Notes to Consolidated Financial Statements
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Business:
Command Center, Inc.
("Command Center,” the “Company,”
“CCI,” “we,” "us," or “our”) is
a leading provider of on-demand labor in the staffing industry. Our
customers are primarily small to mid-sized businesses in the
industrial/manufacturing/warehousing, construction, hospitality,
transportation, and retail industries. At December 28, 2018 we
operated 67 branches in 22 states. Our corporate headquarter is in
Lakewood, Colorado.
Basis of Presentation:
The consolidated financial
statements include the accounts of Command Center and all
wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. The
consolidated financial statements and accompanying notes are
prepared in accordance with accounting principles generally
accepted in the United States of America, or U.S.
GAAP.
Use of Estimates:
The preparation of consolidated
financial statements in conformity with U.S. GAAP requires us to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Revenue
Recognition:
On
December 30, 2017, we adopted new revenue recognition guidance
using the modified retrospective method for all open contracts and
related amendments. Results for reporting periods beginning after
December 30, 2017 are presented under the new revenue recognition
guidance, while prior period amounts were not adjusted and continue
to be reported in accordance with historic accounting guidance. The
adoption of this new guidance did not have a material impact on our
consolidated financial statements.
We account for revenue when both parties to the contract have
approved the contract, the rights and obligations of the parties
are identified, payment terms are identified, and collectability of
consideration is probable.
Our primary source
of revenue is from providing temporary contract labor to our
customers. Revenue is recognized at the time we satisfy our
performance obligation. Our contracts have a single performance
obligation, which is the transfer of services. Because our
customers receive and consume the benefits of our services
simultaneously, our performance obligations are typically satisfied
when our services are provided. Revenue is reported net of customer
credits, discounts, and taxes collected from customers that are
remitted to taxing authorities. Our customers are invoiced every
week and we do not require payment prior to the delivery of
service. Substantially all of our contracts include payment terms
of 30 days or less and are short-term in nature. Because of our
payment terms with our customers, there are no significant contract
assets or liabilities. We do not extend payment terms beyond one
year.
Below
is a summary our revenue disaggregated by industry (in thousands,
except percentages):
|
|
|
|
|
Industrial,
manufacturing and warehousing
|
$
34,207,786
|
35.1
%
|
$
33,495,618
|
34.2
%
|
Construction
|
18,462,347
|
19.0
%
|
19,988,048
|
20.4
%
|
Hospitality
|
16,480,095
|
16.9
%
|
18,304,637
|
18.7
%
|
Transportation
|
15,322,125
|
15.7
%
|
14,046,085
|
14.3
%
|
Retail
and Other
|
12,916,467
|
13.3
%
|
12,237,810
|
12.4
%
|
Total
|
$
97,388,820
|
100.0
%
|
$
98,072,198
|
100.0
%
|
Cost of Staffing Services:
Cost of services
includes the wages of field team members, related payroll taxes,
workers’ compensation expenses, and other direct costs of
services. We do not include branch level costs in this calculation
such as rent, branch manager salary, or other branch level
operating expenses.
Restricted
Cash:
We maintain a cash balance that is held on
deposit as a requirement of our workers’ compensation
insurance provider.
Accounts Receivable and Allowance for Doubtful
Accounts:
Accounts receivable are carried at
their estimated recoverable amount, net of allowances. The
allowance for doubtful accounts is determined based on historical
write-off experience, age of receivable, other qualitative factors
and extenuating circumstances, and current economic data and
represents our best estimate of the amount of probable losses on
our accounts receivable. The allowance for doubtful accounts is
reviewed each period and past due balances are written-off when it
is probable that the receivable will not be collected. Our
allowance for doubtful accounts was approximately $113,000 and
$282,000, at December 28, 2018 and December 29, 2017,
respectively.
Property and Equipment:
Property and equipment
are recorded at cost. We compute depreciation using the
straight-line method over the estimated useful lives, typically
three to five years. Leasehold improvements are capitalized and
amortized over the shorter of the non-cancelable lease term or
their useful lives. Repairs and maintenance are expensed as
incurred. When assets are sold or retired, cost and accumulated
depreciation are eliminated from the consolidated balance sheet and
gain or loss is reflected in the consolidated statement of
income.
Workers’ Compensation Reserves:
In
accordance with the terms of our workers’ compensation
liability insurance policy, we maintain reserves for workers’
compensation claims to cover our cost of all claims. We use third
party actuarial estimates of the future costs of the claims and
related expenses discounted by a 5% present value interest rate to
determine the amount of our reserves. We evaluate the reserves
quarterly and make adjustments as needed. If the actual cost of the
claims incurred and related expenses exceed the amounts estimated,
additional reserves may be required.
Goodwill and Intangible Assets:
Goodwill
represents the excess purchase price over the fair value of
identifiable assets received attributable to business acquisitions
and combinations. Goodwill is measured for impairment at least
annually and whenever events and circumstances arise that indicate
impairment may exist, such as a significant adverse change in the
business climate. In assessing the value of goodwill, an entity
compares the carrying amount of a reporting unit to its fair value.
If the carrying amount of a reporting unit exceeds its fair value,
an entity is required to recognize an impairment charge to goodwill
equal to that difference, up to the carrying value of goodwill. We
assess goodwill for impairment on an annual basis as of the last
day of our fiscal year.
Intangible
assets with definite lives are amortized over the estimated useful
lives and are reviewed for impairment at lease annually and
whenever events and circumstances arise that indicate impairment
may exist.
Income Taxes:
We account for income taxes under
the liability method, whereby deferred income tax liabilities or
assets at the end of each period are determined using the enacted
tax rate expected to be in effect when the taxes are actually paid
or recovered. A valuation allowance is recognized on deferred tax
assets when it is more likely than not that some or all of these
deferred tax assets will not be realized. Our policy is to
prescribe a recognition threshold and measurement attribute for the
recognition and measurement of a tax position taken or expected to
be taken in a tax return.
We have
analyzed our filing positions in all jurisdictions where we are
required to file returns, and found no positions that would require
a liability for unrecognized income tax positions to be recognized.
In the event that we are assessed penalties and/or interest,
penalties will be charged to other financing expense and interest
will be charged to interest expense.
Earnings per Share:
Basic earnings per share is
calculated by dividing net income or loss available to common
stockholders by the weighted average number of common shares
outstanding, and does not include the impact of any potentially
dilutive common stock equivalents. Diluted earnings per share
reflect the potential dilution of securities that could share in
our earnings through the conversion of common shares issuable via
outstanding stock warrants, and/or stock options. We had common
stock equivalents outstanding to purchase 160,831 and 254,995
shares of common stock at December 28, 2018 and December 29,
2017, respectively. If we incur losses in the periods presented, or
if conversion into common shares is anti-dilutive, basic and
dilutive earnings per share are equal.
Diluted
common shares outstanding were calculated using the Treasury Stock
Method and are as follows:
|
|
|
Weighted
average number of common shares used in basic net income per common
share
|
4,853,000
|
5,043,254
|
Dilutive
effects of stock options
|
2,019
|
61,752
|
Weighted
average number of common shares used in diluted net income per
common share
|
4,855,019
|
5,105,006
|
Share-Based Compensation:
Periodically, we issue
common shares or options to purchase our common shares to our
officers, directors, employees, or other parties. Compensation
expense for these equity awards are recognized straight-line over
the service period, based on the fair value on the grant date. We
recognize compensation expense for only the portion of options that
are expected to vest, rather than record forfeitures when they
occur. If the actual number of forfeitures differs from those
estimated by management, additional adjustments to compensation
expense may be required in the future periods. We determine the
fair value of equity awards using the Black-Scholes valuation model
for stock options and the quoted market price for stock
awards.
Advertising Costs:
Advertising costs consist
primarily of print and other promotional activities. We expense
advertisements as incurred and totaled approximately $32,000 and
$33,000 during the fiscal years ended December 28, 2018 and
December 29, 2017, respectively.
Concentrations:
At December 28, 2018, 27.4% of
total accounts payable were due to two vendors and 12.9% of total
accounts receivable was due from a single customer. At December 29,
2017, 44.8% of total accounts payable were due to two vendors and
11.8% of total accounts receivable was due from a single
customer.
Impairment of Long-lived Asset:
We review the
carrying values of our long-lived assets, including property, plant
and equipment, and intangible assets whenever events or changes in
circumstances indicate that such carrying values may not be
recoverable. Long-lived assets are carried at historical cost if
the projected cash flows from their use will recover their carrying
amounts on an undiscounted basis without considering interest. If
projected cash flows are less than their carrying value, the
long-lived assets are reduced to their estimated fair value.
Considerable judgement is required to project such cash flows and,
if required, estimate the fair value of the impaired long-lived
assets.
Fair Value of
Financial Instruments:
We carry financial
instruments on the consolidated balance sheet at the fair value of
the instruments as of the consolidated balance sheet date. At the
end of each period, management assesses the fair value of each
instrument and adjusts the carrying value to reflect its
assessment. At December 28, 2018 and December 29, 2017, the
carrying values of our account purchse agreement, accounts
receivable, and accounts payable approximated their fair values due
to relatively short maturities.
Recent Accounting Pronouncements:
In February
2016, the Financial Accounting Standards Board, or FASB, issued
Accounting Standards Update, or ASU, 2016-02 amending the existing
accounting standards for lease accounting and requiring lessees to
recognize a right-of-use asset and a corresponding lease
liabilities for all leases with a term of more than 12 months,
including those classified as operating leases. Both the asset and
liability will initially be measured at the present value of the
future minimum lease payments, with the asset being subject to
adjustments such as initial direct costs.
This ASU is
effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2018.
During the third quarter of 2018, the
FASB issued updated guidance that provides companies with the
option to apply a practical expedient that allows adoption of the
provisions of the new lease accounting guidance prospectively, with
a cumulative-effect adjustment recorded to retained earnings upon
the date of adoption. We have elected to adopt the standard using
the practical expedient provided in the third quarter and
adopt the guidance prospectively on
the effective date. As a result of adopting this standard, we
expect to recognize a right -of-use asset and lease liability of
approximately $2.1 million.
We do not expect the adoption of
this standard to have a material impact on expense
recognition.
In June 2016, the FASB issued ASU 2016-13, “Financial
Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments.” The standard
significantly changes how entities will measure credit losses for
most financial assets and certain other instruments that are not
measured at fair value through net income. The standard will
replace todays “incurred loss” approach with an
“expected loss” model for instruments measured at
amortized cost. For available-for-sale securities, entities will be
required to record allowances rather than reduce the carrying
amount, as they do today under the other-than-temporary impairment
model. It also simplifies the accounting model for purchased
credit-impaired debt securities and loans. This guidance is
effective for annual periods beginning after December 15, 2019, and
interim periods therein. Early adoption is permitted for annual
periods beginning after December 15, 2018, and interim periods
therein. We are currently evaluating the impact of the new guidance
on our consolidated financial statements and related
disclosures.
In November 2016, the FASB issued ASU 2016-18, “Statement of
Cash Flows (Topic 230) Restricted Cash.” The new guidance
requires that the reconciliation of the beginning-of-period and
end-of-period amounts shown in the statement of cash flows include
restricted cash and restricted cash equivalents. If restricted cash
is presented separately from cash and cash equivalents on the
balance sheet, companies will be required to reconcile the amounts
presented on the statement of cash flows to the amounts on the
balance sheet. Companies also need to disclose information about
the nature of the restrictions. This guidance is effective for
fiscal years beginning after December 15, 2017, and the interim
periods within those fiscal years. We adopted this guidance during
the first quarter of 2017.
In May 2014, the Financial Accounting Standards Board, or FASB,
issued new revenue recognition guidance under Accounting Standards
Update, or ASU, 2014-09 that supersedes the existing revenue
recognition guidance under U.S. GAAP. The new standard focuses on
creating a single source of revenue guidance for revenue arising
from contracts with customers for all industries. The objective of
the new standard is for companies to recognize revenue when it
transfers the promised goods or services to its customers at an
amount that represents what the company expects to be entitled to
in exchange for those goods or services. The new standard became
effective for us beginning December 30, 2017. We implemented the
standard using the modified retrospective approach which recognized
the cumulative effect of application on that date. As a result of
adopting this new standard, we made an adjustment that increased
Revenue on our Consolidated Statement of Income and decreased
Accumulated deficit on our Consolidated Balance Sheet by
approximately $3,000. We have applied the guidance in this new
standard to all contracts at the date of initial
application.
In January 2017, the FASB issued ASU 2017-04, “Intangibles
– Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment.” The new guidance simplifies the
subsequent measurement of goodwill by eliminating the requirement
to perform a Step 2 impairment test to compute the implied fair
value of goodwill. Instead, companies will only compare the fair
value of a reporting unit to its carrying value (Step 1) and
recognize an impairment charge for the amount by which the carrying
amount exceeds the reporting unit’s fair value; however, the
loss recognized may not exceed the total amount of goodwill
allocated to that reporting unit. Additionally, an entity should
consider income tax effects from any tax-deductible goodwill on the
carrying amount of the reporting unit when measuring the goodwill
impairment loss, if applicable. This amended guidance is effective
for fiscal years and interim periods beginning after December 15,
2019, with early adoption permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1,
2017. We adopted this guidance during our fiscal year
2018.
Other accounting standards that have been issued by the Financial
Accounting Standards Board or other standards-setting bodies are
not expected to have a material impact on our financial position,
results of operations, and cash flows. For the period ended
December 28, 2018, the adoption of other accounting standards had
no material impact on our financial positions, results of
operations, or cash flows.
NOTE 2 – PROPERTY AND EQUIPMENT
The
following table summarizes the book value of our assets and
accumulated depreciation and amortization:
|
|
|
Leasehold
improvements
|
$
289,576
|
$
268,586
|
Vehicles
and machinery
|
73,955
|
100,467
|
Furniture
and fixtures
|
127,992
|
127,992
|
Computer
hardware and licensed software
|
634,117
|
502,309
|
Accumulated
depreciation and amortization
|
(796,385
)
|
(627,209
)
|
Total
property and equipment, net
|
$
329,255
|
$
372,145
|
Depreciation
and amortization expense related to property and equipment totaled
approximately $169,000 and $165,000 during the fiscal years
ended December 28, 2018 and December 29, 2017,
respectively.
NOTE 3 – GOODWILL AND INTANGIBLE ASSETS
At
least annually, or whenever events or circumstances arise
indicating an impairment may exist, we review goodwill for
impairment. We are a single reporting unit consisting of purchased
on-demand labor branches, thus the analysis is conducted for the
Company as a whole. Our goodwill represents the consideration given
for acquisitions in excess of the fair value of identifiable assets
received. No provision has been made for an impairment loss as of
December 28, 2018 or December 29, 2017.
The
following table reflects our purchased goodwill and finite-lived
intangible assets.
|
|
|
|
|
|
|
|
Accumulated
amortization
|
Net
|
Goodwill
|
$
3,777,568
|
$
-
|
$
3,777,568
|
$
3,777,568
|
$
-
|
$
3,777,568
|
Finite-lived
intangible assets:
|
|
|
|
|
|
|
Customer
relationships
|
430,984
|
(277,652
)
|
153,332
|
430,984
|
(170,597
)
|
260,387
|
Non-compete
agreements
|
228,580
|
(228,580
)
|
-
|
228,580
|
(180,959
)
|
47,621
|
Total
finite-lived intangible assets
|
659,564
|
(506,232
)
|
153,332
|
659,564
|
(351,556
)
|
308,008
|
|
|
|
|
|
|
|
Total goodwill
and intangible assets
|
$
4,437,132
|
$
(506,232
)
|
$
3,930,900
|
$
4,437,132
|
$
(351,556
)
|
$
4,085,576
|
Amortization
expense related to intangible assets totaled approximately $155,000
and $221,000 during the fiscal years ended December 28, 2018
and December 29, 2017, respectively.
The
following table reflects estimated future amortization expenses of
intangible assets with definite lives as of December 28,
2018:
Year
|
|
2019
|
$
107,746
|
2020
|
44,894
|
Thereafter
|
-
|
Total
|
$
152,640
|
NOTE 4 – ACCOUNT PURCHASE AGREEMENT & LINE OF CREDIT
FACILITY
In May
2016, we signed an account purchase agreement with our lender,
Wells Fargo Bank, N.A., which allows us to sell eligible accounts
receivable for 90% of the invoiced amount on a full recourse basis
up to the facility maximum, or $14.0 million on December 28, 2018
and December 29, 2017. When the receivable is paid by our
customers, the remaining 10% is paid to us, less applicable fees
and interest. Eligible accounts receivable are generally defined to
include accounts that are not more than ninety days past
due.
Pursuant
to this agreement, we owed approximately $399,000 and $854,000 at
December 28, 2018 and December 29, 2017, respectively. The current
agreement bears interest at the Daily One Month London Interbank
Offered Rate plus 2.50% per annum. At December 28, 2018 the
effective interest rate was 5.02%. Interest is payable on the
actual amount advanced. Additional charges include an annual
facility fee equal to 0.50% of the facility threshold in place and
lockbox fees. As collateral for repayment of any and all
obligations, we granted Wells Fargo Bank, N.A. a security interest
in our all of our property including, but not limited to, accounts
receivable, intangible assets, contract rights, deposit accounts,
and other such assets. The agreement requires that the sum of our
unrestricted cash plus net accounts receivable must at all times be
greater than the sum of the amount outstanding under the agreement
plus accrued payroll and accrued payroll taxes. At December 28,
2018 and December 29, 2017 we were in compliance with this
covenant.
As of
December 28, 2018, we have a letter of credit with Wells Fargo for
approximately $6.2 million that secures our obligations to our
workers’ compensation insurance carrier and reduces the
amount available to us under the account purchase agreement. For
additional information related to this letter of credit,
see
Note 5 –
Workers’ Compensation Insurance and
Reserves
.
NOTE 5 – WORKERS’ COMPENSATION INSURANCE AND
RESERVES
In
April 2014, we changed our workers’ compensation carrier to
ACE American Insurance Company, or ACE, in all states in which we
operate other than Washington and North Dakota. The ACE policy is a
large deductible policy where we have primary responsibility for
all claims made. ACE provides insurance for covered losses and
expenses in excess of $500,000 per incident. Under this large
deductible program, we are largely self-insured. Per our
contractual agreements with ACE, we must provide a collateral
deposit of $6.2 million, which is accomplished through a letter of
credit under our account purchase agreement with Wells Fargo. For
workers’ compensation claims originating in Washington and
North Dakota, we pay workers’ compensation insurance premiums
and obtain full coverage under mandatory state government
administered programs. Our liability associated with claims in
these jurisdictions is limited to the payment of premiums, which
are based upon the amount of payroll paid within the particular
state. Accordingly, our consolidated financial statements reflect
only the mandated workers’ compensation insurance premium
liability for workers’ compensation claims in these
jurisdictions.
From
April 2012 to March 2014, our workers’ compensation coverage
was obtained through Dallas National Insurance in all states in
which we operate, other than Washington and North Dakota. During
this time period, Dallas National changed its corporate name to
Freestone Insurance Company, or Freestone. The Freestone coverage
was a large deductible policy where we have primary responsibility
for claims under the policy. Freestone provided insurance for
covered losses and expenses in excess of $350,000 per incident. Per
our contractual agreements with Freestone, we made payments of $1.8
million as a non-depleting deposit as collateral for our
self-insured claims. See
Note
9 – Commitments and Contingencies,
for additional
information on cash collateral provided to Freestone and the
likelihood of its return to the company.
From
April 2011 to March 2012, our workers’ compensation coverage
was obtained through Zurich American Insurance Company, or Zurich,
in all states in which we operate, other than Washington and North
Dakota. The policy with Zurich was a guaranteed cost plan under
which all claims are paid by Zurich. Zurich provided workers’
compensation coverage in all states in which we operate other than
Washington and North Dakota.
Prior
to Zurich, our workers’ compensation
coverage
was provided under an agreement with AMS Staff Leasing II, or AMS,
through its master workers’ compensation policy with
Freestone.
The AMS
agreement provided coverage in all states in which we operate,
excluding Washington and North Dakota. The AMS coverage was a large
deductible policy where we have primary responsibility for claims
under the policy. Under the AMS agreement, we made payments into a
risk pool fund to cover claims within our self-insured layer. Per
our contractual agreements for this coverage, we were originally
required to maintain two deposits, one in the amount of $500,000
and one in the amount of $215,000. At December 28, 2018, our
deposits with AMS were approximately $483,000 and $192,000,
respectively, and at December 29, 2017, our deposits with AMS were
approximately $483,000 and $215,000, respectively.
Prior
to AMS, our workers’ compensation carrier was American
International Group, Inc., or AIG, in all states in which we
operate, other than Washington and North Dakota. The AIG coverage
was a large deductible policy where we have primary responsibility
for claims under the policy. Under the AIG policies, we made
payments into a risk pool fund to cover claims within our
self-insured layer. At December 29, 2017, our risk pool deposit
with AIG was approximately $100,000 and was fully refunded in May,
2018.
As part
of our large deductible workers’ compensation programs, our
carriers require that we collateralize a portion of our future
workers’ compensation obligations in order to secure future
payments made on our behalf. This collateral is typically in the
form of cash and cash equivalents. At December 28, 2018, we had net
cash collateral deposits of approximately $194,000. With the
addition of the $6.2 million letter of credit, our cash and
non-cash collateral totaled approximately $6.4 million at December
28, 2018.
Workers’
compensation expense for field team members is recorded as a
component of our cost of services and consists of the following
components: changes in our self-insurance reserves as determined by
our third party actuary, actual claims paid, insurance premiums and
administrative fees paid to our workers’ compensation
carrier(s), and premiums paid to mandatory state government
administered programs. Workers’ compensation expense for our
temporary workers totaled approximately $3.8 million and $3.7
million for the fiscal years ended December 28, 2018 and December
29, 2017, respectively.
The
following reflects the changes in our workers’ compensation
deposits and our workers’ compensation claims liability
during the fiscal years ended December 28, 2018 and December 29,
2017:
|
|
|
Workers’ Compensation Deposits
|
|
|
Workers’
compensation deposits available at the beginning of the
period
|
$
301,187
|
$
313,340
|
Deposits
refunded
|
(107,203
)
|
-
|
Deposits
applied to payment of claims during the period
|
-
|
(12,153
)
|
Deposits
available for future claims at the end of the period
|
$
193,984
|
$
301,187
|
|
|
|
Workers’ Compensation Claims Liability
|
|
|
Estimated
future claims liabilities at the beginning of the
period
|
$
1,948,997
|
$
2,706,701
|
Claims
paid during the period
|
(1,850,913
)
|
(2,246,367
)
|
Additional
future claims liabilities recorded during the period
|
1,784,014
|
1,488,663
|
Estimated
future claims liabilities at the end of the period
|
$
1,882,098
|
$
1,948,997
|
The
workers’ compensation risk pool deposits are classified as
current and non-current assets on the consolidated balance sheet
based upon management’s estimate of when the related claims
liabilities will be paid. The deposits have not been discounted to
present value in the accompanying consolidated financial
statements. All liabilities associated with our workers’
compensation claims are fully reserved on our consolidated balance
sheet.
NOTE 6 – STOCKHOLDERS’ EQUITY
Issuance of Common
Stock:
In 2018, we issued approximately 11,000 shares
of common stock valued at approximately $62,000 for services, and
in 2017 we issued approximately 10,000 shares of common stock
valued at approximately $50,000 for services.
Stock Repurchase
: In September 2017, our Board of
Directors authorized a $5.0 million three-year repurchase plan of
our common stock. This plan replaces the previously announced plan,
which was put in place in April 2015. During 2018, we repurchased
approximately 324,000 shares of our common stock at an aggregate
price of approximately $1.8 million, resulting in an average price
of $5.65 per share. During 2017 we repurchased approximately 69,000
shares of our common stock at an aggregate price of approximately
$374,000, resulting in an average price of $5.45 per share. These
shares were then retired. As of December 28, 2018, we had
approximately $2.8 million remaining under the plan. We have no
obligation to repurchase our shares. The table below summarizes our
common stock purchased during 2018:
|
|
|
Total number of
shares purchased as part of publicly announced plan
|
Approximate
dollar value of shares that may be purchased under the
plan
|
December 30, 2017
to January 26, 2018
|
4,820
|
$
5.75
|
585,892
|
$
4,598,243
|
January 27, 2018 to
February 23, 2018
|
10,541
|
5.83
|
596,433
|
4,536,840
|
February 24, 2018
to March 30, 2018
|
7,100
|
5.62
|
603,533
|
4,496,949
|
March 31, 2018 to
April 27, 2018
|
34,310
|
5.67
|
637,843
|
4,302,379
|
April 28, 2018 to
May 25, 2018
|
26,382
|
5.77
|
664,225
|
4,150,262
|
May 26, 2018 to
June 29, 2018
|
42,900
|
5.66
|
707,125
|
3,907,442
|
June 30, 2018 to
July 27, 2018
|
36,275
|
6.03
|
743,400
|
3,688,744
|
July 28, 2018 to
August 24, 2018
|
57,400
|
5.69
|
800,800
|
3,361,906
|
August 25, 2018 to
September 28, 2018
|
69,993
|
5.77
|
870,793
|
2,958,257
|
September 29, 2018
to October 26, 2018
|
12,642
|
5.51
|
883,435
|
2,888,566
|
October 27, 2018 to
November 23, 2018
|
14,153
|
4.40
|
897,588
|
2,826,254
|
November 24, 2018
to December 28, 2018
|
7,258
|
4.05
|
904,846
|
2,796,828
|
Total
|
323,774
|
|
|
|
NOTE 7 – STOCK-BASED COMPENSATION
Stock Incentive Plan
: Our 2008 Stock Incentive
Plan, which permitted the grant of up to 533,333 shares of our
common stock, expired in January 2016. Outstanding awards continue
to remain in effect according to the terms of the plan and the
award documents. On November 17, 2016, our stockholders approved
the Command Center, Inc. 2016 Stock Incentive Plan, under
which our Compensation Committee is authorized to issue awards for
up 500,000 shares over the 10-year life of the plan. Pursuant
to awards under these plans, there were approximately 76,000 and
191,000 options vested at December 28, 2018 and December 29, 2017,
respectively.
In July
2018, our Board of Directors authorized a restricted stock grant of
approximately 48,000 shares, valued at $300,000, to our six
non-employee directors. These shares vest in equal installments at
each grant date anniversary over the following two years.
During
2018, we granted 117,500 stock options to certain members of our
board and an officer of the Company. During 2017, we granted
approximately 75,000 stock options to certain officers and an
employee of the Company. The options were granted with an exercise
price equal to the fair market value on the date of grant, ten year
life and vesting over three years from the date of grant. The fair
value of each option award is estimated on the date of grant using
the Black-Scholes pricing model and expensed over the vesting
period. Expected volatility is based on historical annualized
volatility of our stock. The expected term of options granted
represents the period of time that options granted are expected to
be outstanding. The risk-free rate is based upon the U.S. Treasury
yield curve in effect at the time of grant. Currently we do not
foresee the payment of dividends in the near term. The assumptions
used to calculate the fair value are as follows:
|
|
|
Expected term
(years)
|
5.8
|
5.8
|
Expected
volatility
|
59.4% - 59.8
%
|
61.5
%
|
Dividend
yield
|
0.0
%
|
0.0
%
|
Risk-free
rate
|
2.1% - 2.4
%
|
1.1
%
|
The
following table summarizes our stock options outstanding at
December 30, 2016, and changes during the fiscal years ended
December 28, 2018 and December 29, 2017. The majority of the
expired options in 2018 were issued to our former CEO and
subsequently cancelled pursuant to the severance agreement with
him.
|
Number of shares under options
|
Weighted average exercise price per share
|
Weighted average grand date fair value
|
Outstanding,
December 30, 2016
|
208,166
|
$
4.40
|
2.87
|
Granted
|
74,997
|
5.13
|
2.65
|
Forfeited
|
(834
)
|
8.04
|
4.53
|
Expired
|
(27,334
)
|
5.32
|
3.96
|
Outstanding,
December 29, 2017
|
254,995
|
4.49
|
6.48
|
Granted
|
117,500
|
5.67
|
3.15
|
Forfeited
|
(42,187
)
|
5.61
|
2.96
|
Expired
|
(169,477
)
|
3.74
|
2.47
|
Outstanding,
December 28, 2018
|
160,831
|
5.86
|
3.18
|
The
following table reflects a summary of our non-vested stock options
outstanding at December 30, 2016 and changes during the fiscal
years ended December 28, 2018 and December 29, 2017:
|
|
Weighted
average exercise price per share
|
Weighted
average grant date fair value
|
Non-vested,
December 30, 2016
|
53,126
|
$
4.81
|
$
2.98
|
Granted
|
74,997
|
4.49
|
5.68
|
Vested
|
(63,750
)
|
5.47
|
2.86
|
Forfeited
|
(834
)
|
8.04
|
4.53
|
Non-vested,
December 29, 2017
|
63,539
|
5.47
|
2.86
|
Granted
|
117,500
|
5.67
|
3.15
|
Vested
|
(54,329
)
|
5.65
|
3.11
|
Forfeited
|
(42,187
)
|
5.61
|
2.96
|
Non-vested,
December 28, 2018
|
84,523
|
5.56
|
3.05
|
The
following table summarizes information about our stock options
outstanding on, and reflects the intrinsic value recalculated based
on the closing price of our common stock of $3.77 at, December 28,
2018:
|
|
Weighted
average exercise price per share
|
Weighted
average remaining contractual life (years)
|
Aggregate
intrinsic value
|
Outstanding
|
160,831
|
$
5.86
|
8.6
|
$
318,652
|
Exercisable
|
76,308
|
6.18
|
7.8
|
-
|
The
following table summarized information about our stock options
outstanding, and reflects the weighted average contractual life at
December 28, 2018:
|
|
|
Range
of exercise prices
|
Number
of shares outstanding
|
Weighted
average contractual life
|
Number
of shares exercisable
|
Weighted
average contractual life
|
$4.80 - 7.00
Range
|
144,582
|
9.2
|
60,059
|
9.2
|
$7.01 - 8.76
Range
|
16,249
|
2.9
|
16,249
|
2.9
|
Share-based
compensation expense relating to the issuance of stock options
totaled approximately $332,000 and $157,000 during the fiscal years
ended December 28, 2018 and December 29, 2017, respectively.
Share-based
compensation expense relating to the issuance of stock grants
totaled approximately $62,000 during the fiscal year ended December
28, 2018.
As of December 28, 2018, there was unrecognized
share-based compensation expense totaling approximately $425,000
relating to non-vested options and restricted stock grants that
will be recognized over the next 2.5 years.
NOTE 8 – INCOME TAX
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act, or
the Tax Act. The Tax Act made broad and complex changes to the U.S.
tax code that affected our fiscal years ended December 29, 2017 and
December 28, 2018, including, but not limited to, (1) reducing the
U.S. federal corporate tax rate to 21%; (2) eliminating the
corporate alternative minimum tax, or AMT, and changing how
existing AMT credits can be realized; (3) creating the base erosion
anti-abuse tax, or BEAT, a new minimum tax; (4) creating a new
limitation on deductible interest expense; (5) changing rules
related to uses and limitations of net operating loss carryforwards
created in tax years beginning after December 31, 2017; (6) bonus
depreciation that will allow for full expensing of qualified
property; and (7) imposing limitations on the deductibility of
certain executive compensation. In connection with our initial
analysis of the impact of the Tax Act, we recorded an additional
tax expense of approximately $349,000 in the fourth quarter of
2017. This expense is primarily due to remeasurement of our net
deferred tax assets at the enacted rate of 21% compared to the
previous rate of 34%.
The
provision for deferred income taxes is comprised of the
following:
|
|
|
Current:
|
|
|
Federal
|
$
473,964
|
$
126,487
|
State
|
89,414
|
212,998
|
Deferred:
|
|
|
Federal
|
(211,514
)
|
1,586,296
|
State
|
(146,792
)
|
79,747
|
Provision for
income taxes
|
$
205,072
|
$
2,005,528
|
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of our deferred taxes are as
follows:
|
|
|
Deferred
Tax Assets and Liabilities
|
|
|
Workers'
compensation claims liability
|
$
469,040
|
$
481,299
|
Depreciation/amortization
|
59,260
|
42,227
|
Bad debt
reserve
|
28,037
|
69,622
|
Deferred
Rent
|
17,610
|
21,235
|
Accrued
vacation
|
36,202
|
49,030
|
Impairment of
workers' comp deposit
|
383,786
|
-
|
Stock based
compensation
|
35,700
|
-
|
State net operating
loss carryforward
|
45,805
|
-
|
Other
|
4,468
|
-
|
AMT
Credit
|
-
|
58,189
|
Total deferred tax
asset
|
$
1,079,908
|
$
721,602
|
Management
estimates that our combined federal and state tax rates was
approximately 17.8% for 2018, net of federal benefit on state
income taxes. The items accounting for the difference between
income taxes computed at the statutory federal income tax rate and
the income taxes reported on the statements of income are as
follows:
|
|
|
Income tax expense
based on statutory rate
|
$
247,665
|
21.0
%
|
$
1,252,858
|
34.0
%
|
Permanent
differences
|
11,633
|
1.0
%
|
46,939
|
1.3
%
|
State income taxes
expense net of federal taxes
|
(45,329
)
|
-3.8
%
|
220,326
|
6.0
%
|
Remeasurement of
net deferred tax asset at 21%
|
-
|
0.0
%
|
349,240
|
9.5
%
|
Stock based
compensation
|
-
|
0.0
%
|
36,411
|
1.0
%
|
Other
|
(8,897
)
|
-0.8
%
|
99,754
|
2.7
%
|
Total taxes on
income
|
$
205,072
|
17.4
%
|
$
2,005,528
|
54.5
%
|
We have
analyzed our filing positions in all jurisdictions where we are
required to file income tax returns and found no positions that
would require a liability for unrecognized income tax benefits to
be recognized. We include interest and penalties as interest
expense on the consolidated financial statements.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Freestone Insurance Company Liquidation:
From April 2012
through March 2014, our workers’ compensation insurance
coverage was provided by Dallas National Insurance, which changed
its corporate name to Freestone Insurance Company in 2013 (Dallas
National Insurance and Freestone Insurance Company are collectively
referred to as “Freestone”). Under the terms of these
insurance policies, we were required to provide cash collateral of
$900,000 per year, for a total of $1.8 million, as a non-depleting
fund to secure our payment up to the deductible amount on claims
occurring within the respective policy years.
From
July 2008 through March 2011, our workers’ compensation
coverage was provided under an agreement with AMS Staff Leasing II,
through its master workers’ compensation policy with
Freestone. During this time period, we deposited approximately
$500,000 with an affiliate of Freestone for collateral related to
the coverage provided to the company through AMS Staff Leasing II
and its policy with Freestone.
In
April 2014, the Insurance Commissioner of the State of Delaware
placed Freestone in receivership due to concerns about its
financial condition. In August 2014, the receivership was converted
to a liquidation proceeding. In late 2015, we filed timely proofs
of claim with the Receiver demonstrating our claimed right to
return of the company’s collateral deposits. One proof of
claim is filed as a priority claim seeking return of the full
amount of our collateral deposits. The other proof of claim is a
general claim covering non-collateral items. If it is ultimately
determined by the court that our claim is not a priority claim, or
if there are insufficient assets in the liquidation to satisfy the
priority claims, we may not receive any or all of our
collateral.
During
the second quarter of 2015 and the first quarter of 2016, after
evaluating information known at each point in time regarding the
Freestone receivership, it became apparent there was significant
uncertainty related to the collectability of the $500,000 deposit
previously placed under the AMS Staff Leasing II agreement related
to our insurance coverage from July 2008 through March 2011.
Because of this, we recorded a reserve of $250,000 in each of those
quarters, thereby fully reserving this deposit.
In late
May 2017, the Receiver filed a petition with the court, proposing a
plan as to how the Receiver would identify and pay collateral to
all insureds that paid cash collateral to Freestone. In the
petition, the Receiver acknowledged receiving only $500,000 of our
collateral. Of the $500,000 acknowledged, the Receiver proposed to
return only approximately $6,000 to us. In response to additional
information provided to and sought from the Receiver by us and by
others, the Receiver has withdrawn the initial petition,
acknowledging possible inaccuracies.
As part
of our review of first quarter 2018 financial results, the
company’s management and board of directors reviewed the
likelihood of collecting the remaining $1.8 million of collateral
paid to Freestone for policy years beginning in April of 2012 and
continuing through March of 2014. Based on court filings and other
available information, it was determined that it is more likely
than not that our priority claim will be treated in a similar
manner as other creditors, resulting in the priority claim having
little to no value. We believe that our recovery, if any, of the
deposits placed with Freestone and its affiliates will be the
greater of: (i) the amount determined and allowed resulting from a
tracing analysis of our collateral deposits; or (ii) the amount we
would receive in distribution as a general unsecured claimant based
on the amount of our collateral deposit.
Therefore,
we reasonably estimate the high end of the amount the company might
possibly recover through the receivership process is approximately
20% of the $1.8 million deposit amount. Accordingly, for the first
quarter of 2018, the reserve on this asset was reduced by
approximately $1.5 million, resulting in a net carrying amount of
$260,000. This amount is consistent with our current evaluation of
the Freestone receivership matter.
In July
2018, the Receiver filed with the Delaware Court of Chancery the
Second Accounting setting forth Freestone’s estimated assets
and liabilities for the period January 1, 2016, through December
31, 2016. The Second Accounting does not clarify the issues with
respect to collateral claims, priorities or return of collateral.
In the accounting, the Receiver reports total assets consisting of
cash and cash equivalents of $87.8 million as of December 31, 2016,
and estimated liabilities of $252,000,000.
Presently,
the Receiver has not put forth an amended or new petition regarding
its position as to precisely how cash collateral claimants should
be treated. Therefore, our stated reasonable estimate is the best
guidance we can offer as to the ultimate outcome of this matter. In
the event the company receives substantially less than our
reasonably estimated amount, there may be a material negative
effect on our financial statements.
Operating leases:
We presently lease office
space for our corporate headquarters in Lakewood, Colorado. We own
all of the office furniture and equipment used in our corporate
headquarters. We also lease the facilities for all of our branch
locations. All of these facilities are leased at market rates that
vary in amount depending on location. Each branch is between 1,000
and 5,000 square feet, depending on location and market conditions.
Most of our branch leases have terms that extend over three to five
years. Some of the leases have cancellation provisions that allow
us to cancel with 90 days' notice. Other leases have been in
existence long enough that the term has expired and we are
currently occupying the premises on month-to-month tenancies. Below
are the minimum lease obligations as of December 28,
2018:
Year
|
|
2019
|
$
1,116,737
|
2020
|
778,512
|
2021
|
295,769
|
2022
|
106,265
|
2023
|
24,038
|
Thereafter
|
-
|
Total
|
$
2,321,321
|
Lease
expense totaled approximately $1.5 million and $1.4 million for the
fiscal years ended December 28, 2018 and December 29, 2017,
respectively.
Legal Proceedings:
From time to time we are involved in
various legal proceedings. We believe that the outcome of these
proceedings, even if determined adversely, will not have a material
adverse effect on our business, financial condition or results of
operations. There have been no material changes in our legal
proceedings since December 28, 2018. Legal costs related to
contingencies are expensed as incurred.
NOTE 10 – SUBSEQUENT EVENTS
Hire Quest Merger
Agreement:
On April 7, 2019, the Company, CCNI
One, Inc., a wholly-owned subsidiary of the Company (“Merger
Sub 1”), Command Florida, LLC, a wholly-owned subsidiary of
the Company (“Merger Sub 2”), and Hire Quest Holdings,
LLC (“Hire Quest”), entered into an Agreement and Plan
of Merger (the “Merger Agreement”), providing for the
acquisition of Hire Quest by the Company. The Merger Agreement
provides that, upon the terms and subject to the conditions set
forth in the Merger Agreement, (i) Merger Sub 1 will be merged with
and into Hire Quest (the “First Merger”), with Hire
Quest being the surviving entity (the “First Surviving
Company”), and (ii) immediately following the First Merger,
the First Surviving Company will be merged with and into Merger Sub
2 (the “Second Merger” and, together with the First
Merger, the “Merger”), with Merger Sub 2 being the
surviving entity (the “Surviving Company”). Upon
completion of the Merger and subject to shareholder approval, the
Company will change its name to HireQuest, Inc. In addition, the
Merger Agreement contemplates that the Company will commence a
self-tender offer to purchase up to 1,500,000 shares of its common
stock at share price of $6.00 per share (the
“Offer”).
Hire Quest is a trusted name in temporary staffing. Hire Quest
provides the back-office support team for Trojan Labor and Acrux
Staffing franchised branch locations across the United States.
Trojan Labor provides temporary staffing services which includes
general labor, industrial, and construction personnel. Acrux
Staffing provides temporary staffing services which includes
skilled, semi-skilled and general labor industrial personnel, as
well as clerical and secretarial personnel.
Subject to the terms and conditions of the Merger Agreement, which
has been approved by the Board of Directors of the Company and the
members of Hire Quest, if the Merger is completed, all of the
ownership interests in Hire Quest will be converted into the right
to receive an aggregate number of shares of the Company’s
common stock representing 68% of the shares of the Company’s
common stock outstanding immediately after the effective time of
the Merger but prior to giving effect to the purchase of the
Company’s common stock pursuant to the Offer. The
Merger Agreement requires Hire Quest’s net tangible assets at
closing to be at least $14 million.
The Company and Hire Quest have made customary representations,
warranties and covenants in the Merger Agreement. Subject to
certain exceptions, each of the Company and Hire Quest is required,
among other things, to conduct its business in the ordinary course
in all material respects during the interim period between the
execution of the Merger Agreement and the closing of the Merger.
The Company is required to seek shareholder approval of (i) the
amendment of the Company’s articles of incorporation to
increase the authorized shares of Company’s common stock and
to change the name of the Company to “HireQuest, Inc.”,
(ii) the issuance of shares of common stock pursuant to the Merger
Agreement and the related change of control of the Company pursuant
to Nasdaq listing rules, and (iii) the conversion of the Company
from a Washington corporation to a Delaware corporation. The
Company will call and hold a shareholders meeting seeking to obtain
such approvals.
The
Company will distribute proxy statements to shareholders of record
containing additional details regarding the
Merger.