Notes to Consolidated Financial Statements
NOTE 1 – BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have
been prepared by Command Center, Inc. ("Command Center,” the
“Company,” “we,” "us," or
“our”) in accordance with accounting principles
generally accepted in the United States of America, or GAAP, for
interim financial reporting and rules and regulations of the
Securities and Exchange Commission, or the SEC. Accordingly,
certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been
condensed or omitted. In the opinion of our management, all
adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the financial position,
results of operations, and cash flows for the fiscal periods
presented have been included.
These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
related notes included in our Annual Report filed on Form 10-K for
the fiscal year ended December 28, 2018. The results of operations
for the twenty-six weeks ended June 28, 2019 are not necessarily
indicative of the results expected for the full fiscal year or for
any other fiscal period.
Hire Quest Merger:
On July 15,
2019, Command Center completed its acquisition of Hire Quest
Holdings, LLC, a Florida limited liability company, ("Hire Quest"),
in accordance with the terms of the Agreement and Plan of Merger
dated April 8, 2019. Upon the closing of the Merger, all of the
ownership interests in Hire Quest were converted into the right to
receive an aggregate of 9,837,336 shares of the Company’s
common stock. In connection with the Merger, the
Company
completed an issuer tender offer, pursuant to which it accepted for
repurchase 1,394,821 shares of common stock for an aggregate
purchase price of approximately $8.4 million, excluding fees and
expenses
.
Pursuant to the Merger Agreement, Hire Quest had the right to
appoint four directors to the Board, and such directors were
appointed in accordance with this agreement. Four of our prior
directors submitted their resignations consistent with the terms of
the Merger.
As a condition precedent to the Merger, the Company and its
subsidiaries entered into a Loan Agreement with Branch Banking and
Trust Company, or BB&T, for a $30 million line of credit, with
a $15 million sublimit for letters of credit. The Company’s
prior credit facility with Wells Fargo was paid off in full and
terminated in connection with the Merger and a new letter of credit
was issued
to
the Company’s workers’ compensation insurance
carrier
by BB&T to replace the Wells Fargo letter. For
additional information related to the transaction with Hire Quest,
see
Note 10 – Subsequent
Events
.
Consolidation:
The
consolidated financial statements include the accounts of Command
Center and all of our wholly-owned
subsidiaries,
but do not include the accounts of Hire Quest, as the closing of
the Merger occurred after the end of the second quarter
. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Use of estimates:
The preparation of consolidated
financial statements in conformity with 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.
Significant estimates include the allowance for doubtful accounts,
workers’ compensation risk pool deposits and related
allowances, and workers’ compensation claims
liability.
Concentrations:
At June
28, 2019, 14.4% of accounts receivable was due from a single
customer and 72.7% of total accounts payable were due to two
vendors. At December 28, 2018, 12.9% of total accounts receivable
was due from a single customer and 27.4% of total accounts payable
were due to two vendors.
Revenue recognition:
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 are summaries of our revenue disaggregated by industry (in
thousands, except percentages):
|
|
|
|
|
|
|
|
Industrial,
manufacturing and warehousing
|
$
7,323
|
29.5
%
|
$
8,557
|
35.4
%
|
|
Transportation
|
4,665
|
18.8
%
|
3,503
|
14.5
%
|
|
Construction
|
4,662
|
18.8
%
|
4,442
|
18.4
%
|
|
Hospitality
|
4,379
|
17.6
%
|
4,046
|
16.7
%
|
|
Retail
and Other
|
3,809
|
15.3
%
|
3,628
|
15.0
%
|
|
Total
|
$
24,838
|
100.0
%
|
$
24,176
|
100.0
%
|
|
|
|
|
|
|
|
|
Industrial,
manufacturing and warehousing
|
$
13,919
|
29.9
%
|
$
17,185
|
36.8
%
|
|
Construction
|
9,353
|
20.1
%
|
7,252
|
15.5
%
|
|
Hospitality
|
8,664
|
18.6
%
|
8,486
|
18.2
%
|
|
Transportation
|
8,013
|
17.2
%
|
7,794
|
16.7
%
|
|
Retail
and Other
|
6,643
|
14.3
%
|
5,926
|
12.7
%
|
|
Total
|
$
46,593
|
100.0
%
|
$
46,643
|
100.0
%
|
Leases:
As of June 28,
2019, we leased facilities for our corporate headquarters and all
of our branch locations. We have the right to direct, and obtain
substantially all of the economic benefit, from the use of these
facilities. We determine if an arrangement meets the definition of
a lease at inception, at which time we also perform an analysis to
determine whether the lease qualifies as operating or financing.
Most of our branch leases have terms that extend over three to five
years. Generally, these leases do not have a defined option to
extend the term. In the instances where there is an option to
extend, we assumed we would not exercise that option, and
accordingly, did not recognize the option as part of our
right-of-use asset or lease liability. Some of the leases have
cancellation provisions that allow us to cancel with 90 days'
notice and payment of a termination fee. Some of our leases have
been in existence long enough that the term has expired and we are
currently occupying the premises on month-to-month
tenancies.
Operating leases are included in right-of-use assets and lease
current and long-term liabilities. Lease expense for operating
leases is recognized on a straight-line basis over the lease term,
and is included in selling, general and administrative expense.
Some of our leases require variable payments of property taxes,
insurance, and common area maintenance, in addition to base rent.
The variable portion of these lease payments is not included in our
right-of-use assets or lease liabilities. These variable payments
are expensed when the obligation for those payments is incurred and
are included in lease expense in selling, general and
administrative expense.
Lease right-of-use assets and lease liabilities are measured using
the present value of future minimum lease payments over the lease
term at the lease commencement date. The right-of-use asset also
includes any lease payments made on or before the commencement date
of the lease, less any lease incentives received. We use our
incremental borrowing rate based on the information available at
the lease commencement date in determining the present value of
lease payments. The incremental borrowing rates used are estimated
based on what we would be required to pay for a collateralized loan
over a similar term.
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 $125,000 and $113,000 at June
28, 2019 and December 28, 2018, respectively.
Recently adopted accounting pronouncements:
In February 2016, the FASB issued
guidance on lease accounting. The new guidance continues to
classify leases as either finance or operating, but results in the
lessee recognizing most operating leases on the balance sheet as
right-of-use assets and lease liabilities. This guidance was
effective for annual and interim periods beginning after
December 15, 2018, with early adoption permitted. In July
2018, the FASB amended the standard to provide transition relief
for comparative reporting, allowing companies to adopt the
provisions of the new standard using a modified retrospective
transition method on the adoption date, with a cumulative-effect
adjustment to retained earnings recorded on the date of adoption.
We have elected to adopt the standard using the transition relief
provided in the July amendment. In preparation for adoption of the
standard, we have implemented internal controls to enable the
preparation of financial information.
We have elected the three practical expedients allowed for
implementation of the new standard, but have not utilized the
hindsight practical expedient. Accordingly, we did not reassess: 1)
whether any expired or existing contracts are or contain leases; 2)
the lease classification for any expired or existing leases; 3)
initial direct costs for any existing leases.
As a result of adopting this guidance, we recognized a right-of-use
asset, and corresponding lease liability, of approximately $2.1
million as of the first day of our first fiscal quarter of
2019. The adoption of this guidance did not have a material impact
on expense recognition. The difference between the
right-of-use assets and lease liabilities relates to the deferred
rent liability balance as of the end of fiscal 2018 associated with
the leases capitalized. The deferred rent liability, which was the
difference between the straight-line lease expense and cash paid,
reduced the right-of-use asset upon adoption.
In January 2017, the FASB issued guidance to simplify the
subsequent measurement of goodwill by eliminating the requirement
to perform a Step 2 impairment test to compute the implied fair
value of goodwill. As a result, entities 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. 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 early adopted this guidance for our fiscal 2018
annual impairment test. The adoption of the new standard did not
have any impact to our consolidated financial
statements.
Recently issued accounting pronouncements:
In June 2016, the Financial Accounting
Standards Board, or 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 today's “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.
Other accounting standards that have been issued by the FASB or
other standards-setting bodies are not expected to have a material
impact on our financial position, results of operations, and cash
flows.
NOTE 2 – 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 options, except
where their inclusion would be anti-dilutive. Outstanding common
stock equivalents at June 28, 2019 and June 29, 2018 totaled
approximately 161,000 and 202,000, respectively.
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
|
4,629,492
|
4,924,245
|
4,645,883
|
4,953,701
|
|
Dilutive
effects of stock options
|
1,807
|
6,956
|
-
|
-
|
|
Weighted
average number of common shares used in diluted net income per
common share
|
4,631,299
|
4,931,201
|
4,645,883
|
4,953,701
|
NOTE
3 – 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 of $14.0 million. 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 $526,000 and
$399,000 at June 28, 2019 and December 28, 2018, respectively. The
current agreement bears interest at the Daily One Month London
Interbank Offered Rate plus 2.50% per annum. At June 28, 2019, the
effective interest rate was 4.90%. 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 all of our property including, but not limited to, accounts
receivable, intangible assets, contract rights, deposit accounts,
and other similar 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 June
28, 2019 and December 28, 2018, we were in compliance with this
covenant. There was approximately $2,000 available to us under this
agreement at June 28, 2019 and December 28, 2018.
At June 28, 2019, we had 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
.
Subsequent
to June 28, 2019, the account purchase agreement with Wells Fargo
was paid off and terminated in connections with the transaction
with Hire Quest.
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated net of accumulated
amortization. The following table summarizes our purchased goodwill
and finite-lived intangible asset balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
3,777,568
|
$
-
|
$
3,777,568
|
$
3,777,568
|
$
-
|
$
3,777,568
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
Customer
relationships
|
430,984
|
(331,525
)
|
99,459
|
430,984
|
(277,652
)
|
153,332
|
|
Non-compete
agreements
|
228,580
|
(228,580
)
|
-
|
228,580
|
(228,580
)
|
-
|
|
Total finite-lived
intangible assets
|
659,564
|
(560,105
)
|
99,459
|
659,564
|
(506,232
)
|
153,332
|
|
|
|
|
|
|
|
|
|
Total goodwill and
intangible assets
|
$
4,437,132
|
$
(560,105
)
|
$
3,877,027
|
$
4,437,132
|
$
(506,232
)
|
$
3,930,900
|
Amortization expense related to intangible assets for the
twenty-six weeks ended June 28, 2019 and June 29, 2018 was
approximately $54,000 and $101,000,
respectively.
The following table reflects future estimated amortization expense
of intangible assets with definite lives as of June 28,
2019.
|
Year
|
|
|
2019
|
$
53,874
|
|
2020
|
45,585
|
|
Thereafter
|
-
|
|
Total
|
$
99,459
|
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 high deductible policy where we have primary responsibility
for all claims. ACE provides insurance for covered losses and
expenses in excess of $500,000 per incident. Our current ACE policy
also includes a one-time obligation for the Company to pay any
single claim within a policy year that exceeds $500,000 (if any),
but only up to $750,000 for that claim. All other claims within the
policy year are subject to the $500,000 deductible amount for the
Company. Under this high deductible program, we are largely
self-insured. Per our contractual agreements with ACE, we must
provide a collateral deposit of approximately $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 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 each particular state.
Accordingly, our consolidated financial statements reflect only the
mandated workers’ compensation insurance premium liability
for workers’ compensation claims in these
jurisdictions.
As part of our high 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 June 28,
2019, our cash and non-cash collateral totaled approximately $6.2
million consisting of a letter of credit.
Workers’ compensation expense for our 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 administered programs. Workers’ compensation
expense for the thirteen and twenty-six weeks ended June 28, 2019
was approximately $723,000 and $1.4 million, respectively.
Workers’ compensation expense for the thirteen and twenty-six
weeks ended June 29, 2018 was approximately $869,000 and $1.9
million, respectively.
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.
Stock Repurchase:
In
September 2017, our Board of Directors authorized a $5.0 million
three-year repurchase plan of our common stock. This plan replaced
the previous repurchase plan, which was put in place in April 2015.
During the thirteen weeks ended June 28, 2019, we purchased
approximately 4,000 shares of common stock at an aggregate cost of
approximately $15,000 resulting in an average price of $3.97 per
share. These shares were subsequently retired.
In April 2019, we suspended purchases under this plan and we are
not currently repurchasing our common stock.
Tender Offer:
Pursuant to
the Merger Agreement with Hire Quest, on June 26, 2019, we
commenced a self-tender offer to purchase up to 1,500,000 shares of
our common stock at a price of $6.00 per share.
The
offer expired on July 25, 2019 and we accepted for repurchase
1,394,821 shares of common stock.
See
Note 10 – Subsequent
Events
for a more complete
description.
NOTE 7 – STOCK BASED COMPENSATION
Employee Stock Incentive Plan:
Our 2008 Stock Incentive Plan, which permitted the
grant of up to 533,333 equity awards, expired in January 2016.
Outstanding awards continue to remain in effect according to the
terms of the plan and the award documents. In November 2016, our
stockholders approved the
Command Center, Inc. 2016
Stock Incentive Plan
under
which our Compensation Committee is authorized to issue awards for
up to 500,000 shares of our common stock over the 10 year life of
the plan. Pursuant to awards under these plans, there were
approximately 94,000 and 76,000 stock options vested at June 28,
2019 and December 28, 2018, respectively.
The following table summarizes our stock options outstanding at
December 28, 2018, and changes during the period ended June 28,
2019:
|
|
Number of shares underlying options
|
Weighted average exercise price per share
|
Weighted average grant date fair value
|
|
Outstanding,
December 28, 2018
|
160,831
|
$
5.86
|
$
3.18
|
|
Granted
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Expired
|
-
|
-
|
-
|
|
Outstanding,
June 28, 2019
|
160,831
|
5.86
|
3.18
|
The following table summarizes our non-vested stock options
outstanding at December 28, 2018, and changes during the period
ended June 28, 2019:
|
|
Number of shares underlying options
|
Weighted average exercise price per share
|
Weighted average grant date fair value
|
|
Non-vested,
December 28, 2018
|
84,523
|
$
5.56
|
$
3.05
|
|
Granted
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Vested
|
(17,232
)
|
5.65
|
3.14
|
|
Non-vested,
June 28, 2019
|
67,291
|
5.54
|
3.03
|
The following table summarizes information about our outstanding
stock options, and reflects the intrinsic value recalculated based
on the closing price of our common stock of $5.75 at June 28,
2019:
|
|
Number of shares underlying options
|
Weighted average
exercise price per share
|
Weighted average
remaining contractual life (years)
|
Aggregate
intrinsic value
|
|
Outstanding
|
160,831
|
$
5.86
|
8.06
|
$
401,600
|
|
Exercisable
|
93,540
|
6.08
|
7.61
|
14,677
|
The following table summarizes information about our stock options
outstanding, and reflects weighted average contractual life at June
28, 2019:
|
|
|
|
|
|
Number of shares underlying options
|
Weighted
average remaining contractual life (years)
|
Number of shares exercisable
|
Weighted
average remaining contractual life (years)
|
|
$
4.80 - 7.00
|
144,582
|
8.69
|
77,291
|
8.70
|
|
$
7.01 - 8.76
|
16,249
|
2.43
|
16,249
|
2.43
|
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 were scheduled to vest in
equal installments at each grant date anniversary over the next two
years, but became fully vested at the completion of the Hire Quest
Merger.
At June 28, 2019, there was unrecognized stock-based compensation
expense totaling approximately $270,000 relating to non-vested
options and restricted stock grants that will be recognized over
the next two years. Certain non-vested stock options and restricted
stock grants vested upon completion of the Hire Quest Merger which
will result in the recognition all remaining, unrecognized
stock-based compensation expense related to these certain stock
options and restricted stock grants at the closing date of the
Merger.
NOTE 8 – INCOME TAX
Income tax expense during interim periods is based on applying an
estimated annual effective income tax rate to year-to-date income,
plus any significant unusual or infrequently occurring items which
are recorded in the interim period. The provision for
income taxes for the interim periods differs from the amount that
would be provided by applying the statutory U.S. federal income tax
rate to pre-tax income primarily because of state income
taxes. The computation of the annual estimated effective tax
rate at each interim period requires certain estimates and
significant judgment including, but not limited to, the expected
operating income for the year and changes in tax law and tax
rates. The accounting estimates used to compute the
provision for income taxes may change as new events occur, more
experience is obtained, additional information becomes known, or as
the tax environment changes.
Pursuant
to Treasury Regulations, amounts paid to facilitate a business
Merger or acquisition are not deductible for income tax purposes,
which caused our effective income tax rate to be higher in 2019
than normal.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Freestone Insurance Company Liquidation
: From July 2008 through April 2011, our
workers’ compensation coverage was provided under an
agreement with AMS Staff Leasing II, or AMS, through a master
policy with Freestone Insurance Company, or Freestone. During this
time period, we deposited approximately $500,000 with an affiliate
of Freestone for collateral related to the coverage through
AMS.
From April 2012 through March 2014, our workers’ compensation
insurance coverage was provided by Dallas National Insurance, who
later changed its corporate name to Freestone Insurance Company.
Under the terms of the policies, we were required to provide cash
collateral of $900,000 per year, for a total of $1.8 million, as a
non-depleting deposit to secure our obligation up to the deductible
amount.
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. 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 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, it
became apparent that there was significant uncertainty related to
the collectability of the $500,000 deposit with AMS related to our
insurance coverage from July 2008 through April 2011. Because of
this, we recorded a reserve of $250,000 in each of those quarters,
fully reserving this deposit.
In conjunction with management, board, and audit committee changes
in 2018, we have reviewed the estimated costs and potential
benefits of pursuing priority claimant status in the liquidation
proceeding and have altered our planned long-term strategy.
Given that Freestone has negative equity, the complexity of
this matter, our experience to date, and the amount of time this
matter has remained unresolved, we believe the
continuation of our efforts to achieve priority status will not
necessarily prove cost-effective. While we will continue to
seek priority status, we have determined that our stockholders will
be best served by a more measured investment in the recovery
effort. While we are hopeful for a more positive outcome, we
believe that without significant investment, it is more likely than
not that we will be treated in a similar manner as other creditors,
resulting in our priority claim having no value. Based on court
filings and other information made available to us, we estimate the
ratio between Freestone’s liquid assets and liabilities
to be approximately 20%. We now believe this
ratio applied to our deposit represents the best estimate
of the high end of the range of our ultimate recovery. Accordingly,
we increased the reserve on this asset by approximately $1.5
million in the first quarter of 2018 resulting in a net carrying
amount of $260,000.
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. The Company and its counsel, in
conjunction and coordination with counsel for other potentially
aggrieved collateral depositors, are working diligently in order
to maximize our recovery of collateral deposits previously
made to Freestone and achieve the best possible outcome for
our stockholders. Ultimately, the amount of the collateral deposit
to be returned will be determined by the Chancery Court in
Delaware, after hearing evidence and arguments from all engaged
parties.
Management reviews these deposits at each balance sheet date and
estimates the future range in loss related to this matter could be
as high as $260,000, the net balance of the
deposit.
Leases:
At June 28, 2019,
we leased facilities for our corporate headquarters and all of our
branch locations. All of our leases are operating leases. Each
branch is between 1,000 and 5,000 square feet, depending on
location and market conditions.
We determined the discount rate used to calculate the present value
of future minimum lease payments based on our incremental borrowing
rate and consistent with financing terms currently in place with
financial institutions. The weighted average discount rate on our
operating leases is 5.0%. The weighted average remaining lease term
on our operating leases is 1.6 years.
Below is a table of our future minimum operating lease commitments
for the remainder of the current year and for the next five years,
and a reconciliation to the lease liability recognized on our
consolidated balance sheet, and the amount necessary to reduce our
minimum lease payments to present value were calculated using our
incremental borrowing rate.
|
|
|
|
|
|
|
|
|
|
Future
minimum lease payments
|
$
514,878
|
$
768,716
|
$
294,061
|
$
108,481
|
$
23,187
|
$
-
|
$
1,709,324
|
|
Lease
liability interest
|
(33,435
)
|
(36,263
)
|
(11,514
)
|
(3,510
)
|
(142
)
|
-
|
(84,864
)
|
|
Lease
liability as of June 28, 2019
|
$
481,444
|
$
732,453
|
$
282,547
|
$
104,971
|
$
23,045
|
$
-
|
$
1,624,461
|
Lease expense for the thirteen and twenty-six weeks ended June 28,
2019 was approximately $368,000 and $734,000, respectively. Lease
expense for the thirteen and twenty-six weeks ended June 29, 2018
was approximately $366,000 and $745,000, respectively.
Legal Proceedings:
From
time to time, we are involved in various legal proceedings. We
believe the outcome of these matters, 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 as of June 28,
2019.
NOTE 10 – SUBSEQUENT EVENTS
Hire Quest Merger:
On July 15,
2019, Command Center completed its acquisition of Hire Quest
Holdings, LLC, a Florida limited liability company (“Hire
Quest”), in accordance with the terms of the Agreement and
Plan of Merger dated April 8, 2019 (the “Merger
Agreement”) among 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”), Richard Hermanns as the
representative Hire Quests' members and Hire Quest. In accordance
with the Merger Agreement, (i) Merger Sub 1 was 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 was 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.
Upon the closing of the Merger, all of the ownership interests in
Hire Quest were converted into the right to receive an aggregate of
9,837,336 shares of the Company’s common stock. This resulted
in the security holders of Hire Quest acquiring 68% of the shares
of the Company’s common stock outstanding immediately after
the effective time of the Merger.
Pursuant to the Merger Agreement,
Hire
Quest had the right to appoint four directors to the
Board,
and
effective July 15, 2019, each of Richard Hermanns, Edward Jackson,
Payne Brown and Kathleen Shanahan (the “New Directors”)
were appointed to the Board and four of our previous Directors
submitted their resignations.
Because
Hire Quest was entitled to designate the majority of the board of
directors of the combined company and Hire Quest members received a
majority of the equity securities and voting rights of the combined
company, Hire Quest is considered to be the acquirer of Command
Center for accounting purposes. This means that Hire Quest will
allocate the purchase price to the fair value of Command
Center’s assets acquired and liabilities assumed on the
acquisition date, with any excess purchase price being recorded as
goodwill.
Tender
Offer:
On June 26, 2019, the Company commenced an
issuer tender offer to purchase up to 1,500,000 shares of its
common stock at a share price of $6.00 per share (the
“Offer”). The Offer expired on July 25, 2019 and the
Company accepted for purchase 1,394,821 shares for an aggregate
cost of approximately $8.4 million, excluding fees and expenses.
Following completion of the Offer, the Company has 13,071,846
shares outstanding and the percentage ownership of the
Company’s common stock held by the Hire Quest security
holders increased to approximately 75%, with Richard Hermanns
holding 43% of the Company’s common stock and Edward Jackson
holding 19% of the Company’s common
stock.
Credit Facility:
On July 11,
2019, as a condition precedent to the Merger, the Company and its
subsidiaries entered into a Loan Agreement with Branch Banking and
Trust Company (the “Loan Agreement”) for a $30 million
line of credit, with a $15 million sublimit for letters of credit.
Interest will accrue on the outstanding balance of the line of
credit at a variable rate equal to One Month LIBOR plus a margin
between 1.25% and 1.75% that is determined based on the
Company’s collateral value plus unrestricted cash reduced by
the outstanding balance of the line of credit (the “Net
Lendable Collateral”). A non-use fee of between 0.125% and
0.250% (also determined by the Net Lendable Collateral amount) will
accrue on the unused portion of the line of credit. The available
balance under the line of credit is reduced by outstanding letters
of credit. The line of credit will mature on May 31,
2024.
The Loan Agreement and other loan documents contain customary
events of default and negative covenants, including but not limited
to those governing indebtedness, liens, fundamental changes,
transactions with affiliates, and sales of assets. The Loan
Agreement also requires the Company to comply with a fixed charge
coverage ratio of at least 1.10:1.00. The obligations under the
Loan Agreement and other loan documents are secured by
substantially all of the operating assets of the Company and its
subsidiaries as collateral. The Company’s obligations under
the line of credit are subject to acceleration upon the occurrence
of an event of default as defined in the Loan
Agreement.
The Company’s prior credit facility with Wells Fargo was paid
off in full and terminated in connection with the transaction
described above. A new letter of credit was issued to
the
Company’s worker’s compensation insurance
carrier
by BB&T to replace the Wells Fargo
letter.
Franchise Purchase Agreements and Swap Agreement:
On July 15, 2019, to commence
effecting the transition of the Company’s branches from being
Company-owned to being franchisee-owned, the Company entered into
Asset Purchase Agreements (“Purchase Agreements”) with
existing franchisees of Hire Quest and new franchisees
(collectively, “Buyers”) for the sale of certain assets
related to the operations of the Company’s branches in Conway
and North Little Rock, AR; Flagstaff, Mesa, North Phoenix, Phoenix,
Tempe, Tucson, and Yuma, AZ; Aurora and Thornton, CO; Atlanta, GA;
College Park and Speedway, IN; Shreveport, LA; Baltimore and
Landover, MD; Oklahoma City and Tulsa, OK; Chattanooga, Madison,
Memphis, and Nashville, TN; Amarillo, Austin, Houston, Irving,
Lubbock, Odessa, and San Antonio, TX; and Roanoke, VA
(collectively, the “Franchise
Assets”).
The closings under such agreements occurred on July 15, 2019. The
aggregate purchase price for the Franchise Assets consisted of
approximately (i) $4.7 million paid in the form of promissory notes
accruing interest at an annual rate of 6% issued by the Buyers to
the Company plus (ii) the right to receive 2% of annual sales in
excess of $3.2 million in the aggregate for the franchise territory
containing Phoenix, AZ for 10 years, up to a total aggregate amount
of $2.0 million.
Each Purchase Agreement contains negotiated representations,
warranties, covenants and indemnification provisions by the
parties, which are believed to be customary for transactions of
this type. The Company simultaneously entered into a franchise
agreement with each of the Buyers, pursuant to which the Buyers
will operate such branches as franchisees.
A subset of the Purchase Agreements were entered into with, and the
related Franchise Assets sold to Buyers in which New Directors and
significant shareholders of the Company as a result of the Merger,
have direct or indirect interests (the “Worlds
Buyers”).
Pursuant to a Swap Agreement entered into between the Company and
Hire Quest Financial, LLC (“Hire Quest Financial”), an
affiliate of Mr. Hermanns and Mr. Jackson, the promissory notes
issued by the Worlds Buyers to the Company in the aggregate
principal amount of approximately $2.2 million in connection with
the Franchise Assets were transferred on July 15, 2019 to Hire
Quest Financial in exchange for accounts receivable of an equal
value.
Consulting Agreement with Dock Square:
Dock Square HQ, LLC (“Dock Square”),
an affiliate of Dock Square Capital, LLC, was a strategic partner
of, and 6.5% investor in, Hire Quest, LLC, a 93.5% subsidiary of
Hire Quest. Prior to the effective time of the Merger, (a)
Dock Square distributed to its direct or indirect members all of
its rights, title and interest in and to its membership interest in
Hire Quest, LLC, and (b) each such member contributed to Hire Quest
all of its respective rights, title and interest in and to its
membership interest in Hire Quest, LLC as a capital contribution in
exchange for, in the aggregate, a 6.5% membership interest in Hire
Quest. Immediately after such reorganization and prior to the
closing of the Merger, Hire Quest owned 100% of the membership
interest in Hire Quest, LLC.
As contemplated by the Merger Agreement, on July 15, 2019, the
Company entered into a consulting arrangement with Dock Square.
Pursuant to this consulting arrangement, Dock Square introduces
prospective customers and expands relationships with existing
customers of the Company in return for which it is
eligible to receive unregistered shares of the Company’s
common stock, subject to certain performance metrics and vesting
terms. The grant of any such shares by the Company would be based
on the gross revenue generated for the Company's
franchisees from the services of Dock Square as measured over
a 12 month period. These shares are granted in tiers beginning
at $15 million of annual gross revenue generated for the Company's
franchisees from Dock Square's service and progressing
incrementally to the maximum of $360 million of annual gross
revenue at the franchisee level. Upon the grant of any such
shares, 50% of such granted shares would vest immediately, and the
remaining 50% of such granted shares would be subject to a vesting
requirement linked to the Company’s gross revenue generated
from the services of Dock Square measured over a subsequent three
year period such that if the aggregate amount of actual gross
revenue generated for the Company's franchisees from Dock Square's
services over the three year period following a grant of shares
exceeds three times the corresponding annual threshold, the
remaining 50% of shares vest. These three-year look back thresholds
begin at $45 million of gross revenue at the franchisee level over
a three-year period and progress incrementally to the maximum of
$1.08 billion of gross revenue for franchisees over a three-year
period. We refer to any such shares as the
“Performance Shares.” We anticipate the
maximum aggregate number of Performance Shares issuable under the
consulting arrangement would not exceed approximately 1.6 million
shares. Any Performance Shares would be in addition to
the pro rata portion of the shares of Company common stock that
Dock Square’s members received as merger consideration at the
closing of the Merger along with the other investors in Hire Quest.
Dock Square would receive any declared and paid dividends on
issued Performance Shares (including the unvested portion of such
shares during the 3-year vesting measurement period), and the
issued but unvested Performance Shares would vest on a change of
control of the Company. In addition, Dock Square received
piggy-back registration rights with respect to its Performance
Shares issued and vested at the time of such
registration.
Increase in Authorized Shares of Capital Stock
:
In connection with the Merger and
p
ursuant to
Articles of Amendment to the Company’s Articles of
Incorporation filed on July 12, 2019, the Company increased the
number of the Company’s authorized capital stock from
8,749,999 to 31,000,000 shares and correspondingly increased the
authorized shares of common stock from 8,333,333 to 30,000,000
shares and the authorized shares of preferred stock from 416,666 to
1,000,000 shares.