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 U.S. 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 U.S. 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 year ended December 29, 2017. The results of operations for the
twenty-six weeks ended June 29, 2018 are not necessarily indicative
of the results expected for the full fiscal year, or for any other
fiscal period.
Consolidation:
The
consolidated financial statements include the accounts of Command
Center and all of our wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
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.
Significant estimates include the allowance for doubtful accounts,
workers’ compensation risk pool deposits, and workers’
compensation claims liability. For additional information related
to our workers' compensation risk pool deposits,
see
Note 9 – Commitments and
Contingencies
.
Concentrations:
At June
29, 2018, 10.4% of accounts receivable were due from a single
client. For the period ended June 29, 2018, 7.9% of our total
revenue came from that same client. At December 29, 2017, 11.8% of
accounts receivable were due from a single customer. For the period
ended December 29, 2017, 8.5% of our total revenue came from that
same client.
Revenue recognition:
Revenue is recognized at the time we satisfy
our performance obligation. Because our clients 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.
Below are a summaries of our revenue disaggregated by industry (in
thousands, except percentages):
|
|
|
|
|
Industrial,
manufacturing and warehousing
|
$
8,557
|
35.0
%
|
$
8,041
|
33.0
%
|
Construction
|
4,442
|
18.0
%
|
5,383
|
22.0
%
|
Hospitality
|
4,046
|
17.0
%
|
4,825
|
20.0
%
|
Transportation
|
3,503
|
15.0
%
|
3,332
|
13.0
%
|
Retail
and Other
|
3,628
|
15.0
%
|
2,923
|
12.0
%
|
Total
|
$
24,176
|
100.0
%
|
$
24,504
|
100.0
%
|
|
|
|
|
|
Industrial,
manufacturing and warehousing
|
$
17,185
|
36.0
%
|
$
15,295
|
33.0
%
|
Construction
|
8,486
|
18.0
%
|
9,498
|
20.0
%
|
Hospitality
|
7,793
|
17.0
%
|
9,098
|
19.0
%
|
Transportation
|
7,252
|
16.0
%
|
6,955
|
15.0
%
|
Retail
and Other
|
5,927
|
13.0
%
|
6,006
|
13.0
%
|
Total
|
$
46,643
|
100.0
%
|
$
46,852
|
100.0
%
|
Recently adopted accounting pronouncements:
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
Operations 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.
Recent accounting pronouncements:
In February 2016, the FASB issued 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 liability on its balance sheet. Both the
asset and liability will initially be measured at the present value
of the future minimum lease payments. Consistent with current U.S.
GAAP, the presentation of expenses and cash flows will depend
primarily on the classification of the lease as either a finance or
an operating lease. The new standard also requires additional
quantitative and qualitative disclosures regarding the amount,
timing and uncertainty of cash flows arising from leases in order
to provide additional information about the nature of an
organization’s leasing activities. This ASU is effective for
annual periods, and interim periods within those annual periods,
beginning after December 15, 2018, with early adoption permitted. A
modified retrospective approach is required. We plan on adopting
the guidance on the effective date. We are currently evaluating the
impact of the new guidance on our consolidated financial statements
and related disclosures. We expect, upon adoption, nearly, if not
all, of our leases will be recognized on our Consolidated Balance
Sheet as operating lease liabilities and right-of-use assets. We do
not expect the adoption of this standard to have a material impact
on the pattern of lease related expenses currently recognized in
our Consolidated Statements of Operations.
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 plan to adopt this guidance for our 2018 annual
impairment test and do not expect the adoption to have a material
impact on our financial statements.
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 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. For the period ended June 29, 2018, the adoption of
other accounting standards had no material impact on our financial
positions, results of operations, or 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. For the twenty-six
weeks ended June 29, 2018, there were approximately 4,000
outstanding stock options that were excluded from the diluted
earnings per share calculation because their inclusion would have
been anti-dilutive. Total outstanding common stock equivalents at
June 29, 2018 and June 30, 2017, were approximately 202,000 and
182,000, 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 (loss) per
common share
|
4,924,245
|
5,025,676
|
4,953,701
|
5,025,532
|
Dilutive
effects of stock options
|
6,956
|
54,293
|
-
|
57,902
|
Weighted
average number of common shares used in diluted net income (loss)
per common share
|
4,931,201
|
5,079,969
|
4,953,701
|
5,083,434
|
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 $854,000 at
December 29, 2017, and at June 29, 2018 there was approximately
$240,000 that was owed to us which is included in Other receivables
on our Consolidated Balance Sheet. The current agreement bears
interest at the Daily One Month London Interbank Offered Rate plus
2.50% per annum. At June 29, 2018, the effective interest rate was
4.50%. 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 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 June 29, 2018 and December 29, 2017, we were in
compliance with this covenant. There was approximately $49,000 and
$13,000 available to us under this agreement at June 29, 2018 and
December 29, 2017, respectively.
As of June 29, 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 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated net of accumulated
amortization. The following table summarizes the goodwill and
intangible asset balances:
|
|
|
Goodwill
|
$
3,777,568
|
$
3,777,568
|
Intangible
assets
|
659,564
|
659,564
|
Accumulated
amortization
|
(452,359
)
|
(351,556
)
|
Goodwill
and other intangible assets, net
|
$
3,984,773
|
$
4,085,576
|
Amortization expense for the thirteen and twenty-six weeks ended
June 29, 2018 was approximately $47,000 and $101,000, respectively.
Amortization expense for the thirteen and twenty-six weeks ended
June 30, 2017 was approximately $56,000 and $112,000,
respectively.
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. 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 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.
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 29,
2018, our cash and non-cash collateral totaled approximately $6.4
million and consisted of cash deposits of approximately $202,000
and a letter of credit of approximately $6.2 million.
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 government administered programs. Workers’
compensation expense for the thirteen and twenty-six weeks ended
June 29, 2018 was approximately $869,000 and $1.9 million,
respectively. Workers’ compensation expense for the thirteen
and twenty-six weeks ended June 30, 2017 was approximately $787,000
and $1.6 million, respectively.
NOTE 6 – 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. 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 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 72,000 and 191,000 stock options vested at June 29,
2018 and December 29, 2017, respectively.
The following table summarizes our stock options outstanding at
December 29, 2017, and changes during the period ended June 29,
2018. The expired options were issued to our former CEO and
subsequently cancelled pursuant to the severance agreement with
him.
|
Number of shares underlying options
|
Weighted average exercise price per share
|
Weighted average grant date fair value
|
Outstanding,
December 29, 2017
|
254,995
|
$
4.49
|
$
2.68
|
Granted
|
117,500
|
5.67
|
3.15
|
Forfeited
|
(21,875
)
|
6.15
|
3.31
|
Expired
|
(148,958
)
|
3.21
|
2.28
|
Outstanding,
June 29, 2018
|
201,662
|
5.94
|
3.18
|
The following table summarizes our non-vested stock options
outstanding at December 29, 2017, and changes during the period
ended June 29, 2018:
|
Number of shares underlying options
|
Weighted average exercise price per share
|
Weighted average grant date fair value
|
Non-vested,
December 29, 2017
|
63,539
|
$
5.47
|
$
2.86
|
Granted
|
117,500
|
5.67
|
3.15
|
Forfeited
|
(21,875
)
|
6.15
|
3.31
|
Vested
|
(29,375
)
|
5.67
|
3.15
|
Non-vested,
June 29, 2018
|
129,789
|
5.49
|
2.98
|
The following table summarizes information about our stock options
outstanding, and reflects the intrinsic value recalculated based on
the closing price of our common stock of $5.70 at June 29,
2018:
|
Number
of shares underlying options
|
Weighted
average exercise price per share
|
Weighted
average remaining contractual life (years)
|
Aggregate
intrinsic value
|
Outstanding
|
201,662
|
$
5.94
|
8.70
|
$
749,737
|
Exercisable
|
71,873
|
6.76
|
7.13
|
9,937
|
The following table summarizes information about our stock options
outstanding, and reflects weighted average contractual life at June
29, 2018:
|
|
|
Range of exercise prices
|
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
|
171,664
|
9.62
|
42,916
|
9.62
|
$7.01-8.76
|
29,998
|
3.44
|
28,957
|
3.44
|
|
201,662
|
8.70
|
71,873
|
7.13
|
At June 29, 2018, there was unrecognized stock-based compensation
expense totaling approximately $301,000 relating to non-vested
options that will be recognized over the next 3.0
years.
NOTE 7 – STOCKHOLDERS’ EQUITY
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 plan, which was put in place in April 2015. During the
thirteen weeks ended June 29, 2018, we purchased approximately
104,000 shares of common stock at an aggregate cost of
approximately $590,000 resulting in an average price of $5.69 per
share. These shares were subsequently retired. We have
approximately $3.9 million remaining under the plan. The
following table summarizes in more detail our common stock
purchased during the thirteen weeks ended June 29,
2018.
|
|
|
Total
number of shares purchased as part of publicly announced
plans
|
Approximate
remaining dollar value of shares that may be purchased under the
plan
|
Period 4 (March 31,
2018 to April 27, 2018)
|
34,310
|
$
5.67
|
637,843
|
$
4,302,380
|
Period 5 (April 28,
2018 to May 25, 2018)
|
26,382
|
5.77
|
664,225
|
4,150,262
|
Period 6 (May 26,
2018 to June 29, 2018)
|
42,900
|
5.66
|
707,125
|
3,907,442
|
Total
|
103,592
|
5.69
|
|
|
Subsequent to June 29, 2018 through August 10, 2018, we have
repurchased approximately 63,000 additional shares at an aggregate
cost of approximately $375,000.
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 change 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.
On December 22, 2017, Congress signed Public Law No 115-97,
commonly referred to as the Tax Cut and Jobs Act of 2017. The
passage of this legislation resulted in the U.S. federal corporate
tax rate decreasing from 35% to 21% beginning in January 2018, the
elimination of the corporate alternative minimum tax, the
acceleration of depreciation for U.S. tax purposes, creating a new
limitations on deductible interest expense, and changing the rules
related to uses and limitations of net operating loss carryforwards
created in tax years beginning after December 31,
2017.
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
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 fund to secure our payment 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 provided
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 recent management, board, and audit committee
changes, 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.
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 29,
2018.