ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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.

Analysis of Statement of Operations and Year over Year Changes

			                           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, GENERALAND 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 andconsulting                             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 stockwarrant 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 %
			

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.

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         Q48.8%     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.

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.

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.

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.

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 . .

CCNI 10K 2009.pdf (646.99 kb)