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, 2016

 

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 15, 2016
Common Stock, par value $0.0001		7,500,000 shares

 

  

FIRST RATE STAFFING CORPORATION

 

Table of Contents		Page
PART I — FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015	3
	Statements of Operations (Unaudited) — Three and Six Months Ended June 30, 2016 and 2015	4
	Statements of Cash Flows (Unaudited) — Six Months Ended June 30, 2016 and 2015	5
	Notes to Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
PART II — OTHER INFORMATION		19
Item 1.	Legal Proceedings	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
Signatures		20
Exhibit Index

 

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

 

FIRST RATE STAFFING CORPORATION

BALANCE SHEETS 

 

		June 30,				December 31,
		2016				2015
		(Unaudited)
Assets
Current assets
Cash		$	176,801			$	565,040
Accounts receivable, net			515,883				733,009
Total current assets			692,684				1,298,049
Property and equipment, net			46,434				53,309
Intangible assets, net			227,102				272,522
Notes receivable - related party			97,418				98,918
Deposit and other assets			132,640				7,640
Total assets		$	1,196,278			$	1,730,438
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable		$	84,890			$	355,452
Accrued expenses			939,037				780,863
Car loan payable, current portion			5,082				4,623
Notes payable - current portion, net of discount			110,758				107,786
Total current liabilities			1,139,767				1,248,724
Car loan payable, net of current portion			29,070				31,605
Notes payable, net of current portion			70,000				130,000
Total liabilities			1,238,837				1,410,329
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $0.0001 par value, 20,000,000 shares authorized, zero shares issued and outstanding			-				-
Common stock, $0.0001 par value, 100,000,000 shares authorized, 7,500,000 shares issued and authorized at June 30, 2016 (unaudited) and December 31, 2015			750				750
Additional paid-in capital			1,089,802				1,089,802
Accumulated deficit			(1,133,111	)			(770,443	)
Total stockholders' equity (deficit)			(42,559	)			320,109
Total liabilities and stockholders' equity (deficit)		$	1,196,278			$	1,730,438

 

The accompanying notes are an integral part of these financial statements

  

 

FIRST RATE STAFFING CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2016				2015				2016				2015
Revenues		$	6,359,608			$	7,960,386			$	13,317,056			$	12,866,630
Cost of revenues			6,022,920				7,315,513				12,148,538				11,839,326
Gross profit			336,688				644,873				1,168,518				1,027,304
General and administrative expenses			647,393				683,496				1,396,569				1,153,332
Income (loss) from operations			(310,705	)			(38,623	)			(228,051	)			(126,028	)
Gain on sale of property and equipment			-				5,292				-				5,292
Gain on settlement agreement			-				75,000				-				75,000
Interest and other expense, net			(60,271	)			(64,942	)			(134,617	)			(114,455	)
Income (loss) before income tax			(370,976	)			(23,273	)			(362,668	)			(160,191	)
Income tax expense			-				-				-				-
Net income (loss)		$	(370,976	)		$	(23,273	)			(362,668	)			(160,191	)
Net income (loss) per share:
Basic and diluted		$	(0.05	)		$	-				(0.05	)			(0.02	)
Weighted average shares outstanding:
Basic and diluted			7,500,000				7,500,000				7,500,000				7,500,000

 

The accompanying notes are an integral part of these financial statements

  

 

FIRST RATE STAFFING CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 30,
		2016				2015
Operating activities
Net loss		$	(362,668	)		$	(160,191	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense			52,295				149,762
Provision for bad debt			38,605				30,127
Amortization of discount on note payable			2,972				9,977
Gain on sale of property and equipment							(5,292	)
Gain on settlement agreement							(75,000	)
Changes in operating assets and liabilities:
Accounts receivable			178,521				(108,106	)
Deposits and other assets			(125,000	)			(4,440	)
Accounts payable			(270,562	)			(184,635	)
Accrued expenses			158,174				222,363
Net cash used in operating activities			(327,663	)			(125,435	)
Investing activities
Notes receivable - related party (borrowing) collections			1,500				(44,530	)
Proceeds from sale of property and equipment			-				12,500
Net cash provided by (used in) investing activities			1,500				(32,030	)
Financing activities
Payments on note payable			(60,000	)			(125,000	)
Payments on car loan payable			(2,076	)			-
Proceeds from note payable - related party, net			-				3,494
Net cash used in financing activities			(62,076	)			(121,506	)
Net change in cash			(388,239	)			(278,971	)
Cash, beginning of the year			565,040				787,238
Cash, end of year		$	176,801			$	508,267
Supplemental disclosure of cash flow information:
Interest paid		$	5,339			$	1,155
Income taxes paid		$	-			$	-

 

The accompanying notes are an integral part of these financial statements

 

 

FIRST RATE STAFFING CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATION AND BUSINESS

 

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

 

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

 

2. BASIS OF PRESENTATION

 

The accompanying balance sheet as of December 31, 2015, which has been derived from the Company’s audited financial statements as of that date, and the unaudited financial information of the Company as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015, 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, 2016 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, 2015 filed on March 30, 2016.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such 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 financial statements.

 

Use of Estimates

 

In preparing these 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 financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Cash

 

The Company considers all highly-liquid investments with original maturities of three months or less when purchased to be cash equivalents. There were no cash equivalents at June 30, 2016 and December 31, 2015. The Company maintains its cash in bank deposit accounts which at times may exceed federally insured limits. The Company has not experienced any losses related to this concentration of risk.

  

 

Accounts Receivable and Factoring

 

Accounts receivable are carried at the original amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering each customer’s financial condition and credit history, as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. The allowance for doubtful accounts was $29,824 as of June 30, 2016 (unaudited) and December 31, 2015.

 

The Company entered into an accounts receivable factoring arrangement with a non-related third party financial institution (the “Factor”). Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a 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 $2,292,046 (unaudited) and $4,180,834 at June 30, 2016 and December 31, 2015, 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 on a recurring basis using significantly unobservable inputs (Level 3) as of June 30, 2016.

 

Concentration of Credit Risk

 

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

 

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

 

 

Property and Equipment

 

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

 

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

 

Intangible Assets

 

The Company has intangible assets recorded as part of a business acquisition (see Note 6). Intangible assets with definite useful lives, representing customer relationships, are being amortized over their remaining estimated useful lives of 3 years using the straight-line method, which represents the economic benefit pattern of the intangible assets.

 

Impairment of Long-Lived Assets

 

Long-lived assets, including intangibles, are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable. The evaluation requires that assets be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest charges) is less than the carrying value of the assets, the assets will be written down to their estimated fair value and such loss is recognized in income from continuing operations in the period in which the determination is made. The Company’s management currently believes there is no impairment of its long-lived assets as of June 30, 2016 and December 31, 2015. There can be no assurance, however, that market conditions will not change or demand for the Company’s business model will continue. Either of these could result in future impairment of long-lived assets.

 

Revenue Recognition

 

The Company’s revenue is derived from providing temporary staffing services to its clients. The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) 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.

 

The Company recognizes its revenue from temporary staffing services on a gross basis in accordance with the guidance in FASB ASC 605-45 which outlines various factors or indicators that assist in determining whether revenue should be recognized on a gross or a net basis. In connection with this guidance, the Company believes the gross basis is appropriate, as the Company is the primary obligor in its arrangements and is responsible for fulfilling the services being provided to the individual customers and for compensating the individual service providers, regardless of whether the customer accepts the work.

 

Cost of Revenue

 

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

 

 

Net Loss Per Share

 

Basic loss per share is computed by dividing the net loss available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock.  The Company had no common stock equivalents outstanding for the six months ended June 30, 2016 and 2015.

 

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, 2016 or December 31, 2015.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 creates a new topic in the ASC Topic 606 and establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics, and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The guidance in ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early application is not permitted. Management is in the process of assessing the impact of ASU 2014-09 on the Company’s financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires that lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The standard will take effect for fiscal years and interim periods within those fiscal years beginning after December 15, 2018 with earlier adoption permitted. The Company is assessing the impact of adopting ASU No. 2016-02 on our financial statements. 

 

In March 2016, the FASB issued ASU No. 2016-09 ("ASU 2016-09"), Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 with early adoption permitted.  The Company is assessing the impact of adopting ASU No. 2016-09 on our financial statements. ​

 

 

4. GOING CONCERN

 

The Company has an accumulated deficit of $1,133,111 since inception. This accumulated deficit is primarily the result of increased operating expenses associated with professional fees necessary to complete its merger transaction and continue as a public company, as well as revenues historically being at below break-even levels. Going forward, the Company expects these annual expenses to be lower. On February 11, 2014, the Company also acquired the customer list of Loyalty Staffing Services, Inc. (see Note 6), which is expected to increase cash flows from operations. Management believes this will allow the Company to operate at profitable level in the future.

 

The Company 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. Once the factoring entity is successfully set-up, the Company expects to realize ongoing savings from the reduced factoring costs.

 

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 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 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, 2016 and December 31, 2015.

 

		June 30,				December 31,
		2016				2015
		(Unaudited)
Furniture and equipment		$	5,658			$	5,658
Vehicles			63,612				63,612
			69,270				69,270
Less: accumulated depreciation			22,836				15,961
		$	46,434			$	53,309

 

Depreciation expense for the three months ended June 30, 2016 and 2015 amounted to $3,430 and $1,665, respectively. Depreciation expense for the six months ended June 30, 2016 and 2015 amounted to $6,875 and $3,175, respectively.

 

 

6. ACQUISITION

 

On February 11, 2014, the Company entered into an agreement to purchase the customer list of Loyalty Staffing Services, Inc. (“Loyalty”), a California corporation, for an aggregate purchase price of $1,444,363 consisting of a cash payment of $100,000, along with a $400,000 note payable, net of a discount of $55,637 for imputed interest, and 500,000 shares issued of the Company’s common stock, valued at the estimated fair value of $2 per share. The total amount due of $500,000 was payable as follows; 1) $50,000 of the purchase price would be paid within five days of the release of certain Uniform Commercial Code liens and personal guarantees, 2) an additional $50,000 would be paid sixty days from the date of such release, 3) the Company executed a promissory note to the seller for $400,000, payable in four installments of $75,000 every six months after the closing date of the agreement, with a remaining and final payment of $100,000 payable 30 months after the closing date.

 

The Company was in dispute with the seller of Loyalty, Nancy Esteban, concerning the terms of the cash portion and note payable portion of the payout in the original transaction described above. The Company reached a settlement with Ms. Esteban on June 24, 2015. In connection with the settlement agreement, the parties agreed to reduce the total note payable portion of the purchase price from $500,000 to $425,000. Per the terms of the settlement agreement, the aggregate amount due of $425,000 is payable as follows; $125,000 is due upon signing of the agreement, and the remaining $300,000 is payable in 30 monthly installments of $10,000 starting in August 2015 through February 2018. The remaining balance due of this note payable amounted to $190,000 as of June 30, 2016 (see Note 9).

 

Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach.

 

The purchase price allocation was allocated as follows:

 

Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value

 

Intangible assets		$	1,465,867
Accounts payable			(21,504	)
		$	1,444,363

   

Intangible assets acquired represented customer relationships which had an estimated useful life of 5 years. During the year ended December 31, 2015, the Company recorded an impairment charge of $640,733 to write down the carrying value of the intangible assets to their estimated fair value. The adjusted carrying amount of the intangible assets after the impairment loss is being amortized over a remaining estimated useful life of 3 years.

 

Amortization expense for intangible assets for the three months ended June 30, 2016 and 2015 amounted to $22,710 and $73,293, respectively. Amortization expense for the six months ended June 30, 2016 and 2015 amounted to $45,420 and $146,587, respectively. Estimated future amortization of intangible assets, after taking into account the impairment loss of $640,733 described above, is as follows.

 

Year Ended
December 31,
2016 (remainder of)		$	45,421
2017			90,841
2018			90,840
		$	227,102

 

 

7. ACCRUED EXPENSES

 

Accrued expenses consisted of the following as of June 30, 2016 and December 31, 2015.

 

		June 30,				December 31,
		2016				2015
		(Unaudited)
Accrued payroll expenses		$	776,063			$	590,411
Other accrued operating expenses			157,578				185,056
Accrued interest			5,396				5,396
		$	939,037			$	780,863

 

8. NOTES RECEIVABLE – RELATED PARTY

 

The Company issued a series of unsecured notes receivables due from an officer of the Company totaling $97,418 as of June 30, 2016 and December 31, 2015. Of the outstanding borrowings at June 30, 2016, $38,500 of the amounts bear interest at 6% per annum, and the remainder of the amounts are non-interest bearing. The amounts are due in 2018 at the following due dates; $31,918 is due March 31, 2018, $19,500 is due June 30, 2018, $7,500 is due September 30, 2018 and $38,500 is due December 31, 2018. 

 

9. NOTES PAYABLE – ACQUISITION

 

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

 

		June 30,				December 31,
		2016				2015
		(Unaudited)
Settment Agreement Payable to seller - Payable in 30 monthly installments of $10,000 beginning August 15, 2015 through January 15, 2018.  The amounts are non-interest bearing.		$	190,000			$	250,000
		$	190,000			$	250,000
Discount on notes payable			(9,242	)			(12,214	)
Notes payable, net		$	180,758			$	237,786
Less: current portion of notes payable			110,758				107,786
Notes payable, net of curent portion		$	70,000			$	130,000

 

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

 

Year Ended
December 31,
2016 (remainder of)		$	60,000
2017			120,000
2018			10,000
		$	190,000

 

As the note payable from the acquisition of Loyalty has no stated interest, the Company has imputed total interest of $55,637 using a rate of 10% per annum, which represents the Company’s incremental borrowing rate for similar transactions. The discount is being amortized into interest expense using the straight line method, which approximates the interest method, over the maturity period of the note. During the three months ended June 30, 2016 and 2015, amortization of the discount amounted to $1,486 and $1,486, respectively. During the six months ended June 30, 2016 and 2015, amortization of the discount amounted to $2,972 and $9,977, respectively. As of June 30, 2016, the note payable is presented net of a discount of $9,242.

 

 

10. CAR LOAN PAYABLE

 

In August 2015, the Company purchased a vehicle for business purposes for an aggregate price of $49,612. The Company financed $37,612 of the amount over 72 months at an interest rate of 13%. The balance outstanding as of June 30, 2016 amounted to $34,152.

 

Expected future maturity of the car loan payable is as follows for each of the years ended December 31.

 

		Year Ended
		December 31,
2016 (remainder of)		$	2,547
2017			5,242
2018			5,972
2019			6,804
2020			7,751
Thereafter			5,836
Total		$	34,152

11. COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company leases its office locations located in Torrance, California and Phoenix, Arizona under operating leases on a month-to-month basis at monthly rates ranging from $737 to $3,211. The Company leases its offices located in Santa Fe Springs, California and Ontario, California under a non-cancellable operating leases extending through March 2018.

 

The following summarizes the amounts due in future periods under non-cancellable operating leases.

 

		Year Ended
		December 31,
2016 (remainder of)		$	15,576
2017			31,152
2018			5,476
Total		$	52,204

 

Contingencies

 

The Company has determined it is eligible for reimbursement of certain costs under its workers’ compensation insurance policy that ran through May 2016. The Company is currently working with its insurance carrier to determine the final recovery amount. No amounts have been recorded in the accompanying financial statements related to the reimbursement as of June 30, 2016. The Company will record the reimbursement amount once the final amount is known and all contingencies have been resolved.

 

 

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

 

Overview

 

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

 

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

 

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

 

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

 

Critical Accounting Policies

 

For a summary of our critical accounting policies, refer to Note 3 of our unaudited financial statements included under Item 1 – Financial Statements in this Form 10-Q.

 

 

Results of Operations for the Three Months Ended June 30, 2016 as Compared to the Three Months Ended June 30, 2015.

 

The following is a comparison of the results of operations for the Company for the three months ended June 30, 2016 and 2015.

 

		Three Months Ended
		June 30,				June 30,
		2016				2015				$ Change				% Change
Revenues		$	6,359,608			$	7,960,386			$	(1,600,778	)			-20.1	%
Cost of revenues			6,022,920				7,315,513				(1,292,593	)			-17.7	%
Gross profit			336,688				644,873				(308,185	)			-47.8	%
General and administrative expenses			647,393				683,496				(36,103	)			-5.3	%
Income (loss) from operations			(310,705	)			(38,623	)			(272,082	)			704.5	%
Gain on sale of property and equipment			-				5,292				(5,292	)			-100.0	%
Gain on settlement agreement			-				75,000				(75,000	)			-100.0	%
Interest and other expense, net			(60,271	)			(64,942	)			4,671				-7.2	%
Income (loss) before income tax			(370,976	)			(23,273	)			(347,703	)			1494.0	%
Income tax expense			-				-				-				0.0	%
Net income (loss)		$	(370,976	)		$	(23,273	)		$	(347,703	)			1494.0	%

 

Revenues

 

Our revenues decreased by $1,600,778, or 20.1%, during the quarter ended June 30, 2016 as compared to the same period in 2015. The decrease in revenues is due primarily to certain large accounts that we ceased servicing in 2016 resulting from increased workers compensation costs which made them unprofitable to continue servicing.

 

Cost of revenues

 

Our cost of revenues, which represent primarily staffing salaries and workers compensation insurance costs, decreased by $1,292,593, or 17.7%, during the quarter ended June 30, 2016 as compared to the same period in 2015. The decrease in cost of revenues is due to the decrease in revenues for the period. The percentage decrease in cost of revenues was lower than the percentage decrease in revenues due to higher workers compensation insurance costs in 2016 as compared to 2015. In addition, during the quarter ended June 30, 2016, we also outsourced our human resources and other employee management tasks to an outside professional employer organization. This has resulted in higher costs initially, however we ultimately expect the arrangement to result in decreased costs.

 

General and administrative expenses

 

Operating expenses decreased by $36,103, or 5.3%, during the quarter ended June 30, 2016 as compared to the same period in 2015. The decrease was primarily due to higher professional fees incurred during the quarter ended June 30, 2015 as a result of increased legal and accounting fees necessary to complete our registration statement, as well as attorney fees associated with the Loyalty settlement agreement. These decreased fees were partially offset by increased payroll costs associated with additional headcount compared to the prior year.

 

Interest and Other Expenses

 

Interest and other expenses during the quarter ended June 30, 2016 included $60,271 of interest expense as compared to $64,942 compared to the same period in 2015. Interest expense was lower during the quarter ended June 30, 2016 primarily due to a decrease in accounts receivables factored during the period as result of lower revenue during the quarter.

 

 

Results of Operations for the Six Months Ended June 30, 2016 as Compared to the Six Months Ended June 30, 2015.

 

The following is a comparison of the results of operations for the Company for the six months ended June 30, 2016 and 2015.

 

		Six Months Ended
		June 30,				June 30,
		2016				2015				$ Change				% Change
Revenues		$	13,317,056			$	12,866,630			$	450,426				3.5	%
Cost of revenues			12,148,538				11,839,326				309,212				2.6	%
Gross profit			1,168,518				1,027,304				141,214				13.7	%
General and administrative expenses			1,396,569				1,153,332				243,237				21.1	%
Income (loss) from operations			(228,051	)			(126,028	)			(102,023	)			81.0	%
Gain on sale of property and equipment			-				5,292				(5,292	)			-100.0	%
Gain on settlement agreement			-				75,000				(75,000	)			-100.0	%
Interest and other expense, net			(134,617	)			(114,455	)			(20,162	)			17.6	%
Income (loss) before income tax			(362,668	)			(160,191	)			(202,477	)			126.4	%
Income tax expense			-				-				-				0.0	%
Net income (loss)		$	(362,668	)		$	(160,191	)		$	(202,477	)			126.4	%

 

Revenues

 

Our revenues increased by $450,426 or 3.5%, during the six months ended June 30, 2016 as compared to the same period in 2015. Overall, our revenues have increased during the six months ended June 30, 2016 compared to the prior year period due primarily to additional clients picked up towards the end of the quarter ended March 31, 2015. These new clients have continued to provide for additional revenue for the entire six months ended June 30, 2016. The increase in revenues from these new clients was offset by certain large accounts that we ceased servicing during the quarter ended June 30, 2016 resulting from increased workers compensation costs which made them unprofitable to continue servicing.

 

Cost of revenues

 

Our cost of revenues, which represent primarily staffing salaries and workers compensation insurance costs, increased by $309,212, or 2.6%, during the six months ended June 30, 2016 as compared to the same period in 2015. The increase in cost of revenues is due to the decrease in revenues for the period. The percentage increase in cost of revenues was generally consistent with the percentage increase in revenue for the period. During the quarter ended June 30, 2016, we outsourced our human resources and other employee management tasks to an outside professional employer organization. While this resulted in higher costs initially, we ultimately expect the arrangement to result in decreased costs and improved margins.

 

General and administrative expenses

 

Operating expenses increased by $243,237, or 21.8%, during the six months ended June 30, 2016 as compared to the same period in 2015. The increase was primarily related to increased payroll costs associated with additional headcount compared to the prior year.

 

Interest and Other Expenses

 

Interest and other expenses during the six months ended June 30, 2016 included $134,617 of interest expense as compared to $114,455 compared to the same period in 2015. Interest expense was higher for the six months ended June 30, 2016 primarily due to an increase in overall accounts receivables factored during the period resulting from the increase in revenue.

 

Promissory Notes

 

The Company owes an aggregate total of $190,000 to the seller of Loyalty, which is non-interest bearing and due in 30 monthly payment installments of $10,000 commencing August 2015 through January 2018.

 

 

The Company has a loan payable outstanding for the purchase of a vehicle. The balance outstanding as of June 30, 2016 amounted to $34,152, which is payable in monthly installments of $756 at an interest rate of 13% per annum over 72 months through August 2021.

 

Capital Resources

 

As of June 30, 2016, we had cash of $176,801 and accounts receivable of $515,883. Our current assets of $692,684 were lower than our current liabilities of $1,139,767 by $447,083.

 

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

 

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

 

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

 

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

 

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

 

 

Liquidity

 

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

 

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

 

Net cash used in operating activities was $327,663 for the six months ended June 30, 2016 compared to net cash used in operating activities of $125,435 for the same period in 2015. The significant change between the periods was primarily the result of our net loss during the six months ended June 30, 2016 being $362,668, as compared to a net loss of $160,191 during the same period in 2015.

 

Net cash provided by investing activities during the six months ended June 30, 2016 was $1,500 from the collection of outstanding notes receivable, compared to cash used in investing activities of $32,030 during the same period in 2015, which represented payments for borrowings on related party notes receivable of $44,530 offset by $12,500 in proceeds from the sale of a vehicle.

 

We had net cash used in financing activities of $62,076 during the six months ended June 30, 2016 resulting from the payments of $60,000 for the note payable due to the seller of Loyalty and $2,076 from the payment of our car loan payable. Cash used in financing activities during the six months ended June 30, 2015 was $121,506, which primarily represented payments on the note payable due to the seller of Loyalty.

 

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, 2016, the end of the period covered by this Quarterly Report on Form 10-Q under the supervision and with the participation of the Company’s principal executive officer and principal financial and accounting officer. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation. Based upon that evaluation, they believe that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, summarized and processed timely. Both officers are directly involved in the day-to-day operations of the Company.

 

The Company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with the Rule 13a-15 of the Securities Exchange Act of 1934. The Company’s president and its principal financial and accounting officer conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2016, based on the criteria establish in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2016, based on those criteria. A control system can provide only reasonably, not absolute, assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues have been detected.

 

Changes in Internal Control Over Financial Reporting

 

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

 

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

(a)

Not applicable.

(b)

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

 

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

 

ITEM 6. EXHIBITS

 

Exhibit Number		Exhibit Title
31		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase
*		Filed herewith

 

 

SIGNATURES

 

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

 

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

 

Dated: August 15, 2016