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CCNI - Command Center


brendanb22

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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

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  • 1 month later...
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  • 2 months later...

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

 

 

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  • 3 months later...

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.

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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%

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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.

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  • 4 months later...

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. 

 

 

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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 ..

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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.       

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  • 3 months later...

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? 

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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.

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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.

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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.

 

 

 

 

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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

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

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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

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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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

 

 

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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?     

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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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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.

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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

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  • 3 months later...

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. 

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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

 

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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.

 

HQI-Pro-Forma.jpg

 

FWIW,

wabuffo

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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.

 

 

 

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