ITEM 1. BUSINESS
First Rate Staffing Corporation, a Delaware corporation (the “Company”), provides recruiting and staffing services for temporary positions in light industrial, distribution center, assembly, and clerical businesses.
The Company was incorporated in the State of Delaware in April 2011 as Moosewood Acquisition Corporation, a development stage company. In May 2012, the Company effected a change of control by issuing shares of common stock to new shareholders, redeeming shares of existing shareholders, electing new officers and directors and accepting the resignations of its then existing officers and directors. In connection with the change of control, the Company changed its name from Moosewood Acquisition Corporation to First Rate Staffing Corporation.
On November 9, 2012, the Company 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. Prior to the Mergers, First Rate California and First Rate Nevada were under common control of the same group of shareholders.
The mergers were effectuated 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 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 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.
Prior to the mergers, the Company had no ongoing business or operations and was established for the purpose of completing a business combination with a target company, such as First Rate California and First Rate Nevada. 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.
On February 11, 2014, the Company entered into an agreement to purchase all the assets of Loyalty Staffing Services Inc. (“Loyalty”), a California corporation for an aggregate purchase price valued at $1,500,000 consisting of $100,000 in cash and $400,000 in note payable and 500,000 shares of the Company's common stock, valued at a price of $2 per share.
The agreement provided that:
(1) $100,000 of the cash portion of the purchase price shall be paid $50,000 within five business days of the release of certain Uniform Commercial Code liens and personal guarantees and an additional $50,000 sixty days from the date of such release.
(2) The Company shall execute a promissory note in favor of Loyalty for the remaining $400,000 with $75,000 payable six months after the closing date of the agreement (February 11, 2014) and $325,000 payable 30 months after such closing date.
Loyalty has the option of converting all or any part of the $400,000 balance into the Company's common stock at the then prevailing trading price or market value at the time of closing of the agreement or $2 per share. It has agreed to a reduction in the promissory note of an amount equal to 5% of $1,500,000 and a return of common stock of an amount equal to 2.5% of $1,500,000 for every reduction of $1,500,000 in annual revenues generated by the loss a client or clients acquired as part of the asset agreement within 12 months from the closing date.
The Company is currently in dispute with the seller of Loyalty, Nancy Esteban, concerning the cash portion and note payable portion of the payout in the original transaction described above. The parties are currently negotiating in good faith to resolve. The Company expects this settlement to occur during the second quarter of 2015.
Loyalty is a light industrial and hospitality staffing company in business since 2008 servicing clients in the greater Los Angeles area. Loyalty services over 60 clients with approximately $6,000,000 to $7,000,000 in revenues. The Loyalty clients mirror the current client types of First Rate Staffing Corporation and management believes that the synergy between the two companies is extremely strong. The Company services clients in the Santa Fe Springs area of Los Angeles, along with Phoenix, Arizona. Loyalty services clients in the Torrance area of Los Angeles County. Management believes that the acquisition will greatly enhance the market presence of the Company in the greater Los Angeles area that the combination of the two entities will allow the Company to reduce overall expense through economies of scale and improve profitability.
Services
The Company provides recruiting and staffing services for temporary positions in light industrial, distribution center, assembly, and clerical businesses. The Company’s client customization model allows it to integrate its services to its client-specific needs and thereby providing clients with the highest level of customer service. The Company strives to devote adequate time and attention to understand both the needs of its clients and the capabilities of its employees so that the Company can identify the best suitable matches between client needs and employee abilities. The Company is dedicated to achieving a high level of service for all of its clients and considers itself to be a loyal partner to meeting client demands. In this regard, the Company seeks to position itself not only as a pool of employee for its clients, but also as a dedicated business partner that understands its clients’ businesses and needs.
Services provided to clients by the Company include recruiting, payroll, all state and federal taxes, worker’s compensation coverage, and screening and managing of clients’ contingent work force. The Company provides comprehensive screening and electronic verification (for federal employment eligibility requirements) for all employees. The Company also conducts reference checks of employees to ensure that the employers receive accurate and useful descriptions of employees’ backgrounds and experiences. The Company also operates a risk management department that helps client mitigate losses by implementing sound and effective risk management procedures at client sites. Clients receive these risk management services at no cost, helping them to reduce their own business risks and expenses.
The Company offers recruiting, human resources, workers’ compensation services, and risk management at no additional charge as part of the overall mark-up inclusive with the standard mark-up rate for temporary placement of employees. For example, a client may have a need for a certain number of temporary employees that fulfill a specific function. The Company recruits, screens, tests, and verifies employment eligibility for these individuals based on the requirements of the client. The Company also ensures that the employees are certified/licensed based on the equipment and facility that they will be operating within. The Company considers safety to be a very important priority since accidents directly impact workers’ compensation cost. Generally, workers’ compensation costs usually run from 6-10% of total costs. Risk management services, such as safety audits, certifications, and safety training, are typically provided at no additional charge (i.e. inclusive in the mark-up rate) to clients.
The Business: Staffing
The industry is divided into three major segments: temporary help services (about 50 percent of industry revenue), professional employer organizations (about 40 percent), and placement agencies (about 10 percent).
Temporary help services provide workers for customers for limited periods, often to substitute for absent permanent workers or to help during periods of peak demand. These workers, who are employees of the temporary help agency, will generally fill clerical, technical, or industrial positions.
Professional employer organizations (PEOs), sometimes known as employee leasing agencies, contract to provide workers to customers for specific functions, often related to human resource management. In many cases, customers’ employees are hired by a PEO and then leased back to the customer.
Placement agencies, sometimes referred to as executive recruiters or headhunters, find workers to fill permanent positions at customer companies. These agencies may specialize in placing senior managers, midlevel managers, technical workers, or clerical and other support workers.
The Company considers itself to be a temporary staffing company within the broader staffing industry. However, the Company does conduct permanent placements at the request of existing clients.
Staffing companies identify potential employees through advertising and referrals, and the companies interview, test, and counsel workers before sending them to the customer for approval. Pre-employment screening can include skills assessment, drug tests, and criminal background checks. Most staffing agencies provide some sort of training, often involving data entry and basic computer skills. The personnel staffing industry has been radically changed by the Internet. Many employers list available positions with one or several Internet personnel sites like monster.com or jobs.com, and on their own site. Personnel agencies operate their own sites and often still work as intermediaries by helping employers accurately describe job openings and screening candidates who submit applications.
Job growth drives demand for the personnel staffing industry. The profitability of individual companies depends on good marketing and availability of qualified employees. Large companies enjoy economies of scale in marketing and back-office operations. Small companies can compete successfully by specializing in an industry or a job function. The industry is labor-intensive: average annual revenue per worker is about $80,000.
To a great extent, clients follow the seasonal retail cycles but precede them by two to three months and two distinct “peak” seasons: (i) between August and October preceding Halloween, Thanksgiving, and Christmas and (ii) between April and May preceding the summer season.
Major end-use customers include businesses from a wide range of industries. Nine out of ten large US businesses have used a staffing agency, according to the American Staffing Association. Wholesale, retail, and service industries are most likely to use temporary help services. Marketing involves direct sales presentations, referrals from existing clients, and advertising. Agencies compete both for customers and workers. Depending on market supply and demand at any given time, agencies may allocate more resources either to finding potential employers or potential workers. Permanent placement agencies work either on a retainer or a contingency basis, often 30 percent of annual salary. Clients may retain an agency for a specific job search or on contract for a specific period. Temporary help services charge customers a fixed price per hour or a standard markup on prevailing hourly rates. When a temporary employee is hired for a regular position within a company, the customer pays a fee.
Staffing companies are regulated by the United States Department of Labor (DOL) and the Equal Employment Opportunity Commission (EEOC), and often by state authorities. These agencies regulate the relationship between the agency and the temporary employees, or employee candidates. Many federal anti-discrimination rules regulate the type of information that employment firms can request from candidates or provide to customers about candidates. PEOs are often considered co-employers along with the client, but the PEO is responsible for employee wages, taxes, and benefits. State regulation aims to ensure that PEOs provide the benefits they promise to workers.
Demand for personnel staffing services is strongest in areas with strong employment growth, and geographic location can determine an agency's success in attracting employees and employers. Customers generally prefer a staffing service that can provide workers for all of their office locations. Temporary employee candidates are often unwilling to relocate for a position.
The revenue of personnel agencies depends on the number of jobs they fill, which in turn depends on economic growth. During economic slowdowns, many client companies stop hiring altogether. In years of good economic growth, the number of jobs in the US economy grows approximately 2% annually. Internet employment sites expand a company's ability to find workers without the help of traditional agencies. Personnel agencies often work as intermediaries, helping employers accurately describe job openings and screen candidates. Increasing use of sophisticated, automated job description and candidate screening tools could make many traditional functions of personnel agencies obsolete. Free social networking sites such as LinkedIn and Facebook are also becoming a common way for recruiters and employees to connect without the assistance of a staffing agency.
To avoid large placement agency fees, big companies may use in-house personnel staff, current employee referrals, or human resources consulting companies to find and hire new personnel. Because placement agencies typically charge a fee based on a percentage of the first year's salary of a new worker, companies with many jobs to fill have a large financial incentive to avoid agencies.
However, temporary workers are becoming such a large factor at some companies that personnel agency staff sometimes work at the customer's site to recruit, train, and manage. Onsite training is designed to serve only that customer. Agencies try to match the best qualified employees for the customer's needs, but often provide additional training specific to that company, such as instruction in the use of proprietary software.
Most personnel agencies are small and may depend heavily on a few big customers for a large portion of revenue. Large customers may lead to increased revenues, but also expose agencies to higher risks. When major accounts experience financial hardships, and have less need for temporary employment services, agencies stand to lose large portions of revenue.
Startup costs for a personnel agency are very low. Individual offices can be highly profitable, but consolidation is driven mainly by the opportunity for large agencies to develop national relationships with big customers. Some agencies expand by starting new offices in promising markets, but most prefer to buy existing independent offices with proven staff and an existing customer roster.
The Market
The output of US employment services annual growth since 2009 has been 7.2% based on industry data published in December 2014. Growth is expected to increase in the United States as a result of the Affordable Care Act. Based on U.S. Market Research Firms for the period 2009.
Major staffing services providers include Adecco (headquartered in Switzerland), Randstad (the Netherlands), and Manpower (US). The US and Japan each account for about 20 percent of global revenue. The UK accounts for about 15 percent. There are about 70,000 private employment services agencies in the world, with the top 4 companies accounting for about 10% of the industry’s sales.
The US personnel staffing agencies industry includes about 32,000 companies with combined annual revenue of about $230 billion. Major companies include ADP TotalSource, Insperity (formerly Administaff), Kelly Services, Manpower, and the US operations of Adecco. The industry is fragmented: the 50 largest companies generate about 40 percent of industry revenue. The global staffing services industry generates about $280 billion in annual revenue, according to the International Confederation of Private Employment Agencies. Major staffing services providers based outside the US are Adecco (Switzerland) and Randstad (the Netherlands). Large staffing services markets include the EU, the US, Japan, and the UK. The forecast for temporary labor in 2015 is increasing in demand with the implementation of the Affordable Care Act. Many companies are anticipated to use temporary staffing companies due to the definition of fulltime employment changing from 40 to 30 hours.
The Company’s Presence in the Market
Currently, the Company operates in California (the greater Los Angeles area) and Arizona (the greater Phoenix area). The presence in these two regions is due partly from the previous experience of the Company and its officers in these marketplaces, but also because of the heavy focus these two metropolitan areas have on the Company’s particular specialty niche in staffing; light industrial.
In the past 18 months, the Company has seen the market trending upward with respect to its current client base, as well as the addition of Loyalty Staffing in Torrance California. This is evidenced in the number of clients, the billing amounts increasing, and their overall need for labor assistance increasing. According to the American Staffing Association, a leader in industry analysis, temporary labor experienced a total year over year increase of 7.2%.
Los Angeles mirrors the Phoenix market as the Company sees a majority of its business in the form of unloading and re-packaging of bulk quantity goods that arrive through the Port of Long Beach. These goods vary from food products to retail items. Many have seasonal increases but the Company has a mainstay of labor that is employed throughout the year. Several clients operate in both Los Angeles and Phoenix and the Company provides its services in both locations to these clients. The Company does not currently operate in Nevada.
Customers
The Company has a diverse array of customers across sectors. Due to the competitive nature of the industry, client information is kept confidential. The company services the customers in the light industrial category.
Marketing and Sales
The Company has conducted limited advertising and marketing to date to reach new clients. To date, advertising and marketing has been centered on reaching potential employees. In all locations, the Company has used multiple resources to drive in potential new temporary employees. These tactics range from advertisements in newspapers, job boards, unemployment assist centers, as well as online advertisements. The Company also utilizes CareerBuilder to recruit for professional placements.
Registration Statement
The Company has filed a registration statement with the Securities and Exchange Commission on Form S-1 pursuant to the Securities Act of 1933 for the offer and sale of 1,600,000 shares of its common stock offered by the holders of such stock (“selling shareholders”). It is anticipated that the selling shareholders will offer their shares at a price of $2.00 per share. Although the registration statement has been filed, it not yet effective and no sales can be made thereof until the time it has become effective. Although the Company anticipates that the registration statement will be effective in the near future, there is no assurance that this will occur.
The Company and the selling shareholders are seeking an underwriter, broker-dealer or selling agent to sell the shares. Neither the Company nor the selling shareholders have entered into any arrangements with any underwriter, broker-dealer or selling agent as of the date of this Report.
The Company will not receive any portion or percentage of any of the proceeds from the sale of the shares by the selling shareholders' Shares.
Employees
The Company presently has approximately 800 employees, consisting or approximately 680 employees in California and 120 employees in Arizona.
Most employees receive health benefits. The Company may offer additional fringe and welfare benefits in the future as the Company’s profits grow and/or the Company secures additional outside financing.
ITEM 1A.
ITEM 1A. RISK FACTORS
Not required for smaller reporting companies.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently has three physical locations: Torrance, California, Santa Fe Springs, California and Phoenix, Arizona.
The Torrance office is approximately 2300 square feet and is a month to month lease of $3,211. The office is located at a major intersection in southern Los Angeles County. The Company incurs annual expenses of $38,532 for such lease.
The Santa Fe Springs location consists of 1,355 square feet and is a monthly lease that is located in an office park on a major thoroughfare for southern Los Angeles County, California. The monthly lease cost is $1,156, and annually the Company incurs annual expenses of $13,872 for such lease. This new location now provides the Company with the desired street visibility.
The Phoenix location consists of 1,600 square feet and is a yearly lease and is located at an intersection of a major thoroughfare for Phoenix, Arizona. The Phoenix location offers street visibility and room for growth. The monthly lease cost is $737, and annually the Company expends $8,844 for such lease.
The Company also anticipates opening an official corporate location in Irvine, California in the near future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently in dispute with the seller of Loyalty, Nancy Esteban, concerning the terms of the cash portion and note payable portion of the payout in the original transaction described above. The parties are currently negotiating in good faith to resolve. The Company expects this settlement to occur during the second quarter of 2015.
Other than the above, as well as ongoing and routine employee claims for worker’s compensation that arise during the ordinary course of the business of the Company, there are currently no pending, threatened or actual legal proceedings of a material nature in which the Company is a party.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no public market for the Company’s common stock. The Company has filed with the Securities and Exchange Commission a registration statement on Form S-1 pursuant to the Securities Act of 1933 for the offer and sale of up to 1,600,000 shares of its common stock owned by current shareholders. The registration statement is not yet effective and the Company cannot predict when, if at all, such registration statement will become effective.
The Company is authorized to issue 100,000,000 shares of common stock and 20,000,000 shares of preferred stock. As of December 31, 2014, 7,500,000 shares of common stock and no preferred stock were issued and outstanding.
The Company has not paid any dividends to date. The Company intends to employ all available funds for the growth and development of its business, and accordingly, does not intend to declare or pay any dividends in the foreseeable future.
The Company has not made any sales of unregistered stock in the period covered by this report.
Recent Sales of Unregistered Securities; Use of proceeds From Registered Securities.
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
There is no selected financial data required to be filed for a smaller reporting company.
ITEM 7.
ITEM 7. 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," "First Rate," or "the Company" refers to the business of First Rate Staffing Corporation.
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. References to the financial condition and performance of the Company below in this section “Management’s Discussions and Analysis of Financial Condition and Results of Operation” are to First State California and First State Nevada, respectively.
On February 11, 2014, the Company entered into an agreement to purchase all the assets of Loyalty Staffing Services, a California corporation for an aggregate purchase price valued at $1,500,000 consisting of $100,000 in cash and $400,000 in note payable and 500,000 shares of the Company's common stock, valued at a price of $2 per share.
The agreement provides that:
(1) $100,000 of the cash portion of the purchase price shall be paid $50,000 within five business days of the release of certain Uniform Commercial Code liens and personal guarantees and an additional $50,000 sixty days from the date of such release.
(2) The Company shall execute a promissory note in favor of Loyalty Staffing for the remaining $400,000 with $75,000 payable six months after the closing date of the agreement (February 11, 2014) and $325,000 payable 30 months after such closing date.
Loyalty Staffing has the option of converting all or any part of the $400,000 balance into the Company's common stock at the then prevailing trading price or market value at the time of closing of the agreement or $2 per share. It has agreed to a reduction in the promissory note of an amount equal to 5% of $1,500,000 and a return of common stock of an amount equal to 2.5% of $1,500,000 for every reduction of $1,500,000 in annual revenues generated by the loss a client or clients acquired as part of the asset agreement within 12 months from the closing date.
The Company is currently in dispute with the seller of Loyalty, Nancy Esteban, concerning the terms of the cash portion and note payable portion of the payout in the original transaction described above. The parties are currently negotiating in good faith to resolve. The Company expects this settlement to occur during the second quarter of 2015.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our consolidated financial statements. Those material accounting estimates that we believe are the most critical to an investor's understanding of our financial results and condition are discussed immediately below and are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management to determine the appropriate assumptions to be used in the determination of certain 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 December 31, 2014 and 2013 was $0.
During 2012, the Company entered into a new accounts receivable factoring arrangement with a non-related third party financial institution (the "Factor"). Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 90% of the accounts receivable balance to the Company, with the remaining balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. An administrative fee of 0.015% per diem is charged on the gross amount of accounts receivable assigned to Factor, plus interest to be calculated at 0.011806% per day. The total amount of accounts receivable factored was $1,824,376 and $756,718 at December 31, 2014 and December 31, 2013, 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. 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
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, Income Taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized.
ASC 740 also clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.
Results of Operations and Financial Condition for the Year Ended December 31, 2014 as Compared to the Year Ended December 31, 2013
The following are the consolidated results of our operations for the year ended December 31, 2014 compared to the year ended December 31, 2013.
Revenues
Our revenues increased by $8,825,787, or 96.2%, during the year ended December 31, 2014 as compared to the same period in 2013. The increase in revenues is due primarily to the addition of additional customers from the acquisition of Loyalty on February 11, 2014. As a result of the Loyalty acquisition, the Company acquired approximately 60 additional customers which are expected to generate annual revenues of approximately $8 million.
Cost of revenues
Our cost of revenues, which represent primarily staffing salaries and workers compensation insurance costs, increased by $7,837,195, or 94.4%, during the year ended December 31, 2014 as compared to the same period in 2013. The increase in cost of revenues is due to the increase in revenues for the period. The percentage increase in cost of revenues is consistent with the percentage increase in revenues. We expect the cost of revenues to continue to increase as our revenues increase.
Operating expenses
Operating expenses increased by $704,119, or 78.2%, during the year ended December 31, 2014 as compared to the same period in 2013. The increase in operating expenses in 2014 was due to higher expenses associated with increased payroll and other costs from the acquisition of Loyalty subsequent to the purchase date of February 11, 2014, as well as amortization expense of $259,438 on other intangible assets recorded in connection with the acquisition.
Notes Payable
The Company owes an aggregate total of $500,000 to the seller of Loyalty, consisting of $100,000 within of sixty days of obtaining the necessary UCC and personal guarantee releases, as well as a promissory note of $400,000 due in four payment installments of $75,000 commencing every six months after the purchase date of February 11, 2014, as well as one final payment of $100,000 due thirty months after the purchase date. The notes have not paid according to terms due to an internal issue, and the Company is currently renegotiating the terms of the outstanding notes.
The Company has promissory notes outstanding of $4,509. 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.
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 December 31, 2014, the Company had cash of $787,238 and accounts receivable of $330,538.
The Company’s proposed expansion plans and business process improvements over the next two years will necessitate additional capital and financing. 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 $1.0 to $ 1.5 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 collected from the client. Factoring internally would mean self-financing, resulting in a savings to the Company of approximately $150,000 per year. No additional material or regulatory costs would be incurred at this point. If the Company was to offer factoring to other entities (i.e. outside of the Company) then the 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 $35,000 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.
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 November 2013, the factor commitment increased to $2,000,000. We also expect the acquisition of Loyalty in February 2014 to continue to provide additional working capital from the additional customers acquired. In addition, the Company may borrow from time to time as available, sources of funds from its officers and/or directors as needed.
As the Company grows in size, the savings from this new factoring arrangement will continue to accrue and enhance the Company’s profitability and cash flow. Based on this budget and the projected operations of the Company, there are no currently anticipated liquidity issues which would pose a threat to the current business and operations of the Company.
Net cash provided by operating activities was $884,793 for the year ended December 31, 2014 compared to net cash used in operating activities of $23,922 for 2013. The significant change between the years was a result of the proceeds generated from additional sales related to the acquisition of Loyalty during the year ended December 31, 2014.
We had no cash used in investing activities during the year ended December 31, 2014. We had cash flows used in investing activities during 2013 of $37,101, which consisted of $28,713 for the acquisition of property and equipment and $8,388 in notes receivable lending.
We had net cash used in financing activities of $151,598 during the year ended December 31, 2014 resulting from payments of our outstanding notes payable. We had net cash used in financing activities of $70,521 during the year ended December 31, 2013 resulting from the payments of our outstanding notes payable of $99,021, partially offset by capital contributions of $28,500.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for smaller reporting companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST RATE STAFFING CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014 and 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
First Rate Staffing Corporation:
We have audited the accompanying consolidated balance sheets of First Rate Staffing Corporation (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in shareholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to the above present fairly, in all material respects, the consolidated financial position of First Rate Staffing Corporation as of December 31, 2014 and 2013, and the consolidated results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in the Note 4 to the consolidated financial statements, the Company has incurred an accumulated deficit from inception to December 31, 2014. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton & Chia, LLP
Newport Beach, California
March 31, 2015
FIRST RATE STAFFING CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements
FIRST RATE STAFFING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements
FIRST RATE STAFFING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY (DEFICIT)
The accompanying notes are an integral part of these consolidated financial statements.
FIRST RATE STAFFING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
FIRST RATE STAFFING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
First Rate Staffing Corporation (“First Rate” or “the Company”), formerly known as Moosewood Acquisition Corporation (“Moosewood”) was incorporated on April 20, 2011 under the laws of the State of Delaware.
The Company provides recruiting and staffing services for temporary positions in the light industrial, distribution center, assembly, and clerical areas to its clients in California and Arizona, with an option for the clients and candidates to choose the most beneficial working arrangements.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and include all the notes required by generally accepted accounting principles for complete financial statements.
The consolidated financial statements include the accounts of the Company and Loyalty Staffing Services, Inc. All significant intercompany transactions have been eliminated in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Use of Estimates
In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
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’ equity (deficit).
Cash
The Company considers all highly-liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of December 31, 2014 or 2013. 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. As of December 31, 2014, the Company had $537,238 of balances that exceeded the FDIC insurance limits.
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 December 31, 2014 and 2013 was $0.
During 2012, the Company entered into a new accounts receivable factoring arrangement with a non-related third party financial institution (the “Factor”). Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 90% of the accounts receivable balance to the Company, with the remaining balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. An administrative fee of 0.015% per diem is charged on the gross amount of accounts receivables assigned to Factor, plus interest to be calculated at 0.011806% per day. The total amount of accounts receivable factored was $1,824,376 and $756,718 at December 31, 2014 and 2013, respectively.
Business Acquisitions
The Company has accounted for its business acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 805, Business Combinations. Assets acquired and liabilities assumed are recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets are based on valuations using the income approach. The excess of the purchase price, if any, over the tangible assets, identifiable intangible assets and assumed liabilities, is recorded as goodwill.
Intangible Assets
The Company has intangible assets recorded as part of a business acquisition (see Note 6). Intangible assets with definite useful lives, representing customer relationships, are amortized over their estimated useful lives of 5 years using the straight-line method, which represents the economic benefit pattern of the intangible assets.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific asset or liability.
GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:
• Level 1 - Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
• Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
- Quoted prices for similar assets or liabilities in active markets
- Quoted prices for identical or similar assets or liabilities in markets that are not active
- Inputs other than quoted prices that are observable for the asset or liability
- Inputs that are derived principally from or corroborated by observable market data by correlation or other means
• Level 3 - Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) as of December 31, 2014 or 2013.
The Company has determined that the book value of its outstanding financial instruments as of December 31, 2014 and 2013 is the approximate fair value.
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.
Revenue Recognition
The Company’s revenue is derived from providing temporary staffing services to its clients. The Company recognizes revenue in accordance with FASB ASC No. 605, Revenue Recognition. Revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
Cost of Revenue
Cost of revenue consists of wages, related payroll taxes, workers compensation, and employee benefits of the Company’s employees while they work on contract assignment as temporary staff of the Company’s customers.
Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing the net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock. There have been no common stock equivalents included in the diluted earnings per share computation for the years ended December 31, 2014 or 2013 as the amounts are anti-dilutive.
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, Income Taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized.
ASC 740 also clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.
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.
4. GOING CONCERN
The Company has an accumulated deficit of $131,588 since inception. This accumulated deficit is primarily the result of increased operating expenses during 2012 associated with professional fees necessary to complete its merger transaction in November 2012, as well as revenues being at below break-even levels. Going forward, the Company expects these annual expenses to be lower. In addition, on February 11, 2014, the Company also acquired substantially all of the assets of Loyalty Staffing Services, Inc. (see Note 6), which is expected to increase cash flows from operations. Management believes this will allow the Company to operate at profitable level in the future.
The Company’s continuation as a going concern is dependent on management’s ability to develop profitable operations, and / or obtain additional financing from its shareholders and / or other third parties. In order to address the need to satisfy its continuing obligations and realize its long term strategy, management’s plans include continuing to fund operations with cash received from financing activities.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2014 and 2013.
Depreciation expense for the years ended December 31, 2014 and 2013 amounted to $6,660 and $6,439, respectively.
6. ACQUISITION
On February 11, 2014, the Company entered into an agreement to purchase the assets of Loyalty Staffing Services, Inc. (“Loyalty”), a California corporation, for an aggregate purchase price of $1,444,363 consisting of a cash payment of $100,000, along with a $400,000 note payable, net of a discount of $55,637 for imputed interest, and 500,000 shares issued of the Company’s common stock, valued at the estimated fair value of $2 per share. The total amount due of $500,000 is payable as follows; 1) $50,000 of the purchase price will be paid within five days of the release of certain Uniform Commercial Code liens and personal guarantees, 2) an additional $50,000 will be paid sixty days from the date of such release, 3) the Company has executed a promissory note to the seller for $400,000, payable in four installments of $75,000 every six months after the closing date of the agreement, with a remaining and final payment of $100,000 payable 30 months after the closing date.
The seller has the option of converting all or any part of the $400,000 promissory note balance into the Company's common stock at the then prevailing trading price or market value at the time of closing of the agreement or $2 per share. The Seller has agreed to a reduction in the promissory note of an amount equal to 5% of $1,500,000 and a return of common stock of an amount equal to 2.5% of $1,500,000 for every reduction of $1,500,000 in annual revenues generated by the loss a client or clients acquired as part of the asset agreement within 12 months from the closing date.
The Company is currently in dispute with the seller of Loyalty, Nancy Esteban, concerning the terms of the cash portion and note payable portion of the payout in the original transaction described above. The parties are currently negotiating in good faith to resolve. The Company expects this settlement to occur during the second quarter of 2015.
Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation was allocated as follows:
Intangible assets acquired represented customer relationships which have an estimated useful life of 5 years. The estimated useful life is based on the patterns in which the economic benefits related to such assets are expected to be realized.
Amortization expense for intangible assets amounted to $259,438 and $0 for the years ended December 31, 2014 and 2013, respectively. Estimated future amortization of intangible assets is as follows.
The amount of Loyalty’s revenue and earnings included in the Company’s consolidated statement of operations for the year ended December 31, 2014, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2013 are as follows. The pro forma information includes the effects of amortization of intangibles arising from the transaction, as well as interest expense from the note payable issued to the seller. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.
7. NOTE RECEIVABLE - RELATED PARTY
In March 2013, the Company issued a series of unsecured notes receivable 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. As of December 2014 and 2013, the note receivable balance was $8,388.
8. DEPOSITS AND OTHER ASSETS
Deposits and other assets consisted of the following as of December 31, 2014 and 2013.
9. SHAREHOLDERS’ EQUITY (DEFICIT)
The Company is authorized to issue 100,000,000 shares of common stock and 20,000,000 shares of preferred stock. As of December 31, 2014 and 2013, 7,500,000 and 7,000,000 shares of common stock, respectively, were issued and outstanding. There was no preferred stock were issued or outstanding as of December 31, 2014 or 2013.
During the year ended December 31, 2013, Cliff Blake, the Chief Executive Officer and sole director of the Company, made a capital contribution of $28,500 to the Company.
During the year ended December 31, 2014, the Company issued 500,000 shares of common stock in connection with the acquisition of Loyalty (see Note 6).
10. NOTES PAYABLE - RELATED PARTY
During 2012, the Company obtained unsecured promissory notes payable from one of its shareholders on various dates between March 2012 and December 2012. The total aggregate amounts outstanding amounted to $4,509 and $156,107 as of December 31, 2014 and 2013, respectively. The notes bear interest at a rate of 6% per annum and are due in full in one lump payment 3 years from the issuance dates. The remaining outstanding balances are all due in December 2015. There are no financial covenant requirements under the notes.
11. NOTES PAYABLE - ACQUISITION
Notes payable resulting from the acquisition of Loyalty consisted of the following.
As the note payable from the acquisition of Loyalty has no stated interest, the Company has imputed total interest of $55,637 using a rate of 10% per annum, which represents the Company’s incremental borrowing rate for similar transactions. The discount is being amortized into interest expense using the interest method. During the year ended December 31, 2014, amortization of the discount amounted to $30,474. As of December 31, 2014, the note payable is presented net of a discount of $25,163. The note has not been paid due to an internal issue and the Company is currently in the process of renegotiating the terms of the outstanding notes.
12. INCOME TAXES
The components of the provision for income taxes are summarized as follows for the years ended December 31:
Significant components of deferred income tax assets and liabilities are as follows:
At December 31, 2014, the Company had utilized its Federal and State net operating loss carryforwards ("NOL") available to offset future taxable income.
The Company periodically evaluates the likelihood of the realization of deferred tax assets, and adjusts the carrying amount of the deferred tax assets by the valuation allowance to the extent the future realization of the deferred tax assets is not judged to be more likely than not. Management considers many factors when assessing the likelihood of future realization of the Company's deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carryforward periods available to the Company for tax reporting purposes, and other relevant factors.
At December 31, 2014 and 2013, based on the weight of available evidence, management determined that it was unlikely that the Company's deferred tax assets would be realized and have provided for a full valuation allowance associated with the net deferred tax assets.
The Company periodically analyzes its tax positions taken and expected to be taken and has determined that since inception there has been no need to record a liability for uncertain tax positions. The Company classifies income tax penalties and interest, if any, as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. There was no accrued interest or penalties as of December 31, 2014 or 2013.
The Company is neither under examination by any taxing authority, nor has it been notified of any impending examination. The Company's tax years for its Federal and State jurisdictions which are currently open for examination are the years of 2011 - 2014.
13. 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 office located in Santa Fe Springs, California under a non-cancellable operating lease extending through January 2018.
The following summarizes the amounts due in future periods under non-cancellable operating leases.
Litigation
The Company is currently in dispute with the seller of Loyalty, Nancy Esteban, concerning the terms of the cash portion and note payable portion of the payout in the original transaction described above. The parties are currently negotiating in good faith to resolve. The Company expects this settlement to occur during the second quarter of 2015. Management does not anticipate any material adverse impacts from this dispute, and any gain will be recorded upon the finalization of a settlement.
During the ordinary course of the Company’s business, it is subject to various claims and litigation. The Company settled an open claim involving a former employee in 2013 for $35,625. As of December 31, 2014 and 2013, all obligations have been fulfilled by the Company.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report. Based on this evaluation, we concluded that our disclosure controls and procedures were effective as of December 31, 2014.
Internal Control Over Financial Reporting
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets
· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
The Company’s management 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, 2014, 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 December 31, 2014, based on those criteria. A control system can provide only reasonably, not absolute, assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues have been detected.
Anton & Chia LLP, the independent registered public accounting firm, has not issued an attestation report on the effectiveness of the internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following table sets forth information regarding the members of the Company’s board of directors, officers and management.
Explanatory Note
The Company’s officers and directors were previously employed by Easy Staffing Services Inc. (formerly known as Excel Staffing Service, Inc. prior to 2008). In March of 2009, Lumea, Inc. purchased Easy Staffing Services Inc. Mr. Blake was retained as President and CEO of Easy Staffing Services Inc. by Lumea, Inc. The entity Lumea, Inc. was a subsidiary of Green Planet Group, Inc. The President and CEO of Green Planet Group, Inc., and its Chief Financial Officer, retained the full financial control of Lumea, Inc. after the acquisition of Easy Staffing Services Inc. by Lumea, Inc.
Mr. Blake resigned from his employment with Easy Staffing Services Inc. in April 2010 after suspecting that the Lumea entities were not properly paying certain tax obligations. Mr. Blake was also concerned that Lumea, Inc. had defaulted on promissory notes due to Easy Staffing Services Inc. in March 2010. Under the advice of legal counsel and the consideration of these factors, Mr. Blake believed that it was prudent for him to resign. Each of the other officers and directors of the Company thereafter resigned from their employment with Easy Staffing Services Inc. based on factors similar to those prompting Mr. Blake to resign (including that customers of Lumea, Inc. and its affiliates began learning in 2010 about the potential tax problems, and these customers were accordingly terminating their respective relationships with Lumea, Inc. and its affiliates).
Other than Mr. Blake, no other officer or director of the Company was party to any employment agreement with Lumea, Inc. or any of its affiliated entities. Mr. Blake was a party to any employment agreement with Lumea, Inc. and its affiliated entities, but such agreement was terminated when Mr. Blake resigned in 2010. A non-compete clause in Mr. Blake’s employment agreement expired on April 30, 2012.
Prior to, and during, 2012, Lumea, Inc. and its affiliates threatened and pursued civil litigation against Mr. Blake. However, at present, no such litigation against Mr. Blake is pending or threatened, and Lumea, Inc. filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on August 17, 2011 and dissolved all of its operations in August 2012. There are no pending or threatened legal actions against Mr. Blake or the Company arising from or related to Lumea, Inc. or any of its affiliated entities.
Cliff Blake
Cliff Blake serves as Chief Executive Officer, President, official Secretary and Treasurer of the Company, and is the sole director of the Company. Mr. Blake has over 22 years of experience in business and management, including in starting, building and operating numerous businesses, including over 12 years in owning and operating staffing businesses. Mr. Blake founded and built his own staffing company, Easy Staffing Services, Inc. (formerly known as Excel Staffing Service, Inc. prior to 2008), based in Scottsdale, Arizona, in 1999, and he served as its President and CEO from 1999 to 2009. Through the direction of Mr. Blake, the company started with an idea and was built in to a successful company employing over 50 internal employees and thousands of more temporary employees. The company was a major competitor in several states across the United States with ending annual revenues of over $104 million in 2009. The company was sold in 2009. From March 2009 to April 2010, Mr. Blake was employed as President and CEO of Easy Staffing Services, Inc. by Lumea, Inc., which acquired Easy Staffing Services, Inc. (formerly known as Excel Staffing Service, Inc. prior to 2008). From May 2010 to 2012 (when Mr. Blake joined the Company as an officer and director), Mr. Blake was self-employed. During this time, Mr. Blake conducted research on the staffing marketplace and helped design the business plan and model for the Company. Mr. Blake also provided advice and consultation (including with respect to workers’ compensation insurance, sales and marketing ,customer targeting and retention, risk management techniques, accounts receivable management, financing strategies and options, data processing, staffing industry relationships and operational management) to each of First Rate California and First Rate Nevada, respectively, and prepared the Company and these entities for potential merger and acquisition and going-public transactions. Mr. Blake was not directly employed by, or an officer or director of, First Rate Staffing, Inc. or First Rate Staffing LLC; however, he served as a valuable business advisor and consultant for these entities from 2010 to 2012. Mr. Blake did not receive any monetary compensation for his advisory role with First Rate Staffing, Inc. and First Rate Staffing LLC, however, he was provided with health care benefits. Mr. Blake received a Bachelor of Science degree from Louisiana Tech University in 1974 and a Master of Business Administration degree in Finance from Florida State University in 1975.
Devon Galpin
Devon Galpin serves as Chief Operating Officer of the Company. Mr. Galpin supervises all operations of these entities, which includes all office locations, recruiting, internal staffing, order fulfillment, payroll, invoicing compliance, along with client management. Mr. Galpin served in the staffing industry since 2004 holding positions beginning in August 2005 at Easy Staffing Services, Inc. (formerly known as Excel Staffing Service, Inc. prior to 2008). Mr. Galpin joined Lumea Staffing of California, Inc. in March 2009 in sales, account management and operations. At the time he left Easy Staffing Services, Inc. and Lumea Staffing of California, Inc. in April 2010, Mr. Galpin oversaw the operations and management of $30 million is staffing business encompassing California and Arizona. In 2010, Mr. Galpin was a co-founder and officer of each of First Rate California and First Rate Nevada, respectively, a position in which he served until those entities merged into the Company. Upon such merger in 2012, Mr. Galpin became a part of the management of the Company. Mr. Galpin worked hand in hand with all senior members of his company to procure business and develop better operations for current and future clients. Mr. Galpin was also in charge of overseeing all payroll matters, delegating and hiring/terminating positions, evaluating profitability of clients, and accounts renewals. Mr. Galpin received a Bachelor of Arts degree in Political Science from Chapman College.
Michael Mautz
Michael Mautz serves as Vice President of Risk Management for the Company. Mr. Mautz supervises all risk management activities of these entities, including the worker’s compensation program of the companies. Mr. Mautz is an OSHA-certified risk manager. Mr. Mautz has been involved in the staffing industry for 12 years with his primary focus on risk management and loss prevention. His previous tenure with rapidly growing staffing companies, Easy Staffing Services, Inc. (formerly known as Excel Staffing Service, Inc. prior to 2008) and Lumea Staffing Inc., allowed him to gain critical knowledge on how to grow a business in a safe and productive manner. Because of the steady growth of the company, the risk management department had to be very aggressive and effectively design programs that protected the employees, thereby creating a more profitable business environment for the company. Mr. Mautz was with Easy Staffing Services, Inc. (formerly known as Excel Staffing Service, Inc. prior to 2008) and Lumea Staffing Inc. from Janury 2004 to April 2010, just prior to Mr. Mautz becoming a co-founder and officer of each of First Rate California and First Rate Nevada, respectively, a position in which he served until those entities merged into the Company. Upon such merger in 2012, Mr. Mautz became a part of the management of the Company. During his time at Easy Staffing Services, Inc. (January 2004 to March 2009), Mr. Mautz served first as a staffing coordination, then as a risk manager and later as a loss prevention specialist. Mr. Mautz continued in his capacity as a loss prevention specialist with Lumea Staffing, Inc. from March 2009 to April 2010.
Joy Mautz
Joy Mautz serves as Vice President of Finance for the Company. Ms. Mautz heads all accounting functions, including cash flow management, state and federal tax compliance, financial modeling, forecasting and Sarbanes-Oxley compliance. Ms. Mautz has served in the staffing industry since 2005 holding positions as Controller and Assistant Controller of private and public companies, including Easy Staffing Services, Inc. (formerly known as Excel Staffing Service, Inc. prior to 2008) during the period June 2005 to March 2010. Ms. Mautz was employed by Lumea Staffing, Inc. as an accountant from 2009 to 2012, after Lumea Staffing, Inc. acquired Excel Staffing Services, Inc. As Assistant Controller and Controller, she worked with the daily cash management and treasury management for a multitude of business accounts. She worked directly with all banking relationship managers and directly with funding companies preparing daily funding requests and other daily and quarterly reports. Ms. Mautz assisted outside auditors with audit processes for private and public companies. She performed cash flow analysis, monthly financial statements and other miscellaneous management ad hoc reports. She analyzed business performance to maximize operations and prepared budgets, payroll, and cash flow reports. Also, Ms. Mautz performed monthly reconciliations for all bank accounts for management and for auditing purposes, and she researched and resolved any out of balances. Ms Mautz managed accounts receivables and made collection calls when needed. She also assisted with accounts payable and provided solutions to any deficiencies. In 2010, Ms. Mautz was a co-founder and officer of each of First Rate California and First Rate Nevada, respectively, a position in which she served until those entities merged into the Company. Upon such merger in 2012, Ms. Mautz became a part of the management of the Company. Ms. Mautz received a Bachelor of Arts degree from the California State University at Fullerton in 2004.
Julie Galpin
Julie Galpin serves as Assistant Secretary for the Company. In this capacity, she also performs accounting and finance duties for these companies. For the past several years, Ms. Galpin has worked in similar accounting roles and capacities, including at Easy Staffing Services, Inc. (formerly known as Excel Staffing Service, Inc. prior to 2008), where she worked during the period April 2008 to April 2010. Ms. Galpin has served in the staffing industry since 2005, holding the position of accounting manager. In 2010, Ms. Galpin was a co-founder and officer of each of First Rate California and First Rate Nevada, respectively, a position in which he served until those entities merged into the Company. Upon such merger in 2012, Ms. Galpin became a part of the management of the Company. Her skills are in accounts receivables, reconciliations, and banking relationships. Ms. Galpin received a Bachelor of Arts degree in Psychology from the University of California, Irvine in 2005.
Director Independence
Pursuant to Rule 4200 of The NASDAQ Stock Market one of the definitions of an independent director is a person other than an executive officer or employee of a company. The Company's board of directors has reviewed the materiality of any relationship that each of the directors has with the Company, either directly or indirectly. Based on this review, the board has determined that there are no independent directors.
Corporate Governance
The Company does not have a nominating nor audit committee of the board of directors. The board of directors consists of one director. At such time that the Company has a larger, board of directors and commences activities, the Company will propose creating committees of its board of directors, including both a nominating and an audit committee.
Conflicts of Interest
There are no binding guidelines or procedures for resolving potential conflicts of interest. Failure by management to resolve conflicts of interest in favor of the Company could result in liability of management to the Company. However, any attempt by shareholders to enforce a liability of management to the Company would most likely be prohibitively expensive and time consuming.
Code of Ethics
The Company has not at this time adopted a Code of Ethics pursuant to rules described in Regulation S-K. The Company intends to adopt a Code of Ethics to provide a manner of conduct.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Remuneration of Officers: Summary Compensation Table
The officers noted above also received profits participation and earnings from their ownership interest in the equity of each of First Rate California and First Rate Nevada; as such profits participation and earnings represent returns to these officers by virtue of their equity ownership of these businesses, any such profits participation are not reflected in the table above.
As of December 31, 2014, there was no accrued compensation that was due to the Company’s employees or officers. Upon successful completion by the Company of a primary public offering in the future (or the completion of other financing or funding), however, the Company may compensate officers and employees as is discussed below in “Anticipated Officer and Director Remuneration.”
Each of the officers has received certain shares of common stock in the Company in connection with the change of control of the Company and/or the mergers. Accordingly, the Company has not recorded any compensation expense in respect to any shares issued to the officers as such shares do not represent compensation that was paid to any officer.
There are no current plans to pay or distribute any cash or non-cash bonus compensation to officers of the Company, until such time as the Company is profitable, experiences positive cash flow or obtains additional financing. However, the Board of Directors may allocate salaries and benefits to the officers in its sole discretion. No officer is subject to a compensation plan or arrangement that results from his or her resignation, retirement, or any other termination of employment with the Company or from a change in control of the company or a change in his or her responsibilities following a change in control. The members of the Board of Directors may receive, if the Board so decides, a fixed fee and reimbursement of expenses, for attendance at each regular or special meeting of the Board, although no such program has been adopted to date. The Company currently has no retirement, pension, or profit-sharing plan covering its officers and directors; however, the Company plans to implement certain such benefits after sufficient funds are realized or raised by the Company (see “Anticipated Officer and Director Remuneration” below.)
Employment Agreements
The Company enters into and maintains customary employment agreements with each of its officers and employees.
Anticipated Officer and Director Remuneration
The Company pays reduced levels of compensation to its officers and director at present. The Company intends to pay regular, competitive annual salaries to all its officers and will pay an annual stipend to its directors when, and if, it completes a primary public offering for the sale of securities and/or the Company reaches greater profitability, experiences larger and more sustained positive cash flow and/or obtains additional funding. At such time, the Company anticipates offering additional cash and non-cash compensation to officers and directors. In addition, although not presently offered, the Company anticipates that its officers and directors will be provided with additional fringe benefits and perquisites at subsidizes rates, or at the sole expense of the Company, as may be determined on a case-by-case basis by the Company in its sole discretion. In addition, the Company may plan to offer 401(k) matching funds as a retirement benefit at a later time.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial ownership of the Company’s common stock by each of its executive officers and directors, individually and as a group and by each person who beneficially owns in excess of five percent of the common stock after giving effect to any exercise of warrants or options held by that person.
(1) Based upon 7,500,000 shares outstanding.
(2) Terry Blake is the spouse of Cliff Blake, the chief executive officer and sole director of the Company and thus the shares owned by Ms. Blake may be deemed to be beneficially owned by Mr. Blake in which case Mr. Blake would own 2,000,000 shares or 28%.
(3) Julie Galpin is the spouse of Devon Galpin, president and COO of the Company and thus the shares owned by Ms. Galpin may be deemed to be beneficially owned by Mr. Galpin in which case Mr. Galpin would own 2,000,000 shares or 28%.
(4) Joy Mautz is the spouse of Michael Mautz, vice president of the Company and thus the shares owned by Ms. Mautz may be deemed to be beneficially owned by Mr. Mautz in which case Mr. Mautz would own 2,000,000 shares or 28%.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The Company has promissory notes outstanding of $4,509 from monies advanced by Cliff Blake, an officer and sole director of the Company. The note bears interest at a rate of 6% per annum and is due in full in one lump payment in December 2015.
James Cassidy, a partner in the law firm which acts as counsel to the Company, is the sole owner and director of Tiber Creek Corporation which owns 250,000 shares of the Company's common stock. Tiber Creek Corporation has received consulting fees of $45,000 to date from the Company (and is eligible to receive an additional $20,000) and also holds shares in the Company. Tiber Creek and its affiliate, MB Americus LLC, a California limited liability company, each currently hold 250,000 shares in the Company.
James Cassidy and James McKillop, who is the sole officer and owner of MB Americus, LLC, were both formerly officers and directors of the Company. As the organizers and developers of Moosewood, Mr. Cassidy and Mr. McKillop were involved with the Company prior to the Mergers. Mr. Cassidy provided services to the Company without charge, including preparation and filing of the charter corporate documents and the registration statement on Form 10.
Certain officers, directors and five percent shareholders have family relationships amongst them:
Cliff Blake, an officer and director of the Company, and Terry Blake, a five percent shareholder of the Company, are married. Mr. and Mrs. Blake are also parents/step-parents of Joy Mautz, an officer of the Company, and Julie Galpin, an officer of the Company.
Michael Mautz, an officer of the Company, is married to Joy Mautz.
Devon Galpin, an officer of the Company, is married to Julie Galpin.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees incurred for each of the last two years for professional services rendered by the independent registered public accounting firm for the audits of the Company's annual financial statements and review of financial statements included in the Company's Form 10-K and Form 10-Q reports and services normally provided in connection with statutory and regulatory filings or engagements were as follows:
Tax Fees
The Company incurred $0 for tax related services.
All Other Fees
The Company incurred $0 for other fees by the principal accountant for the years ended December 31, 2014 and 2013.
The Company does not currently have an audit committee serving and as a result its board of directors performs the duties of an audit committee. The board of directors will evaluate and approve in advance, the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services. The Company does not rely on pre-approval policies and procedures.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following exhibits are incorporated herein by reference.
2.1++ Agreement and Plan of Merger
2.2++ Agreement and Plan of Merger
3.1+ Certificate of Incorporation
3.2+ By-laws
10.1+++ Factoring Agreements with TAB Bank
10.2+++ Guarantees regarding TAB Bank
10.3++++ Agreement with Tiber Creek Corporation
10.4++++ Promissory Note
10.5++++ Promissory Note
10.6++++ Promissory Note
10.7++++ Promissory Note
10.8++++ Promissory Note
31# Certification of Chief Executive Officer and Chief Financial Officer
32# Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Title 18, United States Code)
#Filed herewith.
+Previously filed on Form 10-12G on June 2, 2011 (File No.: 000-54427) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
++Previously filed on Form S-1 on November 13, 2012 (File No.: 333-184910) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
+++Previously filed on Form S-1 on February 1, 2013 (File No. 333-184910) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
++++Previously filed on Form S-1 on April 11, 2013 (File No. 333-184910) as the same exhibit number as the exhibit number listed here, and incorporated herein by this reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME OFFICE DATE
/s/ Cliff Blake Director March 31, 2015