HIREQUEST, INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
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FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 25, 2009
OR
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
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Commission
file number:
000-53088
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COMMAND
CENTER, INC
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(Exact
Name of Registrant as Specified in its
Charter)
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Washington
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91-2079472
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(State
of other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3773
West Fifth Ave
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Post
Falls, Idaho
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83854
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(208)
773-7450
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(Registrant’s
Telephone Number, including Area Code)
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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
x
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
x
Indicate
by checkmark 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
x
No
¨
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files). Yes
¨
No
¨
Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“Accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act (Check one):
Large
Accelerated Filer
o
Accelerated
Filer
o
Non-Accelerated Filer
o
Smaller Reporting
Company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o
No
x
State 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, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter:
$2,720,000 as of June 26, 2009
The
number of shares of the Registrant’s Common Stock outstanding as of April 9,
2010 was: 48,111,035
Documents
Incorporated by Reference: None
COMMAND
CENTER, INC.
FORM
10-K
December
25, 2009
TABLE
OF CONTENTS
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PART
I
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3
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ITEM
1.
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BUSINESS
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3
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ITEM1A.
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RISK
FACTORS
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7
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ITEM1B.
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UNRESOLVED
STAFF COMMENTS
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13
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ITEM
2.
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DESCRIPTION
OF PROPERTIES
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13
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ITEM
3.
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LEGAL
PROCEEDINGS
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13
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ITEM
4.
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RESERVED
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14
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PART
II
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15
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ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
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MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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15
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ITEM
6.
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SELECTED
FINANCIAL DATA
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16
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
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AND
RESULTS OF OPERATIONS
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16
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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26
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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27
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
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ACCOUNTING
AND FINANCIAL DISCLOSURES
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45
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ITEM
9A(T).
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CONTROLS
AND PROCEDURES
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45
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ITEM
9B.
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OTHER
INFORMATION
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47
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PART
III
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47
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
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47
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ITEM
11.
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EXECUTIVE
COMPENSATION
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50
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
52
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ITEM
13
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
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DIRECTOR
INDEPENDENCE
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53
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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53
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ITEM
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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54
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SIGNATURES
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55
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2
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. Factors which could affect our financial
results are described in Item 7 of Part II of this Form 10-K. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. 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. 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
report.
“CCNI,”
the “Company,” “we,” “us,” “our,” and similar references refer to Command
Center, Inc.
Introduction
and General Background
We were
organized as Command Staffing LLC on December 26, 2002. We commenced operations
in 2003 as a franchisor of on-demand labor businesses. On November 9, 2005, 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
stores, were acquired by Temporary Financial Services, Inc., a public company.
The transaction was accounted for as if Command Staffing LLC was the accounting
acquirer. On November 16, 2005, we changed our name to Command Center,
Inc.
Prior to
April 2006, we generated revenues primarily from franchise fees. On May 12,
2006, we acquired 48 on-demand labor stores from certain former franchisees, and
shifted our business focus from franchisor to operator. On June 30,
2006, we acquired an additional nine on-demand labor stores from our
franchisees. We also opened 20 additional stores during the year (including
eight new stores opened to replace the franchised locations we bought out and
closed in the May 12 transaction). All of our former franchised stores have
either been acquired or ceased operation and we currently generate all of our
revenue from on-demand labor store operations and related
activities.
As a
result of the economic slowdown, in 2008, we evaluated our stores and locations
to determine how best to focus our resources. As a result of our evaluation, we
closed a number of stores and consolidated operations in some areas with
multiple locations. We currently own and operate 50 on-demand labor stores
located in 20 states.
Our
principal executive offices are located at 3773 West Fifth Avenue, Post Falls,
Idaho 83854, and our telephone number is (208) 773-7450. We maintain an
internet website at
www.commandonline.com
. The
information contained on our website is not included as a part of, or
incorporated by reference into, this annual report.
Industry
Overview
The
on-demand labor industry grew out of a desire on the part of businesses to have
an agile staffing plan. Many businesses operate in a cyclical environment and
staffing for peak production periods meant overstaffing in slower times.
Companies also sought a way to temporarily replace full-time employees when
absent due to illness, vacation, or unplanned termination. On-demand labor
offers employers the opportunity to immediately respond to changes in staffing
needs, reduce the costs associated with recruitment and interviewing, eliminate
unemployment and workers’ compensation exposure, and draw from a larger
employment pool of tried and tested temporary staff members.
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 background check requirements vary
among industries and also vary among employers within the same industry. We
operate primarily within the short-term, unskilled and semi-skilled segments of
the on-demand labor industry. We oversee the operation of multiple locations
from a single corporate office. We endeavor to customize our services according
to the unique opportunities and assets presented by each of our locations while
leveraging our overall size. This approach reduces our overhead costs, improves
economies of scale, establishes procedural uniformity and internal controls, and
creates a predictable internal environment that our temporary staff members
(referred to as Field Team Members) can look forward to and find comfort
in.
3
Business
Our
Vision:
Our vision is to be the undisputed best in our industry from the
perspective of our clients, our Field Team Members, our internal staff members,
our shareholders, and our competitors. We strive to achieve this daily in every
decision made at every level of the organization. We empower our store locations
to make decisions that demonstrate our commitment to all stakeholders in a
meaningful way.
Our On-demand
Labor Store Operations:
We are building a national network of on-demand
labor stores. We currently operate 50 on-demand labor stores serving thousands
of customers and employing tens of thousands of Field Team Members. Our stores
are located in 20 states, with approximately 37 stores located in urban
locations and 13 stores located in suburban areas. Our stores are typically
located in proximity to concentrated commercial and industrial areas but we also
plan our locations with the Field Team Member’s needs in mind. Our locations are
easily accessible to public transportation and other services that are important
to Field Team Members. We have developed a store demographic model that is used
to identify and quantify future possible store locations for store
expansion.
We have
currently placed a hold on new store expansion and have focused on hardening our
existing infrastructure and service delivery. We have taken the opportunity that
this economic downturn has afforded us to focus on the fundamentals of our
company: our product quality, our customer service, our sales process, and our
people. This position us well for increased profitability as the economy
improves. Our industry is a leading indicator of the status of the economy. We
have recently been experiencing an increase in sales and we have early
indications that our planning efforts are improving same store
performance.
In 2009,
we closed seven under-performing store locations to allow our team to focus
specifically on achieving greater profitability at stores that were meeting or
exceeding our plan. We will carefully balance our store expansion goals against
prudent return on investment analysis but we are seeing several indications of a
strengthening economy and look forward to continuing with our plan to build a
national network of on-demand labor staffing stores.
We manage
our field operations using in-store personnel, store managers, area managers,
and corporate management personnel. Where appropriate, we also include business
development specialists to help drive business to our stores. Our compensation
plans for store managers, area managers, and business development specialists
have been designed to aid in securing and retaining the qualified personnel
needed to meet our business, financial and growth objectives. Our personnel
practices are designed to support our need to attract, screen, hire, train,
support and retain qualified personnel at all levels of our
business.
Our Temporary
Staff (Field Team Members):
Our Field Team Members are our product and
represent a key asset. Our success is based on our ability to attract, train,
motivate, and reward this important constituent. We have invested in many
proprietary programs designed to create a long term relationship with
top-performing Field Team Members. Some of these programs include health
insurance coverage, bonus programs, safety rewards, longevity programs, training
programs, and career services. As a matter of corporate policy, we know our
Field Team Members by name and show appreciation for the value they bring to our
organization and to our client’s workplace.
Approximately
25,000 W-2 forms were issued in 2009. The pool of available Field Team Members
is sufficient and diverse enough to meet current client needs. We continue to
seek additional Field Team Members through Internet postings, newspaper
advertisement, printed flyers, store displays, career fairs, and
word-of-mouth.
Our
Customers:
In 2009 we serviced 3,040 clients in a variety of industries
that are considered small to medium sized companies. Our ten largest customers
accounted for approximately 23% of our revenue for the fifty-two weeks ended
December 25, 2009. The top five industries we serve are manufacturing, services,
construction, retail, and wholesale trades.
Our Marketing
Strategy:
We recognize that our clients are too busy to have time taken
by a traditional sales person, but rather are looking for a consultant that
provides smart solutions to their current challenge. We have developed our own
unique marketing approach to fit this situation. Our sales process starts by
learning about our prospects. We facilitate conversations with our prospects,
which educates us on their staffing challenges and helps the prospect articulate
their desired outcome. Together, we create an action plan that draws on
Command’s core competencies to resolve the need for the prospect. Once we have
resolved one need, we consistently strive to meet future needs and what started
as a business prospect becomes a repeat client.
4
Not only
is it important that the sales activities follow our Command sales process, it
is also important to ensure that the number of sales activities our sales
organization performs is consistent with our growth targets. Therefore we have
included an accountability component as one of the key metrics of our Command
sales process. We completed the training and implementation of our Command sales
process to our Command sales organization in early 2009, and we are seeing
positive results from this program.
As we
develop a national network of on-demand labor stores we are finding that we
serve our existing customers from multiple stores, across multiple cities, and
in a lot of cases across multiple states. In 2010, we will be focused on
building national accounts and building new store locations around economically
feasible national account needs.
Our
Growth:
In implementing our growth strategy, we will face several
challenges, including meeting our continuing need for talented and dedicated
operations personnel, working capital, managing credit risk and holding worker’s
compensation insurance costs to targeted levels.
As a
developer, owner and operator of on-demand labor stores, we require significant
working capital because we typically pay our temporary personnel on the same day
they perform the services, but bill our customers on a weekly or bi-weekly
basis. As a result, we must maintain sufficient working capital through
borrowing arrangements or other sources, to enable us to continue paying our
temporary workers until we invoice and collect from our customers.
The delay
between payment of compensation to our temporary workers and collection of
receivables from our customers requires that we manage the related credit risk.
We have developed strong credit screening procedures and believe that we have
effectively mitigated our risk exposure. Historically, our bad debt write-offs
are less than 1% of total sales.
Our Workers’
Compensation Coverage:
We are required to provide our temporary and
permanent workers with workers’ compensation insurance. Currently, we maintain
large deductible workers compensation insurance coverage through AMS Staff
Leasing II (“AMS”) in 18 of the 20 states in which we operate. The AMS policy
covers the premium year from May 13, 2009 through May 12, 2010. While we have
primary responsibility for all claims, our insurance coverage provides
reimbursement for covered losses and expenses in excess of our deductible. For
workers’ compensation claims arising in the states where coverage is provided
though AMS, our workers’ compensation policy covers any claim in excess of
$250,000 on a “per occurrence” basis. This results in our being substantially
self-insured. Of the 18 states in which we are covered through AMS, the policy
is underwritten by Dallas National Insurance Company and BancInsure in
California and South Dakota and underwriting is though Dallas National in the
remaining 16 states. During 2009, coverage was provided in California and South
Dakota through Arch Insurance Company (Arch) for the policy year from May 13,
2008 through June 26, 2009. Beginning on June 27, 2009 and continuing thought
December 31, 2009, coverage for California and South Dakota was provided through
TSE PEO, Inc. In all of the other non-monopolistic states, our workers’
compensation coverage was obtained through AMS and Dallas National for the
entire year.
For
workers’ compensation claims originating in Washington and North Dakota (our
“monopolistic jurisdictions”) we pay workers’ compensation insurance premiums
and obtain full coverage under government administered programs. We are not the
primary obligor on claims in these jurisdictions.
Our Safety
Program:
To protect our workforce and help control workers’ compensation
insurance rates, we have implemented a company-wide safety program aimed at
increasing awareness of safety issues. Safety training is accomplished through
bulletin boards, newsletters, training meetings, videos, and employee manuals.
Managers conduct unannounced job site visits to assure that customers utilizing
our temporary staff are doing so in a safe environment. We maintain a safety
points incentive program to reward our Field Team Members for working accident
free. We also encourage our workers to report unsafe working
conditions.
Our
Seasonality:
The short-term manual
labor sector of the on-demand labor business is subject to seasonal fluctuation.
Many of the jobs filled by our temporary staff are outdoor jobs that are
generally performed during the warmer months of the year. As a result, activity
increases in the spring and continues at higher levels through the summer and
then begins to taper off during the fall and through the winter. Seasonal
fluctuations may be less in the western and southwestern parts of the United
States where many of our stores are located. These fluctuations in seasonal
business will affect financial performance from period to period.
Our Competition:
The short-term manual labor sector of the on-demand labor industry is
highly competitive with low barriers to entry. Many of the companies operating
in this sector are small local or regional operators with five or fewer
locations. Within their markets, these small local or regional firms compete
with us for the available business. The primary competitive factors in our
market segment include price, service and the ability to provide the requested
workers when needed. Secondary factors include worker quality and performance
standards, efficiency, ability to meet the business-to-business vendor
requirements for national accounts, name recognition and established reputation.
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
higher. Lack of working capital can be a significant impediment to growth for
small local and regional on-demand labor providers.
5
As a
result of the current recession, many of our smaller local competitors have
adopted a more aggressive pricing policy to attract business. The lower margins
our competitors are willing to accept has caused some of our customers to seek
price reductions from us under threat of moving their business. This has
affected our margins in the last twelve months. Our product differentiation does
offset this trend but at the same time, we are also taking steps to reduce our
cost of sales in order to maintain margins at targeted levels.
We also
face competition from a small number of larger, better capitalized operators.
Our larger competitors include True Blue, Inc. (doing business as “Labor
Ready”), Adecco, Kelly Services, Inc., Manpower, Inc., Spherion Corp. and Volt
Information Services, Inc. Labor Ready operates primarily in our markets. The
other large competitors have divisions that operate in the light industrial or
construction segments of our industry but are primarily focused more on skilled
trades and professional placements. The presence of these larger competitors in
our markets may provide significant pricing pressure and could affect our
ability to price our on-demand labor services at profitable levels.
Our
largest competitor in the short-term manual labor sector of the on-demand labor
industry is Labor Ready with approximately 700 branch offices in all 50 of the
United States, Puerto Rico, and Canada.
In
addition to the large competitors listed above, we also face competition from
smaller regional firms that are much like us in terms of size and market focus.
As we attempt to grow, we will face increasing competition from regional and
national firms that are already established in the areas we have targeted for
expansion.
Government
Regulation:
We are subject to a
number of government regulations, including those pertaining to wage and hours
laws, equal opportunity, workplace safety, maintenance of workers’ compensation
coverage for employees, and legal work authorization, and immigration laws. With
national attention on immigration and related security issues, we anticipate
increased regulatory effect on our operations. In addition to the federal laws,
many states have adopted and continue to adopt laws and regulations relating to
verification of work eligibility. As a matter of corporate policy, work
eligibility for all new Command Center employees is verified through the use of
the E-Verify System maintained by the U.S. department of Homeland
Security.
Our Trademarks
and Trade Names; Intellectual Property:
The Company has registered
“Command”, “Command Center,” “Command Staffing”, “Command Labor”, “Apply Today,
Daily Pay,” “A Different Kind of Labor Place” and “Labor Commander” as service
marks with the U.S. Patent and Trademark Office. Other applications for
registration are pending. Several registrations have also been granted in
Australia, Canada, and the European Economic Community.
We have
in place software systems to handle most aspects of our operations, including
temporary staff dispatch activities, invoicing, accounts receivable, accounts
payable and payroll. Our software systems also provide internal control over our
operations, as well as producing internal management reports necessary to track
the financial performance of individual stores. We utilize a dashboard-type
system to provide management with critical information, and we refine our
systems and processes by focusing on what actually works in the real world. We
take best practices information from our higher performing stores and propagate
this information across all operating groups to produce consistent execution and
improvements in company-wide performance averages.
Our Real
Property:
At year end, we owned a beneficial interest in one parcel of
real estate located in Yuma, Arizona that houses one of our on-demand labor
locations. Subsequently, on February 2, 2010, we closed escrow on the sale and
leaseback of that property. The sales price was $150,000.
We
presently lease office space for our corporate headquarters in Post Falls,
Idaho. We pay $10,000 per month for use of the building. The lease on this
facility expires on December 31, 2010.
We also
lease the facilities of all of our store locations (except for the Yuma location
until February, 2010). All of these facilities are leased at market rates that
vary depending on location. Each store is between 1,000 and 5,000 square feet,
depending on location and market conditions and all current facilities are
considered adequate for their intended uses.
We
believe that our corporate offices and each of the store locations are adequate
for our current needs. As the economy improves and we begin to expand, we will
lease additional locations as needed.
6
Our
Employees:
We currently employ 21 full time personnel at our headquarters
office in Post Falls, Idaho. The number of employees at the corporate
headquarters is not expected to increase significantly over the next year. We
also employ approximately 133 personnel in our field operations staff located at
the various on-demand labor stores, and area and regional operations centers. We
also employed approximately 25,000 temporary workers, primarily in short
duration temporary positions, during 2009. As our business grows, the number of
corporate, internal staff and temporary workers that we employ will also
grow.
Available
Information:
We are subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, file reports and
other information with the SEC. Our reports and other information filed pursuant
to the Securities Exchange Act of 1934 may be inspected and copied at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549. Copies of such material can also be obtained from the Public
Reference Room of the SEC at J100 F Street, N.E., Washington, D.C. 20549, at
prescribed rates. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a Web site that contains reports and other information regarding
registrants that file electronically with the SEC. The address of the SEC’s Web
site is
http://www.sec.gov
.
Our
internet address is
http://www.commandonline.com
.
An
investment in our common stock is speculative and involves a high degree of
risk. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties may also adversely impair our business
operations or affect the market price of our common stock. If any of the events
described in the risk factors below actually occur, our business, financial
condition or results of operations could suffer significantly. In such case, the
value of your investment could decline and you may lose all or part of the money
you paid to buy our common stock.
Business
Risks
We have a history of net losses, and
we anticipate additional losses.
We incurred net losses in each fiscal
year since our inception other than the fiscal year ended December 31, 2005. For
the fiscal year ended December 28, 2008, we incurred a net loss of
approximately $17.62 million including an $11.8 million non-cash charge from
impairment of goodwill and for the fiscal year ended December 26, 2009, we
incurred a net loss of approximately $5.96 million. Our losses have
resulted primarily from the costs of consolidation of the franchisees, time
needed to change the culture of our former franchisees from independent
operators to a centralized command and control structure, from the scale of our
corporate infrastructure, from the non-cash charge for impairment of goodwill
and, more recently, from the current recessionary economic conditions. We have
focused our efforts to date on building a support structure able to meet the
needs of 100 or more stores. We currently operate 50 stores in 20 states and the
revenue flow from our existing base of operations has not been sufficient to
fully offset the corporate infrastructure costs. We may continue to incur
additional operating losses through fiscal 2010. We cannot assure you that our
revenue will increase or that we will be profitable in any future
period.
The current economic conditions have
significantly reduced the demand for temporary personnel which in turn has
substantially decreased our revenues.
Demand for our services has been
significantly decreased by the recessionary downturn in economic activity in the
United States. As economic activity slows, many of our customers reduce their
use of temporary employees before laying off regular employees. For the fiscal
year ending December 25, 2009, our revenues were 35% less than for the 2008
fiscal year. This decline is largely the result of the current economic
conditions. There can be no assurance that we will not continue to experience
further revenue declines.
The decline in revenues has further
weakened our financial condition and may continue to do so.
Further
deterioration of general economic conditions can be expected to have an adverse
material effect on our business, financial condition and results of operations.
The decline in revenues that we have experienced may result in the continuation
or even acceleration of our losses and our negative cash flow, may limit or even
eliminate our ability to obtain needed capital and financing, and may
threaten our viability
and ability to continue as a going concern potentially further reducing the
value of our common stock. We have closed many underperforming offices, reducing
the number of branches from 57 as of December 28, 2008 to 50 as of December 25,
2009.
7
We will require significant
additional working capital to implement our current and future business
plans.
We will require more working capital to fund customer accounts
receivable to continue to expand our operations. We may require more capital in
2010 to meet our operating expenses and make timely payments on our debts, and
refine and improve the efficiency of our business systems and processes. In
future years, we will need more capital to increase our marketing efforts and
expand our network of stores through acquisition and opening of new stores. We
cannot assure that such additional capital will be available when we need it on
terms acceptable to us, or at all. If we are unsuccessful in securing needed
capital in the future, our business may be materially and adversely affected and
the viability of our business operations may be threatened. Furthermore, the
sale of additional equity or debt securities may result in dilution to existing
shareholders, and incurring debt may hinder our operational flexibility. If
sufficient additional funds are not available, we may be required to delay,
reduce the scope of or eliminate material parts of our business
strategy.
We were not in compliance with the
financial covenants of our credit facility.
Our credit facility is
collateralized by eligible accounts receivable, which are generally defined to
include accounts that are not more than sixty days past due. Under this facility
in place at fiscal year end, our lender advanced up to 85% of amounts invoiced
for eligible receivables. This credit facility contained strict financial
covenants, which were formulated and initially agreed to under the more
favorable economic conditions prevailing in 2006, included, among other things,
the following requirements: (i) that we maintain a working capital ratio of 1:1;
(ii) that we maintain positive cash flow; (iii) that we maintain a tangible net
worth of $3,500,000; and (iv) that we achieve operating results within a range
of projected earnings before interest, taxes, depreciation and amortization (the
EBITDA covenant). As of December 25, 2009 we were not in compliance with the
cash flow, tangible net worth and EBITDA covenants. The balance due to our
lender at December 25, 2009, was $2,907,521. In connection with this credit
facility, our lender has a lien on all of our assets. If we do not comply with
the covenants our lender could terminate our credit facility. We are not in a
position to operate without a source of accounts receivable financing. In such
circumstances, we could be required to seek other or additional sources of
capital to satisfy our liquidity needs. We cannot assure that other sources of
financing would be available at all or on terms that we consider to be
commercially reasonable. Subsequent to December 25, 2009, as discussed in Item 6
and Note 7, we renewed our credit arrangement for a period of two years under
modified terms which, among other things, eliminate the financial
covenants.
Our ability to operate as a going
concern is in doubt
. The audit opinion and notes that accompany our
financial statements for the year ended December 25, 2009, disclose a ‘going
concern’ qualification to our ability to continue in business. The financial
statements for the period then ended have been prepared under the assumption
that we will continue as a going concern. Such assumption contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in the financial statements for the year ended December
25, 2009, we incurred losses and negative cash flows from operating activities
for the year then ended, and at December 25, 2009, did not have sufficient cash
reserves to cover normal operating expenditures for the following 12 months. We
also had negative working capital of $2,566,877 million. These factors
raise substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern.
Our
continuation as a going concern is dependent upon our ability to generate
sufficient cash flow to meet our obligations on a timely basis, to obtain
additional financing as may be required, or ultimately to attain profitability.
Potential sources of cash, or relief of demand for cash, include additional
external debt, renegotiation of current liabilities to long-term extensions, the
sale of shares of our stock the return of collateral in excess of that we
believe required by our workers compensation careers, or alternative methods
such as mergers or sale of our assets. No assurances can be given, however, that
we will be able to obtain any of these potential sources of cash or reduced
demand for cash. We currently require additional cash funding from outside
sources to sustain existing operations and to meet current obligations and
ongoing capital requirements. To assure our continuing operations, we will need
to raise additional funds through debt or identified equity sources in
2010.
Our historical financial information
is of limited utility as a basis for your evaluation of our business.
We
were incorporated in December 2002, began operations in 2003, and operated as a
franchisor until April, 2006, when we changed our business model to operator of
on-demand labor stores. Our financial statements for periods prior to April 1,
2006, are not comparable to our financial statements for later periods. As a
result, we have a limited operating history and limited financial results that
you can use to evaluate our business and prospects. Although we previously
experienced significant growth, during the fiscal years ending December 26, 2008
and December 25, 2009, we closed 28 and 7 underperforming offices, respectively.
Because we have limited historical financial data upon which to base planned
operating expenses and forecast operating results, and also because of the
uncertainties associated with the current national economic conditions, we
cannot be certain that our revenue will be sufficient to achieve or maintain
profitability on a quarterly or annual basis. You must consider our prospects in
light of the risks, expenses and difficulties we face as an early stage company
with a limited operating history.
Changes in our business model and
strategy may be difficult to manage.
During 2006, we changed our business
model from franchisor to on-demand labor store operator, acquired 57 on-demand
labor stores and opened an additional 20 stores. This shift in focus and rapid
growth required additional personnel, software capabilities, and infrastructure.
With the shift in the overall direction of the economy, during 2008, we closed
28 underperforming stores, and an additional 7 were closed in 2009. If
management is unable to successfully manage these significant changes, our
business, financial condition and results of operations could be negatively
affected.
8
We have a limited operating history
under our new business model.
We have been operating under our new
business model for less than four years. In light of our limited operating
experience, we have not proven the essential elements of stabilized long-term
operations and we cannot assure that we will be successful in achieving such
operations. Moreover, we have not demonstrated that our business can be operated
on a profitable basis. Until we establish and maintain profitable operations, we
cannot assure you that we can make a profit on a long-term basis.
If our goodwill is further impaired,
we will record an additional non-cash charge to our results of operations and
the amount of the charge may be material.
In 2005 and 2006, we booked a
substantial amount of goodwill resulting from our acquisitions, including the
acquisitions of Harborview Software in 2005 and 57 on-demand labor stores in
2006. At least annually, we evaluate this goodwill for impairment based on the
fair value of each reporting unit, as required by generally accepted accounting
principles in the United States (GAAP). In the fifty-two weeks ended December
26, 2008, we took an $11.8 million non-cash charge for impairment of goodwill.
For the fiscal year 2009, we did not take an additional non-cash goodwill
impairment charge. Following these non-cash charges, goodwill from the 2005 and
2006 acquisitions totaling $2.5 million remains. This estimated fair value 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 the market capitalization of our
Company. We may in the future need to further reduce the amount of the remaining
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.
Loss of key personnel could
negatively affect our business.
The loss of any key executive could have
a material adverse effect on our business, financial condition, and results of
operations. Our future performance also depends on our ability to identify,
recruit, motivate, and retain key management personnel including store managers,
area vice presidents, and other 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.
Our inability to attract, develop
and retain qualified store managers may negatively affect our business.
We rely significantly on the performance and productivity of our store managers.
Each store manager has primary responsibility for managing the operations of the
individual on-demand labor store, including recruiting workers, daily dispatch
of personnel, and collection of accounts receivable. In addition, each store
manager has responsibility for customer service. The available pool of qualified
candidates as replacements for existing positions or for positions with new
on-demand labor stores is limited. To combat a typically high turnover rate for
store managers in the on-demand labor industry, we have developed and continue
to develop and refine training and compensation plans directed at employee
retention. There can be no assurance that our training and compensation plans
will reduce turnover in this position.
Our inability to attract, develop
and retain qualified business development specialists will negatively affect our
business.
In 2010, we will be relying on our branch managers and our
staff of business development specialists to help drive new business to our
growing number of stores. The available pool of qualified candidates for these
sales positions is limited. If our sales efforts are not successful, our
operating results will suffer.
Increased employee expenses could
adversely affect our operations.
We are required to comply with all
applicable federal and state laws and regulations relating to employment,
including occupational safety and health provisions, wage and hour requirements,
employment insurance and laws relating to equal opportunity employment. Costs
and expenses related to these requirements are a significant operating expense
and may increase as a result of, among other things, changes in federal or state
laws or regulations requiring employers to provide specified benefits to
employees (such as medical 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 will have a material adverse effect on our business, financial condition,
and results of operations.
9
If we do not manage our workers’
compensation claims history well increased premiums could negatively affect
operating results.
We maintain workers’ compensation insurance as
required by state laws. Workers’ compensation expenses and the related liability
accrual are based on our actual claims experience. We maintain a ‘large
deductible’ workers’ compensation insurance policy with deductible limits of
$250,000 per occurrence. As a result, we are substantially self insured. Our
management training and safety programs attempt to minimize both the incidence
and severity of workers’ compensation claims, but a large number of claims or a
small number of significant claims could require payment of substantial
benefits. In those states where private insurance is not allowed or not
available, we purchase our insurance through state workers’ compensation funds
and our liability in those monopolistic states is limited to payment of the
insurance premiums. We can provide no assurance that we will be able to
successfully limit the incidence and severity of our workers’ compensation
claims or that our insurance premiums and costs will not increase substantially.
Higher costs for workers’ compensation coverage, if incurred, will have a
material adverse effect on our business, financial condition, and results of
operations.
We face competition from companies
that have greater resources than we do and we may not be able to effectively
compete against these companies.
The temporary services industry is
highly fragmented and highly competitive, with limited barriers to entry. A
large percentage of on-demand labor companies are local operations with fewer
than five stores. Within local or regional markets, these companies actively
compete with us for customers and temporary personnel. There are also 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 with the downturn in the
national economy, pricing pressure is increasing. We expect that the level of
competition will remain high and increase in the future. Competition,
particularly from companies with greater financial and marketing resources than
ours, could have a material adverse effect on our business, financial condition,
and results of operations. There also is 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.
We may not be able to increase
customer pricing to offset increased costs, and may lose volume as a result of
price increases we are able to implement.
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 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.
Failure to adequately back-up, store
and protect electronic information systems could negatively affect future
operations.
Our business depends on our ability to store, retrieve,
process, and manage significant amounts of information. Interruption, impairment
of data integrity, loss of stored data, breakdown or malfunction of our
information processing systems or other events could have a material adverse
effect on our reputation as well as our business, financial condition, and
results of operations. Breakdowns of information systems may be caused by
telecommunications failures, data conversion difficulties, undetected data input
and transfer errors, unauthorized access, viruses, natural disasters, electrical
power disruptions, and other similar occurrences which may be beyond our
control. Our failure to establish adequate internal controls and disaster
recovery plans could negatively affect operations.
We may be held responsible for the
actions of our customers as well as for the actions of our temporary
personnel.
Because we employ and place people in our customers’
workplaces, we are at risk for actions taken by customers with respect to
temporary personnel (such as claims of discrimination and harassment, violations
of occupational, health and safety, or wage and hour laws and regulations), and
for actions taken by temporary personnel (such as claims relating to immigration
status, misappropriation of funds or property, violation of environmental laws,
or criminal activity). Significant instances of these types of issues will
impact customer perception of our Company 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 temporary personnel.
If we are found liable for the actions or omissions of our temporary personnel
or our customers, and adequate insurance coverage is not available, our
business, financial condition and results of operations could be materially and
adversely affected.
We may face potential undisclosed
liabilities associated with acquisitions.
Although we investigate
companies that we acquire, we may fail or be unable to discover liabilities that
arose prior to our acquisition of the business for which we may be responsible.
Such undisclosed liabilities may include, among other things, uninsured workers’
compensation costs, uninsured liabilities relating to the employment of
temporary personnel and/or acts, errors or omissions of temporary personnel
(including liabilities arising from non-compliance with environmental laws),
unpaid payroll tax liabilities, and other liabilities. If we encounter any such
undiscovered liabilities, they could negatively affect our operating
results.
10
We may face claims for payroll taxes
incurred by the franchisees for franchisee operations prior to the dates that we
acquired the franchisee assets.
Under theories of successor liability, we
may be liable for a portion of the payroll tax liabilities incurred by
franchisees prior to the dates when we acquired the franchisee operating assets.
We have been notified of the existence of payroll tax liabilities owed by the
franchisees and have included footnote disclosure in our financial statements of
the potential contingent liability that may exist. We have obtained
indemnification from the responsible parties, including Glenn Welstad, our
President, and have secured indemnification with the pledge of his stock. In the
event the responsible parties do not meet their obligations for the delinquent
taxes and we are found to be liable as a successor, we may become obligated to
pay the balances due and then pursue reimbursement from the responsible parties.
If claims for successor liability are made, payment of such amounts may affect
our available cash reserves, if any, and could negatively affect our current and
future operations, growth plans, and ability to meet our other obligations as
they become due. Liability for delinquent payroll tax obligations may also
constitute a default under our accounts receivable lending agreement with our
lender. The responsible parties may be relying on the value of their shares of
Command Center, Inc. common stock to pay or partially pay these liabilities.
Their indemnification is also partially secured with a pledge of our securities.
Our stock is thinly traded on the Over the Counter Pink market. Selling pressure
in an attempt to meet these obligations by the responsible parties could
negatively affect the price of the shares.
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 now
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. In some cases, the penalties for noncompliance are extremely
harsh. For example, under Arizona law, penalties assessed against employers that
hire undocumented workers may include suspension or revocation of all business
licenses held by the employer in Arizona that are necessary to conduct its
business. If other states adopt similar laws, it could increase our operating
costs and materially affect our operating results. New federal regulations which
become effective in September 2009 require that many federal contractors and
subcontractors use the Department of Homeland Security electronic verification
system for checking identification and work eligibility for employees. 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. If we are not
able to maintain appropriate compliance procedures, our operations would be
materially and adversely affected.
We are exposed to substantial
pressure on working capital due to the delay between the time we pay our
temporary workers and the time we collect our receivables from our customer,
which requires aggressive management of credit risk.
Temporary personnel
are typically paid on the same day the services are performed, while customers
are generally billed on a weekly basis. This 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 credit
management practices that are unduly intrusive for our customers and 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.
If we are unable to find a reliable
pool of temporary personnel, we may be unable to meet customer demand and our
business may be adversely affected.
All 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
actual and potential customers, some of which seek to fill positions directly
with either regular or temporary employees. In addition, our temporary workers
sometimes become regular employees of our customers. From time to time, during
peak periods, we may experience shortages of available temporary workers.
Unavailability of reliable temporary workers will have a negative effect on our
results of operations. Use of temporary employees also is affected by other
factors beyond our control that may increase the cost of temporary personnel,
such as increases in mandated levels of benefits and wages payable to temporary
employees. These economic and other factors could reduce demand for our services
and lead to lower revenues.
Seasonal fluctuations in demand for
the services of our temporary workers in certain markets will adversely affect
our revenue and financial performance in the fall and winter months.
Revenues generated from stores in markets subject to seasonal fluctuations will
be less stable and may be lower than in other markets. Locating stores in highly
seasonal markets involves higher risks. To the extent that we consider the
opening of new offices, we intend to select store locations with a view to
maximizing total long-term return on our investment in stores, 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.
Our directors, officers and current
principal shareholders own a large percentage of our common stock and could
limit your influence over corporate decisions.
Our directors, officers
and current shareholders holding more than 5% of our common stock collectively
beneficially own, in the aggregate, approximately 33.3% of our outstanding
common stock. As a result, these shareholders, if they act together, may be able
to control most matters requiring shareholder approval, including the election
of directors and approval of mergers or other significant corporate
transactions. This concentration of ownership may have the effect of delaying or
preventing a change in control. The interests of these shareholders may not
always coincide with our corporate interests or the interests of our other
shareholders, and they may act in a manner with which you may not agree or that
may not be in the best interests of our other shareholders.
11
We depend on the construction
industry for a significant portion of our business and reduced demand from this
industry has affected our revenue.
We derive a significant percentage of
our revenues from placement of temporary personnel in construction and other
related industrial segments. Man industries are cyclical, and construction in
particular is subject to current recessionary concerns. Downturns in demand from
the building and construction industry, or any of the other industries we serve,
or a decrease in the prices that we can realize from sales of our services to
customers in any of these industries, have reduced and may continue to reduce
our revenues and cash flows.
We likely will be a party, from time
to time, to various legal proceedings, lawsuits and other claims arising in the
ordinary course of our business
. We anticipate that, based upon our
business plan, disputes will arise in the future relating to contract,
employment, labor relations, and other matters that could result in litigation
or require arbitration to resolve, which could divert the attention of our
management team and could result in costly or unfavorable outcomes for our
Company. Any such litigation could result in substantial expense, and could
reduce our profits, and could harm our reputation. These expenses and diversion
of managerial resources could have a material adverse effect on our business,
prospects, financial condition, and results of operations. See Item 3 “LEGAL
PROCEEDINGS”.
Risks
Related to Our Securities
Your investment may be substantially
diluted and the market price of our common stock may be affected if we issue
additional shares of our capital stock.
We are authorized to issue up to
100,000,000 shares of common stock and up to 5,000,000 shares of blank check
preferred stock. We may in the future sell additional shares of our common stock
or preferred stock or other equity securities to raise additional capital. We
may also issue securities to employees under stock option or similar plans that
we intend to implement. When we issue or sell additional shares or equity
securities, the relative equity ownership of our existing investors will be
diluted and our new investors could obtain terms more favorable than previous
investors.
Our common stock is thinly traded
and subject to significant price fluctuations.
Our common stock is traded
on the Pink Quote. The price of our common stock has fluctuated substantially in
recent periods, and is likely to continue to be, highly volatile. Future
announcements concerning us or our competitors, quarterly variations in
operating results, introduction or changes in pricing policies by us or our
competitors, changes in market demand, or changes in sales growth or earnings
estimates by us or analysts could cause the market price of our common stock to
fluctuate substantially. These price fluctuations may affect our ability to
raise capital through the public equity markets which could have a material
adverse effect on our business, financial condition, and results of operations.
Limited trading volume also affects liquidity for shareholders holding our
shares and may affect their ability to sell their shares or the price at which
such sales may be made in the future.
We are not likely to pay dividends
for the foreseeable future.
We have never paid dividends on our common
stock. We anticipate that for the foreseeable future, we will continue to retain
our earnings for the operation and expansion of our business, and that we will
not pay dividends on our common stock in the foreseeable future.
The market price for our common
stock may be affected by significant selling pressure from current shareholders,
including the selling shareholders.
Sales of substantial amounts of
shares of common stock in the public market could have a material adverse effect
on the market price of our common stock. We have outstanding 47,711,035 shares
of common stock, as of April 09, 2010, of which 14.1 million shares (including
10.3 million shares which were registered on Form S-1) are in the “public
float”. Approximately 6.7 million additional shares are registered for sale upon
exercise of the warrants and approximately 10,762,803 million shares may
currently be sold under Rule 144(b) resale provisions. Sales of the shares of
common stock eligible for sale to the public pursuant to the current
registration statement or under the provisions of Rule 144(b) may depress the
market price of our stock as such sales occur. Pursuant to Rule 144(b) adopted
under the Securities Act of 1933, as amended, restricted securities held by
non-affiliates generally may be resold after satisfying a six month holding
period. If shareholders holding these restricted securities choose to sell after
satisfying the holding period, the price of our common stock could be negatively
affected.
12
We have made various assumptions
regarding our future performance that may not prove to be accurate.
We
have made certain assumptions about future events that we believe to be
reasonable; however, these assumptions relate to future economic, competitive
and market conditions, and other events that are impossible to predict. For
example, we have assumed that we will be able to : (i) obtain and maintain
customer acceptance of our services, (ii) stabilize, refine and improve the
efficiency of our operations and business processes; (iii) develop and maintain
an effective sales network, (iv) expand our network of stores and effectively
penetrate, establish and stabilize operations in new markets, (v) increase
demand for our services and correspondingly grow revenue, (vi) establish a
reputation for cost-effective, quality and efficient service and brand
recognition on a national basis, (vii) maintain pricing and profit margins, and
(viii) secure required capital to execute our plans and grow the Company. These
assumptions are in turn based on assumptions relating to overall economic
conditions, including that: (a) economic conditions (including financial,
credit, monetary and labor markets) will remain relatively stable,
(b) demand for unskilled and semi-skilled temporary workers will continue
in accordance with historic trends, and (c) there will be no material adverse
changes in governmental regulations, policies and administrative practices
(including immigration, employee wage and benefits laws, etc.) affecting our
business. Because they relate to future events, assumptions are inherently
subject to uncertainty. Our ability to implement our business plan would suffer
materially if any of our assumptions proves inaccurate.
Not
applicable to smaller reporting companies.
At
December 25, 2009 we owned a beneficial interest in one parcel of real estate
located in Yuma, Arizona that houses one of our on-demand labor locations. We
assumed a mortgage on the Yuma property. The balance due on the mortgage was
approximately $85,000. Our monthly payment was $1,485, with a remaining term of
60 months. The mortgage was secured by the real property.
Subsequent
to the year ended December 25, 2009 the Company sold the Yuma building to an
unrelated party for $150,000. The Company now leases the building from the new
owner for 1,800 a month with the ability to exit the lease agreement without
penalty if ninety days notice is given.
We
presently lease office space for our corporate headquarters in Post Falls,
Idaho. We pay $10,000 per month currently for use of the building. During the
period ended December 25, 2009 we canceled our two-year option to purchase the
land and building for $1,125,000 pursuant to the terms of a Sale and Leaseback
Agreement with a former Director of the Company. As part of this transaction the
Company removed the building as an asset from its financials as well as the
liability associated with the building.
We also
lease the facilities for all of our store locations. All of these facilities are
leased at market rates that vary depending on location. Each store is between
1,000 and 5,000 square feet, depending on location and market
conditions.
Operating leases:
The Company
leases store facilities, vehicles and equipment. Most of our store leases have
terms that extend over three to five years. Some of the leases have cancellation
provisions that allow us to cancel on ninety day notice, and some of the leases
have been in existence long enough that the term has expired and we are
currently occupying the premises on month-to-month tenancies. Lease obligations
for the next five years as of December 25, 2009 are:
|
Year
|
Operating Lease Obligation
|
|||
|
2010
|
$ | 1,132,172 | ||
|
2011
|
640,142 | |||
|
2012
|
122,238 | |||
|
2013
|
14,220 | |||
|
2014
|
- | |||
All of
our current facilities are considered adequate for their intended
uses.
On June
30, 2006, the Company acquired three locations from Everyday Staffing LLC
(“Everyday Staffing”) in exchange for 579,277 shares of Command Center, Inc.
common stock. At the time of the acquisitions, Michael Moothart, controlling
member of the LLC, represented that all tax liabilities of Everyday Staffing had
been paid. As a result of the acquisitions, the Company booked a note payable to
Everyday Staffing in the amount of $113,349. In early 2008, the Company received
notice from the State of Washington that Everyday Staffing owed certain tax
obligations to the State that that arose prior to the acquisition date. The
State requested that the Company pay the amounts due under a theory of successor
liability. Subsequently, a second claim for successor liability was received by
the Company. These two claims are described below.
13
The first
claim relates to business and occupations and excise tax obligations in the
approximate amount of $250,000. Upon receipt of the notice, the Company
contacted Mr. Moothart and demanded that he resolve the tax obligations. Mr.
Moothart indicated that his legal counsel was working on the matter. While Mr.
Moothart was pursuing the matter through his counsel, and in order to forestall
further action against Command Center, the Company agreed to make payments on
the debt in satisfaction of the Everyday Staffing note payable amount. In the 52
weeks ended December 25, 2009, the Company paid Everyday’s business and
occupations and excise tax obligations totaling approximately $231,139. During
this time, Everyday took no apparent action to deal with its obligations to the
Company and the State of Washington.
The
second claim relates to Everyday Staffing liabilities for industrial insurance
taxes that the State of Washington asserts were not paid by Everyday
Staffing. The claims against the Company are based on the theory of
successor liability. The Department of Labor and Industries has estimated the
amount of the unpaid industrial insurance premiums at $1,203,948 plus interest.
The Company and Everyday Staffing have disputed the amount due and the Company
has referred the matter to counsel. The amount claimed by the State is based on
an audit of Everyday in which the auditor appears to have made unsupportable
assignments of workers compensation job codes, hours worked and other estimates
of amounts due, all of which the Company believes to be grossly misstated. The
Company’s review of Everyday Staffing financial records shows that payments made
to the State of Washington approximate the amounts that Everyday Staffing
indicates were owed for industrial insurance.
Based
upon the theory of successor liability, the Washington Department of Labor and
Industries (“the Department”) issued two Notices and Orders of Assessment of
Industrial Insurance Taxes (“Notice”) to Command Center. The first Notice claims
and assesses taxes of $57,446 and the second Notice claims and assesses the
amount of $900,858. The Company strongly disputes both the alleged successor
liability and also the monetary amount asserted by the Department. The Company
is pursuing its administrative remedies in order to vigorously contest the
assertions of these Notices. In strongly disputing the claims of the Department,
Management believes that the potential liability, if any, is not probable and is
not reasonably estimable at this time. Accordingly, no liability has been
established on the books of the Company for the amount claimed. Management
believes the Company’s liability, if any, from the claims and assessments of the
Department are not reasonably likely to have a material adverse affect on the
Company’s financial position, results of operations or cash flows in future
periods.
The Asset
Purchase Agreement signed in connection with the acquisition of assets from
Everyday Staffing requires that Everyday Staffing indemnify and hold harmless
Command Center for liabilities, such as the Washington assessments, that were
not expressly assumed. In response to the state claims for payment of Everyday
Staffing liabilities, the Company filed a lawsuit against Everyday Staffing, LLC
and Mr. Moothart, seeking
indemnification and
monetary damages. Recently, on July 15, 2009, the Company obtained a judgment
against Mr. Moothart and Everyday Staffing, LLC, jointly and severally, in the
amount of $1.295 million. The collectability of this judgment is questionable.
Glenn Welstad, our CEO, has a minority interest in Everyday Staffing as a
passive investor.
In
response to the Company’s position that it is not the legal successor to
Everyday Staffing, the Washington Department of Labor and Industries has
recently asserted its claim of successor liability against a second limited
liability company, also known as Everyday Staffing LLC (“Everyday Staffing
II”). Everyday Staffing II was organized by the members of the first
limited liability company after the first Everyday Staffing LLC was
administratively dissolved by the state. The assertion by the state of successor
liability against Everyday Staffing II is consistent with the position advanced
by Command Center that Everyday Staffing II and not Command Center is the only
successor to the entity against which the industrial insurance taxes were
assessed. The members of Everyday Staffing own approximately 1,400,000 shares of
Command Center, Inc. common stock. The Company has placed stop transfer
instructions with the transfer agent to restrict transfer of these shares
pending resolution of the obligations.
14
Market
Information
Our
common stock, par value $0.001 per share, is quoted on the Over the Counter Pink
Quote). The OTC Pink Quote is a network of security dealers who buy and sell
stock. The dealers are connected by a computer network which provides
information on current “bids” and “asks” as well as volume information. The OTC
Pink Quote is not considered a “national exchange.”
Our
common stock is traded on the Pink Quote under the symbol “CCNI”. The following
table shows the high and low bid information for the common stock for each
quarter of the fiscal years ended December 25, 2009 and December 26,
2008.
|
Bid
Information
*
|
||||||||
|
Quarter Ended
|
High
|
Low
|
||||||
|
March
30, 2008
|
$ | 1.80 | $ | .0.70 | ||||
|
June
29, 2008
|
$ | 0.90 | $ | 0.42 | ||||
|
September
28, 2008
|
$ | 0.53 | $ | 0.22 | ||||
|
December
26, 2008
|
$ | 0.40 | $ | 0.14 | ||||
|
March
27, 2009
|
$ | 0.22 | $ | 0.14 | ||||
|
June
26, 2009
|
$ | 0.18 | $ | 0.07 | ||||
|
September
25, 2009
|
$ | 0.18 | $ | 0.08 | ||||
|
December
25, 2009
|
$ | 0.12 | $ | 0.06 | ||||
The above
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual transactions. The closing
price for our common stock on the Pink Quote was $0.15 on April 8,
2010.
Holders
of the Corporation’s Capital Stock
At
December 25, 2009, we had 138 stockholders of record.
Dividends
No cash
dividends have been declared on our common stock to date and we do not
anticipate paying a cash dividend on our common stock in the foreseeable future.
Our business is highly capital intensive and we expect to retain available
working capital for operations and growth.
Recent
Sales of Unregistered Securities
The
following issuances of unregistered securities that have not been previously
reported occurred in 2009:
|
|
·
|
The
Company issued 240,000 shares of common stock to our investor relations
firm as partial payment for their investor relations fees. The average
price of the shares issued by the Company was ($0.11) The shares were
recorded as an expense during the
year.
|
|
|
·
|
Subsequent
to the period ended December 25, 2009 the Company issued 250,000 shares of
common stock to our Chief Financial Officer, Ralph E Peterson, for the
exercise of warrants he held in the Company and also issued 150,000 shares
of our common stock as compensation. The warrants and common stock were
awarded as employment compensation to Mr. Peterson. When issued the
Company determined the warrants had a nominal fair value. The warrants
were exercised at a price of $0.08 on October 1, 2009. The Company issued
the shares to Mr. Peterson subsequent to the twelve months ended December
25, 2009.
|
|
|
·
|
The
Company issued 667,870 shares to a former director and owner of its Post
Falls, ID office building for rent during the year. The shares were issued
at an average market price of ($0.08) per
share.
|
15
In all
instances the shares were issued in reliance on an exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Act”)
and Rule 506 of Regulation D adopted under the Act. The securities were issued
to individuals in private transactions for investment purposes only and the
certificates issued included restrictive legends preventing transfer without
registration or availability of an exemption the registration requirements of
the Act.
Not
applicable to smaller reporting company.
Command
Center is a provider of temporary employees to the light industrial,
construction, warehousing, transportation and material handling industries. We
provide unskilled and semi-skilled workers to our customers. Generally, we pay
our workers the same day they perform the job. In 2005 and 2006, we underwent a
series of evolutionary changes to convert our business from financial services
to franchisor of on-demand labor stores and finally to operator of on-demand
labor stores. We accomplished these changes by rolling up a franchise and
software Company into the predecessor public corporation and then acquiring all
of our franchisees for stock. We completed the rollup transactions in the second
quarter of 2006.
Our
vision is to be the preferred partner of choice for all on-demand employment
solutions by placing the right people in the right jobs every time. With the
acquisition of the on-demand labor stores, we have consolidated operations,
established and implemented corporate operating policies and procedures, and
developed a unified branding strategy for all of our stores.
On-demand Labor
Store Operations:
We currently operate 50 on-demand labor stores serving
thousands of customers and employing tens of thousands of temporary employees.
In the months following the roll-up we focused on continuity of operations,
reporting, and record keeping. Significant management attention has been devoted
to assuring that the stores are seamlessly integrated into the Company’s
corporate environment and culture. In 2008, recessionary pressures forced a
reassessment of our growth strategy. We analyzed our existing stores in terms of
customer base, level of operations, location and prospects. In an effort to
reduce operating costs, we elected to close or temporarily suspend operations in
a number of locations, this effort was continued in 2009 with the closure of an
additional 7 stores.
As the
economic environment improves we will achieve growth through the continued
increase in business from current national accounts, as well as the addition of
new national accounts. When cash flow from operations is sufficient to fund the
expansion into markets where there is under serviced employers and we can
operate profitably, we will expand with new stores.
We are
also focused on further reducing our operating costs, increasing our selling
efforts and developing our business by targeting new customer development. Our
business model is reasonably scalable, meaning we are able to adjust our cost
structure as revenue rises or falls. While our total revenues have declined
substantially, we have shown moderate reductions in operating costs as a
percentage of revenue year over year. Cost reduction efforts have been an
ongoing process that has trailed the falloff of revenue. We began reducing costs
in the second quarter of 2008 as the economy slowed. We did not anticipate that
economic conditions would continue to worsen through the year, nor did we
anticipate the extent of the declines. As we fully realized the extent of the
recession and understood the speed of the decline, we took additional actions to
reduce costs in the last half of 2008. Cost reductions instituted in the fourth
quarter of 2008 continued through the first quarter of 2009 and were intended to
bring the cost structure in line with current operating levels. These cost cuts
were fully reflected in operations in the fourth of quarter of
2009.
The
following table reflects operating results in 2009 compared to 2008. Percentages
indicate line items as a percentage of total revenue and the year over year
change column compares percentages of revenue between years. The table serves as
the basis for the narrative discussion that follows.
16
As
a Percentage of Revenue
|
52
Weeks Ended
|
52
Weeks Ended
|
Year over Year
|
||||||||||||||||||
|
|
December
25, 2009
|
December
26, 2008
|
Change
in %
|
|||||||||||||||||
|
REVENUE:
|
||||||||||||||||||||
|
Revenue
from services
|
$ | 51,474,445 | 99.8 | % | $ | 78,812,404 | 99.5 | % | 0.4 | % | ||||||||||
|
Other
income
|
86,490 | 0.2 | % | 421,621 | 0.5 | % | -0.4 | % | ||||||||||||
| 51,560,935 | 100.0 | % | 79,234,025 | 100.0 | % | 0.0 | % | |||||||||||||
|
COST
OF SERVICES:
|
||||||||||||||||||||
|
Temporary
worker costs
|
35,425,932 | 68.7 | % | 52,317,484 | 66.0 | % | 2.7 | % | ||||||||||||
|
Workers'
compensation costs
|
2,941,370 | 5.7 | % | 5,799,145 | 7.3 | % | -1.6 | % | ||||||||||||
|
Other
direct costs of services
|
212,780 | 0.4 | % | 521,128 | 0.7 | % | -0.2 | % | ||||||||||||
| 38,580,082 | 74.8 | % | 58,637,757 | 74.0 | % | 0.8 | % | |||||||||||||
|
GROSS
PROFIT
|
12,980,853 | 25.2 | % | 20,596,268 | 26.0 | % | -0.8 | % | ||||||||||||
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES:
|
||||||||||||||||||||
|
Personnel
costs
|
8,035,961 | 15.6 | % | 12,941,348 | 16.3 | % | -0.7 | % | ||||||||||||
|
Selling
and marketing expenses
|
91,108 | 0.2 | % | 396,203 | 0.5 | % | -0.3 | % | ||||||||||||
|
Transportation
and travel
|
943,657 | 1.8 | % | 2,475,462 | 3.1 | % | -1.3 | % | ||||||||||||
|
Office
expenses
|
854,349 | 1.7 | % | 1,394,826 | 1.8 | % | -0.1 | % | ||||||||||||
|
Legal,
professional and consulting
|
818,006 | 1.6 | % | 1,061,827 | 1.3 | % | 0.2 | % | ||||||||||||
|
Depreciation
and amortization
|
786,142 | 1.5 | % | 868,208 | 1.1 | % | 0.4 | % | ||||||||||||
|
Rents
and leases
|
2,081,534 | 4.0 | % | 2,523,361 | 3.2 | % | 0.9 | % | ||||||||||||
|
Other
expenses
|
754,537 | 1.5 | % | 879,165 | 1.1 | % | 0.4 | % | ||||||||||||
|
Utilities
and telephone
|
1,114,040 | 2.2 | % | 1,208,701 | 1.5 | % | 0.6 | % | ||||||||||||
|
Bank
fees
|
430,836 | 0.8 | % | 591,910 | 0.7 | % | 0.1 | % | ||||||||||||
|
Insurance
|
379,974 | 0.7 | % | 710,727 | 0.9 | % | -0.2 | % | ||||||||||||
|
Bad
debt
|
307,714 | 0.6 | % | 534,517 | 0.7 | % | -0.1 | % | ||||||||||||
|
Impairment
of goodwill
|
- | 0.0 | % | 11,757,929 | 14.8 | % | -14.8 | % | ||||||||||||
| 16,597,858 | 32.2 | % | 37,344,184 | 47.1 | % | -14.9 | % | |||||||||||||
|
LOSS
FROM OPERATIONS
|
(3,617,005 | ) | 7.0 | % | (16,747,916 | ) | 21.1 | % | -14.1 | % | ||||||||||
|
OTHER
INCOME (EXPENSE)
|
||||||||||||||||||||
|
Interest
expense
|
(1,877,081 | ) | 3.6 | % | (848,890 | ) | 1.1 | % | 2.6 | % | ||||||||||
|
Other
|
- | 0.0 | % | (24,581 | ) | 0.0 | % | 0.0 | % | |||||||||||
|
Loss
on extinguishmment of debt
|
(518,251 | ) | 1.0 | % | - | 0.0 | % | 1.0 | % | |||||||||||
|
Change
in fair value of stock warrant liability
|
48,973 | 0.1 | % | - | 0.0 | % | 0.1 | % | ||||||||||||
|
Other
income (expense)
|
0.0 | % | (24,581 | ) | 0.0 | % | 0.0 | % | ||||||||||||
| (2,346,359 | ) | 4.6 | % | (873,471 | ) | 1.1 | % | 3.4 | % | |||||||||||
17
Results
of Operations
52
Weeks Ended December 25, 2009
Operations
Summary:.
Revenue fell in the 52 week period ended December 25, 2009 to
$51.6 million from $79.2 million in the 52 week period ended December 26, 2008,
a decline of 35%. Economic conditions and store closures as a result of economic
conditions are the primary factors that drove the decline. The on-demand labor
sector of the staffing industry is one of the first sectors to feel the effect
of an economic slowdown. The decline in revenue of $27.6 million is considered
attributable primarily to economic conditions.
The
current business climate presents significant challenges to smaller on-demand
labor companies like Command Center. These challenges to Command Center came at
a time when we were particularly vulnerable to recessionary pressures. As a
relatively unseasoned business with aggressive growth plans, we had not yet
established a stable base of operations in our existing stores and, with the
completion of our funding in late 2007, we were set to embark on a plan to
rapidly expand our business. We spent much of 2007 putting infrastructure and
control mechanisms in place to operate a substantially larger business. We
expected to have at least 100 stores in operation by the end of 2008 and our
corporate overhead reflected this plan. When revenue did not ramp up as
expected, we had to take a critical look at our financial position and growth
plans and by mid-2008, we were taking action to reverse our plans for growth and
instead develop a plan for contracting our business to ride out the
recession.
Like many
other businesses, we did not fully anticipate the precipitous fall of the
economy or the severity of the effect that fall would have on our revenue. As a
result, we operated in all of 2008 behind the curve of the recession. We closed
stores and reduced costs to reflect current conditions and then conditions
worsened. We reassessed and took additional actions based on the then-current
situation and conditions worsened again. By the end of 2008, our cost reduction
efforts were finally beginning to catch up with current conditions, but the
trailing effect of cost reductions drove significant operating losses in
2008.
In turn,
the decline in revenues and the operating losses in 2008 indicated a further
impairment of our goodwill from the acquisition of franchisees in 2006, and the
resulting non-cash impairment charge to goodwill of $11.8 million compounded our
losses for the year. Overall, our business posted a loss of $17.6 million
including the non-cash impairment charge to goodwill. In 2009 we saw the effects
of our significant cost cutting that we started in 2008 and continued with
through the year ended December 25, 2009. As a result of our cost cutting we
were able to minimize our net loss for the year ended December 25, 2009 to $6.0
million. In 2009 we did not record any further impairment charge on the goodwill
recorded from acquisitions in 2006.
Store
Operations:
At the end of 2008, we
were operating 57 stores. During the year, we closed a net of 7 stores and ended
the year with 50 stores in operation in 20 states. Comparing stores that were in
operation for all of 2008 and 2009, same store revenues were $49.0 million in
2009 and $60.9 million in 2008, a year over year decrease of 19.6%. The decrease
in same store sales is primarily attributable to the recession.
In the
last half of 2009, we developed and have now implemented a sales program focused
on solution selling concepts and tracking of activity as a means of offsetting
the downward pressure on revenues. The sales program has now been rolled out to
all branches and we believe it has allowed us to hold sales at higher levels
than if we had not implemented the program. We also believe that the sales
program will have a positive effect on revenue growth once the economy begins to
recover. Additionally, we have focused more of our sales activity on those
business sectors that are less affected by the economic downturn such as
disaster recovery, event services, and other non-traditional on-demand labor
customers.
Cost of
Sales:
The cost of on-demand labor held relatively steady at 68.7% of
revenue in 2009compared to 66.0% in 2008. As the economy slowed, we have been
able to hold the pay rates of our Field Team Members (“FTM’s”) relatively
steady. The increasing unemployment rate has resulted in a larger than normal
pool of workers willing to fill on-demand positions. The ability to hold pay
rates steady or even reduce them in some instances has been largely offset by
competitive pressures. We see competition from many small on-demand labor
businesses and from our larger national competitors. As demand has cooled with
the recession, many of our competitors have adopted a price reduction strategy
to attract business and this has resulted in some downward pressure on
margins.
18
Toward
the end of 2009 and continuing into 2010, we are evaluating our on-demand labor
pay rates and where possible, implemented pay rate reductions in order to
increase margins to acceptable levels.
Worker’s
compensation costs for the year ended December 25, 2009 decreased to 5.7% of
revenue, compared to 7.3% of revenue for the year ended December 26, 2008. The
decrease is a function of two forces:
|
·
|
First,
the decline in revenue has resulted in a lower administrative cost of
workers’ compensation insurance. This is the result of two significant
changes in our business. The Company negotiated our workers’ compensation
renewal policies in May and June of 2009 at a time when we had already
experienced a significant decline in our revenues, and our on-demand labor
payroll was projected to be lower than prior levels. Our rates were
therefore based on the lower payroll levels and our carriers took the
lower levels into account when computing our workers’ compensation
premiums. We also had a dramatic change in our sales mix, during past
years we did a significant amount of work in the areas determined to be
higher risk by our workers’ compensation carriers. As we have reduced the
amount of work in these areas we have seen a decrease in the number of
claims and premiums charged by our workers’ compensation carriers. When
calculating workers’ compensation insurance as a percentage of revenue,
the lower premium against lower revenue reduces the percentage
rate.
|
|
·
|
Second,
our workers’ compensation insurance costs include amounts for future costs
on existing claims and claims that are incurred but not reported at the
end of a given period. The amounts of such future liabilities are
actuarially determined. During our initial policy year beginning on May
13, 2006, our loss experience from workers’ compensation claims was
significantly higher than originally expected when we obtain our initial
policy. The higher than expected loss has had the effect of skewing the
overall loss expectations for subsequent policy years. While the loss
histories on our second and third workers’ compensation policy years show
marked improvement in losses incurred to date, the effect of the first
policy year increases the development factor used in calculating future
liabilities on both existing and incurred but not reported claims. We
believe this effect has started to diminish as we have built more
operating history and we expect to see continued moderation of workers’
compensation costs in coming
periods.
|
In May of
2008, we changed our workers’ compensation insurance carrier. Our new carrier is
much more aggressive in evaluating and paying claims costs. Our cost of worker’
compensation as a percentage of revenue spiked up between the fourth quarter of
2007 and the second quarter of 2008. The efforts undertaken to control these
costs in late 2007 through the change in carriers in mid-2008 are now beginning
to bear fruit. As a result, we are beginning to see decreases in our workers’
compensation costs. We expect this trend to continue in 2010. Our workers’
compensation costs as a percentage of revenue quarter by quarter for the last
two years were as follows:
|
2008
|
2009
|
|||||||||||||||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||||||||||||||
|
8.8%
|
9.5%
|
5.2%
|
5.6%
|
5.4%
|
8.2%
|
3.5%
|
5.6%
|
|||||||||||||||||||||
Other
direct costs of services decreased significantly as a percentage of revenue in
2009 to 0.4% of revenue compared to 0.7% of revenue in 2008. The decrease was
driven by several factors.
In 2008,
we began providing services to customers working on large disaster recovery
projects. In several instances, the projects were located in areas that required
us to transport and lodge our FTM’s during the course of the project. The
attendant transportation, lodging and meal costs are included in other direct
costs of services in 2008. In some instances, these costs were not reimbursed by
our customers and in some instances the costs were only partially recovered. The
costs in 2008 were due primarily to the large number of workers we mobilized to
the Port of Galveston to assist in remediating the effects of Hurricane Ike. The
cost of our vans, used in selected locations to transport workers to jobsites,
is also included in other direct costs. In 2009, we began reducing our reliance
on the use of vans which resulted in a decrease in other direct costs of
services.
19
Gross
Margin:
The factors affecting gross margin in 2009 are discussed under
the cost of sales above. In the aggregate, cost of sales increased to 74.8% of
revenue in 2009 compared to 74.0% of revenue in 2008 yielding margins of 25.2%
in 2009 and 26.0% in 2008. We have taken steps to reduce pay rates, and to
increase bill rates to account for non-standard costs of providing services for
large scale disaster recovery projects, in an effort to return margins to 2007
levels or above.
Selling, General
and Administrative Expenses:
Notwithstanding the goodwill impairment
charge in 2008 of $11.8 million, as a percentage of revenue, we reduced selling,
general and administrative expenses to 32.2% in 2009 compared to 32.3 % in 2008.
This represents a minor decrease as a percentage of revenue and a monetary
reduction of $9.0 million in 2009 compared to 2008. As noted above, we operated
behind the recessionary curve in 2008 and our cost cutting measures trailed
significant reductions in revenue. We expect to see continuing declines in
selling, general and administrative expenses through the first quarter of 2010
as our cost cutting measures are fully realized in our financial
reports.
The
reduction in selling, general and administrative expenses was driven primarily
by reductions in personnel costs to 15.6% of revenue in 2009 compared to 16.3%
of revenue in 2008. In dollar terms, personnel costs declined to $8 million in
2009 compared to $13 million in 2008. When the downturn hit, we reversed our
growth plans and adjusted staffing levels downward to reflect the reality of the
current business opportunity. We expect to further reduce personnel costs in
2010 until the economy begins to recover.
Other
line item costs in selling, general and administrative expenses generated an
aggregate increase of 0.7%. Increases in some categories were offset by
decreases in others. We continue to monitor selling general and administrative
expenses and are working to further reduce operating costs in 2010.
Liquidity
and Capital Resources
At
December 25, 2009, we had total current assets of $6.9 million and current
liabilities of $9.4 million. Included in current assets are cash of $70,000 in
cash and trade accounts receivable of $5 million (net of allowance for bad debts
of $300,000).
Weighted
average aging on our trade accounts receivable at December 25, 2009, was 39
days. Actual bad debt write-off expense as a percentage of total customer
invoices during fiscal year 2009 was 0.7%. Our accounts receivable are recorded
at the invoiced amounts. We regularly review our accounts receivable for
collectability. The allowance for doubtful accounts is determined based on
historical write-off experience 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 quarterly. Generally, we refer
overdue balances to a collection agency at 60 days and the collection agent
pursues collection for another 30 or more days. Most balances over 120 days past
due are written off when it is probable the receivable will not be collected. As
our business matures, we will continue to monitor and seek to improve our
historical collection ratio and aging experience with respect to trade accounts
receivable. As we grow our historical collection ratio and aging experience with
respect to trade accounts receivable will continue to be important factors
affecting our liquidity.
At
December 25, 2009, we were operating under a $9,950,000 line of credit facility
with our principal lender for accounts receivable financing. The primary terms
and the covenants for this credit line were formulated and modified in 2006 and
2007 when more favorable economic conditions prevailed and we had 70-80 branch
offices. The credit facility is collateralized with accounts receivable and
entitled us to borrow up to 85% of the value of eligible receivables. Eligible
accounts receivable are generally defined to include accounts that are not more
than sixty days past due. The line of credit agreement included limitations on
customer concentrations, accounts receivable with affiliated parties, accounts
receivable from governmental agencies in excess of 5% of the Company’s accounts
receivable balance, and when a customer’s aggregate past due account exceeds 50%
of that customer’s aggregate balance due. The credit facility included a 1%
facility fee payable annually, and a $1,500 monthly administrative fee. The
financing interest rate was computed at the greater of 6.25% per annum or the
greater of (prime + 2.5%) or the London Interbank Offered Rate (LIBOR +2.5%
+3.0%) per annum. Prime and/or LIBOR are defined by the Wall Street Journal,
Money Rates Section. The loan agreement further provided that interest is due at
the applicable rate on the greater of the outstanding balance or $5,000,000. The
balance due our lender at December 25, 2009 was $2,907,521.
20
The line
of credit facility agreement contains certain financial covenants including a
requirement that we maintain a working capital ratio of 1:1, that we maintain
positive cash flow, that we maintain a tangible net worth of $3,500,000, and
that we maintain a rolling average EBITDA of 75% of our projections. At December
25, 2009, we were not in compliance with the cash flow, tangible net worth and
EBITDA requirements. At year end we were not compliance with the cash flow,
tangible net worth and EBITDA covenants.
Subsequent
to December 25, 2009, we entered into a new agreement, dated February 19, 2010,
with our principal lender. The signing of this agreement cures the default that
existed at year-end. The agreement is entered into for a two year term,
commencing on March 8, 2010 and extending through April 7, 2012. Although this
arrangement is actually based upon a sale of accounts to the major commercial
bank that has been our principal lender, it functions in much the same manner as
the prior credit facility. The bank purchases the eligible accounts for 90% of
the invoice amounts. When the account is paid, the remaining 10% not previously
advanced, is paid to us, less the bank’s discount fee and other applicable
charges. The facility maximum is initially $5,000,000 and has been pre-approved
for increases to $6,000,000 and $7,000,000 as needed. The discount fee is equal
to the amount advanced multiplied by 6.25% per annum or the greater of the prime
rate plus two and one half percent (prime + 2.5%) or the London Interbank
Offered Rate (LIBOR) plus five and one-half percent (LIBOR + 5.5%) per annum.
Prime rate is the prime rate published by Wells Fargo Bank, N.A. The discount
fee is payable on the amount advanced or on $3,000,000, whichever is greater.
Additional charges include a facility fee equal to one percent of the current
facility maximum (initially $5,000,000) and a monthly monitoring fee of $5,000.
Under this arrangement, we believe that our borrowing costs will be
significantly lower than in previous years. The loan is collateralized by all
the Company’s property and guaranteed by our CEO, Glenn Welstad.
On June
24, 2008, the Company entered into an agreement with an unrelated third party to
borrow $2,000,000 against an unsecured Promissory Note (“Short-Term Note” or
“Note”). The Note bore interest at 15% per annum with interest only payments
through January 2009. The Note called for monthly payments of $400,000 plus
accrued interest commencing on February 1, 2009. The note holder also received a
warrant to purchase 1,000,000 shares of common stock at $0.45 per share. The
warrant was valued at $250,000 using the Black-Sholes pricing model based on
assumptions about volatility, the risk free rate of return and the term of the
warrants as set out in the agreement. The warrant value was recorded as a note
discount, and was being amortized to interest expense using a straight line
method which approximates the interest method over the life of the
note.
On April
13, 2009, the Company entered into an agreement to extend the repayment term on
its Short Term Note. At the time of the agreement, the balance on the Note was
$1,500,000. As extended, the note became payable in increasing bi-weekly
payments. Payments due under the Note were $75,000 in April, $100,000 in May,
$100,000 in June, $150,000 in July, $250,000 in August, $300,000 in September
and $525,000 in October. The extension agreement provides for an increase in the
interest rate to 20% per annum with interest payable bi-weekly. Under the
extension agreement, if any amounts for principal or interest or both remain
unpaid as of October 30, 2009, then the Company is obligated to pay to the
lender on May 1, 2010 an additional amount as a liquidity redemption equal to
the unpaid total on October 30, 2009.
In
connection with the extension agreement, the warrant for 1,000,000 shares of
common stock issued under the original Short Term Note, and another for 200,000
shares issued to the lender during 2007 were cancelled and replaced by Stock
Purchase Warrants with all the same rights and privileges as the original
warrants except the exercise prices were modified to be $0.15 per share and the
conversion dates extended to April 1, 2014. Further, the Company issued an
additional warrant to purchase 3,000,000 shares of common stock at the exercise
price of $0.15 per share, on or before April 1, 2014.
21
The
Company determined that the modification of the terms of the Note was
substantially different from the original note terms. Therefore, loss on
extinguishment of debt of $518,284 has been recognized on the statement of
operations for the difference between the carrying value of the old debt and the
fair value of the new debt, plus any additional amounts, including warrants, or
fees paid to the lender.
The
Company determined the warrants issued under the extension agreement had an
approximate fair value at inception of $462,000, using a Black-Sholes pricing
model with the following inputs; exercise price of $0.15; current stock price
$0.14; expected life of five years, risk-free rate of 1.81%; and expected
volatility of 105%. Because of their re-pricing terms, these warrants were
recorded on April 13, 2009 as a derivative liability. This derivative liability
was adjusted to fair value of $413,026, with the change in fair value of warrant
liability of $48,973 recorded in the statement of operations for the fiscal year
ended December 25, 2009.
At
December 25, 2009 the Company was not in compliance with bi-weekly principal and
interest payments on the extension agreement. As of the period ending December
25, 2009 there remained due principal and accrued interest totaling $1,025,000.
As a result of this default, the liquidity redemption penalty, equal to an
additional $1,056,939 has been incurred.
Subsequent
to the period ending December 25, 2009, we entered into an agreement with the
lender, effective March 24, 2010, to modify this unsecured loan arrangement. The
effectiveness of this modification cures the default that existed at fiscal year
end. In the Modification Agreement, we agreed to issue 10,000,000 shares of our
common stock to the lender and a number of designated charities in exchange for
the satisfaction of $870,000 of the liquidation redemption penalty. Sale or
transfer of these shares is restricted until March 1, 2011. Pursuant to the
Convertible Promissory Note signed in connection with the modification,
$1,300,000 remains due, along with interest computed at the rate of 12% per
annum. –Weekly payments are calculated based upon weekly revenue levels, with a
minimum weekly payment of $5,000. The Note is due and payable on or before
December 31, 2010 and is convertible at the option of the lender into common
shares of the Company at a price equal to 80% of the average closing bid price
for the common stock for the 20 days prior to the notice of
conversion.
In May
and June 2006, we acquired operating assets for a number of temporary staffing
stores. The entities that owned and operated these stores received stock in
consideration of the transaction. As operating businesses prior to our
acquisition, each entity incurred obligations for payroll withholding taxes,
workers’ compensation insurance fund taxes, and other liabilities. We structured
the acquisition as an asset purchase and agreed to assume only the liability for
each entity’s accounts receivable financing line of credit. We also obtained
representations that liabilities for payroll taxes and other liabilities not
assumed by the Company would be paid by the entities and in each case those
entities are contractually committed to indemnify and hold harmless the Company
from unassumed liabilities.
Since the
acquisitions, it has come to our attention that certain tax obligations incurred
on operations prior to our acquisitions have not been paid. The entities that
sold us the assets (the “selling entities”) are primarily liable for these
obligations. The owners of the entities may also be liable. In most cases, the
entities were owned or controlled by Glenn Welstad, our CEO. Based on the
information currently available, we estimate that the total state payroll and
other tax liabilities owed by the selling entities is between $400,000 and
$600,000 and that total payroll taxes due to the Internal Revenue Service is
between $1,000,000 and $2,000,000. The Company has been advised by outside legal
counsel that successor liability for the federal claims remains
remote.
The Asset
Purchase Agreement governing these transactions requires that the selling
entities indemnify us for any liabilities or claims we incur as a result of
these predecessor tax liabilities. We have also secured an indemnification
agreement from Glenn Welstad with a partial pledge of his common
stock.
The
Company has not accrued any liability related to these claims for state payroll
taxes and total payroll taxes due to the Internal Revenue Service because it has
been advised by outside legal counsel that the likelihood of showing successor
liability for these claims remains remote. The Company would be adversely
affected if the state or federal government was able to show the Company liable
for these claims.
22
Leases
on closed stores
Over the
last two years, the Company has closed a number of stores in response to
economic conditions and a general downturn in business opportunities in certain
markets. Management continued to evaluate opportunities in those markets and
held out hope for a recovery that would allow us to reopen the closed stores.
During the first quarter, management assessed the likelihood of reopening the
closed stores in the next twelve months as remote. As a result, we began
negotiating with landlords for termination of the closed store leases. We are
also seeking replacement tenants for the properties and are considering other
options to reduce the lease obligations on the closed stores. With the
determination that store re-openings are unlikely, we recorded a reserve for
closed store leases. This amount represents Management’s best estimate of the
amounts we are likely to pay in settlement of the outstanding lease obligations
on the closed stores. Management has concluded that total lease obligations on
closed stores at the period ended December 25, 2009 is $275,000 under the
assumption that the near term real estate market continues to be highly
unpredictable and subleasing or disposition of closed store leases remains a
significant challenge. Management has concluded that the potential liability for
closed stores could be between $150,000 and $500,000 depending on how the real
estate market performs in the next twelve months. (See Notes 13 and 14 to the
Financial Statements)
We expect
that additional capital will be required to fund operations during fiscal year
2010. The amount of our capital needs will depend on store operating
performance, revenue growth, our ability to control costs, and the continued
impact on our business from the general economic slowdown and/or recovery cycle.
We are currently working on several projects intended to bring additional
capital into the Company, including completion of a private placement
transaction. We have an amount in excess of $3.0 million on deposit with two
former workers’ compensation insurers and are pursuing the refund of amounts
that we believe to be excess collateral. Also, we have approximately 10,762,803
million warrants outstanding which may offer a source of additional capital at a
future date upon exercise. Management will continue to evaluate capital needs
and sources of capital as we execute our business plan in 2010.
No
assurances can be given that we will be able to find additional capital on
acceptable terms. If additional capital is not available, we may be forced to
scale back operations, lay off personnel, slow planned growth initiatives, and
take other actions to reduce our capital requirements, all of which will impact
our viability as a going concern.
Critical
Accounting Policies
Management's
Discussion and Analysis of Financial Condition and Results of Operations
provides a narrative discussion of our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.
Management
believes the following critical accounting policies reflect the more significant
judgments and estimates used in the preparation of our financial
statements.
Organization
:
Command Center, Inc. is
a Washington corporation initially organized in 2000. We reorganized the Company
in 2005 and 2006 and now provide on-demand employees for manual labor, light
industrial, and skilled trades applications. Our customers are primarily
small to mid-sized businesses in the warehousing, landscaping, light
manufacturing, retail, wholesale, construction, transportation, and
facilities industries. We currently operate 50 stores located in 20 states. Our
10 largest customers represent about 23% of our revenue
The
accompanying financial statements have been prepared under the assumption that
the Company will continue as a going concern. The Company has incurred losses
since its inception and does not have sufficient cash at December 25, 2009 to
fund normal operations for the next 12 months. The Company’s’ only source of
recurring revenue and cash is from continued successful operation of temporary
labor stores. The Company’s plans for the long-term return to and continuation
as a going concern include financing the Company’s future operations through
sales of its common stock, entering into further debt arrangements or the return
of deposits from its’ compensation risk pool deposits. The current capital
markets and general economic conditions in the United States are significant
obstacles to raising the required funds. These factors raise doubt about the
Company’s ability to continue as a going concern.
23
The
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern. If the going
concern basis was not appropriate for these financial statements, adjustments
would be necessary in the carrying value of assets and liabilities, the reported
expenses and the balance sheet classifications used.
Use of
estimates
:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management 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 financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Fiscal year
en
d:
The
financial statements for the periods ended December 25, 2009 and December 26,
2008 are presented on a 52/53-week fiscal year end basis, with the last day of
the year ending on the last Friday of each calendar year. In fiscal years
consisting of 53 weeks, the final quarter will consist of 14 weeks. In fiscal
years with 52 weeks, all quarters will consist of thirteen weeks. Both 2009 and
2008 were 52-week years.
Reclassifications
:
Certain amounts in the
financial statements for 2008 have been reclassified to conform to the 2009
presentation. These reclassifications have no effect on net loss, total assets
or stockholders’ equity as previously reported.
Revenue
recognition
:
We
generate revenues primarily from providing on-demand labor services. Revenue
from services is recognized at the time the service is performed and is net of
adjustments related to customer credits.
Cost of
services
:
Cost
of services includes the wages of temporary employees, related payroll taxes and
workers’ compensation expenses, and other direct costs of services.
Cash:
Cash
consists of demand deposits, including interest-bearing accounts with original
maturities of three months or less, held in banking institutions. At December
25, 2009 the funds were held at two financial institutions.
Accounts
receivable and allowance for bad debts
:
Accounts
receivable are recorded at the invoiced amount. We regularly review our accounts
receivable for collectability. The allowance for bad debts is determined based
on historical write-off experience and current economic data and represents our
best estimate of the amount of probable losses on our accounts receivable. The
allowance for bad debts is reviewed quarterly. We generally refer overdue
balances to a collection agency at 60 days and the collection agent pursues
collection for another 30 or more days. Most balances over 120 days past due are
written off when it is determined to be probable the receivable will not be
collected.
Property and
equipment:
The Company capitalizes equipment purchases and depreciates
the capitalized costs over the useful lives of the equipment, usually three to
five years. Maintenance and repairs are charged to operations. Betterments of a
major nature are capitalized. When assets are sold or retired, cost and
accumulated depreciation are eliminated from the balance sheet and gain or loss
is reflected in operations. Leasehold improvements are amortized over the
shorter of the non-cancelable lease term or their useful lives.
Capitalized
software development costs
:
We expense costs
incurred in the preliminary project stage of developing or acquiring internal
use software. Once the preliminary assessment is complete, management authorizes
the project. When it is probable that the project will be completed, will result
in new software or added functionality of existing software, and the software
will be used for the function intended, we capitalize subsequent software
development costs. The capitalized costs are amortized on a straight-line basis
over the estimated useful life of the software which ranges from three to seven
years.
24
Workers’
compensation reserve
:
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 actuarial estimates of the future costs of the claims and
related expenses discounted by a present value interest rate to determine the
amount of the reserve. We evaluate the reserve regularly throughout the year 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. In monopolistic states, we utilize the state funds for our workers’
compensation insurance and pay our premiums in accordance with the state
plans.
Goodwill and
other intangible assets
:
Goodwill and other
intangible assets are measured for impairment at least annually and/or whenever
events and circumstances arise that indicate an impairment may exist such as a
significant adverse change in the business climate. In assessing the value of
goodwill, assets and liabilities are assigned to the reporting units and
appropriate valuation methodologies are used to determine fair value. Identified
intangible assets are amortized using the straight-line method over their
estimated useful lives which are estimated to be between 36 and 69
months.
Fair value of
financial instruments:
The Company carries financial instruments on the
balance sheet at the fair value of the instruments as of the balance sheet date.
At the end of each period, management assesses the fair value of each instrument
and adjusts the carrying value to reflect their assessment. At December 25, 2009
and December 26, 2008 the carrying values of accounts receivable and accounts
payable approximated their fair values. The carrying values of notes receivable
and notes payable at December 25, 2009 and December 26, 2008 also approximated
fair values based on their nature and terms. The carrying values of our line of
credit facility and notes payable at December 25, 2009 and December 26, 2008
also approximated fair value based on their terms of settlement as compared to
the market value of similar instruments.
Derivatives
:
From time to time, the
Company enters into transactions which contain conversion privileges, the
settlement of which may entitle the holder or the Company to settle obligations
by issuance of Company securities. When the Company enters transactions which
allow it to settle obligations by the issuance of Company securities, beneficial
fair value is estimated using The Black-Scholes option pricing
model.
Income
taxes
:
The
Company accounts for income taxes under the liability method, whereby deferred
income tax liabilities or assets at the end of each period are determined using
the 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. The Company’s 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. The Company has analyzed its
filing positions in all jurisdictions where it is required to file returns, and
found no positions that would require a liability for unrecognized income tax
positions to be recognized. The Company is subject to tax examinations for the
years 2006 through 2008. In the event that the Company is assessed penalties and
or interest, penalties will be charged to other operating 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 effect of any potentially dilutive
common stock equivalents. The Company had warrants outstanding to purchase
10,762,803 and 7,762,803 shares of common stock at December 25, 2009 and
December 26, 2008, respectively. The diluted earnings per share calculation
would include these common stock equivalents. The Company incurred losses in the
fifty-two week periods ended December 25, 2009 and December 26, 2008.
Accordingly, the warrant shares are anti-dilutive and therefore only basic
earnings per share is presented for December 25, 2009 and December 26,
2008.
Share-based
compensation
:
The
Company periodically issues common shares or warrants to purchase shares of the
Company’s common shares to its officers, directors or other parties. These
issuances are valued at market, in the case of common shares issued, or at fair
value in the case of warrants. The Company uses a Black Scholes valuation model
for determining fair value of warrants, and compensation expense is recognized
ratably over the vesting periods. Compensation expense for grants that vest upon
issue are recognized in the period of grant.
25
Fair value
measures
:
Our
policy on fair value measures requires the Company 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.
Adopted
Accounting Pronouncements
Useful life of
intangible assets:
The Company has adopted
a policy for determination of the useful life of intangible assets. This policy
determines what should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
for Goodwill and Other Intangible Assets. The policy is effective for fiscal
years beginning after December 15, 2008. The adoption of this policy did not
have a material effect on our financial position, results of operations or cash
flows.
Not
applicable to smaller reporting company.
26
TABLE
OF CONTENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
28
|
|
Balance
Sheets, December 25, 2009 and December 26, 2008
|
29
|
|
Statements
of Operations for the years ended December 25, 2009 and December 26,
2008
|
30
|
|
Statements
of Changes in Stockholders’ Equity (Deficit) for the years ended December
25, 2009 and December 26, 2008
|
31
|
|
Statements
of Cash Flows for the years ended December 25, 2009 and December 26,
2008
|
32
|
|
Notes
to the Consolidated Financial Statements
|
33
- 44
|
27
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Command
Center, Inc.
We have
audited the accompanying balance sheets of Command Center, Inc. as of December
25, 2009 and December 26, 2008, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Command Center, Inc. as of December
25, 2009 and December 26, 2008, and the results of their operations and their
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has negative working capital and an accumulated deficit
which raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DeCoria,
Maichel & Teague P.S.
Spokane,
Washington
March 24,
2010, except Note 8, which is dated April 2, 2010
28
COMMAND
CENTER, INC.
|
|
December 25, 2009
|
December 26, 2008
|
||||||
|
Assets
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
|
$ | 69,971 | $ | 2,174,960 | ||||
|
Accounts
receivable trade, net of allowance for bad debts of $300,000
and
|
||||||||
|
$500,000
at December 25, 2009 and December 26, 2008, respectively
|
5,025,113 | 5,223,113 | ||||||
|
Other
receivables
|
37,059 | 284,244 | ||||||
|
Prepaid
expenses and deposits
|
437,483 | 975,909 | ||||||
|
Current
portion of workers' compensation risk pool deposits
|
1,300,000 | 1,500,000 | ||||||
|
Total
current assets
|
6,869,626 | 10,158,226 | ||||||
|
PROPERTY
AND EQUIPMENT - NET
|
877,827 | 2,589,201 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Workers'
compensation risk pool deposits, less current portion
|
2,318,805 | 2,729,587 | ||||||
|
Goodwill
|
2,500,000 | 2,500,000 | ||||||
|
Intangible
asset - net
|
323,937 | 503,606 | ||||||
|
Total
other assets
|
5,142,742 | 5,733,193 | ||||||
|
TOTAL
ASSETS
|
$ | 12,890,195 | $ | 18,480,620 | ||||
|
Liabilities
and Stockholders' Equity (Deficit)
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable trade
|
$ | 2,174,504 | $ | 1,080,735 | ||||
|
Line
of credit facility
|
2,907,521 | 2,579,313 | ||||||
|
Accrued
wages and benefits
|
694,079 | 981,293 | ||||||
|
Other
current liabilities
|
224,491 | 195,566 | ||||||
|
Current
portion of note payable
|
9,520 | 9,520 | ||||||
|
Short-term
note payable, net of discount
|
1,025,000 | 1,868,748 | ||||||
|
Short-term
note liquidity redemption payable
|
186,939 | - | ||||||
|
Workers'
compensation insurance and risk pool deposits payable
|
501,423 | 531,062 | ||||||
|
Stock
warrant liability
|
413,026 | - | ||||||
|
Current
portion of workers' compensation claims liability
|
1,300,000 | 1,500,000 | ||||||
|
Total
current liabilities
|
9,436,503 | 8,746,237 | ||||||
|
LONG-TERM
LIABILITIES:
|
||||||||
|
Note
payable, less current portion
|
71,447 | 76,135 | ||||||
|
Workers'
compensation claims liability, less current portion
|
2,800,000 | 2,986,372 | ||||||
|
Common
stock to be issued
|
922,000 | - | ||||||
|
Finance
obligation
|
- | 1,125,000 | ||||||
|
Total
long-term liabilities
|
3,793,447 | 4,187,507 | ||||||
|
TOTAL
LIABILITIES:
|
13,229,950 | 12,933,744 | ||||||
|
COMMITMENTS
AND CONTINGENCIES (Note 9,13,14)
|
||||||||
|
STOCKHOLDERS'
EQUITY (DEFICIT):
|
||||||||
|
Preferred
stock - $0.001 par value, 5,000,000 shares authorized; none
issued
|
- | - | ||||||
|
Common
stock - $0.001 par value, 100,000,000 shares authorized;
|
||||||||
|
37,212,923
and 36,290,053 shares issued and outstanding, respectively
|
37,213 | 36,290 | ||||||
|
Additional
paid-in capital
|
51,446,437 | 51,370,627 | ||||||
|
Accumulated
deficit
|
(51,823,405 | ) | (45,860,041 | ) | ||||
|
Total
stockholders' equity (deficit)
|
(339,755 | ) | 5,546,876 | |||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$ | 12,890,195 | $ | 18,480,620 | ||||
See
accompanying notes to financial statements.
29
COMMAND
CENTER, INC.
Statements
of Operations
|
52 Weeks Ended
|
52 Weeks Ended
|
|||||||
|
December 25, 2009
|
December 26, 2008
|
|||||||
|
REVENUE:
|
||||||||
|
Revenue
from services
|
$ | 51,474,445 | $ | 78,812,404 | ||||
|
Other
income
|
86,490 | 421,621 | ||||||
| 51,560,935 | 79,234,025 | |||||||
|
COST
OF SERVICES:
|
||||||||
|
Temporary
worker costs
|
35,425,932 | 52,317,484 | ||||||
|
Workers'
compensation costs
|
2,941,370 | 5,799,145 | ||||||
|
Other
direct costs of services
|
212,780 | 521,128 | ||||||
| 38,580,082 | 58,637,757 | |||||||
|
GROSS
PROFIT
|
12,980,853 | 20,596,268 | ||||||
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES:
|
||||||||
|
Personnel
costs
|
8,035,961 | 12,941,348 | ||||||
|
Selling
and marketing expenses
|
91,108 | 396,203 | ||||||
|
Transportation
and travel
|
943,657 | 2,475,462 | ||||||
|
Office
expenses
|
854,349 | 1,394,826 | ||||||
|
Legal,
professional and consulting
|
818,006 | 1,061,827 | ||||||
|
Depreciation
and amortization
|
786,142 | 868,208 | ||||||
|
Rents
and leases
|
2,081,534 | 2,523,361 | ||||||
|
Other
expenses
|
754,537 | 879,165 | ||||||
|
Utilities
and telephone
|
1,114,040 | 1,208,701 | ||||||
|
Bank
fees
|
430,836 | 591,910 | ||||||
|
Insurance
|
379,974 | 710,727 | ||||||
|
Bad
debt
|
307,714 | 534,517 | ||||||
|
Impairment
of goodwill
|
- | 11,757,929 | ||||||
| 16,597,858 | 37,344,184 | |||||||
|
LOSS
FROM OPERATIONS
|
(3,617,005 | ) | (16,747,916 | ) | ||||
|
OTHER
INCOME (EXPENSE)
|
||||||||
|
Interest
expense
|
(1,877,081 | ) | (848,890 | ) | ||||
|
Other
|
- | (24,581 | ) | |||||
|
Loss
on extinguishment of debt
|
(518,251 | ) | - | |||||
|
Change
in fair value of stock warrant liability
|
48,973 | - | ||||||
| (2,346,359 | ) | (873,471 | ) | |||||
|
NET
LOSS
|
$ | (5,963,364 | ) | $ | (17,621,387 | ) | ||
|
NET
LOSS PER SHARE - BASIC
|
$ | (0.16 | ) | $ | (0.49 | ) | ||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - BASIC
|
36,782,420 | 36,059,701 | ||||||
See
accompanying notes to financial statements.
30
COMMAND CENTER,
INC
Statements
of changes in Stockholders' Equity (Deficit)
For
the 52 Weeks Ended December 25, 2009 and December 26, 2008
|
Preferred Stock
|
Additional
|
|||||||||||||||||||||||||||
|
Par
|
Common Stock
|
Paid-In
|
Retained
|
|||||||||||||||||||||||||
|
Shares
|
Value
|
Shares
|
Par Value
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
|
BALANCES
DECEMBER 28,2007
|
$ | - | 35,725,050 | $ | 35,725 | $ | 51,005,159 | $ | (28,238,654 | ) | $ | 22,802,230 | ||||||||||||||||
|
Stock
offering and registration costs
|
- | - | - | - | (163,167 | ) | (163,167 | ) | ||||||||||||||||||||
|
Common
stock issued for services
|
- | - | 365,000 | 365 | 168,835 | 169,200 | ||||||||||||||||||||||
|
Common
stock issued on advances payable
|
- | - | 33,333 | 33 | 99,967 | 100,000 | ||||||||||||||||||||||
|
Warrants
issued in connection with notes
|
- | - | - | - | 260,000 | 260,000 | ||||||||||||||||||||||
|
Common
stock issued for conversion price adjustment
|
- | - | 166,670 | 167 | (167 | ) | - | |||||||||||||||||||||
|
Net
loss for the year
|
- | - | - | - | - | (17,621,387 | ) | (17,621,387 | ) | |||||||||||||||||||
|
BALANCES
DECEMBER 26, 2008
|
- | - | 36,290,053 | 36,290 | 51,370,627 | (45,860,041 | ) | 5,546,876 | ||||||||||||||||||||
|
Common
stock issued to employee
|
15,000 | 15 | 1,785 | - | 1,800 | |||||||||||||||||||||||
|
Common
stock issued for services
|
- | - | 240,000 | 240 | 24,480 | - | 24,720 | |||||||||||||||||||||
|
Common
stock issued for rent
|
- | - | 667,870 | 668 | 49,545 | - | 50,213 | |||||||||||||||||||||
|
Net
loss for the year
|
- | - | - | - | - | (5,963,364 | ) | (5,963,364 | ) | |||||||||||||||||||
|
BALANCES
DECEMBER 25, 2009
|
- | $ | - | 37,212,923 | $ | 37,213 | $ | 51,446,437 | $ | (51,823,405 | ) | $ | (339,755 | ) | ||||||||||||||
See
accompanying notes to financial statements.
31
COMMAND
CENTER, INC.
|
52 Weeks Ended
|
52 Weeks Ended
|
|||||||
|
December 25,
|
December 26,
|
|||||||
|
|
2009
|
2008
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
loss
|
$ | (5,963,364 | ) | $ | (17,621,387 | ) | ||
|
Adjustments
to reconcile net loss to net cash
|
||||||||
|
provided (used) by operating activities:
|
||||||||
|
Depreciation
and amortization
|
786,142 | 868,208 | ||||||
|
Write-off
of fixed assets
|
109,978 | 76,064 | ||||||
|
Loss
on debt extinguishment
|
518,251 | - | ||||||
|
Allowance
for bad debts
|
(200,000 | ) | - | |||||
|
Change
in fair value of stock warrant liability
|
(48,973 | ) | - | |||||
|
Amortization
of note payable discount
|
131,251 | 128,749 | ||||||
|
Gain
on disposition of property
|
(112,500 | ) | - | |||||
|
Common
stock issued for interest and services
|
- | 169,200 | ||||||
|
Common
stock issued for compensation
|
24,720 | |||||||
|
Common
stock issued for rent
|
52,014 | - | ||||||
|
Closed
store reserve
|
275,000 | - | ||||||
|
Short-term
liquidity redemption payable
|
1,056,939 | |||||||
|
Impairment
of goodwill
|
- | 11,757,929 | ||||||
|
Change
in:
|
||||||||
|
Accounts
receivable
|
398,000 | 3,856,109 | ||||||
|
Other
receivables
|
247,185 | (191,207 | ) | |||||
|
Prepaid
expenses and deposits
|
538,426 | 635,004 | ||||||
|
Workers'
compensation risk pool deposits
|
610,782 | (246,085 | ) | |||||
|
Accounts
payable trade
|
818,768 | 217,362 | ||||||
|
Accrued
wages, benefits and other current liabilities
|
(258,289 | ) | (1,194,045 | ) | ||||
|
Workers'
compensation insurance and risk pool deposits payable
|
(29,639 | ) | 531,062 | |||||
|
Workers'
compensation claims liability
|
(386,372 | ) | 1,116,355 | |||||
|
Total
adjustments
|
4,531,683 | 17,724,705 | ||||||
|
Net
cash provided (used) by operating activities
|
(1,431,681 | ) | 103,318 | |||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchases
of property and equipment
|
(17,577 | ) | (108,298 | ) | ||||
|
Net
cash used by investing activities
|
(17,577 | ) | (108,298 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Net
advances (payments) on line of credit facility
|
328,208 | (2,106,843 | ) | |||||
|
Proceeds
received from short-term note
|
- | 1,740,000 | ||||||
|
Proceeds
allocated to warrants issued in connection with short-term
note
|
- | 260,000 | ||||||
|
Proceeds
from common stock issuable
|
52,000 | - | ||||||
|
Principal
payments on notes payable
|
(1,035,939 | ) | (8,968 | ) | ||||
|
Proceeds
from stock subscription recevied
|
- | 1,878,000 | ||||||
|
Costs
of common stock offering and registration
|
- | (163,167 | ) | |||||
|
Net
cash provided (used) by financing activities
|
(655,731 | ) | 1,599,022 | |||||
|
NET
INCREASE (DECREASE) IN CASH
|
(2,104,989 | ) | 1,594,042 | |||||
|
CASH,
BEGINNING OF YEAR
|
2,174,960 | 580,918 | ||||||
|
CASH,
END OF YEAR
|
$ | 69,971 | $ | 2,174,960 | ||||
|
INTEREST
PAID IN CASH
|
$ | 401,875 | $ | 885,925 | ||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
||||||||
|
Fair
value of warrants issued in connection with note payable
|
$ | 462,000 | $ | 260,000 | ||||
|
Common
stock issued on advance payable
|
$ | - | $ | 100,000 | ||||
|
Partial
settlement of liquidity redemption penalty in stock
|
$ | 870,000 | $ | - | ||||
See accompanying notes to financial
statements.
32
COMMAND
CENTER, INC.
Notes to
Financial Statements
Organization
:
Command Center, Inc.
(referred to as “the Company”, “CCNI”, “us” or “we”) is a Washington corporation
initially organized in 2000. We reorganized the Company in 2005 and 2006 and now
provide on-demand employees for manual labor, light industrial, and skilled
trades applications. Our customers are primarily small to mid-sized
businesses in the warehousing, landscaping, light
manufacturing, construction, transportation, retail, wholesale, and
facilities industries. We currently operate 51 stores located in 20 states. Our
largest 10 customers represent about 23% of our revenue.
The
accompanying consolidated financial statements have been prepared under the
assumption that the Company will continue as a going concern. The Company has
incurred losses since its inception and does not have sufficient cash at
December 25, 2009 to fund normal operations for the next 12 months. The
Company’s’ only source of recurring revenue and cash is from continued
successful operation of temporary labor stores. The Company’s plans for the
long-term return to and continuation as a going concern include financing the
Company’s future operations through sales of its common stock, entering into
debt transactions or the return of deposits from its’ compensation risk pool
deposits. Additionally, the current capital markets and general economic
conditions in the United States are significant obstacles to raising the
required funds. These factors raise doubt about the Company’s ability to
continue as a going concern.
The
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern. If the
going concern basis was not appropriate for these financial statements,
adjustments would be necessary in the carrying value of assets and liabilities,
the reported expenses and the balance sheet classifications used.
Summary
of Significant Accounting Policies
Use of estimates
:
The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management 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 financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Fiscal year end
:
The financial statements
for the periods ended December 25, 2009 and December 26, 2008 are presented on a
52/53-week fiscal year end basis, with the last day of the year ending on the
last Friday of each calendar year. In fiscal years consisting of 53 weeks, the
final quarter will consist of 14 weeks. In fiscal years with 52 weeks, all
quarters will consist of thirteen weeks. Both 2009 and 2008 were 52-week
years.
Reclassifications:
Certain
amounts in the financial statements for 2008 have been reclassified to conform
to the 2009 presentation. These reclassifications have no effect on net loss,
total assets or stockholders’ equity as previously reported.
Revenue recognition:
We
generate revenues primarily from providing on-demand labor services. Revenue
from services is recognized at the time the service is performed and is net of
adjustments related to customer credits.
Cost of services:
Cost of
services includes the wages of temporary employees, related payroll taxes and
workers’ compensation expenses, and other direct costs of services.
Cash:
Cash consists of demand
deposits, including interest-bearing accounts with original maturities of three
months or less, held in banking institutions. At December 25, 2009 the funds
were held at two financial institutions.
Accounts receivable and allowance
for bad debts:
Accounts receivable are recorded at the invoiced amount.
We regularly review our accounts receivable for collectability. The allowance
for bad debts is determined based on historical write-off experience and current
economic data and represents our best estimate of the amount of probable losses
on our accounts receivable. The allowance for bad debts is reviewed quarterly.
We generally refer overdue balances to a collection agency at 60 days and the
collection agent pursues collection for another 30 or more days. Most balances
over 120 days past due are written off when it is determined to be probable the
receivable will not be collected.
33
COMMAND
CENTER, INC.
Notes to
Financial Statements
NOTE
2 — SUMMARY OF SIGNICANT ACCOUNTING POLICIES, CONTINUED:
Property and equipment:
The
Company capitalizes equipment purchases and depreciates the capitalized costs
over the useful lives of the equipment, usually 3 to 5 years. Maintenance and
repairs are charged to operations. Betterments of a major nature are
capitalized. When assets are sold or retired, cost and accumulated depreciation
are eliminated from the balance sheet and gain or loss is reflected in
operations. Leasehold improvements are amortized over the shorter of the
non-cancelable lease term or their useful lives.
Capitalized software development
costs:
We expense costs incurred in the preliminary project stage of
developing or acquiring internal use software. Once the preliminary assessment
is complete, management authorizes the project. When it is probable that the
project will be completed, will result in new software or added functionality of
existing software, and the software will be used for the function intended, we
capitalize subsequent software development costs. The capitalized costs are
amortized on a straight-line basis over the estimated useful life of the
software which ranges from three to seven years.
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 actuarial estimates of the future costs of the claims and
related expenses discounted by a present value interest rate to determine the
amount of the reserve. We evaluate the reserve regularly throughout the year 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. In monopolistic states, we utilize the state funds for our workers’
compensation insurance and pay our premiums in accordance with the state
plans.
Goodwill and other intangible
assets
: Goodwill and other intangible assets are measured for impairment
at least annually and/or whenever events and circumstances arise that indicate
an impairment may exist such as a significant adverse change in the business
climate. In assessing the value of goodwill, assets and liabilities are assigned
to the reporting units and the appropriate valuation methodologies are used to
determine fair value. Identified intangible assets are amortized using the
straight-line method over their estimated useful lives which are estimated to be
between 36 and 69 months.
Fair value of financial
instruments:
The Company carries financial instruments on the balance
sheet at the fair value of the instruments as of the balance sheet date. At the
end of each period, management assesses the fair value of each instrument and
adjusts the carrying value to reflect their assessment. At December 25, 2009 and
December 26, 2008 the carrying values of accounts receivable and accounts
payable approximated their fair values. The carrying values of notes receivable
and notes payable at December 25, 2009 and December 26, 2008 also approximated
fair values based on their nature and terms. The carrying values of our line of
credit facility and notes payable at December 25, 2009 and December 26, 2008
also approximated fair value based on their terms of settlement as compared to
the market value of similar instruments.
Derivatives
: From time to
time, the Company enters into transactions which contain conversion privileges,
the settlement of which may entitle the holder or the Company to settle
obligations by issuance of Company securities. When the Company enters
transactions which allow it to settle obligations by the issuance of Company
securities beneficial fair value is estimated using The Black-Scholes option
pricing model.
Income taxes:
The Company
accounts for income taxes, whereby deferred income tax liabilities or assets at
the end of each period are determined using the 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. The Company’s 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. The Company has analyzed its filling positions in all jurisdictions
where it is required to file returns, and found no positions that would require
a liability for unrecognized income tax benefits to be recognized. The Company
is subject to tax examinations for the years 2007 through 2009. In the event
that the Company is assessed penalties and or interest, penalties will be
charged to other operating 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 effect of any potentially dilutive common stock
equivalents. The Company had warrants outstanding to purchase 10,762,803 and
6,762,803 shares of common stock at December 25, 2009 and December 26, 2008,
respectively. The diluted earnings per share calculation would include these
common stock equivalents. The Company incurred losses in the fifty-two week
periods ended December 25, 2009 and December 26, 2008. Accordingly, the warrant
shares are anti-dilutive and therefore only basic earnings per share is
presented for December 25, 2009 and December 26, 2008.
34
COMMAND
CENTER, INC.
Notes to
Financial Statements
Share-Based Compensation
: The
Company periodically issues common shares or warrants to purchase shares of the
Company’s common shares to its officers, directors or other parties. These
issuances are valued at market, in the case of common shares issued, or at fair
value in the case of warrants. The Company uses a Black Scholes valuation model
for determining fair value of warrants, and compensation expense is recognized
ratably over the vesting periods. Compensation expense for grants that vest upon
issue are recognized in the period of grant.
Fair Value Measures:
Our
policy on fair value measures requires the Company 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 cash and a stock warrant
liability.
The table
below sets forth our assets and liabilities measured at fair value, whether
recurring or non-recurring and the fair value calculation input hierarchy level
that we have determined applies to each asset and liability
category.
|
Balance December 25, 2009
|
Balance December 27, 2008
|
Input Hierarchy level
|
||||||||
|
Recurring:
|
||||||||||
|
Stock
Warrant liability
|
$ | 413,026 | $ | - |
Level
2
|
|||||
|
Cash
|
$ | 69,971 | $ | 2,174,960 |
Level
1
|
|||||
Adopted
Accounting Pronouncements
Useful life of Intangible Assets:
The Company has adopted a policy for determination of the useful life of
intangible assets. This policy determines what should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset for Goodwill and Other Intangible Assets. The
policy is effective for fiscal years beginning after December 15, 2008. The
adoption of this policy did not have a material effect on our financial
position, results of operations or cash flows.
On an
annual basis the Company reviews goodwill for impairment. The Company recorded
approximately $31 million in goodwill related to the purchase of on-demand labor
stores in 2006 and 2007. The Company is a single reporting unit consisting of
its purchased on-demand labor stores, thus the analysis was conducted for the
Company as a whole.
The
Company performed an annual impairment analysis in March of 2010 and 2009 for
the fifty-two week periods ended December 25, 2009 and December 26, 2008. The
fair value of the reporting unit was determined using a combination of valuation
methodologies including quoted market prices, prices of comparable public
companies and present value of discounted cash flows. The Company did not record
an impairment of goodwill in 2009, as the estimated fair value of the reporting
unit exceeded its carrying value.
35
COMMAND
CENTER, INC.
Notes to
Financial Statements
In
determining the fair value of the reporting unit for 2008 the Company also
considered factors including the price of Units sold in an offering of
securities at the end of 2008 and the relative values of the common stock and
warrants that comprised those units. The analysis concluded that the carrying
amount of the reporting unit exceed its fair value at year end 2008, resulting
in an $11.8 million impairment to goodwill.
The
following table sets forth the changes in goodwill that occurred during the
periods indicated:
|
Fifty-two weeks ended
December 25, 2009
|
Fifty-two weeks ended
December 26, 2008
|
|||||||
|
Beginning
Balance
|
$ | 2,500,000 | $ | 14,257,929 | ||||
|
Impairment
|
- | (11,757,929 | ) | |||||
|
Ending
Balance
|
$ | 2,500,000 | $ | 2,500,000 | ||||
During
the year ended December 25, 2009 in addition to the related party transaction
described in Notes 5 and 14 the Company has had the following transactions with
related parties:
Van Leasing Arrangements
:
Glenn Welstad, our CEO, owns Alligator LLC (Alligator), a vehicle leasing
company. Alligator provided approximately 8 vans and van drivers to the Company
for use in transporting temporary workers to job sites at various locations
within our sphere of operations. The Company provided fuel for the vehicles and
paid Alligator a lease payment for use of the vans plus reimbursement for the
cost of the drivers. As of December 25, 2009 and December 26, 2008, the Company
had accrued in its other current liabilities $224,491 and $119,539,
respectively, for lease payments and driver compensation. During the 2009 and
2008 fiscal years, the Company incurred $187,430 and $469,489, respectively in
expense related to this arrangement, classified as transportation and travel in
the statement of operations.
During
the period ending December 25, 2009 the Company terminated the van leasing
agreement with Alligator LLC and on October 7, 2009 Alligator transferred
ownership of the remaining four vans that were then being leased by the Company
to us. Since that date we have owned and operated the vans, employed the drivers
and have not leased any vans or drivers from Alligator and our business
relationship with Alligator has ended.
Warrant Exercise:
Ralph E
Peterson, our CFO, purchased two hundred and fifty thousand 250,000 shares of
the Company’s common stock through the exercise of warrants.
The Company issued the
warrants to Mr. Peterson during 2009 as compensation for his services and, upon
exercise, as a short term method to raise capital for the Company. The Company
determined the warrants had a nominal fair value at the grant date. The warrants
were exercisable at $.08 with a four year term. The warrants were exercised on
October 1, 2009 and the common shares, shown as common stock to be issued on the
balance sheet, were issued subsequent to the period ended December 25,
2009.
S
hare Issue:
The Company
authorized issuance of 150,000 shares of the Company’s common stock to Ralph E.
Peterson, CFO for services he performed for the Company during the year ended
December 25, 2009. The Company recorded $12,000 in compensation expense for the
shares based on the value of the shares at the authorization date. The common
stock is shown as common stock to be issued on the balance sheet. The shares
were issued subsequent to the period ended December 25, 2009.
36
COMMAND
CENTER, INC.
Notes to
Financial Statements
The
following table sets forth the book value of the assets and accumulated
depreciation and amortization at December 25, 2009 and December 26,
2008:
|
2009
|
2008
|
|||||||
|
Buildings
and improvements
|
$ | 149,000 | $ | 1,274,000 | ||||
|
Leasehold
improvements
|
977,848 | 1,175,449 | ||||||
|
Furniture
and fixtures
|
286,461 | 286,461 | ||||||
|
Computer
hardware and licensed software
|
995,064 | 977,487 | ||||||
|
Accumulated
depreciation
|
(1,728,975 | ) | (1,423,337 | ) | ||||
| 679,398 | 2,290,060 | |||||||
|
Software
development costs
|
682,000 | 682,000 | ||||||
|
Accumulated
amortization
|
(483,571 | ) | (382,859 | ) | ||||
| 198,429 | 299,141 | |||||||
|
Total
property and equipment, net
|
$ | 877,827 | $ | 2,589,201 | ||||
During
the 52 weeks ended December 25, 2009 and December 26, 2008, the Company
recognized $606,473 and $688,539, respectively, of depreciation and amortization
expense on its property and equipment.
On
November 22, 2005 the Company acquired a property from an unrelated third party
for $1,125,000. The property is located at 3773 W. Fifth Avenue, Post Falls,
Idaho. On December 29, 2005, we sold the property to John R. Coghlan, then
a director, for $1,125,000 and concurrently leased back the same property on a
thirty-six month lease with a two year renewal option. The monthly rental is
$10,000 per month, triple net.
The lease
included an option to extend the term for two additional years at the same
rental rate and granted us the option to repurchase the property any time after
January 1, 2008 at the purchase price of $1,125,000. We have had a
continuing involvement in the property based on our contractual right through
the option to repurchase the property for the same price as we initially paid
and the same price at which the property was sold to Mr. Coghlan. Due to
prevailing market conditions, on December 21, 2009 we waived and released our
purchase option right. The
Company removed the
building as an asset and the related long term liability for its purchase. As
part of this transaction the Company recognized $112,500 of gain on the
disposition of property relating to the depreciation recorded on the building
prior to December 21, 2009.
As of
December 25, 2009 the Company had twelve months remaining on our lease for the
Post Falls office building. The terms of the agreement call for lease payments
of $10,000 per month for the remaining twelve month (12) period. The Company at
its option may pay half of the lease payment in common stock of the
Company.
The
Company wrote off of tenant improvements at closed stores for the 52-week period
ended December 25, 2009 and December 25, 2008 of $109,978 and $76,064,
respectively.
The
following table presents the Company’s purchased intangible asset other than
goodwill for the fiscal years ended December 25, 2009 and December 26,
2008:
|
2009
|
2008
|
|||||||
|
Customer
relationships
|
$ | 925,000 | $ | 925,000 | ||||
|
Less
accumulated amortization
|
(601,063 | ) | (421,394 | ) | ||||
|
Intangible
asset, net
|
$ | 323,937 | $ | 503,606 | ||||
We
obtained our amortizable intangible asset as a result of the acquisition of
on-demand labor stores in 2006 and 2007. Amortization expense is included with
depreciation and amortization expenses in the statement of
operations.
Based on
current events and circumstances, we tested the intangible asset for impairment
by comparing the carrying value of the asset to its estimated fair value. The
results of this test indicated that the intangible asset was not impaired as of
December 25, 2009 and December 26, 2008.
37
COMMAND
CENTER, INC.
Notes to
Financial Statements
The
following schedule reflects annual amortization expense and cumulative
amortization:
|
2009
|
2010
|
2011
|
2012
|
|||||||||||||
|
Annual
expense
|
$ | 179,669 | $ | 144,947 | $ | 138,000 | $ | 40,990 | ||||||||
|
Cumulative
|
$ | 601,063 | $ | 746,010 | $ | 884,010 | $ | 925,000 | ||||||||
On May
12, 2006, we entered into an agreement with our principal lender for a financing
arrangement collateralized by eligible accounts receivable. Eligible accounts
receivable are generally defined to include accounts that are not more than
sixty days past due. The loan agreement includes limitations on customer
concentrations, accounts receivable with affiliated parties, accounts receivable
from governmental agencies in excess of 5% of the Company’s accounts receivable
balance, and when a customer’s aggregate past due account exceed 50% of that
customer’s aggregate balance due. The lender will advance 85% of the invoiced
amount for eligible receivables. The credit facility includes a 1% facility fee
payable annually, and a $1,500 monthly administrative fee. The financing bears
interest at the greater of the prime rate plus two and one half percent (prime
+2.5%) or 6.25% per annum. Prime is defined by the Wall Street Journal, Money
Rates Section. Our line of credit interest rate at December 25, 2009 was 10.00%.
The loan agreement further provides that interest is due at the applicable rate
on the greater of the outstanding balance or $5,000,000. In December, 2006, the
Company negotiated an increase in the maximum credit facility to $9,950,000. The
loan agreement includes certain financial covenants including a requirement that
we maintain a working capital ratio of 1:1, that we maintain positive cash flow,
that we maintain a tangible net worth of $3,500,000, and that we maintain a
rolling average of 75% of projected EBITDA. At December 25, 2009, we are not in
compliance with the cash flow, tangible net worth or EBITDA requirements. The
balance due our lender at December 25, 2009 was $2,907,521.
Subsequent
to December 25, 2009, we entered into a new agreement, dated February 19, 2010,
with our principal lender. The signing of this agreement cures the default that
existed at year-end. The agreement is entered into for a two year term,
commencing on March 8, 2010 and extending through April 7, 2012. Although this
arrangement is actually based upon a sale of accounts to the major commercial
bank that has been our principal lender, it functions in much the same manner as
the prior credit facility. The bank purchases the eligible accounts for 90% of
the invoice amounts. When the account is paid, the remaining 10% not previously
advanced, is paid to us, less the bank’s discount fee and other applicable
charges. The facility maximum is initially $5,000,000 and has been pre-approved
for increases to $6,000,000 and $7,000,000 as needed. The discount fee is equal
to the amount advanced multiplied by 6.25% per annum or the greater of the prime
rate plus two and one half percent (prime + 2.5%) or the London Interbank
Offered Rate (LIBOR) plus five and one-half percent (LIBOR + 5.5%) per annum.
Prime rate is the prime rate published by Wells Fargo Bank, N.A. The discount
fee is payable on the amount advanced or on $3,000,000, whichever is greater.
Additional charges include a facility fee equal to one percent of the current
facility maximum (initially $5,000,000) and a monthly monitoring fee of $5,000.
Under this arrangement, we believe that our borrowing costs will be
significantly lower than in previous years.
On June
24, 2008, the Company entered into an agreement with an unrelated third party to
borrow $2,000,000 against an unsecured Promissory Note. The Note bears interest
at 15% per annum with interest only payments through January, 2009. The Note
calls for monthly payments of $400,000 plus accrued interest commencing on
February 1, 2009. The note holder also received a warrant to purchase 1,000,000
shares of common stock at $0.45 per share. The warrant was recorded as a note
discount and amortized over the life of the note. Amortization of the discount
for the years ended December 25, 2009 and December 24, 2008 was $131,251 and
$128,749, respectively.
38
COMMAND
CENTER, INC.
Notes to
Financial Statements
On April
13, 2009, the Company entered into an agreement to extend the repayment term on
its Short Term Note. At the time of the agreement, the balance on the Note
was $1,500,000. As extended, the note became payable in increasing
bi-weekly payments. Payments due under the Note were $75,000 in April, $100,000
in May, $100,000 in June, $150,000 in July, $250,000 in August, $300,000 in
September and $525,000 in October. The extension agreement provides for an
increase in the interest rate to 20% per annum with interest payable
bi-weekly. Under the extension agreement, if any amounts for principal
or interest or both remain unpaid as of October 30, 2009, then the Company is
obligated to pay to the lender on May 1, 2010 an additional amount as a
liquidity redemption equal to the unpaid total on October 30, 2009.
In
connection with the extension agreement, the warrant for 1,000,000 shares of
common stock originally issued under the original Short-Term Note, and another
for 200,000 shares issued to the lender during 2007 were cancelled and replaced
by stock purchase warrants with all the same rights and privileges as the
original warrants except the exercise prices were modified to be $0.15 per share
and the conversion dates extended to April 1, 2014. Further, the Company
issued an additional warrant to purchase 3,000,000 shares of common stock at the
exercise price of $0.15 per share, on or before April 1, 2014.
The
Company determined that the modification of the terms of the Note was
substantially different from the original note terms. Therefore, loss on
extinguishment of debt of $518,284 has been recognized on the statement of
operations for the difference between the carrying value of the old debt and the
fair value of the new debt, plus any additional amounts, including warrants, or
fees paid to the lender.
The
Company determined the warrants issued under the extension agreement had an
approximate fair value at inception of $462,000, using a Black-Sholes pricing
model with the following inputs; exercise price of $0.15; current stock
price $0.14; expected life of five years, risk-free rate of 1.81%; and expected
volatility of 105%. Because of their re-pricing terms, these warrants were
recorded on April 13, 2009 as a stock warrant liability. As of December 25,
2009, the derivate liability has been readjusted to fair value resulting in a
gain of $48,974 recorded as change in fair value of stock warrant liability in
the statement of operations for the twelve months ended December 25,
2009.
The
Company was not in compliance with bi-weekly principal and interest payments on
the extension agreement. As of December 25, 2009, there remained due
principal and accrued interest totaling $1,025,000. As a result not being in
compliance with bi-weekly principal and interest payments the Company incurred a
liquidity redemption penalty, equal to an additional $1,056,939.
Subsequent
to the period ending December 25, 2009, we entered into an agreement with the
lender, effective March 24, 2010, to modify this unsecured loan arrangement. The
new loan agreement cures the default that existed at fiscal year end. In
the Modification Agreement, we agreed to issue 10,000,000 shares of our common
stock to the lender and a number of designated charities in exchange for the
satisfaction of $870,000 of the liquidation redemption penalty. Sale or
transfer of these shares is restricted until March 1, 2011. Pursuant to the
Convertible Promissory Note signed in connection with the modification,
$1,300,000 remains due, along with interest computed at the rate of 12% per
annum. –Weekly payments are calculated based upon weekly revenue levels, with a
minimum weekly payment of $5,000. The Note is due and payable on or before
December 31, 2010 and is convertible into common shares of the Company at a
price equal to 80% of the average closing bid price for the common stock for the
20 days prior to the notice of conversion. As consideration for reducing
the interest rate from 20% to 12% and for extending the maturity, the Company
issued a warrant for the purchase of 1,500,000 shares of common stock to the
lender. Unless sooner exercised, the warrant expires on March 15, 2015. The
exercise price for the warrant is:
|
Exercise Price
|
Ending Period of Exercise Price
|
|||
| $ |
0.08
|
March
15, 2011
|
||
| $ |
0.16
|
March
15, 2012
|
||
| $ |
0.32
|
March
15, 2013
|
||
| $ |
0.50
|
March
15, 2014
|
||
| $ |
1.00
|
March
15, 2015.
|
||
39
COMMAND
CENTER, INC.
Notes to
Financial Statements
We
provide our temporary and permanent workers with workers’ compensation
insurance. At December 25, 2010, we maintained workers’ compensation insurance
policies through AMS Staff Leasing II (“AMS”) and TSE PEO, Inc (“TriState”). The
AMS coverage is a large deductible policy, while the TriState policy is a
guaranteed loss program with no deductible. The workers’ compensation insurance
through AMS provided coverage in 16 of the 20 states in which we operate.
TriState provided coverage in California and South Dakota. In the “monopolistic”
states Washington and North Dakota, coverage is provided under mandatory
government administered programs. Prior to TriState, the workers’ compensation
insurance for California and South Dakota was provided by Arch Insurance Group
(“Arch”). The Arch policy covered our workers in those two states for the period
from June 27, 2008 through June 27, 2009. While we have primary responsibility
for all claims under the AMS policy, our insurance coverage provides
reimbursement for covered losses and expenses in excess of $250,000 per
occurrence. This results in our being substantially self insured. Prior to the
inception of the AMS and Arch policies, we were insured by the American
International Group (“AIG”). The AIG and Arch policies also provided for
reimbursement for covered losses in excess of $250,000 per
occurrence.
On
December 1, 2009, we accepted an offer from AMS to expand the workers’
compensation coverage provided to also include California and South Dakota, to
be effective as of January 1, 2010. Concurrently, we gave notice of
cancellation to TriState, also effective January 1, 2010. With this change,
workers’ compensation coverage will be provided through AMS in all 18 of the
non- monopolistic states in which we presently operate. As with the present
AMS coverage, the new AMS policy for California and South Dakota will provide
reimbursement for covered losses and expenses in excess of $250,000 per
occurrence. This will result in our being substantially self-insured in
California and South Dakota, as well as the 16 states where we presently obtain
coverage through AMS.
Under the
policies, we make payments into a risk pool fund to cover claims within our
self-insured layer. If our payments into the fund exceed our actual losses over
the life of the claims, we may receive a refund of the excess risk pool
payments. Correspondingly, if our workers’ compensation reserve risk pool
deposits are less than the expected losses for any given policy period, we may
be obligated to contribute additional funds to the risk pool fund.
Expected
losses will extend over the life of the longest lived claim which may be
outstanding for many years. As a new temporary staffing company, we have limited
experience with which to estimate the average length of time during which claims
will be open. As a result, our current actuarial analysis is based largely on
industry averages which may not be applicable to our business. If our average
claims period is longer than industry average, our actual claims losses could
exceed our current estimates. Conversely, if our average claims period is
shorter than industry average, our actual claims could be less than current
reserves. For workers’ compensation claims originating in Washington and North
Dakota (our “monopolistic jurisdictions”) we pay workers’ compensation insurance
premiums and obtain full coverage under government administered programs. We are
not the primary obligor on claims in these jurisdictions. Accordingly, our
financial statements reflect only the mandated workers’ compensation insurance
premium liability for workers’ compensation claims in these
jurisdictions.
Workers’
compensation expense for temporary workers is recorded as a component of our
cost of services and consists of the following components: self-insurance
reserves net of the discount; insurance premiums; and premiums paid in
monopolistic jurisdictions. Workers’ compensation expense for our temporary
workers totaled $2,941,370 and $5,799,145 in the 52 weeks ended December 25,
2009 and December 26, 2008, respectively. Workers’ compensation expense in 2008
was affected significantly by claims relating to the policy year from May 12,
2006 through May 12, 2007.
|
|
2009
|
2008
|
||||||
|
Workers’
Compensation Deposits
|
||||||||
|
Workers’
compensation deposits available at the beginning of the
period
|
$ | 4,229,587 | $ | 3,983,502 | ||||
|
Additional
workers’ compensation deposits made during the period
|
879,489 | 2,700,000 | ||||||
|
Deposits
applied to payment of claims during the period
|
( 1,490,271 | ) | (2,453,915 | ) | ||||
|
Deposits
available for future claims at the end of the period
|
$ | 3,618,805 | $ | 4,229,587 | ||||
|
Workers’
Compensation Claims Liability
|
||||||||
|
Estimated
future claims liabilities at the beginning of the period
|
$ | 4,486,372 | $ | 3,370,017 | ||||
|
Claims
paid during the period
|
(1,490,271 | ) | (2,453,915 | ) | ||||
|
Additional
future claims liabilities recorded during the period
|
1,103,899 | 3,570,270 | ||||||
|
Estimated
future claims liabilities at the end of the period
|
$ | 4,100,000 | $ | 4,486,372 | ||||
40
COMMAND
CENTER, INC.
Notes to
Financial Statements
The
workers’ compensation risk pool deposits are classified as current and
non-current assets on the 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 financial
statements.
We have
discounted the expected liability for future losses to present value using a
discount rate of 3%, which approximates the risk free rate on similar termed US
Treasury instruments. Our expected future liabilities are evaluated on a
quarterly basis and adjustments are made as warranted.
Long-term
debt consists of a note payable assumed in connection with the purchase of an
on-demand labor store. The note is payable in monthly installments of $1,200
that include interest at 6%. The note is collateralized by an on-demand labor
store building.
|
2010
|
$ | 9,520 | ||
|
2011
|
10,107 | |||
|
2012
|
10,730 | |||
|
2013
|
11,392 | |||
|
2014
|
39,218 | |||
|
|
$ | 80,967 |
Subsequent
to the twelve months ended December 25, 2009 the Company sold the building to an
unrelated party for $150,000. The Company continues to lease the property back
from the unrelated party.
Issuance of Common
Stock:
In the fifty two weeks ended December 25, 2009,
we issued 667,870 shares for rent to a former director of the Company and
current owner of our Post Falls, ID office building, John Coghlan.
Aggregate value of the shares issued was $52,013. All shares were valued
based on the market price for our common stock at the dates of
issuance.
The
Company issued 240,000 shares of common stock to our investor relations firm as
partial payment for their investor relations fees during the fifty two weeks
ended December 25, 2009. Aggregate value of the shares issued was
$24,720.
The
following Warrants for Command Center, Inc’s common stock were issued and
outstanding on December 25, 2009 and December 26, 2008,
respectively:
|
2009
|
2008
|
|||||||
|
Warrants
outstanding at beginning of year
|
7,762,803 | 6,762,803 | ||||||
|
Issued
|
4,450,000 | 1,000,000 | ||||||
|
Exercised
|
(250,000 | ) | - | |||||
|
Cancelled
|
(1,200,000 | ) | - | |||||
|
Warrants
outstanding at end of year
|
10,762,803 | 7,762,803 | ||||||
A detail
of warrants outstanding at December 25, 2009 is as follows:
|
Number
|
Expiration Date
|
|||||||
|
Exercisable
at $1.25 per share
|
6,312,803 |
06/20/13
|
||||||
|
Exercisable
at $1.50 per share
|
250,000 |
04/14/12
|
||||||
|
Exercisable
at $0.15 per share
|
4,200,000 |
04/01/14
|
||||||
| 10,762,803 | ||||||||
41
COMMAND
CENTER, INC.
Notes to
Financial Statements
The
Company did not recognize an income tax provision for the 52-week periods ended
December 25, 2009 and December 26, 2008.
The
components of deferred tax assets and liabilities were as follows:
|
|
December 25, 2009
|
December 26, 2008
|
||||||
|
Deferred tax assets
|
||||||||
|
Workers’
compensation claims liability
|
$ | 1,841,000 | $ | 1,795,000 | ||||
|
Goodwill
impairment
|
12,023,000 | 12,023,000 | ||||||
|
Other
Assets
|
65,000 | 70,000 | ||||||
|
Net
operating loss
|
6,255,000 | 4,129,000 | ||||||
|
Store
closure reserve
|
111,000 | - | ||||||
|
Bad
debt reserve
|
120,000 | 200,000 | ||||||
|
Total
deferred tax assets
|
20,415,000 | 18,217,000 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Warrants
|
(84,000 | ) | - | |||||
|
Property,
plant and equipment and intangibles
|
(332,000 | ) | (436,000 | ) | ||||
|
Total
Liabilities
|
(416,000 | ) | (436,000 | ) | ||||
|
Net
deferred tax asset
|
19,999,000 | 17,781,000 | ||||||
|
Valuation
allowance
|
(19,999,000 | ) | (17,781,000 | ) | ||||
|
Total
deferred tax asset net of valuation allowance
|
$ | - | $ | - | ||||
At
December 25, 2009 and December 26, 2008, we have fully offset the deferred tax
asset by valuation allowances because of uncertainties concerning our ability to
generate sufficient taxable income in future periods to realize the tax
benefit.
Our
federal and state net operating loss carryover of approximately $15,500,000 will
expire in the years 2022 through 2028. Our charitable contribution carryover
will expire in the years 2010 through 2013.
Management
estimates that our combined federal and state tax rates will be 40%. The items
accounting for the difference between income taxes computed at the statutory
federal income tax rate and the income taxes reported on the statements of
operations are as follows:
|
2009
|
2008
|
|||||||||||||||
|
Income
tax expense (benefit) based on statutory rate
|
$ | (2,083,000 | ) | 35.0 | % | $ | (6,167,000 | ) | 35.0 | % | ||||||
|
Permanent
differences
|
60,000 | (1.1 | )% | 191,000 | (1.1 | )% | ||||||||||
|
State
income taxes benefit net of federal taxes
|
(195,000 | ) | 3.3 | % | (854,000 | ) | 4.9 | % | ||||||||
|
Increase
in valuation allowance
|
2,218,000 | (37.2 | )% | 6,830,000 | (38.8 | )% | ||||||||||
|
Total
taxes on income
|
$ | - | - | % | $ | - | - | |||||||||
On June
30, 2006, the Company acquired three locations from Everyday Staffing LLC
(“Everyday Staffing”) in exchange for 579,277 shares of Command Center, Inc.
common stock. At the time of the acquisitions, Michael Moothart, controlling
member of the LLC, represented that all tax liabilities of Everyday Staffing had
been paid. As a result of the acquisitions, the Company booked a note payable to
Everyday Staffing in the amount of $113,349. In early 2008, the Company received
notice from the State of Washington that Everyday Staffing owed certain tax
obligations to the State that that arose prior to the acquisition date. The
State requested that the Company pay the amounts due under a theory of successor
liability. Subsequently, a second claim for successor liability was received by
the Company. These two claims are described below.
The first
claim relates to business and occupations and excise tax obligations in the
approximate amount of $250,000. Upon receipt of the notice, the Company
contacted Mr. Moothart and demanded that he resolve the tax obligations. Mr.
Moothart indicated that his legal counsel was working on the matter. While Mr.
Moothart was pursuing the matter through his counsel, and in order to forestall
further action against Command Center, the Company agreed to make payments on
the debt in satisfaction of the Everyday Staffing note payable amount. In the 52
weeks ended December 25, 2009, the Company paid Everyday’s business and
occupations and excise tax obligations totaling approximately $231,139. During
this time, Everyday took no apparent action to deal with its obligations to the
Company and the State of Washington.
42
COMMAND
CENTER, INC.
Notes to
Financial Statements
NOTES
13 — EVERDAYSTAFFING LLC TAX LIABILITIES, CONTINUED:
The
second claim relates to Everyday Staffing liabilities for industrial insurance
taxes that the State of Washington asserts were not paid by Everyday
Staffing. The claims against the Company are based on the theory of
successor liability. The Department of Labor and Industries has estimated the
amount of the unpaid industrial insurance premiums at $1,203,948 plus interest.
The Company and Everyday Staffing have disputed the amount due and the Company
has referred the matter to counsel. The amount claimed by the State is based on
an audit of Everyday in which the auditor appears to have made unsupportable
assignments of workers compensation job codes, hours worked and other estimates
of amounts due, all of which the Company believes to be grossly misstated. The
Company’s review of Everyday Staffing financial records shows that payments made
to the State of Washington approximate the amounts that Everyday Staffing
indicates were owed for industrial insurance.
Based
upon the theory of successor liability, the Washington Department of Labor and
Industries (“the Department”) issued two Notices and Orders of Assessment of
Industrial Insurance Taxes (“Notice”) to Command Center. The first Notice claims
and assesses taxes of $57,446 and the second Notice claims and assesses the
amount of $900,858. The Company strongly disputes both the alleged successor
liability and also the monetary amount asserted by the Department. The Company
is pursuing its administrative remedies in order to vigorously contest the
assertions of these Notices. In strongly disputing the claims of the Department,
Management believes that the potential liability, if any, is not probable and is
not reasonably estimable at this time. Accordingly, no liability has been
established on the books of the Company for the amount claimed. Management
believes the Company’s liability, if any, from the claims and assessments of the
Department are not reasonably likely to have a material adverse effect on the
Company’s financial position, results of operations or cash flows in future
periods.
The Asset
Purchase Agreement signed in connection with the acquisition of assets from
Everyday Staffing requires that Everyday Staffing indemnify and hold harmless
Command Center for liabilities, such as the Washington assessments, that were
not expressly assumed. In response to the state claims for payment of Everyday
Staffing liabilities, the Company has filed a lawsuit against Everyday Staffing,
LLC and Mr. Moothart, seeking
indemnification and
monetary damages. Recently, on July 15, 2009, the Company obtained a judgment
against Mr. Moothart and Everyday Staffing, LLC, jointly and severally, in the
amount of $1.295 million. The collectability of this judgment is questionable.
Glenn Welstad, our CEO, has a minority interest in Everyday Staffing as a
passive investor. In response to the Company’s position that it is not the legal
successor to Everyday Staffing, the Washington Department of Labor and
Industries asserted its claim of successor liability against a second limited
liability company, also known as Everyday Staffing LLC (“Everyday Staffing
II”). Everyday Staffing II was organized by the members of the first
limited liability company after the first Everyday Staffing LLC was
administratively dissolved by the state. The assertion by the state of successor
liability against Everyday Staffing II is consistent with the position advanced
by Command Center that Everyday Staffing II and not Command Center is the only
successor to the entity against which the industrial insurance taxes were
assessed.
Contingent payroll and other tax
liabilities:
In May and June 2006, we acquired operating assets for a
number of temporary staffing stores. The entities that owned and operated these
stores received stock in consideration of the transaction. As operating
businesses prior to our acquisition, each entity incurred obligations for
payroll withholding taxes, workers’ compensation insurance fund taxes, and other
liabilities. We structured the acquisition as an asset purchase and agreed to
assume only the liability for each entity’s accounts receivable financing line
of credit. We also obtained representations that liabilities for payroll taxes
and other liabilities not assumed by the Company would be paid by the entities
and in each case those entities are contractually committed to indemnify and
hold harmless the Company from unassumed liabilities.
Since the
acquisitions, it has come to our attention that certain tax obligations incurred
on operations prior to our acquisitions have not been paid. The entities that
sold us the assets (the “selling entities”) are primarily liable for these
obligations. The owners of the entities may also be liable. In most cases, the
entities were owned or controlled by Glenn Welstad, our CEO.
43
COMMAND
CENTER, INC.
Notes to
Financial Statements
Based on
the information currently available, we estimate that the total state payroll
and other tax liabilities owed by the selling entities is between $400,000 and
$600,000 and that total payroll taxes due to the Internal Revenue Service is
between $1,000,000 and $2,000,000. The Company has been advised by outside legal
counsel that successor liability for the federal claims remains
remote.
The Asset
Purchase Agreement governing these transactions requires that the selling
entities indemnify us for any liabilities or claims we incur as a result of
these predecessor tax liabilities. We have also secured an indemnification
agreement from Glenn Welstad with a partial pledge of his common
stock.
The
Company has not accrued any liability related to these claims for state payroll
taxes and total payroll taxes due to the Internal Revenue Service because it has
been advised by outside legal counsel that the likelihood of showing successor
liability for these claims remains remote. The Company would be adversely
affected if the state or federal government was able to show the Company liable
for these claims.
Operating leases:
The Company
leases store facilities, vehicles and equipment. Most of our store leases have
terms that extend over three to five years. Some of the leases have cancellation
provisions that allow us to cancel on ninety day notice, and some of the leases
have been in existence long enough that the term has expired and we are
currently occupying the premises on month-to-month tenancies. Lease obligations
for the next five years as of December 25, 2009 are:
|
Year
|
Operating Lease Obligation
|
|||
|
2010
|
$ | 1,132,172 | ||
|
2011
|
640,142 | |||
|
2012
|
122,238 | |||
|
2013
|
14,220 | |||
|
2014
|
- | |||
Leases on closed stores:
Over
the last two years, the Company has closed a number of stores in response to
economic conditions and a general downturn in business opportunities in certain
markets. Management continued to evaluate opportunities in those markets and
held out hope for a recovery that would allow us to reopen the closed stores.
During the first quarter, management assessed the likelihood of reopening the
closed stores in the next twelve months as remote. As a result, we began
negotiating with landlords for termination of the closed store leases. We are
also seeking replacement tenants for the properties and are considering other
options to reduce the lease obligations on the closed stores. With the
determination that store re-openings are unlikely, we had recorded a reserve for
closed store leases. This amount represents Management’s best estimate of the
amounts we are likely to pay in settlement of the outstanding lease obligations
on the closed stores. Management has concluded that total lease obligations on
closed stores at the period ended December 25, 2009 is $275,000 under the
assumption that the near term real estate market continues to be highly
unpredictable and subleasing or disposition of closed store leases remains a
significant challenge. Management has concluded that the potential liability for
closed stores could be between $150,000 and $500,000 depending on how the real
estate market performs in the next twelve months.
44
There
have been no disagreements between us and our accountants on accounting and
financial disclosure, and no changes in the financial statement presentation
were required by the accountants.
Conclusions
of Management Regarding Effectiveness of Disclosure Controls and
Procedures
At the
end of the period covered by this report, an evaluation was carried out under
the supervision of, and with the participation of, the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a – 15(e) and Rule 15d – 15(e) of the
Securities and Exchange Act of 1934, as amended). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that, except
as noted below, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures were adequately designed and
effective in ensuring that information required to be disclosed by the Company
in its reports that it files or submits to the SEC under the Exchange Act, is
recorded, processed, summarized and reported within the time period specified in
applicable rules and forms.
Our Chief
Executive Officer and Chief Financial Officer have also determined that the
disclosure controls and procedures are effective, except as noted below, to
ensure that material information required to be disclosed in our reports filed
under the Exchange Act is accumulated and communicated to our management,
including the Company’s Chief Executive Officer and Chief Financial Officer, to
allow for accurate required disclosure to be made on a timely
basis.
Except as
noted below, our disclosure controls and procedures were effective as of
December 25, 2009:
|
|
·
|
We
do not have an independent Board of Directors, an independent Audit
Committee or a board member designated as an independent financial expert
for the Company. The Board of Directors and Audit Committee are comprised
largely of members of management. As a result, there may be lack of
independent oversight of the management team, lack of independent review
of our operating and financial results, and lack of independent review of
disclosures made by the Company.
|
Report
of Management on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for preparation
of our financial statements; providing reasonable assurance that receipts and
expenditures of Company assets are made in accordance with management
authorization; and providing reasonable assurance that unauthorized acquisition,
use or disposition of Company assets that could have a material effect on our
financial statements would be prevented or detected on a timely basis. Because
of its inherent limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on a general framework developed by management with
reference to general business, accounting and financial reporting
principles.
Based
upon this evaluation, we determined that we have four material weaknesses
affecting our internal control over financial reporting and several deficiencies
in our disclosure controls and procedures as of December 25, 2009. The material
weakness and deficiencies noted below are being addressed through our
remediation initiatives which are also described below. We believe that our
financial information, notwithstanding the material weakness and internal
control deficiencies noted, accurately and fairly presents our financial
condition and results of operations for the periods presented.
|
|
·
|
We
do not have an independent Board of Directors, an independent Audit
Committee or a board member designated as an independent financial expert
for the Company. The Board of Directors and Audit Committee are comprised
largely of members of management. As a result, there may be lack of
independent oversight of the management team, lack of independent review
of our operating and financial results, and lack of independent review of
disclosures made by the
Company.
|
45
|
|
·
|
As
a relatively new Company, we continue to face challenges with hiring and
retaining qualified personnel in the finance department. In addition, we
continue to labor under a reduced staff as a result of a downsized
accounting department as part of a larger cost cutting program.
Limitations in both the number of personnel currently staffing the finance
department, and in the skill sets employed by such persons, create
obstacles to the segregation of duties essential for sound internal
controls.
|
|
|
·
|
During
the fourth quarter of the fiscal year ended December 25, 2009, we
experienced a higher than normal turnover in personnel in the finance
department. As noted above, we had already downsized the accounting
department as part of a larger cost cutting program. Due to the
introduction of new finance and accounting staff members and the reduced
business process knowledge available to these new staff members, some
phases of the accounting work including reconciliations and recurring
entries and adjusting journal entries were not completed on a timely
basis. Completion of the financial statements and associated notes for the
year required the application of additional third-party resources
subsequent to year end and prior to the completion of the
audit,
|
|
|
·
|
Documentation
of proper accounting procedures is not yet complete and some of the
documentation that exists has not yet been reviewed or approved by
management, or has not been properly communicated and made available to
employees responsible for portions of the internal control
system.
|
Management’s Remediation
Initiatives
To remedy
the material weakness in internal control, we intend to:
|
|
·
|
Add
to our existing accounting staff when growth resumes and the economic
environment stabilizes. In the meantime, steps are being taken to
segregate duties by spreading specific control activities such as account
reconciliations, data entry verification, and transaction approval
procedures among existing staff and additional third-party resources who
are independent of the transactions or reconciliations over which they are
assigned review functions. While this step will help, we do not have
enough internal professional accounting staff to allow segregation of the
more technical accounting functions. We may retain experts when necessary
to address complex transactions as a further means of limiting risk from
this material weakness. We will continue to monitor this material weakness
and will take steps throughout 2010 to minimize risk when
possible.
|
|
|
·
|
Identify
and nominate additional independent members of the Board of Directors and
assign these individuals to the committees of the board, including the
Audit Committee. In addition, we will identify a qualified independent
person on the Board and designate him or her as the financial
expert.
|
|
|
·
|
Provide
focused on-the-job training and orientation to new staff members to align
their performance with the tasks required to produce complete and accurate
financial reports on a timely
basis.
|
Management
has dedicated considerable resources to spearhead remediation efforts and
continues to address these deficiencies. The accounting and information
technology departments are working closely to identify and address system
interface issues and streamline processes and procedures. We have implemented
new reconciliation procedures to ensure that information is properly transferred
to the accounting system.
During
2010, we will conduct quarterly assessments of our controls over financial
reporting using criteria established in “Internal Control-Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). In connection with these assessments, we will document all significant
accounting procedures and determine whether they are designed effectively and
are operating as designed.
Changes
in internal control over financial reporting
Except as
noted above, there have been no changes during the quarter ended
December 25, 2009 in the Company’s internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect, internal controls over financial reporting.
46
Auditors’ Report:
This annual
report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
None.
The names
and ages and positions of the directors and executive officers of the Company
are listed below along with their business experience during the past five
years. The business address of all executive officers of the Company is 3773
West Fifth Avenue, Post Falls, Idaho 83854. All of these individuals are
citizens of the United States. Our Board of Directors currently consists of four
directors. Directors are elected at the annual meeting of shareholders to serve
until they resign or are removed, or are otherwise disqualified to serve, or
until their successors are elected and qualified. Executive officers are
appointed at the Board’s first meeting after each annual meeting of the
shareholders. No family relationships exist among any of the directors or
executive officers of the Company, except that Todd Welstad is the son of Glenn
Welstad.
|
Glenn Welstad, age 66
|
Chairman
of the Board of Directors, Chief Executive Officer, and
President
|
|
|
Ralph E. Peterson, age 76
|
Director,
Chief Financial Officer
|
|
|
Todd Welstad, age 41
|
Director,
Executive Vice President, Chief Operating Officer and Chief Information
Officer
|
|
|
Ronald L. Junck, age 62
|
Executive
Vice President, Secretary and General Counsel
|
|
|
John Schneller, age 43
|
|
Director
|
Glenn
Welstad,
66, has served as Chairman of the Board since 2005. Mr. Welstad
founded Command Staffing, LLC, and Harborview Software, Inc., and has been our
President, Chief Executive Officer and a director since 2003. Glenn Welstad was
a founder of Labor Ready, Inc. and served as its Chief Executive Officer and
President, until his retirement in 2000. Prior to founding Labor Ready, Glen
Welstad was a successful restaurateur and owned a number of Hardees and Village
Inn franchises. Glenn Welstad is the father of Todd Welstad.
Todd
Welstad,
41, is our Chief Operating Officer “COO”, Chief Information
Officer “CIO”, and a director. He has served as CIO and director since 2003 and
COO since May, 2009. Mr. Welstad served as Chief Information Officer of Labor
Ready, Inc. from August 1993 through 2001. Before joining us, Mr. Welstad worked
in the temporary labor industry as owner/operator and was employed by Harborview
Software, Inc., as Vice President in the development of the software used in
temporary labor store operations. Todd Welstad is the son of Glenn
Welstad.
Ronald L. Junck,
62, has been our Executive Vice President and General Counsel since
November, 2006. From 1974 until 1998, Mr. Junck practiced law in Phoenix,
Arizona, specializing in business law and commercial transactions, representing
a wide variety of business organizations in their corporate and business
affairs, as well as in court. He has lectured extensively at colleges and
universities on various aspects of business law. From 1998 through 2001, Mr.
Junck served as Executive Vice President and General Counsel of Labor Ready,
Inc., and for several years served as a director of that company. In 2001, Mr.
Junck returned to the private practice of law. Mr. Junck served as a member of
our Board of Directors from November, 2005 until November 2007.
Mr. Junck
received a Bachelor of Science in Mechanical Engineering from the University of
Illinois in 1971 and a Juris Doctorate from Valparaiso University in 1974. He is
admitted to practice before all of the state and federal courts in the State of
Arizona, the United States Court of Appeals for the Ninth Circuit and the U.S.
Court of Claim.
Ralph E.
Peterson,
76, was appointed to the Board as an independent director in
November 2007 and has served as our Chief Financial Officer since April of 2009.
From 2002 until 2006, Mr. Peterson was a partner with a mid-sized venture
capital firm. From year to year, Mr. Peterson held leadership roles with Labor
Ready, Inc., where he was a member of its Board of Directors and served as its
Chief Financial Officer and Executive Vice President of Corporate and Business
Development. He also spent more than 20 years in the restaurant industry, first
as an officer of Hardee’s Food company, operating both company owned and
franchised fast food restaurants, and subsequently as the Chief Financial
Officer of Rax Restaurants, Inc., a national restaurant chain also operating
both company-owned and franchised restaurants. Mr. Peterson received his Masters
in Business Administration from the University of North Carolina, as well as a
Master of Science in Finance and Management and a Bachelor of Science in
Accounting from Northern Illinois University.
47
John Schneller,
44, was appointed to the Board on June 23, 2008. Mr. Schneller is
currently a Managing Director at the investment banking firm of Grandwood
Securities, LLC. Prior to joining Grandwood, Mr. Schneller served from 2002 to
2007 as an investment analyst at Knott Partners, a multi-billion dollar,
value-based, New York hedge fund. Mr. Schneller's area of expertise was
analysis and investing in micro-to-mid-cap securities with emphasis in the
fields of intellectual property, technology, content distribution,
nanotechnology, healthcare, non-bank financials, business services, brokers,
asset managers and insurance companies, packaging and retail.
Prior to
Knott Partners, Mr. Schneller served from 2000–2001 as Executive Director and
Senior Research Analyst at CIBC World Markets. Prior to CIBC, from 1997 –
2000, he served as Vice President and Senior Research Analyst at Stephens Inc.,
a multi-disciplined investment and merchant bank, where he focused on Business
Services, IT Services and Marketing Services as well as select
software applications. Mr. Schneller was an Associate Analyst at Donaldson,
Lufkin & Jenrette, from 1996 – 1997, where he focused on Business
Services and Photography and Electronic Imaging.
Mr.
Schneller received his Bachelor of Arts in History from the University of
Massachusetts at Amherst, a Masters degree in Public Administration from Suffolk
University and a Masters degree in Business Administration from the Johnson
Graduate School of Management at Cornell University.
Committees
of the Board of Directors
Our Board
of Directors recently established three standing committees to facilitate and
assist the Board in the execution of its responsibilities. The committees
are the Audit Committee, the Compensation Committee and the Nominating and
Corporate Governance Committee. The composition and function of each of our
committees complies with the rules of the Securities and Exchange Commission
that are currently applicable to us and we intend to comply with additional
exchange listing requirements to the extent that they become applicable to us in
the future. The Board has also recently adopted a charter for the Audit
Committee, Compensation Committee and Nominating and Corporate Governance
Committee. Charters for each committee are available on the Company’s
website at www.commandonline.com. The charter of each committee is also
available in print to any shareholder who requests it. The table below shows
current membership for each of the standing Board committees.
|
Audit
|
Compensation
|
Nominating and
Corporate Governance
|
||
|
John
Schneller (Chair)
|
John
Schneller,(Chair)
|
John
Schneller,(Chair)
|
||
|
Ralph
Peterson
|
|
Ralph
Peterson
|
|
Ralph
Peterson
|
The
committees are described below.
Audit
Committee
:
Ralph Peterson and
John Schneller currently serve on the Audit Committee. Mr. Schneller
is the chairman of our Audit Committee. The Audit Committee was officially
recognized on March 23, 2009. Telephonic meetings to review the quarterly and
filings were held each quarter, and several telephonic meetings were held to
discuss December 25, 2009 audit and the preparation of the financial statements
for the period then ended. The Audit Committee held five formal meetings in
2009.
Prior to
formation of the Audit Committee, the entire Board of Directors performed a
similar or equivalent function in lieu of an audit committee and since the
appointment of Messrs. Peterson and Schneller, the directors have performed
in such capacity.
Our Board
of Directors has determined that Mr. Peterson qualifies as an “audit
committee financial expert” as defined under the Securities Exchange Act of 1934
and the applicable rules of the NASDAQ Capital Market; however, he is not an
independent director due to his appointment as CFO of the Company in 2009.. All
the members of the Audit Committee are financially literate pursuant to the
NASDAQ Marketplace Rules.
48
Compensation
Committee
:
The Board appointed a
Compensation Committee in December, 2008. John Schneller serves as Chairman
of the Compensation Committee and Ralph Peterson also serves on the
committee. The Compensation Committee did not meet during fiscal year 2009
and has not yet met to date in 2010. The Compensation Committee is
comprised of one non-employee directors and one employee director, the
non-employee director has been determined by the Board to be independent
pursuant to Rule 10A-3 of the Exchange Act and the NASDAQ Marketplace
Rules.
Nominating and
Corporate Governance Committee
:
The
Board appointed members of the Nominating and Corporate Governance Committee in
December, 2009. Members of the Committee include John Schneller (Chairman)
and Ralph Peterson. The Nominating and Corporate Governance Committee
did not meet in fiscal year 2009 and has also not yet met to date during
2010.
Executive
Officers
Each of
our executive officers has been elected by our Board of Directors and serves
until his or her successor is duly elected and qualified.
Director
Independence
The Board
affirmatively determines the independence of each director and nominee for
election as a director in accordance with certain criteria, which include all
elements of independence set forth in the related Securities and Exchange
Commission Rules and Regulations and the NASDAQ Marketplace Rules. As part of
the Nominating and Governance Committee meetings and as they feel necessary or
appropriate at full board meetings, the independent directors meet in executive
session without management or any non-independent directors
present.
Based on
these standards and information provided in the Director and Officer
Questionnaire, and by unanimous written consent dated December 10, 2008, the
Board determined that John Schneller, a non-employee director, is independent
and has no material relationship with the Company, except as a director and
shareholder of the Company.
In making
their determinations, the Board reviewed the following transactions,
relationships or arrangements which were determined to be immaterial and not to
impair the independence of the respective directors.
Prior to
his nomination and election to the Board, Mr. Schneller received a finder’s
fee of $67,921 and a warrant to purchase up to 116,435 shares of the Company’s
common stock for the purchase price of $1.25 per share as a finder’s fee in
connection with a PIPE transaction with MDB Capital Group, LLC. The Board has
determined that the finder’s fee paid does not impair Mr. Schneller’s
independence in accordance with the NASDAQ Marketplace Rules and Rule 10A-3
under Section 301 of the Sarbanes-Oxley Act as the value of such finder’s fee
was below $100,000 and paid prior to his nomination or election as a
director.
In
addition, based on Securities and Exchange Commission Rules and Regulations and
NASDAQ Marketplace Rules, the Board affirmatively determined that: (a) Glenn
Welstad is not independent because he is the President and Chief Executive
Officer of the Company, (b) Ralph E. Peterson is not independent because he is
the Chief Financial Officer of the Company and (c) Todd Welstad is not
independent because he is the Chief Information Officer and Chief Operating
Officer.
Director
Compensation
The
Company historically has not paid compensation to directors for their services
performed as directors. No director has been paid any compensation in
2009. The Company is still evaluating the issue of compensation for its
independent directors and expects to begin paying a regular fee or other
compensation to its independent directors when significant operating net income
has been achieved. Our employee directors receive no compensation for
attendance at Board meetings or meetings of Board committees. Directors who are
not also executive officers of the Company are also reimbursed for any expenses
they may incur in attending meetings.
Code
of Ethics
The
Company has prepared a Code of Ethics applicable to all directors and employees
of the Company and a separate Code of Ethics applicable to our principal
executive officer, principal financial officer and principal accounting officer
that is designed to comply with the requirements of the Sarbanes-Oxley Act of
2002. The draft Codes of Ethics are intended to be submitted to the Board of
Directors for adoption at its next regular meeting.
49
The
Company intends to disclose its Codes of Ethics and any subsequent amendments
thereto (other than technical, administrative or non-substantive amendments),
and any waivers of a provision of the Code of Ethics for directors or executive
officers, on the Company’s website at
www.commandonline.com
once such Codes of Ethics are adopted.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities and Exchange Act of 1934, as amended, requires the
Company’s officers and directors and certain other persons to timely file
certain reports regarding ownership of and transactions in the Company’s
securities with the Securities and Exchange Commission. Copies of the required
filings must also be furnished to the Company. The Company became subject to the
requirements of Section 16(a) on February 8, 2008. Section 16(a) compliance was
required during the fifty-two week period ended December 25, 2009. Based solely
upon a review of the copies of Section 16(a) forms received by the Company, all
the Reporting Persons have complied with applicable filing
requirements.
Compensation
Discussion and Analysis
The Board
of Directors’ and Compensation Committee’s responsibilities relating to the
compensation of our Company’s Chief Executive Officer and other executives and
directors includes (a) reviewing and reporting on the continuity of executive
leadership for our Company; (b) approving the compensation structure for our
CEO; and (c) reviewing the compensation structure for each of our other
Named Executive Officers (“NEOs”) as listed under Item 11, “Executive
Compensation – Summary Compensation Table” on page 51
below.
Responsibility
for discharging these duties, and for establishing, maintaining, overseeing,
evaluating and reporting upon our executive compensation plans and programs, was
undertaken by the Board of Directors prior to appointment of a Compensation
Committee in December, 2008.
Objectives
of Our Compensation Program
In
general, our objectives in structuring compensation programs for our NEOs is to
attract, retain, incentivize, and reward talented executives who can contribute
to our Company’s growth and success and thereby build value for our shareholders
over the long term. In the past, we have focused on cash compensation in
the form of base salary as the primary element of our compensation program for
NEOs.
In past
years, we did not have any executive compensation policies in place and our
Board of Directors was responsible for annually evaluating individual executive
performance. Historically, our Board of Directors reviewed and approved all
of our compensation packages, and determined the appropriate level of each
compensation component for each executive officer based upon compensation data
and information gleaned from other sources as to salary levels at comparable
companies. Our Board of Directors has also relied on its members’ business
judgment and collective experience in our industry. Although it did not
benchmark our executive compensation program and practices, our Board of
Directors believes that executive compensation levels have historically been
well below compensation levels for comparable executives in other companies of
similar size and stage of development in similar industries and
locations.
During
2010 we intend to expand the elements of our executive compensation program to
include the following:
|
|
·
|
Cash
compensation in the form of base salary and incentive compensation
(performance-based bonuses);
|
|
·
|
Equity-based
awards;
|
|
·
|
Deferred
compensation plans; and
|
|
·
|
Other
components of compensation.
|
In
addition, employment agreements with each of our executive officers may in the
future provide for certain retirement benefits and potential payments upon
termination of employment for a variety of reasons, including a change in
control of our Company. See “Summary of Employment Agreements,”
below.
50
Elements
of Compensation
Base
Salary
: The compensation received by our executive officers consists of a
base salary. Base salaries for our executives are established based on the scope
of their responsibilities and individual experience. Subject to any applicable
employment agreements, base salaries will be reviewed annually, and adjusted
from time to time to realign salaries with market levels after taking into
account individual responsibilities, performance and experience.
Annual
Bonus
: In addition to base salaries, executive compensation may include
annual bonuses to our executive officers based on satisfactory achievement of
performance objectives established prior to the beginning of each fiscal year.
We have not yet formulated the bases upon which we will pay bonuses to our
executive officers for 2010. We may increase the annual bonus paid to our
executive officers at our discretion.
Equity and Other
Compensation:
We offer $20,000 of Company paid life insurance to each
employee, including officers and directors. We also provide a 401(k) plan to all
employees, including officers and directors.
Role
of Executive Officers in Executive Compensation
Beginning
in December 2008, we have a Compensation Committee who is charged with reviewing
executive compensation and making recommendations to the Board of Directors
based upon their review and analysis. There has been no review performed since
the appointment of the Compensation Committee. The newly appointed Compensation
Committee will begin to serve in this role as described under “Compensation
Committee” above in 2010. None of our executive officers currently serves, or in
the past year has served, as a member of the Board of Directors or compensation
committee of any entity that has one or more executive officers serving as an
independent director on the Board of Directors or Compensation
Committee.
Summary
Compensation Table
The
following table provides summary information about compensation expensed or
accrued by our Company during the fiscal years ended December 25, 2009, and
December 26, 2008 and December 28, 2007,
for (a) our Chief
Executive Officer, (b) our Chief Financial Officer, (c) the two other
executive officers other than our CEO and CFO serving at the end of such fiscal
years; and (d) one additional individual for whom disclosure would have been
provided but for the fact that he was not serving as an executive officer at the
end of fiscal year 2008 (collectively, the “Named Executive Officers” or
“NEOs.”) Columns required by SEC rules are omitted where there is no amount to
report.
|
Name and Principal Position
|
Year
|
Salary
|
All Other Compensation
|
Total
|
|||||||
|
Glenn
Welstad
|
2009
|
$ | 147,923 | $ | 147,923 | ||||||
|
Director
and Chief Executive Officer
|
2008
|
$ | 180,000 | $ | 180,000 | ||||||
|
Thomas
Gilbert
|
2009
|
$ | 76,600 | $ | 76,600 | ||||||
|
Former
Chief Operating Officer and a former Director
|
2008
|
$ | 120,000 | $ | 120,000 | ||||||
|
Todd
Welstad
|
2009
|
$ | 115,384 | $ | 115,384 | ||||||
|
Director
and Chief Information Officer
|
2008
|
$ | 120,000 | $ | 120,000 | ||||||
|
Ralph
E. Peterson (1)
|
2009
|
$ | 72,692 | $ | 72,692 | ||||||
|
Director
and Chief Financial Officer
|
2008
|
$ | 0 | $ | 0 | ||||||
|
Brad
E. Herr (2)
|
2009
|
$ | 51,768 | $ | 51,768 | ||||||
|
Former
Director and former Chief Financial Officer
|
2008
|
$ | 120,000 | $ | 120,000 | ||||||
|
Ron
Junck
|
2009
|
$ | 115,384 | $ | 115,384 | ||||||
|
Executive
Vice President, General Counsel and a former Director
|
2008
|
$ | 120,000 | $ | 120,000 | ||||||
|
(1)
|
Ralph
Peterson was appointed Chief Financial Officer when Mr. Herr ended his
employment with the Company. His 2009 salary represents $108,000 annual
salary for the period April 29, 2009 through the end of fiscal
2009.
|
|
(2)
|
Brad
E. Herr was employed by the Company for a portion of fiscal 2009 from
December 27, 2008 through May 1, 2009. His 2009 salary represents $120,000
annual salary for that period.
|
51
Summary
of Executive Employment Agreements
Executive
employment agreements were entered into effective as of January 1, 2006 for
Glenn Welstad, Chief Executive Officer, Todd Welstad, Chief Information Officer,
and Thomas Gilbert, then Chief Operating Officer. Each agreement was for a
three-year initial term. The agreements for Todd Welstad and Thomas Gilbert have
expired and the agreement for Glenn Welstad was automatically renewed for an
additional one year term through December 31, 2009. Consequently, there are no
executive employment agreements with Glenn Welstad, Chief Executive Officer,
Todd Welstad, Executive Vice President Chief Operating Officer and Chief
Information Officer, nor are there presently any executive employment agreements
with Ralph Peterson, Chief Financial Officer or with Ronald Junck, Executive
Vice President and General Counsel. The Company anticipates entering into new
executive employment agreements with Glenn Welstad, Ralph Peterson, Todd Welstad
and Ronald Junck.
Glenn
Welstad receives a base salary of $180,000 per year and is entitled to
performance-based compensation in an amount set by the Company’s Board of
Directors. Todd Welstad and Ronald Junck presently each receive base salaries of
$115,000 per year and Ralph Peterson presently receives a base salary of
$108,000 per year, plus performance based compensation as set by the Board. No
performance-based compensation was awarded for fiscal years 2008 or 2009. All
executive officers of the Company receive expense reimbursement for business
travel and participation in employee benefits programs made available during the
term of employment.
The
following tables set forth information regarding (a) the ownership of any
non-management person known to us to own more than five percent of any class of
our voting common stock, and (b) the number and percentage of our shares of
common stock held by each director, each of the named executive officers and
directors and officers as a group. Percentages of ownership have been calculated
based upon 37,212,923 shares of common stock issued and outstanding as of
December 25, 2009. There are no existing arrangements which may result in a
change of control of the Company.
Security
Ownership of Non-Management Owners
The
Company has three non-management shareholders who own 5% or more of the total
outstanding shares of common stock. Information relating to such shareholders is
listed below.
|
Title of Class
|
Name and Address of Beneficial Owner
|
Amount and Nature of
Beneficial Ownership
|
Percent of Class
|
|||||||
|
Common
Stock
|
Myron
Thompson
P.O.
Box 969
Minot,
ND 58702
|
2,509,454 | 6.65 | % | ||||||
Security
Ownership of Management
|
Name of Beneficial Owner
|
Individual
Ownership
|
Shared
Ownership
|
Total
Beneficial
Ownership
|
Percent of
Class
|
||||||||||||
|
Ronald
L. Junck (1)
|
1,858,614 | 1,113,751 | 2,972,365 | 7.88 | % | |||||||||||
|
Ralph
E. Peterson
|
400,000 | 1.06 | % | |||||||||||||
|
John
Schneller (2)
|
- | - | 0 | 0.0 | % | |||||||||||
|
Glenn
Welstad (1)
|
6,225,693 | 1,323,327 | 7,549,020 | 20.00 | % | |||||||||||
|
Todd
Welstad (1)
|
1,366,132 | - | 1,366,132 | 3.62 | % | |||||||||||
|
All
Officers and Directors as a Group
|
9,850,439 | 2,437,078 | 12,287,517 | 33.50 | % | |||||||||||
|
(1)
|
The
individuals listed acquired a portion or all of their shares at the time
of the acquisitions of assets from the Company’s former franchisees in May
and June, 2006. The number of shares indicated includes shares held in the
names of the legal entities whose assets were acquired. The shares are
considered beneficially owned by the individual if he has the power to
vote and the power to sell the shares owned by such entity. The full
number of shares owned by an entity in which an officer or director held
an interest are deemed beneficially owned by such officer or director.
Such shares are reflected in the Shared Ownership
column.
|
|
(2)
|
An
entity owned or controlled by Mr. Schneller holds warrants to purchase up
to 116,435 shares of the Company’s common
stock.
|
52
Equity
Compensation Plans
At the
annual meeting of shareholders held on January 20, 2009, the shareholders
approved the adoption of the 2008 Stock Incentive Plan. No equity compensation
has been awarded to executive officers or directors under this or any other plan
to date.
Our Board
has previously reviewed and approved the following Related Party
Transactions:
Van Leasing Arrangements
:
Glenn Welstad, our CEO, owns Alligator LLC (Alligator), a vehicle leasing
company. Alligator formerly provided approximately 8 vans and van drivers to the
Company for use in transporting temporary workers to job sites at various
locations within our sphere of operations. The Company provided fuel for the
vehicles and paid Alligator a lease payment for use of the vans plus
reimbursement for the cost of the drivers. As of December 25, 2009 and December
26, 2008, the Company owed Alligator $224,491 and $119,539, respectively, for
lease payments and driver compensation. During the 2009 and 2008 fiscal years,
the Company incurred $194,539 and $469,489, respectively in expense related to
this arrangement, classified as transportation and travel in the statement of
operations.
Management
has concluded that the leasing relationship with Alligator LLC (“Alligator”)
would be considered a variable interest to Command Center, Inc. due to the
ownership interest in Alligator by our Chief Executive Officer. As such, we
evaluated the relationship for consolidation. We undertook to assess the primary
beneficiary of the Variable Interest Entity to determine which member of the
related party group should consolidate, and concluded that the Company was not
the primary beneficiary. Therefore Alligator has not been consolidated in these
financial statements.
During
the period ending December 25, 2009 the Company terminated the van leasing
agreement with Alligator LLC, on October 7, 2009 Alligator transferred ownership
of the remaining four vans that were then being leased by the Company to us.
Since that date we have owned and operated the vans, employed the drivers and
have not leased any vans or drivers from Alligator and our business relationship
with Alligator has ended.
None of
our executive officers serves as a member of the board of directors or
compensation committee, or other committee serving an equivalent function, of
any other entity that has one or more of its executive officers serving as a
member of our Board of Directors or Compensation Committee. None of the current
members of our Compensation Committee, nor any of their family members, has ever
been one of our employees.
Going
forward, our Audit Committee will review and report to our Board of Directors on
any Related Party Transaction. From time to time, the independent members of our
Board of Directors also may form an
ad hoc
committee to consider
transactions and agreements in which a director or executive officer of our
Company has a material interest. In considering Related Party Transactions, the
members of our Audit Committee are guided by their fiduciary duties to our
shareholders. Our Audit Committee does not currently have any written or oral
policies or procedures regarding the review, approval and ratification of
transactions with related parties.
The Board
of Directors selected DeCoria, Maichel & Teague, P.S.,
7307 N. Division, Suite 222, Spokane,
WA 99208
as the independent registered public accounting firm to examine
the consolidated financial statements of the Company and its subsidiary for the
fiscal year ending December 25, 2009. DeCoria, Maichel & Teague, P.S.
have audited the financial statements of the Company since the fiscal year ended
December 31, 2005.
53
The
following table summarizes the fees that DeCoria, Maichel and Teague, P.S.
charged the Company for the listed services during 2009 and 2008:
|
Type of fee:
|
2009
|
2008
|
Description
|
||||||
|
Audit
fees:
|
$ | 126,200 | $ | 107,421 |
Services
in connection with the audit of the annual financial statements and the
review of the financial statements included in our reports on Forms 10-Q
and 10-K.
|
||||
|
Audit
related fees:
|
—0- | -0- |
For
assurance and related services that were reasonably related to the
performance of the audit or review of financial statements and not
reported under “Audit Fees”.
|
||||||
|
Tax
fees:
|
13,200 | 14,800 | |||||||
|
All
other fees
|
1,250 | -0- | |||||||
|
Total
|
$ | 140,650 | $ | 122,221 | |||||
|
Exhibit No.
|
Description
|
|
|
3.1
|
Articles
of Incorporation: previously filed as Exhibit 3.1 to Form SB-2 dated May
7, 2001, and incorporated herein by reference.
|
|
|
3.2
|
Amendment
to the articles of incorporation: previously filed as Exhibit 3.1 to Form
8-K dated November 16, 2005 and incorporated herein by
reference.
|
|
|
3.3
|
Amendment
to the articles of incorporation – previously filed as Exhibit 3.3 to Form
S-1 dated January 14, 2008 and incorporated herein by
reference.
|
|
|
3.4
|
Bylaws:
Previously filed as Exhibit 3(b) to Form SB-2 dated May 7, 2001 and
incorporated herein by reference.
|
|
|
3.5
|
Amendment
to Bylaws: previously filed as Exhibit 3.2 to Form 8-K dated November 16,
2005 and incorporated herein by reference.
|
|
|
10
|
Material
Contracts
|
|
|
10.1
|
Acquisition
agreement: Asset Purchase Agreement dated as of November 9, 2005 by and
among Command Center, Inc. (formerly Temporary Financial Services, Inc.),
Command Staffing LLC, Harborview Software, Inc., and the Operations
Entities as defined herein. (Previously filed as Exhibit 10.1 to Form 8-K
dated November 9, 2005 and incorporated herein by
reference.)
|
|
|
10.2
|
Sale
and Leaseback Agreement dated as of December 29, 2005 by and among Command
Center, Inc. and John R. Coghlan. (Previously filed as Exhibit 10.1 to
Form 8-K dated December 29, 2005 and incorporated herein by
reference.)
|
|
|
10.3
|
Employment
agreement with Glenn Welstad - previously filed as Exhibit 10.3 to Form
S-1 dated January 14, 2008 and incorporated herein by
reference.
|
|
|
10.4
|
Employment
agreement with Tom Gilbert previously filed as Exhibit 10.4 to Form S-1
dated January 14, 2008 and incorporated herein by
reference.
|
|
|
10.5
|
Employment
agreement with Todd Welstad previously filed as Exhibit 10.5 to Form S-1
dated January 14, 2008and incorporated herein by
reference.
|
|
|
31.1
|
Certification
of Principal Executive Officer
|
|
|
31.2
|
Certification
of Principal Financial and Accounting Officer
|
|
|
32.1
|
Certification
of Chief Executive Officer
|
|
|
32.2
|
|
Certification
of Principal Financial and Accounting
Officer
|
54
SIGNATURES
In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMMAND
CENTER, INC.
|
/s/Glenn Welstad
|
Chief Executive Officer, President
|
Glenn Welstad
|
April 9, 2010
|
|||
|
Signature
|
Title
|
Printed Name
|
Date
|
|||
|
/s/ Ralph E. Peterson
|
Chief Financial Officer, Secretary
|
Ralph E. Peterson
|
April 9, 2010
|
|||
|
Signature
|
|
Title
|
Printed Name
|
Date
|
In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
/s/ Glenn Welstad
|
Director
|
Glenn Welstad
|
April 9, 2010
|
|
Signature
|
Title
|
Printed Name
|
Date
|
|
/s/ Ralph E. Peterson
|
Director
|
Ralph E. Peterson
|
April 9, 2010
|
|
Signature
|
Title
|
Printed Name
|
Date
|
|
/s/ John Schneller
|
Director
|
John Schneller
|
April 9, 2010
|
|
Signature
|
Title
|
Printed Name
|
Date
|
|
/s/ Todd Welstad
|
Director
|
Todd Welstad
|
April 9, 2010
|
|
Signature
|
Title
|
Printed Name
|
Date
|
55
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff Comments Not Applicable To Smaller Reporting CompaniesItem 1B. Unresolved Staff CommentsItem 2. Description Of PropertiesItem 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Basis Of Presentation :Note 1 Basis Of PresentationNote 2 Summary Of Significant Accounting Policies:Note 2 Summary Of Signicant Accounting Policies, Continued:Note 3 Goodwill:Note 3 Goodwill, Continued:Note 4 Related-party Transactions:Note 5 Property and Equipment:Note 6 Intangible Asset:Note 6 Intangible Asset, Continued:Note 7 Line Of Credit Facility:Note 8 Short-term Note Payable:Note 8 Short-term Note Payable, Continued:Note 9 Workers Compensation Insurance and Reserves:Note 9 Workers Compensation Insurance and Reserves, Continued:Note 10 Long Term Debt:Note 11 - Stockholders Equity (deficit):Note 12 Income Tax:Note 13 Everyday Staffing Llc Tax Liabilities:Note 14 Commitments and Contingencies:Note 14 Commitments and Contingencies, Continued:Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9a(t). Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers, and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits, Financial Statement Schedules