NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS
First Rate Staffing Corporation (“First
Rate” or “the Company”), formerly known as Moosewood Acquisition Corporation (“Moosewood”) was incorporated
on April 20, 2011 under the laws of the State of Delaware.
The Company provides recruiting and staffing
services for temporary positions in the light industrial, distribution center, assembly, and clerical areas to its clients in California
and Arizona, with an option for the clients and candidates to choose the most beneficial working arrangements.
2. BASIS OF PRESENTATION
The accompanying consolidated balance sheet
as of December 31, 2015, which has been derived from the Company’s audited financial statements as of that date, and the
unaudited consolidated financial information of the Company as of March 31, 2016 and for the three months ended March 31, 2016
and 2015, has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the
opinion of management, such financial information includes all adjustments considered necessary for a fair presentation of the
Company’s financial position at such date and the operating results and cash flows for such periods. Operating results for
the interim period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the entire year.
Certain information and footnote disclosure
normally included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant
to the rules of the United States Securities and Exchange Commission (“SEC”). These unaudited consolidated financial
statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed on March 30, 2016.
3. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The summary of significant accounting policies
presented below is designed to assist in understanding the Company’s consolidated financial statements. Such consolidated
financial statements and accompanying notes are the representations of the Company’s management, who are responsible for
their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States
of America in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Use of Estimates
In preparing these consolidated financial
statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount
of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash
The Company considers all highly-liquid
investments with original maturities of three months or less when purchased to be cash equivalents. There were no cash equivalents
at March 31, 2016 and December 31, 2015. The Company maintains its cash in bank deposit accounts which at times may exceed federally
insured limits. The Company has not experienced any losses related to this concentration of risk. As of March 31, 2016, the Company
had $284,705 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 was $29,824 as of March 31, 2016 (unaudited) and December 31, 2015.
The Company entered into an accounts receivable
factoring arrangement with a non-related third party financial institution (the “Factor”). Pursuant to the terms of
the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a recourse
basis for credit approved accounts. The Factor remits 90% of the accounts receivable balance to the Company, with the remaining
balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer.
An administrative fee of 0.015% per diem is charged on the gross amount of accounts receivables assigned to Factor, plus interest
to be calculated at 0.011806% per day. The total amount of accounts receivable factored was $2,401,839 (unaudited) and $4,180,834
at March 31, 2016 and December 31, 2015, respectively.
Fair Value of Financial Instruments
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific
asset or liability.
GAAP provides for a three-level hierarchy
of inputs to valuation techniques used to measure fair value, defined as follows:
•
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Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
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•
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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:
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–
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Quoted prices for similar assets or liabilities in active markets
|
|
–
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Quoted prices for identical or similar assets or liabilities in markets that are not active
|
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–
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Inputs other than quoted prices that are observable for the asset or liability
|
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–
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Inputs that are derived principally from or corroborated by observable market data by correlation or other means
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•
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Level 3 — Inputs that are unobservable and reflect
the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based
on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount
of expected cash flows). The Company did not measure any financial instruments on a recurring basis using significantly unobservable
inputs (Level 3) as of March 31, 2016.
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Concentration of Credit Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its
cash with high quality banking institutions. From time to time, the Company may maintain cash balances at certain institutions
in excess of the Federal Deposit Insurance Corporation limit. Historically, the Company has not experienced any losses on deposits.
The Company’s policy is to maintain
an allowance for doubtful accounts, if any, for estimated losses resulting from the inability of its customer to pay. However,
if the financial condition of the Company’s customers were to deteriorate rapidly, resulting in nonpayment, the Company could
be required to provide for additional allowances, which would decrease operating income in the period that such determination was
made.
Property and Equipment
Property and equipment is presented at
cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets
are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation
and amortization applicable to retired assets are removed from the Company’s accounts, and the gain or loss on dispositions,
if any, is recognized in the consolidated statements of operations
Equipment are recorded at cost and depreciated
using the straight-line method over an estimated useful life of 5 years.
Intangible Assets
The Company has intangible assets recorded
as part of a business acquisition (see Note 6). Intangible assets with definite useful lives, representing customer relationships,
are being amortized over their remaining estimated useful lives of 3 years using the straight-line method, which represents the
economic benefit pattern of the intangible assets.
Impairment of Long-Lived Assets
Long-lived assets, including intangibles,
are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable. The
evaluation requires that assets be grouped at the lowest level for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest charges)
is less than the carrying value of the assets, the assets will be written down to their estimated fair value and such loss is recognized
in income from continuing operations in the period in which the determination is made. The Company’s management currently
believes there is no impairment of its long-lived assets as of March 31, 2016 and December 31, 2015. There can be no assurance,
however, that market conditions will not change or demand for the Company’s business model will continue. Either of these
could result in future impairment of long-lived assets.
Revenue Recognition
The Company’s revenue is derived
from providing temporary staffing services to its clients. The Company recognizes revenue in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 605,
Revenue Recognition
.
In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists,
the service is performed and collectability of the resulting receivable is reasonably assured.
The Company recognizes its revenue from
temporary staffing services on a gross basis in accordance with the guidance in FASB ASC 605-45 which outlines various factors
or indicators that assist in determining whether revenue should be recognized on a gross or a net basis. In connection with this
guidance, the Company believes the gross basis is appropriate, as the Company is the primary obligor in its arrangements and is
responsible for fulfilling the services being provided to the individual customers and for compensating the individual service
providers, regardless of whether the customer accepts the work.
Cost of Revenue
Cost of revenue consists of wages, related
payroll taxes, workers compensation, and employee benefits of the Company’s employees while they work on contract assignment
as temporary staff of the Company’s customers.
Net Income (Loss) Per Share
Basic income 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 per share reflect per share amounts that would have resulted if diluted potential common stock had been converted
to common stock. The Company had no common stock equivalents outstanding for the three months ended March 31, 2016 and
2015.
Income Taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The likelihood of realizing the tax benefits related to a potential deferred tax asset is evaluated, and a valuation allowance
is recognized to reduce that deferred tax asset if it is more likely than not that all or some portion of the deferred tax asset
will not be realized. Deferred tax assets and liabilities are calculated at the beginning and end of the year; the change in the
sum of the deferred tax asset, valuation allowance and deferred tax liability during the year generally is recognized as a deferred
tax expense or benefit. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations
in the period that includes the enactment date.
The Company evaluates the accounting for
uncertainty in income tax recognized in its financial statements and determines whether it is more likely than not that a tax position
will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in its financial
statements. For those tax positions where it is “not more likely than not” that a tax benefit will be sustained, no
tax benefit is recognized. Where applicable, associated interest and penalties are also recorded. The Company has not accrued for
any such uncertain tax positions as of March 31, 2016 or December 31, 2015.
Recent Accounting Pronouncements
There are no recently issued accounting
pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results
of operations, or cash flows.
4. GOING CONCERN
The Company has an accumulated deficit
of $762,135 since inception. This accumulated deficit is primarily the result of increased operating expenses associated with professional
fees necessary to complete its merger transaction and continue as a public company, as well as revenues historically being at below
break-even levels. Going forward, the Company expects these annual expenses to be lower. On February 11, 2014, the Company also
acquired the customer list of Loyalty Staffing Services, Inc. (see Note 6), which is expected to increase cash flows from operations.
Management believes this will allow the Company to operate at profitable level in the future.
The Company anticipates that it will require
approximately $700,000 to $1.0 million to establish and fund its factoring facility. These amounts would be used to fund payroll
and taxes up to the point that these amounts are collect from the client. Factoring internally would mean self-financing, resulting
in a savings to the Company. No additional material or regulatory costs would be incurred at this point. Once the factoring entity
is successfully set-up, the Company expects to realize ongoing savings from the reduced factoring costs.
The Company’s continuation as a going
concern is dependent on management’s ability to develop profitable operations, and / or obtain additional financing from
its shareholders and / or other third parties. In order to address the need to satisfy its continuing obligations and realize its
long term strategy, management’s plans include continuing to fund operations with cash received from financing activities.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial
doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities
that may result should the Company be unable to continue as a going concern.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following as of March 31, 2016 and December 31, 2015.
|
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March 31,
|
|
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December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Furniture and equipment
|
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$
|
5,658
|
|
|
$
|
5,658
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|
Vehicles
|
|
|
63,612
|
|
|
|
63,612
|
|
|
|
|
69,270
|
|
|
|
69,270
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
19,406
|
|
|
|
15,961
|
|
|
|
|
|
|
|
|
|
|
|
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$
|
49,864
|
|
|
$
|
53,309
|
|
Depreciation expense
for the three months ended March 31, 2016 and 2015 amounted to $3,445 and $1,665, respectively.
6. ACQUISITION
On February 11, 2014, the Company entered
into an agreement to purchase the customer list of Loyalty Staffing Services, Inc. (“Loyalty”), a California corporation,
for an aggregate purchase price of $1,444,363 consisting of a cash payment of $100,000, along with a $400,000 note payable, net
of a discount of $55,637 for imputed interest, and 500,000 shares issued of the Company’s common stock, valued at the estimated
fair value of $2 per share. The total amount due of $500,000 was payable as follows; 1) $50,000 of the purchase price would be
paid within five days of the release of certain Uniform Commercial Code liens and personal guarantees, 2) an additional $50,000
would be paid sixty days from the date of such release, 3) the Company executed a promissory note to the seller for $400,000, payable
in four installments of $75,000 every six months after the closing date of the agreement, with a remaining and final payment of
$100,000 payable 30 months after the closing date.
The
Company was in dispute with the seller of Loyalty, Nancy Esteban, concerning the terms of the cash portion and note payable portion
of the payout in the original transaction described above. The Company reached a settlement with Ms. Esteban on June 24, 2015.
In connection with the settlement agreement, the parties agreed to reduce the total note payable portion of the purchase price
from $500,000 to $425,000. Per the terms of the settlement agreement, the aggregate amount due of $425,000 is payable as follows;
$125,000 is due upon signing of the agreement, and the remaining $300,000 is payable in 30 monthly installments of $10,000 starting
in August 2015 through February 2018. The remaining balance due of this note payable amounted to $220,000 as of March 31, 2016
(see Note 9).
Assets acquired and liabilities assumed
were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were
based on valuations using the income approach.
The purchase price allocation was allocated as follows:
Recognized amounts of identifiable assets acquired
and liabilities assumed, at fair value
Intangible assets
|
|
$
|
1,465,867
|
|
Accounts payable
|
|
|
(21,504
|
)
|
|
|
$
|
1,444,363
|
|
Intangible assets acquired represented
customer relationships which had an estimated useful life of 5 years. During the year ended December 31, 2015, the Company recorded
an impairment charge of $640,733 to write down the carrying value of the intangible assets to their estimated fair value. The adjusted
carrying amount of the intangible assets after the impairment loss is being amortized over a remaining estimated useful life of
3 years.
Amortization expense for intangible assets
for the three months ended March 31, 2016 and 2015 amounted to $22,710 and $73,294, respectively. Estimated future amortization
of intangible assets, after taking into account the impairment loss of $640,733 described above, is as follows.
Year Ended
|
|
|
|
December 31,
|
|
|
|
2016 (remainder of)
|
|
$
|
68,131
|
|
2017
|
|
|
90,841
|
|
2018
|
|
|
90,840
|
|
|
|
$
|
249,812
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|
7. ACCRUED EXPENSES
Accrued expenses consisted of the following
as of March 31, 2016 and December 31, 2015.
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March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll expenses
|
|
$
|
532,740
|
|
|
$
|
590,411
|
|
Other accrued operating expenses
|
|
|
207,219
|
|
|
|
185,056
|
|
Accrued interest
|
|
|
5,396
|
|
|
|
5,396
|
|
|
|
$
|
745,355
|
|
|
$
|
780,863
|
|
8. NOTES RECEIVABLE – RELATED
PARTY
The
Company issued a series of unsecured notes receivables due from an officer of the Company totaling $98,918 as of March 31, 2016
and December 31, 2015. Of the outstanding borrowings at March 31, 2016, $38,500 of the amounts bear interest at 6% per annum, and
the remainder of the amounts are non-interest bearing. The amounts are due in 2018 at the following due dates; $33,418 is due March
31, 2018, $19,500 is due June 30, 2018, $7,500 is due September 30, 2018 and $38,500 is due December 31, 2018.
9. NOTES PAYABLE – ACQUISITION
Notes payable resulting from the acquisition
of Loyalty consisted of the following.
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March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
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Settment Agreement Payable to seller - Payable in 30 monthly installments of $10,000 beginning August 15, 2015 through January 15, 2018. The amounts are non-interest bearing.
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|
$
|
220,000
|
|
|
$
|
250,000
|
|
|
|
$
|
220,000
|
|
|
$
|
250,000
|
|
Discount on notes payable
|
|
|
(10,728
|
)
|
|
|
(12,214
|
)
|
Notes payable, net
|
|
$
|
209,272
|
|
|
$
|
237,786
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of notes payable
|
|
|
109,272
|
|
|
|
107,786
|
|
Notes payable, net of current portion
|
|
$
|
100,000
|
|
|
$
|
130,000
|
|
Expected future maturity of long-term debt is as follows for
each of the years ended December 31.
Year Ended
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2016 (remainder of)
|
|
$
|
90,000
|
|
2017
|
|
|
120,000
|
|
2018
|
|
|
10,000
|
|
|
|
$
|
220,000
|
|
As the note payable from the acquisition
of Loyalty has no stated interest, the Company has imputed total interest of $55,637 using a rate of 10% per annum, which represents
the Company’s incremental borrowing rate for similar transactions. The discount is being amortized into interest expense
using the interest method. During the three months ended March 31, 2016 and 2015, amortization of the discount amounted to $1,486
and $8,491, respectively. As of March 31, 2016, the note payable is presented net of a discount of $10,728.
10. CAR LOAN PAYABLE
In August 2015, the Company purchased a
vehicle for business purposes for an aggregate price of $49,612. The Company financed $37,612 of the amount over 72 months at an
interest rate of 13%. The balance outstanding as of March 31, 2016 amounted to $35,190.
Expected future maturity of the car loan payable is as follows
for each of the years ended December 31.
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|
Year Ended
|
|
|
|
December 31,
|
|
|
|
|
|
2016 (remainder of)
|
|
$
|
3,585
|
|
2017
|
|
|
5,242
|
|
2018
|
|
|
5,972
|
|
2019
|
|
|
6,804
|
|
2020
|
|
|
7,751
|
|
Thereafter
|
|
|
5,836
|
|
Total
|
|
$
|
35,190
|
|
11.
COMMITMENTS
Leases
The
Company leases its office locations located in Torrance, California and Phoenix, Arizona under operating leases on a month-to-month
basis at monthly rates ranging from $737 to $3,211. The Company leases its offices located in Santa Fe Springs, California and
Ontario, California under a non-cancellable operating leases extending through March 2018.
The
following summarizes the amounts due in future periods under non-cancellable operating leases.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
|
|
2016 (remainder of)
|
|
$
|
23,364
|
|
2017
|
|
|
31,152
|
|
2018
|
|
|
5,476
|
|
Total
|
|
$
|
59,992
|
|