Business context and reporting period
The filing is Command Center, Inc.’s Form 10-Q for the thirteen weeks ended March 28, 2014; it does not identify the issuer as Hirequest, Inc. Command Center operated 53 on-demand labor stores in 22 states, providing primarily short-term manual-labor staffing.
Financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $18.46 million | $19.90 million |
| Gross profit / margin | $4.88 million / 26.4% | $5.22 million / 26.2% |
| Operating income / margin | $596,000 / 3.2% | $177,000 / 0.9% |
| Net income | $511,000; $0.01 per diluted share | $12,000; $0.00 per diluted share |
| EBITDA-D (non-GAAP) | $661,000 | $266,000 |
| Operating cash flow | $2.08 million | $1.60 million |
Cash was $5.77 million at quarter-end, versus $5.82 million at December 27, 2013. Current assets were $15.90 million and current liabilities $9.31 million. The account purchase agreement balance was $5.95 million, down from $8.05 million; the facility limit was $14 million at quarter-end. No separate conventional debt balance is clearly presented. The agreement is full recourse, secured by company assets, and carried a 3.15% effective rate.
Changes versus the prior comparable period
Revenue declined 7.3%, which management attributed to winding down Disaster Recovery Services contracts, organizational changes, and an increased focus on profitability. Gross margin improved 0.2 percentage points and SG&A fell to 22.8% of revenue from 24.9%, supporting stronger operating income despite lower sales. Workers’ compensation expense rose to 4.4% of revenue from 2.8%. Net income improved substantially, while operating cash flow increased; the 2014 cash inflow benefited mainly from a $1.91 million reduction in receivables and was partly offset by lower accrued wages and benefits.
Outlook, risks and unusual items
- Management said its current operating plan indicated sufficient cash to fund operations into the foreseeable future, but warned that below-plan sales or higher working-capital needs could require additional cash or expense reductions. No numerical guidance was provided.
- On April 1, 2014, the company changed its workers’ compensation carrier to ACE in most operating states. The large-deductible policy leaves the company primarily responsible for claims up to $500,000 per incident and requires $3.6 million of collateral through a letter of credit, reducing future borrowing availability.
- On April 18, the Wells Fargo facility limit increased from $14 million to $15 million and permitted up to $3.7 million of letters of credit within the facility.
- Subsequent to quarter-end, 4.2 million warrants were exercised for $336,000 and 4.2 million shares were issued on April 14. The company also issued 1,288,126 earn-out shares to DR Services’ former owners on April 16.
- Management reported disclosure controls and procedures were not effective as of quarter-end. It reported no material change in internal control over financial reporting during the quarter.
- Other risks include the limited, low-volume OTCQB market for the stock, customer-receivable collection and bad-debt exposure, workers’ compensation claims, and approximately $5.2 million of bank deposits above FDIC insurance limits. Management said pending legal proceedings were not expected to have a material adverse effect; no material risk-factor changes from the prior 10-K were reported.
Key facts investors should verify
- Confirm the issuer and filing match the intended company: this document is for Command Center, Inc., not Hirequest, Inc.
- Assess whether revenue declines and the company’s emphasis on margin improvement are sustainable, including the effect of reduced disaster-related work.
- Review receivable aging, collectability, and the full-recourse account purchase facility’s balance, covenants, collateral, and available capacity after the ACE letter of credit.
- Monitor workers’ compensation claims experience and the financial effect of the new policy and required collateral.
- Understand the ineffective disclosure controls, any remediation, and the dilution from warrant exercise and earn-out share issuance.