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EX-32 - EXHIBIT 32 - FIRST RATE STAFFING Corpv386675_ex32.htm
EX-31 - EXHIBIT 31 - FIRST RATE STAFFING Corpv386675_ex31.htm

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

OR

 

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from         to

 

Commission file number 000-54427

 

FIRST RATE STAFFING CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   46-0708635
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    

 

2775 West Thomas Road

Suite 107

Phoenix, Arizona 85018

(Address of principal executive offices) (zip code)

 

602-442-5277

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer  ¨ Accelerated filer          ¨
Non-accelerated filer    ¨ Smaller reporting company x
(do not check if smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes x No

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

  

Class   Outstanding at August 14, 2014
Common Stock, par value $0.0001   7,500,000 shares

  

Documents incorporated by reference: None

 

 
 

  

FIRST RATE STAFFING CORPORATION

 

Table of Contents Page
   
PART I — FINANCIAL INFORMATION 3
     
Item 1. Financial Statements 3
     
  Condensed Consolidated Balance Sheets at June 30, 2014 (Unaudited) and December 31, 2013 3
     
  Condensed Consolidated Statements of Operations (Unaudited) — Three and Six Months Ended June 30, 2014 and 2013 4
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) — Three and Six Months Ended June 30, 2014 and 2013 5
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
     
Item 4. Controls and Procedures 19
     
PART II — OTHER INFORMATION 20
     
Item 1. Legal Proceedings 20
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
     
Item 3. Defaults upon Senior Securities 20
     
Item 4. Mine Safety Disclosures 20
     
Item 5. Other Information 20
     
Item 6. Exhibits 20
     
Signatures 20
     
Exhibit Index  

 

2
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

FIRST RATE STAFFING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2014   2013 
   (Unaudited)     
Assets          
           
Current assets          
Cash  $229,734   $54,043 
Accounts receivable, net   130,931    154,030 
Notes receivable - related party, current portion   8,388    - 
Prepaid expenses and other current assets   -    67,484 
Total current assets   369,053    275,557 
           
Property and equipment, net   23,153    26,483 
Notes receivable - related party, net of current portion   -    8,388 
Intangible assets, net   1,354,220    - 
Deposit and other assets   6,200    6,280 
Total assets  $1,752,626   $316,708 
           
Liabilities and Stockholders' Equity (Deficit)          
           
Current liabilities          
Accounts payable  $64,363   $57,659 
Other current liabilities   215,154    153,744 
Current portion of long-term notes payable, net of discount   207,477    - 
Total current liabilities   486,994    211,403 
           
Note payable, net of current portion   250,000    - 
Notes payable - related parties   81,845    156,107 
Total liabilities   818,839    367,510 
           
Commitments          
           
Stockholders' equity (deficit)          
Preferred stock, $0.0001 par value, 20,000,000 shares authorized, zero shares issued and outstanding   -    - 
Common stock, $0.0001 par value, 100,000,000 shares authorized, 7,500,000 (unaudited) and 7,000,000 shares issued and authorized at June 30, 2014 and December 31, 2013, respectively   750    700 
Additional paid-in capital   1,089,802    89,852 
Accumulated deficit   (156,765)   (141,354)
Total stockholders' equity (deficit)   933,787    (50,802)
Total liabilities and stockholders' equity (deficit)  $1,752,626   $316,708 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

3
 

  

FIRST RATE STAFFING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

  

   Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2014   2013   2014   2013 
                 
Revenues  $4,170,454   $2,258,541   $7,067,581   $4,173,605 
Cost of revenues   3,665,451    2,019,059    6,316,096    3,736,598 
Gross profit   505,003    239,482    751,485    437,007 
Operating expenses   436,286    218,716    685,198    424,475 
Income from operations   68,717    20,766    66,287    12,532 
Interest and other expense, net   50,180    5,219    81,698    10,372 
Income (loss) before income tax   18,537    15,547    (15,411)   2,160 
Income tax expense   -    -    -    - 
Net income (loss)  $18,537   $15,547   $(15,411)  $2,160 
                     
Net income (loss) per share:                    
Basic and diluted  $-   $-   $-   $- 
                     
Weighted average shares outstanding:                    
Basic and diluted   7,500,000    7,000,000    7,383,978    7,000,000 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

4
 

  

FIRST RATE STAFFING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six Months Ended 
   June 30, 
   2014   2013 
         
Operating activities          
Net income (loss)  $(15,411)  $2,160 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization expense   114,977    3,124 
Amortization of discount on note payable   13,114    - 
Changes in operating assets and liabilities:          
Accounts receivable   23,099    (40,597)
Prepaid expense and other current assets   67,484    - 
Deposits and other assets   80    (71,031)
Accounts payable   6,704    51,869 
Other current liabilities   39,906    33,667 
           
Net cash provided by (used in) operating activities   249,953    (20,808)
           
Investing activities          
Borrowings on notes receivable - related party   -    (8,388)
Payments from acquisition of property and equipment   -    (28,401)
           
Net cash used in investing activities   -    (36,789)
           
Financing activities          
Payments on note payable - related party   (74,262)   (53,870)
           
Net cash used in financing activities   (74,262)   (53,870)
           
Net change in cash   175,691    (111,467)
Cash, beginning of the period   54,043    185,587 
Cash, end of the period  $229,734   $74,120 
           
Supplemental disclosure of cash flow information:          
Interest paid  $2,588   $10,385 
           
Supplemental disclosures of non-cash investing and financing          
Issuance of common stock for acquisition of Loyalty Staffing Services, Inc.  $1,000,000   $- 
Issuance of note payable for acquisition of Loyalty Staffing Services, Inc.  $500,000   $- 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

5
 

   

FIRST RATE STAFFING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

1. ORGANIZATION AND BUSINESS

 

First Rate Staffing Corporation (“First Rate” or “the Company”), formerly known as Moosewood Acquisition Corporation (“Moosewood”) was incorporated on April 20, 2011 under the laws of the State of Delaware.

 

The Company provides recruiting and staffing services for temporary positions in the light industrial, distribution center, assembly, and clerical areas to its clients in California and Arizona, with an option for the clients and candidates to choose the most beneficial working arrangements.

 

2. BASIS OF PRESENTATION

 

The accompanying condensed consolidated balance sheet as of December 31, 2013, which has been derived from the Company’s audited financial statements as of that date, and the unaudited condensed consolidated financial information of the Company as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013, has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, such financial information includes all adjustments considered necessary for a fair presentation of the Company’s financial position at such date and the operating results and cash flows for such periods. Operating results for the interim period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the entire year.

 

Certain information and footnote disclosure normally included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the United States Securities and Exchange Commission (“SEC”). These unaudited financial statements should be read in conjunction with our audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 31, 2014.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.

 

Use of Estimates

 

In preparing these condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Cash

 

The Company considers all highly-liquid investments with original maturities of three months or less when purchased to be cash equivalents. There were no cash equivalents at June 30, 2014 and December 31, 2013.

 

6
 

  

Accounts Receivable and Factoring

 

Accounts receivable are carried at the original amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering each customer’s financial condition and credit history, as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. The allowance for doubtful accounts was $0 and $29,824 as of June 30, 2014 (unaudited) and December 31, 2013, respectively.

 

During 2012, the Company entered into a new accounts receivable factoring arrangement with a non-related third party financial institution (the “Factor”). Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 90% of the accounts receivable balance to the Company, with the remaining balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. An administrative fee of 0.015% per diem is charged on the gross amount of accounts receivables assigned to Factor, plus interest to be calculated at 0.011806% per day. The total amount of accounts receivable factored was $1,268,011 (unaudited) and $830,725 at June 30, 2014 and December 31, 2013, respectively.

 

Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific asset or liability.

 

GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:

 

Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:

 

Quoted prices for similar assets or liabilities in active markets

Quoted prices for identical or similar assets or liabilities in markets that are not active
Inputs other than quoted prices that are observable for the asset or liability
Inputs that are derived principally from or corroborated by observable market data by correlation or other means

 

Level 3 — Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) as of June 30, 2014 and December 31, 2013.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high quality banking institutions. From time to time, the Company may maintain cash balances at certain institutions in excess of the Federal Deposit Insurance Corporation limit. Historically, the Company has not experienced any losses on deposits.

 

The Company’s policy is to maintain an allowance for doubtful accounts, if any, for estimated losses resulting from the inability of its customer to pay. However, if the financial condition of the Company’s customers were to deteriorate rapidly, resulting in nonpayment, the Company could be required to provide for additional allowances, which would decrease operating results in the period that such determination was made.

 

7
 

  

Property and Equipment

 

Property and equipment is presented at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to retired assets are removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations

 

Equipment are recorded at cost and depreciated using the straight-line method over an estimated useful life of 5 years.

 

Intangible Assets

 

The Company has intangible assets recorded as part of a business acquisition (see Note 6). Intangible assets with definite useful lives, representing customer relationships, are amortized over their estimated useful lives of 5 years using the straight-line method, which represents the economic benefit pattern of the intangible assets.

 

Impairment of Long-Lived Assets

 

Long-lived assets, including intangibles, are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable. The evaluation requires that assets be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest charges) is less than the carrying value of the assets, the assets will be written down to their estimated fair value and such loss is recognized in income from continuing operations in the period in which the determination is made. The Company’s management currently believes there is no impairment of its long-lived assets as of June 30, 2014 and December 31, 2013. There can be no assurance, however, that market conditions will not change or demand for the Company’s business model will continue. Either of these could result in future impairment of long-lived assets.

  

Revenue Recognition

 

The Company’s revenue is derived from providing temporary staffing services to its clients. The Company recognizes revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 605, Revenue Recognition. In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.

 

Cost of Revenue

 

Cost of revenue consists of wages, related payroll taxes, workers compensation, and employee benefits of the Company’s employees while they work on contract assignment as temporary staff of the Company’s customers.

 

Net Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock.  Common stock equivalents have not been included in the diluted earnings per share computation for the three and six months ended June 30, 2014 and 2013 as the amounts are anti-dilutive.

 

8
 

  

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The likelihood of realizing the tax benefits related to a potential deferred tax asset is evaluated, and a valuation allowance is recognized to reduce that deferred tax asset if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are calculated at the beginning and end of the year; the change in the sum of the deferred tax asset, valuation allowance and deferred tax liability during the year generally is recognized as a deferred tax expense or benefit. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

 

The Company evaluates the accounting for uncertainty in income tax recognized in its financial statements and determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in its financial statements. For those tax positions where it is “not more likely than not” that a tax benefit will be sustained, no tax benefit is recognized. Where applicable, associated interest and penalties are also recorded. The Company has not accrued for any such uncertain tax positions as of June 30, 2014 or December 31, 2013.

 

Recent Accounting Pronouncements

 

There are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.

 

4. GOING CONCERN

 

The Company has accumulated deficit of $156,765 since inception. This accumulated deficit is primarily the result of increased operating expenses during 2012 associated with professional fees necessary to complete its merger transaction in November 2012, as well as revenues being at below break-even levels. Going forward, the Company expects these annual expenses to be lower. In addition, on February 11, 2014, the Company also acquired substantially all of the assets of Loyalty Staffing Services, Inc. (see Note 6), which is expected to increase cash flows from operations. Management believes this will allow the Company to operate at profitable level in the future.

 

The Company’s continuation as a going concern is dependent on management’s ability to develop profitable operations, and / or obtain additional financing from its shareholders and / or other third parties. In order to address the need to satisfy its continuing obligations and realize its long term strategy, management’s plans include continuing to fund operations with cash received from financing activities.

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

9
 

  

5. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of June 30, 2014 and December 31, 2013.

 

   June 30,   December 31, 
   2014   2013 
   (Unaudited)     
         
Furniture and equipment  $5,658   $5,658 
Vehicles   28,000    28,000 
    33,658    33,658 
           
Less: accumulated depreciation   10,505    7,175 
           
   $23,153   $26,483 

 

Depreciation expense for the three months ended June 30, 2014 and 2013 amounted to $1,665 and $1,667, respectively. Depreciation expense for the six months ended June 30, 2014 and 2013 amounted to $3,330 and $3,124, respectively.

 

6. ACQUISITION

 

On February 11, 2014, the Company entered into an agreement to purchase the assets of Loyalty Staffing Services (“Loyalty”), a California corporation, for an aggregate purchase price of $1,444,363 consisting of a $500,000 note payable, net of a discount of $55,637 for imputed interest, and 500,000 shares of the Company’s common stock, valued at a price of $2 per share. As part of the agreement, the former president and owner of Loyalty will become an employee of the Company. The $500,000 note payable portion of the purchase price is payable as follows; 1) $50,000 of the purchase price will be paid within five days of the release of certain Uniform Commercial Code liens and personal guarantees, 2) an additional $50,000 will be paid sixty days from the date of such release, 3) the Company has executed a promissory note to the seller for $400,000, payable in four installments of $75,000 every six months after the closing date of the agreement, with a remaining and final payment of $100,000 payable 30 months after the closing date.

 

The seller has the option of converting all or any part of the $400,000 promissory note balance into the Company's common stock at the then prevailing trading price or market value at the time of closing of the agreement or $2 per share. The Seller has agreed to a reduction in the promissory note of an amount equal to 5% of $1,500,000 and a return of common stock of an amount equal to 2.5% of $1,500,000 for every reduction of $1,500,000 in annual revenues generated by the loss a client or clients acquired as part of the asset agreement within 12 months from the closing date.

 

Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.

 

10
 

  

The preliminary purchase price allocation was allocated as follows:

 

Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value    
     
Intangible assets  $1,465,867 
Accounts payable   (21,504)
   $1,444,363 

 

Intangible assets acquired represented customer relationships which have an estimated useful life of 5 years. The estimated useful life is based on the patterns in which the economic benefits related to such assets are expected to be realized.

 

Amortization expense for intangible assets for the three and six months ended June 30, 2014 amounted to $73,093 and $111,647, respectively. Estimated future amortization of intangible assets is as follows.

 

Year Ended      
December 31,      
2014    $147,792 
2015     293,173 
2016     293,173 
2017     293,173 
2018     293,173 
Thereafter     33,736 
     $1,354,220 

 

7. NOTES RECEIVABLE – RELATED PARTY

 

In March 2013, the Company issued a series of unsecured notes receivables to an officer of the Company totaling $8,388. The borrowings are due in one lump payment in March 2015 and earn interest at a rate of 15% per annum.

 

8. NOTES PAYABLE - RELATED PARTIES

 

During 2012, the Company obtained unsecured promissory notes payable from one of its shareholders on various dates between March 2012 and December 2012. The total aggregate amounts outstanding amounted to $81,845 (unaudited) and $156,107 as of June 30, 2014 and December 31, 2013, respectively. The notes bear interest at a rate of 6% per annum and are due in full in one lump payment 3 years from the issuance dates. The remaining outstanding balances are all due in December 2015. During the reporting period, there were no financial covenant requirements under the notes.

 

11
 

  

9. NOTES PAYABLE – ACQUISITION

 

Notes payable resulting from the acquisition of Loyalty consisted of the following.

 

   June 30,   December 31, 
   2014   2013 
   (unaudited)     
         
Cash payments due to the seller of Loyalty within 60 days UCC and personal guarantee releases  $100,000   $- 
Promissory Note due to seller - Payable in four payments of $75,000 every 6 months after the closing date, with a remaining and final payment of $100,000 made at 30 months from the closing date. The note bears no interest and can be converted into shares of the company's common stock at any time at the prevailing trade price or the stock price at the closing of the transaction.   400,000    - 
    500,000    - 
           
Less: current maturities   (250,000)   - 
           
Long-term maturities  $250,000   $- 

  

Expected future maturity of long-term debt is as follows for each of the years ended December 31.

 

Year Ended      
December 31,      
2014    $175,000 
2015     150,000 
2016     175,000 
     $500,000 

 

As the note payable from the acquisition of Loyalty has no stated interest, the Company has imputed total interest of $55,637 using a rate of 10% per annum, which represents the Company’s incremental borrowing rate for similar transactions. The discount is being amortized into interest expense using the interest method. During the three and six months ended June 30, 2014, amortization of the discount amounted to $8,585 and $13,114, respectively. As of June 30, 2014, the note payable is presented net of a discount of $42,523. The note has not been paid due to an internal issue and the Company is currently in the process of renegotiating the terms of the outstanding notes.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

12
 

 

As used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” except where the context otherwise requires, the term “we,” “us,” “our” or “the Company” refers to the business of First Rate Staffing Corporation.

 

The following discussion should be read together with the information contained in the unaudited condensed consolidated financial statements and related notes included in Item 1, “Financial Statements,” in this Form 10-Q.

 

Overview

 

First Rate Staffing Corporation (“First Rate” or “the Company”), formerly known as Moosewood Acquisition Corporation (“Moosewood”) was incorporated on April 20, 2011 under the laws of the State of Delaware.

 

The Company provides recruiting and staffing services for temporary positions in the light industrial, distribution center, assembly, and clerical areas to its clients in California and Arizona, with an option for the clients and candidates to choose the most beneficial working arrangements.

 

The Company’s independent auditors have expressed substantial doubt as to the ability of the Company to continue as a going concern. Unless the Company is able to generate sufficient cash flow from operations and/or obtain additional financing, there is a substantial doubt as to the ability of the company to continue as a going concern.

 

On February 11, 2014, the Company entered into an agreement to purchase the assets of Loyalty Staffing Services (“Loyalty”), a California corporation.

 

Critical Accounting Policies

 

Use of Estimates

 

In preparing these condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Cash

 

The Company considers all highly-liquid investments with original maturities of three months or less when purchased to be cash equivalents. There were no cash equivalents as of June 30, 2014 and December 31, 2013.

 

Accounts Receivable and Factoring

 

On February 11, 2014, the Company entered into an agreement to purchase the assets of Loyalty Staffing Services (“Loyalty”), a California corporation, Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering each customer’s financial condition and credit history, as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. The allowance for doubtful accounts as of June 30, 2014 (unaudited) and December 31, 2013 was $0.

 

During 2012, the Company entered into a new accounts receivable factoring arrangement with a non-related third party financial institution (the “Factor”). Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 90% of the accounts receivable balance to the Company, with the remaining balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. An administrative fee of 0.015% per diem is charged on the gross amount of accounts receivables assigned to Factor, plus interest to be calculated at 0.011806% per day. The total amount of accounts receivable factored was $1,268,011 (unaudited) and $830,725 at June 30, 2014 and December 31, 2013, respectively.

 

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Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific asset or liability.

 

GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:

 

Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:

 

Quoted prices for similar assets or liabilities in active markets

Quoted prices for identical or similar assets or liabilities in markets that are not active
Inputs other than quoted prices that are observable for the asset or liability
Inputs that are derived principally from or corroborated by observable market data by correlation or other means

 

Level 3 — Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) as of June 30, 2014 and December 31, 2013.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high quality banking institutions. From time to time, the Company may maintain cash balances at certain institutions in excess of the Federal Deposit Insurance Corporation limit. Historically, the Company has not experienced any losses on deposits.

 

The Company’s policy is to maintain an allowance for doubtful accounts, if any, for estimated losses resulting from the inability of its customer to pay. However, if the financial condition of the Company’s customers were to deteriorate rapidly, resulting in nonpayment, the Company could be required to provide for additional allowances, which would decrease operating results in the period that such determination was made.

 

Property and Equipment

 

Property and equipment is presented at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to retired assets are removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations

 

Equipment are recorded at cost and depreciated using the straight-line method over an estimated useful life of 5 years.

 

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Intangible Assets

 

The Company has intangible assets recorded as part of a business acquisition (see Note 6). Intangible assets with definite useful lives, representing customer relationships, are amortized over their estimated useful lives of 5 years using the straight-line method, which represents the economic benefit pattern of the intangible assets.

 

Impairment of Long-Lived Assets

 

Long-lived assets, including intangibles, are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable. The evaluation requires that assets be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest charges) is less than the carrying value of the assets, the assets will be written down to their estimated fair value and such loss is recognized in income from continuing operations in the period in which the determination is made. The Company’s management currently believes there is no impairment of its long-lived assets as of June 30, 2014 and December 31, 2013. There can be no assurance, however, that market conditions will not change or demand for the Company’s business model will continue. Either of these could result in future impairment of long-lived assets.

 

Revenue Recognition

 

The Company’s revenue is derived from providing temporary staffing services to its clients. The Company recognizes revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 605, Revenue Recognition. In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.

 

Cost of Revenue

 

Cost of revenue consists of wages, related payroll taxes, workers compensation, and employee benefits of the Company’s employees while they work on contract assignment as temporary staff of the Company’s customers.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The likelihood of realizing the tax benefits related to a potential deferred tax asset is evaluated, and a valuation allowance is recognized to reduce that deferred tax asset if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are calculated at the beginning and end of the year; the change in the sum of the deferred tax asset, valuation allowance and deferred tax liability during the year generally is recognized as a deferred tax expense or benefit. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

 

The Company evaluates the accounting for uncertainty in income tax recognized in its financial statements and determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in its financial statements. For those tax positions where it is “not more likely than not” that a tax benefit will be sustained, no tax benefit is recognized. Where applicable, associated interest and penalties are also recorded. The Company has not accrued for any such uncertain tax positions as of June 30, 2014 or December 31, 2013.

 

Recent Accounting Pronouncements

 

There are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.

 

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Results of Operations for the Three Months Ended June 30, 2014 as Compared to the Three Months Ended June 30, 2013.

 

The following is a comparison of the consolidated results of operations for the Company for the three months ended June 30, 2014 and 2013.

 

   Three Months Ended         
   June 30,   June 30,         
   2014   2013   $ Change   % Change 
                 
Revenues  $4,170,454   $2,258,541   $1,911,913    84.7%
Cost of revenues   3,665,451    2,019,059    1,646,392    81.5%
Gross profit   505,003    239,482    265,521    110.9%
Operating expenses   436,286    218,716    217,570    99.5%
Income from operations   68,717    20,766    47,951    230.9%
Interest and other expense, net   50,180    5,219    44,961    861.5%
Income before income tax   18,537    15,547    2,990    19.2%
Income tax expense   -    -    -    0.0%
Net income  $18,537   $15,547   $2,990    19.2%

 

Revenues

 

Our revenues increased by $1,911,913, or 84.7%, during the quarter ended June 30, 2014 as compared to the same period in 2013. The increase in revenues is due primarily to the addition of additional customers from the acquisition of Loyalty on February 11, 2014. As a result of the Loyalty acquisition, the Company acquired approximately 30 additional customers which are expected to generate annual revenues of approximately $8 million.

 

Cost of revenues

 

Our cost of revenues, which represent primarily staffing salaries and workers compensation insurance costs, increased by $1,646,392, or 81.5%, during the quarter ended June 30, 2014 as compared to the same period in 2013. The increase in cost of revenues is due to the increase in revenues for the period. The percentage increase in cost of revenues is consistent with the percentage increase in revenues. We expect the cost of revenues to continue to increase as our revenues increase.

 

Operating expenses

 

Operating expenses increased by $217,570, or 99.5%, during the quarter ended June 30, 2014 as compared to the same period in 2013. The increase in operating expenses in 2014 was due to higher expenses associated with increased payroll and other costs from the acquisition of Loyalty subsequent to the purchase date of February 11, 2014, as well as amortization expense of $73,093 on other intangible assets recorded in connection with the acquisition.

 

Results of Operations for the Six Months Ended June 30, 2014 as Compared to the Six Months Ended June 30, 2013.

 

The following is a comparison of the consolidated results of operations for the Company for the six months ended June 30, 2014 and 2013.

 

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   Six Months Ended         
   June 30,   June 30,         
   2014   2013   $ Change   % Change 
                 
Revenues  $7,067,581   $4,173,605   $2,893,976    69.3%
Cost of revenues   6,316,096    3,736,598    2,579,498    69.0%
Gross profit   751,485    437,007    314,478    72.0%
Operating expenses   685,198    424,475    260,723    61.4%
Income from operations   66,287    12,532    53,755    428.9%
Interest and other expense, net   81,698    10,372    71,326    687.7%
Income (loss) before income tax   (15,411)   2,160    (17,571)   -813.5%
Income tax expense   -    -    -    0.0%
Net income (loss)  $(15,411)  $2,160   $(17,571)   -813.5%

 

Revenues

 

Our revenues increased by $2,893,976, or 69.3%, during the six months ended June 30, 2014 as compared to the same period in 2013. The increase in revenues is due primarily to the addition of additional customers from the acquisition of Loyalty on February 11, 2014. As a result of the Loyalty acquisition, the Company acquired approximately 30 additional customers which are expected to generate annual revenues of approximately $8 million.

 

Cost of revenues

 

Our cost of revenues, which represent primarily staffing salaries and workers compensation insurance costs, increased by $2,579,498, or 69.0%, during the six months ended June 30, 2014 as compared to the same period in 2013. The increase in cost of revenues is due to the increase in revenues for the period. The percentage increase in cost of revenues is consistent with the percentage increase in revenues. We expect the cost of revenues to continue to increase as our revenues increase.

 

Operating expenses

 

Operating expenses increased by $260,723, or 61.4%, during the six months ended June 30, 2014 as compared to the same period in 2013. The increase in operating expenses in 2014 was due to higher expenses associated with increased payroll and other costs from the acquisition of Loyalty subsequent to the purchase date of February 11, 2014, as well as amortization expense of $111,647 on other intangible assets recorded in connection with the acquisition.

 

Promissory Notes

 

The Company has promissory notes outstanding of $81,845. These notes consist of monies advanced by Cliff Blake, an officer and director of the Company, to the Company, as listed. Each of these promissory notes consists of a single payment at the end of the term.

 

Origination  Principal   Interest   
Date  Amount   Rate per annum  Due Date
December 2012  $81,845   6% simple  December 2015
            

 

The Company also owes an aggregate total of $500,000 to the seller of Loyalty, consisting of $100,000 within of sixty days of obtaining the necessary UCC and personal guarantee releases, as well as a promissory note of $400,000 due in four payment installments of $75,000 commencing every six months after the purchase date of February 11, 2014, as well as one final payment of $100,000 due thirty months after the purchase date. The notes have not paid according to terms due to an internal issue, and the Company is currently renegotiating the terms of the outstanding notes.

 

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Capital Resources

 

As of June 30, 2014, the Company had cash of $229,734 and accounts receivable of $130,931.

 

The Company’s proposed expansion plans and business process improvements over the next two years will necessitate additional capital and financing. Accordingly, the Company plans to raise between $2 million and $4 million of outside funding in the next one year, for the purposes of funding its own accounts receivable factoring company, establishing and operating its own worker’s compensation captive unit, and acquiring competitors and complementary service providers in its sector. Of this amount, the Company expects that it will need funding of $1.0 million to $1.5 million to achieve its expanded growth and profit objectives in its existing core business over the next two years.

 

The Company anticipates that it will require approximately $700,000 to $1.0 million to establish and fund its factoring facility. These amounts would be used to fund payroll and taxes up to the point that these amounts are collect from the client. Factoring internally would mean self-financing, resulting in a savings to the Company. No additional material or regulatory costs would be incurred at this point. If the Company were to offer factoring to other entities (i.e. outside of the Company) then Company would be subject to all the rules and regulations surrounding the operations of a finance company. Once the factoring entity is successfully set-up, the Company expects to realize ongoing savings from the reduced factoring costs.

 

The Company expects that establishing and funding its workers’ compensation captive will separately require funding of approximately $500,000 to $1.0 million, which will include a substantial deposit to establish the captive as a self-insured funding unit. The costs include a deposit needed of $500,000 or more, set-up costs of $50,000 to $60,000, and administrative fees of approximately $15,000 to $20,000 per year. Legal requirements for the formation of a captive vary by state. Currently, Hawaii and Nevada offer the most favorable requirements for establishing a captive for the Company. Any captive would still require catastrophic coverage beyond the normal coverage provided by the captive. There are numerous companies which provide direction and assistance for establishing a captive, and the Company would plan to engage such an advisory company. These companies are primarily responsible for ensuring that the captive meets the regulatory requirements initially and annually in the applicable state of formation. These advisors also assist in risk assessment, legal deposit requirements and claims administration. An impact on the Company’s current business from the captive would be the ability to retain the large deposit amounts required by insurance providers to remain in the control of the Company. As with the factoring entity, once the workers’ compensation captive is successfully set-up, the Company expects to realize ongoing savings from the reduced workers’ compensation costs.

 

There can be no assurance that the Company’s activities will generate sufficient revenues to sustain its operations without additional capital, or if additional capital is needed, that such funds, if available, will be obtainable on terms satisfactory to the Company. Accordingly, given the Company’s limited cash and cash equivalents on hand, the Company will be unable to implement its contemplated business plans and operations (including its goals of establishing a factoring entity and workers’ compensation captive) unless it obtains additional financing or otherwise is able to generate sufficient revenues and profits. The Company may raise additional capital through sales of debt or equity, obtain loan financing or develop and consummate other alternative financial plans.

 

The Company anticipates it will develop a budget for marketing activities consisting of two levels of marketing: client marketing and acquisition marketing. Client marketing costs are associated with sales staff with the single purpose to market to current and potential clients. Acquisition marketing costs are those incurred for investor relations, traveling, expenses for client acquisitions, and case by case joint marketing material for specific acquisitions as they occur.

 

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Liquidity

 

To date, the Company has not suffered from a liquidity issue. The main liquidity issue was addressed when the Company entered into new factoring agreements that went into effect September 1, 2012 with TAB Bank, which provided for a $1,000,000 factor commitment. In addition, the Company may borrow from time to time as available, sources of funds from its officers and/or directors as needed

 

As the Company grows in size, the savings from this new factoring arrangement will continue to accrue and enhance the Company’s profitability and cash flow. Based on this budget and the projected operations of the Company, there are no currently anticipated liquidity issues which would pose a threat to the current business and operations of the Company.

 

Net cash provided by operating activities was $249,953 for the six months ended June 30, 2014 compared to net cash used in operating activities of ($20,808) for the same period in 2013. The significant change between the years was a result of the proceeds generated from additional sales related to the acquisition of Loyalty during the six months ended June 30, 2014.

 

We had net cash used in investing activities of $36,789 for the six months months ended June 30, 2013 which consisted of $28,401 in spending for the acquisition of property and equipment and $8,388 in notes receivable lending. We had no cash flows from investing activities during the six months ended June 30, 2014.

 

We had net cash used in financing activities of $74,262 during the six months ended June 30, 2014 resulting from payments of our outstanding notes payable. Cash used in financing activities during the six months ended June 30, 2013 were $53,870, which represented payments on the same notes payables.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Information not required to be filed by Smaller Reporting Companies.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures.

 

Pursuant to Rules adopted by the Securities and Exchange Commission, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rules. This evaluation was done as of June 30, 2014, the end of the period covered by this Quarterly Report on Form 10-Q under the supervision and with the participation of the Company’s principal executive officer and principal financial and accounting officer. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation. Based upon that evaluation, they believe that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, summarized and processed timely. Both officers are directly involved in the day-to-day operations of the Company.

 

The Company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with the Rule 13a-15 of the Securities Exchange Act of 1934. The Company’s president and its principal financial and accounting officer conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2014, based on the criteria establish in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treaedway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2014, based on those criteria. A control system can provide only reasonably, not absolute, assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues have been detected.

 

Changes in Internal Control Over Financial Reporting

 

The Company has not made any changes during its fiscal quarter that materially affect, or are reasonably likely to materially affect, its internal control over financial reporting.

 

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PART II

 

 

ITEM 1. LEGAL PROCEEDINGS

 

There are no pending, threatened or actual legal proceedings in which the Company or any subsidiary is a party.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

(a) Not applicable.

(b) Item 407(c)(3) of Regulation S-K:

 

During the quarter covered by this Report, there have not been any material changes to the procedures by which security holders may recommend nominees to the Board of Directors.

 

ITEM 6. EXHIBITS

  

Exhibit
Number
  Exhibit Title
     
31   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
*   Filed herewith

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

FIRST RATE STAFFING CORPORATION
 
By:  /s/ Cliff Blake
President and Principal executive officer
Principal financial officer

 

Dated: August 14, 2014

 

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