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COMMAND CENTER, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 8, 2014

Forward Looking Statements: This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding industry trends, our future financial position and performance, business strategy, revenues and expenses in future periods, projected levels of growth and other matters that do not relate strictly to historical facts. These statements are often identified by words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "projects," "forecasts," "plans," "intends," "continue," "could," "should" or similar expressions or variations. These statements are based on the beliefs and expectations of our management based on information currently available. Such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by forward- looking statements. Important factors currently known to our management that could cause or contribute to such differences include, but are not limited to, those referenced in our Annual Report on Form 10-K for the year ended December 27, 2013 under Item 1A "Risk Factors." We undertake no obligation to update any forward-looking statements as a result of new information, future events or otherwise.



Overview

Command Center, Inc. ("Command," the "Company," "we," "us," and "our") is a staffing company, operating primarily in the manual labor segment of the staffing industry. Our customers range in size from small businesses to large corporate enterprises. All of our workers (our "Field Team Members" or "FTMs") are employed by us. Most of our work assignments are short term, and many are filled on little notice from our customers. In addition to short and longer term temporary work assignments, we recruit and place workers in temp-to-hire positions.



As of March 28, 2014, we owned and operated 53 on-demand labor stores in 22 states. We operate as Command Center, Inc., and through our wholly owned subsidiary, Disaster Recovery Services, Inc. ("DR Services").

Results of Operations

The following table reflects operating results for the thirteen weeks ended March 28, 2014 compared to the thirteen weeks ended March 29, 2013 (in thousands, except per share amounts and percentages) and serves as the basis for the narrative that follows. Percentages indicate line items as a percentage of total revenue. Thirteen Weeks Ended March 28, 2014 March 29, 2013 Total operating revenue $ 18,458$ 19,905 Cost of staffing services 13,580 73.6 % 14,685 73.8 % Gross profit 4.878 26.4 % 5,220 26.2 % Selling, general and administrative expenses 4,217 22.8 % 4,954 24.9 % Depreciation and amortization 65 0.4 % 89 0.4 % Income from operations 596 3.2 % 177 0.9 % Interest expense and other financing expense (53 ) -0.3 % (220 ) -1.1 % Change in fair value of warrant liability - 0.0 % 55 0.3 % Net income before income taxes 543 2.9 % 12 0.1 % Provision for income taxes (32 ) -0.2 % - 0.0 % Net income $ 511 2.7 % $ 12 0.1 % Non-GAAP Data EBITDA-D $ 661 3.6 % $ 266 1.3 % Earnings before interest, taxes, depreciation and amortization, and the change in fair value of our derivative liabilities (EBITDA-D) is a non-GAAP measure that represents net income attributable to Command before interest expense, income tax benefit (expense), depreciation and amortization, and the change in fair value of our derivative liabilities. We utilize EBITDA-D as a financial measure as management believes investors find it a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate our results of operations. We believe it is a complement to net income and other financial performance measures. EBITDA-D is not intended to represent net income as defined by U.S. generally accepted accounting principles ("GAAP"), and such information should not be considered as an alternative to net income or any other measure of performance prescribed by GAAP. 10 -------------------------------------------------------------------------------- We use EBITDA-D to measure our financial performance because we believe interest, taxes, depreciation and amortization, and the change in fair value of our derivative liabilities bear little or no relationship to our operating performance. By excluding interest expense, EBITDA-D measures our financial performance irrespective of our capital structure or how we finance our operations. By excluding taxes on income, we believe EBITDA-D provides a basis for measuring the financial performance of our operations excluding factors that our branches cannot control. By excluding depreciation and amortization expense, EBITDA-D measures the financial performance of our operations without regard to their historical cost. By excluding the change in fair value of our derivative liabilities, EBITDA-D provides a basis for measuring the financial performance of our operations excluding factors that are beyond our control. For all of these reasons, we believe that EBITDA-D provides us and investors with information that is relevant and useful in evaluating our business. However, because EBITDA-D excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA-D does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt, nor does it show trends in interest costs due to changes in our financing or changes in interest rates. EBITDA-D, as defined by us, may not be comparable to EBITDA-D as reported by other companies that do not define EBITDA-D exactly as we define the term. Because we use EBITDA-D to evaluate our financial performance, we reconcile it to net income, which is the most comparable financial measure calculated and presented in accordance with GAAP. The following is a reconciliation of EBITDA-D to net loss for the periods presented: Thirteen Weeks Ended March 28, 2014 March 29, 2013 EBITDA-D $ 661 $ 266 Interest expense and other financing expense (53 ) (220 ) Depreciation and amortization (65 ) (89 ) Change in fair value of warrant liability - 55 Provision for income taxes (32 ) - Net income (loss) $ 511 $ 12



Thirteen Weeks Ended March 28, 2014

Summary of Operations: Revenue for the thirteen weeks ended March 28, 2014 was $18.5 million, a decrease of approximately $1.4 million, or 7.3%, when compared to the first quarter of 2013. This decrease in revenue is related to the winding down of contracts ran through our wholly owned subsidiary, Disaster Recovery Services, Inc., a change in organizational structure and an increased focus maximizing income from operations by more effectively controlling our cost of staffing services and operating expenses. Cost of Staffing Services: Cost of staffing services was 73.6% and 73.8% of revenue for the thirteen weeks ended March 28, 2014 and March 29, 2013, respectively. Cost of staffing services decreased due to a decrease in our per diem expenses due to less participation in disaster work in 2014 than 2013, and a relative decrease in FTM wages and related payroll taxes due to an increased focus on gross margin. Workers' compensation expense was 4.4% and 2.8% of revenue for the thirteen weeks ended March 28, 2014 and March 29, 2013, respectively. This increase is attributable to a decrease in our claims liability as estimated by our actuary in the period ended March 29, 2013. Selling, General and Administrative Expenses ("SG&A"): SG&A expenses were 22.8% and 24.9% of revenue for the thirteen weeks ended March 28, 2014 and March 29, 2013, respectively. This decrease is related to a change in our organizational structure, recoveries of accounts receivable previously reserved, and a reduction in travel and travel related expenses. These decreases were offset by an increase in bonus expense paid to our branch employees.



Liquidity and Capital Resources

Based on our current operating plan, we anticipate that we will have sufficient cash and cash equivalents to fund our operations into the foreseeable future. If the level of sales anticipated by our financial plan are not achieved or our working capital requirements are higher than planned, we may need to raise additional cash or take actions to reduce operating expenses. Cash provided by operating activities totaled approximately $2.1 million during the thirteen weeks ended March 28, 2014, as compared to approximately $1.6 million during the same period in 2013. During the first quarter of 2014, the cash provided by operating activities was primarily due to a decrease in accounts receivable of approximately $1.9 million, which was offset by a decrease in accrued wages and benefits of approximately $477,000. Cash used by investing activities totaled approximately $30,000 for the period ended March 28, 2014 compared to approximately $8,000 during the same time period in 2013. In both periods, cash was used to purchase additional property and equipment.



Cash used by financing activities totaled approximately $2.1 million and approximately $2.4 million for the first quarter of 2014 and 2013, respectively, and in both periods these uses of cash relate to a reduction in the amount outstanding in our account purchase agreement with Wells Fargo.

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Accounts Receivable: At March 28, 2014, we had total current assets of approximately $15.9 million. Included in current assets are trade accounts receivable of approximately $8.7 million (net of allowance for bad debts of approximately $628,000). Weighted average aging on our trade accounts receivable at March 28, 2014 was 31 days. Bad debt expense was approximately $69,000 for the thirteen weeks ended March 28, 2014 compared to approximately $281,000 during the same time period in 2013. Accounts receivable are recorded at the invoiced amounts. We regularly review our accounts receivable for collectability. Our 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. We typically refer overdue balances to a collection agency at 120 days and the collection agent pursues collection for another 60 days. Most balances over 120 days past due are written off as it is probable the receivable will not be collected. We will continue to monitor and seek to improve our historical collection ratio and aging experience with respect to trade accounts receivable as these are important factors affecting our liquidity. Financing: We have an account purchase agreement in place 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, at March 28, 2014. When the receivable is collected, the remaining 10% is paid to us, less applicable fees and interest. Net outstanding accounts receivable sold pursuant to this agreement at March 28, 2014 were approximately $5.9 million. The term of the agreement is through April 7, 2016. The agreement bears interest at the London Interbank Offered Rate plus 3.0% per annum. At March 28, 2014 the effective interest rate was 3.15%. Interest is payable on the actual amount advanced or $3 million, whichever is greater. Additional charges include an annual facility fee equal to 0.75% of the facility threshold in place and lockbox fees. As collateral for repayment of any and all obligations, we granted Wells Fargo Bank, N.A. a security interest in all of our property including, but not limited to, accounts receivable, intangible assets, contract rights, investment property, deposit accounts, and other such asset. On April 18, 2014, we entered into the Seventh Amendment to our Account Purchase Agreement with Wells Fargo, N.A., wherein our facility maximum under the account purchase agreement increased from $14 million to $15 million and allows for the issuance of letters of credit under the facility amount up to $3.7 million. Workers' Compensation: 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. Management believes this change will keep our workers' compensation expense at a minimum. 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. Per our contractual agreements with ACE, we must provide a collateral deposit of $3.6 million, which is accomplished through a letter of credit with Wells Fargo, N.A. The letter of credit is secured by our account purchase agreement and will reduce the amount of cash we can draw under our account purchase agreement in future periods.


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Source: Edgar Glimpses


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