10-Q 1 v424381_10q.htm FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2015

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

For the transition period from to

Commission file number 000-54427

FIRST RATE STAFFING CORPORATION

(Exact name of registrant as specified in its charter)

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

2775 West Thomas Road

Suite 107

Phoenix, Arizona 85018

(Address of principal executive offices) (zip code)

602-442-5277

(Registrant’s telephone number, including area code)

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

x Yes ¨ No

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

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

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

¨ Yes x No

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

Class		Outstanding at November 16, 2015
Common Stock, par value $0.0001		7,500,000 shares

FIRST RATE STAFFING CORPORATION

Table of Contents		Page

PART I — FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at September 30, 2015 (Unaudited) and December 31, 2014	3

	Consolidated Statements of Operations (Unaudited) — Three and Nine Months Ended September 30, 2015 and 2014	4

	Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended September 30, 2015 and 2014	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

PART II — OTHER INFORMATION		22

Item 1.	Legal Proceedings	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 3.	Defaults upon Senior Securities	22

Item 4.	Mine Safety Disclosures	22

Item 5.	Other Information	23

Item 6.	Exhibits	23

Signatures		24

Exhibit Index

PART I

ITEM 1. FINANCIAL STATEMENTS

FIRST RATE STAFFING CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2015			2014
	(Unaudited)
Assets

Current assets
Cash	$	566,537		$	787,238
Accounts receivable, net		602,108			330,538
Notes receivable - related party, current portion		-			8,388
Total current assets		1,168,645			1,126,164

Property and equipment, net		56,754			19,823
Intangible assets, net		986,549			1,206,429
Notes receivable - related party, net of current portion		60,418			-
Deposit and other assets		7,640			6,200
Total assets	$	2,280,006		$	2,358,616

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable	$	222,532		$	385,571
Other current liabilities		748,754			534,735
Car loan payable, current portion		4,454
Notes payable - current portion, net of discount		96,300			474,837
Notes payable - related parties		2,391			4,509
Total current liabilities		1,074,431			1,399,652
Car loan payable, net of current portion		32,812			-
Notes payable, net of current portion		170,000			-
Total liabilities		1,277,243			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 September 30, 2015 (unaudited) and December 31, 2014		750			750
Additional paid-in capital		1,089,802			1,089,802
Accumulated deficit		(87,789	)		(131,588	)
Total stockholders' equity		1,002,763			958,964
Total liabilities and stockholders' equity	$	2,280,006		$	2,358,616

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

FIRST RATE STAFFING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2015			2014			2015			2014


Revenues	$	8,904,327		$	4,745,914		$	21,770,957		$	11,813,495
Cost of revenues		7,910,070			4,207,320			19,749,396			10,523,416
Gross profit		994,257			538,594			2,021,561			1,290,079
Operating expenses		723,302			417,498			1,876,634			1,102,696
Income from operations		270,955			121,096			144,927			187,383
Gain on sale of property and equipment		-			-			5,292			-
Gain on settlement agreement		-			-			75,000			-
Interest and other expense, net		(66,965	)		(46,162	)		(181,420	)		(127,860	)
Income before income tax		203,990			74,934			43,799			59,523
Income tax expense		-			-			-			-
Net income	$	203,990		$	74,934		$	43,799		$	59,523

Net income per share:
Basic and diluted	$	0.03		$	0.01		$	0.01		$	0.01

Weighted average shares outstanding:
Basic and diluted		7,500,000			7,500,000			7,500,000			7,423,077

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

FIRST RATE STAFFING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2015			2014

Operating activities
Net income	$	43,799		$	59,523
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense		225,353			190,538
Provision for bad debt		30,127			-
Amortization of discount on note payable		11,463			21,794
Gain on sale of property and equipment		(5,292	)		-
Gain on settlement agreement		(75,000	)		-
Changes in operating assets and liabilities:
Accounts receivable		(301,697	)		(16,323	)
Prepaid expense and other current assets		-			67,484
Deposits and other assets		(1,440	)		80
Accounts payable		(163,039	)		60,470
Other current liabilities		214,019			19,595

Net cash provided by (used in) operating activities		(21,707	)		403,161

Investing activities
Payments for borrowing on notes receivable - related party		(64,030	)		-
Proceeds from sale of property and equipment		12,500			-
Net cash (used in) investing activities		(51,530	)		-

Financing activities
Payments on note payable		(145,000	)		-
Payments on car loan payable		(346	)		-
Payments on note payable - related party		(2,118	)		(119,450	)

Net cash (used in) financing activities		(147,464	)		(119,450	)

Net change in cash		(220,701	)		283,711
Cash, beginning of the year		787,238			54,043
Cash, end of the period	$	566,537		$	337,754

Supplemental disclosure of cash flow information:
Interest paid	$	2,332		$	1,055
Incone taxes paid	$	-		$	-

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 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, 2014, 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 September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014, 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 September 30, 2015 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, 2014 filed on March 31, 2015.

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 September 30, 2015 and December 31, 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 September 30, 2015, the Company had $316,537 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 $30,127 and $0 as of September 30, 2015 (unaudited) and December 31, 2014, respectively.

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 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 $2,053,841 (unaudited) and $1,824,376 at September 30, 2015 and December 31, 2014, respectively.

Fair Value of Financial Instruments

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

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

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

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

•

Level 3 — Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) as of September 30, 2015 and December 31, 2014.

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 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’s management currently believes there is no impairment of its long-lived assets as of September 30, 2015 and December 31, 2014. 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 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 or nine months ended September 30, 2015 and 2014.

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 September 30, 2015 or December 31, 2014.

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 $87,789 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 September 30, 2015 and December 31, 2014.

	September 30,		December 31,
	2015		2014
	(Unaudited)

Furniture and equipment	$	5,658	$	5,658
Vehicles		63,612		28,000
		69,270		33,658

Less: accumulated depreciation		12,516		13,835

	$	56,754	$	19,823

Depreciation expense for the three months ended September 30, 2015 and 2014 amounted to $2,297 and $1,665, respectively. Depreciation expense for the nine months ended September 30, 2015 and 2014 amounted to $5,473 and $4,995, 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 aggregate cash and note payable portion of the purchase price from $500,000 to $425,000. The reduction in the total purchase has been recorded as gain on settlement agreement in the accompanying statement of operations for the three and six months ended June 30, 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 $280,000 as of September 30, 2015 is reflected as a note payable (see Note 10).

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 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 for the three months ended September 30, 2015 and 2014 amounted to $73,293 and $73,896, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2015 and 2014 amounted to $219,880 and $185,543, respectively. Estimated future amortization of intangible assets is as follows.

Year Ended
December 31,
	2015	$	73,295
	2016		293,173
	2017		293,173
	2018		293,173
	2019		33,735
		$	986,549

7. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following as of September 30, 2015 and December 31, 2014.

	September 30		December 31,
	2015		2014
	(Unaudited)

Accrued payroll expenses	$	661,253	$	430,326
Other accrued operating expenses		82,105		99,013
Accrued interest		5,396		5,396
	$	748,754	$	534,735

8. NOTES RECEIVABLE – RELATED PARTY

The Company issued a series of unsecured notes receivables to an officer of the Company totaling $60,418 (unaudited) and $8,388 as of September 30, 2015 and December 31, 2014, respectively. The outstanding borrowings as of September 30, 2015 are non-interest bearing and due in one lump payment in March 2018.

9. NOTES PAYABLE - RELATED PARTIES

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 $2,391 (unaudited) and $4,509 as of September 30, 2015 and December 31, 2014, respectively. The notes bear interest at a rate of 6% per annum and are due in full in one lump payment in December 2015. During the reporting period, there were no financial covenant requirements under the notes.

10. NOTES PAYABLE – ACQUISITION

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

	September 30,			December 31,
	2015			2014
	(Unaudited)

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 settment agreement was reached with the seller effective on June 24, 2015 (see below).		-			400,000
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 and are no longer convertible into common stock.		280,000			-
	$	280,000		$	500,000
Discount on notes payable		(13,700	)		(25,163	)
Notes payable, net	$	266,300		$	474,837

Less: current portion of notes payable		96,300			474,837
Notes payable, net of curent portion	$	170,000		$	-

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

Year Ended
December 31,

2015	$	30,000
2016		120,000
2017		120,000
2018		10,000
	$	280,000

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 September 30, 2015 and 2014, amortization of the discount amounted to $1,486 and $8,680, respectively. During the nine months ended September 30, 2015 and 2014, amortization of the discount amounted to $11,463 and $21,794, respectively. As of September 30, 2015, the note payable is presented net of a discount of $13,700.

11. 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 September 30, 2015 amounted to $37,266.

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

	Year Ended
	December 31,

2015	$	1,060
2016		4,601
2017		5,242
2018		5,972
2019		6,804
Therefter		13,587
Total	$	37,266

12. 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,

2015	$	7,788
2016		31,152
2017		31,152
2018		5,476
Total	$	75,568

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

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

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

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

Overview

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

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

Critical Accounting Policies

Use of Estimates

Cash

Accounts Receivable and Factoring

Fair Value of Financial Instruments

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

•

Concentration of Credit Risk

Property and Equipment

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

Intangible Assets

Impairment of Long-Lived Assets

Revenue Recognition

Cost of Revenue

Net Income Per Share

Income Taxes

Recent Accounting Pronouncements

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

Results of Operations for the Three Months Ended September 30, 2015 as Compared to the Three Months Ended September 30, 2014.

The following is a comparison of the consolidated results of operations for the Company for the three months ended September 30, 2015 and 2014

	Three Months Ended
	September 30,			September 30,
	2015			2014			$ Change			% Change


Revenues	$	8,904,327		$	4,745,914		$	4,158,413			87.6	%
Cost of revenues		7,910,070			4,207,320			3,702,750			88.0	%
Gross profit		994,257			538,594			455,663			84.6	%
Operating expenses		723,302			417,498			305,804			73.2	%
Income (loss) from operations		270,955			121,096			149,859			123.8	%
Interest and other expense, net		(66,965	)		(46,162	)		(20,803	)		45.1	%
Income before income tax		203,990			74,934			129,056			172.2	%
Income tax expense		-			-			-			0.0	%
Net income	$	203,990		$	74,934		$	129,056			172.2	%

Revenues

Our revenues increased by $4,158,413, or 87.6%, during the quarter ended September 30, 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 the quarter ended September 30, 2015 as compared to the same period in 2014.

Cost of revenues

Our cost of revenues, which represent primarily staffing salaries and workers compensation insurance costs, increased by $3,702,750, or 88.0%, during the quarter ended September 30, 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 percentage increase in cost of revenues was consistent with the percentage increase in revenues. We expect the cost of revenues to continue to increase as our revenues increase, but at a decreasing rate for the remainder of 2015 as our state and federal unemployment limits have been met.

Operating expenses

Operating expenses increased by $305,804, or 73.2%, during the quarter ended September 30, 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.

Other income/expense

Other income/expense during the quarter ended September 30, 2015 included a $66,965 of interest expense as compared to $46,162 compared to the same period in 2014. Interest expense was higher during the quarter ended September 30, 2015 primarily due to an increase in accounts receivables factored during the period.

Results of Operations for the Nine Months Ended September 30, 2015 as Compared to the Nine Months Ended September 30, 2014.

The following is a comparison of the consolidated results of operations for the Company for the nine months ended September 30, 2015 and 2014.

	Nine Months Ended
	September 30,			September 30,
	2015			2014			$ Change			% Change


Revenues	$	21,770,957		$	11,813,495		$	9,957,462			84.3	%
Cost of revenues		19,749,396			10,523,416			9,225,980			87.7	%
Gross profit		2,021,561			1,290,079			731,482			56.7	%
Operating expenses		1,876,634			1,102,696			773,938			70.2	%
Income from operations		144,927			187,383			(42,456	)		-22.7	%
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		(181,420	)		(127,860	)		(53,560	)		41.9	%
Income before income tax		43,799			59,523			(15,724	)		-26.4	%
Income tax expense		-			-			-			0.0	%
Net income	$	43,799		$	59,523		$	(15,724	)		-26.4	%

Revenues

Our revenues increased by $9,957,462, or 84.3%, during the nine months ended September 30, 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 the nine months ended June 30, 2015 as compared to the same period in 2014. 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 the nine months ended September 30, 2015 reflect a full nine months of additional revenue from the acquired customers, whereas the revenues from the same period in 2014 only reflect 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 $9,225,980, or 87.7%, during the nine months ended September 30, 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, but at a decreasing rate as state and federal unemployment limits are met.

Operating expenses

Operating expenses increased by $773,938, or 70.2%, during the nine months ended September 30, 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 the nine months ended September 30, 2015 as a result of increased legal and accounting fees necessary to complete our registration statement as well as attorney fees associated with the Loyalty settlement agreement. The increase in operating expenses in 2015 was also due to a full nine 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 September 30, 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 $181,420, which represents interest expense on our outstanding notes payable, as well as financing charges from our factoring arrangements. During the nine months ended September 30, 2014, we had interest and other expenses of $127,860. Interest expense was higher during the nine months ended September 30, 2015 primarily due to an increase in accounts receivables factored during the period.

Promissory Notes

The Company has a promissory note outstanding of $2,391. This note consists of monies advanced by Cliff Blake, an officer and director of the Company, which bear interest at 6% per annum. The promissory note is due in a single payment at the end of the term in December 2015.

The Company also owes an aggregate total of $280,000 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 September 30, 2015 amounted to $37,266, which is payable in monthly installments of $756 at an interest rate of 13% per annum over 72 months through August 2021.

Capital Resources

As of September 30, 2015, we had cash of $566,537 and accounts receivable of $602,108. Our current assets of $1,168,645 exceed our current liabilities of $1,074,431 by $94,214.

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

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

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

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

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

Liquidity

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

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

Net cash used in operating activities was ($21,707) for the nine months ended September 30, 2015 compared to net cash provided by operating activities of $403,161 for the same period in 2014. The significant change between the periods was a result of an increase in accounts receivable of $301,697 and a decrease in accounts payable of $163,039 contributing to a decrease in cash flows from operations during the nine months ended September 30, 2015. During the same period in 2014, our increase in accounts receivable was only $16,323 and our accounts payable increased by $60,470.

Net cash used in investing activities during the nine months ended September 30, 2015 amounted to $51,530 representing payments for borrowings on related party notes receivable of $64,030, offset by proceeds from the sale of property and equipment of $12,500. We had no cash flows from investing activities for the nine months ended September 30, 2014.

We had net cash used in financing activities of $147,464 during the nine months ended September 30, 2015 resulting primarily from the payments of $145,000 for the note payable due to the seller of Loyalty. Cash used in financing activities during the nine months ended September 30, 2014 were $119,450, which represented payments on notes payables to related parties.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information not required to be filed by Smaller Reporting Companies.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

Pursuant to Rules adopted by the Securities and Exchange Commission, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rules. This evaluation was done as of June 30, 2015, the end of the period covered by this Quarterly Report on Form 10-Q under the supervision and with the participation of the Company’s principal executive officer and principal financial and accounting officer. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation. Based upon that evaluation, they believe that the Company’s disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, summarized and processed timely. Both officers are directly involved in the day-to-day operations of the Company.

The Company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with the Rule 13a-15 of the Securities Exchange Act of 1934. The Company’s president and its principal financial and accounting officer conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2015, based on the criteria establish in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treaedway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2015, based on those criteria. A control system can provide only reasonably, not absolute, assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues have been detected.

Changes in Internal Control Over Financial Reporting

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

PART II

ITEM 1. LEGAL PROCEEDINGS

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

(a) Not applicable.

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

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

ITEM 6. EXHIBITS

Exhibit Number		Exhibit Title

31		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
*		Filed herewith

SIGNATURES

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

	FIRST RATE STAFFING CORPORATION

	By:	/s/ Cliff Blake
	President and Principal executive officer
	Principal financial officer

Dated: November 16, 2015