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.

The following table reflects operating results in the 13 weeks ended June 26, 2009 compared to the thirteen weeks ended June 27, 2008. Percentages indicate line items as a percentage of total revenue. The table serves as the basis for the narrative discussion that follows.

			                                                 2009                        2008  REVENUE:                             $ 12,391,373                 $ 21,246,376  COST OF SERVICES:  Temporary worker costs                  8,486,143        68.5 %     14,261,352       67.1 %  Workers' compensation costs             1,018,654         8.2 %      2,015,229        9.5 %  Other direct costs of services              4,409         0.0 %         19,542        0.1 %                                          9,509,206        76.7 %     16,296,123       76.7 %  GROSS PROFIT                            2,882,167        23.3 %      4,950,253       23.3 %  SELLING, GENERAL, AND  ADMINISTRATIVE EXPENSES:  Personnel costs                         1,895,150        15.3 %      3,288,251       15.5 %  Selling and marketing expenses              9,527         0.1 %        218,073        1.0 %  Transportation and travel                 289,317         2.3 %        702,064        3.3 %  Office expenses                            82,678         0.7 %        136,733        0.6 %  Legal, professional and consulting         95,484         0.8 %        136,660        0.6 %  Depreciation and amortization             204,768         1.7 %        215,030        1.0 %  Rents and leases                          396,153         3.2 %        691,291        3.3 %  Other expenses                            873,732         7.1 %        818,074        3.9 %                                          3,846,809        31.0 %      6,206,176       29.2 %  LOSS FROM OPERATIONS                     (964,642 )      -7.8 %     (1,255,923 )     -5.9 %  OTHER INCOME (EXPENSE):                  (517,625 )      -4.2 %       (146,532 )     -0.7 %  NET LOSS                             $ (1,482,267 )     -12.0 %   $ (1,402,455 )     -6.6 %
			

10-Q

Results of Operations

26 Weeks Ended June 26, 2009

Operations Summary. Revenue in the 26 week period ended June 26, 2009 was $25.4 million compared to $41.2 million in the 26 week period ended June 27, 2008, a decline of 38%. In the second quarter 2009 compared to 2008, the downturn in revenue was about the same, $12.4 million compared to $21.2 million or a 41.5% shortfall. Economic conditions and store closures are the primary factors that drove the decline. The on-demand labor component of the staffing industry is one of the first sectors to feel the impact of an economic slowdown.

Early in the first quarter of 2009 we closed 31 underperforming stores which left us operating 52 stores. During 2009 we opened three new stores to mainly service national accounts who already had a book of business. Early in the third quarter of 2009 we closed 2 marginal stores and the business was acquired by our adjacent locations. We also opened one new store. We are presently operating 51 stores in 20 states.

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 impact that fall would have on our revenue.

Store Operations. In the fourth quarter of 2008, and the first quarter 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 is now been rolled out to all branches and we believe it will allow 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 impact 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 impacted by the economic downturn such as, event services, hospitality, disaster recovery and other non-traditional on-demand labor customers.

Cost of Sales. The cost of services was 76.7% of revenue at the end of the second quarter ended June 26, 2009 and was equal to the same percentage at the twenty-six weeks ended June 27, 2008. There was a reduction in workers' compensation costs. Looking ahead, we believe we will be able to reduce the cost of on-demand labor by reducing pay rates. We also expect on-demand labor costs to moderate as a percentage of revenue as we enter our peak season and revenue climbs.
Toward the end of 2008 and continuing into 2009, we have been evaluating our on-demand labor pay rates and where possible, implementing pay rate reductions in order to increase margins to acceptable levels.

Worker's compensation costs for the twenty-six weeks ended June 26, 2009 were 6.8% of revenue compared to 9.2% of revenue for the twenty-six weeks ended June 27, 2008 ($1.7 million compared to $3.8 million). The decrease is a function of three forces. The first factor is a reduction in revenue from store closings and the downturn in the general economy. In May of 2008, we changed our workers' compensation insurance carrier and we have found that our new carriers are much more aggressive in evaluating and paying claims costs. Our cost of worker's 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 the balance of the year.

Gross Margin. The factors impacting gross margin in the second quarter 2009 are discussed under cost of services above. In the aggregate, cost of services was 76.7% of revenue in 2009 compared to 76.7% of revenue in 2008 yielding margins of 23.3% in 2009 and 23.3% in 2008. The current recessionary economic climate has created pressure on our gross margins. In order to deal with this situation, 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 increase margins.

10-Q

Selling, General and Administrative Expenses. As a percentage of revenue, selling, general and administrative expenses for the thirteen weeks ended June 26, 2009 and June 27, 2008 were 31.0 % and 29.2% respectively. For the twenty-six weeks ended June 26, 2009 and June 27, 2008 were 34.9% and 32.8%. SG&A expenses for the same periods showed a monetary reduction of $2.4 million in the 13 weeks 2009 compared to 2008 and $4.7 million in the 26 weeks 2009 vs 2008. In addition, the percentage increase in selling, general and administrative expenses is primarily the result of the precipitous drop in revenue and providing a closed store reserve of $300,000.

Liquidity and Capital Resources
At June 26, 2009, we had total current assets of 7.8 million and current liabilities of $9.1 million. Included in current assets are cash of $306,000 and trade accounts receivable of $4.6 million (net of allowance for bad debts of $500,000). Our cash position continues to deteriorate as a result of the trailing effect of cost reductions in the declining economy and continuing losses.

Weighted average aging on our trade accounts receivable at June 26, 2009, was 39 days. Actual bad debt write-off expense as a percentage of total customer invoices during the thirteen weeks ended June 26, 2009 was 0.62%. 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. We typically refer overdue balances to a collection agency at ninety days and the collection agent pursues collection for another thirty 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.

We currently operate under a $9,950,000 line of credit facility with our principal lender for accounts receivable financing. The credit facility is collateralized with accounts receivable and entitles 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 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 exceeds 50% of that customer's aggregate balance due. 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 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 three percent (LIBOR + 3.0%) per annum. Prime and/or LIBOR are defined by the Wall Street Journal, Money Rates Section. Our line of credit interest rate at June 26, 2009 was 6.25%. The loan agreement further provides that interest is due at the applicable rate on the greater of the outstanding balance or $5,000,000. The credit facility, originally due to expire on April 7, 2009, was recently renewed for one year and now expires on April 7, 2010. The balance due our lender at June 26, 2009 was $2,774,092. We expect that certain terms of the loan, including the maximum credit facility and the minimum amount on which interest is calculated, will be modified in the coming months to better reflect the current needs of the Company.

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 June 26, 2009, we were not in compliance with the cash flow, tangible net worth and EBITDA requirements. As part of the recent renewal of our credit facility, we are currently negotiating revised financial covenants with our lender that are more representative of our present reduced level of business operations.

At June 26, 2009, we also owed a private investor $1,225,000 on an unsecured promissory note bearing interest at 20% per annum and calling for bi-weekly increases in principal and interest payments.

10-Q

As discussed elsewhere in this report, in 2006 we acquired operating assets from a number of entities that were previously our franchisees. 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. 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 $500,000 and $600,000. Our outside legal counsel has advised us that the potential for successor liability on the IRS claims is remote.

We have not accrued any amounts for these contingent payroll and other tax liabilities at June 26, 2009. We have obtained indemnification agreements from the selling entities and their principal members for any liabilities or claims we incur as a result of these predecessor tax liabilities. We believe the selling entities and their principal members have adequate resources to meet these obligations and have indicated through their actions to date that they fully intend to pay the amounts due. We understand that the responsible parties have or are working on payment agreements for the substantial majority of the tax obligations and expect to resolve these debts in full within the next twelve months.

Our current liquidity could be impacted if we are considered to be a successor to these payroll tax obligations. Liability as a successor on these payroll tax obligations may also constitute a default under our line of credit facility agreement with our principal lender creating a further negative impact on our liquidity.

We expect that additional capital will be required to fund operations during fiscal year 2009. Our capital needs will depend on store operating performance, our ability to control costs, and the continued impact on our business from the general economic slowdown and/or recovery cycle. We currently have approximately 10.8 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 2009.

If we require additional capital in 2009 or thereafter, 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 profitability and long term viability.