Hirequest, Inc. — 2012 Q3 Form 10-Q Summary
Filing identity: The supplied filing is for Command Center, Inc., not Hirequest, Inc. The filing covers the 13 and 39 weeks ended September 28, 2012; comparisons are to periods ended September 30, 2011.
Business context and reporting period
Command Center provided temporary workers to restoration, wholesale trades, manufacturing, hospitality, construction and retail industries, operating 58 stores in 23 states. Results include Disaster Recovery Services, Inc. (DRSI), acquired effective January 1, 2012.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Revenue | $28.4 million | $25.0 million | $71.7 million | $61.7 million |
| Gross profit | $7.34 million | $5.90 million | $17.99 million | $13.83 million |
| Gross margin | 25.9% | 23.6% | 25.1% | 22.4% |
| Operating income | $0.98 million | $1.25 million | $2.04 million | $0.24 million |
| Net income (loss) | $0.72 million | $1.42 million | $1.00 million | $(0.21) million |
| Operating cash flow | Not reported separately for the quarter | $0.70 million | $(1.38) million |
Q3 revenue increased 13.7% year over year; nine-month revenue rose 16.4%. Management attributed growth to the DRSI acquisition, increased North Dakota activity, restoration projects and broader staffing demand. Gross margin improved, while Q3 SG&A rose to 22.1% of revenue from 18.3%, reflecting higher compensation, travel and restoration-project costs. Nine-month SG&A was $15.66 million, up about $2.42 million, but remained near 21.8% of revenue.
Q3 net income declined year over year despite higher revenue and gross profit. The filing reports a $408,000 income-tax provision in Q3 and a $698,000 provision year to date, compared with none in 2011. Nine-month operating income improved substantially. A noncash gain on derivative liabilities contributed $372,000 to Q3 pretax results and $218,000 year to date. The company’s non-GAAP EBITDA-D was $1.06 million for Q3 and $2.33 million year to date.
Financial position, liquidity and financing
At September 28, 2012, cash was $1.34 million, current assets $8.25 million, current liabilities $6.57 million, total assets $13.39 million and total liabilities $10.03 million. Stockholders’ equity was $3.36 million. Trade receivables were $5.06 million net, versus $2.16 million at year-end 2011. The filing reports $150,000 of note payments year to date and no other conventional debt balance is clearly stated.
Operating cash flow was positive $698,000, compared with cash used of $1.38 million in the prior-year period; working-capital movements included increased workers’ compensation liabilities and accrued wages, partly offset by higher receivables and insurance deposits. Investing used $340,000, including $150,000 for the acquisition and $190,000 for equipment; financing used $150,000 to repay acquisition-related notes. Cash increased $208,000 from year-end.
The company had a receivables-purchase facility with a $14 million maximum, secured by substantially all company assets. It sold approximately $8.9 million of net receivables under the agreement, on a full-recourse basis, at an effective rate of 6.25%, plus fees. The facility covenant was met at quarter-end. Management said current plans should provide sufficient cash into the foreseeable future, but noted that lower-than-planned sales or higher working-capital needs could require additional cash or expense reductions.
Material changes, outlook and risks
- DRSI acquisition consideration included $150,000 cash, a $150,000 note, 1.5 million shares valued at $390,000, and contingent consideration initially valued at approximately $852,000, potentially payable in additional shares based on performance.
- Workers’ compensation coverage changed in April 2012 to a large-deductible policy for most states. The company bears primary responsibility for claims within its self-insured layer and must maintain a $900,000 deposit; coverage applies above $350,000 per incident.
- Management cited cost controls, incentive programs and focus on higher-margin contracts as drivers of improved gross margin. No specific revenue or earnings guidance was provided.
- Disclosure controls and procedures were deemed ineffective as of quarter-end. Management reported no material change in internal control over financial reporting during the quarter.
- Washington authorities asserted approximately $958,000 in successor-liability assessments tied to a prior acquisition. The company disputes liability, had accrued no amount, and planned administrative appeals following orders received October 22, 2012. Management said the potential liability was not probable or reasonably estimable.
- The company estimated additional predecessor state and federal payroll-tax claims of $400,000–$600,000 and $1–$2 million, respectively, but accrued none based on counsel’s view that successor liability was remote.
- Other matters include a D&B dispute, for which a $50,000 reserve was recorded; a former CFO settlement requiring $75,000 of remaining payments; and a Trident Seafoods/Liberty Mutual lawsuit over workers’ compensation obligations, which the company intends to defend.
- Two customers represented 26.8% of receivables and 7.8% of nine-month revenue. The filing also describes limited trading liquidity and low-price volatility in the company’s OTCQB shares.
Important facts for investors to verify
- Confirm the filing is for Command Center, Inc. and not Hirequest, Inc., as the request metadata and source filing do not match.
- Review the effectiveness and remediation status of disclosure controls, and the previously reported nonreliance filing referenced in this 10-Q.
- Track collection of receivables, the $8.9 million sold under the full-recourse facility, facility costs and covenant headroom.
- Assess potential workers’ compensation claims, required deposits, and the outcomes of the successor-liability tax matters and pending litigation.
- Separate operating performance from derivative fair-value gains, acquisition effects and the new tax provision when evaluating earnings trends.