Business Context and Reporting Period
Company: Command Center, Inc. (CCNI)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 25, 2009
Business Overview: The Company operates 50 on-demand labor stores across 20 states, providing unskilled and semi-skilled temporary workers to industries such as construction, manufacturing, and warehousing. The Company shifted from a franchisor model to an operator model in 2006. Due to the economic recession, the Company closed 7 underperforming stores in 2009 (down from 57 stores in 2008) and placed a hold on new expansion to focus on profitability and infrastructure hardening.
Key Financial Metrics
| Metric | 2009 (52 Weeks) | 2008 (52 Weeks) |
|---|---|---|
| Total Revenue | $51,560,935 | $79,234,025 |
| Gross Profit | $12,980,853 | $20,596,268 |
| Gross Margin | 25.2% | 26.0% |
| Net Loss | $(5,963,364) | $(17,621,387) |
| Operating Loss | $(3,617,005) | $(16,747,916) |
| Cash and Cash Equivalents | $69,971 | $2,174,960 |
| Working Capital | $(2,566,877) | $1,411,989 |
| Total Debt (Current + Long Term) | ~$4.9 Million | ~$4.7 Million |
Note: Total Debt includes Line of Credit ($2.9M), Short-term Note ($1.0M), and other liabilities. The 2008 Net Loss included a non-cash goodwill impairment charge of $11.8 million; no such charge was recorded in 2009.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased by 35% ($27.6 million) primarily due to the recessionary downturn and the closure of 7 stores. Same-store sales decreased by 19.6%.
- Improved Net Loss: Net loss improved significantly from $17.6 million in 2008 to $6.0 million in 2009. This improvement is largely attributed to the absence of the $11.8 million goodwill impairment charge recorded in 2008 and aggressive cost-cutting measures.
- Cost Structure: Selling, General, and Administrative (SG&A) expenses decreased by $9.0 million year-over-year, driven by a reduction in personnel costs from $12.9 million to $8.0 million.
- Liquidity Deterioration: Cash reserves dropped from $2.17 million to $70,000. The Company moved from positive working capital in 2008 to negative working capital of $2.57 million in 2009.
- Debt Covenant Compliance: As of December 25, 2009, the Company was not in compliance with cash flow, tangible net worth, and EBITDA covenants of its primary credit facility.
Guidance, Outlook, Risks, and Contingencies
Going Concern Warning
The independent auditors have issued a "going concern" qualification. The Company has incurred losses since inception, has negative working capital, and does not have sufficient cash to fund normal operations for the next 12 months. Continuation as a going concern is dependent on generating sufficient cash flow, obtaining additional financing, or attaining profitability.
Outlook and Strategy
Management expects to continue cost reductions in 2010. The Company is pursuing additional capital through private placements, debt refinancing, and the potential return of excess collateral from workers' compensation insurers. The Company has renewed its credit facility with modified terms (eliminating financial covenants) subsequent to year-end.
Key Risks and Contingencies
- Successor Liability: The Company faces potential successor liability claims from the State of Washington regarding unpaid taxes and industrial insurance premiums from a 2006 acquisition (Everyday Staffing LLC). The State claims approximately $1.2 million plus interest. The Company disputes this liability and has obtained a judgment against the former owners, though collectability is questionable.
- Workers' Compensation: The Company is substantially self-insured with a $250,000 deductible per occurrence. A significant number of claims or severe claims could materially impact financial results.
- Capital Needs: The Company requires significant additional working capital to fund accounts receivable and operations. Failure to secure capital could force a reduction in operations or liquidation.
- Internal Controls: The Company identified four material weaknesses in internal controls, including a lack of independent board oversight and insufficient segregation of duties in the finance department.
Investor Verification Checklist
- Cash Runway: Verify the Company's ability to secure the additional capital required to sustain operations for the next 12 months given the $70,000 cash balance.
- Debt Covenants: Confirm the status of the new credit facility agreement signed in February 2010 and whether it fully resolves the default status existing at year-end.
- Successor Liability Resolution: Monitor the status of the Washington State tax claims and the collectability of the $1.295 million judgment against the former franchise owners.
- Workers' Comp Reserves: Review the adequacy of the $4.1 million workers' compensation claims liability reserve against actual claim trends.
- Stock Dilution: Assess the impact of the 10 million shares issued to a lender in March 2010 to settle a penalty, and the 10.7 million warrants outstanding.