PART
I
About
Us
Resolve
Staffing, Inc. (“Company” or “Registrant”), headquartered in Cincinnati, Ohio,
is a national provider of outsourced human resource services with approximately
74 offices reaching from California to New York. The Company provides a full
range of human resource outsourcing services, including Professional Employer
Organization (“PEO”) services and solutions for temporary, temporary-to-hire, or
direct hire staffing in the medical, truck driver, clerical, office
administration, customer service, professional and light industrial
categories.
We
offer
a comprehensive range of human resource management services to help small and
medium-sized businesses manage the increasing costs and complexities of a broad
array of employment-related issues. We believe that the combination of these
two
principal services, PEO and staffing, enables us to provide our clients with
a
unique blend of services not offered by our competition. Our platform of human
resource outsourcing (“HRO”) services is built upon our expertise in payroll
processing, employee benefits and administration, workers' compensation
coverage, effective risk management and workplace safety programs and human
resource administration.
In
a PEO
arrangement, we enter into a contract to become a co-employer of the client's
existing workforce and assume responsibility for some or all of the client's
human resource management responsibilities. Staffing services include on-demand
or short-term staffing assignments, long-term or indefinite-term contract
staffing and comprehensive on-site management. Our staffing services also
include direct placement services, which involve fee-based search efforts for
specific employee candidates at the request of our PEO clients, staffing
customers or other companies.
On
February 7, 2005, the Company, entered into an equity purchase agreement
(“Agreement”), to purchase ELS Personnel Services (“ELS”) (the “Reverse
Combination”) from Employee Leasing Services, Inc., (“ELS Inc.”), a
privately-held company located in Cincinnati, Ohio. The Company’s Chief
Executive Officer and director, Ronald Heineman, is a principal shareholder,
officer and director of ELS. Pursuant to the equity purchase agreement, the
Company acquired the ownership interest in the group of companies which
comprised ELS Personnel Services, (ELS Personnel Services, LLC, Five Star
Staffing, Inc., Five Star Staffing (NY), Inc., and American Staffing Resources,
Ltd.) comprising a total of 10 temporary employee staffing locations. See “Basis
of Presentation” section in the notes to the financial statements for discussion
of accounting treatment of the acquisition of ELS.
Employee
Leasing Services, Inc., operated 3 locations and acquired the 7 temporary
employee staffing locations throughout fiscal 2004. ELS Inc. acquired Five
Star
Staffing, Inc. which consisted of 3 locations, in August 2004, Five Star
Staffing (NY), Inc., which consisted of 3 locations, in November 2004 and
American Staffing Resources, Ltd which consisted of 1 location , in November
2004. Prior to ELS Inc.’s acquisition of these entities, these entities were
owned and operated by unrelated third parties in various locations throughout
Florida, New York and Ohio.
In
connection with the Reverse Combination on February 7, 2005, ELS was deemed
to
be the acquiring company for accounting purposes and the Reverse Combination
was
accounted for as a reverse acquisition under the purchase method of accounting
for business combinations in accordance with accounting principles generally
accepted in the United States of America. The acquisition of the ELS entities
was treated as a reverse acquisition for financial accounting purposes and
therefore the accompanying comparative financial information is that of ELS
rather than the historical financial statements of the Company. In conjunction
with this transaction, the group of companies known as ELS Personnel Services,
which were legally acquired by the Company, changed its name to Resolve
Staffing, Inc.
On
various dates during 2005, the Company, entered into purchase agreements
(“Agreements”), to acquire all of the assets and/or ownership of various
separate privately-held entities owned and operated by unrelated parties located
throughout the United States. Pursuant to the acquisition agreements, the
Company acquired a total of 31 temporary employee staffing locations from the
newly acquired entities. These include:
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On
January 24, 2005, the Company acquired certain assets from Solaris
Staffing, Inc. These assets included the operations of certain temporary
staffing offices located in upstate New York.
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On
February 20, 2005, the Company acquired SupportStaff Employment Services,
a full-service staffing firm located in Sebring, FL.
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On
May 9, 2005, the Company acquired certain assets from Pride Staffing,
Inc.
These assets include a temporary staffing office located in Erie,
PA.
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On
June 13, 2005 the Company acquired The Arnold Group, a Southern California
staffing firm.
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On
June 20, 2005 the Company acquired Taylor Personnel Services, Inc.,
a
Buffalo, New York staffing firm.
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On
August 22, 2005 the Company acquired Truckers Plus, Inc., a thirteen
location truck driver staffing firm headquartered in Memphis,
Tennessee.
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On
September 14, 2005 the Company acquired QRD International Inc. d/b/a
Delta
Staffing, a Southern California staffing
firm.
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On
September 30, 2005 the Company acquired Midwest Staffing Inc., a
medical
staffing firm located in Oklahoma City,
Oklahoma.
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On
October 21, 2005 the Company acquired Star Personnel Services of
Kentucky,
LLC, a Northern KY staffing firm.
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On
October 31, 2005 the Company acquired Project Solvers Inc., a temporary
and permanent placement firm specific to the fashion, apparel, and
design
industries, with a New York office.
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On
November 10, 2005 the Company acquired ProCare Medical Staffing,
LLC, a
medical staffing firm with an Illinois
office.
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On
November 28, 2005 the Company acquired Big Sky Travel Nurses, Inc.,
a
medical staffing firm, with a Montana
office.
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On
December 11, 2005 the Company acquired Assisted Staffing, Inc., a
medical
staffing firm with an Arizona office
location.
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On
December 26, 2005 the Company acquired Pagnard Enterprises, Inc.,
a
temporary staffing firm with an Ohio
office.
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On
December 27, 2005 the Company acquired Drivers Plus, Inc., a truck
driver
staffing firm with an office in
Missouri.
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On
December 30, 2005 the Company acquired Staffpro, Inc., a temporary
staffing firm with one office in Kentucky and one office in
Ohio.
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Because
the owners of ELS held approximately 90% of the Company’s outstanding common
stock after the Reverse Combination, as well as the Company’s analysis of the
other criteria used for determining which entity is the accounting acquirer
under SFAS No. 141, ELS is deemed to be the acquiring company for accounting
purposes and the Reverse Combination has been accounted for as a reverse
acquisition under the purchase method of accounting for business combinations
in
accordance with accounting principles generally accepted in the United States
of
America. The audited
financial
statements of the Company for the year ended December 31, 2004 are included
in the Company’s Annual Report on Form 10-KSB, filed with the Securities and
Exchange Commission (the “SEC”) on April 15, 2005. The audited financial
statements of ELS for the two years ended December 31, 2003 and 2004 or such
time as the entity was under the control of ELS, Inc. through December 31,
2004
have been included in the Company’s amended report on Form 8-K pertaining to
this acquisition which was filed in December, 2005. In accordance with the
accounting treatment described above, the historical financial statements prior
to the Reverse Combination reflect those of ELS. In conjunction with this
transaction, the group of companies known as ELS Personnel Services, which
were
legally acquired by the Company, changed its name to Resolve Staffing, Inc.
The
financial information for 2004 includes the combined balances and combined
results of operations of the individual entities which comprise ELS. The
combined results of operations for the acquired entities include the activities
of each entity from the date of acquisition to December 31, 2004.
On
January 24, 2006, the Company acquired R & R Staffing Services, Inc.,
located in Syracuse, New York.
On
March
27, 2006, the Company acquired Ready Nurses LLC, a Fulton, Missouri based
medical staffing firm.
On
May 5,
2006, the Company acquired Steadystaff, a Baltimore/Washington D. C. based
staffing firm.
On
June
1, 2006, the Company announced that it has completed the acquisition of Star
Personnel, headquartered in Cincinnati, Ohio.
On
October 1, 2006, the Company, entered into an equity purchase agreement
(“Agreement”), to purchase Employee Leasing Services, Inc. (“ELS Inc.”)
(“Combination”), a group of privately-held companies known as ELS Inc. located
in Cincinnati, Ohio. The Company’s Chief Executive Officer and Director, Ronald
Heineman, is a principal shareholder, officer and director of ELS Inc. Pursuant
to the equity purchase agreement, the Company acquired the ownership interest
in
the group of companies which comprised ELS Inc.
In
connection with the Combination on October 1, 2006, Resolve was deemed to be
the
acquiring company for accounting purposes and the Combination was accounted
for
as an acquisition under the purchase method of accounting for business
combinations in accordance with accounting principles generally accepted in
the
United States of America. The financial information for 2006, 2005 and 2004
includes the consolidated balances as of December 31, 2006 and 2005 and the
consolidated results of operations of the individual entities which comprise
Resolve for the years ended December 31, 2006, 2005 and 2004. The consolidated
results of operations for the acquired entities include the activities of each
entity from the date of acquisition to the end of the period.
Our
ability to offer clients a broad range of services allows us to become an
outsourced human resource department and strategic partner for our clients.
We
believe our approach allows our clients to focus on their core business rather
than human resources, thus making them more productive.
Our
Business
The
Company focuses on meeting our clients' flexible human resource outsourcing
needs, targeting opportunities in a fragmented; growing market that we believe
has been under-served by large, full-service staffing and PEO companies.
Significant benefits to clients include providing the ability to outsource
the
recruiting and many logistical aspects of their human resource needs, as well
as
converting the fixed cost of employees to the variable cost of outsourced
services. A summary of our Payroll Administration Services and Aggregation
of
Statutory and Non-Statutory Employee Benefits Services are as
follows:
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Professional
Employer Organization - In a PEO arrangement, we enter into a contract
to
become a co-employer of the client's existing workforce and assume
responsibility for some or all of the client's human resource management
responsibilities.
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Payroll
Administration Services - We assume responsibility for our employees
for
payroll and attendant record-keeping, payroll tax deposits, payroll
tax
reporting, and all federal, state, payroll tax reports (including
941s,
940s, W-2s, W-3s, W-4s and W-5s), state unemployment taxes, employee
file
maintenance, unemployment claims and monitoring and responding to
changing
regulatory requirements.
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Aggregation
of Statutory and Non-Statutory Employee Benefits Services - We provide
workers' compensation and unemployment insurance to our service employees.
Workers' compensation is a state-mandated comprehensive insurance
program
that requires employers to fund medical expenses, lost wages, and
other
costs that result from work related injuries and illnesses, regardless
of
fault and without any co-payment by the employee. Unemployment insurance
is an insurance tax imposed by both federal and state governments.
Our
human resources and claims administration departments monitor and
review
workers' compensation for loss control
purposes.
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We
are
the employer of record with respect to flexible staffing services and assume
responsibility for most employment regulations, including compliance with
workers' compensation and state unemployment laws. As part of our basic services
in the flexible staffing market, we conduct a human resources needs analysis
for
clients and client employees. Such analysis includes reviewing work schedules
and productivity data, in addition to recruiting, interviewing, and qualifying
candidates for available positions. Based on the results of that review, we
recommend basic and additional services that the client should
implement.
We
provide certain other services to our flexible industrial staffing clients
on a
fee-for-service basis. These services include screening, recruiting, training,
workforce deployment, loss prevention and safety training, pre-employment
testing and assessment, background searches, compensation program design,
customized personnel management reports, job profiling, description,
application, turnover tracking and analysis, drug testing policy administration,
affirmative action plans, opinion surveys and follow-up analysis, exit
interviews and follow-up analysis, and management development skills
workshops.
The
focus
of our temporary staffing service is to provide short and long term employees
as
well as temp to hire employees to financially secured employers. The average
employee will work a 40 hour work week for a client and will work for an average
of two employers per month. It is estimated an employee will work an average
of
14 days per month. Our service specializes in a variety of staffing fields
including medical, truck driver, clerical, and light industrial staffing with
the largest percentage in the clerical and light industrial fields. Each
applicant is thoroughly interviewed tested and screened to meet the requirements
of our customers. For long term and temp to hire positions a large percentage
of
our customers will interview our candidates and then select the one they believe
to be best suited for the position.
The
Market
The
Human
Resource Outsourcing (HRO) market is large and growing rapidly. Some of the
key
factors driving growth include the desire of businesses to outsource non-core
business functions, to reduce regulatory compliance risk, to rationalize the
number of service providers that they use, and to reduce costs by integrating
human resource systems and processes.
The
outsourcing of business processes represents a growing trend within the United
States. By utilizing the expertise of outsourcing service providers, businesses
are able to reduce processing costs and administrative burdens while at the
same
time offering competitive benefits for their employees. The technical
capabilities, knowledge and operational expertise that we have built, along
with
our broad portfolio of services for clients, have enabled us to capitalize
on
the growing business processing outsourcing trend.
Our
goal
is to become a leading national provider of HRO services for small and
medium-sized businesses. We seek to differentiate our strategic position by
offering a full spectrum of PEO and staffing services. We believe that the
integrated nature of our service platform assists our clients and customers
in
successfully aligning and strengthening their organizational structure to meet
the demands of their businesses. In pursuit of this goal, we have adopted the
operating and growth strategies described below to provide the framework for
our
future growth, while maintaining the quality and integrity of our current
service offerings.
Competition
The
HRO
industry is characterized by intense competition. In staffing, we compete with
many small providers in addition to several large public companies, including
Ablest, Inc., Spherion, Adecco, S.A., Kelly Services, Inc., Manpower, Inc.,
and
others. There are limited barriers to entry and new competitors frequently
enter
the market. Although a large percentage of flexible staffing providers are
locally operated with fewer than five offices, most of the large public
companies have significantly greater marketing, financial and other resources
than us. We believe that by focusing primarily on customer service, we enjoy
a
competitive advantage over many of our competitors that attempt to provide
a
broader range of staffing services. We also believe that by targeting regional
and local companies, rather than the national companies that are generally
being
pursued by our competitors; we can gain certain competitive
advantages.
PEO
companies that periodically compete with us in the same markets have greater
financial and marketing resources than we do, such as Administaff, Inc.,
Gevity HR, Inc., and Paychex, Inc., among others. Competition in the
PEO industry is based largely on price, although service and quality can also
provide competitive advantages. A significant limiting factor to the growth
of
the PEO industry is the perception of potential clients that they have the
capacity to handle human resource issues internally. We believe that our growth
is attributable to our ability to provide small and medium-sized companies
with
the opportunity to reduce workers' compensation costs and to provide enhanced
benefits to their employees while reducing their overall personnel
administration costs.
We
believe that several factors contribute to obtaining and retaining clients
in
the professional, clerical, administrative, light industrial and technical
support staffing market. These factors include an understanding of clients'
specific job requirements, the ability to reliably provide the correct number
of
employees on time, the ability to monitor job performance, and the ability
to
offer competitive prices. To attract qualified candidates for flexible
employment assignments, companies must offer competitive wages, positive work
environments, flexibility of work schedules, an adequate number of available
work hours and, in some cases, vacation and holiday pay. We believe we are
reasonably competitive in these areas in the markets in which we compete,
although we cannot assure you that we will maintain a competitive standing
in
the future.
Employees
As
of
December 31, 2006 we employed over 10,000 PEO employees and over 4,000 temporary
employees.
Typical
Client
Our
HRO
clients represent a cross-section of the industrial sector, of which no client
currently represents more than 5% of our total revenues. We attempt to maintain
diversity within our client base in order to decrease our exposure to downturns
or volatility in any particular industry, but we cannot assure you that we
will
be able to maintain such diversity or decrease our exposure to such volatility.
All prospective clients fill out a questionnaire to help us evaluate workers'
compensation risk, creditworthiness, unemployment history, and operating
stability. We are not dependent on any one customer in any of the markets we
serve.
Our
Offices
Our
Company headquarters are located at 3235 Omni Drive, Cincinnati, Ohio 45245.
Our
telephone number is 800-894-4250.
In
addition to our corporate headquarters, we lease facilities at approximately
74
locations throughout the United States. Our offices are adequate for our present
level of operations. In the future we will need additional facilities in which
to centralize our accounting, training, human resource, risk management and
executive work activities. We anticipate that we will require larger scale
data
processing and network communication capabilities, which will be needed in
order
to facilitate the assimilation of acquired companies into our methods of
operating and accounting standards, and to provide customers state-of-the-art
service and support.
Industry
Regulation
Overview
We
are
subject to the laws and regulations of the jurisdictions within which we
operate, including those governing high deductible employers under the workers'
compensation systems in certain states. We believe we are in compliance with
all
HRO licensing requirement. As an employer, we are subject to federal, state,
and
local statutes and regulations governing our relationships with our employees
and affecting businesses generally, including employees at client worksites.
We
assume the sole responsibility and liability for the payment of federal and
state employment taxes with respect to wages and salaries paid to our employees.
Our
operations are affected by numerous federal and state laws relating to labor,
tax and employment matters. By entering into a co-employer relationship with
employees who are assigned to work at client locations (sometimes referred
to as
"work-site employees"), we assume certain obligations and responsibilities
of an
employer under these federal and state laws. Because many of these federal
and
state laws were enacted prior to the development of nontraditional employment
relationships, such as professional employer, temporary employment, and
outsourcing arrangements, many of these laws do not specifically address the
obligations and responsibilities of nontraditional employers. In addition,
the
definition of "employer" under these laws is not uniform. As an employer, we
are
subject to all federal statutes and regulations governing our employer-employee
relationships. Subject to the discussion of risk factors below, we believe
that
our operations are in compliance in all material respects with applicable
federal statutes and regulations.
We
offer
various benefit plans to our worksite employees. These plans include a
multiple-employer retirement plan, a cafeteria plan, a group health plan, a
group life insurance plan, a group disability insurance plan and an employee
assistance plan. Generally, employee benefit plans are subject to provisions
of
both the Internal Revenue Code and the Employee Retirement Income Security
Act
of 1974, as amended. In order to qualify for favorable tax treatment under
the
Code, the benefit plans must be established and maintained by an employer for
the exclusive benefit of the employer's employees. An IRS examination may
determine that we were not the employer of our worksite employees under Internal
Revenue Code provisions applicable to
employee
benefit plans. If the IRS were to conclude that we were not the employer of
our
worksite employees for employee benefit plan purposes, those employees would
not
have qualified to make tax favored contributions to our multiple-employer
retirement plans or cafeteria plan. If such conclusion were applied
retroactively, employees' vested account balances, could become taxable
immediately, we could lose our tax deduction to the extent the contributions
were not vested, the plan trust could become a taxable trust and penalties
could
be assessed. In such a scenario, we could face the risk of potential litigation
by some of our clients. As such, we believe that a retroactive application
by
the IRS of an adverse conclusion could have a material adverse effect on our
financial position, results of operations and liquidity.
ERISA
also governs employee pension and welfare benefit plans. The United States
Supreme Court has held that the common law test of employment must be applied
to
determine whether an individual is an employee or an independent contractor
under ERISA. If we were found not to be an employer for ERISA purposes, our
employee benefit plans would not be subject to ERISA. As a result of such
finding, we and our employee benefit plans would not enjoy the preemption of
state law provided by ERISA and could be subject to varying state laws and
regulations, as well as to claims based upon state common law.
Workers'
compensation
Workers'
compensation is a state mandated comprehensive insurance program that requires
employers to fund medical expenses, lost wages and other costs resulting from
work-related injuries and illnesses. In exchange for providing workers'
compensation coverage for employees, employers are generally immune from any
liability for benefits in excess of those provided by the relevant state
statutes. In most states, the extensive benefits coverage for both medical
costs
and lost wages is provided through the purchase of commercial insurance from
private insurance companies, participation in state-run insurance
funds, high deductible funds or, if permitted by the state,
employer high deductible. Workers' compensation benefits and arrangements
vary on a state-by-state basis and are often highly complex. In Florida, for
instance, employers are required to furnish, solely through managed care
arrangements, the medically necessary remedial treatment for injured
employees.
Trademarks
and Service Marks
We
do not
have any registered trade or service marks. It is our intention to develop
service marks as appropriate and seek federal registration when possible. We
have begun the process of registering the mark "Resolve Staffing(TM)", and
the
name "Resolve Staffing" with a design, and, if federal registration is granted,
we intend to develop Resolve Staffing as our brand identity.
ITEM
1A. RISK FACTORS
We
were
incorporated in April 1998, and have been engaged in the staffing business
since
August 1999. Our potential for future profitability must be considered in light
of the risks, uncertainties, expenses and difficulties frequently encountered
by
companies in their early stages of development, particularly companies in
rapidly evolving markets, such as staffing services in general and those
catering to small to medium businesses in particular. Since we do not have
a
lengthy history in the staffing business; therefore, prospective investors
do
not have a historical basis from which to evaluate our performance.
We
Lost Money in 2006
We
have
incurred net losses from operations in 2006. Our net loss for the fiscal year
ended December 31, 2006 was $2,421,799 and as of December 31, 2006 we had an
accumulated deficit of $3,821,016. While we expect to become profitable in
the
future, we can not guarantee profitability. We expect our operating expenses
to
continue to increase as we attempt to build our brand, expand our customer
base
and make acquisitions. While we expect to become profitable, to become
profitable, we must increase revenue substantially and achieve and maintain
positive gross margins. We may not be able to increase revenue and gross margins
sufficiently to achieve profitability.
Unless
We Find a New Working Capital Funding Source, We Risk Losing Employees,
Customers and Workers’ Compensation Coverage
We
pay
our flexible staffing employees on a weekly basis. However, on average, we
receive payment for these services from our customers 30 to 60 days after the
date of invoice. As we establish or acquire new offices, or as we expand
existing offices, we will have increasing requirements for cash to fund these
payroll obligations. Our primary sources of working capital funds for payroll
related and workers' compensation expenditures have been loans or private
placements of securities to individuals, including certain of our shareholders.
If we do not obtain an institutional financing source and we are unable to
secure alternative financing on acceptable terms, we will lose employees,
customers, and may be unable to pay payroll related premiums.
We
are uncertain whether our current senior lender will agree to refinance or
extend our senior debt facility, and if so, whether the terms of refinancing
will be acceptable to us.
Our
senior debt forbearance agreement expires as of December 31, 2007 and our senior
lender has indicated that it would prefer that the Company refinance the debt
with alternate financing in order for the current senior lender to exit. If
our
existing senior lender does not refinance our senior debt and a new lender
cannot be found or a new forbearance agreement negotiated with the current
lender that would include terms acceptable to the Company, it would have a
material adverse effect on our financial condition.
We
are Subject to Government Regulations and any Change in these Regulations,
or
the Possible Retroactive Application of These Regulations Could Result in
Additional Tax Liability
As
an
employer, we are subject to all federal, state and local statutes and
regulations governing our relationships with our employees and affecting
businesses generally, including our employees assigned to work at client company
locations (sometimes referred to as worksite employees).
Our
workers' compensation loss reserves may be inadequate to cover our ultimate
liability for workers' compensation costs.
We
maintain reserves (recorded as accrued liabilities on our balance sheet) to
cover our estimated liabilities for our high deductible workers' compensation
program. The determination of these reserves is based upon a number of factors,
including current and historical claims activity, claims payment patterns and
medical cost trends and developments in existing claims. Accordingly, reserves
do not represent an exact calculation of liability. Reserves can be affected
by
both internal and external events, such as adverse developments on existing
claims or changes in medical costs, claims handling procedures, administrative
costs, inflation, and legal trends and legislative changes. Reserves are
adjusted from time to time to reflect new claims, claim developments, or
systemic changes, and such adjustments are reflected in the results of the
periods in which the reserves are changed. Because of the uncertainties that
surround estimating workers' compensation loss reserves, we cannot be certain
that our reserves are adequate. If our reserves are insufficient to cover our
actual losses, we would have to increase our reserves and incur charges to
our
earnings that could be material.
Adverse
developments in the market for excess workers' compensation insurance could
lead
to increases in our costs.
We
have
a high deductible employer workers' compensation coverage in certain
states. To manage our financial exposure in the event of catastrophic injuries
or fatalities, we maintain excess workers' compensation insurance through
our insurance providers. Changes in the market for excess workers'
compensation insurance may lead to limited availability of such coverage,
additional increases in our insurance costs or further increases in our high
deductible retention, any of which may have a material adverse effect on our
financial condition.
If
we
are determined not to be an "employer" under certain laws and regulations,
our
clients may stop using our services, and we may be subject to additional
liabilities.
We
believe that we are an employer of employees provided to our PEO clients on
a
co-employment basis under the various laws and regulations of the Internal
Revenue Service and the U.S. Department of Labor. If we are determined not
to be
an employer under such laws and regulations and are therefore unable to assume
obligations of our clients for employment and other taxes, our clients may
be
held jointly and severally liable for payment of such taxes. Some clients or
prospective clients may view such potential liability as an unacceptable risk,
discouraging current clients from continuing a relationship with us or
prospective clients from entering into a new relationship with us. Any
determination that we are not an employer for purposes of ERISA could adversely
affect our cafeteria benefits plan operated under Section 125 of the
Internal Revenue Code and result in liabilities to us under the
plan.
We
may be exposed to employment-related claims and costs and periodic litigation
that could adversely affect our business and results of
operations.
We
either
co-employ employees in connection with our PEO arrangements or place our
employees in our customers' workplace in connection with our staffing business.
As such, we are subject to a number of risks inherent to our status as an
employer, including without limitation:
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claims
of misconduct or negligence on the part of our employees, discrimination
or harassment claims against our employees, or claims by our employees
of
discrimination or harassment by our clients;
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immigration-related
claims;
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claims
relating to violations of wage, hour and other workplace
regulations;
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claims
relating to employee benefits, entitlements to employee benefits,
or
errors in the calculation or administration of such benefits;
and
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possible
claims relating to misuse of customer confidential information,
misappropriation of assets or other similar
claims.
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If
we
experience significant incidents involving any of the above-described risk
areas
we could face substantial out-of-pocket losses, fines or negative publicity.
In
addition, such claims may give rise to litigation, which may be time consuming,
distracting and costly, and could have a material adverse effect on our
business. With respect to claims involving our co-employer relationship with
our
PEO clients, although our PEO services agreement provides that the client will
indemnify us for any liability attributable to the conduct of the client or
its
employees, we may not be able to enforce such contractual indemnification,
or
the client may not have sufficient assets to satisfy its obligations to
us.
Our
Employee Related Costs are Significant and, if Increased, and We are Unable
to
Pass these Costs on to Our Customers, Will Increase Our Cost of Doing
Business
We
are
required to pay a number of federal and state payroll taxes and related payroll
costs, including unemployment taxes, workers' compensation insurance premiums
and claims, Social Security, and Medicare, among others, for our employees.
We
also incur costs related to providing additional benefits to our employees,
such
as insurance premiums for health care. Health insurance premiums, unemployment
taxes and workers' compensation insurance premiums and costs are significant
to
our operating results, and are determined, in part, by our claims experience.
We
attempt to increase fees charged to our customers to offset any increase in
these costs, but we may be unable to do so or we may lose customers if we do.
If
the federal or state legislatures adopt laws specifying additional benefits
for
temporary workers, demand for our services may be adversely affected. In
addition, workers' compensation expenses are based on our actual claims
experiences in each state and our actual aggregate workers' compensation costs
may exceed estimates.
Because
Our Staffers Work at the Clients’ Place of Business, We May be Exposed to
Employment Related Claims and Costs that Arise from that Clients’ Work Place
Location and We do not Control the Clients’ Working
Environment
Temporary
staffing companies, such as ours, employ people in the workplace of their
customers. This creates a risk of potential litigation based on claims by
customers of employee misconduct or negligence, claims by employees of
discrimination or harassment, including claims relating to actions of our
customers, claims related to the inadvertent employment of illegal aliens or
unlicensed personnel, payment of workers' compensation claims and other similar
claims. We may be held responsible for the actions at a job site of workers
not
under our direct control.
We
May Lose Customers if We are Unable to Attract Qualified Temporary Personnel
Due
to Low Unemployment Rates and an Increase in Competition for Qualified Temporary
Personnel
We
compete with other temporary personnel companies to meet our customer's needs.
We must continually attract reliable temporary workers to fill positions and
may
from time to time experience shortages of available temporary workers. During
periods of increased economic activity and low unemployment, the competition
among temporary staffing firms for qualified personnel increases. Many regions
in which we operate are experiencing historically low rates of unemployment
and
we have experienced, and may continue to experience, significant difficulties
in
hiring and retaining sufficient number of qualified personnel to satisfy the
needs of our customers. Also, we may face increased competitive pricing
pressures during these periods of low unemployment rates.
We
Require Additional Capital to Fund Our Current Operations and to Make
Acquisitions. We May Have to Curtail Our Business if we Cannot Find Adequate
Funding
The
expansion and development of our business will require significant additional
capital, which we may be unable to obtain on suitable terms, or at all. We
currently have no legally binding commitments with any third parties to obtain
any material amount of additional equity or debt financing. If we are unable
to
obtain adequate funding on suitable terms, or at all, we may have to delay,
reduce or eliminate some or all of our advertising, marketing, acquisition
activity, general operations or any other initiatives.
If
We
are Unable to Successfully Integrate and Manage Acquired Business Without
Substantial Expense or Delay We May Not be Able to Effectively Operate Our
Business and/or It May decrease the Value of Our Common Stock
In
the
future, we intend to expand our operations through acquisitions of small and
medium size private companies, or divisions or segments of major private and
public companies. We will do this to:
|
·
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recruit
well−trained, high−quality professionals;
|
|
·
|
expand
our service offerings;
|
|
·
|
gain
additional industry expertise;
|
|
·
|
broaden
our client base; and
|
|
·
|
expand
our geographic presence.
|
We
may
not be able to integrate successfully businesses which we may acquire in the
future without substantial expense, delays or other operational or financial
problems. We may not be able to identify, acquire or profitably manage
additional businesses.
Our
Plan to Make Acquisitions May Divert Management’s Attention From Day-to-Day
Business Operations Which Could Prevent Our Business From Growing
If
we are
able to identify acquisition candidates, management's time and attention will
be
diverted from such activities as sales, marketing and tailoring staffing
solutions to meet customer's needs. If management is not able to address these
day−to−day operational tasks, we may lose customers or fail to increase
revenue.
Acquisition
Activities May Cause Us to Lose Existing Customers Because of Conflicts or
Service Problems
The
clients of companies we may acquire may be in the same or similar businesses
with our existing clients. Although we do not enter into agreements to restrict
the type of business which we service, providing staff services to existing
clients' direct competition may cause such existing clients to look elsewhere
for staffing services.
Our
Principal Stockholders, Officers and Directors Own a Controlling Interest in
Our
Voting Stock and Investors Will Not Have Voice in Our
Management
Our
officers, directors and stockholders with greater than 5% holdings will, in
the
aggregate, beneficially own approximately 77% of our outstanding common stock.
As a result, these stockholders, acting together, will have the ability to
control substantially all matters submitted to our stockholders for approval,
including:
|
·
|
election
of our board of directors;
|
|
·
|
removal
of any of our directors;
|
|
·
|
amendment
of our certificate of incorporation or bylaws; and
|
|
·
|
adoption
of measures that could delay or prevent a change in control or impede
a
merger, takeover or other business combination involving
us.
|
As
a
result of their ownership and positions, our directors and executive officers
collectively are able to influence all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, sales of significant amounts of shares held by our
directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
There
are a Large Number of Shares Underlying Our Warrants that May be Available
for
Future Sale and the Sale of These Shares May Cause the Price of Our Stock to
Drop
As
of
November 6, 2007, we had 19,828,511 shares of common stock issued and
outstanding, which includes 400,000 shares held in escrow as described in Note
C
to the accompanying financial statements. We also have 2,000,000 shares issuable
upon exercise of our warrants. The sale of these shares may cause the market
price of our common stock to drop. The issuance of shares upon conversion or
exercise of the warrants may result in substantial dilution to the interests
of
other stockholders.
The
Application of the “Penny Stock Regulation” Could Harm the Market Price of Our
Common Stock
Our
securities may be deemed a penny stock. Penny stocks generally are equity
securities with a price of less than $5.00 per share other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
Stock Market, provided that current price and volume information with respect
to
transactions in such securities is provided by the exchange or system. Our
securities may be subject to "penny stock rules" that impose additional sales
practice requirements on broker−dealers who sell such securities to persons
other than established customers and accredited investors (generally those
with
assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
together with their spouse). For transactions covered by these rules, the
broker−dealer must make a special suitability determination for the purchase of
such
securities
and have received the purchaser's written consent to the transaction prior
to
the purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the "penny stock rules" require the delivery, prior to the transaction,
of a disclosure schedule prescribed by the Commission relating to the penny
stock market. The broker−dealer also must disclose the commissions payable to
both the broker−dealer and the registered representative and current quotations
for the securities. Finally, monthly statements must be sent disclosing recent
price information on the limited market in penny stocks. Consequently, the
"penny stock rules" may restrict the ability of broker−dealers to sell our
securities and may have the effect of reducing the level of trading activity
and
price of our common stock in the secondary market.
Should
We Enter Into an Acquisition in Exchange for the Issuance of Shares of Our
Common Stock, Such Issuance May Have a Dilutive Effect for Our Current
Shareholders and May Cause the Price of Our Common Stock to
Decline
The
future issuance of all or part of our remaining authorized but currently
unissued common stock in connection with an acquisition may result in
substantial dilution in the percentage of our common stock held by our then
existing shareholders. We may value any common stock issued in the future on
an
arbitrary basis. The issuance of common stock for future services or
acquisitions or other corporate actions may have the effect of diluting the
value of the shares held by our investors, and might cause the price of our
common stock to decline.
We
compete with numerous larger competitors, many of which are better financed
and
have a stronger presence in the industry than ourselves.
As
many
of these firms have significantly stronger name recognition than ourselves,
they
are in a position to quickly attract clients which are in need of services
thus
adversely impacting our potential pool of clients. Our marketing structure
is
not proprietary and it would not be difficult for a company to offer similar
services. Further, entry into the marketplace by new competitors is relatively
easy especially considering their existing presences and their greater resources
for financing, advertising and marketing.
Any
significant economic downturn could result in the Company’s clients using fewer
temporary employees, which would materially adversely affect our business.
Because
demand for temporary personnel services is sensitive to changes in the level
of
economic activity, the Company’s business may suffer during economic downturns.
As economic activity begins to slow down, companies tend to reduce their use
of
temporary employees before undertaking layoffs of their regular employees,
resulting in decreased demand for temporary personnel. Significant declines
in
demand, and thus in revenues, can result in expense de-leveraging, which would
result in lower profit levels.
The
staffing services industry is highly competitive with limited barriers to entry,
which could limit the Company’s ability to maintain or increase its market share
or profitability.
The
staffing services market is highly competitive with limited barriers to entry,
and in recent years has been undergoing significant consolidation. The Company
competes in markets throughout North America with full-service and specialized
temporary service agencies. Several of the Company’s competitors, including
Adecco S.A., Vedior N.V., Randstad Holding N.V. and Kelly Services, Inc., have
very substantial marketing and financial resources. Price competition in the
staffing industry is intense and pricing pressures from competitors and
customers are increasing. The Company expects that the level of competition
will
remain high in the future, which could limit its ability to maintain or increase
its market share or profitability.
Unless
we find a new working capital funding source, we risk losing employees,
customers and workers’ compensation coverage
We
pay
our flexible staffing employees on a weekly basis. However, on average, we
receive payment for these services from our customers 30 to 60 days after the
date of invoice. As we establish or acquire new offices, or as we expand
existing offices, we will have increasing requirements for cash to fund these
payroll obligations. Our primary sources of working capital funds for payroll
related and workers' compensation expenditures have been loans or private
placements of securities to individuals, including certain of our shareholders.
If we do not obtain an institutional financing source and we are unable to
secure alternative financing on acceptable terms, we will lose employees,
customers, and may be unable to pay payroll related premiums.
Government
regulations may result in prohibition or restriction of certain types of
employment services or the imposition of additional licensing or tax
requirements that may reduce the Company’s future earnings.
The
temporary employment industry is heavily regulated. Within the United States,
wherein the Company now operates, the Company’s operations may have to adjust
to:
|
•
|
additional
regulations that prohibit or restrict the types of employment services
that The Company currently provides;
|
|
•
|
the
imposition of new or additional benefit requirements;
|
|
•
|
requirements
that require The Company to obtain additional licensing to provide
staffing services; or
|
|
•
|
Increases
in taxes, such as sales or value-added taxes, payable by the providers
of
staffing services.
|
Any
future regulations may have a material adverse effect on the Company’s financial
condition, results of operations and liquidity because they may make it more
difficult or expensive for the Company to continue to provide staffing services.
The
Company’s acquisition strategy may have a material adverse effect on its
business due to unexpected or underestimated costs.
The
Company has completed a series of acquisitions during 2005-2006 of smaller
and
less capitalized temporary staffing services competitors and its current plan
is
to continue with this acquisition strategy in the future although no assurance
or guaranty can be given that the Company will make further acquisitions. The
Company’s acquisition strategy involves significant risks, including:
|
•
|
difficulties
in the assimilation of the operations, services and corporate culture
of
acquired companies;
|
|
•
|
over-valuation
by the Company of acquired companies;
|
|
•
|
insufficient
indemnification from the selling parties for legal liabilities incurred
by
the acquired companies prior to the acquisitions; and
|
|
•
|
diversion
of management’s attention from other business concerns.
|
These
risks could have a material adverse effect on the Company’s business because
they may result in substantial costs to the Company and disrupt the Company’s
business. In addition, future acquisitions could materially adversely affect
the
Company’s business, financial condition, results of operations and liquidity
because they would likely result in the incurrence of additional debt or
dilution, contingent liabilities, an increase in interest expense and
amortization expenses related to separately identified intangible assets.
Possible impairment losses on goodwill and restructuring charges could also
occur.
Intense
competition may limit the Company’s ability to attract, train and retain the
qualified personnel necessary for the Company to meet its customers’ staffing
needs.
The
Company depends on its ability to attract and retain qualified temporary
personnel who possess the skills and experience necessary to meet the staffing
requirements of its clients. The Company must continually evaluate and upgrade
its base of available qualified personnel through recruiting and training
programs to keep pace with changing client needs and emerging technologies.
Competition for individuals with proven professional skills, particularly
employees with accounting and technological skills, is intense, and the Company
expects demand for such individuals to remain very strong for the foreseeable
future. Qualified personnel may not be available to the Company in sufficient
numbers and on terms of employment acceptable to the Company. Developing and
implementing training programs require significant expenditures and may not
result in the trainees developing effective or adequate skills. The Company
may
not be able to develop training programs to respond to its clients’ changing
needs or retain employees whom it has trained. The failure to recruit, train
and
retain qualified temporary employees could materially adversely affect the
Company’s business because it may result in an inability to meet its customers’
staffing needs.
The
Company may be exposed to employment-related claims and costs and other
litigation that could materially adversely affect its business, financial
condition and results of operations.
The
Company is in the business of employing people and placing them in the
workplaces of other businesses. Risks relating to these activities include:
|
•
|
claims
of misconduct or negligence on the part of the Company’s employees;
|
|
•
|
claims
by the Company’s employees of discrimination or harassment directed at
them, including claims relating to actions of its clients;
|
|
•
|
claims
related to the employment of illegal aliens or unlicensed personnel;
|
|
•
|
payment
of workers’ compensation claims and other similar claims;
|
|
•
|
violations
of wage and hour requirements;
|
|
•
|
retroactive
entitlement to employee benefits;
|
|
•
|
errors
and omissions of the Company’s temporary employees, particularly in the
case of professionals, such as accountants; and
|
|
•
|
claims
by the Company’s clients relating to its employees’ misuse of client
proprietary information, misappropriation of funds, other criminal
activity or torts or other similar claims.
|
The
Company may incur fines and other losses or negative publicity with respect
to
these problems. In addition, some or all of these claims may give rise to
litigation, which could be time-consuming to its management team and costly
and
could have a negative impact on its business. the Company cannot assure you
that
it will not experience these problems in the future or that its insurance will
be sufficient in amount or scope to cover any of these types of liabilities.
The
Company cannot assure you that its insurance will cover all claims that may
be
asserted against it. Should the ultimate judgments or settlements exceed its
insurance coverage, they could have a material effect on the Company’s results
of operations, financial position and cash flows. The Company also cannot assure
you that it will be able to obtain appropriate types or levels of insurance
in
the future or that adequate replacement policies will be available on acceptable
terms, if at all.
If
the Company loses its key personnel, then its business may suffer.
The
Company’s operations are dependent on the continued efforts of its officers and
executive management. In addition, the Company is dependent on the performance
and productivity of its local managers and field personnel. The Company’s
ability to attract and retain business is significantly affected by local
relationships and the quality of service rendered. The loss of those key
officers and members of executive management who have acquired significant
experience in operating a staffing service may cause a significant disruption
to
the Company’s business. Moreover, the loss of the Company’s key managers and
field personnel may jeopardize existing client relationships with businesses
that continue to use its staffing services based upon past relationships with
these local managers and field personnel. The loss of such key personnel could
materially adversely affect the Company’s operations, because it may result in
an inability to establish and maintain client relationships and otherwise
operate its business.
The
price of the Company’s common stock may fluctuate significantly, which may
result in losses for investors.
The
market price for the Company’s common stock has been and may continue to be
volatile. For example, during the fiscal year ended December 31, 2006, the
prices of the Company’s common stock as reported on the OTCBB ranged from a high
of $3.26 to a low of $.09. the Company’s stock price can fluctuate as a result
of a variety of factors, including factors listed in these “Risk Factors” and
others, many of which are beyond the Company’s control. These factors include:
|
•
|
actual
or anticipated variations in the Company’s quarterly operating results;
|
|
•
|
announcement
of new services by the Company or the Company’s competitors;
|
|
•
|
announcements
relating to strategic relationships or acquisitions;
|
|
•
|
changes
in financial estimates or other statements by securities analysts;
and
|
|
•
|
changes
in general economic conditions.
|
Because
of this volatility, the Company may fail to meet the expectations of its
shareholders or the public marketplace, and its stock price could decline as
a
result.
Because
we do not intend to pay any cash dividends on our common stock, our Shareholders
will not be able to receive a return on their shares unless they sell
them.
We
intend
to retain any future earnings to finance the development and expansion of our
business. We do not anticipate paying any cash dividends on our Common Stock
in
the foreseeable future. Unless we pay dividends, our Shareholders will not
be
able to receive a return on their shares unless they sell them. There is no
assurance that Shareholders will be able to sell shares when desired or that
when they chose to do so, that they will receive a return on their investment
in
the Common Stock.
As
a
public company, our administrative costs will be significantly higher than
they
are now, which will make it more difficult for us to be profitable and cash
flow
positive. Difficulties in complying with the Sarbanes-Oxley Act and other legal
and accounting requirements applicable to public companies could affect our
market value.
As
a
public company, we incur significant legal, accounting and other expenses that
we did not incur as a private company. In addition, the Sarbanes-Oxley Act
of
2002, as well as new rules subsequently implemented by the Commission, have
imposed various new requirements on public companies, including requiring
changes in corporate governance practices. Our management and other personnel
will need to devote a substantial amount of time to these compliance
requirements. Moreover, these rules and regulations will increase our legal
and
financial compliance costs and will make some activities more
time
consuming
and costly. Expenses as a result of our being a public company include
additional amounts for legal and accounting services, transfer agent fees,
additional insurance costs, printing and filing fees and fees for investor
and
public relations.
The
existence of outstanding warrants may impair our ability to obtain additional
equity financing.
The
existence of outstanding warrants may adversely affect the terms at which we
could obtain additional equity financing. The holders of these warrants have
the
opportunity to profit from a rise in the value or market price of our Common
Stock and to exercise them at a time when we could obtain equity capital on
more
favorable terms than those contained in these securities.
We
may issue shares of preferred stock in the future, which could depress the
price
of our stock.
Our
corporate charter authorizes us to issue shares of “blank check” preferred
stock. Our board of directors has the authority to fix and determine the
relative rights and preferences of preferred shares, as well as the authority
to
issue such shares, without further shareholder approval. As a result, our board
of directors could authorize the issuance of a series of preferred stock that
would grant to holders preferred rights to our assets upon liquidation, the
right to receive dividends before dividends are declared to holders of our
common stock, and the right to the redemption of such preferred shares, together
with a premium, prior to the redemption of the common stock. To the extent
that
we do issue such additional shares of preferred stock, the rights of the holders
of our Common Stock and other securities could be impaired thereby, including,
without limitation, with respect to liquidation.
We
may, in the future, issue additional common shares, which would reduce
investors' percent of ownership and may dilute our share
value.
Our
corporate charter authorizes the issuance of 50,000,000 shares of Common Stock.
The future issuance of Common Stock may result in substantial dilution in the
percentage of our Common Stock held by our then existing shareholders. We may
value any Common Stock issued in the future on an arbitrary basis. The issuance
of Common Stock for future services or acquisitions or other corporate actions
may have the effect of diluting the value of the shares held by our investors,
and might have an adverse effect on any trading market for our Common
Stock.
The
future issuance of all or part of our remaining authorized but currently
unissued Common Stock in connection with an acquisition may result in
substantial dilution in the percentage of our Common Stock held by our then
existing shareholders. We may value any Common Stock issued in the future on
an
arbitrary basis. The issuance of Common Stock for future services or
acquisitions or other corporate actions may have the effect of diluting the
value of the shares held by our investors, and might cause the price of our
Common Stock to decline.
The
timing and amount of our capital requirements are not entirely within our
control and cannot accurately be predicted and as a result, we may not be able
to raise capital in time to satisfy our needs.
If
capital is required, we may require financing sooner than anticipated. We have
no commitments for financing, and we cannot be sure that any financing would
be
available in a timely manner, on terms acceptable to us, or at all. Further,
any
equity financing could reduce ownership of existing shareholders and any
borrowed money could involve restrictions on future capital raising activities
and other financial and operational matters. If we were unable to obtain
financing as needed, including the refinancing of our credit facility with
our
senior lender by December 31, 2007, we could become insolvent and be subject
to
bankruptcy proceedings.
We
may not be able to raise sufficient capital or generate adequate revenue to
meet
our obligations and fund our operating expenses.
Failure
to raise adequate capital and generate adequate sales revenues to meet our
obligations and develop and sustain our operations could result in our having
to
curtail or cease operations. Additionally, even if we do raise sufficient
capital and generate revenues to support our operating expenses, there can
be no
assurances that the revenue will be sufficient to enable us to develop business
to a level where it will generate profits and cash flows from operations.
Our
Common Stock is subject to the "Penny Stock" Rules of the Commission and the
trading market in our securities is limited, which makes transactions in our
stock cumbersome and may reduce the value of an investment in
ou
r
stock.
The
Commission has adopted Rule 15g-9 which establishes the definition of a "penny
stock," for the purposes relevant to us, as any equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:
|
·
|
that
a broker or dealer approve a person's account for transactions in
penny stocks; and
|
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·
|
the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny
stock to be purchased.
|
In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must:
|
·
|
obtain
financial information and investment experience objectives of the
person; and
|
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·
|
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks
of transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
|
·
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
|
·
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Generally,
brokers may be less willing to execute transactions in securities subject to
the
"penny stock" rules. This may make it more difficult for investors to dispose
of
our Common Stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
We
require additional capital to fund our current operations and to make
acquisitions. We may have to curtail our business if we can-not find adequate
funding
The
expansion and development of our business will require significant additional
capital, which we may be unable to obtain on suitable terms, or at all. We
currently have no legally binding commitments with any third parties to obtain
any material amount of additional equity or debt financing. If we are unable
to
obtain adequate funding on suitable terms, or at all, we may have to delay,
reduce or eliminate some or all of our advertising, marketing, acquisition
activity, general operations or any other initiatives.
ITEM
1B. UNRESOLVED STAFF COMMENTS
On
May
17, 2007, the U.S. Securities and Exchange Commission (“Commission”) issued
comments to the Company in connection with the Commission’s review of the Form
10-K filed by the Registrant on April 16, 2007, for the year ended December
31,
2006. Specifically, the Company’s conclusion that the accounting acquirer in the
Combination was most appropriately determined to be ELS, and therefore a reverse
merger was questioned by the Commission and ultimately, we decided to further
evaluate the best means to report the Combination. Upon further consideration
and additional interpretation of SFAS 141, as it relates to the Combination,
we
determined to concur with the Commission’s accounting staff and treat the
Company as the accounting acquirer, therefore accounting for the transaction
as
a forward merger. Revising our reports to account for the Combination as a
forward rather than a reverse merger requires the amendment of our Form 10-K
for
the period ended December 31, 2006 and our quarterly reports filed for the
quarters ended March 31 and June 30, 2007.
We
believe that once our periodic reports are amended and the Company responds
to
the comments we received from the Commission, the staff comments should be
completed.
ITEM
2. PROPERTIES
Our
headquarters are located at 3235 Omni Drive, Cincinnati, Ohio 45245. Our
telephone number is 800-894-4250.
In
addition to our corporate headquarters, the Company leases facilities at
approximately 74 locations throughout the United States. Our offices are
adequate for our present level of operations. In the future we will need
additional facilities in which to centralize our accounting, training, human
resource, risk management and executive work activities. We anticipate that
we
will require larger scale data processing and network communication
capabilities, which will be needed in order to facilitate the assimilation
of
acquired companies into our methods of operating and accounting standards,
and
to provide customers state-of-the-art service and support.
We
provide PEO and/or staffing services through all 74 of our branch offices.
The
following table shows the number of branch offices located in each state in
which we operate. We also lease office space in other locations in our market
areas which we use to recruit and place employees.
|
State
|
Number
of
Branch
Offices
|
|
New
York
|
16
|
|
Ohio
|
12
|
|
Florida
|
10
|
|
Kentucky
|
7
|
|
California
|
4
|
|
North
Carolina
|
3
|
|
Illinois
|
3
|
|
Pennsylvania
|
2
|
|
Texas
|
2
|
|
Tennessee
|
2
|
|
Missouri
|
2
|
|
Maryland
|
2
|
|
South
Carolina
|
1
|
|
Alabama
|
1
|
|
Georgia
|
1
|
|
Oklahoma
|
1
|
|
Montana
|
1
|
|
Arizona
|
1
|
|
Colorado
|
1
|
|
Michigan
|
1
|
|
Indiana
|
1
|
|
Total
|
74
|
The
Company is subject to legal proceedings and claims, which arise in the ordinary
course of its business. In the opinion of management, with the exception of
the
items listed below, the amount of ultimate liability with respect to currently
pending or threatened actions is not expected to materially affect the financial
position or results of operations of the Company. Litigation is subject to
inherent uncertainties and an adverse result may arise that may harm our
business.
The
Company is in receipt of a Determination and Assessment from the State of
Michigan, Department of Labor & Economic Growth, Unemployment Insurance
Agency seeking payment of amounts totaling $9,505,212. The Company and legal
counsel believe that this assessment is baseless and without merit and intends
to contest this assessment vigorously. As of December 31, 2006, no amount is
accrued in the Company’s financial statements as the matter is deemed groundless
and outside the authority of the Agency.
The
Company has received notice letters from the State of Ohio sales tax auditors
indicating their intention to make an assessment on employee leasing or
co-employment sales. As of the date of filing of this amended report on Form
10-K/A/, we have been notified that the assessed amount of Ohio sales taxes
is
$52,711,436.50. The Company conducts its business through written contracts
of
at least one year, and claims exemption from the sales tax auditor’s position.
We continue to work with the sales tax auditors to have this matter dismissed.
As of December 31, 2006, no amount is accrued in the Company’s financial
statements as the Company and legal counsel believe this assessment is
groundless.
As
of
December 31, 2006 the Company is in receipt of a notice from the United States
Department of Labor asserting various violations of ERISA relating to the ELS
Inc. group health plan. The Company is attempting to address the alleged
violations and does not believe this matter will have a material impact on
the
accompanying financial statements.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no submissions of matters to a vote of shareholders in 2006.
Executive
Officers of the Registrant
Information
required by this Item 4 concerning executive officers of the Company appears
under Item 10 “Directors and Officers of the Registrant”.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
NOTE
A - NATURE OF OPERATIONS, LIQUIDITY AND MANAGEMENT’S PLANS, AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Resolve
Staffing, Inc., (“Resolve” or the “Company”) was organized under the laws of the
State of Nevada on April 9, 1998. The Company is a national provider of
outsourced human resource services with over 74 offices reaching from California
to New York. The Company provides a full range of supplemental staffing and
outsourced solutions, including solutions for temporary, temporary-to-hire,
or
direct hire staffing in the clerical, office administration, customer service,
professional and light industrial categories.
Through the acquisition of the companies known as Employee Leasing Services,
Inc. (“ELS Inc.”), the Company is also a professional employer organization
(“PEO”) providing a variety of personnel management services, including human
resources, payroll, employer payroll taxes and benefits administration as well
as health and workers’ compensation insurance programs. Services are provided to
a diversified group of customers throughout the United States. As of December
31, 2006, the Company served approximately 560 clients located in 43 states
with
approximately 10,000 active PEO client employees and approximately 4,000
temporary staffing employees.
Approximately
55% of PEO revenues are derived from clients within the state of Ohio. The
Company’s PEO operations are headquartered in Cincinnati, Ohio with its main
processing center located in Shelby Township, Michigan.
On
February 7, 2005, Resolve Staffing, Inc., entered into an equity purchase
agreement (“Agreement”), to purchase ELS Personnel Services (“ELS”) (the
“Reverse Combination”) from Employee Leasing Services, Inc., (“ELS Inc.”), a
privately-held company located in Cincinnati, Ohio. The Company’s Chief
Executive Officer and director, Ronald Heineman, is a principal shareholder,
officer and director of ELS. Pursuant to the equity purchase agreement, Resolve
acquired the ownership interest in the group of companies which comprised ELS
Personnel Services, (ELS Personnel Services, LLC, Five Star Staffing, Inc.,
Five
Star Staffing (NY), Inc., and American Staffing Resources, Ltd.) comprising
a
total of 10 temporary employee staffing locations. See Basis of Presentation
section in the notes to the financial statements for discussion of accounting
treatment of the acquisition of ELS.
Employee
Leasing Services, Inc., operated 3 locations and acquired the 7 temporary
employee staffing locations throughout fiscal 2004. ELS Inc. acquired Five
Star
Staffing, Inc. which consisted of 3 locations, in August 2004, Five Star
Staffing (NY), Inc., which consisted of 3 locations, in November 2004 and
American Staffing Resources, Ltd which consisted of 1 location, in November
2004. Prior to ELS Inc.’s acquisition of these entities, these entities were
owned and operated by unrelated third parties in various locations throughout
Florida, New York and Ohio.
In
connection with the Reverse Combination on February 7, 2005, ELS was deemed
to
be the acquiring company for accounting purposes and the Reverse Combination
was
accounted for as a reverse acquisition under the purchase method of accounting
for business combinations in accordance with accounting principles generally
accepted in the United States of America. The acquisition of the ELS entities
was treated as a reverse acquisition for financial accounting purposes and
therefore the accompanying comparative financial information is that of ELS
rather than the historical financial statements of Resolve Staffing, Inc. In
conjunction with this transaction, the group of companies known as ELS Personnel
Services, which were legally acquired by Resolve Staffing, Inc., changed its
name to Resolve Staffing, Inc.
On
October 1, 2006, Resolve Staffing, Inc., entered into an equity purchase
agreement (“Agreement”), to purchase Employee Leasing Services, Inc. (the
“Combination”), a privately-held group of companies located in Cincinnati, Ohio.
The Company’s Chief Executive Officer and Director, Ronald Heineman, is a
principal shareholder, officer and director of ELS Inc. Pursuant to the equity
purchase agreement, Resolve acquired the ownership interest in the group of
companies which comprised ELS Inc.
In
connection with the Combination on October 1, 2006, Resolve was deemed to be
the
acquiring company for accounting purposes and the Combination was accounted
for
as an acquisition under the purchase method of accounting for business
combinations in accordance with accounting principles generally accepted in
the
United States of America. The financial information for 2006, 2005 and 2004
includes the consolidated balances as of December 31, 2006 and 2005 and the
consolidated results of operations of the individual entities which comprise
Resolve for the years ended December 31, 2006, 2005 and 2004. The consolidated
results of operations for the acquired entities include the activities of each
entity from the date of acquisition to the end of the period.
Principles
of Consolidation
The
consolidated financial statements for 2006, 2005 and 2004 include the accounts
of the Company and its subsidiaries. All significant inter-company accounts
and
transactions have been eliminated in preparing the accompanying consolidated
financial statements.
Nature
of Business
The
Company provides its PEO services by entering into a co-employment relationship
with its clients, under which the Company and its clients each take
responsibility for certain portions of the employer-employee relationship.
The
Company and its clients designate each party’s responsibilities through its
client services agreements, under which the Company becomes the employer of
its
worksite employees for most administrative and regulatory purposes. As a
co-employer of its worksite employees, the Company assumes most of the rights
and obligations associated with being an employer. The Company enters into
an
employment agreement with each worksite employee, thereby maintaining a variety
of employer rights, including the right to hire or terminate employees, the
right to evaluate employee qualifications or performance and the right to
establish employee compensation levels. Typically, the Company only exercises
these rights in consultation with its clients or when necessary to ensure
regulatory compliance. The responsibilities associated with the Company’s role
as employer include the following obligations with regard to its worksite
employees: (1) to compensate its worksite employees through wages and salaries,
(2) to pay the employer portion of payroll-related taxes, (3) to withhold and
remit (where applicable) the employee portion of payroll-related taxes, (4)
to
provide employee benefit programs, and (5) to provide workers’ compensation
insurance coverage.
In
addition to its assumption of employer status for its worksite employees, the
Company’s services also include other human resource functions for its
clients.
The
Company plans to continue to grow the business through the acquisition of
private companies in the staffing industry that would provide types of staffing
and/or related services with which it’s familiar. The Company may seek private
staffing companies for acquisitions or strategic alliances both in and out
of
its current markets. By acquiring existing staffing companies the Company
believes it will enable it to:
|
·
|
recruit
well-trained, high-quality professionals;
|
|
·
|
expand
its service offerings;
|
|
·
|
gain
additional industry expertise;
|
|
·
|
broaden
its client base; and
|
|
·
|
expand
its geographic presence.
|
On
various dates during 2006 and 2005, Resolve Staffing, Inc., entered into
purchase agreements (“Agreements”), to acquire all of the assets and/or
ownership of various separate privately-held entities owned and operated by
unrelated parties located throughout the United States. Pursuant to the
acquisition agreements, Resolve acquired a total of 62 temporary employee
staffing locations from the newly acquired entities.
Acquisition
of Entity from Related Party
In
connection with the Combination on October 1, 2006, described above, Resolve
was
deemed to be the acquiring company for accounting purposes and the Combination
was accounted for as an acquisition under the purchase method of accounting
for
business combinations in accordance with accounting principles generally
accepted in the United States of America. In conjunction with this transaction,
Resolve issued 1,486,685 shares of restricted common stock valued at $2,601,699
(See Note M) and a note payable in the amount of $11,977,641 (originally
$18,641,498, See Notes C, G and N) in exchange for 100% of the ownership of
ELS
Inc. In accordance with the accounting for an acquisition the fair value of
the
assets and liabilities assumed, on the date of acquisition were deemed to be
those of ELS Inc. (the acquired entity) and were as follows:
|
Accounts
Receivable
|
$
465,423
|
|
Prepaid
and Other Assets
|
181,560
|
|
Property
and Equipment
|
454,123
|
|
Goodwill
|
14,898,181
|
|
Related
Party Receivable
|
6,996,214
|
|
Deposits
and Other Assets
|
389,996
|
|
Accounts
Payable and Accrued Liabilities
|
(5,761,842)
|
|
Bank
overdraft
|
(1,894,315)
|
|
Notes
Payable
|
(1,150,000)
|
|
Total
|
$
14,579,340
|
|
|
|
Acquisition
of Entities from Related Parties
In
connection with the Reverse Combination on February 7, 2005, described in the
Basis of Presentation section of the notes to consolidated financial statements,
ELS was deemed to be the acquiring company for accounting purposes and the
Reverse Combination was accounted for as a reverse acquisition under the
purchase method of accounting for business combinations in accordance with
accounting principles generally accepted in the United States of America. In
conjunction with this transaction, Resolve issued 13,000,000 shares of
restricted common stock valued at $130,000, a note payable in the amount of
$1,500,000, and paid cash of $17,125, in exchange for 100% of the ownership
interest in 4 entities with 10 staffing locations. The fair value of the assets
and liabilities assumed, on the date of acquisition were as
follows:
|
Accounts
receivable
|
|
|
$
30,457
|
|
Prepaid
and other assets
|
|
56,378
|
|
Property
and equipment
|
|
15,280
|
|
Goodwill
|
|
|
|
2,035,679
|
|
Accounts
payable and accrued liabilities
|
(71,425)
|
|
|
|
|
Notes
payable
|
|
|
(419,244)
|
|
|
|
|
|
|
|
|
|
|
|
$
1,647,125
|
Acquisition
of Entities from Unrelated Parties
During
2006 and 2005, Resolve Staffing, Inc., entered into purchase agreements
(“Agreements”), to acquire all of the assets and/or ownership of various
privately-held entities owned and operated by unrelated parties. Pursuant to
the
acquisition agreements, Resolve acquired the temporary employee staffing
locations from the newly acquired entities.
Resolve
agreed a total purchase price for the acquisition of the entities from unrelated
parties of $8,941,355, $6,030,000 and $-, for the years ended December 31,
2006,
2005 and 2004, respectively. The Company paid cash, issued notes payable, issued
common stock and accrued contingent expenses in exchange for the assets acquired
and liabilities assumed of the above acquired entities as described below.
The
following table summarizes the estimated fair value of the net assets acquired
on the date of acquisition:
|
|
|
2006
|
2005
|
|
Cash
|
|
$
415,585
|
$
-
|
|
Accounts
Receivable
|
1,727,458
|
227,455
|
|
Prepaid
and Other Assets
|
48,490
|
77,376
|
|
Property
and Equipment
|
249,021
|
335,095
|
|
Goodwill
|
|
8,130,751
|
4,029,083
|
|
Non-compete
Agreements
|
695,101
|
338,000
|
|
Accounts
Payable and Accrued Liabilities
|
(589,214)
|
(355,607)
|
|
Line
of credit
|
(1,252,450)
|
-
|
|
Notes
Payable
|
(6,018,337)
|
(231,521)
|
|
Net
Assets Acquired:
|
$
3,406,405
|
$
4,419,881
|
|
|
|
|
|
The
financial results of these acquired entities are included in the consolidated
financial statements from the date of acquisition.
In
conjunction with the previous purchase agreements described in Note J, the
Company capitalized $381,684 and $167,923 in goodwill during 2006 and 2005,
respectively.
In
conjunction with the acquisitions from all unrelated parties during 2006 and
2005, approximately $23,029,000 and $6,056,000, respectively, has been assigned
to goodwill. All of the goodwill is expected to be deductible for tax
purposes.
Basis
of Presentation
Because
the owners of ELS held approximately 90% of the Company’s outstanding common
stock after the Reverse Combination, as well as the Company’s analysis of the
other criteria used for determining which entity is the accounting acquirer
under SFAS No. 141, ELS is deemed to be the acquiring company for accounting
purposes and the Combination has been accounted for as a reverse acquisition
under the purchase method of accounting for business combinations in accordance
with accounting principles generally accepted in the United States of America.
The audited financial statements of Resolve for the year ended December 31,
2004 are included in the Resolve Staffing, Inc. Annual Report on Form 10-KSB,
filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2005.
The audited financial statements of ELS for the two years ended December 31,
2003 and 2004 or such time as the entity was under the control of ELS, Inc.
through December 31, 2004 have been included in the Resolve Staffing, Inc.
amended report on Form 8-K pertaining to this acquisition which was filed in
December, 2005. In accordance with the accounting treatment described above,
the
historical financial statements prior to the Reverse Combination reflect those
of ELS. In conjunction with this transaction, the group of companies known
as
ELS Personnel Services, which were legally acquired by Resolve Staffing, Inc.,
changed its name to Resolve Staffing, Inc. The financial information for 2004
includes the combined balances and combined results of operations of the
individual entities which comprise ELS. The combined results of operations
for
the acquired entities include the activities of each entity from the date of
acquisition to December 31, 2004.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. Actual results could differ from those
estimates.
The
Company provides for workers' compensation, health care insurance and
unemployment taxes related to its employees. A deterioration in claims
experience could result in increased costs to the Company in the future. The
Company records an estimate of any existing liabilities under these programs
at
each balance sheet date. The Company's future costs could also increase if
there
are any material changes in government regulations related to employment law
or
employee benefits.
Revenue
Recognition
The
Company recognizes PEO revenues when each periodic payroll is delivered to
the
client. Revenues are reported in accordance with the requirements of FASB
Emerging Issues Task Force Issue No. 99-19,
“Reporting
Revenues Gross as a Principal Versus Net as an Agent.”
(EITF
99-19). Consistent with its revenue recognition policy, the Company’s net PEO
revenues and cost of PEO revenues do not include the payroll cost of its
worksite employees. Instead, PEO revenues and cost of PEO revenues are comprised
of all other costs related to its worksite employees, such as payroll taxes,
employee benefit plan premiums and workers’ compensation insurance. Payroll
taxes consist of the employer’s portion of Social Security and Medicare taxes,
federal unemployment taxes and state unemployment taxes. PEO revenues also
include professional service fees, which are primarily computed as a percentage
of client payroll or on a per check basis.
Staffing
and managed service revenue and the related labor costs and payroll are recorded
in the period in which services are performed. The Company follows EITF 99-19,
in the presentation of staffing and managed service revenues and expenses.
This
guidance requires Resolve to assess whether it acts as a principal in the
transaction or as an agent acting on behalf of others. In situations where
Resolve is the principal in the transaction and has the risks and rewards of
ownership, the transactions are recorded gross in the consolidated statements
of
operations.
Stock
Based Employee Compensation
The
Company adopted SFAS 123(R) to account for its stock-based compensation
beginning January 1, 2006. Previously, the Company elected to account for its
stock-based compensation plans under Accounting Principles Board Opinion No.
25,
Accounting for Stock Issued to Employees (“APB 25”), Financial Accounting
Standards Board Interpretation No, 44, Accounting for Certain Transactions
Involving Stock Compensation (“FIN 44”), and Statement of Financial
Accounting
Standards
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure
(“SFAS 148”). During 2006, the Company did not grant any stock options which
would require a calculation as prescribed by SFAS 123(R).
There
are
no differences between the historical and pro-forma stock based compensation
value.
Accounts
Receivable
The
PEO
segment does not typically extend credit to its customers. In certain
situations, however, credit is extended on a secured basis. Accounts receivable
are carried at original invoice amount less an estimate made for doubtful
receivables. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer’s financial condition, credit history, and current economic conditions.
Accounts receivable are written off when deemed uncollectible Recoveries of
accounts receivable previously written off are recorded when
received.
Resolve's
trade accounts receivable result from the sale of its services to customers,
and
customers consist primarily of private companies. Resolve uses the allowance
method to account for uncollectible accounts. Bad debt expense for the years
ended December 31, 2006 and 2005 was $819,656 and $88,483, respectively. The
Company’s policy for determining when receivables are past due is 31 days after
original invoice date. The Company’s policy for charging off uncollectible
accounts receivable requires approval of the Chief Financial Officer, after
reviewing Corporate Credit recommendation in consultation with the specific
branch involved, determining that the debt has little, if any chance, of being
collected. An allowance for doubtful accounts in the amounts of $472,428,
$96,986 and $10,700 was recorded at December 31, 2006, 2005 and 2004,
respectively.
Concentration
of Credit Risk
Financial
instruments, which potentially expose Resolve to concentrations of credit risk
consist principally of trade accounts receivable.
Resolve's
trade accounts receivable result from the sale of its services to customers,
and
customers consist primarily of private companies. In order to minimize the
risk
of loss from these private companies, credit limits, ongoing credit evaluation
of its customers, and account monitoring procedures are utilized. Collateral
is
not generally required. Management analyzes historical bad debt, customer
concentrations, customer credit-worthiness, current economic trends, and changes
in customer payment tendencies, when evaluating the allowance for doubtful
accounts. As of December 31, 2006, no customer accounted for 10% or more of
gross accounts receivable and no customer accounted for 10% or more of the
net
revenues for the year ended December 31, 2006. As of December 31, 2005, no
customers accounted for 10% or more of gross accounts receivable and no
customers accounted for 10% or more of the net revenues for the year ended
December 31, 2005.
The
Company is obligated to pay the salaries, wages, related benefit costs, and
payroll taxes of worksite employees. Accordingly, the Company's ability to
collect amounts due from customers could be affected by economic fluctuations
in
its markets or these industries.
Stock
Split
On
December 28, 2004, the Company initiated a reverse stock split of the Company’s
common stock on a 1 for 5 basis. The Company maintained the par value of the
Company’s common stock at $.0001 and also maintained the number of shares of
common stock the Company is authorized to issue at 50,000,000.
Financial
Instruments
Resolve
estimates that the fair value of all financial instruments at December 31,
2006
and 2005 do not differ materially from the aggregate carrying value of its
financial instruments recorded in the accompanying consolidated balance
sheets.
Liquidity
and Management’s Plans
As
reflected in the accompanying consolidated financial statements, the Company
has
a net working capital deficit of $21,645,402 and stockholder’s equity of
$2,589,429, as of December 31, 2006. During 2006, the Company incurred losses
and has been dependent upon the financial support of stockholders, management
and other related parties.
For
the
year ended December 31, 2006 the Company incurred a net loss of $2,421,799.
Of
this loss, $1,256,156 did not represent the use of cash. Non-cash expenditures
consisted of depreciation of $311,918, increase in allowance for
doubtful
accounts
of $365,442, and amortization of non compete agreements of $578,796. Changes
in
accounts receivable, prepaid and other assets, along with increases in accounts
payable, payroll, salary, and other accruals brought the total cash used in
operations to $4,217,093. Additionally the Company used $3,601,512 to purchase
computer equipment, software and office equipment and the acquisition of
subsidiaries during 2006.
Management
has successfully obtained additional financial resources, which the Company
believes will support operations. These financial resources include financing
from both related and non-related third parties, are discussed in the
accompanying footnotes to the financial statements. Our senior debt forbearance
agreement expires as of December 31, 2007 and our senior lender has indicated
that it would prefer that the Company refinance the debt with alternate
financing in order for the current senior lender to exit. If our existing senior
lender does not refinance our senior debt and a new lender cannot be found
or a
new forbearance agreement negotiated with the current lender that would include
terms acceptable to the Company, it would have a material adverse effect on
our
financial condition. There can be no assurance that management will be
successful in continuing operations without additional financing efforts. The
consolidated financial statements do not reflect any adjustments that may arise
as a result of this uncertainty.
Property
and Equipment
Property
and equipment are stated at cost. The cost of significant additions and
betterments is capitalized; maintenance and repairs are charged to expense
as
incurred. Depreciation is provided on property and equipment using both
straight-line and accelerated methods over the estimated useful lives of the
respective assets as follows:
Office
equipment 5 - 7 years
Computer
hardware and software 3
-
5
years
Leasehold
improvements - lesser of estimated life or term of leases
Vehicles
3 years
When
property and equipment are retired or otherwise disposed, the cost and related
accumulated depreciation are removed and any resulting gain or loss is reflected
in the statement of income for the period.
Advertising
Costs
Advertising
costs, except for costs associated with direct-response advertising, are charged
to operations when incurred. The costs of direct-response advertising are
capitalized and amortized over the period during which future benefits are
expected to be received. Resolve did not have direct-response advertising costs
during the years ended December 31, 2006, 2005 and 2004. Total advertising
costs
for the years ended December 31, 2006, 2005 and 2004 were $882,641, $311,376
and
$24,533, respectively.
Income
Tax
Resolve
records its federal and state income tax liability in accordance with Statement
of Financial Accounting Standards Statement No. 109 "Accounting for Income
Taxes". Deferred taxes are provided for differences between the basis of assets
and liabilities for financial statements and income tax purposes, using current
tax rates. Deferred tax assets represent the expected benefits from net
operating losses carried forward and general business credits that are available
to offset future income taxes.
Loss
Per Share
Net
loss
per share is computed based upon the weighted average number of outstanding
shares of the Company’s common stock for each period presented. The weighted
average number of shares for 2006, 2005 and 2004 excludes 2,843,820, 851,320
and
851,320 common stock equivalents, respectively, representing warrants, since
the
effect of including them would be anti-dilutive.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" ("SFAS 155"), which amends SFAS No. 133, "Accounting
for
Derivative Instruments and Hedging Activities" ("SFAS 133") and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 140"). SFAS 155 simplifies the accounting for certain
derivatives embedded in other financial instruments by allowing them to be
accounted for as a whole if the holder elects to account for the whole
instrument on a fair value basis. SFAS 155 also clarifies and amends certain
other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all
financial instruments acquired, issued or
subject
to a re-measurement event occurring in fiscal years beginning after September
15, 2006. The Company adopted SFAS 155 on January 1, 2007 which does not have
a
material effect on the Company’s consolidated financial statements.
In
June
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in the Company’s financial statements in accordance with
FASB Statement No. 109, "Accounting for Income Taxes". The provisions of FIN
48
are effective for the Company’s fiscal year beginning January 1, 2007. The
Company believes that the adoption will not have a material effect on the its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value measurements. SFAS
157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
Company will be required to adopt SFAS 157 in the first quarter of 2008. The
Company’s management is currently evaluating the requirements of SFAS 157 and
has not yet determined the impact on its consolidated financial statements.
In
September 2006, the Securities and Exchange Commission Staff issued Staff
Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in the Current Year Financial
Statements” (“SAB No. 108”). SAB No. 108 requires the use of two alternative
approaches in quantitatively evaluating materiality of misstatements. If the
misstatement as quantified under either approach is material to the current
year
financial statements, the misstatement must be corrected. If the effect of
correcting the prior year misstatements, if any, in the current year income
statement is material, the prior year financial statements should be corrected.
In the year of adoption (fiscal years ending after November 15, 2006, or
calendar year 2006 for us), the misstatements may be corrected as an accounting
change by adjusting opening retained earnings rather than including the
adjustment in the current year statement of operations. Upon completing its
evaluation of the requirements of SAB No. 108, the Company determined it did
not
affect its consolidated financial statements.
Reportable
Segments
As
of the
date of Combination, the Company operates in two reportable segments under
Statement of Financial Accounting Standards Board (FASB) Statement No. 131,
“
Disclosure
about Segments of Enterprise and Related Information
.”
Presented
below is the reconciliation of segment information to the consolidated statement
of operations for 2006. Prior to 2006 the Company operated in one segment.
|
|
Total
|
Staffing
|
PEO
|
|
Revenue
|
$
152,304,237
|
$
139,821,391
|
$
12,482,846
|
|
Cost
of revenues
|
134,038,039
|
122,503,186
|
11,534,853
|
|
Gross
profit
|
18,266,198
|
17,318,205
|
947,993
|
|
Operating
expenses
|
19,297,192
|
17,485,357
|
1,811,835
|
|
Loss
from operations
|
(1,030,994)
|
(167,152)
|
(863,842)
|
|
Interest
expense
|
(1,390,805)
|
(1,311,683)
|
(79,122)
|
|
Net
loss
|
$
(2,421,799)
|
$
(1,478,835)
|
$
(942,964)
|
|
|
|
|
|
Workers’
Compensation Insurance
Worksite
employees in the state of Ohio are part of the state sponsored workers’
compensation insurance program. Accruals for Ohio workers’ compensation expense
are recorded based on actual rates provided by the state.
The
Company maintains high deductible workers’ compensation coverage for most other
work site employees in states other than Ohio. Accruals for high deductible
workers’ compensation expense are made based upon the Company’s claims
experience and analysis by the Company’s third party administrator, utilizing
the Company’s historic loss information. As such, a majority of the Company’s
recorded expense for workers’ compensation is management’s best estimate.
Management believes that the amount accrued is adequate to cover all known
and
unreported claims at each balance sheet date. However, if the actual costs
of
such claims and related expenses exceed the amount estimated, additional
reserves may be required, which could have a material negative effect on
operating results.
Goodwill
As
discussed in Note E, the Company has acquired businesses from related and
un-related parties since 2005. The acquisitions were accounted for using the
purchase method of accounting in accordance with FASB Statement No. 141,
Business
Combinations
.
The
cost in excess of net assets purchased was recorded as an asset (entitled
“Goodwill”). The Company does not amortize the goodwill balance, but reviews
annually (or more frequently if impairment indicators arise) for impairment
under a two-step impairment test in accordance with FASB Statement No. 142,
Accounting
for Goodwill and Other Intangible Assets
.
The
first step is to compare the carrying amount of the reporting unit’s assets to
the fair value of the reporting unit. If the carrying amount exceeds the fair
value, then the second step is required to be completed, which involves the
fair
value of the reporting unit being allocated to each asset and liability with
the
excess being implied goodwill. The impairment loss is the amount by which the
recorded goodwill exceeds the implied goodwill. No impairment loss was
recognized for the years ended December 31, 2006, 2005 and 2004.
Health
Benefits
Claims
incurred under health benefit plans are expensed as incurred according to the
terms of the contract. Liability reserves are established for the benefit claims
reported but not yet paid and claims that have been incurred but not yet
reported.
NOTE
B - PROPERTY AND EQUIPMENT, NET
Property
and equipment as of December 31, 2006 and 2005 is summarized as
follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
Office
equipment
|
$
746,832
|
|
$383,677
|
|
Computer
hardware and software
|
872,230
|
|
431,632
|
|
Leasehold
improvements
|
260,307
|
|
50,887
|
|
Vehicles
|
8,139
|
|
-
|
|
Total
property and equipment
|
1,887,508
|
|
866,196
|
|
Less,
accumulated depreciation
|
(543,735)
|
|
(264,935)
|
|
Net
property and equipment
|
$
1,343,773
|
|
$
601,261
|
|
|
|
|
|
Depreciation
expense for the years ended December 31, 2006, 2005 and 2004 was $311,918,
$71,586 and $10,120, respectively.
NOTE
C - RELATED PARTY TRANSACTIONS
Note
Receivable
On
December 8, 2003, ELS Inc. entered into a non-interest bearing short-term credit
agreement with Resolve Staffing, Inc. that provides for borrowings up to
$200,000. At that time Ronald Heineman was the Chief Executive Officer and
Director of both companies. The underlying promissory note is secured by 400,000
shares of common stock that were released to an escrow agent, but not issued
for
accounting or reporting purposes. Balances due under the credit agreement were
originally due May 8, 2004.
During
March 2006, the agreement was amended to allow unlimited maximum borrowings
with
a maturity date of March 31, 2007. The note bears interest at 3 percent per
annum and is payable monthly. As of December 31, 2006 amounts owed were
eliminated in consolidation. As of December 31, 2005 $5,873,936 was outstanding
under this note. At December 31, 2006 this note is eliminated in consolidation.
Note
payable to related party relates to borrowings of $91,500 from William Brown,
a
Director and Shareholder. The underlying note bears interest at 5% and was
due
on March 31, 2004. The Company has a verbal agreement to extend the maturity
date on a month-to-month basis.
Notes
payable to related parties of $18,641,498 were issued in conjunction with the
Combination. On May 1, 2007, the holders of these notes and the Company agreed
to amend the original note and reduce the amounts by $6,663,857. The outstanding
amount of the notes, after the reduction, as of December 31, 2006 is
$10,280,343. See Notes A, G and N.
Related
Party Lease
The
Company leases its Cincinnati facility from W.H. 2, LLC (WH2), a limited
liability company owned by stockholders of the Company under an operating lease
expiring during September 2011. Future minimum annual rentals under this
operating lease are presented in Note H.
Advances
Receivable
Advances
receivable from related parties as of December 31, 2006 and 2005 were $681,237
and $-, respectively.
NOTE
D - WORKERS’ COMPENSATION INSURANCE
The
Company maintains a high deductible insurance policy with respect to workers’
compensation coverage for its worksite employees who are not employed in the
State of Ohio. The Company had provided a total of $1,636,313 at December 31,
2006, as the estimated liability for unsettled workers’ compensation claims. The
Company did not accrue for estimated unsettled worker’s compensation claims at
December 2005. The estimated liability for unsettled workers’ compensation
claims represents management’s best estimate, which includes, in part, an
evaluation of information provided by the Company’s third-party administrators
for workers’ compensation claims to estimate the total future costs of all
claims, including potential future adverse loss development. Included in this
claim liability are case reserve estimates for reported losses, plus additional
amounts based on projections for incurred but not reported claims, anticipated
increases in case reserve estimates and additional claim related administration
expenses. These estimates are continually reviewed and adjustments to
liabilities are reflected in current operating results as they become known.
The
Company believes that the difference between amounts recorded for its estimated
liabilities and the possible range of costs to settle related claims is not
material to results of operations; nevertheless, it is reasonably possible
that
adjustments required in future periods may be material to the results of
operations.
During
2006, the Company’s primary high deductible workers’ compensation insurance
policy was provided by Providence Property and Casualty Insurance Company of
Frisco, Texas. Under this policy, the Company’s deductible in most cases equals
$500,000 per occurrence and covers most of its worksite employees who are not
employed in the state of Ohio (except California which are not covered under
the
policy.) The Company regularly evaluates the financial capacity of its insurers
to assess the recoverability of any potential insurance receivables.
NOTE
E - INTANGIBLE ASSETS
The
Company’s intangible assets are comprised of goodwill and covenants not to
compete arising from acquisitions. Goodwill will be assessed for impairment
annually by management. The Company’s covenants not to compete have contractual
lives principally ranging from one to two years and are being amortized over
the
period of benefit.
Intangibles
consist of the following at December 31:
|
|
|
2006
|
2005
|
|
|
|
|
|
|
Covenants
not to compete
|
|
$
613,547
|
$
338,000
|
|
|
|
|
|
|
Less
amortization
|
|
(
180,915)
|
(106,917)
|
|
|
|
|
|
|
|
|
$
432,632
|
$
231,083
|
|
|
|
|
|
|
Goodwill
|
|
$
29,724,511
|
$
6,695,579
|
|
|
|
|
|
NOTE
F - EMPLOYEE BENEFIT PLAN
The
Company and many of its clients’ employees participate in a multi-employer
401(k) retirement savings plan covering substantially all employees who have
completed one year of service and are at least 21 years of age. Participants
may
defer up to 50% of their annual base compensation up to the limits prescribed
by
the Internal Revenue Code (IRC).
The
Company and its clients are required to match employee contributions at the
rate
of $1.00 for every $1.00 contributed by the employee, up to a maximum of 3%
and
$0.50 for every $1.00 contributed for the next 2% of the employee’s base
compensation in accordance with the IRC safe harbor rules. The Company and
its
clients may also make discretionary matching and profit sharing contributions
to
the plan.
Total
Company contributions and plan expenses paid by the Company were $36,896, $-
and
$-,, for the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE
G - LONG TERM DEBT AND LINES OF CREDIT
Notes
payable and lines of credit as of December 31, 2006 and 2005 are as
follows:
|
|
|
2006
|
|
2005
|
|
Working
capital line of credit to one bank, interest payable monthly at 7.75%
per
annum, maturing December 31, 2007, maximum of $12,000,000 in borrowings.
Borrowings are not to exceed 80% of accounts receivable.
|
|
$11,735,029
|
|
$-
|
|
Over-line
facility line of credit to one bank, interest payable monthly at
11.25%
per annum, maturing December 31, 2007, maximum of
$17,150,000.
|
|
2,906,471
|
|
3,341,927
|
|
Revolving
line of credit with a financial institution that provides for maximum
borrowings of $1,700,000 through November 2007. Borrowings are not
to
exceed 85% of accounts receivable. Interest accrues at 9.25% per
annum.
|
|
986,956
|
|
-
|
|
Line
of credit with a bank that provides for maximum borrowings of $100,000.
Interest accrues at the bank's prime rate of 9.25% per annum. Maturity
date is on demand.
|
|
74,165
|
|
-
|
|
Note
payable to a bank, interest payable monthly at a rate of 6.6% per
annum,
maturing September 1, 2009.
|
|
303,746
|
|
398,100
|
|
Note
payable to a financial institution, interest payable at annual percentage
rate of 8.25% per annum. Monthly payments of $47,049 through July
2007.
|
|
351,910
|
|
-
|
|
Notes
payable to two individuals for the Combination, interest payable
at a rate
of 5% per annum.. Note principal and interest payments are due the
first
day of each month through December 31, 2017; however, no interest
shall be
accrued until January 1, 2008. See notes A, C and N.
|
|
10,280,343
|
|
-
|
|
Note
payable to individual for the stock purchase of Power Personnel.
The note
will be paid in monthly installments of $125,637 through October
2008.
Interest is payable at 8.3% per annum.
|
|
2,555,931
|
|
-
|
|
Two
notes payable to financial institutions due June 2007 and November
2007.
Interest accruing between 3.5% and 9.25% per annum.
|
|
37,866
|
|
-
|
|
Note
payable to ELS, Inc., accruing interest at 3% per annum, due March
2007.
As of December 31, 2006 amounts owed were eliminated on
consolidation
|
|
-
|
|
5,873,936
|
|
Notes
payable to various individuals for the acquisition of various staffing
entities during 2005 and 2006. Notes are due at varying dates through
December 2007 with monthly payment amounts ranging from $5,833 to
$34,891.
These notes bear no interest and accordingly management has imputed
interest at 7.25% per annum. Shown net of discount of
$103,300.
|
|
2,734,916
|
|
2,278,981
|
|
Note
payable to an individual accruing interest at 5% to 12% per annum,
maturity date is being extended verbally on a month to month basis.
|
|
91,500
|
|
131,500
|
|
Total
long term debt and lines of credit
|
|
32,058,833
|
|
12,024,444
|
|
Current
portion of long term debt and lines of credit
|
|
(22,398,124)
|
|
(1,940,746)
|
|
|
|
|
|
|
|
Long
term portion of long term debt and lines of credit
|
|
$
9,660,709
|
|
$
10,083,698
|
|
|
|
|
|
|
See
Note
C—Related Party Balances and Transactions, for information about the Credit
Agreement with Ron Heineman.
See
Note
C -- Related Party Balances and Transactions, for information about the Note
Payable to William Brown.
Maturities
of long term debt and lines of credit are as follows:
|
|
|
|
|
Year
ending December 31,
|
|
|
|
2007
|
|
$22,398,124
|
|
2008
|
|
2,565,230
|
|
2009
|
|
1,251,248
|
|
2010
|
|
1,183,782
|
|
2011
|
|
1,183,782
|
|
Thereafter
|
|
3,476,667
|
|
Total
|
|
$32,058,833
|
|
|
|
|
NOTE
H - OPERATING LEASES
The
Company rents various office spaces for each of its locations across the United
States, under lease terms ranging from month-to-month expiring September, 2011.
Monthly payments due under these leases range from $210 to $4,970. The Company
has the option to renew various leases under the same terms and conditions
as
the original leases and anticipates exercising certain of these
options. The Company also leases various office and computer equipment
under operating leases that require quarterly payments between $3,641 and $4,988
through March 2007. The Company also leases office space from a related party
at
$4,100 a month through July 2009. This lease was amended and renewed on October
1, 2006 to $10,800 a month through September 30, 2011.
Future
minimum annual rentals under all operating lease agreements are as
follows:
|
Year
Ended December 31,
|
Total
|
Related
Party
|
Other
|
|
2007
|
$
1,035,826
|
$
129,600
|
$
906,226
|
|
2008
|
767,854
|
129,600
|
638,254
|
|
2009
|
518,270
|
129,600
|
388,670
|
|
2010
|
296,224
|
129,600
|
166,624
|
|
2011
|
118,969
|
108,000
|
10,969
|
|
|
$
2,737,143
|
$
626,400
|
$
2,110,743
|
Total
rent expense for all operating leases was $1,041,195, $385,831 and $50,425
for
the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE
I - MAJOR VENDOR
Workers’
compensation paid to the State of Ohio Bureau of Workers’ Compensation
constitute approximate 60% of workers’ compensation insurance cost of revenues
for the PEO segment. This is considered a major vendor relationship. Because
the
State of Ohio is a monopolistic state with regard to workers’ compensation
insurance, there are no alternative sources for workers’ compensation insurance
within the state. The Company believes that, by nature of rules afforded PEOs
within the state, the risk from this relationship is primarily related to rates.
The standard client agreement provides that the Company may, at its discretion,
adjust the amount billed to clients to reflect changes in the Company’s direct
costs. Also, the Company maintains the ability to remove clients from their
policy and, due to having PEO status, the removal of the client from the policy
will remove that client’s claims history from the Company policy. Any such rate
changes or removals require a 30 day notice to the client. Regardless of the
Company’s assertion, there is no assurance that the Company will be able to
successfully pass through rate increases or successfully manage claims in the
future.
NOTE
J - COMMITMENTS AND CONTINGENCIES
The
Company is a defendant in various lawsuits and claims arising in the normal
course of business. Management believes it has valid defenses in these cases
and
is defending them vigorously. While the results of litigation cannot be
predicted with certainty, management believes the final outcome of such
litigation will not have a material adverse effect on the Company’s financial
position or results of operations.
The
Company maintains letters of credit of approximately $4,375,000 at December
31,
2006 to secure workers’ compensation policies in lieu of providing deposits.
There were no draws on the letters of credit for the year ended December 31,
2006.
In
accordance with the high deductible workers’ compensation policy, the Company is
required to purchase $490,000 of the insurance company’s non-voting stock during
the year ended December 31, 2007. There are no additional deposits to be made
during the year ending December 31, 2007 as all deposits were made in
2006.
The
Company is in receipt of a Determination and Assessment from the State of
Michigan, Department of Labor & Economic Growth, Unemployment Insurance
Agency seeking payment of amounts totaling $9,505,212. The Company and legal
counsel believe that this assessment is baseless and without merit and intends
to contest this assessment vigorously. As of December 31, 2006, no amount is
accrued in the Company’s consolidated financial statements as the matter is
deemed groundless and outside the authority of the Agency.
The
Company has received notice letters from the State of Ohio sales tax auditors
indicating their intention to make an assessment on employee leasing or
co-employment sales. As of the date of filing of this amended report on Form
10-K/A/, we have been notified that the assessed amount of Ohio sales taxes
is
$52,711,436.50. The Company conducts its business through written contracts
of
at least one year, and claims exemption from the sales tax auditor’s position.
The Company continues to work with the sales tax auditors to have this matter
dismissed. As of December 31, 2006, no amount is accrued in the Company’s
consolidated financial statements as the Company and legal counsel believe
this
assessment is groundless.
As
of
December 31, 2006 the Company is in receipt of a notice from the United States
Department of Labor asserting various violations of ERISA relating to the ELS
Inc. group health plan. The Company is attempting to address the alleged
violations and does not believe this matter will have a material impact on
the
accompanying consolidated financial statements.
Depending
on certain goals and performances being met, Resolve has the following off
balance sheet arrangements in which Resolve is obligated to pay the previous
owners of the following entities certain contingent amounts, which are the
result of the various acquisitions. If additional amounts are paid these amounts
will be recorded as additional goodwill when paid.
|
·
|
The
Arnold Group - Based on sales targets, the prior owners may receive
contingent performance payments not to exceed $125,000 through May
31,
2007.
|
|
·
|
Taylor
Personnel Services, Inc. - Based on sales targets, the prior owners
may
receive contingent performance payments not to exceed $80,000 through
May
31, 2007.
|
|
·
|
QRD
International, Inc. dba Delta Staffing - Based on gross profit targets,
the prior owners may receive contingent performance payments of up
to
approximately $75,000 through September 11, 2007.
|
|
·
|
Midwest
Staffing, Inc. - Based on pre-tax profit targets, the prior owners
may
receive contingent performance payments not to exceed $75,000 through
September 27, 2007.
|
|
·
|
Project
Solvers, Inc. - Based on pre-tax profit targets, the prior owners
may
receive contingent performance payments not to exceed $200,000 through
October 25, 2008.
|
|
·
|
Pro
Care Medical Staffing, LLC. - Based on pre-tax targets the prior
owners
may receive contingent performance payments not to exceed $ 650,000
in
total through November 9, 2007.
|
|
·
|
Big
Sky Travel Nurses, Inc. - Based on pre- tax profit targets, the prior
owners may receive contingent performance payments of up to approximately
$15,000 through November 27, 2007.
|
|
·
|
Assisted
Staffing, Inc. - Based on pre- tax profit targets, the prior owners
may
receive contingent performance payments of up to approximately $25,000
through December 10, 2007.
|
|
·
|
Driver’s
Plus, Inc. - Based on pre- tax profit targets, the prior owners may
receive contingent performance payments of up to approximately $10,000
through December 26, 2007.
|
|
·
|
Ready
Nurse, LLC. - Based on pre- tax profit targets, the prior owners
may
receive contingent performance payments of up to approximately $10,000
through March 5, 2008.
|
|
·
|
KFT,
Inc. dba Power Personnel - Based on pre- tax profit targets the prior
owners may receive contingent performance payments of up to approximately
$ 50,000 through October 10, 2008 and October, 10 2009.
|
|
·
|
Steadystaff,
LLC - January 1, 2007 to December 31, 2007 and January 1, 2008 to
December
31, 2008, based on pre-tax profit targets the prior owners may receive
contingent performance payouts up to approximately $10,000 per
year.
|
NOTE
K - INCOME TAXES
At
December 31, 2006, the Company had federal and state tax net operating loss
carryforwards (“NOL”) of approximately $2,004,000. The federal and state tax
loss carry forwards will begin to expire in 2025 and 2015, respectively, unless
previously utilized.
Pursuant
to Internal Revenue Code Sections 382 and 383, the Company’s use of its net
operating loss and credit carryforwards may be limited as a result of cumulative
changes in ownership of more than 50% over a three-year period. Management
is
currently in the process of calculating these limitations.
The
Company also recorded a valuation allowance of approximately $404,000 related
to
federal and state loss and tax credit carryforwards and other temporary
differences of Resolve. The tax benefit of these carryforwards, if and when
realized, will first reduce the existing value of goodwill up to a total of
$404,000, then, if applicable, remaining amounts will be applied first to other
intangible assets with any excess amount recognized as an income tax
benefit.
Significant
components of the Company's deferred tax assets are shown below. A valuation
allowance has been established to offset the deferred tax assets, as realization
of such assets has not met the more likely than not threshold required under
SFAS No. 109.
|
December
31,
|
2006
|
2005
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss carry forwards
|
$
779,400
|
$
156,300
|
|
Allowance
and Accruals
|
183,800
|
-
|
|
Bad
Debt Allowance
|
11,400
|
-
|
|
Other
|
-
|
700
|
|
Gross
deferred tax assets
|
974,600
|
157,000
|
|
Fixed
Assets and Intangibles
|
(95,100)
|
-
|
|
|
879,500
|
|
|
Valuation
allowance
|
(879,500)
|
(157,000)
|
|
|
$
-
|
$
-
|
Significant
components of the provision for income taxes for the years ended December 31,
2006, 2005 and 2004 are as follows:
|
|
2006
|
2005
|
2004
|
|
Current
|
|
|
|
|
Federal
|
$
-
|
$
-
|
$
-
|
|
State
|
-
|
-
|
-
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
Federal
|
-
|
-
|
-
|
|
State
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
$
-
|
$
-
|
$
-
|
Reconciliation
of the statutory federal income tax benefit to the Company's effective tax
benefit:
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|
Statutory
U.S. federal rate
|
35.00%
|
34%
|
34%
|
|
State
income taxes - net of federal benefit
|
3.03%
|
0%
|
0%
|
|
Permanent
differences
|
-7.79%
|
6%
|
6%
|
|
True
up of prior year tax provision
|
1.63%
|
0%
|
0%
|
|
Other
|
-0.92%
|
0%
|
0%
|
|
Change
in valuation allowance
|
-30.95%
|
-40%
|
-40%
|
|
Provision
for income taxes
|
0.00%
|
0.00%
|
0.00%
|
NOTE
L - CASH FLOW SUPPLEMENTAL INFORMATION
Cash
paid
for interest during the years ended December 31, 2006, 2005 and 2004 amounted
to
$1,154,054, $238,454 and $13,160, respectively.
Non-cash
investing and financing activities
During
2006 the Company issued 300,000 shares of common stock for services related
to
the raising of funds. The shares were valued at approximately $410,000 and
have
been recorded as an increase and decrease in paid in capital (See Note
M).
Acquisition
of Entity from Related Party
In
connection with the Combination on October 1, 2006, described in Note A, Resolve
was deemed to be the acquiring company for accounting purposes and the
Combination was accounted for as an acquisition under the purchase method of
accounting for business combinations in accordance with accounting principles
generally accepted in the United States of America. In conjunction with this
transaction, Resolve issued 1,486,685 shares of restricted common stock valued
at $2,601,699 (See Note M) and notes payable in the amount of $11,977,641
(originally $18,641,498, See Note C) in exchange for 100% of the ownership
of
ELS Inc. See Note A for the fair value of the assets and liabilities assumed
on
the date of acquisition.
In
conjunction with the Reverse Combination on February 7, 2005, described in the
basis of Presentation section of the notes to consolidated financial statements,
ELS was deemed to be the acquiring company for accounting purposes and the
Reverse Combination was accounted for as a reverse acquisition under the
purchase method of accounting for business combinations in accordance with
accounting principles generally accepted in the United States of America. In
conjunction with this transaction, Resolve issued 13,000,000 shares of
restricted common stock valued at $130,000 and a note payable in the amount
of
$1,500,000 in exchange for 100% of the ownership interest in 4 entities with
10
staffing locations. The fair value of the assets and liabilities assumed, on
the
date of acquisition were as follows:
|
Accounts
receivable
|
$30,457
|
|
Prepaid
and other assets
|
48,483
|
|
Property
and equipment
|
15,280
|
|
Goodwill
|
2,026,496
|
|
Accounts
payable and accrued liabilities
|
(71,472)
|
|
Notes
payable
|
(419,244)
|
|
|
$1,630,000
|
Acquisition
of Entities from Unrelated Parties
During
2006 and 2005, Resolve Staffing, Inc., entered into purchase agreements
(“Agreements”), to acquire all of the assets and/or ownership of multiple
privately-held entities owned and operated by unrelated parties. Pursuant to
the
acquisition agreements, Resolve acquired the temporary employee staffing
locations from the newly acquired entities.
Resolve
issued notes payable, issued common stock and accrued contingent expenses in
the
amount of $6,218,337 and $2,492,416, as of December 31, 2006 and 2005,
respectively; in exchange for the assets and liabilities of the above staffing
entities as described below. The following table summarizes the estimated fair
value, of the assets acquired and liabilities assumed, on the date of
acquisition:
|
|
|
2006
|
2005
|
|
Accounts
Receivable
|
$
1,327,064
|
$
135,252
|
|
Prepaid
& Other Assets
|
48,490
|
21,815
|
|
Property
& Equipment
|
20,000
|
104,489
|
|
Goodwill
|
|
6,664,447
|
2,659,971
|
|
Non-Compete
Agreements
|
-
|
144,000
|
|
Accounts
Payable & Accrued Liabilities
|
(589,214)
|
(355,608)
|
|
Line
of credit
|
(1,252,450)
|
-
|
|
Notes
Payable
|
(6,018,337)
|
(217,503)
|
|
Total
Assets Acquired:
|
$
200,000
|
$
2,492,416
|
|
|
|
|
|
The
Company had no non-cash investing or financing activities during
2004.
NOTE
M - STOCKHOLDERS’ (DEFICIT) EQUITY
Issuance
of Common Stock
On
January 9, 2006, Resolve Staffing entered into a consulting agreement with
Dan
Seifer. Under the term of the agreement, Mr. Seifer will be paid in options
to
acquire up to 4,000,000 shares of common stock of the Company and is to provide
the following services in a timely manner:
|
·
|
Business
Plan Development - Become familiar with the business and operations
of the
Company and review and analyze the Company’s formal and informal
financial, strategic, and business plans. In conjunction with the
Company,
prepare and update a formal strategic business plan along with a
detailed
financial model/projection, and update the business plan and financial
model as needed during the term of this Agreement;
|
|
·
|
Strategic
Consulting - Assist the Company in sourcing and locating joint-venture
partners. Advise the Company in strategic planning matters and assist
in
the implementation of short- and long-term strategic planning initiatives
to fully develop and enhance the Company’s assets, resources, products,
and technologies. Provide advice to and consult with the Company
concerning management, product marketing, strategic planning, and
corporate organization in connection with the Company’s business and
advise the Company regarding its overall development, progress, needs,
and
condition. If requested by the Company, assist in the due diligence
of
prospective strategic partners.
|
|
·
|
Other
Services - Perform other services as may be reasonably requested
by the
Company that are within the normal scope of operations of Dan
Seifer.
|
On
March
31, 2006, Resolve agreed to issue a Note Receivable to Mr. Seifer, and related
parties, for the purchase of shares underlying the options mentioned above.
A
note was issued in the aggregate amount of $6 million. Prior to June 30, 2006
$800,000 was paid on this note. The agreement was terminated on June 30, 2006
and the remaining balance of 3,466,666 shares was canceled.
On
September 7, 2006 the Board of Directors agreed to issue 100,000 shares of
common stock as compensation to the former owners of Truckers Plus, as called
for in the purchase agreement.
On
October 1, 2006, as part of the consideration, Resolve issued shares of its
common stock to the selling shareholders of ELS Inc. Additionally, Resolve
agreed to issue notes payable totaling approximately $12 million (originally
$18.6 million, See Note C) and pay certain other settlement amounts described
in
the ELS Inc. purchase agreement.
In
accordance with acquisition accounting, the shares of common stock issued by
Resolve to the former owners of ELS Inc., described in Note A, have been shown
as outstanding from the date of acquisition. The value of these shares,
$2,601,699, has been presented in the consolidated statement of stockholders’
equity (deficit).
Effective
October 1, 2006, the Company agreed to issue 1,000,000 shares of restricted
common stock to certain accredited investors, for an aggregate consideration
of
$1,500,000. In addition, the investors received a warrant to purchase additional
shares of common stock at $2.00 and a warrant to purchase additional shares
of
common stock at $3.00. The shares of common stock acquired by these investors,
including the warrant shares, have registration rights associated with them,
whereby the Company has committed to use its best efforts to prepare and file
a
registration statement with the Commission registering the shares for resale,
within 30 days from the date of acquisition of the shares. This registration
statement was filed during February 2007.
During
October, 2006 the Company issued 300,000 shares of common stock to individuals
as compensation for services provided relating to the sale of the 1,000,000
shares of common stock described above. The shares issued to these individuals
have been valued at approximately $410,000, based on management’s estimate of
fair value, and have been recorded as an increase and a reduction in paid in
capital in the accompanying consolidated statement of stockholders’ equity
(deficit) as these shares were issued in conjunction with the capital raise
discussed above.
On
February 7, 2005, the Company entered into the Reverse Combination described
above. In conjunction with the Reverse Combination and the treatment as a
reverse acquisition, the 13,000,000 shares of common stock issued as part of
this transaction have been presented as if they were outstanding for all periods
presented.
On
May
25, 2005, Resolve Staffing, Inc. issued 100,000 shares to certain consultants
as
part of their compensation.
On
August
18, 2005, Resolve issued 50,000 shares to certain consultants as part of their
compensation and 100,000 shares as per an employment agreement with certain
shareholders and employees of Truckers Plus.
On
November 22, 2005, Resolve issued 430,000 shares to various consultants as
part
of their compensation.
Common
Stock Warrants
On
April
18, 2006, the Board of Directors of Resolve Staffing, Inc. declared a dividend
distribution of one stock right for each outstanding share of the Company's
Common Stock, $.0001 par value per share (“Common Stock”), to stockholders of
record at the close of business on May 26, 2006 (the “Record Date”). The Board
of Directors of the Company also authorized the issuance of one Right for each
share of Common Stock issued after the Record Date. Additional details are
provided on an 8-K filed on April 21, 2006.
During
2006, warrants covering 7,500 were exercised and converted into 3,621 shares
of
common stock.
As
of
December 31, 2006 there were 2,843,820 warrants outstanding. 843,820 warrants
were due to expire on June 30, 2007 and each warrant has an exercise price
of
$.75 per share price (See Note N). The additional 2,000,000 warrants were issued
on October 1, 2006 as part of the Company’s offering and sale of units
consisting of one share of common stock and two common stock purchase warrants,
50% of which were initially exercisable at a price of $2.00 and the remaining
50% exercisable at a price of $3.00 per share, up to and including September
30,
2008. None of the 2,000,000 common stock purchase warrants have yet been
exercised. By subsequent modifications to the warrant agreements, the Company
and all of the purchasers of the common stock purchase warrants sold to private
placement investors on October 1, 2006, were adjusted. The adjusted common
stock
purchase warrants now have an exercise price of $1.25 and $1.75, respectively
and are exercisable for a term that expires September 30, 2009.
Employee
Agreements
The
employment agreement with Mr. Heineman dated October 1, 2006, (for a 5 year
term) sets forth the terms of his continued employment with the Company as
chief
executive officer and provides for, among other matters: a base salary, bonuses
based on the achievement of specific goals as determined by the agreement and
a
severance package as specified in the agreement. Subsequent to year end the
term
of this agreement was extended to seven years.
The
employment agreement with Mr. Horne dated October 1, 2006, (for a 3 year term)
sets forth the terms of his continued employment with the Company as executive
vice president and chief financial officer and provides for, among other
matters: a base salary, bonuses based on the achievement of specific goals
as
determined by the agreement and a severance package as specified in the
agreement. Subsequent to the period covered by this report, Mr. Horne resigned
in his capacity as chief financial officer of the Company and his executive
employment agreement is no longer in force, effective May 17, 2007. Mr. Horne
has remained employed by the Company in his current capacity of executive
vice-president of franchise development.
The
employment agreement with Mr. Roux dated October 1, 2006, (for a 3 year term)
sets forth the terms of his continued employment with the Company and provides
for, among other matters: a base salary, bonuses based on the achievement of
specific goals as determined by the agreement and a severance package as
specified in the agreement.
Equity
Incentive Plan
During
the year ended December 31, 2001, Resolve adopted a 2001 Equity Incentive Plan
("Incentive Plan") for the benefit of key employees (including officers and
employee directors) and consultants of Resolve and its affiliates. The Incentive
Plan is intended to provide those persons who have substantial responsibility
for the management and growth of Resolve with additional incentives and an
opportunity to obtain or increase their proprietary interest in Resolve,
encouraging them to continue in the employ of Resolve.
On
May
28, 2002, Resolve's 2001 Stock Incentive Plan was amended to restore the number
of shares which may be issued under the plan to 600,000 and to permit the
issuance of unrestricted shares. No shares have been issued under this
plan.
NOTE
N - SUBSEQUENT EVENTS
On
January 3, 2007 the Company issued 150,000 shares of common stock for the
acquisition of one unrelated party. The shares issued for the acquisition have
been valued at approximately $457,500 and have been recorded as an increase
in
paid in capital.
On
January 20, 2007 certain individuals converted outstanding warrants into shares
of common stock. A total of 714,360 warrants were converted into 535,770 shares
of common stock.
On
January 26, 2007 the Board of Directors elected to purchase 129,460 warrants
(with a strike price of $.75) for an aggregate of $6,473 pursuant to the warrant
agreement.
On
February 20, 2007 the Company issued 100,000 shares of common stock for the
acquisition of one unrelated party. The shares issued for the acquisition have
been valued at approximately $280,000 and have been recorded as an increase
in
paid in capital.
During
March 2007 the Company finalized its renewal of its various lines of credit
described in Note G. The lines of credit were increased to $29,150,000, call
for
interest payable monthly at the prime interest rate, include certain financial
covenants and mature September 30, 2007 and January 31, 2008. These lines of
credit are guaranteed by certain shareholders and affiliated entities. During
May 2007, the Company received a notice of default under the terms of these
various lines of credit. During September 2007, the Company and the Bank entered
into a Forbearance and Reaffirmation Agreement whereby the Bank agreed to
forbear from exercising its rights and remedies against the Company and the
Subsidiaries with respect to the defaults existing as of September 28, 2007
until the earlier to occur of (i) December 31, 2007 or (ii) the occurrence
of a
“Forbearance Default”.
On
May 1,
2007 the original price and the corresponding outstanding balance of the notes
payable, related to the acquisition of ELS Inc. and described in Notes A, C
and
G, to the shareholders Ron Heineman and William Walton were reduced by
$6,663,857. Additionally the interest rate was reduced from 8.25% per annum
to a
fixed 5% annual rate and no interest will be accrued until January 1, 2008
on
the entire outstanding balance and no interest will accrue on a portion of
the
amount for the life of the loan.
Mr.
Scott
Horne resigned as Chief Financial Officer of Resolve Staffing, Inc. by letter
dated May 17, 2007. Mr. Horne will remain with the Company as VP of Franchise
Development.
Subsequent
to year end certain subsidiaries of the Company received assessments from the
Internal Revenue Service ("IRS") in a combined amount of approximately $884,000.
As of December 31, 2006 no amount has been accrued in the Company's consolidated
financial statements as the Company's management believes all required
documentation will be provided to the IRS and expects the assessments to be
fully abated.
NOTE
O - PROFORMA INFORMATION
The
consolidated financial statements are presented in accordance with accounting
principles generally accepted in the United States of America (GAAP), which
requires that the financial results of acquired entities are included in the
consolidated financial statements from the date of acquisition. As a result,
the
consolidated statement of operations does not include the activity of the
acquired companies for the period from January 1 to the date of acquisition.
Below is the pro forma information for the significant acquisitions entered
into
during 2006, including the acquisition of Star Personnel (and Direct Staffing),
the acquisition of ELS Inc. by Resolve Staffing, Inc. on October 1, 2006, the
acquisition of Power Personnel, on October 11, 2006, Allstaff on November 6,
2006 and Voyager on November 20, 2006.
Presented
below is the unaudited pro forma condensed combined consolidated statement
of
operations for the year ended December 31, 2006 as if the acquisition of Star
Personnel, Power Personnel, Allstaff, Voyager and ELS Inc. had been completed
January 1, 2006.
|
|
Actual
|
Star
Personnel, Inc.
|
Power
Personnel, Inc.
|
ELS
Inc. (Pre Combination)
|
Pro-forma
adjustments
|
Pro-forma
|
|
Service
Revenues
|
$
152,304,237
|
$
6,665,403
|
$
7,679,844
|
$
40,202,590
|
(a)
(55,269)
|
$
206,796,805
|
|
|
|
|
|
|
|
|
|
Cost
of Services
|
134,038,039
|
4,614,832
|
6,190,000
|
34,430,645
|
(a)
(55,269)
|
179,218,247
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
18,266,198
|
2,050,571
|
1,489,844
|
5,771,945
|
-
|
27,578,558
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
19,297,192
|
2,073,399
|
1,414,420
|
5,594,102
|
-
|
28,379,113
|
|
|
|
|
|
|
|
|
|
Income
(Loss) From Operations
|
(1,030,994)
|
(22,828)
|
75,424
|
177,843
|
-
|
(800,555)
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
(1,390,805)
|
(93)
|
(107,848)
|
2,511
|
(
b) (527,985)
|
(2,024,220)
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
$
(2,421,799)
|
$(22,921)
|
$(32,424)
|
$
180,354
|
$
(527,985)
|
$
(2,824,775)
|
|
|
|
|
|
|
|
|
Pro-forma
earnings per share information for the year ended December 31,
2006:
|
|
|
|
|
Basic
weighted average shares outstanding:
|
|
|
19,158,613
|
|
Pro
forma basic net loss per common share:
|
|
|
$
(0.14)
|
NOTES
TO THE UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF
OPERATIONS
|
a)
|
Elimination
of Management Fees allocated to Resolve by ELS Inc. for the period
January
1, 2006 through September 30, 2006.
|
|
b)
|
Interest
expense related to Bill Walton and Ron Heineman notes payable issued
for
the ELS Inc./Resolve combination. Interest computed as if the notes
were
issued January 1, 2006.
|
|
|
|