FIRST RATE STAFFING Corp - FORM 10-Q

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EX-32 - EXHIBIT 32 - FIRST RATE STAFFING Corp	v410320_ex32.htm
EX-31 - EXHIBIT 31 - FIRST RATE STAFFING Corp	v410320_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 March 31, 2015

¨ 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 May 15, 2015
Common Stock, par value $0.0001		7,500,000 shares

FIRST RATE STAFFING CORPORATION

Table of Contents		Page

PART I — FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at March 31, 2015 (Unaudited) and December 31, 2014	3

	Consolidated Statements of Operations (Unaudited) — Three Months Ended March 31, 2015 and 2014	4

	Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended March 31, 2015 and 2014	5

	Notes to 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	18

Item 4.	Controls and Procedures	18

PART II — OTHER INFORMATION		19

Item 1.	Legal Proceedings	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults upon Senior Securities	19

Item 4.	Mine Safety Disclosures	19

Item 5.	Other Information	19

Item 6.	Exhibits	19

Signatures		20

Exhibit Index

PART I

ITEM 1. FINANCIAL STATEMENTS

FIRST RATE STAFFING CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2015			2014
	(Unaudited)
Assets

Current assets
Cash	$	624,720		$	787,238
Accounts receivable		360,993			330,538
Notes receivable - related party, current portion		-			8,388
Total current assets		985,713			1,126,164

Property and equipment, net		18,158			19,823
Intangible assets, net		1,133,135			1,206,429
Notes receivable - related party, net of current portion		33,418			-
Deposit and other assets		10,640			6,200
Total assets	$	2,181,064		$	2,358,616

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable	$	261,363		$	385,571
Other current liabilities		607,664			534,735
Notes payable, net of discount		483,328			474,837
Notes payable - related parties		6,663			4,509
Total liabilities		1,359,018			1,399,652

Commitments and contingencies

Stockholders' equity
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 shares issued and authorized at March 31, 2015 (unaudited) and December 31, 2014		750			750
Additional paid-in capital		1,089,802			1,089,802
Accumulated deficit		(268,506	)		(131,588	)
Total stockholders' equity		822,046			958,964
Total liabilities and stockholders' equity	$	2,181,064		$	2,358,616

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

FIRST RATE STAFFING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	March 31,			March 31,
	2015			2014

Revenues	$	4,906,244		$	2,897,127
Cost of revenues		4,523,813			2,650,645
Gross profit		382,431			246,482
Operating expenses		469,836			248,912
Loss from operations		(87,405	)		(2,430	)
Interest and other expense, net		49,513			31,518
Loss before income tax		(136,918	)		(33,948	)
Income tax expense		-			-
Net loss	$	(136,918	)	$	(33,948	)

Net loss per share:
Basic and diluted	$	(0.02	)	$	-

Weighted average shares outstanding:
Basic and diluted		7,500,000			7,266,667

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

FIRST RATE STAFFING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	March 31,
	2015			2014

Operating activities
Net loss	$	(136,918	)	$	(33,948	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense		74,959			40,219
Provision for bad debt		30,127			-
Amortization of discount on note payable		8,491			4,529
Changes in operating assets and liabilities:
Accounts receivable		(60,583	)		108,827
Prepaid expense and other current assets		-			31,521
Deposits and other assets		(4,440	)		80
Accounts payable		(124,208	)		(14,021	)
Other current liabilities		72,930			(7,517	)

Net cash provided by (used in) operating activities		(139,642	)		129,690

Investing activities
Payments for borrowing on notes receivable - related party		(25,030	)		-
Net cash used in investing activities		(25,030	)		-

Financing activities
Proceeds from note payable - related party		2,154			-
Payments on note payable - related party		-			(34,864	)

Net cash provided by (used in) financing activities		2,154			(34,864	)

Net change in cash		(162,518	)		94,826
Cash, beginning of the year		787,238			54,043
Cash, end of the period	$	624,720		$	148,869

Supplemental disclosure of cash flow information:
Interest paid	$	554		$	1,641
Income taxes paid	$	-		$	-

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 consolidated financial statements

FIRST RATE STAFFING CORPORATION

NOTES TO 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 consolidated balance sheet as of December 31, 2014, which has been derived from the Company’s audited financial statements as of that date, and the unaudited consolidated financial information of the Company as of March 31, 2015 and for the three months ended March 31, 2015 and 2014, 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 March 31, 2015 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 consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015.

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 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 March 31, 2015 and December 31, 2014.

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 $30,127 and $0 as of March 31, 2015 (unaudited) and December 31, 2014, respectively.

The Company entered into an 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 $1,532,401 (unaudited) and $1,824,376 at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014.

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 income 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.

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 March 31, 2015 and December 31, 2014. 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 Loss Per Share

Basic loss per share is computed by dividing the net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock. There have been no common stock equivalents included in the diluted earnings per share computation for the three months ended March 31, 2015 and 2014 as the amounts are anti-dilutive.

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 March 31, 2015 or December 31, 2014.

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 an accumulated deficit of $268,506 since inception. This accumulated deficit is primarily the result of increased operating expenses associated with professional fees necessary to complete its merger transaction and continue as a public company, as well as revenues historically being at below break-even levels. Going forward, the Company expects these annual expenses to be lower. On February 11, 2014, the Company also acquired the customer list 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 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 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.

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of March 31, 2015 and December 31, 2014.

	March 31,		December 31,
	2015		2014
	(Unaudited)

Furniture and equipment	$	5,658	$	5,658
Vehicles		28,000		28,000
		33,658		33,658

Less: accumulated depreciation		15,500		13,835

	$	18,158	$	19,823

Depreciation expense for the three months ended March 31, 2015 and 2014 amounted to $1,665 and $1,665, respectively.

6. ACQUISITION

On February 11, 2014, the Company entered into an agreement to purchase the customer list of Loyalty Staffing Services, Inc. (“Loyalty”), a California corporation, for an aggregate purchase price of $1,444,363 consisting of a cash payment of $100,000, along with a $400,000 note payable, net of a discount of $55,637 for imputed interest, and 500,000 shares issued of the Company’s common stock, valued at the estimated fair value of $2 per share. The total amount due of $500,000 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 $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 of a client or clients acquired as part of the asset agreement within 12 months from the closing date.

The Company is currently in dispute with the seller of Loyalty, Nancy Esteban, concerning the terms of the cash portion and note payable portion of the payout in the original transaction described above. The parties are currently negotiating in good faith to resolve. The Company expects this settlement to occur during the second quarter of 2015 (see Note 10).

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 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 months ended March 31, 2015 and 2014 amounted to $73,294 and $38,554, respectively. Estimated future amortization of intangible assets is as follows.

Year Ended
December 31,
	2015	$	219,881
	2016		293,173
	2017		293,173
	2018		293,173
	2019		33,735
		$	1,133,135

7. ACCRUED EXPENSES

Accrued expenses consisted of the following as of March 31, 2015 and December 31, 2014.

	March 31,		December 31,
	2015		2014
	(Unaudited)

Accrued payroll expenses	$	534,296	$	430,326
Other accrued operating expenses		67,972		99,013
Accrued interest		5,396		5,396
	$	607,664	$	534,735

8. NOTES RECEIVABLE – RELATED PARTY

The Company issued a series of unsecured notes receivables to an officer of the Company totaling $33,418 (unaudited) and $8,388 as of March 31, 2015 and December 31, 2014, respectively. The outstanding borrowings as of March 31, 2015 are non-interest bearing and due in one lump payment in March 2018.

9. 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 $6,663 (unaudited) and $4,509 as of March 31, 2015 and December 31, 2014, respectively. The notes bear interest at a rate of 6% per annum and are due in full in one lump payment in December 2015. During the reporting period, there were no financial covenant requirements under the notes.

10. NOTES PAYABLE – ACQUISITION

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

	March 31,			December 31,
	2015			2014
	(Unaudited)

Cash payments due to the seller of Loyalty, $50,000 due within 5 days and $50,000 within 60 days of the UCC and personal guarantee releases.	$	100,000		$	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 $2 per share. The Company is currently in default under the terms of the note due to a dispute with the debt holder, and the terms are in the process of being renegotiated. Until a settlement has been reached, the outstanding balances on the note have been presented as current liabilties.		400,000			400,000
	$	500,000		$	500,000
Discount on notes payable		(16,672	)		(25,163	)
Notes payable, net	$	483,328		$	474,837

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 months ended March 31, 2015 and 2014, amortization of the discount amounted to $8,491 and $4,529, respectively. As of March 31, 2015, the note payable is presented net of a discount of $16,672. 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 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 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.

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 consolidated financial statements and related notes included in Item 1, “Financial Statements,” in this Form 10-Q.

Overview

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 customer list of Loyalty Staffing Services (“Loyalty”), a California corporation.

Critical Accounting Policies

Use of Estimates

Cash

Accounts Receivable and Factoring

Fair Value of Financial Instruments

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

•

Concentration of Credit Risk

Property and Equipment

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

Intangible Assets

Impairment of Long-Lived Assets

Revenue Recognition

Cost of Revenue

Net Loss Per Share

Income Taxes

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.

Results of Operations for the Three Months Ended March 31, 2015 as Compared to the Three Months Ended March 31, 2014.

The following is a comparison of the consolidated results of operations for the Company for the three months ended March 31, 2015 and 2014.

	Three Months Ended
	March 31,			March 31,
	2015			2014			$ Change			% Change

Revenues	$	4,906,244		$	2,897,127		$	2,009,117			69.3	%
Cost of revenues		4,523,813			2,650,645			1,873,168			70.7	%
Gross profit		382,431			246,482			135,949			55.2	%
Operating expenses		469,836			248,912			220,924			88.8	%
Loss from operations		(87,405	)		(2,430	)		(84,975	)		3496.9	%
Interest and other expense, net		49,513			31,518			17,995			57.1	%
Loss before income tax		(136,918	)		(33,948	)		(102,970	)		303.3	%
Income tax expense		-			-			-			0.0	%
Net loss	$	(136,918	)	$	(33,948	)	$	(102,970	)		303.3	%

Revenues

Our revenues increased by $2,009,117, or 69.3%, during the quarter ended March 31, 2015 as compared to the same period in 2014. The increase in revenues is due primarily to additional customers from the acquisition of Loyalty on February 11, 2014. As a result of the Loyalty acquisition, the revenues during the quarter ended March 31, 2015 reflect a full three months of additional revenue from the acquired customers, whereas the revenues from the same period in 2014 only reflect additional revenues generated from the additional Loyalty customers subsequent to the acquisition date of February 11, 2014.

Cost of revenues

Our cost of revenues, which represent primarily staffing salaries and workers compensation insurance costs, increased by $1,873,168, or 70.7%, during the quarter ended March 31, 2015 as compared to the same period in 2014. The increase in cost of revenues is due to the increase in revenues for the period. The cost of revenues increased at a higher rate than the percentage increase in revenues due to an increase in the state and federal unemployment tax rates for our staffing employees as compared to the same period in 2014. We expect the cost of revenues to continue to increase as our revenues increase.

Operating expenses

Operating expenses increased by $220,924, or 88.8%, during the quarter ended March 31, 2015 as compared to the same period in 2014. The increase in operating expenses in 2015 was due to a full three months of higher expenses associated with increased payroll and other costs from the acquisition of Loyalty, whereas the operating expenses from the same period in 2014 only reflect additional operating expenses incurred subsequent to the purchase date of February 11, 2014.

Promissory Notes

The Company has promissory notes outstanding of $6,663. 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	$	6,663	6% simple	December 2015

The Company also owes an aggregate total of $500,000 to the seller of Loyalty, consisting of $ 50,000 due within 5 days of obtaining the necessary UCC and personal guarantee releases, $50,000 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.

Capital Resources

As of March 31, 2015, the Company had cash of $624,720 and accounts receivable of $391,121, less an allowance for doubtful accounts of $30,127.

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 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.

Liquidity

To date, the Company has not suffered from a significant 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 used in operating activities was ($139,642) for the three months ended March 31, 2015 compared to net cash provided by operating activities of $129,690 for the same period in 2014. The significant change between the periods was a result of a net loss of $136,918 for the three months ended March 31, 2015, along with an increase in accounts receivable of $60,583. During the same period in 2014, our net loss was only $33,948, and we had increased cash provided from the reduction of accounts receivable of $108,827 and prepaid expenses and other current assets of $31,521.

Net cash used in investing activities during the three months ended March 31, 2015 amounted to $25,030 representing payments for borrowings on related party notes receivable. We had no cash flows from investing activities for the three months ended March 31, 2014.

We had net cash provided by financing activities of $2,154 during the three months ended March 31, 2015 resulting from proceeds from notes payable to related parties of $2,154. Cash used in financing activities during the three months ended March 31, 2014 were $34,864, which represented payments on notes payables to related parties.

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 March 31, 2015, 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 March 31, 2015, 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 March 31, 2015, 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.

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: May 15, 2015

FIRST RATE STAFFING Corp - FORM 10-Q - May 15, 2015

Attached files

FIRST RATE STAFFING Corp Reports