Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: brendanb22 on July 10, 2016, 07:15:35 PM

Title: CCNI - Command Center
Post by: brendanb22 on July 10, 2016, 07:15:35 PM
Microcap stock in the blue collar staffing industry. Quite levered to the oil industry so the stock has sold off recently, but they have an extremely strong balance sheet and management team that has been strategically strengthening their positioning. Additionally just made an acquisition that will increase sales by ~10% and help to burn up NOL's

Would love to get everyone's thoughts. Writeup below

http://seekingalpha.com/article/3358195-command-center-under-followed-micro-cap-with-100-percent-upside
Title: Re: CCNI
Post by: randomep on July 10, 2016, 11:44:05 PM
Hi, thanks for bringing this to our attention. I like microcaps. However, I don't understand what is the big deal about this one.  They lost money last quarter. And they are dependent on oil?

The seeking alpha article is from 2014 and things haven't panned out, as least as far as I can tell from my 15min of cursory analysis.

Title: Re: CCNI
Post by: brendanb22 on July 11, 2016, 06:12:11 PM
1. They are exposed to oil in the Bakken region, but increasingly less so -- only about 10% of their current revenue.
2. They are making significant margin improvements and are on track to gain a few gross margin + opex % points
3. Mgmt has opportunistically acquired businesses during the downturn and just acquired Hancock staffing which helps their diversification and increased sales volume
4. Large cash + NOL position and are increasingly buying back shares
Title: Re: CCNI -- Command Center
Post by: KJP on September 12, 2017, 10:35:14 AM
The business appears to have turned the corner over the last year, but the share price hasn't budged.  After accounting for cash and DTAs, this is a company on the upswing now trading around 7 p/e.  Also, the company is using its excess cash to buy back shares.  Nobody would confuse this with a great business, but if you can collect enough companies like it at valuations like this, I think you will do well.

Quick math:
Rev: $100 million
GM: 26%
GP: $26 million
SG&A:  $22 million
EBIT: $4 million
Tax Rate: 37.5%
NI: $2.5 million

Shares: 61 million
Share Price: $0.37
Market Cap:  $22.5 million
Cash + DTAs: $5 million
EV: $17.5 milion

EV/NI = 7
Title: Re: CCNI -- Command Center
Post by: DTEJD1997 on September 12, 2017, 10:42:24 AM
Hey all:

I had been invested in this one for a while, but sold out (for a loss).  A couple/few quarters ago...they had some type of kerfluffle with their earnings report.  I lost faith in management after that.

The valuation is indeed not too bad...but the stock is down tremendously...they simply can't seem to overcome their past difficulties/declines.
Title: Re: CCNI -- Command Center
Post by: KJP on September 12, 2017, 11:43:29 AM
Hey all:

I had been invested in this one for a while, but sold out (for a loss).  A couple/few quarters ago...they had some type of kerfluffle with their earnings report.  I lost faith in management after that.


There was an accounting issue.  The CFO recently "resigned":  http://filings.irdirect.net/data/1140102/000165495417006926/ccni_8k.pdf

Management has also been publicly flogged about, among other things, the downturn in performance in 2016 and the accounting restatement.  See, in particular, the Q4 2016 conference call:  https://seekingalpha.com/article/4061773-command-centers-ccni-ceo-bubba-sandford-q4-2016-results-earnings-call-transcript?part=single

Here's a note from page 39 in the 2016 10-K:
Special Committees: In February 2017, our Board established the Strategic Alternatives Committee as a special committee and appointed John Schneller, JD
Smith, Rimmy Malhotra and Steven Bathgate to serve on the committee. Subsequently, the Strategic Alternatives Committee appointed Rimmy Malhotra as
chair. The Committee is empowered to identify and evaluate strategic opportunities available to the Company. We anticipate that the Committee will engage the
services of an investment banking firm to assist the Committee in fulfilling this assignment. Each of the members of the Strategic Alternatives Committee meets
the independence standards for independent directors under NASDAQ Listing Rules.

I think a strategic buyer could easily cut out at least $1 million in SG&A from board fees and redundant executive comp.

The valuation is indeed not too bad...but the stock is down tremendously...they simply can't seem to overcome their past difficulties/declines.

What do you mean by "they simply can't seem to overcome their past difficulties/declines"?  Are you referring to the stock price or the operating performance?
Title: Re: CCNI -- Command Center
Post by: DTEJD1997 on September 12, 2017, 06:10:50 PM

What do you mean by "they simply can't seem to overcome their past difficulties/declines"?  Are you referring to the stock price or the operating performance?

I am referring to both.  The stock price has done NOTHING but go down for years...

Their operating performance, while initially better under Bubba, seems to have cratered (closely related to oil price collapse) and now they are scratching & clawing their way back.  Only problem is that the improvements they make are just so minimal.

I also seem to have read that they had $500k in bad debt expense related to two companies.  How in the heck do they allow 2 customers to ring up a 500K bad debt?

I suppose somebody MIGHT do ok with this IF they got into the stock at ROCK BOTTOM levels (under $.31) and they hold it for a few years, AND there is some continued improvements....but I just don't see it.

I took my money & attention elsewhere, to "greener fields".

Good luck if you are still in it!
Title: Re: CCNI -- Command Center
Post by: KJP on November 13, 2017, 02:16:37 PM
10-Q out:  https://www.sec.gov/Archives/edgar/data/1140102/000165495417010482/ccni_10q.htm

$1.6 million in EBIT for the quarter. 

And this from the subsequent events disclosure:
"On November 11, 2017, our Board approved a 1-for-12 reverse stock split with an anticipated effective date of December 7, 2017. This reverse split becoming
effective on that date is contingent upon us filing Articles of Amendment with the state of Washington and receiving approval from the Financial Industry
Regulatory Authority. As of November 13, 2017, these contingencies have not been met. If this reverse split becomes effective, it will reduce future common and
preferred stock amounts and stock options, and increase common stock per share amounts, by a factor of twelve. Our Board approved this reverse split in order
for us to meet the minimum share price requirement in connection with our pending application for listing on the NASDAQ Capital Market. However, there can be
no assurance that our listing application will be approved by NASDAQ."
Title: Re: CCNI -- Command Center
Post by: Foreign Tuffett on January 12, 2018, 08:04:09 AM

What do you mean by "they simply can't seem to overcome their past difficulties/declines"?  Are you referring to the stock price or the operating performance?

I am referring to both.  The stock price has done NOTHING but go down for years...

Their operating performance, while initially better under Bubba, seems to have cratered (closely related to oil price collapse) and now they are scratching & clawing their way back.  Only problem is that the improvements they make are just so minimal.

I also seem to have read that they had $500k in bad debt expense related to two companies.  How in the heck do they allow 2 customers to ring up a 500K bad debt?

I suppose somebody MIGHT do ok with this IF they got into the stock at ROCK BOTTOM levels (under $.31) and they hold it for a few years, AND there is some continued improvements....but I just don't see it.

I took my money & attention elsewhere, to "greener fields".

Good luck if you are still in it!

I've been on the other side of these temp labor situations a few times, so I may have a little insight on the bad debt issue. Temporary manual labor staffing is fiercely competitive in most markets, so companies often feel pressured to chase business and/or be as flexible as possible to preserve existing relationships. This can result in payment terms and conditions that are quite favorable to the customer.

Also, they are active in energy driven-markets, especially the Bakken, so some of their customers may have gone from "hero to zero" quickly. Often the credit departments of service companies are slow to adjust for their changing industry conditions. That may have been the case here. 
Title: Re: CCNI -- Command Center
Post by: KJP on January 12, 2018, 08:09:18 AM

I've been on the other side of these temp labor situations a few times, so I may have a little insight on the bad debt issue. Temporary manual labor staffing is fiercely competitive in most markets, so companies often feel pressured to chase business and/or be as flexible as possible to preserve existing relationships. This can result in payment terms and conditions that are quite favorable to the customer.

Also, they are active in energy driven-markets, especially the Bakken, so some of their customers may have gone from "hero to zero" quickly. Often the credit departments of service companies are slow to adjust for their changing industry conditions. That may have been the case here.

A good reminder that Command Center is not a "good" business, i.e., it likely has no significant competitive advantages.  Instead, any investment case likely must rest on a mean-reversion, "average business selling at well below average price" argument.
Title: Re: CCNI -- Command Center
Post by: Foreign Tuffett on January 12, 2018, 08:51:14 AM
I just got done reading Seeking Alpha's Q4 2016 conference call transcript. Assuming the transcript accurately captures what was said it was a complete trainwreck. One of the worst single CC transcripts I've ever read.

- Management appeared to attempted to obfuscate SSS. CEO: "We include the new stores in the same stores calculation." When pressed later in the call they were unable to provide the actual SSS numbers.

- Despite repeated questions, the CFO was unable to coherently explain the difference between the company's EBITDA and adjusted EBITDA metrics

- The Annual Shareholder's Meeting was pushed back from May so the company could focus on "operational performance." 

- These quotes from Joshua Horowitz with Palm Ventures:

"Obviously, you’ve revised your 2015 results, if I look at last year's full year release from this time, net income was listed at $1.7 million and the release that you published last night, net income is $1.5 million. Operating income was $2.9 million in the last year's release, its $2.6 million today. So, I guess where did the $300,000 go? I don’t think I've ever in my investing [career] seen a company revise its prior year earnings without even the courtesy of an explanation or reconciliation of that difference to the shareholders."

"I mean even your explanation of EBITDA and adjusted EBITDA, I mean even that doesn’t make any sense it's just an installed think and careless discrimination of your financial information. And I think it's indicative of an object lack of oversight and candor. The only way to arrest this making operation is for shareholders to exercise their rights and to seek dramatic Board change. I think I speak for a lot of folks."

- The conference call was in early April 2017, but the CEO was unwilling to say if they would be opening any new stores in their fiscal Q2. It came off as the CEO going out of his way to be as vague and "black box-ey" as possible.

I'm aware that the company has since replace the CFO, but the transcript makes me question the CEO's ability to cogently explain and present what, at the end of the day, is a fairly straightforward business.

Title: Re: CCNI -- Command Center
Post by: DTEJD1997 on January 12, 2018, 10:10:08 AM
I just got done reading Seeking Alpha's Q4 2016 conference call transcript. Assuming the transcript accurately captures what was said it was a complete trainwreck. One of the worst single CC transcripts I've ever read.

- Management appeared to attempted to obfuscate SSS. CEO: "We include the new stores in the same stores calculation." When pressed later in the call they were unable to provide the actual SSS numbers.

- Despite repeated questions, the CFO was unable to coherently explain the difference between the company's EBITDA and adjusted EBITDA metrics

- The Annual Shareholder's Meeting was pushed back from May so the company could focus on "operational performance." 

- These quotes from Joshua Horowitz with Palm Ventures:

"Obviously, you’ve revised your 2015 results, if I look at last year's full year release from this time, net income was listed at $1.7 million and the release that you published last night, net income is $1.5 million. Operating income was $2.9 million in the last year's release, its $2.6 million today. So, I guess where did the $300,000 go? I don’t think I've ever in my investing [career] seen a company revise its prior year earnings without even the courtesy of an explanation or reconciliation of that difference to the shareholders."

"I mean even your explanation of EBITDA and adjusted EBITDA, I mean even that doesn’t make any sense it's just an installed think and careless discrimination of your financial information. And I think it's indicative of an object lack of oversight and candor. The only way to arrest this making operation is for shareholders to exercise their rights and to seek dramatic Board change. I think I speak for a lot of folks."

- The conference call was in early April 2017, but the CEO was unwilling to say if they would be opening any new stores in their fiscal Q2. It came off as the CEO going out of his way to be as vague and "black box-ey" as possible.

I'm aware that the company has since replace the CFO, but the transcript makes me question the CEO's ability to cogently explain and present what, at the end of the day, is a fairly straightforward business.

Now you know why I sold for a loss and went to better opportunities...
Title: Re: CCNI -- Command Center
Post by: KJP on January 12, 2018, 10:28:50 AM
In case you have not yet seen these:

Minority shareholder initiates proxy fight for control of board:  https://www.sec.gov/Archives/edgar/data/1140102/000089706917000497/cg978.htm 

Company responds:  https://www.sec.gov/Archives/edgar/data/1140102/000165495417011037/ccni_pre14a.htm

Minority shareholder replies:  https://www.sec.gov/Archives/edgar/data/1140102/000089706917000573/cg998.htm

Also, here are the brief bios of two people added to the board in 2016:

Steven Bathgate, age 63, has over 35 years of security industry experience, particularly with microcap companies. He was appointed to our Board of Directors in April 2016. In 1995 he founded GVC Capital LLC and he is the Senior Managing Partner of that firm. GVC Capital is an investment banking firm located in Denver, Colorado, focusing primarily on providing comprehensive investment banking services to undervalued microcap companies.  Prior to founding GVC Capital, Mr. Bathgate was CEO of securities firm Cohig & Associates in Denver from 1985 to 1995 and was previously Managing Partner, Equity Trading, at Wall Street West. He currently is also a director for Bluebook International, Inc. and a former director for Global Healthcare REIT. Mr. Bathgate received a Bachelor of Science in Finance from the University of Colorado, Leeds School of Business.

R. Rimmy Malhotra, age 41, was appointed to our Board of Directors on April 6, 2016. From 2013 to the present, Mr. Malhotra has served as the Managing Member and Portfolio Manager for the Nicoya Fund LP, a private investment partnership. Previously, from 2008-2013 he served as portfolio manager of the Gratio Values Fund, a mutual fund registered under the Investment Act of 1940. Prior to this, he was an Investment Analyst at a New York based hedge fund. He earned an MBA in Finance from The Wharton School and a Master’s degree in International Relations from the University of Pennsylvania where he was a Lauder Fellow. Mr. Malhotra holds undergraduate degrees in Computer Science and Economics from Johns Hopkins University.

They each own, or represent funds that own, about 2% of the company.
Title: Re: CCNI -- Command Center
Post by: KJP on January 25, 2018, 01:15:16 PM
And now there's an open board seat:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418000619/ccni_ex991.htm
Title: Re: CCNI -- Command Center
Post by: KJP on January 26, 2018, 02:14:30 PM
Now two board seats open:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418000762/ccni_ex991.htm

I expect the proxy fight to be resolved by the activist (Ephraim Fields) receiving a few seats on the Board. 
Title: Re: CCNI -- Command Center
Post by: KJP on February 07, 2018, 01:35:54 PM
CEO has now resigned:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418001177/ccni_8k.htm
Title: Re: CCNI -- Command Center
Post by: JayGatsby on February 07, 2018, 03:07:07 PM
Met him once. Seemed like a very strong CEO in my opinion. Seems like a really tough business/industry. Very hard to find strong talent for a company of this size/nature, as evidenced by their struggles finding a CFO. Loss for the company in my opinion.
Title: Re: CCNI -- Command Center
Post by: DTEJD1997 on February 07, 2018, 06:53:53 PM
CEO has now resigned:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418001177/ccni_8k.htm

Two board members AND THE CEO IS OUT?  Put a fork in them, they are done....
Title: Re: CCNI -- Command Center
Post by: KJP on February 08, 2018, 07:11:56 AM
CEO has now resigned:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418001177/ccni_8k.htm

Two board members AND THE CEO IS OUT?  Put a fork in them, they are done....

Earlier you said you sold because, among other things, the CEO seemed dishonest or incompetent.  Now you say that that CEO's resignation is a big negative.  How can both be true?

There's obviously alot going on behind the scenes here.  We know there is pressure from an activist campaign and looming proxy contest, the board has formed a "strategic alternatives" committee led by a new board addition who has a financial background and an ownership stake in the company, the annual meeting's been delayed, and two old-guard board members and the CEO have recently resigned.  Meanwhile, the company's operations have turned the corner, it's got ~20% of its market cap in net cash on the balance sheet and it's generating more cash every quarter. 

Perhaps I'm missing something, but I think the facts above suggest the activist campaign is having its effect behind the scenes and there's likely a transaction of some form in the offing.  If there are other inferences to draw from the facts noted above (or any others), it would be great to hear what they are and discuss them.

EDIT:  Three more points:

1.  The only recent insider activity has been a small (~$50k) purchase by a fund controlled by one of the directors:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418000051/xslF345X03/section16.xml

2.  According to the most recent proxy statement, the now former CEO Bubba Sandford would have received $1.1 million in change-of-control payments if a change of control occurred on his watch.  It's unlikely he would just resign and give that up for nothing if a sale was actually in the offing.

3.  One way to manipulate earnings for a company like this is through worker's comp reserves/accruals.  Anyone interested in that can review the disclosures about that topic.
Title: Re: CCNI -- Command Center
Post by: Tim Eriksen on February 08, 2018, 08:26:06 AM
1. The insider activity was for board compensation.
2. Typically majority change in the Board can trigger change in control.  So it is strange to resign before any board change.  Of course new Boards don't like to pay change in control so they will look into possible justification of termination for cause.  Maybe he didn't want that to happen. 
 
Title: Re: CCNI -- Command Center
Post by: KJP on February 08, 2018, 08:41:10 AM
1. The insider activity was for board compensation.

Was the Rimmy Malhotra/Nicoya Fund purchase I linked to for board compensation?  I believe footnote two on the Form 4 refers only to the 1,666 shares directly owned by Malhotra, not the 8,500 shares purchased by the Nicoya Fund on 12/29.  If that's not right, and the 8,500 shares were for board compensation, where is that reflected on the Form 4?

For convenience, here's the transaction I'm talking about:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418000051/xslF345X03/section16.xml


2. Typically majority change in the Board can trigger change in control.  So it is strange to resign before any board change.  Of course new Boards don't like to pay change in control so they will look into possible justification of termination for cause.  Maybe he didn't want that to happen.

Yes, this is possible.  Based on what is known from the disclosures, what do you believe is likely going on?
Title: Re: CCNI -- Command Center
Post by: Tim Eriksen on February 08, 2018, 08:56:52 AM
Sorry my bad.  You are correct on item 1. 
Title: Re: CCNI -- Command Center
Post by: KJP on February 08, 2018, 09:43:11 AM
Sandford's employment agreement was for a three-year term starting July 1, 2015.  See paragraph 7(a) here:  https://www.sec.gov/Archives/edgar/data/1140102/000135448815004666/ccni_ex101.htm

A "change of control" under the agreement does not include a change in the identity of the majority of the board.  See paragraph 7(b)(iv).

As a result of Sandford's apparently voluntary termination of the agreement, it appears he will receive no additional compensation.  See paragraph 7(b)(vi)(1).

So, Sandford's employment agreement was due to expire in July 2018 and he wouldn't get any additional comp if a majority of the board changed before then.  Based on the board resignations and activist campaign, it looks to me like a change in the board is coming.  In light of that, Sandford may have wanted to be reupped sooner rather than later and the board declined to do it, so he quit.

That's obviously speculation on my part.  I'd still love to hear another view on how to connect the various dots here.
Title: Re: CCNI -- Command Center
Post by: DTEJD1997 on February 08, 2018, 10:30:30 AM
CEO has now resigned:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418001177/ccni_8k.htm

Two board members AND THE CEO IS OUT?  Put a fork in them, they are done....

Earlier you said you sold because, among other things, the CEO seemed dishonest or incompetent.  Now you say that that CEO's resignation is a big negative.  How can both be true?

There's obviously alot going on behind the scenes here.  We know there is pressure from an activist campaign and looming proxy contest, the board has formed a "strategic alternatives" committee led by a new board addition who has a financial background and an ownership stake in the company, the annual meeting's been delayed, and two old-guard board members and the CEO have recently resigned.  Meanwhile, the company's operations have turned the corner, it's got ~20% of its market cap in net cash on the balance sheet and it's generating more cash every quarter. 

Perhaps I'm missing something, but I think the facts above suggest the activist campaign is having its effect behind the scenes and there's likely a transaction of some form in the offing.  If there are other inferences to draw from the facts noted above (or any others), it would be great to hear what they are and discuss them.

EDIT:  Three more points:

1.  The only recent insider activity has been a small (~$50k) purchase by a fund controlled by one of the directors:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418000051/xslF345X03/section16.xml

2.  According to the most recent proxy statement, the now former CEO Bubba Sandford would have received $1.1 million in change-of-control payments if a change of control occurred on his watch.  It's unlikely he would just resign and give that up for nothing if a sale was actually in the offing.

3.  One way to manipulate earnings for a company like this is through worker's comp reserves/accruals.  Anyone interested in that can review the disclosures about that topic.

I don't think I said it was the CEO, I think it was CFO?  The person in charge of compiling the financials?  I think it was a woman?

Of course, assuming that I am correct, it still does not reflect well on the CEO.  I seem to remember that whole C level was a mess.

Doesn't matter too much to me though.  I sold out for a loss a long time ago.  I also don't think CCNI will end well for others.  Of course, I've been wrong before!
Title: Re: CCNI -- Command Center
Post by: Foreign Tuffett on March 07, 2018, 10:01:55 AM
Does anyone know when their annual meeting will be held?

Also, did anyone else notice that the two directors that resigned in Jan. were both on the audit committee? R. Rimmy Malhotra, the only remaining audit committee member, is a fairly recent (2016) addition to the board. Combine this with the recent resignation of the CEO, and it makes me wonder if we are about to enter the next chapter in their financial control issues.

All this being said, on a quantitative basis this thing looks cheap, but IMO it's only suitable for a quantitative basket type approach.
Title: Re: CCNI -- Command Center
Post by: KJP on April 16, 2018, 02:23:12 PM
Now two board seats open:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418000762/ccni_ex991.htm

I expect the proxy fight to be resolved by the activist (Ephraim Fields) receiving a few seats on the Board.

As I expected, the proxy contest has settled with Fields getting a board seat and an agreed slate of directors running at the upcoming annual meeting:  https://www.otcmarkets.com/stock/CCNI/news?id=189272
Title: Re: CCNI -- Command Center
Post by: KJP on May 31, 2018, 12:50:24 PM
Command Center is uplisting to Nasdaq next week:  http://www.irdirect.net/prviewer/release/id/3123553
Title: Re: CCNI -- Command Center
Post by: KJP on August 14, 2018, 12:58:14 PM
The business appears to have turned the corner over the last year, but the share price hasn't budged.  After accounting for cash and DTAs, this is a company on the upswing now trading around 7 p/e.  Also, the company is using its excess cash to buy back shares.  Nobody would confuse this with a great business, but if you can collect enough companies like it at valuations like this, I think you will do well.

Quick math:
Rev: $100 million
GM: 26%
GP: $26 million
SG&A:  $22 million
EBIT: $4 million
Tax Rate: 37.5%
NI: $2.5 million

Shares: 61 million
Share Price: $0.37
Market Cap:  $22.5 million
Cash + DTAs: $5 million
EV: $17.5 milion

EV/NI = 7

Another essentially steady quarter:  http://www.irdirect.net/CCNI/corporate_overview?title_override=Recent%20News

Since March they've bought back ~3% of the shares.  During the Q2 call management stated that, at current prices, they will continue to favor buying back shares, rather than spending cash on acquisitions.

Although the stock price is up about 30% from when I posted the numbers quoted above, it still appears to be cheap in light of the tax cut and the sensible capital allocation.

Current back of the envelope annual numbers:

Rev: $100 million
GM: 26%
GP: $26 million
SG&A:  $22 million
EBIT: $4 million
Tax Rate: 25%
NI: $3 million

Shares: 4.875 million  [1 for 12 reverse split]
Share Price: $5.70
Market Cap:  $28 million
Excess Cash: $5 million
EV: $23 milion

EV/NI = ~7.5

Title: Re: CCNI -- Command Center
Post by: KJP on November 20, 2018, 10:42:12 AM
Revenue was flat, but there was ~250bps gross margin compression for the quarter:  http://www.irdirect.net/prviewer/release/id/3452525
The market appears to believe the GM decline (and then some) is permanent.  On the call, management blamed most of the gross margin decline on an uptick in workers comp. costs, but we'll see.

At $3.70/share, the market cap is about $17 million.  Subtracting $5 million in excess net cash gives an adjusted market cap of ~$12 million.  With the exception of some things that I think can fairly be described as non-recurring, SG&A has been flat.  So, on $98 million in revenue, the current multiples at various gross margins are roughly the following:

26% GM = $2.6 million net income = adjusted P/E of 4.6
25% GM = $1.875 million net income = adjusted P/E of 6.4
24.5% GM = $1.5 million of net income = adjusted P/E of 8
24% GM = $1.14 million of net income = adjusted P/E of 10.5

The company continues to produce free cash flow and to buy back shares with its excess cash.
Title: Re: CCNI -- Command Center
Post by: Tim Eriksen on November 20, 2018, 11:49:54 AM
I have higher earnings at those levels based on normalized SG&A of just over $21 million annually.  You also included taxes which they currently don't pay due to NOLs. That will likely change in a year or so.

26% GM = $4.0 million pre-tax net income = adjusted P/E (net of cash) of 3
25% GM = $3.1 million pre-tax net income = adjusted P/E of 4
24.5% GM = $2.6 million pre-tax of net income = adjusted P/E of 4.6
24% GM = $2.1 million of pre-tax net income = adjusted P/E of 5.7

I am using 24.5% GM for forward estimates which was what they had in the last quarter.  Five year average is 26%
Title: Re: CCNI -- Command Center
Post by: KJP on November 20, 2018, 12:17:10 PM
I have higher earnings at those levels based on normalized SG&A of just over $21 million annually.  You also included taxes which they currently don't pay due to NOLs. That will likely change in a year or so.

26% GM = $4.0 million pre-tax net income = adjusted P/E (net of cash) of 3
25% GM = $3.1 million pre-tax net income = adjusted P/E of 4
24.5% GM = $2.6 million pre-tax of net income = adjusted P/E of 4.6
24% GM = $2.1 million of pre-tax net income = adjusted P/E of 5.7

I am using 24.5% GM for forward estimates which was what they had in the last quarter.  Five year average is 26%

Yes, I used $22 million of annual SG&A and included taxes at 25% because, as you noted, the NOL will be used up soon.  I agree it would be fair to shave a bit more off the adjusted market cap to account for the remaining NOL.

I like your numbers better and hope they can be achieved.  As you illustrated, at ~$21 million SG&A and a capital allocation policy heavy on buybacks, this looks cheap, even if the company is a full-rate taxpayer.
Title: Re: CCNI -- Command Center
Post by: KJP on April 08, 2019, 01:14:57 PM
Significant transaction announced today:  https://www.businesswire.com/news/home/20190408005786/en/Command-Center-Announces-Definitive-Merger-Agreement-Transition

Note the planned tender offer at $6/share for existing shareholders.
Title: Re: CCNI -- Command Center
Post by: KJP on April 09, 2019, 06:07:53 AM
I think this is one to keep an eye on. 

The transaction is akin to a reverse merger for Hire Quest and probably driven in part its CEO's desire to have an easier way to eventually exit his controlling stake in that company.  When the transaction closes, there will be 14.5 million Command Center shares outstanding, and then they are going to tender for 1.5 million shares at $6/share.  I believe that $9 million tender will be roughly $2 million more than the company's cash on hand at the time.  Assuming the tender is fully subscribed, that would leave 13 million shares outstanding, with ~$2 million or so in net debt.

The plan is then to franchise all of Command Center's 67 branches (less any closed due to overlap with existing Hire Quest locations) to mirror Hire Quest's franchise model.  Once this process is complete, the press release projects "annual EBITDA in excess of $15 million, exclusive of growth opportunities."  The combined company should be an asset-light franchisor, so D&A should be very low.  So, assuming a 25% tax rate, that $15 million in EBITDA should generate $10+ million in net income/free cash flow. 

The company may also be able to generate significant one-time gains from the franchising process itself, i.e., whoever buys the existing franchises will pay Command Center to take over the existing location, relationships, etc.  It's not clear to me how much money franchising all of the existing locations would generate.

At the end of the day, the company may end up being an asset-light franchisor generating $10+ million in free cash flow, with an experienced and incentivized CEO who owns 39% of the company (Rick Hermanns, current CEO and majority owner of Hire Quest).  If there are 13 million shares outstanding, here are the share prices at various cash flow multiples:

8x FCF = $80 million market cap = $6.15/share
10x FCF = $100 million market cap = $7.70/share
12x FCF = $120 million market cap = $9.23/share
15x FCF = $150 million market cap = $11.53/share
17x FCF = $170 million market cap = $13.07/share
20x FCF = $200 million market cap = $15.38/share

So, the $6.00/share tender offer price implies only about 8x free cash flow, which seems quite low for an apparently successful franchisor.  I think at least low double-digit multiple of free cash flow is more appropriate.  I'm also giving the company no credit for the potential proceeds it may get for selling its existing locations to franchisees.

We'll learn more the merger documents are filed with the SEC.  I'm particularly interested in whether insiders are planning to tender their shares. 

Title: Re: CCNI -- Command Center
Post by: writser on April 09, 2019, 06:47:21 AM
Interesting situation, another KJP value pick is involved in a deal. Good stuff. Shares are all over the place today. With a pre-announcement price of $4 and a tender for ~30% outstanding at $6 I'd say the market is currently not super optimistic about the deal. If some insiders do not tender you could easily sell 50%+ at $6. Shares traded below $5 today, implying the deal is a net negative. Hard to judge without more information, but if you agree somewhat with KJP's posts that seems overly pessimistic.

I scalped a few shares, probably sold too soon. Haven't looked at this in too much detail ..
Title: Re: CCNI -- Command Center
Post by: Tim Eriksen on April 10, 2019, 07:58:00 AM
CCNI reported a much better Q4 than I expected.   Earnings of $0.23 per share.  Cash now up to $7.9 million.  They may be able to pay for the tender (up to 1.5 million shares at $6) without any debt.    Back of the envelope is the Hire Quest acquisition/merger would result in issuance of 9.8 million shares, bringing total o/s to 14.5 million.  Post tender that becomes 13.0 million if fully subscribed.  Per management, after normalization (and synergies ?) EBITDA estimated at $15 million,or $1.15 per share.  Since there is no debt on either entity and minimal depreciation that leaves any non cash amortization from the merger (which I would back out) and taxes.  Adjusted EPS could be $0.85 per share.

Plus they will earn proceeds from franchising the 67 CCNI branches.  For example: 100k per branch = $6.7 million or $0.50 per share.  I am not predicting that amount per branch, I have no idea without seeing the economic split between franchise and franchisee.       
Title: Re: CCNI -- Command Center
Post by: KJP on July 26, 2019, 07:23:42 AM
The tender closed and (in a surprise to me) was undersubscribed, so anyone who tendered got $6.00 for all the shares they tendered. 

Prior to the closing of the tender, shares were trading around $5.60.  Who is selling at that price when there's an open tender at $6.00?  I've seen this in other tenders as well.  What drives that behavior? 
Title: Re: CCNI -- Command Center
Post by: Jurgis on July 26, 2019, 07:46:41 AM
The tender closed and (in a surprise to me) was undersubscribed, so anyone who tendered got $6.00 for all the shares they tendered. 

Prior to the closing of the tender, shares were trading around $5.60.  Who is selling at that price when there's an open tender at $6.00?  I've seen this in other tenders as well.  What drives that behavior?

Assuming sellers know about the tender, then sellers selling at discount ($5.60) expect the tender to be oversubscribed and the stock to drop much lower after tender.

I don't follow CCNI so I can't say if the expectation that stock will drop after tender is rational. Clearly the expectation of oversubscription was wrong.
Title: Re: CCNI -- Command Center
Post by: Tim Eriksen on July 26, 2019, 07:48:21 AM
The tender closed and (in a surprise to me) was undersubscribed, so anyone who tendered got $6.00 for all the shares they tendered. 

Prior to the closing of the tender, shares were trading around $5.60.  Who is selling at that price when there's an open tender at $6.00?  I've seen this in other tenders as well.  What drives that behavior?

Surprised me too.  I tendered 100% expecting to have it pro-rated.  It will be interesting how the market responds to earnings.  GAAP EPS will be low (I estimate $0.12 annually) due to high intangible amortization ($0.38 annually), excluding gains from sale of company owned locations.  Cash EPS will be solid.
Title: Re: CCNI - Command Center
Post by: Foreign Tuffett on July 26, 2019, 12:10:55 PM
From the "Related Party Transactions" section of the proxy:

"Members of the Company owned fifty of the ninety-seven, thirty-nine of the seventy-nine, fifty-four of the ninety-seven, and thirty-nine of the eighty-five franchisee branch locations at December 31, 2018 and 2017 and at March 31, 2019 and 2018, respectively. Relatives of Company members owned twenty-seven, eighteen, thirty-two, and twenty franchise locations at December 31, 2018 and 2017 and at March 31, 2019 and 2018 respectively."

So of the ~97 total Hire Quest locations, a total of 86(!) are franchises owned by Hire Quest insiders and their relatives. I'm skeptical that minority shareholders will be treated fairly here.

There are lots of other related party transactions as well.



Title: Re: CCNI - Command Center
Post by: wabuffo on July 26, 2019, 01:57:09 PM
They have already begun buying out the some of Command Center owned locations and converting them:

https://www.sec.gov/Archives/edgar/data/1140102/000119380519000640/e618556_8k-cc.htm (https://www.sec.gov/Archives/edgar/data/1140102/000119380519000640/e618556_8k-cc.htm)
Quote
On July 15, 2019, to commence effecting the transition of the Company’s branches from being Company-owned to being franchisee-owned, the Company entered into Asset Purchase Agreements (“Purchase Agreements”) with existing franchisees of Hire Quest and new franchisees (collectively, “Buyers”) for the sale of certain assets related to the operations of the Company’s branches in Conway and North Little Rock, AR; Flagstaff, Mesa, North Phoenix, Phoenix, Tempe, Tuscon, and Yuma, AZ; Aurora and Thornton, CO; Atlanta, GA; College Park and Speedway, IN; Shreveport, LA; Baltimore and Landover, MD; Oklahoma City and Tulsa, OK; Chattanooga, Madison, Memphis, and Nashville, TN; Amarillo, Austin, Houston, Irving, Lubbock, Odessa, and San Antonio, TX; and Roanoke, VA (collectively, the “Franchise Assets”).

The closings under such agreements occurred on July 15, 2019. The aggregate purchase price for the Franchise Assets consisted of approximately (i) $4.7 million paid in the form of promissory notes accruing interest at an annual rate of 6% issued by the Buyers to the Company plus (ii) the right to receive 2% of annual sales in excess of $3.2 million in the aggregate for the franchise territory containing Phoenix, AZ for 10 years, up to a total aggregate amount of $2.0 million.
...
A subset of the Purchase Agreements was entered into with, and the related Franchise Assets sold to, Buyers in which Richard Hermanns and Edward Jackson (both of whom are New Directors (as defined below) and significant shareholders of the Company as a result of the Merger) have direct or indirect interests (the “Worlds Buyers”).

I'm skeptical that minority shareholders will be treated fairly here.

Its always a concern - so you have to follow the incentives of the new management team coming in.  I think they had strong reasons to do the takeover merger as a value creation move (ie., perhaps move to a new, lower corporate tax rate as a public company under the new Tax Act).  I'm willing to give them some rope at the outset ...

wabuffo
Title: Re: CCNI - Command Center
Post by: Foreign Tuffett on July 26, 2019, 02:48:06 PM
They have already begun buying out the some of Command Center owned locations and converting them:

https://www.sec.gov/Archives/edgar/data/1140102/000119380519000640/e618556_8k-cc.htm (https://www.sec.gov/Archives/edgar/data/1140102/000119380519000640/e618556_8k-cc.htm)
Quote
On July 15, 2019, to commence effecting the transition of the Company’s branches from being Company-owned to being franchisee-owned, the Company entered into Asset Purchase Agreements (“Purchase Agreements”) with existing franchisees of Hire Quest and new franchisees (collectively, “Buyers”) for the sale of certain assets related to the operations of the Company’s branches in Conway and North Little Rock, AR; Flagstaff, Mesa, North Phoenix, Phoenix, Tempe, Tuscon, and Yuma, AZ; Aurora and Thornton, CO; Atlanta, GA; College Park and Speedway, IN; Shreveport, LA; Baltimore and Landover, MD; Oklahoma City and Tulsa, OK; Chattanooga, Madison, Memphis, and Nashville, TN; Amarillo, Austin, Houston, Irving, Lubbock, Odessa, and San Antonio, TX; and Roanoke, VA (collectively, the “Franchise Assets”).

The closings under such agreements occurred on July 15, 2019. The aggregate purchase price for the Franchise Assets consisted of approximately (i) $4.7 million paid in the form of promissory notes accruing interest at an annual rate of 6% issued by the Buyers to the Company plus (ii) the right to receive 2% of annual sales in excess of $3.2 million in the aggregate for the franchise territory containing Phoenix, AZ for 10 years, up to a total aggregate amount of $2.0 million.
...
A subset of the Purchase Agreements was entered into with, and the related Franchise Assets sold to, Buyers in which Richard Hermanns and Edward Jackson (both of whom are New Directors (as defined below) and significant shareholders of the Company as a result of the Merger) have direct or indirect interests (the “Worlds Buyers”).

I'm skeptical that minority shareholders will be treated fairly here.

Its always a concern - so you have to follow the incentives of the new management team coming in.  I think they had strong reasons to do the takeover merger as a value creation move (ie., perhaps move to a new, lower corporate tax rate as a public company under the new Tax Act).  I'm willing to give them some rope at the outset ...

wabuffo

If I'm reading that right, they bought a total of ~30 locations for $4.6 million in 6% promissory notes + a CVR. Does that seem like a good price for CCNI shareholders to you? I think it's a horrible price.
Title: Re: CCNI - Command Center
Post by: wabuffo on July 26, 2019, 03:16:36 PM
If I'm reading that right, they bought a total of ~30 locations for $4.6 million in 6% promissory notes + a CVR. Does that seem like a good price for CCNI shareholders to you? I think it's a horrible price.

Why do you say that?  Ignoring Phoenix (which would be a larger than average branch - and is clearly valued differently via the CVR), what is the average CCNI branch location worth?  Legacy CCNI made $1.1m pre-tax in 2018 over 67 branches.  So per branch, that's $16k in pre-tax profit.  $16k per branch x 29 branches (ex-Phoenix), that's $464k of total pre-tax profit.   So it looks like 10x pre-tax.  That doesn't sound like they are stealing these branches for a song, AFAIK.

Now of course, that includes an allocation for G&A, but that's what makes the HQ business model, they download the personnel costs to the branches and run a very lean HQ (no pun intended).  They basically provide the working capital funding to the branches (branches pay the temp employees daily, weekly) while HQ covers the receivables from the corporate customers which pay HQ monthly.  They also provide insurance, legal and that's about it.  So the new branch structure has to incorporate more G&A costs than the old legacy CCNI branch structure did.  These branches will also have to pay a royalty to company after they are franchised.  That makes it a bit more difficult to value the pro-forma profitability of the newly-franchised branch structure.  You can't use the old CCNI branch gross profit numbers though - its apples and rutabagas.

Like I said, I'm willing to give the new HQ mgmt team some rope...

wabuffo

Title: Re: CCNI - Command Center
Post by: Tim Eriksen on July 26, 2019, 03:21:09 PM

If I'm reading that right, they bought a total of ~30 locations for $4.6 million in 6% promissory notes + a CVR. Does that seem like a good price for CCNI shareholders to you? I think it's a horrible price.

CCNI is getting 150k per branch (payable in a note) plus future royalties.   If the royalty rate is 6 to 7% it seems reasonable. 

2018 numbers for per branch profitability should include SG&A adjustments of $2.5 million (CEO severance, proxy costs, write down).  How profitable will they be after the royalty?     
Title: Re: CCNI - Command Center
Post by: Foreign Tuffett on July 26, 2019, 05:01:45 PM
1) It's a seller funded deal. Buyers aren't putting up any cash up-front. Focusing on the $4.6 million # is misleading in that it ignores the specifics of the actual deal terms. If this was an all cash deal I would probably have a somewhat different opinion.

2) As of his Q2 letter published a few days ago, Artko Capital's PM (who's a sharp guy) was estimating $20 - $40 million cash inflows for franchising CCNI's 67 legacy locations. We're not even in the same ballpark based on this deal. I'm not going to link to the letter, but it's publicly available.

3) Invert the situation. Imagine someone offered you this deal. As long as your personal assets aren't collateral for the loan, you would take the deal, right? Seller funded, no cash up front. If the deal "works" you make money. If it doesn't, you can walk away with minimal losses.

4) The new CEO is one of the buyers. As an outside shareholder, I generally don't want to be on one side of a transaction when the CEO is on the other.

I understand giving them some rope, and by no means do I have a capital markets crystal ball. All I'm saying is to be careful that you don't end up tied to a flaming tree of avarice.
Title: Re: CCNI - Command Center
Post by: Tim Eriksen on July 26, 2019, 05:22:46 PM
1) It's a seller funded deal. Buyers aren't putting up any cash up-front. Focusing on the $4.6 million # is misleading in that it ignores the specifics of the actual deal terms. If this was an all cash deal I would probably have a somewhat different opinion.

2) As of his Q2 letter published a few days ago, Artko Capital's PM (who's a sharp guy) was estimating $20 - $40 million cash inflows for franchising CCNI's 67 legacy locations. We're not even in the same ballpark based on this deal. I'm not going to link to the letter, but it's publicly available.

3) Invert the situation. Imagine someone offered you this deal. As long as your personal assets aren't collateral for the loan, you would take the deal, right? Seller funded, no cash up front. If the deal "works" you make money. If it doesn't, you can walk away with minimal losses.

4) The new CEO is one of the buyers. As an outside shareholder, I generally don't want to be on one side of a transaction when the CEO is on the other.

I understand giving them some rope, and by no means do I have a capital markets crystal ball. All I'm saying is to be careful that you don't end up tied to a flaming tree of avarice.

The CEO is also the seller, so I am not sure it is far to say he is on the other side.

I read Artko's letter a few days ago.  Some parts of their analysis were not accurate.  For example, they say they paid $5.40 per share which equates to $65 million market cap.  It is actually $70 million ($5.40 x 13mm shares).  They mentioned management guidance of $15MM EBITDA for 2019.  My notes are that management said proforma after synergies and did not mention 2019.   Current proforma EBITDA is around 11.3MM.   They seemed to fail to incorporate the royalty into the value of the branches.  All they are doing is changing how the pie at CCNI is divided, plus cutting some corporate costs, and attaching it to a faster growing franchise.
Title: Re: CCNI - Command Center
Post by: wabuffo on July 26, 2019, 06:48:10 PM
Artko Capital's PM (who's a sharp guy) was estimating $20 - $40 million cash inflows for franchising CCNI's 67 legacy locations.

I would agree with Tim E. that Artko's analysis seems a little sloppy (even though I am a big fan of his quarterly letters).   Go back to the 2006 acquisition of 67 franchised stores which originally formed the legacy CCNI.  That acquisition was done via the issuance of 12.9m common shares for a little less than $0.90 per share at the time - so that's about $11.6m for around the same number of legacy CCNI locations.  Thus, 30 locations would be 30/67 x $11.6m = ~$5.2m (~$173k per location).  That's pretty close to the current deal - given the slippage in CCNI's performance since then.  The fact that its in the form of a note payable that will likely be paid back through regular payments (+6% interest) over-and-above the royalty volume doesn't bug me all that much.

Its funny though to see the business model come full circle. Legacy CCNI was formed by buying out their franchisees in 2006 and turning them into corporate run locations and now the "new" CCNI is being formed by converting their owned locations back into franchisees.

wabuffo
Title: Re: CCNI - Command Center
Post by: KJP on November 14, 2019, 10:28:51 AM
As has been discussed earlier in the thread, the April 2019 press release accompanying the HQI transaction projected "in excess of" $15 million in post-restructuring EBITDA.  Has anyone bridged to that number in light of the information disclosed since then?

In 2018, HQI had franchise revenues of $11.3 million and EBIT of $6.86 million on system-wide sales of $189 million, for a royalty rate of ~6% and an EBIT margin of ~3.6% on system-wide sales.  During the call two days ago, the company confirmed that legacy HQ typically produced an EBIT margin of 3.5-4% of system-wide sales.  HQ was not a public company, so those margins don't include any additional public company costs.

In 2018, legacy CCNI produced $97 million in system-wide sales.  So, total CCNI + HQ 2018 system-wide sales were ~$285 million.  At a 3.6% margin, that would produce EBIT of ~$10 million. 

There was essentially no D&A at legacy HQ, so what makes up the difference between the $15 million in projected EBITDA and the $10 million in EBIT implied by HQ's historical operating margins?  One source would be improved scale from layering on new CCNI franchise revenue on top of a relatively flat legacy HQ SG&A.  But I don't think that math gets all of the way there for the following reasons:

1.  Legacy HQ was running at about $5 million in SG&A.  During Tuesday's call, management was asked about run-rate overhead post-restructuring, and they said it would salaries of ~$4.5-4.7 million, plus benefits and payroll taxes.  So, it sounds like go-forward SG&A will be $6-7 million, which makes sense because they're adding some public company costs and there must be some incremental cost to having 60 additional franchises.

2.  At a 6% royalty rate, legacy CCNI would produce about $6 million in franchise fees, plus about $500,000 in ancillary "service" revenue, to go along with about $1 million in legacy HQ service revenue.  So, the new P&L should look something like this:

Legacy HQ Royalties:  $11.5
Legacy CCNI Royalties:  $5.8
Total Royalties:  $17.3
Service Revenue:  $1.5
Total Revenue:  $18.8
Overhead:  (6-7)
EBIT:  $11.8 - 12.8

[This doesn't account for the sale of the CA locations to non-franchisees, but it also doesn't account for growth in legacy HQ, which I have assumed is roughly a wash.]

So, can anyone fill in the gap between the EBIT math above and the "in excess of" $15 million EBITDA projection?

I note that even at my EBIT projection the company still appears to be cheap.  There are about 13.5 million shares outstanding x $6.10/share = market cap of $82 million.  They currently have $7 million drawn on their credit line, but that likely is in part driven by the seasonality of A/R (I believe the $5.3 million in "due to franchisee" liability arises from the same seasonality).  In addition, as of quarter end they had about $17 million in notes receivable from the sales of legacy CCNI locations to franchisees, $3 million of which was paid post-quarter end.  Putting a bit of a haircut on the note receivables and assuming some seasonality on the debt, you get a current enterprise value of ~$70-75 million, or about 6x my projected EBIT.  Not bad for a franchisor. 
Title: Re: CCNI - Command Center
Post by: wabuffo on November 14, 2019, 11:52:56 AM
As has been discussed earlier in the thread, the April 2019 press release accompanying the HQI transaction projected "in excess of" $15 million in post-restructuring EBITDA.

That statement was made in the CCNI press-release at the time of the merger/buyout announcement by the outgoing CEO of CCNI.  It was never seen again in any of the shareholder communications after that.  So I don't know if it's a relevant benchmark anymore.

The quarterly financials are very noisy - but I get similar numbers as you do for pro-forma income statement numbers.  I think a couple of statements from the conference call by the CFO were interesting as well. 

a) he said that the goal for SG&A expenses was to try to keep them at a level of where legacy HireQuest was.  Legacy HQ had an annual run rate of $5.2m.  Like you, I think they will have some new public company expenses - so your estimate is probably roughly right.

b) he also threw out that their goal was to run at a 3.5-4.0% pre-tax margin on total systemwide revenues (+/- workers' comp costs).  For this Q, they ran systemwide revenues at $74m. So annualized that would be around $296m.  Take out $10m for the 4 California branches that were sold off (no idea if that's right) - and call it $285m x 3.5% = $10m annualized.  At 4% pre-tax, it would be around $11.4m annualized.

In addition, as of quarter end they had about $17 million in notes receivable from the sales of legacy CCNI locations to franchisees

$1m of notes were legacy and not related to the branch conversions/sales and $2.2m of notes were exchanged for receivables.   The receivables number is extremely hard to pin down but some of it is run-off from the sold California branches.   Regardless, its clear that there is some one-time cash inflows coming that will be free and clear of normal working capital requirements.

It does look interesting.  I think the noise in the results makes it confusing for analysis and mgmt seems poor at explaining their model.   For example, Artko Capital on the call asked a question about receivables being high because mgmt has not clearly made the distinction that part of their model is that they hold and collect total receivables on 100% of systemwide revenues.

wabuffo
Title: Re: CCNI - Command Center
Post by: wabuffo on November 14, 2019, 01:05:03 PM
Here's my pro-forma, annualized income statement based on the 10-Q.  I made three adjustments:
1) Converted the revenues classified in discontinued ops for the sold/converted company-owned branches into an equivalent royalty stream back into continuing ops. This increased royalty revenues for the Q by $701k.
2) Eliminated $4.8m in SG&A expenses that were one-time expenses related to the merger.
3) Eliminated a futher $1.0m in duplicate SG&A expenses that are still embedded in the income statement (duplicate HQ costs, some leftover leases, extra manpower to wind-down CCNI operations).   That's a SWAG - but it's in-line with what legacy HQ had in SG&A per Q.  The pre-tax income seems in-line with the $10m-$11.4m projection using mgmt's 3.5%-4.0% of systemwide revenues.

(https://i.ibb.co/FXDG548/HQI-Pro-Forma.jpg)

FWIW,
wabuffo
Title: Re: CCNI - Command Center
Post by: KJP on November 14, 2019, 02:23:40 PM
Wabuffo,

You're right that the $15 million EBITDA appears to have come from Coleman.  It's just strange to me because it appears to be impossible from historical HQ financials.

Also, thanks for sharing your numbers.  The only thing I'd add is that there may be some seasonality to HQ's results, with Q3 being the weak quarter.  For example, 2018 annual franchise royalties were $11.3 million, which averages to $2.85 million/quarter.  Q1 2018 franchise royalties were $2.7 million (from the August 23, 2019 8-K), which sounds about average given that they added franchises throughout the year, but Q3 2018 was only $2.18 million (from 10-Q filed earlier this week).  First three quarters total royalties in 2018 were $8.03 million (from the 10-Q), implying that they recorded royalties of ~$3.1 million in Q2 2018 (8 - 2.7 - 2.2). 

Similarly, in 2019, legacy HQ had $3.16 million in franchise royalties in Q1 (8/23/19 8-K) and the combined company reported $3.14 million in Q3 and $9.27 total for Q1-Q3, implying $2.97 million in Q2.  If there was no seasonality, Q3 should have been the highest revenue quarter because it included nearly a full quarter in royalty revenue from the first batch of legacy CCNI branches sold in July 2019. 

So, long story short, I believe annualizing Q3 franchise royalties will understate actual annual royalties.  This seasonality in HQ royalties is strange, because CCNI's revenues peaked in the summer (Q2 and Q3), and the most recent 10-Q says "revenue from franchise royalties is based on a percentage of sales generated by the franchisee and recognized at the time the underlying sales occur."  Given this revenue recognition principle, I cannot explain the seasonality of HQ's franchise royalties.

That being said, I also cannot tell what the $400,000 of non-operating "other miscellaneous income" in Q3 relates to.  Based on the cash flow statement, it may be a gain on sale associated with the California transaction.  In any event, it probably doesn't represent an ongoing revenue/income stream.


Title: Re: CCNI - Command Center
Post by: KJP on November 14, 2019, 05:10:17 PM
Wabuffo and others:  Do you understand slide 11 from this presentation, in particular the statement that royalties and interest collectively typically total 4% of system-wide revenue?:  https://s3.amazonaws.com/cdn.irdirect.net/PIR/384/3830/HQ%20Inc.%20Presentation%20Deck%20(Final).pdf 

Everything else I've seen suggests that system-wide royalties alone (not including interest) are about 6%of system-wide sales:

1.  The notes to HQ's 2018 financials state:  "The royalty ranges from approximately 8% of sales by franchisees to approximately 4% of sales by franchisees."  [p. 11:  https://www.sec.gov/Archives/edgar/data/1140102/000119380519000775/e618595_ex99-1.htm]

2.  Same financial statements state that annual franchise royalties were $9.7 million in 2017 and $11.27 million in 2018.  The September 2019 presentation says HQ system-wide sales were $168 million in 2017 and $189 million in 2018.  [Slide 15:  https://s3.amazonaws.com/cdn.irdirect.net/PIR/384/3830/HQ%20Inc.%20Presentation%20Deck%20(Final).pdf]  Based on those numbers, the average royalty rates were 5.8% in 2017 [9.7/168] and 6% in 2018 [11.27/189]

3.  Year-to-date system-wide franchise sales have been $160 million [2019 Q3 10-Q at p.19] and year-to-date franchise royalties have been $9.28 million, for an average royalty rate of 5.8%. 

So, what exactly is slide 11 of the September presentation referring to when it says royalties and interest are typically 4% of system-wide revenue?  Is a portion of what the company reports as "franchise royalties" in its financials really insurance premiums that franchisees pay to HQ corporate for "insurance" to cover the $500,000 deductible that exists on HQ's worker's comp policy, with the variance between these "premiums" that HQ collects from franchisees and deductible reimbursements it has to pay them representing the potential worker's comp variance to margins that management referred on the call?  I can't find any disclosure one way or the other about this.  I also don't see how it could be true in light of the statement in the 2018 HQ financials that HQ paid $7.5 million on behalf of franchisees in 2018 for insurance from a related-party to cover deductible reimbursements. (This policy was canceled on the date of the merger.)  [p. 14:  https://www.sec.gov/Archives/edgar/data/1140102/000119380519000775/e618595_ex99-1.htm]  The company isn't taking in enough in franchise royalties to self-insure a risk that cost $7.5 million to insure in 2018 on a smaller franchise base.

Also, what explains the odd seasonality of reported franchise royalties?
Title: Re: CCNI - Command Center
Post by: wabuffo on November 14, 2019, 08:10:29 PM
KJP - I haven't looked into the internals of the numbers as deeply as you but here are my guesses, FWIW:

So, what exactly is slide 11 of the September presentation referring to when it says royalties and interest are typically 4% of system-wide revenue?

I'm guessing that there's a flat 4% royalty/interest that covers working capital management (receivables) plus another variable portion (as per the slide you referenced) that covers workers' comp.  If you add the extra 35% of the bar chart covering the insurance to the 4% royalty + interest portion - you get around 6% total "royalty" fee as a % of franchisee revenue.  At least that's how I interpreted it - could be wrong. 

I mean the entire value-added of their business model is that HQ provides two basic transactional services to the franchisee:

1) They factor the franchisee receivables (HQI advances 70% of what's owed to the franchisee from the hiring customers, and then HQI does the collection) and
2) They provide scale purchasing of workers' comp. insurance (since they can aggregate the entire network as part of a larger risk pool).

Thus, I would imagine, these two components make up the value-added basic service for which franchisees pay a royalty fee.  They provide other services upon request but those go into the service fee part of their revenue model since these are considered "extras".

I think this mgmt is new to public company investor relations and can be confusing in their shareholder communication.  They aren't always clear and consistent with how they present basic business model information - but they'll improve.

Of course, I could be wrong about all this.

wabuffo