Business context and reporting period
This is Command Center, Inc.’s unaudited Form 10-Q for the quarter ended June 27, 2014, covering 13-week and 26-week periods. The company operated 53 on-demand labor stores in 22 states, providing temporary manual labor staffing and disaster-recovery services. The filing identifies the registrant as Command Center, Inc.; it does not identify Hirequest, Inc. as the filer.
Financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $21.66 million | $23.29 million | $40.12 million | $43.20 million |
| Gross profit (margin) | $5.84 million (26.9%) | $5.88 million (25.3%) | $10.72 million (26.7%) | $11.10 million (25.7%) |
| Operating income (margin) | $1.64 million (7.6%) | $0.55 million (2.4%) | $2.23 million (5.6%) | $0.73 million (1.7%) |
| Net income | $1.50 million | $0.47 million | $2.01 million | $0.48 million |
| EPS, diluted | $0.02 | $0.01 | $0.03 | $0.01 |
| Operating cash flow | Not separately reported | Not separately reported | $1.98 million | $1.14 million |
First-half revenue declined 7.1% year over year, primarily due to closures of unprofitable branches and a vendor on-premise job site. Management attributed improved gross margin to lower per diem costs from less disaster work and a greater focus on staffing margins. SG&A fell to $8.35 million from $10.16 million, reflecting organizational changes, recoveries of previously reserved receivables, and lower controllable costs, partly offset by higher branch bonuses. First-half workers’ compensation expense was 4.2% of revenue versus 3.9% in 2013; in Q2 it was 4.0% versus 4.8%.
Cash, liquidity, and financing
Cash declined to $2.76 million at June 27, 2014, from $5.82 million at December 27, 2013. First-half operating cash flow of $1.98 million was more than offset by $0.22 million of investing outflows and $4.83 million of financing outflows, principally repayment of the receivables facility. Current assets were $14.55 million and current liabilities $6.63 million, for working capital of approximately $7.92 million.
The company reported $2.88 million outstanding under its account purchase agreement facility, down from $8.05 million at year-end. The $15 million facility sells eligible receivables on a full-recourse basis, carries an effective rate of 3.15% at quarter-end, and is secured by company assets. A $3.6 million letter of credit for workers’ compensation collateral reduces facility availability; the company reported compliance with the facility covenant. No separate conventional debt balance is stated. Trade receivables were $9.42 million, net of a $0.71 million allowance, with weighted-average aging of 29 days. One customer represented 12.5% of receivables.
Material changes, outlook, and risks
- On April 1, the company changed its workers’ compensation carrier to ACE in all operating states except Washington and North Dakota. The high-deductible policy leaves the company largely self-insured for claims, with ACE covering covered losses above $500,000 per incident. Total cash and non-cash workers’ compensation collateral was approximately $6.5 million.
- In April, 4.2 million warrants were exercised for $336,000, and 1,288,126 shares were issued to settle the remaining acquisition earn-out. Shares outstanding rose to 65.25 million at quarter-end from 59.71 million at year-end.
- The company reported no specific revenue or earnings guidance. Management cautioned that first-half results are not necessarily indicative of full-year results.
- Management concluded disclosure controls and procedures were not effective at period-end. It reported no material changes in internal control over financial reporting during the quarter.
- The company cited risks including limited, low-volume OTCQB trading and possible difficulty reselling shares. It said there were no material changes to previously disclosed risk factors and that existing legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue declines stabilize and margin improvements persist despite the smaller operating footprint and lower disaster-work activity.
- Receivables quality, customer concentration, collection trends, and the adequacy of the doubtful-account allowance.
- Liquidity and available borrowing capacity after the $3.6 million letter of credit, including compliance with facility covenants.
- Workers’ compensation claims development, collateral requirements, and the financial exposure retained under the high-deductible policy.
- Remediation plans and progress regarding the ineffective disclosure controls.
- Share dilution from outstanding options and warrants and the effects of the acquisition earn-out issuance.