment in the statement of income and loss. ALJ recognized adjusted EBITDA of $7.8 million for the 3 months ended June 30, 2021, an increase of $0.6 million or 8.9% compared to $7.1 million for the 3 months ended June 30, 2020. The increase was driven by higher volumes from trade components and books at Phoenix, offset somewhat by the winding of certain state unemployment contracts and continuing losses from 1 health care contract at Faneuil.

For the year-to-date ended June 30, 2021, ALJ recognized consolidated revenue of $329.2 million, an increase of $76.9 million or 30.5% compared to $252.2 million for the comparable prior year period. The increase was driven by the start of production for new contracts and increased volume for existing contracts at Faneuil and improved volumes for trade components and books at Phoenix.

ALJ recognized net loss from continuing operations of $4.6 million and a loss per share from continuing operations of $0.11 for the fiscal year ended June 30, 2021, compared to a net loss from continuing operations of $65.4 million and a loss per share from continuing operations of $1.55 for the comparable prior year period. Net loss from continuing operations for the 9 months ended June 30, 2020, reflects a $56.5 million noncash, nonrecurring impairment of goodwill. Excluding such impairment of goodwill, ALJ recognized a net loss from continuing operations of $8.9 million and net loss per share from continuing operations of $0.21 for the 9 months ended June 30, 2020.

The improvement in net loss is due to higher business activity at Faneuil and Phoenix. ALJ recognized adjusted EBITDA from continuing operations of $23.1 million for the fiscal year-to-date ended June 30, 2021, an increase of $7.9 million or 51.9% compared to $15.2 million for the comparable prior year period. The increase was driven by the start of new contracts and operational improvements at existing contracts for Faneuil and higher volumes from trade components and books at Phoenix.

With regard to debt and covenants, at June 30, 2021, total debt was $102.3 million and consisted of $101 million of term loans. No amounts were outstanding on our line of credit and $1.3 million of capital leases. All amounts are exclusive of any deferred financing cost.

Cash on hand at June 30, 2021, was $8.4 million. At June 30, 2021, we had $29.2 million of borrowing capacity on our line of credit, and we're in compliance with all debt covenants. Cash capital expenditures totaled $6.6 million for the fiscal year-to-date ended June 30, 2021. Cash interest totaled $6.9 million for the fiscal year-to-date ended June 30, 2021, or $7 million for the comparable prior year period.

Cash taxes totaled $0.1 million for the fiscal year-to-date ended June 30, 2021, which is lower than prior year's $0.8 million. Cash taxes primarily related to state taxes. We continue to use existing net operating losses to offset federal taxable income. On June 29, 2021, the company completed the refinancing of its term loans with a new provider and amended its existing agreement with its working capital revolver provider.

Significant benefits from this refinancing are: greater financial flexibility by reducing debt amortization, capital lease and equipment financing payments; improvement in cash flows that can be reinvested in our business; reset of financial covenants with cushion of 20% based on adjusted EBITDA forecast; and extension of debt maturities to June 2025.

We have discussed in the past, 1 contract at Faneuil, which had underperformed significantly as the initial ramp-up occurred during the early stages of COVID. As you may remember, this program was meant to be operated from 2 call center locations, but due to COVID, had to be facilitated from an at-home model from the very beginning. In early July 2021, Faneuil reached an agreement with this customer to conclude this contract prior to the end of this calendar year and has developed a transition plan.

Cumulative life-to-date losses related to this contract approximate $8.8 million through June 30, 2021, and will not be recurring. Faneuil approximates that going forward through the end of the transition period, results for this contract will approximate breakeven.

On a consolidated basis, we are forecasting a range of $29 million to $31 million of adjusted EBITDA for the full fiscal year ending 2021 compared to $24 million for fiscal 2020. For the full fiscal year 2021, we are forecasting cash capital expenditures to be in the range of $9 million to $11 million, cash interest to be in the range of $9 million to $10 million, amortization payments of $5.1 million, cash payments for capital leases and equipment financing to approximate $4 million. This excludes any impact from the refinancing transaction. Cash taxes to be in the range of $1 million and cash restructuring costs related to efficiency initiatives to be in the range of $0.5 million. We are currently working on our fiscal 2022 budget and are not at a point to provide specific details.

We will now open the call for questions.

(Operator Instructions) And the first question will come from Jay Leonard with Oppenheimer.

I'm not really sure where I want to begin, but just from a point of reference on the proxy results, is that something that you guys are going to put out?

Yes, on the 8-K, when we file after the -- on Friday when we have the vote, there'll be an 8-K within 4 days, and we'll list out all the voting as it came in.

Okay. Great. So then the votes are not all tallied as of yet?

No. No. The cutoff, I think, is tonight.

Got you. I misread it, I thought that we'd be able to know what it was today. Okay. Getting to reading through from a focus standpoint, with new contracts versus the building upon existing contracts. Am I interpreting correctly that the emphasis for ALJ is to work on existing relationships and basically try to get more out of those relationships as compared to going out and taking the inherent risks as is evidenced by some of these other contracts that we've had to walk away from? Where are we with regards to that? That's my first question.

Okay. So first of all, there's Faneuil and Phoenix. In Phoenix, the landscape is pretty static. And there's not a lot of additional publishers out there. And so we are -- we have a stable core of customers and we look to increase business with them, but there's not a lot of movement in that marketplace. With regard to Faneuil, which is I assume where you were talking about. We -- through our relationships with states, you pick up ancillary business. You're doing some work for the state and they need other work. They can sometimes do it under your same contract or you have relationships. But we are constantly going after new business. We have a much more disciplined approach to how to do that than when we took on this contract that cost us $8.8 million, 4 or 5 years ago. And there was implementation 2 years, and then we went live. It was a confluence of loser standards back then, plus obviously, COVID hit and it just changed the program's dynamics completely around. But we are not just focusing on current clients. We are -- we -- it was recently announced we won a large transportation contract, and we are continuing to look for new business.

Okay. And are we -- what's the status on the hybrid model that you guys migrated to during COVID?

You mean work at home?

Yes.

We are still vastly work at home. Some clients have wanted people back in, but with COVID coming back, it's very fluid. My guess is that there will be a percentage, whether it's -- before this all started, we were 90-some-odd percent brick-and-mortar. And then at the height, we're 80-plus percent work at home. My guess is that we will end up somewhere between 30% and 50% work at home, which means that our brick-and-mortar footprint will be reduced.

Okay. Because I saw the -- on the finance leases, that number went down dramatically. Is that due to the fact that we had leases that we didn't renew? Or what -- am I reading that right under the (inaudible)

Yes. Yes. During when we did our refinancing on June 29, we paid off as men all of our equipment financing agreements, and we paid off about 90% of our capital leases in the refi.

So if you're talking real estate leases, we are actively managing brick-and-mortar that we don't need as they roll off.

Okay. Because that leads me into the beginning of the unfortunate set of events that caused all of our debt issues started with a bad lease and putting the company in jeopardy prior to the pandemic.

I don't -- what do you mean the...

Well, we -- the company was -- when we had to do the first refi with your previous lenders, that started -- at least I'm -- unless I'm misreading it, is understanding what happened before the pandemic, that was the first time we had to go work within the covenants not being met. I'm pretty sure that was the way it started, and then things started to get -- then the pandemic hit and then bring it home while the other help that came out. Is that not correct?

Brian, do you -- I...

Yes. I think Jay is asking about the $18.5 million of CapEx and the...

Oh, you mean not leases, just CapEx.

Yes, CapEx. Yes.

We spent $18 million building out facilities for growth and that growth did come, some of that was not profitable, and that's on us. And then obviously, hindsight with work at home, we would not -- we -- our CapEx spending will be vastly different going forward than it has been in the past. Because like everyone else, you have to readjust to post-COVID life where not everyone is coming back to the office.

Right. Okay. I just -- I mean, because the way the thing -- the chain of events. And then it was unknown about this pandemic coming to just kind of push every business into this new hybrid work at home, things going forward, which is a positive, I would think, for us. Because your footprint actual costs will go down, at least that's what it appears.

Yes. That's accurate.

So let's talk about the Board -- our current Board. And I'm trying to figure out a way to save is the nicest way I can. The Board has been around for a very, very long time. There are a few members of the Board that I think most shareholders are very comfortable with. And then there are a lot of people on the Board that they're not. Is there -- this would probably be a good time to really refresh what we have and especially in the way of independence within the Board. Where do we stand on that? I know you've added 1 person, which is great. But the refresh is really necessary going forward. Any thoughts.

It's not under active consideration at the moment.

Okay. Will that become effective? I mean we really need new blood in the Board. I mean you need more checks and balances. Let me move on to the next thing, investor Relations. I know that, that was something that you were guys going to entertain once the company turn the corner, i.e. got the debt refinance at a much better view of the -- I can't say the total future, but of the immediate future and with the numbers starting to get better, where are we on that respect?

Brian, do you want to take that?

At the moment, we haven't engaged a firm. There have been some talks as we've mentioned in different -- in past annual shareholder meetings. We'd look into it. But at the moment, there are no discussions that doesn't prohibit us from starting discussions with such firms.

Okay. But that will get back on the agenda, hopefully in the foreseeable future. Because I know that was put to the side because why have them if the numbers weren't going to be good. And now that you've made the turn, at least we hope you made the turn, I would think that, that -- will that become something to get started in the near term because people are a little frustrated, stock has been 15 years of not moving when you look at it.

Yes. I mean we did have some of that last year with attending a conference that was webcasted. We did get some positive feedback from that. But again, I think we can talk about this at the Board level, and we'll see where things shake out. But again, nothing at the moment has been actively discussed.

Okay. on a different level and just, of course, being the savior, had to step in to take on to make goods during the pandemic. Has it been considered because of the dilution of that whole debt financing that, that debt could be paid back instead of in shares in cash since that wasn't really the company's "fault" from -- or the shareholders fault that we went through a pandemic. It was -- we were in a weekend condition and then the pandemic hit, and then we're going to end up being in a very diluted standpoint going forward. Has that been something that has been considered?

Jess, do you want me to take that?

Yes.

That is the original Term Loan C that was issued in May of 2020. And as you know, we publicly stated that the conversion of that debt was at $0.54, it hasn't changed. That debt picked all throughout the year. And when we refied on June 29 of this year, we asked our new term loan lender to change the terms. The only term that we change was to make it from PIK, which would be very dilutive at the $0.54 when the shares are trading north of $1 and make it cash pay. So the dilution has turned off. And now it's just the normal dilution set back when Jess and 1 additional investor made the investment at that time. So there's no additional dilution coming. It's already been in our numbers disclosed since May of 2020, and now the extra PIK piece is completely capped because the...

And paid in cash.

Yes, paid in cash.

Okay. No, I'm not aware of that. I mean does the inherent structure of that -- and let's make an assumption here that as the company gets stronger, and I'm sure, Jess, I would love to, or the company would love to add another leg to the tripod type of thing for another business. Does that affect, a, the ability to go use stock in the future to make an acquisition or the, -- I guess, the attractiveness of the stock in the future? And b, what happens with the NOLs? I know we -- is it February that the end of March that the chunk of the NOLs go bye-bye?

The NOLs expire on June 30, 2022, so call it, 10, 11 months from now. And there's nothing in the structure of the agreement. It's listed on the SEC, the actual Term Loan C, which is now a Term Loan B under the new refinancing. There's nothing in there structure that changes that from what it was before. It's convertible at the noteholders option, and it could be converted into actual shares at the $0.54 versus current price, or we -- the company would have to pay it back in cash.

I just know that, that is something that if a deal did arise and we didn't -- whoever was buying didn't want to come in with a diluted stat that, I mean that's a Jess discretion, obviously, but -- I'm just worried that we finally get moving, and that becomes the next hindrance because it's already the company has controlled 40% by Jess as it is. Let me just stops new investors on my own, it might get start.

Yes. What you're saying is accurate. I think if we were to do a deal and not that there's one in the works, I don't think that, that would be a hindrance. I think if it would, we would find a solution to it at that time.

Okay. And is there anything else you guys can share on getting aside from improving the operations and everything on getting the stock at a more reasonable level compared to what your current EBITDA is? And what a proper multiple might be?

We've met with some companies that hold now virtual conferences and the like. One of the sticking point is that we have no float and we have no volume. So it's a little bit of a -- they want to go there or people that want to research it, want to be able to make money, trading the stock. And as you said, it's fairly tightly controlled, which limits...

We traded, we (inaudible). We traded 70 million shares of a day.

Yes. I know, 1 day.

Yes, but still the stock finds its way out there if someone somebody wants to buy.

Yes, I think that there was the same shares trading over and over, Jay, on a bot.

Well, it could be.

Obviously, 70 million shares did in trade hands because we only have 50 million sending and 30 million of them are slightly were all restricted. So...

No. The kind of a -- we set our circumstances. But again, that puts us into that same -- I'm a believer that the volume will -- there's enough shares in the float that if we -- if it started to move, you would see a lot more action in the stock, prior to this.

I also write it, it will trade if there's trading. So -- but again, I'm glad that you're make -- having those meetings. And obviously, you can't do a secondary or anything to get more stock into the system either.

We're not at this price. We would...

Yes, of course. I mean, can you speak to what you think would be a reasonable level for where the stock would be trading at if we bring a reasonable world that the way the stock is being [weak]?

I legally cannot. So my lawyers would see.

But just from a reference standpoint, it used to be like 5 or 6x EBITDA would kind of be a good benchmark.

Again, yes, we have a Board of Directors that own stock that is married up with the public. We have an NOL that's running out in June that we're aware of, and we all have an interest in maximizing value. At the same time, we're at 0 -- roughly a 0 interest rate environment and 5 to 6x EBITDA is 16% to 20% cash on cash. So everything has to be balanced.

Got you. Anything else you can share on what your thoughts might be on enhancement of value for the shareholders?

I mean we are -- I really can't. I mean, I'm the largest shareholder. I want to maximize value. I don't see it coming on just daily trading. So our stock is always sort of done nothing and then we make an announcement of either a sale or something and then it goes up and then it sort of goes into stagnation again. I'd like to get that change, but without the stock getting to a different level and us either doing a secondary or reducing the insider holdings, I don't see how the volume is going to pick up enough. I don't know if that answers, but that's sort of how I think about.

Yes. So basically, it's more a matter of we have to just get some coverage on the stock and the stock will take care of itself.

Yes, we do have a little bit of a timing done to our head where we have an NOL that runs out in 9 to 10 months.

Yes. Well, that's -- well, the assumption, which I wasn't going to say, but the assumption would be, obviously, if you could merge Faneuil with another entity, utilizing your NOLs, and of course, if you could the margins together, that would be a very attractive thing to do if you could pull it up.

Yes. And we're -- it would make sense if we -- or anyone within NOL, we're going to do something, they do it before the NOL runs out then rather than the day after the NOL runs out.

Exactly. Thanks, Jeff. I think we all know that one.

Well, but the NOL when we started this journey was 10 years away. And we sold KS and we did other things, but now it's getting closer.

(Operator Instructions) And this will conclude our question-and-answer session for today.

I would like to turn the conference back over to Brian Hartman for any closing remarks. Please go ahead, sir.

We would like to thank everyone for attending the investor conference call today and look forward to providing our next update. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.