Attached files
file | filename |
---|---|
EX-2.1 - Corporate Resource Services, Inc. | v210832_ex2-1.htm |
EX-2.4 - Corporate Resource Services, Inc. | v210832_ex2-4.htm |
EX-2.3 - Corporate Resource Services, Inc. | v210832_ex2-3.htm |
EX-2.2 - Corporate Resource Services, Inc. | v210832_ex2-2.htm |
EX-2.5 - Corporate Resource Services, Inc. | v210832_ex2-5.htm |
EX-10.2 - Corporate Resource Services, Inc. | v210832_ex10-2.htm |
EX-10.4 - Corporate Resource Services, Inc. | v210832_ex10-4.htm |
EX-31.1 - Corporate Resource Services, Inc. | v210832_ex31-1.htm |
EX-10.1 - Corporate Resource Services, Inc. | v210832_ex10-1.htm |
EX-10.3 - Corporate Resource Services, Inc. | v210832_ex10-3.htm |
EX-32.1 - Corporate Resource Services, Inc. | v210832_ex32-1.htm |
EX-10.5 - Corporate Resource Services, Inc. | v210832_ex10-5.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2010
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 000-30734
CORPORATE
RESOURCE SERVICES, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
80-0551965
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
160
Broadway, 11th
Floor
New
York, New York 10038
|
||
(Address
of principal executive offices)
|
||
(646)
443-2380
|
||
(Registrant’s
telephone number, including area code)
|
||
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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. Yes ý No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such
files). o
Yes o 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 definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated Filer o
|
Accelerated
filer o
|
|
Non
- accelerated filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No ý
The
number of shares of Common Stock, $.0001 par value, outstanding as of February
9, 2011 was 67,441,000.
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
INDEX
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements (unaudited)
|
|
Condensed
Consolidated Balance Sheets as of December 31, 2010 (unaudited)
and September 30, 2010
|
3
|
Condensed
Consolidated Statements of Operations for the Three Months Ended December
31, 2010 and 2009 (unaudited)
|
4
|
Condensed
Consolidated Statement of Stockholders’ Equity (Deficit) for the Three
Months Ended December 31, 2010 (unaudited)
|
5
|
Condensed
Consolidated Statements of Cash Flows for the Three Months Ended December
31, 2010 and 2009 (unaudited)
|
6
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
17
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risks
|
25
|
Item
4. Controls and Procedures
|
25
|
PART
II – OTHER INFORMATION
|
|
Item
1. Legal Proceedings
|
26
|
Item
1A. Risk Factors
|
26
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
26
|
Item
3. Defaults Upon Senior Securities
|
26
|
Item
4. (Removed and Reserved)
|
26
|
Item
5. Other Information
|
26
|
Item
6. Exhibits
|
26
|
Signatures
|
28
|
2
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
December
31,
|
September
30,
|
|||||||
2010
|
2010
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 395,000 | $ | 254,000 | ||||
Accounts
receivable – less allowance for
doubtful
accounts of $1,669,000 and $473,000, respectively
|
4,838,000 | 269,000 | ||||||
Due
from financial institution, net of allowance for
chargebacks of
$730,000 and $468,000, respectively
|
1,342,000 | 1,556,000 | ||||||
Unbilled
receivables
|
2,507,000 | 2,767,000 | ||||||
Prepaid
expenses
|
179,000 | 169,000 | ||||||
Total
current assets
|
9,261,000 | 5,015,000 | ||||||
Property
and equipment, net
|
1,091,000 | 1,078,000 | ||||||
Other
assets
|
719,000 | 567,000 | ||||||
Intangible
assets, net
|
6,354,000 | 2,946,000 | ||||||
Goodwill
|
4,939,000 | 3,623,000 | ||||||
Total
assets
|
$ | 22,364,000 | $ | 13,229,000 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 6,121,000 | $ | 3,968,000 | ||||
Accrued
wages and related obligations–due to related party
|
2,754,000 | 3,340,000 | ||||||
Borrowings
under revolving credit facility
|
3,059,000 | – | ||||||
Current
portion of long-term debt
|
2,298,000 | 1,478,000 | ||||||
Current
portion of related party long-term debt
|
1,009,000 | 1,009,000 | ||||||
Due
to related party
|
2,382,000 | 1,994,000 | ||||||
Total
current liabilities
|
17,623,000 | 11,789,000 | ||||||
Long
term debt, net of current portion
|
3,990,000 | 1,000,000 | ||||||
Deferred
Rent
|
108,000 | 97,000 | ||||||
Total
liabilities
|
21,721,000 | 12,886,000 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Preferred
stock, $0.0001 par value, 5,000,000 shares
authorized; zero shares issued and outstanding
|
– | – | ||||||
Common
stock, $0.0001 par value, 95,000,000 shares authorized; 42,286,000 and
42,186,000
shares issued and 38,029,000 and 37,929,000 outstanding as of December 31,
2010 and September 30, 2010, respectively
|
4,000 | 4,000 | ||||||
Additional
paid-in capital
|
6,202,000 | 6,134,000 | ||||||
Accumulated
deficit
|
(5,563,000 | ) | (5,795,000 | ) | ||||
Total
stockholders’ equity
|
643,000 | 343,000 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 22,364,000 | $ | 13,229,000 |
See accompanying notes to condensed
consolidated financial statements.
3
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three
Months Ended
|
||||||||
December
31,
2010
|
December
31,
2009
|
|||||||
Revenues
|
$ | 44,864,000 | $ | 20,696,000 | ||||
Direct
cost of producing revenues
|
365,000 | 77,000 | ||||||
Direct
cost of producing revenues purchased from related parties
|
35,362,000 | 17,633,000 | ||||||
Gross
profit
|
9,137,000 | 2,986,000 | ||||||
Selling,
general and administrative expenses (including
stock-based
compensation of $28,000 and $40,000,
respectively)
|
2,041,000 | 2,192,000 | ||||||
Selling,
general and administrative expenses - related parties
|
5,939,000 | 694,000 | ||||||
Depreciation
and amortization
|
256,000 | 142,000 | ||||||
Other
(income)
|
(40,000 | ) | – | |||||
Income
(loss) from operations
|
941,000 | (42,000 | ) | |||||
Interest
expense
|
334,000 | 136,000 | ||||||
Acquisition
expenses
|
375,000 | – | ||||||
Loss
on debt extinguishments
|
– | 501,000 | ||||||
Net
income (loss) available to common stockholders
|
$ | 232,000 | $ | (679,000 | ) | |||
Net income (loss) per common share: | ||||||||
Basic
|
$ | 0.01 | $ | (0.02 | ) | |||
Diluted
|
$ | 0.01 | $ | (0.02 | ) | |||
Weighted
average shares outstanding:
|
||||||||
Basic
|
37,971,000 | 31,357,000 | ||||||
Diluted
|
38,274,000 | 31,357,000 | ||||||
See
accompanying notes to condensed consolidated financial statements.
4
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Additional
|
||||||||||||||||||||
Common
Stock
|
Paid-in
|
Accumulated
|
Stockholders’
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||
Balances
as of September 30, 2010
|
42,186,000 | $ | 4,000 | $ | 6,134,000 | $ | (5,795,000 | ) | $ | 343,000 | ||||||||||
Conversion
of outstanding interest to
unregistered common shares
|
100,000 | 40,000 | 40,000 | |||||||||||||||||
Stock-based
compensation expense
|
28,000 | 28,000 | ||||||||||||||||||
Net
income for the three months
ended December 31, 2010
|
232,000 | 232,000 | ||||||||||||||||||
Balances
as of December 31, 2010
|
42,286,000 | $ | 4,000 | $ | 6,202,000 | $ | (5,563,000 | ) | $ | 643,000 |
See
accompanying notes to condensed consolidated financial statements.
5
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three
Months Ended
|
||||||||
December
31,
2010
|
December
31,
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 232,000 | $ | (679.000 | ) | |||
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
256,000 | 142,000 | ||||||
Stock-based
compensation
|
28,000 | 40,000 | ||||||
Bad
debt expense
|
257,000 | 70,000 | ||||||
Loss
on debt extinguishments
|
– | 501,000 | ||||||
Adjustment
to deferred rent
|
11,000 | – | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Trade
accounts receivable including unbilled receivables
|
171,000 | 1,186,000 | ||||||
Due
from financial institution
|
214,000 | (151,000 | ) | |||||
Prepaid
expenses
|
(10,000 | ) | 165,000 | |||||
Other
assets
|
(152,000 | ) | 2,000 | |||||
Accounts
payable and accrued liabilities
|
1,460,000 | 329,000 | ||||||
Accrued
wages and related obligations – due to related party
|
(1,897,000 | ) | (1,372,000 | ) | ||||
Net
cash provided by operating activities
|
570,000 | 233,000 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
(4,000 | ) | (16,000 | ) | ||||
Acquisition
of assets
|
(50,000 | ) | – | |||||
Net
cash used in investing activities
|
(54,000 | ) | (16,000 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Principal
payments on long-term debt
|
(678,000 | ) | (4,000 | ) | ||||
Advances
from related party–net
|
188,000 | (166,000 | ) | |||||
Borrowings
(payments) on credit facilities–net
|
115,000 | (75,000 | ) | |||||
Net
cash used in financing activities
|
(375,000 | ) | (245,000 | ) | ||||
Net
increase (decrease) in cash
|
141,000 | (28,000 | ) | |||||
Cash
at the beginning of period
|
254,000 | 63,000 | ||||||
Cash
at the end of period
|
$ | 395,000 | $ | 35,000 |
See
accompanying notes to condensed consolidated financial statements.
6
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description
of the Company and its Business
Holding
Company Reorganization
Corporate
Resource Services, Inc. (the “Company”) was formed on December 15, 2009 for the
purpose of acting as a holding company with operating subsidiaries in the
staffing business and other related businesses. On February 23, 2010,
we completed a holding company reorganization, pursuant to which
Accountabilities, Inc., a Delaware corporation (“Accountabilities”), which
immediately prior to the reorganization was our parent company, became a
wholly-owned subsidiary of our Company.
As a
result of the reorganization, the former holders of Accountabilities common
stock became owners of shares of our common stock, par value $0.0001 per share,
and each restricted share of Accountabilities’ common stock issued and
outstanding under the Accountabilities Equity Incentive Plan immediately prior
to the effective time of the reorganization was automatically converted into a
similarly restricted share of our common stock. Our equity
capitalization and consolidated assets, liabilities and stockholders’ equity
immediately following the reorganization remained the same as the equity
capitalization and consolidated assets, liabilities and stockholders’ equity of
Accountabilities immediately prior to the reorganization.
References
in these Notes to Condensed Consolidated Financial Statements to the “Company”
refer, for periods prior to February 23, 2010, to Accountabilities, and, for the
periods after the reorganization, to Corporate Resource Services, Inc., in each
case including its consolidated subsidiaries (unless indicated or context
otherwise requires):
·
|
Accountabilities;
|
·
|
Corporate
Resource Development, Inc. (“CRD”), a wholly-owned subsidiary of the
Company formed on March 23, 2010. On April 5, 2010, CRD
acquired, through a private foreclosure sale, certain assets of GT
Systems, Inc. and its operating affiliates (“GT Systems”) related to the
temporary and permanent placement of employees. See also Note 3
to the Condensed Consolidated Financial
Statements;
|
·
|
Insurance
Overload Services, Inc. (“Insurance Overload”), a wholly-owned subsidiary
was formed on July 22, 2010. On August 27, 2010, pursuant to a
merger, Insurance Overload closed its acquisition of Tri-Overload
Staffing, Inc. (“Tri-Overload”), renamed Insurance Overload as part of the
acquisition. Prior to the Company’s acquisition of Tri-Overload, it
was purchased on July 20, 2009 by TS Staffing Corp. (“TS Staffing”), an
entity wholly-owned by Robert Cassera, a director of the
Company. Mr. Cassera owns Tri-State Employment Services, Inc.
(“Tri-State” or “TSE”), which together with its affiliated entities and
persons was the beneficial owner of approximately 74.3% of the Company's
outstanding shares of common stock at December 31, 2010, including the
shares issued to TS Staffing, the seller of Tri-Overload, in connection
with the Company's acquisition of such entity. Because the
Company and Tri-Overload were both controlled by Tri-State and its
affiliates, the acquisition was recorded using the pooling-of-interest
method as required under United States generally accepted accounting
principles (“U.S. GAAP”) for business combinations of entities under
common control and the financial information for all periods presented
reflects the financial statements of the combined companies as if the
acquisition had occurred on July 20, 2009. See also Note 3 to
the Condensed Consolidated Financial Statements;
and,
|
·
|
Integrated
Consulting Group, Inc. (“ICG Inc.”), a wholly-owned subsidiary formed on
October 18, 2010 acquired, through a public foreclosure sale, certain
assets of Integrated Consulting Group of NY LLC (“ICG Seller”) on December
14, 2010 related to the temporary placement of employees in the light
industrial industry and translation and interpreting services (the “ICG
Acquisition”). See also Note 3 to the Condensed Consolidated
Financial Statements.
|
Nature
of Operations
Through
its four wholly-owned subsidiaries, Accountabilities, CRD, Insurance Overload
and ICG Inc., the Company is a national provider of diversified staffing,
recruiting and consulting services, including temporary staffing services, with
a focus on light industrial services, clerical and administrative support and
insurance related staffing. The Company provides its services across
a variety of industries and to a diverse range of clients ranging from sole
proprietorships to Fortune 1000 companies. The Company conducts all
of its business in the United States through its New York City headquarters and
the operation of 53 staffing and recruiting offices.
7
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary
of Significant Accounting Policies
Basis
of Presentation
The
consolidated financial statements have been prepared in accordance with U.S.
GAAP and the rules of the Securities and Exchange Commission
(“SEC”).
Revenue
Recognition
Staffing
and consulting revenues are recognized when professionals deliver
services. Permanent placement revenue, which generated 3.7% and 0.3%
of total revenue in the three months ended December 31, 2010 and 2009,
respectively, is recognized when the candidate commences employment, net of an
allowance for those not expected to remain with clients through a 90-day
guarantee period, wherein the Company is obligated to find a suitable
replacement.
Per
Share Information
The
Company presents both basic and diluted earnings per share amounts
(“EPS”). Basic EPS is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
EPS per share reflects any potential dilution that could occur if securities or
other contracts to issue common stock, such as options, convertible notes and
convertible preferred stock, were exercised or converted into common stock or
could otherwise cause the issuance of common stock that then shared in
earnings. Such potential additional common stock is included in the
computation of diluted earnings per share. Diluted loss per share is
not computed because any potential additional common stock would reduce the
reported loss per share and therefore have an anti-dilutive
effect. The weighted-average number of common shares outstanding does
not include the anti-dilutive effect of approximately 1,052,000 common stock
equivalent shares for the three months ended December 31, 2009, representing
warrants, convertible debt and non-vested shares.
The
following table sets forth the computation of basic and diluted per share
information:
For
the Three Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Numerator:
|
||||||||
Net
income (loss)
|
$ | 232,000 | $ | (679,000 | ) | |||
Denominator:
|
||||||||
Weighted-average
shares of common stock outstanding
|
37,971,000 | 31,357,000 | ||||||
Dilutive
effect of stock warrants,
convertible
debt and restricted stock
|
303,000 | – | ||||||
Weighted-average
shares of
common
stock outstanding, assuming dilution
|
38,274,000 | 31,357,000 | ||||||
Net
income (loss) per share:
|
||||||||
Basic
|
$ | 0.01 | $ | (0.02 | ) | |||
Diluted
|
$ | 0.01 | $ | (0.02 | ) |
8
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Although management believes these
estimates and assumptions are adequate, actual results could differ from the
estimates and assumptions used.
Reclassification
Certain
prior period amounts were reclassified to conform to the current year
presentation.
Consolidation
The
accompanying condensed consolidated financial statements include the accounts of
the Company and its four wholly owned subsidiaries, Accountabilities, CRD,
Insurance Overload and ICG, Inc. All significant intercompany transactions have
been eliminated in consolidation.
Interim
Financial Information
The
condensed consolidated financial information as of and for the three months
ended December 31, 2010 and 2009 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of its financial position at such dates and
the operating results and cash flows for those periods. The condensed
year-end balance sheet was derived from audited financial statements, and
certain information and note disclosures normally included in annual financial
statements, prepared in accordance with accounting principles generally accepted
in the United States, have been condensed or omitted pursuant to the rules and
regulations of the SEC; however, the Company believes the disclosures made are
adequate to make the information presented not misleading in any material
respect.
The
results of operations for the interim periods presented are not necessarily
indicative of the results of operations to be expected for the full fiscal
year. These condensed consolidated interim financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended September 30, 2010, which are included in the
Company’s Annual Report on Form 10-K as filed with the SEC on January 11,
2011. Certain reclassifications have been made to the accompanying
condensed consolidated financial statements to conform to the current period’s
presentation.
3. Acquisitions
GT
Systems, Inc. and Affiliated Companies
On April
5, 2010 the Company, through its wholly-owned subsidiary, CRD, acquired, through
a private foreclosure sale, certain assets of GT Systems for $3,000,000 (the
“Purchase Price”) of which $750,000 was paid at the closing with the balance
payable in installments of $250,000 per quarter for one year, and thereafter,
0.75% of revenue on a monthly basis until the earlier of payment of the full
purchase price, or April 5, 2013. If, on April 5, 2013, the Purchase Price has
not been paid, then any remaining balance is due and payable by CRD at that
time. CRD’s obligation to make the required payments is guaranteed by the
Company, and is secured by a pledge of 4,257,332 shares of the Company’s common
stock to the payee. These shares are not treated as outstanding for
these financial statements, and are not included in the number of the Company’s
shares of common stock outstanding on the cover page of this Quarterly Report on
Form 10-Q. Tri-State is also a guarantor of CRD’s obligation to pay
the Purchase Price.
9
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents the allocation of the Purchase Price which has been
accounted for at the fair values of the assets acquired and liabilities assumed
under the acquisition method of accounting:
Backlog
|
$ | 195,000 | ||
Sales representative
network
|
2,055,000 | |||
Property,
plant and equipment
|
750,000 | |||
Total
Purchase Price
|
$ | 3,000,000 |
In
addition, CRD has entered into a three year consulting agreement with GT
Systems’ former owner for his assistance with the administration of the business
and maintenance of customer and client relationships. Compensation to be paid
under the agreement includes an annual payment of $200,000, 0.4% of the gross
sales of each pay period, and an additional 0.6% of the annual gross sales in
excess of $80,000,000 on an annual basis.
The
Company also incurred $482,000 in acquisitions-related costs, which include a
finder's fee of $52,000, legal fees of $360,000 and accounting fees of $70,000
in the third quarter of fiscal year 2010.
Tri-Overload
Staffing, Inc.
On August
27, 2010, the Company acquired Tri-Overload from TS Staffing through a merger of
Tri-Overload into a wholly-owned subsidiary of the Company. The
purchase price for Tri-Overload was $6,200,000, which was paid through the
issuance of 8,589,637 shares of the Company’s common stock to a related
party. The number of shares issued was based upon a negotiated
$0.7218 price per share for our common stock that was determined using
historical market prices. Tri-Overload operates an insurance-specific
staffing business in major cities throughout the United
States. Tri-Overload furnishes temporary personnel and makes direct
hire placements in both the property/casualty/worker's compensation insurance
industry and the health insurance industry.
The
Company incurred $209,000 in acquisition related costs, which include $41,000 of
legal fees, accounting fees of $153,000 and $15,000 for a fairness opinion in
the fourth quarter of fiscal year 2010.
A
condensed combined summary of operations for the three months ended December 31,
2009 is presented below:
Three
Months Ended December 31, 2009
|
||||||||||||
Corporate
Resource Services, Inc.
|
Tri-
Overload Staffing, Inc. |
Combined
|
||||||||||
Revenues
|
$ | 14,114,000 | $ | 6,582,000 | $ | 20,696,000 | ||||||
Direct
cost of producing revenues
|
12,687,000 | 5,023,000 | 17,710,000 | |||||||||
Gross
profit
|
1,427,000 | 1,559,000 | 2,986,000 | |||||||||
Operating
expenses
|
1,945,000 | 1,083,000 | 3,028,000 | |||||||||
Income
(loss) from operations
|
(518,000 | ) | 476,000 | (42,000 | ) | |||||||
Interest
and other expenses
|
597,000 | 40,000 | 637,000 | |||||||||
Net
income (loss)
|
$ | (1,115,000 | ) | $ | 436,000 | $ | (679,000 | ) | ||||
Basic
and diluted loss per common share
|
$ | (0.05 | ) | $ | (0.02 | ) | ||||||
Weighted
average shares outstanding – basic and diluted
|
22,767,000 | 31,357,000 |
10
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Integrated
Consulting Group
On
December 14, 2010 (the “Closing Date”), ICG Inc. acquired, through a public
foreclosure sale, a portion of the assets of Integrated Consulting Group of NY
LLC (“ICG Seller”) related to the temporary and permanent placement of employees
in the light industrial industry and translation and interpreting services (the
“ICG Acquisition”). The consideration for these assets included (i)
the repayment of ICG Seller’s outstanding obligations on the Closing Date under
its credit facility, which amounted to approximately $3.2 million, (ii) payment
of up to $366,000 for outstanding accounts payable of ICG Seller as of the
Closing Date, (iii) payments to various taxing authorities in the aggregate
amount of approximately $757,000 for certain taxes owed by ICG Seller on the
Closing Date, and (iv) payment of approximately $183,000 to Rosenthal &
Rosenthal, Inc. (“Rosenthal”), for amounts owed to it by ICG Seller on the
Closing Date, which amount is to be paid in installments commencing in January
2011. ICG Inc. also entered into a commission agreement with
Rosenthal to replace a similar agreement that Rosenthal had with ICG Seller and
its members, pursuant to which ICG Inc. is obligated to pay to Rosenthal 3% of
its net sales for the next two years, and 2% of its net sales for the three year
period thereafter. In addition, ICG Inc. entered into a non-competition
agreement with the principal of ICG Seller, Eric Goldstein, pursuant to which,
Mr. Goldstein agreed not to compete with ICG Inc. or solicit its employees or
customers for a five-year period commencing on the Closing Date, in exchange for
payment by ICG Inc. of 1% of ICG Inc.’s sales revenue earned during the two year
period commencing on the Closing Date. ICG Inc.’s payment obligations
under the commission agreement and the non-competition agreement are guaranteed
by TSE.
The
following table presents the allocation of purchase consideration for the ICG
acquisition, which has been accounted for at the fair values of the assets
acquired and liabilities assumed under the acquisition method of
accounting:
Net
working capital
|
$ | 2,693,000 | ||
Property,
plant and equipment
|
71,000 | |||
Backlog
|
278,000 | |||
Sales representative
network
|
3,324,000 | |||
Goodwill
|
1,316,000 | |||
Total
Purchase Price
|
$ | 7,682,000 |
To date,
the Company has also incurred $375,000 in acquisitions-related costs, which
includes legal fees of $328,000 and accounting fees of $47,000 during the first
quarter of fiscal year 2011.
The
following table shows certain unaudited pro forma results of the Company,
assuming the Company had acquired the assets of ICG Seller on October 1,
2010:
Included
in the
Financial
Statements of the Company
December
14, 2010 –
December
31, 2010
|
Supplemental
Pro
forma
Consolidated
October
1, 2010 –
December
31, 2010
|
|||||||
Revenue
|
$ | 1,599,000 | $ | 7,936,000 | ||||
Net
loss
|
$ | (451,000 | ) | $ | (768,0000 | ) |
4. Intangible
Assets and Goodwill
The
following table provides a detailed presentation of the Company’s intangible
assets, estimated lives, related accumulated amortization and
goodwill:
11
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As
of December 31, 2010
|
As
of September 30, 2010
|
||||||||||||||||||||||
Accumulated
|
Accumulated
|
||||||||||||||||||||||
Gross
|
Amortization
|
Net
|
Gross
|
Amortization
|
Net
|
||||||||||||||||||
Customer
lists and relationships
(7 to 10 years) |
$
|
4,318,000
|
$
|
1,626,000
|
$
|
2,692,000
|
$
|
4,318,000
|
$
|
1,467,000
|
$
|
2,851,000
|
|||||||||||
Sales
representative network
(10
years)
|
3,324,000
|
10,000
|
3,314,000
|
–
|
–
|
–
|
|||||||||||||||||
Backlog
(6
months)
|
278,000
|
23,000
|
255,000
|
–
|
–
|
–
|
|||||||||||||||||
Non-competition
agreements
(3
years)
|
111,000
|
111,000
|
–
|
111,000
|
111,000
|
–
|
|||||||||||||||||
Trade
name
(20
years)
|
101,000
|
8,000
|
93,000
|
101,000
|
6,000
|
95,000
|
|||||||||||||||||
Total
|
$
|
8,132,000
|
$
|
1,778,000
|
$
|
6,354,000
|
$
|
4,530,000
|
$
|
1,584,000
|
$
|
2,946,000
|
|||||||||||
Goodwill
(indefinite life)
|
$
|
4,939,000
|
$
|
4,939,000
|
$
|
3,623,000
|
$
|
3,623,000
|
The
Company recorded amortization expense for the three months ended December 31,
2010 and 2009 of $194,000 and $63,000, respectively. Estimated
intangible asset amortization expense (based on existing intangible assets) for
the remaining nine months of fiscal 2011 is $985,000 and for the fiscal years
ending September 30, 2012, 2013, 2014, 2015 and 2016 is $847,000, $679,000,
$554,000, $554,000 and $554,000, respectively. On December 14, 2010,
the Company, through its wholly-owned subsidiary, ICG Inc., completed the ICG
Acquisition and, in conjunction therewith, acquired $1,316,000 of
goodwill.
5. Sale
of Receivables
The
Company’s subsidiaries, other than ICG Inc. (see Note 7(ii)), have
entered into trade account receivable purchase agreements with Wells Fargo
Business Credit operating division of Wells Fargo Bank, National
Association (“Wells Fargo”). Under the agreements, the maximum amount
of trade receivables that can be sold by the subsidiaries in the aggregate is
$28,000,000, with each subsidiary subject to a limit on the amount of trade
receivables that it may individually sell to Wells Fargo. As
collections reduce previously sold receivables, the subsidiaries may replenish
these with new receivables. As of December 31, and September 30,
2010, trade receivables of $19,265,000 and $19,831,000 had been sold and remain
outstanding, for which amounts due from Wells Fargo total $1,342,000 and
$1,556,000, respectively. Interest charged on the amount of
receivables sold prior to collection is charged at an annual rate of prime plus
1.5% or 2.5%. Receivables sold may not include amounts over 90 days
past due. Under the terms of the agreements, with the exception of CRD
permanent placement receivables, the financial institution advances 90% of the
assigned receivables’ value upon sale, and the remaining 10% upon final
collection. Under the terms of CRD’s agreement, the financial
institution advances 65% of the assigned CRD permanent placement receivables’
value upon sale, and the remaining 35% upon final collection. The
aggregate amount of trade receivables from the permanent placement business that
CRD may sell to Wells Fargo at any one time is $1,250,000. Interest
expense charged under the trade accounts receivable purchase agreements are
included in interest expense in the accompanying Statements of Operations and
amounted to $295,000 and $101,000, restated to include $40,000 for Insurance
Overload, for the three months ended December 31, 2010 and 2009,
respectively.
Tri-State
and Robert Cassera, which together with affiliated entities and persons owned
approximately 74.3% of the company’s outstanding shares of common stock as of
December 31, 2010, have guaranteed our obligations to Wells Fargo.
6. Related
Parties
12
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Commencing
January 2006, TSE-PEO, Inc. (“TSE-PEO”) began providing professional employer
services to the Company, and beginning in August 2010, TS Employment, Inc. (“TS
Employment”), also commenced providing such services. Professional
employer services rendered include payroll services, benefits and workers
compensation insurance coverage. These arrangements allow us to
reduce certain insurance risks and costs and obtain employee benefits at more
advantageous rates. TSE-PEO and TS Employment are affiliates of
Tri-State, which is wholly-owned by Robert Cassera. The aggregate
amount payable to TSE-PEO and TS Employment were $2,754,000 and $3,340,000 as of
December 31, and September 30, 2010, respectively. The Company pays
an amount equal to the actual wages and associated payroll taxes for the
employee plus an agreed upon rate for workers’ compensation
insurance. The total amount charged by TSE-PEO and TS
Employment for the quarters ended December 31, 2010 and 2009 was
$41,301,000 and $18,327,000, respectively, which amounts are inclusive of
payroll, withholding taxes and workers compensation costs. The charges from the
quarter ended December 31, 2009 includes $5,717,000 incurred by
Tri-Overload. Each of TSE-PEO and TS Employment charges the Company
its current market rate that it charges its other customers. The
Company also received advances from, and owes other amounts to TSE totaling
$2,382,000.
7. Long-Term
Debt
Long-term
debt at December 31, and September 30, 2010 is summarized as
follows:
December
31,
|
September
30,
|
|||||||
2010
|
2010
|
|||||||
Long-term
debt:
|
||||||||
ICG
Inc. acquisition (i)
|
$ | 4,368,000 | $ | – | ||||
ICG
Inc. revolving credit facility and term loan (ii)
|
3,179,000 | – | ||||||
CRD
acquisition (iii)
|
1,750,000 | 2,000,000 | ||||||
Tri-Overload
acquisition (iv)
|
– | 428,000 | ||||||
Other
debt
|
50,000 | 50,000 | ||||||
Total
|
9,347,000 | 2,478,000 | ||||||
Less
current maturities
|
5,357,000 | 1,478,000 | ||||||
Non-current
portion
|
3,990,000 | 1,000,000 | ||||||
Related
party long-term debt:
|
||||||||
CRD
acquisition (v)
|
750,000 | 750,000 | ||||||
13%
unsecured demand note (vi)
|
104,000 | 104,000 | ||||||
18%
unsecured convertible note (vii)
|
100,000 | 100,000 | ||||||
Demand
loans (viii)
|
55,000 | 55,000 | ||||||
Total
|
1,009,000 | 1,009,000 | ||||||
Less
current maturities
|
1,009,000 | 1,009,000 | ||||||
Non-current
portion
|
– | – | ||||||
Total
long-term debt
|
10,356,000 | 3,487,000 | ||||||
Less
current maturities
|
6,366,000 | 2,487,000 | ||||||
Total
non-current portion
|
$ | 3,990,000 | $ | 1,000,000 |
(i) In
connection with the ICG Acquisition, consummated on December 14, 2010, the
Company is obligated to pay an estimated $4,368,000 which includes an agreement
to pay$183,000 to Rosenthal for amounts owed to it by ICG Seller on the Closing
Date, which amount is to be paid in installments commencing in January, 2011 and
continuing through July 2011. ICG Inc. also entered into a commission
agreement with Rosenthal to replace a similar agreement that Rosenthal
had with ICG Seller and its members, pursuant to which ICG Inc. is
obligated to pay to Rosenthal 3% of its net sales for the next two years, and 2%
of its net sales for the three year period thereafter. In addition, ICG Inc.
entered into a non-competition agreement with the principal of ICG
Seller. The Company estimates the value of these payments to be
$4,185,000, approximately $945,000 of which is estimated to be payable by
December 31, 2011.
13
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ii) ICG Inc.
entered into a Loan and Security Agreement (the “Financing Agreement”) with
North Mill Capital, LLC (“North Mill”). Under the Financing
Agreement, a term loan was made at closing to ICG Inc. in the amount of
$120,000, which amount is required to be repaid by ICG Inc. in four consecutive
monthly installments of $30,000 commencing in January 2011. Also, a
two year $4.2 million revolving credit facility, with a one year renewal option,
was made available to ICG Inc., provided that borrowings under the revolving
credit facility are at North Mill’s discretion and are limited to the lesser of
$4.2 million and the amount that is 85% of ICG Inc.’s eligible accounts
receivables. The Financing Agreement defines eligible receivables as
accounts which are acceptable to North Mill and meet certain eligibility
standards which North Mill may revise from time to time. Accounts which
will generally not be eligible under such standards include, among others,
accounts that are 90 days past its invoice date, accounts owed by any account
debtor that has failed to pay 25% or more of its aggregate accounts within 90
days of the invoice date, related party accounts and accounts where the debtor
has filed for bankruptcy. Each of the term loan and the revolving credit
facility are secured by substantially all of ICG Inc.’s assets.
Amounts outstanding under the Financing Agreement that are less than or equal to
$3,500,000 shall bear interest at prime plus 7.00% but not less than 10.25% and
for all outstanding amounts exceeding $3,500,000, the interest rate shall be
prime plus 8.50%.
(iii) In
connection with the acquisition of certain assets of GT Systems for $3,000,000,
consummated on April 5, 2010, the Company paid $750,000 at closing, with the
balance of the purchase price to be paid in installments. This
balance is to be paid at $250,000 per quarter for one year, and
thereafter 0.75% of revenue on a monthly basis until the earlier of payment of
the full purchase price, or April 5, 2013. If, on April 5, 2013, the
full purchase price of $3,000,000 has not been paid, then any
remaining balance is due and payable by CRD at that time. This debt
is secured by 4,257,000 shares of the Company’s common stock being held in
escrow.
(iv) In
connection with the acquisition of Tri-Overload on August 27, 2010, the Company
assumed a $400,000 note payable to the party that had previously sold
Tri-Overload to TS Staffing on July 20, 2009. The note was satisfied
through payment to vendors on the lender’s behalf.
(v)
In connection
with the acquisition of certain assets of GT Systems, TSE made the initial
payment of $750,000 on behalf of the Company. Payment of this amount
to TSE is due on demand, with no interest due. This amount is
classified as short term debt.
(vi)
An unsecured demand note was issued March 31, 2006 to an affiliate of a former
director and officer of the Company, having an original principal amount of
$150,000 and bearing annual interest at 8%. The Company has entered
into various forbearance agreements, under which the holder agreed to waive
defaults, refrain from exercising its rights and remedies against the Company,
and effectively grant forbearance until October 31, 2008, in exchange for an
increase in the interest rate to 13% per annum. On October 31, 2008,
the Company entered into another forbearance agreement with the holder of the
note effectively extending the terms of the original forbearance agreement until
October 31, 2009. The Company received a demand for payment of
outstanding principal and interest under the note in November
2010. Management is contesting the amounts due under this
obligation.
(vii) A
$100,000 unsecured convertible note and 600,000 shares of common stock were
issued on January 31, 2008 to an affiliate of a director of the Company in
exchange for another note that had an outstanding principal balance of
$200,000. This $100,000 unsecured convertible note was due October
31, 2008, and bore interest at an annual rate of 12%. It is
convertible at any time at the option of the holder at a specified price of
$0.40 per share. Due to the failure to pay the note at maturity, the interest
rate on the note has increased to 18% per annum.
(viii) Demand
Loans consist of amounts due to an affiliate of a former director and officer of
the Company, as well as a former director of the Company. The amounts
are not subject to interest and are classified as short-term loans and are due
and payable upon demand. The Company received a demand for payment of
outstanding principal under this demand loan in November
2010. Management is contesting the amounts due under this
obligation.
Reliance
on Related Parties
The
Company has historically relied on funding from related parties in order to meet
its liquidity needs, such as the debt described above. Management
believes that the advantages the Company derived from obtaining funding from
related parties include a shortened length of time to identify and obtain
funding sources and the lack of agent or broker compensation often deducted from
gross proceeds available to the Company. Management anticipates the
Company will continue to have significant working capital requirements to fund
its growth and operations, and to the extent the Company does not generate
sufficient cash flow from operations to meet these working capital requirements,
the Company will continue to seek other sources of funding, including through
the issuance of related party debt.
14
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company must generate sufficient levels of positive net cash flows in order to
service its debt and to fund ongoing operations. As of December 31, 2010
current liabilities exceeded current assets by $8,362,000. Additionally,
subsequent to September 30, 2010, the Company has been engaging in several
activities to further increase current assets and/or decrease current
liabilities including seeking additional reductions in operating expenditures
and increases in operating efficiencies.
8. Stock-Based
Compensation
In
September 2007, the Board of Directors of Accountabilities adopted the
Accountabilities, Inc. Equity Incentive Plan (the “Plan”). Under the
terms of the reorganization discussed above, the Company has assumed the Plan
and any agreement thereunder pursuant to which restricted stock awards of
Accountabilities’ common stock were granted. The Plan provides for
the grant of stock options, stock appreciation rights and restricted stock
awards to employees, directors and other persons in a position to contribute to
the growth and success of the Company. A total of 2,000,000 shares of
common stock have been reserved for issuance under the Plan, and as of December
31, 2010, grants with respect to 1,488,000 shares had been made.
The
Company has 297,000 outstanding non-vested restricted common stock
awards as of December 31, and September 30, 2010 with a weighted
average grant day fair value of $0.33.
Compensation
expense is measured using the grant-date fair value of the shares granted and is
recognized on a straight-line basis over the required vesting
period. Fair value is determined as a discount from the current
market price quote to reflect a) lack of liquidity resulting from the restricted
status and low trading volume and b) private placement
valuations. For the three months ended December 31, 2010 and 2009,
compensation expense relating to restricted stock awards was $28,000 and
$40,000, respectively. As of December 31, 2010, there was $1,000 of
total unrecognized compensation cost. The total fair value of the
shares that vested during the three months ended December 31, 2010 was
$28,000.
9. Supplemental
Disclosure of Cash Flow Information
Three
Months Ended
|
||||||||
December
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 284,000 | $ | 104,000 | ||||
Income
Taxes
|
1,000 | 28,000 | ||||||
Non-cash
investing and financing activities:
|
||||||||
Stock
based compensation
|
28,000 | 40,000 | ||||||
Conversion
of accrued
interest
to unregistered common shares
|
40,000 | – | ||||||
Assets
acquired for issuance of debt –ICG Inc.
|
7,682,000 | – | ||||||
15
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Stockholders’
Equity
In
connection with the acquisition of certain assets of GT Systems by CRD on April
5, 2010, the Company issued 4,257,000 shares of common stock to the seller as
collateral for the debt related to the purchase. These shares are being held in
escrow and the Company will repurchase them at $.0001 per share when or as the
debt is repaid.
11. Commitments
and Contingencies
Accounts
Receivable
In
connection with the Company’s sale of its trade receivables, it is contingently
liable to repurchase any receivables that are 90 days past due. The Company
provides an estimated allowance for doubtful accounts to address this
contingency.
Unremitted
Payroll Taxes Related to Humana Businesses
Prior to
the holding company reorganization Accountabilities was notified by the IRS and
certain state taxing authorities that a business which was operated though the
Accountabilities corporate entity, which had ceased operations at the end of
2004, had accumulated liabilities for unremitted payroll taxes for calendar year
2004. Consequently, we have recorded a liability of $700,000
representing the amount management believes may ultimately be payable for
this liability based upon our knowledge of current events and
circumstances. This amount is included in accounts payable and
accrued liabilities in the accompanying financial
statements. However, there can be no assurance that future events and
circumstances will not result in an ultimate liability, including penalties and
interest, in excess of management’s current estimate.
Lease
Commitments
At
December 31, 2010, the Company had operating leases, primarily for office
premises, expiring at various dates through September
2017. Future minimum rental commitments under operating leases
are as follows:
Fiscal
Years Ending September 30,
|
Operating
Leases
|
|||
2011
|
$
|
1,205,000
|
||
2012
|
1,389,000
|
|||
2013
|
1,395,000
|
|||
2014
|
1,409,000
|
|||
2015
|
739,000
|
|||
Thereafter
|
96,000
|
|||
Total
|
$
|
6,233,000
|
Employment
Agreements
The
Company has employment agreements with certain key members of management,
requiring mutual termination notice periods of up to 30 days. These
agreements provide those employees with a specified severance amount in the
event the employee is terminated without good cause as defined in the applicable
agreement.
12. Subsequent
Events
On
January 31, 2011 the Company completed its acquisition of Tri-Diamond Staffing
Inc. from an affiliate of Tri-State. Tri-Diamond Staffing, which following
the consummation of the acquisition is known as Diamond Staffing Services,
Inc., is in the business of providing temporary and permanent employment
staffing services and related support services principally to clients in light
industrial businesses. The purchase price of approximately $25 million was paid
through the issuance of 29,411,765 shares of the Company's common
stock. This increase to Tri-State’s share ownership increased Mr.
Cassera’s beneficial ownership to approximately 85.7%.
The
Company did not have any other material subsequent events from the balance sheet
date through the date the financial statements were filed.
16
CORPORATE
RESOURCE SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion and analysis contains “forward-looking
statements”. These statements relate to expectations concerning matters that are
not historical facts. Such forward-looking statements may be identified by words
such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,”
“expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or
“will” or the negative of these terms or other comparable terminology. These
statements, and all phases of our operations, are subject to known and unknown
risks, uncertainties and other factors as identified in our annual report on
Form 10-K for the fiscal year ended September 30, 2010, and our other reports
filed with the Securities and Exchange Commission, or SEC. Readers are cautioned
not to place undue reliance on these forward-looking statements. Our actual
results, levels of activity, performance or achievements and those of our
industry may be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. Except as required by law, we undertake no
obligation to update the forward-looking statements in this filing. References
in this filing to the “Company,” “we,” “us,” and “our” refer, for periods prior
to February 23, 2010, to Accountabilities, Inc., and, for the periods after
February 23, 2010, to Corporate Resource Services, Inc., in each case including
consolidated subsidiaries, unless otherwise indicated or the context otherwise
requires.
As a
result of our acquisition of Tri-Overload Staffing, Inc. (“Tri-Overload”) that
is required to be accounted for as a pooling of interest from a related party,
all previously reported information has been restated to include this
acquisition as if it occurred on July 20, 2009. See Note 1 to the
Consolidated Financial Statements.
Holding
Company Reorganization
Corporate
Resource Services, Inc. was formed on December 15, 2009 for the purpose of
acting as a holding company with operating subsidiaries in the staffing business
and other related businesses. On February 23, 2010, we completed a
holding company reorganization, pursuant to which Accountabilities, Inc., a
Delaware corporation (“Accountabilities”), which immediately prior to the
reorganization was our parent company, became our wholly-owned
subsidiary.
As a
result of the reorganization, the former holders of Accountabilities’ common
stock became owners of shares of our common stock, par value $0.0001 per share,
and each restricted share of Accountabilities’ common stock issued and
outstanding under the Accountabilities Equity Incentive Plan immediately prior
to the effective time of the reorganization was automatically converted into a
similarly restricted share of our common stock. Our capitalization
and consolidated assets, liabilities and stockholders’ equity immediately
following the reorganization remained the same as the capitalization and
consolidated assets, liabilities and stockholders’ equity of Accountabilities
immediately prior to the reorganization.
Overview
Through
our wholly-owned subsidiaries, Accountabilities, Corporate Resource Development
Inc. (“CRD”), Insurance Overload Services, Inc. (“Insurance Overload”),
Integrated Consulting Group, Inc. (“ICG Inc.”) and Diamond Staffing Services,
Inc. we are a national provider of diversified staffing, recruiting and
consulting services, including temporary staffing services, with a focus on
light clerical and administrative support and insurance related
staffing. We provide our services across a variety of industries and
to a diverse range of clients ranging from sole proprietorships to Fortune 1000
companies. We conduct all of our business in the United States from
our New York City headquarters and the operation of 53 staffing and recruiting
offices.
Our
future profitability and rate of growth, if any, will be directly affected by
our ability to continue to expand our service offerings at acceptable gross
margins, and to achieve economies of scale, through the continued introduction
of differentiated marketing and sales channels, and through the successful
completion and integration of acquisitions. Our ability to be profitable will
also be affected by the extent to which we must incur additional expenses to
expand our sales, marketing, and general and administrative capabilities to
expand our business. The largest component of our operating expenses
is personnel costs. Personnel costs consist of salaries, employment taxes,
benefits and incentive compensation (including bonuses and stock-based
compensation) for our employees. Our management expects our operating expenses
will continue to grow in absolute dollars as our business continues to grow. As
a percentage of revenue, we expect our operating expenses to decrease as our
revenues increase.
17
We have
financed our growth largely through the issuance of debt as well as advances
from our principal shareholder and related companies and have incurred negative
working capital. As of December 31, 2010, we had negative working capital of
$8,362,000, for which the component constituting the current portion of
long-term debt was approximately $3,307,000. In addition, at December
31, 2010, ICG Inc. had borrowings of $2,939,000 outstanding as part of a
revolving credit facility (“the Revolving Credit Facility”) with North Mill
Capital, LLC (“North Mill”) and a $120,000 term
loan with North Mill which is required to be repaid by ICG Inc. in
four consecutive monthly installments of $30,000 commencing in January
2011. Borrowings under the Revolving Credit Facility are at North
Mill’s discretion and are limited to the lesser of $4.2 million and the amount
that is 85% of ICG Inc.’s eligible accounts receivables. The negative working
capital also includes liabilities of $2,382,000, which is due and payable to
Tri-State Employment Services, Inc. and affiliates (“TSE” or “Tri-State”) for
costs charged by TSE for professional employment organization services provided
by TSE to us, which arise and are paid in the ordinary course of business,
normally on a weekly basis. Additionally, there is approximately $2.8 million of
accrued payroll and related costs for December 2010, which were invoiced by TSE
in January 2011, but attributable to December 2010. Total outstanding debt as of
December 31, 2010 was $10,356,000, $260,000 of which is past due or due upon
demand. In order to service our debt and maintain our current level
of operations, as well as fund the costs of being a reporting company, we must
be able to generate sufficient amounts of cash flow and working capital. Our
management is engaged in several activities, as explained further in “Working
Capital” below, to effectively accomplish these objectives.
Mergers
and Acquisitions
One of
our key strategies is to focus on mergers and acquisitions of companies that
grow or complement our existing service offerings, expand our geographic
presence and/or further expand and strengthen our existing
infrastructure.
On August
27, 2010, we acquired Tri-Overload from TS Staffing Corp. (“TS Staffing”), a
related party (the “Tri-Overload Acquisition”). Tri-Overload was
merged into a wholly-owned subsidiary of the Company and its name was changed to
Insurance Overload Services, Inc. TS Staffing is wholly owned by
Robert Cassera, who is a director of the Company. The acquisition was
paid through the issuance of 8,589,637 shares of the Company’s common
stock. This stock issuance increased the holdings of our outstanding
shares of common stock by Mr. Cassera and TS Staffing, and their affiliated
entities and persons, to approximately 74.3% at such time. Insurance
Overload is in the business of providing temporary and permanent employment
services principally to the insurance industry.
Tri-Overload
was purchased by TS Staffing on July 20, 2009. Because the Company
and TS Staffing and its affiliates are all under common control, the acquisition
was recorded using the pooling of interests method as required under United
States generally accepted accounting principles. Accordingly, all
financial statements and financial information have been restated to reflect the
combined companies as if the acquisition occurred on July 20,
2009. See Note 3 to the consolidated financial statements included in
this Quarterly Report on Form 10-Q.
On March
24, 2010, our newly formed, wholly-owned subsidiary CRD entered into a
foreclosure and asset purchase agreement (the “GT Acquisition Agreement”) to
acquire a portion of the assets of GT Systems, Inc. (“GT Systems”), a staffing
company, and certain of its affiliates (collectively referred to as the “GT
Entities”), through a private sale by Rosenthal & Rosenthal, Inc.
(“Rosenthal”). The transaction closed on April 5,
2010. The acquisition was made to expand the Company’s penetration of
the New York Tri-State region, diversify the Company’s product offerings, and
take advantage of the expected economies of scale.
Pursuant
to the GT Acquisition Agreement, Rosenthal foreclosed on certain assets of the
GT Entities related to the temporary and permanent placement of employees, and
sold the assets to CRD (the “GT Systems Acquisition”) in a secured creditor’s
private sale under Article 9 of the Uniform Commercial Code for $3,000,000 (the
“GT Purchase Price”), which is to be paid in installments over three
years. In connection with our guarantee of the obligation of CRD to
pay the GT Purchase Price, the Company issued 4,257,332 shares of the Company’s
common stock to Rosenthal. These shares are held in escrow and are
subject to a stock repurchase agreement between Rosenthal and us, pursuant to
which we have the right to repurchase for a nominal price some or all of such
shares as the GT Purchase Price is paid. These shares are not treated
as outstanding for our financial statements, and are not included in the number
of our shares of common stock outstanding on the cover page of this Quarterly
Report on Form I0-Q. TSE is also a guarantor of CRD’s obligation to
pay the GT Purchase Price. We have accounted for this purchase using
the acquisition method of accounting and the results of operations of CRD are
included in our results from April 5, 2010.
On
December 14, 2010, our
newly formed wholly-owned subsidiary ICG Inc. acquired, through a public
foreclosure sale, a portion of the assets of Integrated Consulting Group of NY
LLC (“ICG Seller”) related to the temporary and permanent placement of employees
in the light industrial industry and translation and interpreting services (the
“ICG Acquisition”). The consideration for these assets included (i)
the repayment of ICG Seller’s outstanding obligations on the Closing Date under
its credit facility, which amounted to approximately $3.2 million, (ii) payment
of up to $366,000 for outstanding accounts payable of ICG Seller as of the
closing date, (iii) payments to various taxing authorities in the aggregate
amount of approximately $757,000 for certain taxes owed by ICG Seller on the
Closing Date, and (iv) payment of approximately $183,000 (subject to final
confirmation, reconciliation and adjustments) to Rosenthal, for amounts owed to
it by ICG Seller on the Closing Date, which amount is to be paid in installments
commencing in January 2011. ICG Inc. also entered into a commission
agreement with Rosenthal to replace a similar agreement that Rosenthal was a
party to with ICG Seller and its affiliates, pursuant to which ICG Inc. is
obligated to pay to Rosenthal 3% of its net sales for the next two years, and 2%
of its net sales for the three-year period thereafter. In addition,
ICG Inc. entered into a non-competition agreement with the principal of ICG
Seller, Eric Goldstein, pursuant to which, Mr. Goldstein agreed not to compete
with ICG Inc. or solicit its employees or customers for a five-year period
commencing December 14, 2010, in exchange for payment by ICG Inc. of 1% of ICG
Inc.’s sales revenue earned during the two year period commencing December 14,
2010.
18
ICG
Inc.’s payment obligations under the commission agreement and the
non-competition agreement are guaranteed by TSE.
We have
accounted for this purchase using the acquisition method of accounting and the
results of operations of CRD are included in our results from April 5,
2010.
On
January 31, 2011, the Company completed its acquisition of Tri-Diamond Staffing,
Inc. (“Tri-Diamond”) pursuant to an Agreement and Plan of Merger (the “Merger
Agreement”) among the Company, Diamond Staffing Services, Inc. (“Diamond”),
Tri-Diamond, TS Staffing, the former sole owner of all of the outstanding shares
of Tri-Diamond, and Diamond Staffing, Inc., a wholly-owned subsidiary of
Tri-Diamond. Pursuant to the terms and conditions of the Merger
Agreement dated January 10, 2011, we acquired Tri-Diamond pursuant to a merger
(the “Merger”) of Tri-Diamond with and into Diamond, with Diamond continuing as
the surviving entity. The acquisition was paid for through the
issuance of shares of the Company’s common stock, which was valued at $25
million, or $0.85 per share issued. The $0.85 price per share
utilized was based upon a negotiated price per share for our common
stock that was determined using historical market prices.
TS
Staffing is an affiliate of TSE and is wholly-owned by Robert Cassera, a
director of the Company. Following the consummation of the
Tri-Diamond acquisition, TSE, together with its affiliated entities (including
TS Staffing) and persons, became the beneficial owner of approximately 85.7% of
the Company's outstanding shares of common stock.
Management
continues to seek to complete and integrate acquisitions that may grow or
enhance our current service offerings, expand our geographical market presence,
and effectively implement our marketing and sales strategies. Currently,
management expects acquisitions to continue to constitute a significant portion
of any future growth. Completing such acquisitions with third parties, however,
will likely be limited by our ability to negotiate purchase terms and obtain
financing on terms acceptable to us, given our current financial position as
discussed below.
Recent
Accounting Pronouncements
In
December 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-28, Intangibles—Goodwill and Other
(Topic 350) (“ASU 2010-28”). This ASU amends the Accounting
Standards Codification (“ASC”) Topic 350. ASU 2010-28 clarifies the
requirement to test for impairment of goodwill. ASC Topic 350 has
required that goodwill be tested for impairment if the carrying amount of a
reporting unit exceeds its fair value. Under ASU 2010-28, when the
carrying amount of a reporting unit is zero or negative an entity must assume
that it is more likely than not that a goodwill impairment exists, perform an
additional test to determine whether goodwill has been impaired and calculate
the amount of that impairment. The modifications to ASC Topic 350
resulting from the issuance of ASU 2010-28 are effective for fiscal years
beginning after December 15, 2010 and interim periods within those years. Early
adoption is not permitted. The Company cannot determine what effect,
if any, the application of the amendments in ASU 2010-28 may have on its
financial statements.
Results
of Operations`
Three
months ended December 31, 2010 compared to three months ended December 31,
2009
The
Company’s subsidiaries completed the following acquisitions in calendar year
2010:
19
·
|
CRD
acquired certain assets of GT Systems, through a private foreclosure sale,
on April 5, 2010;
|
·
|
Insurance
Overload acquired Tri-Overload on August 27, 2010;
and,
|
·
|
ICG
Inc. completed the ICG Acquisition, through a public foreclosure sale, on
December 14, 2010
|
As a
result, the results of operations of CRD and ICG Inc. are included in the
results of operations for fiscal year 2010 beginning on April 5, and December
14, 2010, respectively. The acquisition of Insurance Overload has
been accounted for as a pooling of interests by a related party, and as a
result, the Company’s fiscal year 2009 results of operations were restated to
include the results of Tri-Overload commencing on July 20, 2009, the date it was
acquired by the related party.
Revenues
For the
three months ended December 31, 2010, revenue increased $24,168,000 to
$44,864,000 as compared to $20,696,000 for the three months ended December 31,
2009 which was restated to include $6,582,000 in revenue from Insurance
Overload. Of the increase in the first fiscal quarter of 2011, $18,560,000 and
$1,599,000 was attributable to CRD and ICG Inc., respectively. Revenue at
Accountabilities increased by $2,541,000, or 18.0%, to $16,665,000 in the
three months ended December 31, 2010, as compared to $14,114,000 in the
comparable period of fiscal 2009. The increase was due to improved
economic conditions, particularly new clients in California and Washington
state. Insurance Overload revenues increased from $6,582,000 in the
first quarter of fiscal 2010 to $8,050,000 in the first quarter of fiscal 2011,
an increase of $1,468,000 or 22.3%. Insurance Overload’s improvement
was also due to more favorable economic conditions as well as positive results
from a restructuring of its sales force.
Starting
in fiscal 2009, the Company decided to focus more of its efforts on providing
temporary commercial staffing and decrease its activities in the permanent
placement of personnel. Consequently, there was no permanent placement revenue
and gross profit for the Company in fiscal 2010 from its traditional line of
business. However, a portion of the acquired businesses of the former GT Systems
and Tri-Overload focus on permanent placement of personnel. The Company
recognized approximately $1.6 million in revenue in fiscal 2011 from this
business.
Direct
cost of producing revenues
TSE
affiliates provide professional employer services to the
Company. Professional employer services rendered include the
provision of payroll services, benefits and workers compensation insurance
coverage. These arrangements allow us to mitigate certain insurance
risks and obtain employee benefits at more advantageous rates. The
cost of the professional employer services are included in direct cost of
services.
For the
three months ended December 31, 2010, direct cost of services increased
$18,017,000 to $35,727,000 as compared to $17,710,000 for the three months ended
December 31, 2009, which was restated to include $5,023,000 in direct cost of
services from Insurance Overload. Of the increase in the first fiscal quarter of
2011, $13,470,000 and $1,309,000 was attributable to CRD and ICG Inc.,
respectively. Direct cost of revenues at Accountabilities increased $2,020,000,
a 15.9% increase in the direct cost of services to $14,707,000 as compared
to $12,687,000 in the first fiscal quarter of 2011. This
increase was primarily due to the 18% increase in revenues described above,
partially offset by favorable state unemployment tax rates. Insurance Overload
direct costs of producing revenues increased $1,218,000 or 24.2% to $6,241,000
in the three months ended December 31, 2010 from $5,023,000 in the comparable
period in 2009. This increase was primarily due to an increase in the
temporary staff downtime accrual for the quarter ended December 31,
2010.
Gross
profit
In the
quarter ended December 31, 2010, gross profit increased $6,151,000 to $9,137,000
as compared to $2,986,000 in the comparable quarter in 2009, which was restated
to include $1,559,000 in gross profit from Insurance Overload. Of the increase
for the quarter, $5,090,000 and $290,000 was attributable to CRD and ICG Inc.,
respectively. Gross profit at Accountabilities increased $521,000 to
$1,948,000 from $1,427,000 in the previous year. As a percentage of
revenues, gross profit for fiscal 2010 increased to 11.7% at Accountabilities,
as compared to 10.1% in the prior year due to lower costs on unemployment
allocations. Gross profit at Insurance Overload increased $250,000 to
$1,809,000 from $1,559,000 in the previous year. As a percentage of
revenue, gross profit for fiscal first quarter 2011 decreased to 22.5% at
Insurance Overload, as compared to 23.7% in the first fiscal quarter
of 2010 due to increased temporary staff downtime accruals.
20
Selling,
general and administrative expenses
For the
three months ended December 31, 2010, selling, general and administrative
expenses increased $5,094,000 to $7,980,000 as compared to $2,886,000 in the
same quarter of fiscal year 2010, which was restated to include $1,025,000 in
selling, general and administrative expenses from Insurance Overload. Of the
increase in the first fiscal quarter of 2011, $5,570,000 and $312,000 was
attributable to CRD and ICG Inc., respectively. The remaining decrease at
Accountabilities of $53,000 to $1,808,000, as compared to $1,861,000 in the
three months ended December 31, 2009. Selling, general and
administrative expenses include non-cash charges for stock based compensation
expense of $28,000 for the first quarter of fiscal 2011 compared to $40,000 for
the first fiscal quarter of 2010. The overall decrease at
Accountabilities in selling, general and administrative expenses in the current
year is attributable to management’s cost control initiatives. As a
percentage of revenue, selling, general and administrative expenses at
Accountabilities were 10.9% during the first quarter of fiscal 2011 compared to
13.2% during the same fiscal quarter of fiscal 2010, as revenue increased but
expenses were reduced, as described above. Insurance Overload
selling, general and administrative expenses decreased $735,000 from $1,025,000
for the three months ended December 31, 2009 compared to the three months ended
December 31, 2010 as the Company’s management made the decision to eliminate
certain reserves of approximately $600,000 and applied vendor payments against
long term debt of approximately $400,000 under a right of
setoff. These benefits were partially offset by increased
professional and advertising fees.
Depreciation
and amortization
For the
three months ended December 31 2010, depreciation and amortization increased
$114,000 to $256,000 as compared to $142,000 in the three months ended December
31, 2009, which was restated to include $58,000 in depreciation and amortization
from Insurance Overload. Of the increase in the first fiscal quarter of 2011,
$127,000 was attributable to CRD, $33,000 was attributable to ICG Inc., with a
decreases at Insurance Overload of $35,000 and Accountabilities of
$11,000. The decrease is primarily attributable to certain intangible
assets that have been fully amortized.
Other
income
For the
first fiscal quarter of 2011, other income of $40,000 was attributable to CRD
only. This income consists of amounts earned under a Service and Collections
agreement with Rosenthal whereby the Company provides services to assist
Rosenthal in collecting the outstanding receivables on behalf of the lender and
its owner.
Income
(loss) from operations
Income
from operations increased $983,000 from a loss of ($42,000), restated to include
a $476,000 gain at Insurance Overload and its owner, for the three months ended
December 31, 2009, to a gain of $941,000 for the three months ended December 31,
2010. Accountabilities improved $585,000 from a loss from operations of
($518,000) in the first quarter of fiscal 2010 to a $67,000 gain in the same
quarter in fiscal 2011. Insurance Overload improved its income
from operations by $592,000 for the three months ended December 31, 2010, to
$1,496,000.
Interest
expense
Interest
expense includes the net discounts associated with the sales of accounts
receivable, as well as interest on debt associated with acquired companies and
financing our operations. For the first quarter of fiscal 2011, interest
expense increased $198,000 to $334,000 as compared to $136,000 in fiscal
2010, which was restated to include $40,000 of interest expense from Insurance
Overload. Of this increase, $163,000 was attributable to CRD, $37,000 was
attributable to Insurance Overload, and $21,000 was attributable to ICG
Inc. Interest expense at Accountabilities declined by $23,000, or
24.0%, to $73,000 for the quarter. The decrease in interest expense
at Accountabilities is attributable to a negotiated reduction in debt with a
note holder of approximately $550,000, and the assumption of approximately
$1,200,000 of debt by TSE in exchange for 6,000,000 shares of our common stock
in the first two quarters of fiscal year 2010. In addition,
substantial efforts were made to reduce outstanding balances on our sold
accounts receivable, which in effect, reduces the interest charged on those
balances.
21
Acquisitions
related expense
For the
three months ended December 31, 2010 acquisitions related expense was $375,000
due to the ICG Inc. acquisition on December 14, 2010. These expenses consisted
primarily of legal and accounting fees.
Loss
on debt extinguishments
On
December 29, 2009, we entered into an exchange agreement with TSE, whereby all
amounts due to TSE under the terms of notes recently acquired by TSE from a
third party were settled in full, in exchange for the issuance to TSE of shares
of our common stock. On the date of the exchange, there was $590,000
in principal and accrued interest of $52,000 outstanding on the notes, for which
we issued 2,333,333 shares of our common stock. Loss on debt
extinguishment of $501,000 was measured as the difference between the fair value
of the common stock we issued and the remaining outstanding principal and
accrued interest on the notes that were exchanged during the first quarter of
fiscal 2010.
Net
income (loss)
The
factors described above resulted in net income from operations of $232,000 for
the three months ended December 31, 2010 as compared to a loss from operations
of ($679,000) in the comparable period in fiscal 2010, restated to include a
gain of $436,000 from Insurance Overload in the three months ended December 31,
2009. Included in net income were losses of ($730,000) and
($451,000), which were attributable to CRD and ICG Inc.
respectively, with a remaining loss from Accountabilities of ($6,000) as
compared to a loss of ($1,115,000) for the same period in the prior
year. Insurance Overload income improved by $983,000 to
$1,419,000.
Liquidity
and Capital Resources
Cash
Flows
We have
historically relied on cash flows from operations, borrowings under debt
facilities, the sale of our trade receivables prior to collection, loans from
related parties and proceeds from sales of our common stock to satisfy our
working capital requirements and to fund acquisitions. In the future,
we may need to raise additional funds through debt or equity financings to
satisfy our working capital, take advantage of business opportunities, including
growth of our existing business and mergers and acquisitions. To the
extent that funds are not available to meet our operating needs, we may have to
further seek additional reductions in operating expenditures
and/or increases in operating efficiencies.
At
December 31, 2010, cash was $395,000, an increase of $141,000 from $254,000 as
of September 30, 2010.
Net cash
flows provided by operating activities during the three months ended December
31, 2010, were $570,000 as compared to cash generated from operations of
$233,000 during the same period of the prior year. This increase of
$337,000 reflects net income of $232,000 during the three months ended December
31, 2010, which after adding back non-cash expenses amounts
to $784,000. The remaining decrease of $214,000 was principally due to a
decrease in net payables.
Net cash
used in investing activities during the three months ended December 31, 2010,
increased $38,000 to $54,000 from $16,000 during the same period of the prior
year, which is due to a $50,000 investment in the acquisition of ICG
Inc.
Net cash
used in financing activities during the three months ended December, 2010,
increased by $130,000 to ($375,000) from ($245,000) during the same period of
the prior year. This increase was primarily due to principal payments
on long-term debt of $678,000, net of net cash received from TSE and net
borrowings from credit facilities.
Working
Capital
As of
December 31, 2010, we had negative working capital of ($8,362,000), for which
the component constituting the current portion of long-term debt was $6,366,000
with $1,009,000 due to related parties. Within the current portion of long-term
debt $260,000 is past due or due upon demand as explained further
below. Of the negative working capital, $2,093,000 is due and payable
to TSE relating to costs charged by TSE for professional employment organization
services provided by TSE to us, which arise and are paid in the ordinary course
of business, normally on a weekly basis. Total outstanding debt as of
December 31, 2010 was $10,356,000. The working capital deficit of
$8,362,000 as of December 31, 2010 represents an increase in the deficit of
$1,588,000 as compared to a working capital deficit of $6,774,000 as of
September 30, 2010.
22
In order
to service our debt, maintain our current level of operations and finance our
growth initiatives, we must be able to generate sufficient amounts of cash flow
and working capital. Our management has engaged and continues to
engage in the following activities to effectively accomplish these
objectives:
a)
|
On
December 29, 2009, we entered into an exchange agreement with TSE, whereby
all amounts due to TSE under the terms of notes acquired by TSE from a
third party were settled in full, in exchange for the issuance of shares
of our common stock. On the date of the exchange, there was
$590,000 in principal and accrued interest of $52,000 outstanding on the
notes for which we issued 2,333,333 shares of our common
stock. Loss on debt extinguishment of $501,000 was measured as
the difference between the fair value of the common stock we issued and
the remaining outstanding principal and accrued interest on the notes that
were exchanged during the first quarter of fiscal
2010.
|
b)
|
In
the first quarter of fiscal 2010, we discontinued the operations
associated with the direct provision of accounting and finance services in
order to focus management’s efforts, as well as our capital, more directly
on our light industrial, and clerical and administrative service
offerings.
|
c)
|
On
February 5, 2010, we entered into a settlement and release agreement with
the former owner of Restaff Services, Inc. or ReStaff, whereby all
obligations we owed to ReStaff were released in exchange for a series of
payments totaling $545,000. These obligations included the
remaining principal of $1,056,000 outstanding on a note, $75,000
previously included in demand loans and $34,000 in accrued interest
payable.
|
d)
|
On
February 22, 2010, TSE agreed to assume our obligation to make the
$545,000 series of payments to the former owner of ReStaff under our
February 5, 2010 settlement and release agreement. In exchange
for the assumption of this payment obligation and TSE’s lead in
negotiating the disputed amount, we agreed to issue 3,666,667 shares of
our common stock to TSE. We recorded a loss of $922,000 on the
extinguishment of debt, representing the difference between the fair value
of the shares issued on the date of the exchange and
$545,000. The fair value of the shares issued on the date of
the exchange was determined by reference to the per share closing price of
our common stock on the date of the exchange, which was
$0.40.
|
e)
|
On
March 24, 2010, CRD entered into a foreclosure and asset purchase
agreement to acquire a portion of the assets of GT Systems, Inc., a
staffing company, and certain of its affiliates, collectively referred to
as the GT Entities, through a private sale by Rosenthal & Rosenthal,
Inc., or Rosenthal. The transaction closed on April 5,
2010. Pursuant to the GT Acquisition Agreement, Rosenthal
foreclosed on certain assets of the GT Entities, related to the temporary
and permanent placement of employees, and sold the assets to CRD in a
secured creditor’s private sale under Article 9 of the Uniform Commercial
Code for $3,000,000 in cash, or the Purchase Price. In
connection with our guarantee of the obligation of CRD to pay the GT
Purchase Price, on April 5, 2010 the Company issued 4,257,332 shares of
the Company’s common stock to Rosenthal. These shares are held
in escrow and are subject to a stock repurchase agreement, dated April 5,
2010, between Rosenthal and us, pursuant to which we have the right to
repurchase some or all of such shares as the Purchase Price is
paid. These shares are not treated as outstanding for
these financial statements, and are not included in the number of the
Company’s shares of common stock outstanding on the cover page of this
Quarterly Report on Form 10-Q. Tri-State is also a guarantor of
CRD’s obligation to pay the Purchase
Price.
|
f)
|
On
May 3, 2010, CRD entered into an account purchase agreement with
TSE. Under the terms of the account purchase agreement, CRD
sold its receivables to TSE. The maximum amount of trade
receivables was $45,000,000, for which TSE would advance 90% of the
assigned receivables’ value upon sale, and 10% upon final collection,
subject to certain offsets. The risk CRD bore from bad debt
losses on trade receivables sold was retained by CRD, and receivables sold
which became greater than 90 days old could be charged back to CRD by
TSE. This agreement was terminated on November 2, 2010 and
replaced by an account purchase agreement with Wells Fargo. See
Note 5 of Condensed Consolidated Financial
Statements.
|
g)
|
In
connection with our acquisition of CRD, on April 5, 2010, TSE provided the
initial down payment of $750,000. In addition, TSE has made the first
installment payments of $250,000 due in July and CRD made the payment due
in October 2010.
|
h)
|
In
connection with the ICG Acquisition, TSE provided ICG Seller $250,000
prior to the close of the acquisition on December 14,
2010.
|
23
i)
|
TSE
has provided further financial accommodations to us by allowing us to
delay from time to time amounts due to TSE under our professional services
arrangement with TSE’s affiliates.
|
j)
|
We
are aggressively managing cash and expenses with activities such as
seeking additional efficiencies in our operating offices and corporate
functions (including headcount reductions, if appropriate), improving our
accounts receivable collection efforts, obtaining more favorable vendor
terms, and using our finance and accounting consultants when available to
aid in the necessary obligations associated with being a public reporting
company.
|
We
believe, based on the above activities and our current expectations, that we
have adequate resources to meet our operating needs through December 31,
2011.
The
Company’s subsidiaries, other than ICG, Inc. (see Note 7(ii) of the
Condensed Consolidated Financial Statements), have entered into
trade account receivable purchase agreements with Wells Fargo Business Credit
operating division of Wells Fargo Bank, National Association (“Wells
Fargo”). Under the agreements, the maximum amount of trade
receivables that can be sold by the subsidiaries in the aggregate is
$28,000,000, with each subsidiary subject to a limit on the amount of trade
receivables that it may individually sell to Wells Fargo. As
collections reduce previously sold receivables, the subsidiaries may replenish
these with new receivables. As of December 31, and September 30,
2010, trade receivables of $19,265,000 and $19,831,000 had been sold and remain
outstanding, for which amounts due from Wells Fargo total $1,342,000 and
$1,556,000, respectively. Interest charged on the amount of
receivables sold prior to collection is charged at an annual rate of prime plus
1.5% or 2.5%. Receivables sold may not include amounts over 90 days
past due. Under the terms of the agreements, with the exception of CRD
permanent placement receivables, the financial institution advances 90% of the
assigned receivables’ value upon sale, and the remaining 10% upon final
collection. Under the
term of CRD’s agreement, the financial institution advances 65% of the assigned
CRD permanent placement receivables’ value upon sale, and remaining 35% upon
final collection. The aggregate amount of trade receivables from the
permanent placement business that CRD may sell to Wells Fargo at any one time is
$1,250,000. Interest expense charged under the trade accounts
receivable purchase agreements are included in interest expense in the
accompanying Statements of Operations and amounted to $295,000 and $101,000,
restated to include $40,000 for Insurance Overload, for the three months ended
December 31, 2010 and 2009, respectively.
Sales
of Common Stock
On
November 22, 2010, NGA, Inc., which is owned by Norman Goldstein, one of our
directors, provided us with notice that it desired to convert $40,000 in accrued
interest under a $100,000 convertible promissory note issued to it by the
Company on January 31, 2008 into the Company’s common
shares. Pursuant to the terms of the note, we issued 100,000
unregistered shares of common stock to NGA, Inc., at the conversion price of
$0.40 per share, as provided for in the promissory note. This
issuance is exempt from registration pursuant to Section 3(a)(9) under the
Securities Act of 1933, as amended.
Critical
Accounting Policies
The
preceding discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States
and the rules of the SEC. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
The
following represents a summary of the critical accounting policies, which our
management believes are the most important to the portrayal of our financial
condition and results of operations and involve inherently uncertain issues that
require management’s most difficult, subjective or complex
judgments.
Revenue
Recognition. We recognize staffing and consulting revenues
when professionals deliver services. Permanent placement revenue is
recognized when the candidate commences employment, net of an allowance for
those not expected to remain with clients through a 90-day guarantee period,
wherein we are obligated to find a suitable replacement.
Allowance for Doubtful
Accounts. We maintain an allowance for doubtful accounts for
estimated losses resulting from our clients failing to make required payments
for services rendered. Our management estimates this allowance based
upon knowledge of the financial condition of our clients, review of historical
receivable and reserve trends and other pertinent information. If the
financial condition of any of our clients deteriorates or there is an
unfavorable trend in aggregate receivable collections, additional allowances may
be required.
24
Stock-Based
Compensation. We calculate stock-based compensation expense
using the fair value method required by GAAP The value of the portion
of the award that is ultimately expected to vest is recognized as an expense on
a straight-line basis over the requisite service periods.
Income Taxes. We
account for income taxes using the liability method. Under that
method, deferred income taxes are recognized for the estimated tax consequences
in future years of differences between the tax basis of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax laws
and statutory rates applicable to the periods in which the differences are
expected to affect taxable income. If necessary, valuation allowances
are established to reduce deferred tax assets to the amount expected to be
realized when, in management’s opinion, it is more likely than not that some
portion of the deferred tax assets will not be realized. The
estimated provision for income taxes represents current taxes that would be
payable net of the change during the period in deferred tax assets and
liabilities. We evaluate the probable resolution of tax positions based on the
technical merits, that the position will be sustained upon examination,
presuming that the tax position will be examined by the relevant taxing
authority that has full knowledge of all relevant information.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although management believes these estimates and
assumptions are adequate, actual results could differ from the estimates and
assumptions used.
Intangible
Assets. Goodwill and other intangible assets with indefinite
lives are not subject to amortization but are tested for impairment annually or
whenever events or changes in circumstances indicate that the asset might be
impaired. We perform an annual impairment analysis to test for
impairment. No impairment was indicated by our
latest impairment analysis. Intangible assets with finite
lives are subject to amortization over the period they are expected to benefit
and impairment reviews are performed when there is an indication that the asset
might be impaired.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
Applicable.
Item
4.
|
CONTROLS
AND PROCEDURES
|
As
required by SEC Rule 13a-15(b) under the Securities and Exchange Act of 1934, as
amended, or the Exchange Act, we carried out an evaluation, under the
supervision and with the participation of our management, including our
principal executive and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is
defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, we noted that certain changes to the design of our disclosure
controls and procedures had not been made that were necessary to reflect
significant changes that occurred in our senior management and board of
directors. Due to this, our principal executive and principal
financial officer concluded that our disclosure controls and procedures were not
effective as of December 31, 2010. We are in the process of
remediating the material weaknesses identified in our assessment by defining and
documenting the roles and responsibilities of new senior management as they
relate to proper disclosure controls and procedures.
There
were no changes in our internal controls over financial reporting during the
quarter ended December 31, 2010 that have materially affected, or are reasonably
likely to have materially affected, our internal controls over financial
reporting. We are however in the process of remediating the material
weaknesses identified in our assessment as of our fiscal year end September 30,
2010.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
25
Part
II
|
Other
Information
|
Item
1.
|
Legal
Proceedings
|
We are
involved, from time to time, in routine litigation arising in the ordinary
course of business, including the matters described in our Annual Report on Form
10-K for the fiscal year ended September 30, 2010.
Item
1A.
|
Risk
Factors
|
There has
been no material changes with respect to the risk factors disclosed in our
latest Annual Report on Form 10-K for the fiscal year ended September 30, 2010
as filed with the SEC.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
On
November 22, 2010, NGA, Inc., which is owned by Norman Goldstein, one of our
directors, provided us with notice that it desired to convert $40,000 in accrued
interest under a $100,000 convertible promissory note issued to it by the
Company on January 31, 2008 into the Company’s common
shares. Pursuant to the terms of the note, we issued 100,000
unregistered shares of common stock to NGA, Inc., at the conversion price of
$0.40 per share, as provided for in the promissory note. This
issuance is exempt from registration pursuant to Section 3(a)(9) under the
Securities Act of 1933, as amended.
Item
3.
|
Defaults
Upon Senior Securities
|
Not
applicable.
Item
4.
|
(Removed
and Reserved)
|
Item
5.
|
Other
Information
|
Not
applicable.
Item
6.
|
Exhibits
|
Number
|
Description
|
2.1
|
Foreclosure
and Asset Purchase Agreement, dated as of November 12, 2010, by and among
Integrated Consulting Group, Inc., North Mill Capital, LLC, Integrated
Consulting Group of NY LLC, The Tuttle Agency Inc., The Tuttle Agency of
New Jersey, Inc., Tuttle Specialty Services Inc., Segue Search of New
Jersey Inc. and Eric Goldstein
|
2.2
|
Amendment
No. 1, dated as of December 7, 2010, to the Foreclosure and Asset Purchase
Agreement, dated as of November 12, 2010, by and among Integrated
Consulting Group, Inc., North Mill Capital, LLC, Integrated Consulting
Group of NY LLC, The Tuttle Agency Inc., The Tuttle Agency of New Jersey,
Inc., Tuttle Specialty Services Inc., Segue Search of New Jersey Inc. and
Eric Goldstein
|
2.3
|
Amendment
No. 2, dated as of December 13, 2010, to the Foreclosure and Asset
Purchase Agreement, dated as of November 12, 2010, by and among Integrated
Consulting Group, Inc., North Mill Capital, LLC, Integrated Consulting
Group of NY LLC, The Tuttle Agency Inc., The Tuttle Agency of New Jersey,
Inc., Tuttle Specialty Services Inc., Segue Search of New Jersey Inc. and
Eric Goldstein
|
2.4
|
Agreement
and Plan of Merger, dated as of January 10, 2011 by and among TS Staffing
Corp., Tri-Diamond Staffing Inc., Diamond Staffing, Inc., Corporate
Resource Services, Inc. and Diamond Staffing Services,
Inc.
|
2.5
|
Amendment
No. 1, dated as of January 28, 2011, to the Agreement and Plan of Merger,
dated as of January 10, 2011 by and among TS Staffing Corp., Tri-Diamond
Staffing Inc., Diamond Staffing, Inc., Corporate Resource Services, Inc.
and Diamond Staffing Services, Inc.
|
10.1
|
ICG
Participation Agreement, dated as of November 9, 2010, between North Mill
Capital LLC and Integrated Consulting Group, Inc.
|
26
10.2
|
Amended
and Restated Commission Agreement, dated December 14, 2010, by and among
The Tuttle Agency, Inc., Segue Search of New Jersey Inc., Tuttle Agency of
New Jersey, Inc., Tuttle Specialty Services Inc., Rosenthal &
Rosenthal, Inc., Integrated Consulting Group, Inc. and Tri-State
Employment Services, Inc.
|
10.3
|
Amended
and Restated Consulting Agreement, dated December 14, 2010, by and between
Corporate Resource Development Inc. and Eric Goldstein
|
10.4+
|
Non-Competition
Agreement, dated as of December 14, 2010, by and among Integrated
Consulting Group, Inc. and Eric Goldstein
|
10.5
|
Loan
and Security Agreement, dated as of December 14, 2010, between North Mill
Capital LLC and Integrated Consulting Group, Inc.
|
10.6
|
Account
Purchase Agreement, dated November 2, 2010, by and between Wells Fargo
Bank, National Association and Corporate Resource Development, Inc.
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the
Registrant on November 5, 2010)
|
31.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
|
+ Certain
portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions have been separately filed with the
SEC.
27
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.
Corporate
Resource Services, Inc.
|
|
Date: February
16, 2011
|
By:
/s/ Jay H. Schecter
|
Jay
H. Schecter
|
|
Chief
Executive Officer
|
|
(Principal
Executive and Financial and Accounting
Officer)
|
28