Author Topic: CCNI - Command Center  (Read 16373 times)

Foreign Tuffett

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Re: CCNI - Command Center
« Reply #40 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
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.
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wabuffo

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Re: CCNI - Command Center
« Reply #41 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

« Last Edit: July 26, 2019, 03:49:30 PM by wabuffo »

Tim Eriksen

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Re: CCNI - Command Center
« Reply #42 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?     

Foreign Tuffett

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Re: CCNI - Command Center
« Reply #43 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.
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Tim Eriksen

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Re: CCNI - Command Center
« Reply #44 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.

wabuffo

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Re: CCNI - Command Center
« Reply #45 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
« Last Edit: November 13, 2019, 12:14:41 PM by wabuffo »

KJP

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Re: CCNI - Command Center
« Reply #46 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. 

wabuffo

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Re: CCNI - Command Center
« Reply #47 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

wabuffo

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Re: CCNI - Command Center
« Reply #48 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.



FWIW,
wabuffo

KJP

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Re: CCNI - Command Center
« Reply #49 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.


« Last Edit: November 14, 2019, 02:35:15 PM by KJP »