Business context and reporting period
The supplied filing is Command Center, Inc.’s Form 10-K for the fiscal year ended December 30, 2016—not a filing under the name Hirequest, Inc. It covers 53 weeks in 2016 versus 52 weeks in 2015; the fourth quarter was 14 weeks versus 13 weeks. Command Center provides temporary manual, light-industrial and skilled-trade staffing through stores in 21 states. It reported 64 stores at fiscal year-end, approximately 34,000 temporary workers and 3,200 customers.
Financial results and liquidity
| Metric | 2016 | 2015, revised |
|---|---|---|
| Revenue | $93.3 million | $88.5 million |
| Gross profit / margin | $23.7 million / 25.4% | $23.6 million / 26.7% |
| Operating income / margin | $1.6 million / 1.7% | $2.6 million / 3.0% |
| Net income / margin | $759,000 / 0.8% | $1.6 million / 1.8% |
| EBITDA, non-GAAP | $2.1 million | $3.5 million |
| Net cash from operating activities | $13,000 | $3.3 million |
Revenue rose 5.4%, but staffing costs grew faster, increasing from 73.3% to 74.6% of revenue and compressing gross margin. Net income fell about 51%. Basic and diluted EPS were $0.01 in 2016 versus $0.02 in 2015. The filing reports $3.0 million cash, $10.3 million net accounts receivable, $15.2 million current assets and $3.8 million current liabilities at year-end; working capital was approximately $11.4 million. Total liabilities were $5.4 million, primarily workers’ compensation claims liabilities; the account-purchase facility had no payable balance at year-end.
Cash declined $4.6 million to $3.0 million. Investing used $2.1 million, mainly for the Hancock acquisition; financing used $2.5 million, including $1.5 million for share repurchases and $417,000 to repay acquired debt. The Wells Fargo receivables facility permits up to $14 million of eligible receivables to be sold on a full-recourse basis, but a $5.7 million letter of credit reduces otherwise available capacity. Management said cash flow, working capital and facility access were expected to fund operations through March 2018.
Material changes, outlook and risks
- June 2016 acquisition of Hancock Staffing’s two stores cost $2.6 million including assumed liabilities; Hancock contributed approximately $4.5 million revenue after acquisition and $1.3 million goodwill was recognized. Store count increased from 57 to 64.
- North Dakota revenue fell 33.8% to $10.2 million amid reduced Bakken-region oil and gas staffing demand. Revenue from other stores, excluding Hancock and North Dakota, increased 7.5%.
- Management planned to pursue sales growth at existing stores, selective openings and acquisitions, and new national accounts, emphasizing margins, quality customers and service. No quantified earnings or revenue guidance was provided.
- Workers’ compensation expense rose to approximately $3.8 million from $3.1 million. The company is substantially self-insured under a $500,000 per-incident deductible policy and relies on a $5.7 million letter of credit for collateral.
- Recovery of collateral from former carrier Freestone Insurance remains uncertain. The company recorded a cumulative $500,000 reserve against deposits; it believes its claim is priority but may not recover all amounts.
- 2015 financial statements were revised for previously under-accrued costs and reclassified bank fees. The filing states the prior-year errors were not material to 2015 but would have been material to 2016 if uncorrected. Management said disclosure controls were effective and the errors did not represent a material weakness; it engaged a consultant to assess controls.
- Other notable risks include seasonal and local economic volatility, worker availability, customer concentration (top 10 were 24% of revenue), credit and working-capital exposure, employment regulation, workers’ compensation costs, competition and OTCQB/penny-stock liquidity. The company reported an accumulated deficit of $37.6 million despite profits in each of the prior six fiscal years.
- The auditor issued an unqualified opinion on the consolidated financial statements; it did not audit internal control effectiveness. A separate litigation matter involving a Labor Smart note receivable had been fully reserved in 2015.
Important facts for investors to verify
- Confirm the issuer identity: the source filing names Command Center, Inc., while the request identifies Hirequest, Inc.
- Review the revised 2015 figures and the 2016 accounting adjustments, including the effect on comparability.
- Assess whether the receivables facility, its full-recourse terms and the $5.7 million letter-of-credit encumbrance leave adequate seasonal liquidity.
- Track collections and the ultimate recovery, if any, of Freestone collateral, as well as workers’ compensation claims and reserve assumptions.
- Separate acquired Hancock revenue and the extra fiscal week from underlying store growth, and monitor the North Dakota market’s continuing decline.
- Evaluate operating cash generation, which was only $13,000 despite positive net income, and the returns from store expansion and stock repurchases.