Filing summary
Entity and period: The supplied filing is Command Center, Inc.’s Form 10-K, not a filing identified as HireQuest, Inc. It covers the 52-week fiscal year ended December 30, 2011; the comparable 2010 fiscal year had 53 weeks. This is an annual report, not a standalone fourth-quarter report.
Business context
Command Center operated 51 on-demand labor stores in 23 states, serving approximately 3,000 clients and employing more than 30,000 temporary workers. Its largest 10 customers generated approximately 24% of 2011 revenue. The company focused on manual, light-industrial and skilled-trade staffing and operated Bakken Staffing in North Dakota.
Financial performance
| Metric | 2011 | 2010, restated |
|---|---|---|
| Revenue | $81.9 million | $69.4 million |
| Gross profit / margin | $18.6 million / 22.8% | $17.1 million / 24.7% |
| Operating income / margin | $0.9 million / 1.1% | $1.6 million / 2.2% |
| Net income (loss) | $0.854 million | $(1.560) million |
| Basic / diluted EPS | $0.02 / $0.01 | $(0.03) / $(0.03) |
| Operating cash flow | $(0.627) million | $2.640 million |
| Cash at year-end | $1.131 million | $1.667 million |
Revenue rose about 18%; management attributed growth to restoration work, national accounts and branch-level organic growth. Same-store revenue increased approximately 28%, to $79.7 million. Staffing costs rose to 77.2% of revenue from 75.3%, as wages and payroll taxes increased and competitive pricing and lower-margin large-account work pressured margins. SG&A increased to $17.3 million, though it declined as a share of revenue to 21.1% from 21.6%.
2011 net income included a $912,195 income-tax benefit from recognizing deferred tax assets expected to be used in the following year. Before that benefit, the company reported a $58,292 pretax loss. Interest and other financing expense was $1.124 million. The company reported an accumulated deficit of $53.2 million.
Liquidity, financing and balance sheet
At year-end, current assets were $5.437 million and current liabilities were $3.601 million. Assets totaled $8.498 million and liabilities $6.733 million. The balance sheet showed no conventional long-term borrowings, but the company relied on a full-recourse accounts-receivable purchase facility with a $10 million limit. Approximately $6.1 million of receivables had been sold under the facility. It carried a 6.25% effective rate at year-end, additional fees and a blanket security interest; its stated term ended April 7, 2012. The company reported compliance with its covenant.
Operating cash flow turned negative despite the return to reported net income, with receivables growth and workers’ compensation-related changes among the reported cash-flow movements. Management said additional capital would be required in 2012 and that access to funding was not assured. Approximately $930,000 remained on deposit with former workers’ compensation insurers, and the company was pursuing refunds it considered excess collateral.
Changes, outlook and significant items
- Workers’ compensation: On April 1, 2011, the company moved from substantially self-insured large-deductible coverage to a guaranteed-cost policy in most states. Workers’ compensation expense was approximately $4.9 million in 2011 versus $4.1 million in 2010, but fell to 5.1% of revenue from 5.9%. Management cited the coverage change, safety efforts and claims handling.
- Restatement: The company found that AIG workers’ compensation deposits for 2006–2008 had been overstated by approximately $716,000, principally because a former broker misdirected premium-related payments. The prior 2011 third-quarter charge to expense was determined to be erroneous; the correction was applied to prior-period accumulated deficit. Fiscal 2011 and 2010 annual net income and EPS were unchanged, but the third-quarter 2011 EPS impact was approximately $0.01. Previously issued 2010 audited and quarterly financial statements from March 2010 through September 2011 should no longer be relied upon. The filing also describes a correction to previously reported deferred-tax components; the former deferred tax assets had been fully offset by a valuation allowance, so earnings were unaffected.
- Management outlook: The company said it had taken steps in 2012 to raise bill rates while maintaining Field Team Member pay rates and expected gross margin to return to previously attained levels by the end of the first quarter of 2012. It planned to grow existing branches, selectively open locations and pursue national accounts, disaster recovery and North Dakota opportunities. No quantified revenue or earnings guidance was provided.
- Subsequent acquisition: In January 2012, the company acquired substantially all assets of disaster-recovery staffing businesses for $300,000 and 1.5 million restricted shares, with up to 1.5 million additional shares contingent on performance.
- Contingencies: A former CFO sued the company and its CEO in December 2011, alleging breach of contract and unpaid wages; the company intended to defend the case. The company disclosed disputed potential successor-liability claims tied to acquired businesses, including estimated selling-entity tax liabilities of $400,000–$600,000 at the state level and $1–$2 million in federal payroll taxes, for which no liability was accrued based on counsel’s assessment. A separate Washington assessment was disputed, and management did not record a liability. The company also reported potential under-collateralization with AIG of $500,000–$1 million, despite stating the related claims were fully reserved.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end and identified a material weakness involving incomplete accounting-procedure documentation, staff training and lack of verification controls over third-party deposits. The independent auditor expressed an unqualified opinion on the financial statements, but did not audit internal-control effectiveness.
Key facts for investors to verify
- Confirm the issuer: this filing names Command Center, Inc., not HireQuest, Inc.
- Review the restated financial statements and the identified non-reliance periods, including the $716,000 workers’ compensation deposit correction.
- Assess the quality of 2011 earnings, particularly the $912,195 tax benefit, alongside negative operating cash flow and declining cash.
- Verify renewal or replacement of the receivables facility that was scheduled to expire April 7, 2012, and the company’s ability to fund payroll and growth.
- Track gross-margin recovery against management’s stated first-quarter 2012 expectation and monitor workers’ compensation collateral and claims estimates.
- Monitor remediation of the material control weakness and outcomes of the former-CFO lawsuit and disputed successor-liability matters.