HQI

Business Context and Reporting Period

Company: Command Center, Inc. (Note: Input metadata listed "Hirequest, Inc.", but the filing text identifies the registrant as Command Center, Inc.)
Reporting Period: Quarterly period ended June 25, 2010 (13 weeks) and the 26 weeks ended June 25, 2010.
Business Overview: The Company provides on-demand temporary employees for manual labor, light industrial, and skilled trades. As of June 25, 2010, it operated 51 stores in 21 states plus 2 additional sites related to the Gulf Coast oil spill. The Company is classified as a smaller reporting company.

Key Financial Metrics

Note: Cash balance was $31,132 with an additional $150,000 in restricted cash. Current liabilities ($7.5M) exceeded current assets ($5.8M).

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 53% in the 13-week period (from $12.4M to $19.0M) and 22.7% in the 26-week period (from $25.2M to $30.9M). Growth was driven by increased operations across branches and specific demand from the Gulf Coast oil spill.
• Profitability: The Company reported a net income of $336,123 for the 13 weeks ended June 25, 2010, compared to a net loss of $1,482,267 in the same period in 2009. However, the 26-week period still showed a net loss of $1.4M.
• Cost Structure: Cost of services as a percentage of revenue decreased from 76.7% to 73.3% (13 weeks) due to revenue growth and reduced workers' compensation costs (dropped from 8.2% to 5.2% of revenue).
• SG&A Expenses: Selling, General, and Administrative expenses decreased as a percentage of revenue from 30.0% to 18.7% (13 weeks), primarily due to reductions in personnel costs, office expenses, and rent.
• Debt Restructuring: The Company recognized a loss on debt extinguishment of approximately $845,000 in the 26-week period following an amendment to a short-term note with Sonoran Pacific Resources, which involved issuing stock and warrants.

Guidance, Outlook, Risks, and Contingencies

Going Concern

Management has raised substantial doubt about the Company's ability to continue as a going concern. The Company does not have sufficient cash to fund normal operations for the next 12 months and relies on future stock sales, warrant exercises, or debt transactions to continue.

Liquidity and Financing

• Line of Credit: The Company entered a new account purchase agreement (effectively a line of credit) with a $7 million facility (negotiated to $10 million post-period). However, the Company was not in compliance with financial covenants as of June 25, 2010.
• Convertible Note: A new $1.3 million convertible note is due by December 31, 2010, with weekly payments based on revenue.

Legal and Tax Contingencies

• Successor Liability: The Company faces potential successor liability claims from the State of Washington regarding unpaid taxes from acquired entities (Everyday Staffing LLC). Claims include approximately $1.2 million in industrial insurance taxes. The Company disputes these claims and has obtained a judgment against the former owners, though collectability is questionable.
• Other Tax Liabilities: Potential state payroll tax liabilities of $400k-$600k and federal payroll tax liabilities of $1M-$2M exist from prior acquisitions. Management believes the likelihood of successor liability for federal claims is remote.
• Closed Store Leases: Potential liability for closed store leases is estimated between $150,000 and $500,000.

Internal Controls

Management identified material weaknesses in internal controls, including a lack of an independent Board of Directors/Audit Committee, insufficient segregation of duties in the finance department, and delays in accounting processes due to staff turnover.

Investor Verification Checklist

• Covenant Compliance: Verify the status of the financial covenants with the Wells Fargo line of credit facility, given the reported non-compliance as of June 25, 2010.
• Going Concern Funding: Assess the likelihood of securing additional capital via stock sales or warrant exercises to fund operations for the next 12 months.
• Successor Liability Resolution: Monitor the outcome of the dispute with the Washington Department of Labor and Industries regarding the $1.2 million industrial insurance tax claim.
• Debt Maturity: Confirm the Company's ability to meet weekly payments on the $1.3 million convertible note due December 31, 2010.
• Internal Control Remediation: Review progress on hiring independent board members and segregating duties within the finance department.