HireQuest, Inc. - Annual Report: 2018 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☑

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 28, 2018

 

or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-53088

 

COMMAND CENTER, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Washington		91-2079472
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

3609 S. Wadsworth Blvd., Suite 250, Lakewood, CO		80235
(Address of Principal Executive Offices)		(Zip Code)

 

Registrant’s Telephone Number, including Area Code: (866) 464-5844

Securities Registered Pursuant to Section 12(b) of the Act:  None

Securities Registered Pursuant to Section 12(g) of the Act:  Common Stock, par value $0.001

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No☑

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer ☐ , accelerated filer ☐ , non-accelerated filer ☐ , smaller reporting company  ☑ , or an emerging growth company ☐ (as defined in Rule 12b-2 of the Exchange Act).

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐·No☑

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, as of the last business day of the second fiscal quarter, June 29, 2018, was approximately $16,500,000.

As of April 9, 2019, there were 4,629,331 common shares of the registrant’s common stock outstanding.   The following document is incorporated by reference into Parts I, II, III, and IV of this report:  None.

Command Center, Inc.

2018 Annual Report on Form 10-K

Table of Contents

 

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	12
Item 2.	Description of Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Mine Safety Disclosure	14
PART II
Item 5.	Markets for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	15
Item 7.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 8.	Financial Statements and Supplementary Data	20
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37
Item 9B.	Other Information	37
PART III
Item 10.	Directors, Executive Officers, and Corporate Governance	39
Item 11.	Executive Compensation	45
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	48
Item 13.	Certain Relationships and Related Transactions, and Director Independence	50
Item 14.	Principal Accountant Fees and Services	50
PART IV
Item 15.	Exhibits and Financial Statement Schedules	51
Item 16.	Form 10-K Summary	51
	Signatures	52

 

 

Special Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K (this "Form 10-K") may contain forward-looking statements. These statements relate to our expectations for future events and future financial performance. Generally, the words “intend,” “expect,” “anticipate,” “estimate,” or “continue” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. In addition to other factors discussed in this Form 10-K, some of the important factors that could cause actual results to differ from those discussed in the forward-looking statements include risk factors described in Item 1A of this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations, beliefs, or projections may not be achieved or accomplished. We do not, nor have we authorized any other person to, assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no duty to update any of the forward-looking statements after the date of this Form 10-K, whether as a result of new information, future events, or otherwise, except as required by law. You are advised to consult further disclosures we may make on related subjects in our filings with the Securities and Exchange Commission, or the SEC.

 

PART I

 

Item 1. Business

 

Introduction and General Background

 

Command Center, Inc. ("Command Center,” the “Company,” “CCI,” “we,” "us," or “our”) is a staffing company, operating primarily in the manual on-demand labor segment of the staffing industry. In 2018, we employed approximately 32,000 employees and provided services to approximately 3,600 customers, primarily in the industrial/manufacturing/warehousing, construction, hospitality, transportation, and retail industries. Our customers range in size from small businesses to large corporate enterprises. All of our temporary staff, whom we refer to as "field team members," are employed by us. Most of our work assignments are short-term, and many are filled on little advanced notice from our customers. In addition to short and longer-term temporary work assignments, we sometimes recruit and place workers in temp-to-hire positions.

 

As of April 9, 2019, we owned and operated 67 on-demand labor locations, or branches, across 22 states. We currently operate as Command Center, Inc., and we are also known in some locations as Command Labor. All financial information is consolidated and reported in our consolidated financial statements. Our corporate headquarters is located in Lakewood, Colorado.

 

In prior years we were organized as Command Staffing, LLC. We were organized as a limited liability company in December 2002 and commenced operations in 2003 as a franchisor of on-demand labor businesses. In November 2005, Temporary Financial Services, Inc., a public company, acquired the assets of Command Staffing, LLC and Harborview Software, Inc., an affiliated company that owned the software used in the operation of our on-demand labor branches. The transaction was accounted for as if Command Staffing, LLC was the accounting acquirer, and our name changed to Command Center, Inc.

 

Industry Overview

 

The on-demand labor industry has developed based on the business need for flexible staffing solutions. Many businesses operate in a cyclical production environment and find it difficult to staff according to their changing business requirements. Companies also desire a way to temporarily replace full-time employees when absent due to illness, vacation, or unplanned termination. On-demand labor offers customers the opportunity to immediately respond to changes in staffing needs, reduce the costs associated with recruiting and interviewing, eliminate unemployment and workers’ compensation exposure, and draw from a larger pool of potential employees.

 

 

 

 

The on-demand labor industry continues to develop specialized market segments that reflect the diverse needs of the businesses it serves. Technical skills, prior work history, duration of assignment, and drug and background check requirements vary among industries and customers. We operate primarily within the short-term, semi-skilled and unskilled segments of the on-demand labor industry. We endeavor to customize our services according to the unique opportunities and assets presented by each of our branches, while leveraging our overall size when possible. This approach reduces our overhead costs, improves economies of scale, establishes procedural uniformity and internal controls, and creates a predictable internal environment for our field team members.

 

Business

 

Strategic Growth Opportunities:  We continue to improve our network of on-demand labor branches. We supply a quality workforce and we strive to consistently match the right field team members to the right jobs. We have 67 locally-managed branches throughout the United States that serve as trusted partners to businesses and job seekers alike. Customers, representing a variety of industries, trust us to learn their business and to plan ahead to address their dynamic staffing needs. Job seekers trust us to understand their complete employment picture and place them in on-demand, temporary, temp-to-hire, or permanent placement positions where they can grow, thrive, and provide immediate value. The total number of branches open and operating increased from 66 at the end of fiscal year 2017 to 67 at the end of fiscal year 2018. In 2019, we plan to continue our strategy of carefully balancing branch expansion against return on investment at existing locations. In doing so, we expect to concentrate our revenue growth efforts primarily on sales growth within our existing branch structure, while possibly opening new branches in areas that present exceptional opportunities, and looking for acquisitions that will expand our existing operational footprint. In all of our growth opportunities, we continue to emphasize the fundamentals of our business: sell to quality accounts, increase margins where possible, and provide exceptional customer service.

 

On-demand Labor Branch Operations:  In 2018, we continued to focus on the basics of our business: service consistency and excellence, margin improvement, cost containment, sales effectiveness, and company culture. We concentrated on these measures to improve profitability and solidify the groundwork for future growth.

 

Our branches are often located in proximity to concentrated commercial and industrial areas typically with access to public transportation and other services that are important to our field team members. We have developed a branch demographic model to identify and qualify potential future locations.

 

Our operations are managed by in-branch personnel, area managers, and corporate management. Where appropriate, business development specialists are employed to help drive business to our branches. Our compensation plans for branch personnel, area managers, and other sales personnel are designed to secure and retain the qualified individuals needed to meet our business, financial, and growth objectives. Our personnel practices are designed to attract, screen, hire, train, support, and retain qualified personnel at all levels of our organization. We propagate best practices from our higher performing branches across all operating groups to produce consistent execution and improvements in company-wide performance.

 

Our Temporary Staff, or Field Team Members:  Field team members are our product and our key asset. Our success is highly dependent on our ability to attract, motivate, and reward our field team members. We have invested in numerous programs designed to create a long-term relationship with top-performing field team members. These programs include health insurance, bonus programs, safety rewards, longevity programs, and training programs.

 

The pool of qualified and available field team members varies by location. For most of our branches, the supply of field team members is sufficient and diverse enough to meet current customer needs. However, in some locations, field team member availability is a limiting factor. We continue to seek additional field team members through internet postings, newspaper advertisements, printed flyers, branch displays, career fairs, and word-of-mouth.

 

Our Customers:  In 2018, we serviced approximately 3,600 customers across a variety of industries. Our 10 largest customers accounted for approximately 25% of our revenue in 2018. Additionally, at December 28, 2018, 12.9% of total accounts receivable was due from a single customer. The top industries we served were industrial/manufacturing/warehousing, construction, hospitality, transportation, and retail. In 2017, we serviced approximately 3,200 customers in these same industries and our 10 largest customers accounted for approximately 23% of our revenue.

 

 

 

 

Our Marketing Strategy:  We have adapted our sales process to respond to our customers’ needs and significant time constraints. Our customers are focused on their own business requirements and rely on us to respond quickly and effectively with smart solutions to their current challenges. Our unique sales process starts by learning about customers and facilitating conversations where we offer support and contribute to a growing relationship. Together, we create an action plan that draws on our core competencies and solves our customers’ needs. Once we have resolved one need, we consistently strive to meet additional needs as presented. Many of our existing customers are served by multiple branches, across multiple cities, and in many cases, across multiple states. We have tailored programs to specifically address the needs of these national accounts and plan to continue our efforts to expand our national accounts relationships in the years ahead.

 

Our Workers’ Compensation Coverage:  In accordance with state laws, we provide our workforce with workers’ compensation insurance. Currently, we are covered under a large deductible policy with ACE American Insurance Company, or ACE, where we have primary responsibility for claims under the policy. Under our current policy, which has been in place since April 1, 2014, we are responsible for covered losses and expenses up to $500,000 per incident. Amounts in excess of $500,000 are the responsibility of ACE. From April 1, 2012 through March 31, 2014, we were covered under a large deductible policy issued by Dallas National Insurance, who changed their name to Freestone Insurance Company, or Freestone, in 2014. Under this prior policy, we are responsible for covered losses and expenses up to $350,000 per incident. Amounts in excess of $350,000 were the responsibility of Freestone; however, due to the current insolvency and liquidation of Freestone (as set forth in more detail in the below Risk Factors), any payments required to be made above this amount, if any, will likely be paid by a state guaranty fund in the jurisdiction where the injury occurred.

 

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 states is limited to our premium payments.

 

Our Safety Program:  To protect our workforce and help control workers’ compensation insurance rates, we maintain several company-wide safety programs designed to increase safety awareness. We provide safety training through videos, safety testing, and basic and remedial instruction. Branch managers conduct periodic job site safety inspections on new and existing jobs to ensure that our field team members are working in a safe environment. We encourage safe work behavior through an incentive program that rewards our field team members for working accident free by allowing them to purchase safety and other items by using earned points. We also encourage our field team members to report unsafe working conditions. Branch managers also learn risk management and proper safety protocols when attending training sessions at our corporate office or elsewhere. We regularly evaluate the risk profile of the work we undertake on an ongoing basis and sometimes restrict classes of work in order to manage risk appropriately.

 

Our Seasonality:  Some of the industries in which we operate are subject to seasonal fluctuation. Many of the jobs filled by field team members are outdoors and generally performed during the warmer months of the year. As a result, activity increases in the spring and continues at higher levels through summer, then begins to taper off during fall and through winter. Seasonal fluctuations are typically less in the more temperate parts of the United States, where many of our branches are located. Fluctuations in seasonal business affect financial performance from period to period. Severe weather in any of our locations for prolonged periods has the potential to impair our business within these geographies, given the outdoor nature of many of our assignments.

 

Our Competition:  The manual labor sector of the on-demand labor industry in which we operate is largely fragmented and highly competitive, with low barriers to entry. Our competitors range in size from small, local or regional operators with five or fewer locations to large, multi-national operations with hundreds of locations.

 

The primary competitive factors in our market segment include price, the ability to timely provide the requested workers, and overall quality of service. Secondary factors include worker quality and performance, efficiency, the ability to meet the business-to-business vendor requirements, name recognition, established reputation, and customer relationships. While barriers to entry are low, businesses operating in this sector of the on-demand labor industry do require access to significant working capital, particularly in the spring and summer when seasonal staffing requirements are highest. Lack of working capital can be a significant impediment to growth for small, local, and regional on-demand labor providers. In addition, increasing government regulation is also a barrier to entry as many smaller firms cannot profitably comply with the administrative burden of the new regulations.

  

Our Trademarks and Trade Names:  We have registered “Command,” “Command Center,” “Command Staffing,” “Command Labor,” “Real Jobs for Real People,” “Bakken Staffing,” and “Exceeding Expectations Every Time,” as service marks with the U.S. Patent and Trademark Office.

 

 

 

 

Our Intellectual Property:  We have proprietary software systems in place to handle most aspects of our operations, including field team member dispatch activities, invoicing, accounts receivable, and payroll. Our software systems also provide internal control over our operations, and allow us to produce internal management reports necessary to track the financial performance of individual branches. We refine our systems and processes based on the feedback we receive from management and others within the Company in order to adequately track and manage individual branches. Our proprietary software systems are not patented and are not licensed to, or used by, any other organization. We have invested in off-site back-up and storage systems that we believe provide reasonable protections for our electronic information systems against breakdowns as well as other disruptions and other unauthorized intrusions.

 

Our Real Property:  We lease the real property for our corporate office and of all of our branch locations. All of these properties are leased at market rates that vary depending on location. Each branch is between 1,000 and 5,000 square feet, depending on location and market conditions. We believe that our corporate office and each of the branch locations are adequate for our current needs.

 

Our Employees:  We currently employ a staff of approximately 30 at our corporate headquarters in Lakewood, Colorado, of which approximately 30 are full-time employees. The number of employees at our corporate headquarters is not expected to significantly increase over the next year. We also employ approximately 200 field operations staff in our various branches, of which approximately 180 are full-time employees. During 2018, we employed approximately 32,000 field team members. We are the employer of record for our field team members, and as such, are responsible for collecting withholding taxes and for paying employer contributions for social security, unemployment tax, workers’ compensation, other insurance programs, and all other governmental requirements imposed on employers, including any imposed by state and local governments or regulatory agencies. In addition to completing Form I-9 required by the Department of Homeland Security, we also verify the identity and work eligibility of each new employee through the federal E-Verify system.

 

Environmental Concerns:  Because we are a service business, federal, state, or local laws that regulate the discharge of materials into the environment do not impact our business.

 

Available Information: We make the following items available, free of charge, through the investor section of our website: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Charters adopted by the Audit, Compensation, and Nominating and Governance Committees of our Board of Directors, as well as our Corporate Governance Guidelines, Standards of Ethics and Business Conduct, and Policy on Roles and Responsibilities of the Chairperson of the Board are also available through the investor section of our website. Our website address is: www.commandonline.com. The information contained on our website, or on other websites linked to our website, is not part of this Form 10-K.

 

Any materials we file with the SEC may be read and copied at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

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.

 

 

 

ITEM 1A. RISK FACTORS  

 

We are vulnerable to fluctuations in the general economy. The staffing needs of our customers vary greatly with the overall condition of the economy. Even though the economy is currently experiencing a period of growth, there is a risk that conditions will change, and that the future economic climate will become more volatile, or uncertain. This could have a material adverse effect on our business and operating results. During periods of weak economic growth or economic contraction, the demand for staffing services typically declines. When demand drops, our business is typically impacted unfavorably as we experience a decrease of our revenue but our selling and administrative expense base may not decline as quickly as revenues. In periods of decline, we can only reduce selling and administrative expenses to a certain level without negatively impacting the long-term potential of our branch network and brands. Additionally, during economic downturns companies may slow the rate at which they pay their vendors, or they may become unable to pay their obligations. If our customers become unable to pay amounts owed to us, or pay us more slowly, then our cash flow and profitability may suffer. Deterioration of general economic conditions could have an adverse material effect on our business, financial condition, and results of operations. 

 

We are vulnerable to downturns in regional and local economies. As of  April 9, 2019, we own and operate 67 branches across 22 states. As such, we are subject to regional and local economic conditions in many markets. Additionally, our new branches are sometimes placed in metropolitan areas where we have one or more existing branches, increasing our exposure to future economic weakness in those local areas. Deterioration in regional and local economic conditions in the areas in which we operate could have a material adverse impact on our business, financial condition and results of operations.

 

We rely on a number of key customers and if we lose any one of these customers, our revenues may decline. Although we have a significant number of customers in each of the geographic markets that we operate in, we rely on certain key customers for a significant portion of our revenues. In 2018, our 10 largest customers accounted for approximately 25% of our revenue. In 2017, our 10 largest customers accounted for approximately 23% of our revenue. In the future, a small number of customers may represent a significant portion of our total revenues in any given period. These customers may not consistently use our services at a particular rate over any subsequent period. The loss of any of these customers could adversely affect our revenues and profitability.

 

We are vulnerable to seasonal fluctuations with lower demand in the fall and winter months. Revenues generated from branches in markets subject to seasonal fluctuations will be less stable and may be lower than in other markets. Locating branches in highly seasonal markets involves higher risks. Our individual branch revenue can fluctuate significantly on both a quarter over quarter and year over year basis, depending on the local economic conditions and need for temporary labor services in the local economy. One of our goals is to increase the diversity of customers and industries we service at both the branch and the company level. This will reduce the potential negative impact of an economic downturn in any one industry or region. To the extent that we consider opening new branches, we intend to select branch locations with a view to maximizing total long-term return on our investment in branches, personnel, marketing, and other fixed and sunk costs. However, there can be no assurance that our profitability will not be adversely affected by low returns on investment in certain highly-seasonal markets. Weather can also have a significant impact on our operations as there is typically lower demand for staffing services during adverse weather conditions in the winter months.

 

The market for our common stock is limited and our stockholders may have difficulty reselling their shares when desired or at attractive market prices. Our stock price and our listing may make it more difficult for our stockholders to resell shares when desired or at attractive prices. Our Company stock trades on the NASDAQ stock exchange. Our common stock has continued to trade in low volumes and at low prices. On December 7, 2017, we effected a 1-for-12 reverse stock split of our common and preferred stock which also affected our trading volume. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many brokerage firms and institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks.

 

 

  

“Penny stock” rules may make buying or selling our securities difficult and impact liquidity. Trading in our securities may be subject to the SEC’s “penny stock” rules. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser's written agreement to execute the transaction. Unless an exception is available, the regulations require, prior to any transaction involving a penny stock, the delivery of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities. 

 

Loss of key management personnel could negatively affect our business. We have a small management team and we are highly dependent on principal members of our management team to operate our business. The loss of any key employee, or the loss of one of our executives, could have a material adverse effect on our business.  While any key executive and management changes are carefully considered to ensure business continuity and performance, there is no way to estimate the potential impact of such changes. On April 1, 2018, our previous CEO of five-years was replaced by our current CEO.  Following the replacement of key personnel, including our CEO, it may take new employees substantial time and efforts to develop important expertise and knowledge. Our future performance depends on our continued ability to identify, recruit, motivate, and retain key management personnel at all levels. The failure to attract and retain key management personnel could have a material adverse effect on our business, financial condition, and results of operations.

 

If we lose members of our Board of Directors, our ability to manage our business could be impaired. We have a highly talented board of directors and there are periodic changes to the board for a variety of business and personal reasons, including to ensure an optimal mix of experience and expertise. In January 2018, two members of our Board of Directors resigned, one of which was the chairman. While we were able to appoint replacement board members, it may take these new board members substantial time and efforts to regain the previous directors’ expertise and knowledge. Our future performance also depends on our continued ability to identify, recruit, motivate, and retain board members. The failure to attract and retain board members could have a material adverse effect on our business, financial condition, and results of operations.

 

Difficulty in attracting, developing, and retaining qualified branch personnel could negatively affect our business. We rely significantly on the performance and productivity of our branch managers and business development specialists to help drive new business. Each branch manager has primary responsibility for managing the operations of the individual branch, including recruiting workers, daily dispatch of personnel, collection of accounts receivable, and overall customer service. To combat a typically high turnover rate for branch managers in the on-demand labor industry, we continue to develop and refine our training and compensation plans to encourage employee retention. There is no assurance that our training and compensation plans will reduce turnover in this position.

 

Loss of key personnel could negatively affect our business. The loss of any key executive or manager could have a material adverse effect on our business. Our future performance also depends on our ability to identify, recruit, motivate, and retain key management personnel. The failure to attract and retain key management personnel could have a material adverse effect on our business, financial condition, and results of operations.

 

Unavailability of a reliable pool of field team members may negatively impact our business. On-demand labor companies must continually attract reliable temporary workers to meet customer needs. We compete for such workers with other temporary labor businesses, as well as with actual and potential customers, some of which seek to fill positions directly with regular or field team members. In addition, our customers sometimes hire our field team members into permanent positions. From time to time, during peak periods and/or in certain geographic regions, we may experience shortages of available temporary workers.

 

We are dependent upon the continued availability of workers' compensation insurance. We maintain workers' compensation insurance as required by state laws. Few insurance carriers provide workers' compensation coverage for staffing companies in the manual labor market, and the insurance market may tighten even further in the future. We cannot be certain that we will be able to obtain adequate levels of insurance with acceptable terms, coverages, deductibles and collateral requirements. In all of the states in which we operate, we cannot engage in business without workers' compensation insurance. In order to obtain coverage, we are required to post collateral with the carrier in the form of cash or a letter of credit from our lender. The carrier can retain this collateral for extended periods of time, and increase the amount of such collateral.

 

 

 

Increased competition in our highly competitive industry may impact our ability to retain customers or market share. We operate in a highly competitive industry with low barriers to entry. We face competition from a wide variety of companies ranging in size from large, multi-national corporations to small, local sole proprietors. This causes extensive pricing pressure, and there can be no assurance that we will be able to retain customers or market share going forward, nor that we will be able to maintain profitability or current profit margins.

 

We may not be able to recover collateral deposits we have placed with our workers’ compensation insurance carrier. Historically our workers’ compensation insurance carriers have required collateral deposits to secure our payment of claims up to the amount of our policy deductible. For the two-year period ending March 31, 2014, Dallas National Insurance, now known as Freestone Insurance Company, or Freestone, provided our workers’ compensation insurance coverage under a high deductible ($350,000 per incident) policy. Under the terms of the policy, we were required to provide cash collateral of $1.8 million as security for payment of claims up to the policy deductible. In April 2014, the Insurance Commissioner of the State of Delaware placed Freestone in receivership due to concerns about Freestone’s financial condition. In August 2014, the receivership was converted into a liquidation proceeding. In late 2015, we filed timely proofs of claim with the Receiver for return of our collateral deposits, one filed as a priority claim and one as a general claim. Based on available information, the company determined 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. Accordingly, the reserve on this asset was reduced in 2018 by approximately $1.5 million, resulting in a net carrying amount of $260,000. In the event the company receives substantially less than our reasonably estimated amount, there may be a material negative effect on our financial statements.

 

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations. We are required to prepare our financial statements in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board, or the FASB, and the SEC. It is possible that we may be required to adopt future accounting standards which may require additional changes to the current accounting treatment that we apply to our financial statements and may also require us to make significant changes to our reporting systems. Such changes could result in a material adverse impact on our business, results of operations, and financial condition.

 

The delay between the time we pay our temporary workers and other creditors and the time we collect from our customers requires debt refinancing to provide working capital. Field team members are typically paid on the same day the services are performed, while customers are generally billed on a weekly basis with seven-day payment terms. We currently have an account purchase agreement with 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. When the receivable is collected, the remaining 10% is paid to us, less applicable fees and interest. The term of the agreement is through April 7, 2020. The cancelation of the account purchase agreement would have a material adverse effect on our liquidity, cash flows, and results of operations.

 

The delay between the time we pay our temporary workers and the time we collect from our customers requires aggressive management of our credit risk and places pressure on working capital. Pressure on our working capital requires that we manage the resulting credit risk. The magnitude of the risk varies with general economic conditions. We believe that write-offs for doubtful accounts can be maintained at commercially acceptable levels without the need to resort to unduly intrusive credit management practices that could interfere with customer acquisition and retention. Nevertheless, there can be no assurance that our ability to achieve and sustain profitable operations will not be adversely affected by losses from doubtful accounts or customer relations problems arising from our efforts to manage credit risk.

 

Limitations in our receivables financing agreements negatively impact our liquidity. Under our account purchase agreement with Wells Fargo Bank, our borrowing base is limited to the lesser of: (1) 90% of acceptable accounts as defined in the agreement, or (2) $14.0 million. Our collateral requirements with our workers' compensation insurance carrier are secured by a $6.2 million letter of credit from our lender. The amount of the letter of credit results in a reduction to our borrowing base, currently reducing funds otherwise available to us by $6.2 million. This limitation on our liquidity may result in our inability to expand or to sustain our operations, which could result in a material adverse impact on our business.

 

 

 

 

Increased employee expenses could adversely affect our operations. We are required to comply with all applicable federal, state, and local laws and regulations relating to employment, including verification of eligibility for employment, occupational safety and health laws, wage and hour requirements, employment insurance, and equal opportunity employment laws. Costs and expenses related to these requirements are a significant operating expense and may increase as a result of changes in such laws or regulations requiring employers to provide specified employee benefits (such as health insurance), increases in the minimum wage or the level of existing benefits, or the lengthening of periods for which unemployment benefits are available. We cannot assure that we will be able to increase fees charged to our customers to offset any increased costs and expenses, and higher costs may have a material adverse effect on our business, financial condition, and results of operations.

 

Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting. If our management is unable to certify the effectiveness of our internal controls, including those of our third party vendors, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence. In addition, if we do not maintain adequate financial and management personnel, processes, and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause our stock price to fall.

 

We will continue to be impacted by new or existing laws and regulations relating to employment. In addition to federal and state laws and regulations, many counties and cities have become active in regulating various aspects of employment, including minimum wages, paid sick leave, application forms and background checks, and required notices to employees, among others. As a staffing company and large employer with a wide geographical footprint, we are often faced with new legal requirements. Although we believe that we will be able to maintain appropriate compliance procedures, there is no assurance that our efforts will always be timely or effective, or that we will be able to recover the increased cost of new legal requirements through timely pricing increases to our customers.

 

We may incur additional tax liabilities that exceed our estimates. We are subject to federal taxes and a multitude of state and local taxes. We are regularly subject to audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical tax provisions and accruals. The results of an audit or litigation could materially harm our business. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for determining tax liabilities, or change their laws, which could increase our effective tax rate and negatively affect our financial position and results of operations.

 

We may incur additional costs and regulatory risks relating to new laws regulating the hiring of undocumented workers. In addition to federal laws, the statutes of several states regulate employer practices relating to the identification and eligibility to work of new hires. We have implemented procedures intended to meet all of these requirements. We process information on each new employee through the federal government’s E-Verify system. Although we believe that we are in compliance and we will be able to maintain appropriate procedures, we cannot assure that our compliance will not be flawed or delayed because of the large number of temporary personnel that we employ. In some cases, the penalties for noncompliance are punitive. Regulatory requirements imposed on employers and enforcement actions relating to immigration status of employees are expected to increase. If we are not able to maintain appropriate compliance procedures, our operations would be materially and adversely affected.

 

We will incur additional costs and regulatory risks relating to the impact of health care reform upon our business and failure to comply with such rules and regulations could materially harm our business. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or collectively, the Health Care Reform Laws, include various health-related provisions that took effect in 2015 and 2016, including the requirement that most individuals have health insurance and establishing new regulations on health plans. Although the Health Care Reform Laws do not mandate that employers offer health insurance, beginning in 2016 tax penalties are assessable on large employers which do not offer health insurance that meets certain affordability or benefit requirements. Providing such additional health insurance benefits to our qualifying temporary workers, or the payment of tax penalties if such coverage is not provided, will increase our costs. The economic impact of the Health Care Reform Laws to us is not yet known. It is likely that the Health Care Reform Laws will be revised or rewritten pursuant to proposed legislation. The requirements and the cost impact of revisions to existing laws, Health Care Reform Laws, or new health care legislation is unknown. Under both the present laws and proposed legislation, if we are unable to raise the rates we charge our customers to cover the costs of these programs, such increases in costs could materially harm our business.

 

 

 

 

We may be exposed to employment-related claims and costs from field team members, customers, or third parties that could materially adversely affect our business, financial condition and results of operations. We are in the business of employing people and placing them in the workplaces of other businesses. As the employer of record, we are at risk for claims brought by our field team members, such as wage and hour claims, discrimination and harassment actions and workers' compensation claims. We are also at risk for liabilities alleged to have been caused by our field team members (such as claims relating to personal injuries, property damage, immigration status, misappropriation of funds or property, violation of environmental laws, or criminal activity). Significant instances of these types of issues may impact our customers’ perception of us and may have a negative effect on our results of operations. The risk is heightened because we do not have control over our customers’ workplace or direct supervision of our field team members. If we are found liable for the actions or omissions of our field team members or our customers, and adequate insurance coverage is not available, our business, financial condition, and results of operations could be materially and adversely affected.

 

Competitive factors may require us to absorb increases in operating costs, and we may lose volume as a result. We expect to raise prices for our services in amounts sufficient to offset increased costs of services, operating costs, and cost increases due to inflation, regulatory requirements and to improve our return on invested capital. However, competitive factors may require us to absorb cost increases, which would have a negative effect on our operating margins. Even if we are able to increase costs as desired, we may lose volume to competitors willing to service customers at a lower price.

 

We face competition from companies that have greater resources than we do and we may not be able to effectively compete with these companies. There are several very large full-service and specialized temporary labor companies competing in national, regional and local markets. Many of these competitors have substantially greater financial and marketing resources than we have. Price competition in the staffing industry is intense and we expect this level of competition to remain high and to increase in the future. Competition could have a material adverse effect on our business, financial condition, and results of operations. There is also a risk that competitors, perceiving our lack of capital resources, may undercut our prices or increase promotional expenditures in our strongest markets in an effort to force us out of business.

 

Improper disclosure of employee and customer data could result in liabilities and harm our reputation. In the course of our business, we collect, store, use, and transmit information about our employees and customers. Protecting the privacy of this information is critical to our business. We have established a system of controls for safeguarding the security and privacy of our data. Our security controls may not, in every case, be adequate to prevent unauthorized internal or external intrusions into our systems and improper disclosure of personal data and confidential information relating to our employees, our customers or our business. The regulations relating to the security and privacy of information are increasingly prevalent and demanding. The failure to adequately protect private information could expose us to claims from employees and customers and regulatory actions, harm our reputation, and have a material adverse effect on our business, financial condition, and results of operations. Additional security measures we may take to address customer or employee concerns may cause higher operating expenses.

  

Cyberattacks or other breaches of our technology hardware and software, as well as risks associated with compliance and data privacy could have an adverse effect on our systems, our service to our customers, our reputation, our competitive position, and financial results. Our ability to manage our operations successfully is critical to our success. Our business relies on our ability to electronically gather, compile, process, store and distribute data and other information. Unintended interruptions or failures resulting from computer and telecommunications failures, equipment or software malfunction, power outages, catastrophic events, security breaches (such as unauthorized access by hackers), social engineering schemes, unauthorized access, errors in usage by our employees, computer viruses, ransomware or malware, and other events could harm our business.  While we have taken measures to minimize the impact of these problems, the proper functioning of these systems is critical to our business operations. Any security breach or failure in our computer equipment, systems or data could result in the interruption of our business operations, tarnish our reputation, and expose us to damages and litigation.

 

Our directors, officers and current principal stockholders own a large percentage of our common stock and could limit other stockholders’ influence over corporate decisions. As of  April 9, 2019, our directors, officers and current stockholders holding more than 5% of our common stock collectively beneficially own, in the aggregate, approximately 38% of our outstanding common stock. As a result, these stockholders acting together, may be capable of controlling most matters requiring stockholder approval, including the election of directors, approval of mergers, and other significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control. The interests of these stockholders may not always coincide with our corporate interests or the interests of our other stockholders, and they may act in a manner with which some stockholders may not agree or that may not be in the best interests of all stockholders.

 

 

 

 

We will likely be party, from time to time, to various legal proceedings, lawsuits, and other claims arising in the ordinary course of our business. In the ordinary course of business, we are subject to a variety of legal proceedings, lawsuits and claims. We anticipate that disputes may arise in the future relating to contract, employment, labor relations, and other matters that could result in litigation or arbitration. These proceedings could divert the attention of our management team and result in costly or unfavorable outcomes. Any such litigation could result in substantial expense and reduced profits, harm our reputation, create inability to obtain certain insurance, and have a materially adverse impact on our business and financial condition. Also see Item 3 “Legal Proceedings”.

 

Our customer contracts contain termination provisions that could decrease our future revenues and earnings. Most of our customer contracts are either day-to-day or can be terminated by the customer on short or no notice without penalty. Our customers are, therefore, not contractually obligated to continue to do business with us in the future. This creates uncertainty with respect to the revenues and earnings we may recognize with respect to our customer contracts.

 

We have a history of net losses. Although we have recorded a net profit in several of our most recent fiscal years, as of December 28, 2018, we have an accumulated deficit of approximately $36 million. We have incurred net losses in many of our fiscal years since inception. We may incur additional operating losses. We make no assurance that our revenue will increase or that we will be profitable in any future period.

 

If our goodwill is impaired, we will record an additional non-cash charge to our results of operations and the amount of the charge may be material. At least annually, or whenever events or circumstances arise indicating impairment may exist, we review goodwill for impairment as required by U.S. GAAP. In June 2016, we purchased substantially all of the assets of Hanwood Arkansas, LLC, an Arkansas limited liability company, and Hanwood Oklahoma, LLC, an Oklahoma limited liability company. Together these companies operated as Hancock Staffing, or Hancock, from branches located in Little Rock, Arkansas and Oklahoma City, Oklahoma. In connection with our 2016 acquisition of Hancock, we identified and recognized $1.3 million in goodwill that we added to the carrying amount of $2.5 million from the acquisition of Disaster Recovery Services after the write-off. The resulting carrying amount of $3.8 million could change if there are future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted, or a permanent change to our market capitalization. In the future, we may need to further reduce the carrying amount of goodwill by taking an additional non-cash charge to our results of operations. Such a charge would have the effect of reducing goodwill with a corresponding impairment expense and may have a material effect upon our reported results. The additional expense may reduce our reported profitability or increase our reported losses in future periods and could negatively affect the market for our securities, our ability to obtain other sources of capital, and may generally have a negative effect on our future operations.

  

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. DESCRIPTION OF PROPERTIES

 

We presently lease office space for our corporate headquarters in Lakewood, Colorado. We also lease the property for all of our current branch locations. All of these branches are leased at market rates that vary in amount, depending on location. Most of our branch leases have terms that extend over three to five years. The majority of our 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. For additional information related to our operating leases see Note 9 – Commitments and Contingencies in our notes to the consolidated financial statements.

 

ITEM 3. LEGAL PROCEEDINGS

 

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 $252.0 million.

 

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.

 

Other than the Freestone litigation described above, on occasion, we may be involved in legal matters arising in the ordinary course of our business. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which we are, or could become involved in litigation, may have a material adverse effect on our business, financial condition or results of operations in the future.

 

 

 

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Reverse Stock Split

 

In December 2017, we filed an amendment to our Articles of Incorporation and effected a 1-for-12 reverse stock split of our common and preferred stock, effective as of the close of business on December 7, 2017, whereby 60,615,549 shares of our common stock were exchanged for 5,051,542 newly issued common shares. Under the terms of the reverse stock split, fractional shares issuable to stockholders were cashed out, resulting in a reverse split slightly more than 1-for-12 in the aggregate. All stock prices, per share amounts, and number of shares in this Form 10-K have been retroactively adjusted to reflect the 1-for-12 reverse stock split, resulting in the transfer of approximately $56,000 from common stock to additional paid in capital at December 29, 2017 and December 30, 2016.

 

Market Information

 

Our common stock is listed on the NASDAQ Stock Exchange under the symbol “CCNI.” The following table shows the high and low sales prices for the common stock for the quarterly period indicated for the last two fiscal years:

 

	High	Low
Fourth Quarter, 2018	$5.91	$3.55
Third Quarter, 2018	6.30	5.14
Second Quarter, 2018	6.40	5.35
First Quarter, 2018	6.49	5.32
Fourth Quarter, 2017	6.12	4.80
Third Quarter, 2017	5.40	3.72
Second Quarter, 2017	4.44	3.96
First Quarter, 2017	5.04	4.20

 

Holders of the Corporation’s Capital Stock

 

At April 9, 2019, we had approximately 205 stockholders of record. This figure does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.

 

Dividends

 

No cash dividends have been declared on our common stock to date and, at present, we do not anticipate paying a cash dividend on our common stock in the foreseeable future.

 

Equity Compensation Plan Information

 

Pursuant to Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,” we are providing the following information summarizing information about our equity compensation plans as of December 28, 2018. All share numbers have been updated for the 1-for-12 reverse stock split of the Company’s common stock effective as of December 7, 2017.

 

 

 

 

Plan category	Number of securities to be issued upon exercise of outstanding options and rights	Weighted average exercise price of outstanding options, warrants, and rights	Number of securities remaining available for future issuance
Equity compensation plans approved by security holders	160,831	$5.86	296,530

 

Our Command Center, Inc. 2016 Employee Stock Incentive Plan was adopted by our Board of Directors on September 29, 2016 and approved by our stockholders at the 2016 Annual Meeting of Stockholders on November 17, 2016. We have previously provided the material terms of such plan.

 

Transfer Agent and Registrar

 

Our transfer agent is Continental Stock Transfer & Trust, located at 17 Battery Street, 8th Floor, New York, New York, 10004.

  

Issuer Purchases of Equity Securities 

 

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 implemented plan, which was put in place in April 2015. During 2018 we purchased approximately 324,000 shares of common stock at an aggregate price of approximately $1.8 million resulting in an average price of $5.65 per share under the plan. These shares were then retired. During 2017 we purchased approximately 69,000 shares of common stock at an aggregate price of approximately $374,000 resulting in an average price of $5.45 per share under the plan. These shares were then retired. We have approximately $2.8 million remaining under the repurchase plan as of December 28, 2018. For additional information related to our stock repurchase see Note 6 – Stockholders’ Equity in our notes to the consolidated financial statements. The table below summarizes our common stock purchased during the fourth quarter of 2018.

 

	Total shares purchased	Average price per share	Total number of shares purchased as part of publicly announced plan	Approximate dollar value of shares that may be purchased under the plan
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	34,053

 

ITEM 6. SELECTED FINANCIAL DATA

 

As a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

The following discussion reviews significant factors with respect to our financial condition at December 28, 2018, and results of operations for the fiscal years ended December 28, 2018 and December 29, 2017. This discussion should be read in conjunction with the consolidated financial statements, notes, tables, and selected financial data presented elsewhere in this Form 10-K.

 

 

 

 

Our discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties that may cause actual results to differ materially from those discussed in such forward-looking statements. A cautionary statement regarding forward-looking statements is set forth under the caption “Special Note Regarding Forward-Looking Statements” immediately prior to Item 1 of this Form 10-K. This discussion and analysis should be considered in light of such cautionary statements and the risk factors disclosed elsewhere in this Form 10-K.

 

The following table reflects operating results from 2018 and 2017 (in thousands, except per share amounts and percentages). Percentages indicate line items as a percentage of total revenue. The table serves as the basis for the narrative discussion that follows.

 

	Fifty-two weeks ended
	December 28, 2018		December 29, 2017
Revenue	$97,389	100.0%	$98,072	100.0%
Cost of staffing services	72,450	74.4%	72,642	74.1%
Gross profit	24,939	25.6%	25,430	25.9%
Selling, general and administrative expenses	23,434	24.1%	21,347	21.8%
Depreciation and amortization	324	0.3%	386	0.4%
Income from operations	1,181	1.2%	3,697	3.8%
Interest expense and other financing expense	2	0.0%	12	0.0%
Net income before income taxes	1,179	1.2%	3,685	3.8%
Provision for income taxes	205	0.2%	2,006	2.0%
Net income	$974	1.0%	$1,679	1.7%
Non-GAAP data
Adjusted EBITDA	$4,074	4.2%	$4,240	4.3%

 

Because we use adjusted EBITDA to evaluate our financial performance, we reconcile it to net income, which is the most comparable financial measure calculated and presented in accordance with U.S. GAAP.

 

	Fifty-two weeks ended
	December 28, 2018	December 29, 2017
Net income	$974	$1,679
Interest expense	2	12
Provision for income taxes	205	2,006
Depreciation and amortization	324	386
Non-cash compensation	395	157
Reserve for workers' compensation deposit	1,540	-
Other non-recurring expense	634	-
Adjusted EBITDA	$4,074	$4,240

 

Earnings before interest, taxes, depreciation and amortization, non-cash compensation, and certain non-recurring charges, or adjusted EBITDA, is a non-GAAP measure that represents our net income before interest expense, income tax expense, depreciation and amortization, non-cash compensation, and certain nonrecurring charges. We utilize adjusted EBITDA as a financial measure as management believes investors find it a useful tool to perform more meaningful comparisons and evaluations of past, present, and future operating results. We believe it is a complement to net income and other financial performance measures. Adjusted EBITDA is not intended to represent net income as defined by generally accepted accounting principles in the United States, or U.S. GAAP, and such information should not be considered as an alternative to net income or any other measure of performance prescribed by U.S. GAAP.

 

 

 

 

We use adjusted EBITDA to measure our financial performance because we believe interest, taxes, depreciation and amortization, non-cash compensation, and certain non-recurring charges bear little or no relationship to our operating performance. By excluding interest expense, adjusted EBITDA measures our financial performance irrespective of our capital structure or how we finance our operations. By excluding taxes on income, we believe adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding factors that are beyond our control. By excluding depreciation and amortization expense, adjusted EBITDA measures the financial performance of our operations without regard to their historical cost. By excluding non-cash compensation, adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the value of our stock and stock option awards. In addition, by excluding certain non-recurring charges, adjusted EBITDA provides a basis for measuring financial performance without non-recurring charges. For all of these reasons, we believe that adjusted EBITDA provides us, and investors, with information that is relevant and useful in evaluating our business.

 

However, because adjusted EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because adjusted EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt, nor does it show trends in interest costs due to changes in our financing or changes in interest rates. Adjusted EBITDA, as defined by us, may not be comparable to adjusted EBITDA as reported by other companies that do not define adjusted EBITDA exactly as we define the term.

 

Results of Operations

 

Fifty-two weeks ended December 28, 2018

 

Summary of Operations: Revenue was $97.4 million in 2018, compared to $98.1 million in 2017, a decrease of approximately $683,000, or 0.7%. This decrease is primarily related to lower revenue in the second and third quarter of 2018 due to higher than normal turnover in sales positions and some seasonality in the periods.

 

Our branches serve a wide variety of customers and industries across 22 states. Our individual branch revenue can fluctuate significantly on both a quarter-over-quarter and year-over-year basis depending on the local economic conditions and need for temporary labor services in the local economy. One of our goals is to increase the diversity of customers and industries we service at both the branch and the company level. We believe this will reduce the potential negative impact of an economic downturn in any one industry or region.

 

Cost of Staffing Services:  Cost of staffing services was 74.4% of revenue in 2018, compared to 74.1% in 2017, an increase of 0.3%. This relative increase was due to higher compensation paid to our field team members related to competitive forces in a tightening labor market, as well as increases in minimum wages in some states in which we operate. We also saw a relative increase in workers’ compensation insurance costs, which can fluctuate as a result of changes to the mix of work performed during the year, changes in our claims history and ongoing claims management, and changes in actuarial assumptions. These increases were partially offset by a relative decrease in our state unemployment insurance costs as we have continued to actively manage this part of our business.

 

Selling, General and Administrative Expenses, or SG&A:  SG&A was approximately $23.4 million in 2018, compared to $21.3 million in 2017, an increase of approximately $2.1 million. This increase is due to several non-recurring charges that occurred in 2018. These non-recurring charges include a $1.5 million impairment of our workers’ compensation deposit in receivership, executive severance of approximately $565,000, a one-time $100,000 expense related to the settlement of the 2018 proxy contest, and other legal and professional fees of approximately $167,000. These non-recurring expenses total approximately $2.4 million, or 10% of our SG&A. Other increases in SG&A included an increase in recruiting costs, employee medical benefits, stock based compensation, and payroll and payroll related taxes. These other increases were offset by decreases in bad debt expense, and a refund of our workers’ compensation risk pool deposit in excess of what was recorded of approximately $198,000.

 

 

 

Liquidity and Capital Resources

 

We believe that our cash flow from operations, working capital balances at December 28, 2018, and access to our account purchase agreement, will be sufficient to fund anticipated operations through March 2020.

 

At December 28, 2018, our current assets exceeded our current liabilities by approximately $14.0 million. Included in current assets is cash of approximately $8.0 million, and trade accounts receivable of approximately $9.0 million. Included in current liabilities are accrued wages and benefits of approximately $1.2 million, and the current portion of workers’ compensation claims liability of approximately $1.0 million.

 

Our current financing agreement is an account purchase agreement with 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 at December 28, 2018. When the receivable is collected, the remaining 10% is paid to us, less applicable fees and interest. The liability related to this account purchase agreement facility was approximately $399,000 and $854,000 at December 28, 2018 and at December 29, 2017, respectively. The term of the agreement is through April 7, 2020 and 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 all of our property including, but not limited to, accounts receivable, intangible assets, contract rights, investment property, deposit accounts, and other such assets. We also have an outstanding letter of credit under this agreement in the amount of $6.2 million which reduces the amount of funds otherwise made available to us under this agreement. As of December 28, 2018 we had approximately $2,000 of availability on this facility.

 

Operating Activities:  Net cash provided by operating activities totaled approximately $2.6 million in 2018, compared to $4.7 million in 2017. Operating activity in 2018 included net income of approximately $1.0 million, an increase in the reserve on our workers’ compensation risk pool deposit in receivership of approximately $1.5 million, a decrease of approximately $359,000 in prepaid expense, deposits, and other assets, and a decrease in accounts receivable of approximately $282,000. These were offset by a decrease of approximately $526,000 in accrued wages and benefits and a decrease of approximately $343,000 in accounts payable. Operating activity in 2017 included net income of approximately $1.7 million, a decrease of approximately $1.7 million in our deferred tax asset, a decrease of approximately $683,000 in accounts receivable, an increase of approximately $503,000 in other current liabilities, and a decrease of approximately $578,000 in prepaid workers’ compensation. These were offset by a decrease of approximately $758,000 in our workers’ compensation claims liability and a decrease of approximately $199,000 in accounts payable.

 

Investing Activities:  Net cash used in investing activities totaled approximately $117,000 in 2018, compared to approximately $104,000 in 2017. Investing activity in both years related primarily to the purchase of equipment.

 

Financing Activities:  Net cash used in financing activities totaled approximately $2.3 million in 2018, compared to net cash provided by financing activities of approximately $90,000 in 2017. Financing activities in 2018 included $1.8 million used to purchase treasury stock and net cash used to decrease our account purchase facility of approximately $455,000. Financing activity in 2017 included net cash provided by our account purchase facility of approximately $465,000 and $375,000 used to purchase treasury stock.

 

Critical Accounting Policies

 

Management's discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. For additional information related to our critical accounting policies see Note 1 – Summary of Significant Accounting Policies in our notes to the consolidated financial statements.

 

 

 

 

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.

 

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 monthly, 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.

 

 

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.

 

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.

 

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.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

We are a “smaller reporting company” as defined by Regulation S-K and as such, we are not providing the information contained in this item pursuant to Regulation S-K.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors of

Command Center, Inc.

Lakewood, Colorado

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheet of Command Center, Inc. (the “Company”) as of December 28, 2018, the related consolidated statement of income, stockholders' equity, and cash flows for the fifty-two weeks ended December 28, 2018 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 28, 2018, and the results of its operations and its cash flows for the fifty-two weeks ended December 28, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ Plante & Moran, PLLC

 

We have served as the Company’s auditor since 2017.

 

 

Denver, Colorado

April 9, 2019

 

 

Report of Independent Public Accounting Firm

 

 

To the Shareholders and Board of Directors of

Command Center, Inc.

Lakewood, Colorado

 

OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS

 

We have audited the accompanying consolidated balance sheet of Command Center, Inc. (the “Company”) as of December 29, 2017, and the related consolidated statement of income, stockholders’ equity, and cash flows, for the fifty-two weeks ended December 29, 2017, and the related notes (collectively referred to as the “financial statements”). 

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 29, 2017, and the results of its operations and its cash flows for the fifty-two weeks ended December 29, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

BASIS FOR OPINION

  

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

 

 

 

/s/ EKS&H LLLP

 

March 29, 2018

Denver, Colorado

  

Command Center, Inc.

Consolidated Balance Sheets

 

	December 28, 2018	December 29, 2017
ASSETS
Current assets
Cash	$7,934,287	$7,768,631
Restricted cash	69,423	12,853
Accounts receivable, net of allowance for doubtful accounts	9,041,361	9,394,376
Prepaid expenses, deposits, and other assets	380,930	740,280
Prepaid workers' compensation	212,197	167,597
Current portion of workers' compensation deposits	-	99,624
Total current assets	17,638,198	18,183,361
Property and equipment, net	329,255	372,145
Deferred taxes	1,079,908	721,602
Workers' compensation risk pool deposit, less current portion, net	193,984	201,563
Workers' compensation risk pool deposit in receivership, net	260,000	1,800,000
Goodwill and other intangible assets, net	3,930,900	4,085,576
Total assets	$23,432,245	$25,364,247
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$219,945	$563,402
Account purchase agreement facility	398,894	853,562
Other current liabilities	821,142	898,809
Accrued wages and benefits	1,218,699	1,503,688
Current portion of workers' compensation claims liability	1,003,643	1,031,500
Total current liabilities	3,662,323	4,850,961
Workers' compensation claims liability, less current portion	878,455	917,497
Total liabilities	4,504,778	5,768,458
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock - $0.001 par value, 416,666 shares authorized; none issued	-	-
Common stock - $0.001 par value, 8,333,333 shares authorized; 4,680,871 and 4,993,672 shares issued and outstanding, respectively	4,681	4,994
Additional paid-in capital	54,536,852	56,211,837
Accumulated deficit	(35,650,066)	(36,621,042)
Total stockholders' equity	18,891,467	19,595,789
Total liabilities and stockholders' equity	$23,432,245	$25,364,247

 

 

 

Command Center, Inc.

Consolidated Statements of Income

 

	Fifty-two weeks ended
	December 28, 2018	December 29, 2017
Revenue	$97,388,820	$98,072,198
Cost of staffing services	72,450,295	72,641,609
Gross profit	24,938,525	25,430,589
Selling, general and administrative expenses	23,433,198	21,347,681
Depreciation and amortization	323,852	386,413
Income from operations	1,181,475	3,696,495
Interest expense and other financing expense	2,116	11,619
Net income before income taxes	1,179,359	3,684,876
Provision for income taxes	205,072	2,005,528
Net income	$974,287	$1,679,348
Earnings per share:
Basic	$0.20	$0.33
Diluted	$0.20	$0.33
Weighted average shares outstanding:
Basic	4,853,000	5,043,254
Diluted	4,855,019	5,105,006

 

 

 

Command Center, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

  

	Common stock		Additional		Total
			paid-in	Accumulated	stockholders'
	Shares	Par value	capital	deficit	equity
Balance at December 30, 2016	5,052,888	$5,053	$56,430,206	$(38,300,390)	$18,134,869
Common stock issued for services	9,583	10	49,690	-	49,700
Stock-based compensation	-	-	107,090	-	107,090
Common stock purchased and retired	(68,799)	(69)	(375,149)	-	(375,218)
Net income for the year	-	-	-	1,679,348	1,679,348
Balance at December 29, 2017	4,993,672	4,994	56,211,837	(36,621,042)	19,595,789
Common stock issued for services	10,973	11	62,425	-	62,436
Stock-based compensation	-	-	332,089	-	332,089
Common stock purchased and retired	(323,774)	(324)	(1,828,829)	-	(1,829,153)
Cumulative effect of accounting change	-	-	-	(3,311)	(3,311)
Effective repurchase of stock options			(240,670)	-	(240,670)
Net income for the year	-	-	-	974,287	974,287
Balance at December 28, 2018	4,680,871	$4,681	$54,536,852	$(35,650,066)	$18,891,467

 

 

 

Command Center, Inc.

Consolidated Statements of Cash Flow

 

	Fifty-two weeks ended
	December 28, 2018	December 29, 2017
Cash flows from operating activities
Net income	$974,287	$1,679,348
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	323,852	386,413
Provision for bad debt	71,278	209,805
Stock based compensation	332,089	156,790
Deferred taxes	(358,306)	1,666,043
Reserve on workers' compensation risk pool deposit in receivership	1,540,000	-
Cumulative effect of accounting change	(3,311)	-
Common stock issued for services	62,436	-
Gain on disposition of property and equipment	(9,383)	-
Changes in operating assets and liabilities:
Accounts receivable	281,737	683,273
Prepaid expenses, deposits, and other assets	359,350	(106,665)
Prepaid workers' compensation	(44,600)	578,100
Accounts payable	(343,457)	(198,875)
Other current liabilities	(77,667)	502,883
Accrued wages and benefits	(525,659)	(63,897)
Workers' compensation risk pool deposits	107,203	12,153
Workers' compensation claims liability	(66,899)	(757,703)
Net cash provided by operating activities	2,622,950	4,747,668
Cash flows from investing activities
Purchase of property and equipment	(158,578)	(103,665)
Proceeds from the sale of property and equipment	41,675	-
Net cash used in investing activities	(116,903)	(103,665)
Cash flows from financing activities
Net change in account purchase agreement facility	(454,668)	465,282
Purchase of treasury stock	(1,829,153)	(375,218)
Net cash (used in) provided by financing activities	(2,283,821)	90,064
Net increase in cash	222,226	4,734,067
Cash and restricted cash, beginning of period	7,781,484	3,047,417
Cash and restricted cash, end of period	$8,003,710	$7,781,484
Supplemental disclosure of non-cash activities
Effective purchase of vested stock options	240,670	-
Supplemental disclosure of cash flow information
Interest paid	3,503	11,620
Income taxes paid	18,227	522,525
Reconciliation of cash and cash equivalents
Cash	$7,934,287	$7,768,631
Restricted cash	69,423	12,853
Total cash and restricted cash	$8,003,710	$7,781,484

 

Command Center, Inc.

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.

 

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. 

 

 

	Fifty-two weeks ended
	December 28, 2018		December 29, 2017
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.

 

 

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:

 

	December 28, 2018	December 29, 2017
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:

 

	December 28, 2018	December 29, 2017
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.

 

	December 28, 2018			December 29, 2017
	Gross	Accumulated amortization	Net	Gross	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	Obligation
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:

 

	December 28, 2018	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

 

 

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 shares purchased	Average price per share	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:

 

	2018	2017
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:

 

	Number of options	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:

 

	Number of options	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:

 

	Outstanding options		Vested options
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:

 

	December 28, 2018	December 29, 2017
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:

 

	December 28, 2018	December 29, 2017
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