SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2013

 

OR

 

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

For the transition period from         to

 

Commission file number 000-54427

 

FIRST RATE STAFFING CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

2775 West Thomas Road

Suite 107

Phoenix, Arizona 85018

(Address of principal executive offices) (zip code)

 

602-442-5277

(Registrant’s telephone number, including area code)

 

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

x Yes ¨ No

 

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

 

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

 

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

¨ Yes x No

 

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

  

Class		Outstanding at August 26, 2013
Common Stock, par value $0.0001		7,000,000 shares

 

Documents incorporated by reference: None

 

 

FIRST RATE STAFFING CORPORATION

 

 

Table of Contents		Page
PART I — FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets at June 30, 2013 (Unaudited) and December 31, 2012	3
	Condensed Consolidated Statements of Operations (Unaudited) — Three and Six Months Ended June 30, 2013 and 2012	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended June 30, 2013 and 2012	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II — OTHER INFORMATION		17
Item 1.	Legal Proceedings	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults upon Senior Securities	17
Item 4.	Mine Safety Disclosures	18
Item 5.	Other Information	18
Item 6.	Exhibits	18
Signatures		18
Exhibit Index

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

FIRST RATE STAFFING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30,				December 31,
		2013				2012
		(Unaudited)
Assets
Current assets
Cash		$	74,120			$	185,587
Accounts receivable, net			94,175				53,578
Total current assets			168,295				239,165
Property and equipment, net			29,486				4,209
Notes receivable - related party			8,388				-
Deposit and other assets			151,548				80,517
Total assets		$	357,717			$	323,891
Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable		$	82,527			$	30,658
Other current liabilities			109,175				75,508
Total current liabilities			191,702				106,166
Notes payable - related parties			201,258				255,128
Total liabilities			392,960				361,294
Commitments
Stockholders’ deficit
Preferred stock, $0.0001 par value, 20,000,000 shares authorized, zero shares issued and outstanding			-				-
Common stock, $0.0001 par value, 100,000,000 shares authorized, 7,000,000 shares issued and authorized at June 30, 2013 and December 31, 2012			700				700
Additional paid-in capital			61,352				61,352
Accumulated deficit			(97,295	)			(99,455	)
Total stockholders’ deficit			(35,243	)			(37,403	)
Total liabilities and stockholders’ deficit		$	357,717			$	323,891

 

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

 

 

FIRST RATE STAFFING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,				June 30				June 30,				June 30
		2013				2012				2013				2012
Revenues		$	2,258,541			$	1,827,254			$	4,173,605			$	3,315,745
Cost of revenues			2,019,059				1,664,361				3,736,598				3,018,572
Gross profit			239,482				162,893				437,007				297,173
Operating expenses			218,716				270,419				424,475				409,044
Income (loss) from operations			20,766				(107,526	)			12,532				(111,871	)
Interest and other expense (income), net			5,219				(14,023	)			10,372				1,351
Income (loss) before income tax			15,547				(93,503	)			2,160				(113,222	)
Income tax expense			-				-				-				-
Net income (loss)		$	15,547			$	(93,503	)		$	2,160			$	(113,222	)
Net income (loss) per share:
Basic and diluted		$	0.00			$	(0.02	)		$	0.00			$	(0.03	)
Weighted average shares outstanding:
Basic and diluted			7,000,000				4,000,000				7,000,000				4,000,000

 

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

 

 

FIRST RATE STAFFING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Six Months Ended
		June 30,
		2013				2012
Cash flows from operating activities
Net income (loss)			2,160				(113,222	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense			3,124				-
Changes in operating assets and liabilities:
Accounts receivable			(40,597	)			(17,013	)
Prepaid expense			-				(24,942	)
Deposits and other assets			(71,031	)			(67,310	)
Accounts payable			51,869				41,850
Other current liabilities			33,667				6,292
Net cash used in operating activities			(20,808	)			(174,345	)
Cash flows from investing activities
Borrowings on notes receivable - related party			(8,388	)			-
Payments from acquisition of property and equipment			(28,401	)			-
Net cash used in investing activities			(36,789	)			-
Cash flows from financing activities
Change in bank overdraft			-				(13,382	)
Proceeds from note payable - related party			-				236,026
Payments on note payable - related party			(53,870	)			-
Proceeds from shareholder contributions			-				147,590
Distributions to members			-				(157,500	)
Net cash (used in) provided by financing activities			(53,870	)			212,734
Net change in cash			(111,467	)			38,389
Cash, beginning of the year			185,587				11,912
Cash, end of the year $		$	74,120			$	50,301
Supplemental disclosure of cash flow information:
Interest paid		$	10,385			$	1,356

 

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

 

 

FIRST RATE STAFFING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATION AND BUSINESS

 

First Rate Staffing Corporation (“First Rate” or “the Company”), formerly known as Moosewood Acquisition Corporation (“Moosewood”) was incorporated on April 20, 2011 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions.

 

On May 22, 2012, the shareholders of the corporation and the Board of Directors unanimously approved the change of the Registrant’s name to First Rate Staffing Corporation and filed such change with the State of Delaware. On May 22, 2012, new officers and directors were appointed and elected and the prior officers and directors resigned.

 

On November 9, 2012, First Rate, entered into merger agreements with each of First Rate Staffing, LLC, a California limited liability company (“First Rate California”), and First Rate Staffing, Inc., a Nevada corporation (“First Rate Nevada”), in separate mergers (collectively, and together, the “Mergers”) that were concurrently completed on November 13, 2012. The purpose of the Mergers was to facilitate and prepare the Company for a registration statement and/or public offering of securities. Prior to the Mergers, First Rate California and First Rate Nevada were under common control by the same group of shareholders.

 

The Mergers were affected by the Company through the exchange of (i) all of the outstanding membership interests of First Rate California for 2,000,000 shares of common stock of the Company, and (ii) all of the outstanding shares of First Rate Nevada for 2,000,000 shares of common stock of the Company. Accordingly, a total of 4,000,000 shares were issued in the Mergers.

 

First Rate California was formed in April 2010 in the State of California. Since its inception, First Rate California has provided recruiting and staffing services for temporary positions in light industrial, distribution center, assembly, and clerical businesses to clients in California.

 

First Rate Nevada was formed in March 2010 in the State of Nevada and is registered to do conduct business in the State of Arizona. Since its inception, First Rate Nevada has provided recruiting and staffing services for temporary positions in light industrial, distribution center, assembly, and clerical businesses to clients in Arizona.

 

As a result of the Mergers, each of First Rate California and First Rate Nevada has merged into and become a part of the Company. The Company, as the surviving entity from the Mergers, has taken over the respective operations and business plans of each of both First Rate California and First Rate Nevada.

 

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

 

2. BASIS OF PRESENTATION

 

The accompanying condensed consolidated balance sheet as of December 31, 2012, which has been derived from the Company’s audited financial statements as of that date, and the unaudited condensed consolidated financial information of the Company as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012, has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, such financial information includes all adjustments considered necessary for a fair presentation of the Company’s financial position at such date and the operating results and cash flows for such periods. Operating results for the interim period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the entire year.

 

 

Certain information and footnote disclosure normally included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the United States Securities and Exchange Commission (“SEC”). These unaudited financial statements should be read in conjunction with our audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on April 11, 2013.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

Use of Estimates

 

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

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform with the current year presentation.  The reclassifications have not impacted the previously reported results of operations or total assets, liabilities or stockholders’ deficit.

 

Cash

 

The Company considers all highly-liquid investments with original maturities of three months or less when purchased to be cash equivalents.

 

Accounts Receivable and Factoring

 

Accounts receivable are carried at the original amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering each customer’s financial condition and credit history, as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. The allowance for doubtful accounts as of June 30, 2013 and December 31, 2012 was $0.

 

During 2012, the Company entered into a new accounts receivable factoring arrangement with a non-related third party financial institution (the “Factor”). Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 90% of the accounts receivable balance to the Company, with the remaining balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. An administrative fee of 0.015% per diem is charged on the gross amount of accounts receivables assigned to Factor, plus interest to be calculated at 0.011806% per day. The total amount of accounts receivable factored was $847,609 (unaudited) and $586,867 at June 30, 2013 and December 31, 2012, respectively.

 

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

•

Level 3 — Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) during the six months ended June 30, 2013 and 2012. Although, the disclosed fair value of accounts receivables that are not carried at fair value are classified within Level 3 including $94,175 (unaudited) and $53,578 as of June 30, 2013 and December 31, 2012, respectively.

 

Concentration of Credit Risk

 

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

 

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

 

Property and Equipment

 

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

 

 

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

 

Revenue Recognition

 

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

 

Cost of Revenue

 

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

 

Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed by using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. The Company had no dilutive common shares during the three or six months ended June 30, 2013 or 2012.

 

Income Taxes

 

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

 

The Company evaluates the accounting for uncertainty in income tax recognized in its financial statements and determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in its financial statements. For those tax positions where it is “not more likely than not” that a tax benefit will be sustained, no tax benefit is recognized. Where applicable, associated interest and penalties are also recorded. The Company has not accrued for any such uncertain tax positions as of June 30, 2013 or December 31, 2012.

 

Recent Accounting Pronouncements

 

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

 

 

4. GOING CONCERN

 

The Company has sustained operating losses of $97,295 since inception. These losses are primarily the result of increased operating expenses during 2012 associated with professional fees necessary to complete the merger transaction in November 2012, as described in Note 1. Going forward, the Company expects these annual expenses to be lower. In addition, in September of 2012, the Company entered into a new factoring agreement with TAB Bank which reduced financing costs from an average APR of 24% to 12%. We expect this will generate an annual savings of approximately $40,000 to $70,000.

 

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

 

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

 

5. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of June 30, 2013 and December 31, 2012.

 

		June 30,				December 31,
		2013				2012
		(Unaudited)
Equipment		$	5,346			$	4,945
			28,000				-
			33,346				4,945
Less: accumulated depreciation			3,860				736
		$	29,486			$	4,209

 

Depreciation expense for the three months ended June 30, 2013 and 2012 amounted to $1,667 and $0, respectively. Depreciation expense for the six months ended June 30, 2013 and 2012 amounted to $3,124 and $0, respectively.

 

6. NOTES RECEIVABLE – RELATED PARTY

 

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

 

7. NOTES PAYABLE - RELATED PARTIES

 

During 2012, the Company obtained unsecured promissory notes payables from one of its shareholders on various dates between March 2012 and December 2012. The total aggregate amounts outstanding as of June 30, 2013 and December 31, 2012 amounted to $201,258 (unaudited) and $255,128, respectively. The notes bear interest at a rate of 6% per annum and are due in full in one lump payment 3 years from the issuance dates. All notes are payable at various dates ranging from March through December 2015. During the reporting period, there were no financial covenant requirements under the notes.

 

 

8. CONTINGENCIES

 

Litigation

 

From time to time, the Company is involved in various legal proceedings incidental to its business. While the result of any litigation contains an element of uncertainty, management believes that the outcome of any known, pending or threatened legal proceeding or claim, individually or combined, will not have a material adverse effect on the Company’s financial statements.

 

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

 

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

 

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

 

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

 

Overview

 

The Company was incorporated in the State of Delaware in April 2011. Each of First Rate Staffing, LLC, a California limited liability company (“First Rate California”), and First Rate Staffing, Inc., a Nevada corporation (“First Rate Nevada”), merged into the Company in separate mergers (collectively, and together, the “Mergers”) that were concurrently completed in November 2012.

 

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

 

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

 

Critical Accounting Policies

 

Use of Estimates

 

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

 

 

 

Accounts Receivable and Factoring

 

Accounts receivable are carried at the original amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering each customer’s financial condition and credit history, as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. The allowance for doubtful accounts as of June 30, 2013 and December 31, 2012 were $0.

 

During 2012, the Company entered into a new accounts receivable factoring arrangement with a non-related third party financial institution (the “Factor”). Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 90% of the accounts receivable balance to the Company, with the remaining balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. An administrative fee of 0.015% per diem is charged on the gross amount of accounts receivables assigned to Factor, plus interest to be calculated at 0.011806% per day. The total amount of accounts receivables factored was $847,609 (unaudited) and $586,867 at June 30, 2013 and December 31, 2012, respectively.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

–

Quoted prices for similar assets or liabilities in active markets

 

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

 

•

Level 3 — Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) during the six months ended June 30, 2013 and 2012. Although, the disclosed fair value of accounts receivables that are not carried at fair value are classified within Level 3 including $94,175 (unaudited) and $53,578 as of June 30, 2013 and December 31, 2012, respectively.

 

Revenue Recognition

 

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

 

 

Cost of Revenue

 

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

 

Income Taxes

 

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

 

The Company evaluates the accounting for uncertainty in income tax recognized in its financial statements and determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in its financial statements. For those tax positions where it is “not more likely than not” that a tax benefit will be sustained, no tax benefit is recognized. Where applicable, associated interest and penalties are also recorded. The Company has not accrued for any such uncertain tax positions as of June 30, 2013 or December 31, 2012.

 

Recent Accounting Pronouncements

 

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

 

Results of Operations for the Three Months Ended June 30, 2013 as Compared to the Three Months Ended June 30, 2012.

 

The following is a comparison of the consolidated results of operations for the Company for the three months ended June 30, 2013 and 2012.

 

		Three Months Ended
		June 30,				June 30
		2013				2012				$ Change				% Change
Revenues		$	2,258,541			$	1,827,254			$	431,287				23.6	%
Cost of revenues			2,019,059				1,664,361				354,698				21.3	%
Gross profit			239,482				162,893				76,589				47.0	%
Operating expenses			218,716				270,419				(51,703	)			-19.1	%
Income (loss) from operations			20,766				(107,526	)			128,292				-119.3	%
Interest and other expense (income), net			5,219				(14,023	)			19,242				-137.2	%
Income (loss) before income tax			15,547				(93,503	)			109,050				-116.6	%
Income tax expense			-				-				-				0.0	%
Net income (loss)		$	15,547			$	(93,503	)		$	109,050				-116.6	%

 

 

 

Revenues

 

Our revenues increased by $431,287, or 23.6%, during the quarter ended June 30, 2013 as compared to the same period in 2012. The increase in revenues is due primarily to the addition of eight new customers during the first quarter of 2013. We expect the trend of increasing revenues to continue in 2013.

 

Cost of revenues

 

Our cost of revenues increased by $354,698, or 21.3%, during the quarter ended June 30, 2013 as compared to the same period in 2012. The increase in cost of revenues is due to the increase in revenues for the period. The percentage increase in cost of revenues is consistent with the percentage increase in revenues. We expect the cost of revenues to continue to increase as our revenues increase.

 

Operating expenses

 

Operating expenses decreased by $51,703, or 19.1%, during the quarter ended June 30, 2013 as compared to the same period in 2012. The decrease in operating expenses in 2013 was due to higher expenses in 2012 associated with increased professional fees and other costs of preparing the Company for its merger transaction to become a public company.

 

Results of Operations for the Six Months Ended June 30, 2013 as Compared to the Six Months Ended June 30, 2012.

 

		Six Months Ended
		June 30,				June 30
		2013				2012				$ Change				% Change
Revenues		$	4,173,605			$	3,315,745			$	857,860				25.9	%
Cost of revenues			3,736,598				3,018,572				718,026				23.8	%
Gross profit			437,007				297,173				139,834				47.1	%
Operating expenses			424,475				409,044				15,431				3.8	%
Income (loss) from operations			12,532				(111,871	)			124,403				-111.2	%
Interest and other expense (income), net			10,372				1,351				9,021				667.7	%
Income (loss) before income tax			2,160				(113,222	)			115,382				-101.9	%
Income tax expense			-				-				-				0.0	%
Net income (loss)		$	2,160			$	(113,222	)		$	115,382				-101.9	%

 

Revenues

 

Our revenues increased by $857,860, or 25.9%, during the six months ended June 30, 2013 as compared to the same period in 2012. The increase in revenues is due primarily to the addition of eight new customers during the first quarter of 2013. We expect the trend of increasing revenues to continue in 2013.

 

Cost of revenues

 

Our cost of revenues increased by $718,026, or 23.8%, during the six months ended June 30, 2013 as compared to the same period in 2012. The increase in cost of revenues is due to the increase in revenues for the period. The percentage increase in cost of revenues is consistent with the percentage increase in revenues. We expect the cost of revenues to continue to increase as our revenues increase.

 

 

Operating expenses

 

Operating expenses increased by $15,431, or 3.8%, during the six months ended June 30, 2013 as compared to the same period in 2012. The increase in operating expenses in 2013 was due to increases in salaries and payroll costs due to the increase in our revenues for the period, offset by a decrease in professional fees as compared to the same period in 2012 associated with preparing the Company for its merger transaction to become a public company.

 

Promissory Notes

 

The Company has promissory notes outstanding of $201,258. These notes consist of monies advanced by Cliff Blake, an officer and director of the Company, to the Company, as listed. Each of these promissory notes consists of a single payment at the end of the term.

 

Origination		Principal				Interest
Date		Amount				Rate per annum		Due Date
March  2012		$	50,000			6% simple		April 2015
April 2012			45,000			6% simple		April 2015
April 2012			15,600			6% simple		April 2015
June 2012			109,826			6% simple		June 2015
June 2012			15,600			6% simple		June 2015
December 2012			19,102			6% simple		December 2015

 

The Company does not anticipate that it will borrow monies from related parties in the future. Such earlier loans were required to fund certain non-recurring expenses, such as costs associated with filing its registration statement. In addition, as the Company obtained a new factoring/financing facility in 2012 which lowered its costs of capital, the Company expects to realize significant cost savings (and corresponding improvement to cash flow) from obtaining this new facility.

 

Capital Resources

 

As of June 30, 2013, the Company had cash of $74,120 and accounts receivable of $94,175.

 

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

 

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

 

 

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

 

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

 

The Company anticipates it will develop a budget for marketing activities during 2012 and 2013 consisting of two levels of marketing: client marketing and acquisition marketing. Client marketing costs are associated with sales staff with the single purpose to market to current and potential clients. Acquisition marketing costs are those incurred for investor relations, traveling, expenses for client acquisitions, and case by case joint marketing material for specific acquisitions as they occur.

 

Liquidity

 

To date, the Company has not suffered from a liquidity issue. The main liquidity issue was addressed when the Company entered into new factoring agreements that went into effect September 1, 2012. The Company expects to save approximately $100,000 annually from this new arrangement (the difference resulting mainly from the lower interest rate charged by the new factor of approximately 9% versus approximately 24% from the previous factoring company). The Company entered into a new agreement with TAB Bank, effective September 1, 2012, with a $1,000,000 factor commitment. In addition, the Company may borrow from time to time as available, sources of funds from its officers and/or directors as needed

 

As the Company grows in size, the savings from this new factoring arrangement will continue to accrue and enhance the Company’s profitability and cash flow. The Company anticipates a marketing and ongoing public company reporting budget of approximately $40,000 to $50,000 per year (consisting of corporate governance associated expenses, professional legal and accounting fees). Based on this budget and the projected operations of the Company, there are no currently anticipated liquidity issues which would pose a threat to the current business and operations (as-is) of the Company.

 

Net cash used in operating activities was $20,808 for the six months ended June 30, 2013 compared to net cash used in operating activities of $174,345 for the same period in 2012. The significant change between the years was a result of the Company generating net income of $2,160 for the six months ended June 30, 2013 as compared to a net loss of $113,222 for the six months ended June 30, 2012.

 

We had net cash used in investing activities of $36,789 for the six months ended June 30, 2013 which consisted of $28,401 in spending for the acquisition of property and equipment and $8,388 in notes receivable lending. We had no cash flows from investing activities during the six months ended June 30, 2012.

  

We had net cash used in financing activities of $53,870 during the six months ended June 30, 2013 resulting from the payments of our outstanding notes payable. During the six months ended June 30, 2012, we had net cash provided by financing activities of $212,734, which resulted primarily from borrowings of $236,026 and shareholder contributions of $147,590, offset by the payment of distributions of $157,500.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Information not required to be filed by Smaller Reporting Companies.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures.

 

Pursuant to Rules adopted by the Securities and Exchange Commission. the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rules. This evaluation was done as of June 30, 2013, the end of the period covered by this Quarterly Report on Form 10-Q under the supervision and with the participation of the Company’s principal executive officer and principal financial and accounting officer. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation. Based upon that evaluation, they believe that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, summarized and processed timely. Both officers are directly involved in the day-to-day operations of the Company.

 

The Company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with the Rule 13a-15 of the Securities Exchange Act of 1934. The Company’s president and its principal financial and accounting officer conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria establish in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treaedway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2013, based on those criteria. A control system can provide only reasonably, not absolute, assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues have been detected.

 

Changes in Internal Control Over Financial Reporting

 

The Company effected a change in control on May, 2012, resulting in the resignation of the then officers and directors. New officers and directors are now in charge of the Company’s internal controls over financial reporting but have not made any changes during its fiscal quarter that materially affect, or are reasonably likely to materially affect, its internal control over financial reporting.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

(a) Not applicable.

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

 

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

 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

31.1      Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1      Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

SIGNATURES

 

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

 

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

 

Dated: September 25, 2013