Business context and reporting period
The supplied filing is Command Center, Inc.’s Form 10-K for the 52-week fiscal year ended December 28, 2012, compared with the year ended December 30, 2011. This differs from the request metadata naming Hirequest, Inc.; verify the issuer identity. Command Center operated 59 on-demand labor stores in 24 states, serving about 3,400 clients and employing more than 35,000 temporary workers. In January 2012, it acquired substantially all assets of disaster-recovery staffing business DRS, LLC.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $98.4 million | $81.9 million |
| Gross profit / margin | $24.9 million / 25.3% | $18.6 million / 22.8% |
| SG&A | $22.0 million / 22.4% of revenue | $17.7 million / 21.6% |
| Operating income | $2.48 million / 2.5% | $0.52 million / 0.6% |
| Net income | $1.56 million; diluted EPS $0.02 | $0.85 million; diluted EPS $0.01 |
| Operating cash flow | $(1.83) million | $(1.00) million |
Revenue grew 20.2%; management attributed growth to the DRS acquisition, increased disaster-recovery work, national accounts and branch-level organic growth. Same-store revenue increased approximately 6% to $83.1 million. Staffing costs declined to 74.7% of revenue from 77.2%; workers’ compensation expense declined to 4.2% from 5.1% of revenue. SG&A rose in dollars and as a percentage of revenue, mainly due to staffing and travel costs.
Net income included an $842,000 gain from changes in fair value of derivative liabilities and a $958,000 income-tax provision. The 2011 result included a $912,000 tax benefit. Management’s non-GAAP EBITDA-D was $2.85 million versus $0.96 million; it excludes interest, taxes, depreciation and amortization, and derivative fair-value changes.
At year-end, current assets were $17.0 million and current liabilities $14.8 million, a $2.2 million working-capital surplus; cash was $1.63 million and net accounts receivable $13.7 million. The $9.05 million factoring liability funded operations through a full-recourse receivables-purchase facility with a $15 million limit, 6.25% effective rate and term through April 2014. The company reported covenant compliance. Total liabilities were $17.9 million; stockholders’ equity was $4.0 million. Operating cash use reflected a $5.75 million increase in receivables, associated in part with higher fourth-quarter disaster-recovery sales. Financing provided $2.78 million, primarily from factoring. The filing reports net cash used in investing activities as $488,000 in MD&A, while the cash-flow statement shows $443,285; reconcile this discrepancy.
Material changes, outlook and risks
Command Center opened nine stores, including DRS, and closed one, ending the year with 59. The acquisition consideration included $150,000 cash, a $150,000 note, 1.5 million shares and contingent share consideration. The company issued 2.0 million shares in total related to DRS, including contingent consideration; approximately 1.3 million additional shares valued at about $323,000 were reported as earned and due at year-end.
For 2013, management planned to prioritize same-store growth, open new branches selectively based on expected returns, continue improving gross margins and pursue lower SG&A costs. No quantified revenue, earnings or cash-flow guidance was provided. In February 2013, Frederick Sandford became CEO and President after Glenn Welstad resigned; Sandford received options for 1.5 million shares, vesting over four years.
Key risks include recurring historical losses and a $51.7 million accumulated deficit; working-capital dependence and receivable-collection timing; competition and pricing pressure; seasonal demand; and workers’ compensation availability, claims and reserve estimates. Workers’ compensation claims liability was $3.71 million, with $1.71 million of deposits; management estimated possible AIG under-collateralization of up to $500,000. The company also disclosed a lawsuit by Trident Seafoods and Liberty Mutual alleging responsibility for benefits for an injured borrowed worker; management disputes the claims, and no clear potential loss amount is provided. The company reported material weaknesses in financial-reporting controls, including incomplete accounting-procedure documentation and lack of third-party deposit verification; management concluded disclosure controls and internal control over financial reporting were ineffective. The independent auditor gave an unqualified opinion on the financial statements but did not audit internal controls.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing identifies Command Center, Inc., not Hirequest, Inc., and covers the full 2012 fiscal year rather than a standalone Q4 report.
- Reconcile the investing-cash-flow amounts in MD&A and the cash-flow statement, and assess why operating cash use increased despite reported net income.
- Review receivables aging, factoring availability and terms, covenant headroom, and the ability to fund payroll while awaiting customer collections.
- Evaluate workers’ compensation reserve adequacy, collateral requirements and the Trident/Liberty Mutual litigation exposure, which is not quantified in the filing.
- Track remediation of material weaknesses and whether subsequent reporting demonstrates effective controls.
- Assess potential dilution from outstanding warrants, options and DRS contingent consideration, and the sensitivity of reported earnings to derivative fair-value changes and tax valuation allowances.