CCNI - Command Center

[brendanb22]

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

[randomep]

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.

 

 

[brendanb22]

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

[KJP]

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

[DTEJD1997]

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.

[KJP]

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?

 

[DTEJD1997]

 

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!

[KJP]

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."

 

[Foreign Tuffett]

 

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. 

 

[KJP]

 

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.

[Foreign Tuffett]

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.

 

 

[DTEJD1997]

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...

[KJP]

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.

 

[KJP]

And now there's an open board seat:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418000619/ccni_ex991.htm

[KJP]

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. 

[KJP]

CEO has now resigned:  https://www.sec.gov/Archives/edgar/data/1140102/000165495418001177/ccni_8k.htm

[JayGatsby]

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.

[DTEJD1997]

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....

[KJP]

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.

[Tim Eriksen]

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. 

 

[KJP]

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?

[Tim Eriksen]

Sorry my bad.  You are correct on item 1. 

[KJP]

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.

[DTEJD1997]

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!

[Foreign Tuffett]

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.