UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended September 28, 2012

OR

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

For the transition period from                to

Commission file number 000-30734

 (Exact name of Registrant as specified in its charter)

 

160 Broadway, 11^th Floor
New York, New York 10038
(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sale price of such stock on December 19, 2012, was $5,397,000 based upon 11,676,527 shares held by non-affiliates.    The number of shares of common stock, $0.0001 par value, outstanding as of December 21, 2012 was 134,798,659.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report, excluding those statements that relate purely to historical information, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 (the “Securities Act”), as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. Forward-looking statements include, without limitation, statements relating to plans, objectives, goals, strategies and future events or performance, as well as the assumptions upon which such statements are based. The words “expect”, “estimate”, “anticipate”, “believe”, “intend”, “project”, “strategy”, “future”, “opportunity”, “plan”, “may”, “should”, “will”, “would”, “will be”, “will continue”, “will likely result” and similar expressions or phrases are generally intended to identify forward-looking statements. Such statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements.

The risks discussed in this Annual Report are not intended to represent a complete list of all risks and uncertainties inherent to our business, and we undertake no obligation to update or publicly revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Beginning on October 1, 2011, our operations are on a “52/53-week” fiscal year ending on the Friday closest to September 30  (the “Fiscal Year”).  The differences in our Fiscal Year and between our Fiscal Year and our year end close dates from previous periods are not significant.

 

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PART I

ITEM 1.BUSINESS

Overview

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

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

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

●    Accountabilities, Inc. (“Accountabilities”) provides administrative and light industrial staffing solutions, primarily to our customers in the Western United States;

●    Corporate Resource Development, Inc. (“CRD”) provides permanent and temporary professional, administrative and clerical solutions to financial services, entertainment, media, advertising, fashion and other companies through locations primarily in the Northeastern United States.;

●    Insurance Overload Services, Inc. (“Insurance Overload”) provides professional insurance industry staffing solutions for personnel in claims processing, customer services and related fields throughout the United States;

●    Integrated Consulting Group, Inc. (“ICG Inc.”) provides light industrial staffing solutions to our customers in the Northeastern United States;

●    Diamond Staffing Services Inc. (“Diamond Staffing”) provides administrative, light industrial and professional staffing solutions  throughout the United States most heavily concentrated in New Jersey, California and New England; and

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

The type and number of services we offer have grown largely through the acquisition of established offices from general staffing companies, which acquisitions are described in more detail under the “Company History” section of this Item 1.

We provide these services nationwide across a variety of industries and to a diverse array of clients, ranging from sole proprietorships to Fortune 1000 companies. We conduct all of our business in the United States and operate 205 staffing and on-site facilities in 37 states and the District of Columbia.  Our headquarters are in New York City.

Seasonality

Our business is seasonal in nature, with demand for our services generally at its highest point during our first and fourth quarters (with our strongest performance occurring in the first quarter) and lowest during our second quarter. This is normally a result of our customers increasing their temporary workforces for the holiday season and then decreasing it soon thereafter. As a result, we typically experience a seasonal decrease in our second quarter revenues compared with first quarter revenues

 

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Customers

We have a diverse industrial and geographic base of approximately 6,000 customers.  We are not dependent on any single customer, or limited segment of customers. Our largest single customer accounted for less than 10% of our total revenue in 2012.

Governmental Regulation

Staffing firms are generally subject to one or more of the following types of government regulations: (i) regulation of the employer/employee relationship between a firm and its flexible staff, (ii) registration, licensing, record keeping and reporting requirements and (iii) substantive limitations on its operations. Staffing firms are the legal employers of their temporary workers. Therefore, staffing firms like us are governed by laws regulating the employer/employee relationship, such as wage and hour regulations, tax withholding and reporting, social security or retirement, anti-discrimination and workers’ compensation. We do not anticipate that these legal structures and requirements will have a material effect on our growth or prospects. However, any material change in federal, state or local regulation of staffing services could have an adverse effect on us.

Environmental Concerns

Because we are involved in a service business, federal, state or local laws that regulate the discharge of materials into the environment do not materially impact us.

 

Marketing and Sales

We use five principal channels for marketing our services, promoting our brand and recruiting employee candidates: (1) client-paid and Company-paid advertising for vacant positions; (2) public relations to promote our services; (3) our website and the internet generally; (4) job fairs; and (5) directed selling efforts. Each of our regional staffing and recruiting offices maintains sales and recruiting personnel responsible for effectuating our marketing strategy to clients and candidates. In total, we have approximately 200  sales and recruiting personnel nationwide.

Competition

Our staffing, recruiting and consulting services face competition in attracting clients as well as skilled specialized employment candidates. In providing staffing services, we operate in a competitive, fragmented market and compete for clients and candidates with a variety of organizations that offer similar services. Our principal competitors include:

●    traditional and Internet-based staffing firms and their specialized divisions;

●    the in-house resources of our clients; and

●    independent contractors.

We compete for clients on the basis of the quality of employment personnel, the timely availability of personnel with requisite skills, the scope and price of services, the geographic reach of services and the ability to coordinate blended services.  While some of our competitors have significantly greater financial resources, generate greater revenues and have greater name recognition than we do, we believe we compete favorably with these competitors by delivering superior services.

The general temporary staffing industry is highly competitive with few barriers to entry. We believe that the majority of companies offering these services are local, full-service or specialized operations with less than five offices. Within local markets, typically no single company has a dominant share of the market. We also compete for qualified candidates and customers with larger full-service and specialized competitors in local, regional and national markets. Competitors offering general temporary staffing services nationally and similar to ours include companies such as Adecco SA, Kelly Services, Inc., Manpower Inc., Remedy Intelligent Staffing, Express Personnel Services, Inc. and Randstad North America. Some of our principal competitors have greater financial, marketing and other resources than we do. In addition, there are a number of medium-sized firms that compete with us in certain markets where they may have a stronger presence, such as regional or specialized markets.

 

We believe that the competitive factors in obtaining and retaining customers include understanding customers’ workforce and specific job requirements, providing qualified temporary personnel and permanent placement candidates in a timely manner, monitoring quality of job performance and pricing of services. We believe that the primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits and flexibility of work schedules.

 

 

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Employees

We employ 658 full time and 157 part time employees in our operations.  In Fiscal Year 2012, we placed approximately 120,000 temporary staff with our customers nationwide.

Company History

The following summarizes certain recent developments with respect to our corporate history:

●    In fiscal year 2009, Tri-State Employment Services, Inc. (“TSE”), together with its affiliated companies (“Tri-State”), obtained control of our company by acquiring beneficial ownership of more than a majority of our outstanding shares of common stock through a series of stock purchases. As of the date hereof, Tri-State and its related persons own approximately 91.3% of our outstanding shares of common stock.

●    In the third quarter of fiscal year 2009 and first quarter of fiscal year 2010, we discontinued our CPA Partner on Premise Program and Direct Professional Accounting Service offerings, respectively, both of which provided accounting related services. We made these decisions after reviewing the historical operating losses of these operations, and in order to focus our efforts on offering light industrial and administrative services.

●    On February 23, 2010, we completed a  holding company reorganization by merging Accountabilities, our former parent company, into a wholly-owned subsidiary. As a result of the reorganization, the shareholders of Accountabilities acquired shares of our common stock, and immediately following the reorganization, our capitalization and consolidated assets, liabilities and stockholders’ equity were the same as the capitalization and consolidated assets, liabilities and stockholders’ equity of Accountabilities immediately prior to the reorganization.

●    On April 5, 2010, our newly formed, wholly-owned subsidiary, CRD, acquired, through a private foreclosure sale, a portion of the assets of GT Systems, Inc. and its affiliated companies (“GT Systems”) related to the temporary and permanent placement of employees. The purchase price for this acquisition was $3 million, which was guaranteed by TSE and by us, and was secured by a pledge of 4,257,332 shares of our common stock. Pursuant to this agreement,  we exercised our right to repurchase 2,323,001 shares of our common stock at par value from the pledged shares during Fiscal Year 2011. The pledged shares are not treated as outstanding for our financial statements, and are not included in the number of our shares of common stock outstanding on the cover page of this Annual Report.

 

●    Insurance Overload, a wholly-owned subsidiary of the Company, was formed on July 22, 2010.  On August 27, 2010, pursuant to a merger, Insurance Overload acquired Tri-Overload Staffing Inc. (“Tri-Overload”), an entity engaged in the business of providing temporary and permanent employment services and related support services to the insurance industry.  The purchase price for this entity was $6.2 million, which was paid through the issuance of 8,589,637 shares of our common stock.  The number of shares issued was based upon a negotiated $0.7218 price per share for our common stock that was determined using volume weighted historical market prices.

 

●    ICG Inc., a wholly-owned subsidiary of the Company, was formed on October 18, 2010.  On December 14, 2010, ICG Inc. acquired, through a public foreclosure sale, a portion of the assets of Integrated Consulting Group of NY LLC.  For a description of the consideration for these assets see Note 3 to the Consolidated Financial Statements.

●    Diamond Staffing, our wholly-owned subsidiary, was formed on October 7, 2010. On January 31, 2011, through a merger, Diamond Staffing acquired Tri-Diamond Staffing, Inc. (“Tri-Diamond”) from TS Staffing Corp. (“TSS Corp.”). The purchase price for this acquisition was $25 million which was paid through the issuance of 29,411,765 shares of our common stock. The number of shares issued was based upon a negotiated $0.85 price per share, which was determined using volume weighted historical market prices.

●    On November 21, 2011, we entered into an Acquisition and Share Exchange Agreement (the “TS Staffing Acquisition”) with TS Staffing, a Texas corporation and the successor company of TSS Corp., and Robert Cassera, the sole shareholder of TS Staffing and a member of the board of directors of our company (the “Board”). Pursuant to the terms of the Acquisition and Share Exchange Agreement, we acquired all of TS Staffing’s issued and outstanding shares of common stock, par value $0.0001 per share, in exchange for the issuance of 34,839,159 shares of our common stock, valued at $0.8611 per share, equal to $30 million, the agreed upon value of TS Staffing’s business operations as of November 21, 2011. An additional 38,001,402 shares of our common stock were issued in exchange for an equal number of shares that were held by TS Staffing immediately prior to the TS Staffing Acquisition. These shares, related to the acquisitions by us of Tri-Overload and Tri-Diamond from TSS Corp., were cancelled upon completion of the TS Staffing Acquisition.

 

 

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Access to Company Information

We file reports with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information about issuers such as us that file electronically with the SEC.

 

In addition, we make available, free of charge, on our website at http://www.crsco.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) under the Exchange Act as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.

 

 

Our business is significantly affected by fluctuations in general economic conditions.

 

Demand for staffing services is significantly affected by the general level of economic activity and employment in the United States and the other countries in which we operate. When economic activity increases, temporary employees are often added before full-time employees are hired. As economic activity slows, however, many companies reduce their use of temporary employees before laying off full-time employees. Significant swings in economic activity historically have had a disproportionate impact on staffing industry volumes. We may also experience more competitive pricing pressure during periods of economic downturn. A substantial portion of our revenues and earnings are generated by our business operations in the United States. Any significant economic downturn in the United States could have a material adverse effect on our business, financial condition and results of operations.

 

Due to the highly competitive nature of and the low barriers of entry to the temporary staffing industry, we may be unable to compete successfully against existing or new competitors.

 

We operate in the highly competitive temporary staffing industry, which has low barriers of entry. We compete with larger companies that have greater name recognition, greater financial resources and larger staffs. We also compete with smaller, more specialized entities that are able to concentrate their resources on particular industries or markets. We expect that the level of competition will remain high.  To remain competitive, we must provide superior service and performance on a cost-effective basis to customers. Any failure to do so could have a material adverse effect on our existing business and future prospects.

 

We have significant working capital requirements and have historically experienced negative working capital balances.  If we experience such negative working capital balances in the future, it could have a material adverse effect on our business, financial condition and results of operations.

 

We require significant amounts of working capital to operate our business and pay expenses relating to the employment of temporary employees.  Temporary personnel are generally paid on a weekly basis while payments from customers are generally received 30 to 60 days after billing. As a result, we must maintain sufficient cash availability to pay temporary personnel prior to receiving payment from customers.  We finance our operations primarily through sales of our receivables to financial institutions with recourse, issuances of debt, including debt issued to related parties, and through cash generated by our operating activities.

 

We have been required to aggressively manage working capital to ensure adequate funds to meet working capital requirements and to service debt. Such steps included working to improve collections and adjusting the timing of cash expenditures, reducing operating expenses where feasible, and seeking to generate cash from a variety of other sources.

 

There is no assurance that we will generate the necessary net income or operating cash flows to meet our working capital requirements and pay our debt as it becomes due in the future due to a variety of factors, including the cyclical nature of the staffing industry and other factors discussed in this “Risk Factors” section. If we are unable to do so, our liquidity would be adversely affected and we would consider taking a variety of actions, including attempting to reduce fixed costs (for example, further reducing the size of our administrative work force), curtailing or reducing planned capital additions, raising additional equity, borrowing additional funds, refinancing existing indebtedness or taking other actions. There can be no assurance, however, that we will be able to successfully take any of these actions, including adjusting expenses sufficiently or in a timely manner, or raising additional equity, increasing borrowings or completing a refinancing on any terms or on terms that are acceptable to us. Our inability to take these actions as and when necessary would materially adversely affect our liquidity, results of operations and financial condition.

 

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We have historically experienced periods of negative cash flow from operations and investment activities, and we had negative working capital balances of $0.6 million and $9.9 million as of September 28, 2012 and September 30, 2011, respectively.  During the fiscal year ended September 28, 2012, a related party converted $12 million and $2.1 million of loans into 30,506,276 shares of our common stock which reduced the negative working capital balance.  Any increase or sustained negative cash flows would decrease amounts available for working capital purposes and could have an adverse effect on our liquidity and financial condition.

 

We are heavily reliant on accounts receivable sales agreements to fund working capital requirements and any termination of such agreements may adversely affect our business.

 

We fund, in part, our working capital requirements with the proceeds from accounts receivable sales agreements.  CRD, Insurance Overload, Diamond Staffing and TS Staffing are parties to accounts receivable sales agreements with Wells Fargo Capital Finance, an operating division of Wells Fargo Bank, N.A. (“Wells Fargo”), pursuant to which, a  maximum amount of  $67.5 million of accounts receivable can be sold to Wells Fargo.   Accountabilities and ICG Inc. entered into similar trade accounts receivable sales agreements with Amerisource Funding, Inc. (“Amerisource”) on June 13, 2011 and October 18, 2011, respectively.  The maximum borrowing amounts under the Accountabilities and ICG Inc. agreements with Amerisource is $7.5 million and $4.5 million, respectively, as of the date hereof.

 

Under each of these facilities, subject to certain exceptions, we receive 90% of the assigned receivables’ value upon sale, and 10% upon final collection. As collections reduce previously sold receivables, we may replenish these with new receivables. The risk of bad debt losses on assigned accounts receivables is retained by us and receivables sold which become greater than 90 days old can be charged back to us by Wells Fargo or Amerisource. Any such increase in accounts receivables older than 90 days and charged back will decrease amounts available for working capital purposes and could have an adverse effect on our liquidity and financial condition.

 

Our accounts receivable sales agreements with Wells Fargo and Amerisource may be terminated upon the occurrence of certain events of default or at any time within their broad discretion. In addition, our majority shareholder and several of his affiliated entities guarantee our obligations under these accounts receivable sales agreements and may terminate such guarantees at any time, which would permit the termination of such agreements by Wells Fargo or Amerisource.  In the event of any such termination, we may be unable to finance our operations, and our operations and working capital could be negatively impacted.   In addition, we may be unable to secure alternative arrangements, or any such alternative arrangements may include terms and conditions less favorable to us than under our current accounts receivable sale agreements.  Finding such alternative arrangements may be difficult given the current economic climate and the reduction in the number of entities willing to provide this type of financing. This could adversely affect our ability to secure sufficient working capital to operate our business and to pay expenses. In addition, as a result of a continuing guarantee by each of CRD, Insurance Overload, Diamond Staffing and ourselves, a default under one accounts receivable sales agreement by one of our operating subsidiaries could create financial difficulty for us and our non-defaulting operating subsidiaries.

 

Impairment charges relating to our goodwill and long-lived assets could adversely affect our results of operations.

 

We regularly monitor our goodwill and long-lived assets for impairment indicators. In conducting our goodwill impairment testing, we compare the fair value of each of our reporting units to the related net book value. In conducting our impairment analysis of long-lived assets, we compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets. In the event that we determine that our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings that could adversely affect our results of operations.

 

On January 20, 2012, a sales executive from ICG Inc. and 14 other sales, administration and operations personnel resigned from our company and began operating a competing temporary placement firm. We expect that this departure will affect ICG Inc.’s light industrial business for the foreseeable future. Accordingly, we revalued our goodwill and long-lived assets relating to ICG Inc. and recorded impairment charges for goodwill of $398,000 and intangible assets of $181,000 in the second fiscal quarter of the year ended September 28, 2012.

 

We have historically been, and may continue to be, heavily reliant upon financing from related parties, which presents potential conflicts of interest that may adversely affect our financial condition and results of operations.

 

We have historically obtained financing from related parties, including major shareholders, directors and officers, in the form of debt, debt guarantees and issuances of equity securities, to finance working capital growth and acquisitions. These related parties have the ability to exercise significant control over our financing decisions, which may present conflicts of interest regarding the choice of parties from whom we obtain financing, as well as the terms of financing.  No assurance can be given that the terms of financing

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transactions with related parties are or will be as favorable as those that could be obtained in arms’ length negotiations with third parties.

 

Our principal stockholder, whose affiliated entities are engaged in multiple transactions with us, beneficially owned, together with its affiliated entities and persons, approximately 91.3% of our outstanding shares of common stock as of the date hereof, 2012, and his interests may conflict with our interests and those of our other shareholders.

 

Tri-State and its affiliated persons owned approximately 91.3% of our outstanding shares of common stock as of the date hereof.  Tri-State companies are wholly-owned by Robert Cassera, a member of our Board.  Transactions between us and Tri-State’s companies include TSE’s guarantee of our subsidiaries’ obligations under the accounts receivable agreements with Wells Fargo and Amerisource, the provision of professional employer services to our subsidiaries, and, in the past, the exchange of our indebtedness for shares of our common stock and the sales of Tri-Overload, Tri-Diamond and TS Staffing to us.  The interests of Tri-State and its affiliated persons could conflict with our interests and the interests of our other shareholders.

 

As a result of such ownership, Tri-State and its affiliates persons have the ability to cause the election of all of the members of the Board, appoint new management and approve actions requiring the approval of our shareholders, including amending our certificate of incorporation and merging the Company with or into another entity or selling all or substantially all of our assets. The directors elected by Tri-State and its affiliated persons will be able to make decisions affecting our capital structure, including decisions to issue additional capital stock, implement stock repurchase programs and declare dividends. In addition, certain employees of Tri-State hold management positions in our company, including John Messina, our President, Chief Executive Officer and Chairman of the Board,  who is also compensated by TSE.  We do not have any policies or procedures in places that address potential conflicts of interest arising from Mr. Messina’s employment with TSE and his management responsibilities with us because we do not believe that such a conflict is a material risk given that Tri-State and the Company are engaged in different businesses.

 

Additionally, if Tri-State’s affiliated companies, including TSE, TS Employment, Inc. (“TS Employment”) and TSE-PEO, Inc. (“TSE-PEO”), were to cease providing us with professional employer services (which include payroll related administrative services), we may not be able to secure a comparable provider of such services at agreeable rates. Should we be unsuccessful at finding a comparable provider, we may not be able to secure required workers’ compensation insurance on affordable terms. The failure to obtain a comparable provider of workers’ compensation insurance at affordable rates would possibly require significant capital requirements that are not currently available to us. In addition, we may not be able to pass these increased costs on to our clients, and this would reduce our profit margins.

 

The performance of our subsidiaries and their ability to distribute cash to our parent company may vary, negatively affecting our ability to service our debt at the parent company level or in other subsidiaries.

 

Since we conduct a significant portion of our operations through our subsidiaries, our cash flow and our consequent ability to service our debt depends in part upon the earnings of our subsidiaries and the distribution of those earnings to our parent company, or upon loans or other payments of funds by those subsidiaries to our parent company or to other subsidiaries. The remittance of such cash inflows and the making of such loans and advances by our subsidiaries may be subject to legal or contractual restrictions, depend upon the earnings of those subsidiaries and be subject to various business considerations, including the ability of such subsidiaries to remit such cash inflows or make such loans and advances in a manner that does not result in substantial tax liability or other costs.

 

If we are unable to execute our acquisitions or investments strategy for growing our business, our competitiveness within the industry may suffer, which in turn could adversely affect our business, financial condition and results of operations.

 

We have supplemented our internal growth through acquisitions, including the acquisitions of ICG Inc. in December 2010, the Tri-Diamond in January 2011 and the TS Staffing in November 2011,   in addition to smaller acquisitions and purchases of customer lists.  In the future, we expect to continue to grow through additional acquisitions, investments or joint ventures. We evaluate potential acquisitions, investments and joint ventures on an ongoing basis. Our acquisitions, investments and joint ventures pose many risks, including:

 

 

 

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Completing future acquisitions may be limited by our ability to negotiate purchase terms and/or obtain financing on terms acceptable to us, given our current working capital deficit, as discussed above, and our current inability to finance such acquisitions through current cash flows. There can be no assurance that we will be able to negotiate such acceptable purchase or financing terms.

 

Acquisitions of additional companies could have an adverse effect on our liquidity, results of operations and cash flows, and could cause our shareholders to have their equity in the Company diluted.

 

From time to time, we may evaluate or complete acquisitions to expand our service offerings, broaden our customer base or grow our geographic presence. The acquisition and subsequent integration of a business into our corporate structure could, among other things, divert management’s attention away from our existing operations, result in a loss of key personnel or customers of the acquired business or result in the assumption of the unknown liabilities of the acquired entity.  If the acquisition of a business involves a significant cash expenditure, debt incurrence or integration expense, it could have a material adverse effect on our liquidity, results of operations and cash flows.  Furthermore, in the event that we consummate an acquisition or obtain additional capital through the sale of debt or equity to finance an acquisition, shareholders may experience dilution in their ownership interest.

 

We may be exposed to employment-related claims and costs that could have a materially adverse effect on our business, financial condition and results of operations.

 

Due to the nature of our business of placing workers in the workplace of other businesses on a temporary or permanent basis, we are subject to a large number of laws and regulations relating to employment. The risks related to engaging in such business include but are not limited to:

 

 

 

 

 

 

 

 

 

 

In addition, some or all of these claims may give rise to litigation, which could be time-consuming to our management and could have a materially negative effect on our business. In some instances, we have agreed to indemnify our customers against some or all of these types of liabilities. We have policies and guidelines in place to help reduce our exposure to these risks and have purchased insurance policies against certain risks in amounts that we currently believe to be adequate, but our insurance may not be sufficient in amount or scope to cover these types of liabilities, and we may not be able to secure insurance coverage for such risks on affordable terms. Should some or all of these claims arise, they may have a material adverse effect on our business, financial condition and results of operations.

 

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We may be subject to successor liability as a result of acquisitions we have made, which could negatively affect our business, financial condition and results of operations.

 

The growth of our business has been partially a result of acquisitions we have made.  Although we have endeavored to structure these transactions to minimize exposure to unassumed liabilities, it is possible that under common law and certain statutes, creditors of the entities that sold us these operations could attempt to assert that we have successor liability for obligations of the sellers. Even if any such claim is asserted and is unsuccessful (which management believes would be the case), we could incur substantial fees, expenses and other costs in defending ourselves against it, which could adversely affect our financial condition and results of operations.

 

Improper disclosure of sensitive or private information could result in liability and damage our reputation.

 

Our business involves the use, storage and transmission of information about full-time and temporary employees. Additionally, our employees may have access or exposure to customer data and systems, the misuse of which could result in legal liability. We are dependent on the security provisions of vendors who have custodial control of our data. We have established policies and procedures to help protect the security and privacy of this information. It is possible that our security controls over personal and other data and other practices we follow may not prevent the improper access to or disclosure of personally identifiable or otherwise confidential information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data and confidential information, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability, additional compliance costs or damage to our reputation in the marketplace.

 

Government regulations may significantly increase our costs, result in prohibition or restriction of certain types of employment services or the imposition of additional licensing or tax requirements that may reduce our future earnings.

 

Our business is subject to extensive regulation. The cost to comply, and any inability to comply, with government regulation could materially harm our business.  Increased government regulation in the jurisdictions in which we operate may prohibit or restrict the types of employment services that we currently provide. Future regulations may also require new or additional benefits be paid to our associates or require us to obtain additional licensing to provide employment services.  Any future regulations may materially affect our financial condition, results of operations and liquidity because they may make it more difficult or expensive for us to continue to provide employment services.

 

In conducting our business, we are required to pay a number of payroll and related expenses, including unemployment taxes, workers’ compensation and medical insurance, for our personnel.  Unemployment insurance premiums paid by employers typically increase during periods of increased levels of unemployment.  Workers’ compensation costs may increase in the future if states raise benefit levels and expand the amount of allowable claims.  In addition, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, both of which were passed in 2010, require that we provide healthcare coverage to our temporary employees, and new healthcare requirements may further increase the costs associated with employing temporary workers.  Although we may attempt to recover such costs through the rates we charge our customers, there is no assurance that we will be able to pass on all cost increases to our customers.

 

We are dependent on workers' compensation insurance coverage at commercially reasonable terms; unexpected changes in claim trends on our workers’ compensation and benefit plans may negatively impact our financial condition.

 

Although we are insured through TS Employment for workers’ compensation and medical benefit claims, our costs could be affected by unexpected changes in claim trends, which include the severity and frequency of claims, actuarial estimates and medical cost inflation that could result in costs that are significantly higher. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in claims-related liabilities.  The loss of our workers' compensation insurance coverage would prevent us from doing business in the majority of our markets. Further, we cannot be certain that TS Employment‘s current and former insurance carriers will be able to pay claims we make under such policies.

 

We bear the risk of loss of major clients, nonpayment from our clients and the possible effects of bankruptcy filings by clients, which could adversely affect our financial condition and results of operations.

 

Our business strategy is focused on serving large corporate customers. While our strategy is intended to enable us to increase our revenues and earnings from our major corporate customers, the strategy also exposes us to increased risks arising from the possible loss of major customer accounts.  If a large client experiences financial difficulty, or is otherwise unable to meet its obligations as they become due, our financial condition and results of operations could be adversely affected.  For work performed prior to the

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termination of a client agreement, we are obligated to pay the agreed-upon fees to TS Employment and TSE-PEO for providing professional employment services (which include payroll services, administration of employee benefits, workers’ compensation insurance coverage and accounts receivable collection services) whether or not our client pays us on a timely basis, or at all. Given the difficult economic environment, there is an increased risk of clients failing to pay or delaying payment, although we are not currently experiencing significant levels of these occurrences. A significant increase in uncollected accounts receivables or customer defaults would have a material adverse effect on our earnings and financial condition. In addition, we would have charge backs on existing accounts receivable and invoices on future sales of accounts receivable generated by such clients under our accounts receivable purchase agreements.

 

If we are unable to attract and retain qualified temporary and permanent personnel, the demand for our services could decrease, which in turn could negatively affect our business, financial condition and results of operations.

 

The failure to identify, recruit, train and place candidates, as well as retain qualified temporary employees over a long period of time, could materially adversely affect our business. Our success depends on our ability to provide clients with highly qualified and experienced personnel who possess the skills and experience necessary to satisfy their needs. Such individuals are in great demand, particularly in certain geographic areas, and are likely to remain a limited resource for the foreseeable future. Consequently, we must continuously evaluate and upgrade our base of available qualified personnel to keep pace with changing customer needs and emerging technologies. Furthermore, a substantial number of our temporary employees during any given year will terminate their employment with us and accept regular staff employment with our customers and others. There can be no assurance that qualified candidates will continue to be available to us in sufficient numbers and on acceptable terms. Additionally, we may not be able to develop training programs to respond to our clients’ changing needs or retain temporary and permanent personnel who we have trained.

 

We are highly dependent on our senior management and their continued performance and productivity; In the past, we experienced significant management turnover, which may result in operational inefficiencies that could negatively affect our business.

 

We are highly dependent on the continued efforts of the members of our senior management. The loss of any of the members of our senior management may cause a significant disruption in our business, jeopardize existing customer relationships and have a material adverse effect on our business.  Since Fiscal Year 2009 we have experienced significant turnover in our senior management. In Fiscal Year 2009, we experienced changes in our President and Chief Executive Officer positions.  In Fiscal Year 2010, our Chief Financial Officer and Vice President of Finance resigned.  In Fiscal Year 2011, we appointed a new Chief Financial Officer and President of Sales.  In Fiscal Year 2012, our Chief Financial Officer was terminated and we appointed a successor.  On October 8, 2012, our Chief Executive Officer resigned and our President assumed the role of Chief Executive Officer as well as Chairman of the Board. This lack of management continuity, and the resulting lack of long-term experience in their new roles within the Company, could result in operational and administrative inefficiencies and added costs, which could adversely impact our results of operations, stock price and customer relationships and may make recruiting for future management positions more difficult. In addition, we must successfully integrate any new management personnel that we hire within our organization or who join us through acquisitions in order to achieve our operating objectives, and changes in other key management positions may temporarily affect our financial performance and results of operations as new management becomes familiar with our business. Accordingly, our future financial performance will depend to a significant extent on our ability to motivate and retain key management personnel. 

 

We may experience business interruptions that could have an adverse effect on our operations; Our management information systems are vulnerable to damage and interruption.

 

The efficient operation of our business is dependent on our management information systems. If our critical information systems fail or are otherwise unavailable, this could temporarily impact our ability to pay employees, bill customers, service customers, maintain billing and payroll records reliably and pay taxes, which could adversely affect our revenues, operating expenses and financial condition.  Our primary computer systems and operations are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attacks, security breaches, catastrophic events and errors in usage by our employees. Although we have disaster recovery plans and adequate levels of insurance in place, we may not be able to adequately execute these plans in a timely fashion.  A prolonged outage could seriously impact our ability to service customers or hire temporary workers and could seriously threaten the Company.

 

Beginning on October 28, 2012, the New York Metropolitan Area was affected by Hurricane Sandy.  Our headquarter offices at 160 Broadway New York, New York were inaccessible for five business days.  We are in the process of assessing the financial impact of Hurricane Sandy to our staffing business and resultant loss of revenues as well as increased costs.  We will also reassess our business continuity plan and infrastructure needs in the wake of Hurricane Sandy in our future strategic planning and disaster recovery evaluations which could result in additional capital investments.

 

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Our customer contracts contain termination provisions that could decrease our future revenues and earnings.

 

Most of our customer contracts can be terminated by the customer on short notice without penalty. Our customers are, therefore, not contractually obligated to continue to do business with us in the future. This creates uncertainty with respect to the revenues and earnings we may recognize with respect to our customer contracts.

 

Stockholder ownership interest in our company may be diluted as a result of future financings or additional acquisitions.

 

We may seek to raise funds from time to time in public or private issuances of equity and such financings may take place in the near future or over the longer term.   Sales of our securities offered through future equity offerings may result in substantial dilution to the interests of our current shareholders.  The sale of a substantial number of securities to investors, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.  In addition, we have issued shares of our common stock for various acquisitions in the past and may do so in the future, which may also result in substantial dilution to the interests of our current shareholders.

 

We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could adversely affect our operating results, investor confidence in our reported financial information, and the market price of our common stock.

 

The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.  Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, governing internal control and procedures for financial reporting have resulted in increased general and administrative expenses and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources.  We may identify material weaknesses or significant deficiencies in our assessments of our internal control over financial reporting.  Failure to maintain effective internal control over financial reporting could result in investigations or sanctions by regulatory authorities and could adversely affect our operating results, investor confidence in our reported financial information, and the market price of our common stock.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  In 2010, our management concluded that there was a material weakness in our internal control over financial reporting, which resulted from a lack of sufficient and effective supervisory review over the preparation and reconciliation of certain general ledger account balances to their underlying source documents at one of our subsidiaries.  While we addressed this weakness during Fiscal Years 2011 and 2012, no assurance can be given that we will be able to maintain effective controls in the future, especially if we continue to significantly grow our business by merger or acquisition.

 

Our common stock is a thinly traded over-the-counter security that is quoted on the Over-the-Counter Bulletin Board and may be subject to significant volatility.

 

Our common stock is currently quoted on the Over-the-Counter Bulletin Board (“OTCBB”).  Trading in stocks quoted on the OTCBB is often thin and characterized by wide fluctuations in trading price due to many factors that may have little to do with our operations or business prospects.  Moreover, the OTCBB is not a stock exchange, and trading of securities on the OTCBB is often more sporadic than the trading of securities listed on stock exchanges. Accordingly, our shareholders may have difficulty reselling any of their shares.

 

In addition, the stock market in general, and the OTCBB in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies.  These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. This could result in losses to our shareholders.  In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of our management’s attention and resources.

 

We cannot give assurance that our common stock will become more liquid or that it will be listed on a securities exchange.

 

We may not be able to meet the listing standards of any stock exchange or be able to maintain any such listing. Such exchanges require companies to meet certain initial listing criteria, including certain minimum bid prices per share. We may not be able to achieve or maintain such minimum bid prices or may be required to effect a reverse stock split to achieve such minimum bid prices. Because our common stock is quoted on the OTCBB, an investor may experience a lack of buyers to purchase such common stock or a lack of market makers to support the stock price. In addition, if we fail to meet the criteria set forth in SEC regulations, various

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requirements would be imposed by law on broker-dealers who sell our common stock to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would make it more difficult for us to raise additional capital and for investors to dispose of their shares of our common stock.

 

Our common stock is a penny stock. Trading may be restricted by the SEC’s penny stock regulations and the FINRA’s sales practice requirements, which may limit a stockholder’s ability to buy and sell our common stock.

 

Our common stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines penny stock to be any equity security that has a market price (as defined in the Rule) or an exercise price of less than $5.00 per share, subject to certain exceptions. Our common stock is covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability or willingness of broker-dealers to trade our securities. We believe that the penny stock rules discourage broker-dealer and investor interest in, and limit the marketability of, our common stock.

 ITEM 1B.                UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2.         PROPERTIES

Our corporate headquarters is located at 160 Broadway, 11^th Floor, New York, New York, where we have a lease for 2,452 square feet of office space that will expire in December 2016. CRD, our wholly-owned subsidiary, leases approximately 30,000 square feet of office space located at 295 Madison Avenue, New York, New York, for its headquarters and main staffing and recruiting location. CRD’s lease expires in May 2015. As of December 14, 2012, we conducted placement activities through our approximately 201 staffing and recruiting offices located in the United States, for which all of the locations are leased with terms expiring at various times through 2018. We believe that our existing facilities are adequate and suitable for our current operations; however, we may add or subtract additional facilities from time to time in the future as the need arises.

ITEM 3.         LEGAL PROCEEDINGS

In the ordinary course of business, we are, from time to time, threatened with litigation or named as a defendant in lawsuits. We are not aware of any pending legal proceedings that are likely to have a material adverse impact on us.

ITEM 4.         MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.         MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is traded on the OTCBB under the symbol “CRRS.” The following table shows the reported high and low sale prices for our common stock for the periods indicated, as reported by the OTCBB. The quotations listed below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

 

 

 

 As of December 19, 2012, there were approximately 451 record holders of our common stock and the closing price of our common stock on that date was $0.43.

Dividend Policy

We have not declared or paid any cash dividends on our common stock during the periods presented, and we do not anticipate doing so in the foreseeable future. We currently intend to retain future earnings, if any, to operate our business and finance future growth strategies.

 

Equity Compensation Plan Information

Effective October 22, 2009, our Board terminated the Accountabilities Equity Incentive Plan (the “Plan”), and as a result, there were no further grants under the Plan after this date.  Any unvested shares of our common stock granted under the Plan and outstanding at the time of its termination continued to vest in accordance with the terms of the Plan. As of September 28, 2012, there were no options that remained unvested under the Plan.

In addition, during the year ended September 28, 2012,  we granted 300,000 restricted shares to an executive officer of the Company.    During Fiscal Year 2012, 605,000 restricted shares of our common stock granted in Fiscal Year 2011were forfeited by former employees. As of September 28, 2012, 33,333 restricted shares of our common stock granted remain unvested.

Issuances of Unregistered Securities

On January 31, 2011, we issued 29,411,765  shares of our common stock to TSS Corp. in connection with the acquisition of Tri-Diamond.  

During the second quarter of Fiscal Year 2011, we granted 750,000 shares of common stock and 555,000 restricted stock units in connection with the appointment of two of our executive officers and 122,500 shares of common stock to three other employees of our Company.

On November 21 and December 30, 2011, we issued 17,999,999 and 16,839,160 shares of our common stock, respectively, to Robert Cassera, the sole stockholder of TSS Corp. and member of our Board, to complete the TS Staffing Acquisition.  An additional 38,001,042 shares of common stock were issued in exchange for an equal number of shares that were held by TSS Corp. immediately prior to the TS Staffing Acquisition.  The shares previously held by TSS Corp. were cancelled upon completion of the TS Staffing Acquisition. 

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On March 30, 2012 and July 30, 2012, we converted $12.0 million and $2.1 million of the Company debt with TS Employment into 25,962,788 and 4,543,488 shares of our common stock, respectively. 

During the fourth quarter of Fiscal Year 2012, we granted 300,000 shares of common stock to an executive officer of our Company.

We believe that all such issuances were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof as securities involved in transactions that did not constitute public offerings.

 

Issuer Purchases of Equity Securities

Not applicable.

 

ITEM 6.         SELECTED FINANCIAL DATA

Not applicable.

 

ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our financial statements and related notes. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.”

Results of Operations

The Company’s subsidiaries completed the following acquisitions in Fiscal Years 2011 and 2012:

 

●    ICG Inc. through a public foreclosure sale, on December 14, 2010;

●    Diamond Staffing acquired Tri-Diamond on January 31, 2011; and

●    TS Staffing acquired TSS Corp. on November 21, 2011.

Accordingly, the results of ICG Inc. are included in the results of operations for fiscal year 2011 beginning on December 14, 2010. The acquisitions of Tri-Diamond and TSS Corp. have been accounted for as a pooling of interests by a related party, and as a result, our results of operations were restated to include their respective results of operations as if the acquisition had occurred on October 1, 2010.

Fiscal year ended September 28, 2012 compared to fiscal year ended September 30, 2011

Revenues

For the year ended September 28, 2012,  our revenues   increased by $100.9 million or 18.7% to $639.8 million as compared to $538.9 million for the year ended September 30, 2011, which we restated to include $193.7 million in revenues from TSS Corp.  This increase includes a  full year of revenues from a managed services customer we added during Fiscal Year 2011 that added $14.9 million in Fiscal Year 2012 revenues.  Part of the increase is attributable to acquisitions that we made since the beginning of Fiscal Year 2011 that added $14.4 million in revenues and other strategic relationships that we entered into that added $6.3 million in revenues.  The remaining increase of $65.3 million is a result of other new clients and demand from our existing customers that is consistent with national staffing industry trends.    We expect that our sales  force will continue to grow revenues from existing and new customers consistent with national staffing in the future and that we will be able to supplement this growth with strategic acquisition opportunities as they arise and by increasing the number of value-added services we offer to the marketplace.

 

Direct cost of producing revenues

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

For Fiscal Year 2012,  our direct cost of services increased by $99.1 million or 21.3% to $565.0 million, as compared to $465.9 million for Fiscal Year 2011, which we restated to include $174.1 million in direct costs of producing revenues from TSS Corp.  Prior to its

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acquisition, TS Staffing’s predecessor, TSS Corp., was an affiliate of Tri-State and self-administered its payroll services, benefits and workers compensation insurance, resulting in a reallocation of certain costs between the cost of producing revenues and selling, general and administrative expenses.

The increase in our cost of producing revenues in Fiscal Year 2012 was primarily driven by the 18.7% increase in revenues. As a percentage of revenue, our cost of producing revenues increased 1.8%, from 86.5% to 88.3%, primarily as a result of competitive pricing pressure and the Company’s stronger relative growth in the light industrial businesses, which traditionally generates lower gross margins. These increases were partially offset by a reduction in the administrative fee TS Employment charges us.  We expect this reduction to yield annual savings of approximately $2.0 million in Fiscal Year 2013 and future years. As our volume of business increases, we may be able to realize further reductions to the administrative fee.    These factors combined to cause the consolidated cost of producing revenues to grow at a greater rate than the associated revenues. 

Gross profit

For Fiscal Year 2012,  our gross profit increased by $1.8 million or 2.4% to $74.8 million as compared to $73.0 million in the comparable period in 2011, which was restated to include $19.6 million in gross profit from TSS Corp.  As a percentage of revenue, gross profit decreased 1.8% from 13.5% in Fiscal Year 2011 to 11.7% in Fiscal Year 2012.    In the fourth quarter of Fiscal Year 2012, we implemented initiatives intended to increase our gross profit, including the expansion of value added services and pricing reviews of all customers, but expect competitive pricing pressure to continue to affect our business for the foreseeable future.

Selling, general and administrative expenses

For Fiscal Year 2012, selling, general and administrative expenses increased by $4.0 million or 5.9% to $70.7 million, or 11.0% of revenues, as compared to $66.7 million, or 12.4% of revenues for Fiscal Year 2011, which was restated to include $16.5 million from TSS Corp.  The increase was primarily due to increased selling and support expenses related to our increase in revenues, primarily commissions and new employees added to support the revenue growth as well as higher corporate administration costs.

Due to revenue growth, we have been able to better leverage our fixed costs as a percentage of revenues as indicated by the year-over-year decrease in selling, general and administrative costs as a percentage of revenues.  In addition, during Fiscal Year 2012,  we undertook initiatives to reduce selling, general and administrative costs through consolidation of select offices and administrative functions.  We expect that the completion of fully integrating our acquired operations as well as the continued dilution of fixed costs as a percentage of revenues through growth and to continue reduce selling, general and administrative costs as a percentage of revenues in Fiscal Year 2013 and beyond.

Depreciation and amortization

For the Fiscal Year ended September 28, 2012, depreciation and amortization expenses decreased by $558,000  to $1.9 million as compared to $2.5 million in the year ended September 30, 2011, which was restated to include $397,000 from TSS Corp.  The variability in the timing of acquisitions will continue to cause fluctuation to the amortization of acquisition-related long-lived assets.

Income from operations

The factors described above resulted in a decrease in income from operations of $1.7 million from $3.8 million for the year ended September 30, 2011, restated to include income of $2.7 million from TSS Corp., to income of $2.1 million for the year ended September 28, 2012.

Interest expense

Interest expense includes the net discounts associated with the sales of accounts receivable, as well as interest on debt associated with acquired companies and financing our operations. For the twelve months of Fiscal Year 2012, interest expense increased $1.1 million to $4.1 million as compared to $3.0 million in Fiscal Year 2011, which was restated to include $773,000 of interest expense from TSS Corp. The remaining increase was due to a higher volume of accounts receivable financing during the year ended September 28, 2012. Substantial efforts have been and continue to be made to reduce outstanding balances on our sold accounts receivables, which in effect, will reduce the interest charged on those balances.  In addition, we recorded $925,000 of related party interest in Fiscal Year 2012 as interest on related party balances.

Acquisitions related expense

We incurred acquisition expenses of $489,000 and $731,000 for the fiscal years ended September 28, 2012 and September 30, 2011, respectively. Expenses in Fiscal Year 2012 were related to the acquisitions of TS Staffing and other smaller acquisitions while expenses incurred in Fiscal Year 2011 were related to the acquisitions of ICG Inc., Tri-Diamond and other smaller acquisitions. These expenses consisted primarily of legal and accounting fees.

 

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Net gain on revaluation of ICG Inc.

 

As a result of the resignation of a sales executive from ICG Inc. and 14 other sales, administration and operations personnel resigning in January 2012, we recognized various non-operating gains and losses, netting to a gain of $537,000 for the year ended September 28, 2012.  The gain was primarily due to a gain on the remeasurement of long term debt,  offset by related goodwill and intangible asset impairment charges of $398,000 and $181,000, respectively.

Other expense (income)

 

Other expense in Fiscal Year 2012 was $544,000, while in Fiscal Year 2011 we recorded other income of $87,000.  In Fiscal Year 2012, we incurred a charge of $543,000 to establish an allowance for the potential uncollectibility of indemnifiable costs associated with CRD’s acquisition of certain assets of GT Systems. These costs primarily relate to the period prior to CRD's acquisition of GT Systems on April 5, 2010. Other income in Fiscal Year 2011was attributable to CRD for amounts earned under a service and collections agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”), whereby the Company provided services to assist Rosenthal in collecting their outstanding receivables.

Net income (loss)

The factors described above resulted in a net loss of $3.4 million for Fiscal Year 2012 as compared to income of $114,000 for Fiscal Year 2011, restated to include a gain of $2.0 million from TS Staffing for the Fiscal Year 2011.

 

Liquidity and Capital Resources

Cash Flows

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

In Fiscal Year 2012 and 2011, net cash provided by financing activities of $6.2 million and $4.5 million, respectively, were offset by net cash used by operating activities of $5.3 million and $4.4 million, respectively.  We also used cash for investing activities of $847,000 and $405,000 for the years ended September 28, 2012 and September 30, 2011, respectively.  While our losses increased by $3.5 million in Fiscal Year 2012 over Fiscal Year 2011, our improved working capital management minimized our cash used by operating activities and the funding from related parties, which increased by $1.4 million to $9.8 million in Fiscal Year 2012 from $8.4 million in Fiscal Year 2011.  Additionally, in Fiscal Year 2012, a related party converted $14.1 million of a loan into our common stock. 

We believe that improving cash flows from operating activities through improved profitability, improved efficiency in the sale of our trade receivables and other working capital management will enable us to finance our growth through acquisitions or other initiatives.

Working Capital

Our current liabilities exceeded our current assets  by $0.6 million and  $9.9 million as of September 28, 2012 and September 30, 2011, respectively.  The improvement of $9.3 million was primarily due to the conversion of a $14.1 million loan payable to a related party into common stock.  We also continue to engage in several activities to further increase current assets and/or decrease current liabilities, including seeking additional reductions in operating expenditures and increases in operating efficiencies. In order to service our debt, maintain our current level of operations, as well as fund the increased costs of being a reporting company and our growth initiatives, we must be able to generate or obtain sufficient amounts of cash flow and working capital. Our management has engaged, and continues to engage, in activities to accomplish these objectives, including focusing on increased profitability, raising new outside capital and consummating debt to equity conversions.

Based on the above activities and our current expectations, we believe that we have adequate resources to meet our operating needs through September 27, 2013.    Our subsidiaries, other than ICG Inc. and Accountabilities, are currently participating in a trade accounts receivable purchase agreement with Wells Fargo. Accountabilities participated in this Wells Fargo agreement until June 13, 2011, when it entered in a similar trade accounts receivable purchase agreement with Amerisource. ICG Inc. entered into a similar agreement with Amerisource in October 2011. Under the Wells Fargo agreement, the maximum amount of trade receivables that can

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be sold by our participating subsidiaries and affiliates in the aggregate is $67.5 million. As collections reduce previously sold receivables, the subsidiaries may replenish these with new receivables. As of September 28, 2012 and September 30, 2011, trade receivables of $60.4 million and $39.1 million, restated to include $13.4 million from TS Staffing, had been sold and remained outstanding, and amounts due from Wells Fargo for collected reserves totaled  $6.2 million and $4.8 million, restated to include $1.6 million of TSS Corp. receivables,  respectively. Interest charged on the amount of receivables sold prior to collection is charged at an annual rate of prime plus 1.5% or 2.5%. Receivables sold may not include amounts that are over 90 days past due.

Under the terms of the Wells Fargo agreements, with the exception of CRD permanent placement receivables, Wells Fargo advances 90% of the assigned receivables’ value upon sale, and the remaining 10% upon final collection. Under the terms of CRD’s agreement, the financial institution advances 65% of value of the assigned CRD permanent placement receivables’ value upon sale, and the remaining 35% upon final collection. The aggregate amount of trade receivables from the permanent placement business that CRD may sell to Wells Fargo at any one time is $1,250,000. Interest expense charged under the Wells Fargo trade accounts receivable purchase agreement is included in interest expense in the accompanying statements of operations and amounted to $2.9 million for the year ended September 28, 2012 compared to $2.5 million was for the year ended September 30, 2011, which included $228,000 from Accountabilities for interest and $40,000 for termination fees and restated to include $773,000 for TSS Corp. Tri-State and Robert Cassera, which together with affiliated persons owned approximately 91.3% of our outstanding shares of common stock as of the date hereof, have guaranteed our obligations to Wells Fargo.

The trade accounts receivable purchase agreement between Accountabilities and ICG Inc. and Amerisource each have a term of two years and maximum borrowing amount of $7.5 million and $4.5 million, respectively,  as of the date hereof, with an advance rate of 90%. The agreements provide for an interest rate of the prime rate plus 1% (with a minimum rate of 6% per annum) and a monthly collateral management fee of 0.65% of the average daily outstanding borrowings. At September 28, 2012 and September 30, 2011, there were $8.5 million and $5.3 million of trade accounts receivable sold that remained outstanding, respectively.  In addition, there were $1.8 million and $661,000 due from Amerisource for the fiscal years ended September 28, 2012 and September 30, 2011, respectively. The Company paid Amerisource $1.2 million and $173,000 in interest for the years ended September 28, 2012 and September 30, 2011, respectively.

 

Debt

Long-term debt at September 28, 2012 and September 30, 2011 is summarized as follows:

 

 

 

For an explanation of footnotes (i) through (vii) above, please see Note 7 to our financial statements beginning on page 19 of this Annual Report on Form 10-K.

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Sales of Common Stock

In January 2011, we issued 29,411,765 shares of common stock to TSS Corp. in connection with the acquisition of Tri-Diamond.

During the second quarter of 2011, we granted 750,000 shares of common stock, and 555,000 restricted stock units in connection with the appointment of two executive officers of the Company, and 122,500 shares of common stock to three other employees of the Company.

On November 21, 2011, we issued 34,839,159 shares of common stock to Robert Cassera, the sole stockholder of TS Staffing and member of the Board, to complete the TS Staffing Acquisition. An additional 38,001,402 shares of common stock were issued in exchange for an equal number of shares that were held by TS Staffing immediately prior to the TS Staffing Acquisition. The shares previously held by TS Staffing were cancelled upon completion of the TS Staffing Acquisition.

On March 30, 2012 and July 30, 2012 we converted $12.0 million and $2.1 million of the Company debt with TS Employment into 25,962,788 and 4,543,488 shares of our common stock, respectively.  The number of shares issued to TS Employment under these conversion agreements was calculated based upon an independent valuation of our common stock at $0.4622 per share.

During the fourth quarter of Fiscal Year 2012, we granted 300,000 shares of common stock to an executive officer of the Company pursuant to the terms of his employment agreement.

Critical Accounting Policies

The preceding discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules of the SEC. The preparation of these financial statements 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.

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

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

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

 

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

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. We adopted this new guidance beginning July 1, 2012. Adoption of this new guidance did not have a material impact on our financial statements.

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Contractual Obligations

A summary of the Company’s obligations and commitments as of September 28, 2012 is as follows:

 

 

 

 

 

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

 

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ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of Corporate Resource Services, Inc.

We have audited the accompanying consolidated balance sheets of Corporate Resource Services, Inc. and Subsidiaries (the “Company”), as of September 28, 2012 and September 30, 2011 and the related consolidated statements of operations, cash flows and stockholders’ equity for each of the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Corporate Resource Services, Inc. and subsidiaries as of September 28, 2012 and September 30, 2011 and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Rosen Seymour Shapss Martin & Company LLP

CERTIFIED PUBLIC ACCOUNTANTS

New York, New York

December 21, 2012

 

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