UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission File Number 0-29485
RESOLVE STAFFING, INC. |
| (Exact Name of Small Business Issuer as Specified in Its Charter) |
NEVADA | 33-0850639 |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
3235 OMNI DRIVE CINCINNATI, OH 45245 |
| (Address of Principal Executive Offices) |
(800) 894-4250 |
| (Issuer's Telephone Number, Including Area Code) |
N/A |
| (Former Name, Former Address and Former Fiscal Year, If changed since Last Report) |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of July 31, 2006, there were outstanding 15,752,435 shares of common stock, par value $0.0001, and no shares of preferred stock.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Page 1
RESOLVE STAFFING, INC.
FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | |
| Item 1. Financial Statements | |
| 3 | |
| 4 | |
| 5 | |
| 7 | |
| 17 | |
| 21 | |
PART II OTHER INFORMATION | |
| 22 | |
| 22 | |
| 22 | |
| 22 | |
| 22 | |
| 23 |
Page 2
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND DECEMBER 31, 2005
ASSETS | ||
2006 | 2005 | |
Current Assets: | ||
| Cash | $ - | $ - |
| Accounts receivable, net of allowance for bad debts of $173,614 for 2006 and $96,986 for 2005 | 13,644,036 | 6,638,782 |
| Prepaid and other assets | 403,106 | 330,368 |
| Total current assets | 14,047,142 | 6,969,150 |
Property and Equipment: | ||
| Property and equipment | 1,203,744 | 866,196 |
| Less: Accumulated depreciation | (370,307) | (264,935) |
| Net property and equipment | 833,437 | 601,261 |
Other Assets: | ||
| Goodwill | 9,750,454 | 6,695,579 |
| Non competes, net of accumulated amortization of $326,498 for 2006 and $106,917 for 2005 | 696,393 | 231,083 |
| Total other assets | 10,446,847 | 6,926,662 |
Total Assets | $25,327,426 | $14,497,073 |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||
Current Liabilities: | ||
| Bank overdraft | $730,660 | $205,551 |
| Accounts payable and accrued liabilities | 3,024,107 | 1,011,903 |
| Accounts payable related party | - | 825,921 |
| Accrued salaries and payroll taxes | 1,722,439 | 639,474 |
| Notes payable and lines of credit | 11,192,720 | 1,849,246 |
| Notes payable - related parties | 91,500 | 91,500 |
| Total current liabilities | 16,761,426 | 4,623,595 |
Long Term Liabilities | ||
| Notes payable | 890,663 | 4,209,762 |
| Notes payable - related parties | 7,369,094 | 5,873,936 |
| Total long term debt | 8,259,757 | 10,083,698 |
| Total Liabilities | 25,021,182 | 14,707,293 |
Stockholders’ Equity (Deficit): | ||
| Common stock, $.0001 par value, 50,000,000 shares authorized, issued and outstanding: June 30, 2006 - 15,752,435 shares; December 31, 2005 - 15,219,101 shares | 1,575 | 1,522 |
| Paid-in capital | 2,107,171 | 1,187,475 |
| Accumulated deficit | (1,802,502) | (1,399,217) |
| Total stockholders’ equity (deficit) | 306,244 | (210,220) |
Total Liabilities and Stockholders’ Equity (Deficit) | $25,327,426 | $14,497,073 |
See accompanying notes to these financial statements.
Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
Three Months Ended June 30, | Six Months Ended June 30, | |||
2006 | 2005 | 2006 | 2005 | |
Staffing Services Revenue | $27,670,465 | $5,421,811 | $45,075,043 | $8,100,261 |
Cost of Staffing Services Revenue | 23,266,196 | 4,337,104 | 37,450,198 | 6,509,793 |
Gross Profit | 4,404,269 | 1,084,707 | 7,624,845 | 1,590,468 |
Operating Expenses | 4,144,946 | 1,197,841 | 7,709,869 | 1,829,985 |
Income (Loss) From Operations | 259,323 | (113,134) | (85,024) | (239,517) |
Other Income (Expense): | ||||
| Interest expense | (166,423) | (72,731) | (318,261) | (103,257) |
| Other income (expenses), net | (166,423) | (72,731) | (318,261) | (103,257) |
Net Income (Loss) | $92,900 | $(185,865) | $(403,285) | $(342,774) |
Net Income (Loss) Per Share | ||||
| Basic | $.00 | $(.01) | $(.02) | $(.02) |
| Diluted | $.00 | $(.01) | $(.02) | $(.02) |
Weighted Average Number of Shares Used in Loss Per Share Computation: | ||||
| Basic | 19,181,006 | 14,578,661 | 17,233,097 | 14,244,368 |
| Diluted | 19,693,564 | 14,578,661 | 17,233,097 | 14,244,368 |
See accompanying notes to these financial statements.
Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
2006 | 2005 | |
Cash Flows From Operating Activities | ||
| Net loss | $(403,285) | $(342,774) |
Adjustments to reconcile net loss to cash used in operating activities: | ||
| Depreciation and amortization | 105,370 | 50,639 |
| Stock based compensation | 119,749 | 10,000 |
| Change in allowance for doubtful accounts | 76,628 | 5,340 |
| Amortization of intangibles | 2,091 | |
| Amortization of non compete | 184,690 | - |
Decrease (increase) in current assets: | ||
| Accounts receivable | (7,081,882) | (913,510) |
| Prepaid and other assets | (72,738) | 7,941 |
Increase (decrease) in current liabilities: | ||
| Accounts payable | 1,962,744 | 281,879 |
| Account payable - related party | (825,921) | - |
| Accrued salaries and payroll taxes | 1,082,965 | 200,881 |
| Total adjustments | (4,448,395) | (354,739) |
| Net cash used in operating activities | (4,851,680) | (697,513) |
Cash Flows From Investing Activities | ||
| Acquisition of net assets of subsidiaries, net of cash | 2,072,415 | (346,000) |
| Purchase of property and equipment | (157,546) | (118,706) |
| Net cash used in investing activities | (2,229,961) | (464,706) |
Cash Flows From Financing Activities | ||
Increase in (Repayment of) bank overdraft | 525,109 | (37,871) |
| Stock purchase | 800,000 | - |
| Proceeds from line of credit | 5.695,573 | 1,710,071 |
| Repayment of notes payable | (1,434,199) | (53,179) |
| Proceeds from (repayment of) loans payable - related party | 1,495,158 | (400,873) |
| Net cash provided by financing activities | 7,081,641 | 1,218,148 |
Net Increase in Cash | - | 55,929 |
Cash, Beginning of the Period | - | 75,356 |
Cash, End of the Period | $- | $131,285 |
Page 5
RESOLVE STAFFING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the quarter ended March 31, 2006, Resolve issued a note receivable to a consultant in the amount of $6,000,000 for the purchase of 4,000,000 shares of the Company’s common stock. As of June 30, 2006, $800,000 (533,334 shares purchased) was paid towards the note. On June 30, 2006, the agreement was terminated and the note receivable was canceled and the remaining balance of common stock issued (3,566,666 shares) was canceled.
During the six months ended June 30, 2006, Resolve acquired all of the assets and ownership of 4 unrelated entities. In conjunction with these transactions Resolve issued notes payable in the amount of $1,763,000 and accrued $49,460 of contingent expenses in exchange for 100% of the ownership interest in 4 entities with 11 staffing locations. The fair value of the assets and liabilities assumed, on the date of acquisition were as follows:
| Property and equipment | $10,000 |
| Goodwill | 1,802,460 |
| Total | $1,812,460 |
On February 7, 2005, Resolve Staffing purchased the staffing division of ELS. In connection with the Combination on February 7, 2005, described below 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 Combination was accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with U.S. generally accepted accounting principles generally accepted in the United States. 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 3 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) |
| Total | $1,630,000 |
See accompanying notes to these financial statements.
Page 6
NOTE A - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Organization and Nature of Operations
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 approximately 63 offices reaching from California to New York. Resolve provides a full range of supplemental staffing and outsourced solutions, including 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.
On February 7, 2005, Resolve Staffing, Inc., entered into an equity purchase agreement (“Agreement”), to purchase ELS Personnel Services (“ELS”) (the “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.
On various dates during 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 31 temporary employee staffing locations from the newly acquired entities. Additional information pertaining to these acquisitions is included in Resolve Staffing, Inc.’s Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange Commission.
On January 3, 2006, Resolve Staffing elected three new officers. Steve Ludders has been promoted to Executive VP, Chief Operating Officer of the Company. Scott Horne has been promoted to Executive VP, Chief Financial Officer of the Company. Tom Lawry has been promoted to Controller, Treasurer of the Company.
On January 24, 2006, Resolve Staffing acquired R & R Staffing Services, Inc., located in Syracuse, New York. With $3 million in annual revenue, this acquisition gave Resolve its 13th office in various Northeast markets.
On February 22, 2006, Resolve Staffing announced that it has reached an agreement in principle to merge with Employee Leasing Services, Inc. (ELS Inc.), and certain related affiliates. Headquartered in Cincinnati, Ohio. ELS Inc., a professional employer organization (PEO), manages a payroll of over 10,000 worksite employees in over 40 states and has operation and service centers throughout the country. ELS Inc.’s 2005 gross (non-GAAP) revenues were over $200 million, which equates to approximately $50 million in net (GAAP) revenues and $3.5 million in Pretax Profit. Under the terms of the agreement, Resolve will acquire all outstanding shares of ELS Inc. for approximately $3 million in cash, a $7 million note and 1.4 million shares of Resolve common stock. On July 5, 2006, Resolve Staffing announced the merger had been delayed until further notice. While the companies will continue to move forward with the proposed merger, a new closing date has yet to be set. There is no certainty that Resolve will be able to consummate a transaction with ELS. In any event, Resolve will immediately announce a new closing date, or if merger discussion have been terminated, as soon as any revised dates or discussions have been set.
On March 27, 2006, Resolve Staffing acquired Ready Nurses LLC, a Fulton, Missouri based medical staffing firm. Ready Nurses provides a variety of medical staffing services including travel nurses and other healthcare related professionals. With $800,000 in annual sales, this acquisition was Resolve’s fourth in the burgeoning medical staffing industry.
Page 7
RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE A - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION (CONTINUED)
On April 18, 2006, the Board of Directors of Resolve Staffing, Inc. declared a dividend distribution of one 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.
On May 5, 2006, Resolve Staffing acquired Steadystaff, a Baltimore/Washington D. C. based staffing firm. Steadystaff provides a variety of staffing services including temporary staffing, temp-to-perm, and permanent placement services. Steadystaff provides staffing services to a rapidly expanding client base. The company provides qualified employees in a variety of fields including accounting, administrative, light industrial, and other difficult-to-find professions. With $3 million in annual sales, this acquisition is Resolve's first in the burgeoning Baltimore/Washington D. C. market.
On June 1, 2006, Resolve Staffing announced that it has completed the acquisition of Star Personnel. Star Personnel (www.starpersonnel.com), headquartered in Cincinnati, Ohio, is a provider of diversified staffing services with eight offices in the Cincinnati/tri-state market. With approximately $20 million in annual sales (unaudited), Star Personnel offers a variety of staffing services including light industrial and office/clerical support.
We plan to continue to grow our business through the acquisition of private companies in the staffing industry that would provide types of staffing and/or related services with which we are familiar. We may seek private staffing companies for acquisitions or strategic alliances both in and out of our current markets. We believe that by acquiring existing staffing companies it will enable us to:
| · | recruit well-trained, high-quality professionals; |
| · | expand our service offerings; |
| · | gain additional industry expertise; |
| · | broaden our client base; and |
| · | expand our geographic presence. |
Acquisition of Entities from Related Parties
On February 7, 2005, Resolve Staffing, Inc., entered into an equity purchase agreement (“Agreement”), to purchase ELS Personnel Services (“ELS”) (the “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 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 3 locations from Five Star Staffing, Inc., in August 2004, 3 locations from Five Star Staffing (NY), Inc., in November 2004 and 1 location from American Staffing Resources, Ltd., 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 Combination on February 7, 2005, described below in the Basis of Presentation section of these notes to consolidated financial statements, ELS was deemed to be the acquiring company for accounting purposes and the 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.
Page 8
RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE A - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION (CONTINUED)
In connection with the Combination on February 7, 2005, described below 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 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) |
| Total | $ 1,647,125 |
Acquisition of Entities from Unrelated Parties
During the six months ended June 30, 2006, 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 and accrued contingent expenses 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:
| Property and equipment | $180,000 |
| Noncompete | 650,000 |
| Goodwill | 3,054,876 |
| Total | $3,884,876 |
To date the books and records of the locations acquired from unrelated parties during 2006 have not been audited, and therefore the allocation of the purchase price is subject to refinement.
In conjunction with the acquisitions from all parties during the six months ended June 30, 2006, approximately $3,054,876 has been assigned to goodwill. All of the goodwill is expected to be deductible for tax purposes.
The financial results of these acquired entities are included in the consolidated financial statements from the date of acquisition.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions incorporated in Regulation S-B, Item 310(b) of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The financial statements are unaudited, but in the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the six months ended June 30, 2006 and 2005 have been included.
These statements are not necessarily indicative of the results to be expected for the full fiscal year. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange Commission.
Page 9
RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE A - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION (CONTINUED)
Because the owners of ELS held approximately 90% of the Company’s outstanding common stock after the 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 each of the two years ended December 31, 2003 and 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 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.
Principles of Consolidation
The consolidated financial statements at June 30, 2006 include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in preparing the accompanying financial statements.
Revenue Recognition
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 Emerging Issues Task Force (“EITF”) 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” in the presentation of 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
Resolve accounts for and reports its stock-based employee compensation arrangements using the intrinsic value method as prescribed in 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”). Accordingly, compensation cost for stock options and warrants are measured as the excess, if any, of the fair value of the Company’s stock at the date of grant over the stock option exercise price. Resolve accounts for stock issued to non-employees in accordance with the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Under SFAS 123, stock option awards issued to non-employees are accounted for at their fair value on the date issued, where fair value is determined using the Black-Scholes option pricing method. In December 2004, The Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 123 (Revised), "Shared-Based Payment" (SFAS 123R). This standard revises SFAS No. 123, Accounting Principles Board Option 25 and related interpretations, and eliminates use of the intrinsic value method of accounting for stock options. The Company currently uses the intrinsic value method to value stock options, and, accordingly, no compensation expense has been recognized for stock options. SFAS 123R requires that all employee share-based payments to employees, including stock options, be valued using a fair-value-based method and recorded as expense in the statement of operations. For the Company, SFAS 123R will first be effective for its December 31, 2006 financial statements. This new Statement will not affect accounting for the Company's stock options currently outstanding, but it will affect financial statement disclosures about those stock options, and it will change the accounting for stock options issued subsequent to January 1, 2006.
Furthermore, public entities are required to measure liabilities incurred to employees in share-based payment transactions at fair value as well as estimate the number of instruments for which the requisite service is expected to be rendered. Any incremental compensation cost for a modification of the terms or conditions of an award is measured by comparing the fair values before and after the modification. The Company has recognized approximately $120,000 as a result of SFAS No. 123R as of June 30, 2006.
Page 10
RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE A - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION (CONTINUED)
Recent Accounting Principles
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140. This statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. SFAS No. 155: (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; (c) establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, (e) eliminates restrictions on a qualifying special-purpose entity's ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. SFAS No. 155 also requires presentation within the financial statements that identifies those hybrid financial instruments for which the fair value election has been applied and information on the income statement impact of the changes in fair value of those instruments. The Company is required to apply SFAS No. 155 to all financial instruments acquired, issued or subject to a remeasurement event beginning January 1, 2007. The Company does not expect the adoption of SFAS No. 155 to have a material impact on the Company's financial statements.
NOTE B - LIQUIDITY AND MANAGEMENT’S PLANS
As reflected in the accompanying financial statements, the Company has a net working capital deficit and stockholders’ equity of $2,714,284 and $306,244, respectively, as of June 30, 2006. To date, The Company has incurred substantial losses and has been dependent upon the financial support of stockholders, management and other related parties.
Management has successfully obtained additional financial resources, which the Company believes will support operations until profitability can be sustained. These financial resources include financing from both related and non-related third parties, as discussed in the accompanying footnotes to the financial statements. There can be no assurance that management will be successful in these efforts. The financial statements do not reflect any adjustments that may arise as a result of this uncertainty.
Page 11
RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE C - NOTES PAYABLE AND LINES OF CREDIT
Notes payable and lines of credit as of June 30, 2006 and December 31, 2005 are as follows:
| 2006 | 2005 | ||
| Lines of credit to two banks totaling $9,500,000, interest payable monthly at rates ranging from prime to 8.50%, maturing September 2006 and February 2007. Borrowings under this note are limited to 80% of the Company’s accounts receivable balance which have been outstanding for less than 90 days. | $9,037,500 | $3,341,927 | |
| Note payable to a bank, principal and interest payable monthly of $9,845, maturing September 2009. Interest is payable on the principal balance outstanding at a rate of 6.6% per annum. | 351,677 | 398,100 | |
| Notes payable to ELS Inc., accruing interest at 3% per annum, due September 2007 | 7,369,094 | 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 June 2008 with monthly payment amounts ranging from $5,833 to $41,664. One note bears interest at 2.875% per annum. The other notes bear no interest and accordingly management has imputed interest at 7.25% per annum. Balance is shown net of unamortized loan discount of $91,702 and $140,106 at June 30, 2006 and December 31, 2005, respectively. | 2,654,206 | 2,278,981 | |
| Demand notes payable to two individuals accruing interest at 5% to 12% per annum, maturity dates are being extended verbally on a month to month basis. | 131,500 | 131,500 | |
| Total notes payable and lines of credit | 19,543,977 | 12,024,444 | |
| Current portion of notes payable and lines of credit | (11,284,220) | (1,940,746) | |
| Long term portion of notes payable and lines of credit | $8,259,757 | $10,083,698 |
See Note D - Note Payable Related Party, for information about the Credit Agreement with ELS, Inc.
See Note D - Note Payable Related Party, for information about the Note Payable to William Brown.
NOTE D - NOTE PAYABLE - RELATED PARTY
Notes payable - related party includes 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.
On December 8, 2003, the Company entered into a non-interest bearing short-term credit agreement with ELS, Inc., that provides for borrowings of up to $200,000. ELS, Inc. is a company owned by Ronald Heineman, the Company’s Chief Executive Officer. 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. As of June 30, 2006, Resolve had a balance of $7,369,094 outstanding, which includes the note payable for the purchase of ELS of $1,500,000. Balances due under the credit agreement were originally due May 8, 2004, but the agreement was extended on a month-to-month basis, and provided for an additional $100,000 in borrowings. On June 1, 2004, the agreement was amended to extend the line to a maximum of $500,000. During 2005, the agreement was extended for an additional 18 months, becoming due March 31, 2007 with interest due at 3% per annum, and the maximum amount was increased on a case by case basis upon review. Management extended this note during 2006 to become due September 2007.
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RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE E - STOCKHOLDERS’ 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. As of June 30, 2006, the balance of the note was $5,200,000. The agreement was terminated on June 30, 2006 and the remaining balance of 3,566,666 shares was canceled.
Common Stock Warrants
As of June 30, 2006, there were 851,320 stock warrants outstanding which are due to expire on June 30, 2007. Each warrant has an exercise price of $.75 per share price. All stock warrants are exercisable.
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.
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RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE F - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the six months ended June 30, 2006 and 2005 amounted to $318,261 and $103,257 respectively.
NOTE G - NET LOSS PER SHARE
Net loss per share is computed based upon the weighted outstanding shares of the Company’s common stock for each period presented. The weighted average number of shares excludes 851,320 common stock equivalents, representing principally warrants and stock options, since the effect of including them would be anti-dilutive.
NOTE H - SUBSEQUENT EVENTS
On July 5, 2006 Resolve Staffing, Inc. announced that the proposed merger with ELS has been delayed until further notice. On February 22, 2006, Resolve Staffing, Inc. and Employee Leasing Services, Inc. entered into a merger agreement. Resolve and ELS contemplated that the merger would be completed by June 30, 2006. Subsequent to the February 22, 2006 announcement, Resolve has acquired two additional staffing firms with annual sales totaling over $20 million. Because of these acquisitions, and unexpected filing and accounting issues, the merger with ELS was delayed until further notice. While the companies will continue to move forward with the proposed merger, a new closing date has yet to be set. There is no certainty that Resolve will be able to consummate a transaction with ELS. In any event, Resolve will immediately announce a new closing date, or if merger discussions have been terminated, as soon as any revised dates or discussions have been set.
NOTE I - PROFORMA INFORMATION
The interim financial statements for the six months ended June 30, 2006 and 2005 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 statements of operations do not include the activity of the acquired companies, including the acquisition of Star Personnel (and Direct Staffing) and the acquisition of Resolve, which has been recorded as a reverse acquisition, for the period from January 1, of each period to the respective dates of acquisition.
Presented below is the unaudited pro forma statement of operations for the three months ended June 30, 2006 as if the acquisition of Star Personnel had been completed April 1, 2006.
Actual three months ended June 30, 2006 | Pro forma adjustments for Star Personnel, Inc. | Adjusted June 30, 2006 | |
| Service Revenues | $27,670,465 | $2,725,520 | $30,395,985 |
| Cost of Services | 23,266,196 | 1,699,552 | 24,965,748 |
| Gross Margin | 4,404,269 | 1,025,968 | 5,430,237 |
| Operating Expenses | 4,144,946 | 757,911 | 4,902,857 |
| Profit (Loss) From Operations | 259,323 | 268,057 | 527,380 |
| Other Income (Expense): | |||
| Interest expense | (166,423) | - | (166,423) |
| Net other expenses | (166,423) | - | (166,423) |
| Net Income | $92,900 | $268,057 | $360,957 |
| Pro-forma earnings per share information for the six months ended June 30, 2006: | |||
Basic weighted average shares outstanding: Diluted weighted average shares outstanding | 19,181,006 19,693,564 | ||
Pro forma basic net income per common share: Pro forma diluted net income per common share | $.02 $.02 | ||
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RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE I - PROFORMA INFORMATION (CONTINUED)
Presented below is the unaudited pro forma statement of operations for the six months ended June 30, 2006 as if the acquisition of Star Personnel had been completed January 1, 2006.
Actual six months ended June 30, 2006 | Pro forma adjustments for Star Personnel, Inc. | Adjusted June 30, 2006 | |
| Service Revenues | $45,075,043 | $6,665,403 | $51,740,446 |
| Cost of Services | 37,450,198 | 4,614,832 | 42,065,030 |
| Gross Margin | 7,624,845 | 2,050,571 | 9,675,416 |
| Operating Expenses | 7,709,869 | 2,073,399 | 9,783,268 |
| Profit (Loss) From Operations | (85,024) | (22,828) | (107,852) |
| Other Income (Expense): | |||
| Interest expense | (318,261) | (93) | (318,354) |
| Net other expenses | (318,261) | (93) | (318,354) |
| Net Loss | $(403,285) | $(22,921) | $(426,206) |
| Pro-forma earnings per share information for the six months ended June 30, 2006: | |||
| Basic weighted average shares outstanding: | 17,233,097 | ||
| Pro forma basic net loss per common share: | $(.02) | ||
Presented below is the unaudited pro forma statement of operations for the three months ended June 30, 2005 as if the acquisition of Star Personnel had been completed April 1, 2005.
Actual three months ended June 30, 2005 | Pro forma adjustments for Star Personnel, Inc. | Adjusted June 30, 2005 | |
| Service Revenues | $5,421,811 | $3,716,267 | $9,138,078 |
| Cost of Services | 4,337,104 | 2,528,976 | 6,866,080 |
| Gross Margin | 1,084,707 | 1,187,291 | 2,271,998 |
| Operating Expenses | 1,197,841 | 998,116 | 2,195,957 |
| Profit (Loss) From Operations | (113,134) | 189,175 | 76,041 |
| Other Income (Expense): | |||
| Interest expense | (72,731) | (11,411) | (84,142) |
| Net other expenses | (72,731) | (11,411) | (84,142) |
| Net Loss | $(185,865) | $177,764 | $(8,101) |
| Pro-forma earnings per share information for the three months ended June 30, 2006: | |||
| Basic weighted average shares outstanding: | 14,578,661 | ||
| Pro forma basic net loss per common share: | $.00 | ||
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RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE I - PROFORMA INFORMATION (CONTINUED)
Presented below is the unaudited pro forma statement of operations for the six months ended June 30, 2005 as if the acquisition of Resolve, from related parties (Note A), and Star Personnel had been completed January 1, 2005.
Actual six months ended June 30, 2005 | Pro forma Adjustments for Resolve Staffing, Inc. | Pro forma Adjustment for Star Personnel, Inc. | Adjusted June 30, 2005 | |
| Service Revenues | $8,100,261 | $45,069 | $7,664,985 | $15,810,315 |
| Cost of Services | 6,509,793 | - | 5,400,029 | 11,909,822 |
| Gross Margin | 1,590,468 | 45,069 | 2,264,956 | 3,900,493 |
| Operating Expenses | 1,829,985 | 63,667 | 2,099,640 | 3,993,292 |
| Profit (Loss) From Operations | (239,517) | (18,598) | 165,316 | (92,799) |
| Other Income (Expense): | ||||
| Interest expense | (103,257) | (400) | (18,686) | (122,343) |
| Net other expenses | (103,257) | (400) | (18,686) | (122,343) |
| Net Loss | $(342,774) | $(18,998) | $146,630 | $(215,142) |
| Pro-forma earnings per share information for the six months ended June 30, 2005: | ||||
| Basic weighted average shares outstanding: | 14,244,368 | |||
| Pro forma basic net loss per common share: | $(.02) | |||
The Company has been unable to obtain the necessary information to present pro-forma financial information reflecting the combined operations of Resolve Staffing, Inc, and certain of the various acquired staffing locations from unrelated parties, for the period ended June 30, 2006 and 2005. This current Report on Form 10-QSB/A will be supplemented by amendment to provide the necessary comparative pro-forma information as soon as the information becomes available.
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RESOLVE STAFFING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
Cautionary Statement Regarding Forward-looking Information
This report and other reports, as well as other written and oral statements made or released by us, may contain forward-looking statements. Forward-looking statements are statements that describe, or that are based on, our current expectations, estimates, projections and beliefs. Forward-looking statements are based on assumptions made by us, and on information currently available to us. Forward-looking statements describe our expectations today of what we believe is most likely to occur or may be reasonably achievable in the future, but such statements do not predict or assure any future occurrence and may turn out to be wrong. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. The words "believe," "anticipate," "intend," "expect," "estimate," "project", "predict", "hope", "should", and "may", other words and expressions that have similar meanings, and variations of such words and expressions, among others, usually are intended to help identify forward-looking statements.
Forward-looking statements are subject to both known and unknown risks and uncertainties and can be affected by inaccurate assumptions we might make. Risks, uncertainties and inaccurate assumptions could cause actual results to differ materially from historical results or those currently anticipated. Consequently, no forward-looking statement can be guaranteed. The potential risks and uncertainties that could affect forward looking statements include, but are not limited to the ability to raise needed financing, increased competition, extent of the market demand for and supply of goods and services of the types provided by the Company, governmental regulation, performance of information systems, and the ability of the Company to hire, train and retain qualified employees. In addition, other risks, uncertainties, assumptions, and factors that could affect the Company's results and prospects have been and may further be described in the Company's prior and future filings with the Securities and Exchange Commission and other written and oral statements made or released by the Company.
We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date of this document. The information contained in this report is current only as of its date, and we assume no obligation to update any forward-looking statements.
The financial information set forth in the following discussion should be read in conjunction with, and qualified in its entirety by, the Company's unaudited consolidated financial statements and notes included herein. The results described below are not necessarily indicative of the results to be expected in any future period. Certain statements in this discussion and analysis, including statements regarding our strategy, financial performance and revenue sources, are forward-looking information based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Readers are referred to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005.
Results of Operations
As discussed above, the Company entered into a reverse acquisition transaction between ELS and Resolve on February 7, 2005. Prior period amounts presented in the consolidated balance sheets, statements of operations and cash flows reflect the balances of ELS only as ELS is deemed to be the acquirer for accounting purposes.
COMPARISON OF CONSOLIDATED OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005.
Our net income increased from a loss of $185,865 for three months ended June 30, 2005 to a profit of $92,900 or a $278,765 increase for three months ended June 30, 2006. A discussion of our results of operations is as follows:
Revenues for three months ended June 30, 2005 compared to 2006 increased from $5,421,811 to $27,670,465 or a 410% increase. This increase is attributable to several acquisitions Resolve has completed. In addition, Resolve has opened several new locations and created additional organic growth. As of June 30, 2006, Resolve operated approximately 63 staffing locations throughout the United States.
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RESOLVE STAFFING, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our cost of services increased from $4,337,104 for the three months ended June 30, 2005 to $23,266,196 for the three months ended June 30, 2006. This increase was largely due to the increased revenues as noted above. However, as a percentage of revenue, our cost of services increased from 80% in 2005 to 84% in 2006. This increase in our cost of sales is attributable to changes in our sales mix. In addition to standard staffing services, Resolve also offers human resource outsourcing services, such as payroll processing. While our staffing margins continue to remain constant, the increase in revenues attributable to payroll processing, which has lower margins, causes our costs of sales to increase, as a percent of sales. We expect our gross profit margins for staffing services to increase, as a percent of sales, in the future as we continue to grow our business in higher margin areas such as the truck driver and medical staffing market niches. However, as we continue to increase revenues from other services, such as payroll processing, we expect overall gross margins to continue to fluctuate.
Resolve expects to see continuing improvement in operating results as both existing acquisitions and organic growth are integrated over the remainder of the year. We expect to have a competitive advantage by offering a turnkey Human Resource Outsourcing (HRO) product line. This competitive advantage should enable Resolve to significantly increase its business opportunities with both existing customers and in new markets. Resolve expects this favorable trend to be realized in the later part of 2006 as the acquisitions are consolidated and synergies are realized.
Selling, General and Administrative expenses (“SG&A”) have increased from $1,197,841 for the three months ended June 30, 2005 to $4,144,946 for the three months ended June 30, 2006. This increase is attributable to our aggressive growth through acquisitions and opening of new locations. Resolve has grown into a national provider of staffing services with approximately 63 offices from coast to coast. This increase in SG&A expenses includes marketing, salaries, rents, and various other expenses associated with these locations, as well as corporate overhead and infrastructure to support the locations. These costs have decreased from approximately 22% to 15% as a percent of Sales. This decrease is attributable to the relatively fixed nature of some of the expenses. SG&A also includes non cash related items such as amortization of noncompete agreements and depreciation. Moreover, operating expenses include an approximately $200,000 bad-debt write-off that occurred in the second quarter of 2006.
Interest expense increased from $72,731 for the three months ended June 30, 2005 to $166,423 for the three months ended June 30, 2006. The increase is attributable to increase debt obligations related to our aggressive acquisition strategy. A majority of our debt is through affiliated parties, including Ron Heineman and ELS, Inc. This is discussed in detail in the footnotes to our financial statements.
No provision for income taxes have been reflected or recorded on these financial statements. We incurred a net income of $92,900 for the three months ended June 30, 2006 as a result of the matters discussed above. This represents a $278,765 increase in operating profit from the three months ended June 30, 2005. Losses to date may be used to offset future taxable income, assuming the Company becomes profitable.
Resolve has historically experienced fluctuations in its quarterly operating results and expects such fluctuations to continue in the future. The Company's operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, workers' compensation, demand and competition for the Company's services and the effect of acquisitions. The Company's revenue levels may fluctuate from quarter to quarter primarily due to the impact of seasonality in the staffing industry. As a result, the Company may have greater revenues and net income in the third and fourth quarters of its fiscal year. Payroll taxes and benefits fluctuate with the level of direct payroll costs, but tend to represent a smaller percentage of revenues and direct payroll later in the Company's fiscal year as federal and state statutory wage limits for unemployment and social security taxes are exceeded by some employees. Workers' compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. Adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the Company's estimated workers' compensation expense.
Liquidity and Capital Resources
As reflected in the accompanying financial statements, the Company has a net working capital deficit and a stockholders’ equity of $2,714,284 and $306,244, respectively, as of June 30, 2006. While the Company has achieved profitability, we have incurred substantial losses and have been dependent upon the financial support of stockholders, management, other related parties and banks.
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RESOLVE STAFFING, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Management has successfully obtained additional financial resources, which the Company believes will support operations until profitability can be achieved. These financial resources include financing from both related and non-related third parties, as discussed in the footnotes to the financial statements. There can be no assurance that management will be successful in these efforts. The financial statements do not reflect any adjustments that may arise as a result of this uncertainty.
Our average monthly revenue for the second quarter of 2005 was $1,807,270, and has increased to a monthly average of $9,223,488 for the second quarter of 2006.
We expect our operating expenses to continue to increase as we attempt to build our brand and expand our customer base. We hope our expenses will be funded from operations and short-term loans from officers, shareholders or others; however, our operations may not provide such funds and we may not be able obtain short-term loans from officers, shareholders or others. Our officers and shareholders are under no obligation to provide additional loans to the company.
COMPARISON OF CONSOLIDATED OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005.
Our net loss increased from a loss of $342,774 for six months ended June 30, 2005 to a net loss of $403,285 or a $60,511 increase for six months ended June 30, 2006. A discussion of our results of operations is as follows:
Revenues for six months ended June 30, 2005 compared to 2006 increased from $8,100,261 to $45,075,043 or a 456% increase. This increase is attributable to several acquisitions Resolve has completed. In addition, Resolve has opened several new locations and created additional organic growth. As of June 30, 2006, Resolve operated approximately 63 staffing locations throughout the United States.
Our cost of services increased from $6,509,793 for the six months ended June 30, 2005 to $37,450,198 for the six months ended June 30, 2006. This increase was largely due to the increased revenues as noted above. However, as a percentage of revenue, our cost of services increased from 80% in 2005 to 83% in 2006. This increase in our cost of sales is attributable to changes in our sales mix. In addition to standard staffing services, Resolve also offers human resource outsourcing services, such as payroll processing. While our staffing margins continue to remain constant, the increase in revenues attributable to payroll processing, which has lower margins, causes our costs of sales to increase, as a percent of sales. We expect our gross profit margins for staffing services to increase, as a percent of sales, in the future as we continue to grow our business in higher margin areas such as the truck driver and medical staffing market niches. However, as we continue to increase revenues from other services, such as payroll processing, we expect overall gross margins to continue to fluctuate.
Resolve expects to see continuing improvement in operating results as both existing acquisitions and organic growth are integrated over the remainder of the year. We expect to have a competitive advantage by offering a turnkey Human Resource Outsourcing (HRO) product line. This competitive advantage should enable Resolve to significantly increase its business opportunities with both existing customers and in new markets. Resolve expects this favorable trend to be realized in the later part of 2006 as the acquisitions are consolidated and synergies are realized.
Selling, General and Administrative expenses (“SG&A” or “Operating expenses”) have increased from $1,829,985 for the six months ended June 30, 2005 to $7,709,869 for the six months ended June 30, 2006. This increase is attributable to our aggressive growth through acquisitions and opening of new locations. Resolve has grown into a national provider of staffing services with approximately 63 offices from coast to coast. This increase in SG&A expenses includes marketing, salaries, rents, and various other expenses associated with these locations, as well as corporate overhead and infrastructure to support the locations. These costs have decreased from approximately 23% to 17% as a percent of Sales. This decrease is attributable to the relatively fixed nature of some of the expenses. SG&A also includes non cash related items such as amortization of noncompete agreements and depreciation. Moreover, operating expenses include an approximate $200,000 bad-debt write-off that occurred in the second quarter of 2006.
Interest expense increased from $103,257 for the six months ended June 30, 2005 to $318,261 for the six months ended June 30, 2006. The increase is attributable to increase debt obligations related to our aggressive acquisition strategy. A majority of our debt is through affiliated parties, including Ron Heineman and ELS, Inc. This is discussed in detail in the footnotes to our financial statements.
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RESOLVE STAFFING, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
No provision for income taxes have been reflected or recorded on these financial statements. We incurred a net loss of $403,285 for the six months ended June 30, 2006 as a result of the matters discussed above. This represents a $60,511 increase in net loss from the six months ended June 30, 2005. Losses to date may be used to offset future taxable income, assuming the Company becomes profitable.
Resolve has historically experienced fluctuations in its quarterly operating results and expects such fluctuations to continue in the future. The Company's operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, workers' compensation, demand and competition for the Company's services and the effect of acquisitions. The Company's revenue levels may fluctuate from quarter to quarter primarily due to the impact of seasonality in the staffing industry. As a result, the Company may have greater revenues and net income in the third and fourth quarters of its fiscal year. Payroll taxes and benefits fluctuate with the level of direct payroll costs, but tend to represent a smaller percentage of revenues and direct payroll later in the Company's fiscal year as federal and state statutory wage limits for unemployment and social security taxes are exceeded by some employees. Workers' compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. Adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the Company's estimated workers' compensation expense.
Liquidity and Capital Resources
As reflected in the accompanying financial statements, the Company has a net working deficit and a stockholders’ equity of $2,714,284 and $306,244, respectively, as of June 30, 2006. While the Company has achieved profitability, we have incurred substantial losses and have been dependent upon the financial support of stockholders, management, other related parties and banks.
Management has successfully obtained additional financial resources, which the Company believes will support operations until profitability can be achieved. These financial resources include financing from both related and non-related third parties, as discussed in the footnotes to the financial statements. There can be no assurance that management will be successful in these efforts. The financial statements do not reflect any adjustments that may arise as a result of this uncertainty.
For the six months ended June 30, 2006 we incurred a net loss of $403,285. Our expenses include $366,688 for depreciation, amortization, and a change in allowance for doubtful accounts and did not represent the use of cash. The expenses also include $119,749 for stock-based compensation and did not represent the use of cash. Changes in accounts receivable, prepaid and other expenses, offset by increases in accounts payable, payroll, salary, and other accruals brought the total cash used by operations to $4,851,680.
Our average monthly revenue for the first six months of 2005 was $1,350,044, and has increased to a monthly average of $7,512,507 for the first six months of 2006.
We expect our operating expenses to continue to increase as we attempt to build our brand and expand our customer base. We hope our expenses will be funded from operations and short-term loans from officers, shareholders or others; however, our operations may not provide such funds and we may not be able obtain short-term loans from officers, shareholders or others. Our officers and shareholders are under no obligation to provide additional loans to the company.
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RESOLVE STAFFING, INC.
Evaluation of disclosure controls and procedures
As of June 30, 2006, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer. Based upon that evaluation, they concluded that our disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Exchange Act.
Changes in internal controls
There were no changes in our internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls.
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RESOLVE STAFFING, INC.
PART II - OTHER INFORMATION
The Company is subject to legal proceedings and claims, which arise in the ordinary course of its business. In the opinion of management, 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.
There were no unregistered sales of securities for the six months ended June 30, 2006.
There were no defaults on senior securities for the six months ended June 30, 2006.
There were no submissions of matters to a vote of shareholders in the six months ended June 30, 2006.
On January 4, 2006, the board of directors of Resolve Staffing elected Steve Ludders to Executive VP, Chief operating Officer of the Company. Mr. Ludders was Regional Director and in charge of business development since joining Resolve. Mr. Ludders' experience includes a former VP of Strategic Planning with Interim Personnel, a $2 billion public staffing firm. Mr. Ludders is an MBA Thunderbird Graduate.
On January 4, 2006, the board of directors of Resolve Staffing elected Scott Horne to Executive VP, Chief Financial Officer of the Company. Mr. Horne was in charge of accounting since joining Resolve. Mr. Horne has extensive experience in finance and accounting for Human Resource Outsourcing companies, including being CFO of a national PEO. Mr. Horne graduated from Xavier University with an MBA in Finance.
On January 4, 2006, the board of directors of Resolve Staffing elected Tom Lawry Controller, Treasurer of the Company. Mr. Lawry has extensive accounting experience in the staffing and PEO markets.
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 January 19, 2006, Resolve Staffing filed a Form S-8 Registration Statement for the options issued pursuant to the consulting agreement.
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RESOLVE STAFFING, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
On February 22, 2006, Resolve Staffing, Inc. announced that it has reached an agreement in principle to merge with Employee Leasing Services, Inc. (ELS), and certain related affiliates. Headquartered in Cincinnati, Ohio, ELS (www.elshr.com), a professional employer organization (PEO), manages a payroll of over 10,000 worksite employees in over 40 states and has operation and service centers throughout the country. ELS’ 2005 gross (non-GAAP) revenues were over $200 million, which equates to approximately $50 million in net (GAAP) revenues and $3.5 million in Pretax Profit.
Under the terms of the agreement, Resolve will acquire all outstanding shares of ELS for approximately $3 million in cash, a $7 million note and 1.4 million shares of Resolve common stock. Closing of the transaction is subject to certain customary closing conditions and is expected to occur in the second quarter of 2006.
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 granted on January 9, 2006. A note was issued in the aggregate amount of $6 million. The agreement was terminated on June 30, 2006 and the remaining balance of 3,566,666 shares and the note balance of $5,200,000 were canceled.
On April 18, 2006, the Board of Directors of Resolve Staffing, Inc. declared a dividend distribution of one 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 and prior to the earliest of the Distribution Date (as defined below), the redemption of the Rights and the expiration of the Rights and, in certain circumstances, after the Distribution Date. Additional details are provided on an 8-K filed on April 21, 2006.
(a) Exhibits
| Exhibit | |
| 31.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports of Form 8-K
We filed the following reports on Form 8-K during the first and second quarter of 2006:
Form 8-K, January 4, 2006, Item 5 - Change in Registrants Officers; Reporting the election of Steve Ludders, Scott Horne, and Tom Lawry as Officers.
Form 8-K, February 24, 2006, Item 8 - Other Events; Reporting an agreement to merge with Employee Leasing Services, Inc. and certain affiliates.
Form 8-K, April 18, 2006, Item 8 - Other Events; Reporting a Letter of Intent to purchase Star Personnel, Inc.
Form 8-K, April 21, 2006, Item 2 - Results of Operations and Financial Conditions; Reporting the Company’s results for the year ended December 31, 2005, and Item 5 - Amendment to Articles of Incorporation or Bylaws; Reporting the adoption of an amendment to the Bylaws of the Company by the Board of Directors.
Form 8-K, May 17, 2006, Item 2 - Results of Operations and Financial Conditions; Reporting the Company’s results for the quarter ended March 31, 2006.
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RESOLVE STAFFING, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RESOLVE STAFFING, INC. | |
| Dated: August 11, 2006 | /s/ Ronald Heineman |
| By: Ronald Heineman, Chief Executive Officer | |
| Dated: August 11, 2006 | /s/ Scott Horne |
| By: Scott Horne, Chief Financial Officer |