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CCNI > SEC Filings for CCNI > Form 10-K on 20-Mar-2014All Recent SEC Filings

Show all filings for COMMAND CENTER, INC.

Form 10-K for COMMAND CENTER, INC.


20-Mar-2014

Annual Report


ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following management's discussion and analysis reviews significant factors with respect to our financial condition at December 27, 2013 and December 28, 2012, and results of operations for the fiscal years ended December 27, 2013 and December 28, 2012. This discussion should be read in conjunction with the consolidated financial statements, notes, tables, and selected financial data presented elsewhere in this report.

Our discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties that may cause actual results to differ materially from those discussed in such forward-looking statements. A cautionary statement regarding forward-looking statements is set forth under the caption "Special Note Regarding Forward-Looking Statements" in Item 1 of this Annual Report on Form 10-K. This discussion and analysis should be considered in light of such cautionary statements and the risk factors disclosed elsewhere in this report.


Overview

Our mission is to be the preferred provider of choice for all on-demand employment solutions by placing the right people in the right jobs every time and by providing unparalleled service to our customers. We have focused intently on training, coaching and mentoring of all of our employees in the achievement of consistent excellence in serving both our FTMs and our customers. In furtherance of our mission, we have consolidated operations, established and implemented corporate operating policies and procedures, and developed a unified branding strategy for all of our stores.

The Temporary Labor Market: The temporary labor industry is competitive and highly fragmented. In the United States, approximately 100 companies operate nationally, and approximately 10,000 smaller companies compete in varying degrees at local levels. Demand for temporary services is highly dependent on the overall strength of labor markets. In periods of economic growth, demand for temporary services generally increases, and the need to recruit, screen, train, retain and manage a labor pool matching the skills required by particular customers becomes critical. Conversely, during an economic downturn, competitive pricing pressures can pose a threat to retaining a qualified temporary workforce. Accordingly, the slow recovery from recession in the U.S. has impacted all staffing firms over the last several years. We believe the on-demand temporary labor market creates a unique competitive niche for us.

On-demand Labor Store Operations: At December 27, 2013, we operated 56 on-demand labor stores serving approximately 3,600 customers and employing approximately 33,000 temporary employees.

As the economic environment continues to improve, we plan to grow through revenue increases at existing offices, as well as acquiring and opening new locations. Our target markets will include locations that we believe are underserved by competitors, areas where there is growing demand for on demand services, and where we can increase business from current national accounts. Additional sales growth may result from selected acquisition opportunities, as well as the development of new national accounts, and by providing services in new business sectors.

With growth, we expect to leverage our existing cost structure over increased revenue. This may enable us to further reduce our operating costs as a percentage of revenue. Increasing our selling efforts and developing our business by targeting new customer development remains one of our top priorities

The following table reflects operating results in 2013 compared to 2012 (in thousands, except per share amounts and percentages). Percentages indicate line items as a percentage of total revenue. The table serves as the basis for the narrative discussion that follows.

                                                                Fifty-two Weeks Ended
                                                   December 27, 2013             December 28, 2012
Total Operating Revenue                        $    93,748                   $    98,432
Cost of Staffing Services                           69,501          74.1 %        73,539          74.7 %
Gross profit                                        24,247          25.9 %        24,893          25.3 %
Selling, general and administrative expenses        19,528          20.8 %        22,043          22.4 %
Depreciation and amortization                          351           0.4 %           371           0.4 %
Income from operations                               4,368           4.7 %         2,479           2.5 %
Interest expense and other financing expense          (504 )        -0.5 %          (804 )        -0.8 %
Change in fair value of warrant liability             (786 )        -0.8 %           842           0.9 %
Net income before income taxes                       3,078           3.3 %         2,517           2.6 %
Provision for income taxes                            (137 )        -0.1 %          (958 )        -1.0 %
Net income                                     $     2,941           3.2 %   $     1,559           1.6 %
Non-GAAP Data
EBITDA-D                                       $     4,719           5.0 %   $     2,850           2.9 %

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 CCNI before interest expense, income tax 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 operational results. 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 GAAP, and such information should not be considered as an alternative to net income or any other measure of performance prescribed by GAAP.


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 income for the periods presented:

                                                      Fifty-two Weeks Ended
                                                December 27,         December 28,
                                                    2013                 2012
EBITDA-D                                       $        4,719       $        2,850
Interest expense and other financing expense             (504 )               (804 )
Depreciation and amortization                            (351 )               (371 )
Change in fair value of warrant liability                (786 )                842
 Provision for income taxes                              (137 )               (958 )
Net income (loss)                              $        2,941       $        1,559

Results of Operations

52 Weeks Ended December 27, 2013

Operations Summary: Revenue decreased by approximately 4.8% in the fiscal year ended December 27, 2013 to $93.7 million from $98.4 million in 2012. The decrease is due primarily to decreased restoration work, the winding down of hard-bid construction contracts through DR Services, and our focus on reducing lower margin work.

Store Operations: At the beginning of 2013, we operated 59 stores. During the year, we closed four stores and opened one, ending the year with 56 stores operating in 23 states. Same store revenues increased approximately 8.0% to $92.9 million in 2013 compared to $86.0 million in 2012. The increase in same store sales is primarily attributable to our increased focus on attracting new, high quality clients, strengthening existing client relationships, and encouraging existing client growth. Same store revenues are measured taking revenue from locations that were operational during the majority of both operating periods.

Cost of Staffing Services: Our cost of staffing services decreased to 74.1% of revenue in 2013 from 74.7% in 2012. This decrease is due primarily to decreased per diem and other costs of staffing services, as well as efforts to increase our margins. In 2014, we will continue to focus on increasing our gross margin and increasing profitability.

Worker's compensation costs for the fiscal year ended December 27, 2013 increased to 4.5% of revenue, compared to 4.2% of revenue in 2012. This increase is primarily attributable to an increase in our claims liability as determined by an actuary.

Our workers' compensation costs as a percentage of revenue quarter by quarter for the last two years were as follows:

2013 2012
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2.8% 4.8% 5.3% 4.9% 3.4% 5.1% 4.3% 3.7%


Gross Margin: The factors affecting gross margin in 2013 are discussed under the cost of staffing services above. In the aggregate, cost of staffing services decreased to 74.1% of revenue in 2013 compared to 74.7% of revenue in 2012 yielding gross margins of 25.9% and 25.3%, respectively.

Selling, General and Administrative Expenses (SG&A): SG&A expenses decreased to 20.8% in 2013 compared to 22.4 % in 2012. This decrease is due primarily to a change in our organizational structure and also to the successful recovery of receivables previously written off. We also experienced decreases in several other expenses as management critically reviewed all expenditures.

Liquidity and Capital Resources

As of December 27, 2013, our current assets exceeded our current liabilities by approximately $5.7 million. We had total current assets of approximately $17.9 million and current liabilities of $12.2 million. Included in current assets are cash of approximately $5.8 million, trade accounts receivable of $10.6 million, net of allowance for doubtful accounts of approximately $637,000, and the current portion of workers' compensation deposits of approximately $1.1 million.

Included in current liabilities is our factoring liability of approximately $8.1 million, accrued wages and benefits of approximately $1.7 million, and the current portion of workers' compensation premiums and claims liability of approximately $1.6 million.

The factoring liability of approximately $8.1 million is used to fund operating needs. The current financing agreement is an account purchase agreement with 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 December 27, 2013 and $15 million on December 28, 2012. 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. Prior to November 13, 2012, eligible accounts receivable were generally defined to include accounts that were not more than sixty days past due.

Net accounts receivable sold pursuant to this agreement at December 27, 2013 and December 28, 2012 were approximately $8.1 million and $9.1 million, respectively. The term of the current agreement is through April 7, 2016. The current agreement bears interest at the greater of the prime rate plus 2.5%, or the London Interbank Offered Rate (LIBOR) plus 3.0 per annum. At December 27, 2013 the effective interest rate was 3.2%. 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 our all of our property including, but not limited to, accounts receivable, intangible assets, contract rights, investment property, deposit accounts, and other such assets.

The agreement contains a covenant that requires the sum of the excess available advances, plus or minus our book cash balance at month end, must at all times be greater than accrued payroll and accrued payroll taxes. At December 27, 2013 and December 28, 2012, we were in compliance with this covenant.

Operating Activities: Net cash provided by operating activities totaled approximately $5.2 million in 2013, an increase of $7.0 million compared to net cash used by operating activities of approximately $1.8 million in 2012. Net trade accounts receivable, decreased by approximately $2.7 million, primarily driven by the subsequent collection of receivables arising from the heightened sales in the fourth quarter of 2012 related to disaster recovery work. In 2013, workers' compensation risk pool deposits increased approximately $927,000.

Investing Activities: Net cash used by investing activities totaled approximately $19,000 in 2013, approximately a $425,000 decrease from approximately $443,000 used in 2012. This change was primarily related to cash consideration of $150,000 related to the acquisition of DR Services in 2012.

Financing Activities: Net cash used by financing activities totaled approximately $1.0 million in 2013 compared to cash provided by financing activities of approximately $2.8 million in 2012. Financing activity relates almost exclusively to changes in the balance of our factoring liability. In addition, we paid off a note in the amount of $150,000 in connection with the acquisition of DR Services in 2012.


Critical Accounting Policies

Management's Discussion and Analysis of Financial Conditions and Results of Operations provides a narrative discussion of our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

Management believes the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Basis of Presentation: The consolidated financial statements include the accounts of Command Center, Inc. and all of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements and accompanying notes are prepared in accordance with U.S. GAAP.

Use of Estimates: The preparation of consolidated financial statements in conformity with U.S. 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.

Fiscal Year End: Our consolidated financial statements are presented on a 52/53-week fiscal year end basis, with the last day of the fiscal year being the last Friday of each calendar year. In fiscal years consisting of 53 weeks, the final quarter will consist of 14 weeks. Fiscal years 2013 and 2012 both consisted of 52 weeks.

Revenue Recognition: We generate revenues primarily from providing on-demand labor services. Revenue from services is recognized at the time the service is performed and is net of adjustments related to customer credits. Revenues are reported net of customer credits and taxes collected from customers that are remitted to taxing authorities.

Cost of Staffing Services: Cost of services includes the wages of temporary employees, related payroll taxes, workers' compensation expenses, and other direct costs of services.

Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable are carried at their estimated recoverable amount, net of allowances. We regularly review our accounts receivable for collectability. The allowance for doubtful accounts is determined based on historical write-off experience, age of receivable, other qualitative factors and extenuating circumstances 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 monthly. Generally, we refer overdue balances to a collection agency at 120 days and the collection agent typically pursues collection for another 60 or more days. All balances over 180 days past due are fully reserved. At December 27, 2013 and December 28, 2012, our allowance for doubtful accounts was approximately $637,000 and $519,000, respectively.

Workers' Compensation Reserves: In accordance with the terms of our workers' compensation liability insurance policy, we maintain reserves for workers' compensation claims to cover our cost of all claims. We use third party actuarial estimates of the future costs of the claims and related expenses discounted by a 3% present value interest rate to determine the amount of our reserves. We evaluate the reserves quarterly and make adjustments as needed. If the actual cost of the claims incurred and related expenses exceed the amounts estimated, additional reserves may be required. In monopolistic states, we utilize the state funds for our workers' compensation insurance and pay our premiums in accordance with the state plans.

Goodwill and Other Intangible Assets: Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business acquisitions and combinations. Goodwill and other intangible assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate impairment may exist, such as a significant adverse change in the business climate. In assessing the value of goodwill, assets and liabilities are assigned to the reporting units and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. Identified intangible assets are amortized using the straight-line method over their estimated useful lives which are estimated to be between three and seven years.

Fair Value of Financial Instruments: We carry financial instruments on the consolidated balance sheet at the fair value of the instruments as of the consolidated balance sheet date. At the end of each period, management assesses the fair value of each instrument and adjusts the carrying value to reflect its assessment. At December 27, 2013 and December 28, 2012, the carrying values of accounts receivable and accounts payable approximated their fair values due to relatively short maturities.

Derivatives: From time to time, we enter into transactions which contain conversion privileges, the settlement of which may entitle the holder or us to settle the obligation(s) by issuance of our securities. When we enter into transactions which allow us to settle obligations by the issuance of our securities, fair value is estimated each reporting period.


Income Taxes: Deferred tax assets and liabilities are recognized for the effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. A number of estimates and judgments are necessary to determine deferred tax assets, deferred tax liabilities and valuation allowances.

We recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. The calculation of our tax liabilities requires judgment related to uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on an annual basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity.

We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in predicting future results and our conclusion that we cannot rely on projections of future taxable income to realize the deferred tax assets. Also, certain changes in stock ownership could result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. Should we undergo such a change in stock ownership, it would severely limit the usage of these carryover tax attributes against future income, resulting in additional tax charges.

Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal or decrease in this allowance.

Share-Based Compensation: Periodically, we issue common shares or options to purchase our common shares to our officers, directors, employees, or other parties. Compensation expense for these equity awards are recognized over the vesting period, based on the fair value on the grant date. We recognize compensation expense for only the portion of options that are expected to vest, rather than record forfeitures when they occur. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in the future periods. We determine the fair value of equity awards using the Black-Scholes valuation model.

Long-lived asset impairment: Long-lived assets include property and equipment and definite-lived intangible assets. Definite-lived intangible assets consist of customer relationships, trade names and non-compete agreements. Long-lived assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate that the carrying value of the assets may not be recoverable.

Business Combinations: We account for business combinations using the purchase method of accounting to recognize and measure the identifiable assets and goodwill acquired in business combinations. Identifiable assets are recorded at fair value at the acquisition date. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

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