Hirequest, Inc. (then Command Center, Inc.) — Q3 2018 Form 10-Q
Business and period: The company provides on-demand staffing, primarily manual labor, through 67 branches in 22 states as of November 5, 2018. The filing covers the 13 and 39 weeks ended September 28, 2018, compared with the periods ended September 29, 2017.
Financial performance
| Metric | 13 weeks ended Sept. 28, 2018 | 13 weeks ended Sept. 29, 2017 | 39 weeks ended Sept. 28, 2018 | 39 weeks ended Sept. 29, 2017 |
|---|---|---|---|---|
| Revenue | $26.31 million | $26.70 million | $72.95 million | $73.56 million |
| Gross profit / margin | $6.45 million / 24.5% | $7.19 million / 26.9% | $18.33 million / 25.1% | $19.42 million / 26.4% |
| Operating income (loss) | $751,000 | $1.61 million | $(141,000) | $3.14 million |
| Net income (loss) | $546,000 | $851,000 | $(108,000) | $1.77 million |
| Adjusted EBITDA | $912,000 | $1.81 million | Approximately $2.62 million | $3.55 million |
- Q3 revenue declined 1.5%; net income fell to $546,000 from $851,000. Gross margin contracted 2.4 percentage points.
- Year-to-date revenue declined 0.8%, while the company swung to a net loss from $1.77 million of profit. Gross margin fell 1.3 percentage points; SG&A increased to $18.21 million from $15.99 million.
- For the 39 weeks, operating cash flow was $961,000, down from $2.51 million. Investing activities used $130,000 and financing activities used $2.31 million; cash decreased $1.48 million to $6.30 million, including restricted cash.
Liquidity, debt, and capital
- At September 28, cash was $6.26 million, net accounts receivable $9.80 million, current assets $16.82 million, and current liabilities $3.84 million. Working capital was approximately $13.0 million; total liabilities were $4.85 million.
- The company reported $212,000 outstanding under its full-recourse accounts receivable purchase facility, versus $854,000 at year-end 2017. The facility bears interest at 4.76% at quarter-end. Only approximately $23,000 was available under it, partly constrained by a $6.2 million workers’ compensation letter of credit. The company reported covenant compliance.
- Year-to-date financing cash use included $1.67 million of treasury-stock purchases and a $642,000 reduction in the receivables facility. Q3 repurchases totaled approximately 164,000 shares for $949,000; about $3.0 million remained under the repurchase plan.
Material changes, commentary, and risks
- Management attributed lower revenue to elevated turnover in sales positions amid increased labor-market competition. It cited higher recruiting costs, internal pay and benefits, field-team wages, payroll taxes, and workers’ compensation costs.
- Workers’ compensation expense was approximately $1.4 million in Q3 2018 versus $900,000 in Q3 2017, and $3.2 million year to date versus $2.4 million. Management cited increased claims payments and less favorable claims-liability changes than in the prior-year quarter.
- Year-to-date SG&A included a $1.54 million reserve increase on the Freestone workers’ compensation deposit, approximately $565,000 in executive severance, and a $100,000 proxy-contest settlement. These items were partly offset by an approximately $198,000 refund related to a workers’ compensation risk-pool deposit. Adjusted EBITDA excludes certain specified items and is a non-GAAP measure.
- The Freestone insurer is in liquidation. The company reduced the deposit’s carrying amount to $260,000 and estimated that as the high end of potential recovery; actual recovery depends on court determinations and available assets. Management said recovery may be limited and is pursuing the matter with a more measured investment.
- One customer accounted for 8.4% of revenue and 11.0% of receivables at September 28, 2018. Two vendors accounted for 33.9% of accounts payable. The filing noted no material change in previously disclosed risk factors.
- No financial guidance or specific forecast was provided. Management stated interim results are not necessarily indicative of full-year results. Disclosure controls were concluded to be effective, with no material changes in internal controls reported.
Key facts for investors to verify
- Whether staffing-sales turnover and competitive labor conditions continue to affect revenue growth and recruiting expense.
- Workers’ compensation claims experience, reserve estimates, collateral requirements, and the limited availability under the receivables facility.
- Freestone liquidation proceedings, including the basis for the $260,000 carrying value and any eventual recovery.
- Whether gross-margin pressure and elevated SG&A persist after the identified unusual expenses.
- Cash generation after share repurchases, and the extent to which adjusted EBITDA adjustments reflect recurring costs.