Notes to Consolidated Condensed Financial Statements
NOTE 1 – BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited consolidated condensed financial statements
have been prepared by Command Center, Inc. ("Command Center,”
the “Company,” “we,” "us," or
“our”) in accordance with U.S. generally accepted
accounting principles (“GAAP”) for interim financial
reporting and rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted. In the opinion
of our management, all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the
fiscal periods presented have been included.
These
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and related
notes included in our Annual Report filed on Form 10-K for the year
ended December 30, 2016. The results of operations for the thirteen
and thirty-nine weeks ended September 29, 2017 are not necessarily
indicative of the results expected for the full fiscal year, or for
any other fiscal period.
Consolidation:
The consolidated financial statements include
the accounts of Command Center and all of our wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of consolidated
financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates include the allowance for doubtful accounts,
workers’ compensation risk pool deposits, and workers’
compensation claims liability.
Reclassifications:
Certain financial statement amounts have been reclassified to
conform to the current period presentation. These reclassifications
had no effect on net income or accumulated deficit as previously
reported.
Fiscal Year End:
Our
consolidated financial statements are presented on a 52/53-week
fiscal year end basis, with the last day of the fiscal year being
the last Friday of each calendar year. In fiscal years consisting
of 53 weeks, the final quarter will consist of 14 weeks. Fiscal
year 2017 will consist of 52 weeks and 2016 consisted of 53
weeks.
Cash and cash equivalents:
Cash and cash equivalents consist
of demand deposits, including interest-bearing accounts with
original maturities of three months or less, held in banking
institutions and a trust account.
Concentrations:
At December 30, 2016, 20.6% of accounts
payable were due to a single vendor. There were no concentrations
at September 29, 2017.
Fair Value Measures:
Fair value is the price that would
be received to sell an asset, or paid to transfer a liability, in
the principal or most advantageous market for the asset or
liability in an ordinary transaction between market participants on
the measurement date. Our policy on fair value measures requires us
to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The policy
establishes a fair value hierarchy based on the level of
independent, objective evidence surrounding the inputs used to
measure fair value. A financial instrument’s categorization
within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The policy
prioritizes the inputs into three levels that may be used to
measure fair value:
Level
1: Applies to assets or liabilities for which there are quoted
prices in active markets for identical assets or
liabilities.
Level
2: Applies to assets or liabilities for which there are inputs
other than quoted prices that are observable for the asset or
liability such as quoted prices for similar assets or liabilities
in active markets; quoted prices for identical assets or
liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
Level
3: Applies to assets or liabilities for which there are
unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or
liabilities.
Our
financial instruments consist principally of a contingent
liability. For additional information, see
Note 10 – Commitments and
Contingencies
.
Recent Accounting Pronouncements:
In May 2014, the FASB
issued new revenue recognition guidance under ASU 2014-09 that will
supersede the existing revenue recognition guidance under 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.
In July 2015, the FASB deferred the effective date by one year (ASU
2015-14). This ASU will now be effective for annual periods, and
interim periods within those annual periods, beginning on or after
December 15, 2017. Early adoption is permitted, but not before the
original effective date of December 15, 2016. Since the issuance of
the original standard, the FASB has issued several other subsequent
updates including the following: 1) clarification of the
implementation guidance on principal versus agent considerations
(ASU 2016-08); 2) further guidance on identifying performance
obligations in a contract as well as clarifications on the
licensing implementation guidance (ASU 2016-10); 3) rescission of
several SEC Staff Announcements that are codified in Topic 605 (ASU
2016-11); and 4) additional guidance and practical expedients in
response to identified implementation issues (ASU 2016-12). The new
standard will be effective for us beginning December 30, 2017 and
we expect to implement the standard with the modified retrospective
approach, which recognizes the cumulative effect of application
recognized on that date.
We have
established a team made up of members from our accounting and legal
departments. We are reviewing our contracts and evaluating our
accounting policies to identify potential differences that would
result from applying this standard. Based on our initial due
diligence, we do not expect the adoption of this standard to have
any material impact on our consolidated results of operations,
consolidated financial position and cash flows. We are still in the
process of evaluating any potential impact to our disclosure. We
expect to have our evaluation complete before the end of our fiscal
year.
In
February 2016, the FASB issued ASU 2016-02 amending the existing
accounting standards for lease accounting and requiring lessees to
recognize lease assets and lease liabilities for all leases with
lease terms 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. Consistent with current GAAP, the presentation of expenses
and cash flows will depend primarily on the classification of the
lease as either a finance or an operating lease. The new standard
also requires additional quantitative and qualitative disclosures
regarding the amount, timing and uncertainty of cash flows arising
from leases in order to provide additional information about the
nature of an organization’s leasing activities. This ASU is
effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2018 and requires
modified retrospective application. Early adoption is permitted. 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 will also need to disclose information
about the nature of the restrictions. The 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
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 are
currently evaluating the impact of the new guidance on our
consolidated financial statements and related
disclosures.
Other
accounting standards that have been issued by the 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
September 29, 2017, the adoption of other accounting standards had
no material impact on our financial positions, results of
operations, or cash flows.
NOTE 2 – EARNINGS PER SHARE
Basic
earnings per share is calculated by dividing net income or loss
available to common stockholders by the weighted average number of
common shares outstanding, and does not include the impact of any
potentially dilutive common stock equivalents. Diluted earnings per
share reflect the potential dilution of securities that could share
in our earnings through the conversion of common shares issuable
via outstanding stock options except where their inclusion would be
anti-dilutive. Total outstanding common stock equivalents at
September 29, 2017 and September 23, 2016, were 3,060,000 and
3,303,000, respectively.
Diluted
common shares outstanding were calculated using the treasury stock
method and are as follows:
|
|
|
|
|
|
|
|
Weighted average
number of common shares used in basic net income per common
share
|
60,623,514
|
62,009,514
|
60,620,938
|
63,048,377
|
Dilutive effects of
stock options
|
673,729
|
758,344
|
681,532
|
757,977
|
Weighted average
number of common shares used in diluted net income per common
share
|
61,297,243
|
62,767,858
|
61,302,470
|
63,806,354
|
NOTE 3 – ACCOUNT PURCHASE AGREEMENT & LINE OF CREDIT
FACILITY
In May
2016, we signed a new 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 million on September 29, 2017
and December 30, 2016. When the account 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, at September 29, 2017, we owed approximately
$569,000, and at December 30, 2016, there was approximately
$114,000 that was owed to us which was included in Other
receivables on our Consolidated Condensed Balance
Sheet.
The
current agreement bears interest at the Daily One Month London
Interbank Offered Rate plus 2.5% per annum. At September 29, 2017,
the effective interest rate was 3.73%. Interest is payable on the
actual amount advanced. Additional charges include an annual
facility fee equal to 0.50% of the facility threshold in place and
lockbox fees. As collateral for repayment of any and all
obligations, we granted Wells Fargo Bank, N.A. a security interest
in all of our property including, but not limited to, accounts
receivable, intangible assets, contract rights, deposit accounts,
and other such assets. Under our account purchase agreement, our
borrowing base is limited to 90% of acceptable accounts as defined
in the agreement, less the amount of outstanding letters of credit.
At September 29, 2017, the amount available to us under the Wells
Fargo agreement was approximately $87,000.
As of
September 29, 2017, we had a letter of credit with Wells Fargo for
approximately $6.0 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 6 – Workers’
Compensation Insurance and Reserves
.
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 September 29, 2017, and December 30,
2016, we were in compliance with this covenant.
NOTE 4 – ACQUISITION
On June
3, 2016, we purchased substantially all 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
(“Hancock”) from stores located in Little Rock,
Arkansas and Oklahoma City, Oklahoma. We acquired all of the assets
used in connection with the operation of the two staffing stores.
In addition, we assumed liabilities for future payments due under
the leases for the two stores, amounts owed on motor vehicles
acquired, and the amount due on their receivables factoring
line.
The
aggregate consideration paid for Hancock was approximately
$2,617,000, allocated as follows: (i) cash of $1,980,000; (ii) an
unsecured one-year holdback obligation of $220,000; and (iii)
assumed liabilities of approximately $417,000. As of September 29,
2017 the holdback obligation has not been released.
In
connection with the acquisition of Hancock, we identified and
recognized intangible assets of approximately $659,000 representing
customer relationships and employment agreements/non-compete
agreements. The customer relationships are being amortized on a
straight-line basis over their estimated life of four years and the
non-compete agreements are being amortized over their two-year
terms. Amortization expense for the thirteen and thirty-nine weeks
ended September 29, 2017, was approximately $56,000 and $167,000,
respectively, for these intangible assets. At September 29, 2017,
this net intangible asset balance was approximately
$364,000.
The
following table summarizes the fair values of the assets acquired
and liabilities assumed and recorded at the date of
acquisition:
Assets:
|
|
Current
assets
|
$
587,833
|
Fixed
assets
|
92,220
|
Intangible
assets
|
659,564
|
Goodwill
|
1,277,568
|
|
$
2,617,185
|
Liabilities:
|
|
Current
liabilities
|
417,185
|
Net purchase
price
|
$
2,200,000
|
The
following table summarizes the pro forma operations had the
entities been acquired at the beginning of 2016 in the Consolidated
Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
Revenue
|
$
26,703
|
$
71,314
|
|
|
|
Net income before
income tax
|
$
1,603
|
$
2,447
|
Income
tax
|
181
|
450
|
Net
income
|
$
1,422
|
$
1,997
|
NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
and other intangible assets are stated net of accumulated
amortization. The following table summarizes the goodwill and
intangible asset balances:
|
|
|
Goodwill
|
$
3,777,568
|
$
3,777,568
|
Intangible
assets
|
659,564
|
659,564
|
Accumulated
amortization
|
(296,048
)
|
(129,521
)
|
Goodwill and other
intangible assets, net
|
$
4,141,084
|
$
4,307,611
|
Amortization
expense for the thirteen and thirty-nine weeks ended September 29,
2017 was approximately $56,000 and $167,000, respectively.
Amortization expense for the thirteen and thirty-nine weeks ended
September 23, 2016 was approximately $63,000 and $74,000,
respectively.
NOTE 6 – WORKERS' COMPENSATION INSURANCE AND
RESERVES
On
April 1, 2014, we changed our workers’ compensation carrier
to ACE American Insurance Company (“ACE”) in all states
in which we operate other than Washington and North Dakota. The ACE
insurance 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 high deductible program, we are largely self-insured.
Per our contractual agreements with ACE, we must provide a
collateral deposit of $6.0 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. Generally, our liability
associated with claims in these jurisdictions is limited to the
payment of premiums. In the past, we also obtained full coverage in
the state of New York under a policy issued by the State Fund of
New York. Accordingly, our consolidated financial statements
reflect only the mandated workers’ compensation insurance
premium liability for workers’ compensation claims in these
jurisdictions.
From
April 1, 2012 to March 31, 2014, our workers’ compensation
carrier was Dallas National Insurance in all states in which we
operate other than Washington, North Dakota and New York. The
Dallas National coverage was a large deductible policy where we
have primary responsibility for claims under the policy. Dallas
National provided insurance for covered losses and expenses in
excess of $350,000 per incident. Per our contractual agreements
with Dallas National, we made payments into, and maintain a balance
of $1.8 million as a non-depleting deposit as collateral for our
self-insured claims. During this period, Dallas National arranged
with Companion Insurance (now Sussex Insurance) to underwrite
coverage in California and South Dakota. As a result of this
arrangement, Sussex Insurance continues to hold a collateral
deposit advanced by us of $215,000.
From
April 1, 2011 to March 31, 2012, our workers’ compensation
coverage was obtained through Zurich American Insurance Company
(“Zurich”). 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 operated other than Washington and North
Dakota.
From
May 13, 2008 to March 31, 2011, our workers’ compensation
coverage was obtained through AMS Staff Leasing II
(“AMS”) for coverage in all jurisdictions in which we
operated, other than 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 policies, 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 a deposit in the
amount of $500,000. At September 29, 2017, our deposit with AMS was
approximately $483,000.
For the
two-year period prior to May 13, 2008, our workers’
compensation coverage was obtained through policies issued by AIG.
At September 29, 2017, our risk pool deposit with AIG was
approximately $397,000.
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 September 29, 2017 and
December 30, 2016, we had net cash collateral deposits of
approximately $2.4 million and a letter of credit of approximately
$6.0 million, for a net total of approximately $8.4 million at
September 29, 2017. We placed an allowance of approximately
$500,000 on our cash collateral deposits to reserve for the
possibility that we will not recover all of our risk pool deposits
placed with our former workers’ compensation insurance
carrier, Freestone Insurance (formerly Dallas National Insurance
Company). See
Note 10 –
Commitments and Contingencies,
for additional information on
cash collateral provided to Freestone Insurance
Company.
Workers’
compensation expense for temporary workers 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, and premiums paid in monopolistic
jurisdictions. Workers’ compensation expense for our
temporary workers was approximately $900,000 and $2.4 million for
the thirteen and thirty-nine weeks ended September 29, 2017,
respectively. Workers’ compensation expense for our temporary
workers was approximately $1.1 million and $2.8 million for the
thirteen and thirty-nine weeks ended September 23, 2016,
respectively.
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 7 – STOCK BASED COMPENSATION
Employee Stock Incentive Plan:
Our 2008 Stock
Incentive Plan, which permitted the grant of up to 6.4 million
stock options, 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 shareholders approved
the
Command Center, Inc. 2016
Stock Incentive Plan
under which the Compensation Committee
is authorized to issue awards for up to 6.0 million shares over the
10 year life of the plan. Pursuant to awards under these plans,
there were 2,132,500 and 1,860,500 stock options vested at
September 29, 2017 and December 30, 2016,
respectively.
The
following table summarizes our stock options outstanding at
December 30, 2016 and changes during the period ended September 29,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 30, 2016
|
2,498,000
|
$
0.36
|
$
0.23
|
Granted
|
900,000
|
$
0.43
|
$
0.22
|
Forfeited
|
(10,000
)
|
$
0.67
|
$
0.38
|
Expired
|
(328,000
)
|
$
0.42
|
$
0.33
|
Outstanding
September 29, 2017
|
3,060,000
|
$
0.37
|
$
0.22
|
|
|
|
|
The
following table summarizes our non-vested stock options outstanding
at December 30, 2016, and changes during the period ended September
29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested December
30, 2016
|
637,500
|
$
0.40
|
$
0.27
|
Granted
|
900,000
|
$
0.43
|
$
0.22
|
Vested
|
(600,000
)
|
$
0.29
|
$
0.18
|
Forfeited
|
(10,000
)
|
$
0.67
|
$
0.38
|
Non-vested
September 29, 2017
|
927,500
|
$
0.50
|
$
0.26
|
The
following table summarizes information about our stock options
outstanding, and reflects the intrinsic value recalculated based on
the closing price of our common stock of $0.45 at September 29,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
3,060,000
|
$
0.37
|
6.48
|
$
797,375
|
Exercisable
|
2,132,500
|
$
0.32
|
5.65
|
$
380,000
|
|
|
|
Number of Shares Outstanding
|
Weighted Average Contractual Life (years)
|
Number of Shares Exercisable
|
Weighted Average Contractual Life
|
|
1,900,000
|
6.36
|
1,600,000
|
5.69
|
|
1,160,000
|
6.67
|
532,500
|
5.53
|
|
3,060,000
|
6.48
|
2,132,500
|
5.65
|
At
September 29, 2017, there was unrecognized share-based compensation
expense totaling approximately $160,000 relating to non-vested
options that will be recognized over the next 3.0
years.
NOTE 8 – STOCKHOLDERS’ EQUITY
Issuance of Common Stock:
In September, we issued
120,000 shares of common stock valued at $48,000 to members of our
Board of Directors as partial payment for their
services.
Stock Repurchase:
In September 2017, our Board of
Directors authorized a $5.0 million three-year repurchase plan of
our common stock. This plan replaces the previously announced plan,
which was put in place in April 2015. During the thirty-nine weeks
ended September 29, 2017, we purchased 134,100 shares of common
stock at an aggregate price of approximately $55,000 resulting in
an average price of $0.41 per share under the plan. These shares
were then retired. We have approximately $4.9 million remaining
under the plan. The table below summarizes our common stock
purchases during the thirteen weeks ended September 29,
2017.
|
|
|
Total number of shares purchased as part of publicly announced
plan
|
Approximate dollar value of shares that may yet be purchased under
the plan
|
July
(July 1, 2017 to July 28, 2017)
|
-
|
$
-
|
6,149,828
|
$
2,898,449
|
August
(July 29, 2017 to August 25, 2017)
|
-
|
$
-
|
6,149,828
|
$
2,898,449
|
September
(August 26, 2017 to September 29, 2017)
|
134,100
|
$
0.41
|
6,283,928
|
$
4,945,023
|
Total
|
134,100
|
|
|
|
NOTE 9 – INCOME TAX
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 generally
consists of net operating loss, accrued vacation, workers’
compensation claims liability, depreciation, bad debt reserve,
deferred rent, stock compensation, charitable contributions, AMT
credit, and other accruals.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Operating leases:
We presently lease office
space for all of our facilities. All of these facilities are leased
at market rates that vary in amount depending on location. Each
facility is between 1,000 and 5,000 square feet, depending on
location and market conditions.
Most of
our store leases have terms that extend over three to five years.
The majority of the leases have cancellation provisions that allow
us to cancel with 90 days' notice. Other leases have been in
existence long enough that the term has expired and we are
currently occupying the premises on month-to-month tenancies.
Minimum lease obligations for the next five fiscal years as of
September 29, 2017, are:
|
|
Year
|
|
2017 (3
months)
|
$
261,945
|
2018
|
858,929
|
2019
|
637,976
|
2020
|
346,845
|
2021
|
12,155
|
|
$
2,117,850
|
Lease
expense for the thirteen and thirty-nine weeks ended September 29,
2017 was approximately $366,000 and $1.1 million, respectively.
Lease expense for the thirteen and thirty-nine weeks ended
September 23, 2016 was approximately $382,000 and $1.1 million,
respectively.
Legal Proceedings:
From time to time, we are involved
in various legal proceedings. Except for the Freestone Insurance
Company liquidation (discussed in detail below), we believe the
outcome of these matters, even if determined adversely, will not
have a material adverse effect on our business, financial condition
or results of operations. There have been no material changes in
our legal proceedings since September 29, 2017.
Freestone Insurance Company Liquidation:
From April 1,
2012, through March 31, 2014, our workers’ compensation
insurance coverage was provided by Dallas National Insurance under
high deductible policies in which we are responsible for the first
$350,000 per incident. During this time period, Dallas National
changed its corporate name to Freestone Insurance Company. Under
the terms of the policies, because we are obligated to pay for the
costs of claims up to the deductible amount, we were required to
provide cash collateral of $900,000 per year, for a total of $1.8
million, as a non-depleting fund to secure our payment up to the
deductible amount. In January 2014, Freestone Insurance provided
written confirmation to us that it continued to hold $1.8 million
of Command Center funds as collateral and stated that an additional
$200,000 was held at another insurance provider for a total of $2.0
million. In April 2014, the State of Delaware placed Freestone
Insurance in receivership due to concerns about its financial
condition. On August 15, 2014, the receivership was converted to a
liquidation proceeding. The receiver then distributed pending
individual claims for workers’ compensation benefits to the
respective state guaranty funds for administration. In many cases,
the state guaranty funds have made payments directly to the
claimants. In other situations, we have continued to pay claims
that are below the deductible level. We are not aware of any
pending claims from this time period that exceed or are likely to
exceed our deductible.
From
about July 1, 2008 until April 1, 2011, in most states our
workers’ compensation coverage was provided under an
agreement with AMS Staff Leasing II, through a master policy with
Dallas National. During this time period, we deposited
approximately $500,000 with an affiliate of Dallas National for
collateral related to the coverage through AMS Staff Leasing II.
Claims that remain open from this time period have also been
distributed by the receiver to the state guaranty funds. In one
instance, the State of Minnesota has denied liability for payment
of a workers’ compensation claim that arose in 2010 and is in
excess of our deductible. In the first quarter of 2016, we settled
the individual workers’ compensation case and we ultimately
withdrew our legal challenge to the state’s denial of
liability.
On July
5, 2016, the receiver filed the First Accounting for the period
April 28, 2014 through December 31, 2015, with the Delaware Court
of Chancery. The First Accounting does not clarify the issues with
respect to the collateral claims, priorities and return of
collateral. In the accounting, the receiver reports total assets
consisting of cash and cash equivalents of $87.7 million as of
December 31, 2015.
In late
2015, we filed timely proofs of claim with the receiver. One proof
of claim is filed as a priority claim seeking return of the full
amount of our collateral deposits. The other proof of claim is a
general claim covering non-collateral items. We believe that our
claim to the return of our collateral is a priority claim in the
liquidation proceeding and that our collateral should be returned
to us. However, if it is ultimately determined that our claim is
not a priority claim, or if there are insufficient assets in the
liquidation to satisfy the priority claims, we may not receive any
or all of our collateral. During the second quarter of 2015 and the
first quarter of 2016 we recorded reserves of $250,000 on the
deposit balance, for a total reserve of $500,000. The current net
deposit of $1.8 million is recorded as workers’ compensation
risk pool deposit. We review these deposits at each balance sheet
date, and at September 29, 2017, no additional reserve was
recognized because any potential impairment was not probable and
estimable.
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 has acknowledged receiving only $500,000 of
our collateral. Of the $500,000 acknowledged, the receiver proposes
to return only approximately $6,000 to us. There was no comment or
information provided in the petition regarding the additional $1.8
million in collateral that we provided to Freestone via its agent,
High Point Risk Services, for which Freestone previously confirmed
receipt in a letter to us in January 2014. Furthermore, the
receiver has proposed similar severe reductions to the other
collateral depositors. Although the receiver acknowledged holding
$87.7 million in cash and cash equivalents as of December 31, 2015,
the receiver proposed to pay only approximately $1.1 million in
total for return of collateral, to be divided among all collateral
depositors in differing proportions.
Our
initial assessment of the receiver’s petition is that the
plan proposed by the receiver is incomplete, factually incorrect
and legally unsupportable. Recently, with additional documentation
received directly from High Point Risk Services, we have
reconfirmed that High Point transferred at least $1.8 million of
our collateral to Freestone. In response to questions asked and
additional information sought from the receiver by us and by
others, the receiver through his legal counsel has now acknowledged
that the May 2017 petition may not accurately account for all
collateral. As a result, the receiver’s counsel has stated
that they will be withdrawing the petition and reformulating the
collateral analysis and proposal. We are aggressively proceeding
with our efforts to advance our own case for payment of our
collateral claims in full. We and our counsel, in conjunction and
coordination with counsel for other potentially aggrieved
collateral depositors, are working diligently in order to maximize
our recovery of collateral deposits previously made to Freestone
under written policy agreements. To be clear, the receiver does not
have the final say in how this matter is decided. The Chancery
Court in Delaware makes that decision after hearing evidence and
arguments from all engaged parties.
Because
we are still in the very early stages of this adversarial
litigation, we are unable provide an estimate as to when the court
may ultimately rule on the collateral issues. Presently, we
anticipate that it will take several months for the receiver to
rewrite its collateral proposal and file a new petition with the
court. We are similarly unable to provide a projection as to how
the court may eventually rule or what amount of collateral Command
Center may finally receive. If the court were to ultimately award
to us an amount significantly less than the full amount of our
paid-in collateral, that result would have a material adverse
effect on our financial condition.
NOTE 11 – SUBSEQUENT EVENTS
On
November 11, 2017, our Board approved a 1-for-12 reverse stock
split with an anticipated effective date of December 7, 2017. This
reverse split becoming effective
on that date
is
contingent upon us filing Articles of Amendment with the state of
Washington and receiving approval from the Financial Industry
Regulatory Authority. As of November 13, 2017, these contingencies
have not been met. If this reverse split becomes effective, it will
reduce future common and preferred stock amounts and stock options,
and increase common stock per share amounts, by a factor of twelve.
Our Board approved this reverse split in order for us to meet the
minimum share price requirement in connection with our pending
application for listing on the NASDAQ Capital Market. However,
there can be no assurance that our listing application will be
approved by NASDAQ.