Business context and reporting period
The supplied filing is Command Center, Inc.’s unaudited Form 10-Q for the 13 and 26 weeks ended June 29, 2012; it does not identify HireQuest, Inc. as the registrant. Command Center provided temporary staffing services across multiple industries and operated 53 stores in 23 states. In January 2012, it acquired substantially all assets of DR Services of Louisiana and Environmental Resource Group through subsidiary Disaster Recovery Services, Inc. (DRSI).
Financial results and liquidity
| Metric | 13 weeks ended June 29, 2012 | 26 weeks ended June 29, 2012 |
|---|---|---|
| Revenue | $24.27 million, up 19.6% year over year | $43.36 million, up 18.2% |
| Gross profit / margin | $6.01 million / 24.8% | $10.65 million / 24.6% |
| Operating income (loss) | $892,792 | $1.09 million |
| Net income (loss) | $842,583; $0.01 per basic and diluted share | $281,087; reported EPS rounded to zero |
| Operating cash flow | Not separately reported for the quarter | $(392,092), versus $(1.50) million in prior-year period |
For the six-month period, EBITDA-W, the company’s non-GAAP measure, was $930,000 versus $(1.39) million a year earlier. Cash was $365,597 at June 29, 2012, down from $1.13 million at December 30, 2011. Current assets were $6.81 million and current liabilities $5.33 million. Accounts receivable, net, was $4.34 million; the filing reports approximately $7.1 million of receivables sold under a full-recourse factoring arrangement with a $10 million facility limit.
Total liabilities were $9.21 million, including workers’ compensation claims liabilities of approximately $4.17 million, warrant liabilities of $1.17 million, and acquisition contingent liabilities of approximately $801,000. The balance sheet reports $25,000 current notes payable; the acquisition note was initially $150,000, with $125,000 repaid during the half. No separate long-term debt amount is presented.
Material changes versus prior comparable periods
- Second-quarter revenue and net income increased from $20.30 million and $670,000, respectively, in 2011. Gross margin improved to 24.8% from 23.3%.
- Six-month revenue rose from $36.68 million to $43.36 million, and results shifted from a $1.63 million net loss to $281,000 net income. Prior-period results included an adverse warrant fair-value change; the 2012 six-month change was also a loss, while the second-quarter change was a gain.
- Management attributed revenue growth to the DRSI acquisition and organic demand. It cited improved service-cost ratios from incentive programs, cost management, and higher-margin contracts, partly offset by per-diem costs on a newly acquired contract. Second-quarter workers’ compensation expense rose as a share of revenue, while the six-month ratio declined.
- Cash used in operations improved year over year but remained negative. Higher receivables—up approximately $3.1 million in operating cash-flow changes—and increased risk-pool deposits were significant cash uses.
Outlook, risks, and unusual items
Management expected available cash and cash equivalents to fund operations into the foreseeable future, but warned that lower-than-planned sales or higher working-capital needs could require additional funding or expense reductions. No specific revenue or earnings guidance was provided. The company changed workers’ compensation carriers effective April 1, 2012, to a large-deductible policy; it bears primary responsibility for claims up to the insurer’s $350,000-per-incident coverage threshold and must maintain a $900,000 non-depleting deposit.
- The factoring facility is full recourse, secured by company assets, bears an effective rate of 6.25% at quarter-end, and includes fees. The company reported compliance with its payroll-related covenant at June 29, 2012.
- Contingent payroll and tax liabilities from prior acquisitions were estimated at $400,000–$600,000 for state obligations and $1–$2 million for IRS payroll taxes. No liability was accrued; management cited counsel’s view that successor-liability risk was remote. Exposure could be adverse if authorities establish liability.
- Washington authorities asserted approximately $958,000 in claims relating to Everyday Staffing; the company disputes liability and amount and has not accrued a liability. A $1.295 million judgment against the former owner and entity may be difficult to collect.
- A D&B dispute seeking $247,000 was dismissed without prejudice and is to be mediated; a $50,000 reserve was recorded. A former CFO’s lawsuit alleging unpaid compensation was in pretrial discovery; the company intended to defend it.
- Management concluded disclosure controls and procedures were not effective as of quarter-end. It reported no material change in internal control over financial reporting during the quarter.
- Forward-looking risks include economic conditions, staffing-industry risks, regulatory compliance, employment claims, and availability and cost of workers’ compensation coverage.
Important facts for investors to verify
- Confirm the issuer: the supplied filing names Command Center, Inc., whereas the request metadata names HireQuest, Inc.
- Review subsequent collections, factoring availability and recourse exposure, and the cash impact of receivable growth.
- Track workers’ compensation claims, required deposit funding, and the effect of the new insurance arrangement on expense and reserves.
- Monitor the DRSI contingent share consideration and acquisition performance, including potential dilution.
- Check developments in the predecessor-tax claims, Everyday Staffing dispute, D&B mediation, and former CFO lawsuit.
- Assess remediation of the ineffective disclosure controls and procedures.