Business Context and Reporting Period
Company: Command Center, Inc. (Note: Input metadata referenced "Hirequest, Inc.", but the filing text identifies the registrant as Command Center, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2011
Business Overview: The Company provides temporary unskilled and semi-skilled workers to restoration, wholesale trades, manufacturing, hospitality, construction, and retail industries. As of September 30, 2011, it operated 54 stores in 23 states.
Key Financial Metrics
| Metric | 13 Weeks Ended Sep 30, 2011 | 39 Weeks Ended Sep 30, 2011 |
|---|---|---|
| Revenue | $24,972,597 | $61,652,359 |
| Gross Profit | $5,122,065 (20.5% margin) | $12,846,464 (20.8% margin) |
| Net Income (Loss) | $703,387 | $(928,307) |
| Operating Cash Flow | N/A | $(1,375,888) used |
| Cash Balance | $440,035 | $440,035 (End of Period) |
| Total Assets | $9,012,177 | $9,012,177 |
| Total Liabilities | $8,341,636 | $8,341,636 |
| Stockholders' Equity | $670,541 | $670,541 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 26.8% for the quarter and 21.7% year-to-date compared to the prior year, driven by disaster relief work (North Dakota, New York, Pennsylvania) and organic growth.
- Margin Compression: Gross margin decreased from 25.1% to 20.5% for the quarter. Cost of services rose to 79.5% of revenue due to higher wages, payroll taxes, and a $700,000 write-down of workers' compensation risk pool deposits.
- Profitability: While the Company reported a net income of $703,387 for the quarter, it reported a net loss of $928,307 for the 39-week period, compared to a net loss of $302,827 in the prior year-to-date period.
- Liquidity: Cash decreased from $1.67 million at year-end 2010 to $440,035 at September 30, 2011. Operating cash flow turned negative, using $1.38 million, primarily due to a $4.1 million increase in trade receivables and a $1.3 million decrease in trade payables.
Outlook, Risks, and Contingencies
- Liquidity Risk: Management anticipates sufficient cash to fund operations only through December 2011. Additional equity or debt financing will be required thereafter. Failure to secure funding may force operational reductions.
- Workers' Compensation: The Company switched from a self-insured model to a guaranteed cost policy with Zurich American Insurance Company effective April 1, 2011, to mitigate rising costs. However, it remains under-funded in its previous risk pool deposit account with AMS Staff Leasing II, with an estimated future liability of $2 million.
- Legal Contingencies:
- Dun & Bradstreet Lawsuit: Sued for $247,000; Company has reserved $50,000.
- Successor Liability (Tax): Potential liability for unpaid payroll taxes from 2006 acquisitions estimated between $1.4 million and $2.6 million. Management believes successor liability is remote and has not accrued a liability.
- Everyday Staffing: Disputed claim by the State of Washington for industrial insurance taxes of approximately $1.2 million. Company disputes the claim and has a judgment against the seller for $1.295 million, though collectability is questionable.
- Debt Covenants: The Company is in compliance with its line of credit covenant requiring excess available advances plus cash to exceed accrued payroll.
Investor Verification Checklist
- Verify the Company's ability to secure additional financing before December 2011 to avoid operational curtailment.
- Monitor the resolution of the $1.2 million industrial insurance tax claim from the State of Washington regarding Everyday Staffing.
- Assess the impact of the $700,000 workers' compensation write-down and the ongoing under-funding of the AMS risk pool deposit.
- Review the aging of trade receivables, which increased by $4.1 million, and the effectiveness of collection efforts given the 26-day weighted average aging.
- Confirm the status of the Dun & Bradstreet litigation and the potential for the $50,000 reserve to be insufficient.