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 the customer list of Loyalty Staffing Services (“Loyalty”), a California corporation.
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.
Critical Accounting
Policies and Estimates
Our
significant accounting policies are more fully described in the notes to our 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, 2015 and 2014 was $29,824
.
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 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 $4,180,834 and
$1,824,376 at December 31, 2015 and 2014, 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, 2015 as Compared to the Year Ended December 31, 2014
The following are the
consolidated results of our operations for the year ended December 31, 2015 compared to the year ended December 31, 2014.
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
32,874,503
|
|
|
$
|
18,003,628
|
|
|
$
|
14,870,875
|
|
|
|
82.6
|
%
|
Cost of revenues
|
|
|
29,936,133
|
|
|
|
16,137,224
|
|
|
|
13,798,909
|
|
|
|
85.5
|
%
|
Gross profit
|
|
|
2,938,370
|
|
|
|
1,866,404
|
|
|
|
1,071,966
|
|
|
|
57.4
|
%
|
Impairment of intangible assets
|
|
|
640,733
|
|
|
|
-
|
|
|
|
640,733
|
|
|
|
100.0
|
%
|
General and administrative expenses
|
|
|
2,632,050
|
|
|
|
1,604,707
|
|
|
|
1,027,343
|
|
|
|
64.0
|
%
|
Income (loss) from operations
|
|
|
(334,413
|
)
|
|
|
261,697
|
|
|
|
(596,110
|
)
|
|
|
-227.8
|
%
|
Gain on sale of property and equipment
|
|
|
5,292
|
|
|
|
-
|
|
|
|
5,292
|
|
|
|
100.0
|
%
|
Gain on settlement agreement
|
|
|
75,000
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
100.0
|
%
|
Interest and other expense, net
|
|
|
(273,632
|
)
|
|
|
(185,255
|
)
|
|
|
(88,377
|
)
|
|
|
47.7
|
%
|
Income (loss) before income tax
|
|
|
(527,753
|
)
|
|
|
76,442
|
|
|
|
(604,195
|
)
|
|
|
-790.4
|
%
|
Income tax expense
|
|
|
111,102
|
|
|
|
66,676
|
|
|
|
44,426
|
|
|
|
66.6
|
%
|
Net income (loss)
|
|
$
|
(638,855
|
)
|
|
$
|
9,766
|
|
|
$
|
(648,621
|
)
|
|
|
-6641.6
|
%
|
Revenues
Our revenues increased by $14,870,875,
or 82.6%, during the year ended December 31, 2015 as compared to the same period in 2014. The increase in revenues is due primarily
to additional clients picked up towards the end of the quarter ended March 31, 2015. These new clients provided for additional
revenue during 2015. In addition, the increase in revenues is also partially due to additional customers from the acquisition of
Loyalty on February 11, 2014. As a result of the Loyalty acquisition, the revenues during 2015 reflect a full twelve months of
additional revenue from the acquired customers, whereas the revenues from the same period in 2014 only reflects additional revenues
generated from the additional Loyalty customers subsequent to the acquisition date of February 11, 2014.
Cost
of revenues
Our cost of revenues, which represent primarily
staffing salaries and workers compensation insurance costs, increased by $13,798,909, or 85.5%, during the year ended December
31, 2015 as compared to the same period in 2014. The increase in cost of revenues is due to the increase in revenues for the period.
The cost of revenues increased at a higher rate than the percentage increase in revenues due to an increase in the state and federal
unemployment tax rates for our staffing employees as compared to the same period in 2014. We expect the cost of revenues to continue
to increase as our revenues increase.
Operating
expenses
During the year ended December 31, 2015,
we had an impairment charge of $640,733 relating to the impairment of an intangible asset acquired from the purchase of Loyalty
in 2014. This expense was a one-time loss that we do not expect to occur in the future.
General and administrative expenses increased
by $1,027,343, or 64.0%, during the year ended December 31, 2015 as compared to the same period in 2014. The increase in operating
expenses in 2015 was due primarily to increased payroll costs associated with additional headcount added to manage the increase
in our volume. In addition, we incurred an increase in professional fees during 2015 as a result of increased legal and accounting
fees necessary to complete our registration statement, as well as attorney fees associated with the Loyalty settlement agreement.
The increase in operating expenses in 2015 was also due to a full twelve months of higher expenses associated with increased payroll
and other costs from the acquisition of Loyalty, whereas the operating expenses from the same period in 2014 only reflect additional
operating expenses incurred subsequent to the purchase date of February 11, 2014.
Other income/expense
Other income/expense during the nine months
ended December 31, 2015 included a $5,292 gain on the sale of property and equipment during the period, as well as a $75,000 gain
resulting from the settlement agreement with the seller of Loyalty. These gains were offset by interest and other expense of $273,632,
which represents interest expense on our outstanding notes payable, as well as financing charges from our factoring arrangements.
During 2014, we had interest and other expenses of $185,255. Interest expense was higher during 2015 primarily due to an increase
in accounts receivables factored during the period.
Notes
Payable
The Company also owes an aggregate total
of $250,000 to the seller of Loyalty, which is non-interest bearing and due in 30 monthly payment installments of $10,000 commencing
August 2015 through January 2018.
The Company has a loan payable outstanding
for the purchase of a vehicle. The balance outstanding as of December 31, 2015 amounted to $36,228, which is payable in monthly
installments of $756 at an interest rate of 13% per annum over 72 months through August 2021.
In
the past, we have borrowed monies from officers to find the operations of the Company. 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, 2015, we had cash of
$565,040 and accounts receivable of $733,009. Our current assets of $1,298,049 exceed our current liabilities of $1,248,724 by
$49,325.
The Company’s proposed expansion
plans and business process improvements over the next two years will necessitate additional capital and financing. Accordingly,
the Company plans to raise between $2 million and $4 million of outside funding in the next year, for the purposes of funding its
own accounts receivable factoring company, establishing and operating its own worker’s compensation captive unit, and acquiring
competitors and complementary service providers in its sector. Of this amount, the Company expects that it will need funding of
$1.0 million to $1.5 million to achieve its expanded growth and profit objectives in its existing core business over the next two
years.
The Company anticipates that it will require
approximately $700,000 to $1.0 million to establish and fund its factoring facility. These amounts would be used to fund payroll
and taxes up to the point that these amounts are collect from the client. Factoring internally would mean self-financing, resulting
in a savings to the Company. No additional material or regulatory costs would be incurred at this point. If the Company were to
offer factoring to other entities (i.e. outside of the Company) then Company would be subject to all the rules and regulations
surrounding the operations of a finance company. Once the factoring entity is successfully set-up, the Company expects to realize
ongoing savings from the reduced factoring costs.
The Company expects that establishing and
funding its workers’ compensation captive will separately require funding of approximately $500,000 to $1.0 million, which
will include a substantial deposit to establish the captive as a self-insured funding unit. The costs include a deposit needed
of $500,000 or more, set-up costs of $50,000 to $60,000, and administrative fees of approximately $15,000 to $20,000 per year.
Legal requirements for the formation of a captive vary by state. Currently, Hawaii and Nevada offer the most favorable requirements
for establishing a captive for the Company. Any captive would still require catastrophic coverage beyond the normal coverage provided
by the captive. There are numerous companies which provide direction and assistance for establishing a captive, and the Company
would plan to engage such an advisory company. These companies are primarily responsible for ensuring that the captive meets the
regulatory requirements initially and annually in the applicable state of formation. These advisors also assist in risk assessment,
legal deposit requirements and claims administration. An impact on the Company’s current business from the captive would
be the ability to retain the large deposit amounts required by insurance providers to remain in the control of the Company. As
with the factoring entity, once the workers’ compensation captive is successfully set-up, the Company expects to realize
ongoing savings from the reduced workers’ compensation costs.
There can be no assurance that the Company’s
activities will generate sufficient revenues to sustain its operations without additional capital, or if additional capital is
needed, that such funds, if available, will be obtainable on terms satisfactory to the Company. Accordingly, given the Company’s
limited cash and cash equivalents on hand, the Company will be unable to implement its contemplated business plans and operations
(including its goals of establishing a factoring entity and workers’ compensation captive) unless it obtains additional financing
or otherwise is able to generate sufficient revenues and profits. The Company may raise additional capital through sales of debt
or equity, obtain loan financing or develop and consummate other alternative financial plans.
The Company anticipates it will develop
a budget for marketing activities consisting of two levels of marketing: client marketing and acquisition marketing. Client marketing
costs are associated with sales staff with the single purpose to market to current and potential clients. Acquisition marketing
costs are those incurred for investor relations, traveling, expenses for client acquisitions, and case by case joint marketing
material for specific acquisitions as they occur.
Liquidity
To date, the Company has not suffered from
a significant liquidity issue. The main liquidity issue was addressed when the Company entered into new factoring agreements that
went into effect September 1, 2012 with TAB Bank, which provided for a $1,000,000 factor commitment. In addition, the Company may
borrow from time to time as available, sources of funds from its officers and/or directors as needed
As the Company grows in size, the savings
from this new factoring arrangement will continue to accrue and enhance the Company’s profitability and cash flow. Based
on this budget and the projected operations of the Company, there are no currently anticipated liquidity issues which would pose
a threat to the current business and operations of the Company.
Net
cash provided by operating activities was $48,725 for the year ended December 31, 2015 compared to $884,793 for 2014.
The
significant change between the years was the result of increases during 2014 to accounts payable of $327,912 and other current
liabilities of $359,487. As these amounts were paid during 2015, the net cash provided from operations was lower during 2015.
We
had net cash flows used in investing activities during 2015 of $90,030, which consisted of $102,530 in payments for notes receivable
lending, offset by $12,500 in proceeds from the sale of property and equipment. We had no cash used in investing activities during
the year ended December 31, 2014.
We had net cash used in financing activities
of $180,893 during 2015 resulting from payments of $175,000 on the note payable due to the seller of Loyalty, $1,384 in payments
on a car loan payable and $4,509 in payments on an outstanding note payable due to an officer. We had net cash used in financing
activities of $151,598 during the year ended December 31, 2014 resulting from payments of our outstanding note payable due to an
officer.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST
RATE STAFFING CORPORATION
FINANCIAL
STATEMENTS
December
31, 2015 and 2014
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
and Shareholders of
First Rate Staffing Corporation:
We
have audited the accompanying balance sheets of First Rate Staffing Corporation (the “Company”) as of December 31,
2015 and 2014, and the related statements of operations, changes in shareholders’ equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these 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 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 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 financial statements referred to the above present fairly, in all material respects, the financial position of
First Rate Staffing Corporation as of December 31, 2015 and 2014, and the 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 financial statements have been prepared assuming that the Company will continue as a going concern. As described in
the Note 4 to the financial statements, the Company has incurred an accumulated deficit from inception to December 31, 2015. 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 financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Anton & Chia,
LLP
Newport Beach, California
March 30, 2016
FIRST RATE STAFFING CORPORATION
|
BALANCE SHEETS
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
565,040
|
|
|
$
|
787,238
|
|
Accounts receivable, net
|
|
|
733,009
|
|
|
|
330,538
|
|
Notes receivable - related party, current portion
|
|
|
-
|
|
|
|
8,388
|
|
Total current assets
|
|
|
1,298,049
|
|
|
|
1,126,164
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
53,309
|
|
|
|
19,823
|
|
Intangible assets, net
|
|
|
272,522
|
|
|
|
1,206,429
|
|
Notes receivable - related party, net of current portion
|
|
|
98,918
|
|
|
|
-
|
|
Deposit and other assets
|
|
|
7,640
|
|
|
|
6,200
|
|
Total assets
|
|
$
|
1,730,438
|
|
|
$
|
2,358,616
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
355,452
|
|
|
$
|
385,571
|
|
Accrued expenses
|
|
|
780,863
|
|
|
|
534,735
|
|
Car loan payable, current portion
|
|
|
4,623
|
|
|
|
-
|
|
Notes payable - current portion, net of discount
|
|
|
107,786
|
|
|
|
474,837
|
|
Notes payable - related parties
|
|
|
-
|
|
|
|
4,509
|
|
Total current liabilities
|
|
|
1,248,724
|
|
|
|
1,399,652
|
|
Car loan payable, net of current portion
|
|
|
31,605
|
|
|
|
-
|
|
Notes payable, net of current portion
|
|
|
130,000
|
|
|
|
-
|
|
Total liabilities
|
|
|
1,410,329
|
|
|
|
1,399,652
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 20,000,000 shares authorized, zero shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value, 100,000,000 shares authorized, 7,500,000 shares issued and authorized at December 31, 2015 and December 31, 2014
|
|
|
750
|
|
|
|
750
|
|
Additional paid-in capital
|
|
|
1,089,802
|
|
|
|
1,089,802
|
|
Accumulated deficit
|
|
|
(770,443
|
)
|
|
|
(131,588
|
)
|
Total stockholders' equity
|
|
|
320,109
|
|
|
|
958,964
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,730,438
|
|
|
$
|
2,358,616
|
|
The accompanying notes are an integral part
of these consolidated financial statements
FIRST RATE STAFFING CORPORATION
|
STATEMENTS OF OPERATIONS
|
|
|
Year Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
32,874,503
|
|
|
$
|
18,003,628
|
|
Cost of revenues
|
|
|
29,936,133
|
|
|
|
16,137,224
|
|
Gross profit
|
|
|
2,938,370
|
|
|
|
1,866,404
|
|
Impairment of intangible assets
|
|
|
640,733
|
|
|
|
-
|
|
General and administrative expenses
|
|
|
2,632,050
|
|
|
|
1,604,707
|
|
Income (loss) from operations
|
|
|
(334,413
|
)
|
|
|
261,697
|
|
Gain on sale of property and equipment
|
|
|
5,292
|
|
|
|
-
|
|
Gain on settlement agreement
|
|
|
75,000
|
|
|
|
-
|
|
Interest and other expense, net
|
|
|
(273,632
|
)
|
|
|
(185,255
|
)
|
Income (loss) before income tax
|
|
|
(527,753
|
)
|
|
|
76,442
|
|
Income tax expense
|
|
|
111,102
|
|
|
|
66,676
|
|
Net income (loss)
|
|
$
|
(638,855
|
)
|
|
$
|
9,766
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,500,000
|
|
|
|
7,442,466
|
|
The accompanying notes are an integral part
of these consolidated financial statements
FIRST RATE STAFFING CORPORATION
|
STATEMENTS OF CHANGES IN STOCKHOLDERS’
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
-
|
|
|
$
|
-
|
|
|
|
7,000,000
|
|
|
$
|
700
|
|
|
$
|
89,852
|
|
|
$
|
(141,354
|
)
|
|
$
|
(50,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
50
|
|
|
|
999,950
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,766
|
|
|
|
9,766
|
|
Balance, December 31, 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
7,500,000
|
|
|
|
750
|
|
|
|
1,089,802
|
|
|
|
(131,588
|
)
|
|
|
958,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(638,855
|
)
|
|
|
(638,855
|
)
|
Balance, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
7,500,000
|
|
|
$
|
750
|
|
|
$
|
1,089,802
|
|
|
$
|
(770,443
|
)
|
|
$
|
320,109
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
FIRST RATE STAFFING CORPORATION
|
STATEMENTS OF CASH FLOWS
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(638,855
|
)
|
|
$
|
9,766
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
302,092
|
|
|
|
266,098
|
|
Provision for bad debt
|
|
|
54,186
|
|
|
|
-
|
|
Amortization of discount on note payable
|
|
|
12,949
|
|
|
|
30,474
|
|
Impairment charge
|
|
|
640,733
|
|
|
|
-
|
|
Gain on sale of property and equipment
|
|
|
(5,292
|
)
|
|
|
-
|
|
Gain on settlement agreement
|
|
|
(75,000
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(456,657
|
)
|
|
|
(176,508
|
)
|
Prepaid expense and other current assets
|
|
|
-
|
|
|
|
67,484
|
|
Deposits and other assets
|
|
|
(1,440
|
)
|
|
|
80
|
|
Accounts payable
|
|
|
(30,119
|
)
|
|
|
327,912
|
|
Accrued expenses
|
|
|
246,128
|
|
|
|
359,487
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
48,725
|
|
|
|
884,793
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Notes receivable - related party borrowing
|
|
|
(102,530
|
)
|
|
|
-
|
|
Proceeds from sale of property and equipment
|
|
|
12,500
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(90,030
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Payments on note payable
|
|
|
(175,000
|
)
|
|
|
-
|
|
Payments on car loan payable
|
|
|
(1,384
|
)
|
|
|
-
|
|
Payment on note payable - related party, net
|
|
|
(4,509
|
)
|
|
|
(151,598
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(180,893
|
)
|
|
|
(151,598
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(222,198
|
)
|
|
|
733,195
|
|
Cash, beginning of the year
|
|
|
787,238
|
|
|
|
54,043
|
|
Cash, end of year
|
|
$
|
565,040
|
|
|
$
|
787,238
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
5,094
|
|
|
$
|
1,630
|
|
Income taxes paid
|
|
$
|
5,157
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
Issuance of common stock for acquisition of Loyalty Staffing Services, Inc.
|
|
$
|
-
|
|
|
$
|
1,000,000
|
|
Issuance of note payable for acquisition of Loyalty Staffing Services, Inc.
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Acquisition of property and equipment through loan
|
|
$
|
49,612
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these consolidated financial statements
FIRST RATE STAFFING CORPORATION
|
NOTES TO 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 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.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial
statements. Such financial statements and accompanying notes are the representations of the Company’s management, who are
responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted
in the United States of America in all material respects, and have been consistently applied in preparing the accompanying financial
statements.
Use
of Estimates
In
preparing these financial statements, management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the
reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash
The
Company considers all highly-liquid investments with maturities of three months or less when purchased to be cash equivalents.
The Company had no cash equivalents as of December 31, 2015 or 2014.
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, 2015 and 2014, the Company had $315,040 and $537,238, respectively, 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, 2015 and 2014 was $29,824
.
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 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 $4,180,834
and $1,824,376 at December 31, 2015 and 2014, 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 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.
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 performed this impairment analysis
of its intangible assets at December 31, 2015 and determined that the sum of the projected future cash flows was less than the
carrying value of the intangible asset. Accordingly, the Company recorded an impairment charge of $640,733 to write down the asset
to its estimated fair value.
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 measured the fair value of its intangible assets using Level 3 inputs in estimating its future discounted cash flows to test for impairment as of December 31, 2015. The Company used an estimated discount rate of 10% which approximates the Company’s borrowing rate in performing the impairment test.
|
The Company has determined that the book value of its outstanding
financial instruments as of December 31, 2015 and 2014 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.
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 (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 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, 2015 or 2014 as there were no common stock equivalents outstanding.
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 $770,443. This accumulated deficit is primarily the result of a non cash write off of an impaired asset of $640,733. The Company
also has substantial expenses associated with being a public company.
The Company anticipates that it will require
approximately $700,000 to $1.0 million to establish and fund its factoring facility. These amounts would be used to fund payroll
and taxes up to the point that these amounts are collect from the client. Factoring internally would mean self-financing, resulting
in a savings to the Company. No additional material or regulatory costs would be incurred at this point. Once the factoring entity
is successfully set-up, the Company expects to realize ongoing savings from the reduced factoring costs.
The Company’s continuation as a going
concern is dependent on management’s ability to develop profitable operations, and / or obtain additional financing from
its shareholders and / or other third parties. In order to address the need to satisfy its continuing obligations and realize its
long term strategy, management’s plans include continuing to fund operations with cash received from financing activities.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt
about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should
the Company be unable to continue as a going concern.
5.
PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following as of December 31, 2015 and 2014.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
5,658
|
|
|
$
|
5,658
|
|
Vehicles
|
|
|
63,612
|
|
|
|
28,000
|
|
|
|
|
69,270
|
|
|
|
33,658
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
15,961
|
|
|
|
13,835
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,309
|
|
|
$
|
19,823
|
|
Depreciation
expense for the years ended December 31, 2015 and 2014 amounted to $8,918 and $6,660, 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 renegotiate the note payable from $500,000 to $425,000. The
reduction in the note payable has been recorded as gain on settlement agreement in the accompanying statement of operations for
the year ended December 31, 2015. 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 Company paid $125,000 in June 2015, and began paying the monthly installments
of $10,000 beginning in August 2015 in connection with the agreement. The remaining balance due of $250,000 as of December 31,
2015 is reflected as a note payable (see Note 11).
Assets acquired and liabilities assumed
were recorded at their estimated fair values as of the acquisition date.
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 year ended December 31, 2015 and 2014 amounted to $293,173 and $259,438, 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
|
|
$
|
90,841
|
|
2017
|
|
|
90,841
|
|
2018
|
|
|
90,840
|
|
|
|
$
|
272,522
|
|
The amount of Loyalty’s revenue and earnings included
in the Company’s statement of operations for the year ended December 31, 2014. 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.
|
|
Revenues
|
|
|
Earnings (Loss)
|
|
|
|
|
|
|
|
|
|
|
Actual from February 11, 2014 to December 31, 2014
|
|
$
|
7,005,170
|
|
|
$
|
225,426
|
|
|
|
|
|
|
|
|
|
|
2014 supplemental pro forma (unaudited) from January 1, 2014 to December 31, 2014
|
|
$
|
18,922,592
|
|
|
$
|
244,523
|
|
7. ACCRUED EXPENSES
Accrued expenses consisted of the following
as of December 31, 2015 and December 31, 2014.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Accrued payroll expenses
|
|
$
|
590,411
|
|
|
$
|
430,326
|
|
Other accrued operating expenses
|
|
|
185,056
|
|
|
|
99,013
|
|
Accrued interest
|
|
|
5,396
|
|
|
|
5,396
|
|
|
|
$
|
780,863
|
|
|
$
|
534,735
|
|
8. NOTES RECEIVABLE – RELATED
PARTY
The Company issued a series of unsecured
notes receivables due from an officer of the Company totaling $98,918 and $8,388 as of December 31, 2015 and 2014, respectively.
Of the outstanding borrowings at December 31 2015, $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.
SHAREHOLDERS’ EQUITY
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,
2015 and 2014, 7,500,000 shares of common stock were issued and outstanding. There was no preferred stock were issued or outstanding
as of December 31, 2015 or 2014.
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).
Each
of the Company’s five officers are eligible for restricted stock option grants for meeting revenue growth goals. Starting
with the 12 months ending July 1, 2016, for each $5 million in new incremental annual revenue generated (through internal growth,
acquisition, and/or merger), each of the officers will be eligible for an option grant of 100,000 options for each additional $5
million generated annually. The options would have an exercise price of $0.05 per share and are exercisable at the end of each
measured periods. No options have been granted during the year ended December 31, 2015. The first eligible measurement period is
the 12 months ended July 1, 2016.
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 $0 and $4,509 as of December 31, 2015 and 2014, respectively. The notes earned interest at a rate
of 6% per annum and were due in full in one lump payment in December 2015. There were no financial covenant requirements under
the notes.
11. NOTES PAYABLE – ACQUISITION
Notes payable resulting from the acquisition
of Loyalty consisted of the following.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Cash payments due to the seller of Loyalty, $50,000 due within 5 days and $50,000 within 60 days of the UCC and personal guarantee releases.
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Promissory Note due to seller - Payable in four payments of $75,000 every 6 months after the closing date, with a remaining and final payment of $100,000 made at 30 months from the closing date. The note bears no interest and can be converted into shares of the company's common stock at any time at $2 per share. The Company was in default under the terms of the note due to a dispute with the debt holder, and the terms were in the process of being renegotiated. Until a settlement was reached, the outstanding balances on the note were presented as current liabilities. The settlement agreement was reached with the seller effective on June 24, 2015 (see below).
|
|
|
-
|
|
|
|
400,000
|
|
Settlement 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 and are no longer convertible into common stock.
|
|
|
250,000
|
|
|
|
-
|
|
|
|
$
|
250,000
|
|
|
$
|
500,000
|
|
Discount on notes payable
|
|
|
(12,214
|
)
|
|
|
(25,163
|
)
|
Notes payable, net
|
|
$
|
237,786
|
|
|
$
|
474,837
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of notes payable
|
|
|
107,786
|
|
|
|
474,837
|
|
Notes payable, net of current portion
|
|
$
|
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
|
|
$
|
120,000
|
|
2017
|
|
|
120,000
|
|
2018
|
|
|
10,000
|
|
|
|
$
|
250,000
|
|
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 year ended December 31, 2015 and 2014, amortization of the discount amounted to $12,949 and $30,474, respectively. As
of December 31, 2015 and 2014, the note payable is presented net of a discount of $12,214 and $25,163, respectively.
12.
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 December 31, 2015 amounted to $36,228.
Expected future maturity of the car loan payable is as follows
for each of the years ended December 31.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
|
|
2016
|
|
$
|
4,623
|
|
2017
|
|
|
5,242
|
|
2018
|
|
|
5,972
|
|
2019
|
|
|
6,804
|
|
2020
|
|
|
7,751
|
|
Thereafter
|
|
|
5,836
|
|
Total
|
|
$
|
36,228
|
|
13.
INCOME TAXES
The components of the
provision for income taxes are summarized as follows for the years ended December 31:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
89,741
|
|
|
$
|
52,529
|
|
State
|
|
|
21,261
|
|
|
|
14,147
|
|
Total current
|
|
|
111,102
|
|
|
|
66,676
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
111,102
|
|
|
$
|
66,676
|
|
Significant components
of deferred income tax assets and liabilities are as follows:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
State income taxes
|
|
$
|
9,282
|
|
|
$
|
3,837
|
|
Depreciation and amortization
|
|
|
420,509
|
|
|
|
72,072
|
|
Total, net
|
|
|
429,791
|
|
|
|
75,909
|
|
Valuation allowance
|
|
|
(429,791
|
)
|
|
|
(75,909
|
)
|
Deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
At
December 31, 2015, 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, 2015 and 2014, 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 statements of operations. There was no accrued interest
or penalties as of December 31, 2015 or 2014.
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 - 2015.
14.
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.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
|
|
2016
|
|
$
|
31,152
|
|
2017
|
|
|
31,152
|
|
2018
|
|
|
5,476
|
|
Total
|
|
$
|
67,780
|
|
Litigation
During
the ordinary course of the Company’s business, it is subject to various claims and litigation. Management is not aware of
any outstanding litigation which would have a significant impact on the Company’s financial statements.