Notes to Consolidated Condensed Financial Statements
NOTE 1 – BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited consolidated condensed financial statements
have been prepared by Command Center, Inc. ("Command Center,”
the “Company,” “CCI,” “we,”
"us," or “our”) in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim
financial reporting and rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted. In the opinion
of our management, all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the
fiscal periods presented have been included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended December 30, 2016. The
results of operations for the thirteen and twenty-six weeks ended
June 30, 2017 are not necessarily indicative of the results
expected for the full fiscal year, or for any other fiscal
period.
Consolidation:
The consolidated financial statements include
the accounts of Command Center and all of our wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of consolidated
financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates include the allowance for doubtful accounts,
workers’ compensation risk pool deposits, and workers’
compensation claims liability.
Cash and cash equivalents:
Cash and cash equivalents consist
of demand deposits, including interest-bearing accounts with
original maturities of three months or less, held in banking
institutions and a trust account.
Concentrations:
At June 30, 2017, 31.1% of our accounts
payable was due to a single vendor.
At December
30, 2016, 20.6% of accounts payable were due to a single
vendor.
Fair Value Measures:
Fair value is the price that would
be received to sell an asset, or paid to transfer a liability, in
the principal or most advantageous market for the asset or
liability in an ordinary transaction between market participants on
the measurement date. Our policy on fair value measures requires us
to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The policy
establishes a fair value hierarchy based on the level of
independent, objective evidence surrounding the inputs used to
measure fair value. A financial instrument’s categorization
within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The policy
prioritizes the inputs into three levels that may be used to
measure fair value:
Level
1: Applies to assets or liabilities for which there are quoted
prices in active markets for identical assets or
liabilities.
Level
2: Applies to assets or liabilities for which there are inputs
other than quoted prices that are observable for the asset or
liability such as quoted prices for similar assets or liabilities
in active markets; quoted prices for identical assets or
liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
Level
3: Applies to assets or liabilities for which there are
unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or
liabilities.
Our
financial instruments consist principally of a contingent
liability. For additional information see
Note 10 – Commitments and
Contingencies
.
Recent Accounting Pronouncements:
In May 2014, the FASB
issued new revenue recognition guidance under ASU 2014-09 that will
supersede the existing revenue recognition guidance under U.S.
GAAP. The new standard focuses on creating a single source of
revenue guidance for revenue arising from contracts with customers
for all industries. The objective of the new standard is for
companies to recognize revenue when it transfers the promised goods
or services to its customers at an amount that represents what the
company expects to be entitled to in exchange for those goods or
services. In July 2015, the FASB deferred the effective date by one
year (ASU 2015-14). This ASU will now be effective for annual
periods, and interim periods within those annual periods, beginning
on or after December 15, 2017. Early adoption is permitted, but not
before the original effective date of December 15, 2016. Since the
issuance of the original standard, the FASB has issued several
other subsequent updates including the following: 1) clarification
of the implementation guidance on principal versus agent
considerations (ASU 2016-08); 2) further guidance on identifying
performance obligations in a contract as well as clarifications on
the licensing implementation guidance (ASU 2016-10); 3) rescission
of several SEC Staff Announcements that are codified in Topic 605
(ASU 2016-11); and 4) additional guidance and practical expedients
in response to identified implementation issues (ASU 2016-12). The
new standard will be effective for us beginning January 1, 2018 and
we expect to implement the standard with the modified retrospective
approach, which recognizes the cumulative effect of application
recognized on that date We are evaluating the impact of adoption on
our consolidated results of operations, consolidated financial
position and cash flows.
In
February 2016, the FASB issued ASU 2016-02 amending the existing
accounting standards for lease accounting and requiring lessees to
recognize lease assets and lease liabilities for all leases with
lease terms of more than 12 months, including those classified as
operating leases. Both the asset and liability will initially be
measured at the present value of the future minimum lease payments,
with the asset being subject to adjustments such as initial direct
costs. Consistent with current U.S. GAAP, the presentation of
expenses and cash flows will depend primarily on the classification
of the lease as either a finance or an operating lease. The new
standard also requires additional quantitative and qualitative
disclosures regarding the amount, timing and uncertainty of cash
flows arising from leases in order to provide additional
information about the nature of an organization’s leasing
activities. This ASU is effective for annual periods, and interim
periods within those annual periods, beginning after December 15,
2018 and requires modified retrospective application. Early
adoption is permitted. We are currently evaluating the impact of
the new guidance on our consolidated financial statements and
related disclosures.
In
November 2016, the FASB issued ASU 2016-18, “Statement of
Cash Flows (Topic 230) Restricted Cash.” The new guidance
requires that the reconciliation of the beginning-of-period and
end-of-period amounts shown in the statement of cash flows include
restricted cash and restricted cash equivalents. If restricted cash
is presented separately from cash and cash equivalents on the
balance sheet, companies will be required to reconcile the amounts
presented on the statement of cash flows to the amounts on the
balance sheet. Companies will also need to disclose information
about the nature of the restrictions. The guidance is effective for
fiscal years beginning after December 15, 2017, and the interim
periods within those fiscal years. We adopted this guidance during
the first quarter of 2017.
In
January 2017, the FASB issued ASU 2017-04, “Intangibles
– Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment.” The new
guidance simplifies the subsequent measurement of
goodwill by eliminating the requirement to perform a Step 2
impairment test to compute the implied fair value of goodwill.
Instead, companies will only compare the fair value of a reporting
unit to its carrying value (Step 1) and recognize an impairment
charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value; however, the loss recognized may
not exceed the total amount of goodwill allocated to that reporting
unit. Additionally, an entity should consider income tax effects
from any tax deductible goodwill on the carrying amount of the
reporting unit when measuring the goodwill impairment loss, if
applicable. This amended guidance is effective for fiscal years and
interim periods beginning after December 15, 2019, with early
adoption permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017.
We are
currently evaluating the impact of the new guidance on our
consolidated financial statements and related
disclosures.
Other
accounting standards that have been issued by the Financial
Accounting Standards Board or other standards-setting bodies are
not expected to have a material impact on our financial position,
results of operations and cash flows. For the period ended June 30,
2017, the adoption of other accounting standards had no material
impact on our financial positions, results of operations, or cash
flows.
NOTE 2 – EARNINGS PER SHARE
Basic
earnings per share is calculated by dividing net income or loss
available to common stockholders by the weighted average number of
common shares outstanding, and does not include the impact of any
potentially dilutive common stock equivalents. Diluted earnings per
share reflect the potential dilution of securities that could share
in our earnings through the conversion of common shares issuable
via outstanding stock options and stock warrants, except where
their inclusion would be anti-dilutive. Total outstanding common
stock equivalents at June 30, 2017 and June 24, 2016, were
2,180,000 and 3,626,000, respectively.
Diluted
common shares outstanding were calculated using the treasury stock
method and are as follows:
|
|
|
|
|
|
|
|
Weighted average
number of common shares used in basic net income (loss) per common
share
|
60,308,111
|
63,558,745
|
60,306,380
|
63,781,844
|
Dilutive effects of
stock options
|
651,515
|
758,344
|
694,831
|
-
|
Weighted average
number of common shares used in diluted net income (loss) per
common share
|
60,959,626
|
64,317,089
|
61,001,211
|
63,781,844
|
|
|
|
|
|
NOTE 3 – ACCOUNT PURCHASE AGREEMENT & LINE OF CREDIT
FACILITY
In May 2016, we signed a new account purchase agreement with our
lender, Wells Fargo Bank, N.A.,
which allows us to sell
eligible accounts receivable for 90% of the invoiced amount on a
full recourse basis up to the facility maximum, $14 million on June
30, 2017 and December 30, 2016. When the account is paid by our
customers, the remaining 10% is paid to us, less applicable fees
and interest. Eligible accounts receivable are generally defined to
include accounts that are not more than ninety days past
due.
Pursuant
to this agreement, at June 30, 2017, we owed approximately
$109,000, and at December 30, 2016, there was approximately
$114,000 that was owed to us which was included in Other
receivables on the Consolidated Condensed Balance
Sheet.
The
current agreement bears interest at the Daily One Month London
Interbank Offered Rate plus 2.5% per annum. At June 30, 2017, the
effective interest rate was 3.7%. Interest is payable on the actual
amount advanced. Additional charges include an annual facility fee
equal to 0.50% of the facility threshold in place and lockbox fees.
As collateral for repayment of any and all obligations, we granted
Wells Fargo Bank, N.A. a security interest in all of our property
including, but not limited to, accounts receivable, intangible
assets, contract rights, deposit accounts, and other such assets.
Under our account purchase agreement, our borrowing base is limited
to 90% of acceptable accounts as defined in the agreement, less the
amount of outstanding letters of credit. At June 30, 2017, the
amount available to us under the Wells Fargo agreement was
approximately $120,000.
As of
June 30, 2017, we had a letter of credit with Wells Fargo for
approximately $6.0 million that secures our obligations to our
workers’ compensation insurance carrier and reduces the
amount available to us under the account purchase agreement. For
additional information related to this letter of credit see
Note 6 – Workers’
Compensation Insurance and Reserves
.
The
agreement requires that the sum of our unrestricted cash plus net
accounts receivable must at all times be greater than the sum of
the amount outstanding under the agreement plus accrued payroll and
accrued payroll taxes. At June 30, 2017, and December 30, 2016, we
were in compliance with this covenant.
NOTE 4 – ACQUISITION
On June
3, 2016, we purchased substantially all the assets of Hanwood
Arkansas, LLC, an Arkansas limited liability company, and Hanwood
Oklahoma, LLC, an Oklahoma limited liability company. Together
these companies operated as Hancock Staffing
(“Hancock”) from stores located in Little Rock,
Arkansas and Oklahoma City, Oklahoma. We acquired all of the assets
used in connection with the operation of the two staffing stores.
In addition, we assumed liabilities for future payments due under
the leases for the two stores, amounts owed on motor vehicles
acquired, and the amount due on their receivables factoring
line.
The
aggregate consideration paid for Hancock was approximately
$2,617,000, allocated as follows: (i) cash of $1,980,000; (ii) an
unsecured one-year holdback obligation of $220,000; and (iii)
assumed liabilities of approximately $417,000. As of June 30, 2017
the holdback obligation has not been released.
In
connection with the acquisition of Hancock, we identified and
recognized intangible assets of approximately $659,000 representing
customer relationships and employment agreements/non-compete
agreements. The customer relationships are being amortized on a
straight line basis over their estimated life of four years and the
non-compete agreements are being amortized over their two-year
terms. During the thirteen and twenty-six weeks ended June 30,
2017, we recognized amortization expense of approximately $56,000
and $111,000, respectively. At June 30, 2017, the net intangible
asset balance was approximately $419,000.
The
following table summarizes the fair values of the assets acquired
and liabilities assumed and recorded at the date of
acquisition:
Assets:
|
|
Current
assets
|
$
587,833
|
Fixed
assets
|
92,220
|
Intangible
assets
|
659,564
|
Goodwill
|
1,277,568
|
|
$
2,617,185
|
Liabilities:
|
|
Current
liabilities
|
637,185
|
Net purchase
price
|
$
1,980,000
|
The
following table summarizes the pro forma operations had the
entities been acquired at the beginning of 2016 in the Consolidated
Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
Revenue
|
$
23,610
|
$
44,611
|
|
|
|
Net income before
income tax
|
$
857
|
$
844
|
Income
tax
|
168
|
269
|
Net
income
|
$
689
|
$
575
|
NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
and other intangible assets are stated net of accumulated
amortization. The following table summarizes the goodwill and
intangible asset balances:
|
|
|
Goodwill
|
$
3,777,568
|
$
3,777,568
|
Intangible
assets
|
659,564
|
659,564
|
Accumulated
amortization
|
(240,539
)
|
(129,521
)
|
Goodwill and other
intangible assets, net
|
$
4,196,593
|
$
4,307,611
|
Amortization
expense for the thirteen and twenty-six weeks ended June 30, 2017
was approximately $56,000 and $112,000, respectively. Total
amortization expense for the thirteen and twenty-six weeks ended
June 24, 2016 were both approximately $11,000.
NOTE 6 – WORKERS' COMPENSATION INSURANCE AND
RESERVES
On
April 1, 2014, we changed our workers’ compensation carrier
to ACE American Insurance Company (“ACE”) in all states
in which we operate other than Washington and North Dakota. The ACE
insurance policy is a large deductible policy where we have primary
responsibility for all claims made. ACE provides insurance for
covered losses and expenses in excess of $500,000 per incident.
Under this high deductible program, we are largely self-insured.
Per our contractual agreements with ACE, we must provide a
collateral deposit of $6.0 million, which is accomplished through a
letter of credit under our Account Purchase Agreement with Wells
Fargo. For workers’ compensation claims originating in
Washington and North Dakota, we pay workers’ compensation
insurance premiums and obtain full coverage under mandatory state
government administered programs. Generally, our liability
associated with claims in these jurisdictions is limited to the
payment of premiums. In the past, we also obtained full coverage in
the state of New York under a policy issued by the State Fund of
New York. Accordingly, our consolidated financial statements
reflect only the mandated workers’ compensation insurance
premium liability for workers’ compensation claims in these
jurisdictions.
From
April 1, 2012 to March 31, 2014, our workers’ compensation
carrier was Dallas National Insurance in all states in which we
operate other than Washington, North Dakota and New York. The
Dallas National coverage was a large deductible policy where we
have primary responsibility for claims under the policy. Dallas
National provided insurance for covered losses and expenses in
excess of $350,000 per incident. Per our contractual agreements
with Dallas National, we made payments into, and maintain a balance
of $1.8 million as a non-depleting deposit as collateral for our
self-insured claims. During this period, Dallas National arranged
with Companion Insurance (now Sussex Insurance) to underwrite
coverage in California and South Dakota. As a result of this
arrangement, Sussex Insurance continues to hold a collateral
deposit advanced by us of $215,000.
From
April 1, 2011 to March 31, 2012, our workers’ compensation
coverage was obtained through Zurich American Insurance Company
(“Zurich”). The policy with Zurich was a guaranteed
cost plan under which all claims are paid by Zurich. Zurich
provided workers’ compensation coverage in all states in
which we operated other than Washington and North
Dakota.
From
May 13, 2008 to March 31, 2011, our workers' compensation coverage
was obtained through AMS Staff Leasing II (“AMS”) for
coverage in all jurisdictions in which we operated, other than
Washington and North Dakota. The AMS coverage was a large
deductible policy where we have primary responsibility for claims
under the policy. Under the AMS policies, we made payments into a
risk pool fund to cover claims within our self-insured layer. Per
our contractual agreements for this coverage, we were originally
required to maintain a deposit in the amount of $500,000. At June
30, 2017, our deposit with AMS was approximately
$483,000.
For the
two-year period prior to May 13, 2008, our workers’
compensation coverage was obtained through policies issued by AIG.
At June 30, 2017, our risk pool deposit with AIG was approximately
$400,000.
As part
of our large deductible workers’ compensation programs, our
carriers require that we collateralize a portion of our future
workers’ compensation obligations in order to secure future
payments made on our behalf. This collateral is typically in the
form of cash and cash equivalents. At June 30, 2017 and December
30, 2016, we had net cash collateral deposits of approximately $2.4
million. With the addition of the $6.0 million letter of credit,
our cash and non-cash collateral totaled approximately $8.4 million
at June 30, 2017. The letter of credit increased to $6.0 million on
April 7, 2017, with the renewal of our current workers’
compensation policy with ACE (effective April 1, 2017, through
March 31, 2018). The workers’ compensation risk pool deposits
total $2.4 million as of June 30, 2017, consisting of a current
portion of approximately $403,000 and a long-term portion of
approximately $2.0 million. The long-term portion of the risk pool
deposits is net of an allowance of approximately $500,000. This
allowance is to reserve for the possibility that we will not
recover all of our risk pool deposits that we placed with our
former workers’ compensation insurance carrier, Freestone
Insurance (formerly Dallas National Insurance Company). Freestone
Insurance was placed in receivership by the State of Delaware in
2014. We continue to believe that we have a priority claim for the
return of our collateral. However, the amount that will ultimately
be returned to us is still uncertain. See
Note 10 – Commitments and
Contingencies,
for additional information on cash collateral
provided to Freestone Insurance Company.
Workers’
compensation expense for temporary workers is recorded as a
component of our cost of services and consists of the following
components: changes in our self-insurance reserves as determined by
our third party actuary, actual claims paid, insurance premiums and
administrative fees, and premiums paid in monopolistic
jurisdictions. Workers’ compensation expense for our
temporary workers totaled approximately $787,000 and $1.6 million
for the thirteen and twenty-six weeks ended June 30, 2017,
respectively. Workers’ compensation expense for our temporary
workers totaled approximately $894,000 and $1.7 million for the
thirteen and twenty-six weeks ended June 24, 2016,
respctively.
The
workers’ compensation risk pool deposits are classified as
current and non-current assets on the consolidated balance sheet
based upon management’s estimate of when the related claims
liabilities will be paid. The deposits have not been discounted to
present value in the accompanying consolidated financial
statements. All liabilities associated with our workers’
compensation claims are fully reserved on our consolidated balance
sheet.
NOTE 7 – STOCK BASED COMPENSATION
Employee Stock Incentive Plan:
Our 2008 Stock
Incentive Plan expired in January 2016. Outstanding awards continue
to remain in effect according to the terms of the plan and the
award documents. The 2008 Stock Incentive Plan permitted the grant
of up to 6.4 million stock options in order to motivate, attract
and retain the services of employees, officers and directors, and
to provide an incentive for outstanding performance. Pursuant to
awards under this plan, there were 1,917,500 and 1,860,500 stock
options vested at June 30, 2017 and December 30, 2016,
respectively. As of June 30, 2017, we had one equity compensation
plan, namely the
Command Center,
Inc. 2016 Stock Incentive Plan,
approved by the shareholders
on November 17, 2016. Pursuant to the 2016 Plan, the Compensation
Committee is authorized to issue awards for up to 6.0 million
shares over the 10 year life of the plan. Currently, there have
been no awards granted under this plan.
The
following table summarizes our stock options outstanding at
December 30, 2016 and changes during the period ended June 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 30, 2016
|
2,498,000
|
$
0.36
|
$
0.23
|
Expired
|
(318,000
)
|
$
0.41
|
$
0.33
|
Outstanding June
30, 2017
|
2,180,000
|
$
0.36
|
$
0.23
|
|
|
|
|
The
following table summarizes our non-vested stock options outstanding
at December 30, 2016, and changes during the period ended June 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested December
30, 2016
|
637,500
|
$
0.40
|
$
0.27
|
Vested
|
(375,000
)
|
$
0.20
|
$
0.16
|
Non-vested June 30,
2017
|
262,500
|
$
0.69
|
$
0.37
|
|
|
|
|
The
following table summarizes information about our stock options
outstanding, and reflects the intrinsic value recalculated based on
the closing price of our common stock at June 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
2,180,000
|
$
0.36
|
5.26
|
$
240,000
|
Exercisable
|
1,917,500
|
$
0.31
|
5.38
|
$
164,413
|
|
|
|
Number of Shares Outstanding
|
Weighted Average Contractual Life (years)
|
Number of Shares Exercisable
|
Weighted Average Contractual Life
|
|
1,500,000
|
5.63
|
1,500,000
|
5.65
|
|
680,000
|
4.39
|
417,500
|
4.40
|
|
2,180,000
|
5.26
|
1,917,500
|
5.38
|
NOTE 8 – STOCKHOLDERS’ EQUITY
Stock Repurchase:
In April 2015, we announced
that our Board of Directors authorized a $5.0 million three year
repurchase plan of our common stock. During the twenty-six weeks
ended June 30, 2017, we did not purchase any shares of common under
the plan. During the twenty-six weeks ended June 24, 2016 we
purchased 2,163,464 shares of common stock at an aggregate price of
$880,000. We have approximately $2.1 million remaining under the
plan.
NOTE 9 – INCOME TAX
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of our deferred taxes generally
consists of net operating loss, accrued vacation, workers’
compensation claims liability, depreciation, bad debt reserve,
deferred rent, stock compensation, charitable contributions, AMT
credit, and other accruals.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Operating leases:
We presently lease office
space for our corporate headquarters in Lakewood, Colorado. The
lease for the corporate headquarters expires January 31, 2021. We
currently pay approximately $11,000 per month for our office space
with annual increases of approximately 3%. We own all of the office
furniture and equipment used in our corporate
headquarters.
We also
lease the facilities for all of our store locations. All of these
facilities are leased at market rates that vary in amount depending
on location. Each store is between 1,000 and 5,000 square feet,
depending on location and market conditions.
We
lease store facilities, vehicles, and equipment. Most of our store
leases have terms that extend over three to five years. The
majority of the leases have cancellation provisions that allow us
to cancel with 90 days' notice. Other leases have been in existence
long enough that the term has expired and we are currently
occupying the premises on month-to-month tenancies. Minimum lease
obligations for the next five fiscal years as of June 30, 2017,
are:
|
|
Year
|
|
2017 (6
months)
|
$
415,413
|
2018
|
654,595
|
2019
|
437,282
|
2020
|
234,384
|
2021
|
12,155
|
|
$
1,753,829
|
|
|
Total
lease expense for the thirteen and twenty-six weeks ended June 30,
2017 was approximately $356,000 and $728,000, respectively. Total
lease expense for the thirteen and twenty-six weeks ended June 24,
2016 was approximately $374,000 and $727,000,
respectively.
Legal Proceedings:
From time to time we are involved in
various legal proceedings. Except for the Freestone Insurance
Company liquidation proceedings (discussed in detail below), we
believe the outcome of these proceedings, even if determined
adversely, will not have a material adverse effect on our business,
financial condition or results of operations. There have been no
material changes in our legal proceedings since June 30,
2017.
Freestone Insurance Company Liquidation:
From April 1,
2012, through March 31, 2014, our workers’ compensation
insurance coverage was provided by Dallas National Insurance under
high deductible policies in which we are responsible for the first
$350,000 per incident. During this time period, Dallas National
changed its corporate name to Freestone Insurance Company. Under
the terms of the policies, because we are obligated to pay for the
costs of claims up to the deductible amount, we were required to
provide cash collateral of $900,000 per year, for a total of $1.8
million, as a non-depleting fund to secure our payment up to the
deductible amount. In January 2014, Freestone Insurance provided
written confirmation to us that it continued to hold $1.8 million
of Command Center funds as collateral and stated that an additional
$200,000 was held at another insurance provider for a total of $2.0
million. In April 2014, the State of Delaware placed Freestone
Insurance in receivership due to concerns about its financial
condition. On August 15, 2014, the receivership was converted to a
liquidation proceeding. The receiver then distributed pending
individual claims for workers’ compensation benefits to the
respective state guaranty funds for administration. In many cases,
the state guaranty funds have made payments directly to the
claimants. In other situations we have continued to pay claims that
are below the deductible level. We are not aware of any pending
claims from this time period that exceed or are likely to exceed
our deductible.
From
about July 1, 2008 until April 1, 2011, in most states our
workers’ compensation coverage was provided under an
agreement with AMS Staff Leasing II, through a master policy with
Dallas National. During this time period, we deposited
approximately $500,000 with an affiliate of Dallas National for
collateral related to the coverage through AMS Staff Leasing II.
Claims that remain open from this time period have also been
distributed by the receiver to the state guaranty funds. In one
instance, the State of Minnesota has denied liability for payment
of a workers’ compensation claim that arose in 2010 and is in
excess of our deductible. In the first quarter of 2016 we settled
the individual workers’ compensation case and we ultimately
withdrew our legal challenge to the state’s denial of
liability.
During
the second quarter of 2015, the receiver requested court
authorization to disburse funds to the state guaranty funds. We and
other depositors of collateral with Freestone objected and asked
the court to block the disbursements until a full accounting of the
assets and liabilities of Freestone is provided. Distribution of
funds by the receiver to the state guaranty funds remains on hold.
As a result of these developments, during the second quarter of
2015 and the first quarter of 2016 we recorded reserves of $250,000
on the deposit balance, for a total reserve of $500,000. The
current net deposit of $1.8 million is recorded as workers’
compensation risk pool deposit. We review these deposits at each
balance sheet date, and at June 30, 2017, no additional reserve was
recognized because any potential impairment was not probable and
estimable.
On July
5, 2016, the receiver filed the First Accounting for the period
April 28, 2014 through December 31, 2015, with the Delaware Court
of Chancery. The First Accounting does not clarify the issues with
respect to the collateral claims, priorities and return of
collateral. In the accounting, the receiver reports total assets
consisting of cash and cash equivalents of $87.7 million as of
December 31, 2015.
In late
2015, we filed timely proofs of claim with the receiver. One proof
of claim is filed as a priority claim seeking return of the full
amount of our collateral deposits. The other proof of claim is a
general claim covering non-collateral items. We believe that our
claim to the return of our collateral is a priority claim in the
liquidation proceeding and that our collateral should be returned
to us. However, if it is ultimately determined that our claim is
not a priority claim, or if there are insufficient assets in the
liquidation to satisfy the priority claims, we may not receive any
or all of our collateral.
In late
May 2017, the receiver filed a petition with the court, proposing a
plan as to how the receiver would identify and pay collateral to
all insureds that paid cash collateral to Freestone. In the
petition, the receiver has acknowledged receiving only $500,000 of
Command Center’s collateral. Of the $500,000 acknowledged,
the receiver proposes to return only approximately $6,000 to
Command Center. There was no comment or information provided in the
petition regarding the additional $1.8 million in collateral
provided by Command Center to Freestone via its agent, High Point
Risk Services, which Freestone previously confirmed receipt of in a
letter to Command Center in January 2014. Furthermore, the receiver
has proposed similar severe reductions to the other collateral
depositors. Although the receiver acknowledged holding $87.7
million in cash and cash equivalents as of December 31, 2015, the
receiver proposes to pay only approximately $1.1 million in total
for return of collateral, to be divided among all collateral
depositors in differing proportions.
It is
noteworthy that the receiver has not specified its supposed tracing
method in a manner that would allow any collateral depositor or the
court to understand the particulars of the process by which the
receiver would severely reduce the initial collateral deposit to a
nominal figure. We do know that the stated tracing methodology used
by the receiver includes the Lowest Intermediate Balance Test
(LIBT). We and other collateral depositors are working to determine
whether the application of the LIBT is correct in this matter. If
it is ultimately determined that the LIBT is the correct tracing
methodology, we must determine if the receiver applied the LIBT in
the correct manner. To date, the receiver has provided very little
information to assist collateral depositors in the
depositors’ efforts to ascertain answers to these very
fundamental questions.
In
February 2016, the receiver indicated that the receivership estate
had sufficient unencumbered funds to pay in full the claims of all
collateral depositors who asserted priority claims. Our initial
assessment of the receivers petition is that the plan proposed by
the receiver is incomplete, factually incorrect, and legally
unsupportable. We therefore believe that the receiver's plan is
unsustainable and unlikely to succeed and are aggressively
proceeding with our efforts to defeat the result sought and to
advance our own case for payment of our collateral claims in full.
The Company and its counsel, in conjunction and coordination with
counsel for other potentially aggrieved collateral depositors, are
working diligently in order to maximize our recovery of collateral
deposits previously made to Freestone under written policy
agreements. To be clear, the receiver does not have the final say
in how this matter is decided. The Chancery Court in Delaware makes
that decision after hearing evidence and arguments from all engaged
parties.
Because
we are still in the very early stages of this adversarial
litigation, we are unable provide an estimate as to when the court
may ultimately rule on the receiver’s proposal. Presently, we
anticipate that the hearing on the receiver’s petition will
not occur for several months, allowing time for all affected
parties to engage in formal and informal discovery. We are
similarly unable to provide a projection as to how the court may
rule or what amount of collateral Command Center may ultimately
receive. If the court were to grant the relief sought by the
receiver, that result would have a material adverse effect on our
financial condition.