UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-QT

 

 

For the three month period ended December 28, 2012

 

 

 

For the transition period from September 29, 2012 to December 28, 2012

 

Commission file number:  0-30734

(Exact name of Registrant as specified in its charter)

 

160 Broadway, 13^th Floor
New York, New York 10038
(Address of principal executive offices)

(646) 443-2380
(Registrant’s telephone number, including area code)

 

Former fiscal year: Friday closest to September 30

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The number of shares of Common Stock, $.0001 par value, outstanding as of February 8, 2013 was 134,832,000.

 

 

 

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Item 1. Financial Statements (unaudited)

 

 

 

 

 

 

 

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1.         Description of the Company and its Business

Nature of Operations

Corporate Resource Services, Inc. (the “Company”) is a national provider of diversified staffing, recruiting, and consulting services with a focus on delivering our customers temporary staffing solutions for professional services, administrative and light industrial positions. We help our customers build a better workforce by providing trained employees in the areas of Insurance, Information Technology, Accounting, Legal, Engineering, Science, Healthcare, Life Sciences, Creative Services, Hospitality, Retail, General Business and Light Industrial work.  Our blended staffing solutions are tailored to our customers’ needs and can include customized employee pre-training and testing, on-site facilities management, vendor management, risk assessment and management, market analyses and productivity/occupational engineering studies.

The Company provides these services nationwide across a variety of industries and to a diverse array of clients, ranging from sole proprietorships to Fortune 1000 companies. We conduct all of our business in the United States and operate 207 staffing and on-site facilities in 37 states and the District of Columbia.  Our headquarters are in New York City.

 

The Company

 

References in these Notes to the Condensed Consolidated Financial Statements of the Company refer to Corporate Resource Services, Inc., including its wholly-owned consolidated subsidiaries (unless indicated or context otherwise requires), which are:

 

●    Accountabilities, Inc. (“Accountabilities”);

 

●    Corporate Resources Development, Inc. (“CRD”);

 

●    Insurance Overload Services, Inc. (“Insurance Overload”);

 

●    Integrated Consulting Group, Inc. (“ICG Inc.”);

 

●    Diamond Staffing Services, Inc. (“Diamond Staffing”); and,

 

●    TS Staffing Services, Inc. (“TS Staffing”) (see Note 3)

 

2.            Summary of Significant Accounting Policies

 

The accompanying condensed consolidated financial information of the Company as of and for the three month periods ended December 28, 2012 and December 30, 2011 have 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 10 of Regulation S-X. Accordingly, they are unaudited and do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed year-end balance sheet was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements, prepared in accordance with U.S. GAAP, have been condensed or omitted pursuant to the rules and regulations of the SEC; however, the Company believes the disclosures made are adequate to make the information presented not misleading.

 

The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended September 28, 2012, which are included in the Company’s Annual Report on Form 10-K as filed with the SEC on December 21, 2012. Certain reclassifications have been made to the accompanying condensed consolidated financial statements of prior periods to conform to the current period’s presentation.

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Effective January 14, 2013, the Board of Directors of the Company determined to change the Company’s fiscal year from the Friday closest to September 30^th to the Friday closest to December 31^st.  The change was intended to align the Company’s fiscal periods more closely with the seasonality of its business and improve comparability with industry peers.  The Company’s fiscal quarters are the interim 13 week periods of the fiscal year, with the first quarter of a 53-week fiscal year extended to 14 weeks.

Revenue Recognition

Staffing and consulting revenues are recognized when professionals deliver services. Permanent placement revenue, which generated 0.5% of revenues for both the three months ended December 28, 2012 and December 30, 2011, respectively, is recognized when the candidate commences employment, net of an allowance for those not expected to remain with clients through a 90-day guarantee period, wherein the Company is obligated to find a suitable replacement.

Cash

The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or less to be cash and cash equivalents. 

Accounts Receivable

The Company maintains an allowance for doubtful accounts for estimated losses resulting from its clients failing to make required payments for services rendered. Management estimates this allowance based upon knowledge of the financial condition of its clients, review of historical receivables and reserve trends and other pertinent information. If the financial condition of the Company’s clients deteriorates or there is an unfavorable trend in aggregate receivable collections, additional allowances may be required. The Company sells its accounts receivable under a sale agreement, as described in Note 5 to these condensed consolidated financial statements.

Intangible Assets 

Goodwill and other intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. Intangible assets with finite lives are subject to amortization, and are tested for impairment when events and circumstances indicate that an asset or asset group might be impaired.  See Note 4.

Related Party Liabilities

The Company classifies liabilities to related parties on its balance sheet as the following:

●    Accrued wages and related obligations – due to related party represent accrued wages, taxes and other related items that have not yet been invoiced.

●    Loan payable – related party represents amounts due for items that have been invoiced from TS Employment Services, Inc. (“TS Employment”) and other affiliates of Robert Cassera (“collectively “Tri-State”), a member of our Board of Director who beneficially owns 91.3%% of the Company’s common stock as of December 28, 2012 .   Tri-State charges the Company interest on a monthly basis at 12% per annum of the outstanding loan balance.

●    Related party long-term debt represents amounts due for long-term borrowings from a related party.

Per Share Information

The Company presents both basic and diluted earnings per share amounts (“EPS”).  Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects any potential dilution that could occur if securities or other contracts to issue common stock, such as options, warrants, convertible notes and convertible preferred stock, were exercised or converted into common stock or could otherwise cause the issuance of common stock that then shared in earnings.  Although options to purchase 143,000 shares of the Company’s common stock had vested during the three months ended December 28, 2012 (see Note 8), the exercise price of these options to purchase the Company’s common stock exceeded the average price of the stock during the period.  Accordingly, these options were not dilutive to earnings per share for the three months ended December 28, 2012.

 

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The following table sets forth the computation of basic and diluted per share information:

 

 

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for the estimated tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end, based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management’s opinion, it is more likely than not that the future tax benefits from some portion of the deferred tax assets will not be realized.

U.S. GAAP requires that, in applying the liability method, the financial statement effects of an uncertain tax position be recognized based on the outcome that is more likely than not to occur. Under this criterion the most likely resolution of an uncertain tax position should be analyzed based on technical merits and on the outcome that will likely be sustained under examination.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions are adequate, actual results could differ from the estimates and assumptions used.

 

 

3.         TS Staffing Acquisition

 

On November 21, 2011, the Company entered into an agreement with TS Staffing and Robert Cassera, the sole shareholder of TS Staffing and a member of the Board of Directors of the Company. Pursuant to the terms of the agreement, the Company acquired all of TS Staffing’s issued and outstanding shares of common stock, par value $0.0001 per share, in exchange for 34,839,159 shares of the Company’s common stock, valued at $0.8611 per share, equal to $30 million, the agreed upon value of TS Staffing’s business operations (the “TS Staffing Acquisition”). The Company issued an additional 38,001,402 shares of its common stock in exchange for an equal number of its  common stock that were held by TS Staffing immediately prior to the TS Staffing Acquisition. These shares were cancelled upon acquisition.

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As described above, Mr. Cassera was the sole owner of TS Staffing, and its predecessor TS Staffing Corp. (“TSS Corp.”) and Tri-State and was the beneficial owner of approximately 91.3% of the Company’s outstanding shares of common stock on December 28, 2012. Because the Company and TS Staffing were both controlled by Tri-State, the acquisition was recorded using the pooling-of-interest method as required under U.S. GAAP for business combinations of entities under common control and the financial information for all periods presented reflects the financial statements of the combined companies as if the acquisition had been in effect for all reporting periods.    The Company incurred acquisition related costs of $397,000 related to the acquisition of TS Staffing during the three months ended December 30, 2011.

 

4.            Intangible Assets and Goodwill

 

The following table presents details of the Company’s intangible assets, estimated lives, related accumulated amortization and goodwill as of December 28, 2012 and September 28, 2012:

 

 

The Company recorded amortization expense of $378,000 and $419,000 for the three months ended December 28, 2012 and December 30, 2011, respectively. The Company’s estimated intangible asset amortization expense (based on existing intangible assets) for the fiscal years ending on the Friday closest to December 31,   in 2013, 2014, 2015, 2016, 2017 and thereafter is $949,000, $859,000, $785,000, $676,000, $531,000 and $1,818,000, respectively.

 

The Company performed its latest annual impairment analysis as of September 28, 2012, and will continue to test for impairment annually. While no impairment was indicated as of September 28, 2012, in January 2012, a sales executive from ICG Inc. and 14 other sales, administration and operations personnel resigned from the Company and began operating a competing temporary placement firm.  Based on the effect of the associated decrease in revenues, the Company recorded impairment losses for goodwill of $398,000 and for customer lists and relationships and a non-competition agreement of $137,000 and $44,000, respectively, in the fiscal year ending September 28, 2012.  The Company also measures impairment, as conditions warrant, throughout the fiscal year.

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5.            Sales of Receivables

The Company’s subsidiaries, other than ICG Inc. and Accountabilities, are currently participating in trade accounts receivable purchase agreements with Wells Fargo Capital Finance, an operating division of Wells Fargo Bank, N.A. (“Wells Fargo”). Accountabilities participated in a Wells Fargo agreement until June 13, 2011, when it entered into a similar trade accounts receivable purchase agreement with Amerisource Funding, Inc. (“Amerisource”) and ICG Inc. entered into a similar agreement on October 18, 2011 with Amerisource. As of December 28, 2012, the maximum aggregate amount of trade receivables that could be sold by our participating subsidiaries to Wells Fargo and its participating lender, Sterling National Bank, in the aggregate was $67,500,000. As collections reduce previously sold receivables, the subsidiaries may replenish these with new receivables. As of December 28, 2012 and September 28, 2012, trade receivables of $64,660,000 and $60,093,000, respectively, had been sold and remained outstanding with Wells Fargo. Amounts held for the Company’s reserve to repurchase disqualified receivables (“Collected Reserve”) and due to the Company from Wells Fargo totaling $6,042,000 and $6,192,000, were outstanding as of December 28, 2012 and September 28, 2012, respectively. Interest charged on the amount of receivables sold prior to collection is charged at an annual rate of the 90-day London Interbank Offered Rate plus 5.55% per annum. Receivables sold may not include amounts over 90 days old with the exception of certain healthcare-related receivables.

 

Under the terms of the agreements the Company’s subsidiaries have with Wells Fargo and Amerisource, with the exception of CRD permanent placement receivables, the lender advances 90% of the assigned receivables’ value upon sale, and the remaining 10% upon final collection. Under the terms of CRD’s agreement, Wells Fargo advances 65% of the assigned CRD permanent placement receivables’ value upon sale, and the remaining 35% upon final collection. The aggregate amount of trade receivables from the permanent placement business that CRD may sell to Wells Fargo at any one time is $1,250,000.

Interest expense charged under the Wells Fargo trade accounts receivable purchase agreements is included in interest expense in the accompanying statements of operations and amounted to $832,000 and $719,000 for the three ended December 28, 2012 and December 30, 2011, respectively. Tri-State and Robert Cassera have guaranteed the Company’s obligations to Wells Fargo.

The Accountabilities and ICG Inc. agreements with Amerisource have a term of two years and a maximum borrowing amount of $7,500,000 and $4,500,000, respectively, with an advance rate of 90%. The agreements provide for an interest rate of the prime rate plus 1% (with minimum rates of 6% and 5% per annum for Accountabilities and ICG Inc., respectively) and a monthly collateral management fee of 0.65% and 0.60% of the average daily outstanding borrowings at Accountabilities and ICG Inc., respectively. As of December 28, 2012 and September 28, 2012, there were $10,488,000 and $8,519,000 of trade accounts receivable sold in the aggregate that remain outstanding.  The Amerisource Collected Reserve totaled $1,503,000 and $1,766,000 at December 28, 2012 and September 28, 2012, respectively. The Company incurred interest on these borrowings of $339,000 and $270,000 for the three months ended December 28, 2012 and December 30, 2011, respectively.

 

6.         Related Parties

 

Commencing August 2010, TS Employment began providing professional employer services to the Company. Professional employer services rendered include payroll services, administration of employee benefits, workers compensation insurance coverage and accounts receivable collection services. These arrangements allow the Company to reduce certain insurance risks and costs. TS Employment is an affiliate of Tri-State, which is wholly-owned by Mr. Cassera. Due to the timing and payment of invoices received, the aggregate amount payable to TS Employment for such services was $9,650,000 and $15,168,000 as of December 28, 2012 and September 28, 2012, respectively.

 

The Company is charged an amount equal to the actual wages and associated payroll taxes for the employee plus an agreed upon rate for workers’ compensation and health insurance as well as an administrative fee. The total amount charged by TS Employment for the three months ended December 28, 2012 and December 30, 2011 was $188,745,000 and $127,935,000, respectively. TS Employment charges the Company its current market rate for services, which is consistent with the amounts that it charges its other customers. Beginning on October 1, 2011,  the Company also received advances from, and owed other amounts to Tri-State and affiliates totaling $9,782,000 and $7,711,000 on December 28, 2012 and September 28, 2012, respectively. The Company is borrowing these amounts from Tri-State as related party loans payable.   The principal amount increases or decreases based on periodic borrowings or repayments, and each subsidiary of the Company is charged interest at the rate of 12% per annum of their net loan payable. 

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On March 30, 2012, the Company and TS Employment entered into an agreement to convert $12,000,000 of this loan payable into 25,962,788 shares of common stock, at a value per share of $0.4622. Additionally, on July 31, 2012, the Company and TS Employment agreed to convert an additional $2,100,000 of this loan into 4,543,488 shares of the common stock, at a value per share of $0.4622.  These conversions are reflected in the loan payable—related party balance, after giving effect to the conversions noted above as of December 28, 2012 and September 28, 2012.  The Company recognized $292,000 and $356,000 of related party interest expense for the three months ended December 28, 2012 and December 30, 2011, respectively.

 

 

7.            Debt

 

Debt as of December 28, 2012 and September 28, 2012 is summarized as follows:

 

 

In January 2012, a sales executive from ICG Inc. and 14 other sales, administrative and operations personnel resigned from the Company and began operating a competing temporary placement firm that the Company expects will affect ICG Inc.’s light industrial business for the foreseeable future.   Accordingly, the Company reduced the estimate of the liabilities related to the Rosenthal Commission Agreement by $713,000 due to the facts described above in the first fiscal quarter of 2012.  In August 2012 the Company and Rosenthal renegotiated the payment terms with the Company agreeing to pay 1.5% of cash receipts on its net sales through September 7, 2013 and 1.0% of net sales through September 8, 2019.  The remaining liability to Rosenthal as of December 28, 2012 is $1,336,000 with approximately $398,000 estimated to be payable by December 28, 2013.

 

 

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Additionally, on the ICG Closing Date ICG Inc. entered into a non-competition agreement with the former owner of ICG Seller and its members, pursuant to which ICG Inc. was obligated to pay 1% of its net sales for two years. The Company originally estimated the value of these payments to be $533,000 and reduced this estimate by $53,000 due to the facts described above in the first fiscal quarter of 2012. In August 2012, the Company also renegotiated these payment terms and agreed to pay 0.5% of net sales through August 25, 2013.  The remaining liability to the former owner at September 28, 2012 is $79,000, all of which is payable by December 28, 2013.

Payments aggregating $123,000 were paid against debt incurred in conjunction with the acquisition of ICG Inc. during the three months ended December 28, 2012 (see Note (v) below).

 

Additionally in fiscal year 2012, the Company made three acquisitions that required  $1,585,000 in future payments based on net sales, which has been accounted for as long term debt.   The Company also paid $450,000 for customer lists and incurred $100,000 of long term debt.  The Company made $140,000 in payments against these debts in the three months ended December 28, 2012.

 

 

 

8.            Stock-Based Compensation

Compensation expense is measured using the grant-date fair value of the shares or options granted and is recognized on a straight-line basis over the instruments required vesting period. For shares vesting immediately, compensation expense is recognized on the date of grant. Fair value is determined by a valuation report of an independent appraiser or at a discount from the current market price quote to reflect lack of liquidity resulting from the restricted status and low trading volume.

During the three months ended December 28, 2012, 1,000,000 restricted shares of the Company’s common stock were issued under the terms of a business advisory agreement (the “Advisory Agreement”), 50,000 shares were granted to an employee as part of an employment agreement and 17,000 shares were forfeited.  In addition, the Company granted options to purchase up to 1,000,000 shares of the Company’s common stock under the terms of the Advisory Agreement, of which options to purchase 143,000 shares of common stock have vested as of December 28, 2012 (See Note 2).  

 

As a result of these grants, the Company recorded  $452,000 of stock compensation costs for the three months ended December 28, 2012 compared to $ 38,000 for the three months ended December 30, 2011.  As of December 28, 2012, there were unvested options to purchase 857,000 shares of the Company’s common stock related to the Advisory Agreement which the Company will record a related expense of $9,000 over the two remaining years of the vesting period.

 

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9.            Supplemental Disclosure of Cash Flow Information

 

 

10.            Commitments and Contingencies

Accounts Receivable

In connection with the Company’s sale of its trade receivables it is contingently liable to repurchase,  at the sole discretion of the factor, any receivables that are 90 days past due,  with the exception of accounts related to the healthcare industry, because they are slow payers due to reimbursement cycles. Accordingly, the Company repurchases any healthcare industry related receivables that are 120 days past due. The Company provides an estimated allowance for doubtful accounts to address this contingency.

 

Lease Commitments

At December 28, 2012, the Company had operating leases, primarily for office premises, expiring at various dates through February 2017. Future minimum rental commitments under operating leases are as follows:

 

Employment Agreements

The Company has employment agreements with certain key members of management, requiring mutual termination notice periods of up to 60 days. These agreements provide those employees with a specified severance amount in the event the employee is terminated without good cause as defined in the applicable agreement.

Legal Proceedings

 

From time to time, the Company is involved in litigation incidental to its business including employment practices claims. There is currently no litigation that management believes will have a material impact on the financial position of the Company.

 

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11.            Subsequent Events

 

On January 22, 2013, the Company announced its entry into the retail energy services industry with the formation of Abest Power & Gas, LLC (“Abest”), a joint venture between it and retail energy veteran Frank Rosa. Abest will operate as an energy services company to supply electricity and gas to residential and commercial customers in states where deregulation has offered consumers the ability to choose their energy provider.

 

On January 31, 2013 the Company announced the completion of negotiations to purchase the Summit Software division of Tri-Tel Communications, Inc. (“Summit”) from persons and affiliates of Tri-State. The acquisition is expected to close once the customary approval requirements and closing conditions have been met. 

 

The Company did not identify any further subsequent events that required additional disclosure or adjustments in our financial statements through the date the financial statements were available to be issued.

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes to the condensed consolidated financial statements. This discussion and analysis contains “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements relate to expectations, projections, estimates or objectives relating to the Company and may be identified by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will,” or the negative of these terms or other comparable terminology. Forward-looking statements are based on historical facts, current expectations and reasonable assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from those expressed in any such forward-looking statements. These risks and uncertainities include, without limitation, those identified in the section titled “Risk Factors” in our annual report on Form 10-K the fiscal year ended September 28, 2012 and our other reports filed with the SEC. Some of the key factors that may have a direct bearing on our expected results of operations, performance and financial condition are:

 

 

●          our ability to satisfy our working capital requirements;

●          our ability to identify suitable acquisition candidates or investment opportunities;

●          material employment related claims and costs as a result of the nature of our business;

●          our ability to retain key management personnel;

●          the financial difficulty of our clients, which may result in nonpayment of amounts owed to us;

●          significant economic downturns resulting in reduced demand for our services;

●          our ability to attract and retain qualified temporary personnel who possess the skills and experience necessary to satisfy our clients;

●          our ability to raise additional capital;

●          our ability to achieve and manage growth;

●          the continued cooperation of our creditors; and

●          our ability to diversify our client base.

 

Readers are cautioned not to place undue reliance on these forward-looking statements. Our actual results, levels of activity, performance or achievements and those of our industry may be materially different from any of those that are expressed or implied by these forward-looking statements. Except as required by law, we undertake no obligation to update the forward-looking statements in this filing.

 

References in this filing to the “Company,” “we,” “us” and “our” refer, to Corporate Resource Services, Inc., in each case including consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

 

On January 14, 2013, the Company’s Board of Directors approved a change in the Company’s fiscal year end from the Friday closest to September 30 to the Friday closest to December 31.  The change is intended to align the Company’s fiscal periods more closely with the seasonality of its business and improve comparability with industry peers.  We are reporting results for the three month transitional period September 29, 2012 to December 28, 2012 in this Transition Report on Form 10-QT.

 

Overview

We are a national provider of diversified staffing, recruiting, and consulting services with a focus on delivering our customers temporary staffing solutions for professional services, administrative and light industrial positions. We help our customers build a better workforce by providing trained employees in the areas of Insurance, Information Technology, Accounting, Legal, Engineering, Science, Healthcare, Life Sciences, Creative Services, Hospitality, Retail, General Business and Light Industrial work.  Our blended staffing solutions are tailored to our customers’ needs and can include customized employee pre-training and testing, on-site facilities management, vendor management, risk assessment and management, market analyses and productivity/occupational engineering studies.

Our ability to deliver broad-based solutions provide our customers a “one stop shop” to fulfill their staffing needs from professional services and consulting to clerical and light industrial positions.  Depending on the size and complexity of an assignment, we can create an on-site facility for recruiting, training and administration at the customers’ location.   Our recruiters have the latest state of the art recruiting resources available to help our customers secure the best candidates available in today's ever changing marketplace. Our national network of recruiters has staffing experts that get excellent results by focusing within their areas of expertise.

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We offer our services through our wholly-owned specialty recruiting and staffing subsidiaries, which include the following companies:

●    Accountabilities provides administrative and light industrial staffing solutions, primarily to our customers in the Western United States;

●    CRD provides permanent and temporary professional, administrative and clerical solutions to financial services, entertainment, media, advertising, fashion and other companies through locations primarily in the Northeastern United States.;

●    Insurance Overload provides professional insurance industry staffing solutions for personnel in claims processing, customer services and related fields throughout the United States;

●    ICG Inc. provides light industrial staffing solutions to our customers in the Northeastern United States;

●    Diamond Staffing provides administrative, light industrial and professional staffing solutions throughout the United States most heavily concentrated in New Jersey, California and New England; and

●    TS Staffing provides temporary placement solutions across a range of administrative and professional fields throughout the United States, most heavily concentrated in California, the Midwestern United States and Florida.

The type and number of services we offer have grown largely through the acquisition of established offices from general staffing companies.  We provide these services nationwide across a variety of industries and to a diverse array of clients, ranging from sole proprietorships to Fortune 1000 companies. We conduct all of our business in the United States and operate 207 staffing and on-site facilities in 37 states and the District of Columbia.  Our headquarters are in New York City. 

 

Our future profitability and rate of growth will be directly affected by our ability to continue to expand the services we offer at acceptable gross margins, and to achieve economies of scale, through the continued introduction of differentiated marketing and sales channels, and through the successful completion and integration of acquisitions. Our ability to be profitable will also be affected by the extent to which we are able to extinguish debt and incur additional expenses to increase our sales, marketing and administrative capabilities to expand our business. The largest component of our operating expenses is personnel costs. Personnel costs consist of salaries, employment taxes, benefits and incentive compensation (including bonuses and stock-based compensation) for our employees. Our management expects that our operating expenses will continue to grow in absolute dollars as our business continues to grow. As a percentage of revenue, we expect our operating expenses to decrease as our revenues increase.

 

The Company’s operations are subject to seasonal variations based on the nature of the industry. The Company’s revenues tend to be strongest in its fourth calendar quarter primarily due to growth in business supporting the holiday season. Revenues tend to be weakest in the first calendar quarter following the fourth calendar quarter’s peak and have traditionally grown throughout the year thereafter. Our gross profit percentage follows a similar trend due to payroll taxes that reach statutory limits at some point in the year and restart annually on January 1^st. As the payroll taxes related to temporary employees reach the statutory threshold, some of these taxes are reduced and the hourly cost of producing revenues decreases, causing an increase in related gross margin percentage.

 

Mergers and Acquisitions

 

One of our key strategies is to merge with or acquire companies that increase or complement our business and the services we offer, expand our geographic presence or further strengthen our existing infrastructure (see Note 3). Management expects acquisitions to continue to play a key role in our future growth, including growth into higher margin service businesses such as the acquisition of Summit and the Abest joint venture announced in January 2013. Completing acquisitions with unrelated third parties, however, will likely be limited by our ability to negotiate purchase terms and obtain financing on terms that are acceptable to us given our current financial position, as discussed below.

 

 

Recent Accounting Pronouncements

 

None

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Results of Operations

Three months ended December 28, 2012 compared to three months ended December 30, 2011

Revenues

For the three months ended December 28, 2012, our revenues  increased by $37.6 million or 23.2% to $200.2 million as compared to $162.5 million for the three months ended December 30, 2011.  Part of the increase is attributable to acquisitions that we made during 2012 that added $12.9 million in revenues with the remainder from new clients and demand from our existing customers of $24.7 million that is consistent with national staffing industry trends.  We expect that our sales force will continue to grow revenues from existing and new customers consistent with these trends for the foreseeable future and that we will be able to supplement this growth with strategic acquisition opportunities as they arise and by increasing the number of value-added services we offer to the marketplace.

Direct cost of producing revenues

TS Employment provides professional employer services to the Company. Professional employer services rendered include the provision of payroll services, benefits and workers’ compensation insurance coverage. These arrangements allow us to mitigate certain insurance risks and obtain employee benefits at more advantageous rates. The costs of the professional employer services are included in direct cost of services.

For the three months December 28, 2012, our direct cost of services increased by $34.1 million or 23.9% to $176.8 million, as compared to $142.7 million for the three months ended December 30, 2011.   Prior to its acquisition, and during the period of pooling-of interest during the three months ended December 30, 2011, TS Staffing’s predecessor, TSS Corp., was an affiliate of Tri-State and self-administered its payroll services, benefits and workers compensation insurance, resulting in a reallocation of certain costs between the cost of producing revenues and selling, general and administrative expenses.

The increase in our cost of producing revenues in the three months ended December 28, 2012 was primarily driven by the 23.2% increase in revenues. As a percentage of revenue, our cost of producing revenues increased 0.5%, from 87.8% to 88.3%, primarily as a result of competitive pricing pressure and the Company’s stronger relative growth in the light industrial businesses, which traditionally generates lower gross margins. These increases were partially offset by a reduction in the administrative fee TS Employment charges us. We expect this reduction to yield a $1 million to $2 million in savings 2013. As our volume of business increases, we may be able to realize further reductions to the administrative fee.  These factors combined to cause the consolidated cost of producing revenues to grow at a greater rate than the associated revenues. 

Gross profit

For the three months ended December 28, 2012, our gross profit increased by $3.5 million or 17.8% to $23.3 million as compared to $19.8 million for the three months ended December 30, 2011.  As a percentage of revenue, gross profit decreased 0.5% from 12.2% in the 2011 period to 11.7% in the 2012 period.  We have completed and continue to implement initiatives intended to increase our gross profit, including the expansion of value added services and pricing reviews of all customers, but expect competitive pricing pressure to continue to affect our business for the foreseeable future.

Selling, general and administrative expenses

For the three months ended December 28, 2012, selling, general and administrative expenses increased by $2.9 million or 17.9% to $19.3 million, or 9.7% of revenues, as compared to $16.4 million, or 10.1% of revenues for the three months ended December 30, 2011.  The increase was primarily due to increased selling and support expenses related to our increase in revenues, primarily commissions and new employees added to support the revenue growth as well as higher corporate administration costs.

Due to revenue growth, we have been able to better leverage our fixed costs as a percentage of revenues as indicated by the year-over-year decrease in selling, general and administrative costs as a percentage of revenues.  In addition, we have completed and continue to undertake initiatives to reduce selling, general and administrative costs through consolidation of select offices and administrative functions.  We expect that the completion of integrating our acquired operations as well as the continued decrease of fixed costs as a percentage of revenues through growth will result in continued reduced selling, general and administrative costs as a percentage of revenues in 2013 and beyond.

Depreciation and amortization

For the three months ended December 28, 2012, depreciation and amortization expenses decreased by $20,000 to $485,000 as compared to $505,000 in the three months ended December 30, 2011.  The variability in the timing of acquisitions will continue to cause fluctuation in the amortization of acquisition-related long-lived assets.

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Income from operations

The factors described above resulted in an increase in income from operations of $0.6 million from $2.9 million for the three months ended December 30, 2011 to $3.5 million for the three months ended December 28, 2012.

Interest expense

Interest expense includes the net discounts associated with the sales of accounts receivable, as well as interest on debt associated with our acquisitions and financing our operations. For the three months ended December 28, 2012, interest expense increased $0.2 million to $1.2 million as compared to $1.0 million for the three months ended December 30, 2011. The remaining increase was due to a higher volume of accounts receivable financing during the 2012 period compared with 2011. In addition, we recorded $292,000 and $356,000 for the three months ended December 28, 2012 and December 30, 2011, respectively, of interest on related party balances.

Acquisitions expenses

We incurred acquisition expenses of $48,000 and $397,000 for the three months ended December 28, 2012 and December 30, 2011, respectively. Expenses in the 2011 period were mainly related to the TS Staffing Acquisition, while the current period expenses were related to smaller acquisitions. These expenses consisted primarily of legal and accounting fees.

 

Net income

The factors described above resulted in net income of $2.0 million for the three months ended December 28, 2012 as compared to net income of $1.2 million for the three months ended December 30, 2011.

 

Liquidity and Capital Resources

 

We have financed our growth largely through the issuance of debt as well as advances and loans from our principal shareholder and related companies. As of December 28, 2012, we had working capital of $1,181,000. Current liabilities as of December 28, 2012 included approximately $2,135,000 in the current portion of long-term debt (including $750,000 to related parties) and a loan payable to a related party of $9,782,000, which is due and payable to Tri-State for costs charged by Tri-State for professional employment organization services but arise and are paid in the ordinary course of business. On March 30, 2012 and July 31, 2012, the Company and TS Employment agreed to convert $12 million and $2.1 million of loans payable into 25,962,788 shares and 4,543,488 shares of common stock, respectively, at a value per share of $0.4622. Additionally, $9,650,000 of accrued wages and related costs represents invoices from Tri-State in January 2013 but are attributable to December 2012. Our total outstanding debt and loans payable to related party as of December 28, 2012 was $10,532,000, $750,000 of which is past due or due upon demand. In order to service our debt and maintain our current level of operations, as well as fund the costs of being a reporting company, we must be able to generate sufficient amounts of cash flow and working capital. Our management is engaged in several strategic activities, as explained further below in the section titled “Working Capital,” to effectively accomplish these objectives.

 

Cash Flows

We have relied on the sale of our trade receivables prior to collection, funding from related parties and, periodically, proceeds from short term borrowings and issuance of our common stock to satisfy our working capital requirements and to fund acquisitions.  Management believes that the funding from related parties has advantages to the Company, including a quick response to funding requirements and a lack of restrictive covenants. Management anticipates that the Company will continue to rely on related parties for its short-term financing needs, as well as other sources of funding.  In the future, we may need to raise additional funds through debt or equity financings to satisfy our working capital needs, or to take advantage of business opportunities, including growth of our existing business and acquisitions. To the extent that funds are not available to meet our operating needs, we may have to seek additional reductions in operating expenditures and/or increases in operating efficiencies.

For the three months ended December 28, 2012 and December 30, 2011, net cash provided by financing activities of $1.3 million and $1.9 million, respectively, were partially offset by net cash used by operating activities of $0.8 million and $1.7 million, respectively, and cash used for investing activities of $189,000 and $150,000 for the three months ended December 28, 2012 and December 30, 2011, respectively. 

Our increase in net income of $855,000 for the three months ended December 28, 2012 compared to the comparable 2011 period had the effect of improving cash used in operating activities by  $858,000.  Cash provided from financing activities decreased $622,000 primarily as a result of a net decrease in loan payable borrowings from a related party of $2,418,000 partially offset by a decrease in repayments of a loan facility of $1,790,000 in comparing the 2012 to the 2011 three month periods.

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We believe that improving cash flows from operating activities through improved profitability and working capital management including improved efficiencies in the sale of our trade receivables will enable us to finance our growth through acquisitions or other initiatives while being less reliant on loans from related parties.

 

Working Capital

Our current assets exceeded our current liabilities by $1.2 million as of December 28, 2012 and current liabilities exceeded current assets by $0.6 million as of September 28, 2012.  The $1.8 million improvement in our working capital was primarily due to our net income of $2.0 million during the fiscal quarter.  We also continue to engage in activities to further improve our working capital, including seeking additional reductions in operating expenditures and increases in operating efficiencies. In order to service our debt, maintain our current level of operations, as well as fund the increased costs of being a public reporting company and our growth initiatives, we must be able to generate or obtain sufficient amounts of cash flow and working capital. To accomplish these objectives our management is focusing on increased profitability, raising new outside capital and consummating debt to equity conversions.

Based on the above activities and our current expectations, we believe that we have adequate resources to meet our operating needs through December 28, 2013.  Our subsidiaries, other than ICG Inc. and Accountabilities, are currently participating in a trade accounts receivable purchase agreement with Wells Fargo. Accountabilities participated in this Wells Fargo agreement until June 13, 2011, when it entered in a similar trade accounts receivable purchase agreement with Amerisource. ICG Inc. entered into a similar agreement with Amerisource in October 2011. Under the Wells Fargo agreement, the maximum amount of trade receivables that can be sold by our participating subsidiaries and affiliates to Wells Fargo and its participating lender, Sterling National Bank, in the aggregate is $67.5 million. As collections reduce previously sold receivables, the subsidiaries may replenish these with new receivables. As of December 28, 2012 and September 28, 2012, trade receivables of $64.7 million and $60.1 million had been sold and remained outstanding, and amounts due from Wells Fargo for Collected Reserves totaled $6.0 million and $6.2 million, respectively. Interest charged on the amount of receivables sold prior to collection is charged at an annual rate of prime plus 1.5% or 2.5%. Receivables sold may not include amounts that are over 90 days past due.

Under the terms of the Wells Fargo agreements, with the exception of CRD permanent placement receivables, Wells Fargo advances 90% of the assigned receivables’ value upon sale, and the remaining 10% upon final collection. Under the terms of CRD’s agreement, the financial institution advances 65% of value of the assigned CRD permanent placement receivables’ value upon sale, and the remaining 35% upon final collection. The aggregate amount of trade receivables from the permanent placement business that CRD may sell to Wells Fargo at any one time is $1,250,000. Interest expense charged under the Wells Fargo trade accounts receivable purchase agreement is included in interest expense in the accompanying statements of operations and amounted to $832,000 for the three months ended December 28, 2012 compared to $719,000 for the three months ended December 30, 2011.  Tri-State and Robert Cassera, who together with affiliated persons own approximately 91.3% of our outstanding shares of common stock, have guaranteed our obligations to Wells Fargo.

The trade accounts receivable purchase agreement between Accountabilities and ICG Inc. and Amerisource each have a term of two years and maximum borrowing amounts of $7.5 million and $4.5 million, respectively, with an advance rate of 90%. The agreements provide for an interest rate of the prime rate plus 1% (with minimum rates of 6% and 5% per annum for Accountabilities and ICG Inc., respectively) and a monthly collateral management fee of 0.65% of the average daily outstanding borrowings. As of December 28, 2012 and September 28, 2012, there were $10.5 million and $8.5 million of trade accounts receivable sold that remained outstanding, respectively.  In addition, there were $1.5 million and $1.8 million due from Amerisource as December 28, 2012 and September 28, 2012, respectively. The Company incurred interest charges on these borrowings of $339,000 and $270,000 for the three months ended December 28, 2012 and December 30, 2011, respectively.

 

Sales of Common Stock

During the three months ended December 28, 2012, 1,000,000 restricted shares of the Company’s common stock were issued under the terms of an advisory agreement, 50,000 restricted shares were granted to an employee as part of an employment agreement previously entered into and 17,000 restricted shares were forfeited.  In addition, the Company granted options to purchase up to 1,000,000 shares  of our common stock under the terms of the advisory agreement, of which 143,000 options have vested as of December 28, 2012.

 

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Critical Accounting Policies

The following represents a summary of the critical accounting policies, which our management believes are the most important to the portrayal of our financial condition and results of operations and involve inherently uncertain issues that require management’s most difficult, subjective or complex judgments.

Revenue Recognition. We recognize staffing and consulting revenues when services are rendered. Permanent placement revenue is recognized when the candidate commences employment, net of an allowance for those not expected to remain with clients through a 90-day guarantee period, wherein we are obligated to find a suitable replacement.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered. Our management estimates this allowance based upon knowledge of the financial condition of our clients, review of historical receivable and reserve trends and other pertinent information. If the financial condition of any of our clients deteriorates or there is an unfavorable trend in aggregate receivable collections, additional allowances may be required.

 

Intangible Assets. Goodwill and other intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. We perform an annual impairment analysis to test for impairment. No impairment was indicated by our latest impairment analysis. Intangible assets with finite lives are subject to amortization over the period they are expected to benefit and impairment reviews are performed when there is an indication that the asset might be impaired.  See Note 4 to the Consolidated Financial Statements.

 

 

Off-Balance Sheet Arrangements

 

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources. We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these agreements that have been material individually or in the aggregate. As of our most recent fiscal year end, we were not aware of any obligations under such indemnification agreements that would require material payments.

 

 

Effects of Inflation

 

Inflation and changing prices have not had a material effect on the Company’s net revenues and results of operations, as the Company has been able to modify its prices and cost structure to respond to inflation and changing prices.

 

 

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

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ITEM 4.          CONTROLS AND PROCEDURES

 

As required by SEC Rule 13a-15(b) under the Exchange Act of 1934, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Transitional Report on Form 10-QT.

 

Evaluation of Disclosure Controls and Procedures.  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 28, 2012.

 

Changes in Internal Control over Financial Reporting.  There were no changes in our internal controls over financial reporting during the three months ended December 28, 2012 that have materially affected, or are reasonably likely to have materially affected, our internal controls over financial reporting.

 

 

Part II Other Information

 

 

We are involved, from time to time, in routine litigation arising in the ordinary course of business, including the matters described in our Annual Report on Form 10-K for the fiscal year ended September 28, 2012. Management does not believe we are subject to any material pending legal proceedings outside of ordinary litigation incidental to our business as of the date of this Transitional Report on Form 10-QT.

  

 

There have been no material changes with respect to the risk factors disclosed in our latest Annual Report on Form 10-K for the fiscal year ended September 28, 2012 as filed with the SEC.

 

6. Exhibits

 

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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.

 

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