Merger Viability & Cost Structure Review for NewCo

Hey Sean.

Hey Judy, how you doing?

I'm good, how are you doing?

Hang in there.

Hey James, what's going on?

James, you see TCU just won a buzzer beater? Yeah, I don't know if it's a buzzer beater, I just saw they won by 2, so it's—

I've been stuck on like back-to-backs all day, like trying to like Yeah. I'm like losing my mind. What's going on, Pat? Hey, Pat.

Hey, guys.

How's it going?

Yeah.

So during this call, we just slowly see James just, you know, veer his focus off camera. We know what's going on. Against kind of all odds. So there you go. You went to Penn, right? Uh, for grad school. Yeah. Okay. Where was undergrad? Uh, Boston College. Okay, Brad. Pat, whereabouts are you from?

Uh, born and raised New Jersey. Uh, Penn State undergrad and then UCLA grad school.

Nice.

Brad, about you guys?

Texas. Um, What's that?

Do you go to UT or is it—

I was TCU.

TCU.

I'm from Texas and went to TCU and then grad school at Pepperdine, which is pretty rad. Yeah.

A minor in surfing.

Yeah.

It was like absolutely not grad school. It was like, it was like burnout protocol. Yeah.

I went to LMU. Who were really good back in the '80s until— I don't know if you've seen the 30 for 30 documentary where I can't remember the guy's name, Hank Gathers. You should look into that story. So LMU used to be like one of the best basketball schools in the nation. Then this guy passed away on the court tragically and they've been horrible since.

So it's kind of like a Len Bias story in Boston. And I can't think of a better segue than like, what are we talking about?

Things that are dying.

Happy Thursday, everybody. That's my numbers guy.

I assume this was a March Madness started conversation.

It started that way and then it ended up in kind of a weird turn.

Took us on a dark turn.

Ended up in a bit of a ghost story.

Thanks, JD, for getting us started on such a positive note.

I like to set a good tone for all our calls.

All right, go ahead and go camera off. Appreciate you doing that.

That's so funny. Um, thanks guys for the regroup and apologies. I know it kind of took a while for us to get back together. We have been playing around with the model. We've been having quite a bit of internal dialogue on the concept. And I think where we wanted to start today, like, I know we had some back and forth in email over like valuation methodology. I think that's maybe like the second order question to address. I think first, where I'm a bit hung up is I want to make sure that if we move forward with this, like, new co-concept, that that new co is viable and in a position to sustain itself and continue forward with, you know, positive cash flow to equity, basically. And what I'm struggling with in the model is like, if I tweak any of like 3 assumptions in what I consider to be like pretty reasonable ways, the cash flow turns negative pretty quickly. So like just we don't need to like get too deep into them. But CapEx is, I think, a question for us because we've frankly not had a year with $1 million of CapEx. We've been running higher than that, although not terribly higher. Going forward, 5% annual growth when we've— in revenue, when we've seen year-over-year declines, just to name a couple. And I think the issue here ultimately is like, despite, you know, pretty aggressive payroll reduction assumptions, which I think we can just assume for now are achievable. The cost structure still just seems too high. And I think the major drivers that are left are the leases and the debt. So where I think our heads are at, at the moment is like, can we brainstorm? Are there things we should consider in how we're talking about going about this and what gets contributed? To like further reduce that overhead from the start so that this new co is more viable and can withstand whether there's a little bit more CapEx or revenues flat or whatnot. And we're not just kind of doing all this work to end up with another business that's losing money, to put it delicately. So that's kind of where my head's at. And I think, you know, Shawn and Pat and I were kind of debating, like, are there things we consider where we reconsider what's getting contributed? And maybe it's even from both sides of the house. Maybe there are leases we need to hold back and not put into the new co. Maybe there's something on the debt side that y'all can do from your end with paying it down, maybe in part. But I wanted to kind of open the conversation there. And so maybe just like initial reactions to what I just said, like whether you, you agree with what I'm saying, whether you see my point, whether you disagree. Like, that's where I think our heads are at at the moment.

James, you might have—

I think, yeah.

So we have an updated version of this model that kind of breaks out the upside assumption. Outside of just like, here's revenue growth, and kind of breaks it into the, uh, drivers that we see for revenue, mainly just being the rate per day and the utilization and the count of assets. So we can get more tactical about the actual specifics about how the revenue increased, or if we're modeling for a decrease in a, in a down or a bear assumption, what the actual specific scenario would be that we're actually trying to account for. Um, I can share that with you after the call, but there's additional upside scenarios that we can toggle on and off to kind of see, all right, if we're able to execute on X, Y, and Z, what is the actual, or what is the resulting EBITDA at the end of 2030, let's say. Um, and kind of building more of a J curve as opposed to it kind of being flatlined with static cost structures and static revenue growth.

Um, can I provide an example just to tie that to what she's talking about? So I think first off, there's the concept of viability, which 100%. Like, and I think viability is broken down on the business is able to either sustain itself or from a capital structure perspective, and ideally both of those boxes are checked. But what JD's talking about there in terms of like what is currently being considered is quite literally here's what happens when you slam these two businesses together. And more or less do nothing. You let leases either expire naturally, or there's some odds and ends tweaking, but to your point, it's mostly just the big EBITDA swing is right now facilitated through a giant personnel cut. But when we think about what we would actually do, a toggle that we have built out is Kiote by Sunset, and specifically Star Wagon before that, was the, like, West Coast market leader in live event, kind of like, whatever, cast trailer mobilization up and down. I imagine it still is. Part of our conversations throughout this have been more or less confirmatory to that. And so when we think about, okay, we've got 400 or 500 assets that we agree need to Do something with them, because if we're not going to use them, then we need to get rid of them. But of that, it's like, is there 100 in that 400 to 500 that we can scope out to and budget for the, the CapEx above $1 million to get those East Coast Four Seasons ready so that they can capture the live event space on the East Coast and up and down kind of like the kind of East Coast middle of the country piece as well and pick up whatever other type of opportunities there are out there. So it's taking what's working today, figuring out how much it's going to cost to make it work where it's not currently happening. It's our understanding that the East Coast is largely dead for you guys on the live events base specifically.

We do events in the Southeast out of Atlanta right now, although I wouldn't say we have the same position we have in LA. And we do do a few events like in the kind of Northeast seaboard as well. Not the same volume, but we do do some. And we have started sending, we have now trailers in New Jersey that are going on their first 2 productions in the coming weeks. So we've begun, we've begun that. What we're going to find challenging, I'm sure to no surprise to y'all, is like there is one of us in, in those markets, right? BI, head ads, like everybody's trying to go after all the same stuff. And so what I, what I would say is like, while that sounds great and like we certainly agree that that could be upside for us. I think this has to work without that.

Great. I mean, in that case, that's more or less what the model that we are currently working against has. And so going back to kind of your original point, it's either viable from it can walk on its own and doesn't require additional support from equity, or the capital structure is such that it is able to more or less tread water. But it is one of those two levers. Yeah, I think historically our approach and what we've discussed with you guys is that we need to figure this out without kind of the deus ex machina thing that we've been talking about, like either some upside hockey stick scenario or some capital partner coming in and wiping out or exhausting, resetting that, because I do think— I've also said I do think that will still be required, but I think that we will be in a much better position to more or less negotiate those terms. We'll know exactly more or less what we need if we are going through the actual, like, the constructive dialogue of just honing in and doing exactly what kind of you're talking about there. It's like Contribute this, leave that out, drop Cahuenga, can we consolidate it into West Hollywood? It doesn't wipe out both of those rents, but the combined revenue there. It's fine. It's like actually taking that next level down and starting to hone in, because if we have a $7 million margin of error in a pro forma year 1, at the same time that SAG did not reach a deal on Sunday, You will not find like, as JD led in with like his horror story, you will not find optimistic people on this side of the call either. So we're happy to go through that with you guys. Where do you want to start? I have some ideas.

Well, I think, like I said, I think it's like the leases or the debt. Like those are the two biggest needle movers left. After what you've assumed around the payroll. So I think we either need to talk about like, well, probably, but we need to talk about both, I think.

But there's, there's also a like a $9 million bucket of other expenses on the, on your guys' side that we don't really have any insight into. I think that also from our perspective, we have the granular information for us. We have top level information for you guys. It's hard for us to say we're going to go in and cut X, Y, and Z when we don't know what makes up some of these like large expense buckets. Um, so maybe further information there. I know there's some assumptions we made around just not having to be a public company and the reporting infrastructure and all of that required to be a part of that. And we've taken a chunk off, assuming we know about what that is. Um, But like James said before, this really is meant to model like smashing two companies together, not getting really granular on the detail yet because we don't have the detail to actually make an operating model that is defensible.

So, and we're not really sure it makes sense, like kind of what we were saying a couple months ago. We don't know if it makes sense to take the time to do that if from a value perspective we're not in the same galaxy.

But like there's nothing of value now with the numbers that where we're at, I guess. But we could argue— well, I guess I— let me rephrase that.

All right, I totally agree.

Yeah, we're like, is there any point debating value when the company has no value, uh, in the go-forward scenario?

Yes.

So we need to first figure out if we can get the go-forward new co to a company that has value, to be a company with value. Because right now it doesn't, there's no equity value in the current model if you tweak any of those things I described earlier.

I would throw out as a possible ingredient looking at business unit level contributions. So like, is there a holdback where like, I don't know, there are just some things that like, like I think y'all pose the question like, does this need a bathroom company?

You know, we decided we don't need a bathroom company. So we got rid of all our bathrooms. So yes, that's a good question.

You know, and I think like I did, I guess my point here, it's like if we're going to figure it out, it's kind of got to be no holds barred. And it's like everything has to be on the table because— and that means like everyone fought us tooth and nail. We were like, we must kill this rental car company here. Like it's a cancer. Yeah. And I think like the thing about bathrooms and location services is that it's really betting against the trend that we're all building into the DNA of this go forward. That physical production will be at a critical mass enough to justify the bathroom and production supply and labor infrastructure required to facilitate on-site location services. So, I don't think we should be afraid to look at that. And if that's something that's left behind, it's self-sustaining. Right? So, it's like, but It is volatile. And I think that at the end of the day, when we think about viable, it's really what we're looking for is predictable, consistent, like something that we can get confidence in, which is not something that is predicated on the right location manager getting hired by the production, one of the few productions that is going to be doing enough on-location shooting to justify the 15 to 20 people working basically 24/7, so double overtime, to like get that 50th table out.

Yeah.

Um, so I think that's in the spirit of what I'm trying to say.

And I guess what I'm suggesting is like, we are open to talking about leaving more stuff out of the equation if it means that the new co is in a better position and more sustainable.

Here's what it can't do. It can't result in a competitor. So in the same way that it's like we leave location services and bathrooms out, I don't think the over— I don't think it's necessarily then competing with what SuperCo is doing on the go-forward. What it's competing with is the like stallion site services that just was like, took these assets elsewhere from an understandable third-party transaction that we have, that we are like, way to go, guys. But it does put those two things at odds. And so the business, from a combin— like, from a combination standpoint, it's like, if we're going to hold something back, it can't then compete with it. I know that sounds intuitive, but it means it kind of locks us into— it's like, if we're doing cast trailers, it's It's all the cab trailers and we have to handle this. If we're doing trucks, it's all of the trucks because we can't be seeding competitors along the way to then like kind of like nip at the heels.

Yeah, I agree with that. So even if it's something like we want to talk about, I know I don't really want Atlanta as an example and we've talked about how it's not the most important thing here. But we always talk about it. But like, as just like an example, if we were to say, screw it, like, none of us have confidence in that market. Like, let's just drop it from the equation and leave it out. Even in that version, I wouldn't— and that, uh, that's the location. The trailers could still be in this new co, right? Like, to your point, we're not selling the trailers to then create a competitor. It's like, we maybe we auction the bathrooms Maybe the bathrooms come in. If bathrooms are part of this future business, the trucks can come in. It's just that geography goes away. So I think we could talk through like what that looks like depending on what we think the most viable version of NewCo is.

That makes sense to me. JD, thoughts?

Yeah, I agree. There's definitely still losing operations inside of SuperCo. Um, to the degree that we can. I think that the thing James said is the most important, like we can't be out there seeding competitors. So if we agree that this is just not a line of business that we ultimately want to go down, and we're fine if there's a competitor out there because it doesn't, uh, infringe on anything, we're like the core business that we're trying to, to build here. I think that makes sense. Bathroom is probably the best example. But if we get rid of bathrooms and keep locations, is there like— are those at odds? I don't know. But I do agree, maybe it's changing the ingredients to make it as defensible as possible.

I would pose that as a framework question to you guys. Do we want to try to make bets on the business, like the viability of business units where it's like even though location services is profitable, we're betting against kind of like the grain. It's a contrarian bet. So, I use that as more like the frame, like a challenge. It's like, we don't, we're not like, alternatively, take commercials. Commercials are easily going to be the fastest to get disrupted by AI. I don't think that's a controversial statement. So like, I think it's a question of— but we— but SuperCo between LA and New York is in the two markets that whatever it ends up being, they can be a market dominant or market leader, and they have the ingredients to do that. Um, but it's like, are you— it's trying— are you trying to be proactive, I guess, here? Or it's like, we don't think location— we don't think they're going to be shooting a lot on location, so we should just leave out location services even though it's profitable today and maybe the juice is not worth the squeeze. But it's a question, I guess, is—

Yeah, and I think maybe I would focus on like some of all of— we probably don't need to answer all of these questions up front and we probably just need to prioritize and focus on what are the biggest drags on cash flow and like tackle them that way. I mean, like, the bathroom question, like, can, you know, be a question we resolve later unless it's a significant negative cash flow drag now, in which case then we should, yes, address it now. Oh, that's where my head goes. So I kind of circle back to, like, overlapping leases and debt. Like, those are the other two biggest cost drivers besides the payroll one. And yes, I hear you on the other costs. Like, Pat can help provide more breakdown on our side of like what's in there, and we can kind of talk about that and what other reductions might be possible. But like, is it not the leases and the debt at this point that would be the biggest needle movers?

Yeah, I, I agree. Um, let me think about how to pose the lease question. I guess the— it honestly goes back to what we were just talking about, is what lines of business do we want to be in? The fewer lines of business we're in, the fewer leases we need to actually maintain. And I'm just thinking from like, if we, if we do a bonfire of 400 trailers, it probably reduces our, our lease component considerably. If we do decide like, hey, those— the, the benefit of having those to go after these geographies or these lines of business is ultimately worth it, that's going to be higher revenue potential but also higher cost structure.

Um, so is this not like, hey, what is the like target for the fleet going forward in terms of size? What's the actual footprint we need to support it? And then Okay, what does that mean for which properties we don't want to be part of this and how do we get out of those assets?

I think, I think that almost if we can— I know we'd want to discount what the potential J-curve of cash flow looks like, but if we have a vision, if we have a shared vision in mind of these are the 3, 4, 5 initiatives that we ultimately want to go after, here's the assets we have or the, um, the operations that we have that can support that or that we can use to deploy towards that, we will need to keep them. We'll be, uh, bearing the burden of them until we just figure out whether they actually succeed or fail. Everything else that doesn't support those growth initiatives or what we know already exists for the business, I think that's where we would look to cut. Um, so in James' example, we want to go after more live events on a nationwide basis. That requires us to probably have a significant amount of trailers that we ultimately can't get rid of a lease because we need to be able to store those while we do the 12 to 18 to 24 month sales cycle to see how many of these live events we can actually get, um, as business going forward. And then we can make the decision from there. Um, I don't know, James, I, I'm not sure if you get what I'm trying to say, but it's like We can get very bare bones if we don't want to assume any upside that we're building towards any sort of like $25 million EBITDA goal or $30 million, whatever we want to set as the goal after 5 years. Um, we can strip it down bare bones knowing we're sacrificing revenue potential down the road.

I want to try to simplify it like it, because it feels like we understand they're getting back in the weeds, but I liked the way that Stephanie framed it from the outset. On just thinking about it in terms of viability, either through basically additional cost takeouts or a capital structure reset. And I think, JD, what you're talking to there about wanting to commit to some initiatives that do have some potential upside, I will just tell y'all that will be ultimately required. And for better or worse, when we go try— when we go have conversations with a capital partner, they're going to want to see a hockey stick. Everyone knows it's bullshit. Everyone knows that the hockey stick isn't real. It's just about like, are we able to defend it until we believe it? And I think at that point, we probably would. Some of the stuff sounds great, and it makes sense. And it's just how plausible is it? But I think to put it very bluntly, what the model currently shows is an equally uninvestable business with no value today.

Yeah.

So I think trying— what you're trying to do on debt leases, those are the low-hanging fruit. JD, do we have Sadakoi and Valhalla rolling off next year?

We don't have Sadakoi rolling off. I believe we are assuming that we re-up that. Valhalla, yes, rolling off.

Okay. I think, Stephanie, your question the other day on the future of Kuanga, was very helpful in just kind of getting it, getting us to kind of look at it a different way where it's like, drop Coenga, can we convert state, like what is Stage 5 doing in terms of its actual, like if we think about it from like a hotel standpoint, like what's the RevPAR or the ADR on Stage 5? Can it be converted to just like a, we're putting a gun to their head and saying like, you have to operationalize things. Where trade— the trade-off is we're saying no, thank God, to the truck-only revenue that Avon does out of there, even though it's a couple hundred thousand. We're better off routing that somewhere else where our economies are and just getting very focused on that and seeing what that does. Because between offloading Kawenga in May of '27, which we're operating around the assumption right now I don't think that it's our option. At the end of the day, we've built a lot of optionality into that lease because we do not trust these, like, this industry. So we can look at it from a standpoint of like consolidate, um, Kuenga into Stage 5, make that Fuller piece really just kind of like the last bastion of commercial production there in Hollywood and see, like, kind of ride that out, keep it same store sales, but just look at what those— like, what that does to kind of like the waterfall. Because between Cahuenga, I don't know what the rent is at WeHo, it's probably what, $120,000? But I mean, Santa Clara, Mojave, and Cahuenga You're at basically $200,000. So $200,000 minus whatever the rent of West Hollywood is, is, uh, can now go to the bottom line.

And you also have the old HDR location in Burbank, 2/3 subleased.

It expires naturally next November, which is what's making that last third really difficult to sublease. There's also just a ton of capacity in industrial, like, kind of in and around that space right now.

Stage 5 is a little under half a million this year.

What's the total West Hollywood Fuller?

Including the park. Yeah, with the parking lot is a little over 1.1.

So basically 1.6 between 5 and the entire— for all of West Hollywood compound.

Yes, I think them is coming up soon.

When does it expire?

It's fully extended.

We have 5 years. Oh no, sorry, that's an old It's about 133.

I don't know if that's with or without the nets.

With the main campus through July 2030. And Stage 5 through May— oh, I'm sorry. And then Stage 5 is through June 27th. So we have an out on Stage 5. We do have an option through '32 on Stage 5, but the current term ends next year.

So the real dig deep, bare bones cost reduction there is drop Kuanga, drop Stage 5, figure out how to run a satellite pro supply, but like true bare bones. It's like, how do we— like, how do you maxim— like, run the maximum amount of revenue, the minimum amount of cost? Through there, but I don't know what stage utilization is. We're also not stage runners.

Like, yeah, yeah, the West Hollywood campus is basically including Stage 5 is basically break even before any overhead. So like losing the utilization of Stage 5 would put the WeHo campus negative. In terms of contribution. So we would have like an offset on our side that would— or a decline on our side that would offset some of the benefit of putting pro supplies there.

And that's— I think we can probably provide some better visibility. I will say that even though we are not stage runners, those guys get a ton of stage opportunities. That they are like trying to find homes for. And I think that I don't think we can bank on that because as we said, AI is going to get disrupted first. But it's really kind of like on some of the stuff, it's like, how do you build it so that it can ride out the rest of its days and like so that it can ride out the rest of this sector's days? Because the sector is not going to zero. but it's also not going to ever be what it was. So it's trying to just make, trying to achieve almost that minimum viable product that still provides the service. It's still, you know, something that we can sleep at night being proud of, but it is, you know, I don't need to, I don't need to tell you guys what it is.

Um, wait, just for clarity, I think I, I must've misheard it. What was the monthly at? $133,000 a month. Okay, thank you.

Stage effectively, it's basically $500,000 for Stage 4. The rest of it, I think you said, is $1.1 million. Um, so West Hollywood as a campus, $1.1 million plus $500,000.

Got it.

Um, And then, okay, so then let's switch gears then to the debt side. I think you've got really, our capital structure is fairly simple and clean. You've got investor debt, which I think we've highlighted, and that really sits there more as preferred equity than like a debt instrument. And then the ABL piece that we just finalized the restructure on, that's clipping along at like $400K a month. But I would say that the combined asset base is significantly more bankable or financeable, if you will. There are significantly better terms that are able to be better able to be achieved, if not more or less wiped out. I think our bank is conceptually— our bank is on board for just about anything. They're equipment lenders at the core, through and through. But I think there's an exercise that we can do there, I guess, on a capital structure side to just see What does that look like to clear more margin of error? Like, to us, that's what we're trying to solve for here, the viability. How do we build as much of a margin of safety as possible? And it's through these two levers. And I think, but I guess the fill-in-the-blank piece of that is on the capital structure side, it's how do you do that? Do you do that through another capital markets exercise of just like, what are we able to achieve here? Or do you bring in or have some type of liquidity injection to neutralize and retire some of that debt? Our initial plan when we were in the primordial stages talking with Redbird was we need to retire this debt and restart in conjunction with, you know, some of the odds and ends benefits that they can bring. As you have seen, as you, when you really get into it, like it's a difficult thing to lend against. Now combined, you are getting a, on just the truck side alone, you're starting out under 50% LTV, which people like. But you got to— you're valuing trailers at zero, even though we just got a fresh appraisal saying otherwise. Like, I think that's just so that the banks get the regulators off their backs. Like, I think that maybe that is probably where we can sharpen our pencils. Because I think— yeah, I think the thing that we need to be solving for is It's trying to make it less, I guess, ethereal or amorphous. We have to be working against, say, I guess, like tangible target where it's like, okay, we've got $7 million here. What are we actually wanting? We always want more. But at what point are we feeling better about the achievability of whatever the model is spitting out?

I feel like the bare minimum is like positive cash flow to equity with a more reasonable CapEx number included.

Just to—

I do want to touch on that before any like growth assumptions, right? I do want to— yeah, I want to touch on that CapEx number because the CapEx number reflects the spirit of what we're trying to accomplish here, where we're not investing in any sort of growth. If things go sideways from like an asset perspective, We're just retiring that asset. We're selling it off. That's— I think Avon on a combined basis in 2025 did about $100,000 of CapEx in 2025. Like there was a couple of legacy from 2024 that we ended up taking on in 2025, but we had minimal CapEx in 2025 just because we had this austerity mindset where we're going to take advantage of what we have. Not necessarily try to go out and get anything else. Um, so the one that I think—

breakdown growth versus maintenance. JD, breakdown— like, I think that's another distinction. And when these maintenance is probably like growth here, it could actually be addition by subtraction, where like you're using a CapEx charge to quantify the decommissioning of assets. Like, there's a cost to that as well.

So that might be something that we can But I guess what I'll say is like, I believe that that level of CapEx you can do for a period, right? Is it sustainable? Probably not. And part of that is like a huge chunk of your business is motorized vehicles, right? That fleet is going to age. It's going to deteriorate. The fleet's going to get smaller. I know right now we're oversized. Carb, our best friend carb, like trucks are going to exit the fleet at some point to even just sustain revenue. You have to buy new trucks, right? The trailers you all have, like, and I like if you sustain, if— but you're modeling revenue going up at 5% a year, right? So you're not modeling any falloff in truck revenue, but you're not reinvesting in the truck fleet. And I'm not saying that's a good decision to reinvest in the truck fleet. I'm just saying, like, those two assumptions are not congruous to me. And then the other thing I would say on the trailer side, you have new trailers. You clearly spent money buying those new trailers. I believe you have little to no CapEx on your brand new trailers. Our trailers are not brand new. If you want revenue to flow out of them, there is CapEx associated with maintaining that smaller fleet. So I can tell you we've not touched $1 million of CapEx, much to our regret. If our CapEx right now were $1 million, I don't even know if we'd be talking, frankly. So like, I just don't believe that number is sustainable. Could we do it for a year or two? Maybe. But like, I would see revenue falling off if that were the recurring number. And like, please, Sean, Pat, disagree with me if you, if you think I'm kind of overstating the case here. But like, I struggle with that million dollars of CapEx.

Oh yeah, I think that's exactly right. And to your point about growth CapEx, JD, we haven't been growing the fleet at all. We've been, we've been subtracting. Our CapEx number is purely maintenance. So we're like cleaning up the trailers after they get used. We make a lot of modifications to trailers that clients request. And we think that's part of our value add. So if we were to cut that number materially, there would certainly be revenue at risk.

And I'd say maybe the other thing we've done quite a bit of is like solar conversions, right? Like in the craziness of the market we're in, despite declining revenue, there's been growing competition and we've been forced to invest in solar for trailers just to defend revenue. And it's not— it's not growth investment. It's protecting market share. Yeah, it's defensive spending. And if you— it bears out if you look at the utilization of our solar trailers versus our non-solar trailers, like, you know, the proof is there. But like, the stuff is always greener.

Because I got to tell you, the amount of times that I have thought to myself, I wish we had fucking non-solar trailers, just 100 of them. Because it's like, I think the opportunities that— like, the amount of opportunities that we have to capitalize that we can't because we don't— we only have this, like, granted, we restructured it so that our base— like, we can do that now. But like, the price point and the level of asset that we see more of than we see for solar trailer I don't know, it's got to be like 2.5 to 1 where they're looking for a non-solar, just kind of bare bones.

Well, that's probably true of like the volume we do, but just because of the quantity, we have so many non-solar trailers. Like, yeah, if I broke out the revenue, it may not be too dissimilar, but like utilization of our solar trailers, because we have so fewer of them and quantity is much higher, but I think like globally well heard.

I think one thing I just want to circle back on, Pat, CapEx, where you say like cleaning it up after they go out. Yeah.

Repairs from damage from clients.

So that's like just the main floor replacement.

So like I got dented appliances, like stuff like that.

Yeah, just the wear and tear.

Just a couple of items here. I don't think I've seen the CapEx numbers for you guys. I don't know if it got sent over. Are you able to send that over after the call? Is that something you have available?

Yeah, we can, we can share like what our kind of plan for this year is. And what I will also say is in our CapEx number, when we share it, we do capitalize the facility part of the cost of the facilities from which we repair and historically have manufactured.

Modify a truck or trailer in Ralston, you capitalize part of the rent from Ralston. Got it.

So I think—

yes, so it will be high because of that in part. So like, as we assume those facilities burn off, we'll be able to bring our CapEx down, or it flips to an expense. One of the two.

I was gonna say, I, I think that is where the method— because all these things you're describing, these are all things that we're talking about, but these get— we recognize these on our P&L. We're not taking CapEx charges for these. So I think that is where the difference is here. We're having all of our maintenance and repair and all these items when loss and damage comes back, like we're taking that as an expense in our P&L. Granted, is that the correct way to do it from if we were getting audited financials? Maybe not, but it's the luxury of not being a publicly traded company. Um, we are still recognizing all these expenses. They're just baked into our P&L. Um, so maybe Maybe the $1 million CapEx number that's being used as that fill number, I don't think we're— I think it's apples and oranges what we're comparing that number to actually be, because that is showing up on our P&L and baked into our assumptions. Um, the other item on the revenue decline and it being incongruous with the level of CapEx, I don't think there is any— I think our utilization is low enough to where there's not the need to go out and repair a vehicle or repair a trailer in order to get utilization for that because we don't have replacements. Um, utilization is low enough across the board where we can have meaningful increases on both the truck and trailer utilization and not require significant CapEx to bring these vehicles up to spec or bring them back into operating, um, I guess, condition and not be— and still be kind of talking about like the art of motorcycle repair.

Where it's like you have a motorcycle to ride and then you have an identical motorcycle to raid for its parts, right?

Like, so, so I, I agree with you that in perpetuity, $1 million of CapEx is not feasible. Maybe the 5-year timeline is a bit aggressive, but I do think for the next 2 to 3 years, we can ride down the fleet we have now, especially if that is the operating assumption we want to use. And actually make that— and, and that be achievable. We may have to change the methodology or figure out like how we're actually accounting for those items. Um, I don't know. I, I do feel strongly though that that is possible just with the large fleet that we have and the current utilization we're seeing, that we're not missing out on revenue opportunities because we don't have operating assets that we need to put CapEx into.

I also feel very strongly that the team and the infrastructure, like, they— granted, there was nothing here when we got here, so anything was going to be better. But what we've seen them do over several years, and I think what— it's a big— it's a thing that I have the highest confidence in, is what that team is able to do with this larger kind of combined fleet. And from there, it's the asset management decisions of just like writing it down, right-sizing it to whatever we are thinking that this industry is going to be. So I guess the question, it's like the accounting categorization question. And then, but the piece of it that I would, I'd be pretty confident in betting on is that team's ability to come in at or under these numbers when it comes to the PDI, like the stuff that comes, like what, how it comes back, how they go about kind of addressing those needs.

Yeah, I, I, well, I hear what you're saying. I think the way we need to skin it then so that we're apples to apples is right now in our cost of sales and our payroll, we have capitalization offsets. Don't ask me why, but the overhead piece— so rent, R&M, facility-related costs— is getting capitalized into our cost of sales and thereby reducing it. And then our capitalization of the payroll associated with manufacturing is offsetting payroll. So we could update that to remove that capitalization piece, and then our CapEx— the only remaining CapEx would be inventory purchases.

Yeah.

Right, Steph. And then it sounds like those would be R&M expense through the P&L for you guys.

That's correct.

Yeah.

Because any— no, the, the approach we've taken is if there is like an engine repair or something like that, we're just going to dispose of the asset. We're not going to throw good money after bad at that point. Like, if it costs $25,000, we'll just sell it off because we have enough fleet to back something.

Do you guys track total cost of ownership by asset?

Yeah.

No.

Yeah.

Maybe it'd be helpful if we shared that data that we have then, just so we can get an idea of like, what are we spending per year on our fleet per asset, just to get an idea of like why we think this is achievable.

Yeah, that would be helpful. And it's also helpful, like, that's effectively already in your number on your side, right, is what you're saying? Like, whatever you're spending, whatever you are spending to maintain your fleet is in your expenses?

It's in our P&L, correct. Yeah.

Okay. How do you all think about the truck side of it as to like what the future of that looks like? And because trucks are super challenging, obviously with like carb, it's harder. They're expensive. The economics aren't great. If California kind of turns back up the rules on the like air resource, the ACF, Advanced Clean Fleet rules, and like starts pushing back toward electrification, it really doesn't work. All that context, I mean, between us, we've got like 500 motorized vehicles. Even just thinking like, okay, maybe you don't need 500, maybe you need 300 between the two of us. Like to even just maintain that fleet, like as the trucks age, that on that smaller scale, we've gotta replace like, 10 a year. Like, we have not been doing that, but like, how do y'all think about that part of the business?

I can answer, then JD will tell us what actually is happening, but we don't think about like replacing. I don't think like we're in a— it's not a replacement stage still. It's— I don't know, like it's—

y'all have bought new trucks in the last 3 or 4 years. How many?

Well, okay, I've heard, I've heard y'all have bought new trucks. When you go 3 or 4, yes.

Yeah, yeah, yeah.

But like, that's also— there's really kind of like 2 timelines here. There's we get in in 2022, uh, and then halfway through 2023 we realize, uh-oh, like, like we have to start betting that this is never going back to what it was. And so then we spent halfway through '23 through basically '24 turning around and trying to stop the flow of new vehicles that we had committed to from coming in. And that means like, like we won some, we lost some, and we got, we ended up with some new trucks in '24, I think like 8. Um, this story sounds familiar to me, but Avon also had a just breathtaking reputation problem from both the quality of its assets and it's like non-existent existing maintenance and repair infrastructure, which contributed to the quality of the assets. So, we went through and just, like, you know, pulled half the fleet— not half of it, we pulled a lot of the fleet. And I think by the end of 2022, at the end of '22, we had 820-some-odd vehicles. I think at the end of last year, we had less than 500, less than 450. Did we, did we cut it in half, JD?

Yeah, we're at 428 at the end of '25. Pretty much like that. Yeah.

So like we— all that to say, like we stopped acquiring vehicles and we— but we did not remove the ability to keep the vehicles we had. We got really focused on total cost of ownership and looking to extend useful life from 8 to 10. To more like 10 to 12. And that was probably the hardest. I cannot tell you the amount of shit that I took from our investors, like for 2 years where they were like, this does not make sense. This doesn't make sense until it started actually showing up in the numbers. And like we were having months where it was literally $0 spent on maintenance and repair or like other things because on repair, not on maintenance.

On repair, but not on maintenance.

Yeah. Because of the— because it's a compounding thing. Now, trucks are still 10,000 moving parts desperately trying to like explode all the time. So things happen. But it's why I'm very confident. My background was in trucking. Like, I think it's the least sexy piece to like that people think about when they think about these businesses. But it's the I would argue that it's been the secret to why we have, why we were able to turn around most of Avon's reputation so quickly. Couldn't have got much worse, but also like it's why we've been able to sustain that for the most part. So I do not think about replacement. I do not think about buying net new. And I think that when you put these two together, you're doing the same thing that we did, which I feel we've demonstrated, or we'll show you, like that we are pretty adept at disposition. On the asset management side, we've got a pretty good team. Like, and I think that between the two of our kind of collective brains together, I don't anticipate, I would say that the amount of trucks that we need to buy, unless there is some regulatory black swan, which I think is like worth considering just given the last couple of years. But I don't see there being meaningful reaccumulation or replacement of assets there. Y'all buy new—

like, we have enough new trucks between us to sustain, to last for some amount of years. Yeah. Um, which, speaking of, because our because they're going to age and then they're going to, you know, oh, Galpin has new trucks and blah, blah, blah. But yeah, it will— the fleet size will deteriorate, will dwindle as it should. And I guess one question there, we were talking about the debt with the asset line of credit. I mean, like, do you just go auction off? I mean, you don't want to create competitors, but trucks aren't exactly like unique assets, go auction off 200 trucks and pay down some of that asset financing.

I tried to get Supposed to Drive to just buy the truck division last year. They said no. But those guys are also like fence riding. Like, I'm not opposed to creating a competitor on the truck side. The problem is we just have too many and it's not a thing. You're also competing with the studios themselves. Like, the force— the competitive forces on the truck segment is multifaceted. But yes, to your—

but we have way too many between us, and that's part of what's securing that debt. So like, if there's a way to offload a bunch, at least there's a market for trucks. There's a market for trailers.

I think you're spot on with that, Stephanie. I think that would be the lever we pull on to just reduce that debt load and make— you're not— like I said, if we're not impacting utilization and the incremental vehicle wouldn't be rented anyway, why wouldn't we use it to take out some of that interest-bearing debt and just improve cash flow?

We sell them in, what is it, Minnesota, Nashville. Like, we have a pretty established network of buyers across the country that we get pretty solid. And then the big one that was— we were successful at last year was just taking— I think they initially wanted $60,000, we convinced them to take $80,000. Uh, and then we We're really happy with how that turned out. Yeah. So it's big swings. But that's another question of like, how do you— I don't think that you can leave that out. Like, I think that like, we don't think we can leave trucks out.

Yeah, I don't think you can leave it out. I think it'd be much smaller.

Okay. So we're coming up here on time. Um, JD, can you recap action items as you think of it? Did you see it? And I will pepper in, um, like specific action items.

I think that the defense of the actual operating model and making sure that it is cashflow generative, that it makes sense for the equity actually has value, I think is something we need to continue to develop. I know a couple of requests on our end is kind of the makeup of the other fixed asset— or sorry, not fixed— fixed expense bucket from Pat, just to kind of understand what could potentially be removed from that cost center, as well as just CapEx history 2022 to today or to 2025. That would help us understand kind of what you guys are seeing, that we're— why we're so confident, why you guys aren't confident in the CapEx number, and maybe develop something a little more reasonable, especially for the fourth and fifth year of this model.

Yeah, on the CapEx side, we've been spending previously in a way as if we knew the market was going to come back, but our go-forward CapEx expectations are probably more in line with what we'd expect for this business going forward. So it'll be like our current forecast rather than the historical actual.

Sure.

Yeah, that would be helpful.

And Pat, maybe we could break that down in terms of like the capitalized overhead, all our property costs versus like materials and labor, because that'll be informative, I think.

Yeah, I mean, here's what I'm thinking is like, A, we need to take the over— the capitalization out of the P&L in this. And then once we do that, we need to think through whether or not the inventory purchases would belong in R&M or in CapEx, right? So for like our go-forward spend, a lot of that is where— is synonymous with their R&M, which is sitting in the P&L.

So to, uh, just to be clear, the inventory purchase— like, we're talking purchasing production supplies— that is what we capitalize.

Um, oh no, sorry, like parts for the trucks and trailers.

Yeah.

Um, that, that would— that goes into your P&L, right? So what I'm, what I'm saying is a lot of our current forecast for CapEx is effectively just OpEx. Um, so it's not gonna It's not going to help other than the geography where the cash flow is going to hit.

Okay. Yeah.

Okay. I think I do want to re-pose one question, though, which is the, like, what is the margin of safety? What is the target that we're looking to hit here?

I think, Steph, your original point of it needs to be cash flow positive after debt service with the assumption that we're sitting— we're not materially assuming we improve revenue. It's basically like current state of the businesses with OpEx reductions that we firmly believe in.

Yeah.

Understood. I think that as a component, I would say though is different than cash flow to equity. Like when I hear cash flow to equity, I hear obviously distributions. And so I think the question behind my question is like, is there a distribution target or is it just that there are distributions happening?

Break even. I would say break even is fine. To equity, maybe there's not distributions, but it's not negative, right? We're not funding on a— as a plan, right?

There's not a risk to funding.

Uh, I mean, there's always going to be a risk to funding, but what I would say is like, if we're break-even with what we think are defensible assumptions, and like, I, I think that the ones I've pointed out that I'm most nervous about are the CapEx, which we'll deep dive on a little bit and figure out. It's helpful to know yours is embedded in your P&L basically, so like maybe it's not as, as, uh, bad as I thought, but we'll refine that. I think the other one I question is like the 5% revenue growth assumption, uh, but if we're like at a break-even point on cash flow to equity with what we think are reasonable, like, no growth assumptions there, I think that's a fine place to be.

I would like to take— I'd like to reiterate our request to get just, if nothing else, just a unit-level asset list. Because whether or not it's being used to assign value, that will give me what I need to go, no pun intended ever, kick tires on what a potential capital solution and what other We can give you an asset list. What kind of other options?

I think, and then I guess the other thing is on the, like, leased, the lease footprint. Like, can we try to put a finer point on, like, hey, what properties do we actually, like, need to be in there, want to be in there day one versus not? Because, like I said, I think if we can come up with a solution where we don't— there's properties that we're just waiting to burn off. We can come up with an upfront solution to some of those. We can try that. We can look into what that would look like for us. Because I think where I'm coming at with that is like, I think we'd rather bite the bullet and resolve those issues upfront versus get ourselves into a company that we're going to keep hearing from investors, okay, well, why do you own part of this thing that's losing money? Would rather take the hit up front and then believe in what the go-forward looks like.

We love this. And I think just in practice, what that could look like for us is we're not afraid to more or less shove a landlord and try to work through basically a negotiated settlement. Like, we're basically, we're basically going to go do that on Winona shortly.

Yeah, and I say that as us, but I think it's the same question for y'all. Like, Kuenga, maybe like that whole thing, we can come up with a resolution on what we think the go-forward is. Not that you have to get out of Kuenga, but it's a near-term expiration. So looking at that, Atlanta coming to some resolution there, because like I know y'all, y'all have the economics of TR running through here, but like you don't own it yet. So like I think that's propping up some of the cash flow here too. And it's just like what's going to be in and what's going to be out, putting a finer point on that. And then if there's anything that we can do or y'all can do to reduce the debt expense upfront, like that would also be part of the conversation.

Cool.

Okay, so we'll share that information. Do we want to just plan to regroup now so we don't let it linger?

Yeah. How— I mean, JD, if I'm out there all next week, what is—

I basically, next week I cannot do Tuesday and I cannot do Friday, but I could be flexible other days next week.

Why don't we plan to try to get the follow-up kind of data traded? It's Thursday, so by the end of the day tomorrow, and then plan for a Wednesday regroup so that any questions that come out of that can kind of get resolved in advance, and then we can maybe look at Wednesday as a recircle the wagons and see where it's at.

Works for me.

Okay.

Yep. Okay, great.

Okay. All right, thank you guys.

Thank you guys as well. We'll talk soon. Bye. Bye.