The accompanying notes are an integral
part of these condensed consolidated financial statements
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Note
1 - Description of Business
On December 22, 2015, the Company
entered into a Licensing Agreement with Labor Smart, Inc., a stockholder of the Company, whereby Labor Smart, Inc. has granted
the Company an exclusive license to use their trademarked name in connection with general advertising materials, point of sale
displays and other promotional materials. As consideration for the use of the trademarked name, the Company agreed to pay to Labor
Smart, Inc. a one-time fee of $5,000 for each newly opened branch location that is opened under the name of Labor Smart, Inc.
On December 28, 2015, the Company
incorporated a subsidiary, Staff Fund I, LLC, a Nevada Limited Liability Company.
On December 31, 2015, the
Company entered into a Stock Purchase Agreement (“SPA”) with Pour Les Enfant, LLC, a Louisiana limited liability company
(“Pour Les Enfant”). Pursuant to the SPA, the Company, as sole shareholder of EmployUS, Ltd. completed the split-off
by transferring to Pour Les Enfant all outstanding shares and tangible assets of EmployUS, Ltd. (the “split-off transaction”).
In consideration thereof, Pour Les Enfant assumed all liabilities of EmployUS, Ltd. associated with monies owed to the Internal
Revenue Service for late payroll taxes; and all corporate, personal, and validity guarantees associated the Crestmark Bank Loan
and Security Agreement. Pursuant to the SPA, Brent Callais and Brian McLoone, directors, executives and controlling shareholders
of the Company, each agreed to transfer to the Company 91,000 shares of the Company’s common stock and one share of the Company’s
preferred stock, for immediate cancellation. As a result of the cancellation of the two (2) preferred shares by Brent Callais and
Brian McLoone, there was a change in control of the Company as Labor Smart, Inc. holds the one (1) remaining outstanding preferred
share of the Company.
The financial results of
EmployUS, Ltd. qualifies for reporting as a discontinued operations. A substantial portion of the Company’s 2015 financial
statements have been reclassified to conform to the reporting of discontinued operations adopted in 2015. See Note 5.
In January 2016, the Company commenced
operations of one (1) staffing location Montgomery, Alabama through the subsidiary, Staff Fund I, LLC. This subsidiary operates
under a licensing agreement with Labor Smart, Inc. Staff Fund I, LLC recruits, hires, employs and manages skilled and unskilled
workers that it places with its client companies. During the nine months ended September 30, 2016. Staff Fund I, LLC issued membership
interests for cash proceeds of $14,000. At September 30, 2016, 7% of Staff Fund I, LLC’s membership interest are held by
non-controlling interest.
On April 1, 2016, the Company purchased
the operating assets of four (4) branch locations in Charlotte, NC, Indianapolis, IN, Nashville, TN and Raleigh, NC from Labor
Smart, Inc. for consideration with a fair value of $2,666,000. The one-time fee of $5,000 for the (4) newly opened branches which
were opened under the Labor Smart, Inc. name totaling $20,000 was waived. As a requirement of the purchase of the operating assets,
the one (1) issued and outstanding share of Series A Preferred Stock owed by Labor Smart, Inc. was transferred to Kimberly Thompson,
the Chief Executive Officer of the Company in addition the CEO stepped down from any former position she held with Labor Smart,
Inc. Each share of Series A Preferred Stock gives the holder voting rights equal to 2 votes for every one share of common stock
outstanding at the time of a vote of shareholders and does not have any additional rights or preferences. As such, at September
30, 2016, Kimberly Thompson controlled the majority of shareholder votes. (See Note 3).
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Note 2 - Summary
of Significant Accounting Policies
Basis
of presentation
The accompanying unaudited
condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Article
8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated
financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may
be expected for any subsequent quarter of for the year ending December 31, 2016. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s
Annual Report on Form 10-K filed on April 13, 2016 for the year ended December 31, 2015.
principles
of consolidation
The condensed consolidated
financial statements include the accounts of the Company’s one operating subsidiary. All significant inter-company
transactions and balances are eliminated in consolidation.
Use
of Estimates
The preparation of condensed consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates. Significant matters requiring the use of estimates and assumptions
include, but may not be limited to, accounts receivable allowances, goodwill, intangible assets, valuation allowance for deferred
tax assets and valuation of derivative liabilities. Management believes that its estimates and assumptions are reasonable, based
on information that is available at the time they are made.
Revenue
Recognition
Contract staffing service revenues
are recognized when services are rendered. The Company recognizes revenue in accordance with Accounting Standards Codification
(“ASC”) 605 “Revenue Recognition”, which requires that four basic criteria be met before revenue can be
recognized: (i) persuasive evidence that an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is
reasonably assured; and (iv) services have been rendered.
Cash
and Cash Equivalents
The Company considers highly liquid
investments with original maturities of three months or less when purchased as cash equivalents. At times throughout the year,
the Company might maintain bank balances that may exceed Federal Deposit Insurance Corporation (FDIC) insured limits. Periodically,
the Company evaluates the credit worthiness of the financial institutions, and has not experienced any losses in such accounts.
As of September 30, 2016 and December 31, 2015, the Company did not have any cash equivalents.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Cash
- Restricted
Restricted cash represents
cash in a lockbox account by held by TCA Global Credit Master Fund, LP in accordance with the Senior Secured Revolving Credit Facility
Agreement. The Company considered $11,953, as restricted cash at September 30, 2016. No cash was considered restricted at December
31, 2015. (See Note 8)
Accounts
Receivable
The Company extends credit to its
customers based on an evaluation of the customer’s financial condition and ability to pay the Company in accordance with
the payment terms. An allowance for doubtful accounts is recorded as a charge to bad debt expense where collection is considered
doubtful due to credit issues. This allowance reflects management’s estimate of the potential losses inherent in the accounts
receivable balance, based on historical loss statistics and known factors impacting its customers. The nature of the contract service
business, where companies are dependent on employees for their production cycle, generally results in a nominal provision for doubtful
accounts. Based on management’s review of accounts receivable, an allowance for doubtful accounts was not material for any
of the periods presented. The Company charges uncollectible accounts against the allowance once the invoices are deemed unlikely
to be collectible. The Company does not accrue interest on past due receivables.
Net
(Loss) Income per Common Share
Net (loss) income per common
share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net (loss) income
per common share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding
during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted
average number of shares of common stock and potentially dilutive outstanding shares of common stock during the period to reflect
the potential dilution that could occur from common shares issuable through contingent share arrangements, stock options and warrants.
At September 30, 2016 and December 31, 2015, the Company excluded 3,686,245 and 151,963 shares of common stock issuable upon conversion
of convertible notes payable and Series B Stock, respectively, as their effect would have been anti-dilutive.
Identifiable
Intangible Assets
Identifiable intangible assets
consist primarily of customer relationships and non-compete contracts. These assets are tested for impairment using discounted
cash flow methodology annually and whenever there is an impairment indicator. Estimating future cash flows requires significant
judgment and projections may vary from cash flows eventually realized. Several impairment indicators are beyond the Company’s
control, and determining whether or not they will occur cannot be predicted with any certainty. Customer relationships and non-compete
contracts are amortized on a straight-line basis over an estimated life of five years.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Goodwill
Goodwill represents the premium
paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company’s business combinations.
The Company performs a goodwill impairment test on at least an annual basis at the reporting unit level. Application of the goodwill
impairment test requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts,
estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination
of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of
fair value and/or conclusions on goodwill impairment for each reporting unit. The Company will conduct its annual goodwill impairment
test as of December 31 of each year or more frequently if indicators of impairment exist. The Company periodically analyzes whether
any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment
has occurred. Such indicators may include a sustained significant decline in our stock price and market capitalization, a significant
adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, adverse
actions or assessments by a regulator, among others. The Company compares the fair value of its reporting unit to its respective
carrying value, including related goodwill. Future changes in the industry could impact the results of future annual impairment
tests. There can be no assurance that future tests of goodwill impairment will not result in impairment charges.
Fair
Value Measurement
As required by the Fair Value
Measurements and Disclosures Topic of the FASB ASC (“ASC 820-10”), fair value is measured based on a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted
prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly
or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity
to develop its own assumptions.
The three levels of the fair
value hierarchy are described below:
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
Level 2
|
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
|
Convertible promissory notes
payable and convertible promissory note derivative liability – related party is measured at fair value on a recurring basis
using Level 3 inputs.
The carrying amounts reported in
the Company’s condensed consolidated financial statements for accounts receivable, prepaid expenses, accounts payable and
accrued expenses approximate their fair value because of the immediate or short-term nature of these consolidated financial instruments.
The carrying amounts reported in the condensed consolidated balance sheets for its line of credit and convertible notes payable
approximates fair value as the contractual interest rate and features are consistent with similar instruments of similar risk in
the market place.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Convertible
Promissory Notes
|
i)
|
Beneficial Conversion Feature
|
If the conversion features
of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as
a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic
470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded
net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using
the effective interest method.
The Company determines if
the convertible debenture should be accounted for as a liability or equity under ASC 480, Liabilities — Distinguishing Liabilities
from Equity. ASC 480, applies to certain contracts involving a Company's own equity, and requires that issuers classify the following
freestanding financial instruments as liabilities. Mandatorily redeemable financial instruments, obligations that require or may
require repurchase of the issuer's equity shares by transferring assets (e.g., written put options and forward purchase contracts),
and certain obligations where at inception the monetary value of the obligation is based solely or predominantly on:
– A fixed monetary
amount known at inception, for example, a payable settleable with a variable number of the issuer's equity shares with an issuance
date fair value equal to a fixed dollar amount,
– Variations in something
other than the fair value of the issuer's equity shares, for example, a financial instrument indexed to the S&P 500 and settleable
with a variable number of the issuer's equity shares, or
– Variations inversely
related to changes in the fair value of the issuer's equity shares, for example, a written put that could be net share settled.
If the entity determined
the instrument meets the guidance under ASC 480 the instrument is accounted for as a liability with a respective debt discount.
The Company records debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized
to non-cash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of
the unamortized amounts is immediately expensed.
|
iii)
|
Derivative Financial Instruments
|
Derivative financial instruments,
as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial
instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or
other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing
or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured
at fair value and recorded as liabilities or, in rare instances, assets.
The Company does not use
derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued
financial instruments including senior convertible promissory notes payable and freestanding stock purchase warrants with features
that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or
(iii) may be net-cash settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required
to be carried as derivative liabilities, at fair value, in our consolidated financial statements.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Recent
Accounting Pronouncements
In April 2015, the FASB issued
a new accounting standard which changes the presentation of debt issuance costs in financial statements. Under the new standard,
an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.
Amortization of the costs is reported as interest expense. The accounting standard is effective for annual reporting periods beginning
after December 15, 2015 and was adopted in the first quarter of 2016.
In March 2016, the FASB issued
a new accounting standard which is intended to simplify the accounting for share-based compensation. This standard simplifies the
accounting for income taxes in relation to share-based compensation, modifies the accounting for forfeitures, and modifies the
statutory tax withholding requirements. This standard will be effective for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the new accounting standard
will have on its consolidated financial position, results of operations or cash flows.
In April 2016, the FASB issued
ASU No. 2016-10 (“ASU 2016-10”), “Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing.” ASU 2016-10 will affect all entities that enter into contracts with customers to transfer goods
or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments
in this update affect the guidance in ASU 2014-09 which is not yet effective, the amendments in this update clarify the following
two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related
principles for those areas. The effective date and transition requirements for the amendments in this update are effective in the
annual period ending December 31, 2017, including interim periods within that annual period. The Company is currently evaluating
the effect that ASU 2016-10 will have on the Company’s consolidated financial position and results of operations.
In May 2016, the FASB issued
ASU No. 2016-12 (“ASU 2016-12”), “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients.” ASU 2016-12 will affect all entities that enter into contracts with customers to transfer goods
or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments
in this update affect the guidance in ASU 2014-09 which is not yet effective, the amendments in this update affect narrow aspects
of Topic 606 including among others: assessing collectability criterion, noncash consideration, and presentation of sales taxes
and other similar taxes collected from customers. The effective date and transition requirements for the amendments in this update
are the same as the effective date and transition requirements for ASU 2016-10. The Company is currently evaluating the effect
that ASU 2016-12 will have on the Company’s consolidated financial position and results of operations.
In August 2016, the FASB
issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 is intended to address how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing
diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. The Company is currently evaluating the effect that ASU 2016-15 will have
on the Company’s consolidated financial position and results of operations.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Note 3 –
business acquisition
On April 1, 2016, the Company
entered into an Agreement for Purchase and Sale of Assets (the “Agreement”) with Labor Smart, Inc. (the “Seller”),
related party and shareholder of the Company. Pursuant to the Agreement, the Company purchased from the Seller the operating assets
of four (4) branch locations, which includes customer lists, title to certain leases for real or personal property, contracts,
fixed assets, and business records (collectively the “Four Branches”). The Seller retained all open accounts receivable
related to the prior operations of the branch locations and was responsible for all operating liabilities. In consideration for
the Four Branches, the Company paid the Seller total consideration with a fair value of $2,666,000, paid as follows: (i) $890,890
in cash, (ii) 600,000 shares of the Company’s common stock at a fair value of $1,080,000 ($1.80 per share based on the closing
price of the Company common stock on March 31, 2016), (iii) a non-interest bearing promissory note due on April 1, 2018 with a
face amount of $755,000 and a fair value of $506,000. The Company assumed no liabilities in the business acquisition. In accordance
with FASB ASC 835-30 "Imputation of Interest", interest has been imputed on the promissory note at an annual market interest
rate of 20% per annum. (iv) payoff of certain of the Seller’s outstanding debt totaling $29,110, and (v) direct payment to
the IRS on behalf of the Seller in the amount of $160,000 (the “Purchase Price”).
On
April 1, 2016, a
s a requirement of
the purchase of the operating
assets, the one (1) issued and outstanding share of Series A Preferred Stock owed by Labor Smart, Inc. was transferred to Kimberly
Thompson, the Chief Executive Officer of the Company. Each share of Series A Preferred Stock gives the holder voting rights equal
to 2 votes for every one share of common stock outstanding at the time of a vote of shareholders and does not have any additional
rights or preferences. As such, at September 30, 2016, Kimberly Thompson controlled the majority of shareholder votes.
Assets acquired and liabilities
assumed in the Agreement were recorded on the Company’s Consolidated Balance Sheet as of the acquisition date of April 1,
2016 based upon their estimated fair values. The results of operations of businesses acquired by the Company have been included
in the statements of operations since the date of acquisition. The excess of the purchase price over the estimated fair values
of the underlying identifiable assets acquired and liabilities assumed were allocated to goodwill.
The preliminary allocation
of the purchase price and the estimated fair market values of the assets acquired and liabilities assumed are shown below:
Customer Relationships
|
$ 1,130,000
|
Non-complete Agreements
|
70,000
|
Goodwill
|
1,466,000
|
Purchase Price
|
$ 2,666,000
|
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Unaudited pro forma results
of operations information for the three and nine months ended September 30, 2015 as if the Company and the entities described above
had been combined on January 1, 2015 are as follows. The pro forma results include estimates and assumptions which management believes
are reasonable. The pro forma results do not include any anticipated cost savings or other effects of the planned integration of
these entities, and are not necessarily indicative of the results that would have occurred if the business combinations had been
in effect on the dates indicated, or which may result in the future.
|
|
Nine months Ended September 30, 2016
|
|
Three Months Ended
September 30, 2015
|
|
Nine months Ended September 30, 2015
|
Net revenues
|
|
$
|
4,391,233
|
|
|
$
|
1,602,663
|
|
|
$
|
4,580,628
|
|
Income (loss) from operations
|
|
$
|
(18,364
|
)
|
|
$
|
(8,603
|
)
|
|
$
|
(114,675
|
)
|
Net loss
|
|
$
|
(2,769,407
|
)
|
|
$
|
(63,973
|
)
|
|
$
|
(237,3161
|
)
|
Net loss per share
|
|
$
|
(2.67
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.32
|
)
|
Revenue and costs are generally
allocated using specific identification and include corporate administrative expenses, finance, legal, tax, treasury and other
general corporate services.
The carve-out financial information
include revenue and expenses of Labor Smart, Inc., allocated to the
Four Branches (“Predecessor”)
for certain functions provided by Labor Smart, including compensation and benefits, occupancy, information technology costs, finance
and interest costs, legal, tax, treasury and other general corporate services. These expenses have been allocated to the results
of the Four Branches based on one of four allocation cost drivers:
1)
Revenues attributable to the Four Branches,
2)
The headcount of employees within the Four Branches and Labor Smart
3)
The identification of costs specific to the Four Branches; and
4)
Allocation of finance and interest costs based on proceeds from the sales of the Four Branches
by Labor Smart.
Management considers the
basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to, or the
benefit received by, the Four Branches, The allocations may not; however, reflect the expenses the Four Branches would have incurred
as an independent entity for the periods presented.
Unaudited predecessor financial
information has been provided in these condensed consolidated financial statements as the Company acquired the Four Branches and
the operations of the Company before the acquisition of the Four Branches were insignificant relative to the operations acquired.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Note
4 - Liquidity and Capital Resources
The accompanying condensed consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As of September 30, 2016, the Company had a stockholders’ deficit of $1,779,775
and a working capital deficit of $3,764,394. For the nine months ended September 30, 2016 the Company had a net loss of $2,643,936.
The Company’s stockholders’ deficiency is primarily due to, among other reasons, funding its historical net losses.
The Company’s principal sources
of liquidity include cash from operations and proceeds from debt and equity financings. As of September 30, 2016, the Company had
$209,048 in cash.
The Company is funding its operations
primarily through the sale of equity, convertible notes payable and shareholder loans. In the event the Company experiences liquidity
and capital resources constraints because of greater than anticipated sales growth or acquisition needs, the Company may need to
raise additional capital in the form of equity and/or debt financing including refinancing its current debt. Issuances of additional
shares will result in dilution to its existing shareholders. There is no assurance that the Company will achieve any additional
sales of its equity securities or arrange for debt or other financing to fund any potential acquisition needs or increased growth.
If such additional capital is not available on terms acceptable to the Company, or at all, then the Company may need to curtail
its operations and/or take additional measures to conserve and manage its liquidity and capital resources, any of which would have
a material adverse effect on its business, results of operations and financial condition. The ability to successfully resolve these
factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements
of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties. In order
to mitigate the risk related with this uncertainty, the Company plans to issue additional shares of common stock for cash and services
during the next 12 months.
Note
5 – DISCONTINUED OPERATIONS
On December 31, 2015, the
Company entered into a Stock Purchase Agreement (“SPA”) with Pour Les Enfant, LLC, a Louisiana limited liability company
(“Pour Les Enfant”). Pursuant to the SPA, the Company, as sole shareholder of EmployUS, Ltd. Completed the split-off
by transferring to Pour Les Enfant all outstanding shares and tangible assets of EmployUS, Ltd.. In consideration thereof, Pour
Les Enfant assumed all liabilities of EmployUS, Ltd. Associated with monies owed to the Internal Revenue Service for late payroll
taxes; and all corporate, personal, and validity guarantees associated with the Crestmark Bank Loan and Security Agreement. Pursuant
to the SPA, Brent Callais and Brian McLoone, directors, executives and controlling shareholders of the Company, each agreed to
transfer to the Company 91,000 shares of the Company’s common stock and one share of the Company’s preferred stock,
for immediate cancellation.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
The following table summarizes
the results from discontinued operations:
|
|
Three Months
Ended
September 30,
2015
|
|
Nine months
Ended
September 30,
2015
|
|
|
|
|
|
NET REVENUES
|
|
|
|
|
|
Contract staffing services
|
|
$
|
3,393,046
|
|
$ 10,832,933
|
|
|
|
|
|
|
COST OF SERVICES
|
|
|
2,777,902
|
|
8,855,709
|
GROSS PROFIT
|
|
|
615,144
|
|
1,977,224
|
SELLING, GENERAL AND ADMINISTRATIVE
|
|
|
572,495
|
|
1,791,524
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
42,649
|
|
185,700
|
OTHER EXPENSE
|
|
|
(45,453)
|
|
(146,265)
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(2,804)
|
|
39,435
|
|
|
|
|
|
|
(Provision) benefit for income taxes
|
|
|
-
|
|
-
|
|
|
|
|
|
|
NET INCOME (LOSS) OF EMPLOYUS, LTD.
|
|
$
|
(2,804)
|
$
|
39,435
|
Note
6 – Identifiable Intangible Assets
Intangible assets comprise
customer relationships and non-compete agreements which are recorded at cost.
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,130,000
|
|
$ -
|
Non-compete agreements
|
|
|
70,000
|
|
-
|
|
|
|
1,200,000
|
|
-
|
Accumulated amortization
|
|
|
(120,000
|
)
|
-
|
Identifiable Intangible Assets
|
|
$
|
1,080,000
|
|
$ -
|
On
April 1, 2016, the Company acquired and commenced amortization of identifiable intangible assets upon closing of the business acquisition
for the Four Branches. During the three and nine months ended September 30, 2016 and 2015, $60,000 and $120,000, respectively,
was recorded as amortization. The Company estimates amortization over the next five years to be as follows: 2016 (remaining) $60,000
and the following four years $240,000 per annum.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Note 7 –
accounts payable – related party
At September 30, 2016 and
December 31, 2015, $805,970 and $0, respectively, is due to Labor Smart Inc for trade payables related to payroll costs.
Note
8 –
notes payable – related party
On May 20, 2014, the Company
issued a promissory note for $94,500 for cash to a shareholder of the Company that is to be repaid in full by May 20, 2015. The
note accrues interest expense at 10% per annum and in accordance with the promissory note, there is a late fee of $100 per day
for each day the note remains unpaid beyond the maturity date. Interest and late fee expense for the three months ended September
30, 2016 and 2015 was $11,563 and $11,563, respectively and for the nine months ended September 30, 2016 and 2015 was $34,488 and
$20,388, respectively. The Company recorded late fees payable of $49,800 and $22,400 and accrued interest payable of $21,769 and
$14,681, as of September 30, 2016 and December 31, 2015, respectively, and is included in accounts payable and accrued expenses
– related party as of September 30, 2016 and December 31, 2015.
On July 14, 2014, the Company
issued a promissory note for $12,500 for cash to a shareholder of the Company that is to be repaid in full by July 14, 2015. The
note accrues interest expense at 10% per annum and in accordance with the promissory note, there is a late fee of $100 per day
for each day the note remains unpaid beyond the maturity date. Interest and late fee expense for the three months ended September
30, 2016 and 2015 was $9,513 and $8,012, respectively and for the nine months ended September 30, 2016 and 2015 was $28,338 and
$8,638, respectively. The Company recorded late fees payable of $44,300 and $16,900 and accrued interest payable of $2,771 and
$1,833, as of September 30, 2016 and December 31, 2015, respectively, and is included in accounts payable and accrued expenses
– related party as of September 30, 2016 and December 31, 2015.
On April 1, 2016, in conjunction
with Agreement for Purchase and Sale of Assets (Note 3), the Company issued an unsecured non-interest bearing promissory note to
Labor Smart, Inc., due on April 1, 2018 with a face amount of $755,000 and a fair value of $506,000. In accordance with FASB ASC
835-30 "Imputation of Interest", interest has been imputed on the promissory note at a market interest rate of 20% per
annum. At September 30, 2016, the promissory note has been recorded net of debt discount of $192,255. Amortization of debt discount
of $29,430 and $56,745 has been included in interest expense in the consolidated statements of loss for the three and nine months
ended September 30, 2016, respectively. The debt discount is being amortized on the effective interest method.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Note
9 – convertible promissory note – related party
On December 18, 2015, the
Company entered into a Convertible Promissory Note (“Note”) with Labor Smart Inc. (“Holder”) in the original
principal amount of $80,000 bearing a 12% annual interest rate and maturing on December 16, 2016. In conjunction with the issuance
of the Note, as further consideration, the Company issued the Holder one (1) share of Series A Preferred Stock of the Company.
Each share of Series A Preferred Stock gives the holder voting rights equal to 2 votes for every one share of common stock outstanding
at the time of a vote of shareholders and does not have any additional rights or preferences. This Note together with any unpaid
accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion
price calculated at 75% of the market price which means the lowest trading price during the thirty trading day period ending on
the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 120 days of date
of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at 130% of the original principal
amount plus interest and between 151 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the
Company does not have the right of prepayment. At September 30, 2016, the Note includes principal of $80,000 and accrued interest
of $31,091 less unamortized debt discount of $16,925. See Note 10 – Convertible Promissory Note Derivative Liability –
Related Party.
Note
10 – convertible promissory notes
On March 29, 2016, with
an effective date of April 5, 2016, in conjunction with the Agreement for Purchase and Sale of Assets (Note 3), the Company entered
into a Senior Secured Revolving Credit Facility Agreement (the “Credit Agreement”) with TCA Global Credit Master Fund,
LP, a Cayman Islands limited partnership (“TCA”), pursuant to which TCA agreed to loan up to a maximum of three million
dollars ($3,000,000) to us for working capital purposes. A total of $1,300,000 was funded by TCA in connection with the closing
of the Agreement. The amounts borrowed pursuant to the Credit Agreement are evidenced by a Senior Secured Revolving Convertible
Promissory Note (the “Revolving Note”), the repayment of which is secured by Security Agreements executed by us and
our subsidiary, The Staff Fund I, LLC. Pursuant to the Security Agreements, the repayment of the Revolving Note is secured by a
security interest in substantially all of our assets in favor of TCA. The initial Revolving Note in the amount of $1,300,000 is
due and payable along with interest thereon on October 5, 2016, and bears interest at the minimum rate of 12% per annum, increasing
to 22% per annum upon the occurrence of an Event of Default, as defined in the Credit Agreement. Upon an Event of Default, TCA
shall have the right to convert all or any portion of the Revolving Note into shares of the Company’s common stock. The conversion
rate shall be 85% of the lowest VWAP of the Company’s stock for the five days preceding the conversion date. The Credit Agreement
provides for certain contractual rights to TCA. TCA has influence and veto power over key decisions which effect operating, investing
and financing activities of the Company including the right to approve the transfer agent, maintenance of insurance, approve the
selection of management after performing background investigations, approve all capital expenditures, approve issuance of stock,
approve opening new bank accounts and approve change in control of the Company. The Credit Agreement also provides that all
cash receipts from customers are required to be deposited in a lock box account. Distributions from the lock box account are made
to the Company only after obligations to TCA are satisfied. TCA with absolute discretion may withhold cash in the lock box in order
to protect collateral. During the period ended September 30, 2016, the Company paid $304,239 in cash for principal and $84,522
for interest and fees. At September 30, 2016, the Note includes principal of $995,763 and accrued interest of $256,846 less unamortized
debt discount of $28,572. See Note 10 – Convertible Promissory Note Derivative Liability. See Note 16 – Subsequent
Events.
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
On May 26, 2016, the Company
entered into a Convertible Promissory Note (“Note”) with Group 10 Holdings, LLC (“Holder”) in the original
principal amount of $100,000 bearing a 10% annual interest rate and maturing December 26, 2016. This Note together with any unpaid
accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion
price calculated at 55% of the lowest trading price of any day during the 25 consecutive trading days prior to the date on which
the Holder elects to convert all or part of the Note. The Company may prepay the Note at any time while outstanding for no prepayment
penalty.
At September 30, 2016, the
Note includes principal of $100,000 and accrued interest of $54,881 less unamortized debt discount of $40,654. See Note 10 –
Convertible Promissory Note Derivative Liability.
On September 27, 2016, the
Company entered into a Convertible Promissory Note (“Note”) with Carebourn Capital, L.P. (“Holder”) in
the original principal amount of $236,325 less transaction costs of $36,325 bearing a 12% annual interest rate and maturing September
27, 2017. This Note together with any unpaid accrued interest is convertible into shares of common stock of the Company at the
Holder’s option at a variable conversion price calculated at 60% of the average of the three lowest trading prices of any
day during the 20 consecutive trading days prior to the date on which the Holder elects to convert all or part of the Note. The
Company may repay the Note if repaid within 180 days of date of issue at 130% of the original principal amount plus interest and
between 181 days and 364 days at 150% of the original principal amount plus interest. Thereafter, the Company does not have the
right of prepayment. At September 30, 2016, the Note includes principal of $236,325 and accrued interest of $1,683 less unamortized
debt discount of $234,382. See Note 10 – Convertible Promissory Note Derivative Liability.
Note
11 – Convertible Promissory Note Derivative Liability
The Convertible Promissory
Notes with Labor Smart, Inc. with an issue date of December 18, 2015, TCA Global Credit Master Fund, LP with an issue date of April
5, 2016, Group 10 Holdings, LLC with an issue date of May 26, 2016 and Carebourn Capital, L.P. with and issue date of September
27, 2016 were accounted for under ASC 815. The variable conversion price is not considered predominately based on a fixed
monetary amount settleable with a variable number of shares due to the volatility and trading volume of the Company’s common
stock. The Company’s convertible promissory note derivative liability has been measured at fair value at September 30, 2016
using the binominal lattice model.
The inputs into the binominal
lattice model are as follows:
Conversion price
|
$0.17 - $1.07 per share
|
Risk free rate
|
0.64%
|
Expected volatility
|
177 – 219%
|
Dividend yield
|
0%
|
Expected life
|
0.01 - 0.99 years
|
Changes in
convertible promissory note derivative liability during the nine months ended September 30, 2016 were as follows:
Opening balance at December 31, 2015
|
|
$
|
178,959
|
|
Initial valuation of derivatives
|
|
|
1,052,612
|
|
Change in fair value of derivative
Liability
|
|
|
418,031
|
|
Closing balance at September 30, 2016
|
|
$
|
1,649,602
|
|
Changes in
convertible promissory note derivative liability party during the three months ended September 30, 2016 were as follows:
Opening balance at June 30, 2016
|
|
$
|
376,176
|
|
Initial valuation of derivatives
|
|
|
200,000
|
|
Change in fair value of derivative
Liability
|
|
|
1,073,426
|
|
Closing balance at September 30, 2016
|
|
$
|
1,649,602
|
|
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Note 12 –
due to stockholder
Amounts due to stockholder of $28,500 is non-interest
bearing, unsecured and have no specific terms of repayment.
Note 13 –
Series B Preferred Stock
On March 29, 2016, the Board
of Directors Board designated sixty (60) shares of preferred stock, par value $0.001 per share as Series B Preferred Stock (“Series
B Stock”). The Series B Stock is being issued to the owner of the Series B Preferred Stock (“Holder”) in connection
with the Senior Secured Revolving Credit Facility Agreement between the Company and TCA, effective as of April 5, 2016 (Note 3).
The Series B Stock is non-voting and not entitled to dividends. Upon liquation, dissolution or winding up of the Company, the Holder
is entitled to a liquidation preference of $25,000 per share of Series B Stock. The Holder may convert Series B Stock into shares
of authorized but unissued common stock equal to $25,000 divided by the average VWAP for five business days immediately prior to
the conversion date.
The Company has classified
Series B Stock as a liability in these consolidated financial statements in accordance with ASC 480, Liabilities – Distinguishing
Liabilities from Equity, as the Series B Stock has a fixed monetary amount known at inception and is settable in a variable amount
shares based on the fair value of the shares of the Company’s common stock.
On April 1, 2016, the Company
issued thirty (30) shares of the Company’s Series B Stock to TCA an advisory fee with a fair value of $750,000. The Series
B Stock was issued in conjunction with the convertible note payable issued to TCA and was recorded as debt discount. The amount
was classified as a current liability as the shares are expected to be redeemed within one year.
Note 14 –
Stockholders’ Deficit
On March 8, 2016, the Company
approved and effected a 1-for 50 reverse stock split of issued and outstanding common shares. All share information has been revised
to reflect the reverse stock split from the Company’s inception.
On April 1, 2016, the Company
issued 600,000 shares of common stock with a fair value of $1,080,000 ($1.80 per share based on the closing price of the Company
common stock on March 31, 2016) in conjunction with the Agreement for Purchase and Sale of Assets (Note 3).
On
April 1, 2016, a
s a requirement of
the purchase of the operating
assets, the one (1) issued and outstanding share of Series A Preferred Stock owed by Labor Smart, Inc. was transferred to Kimberly
Thompson, the Chief Executive Officer of the Company.
On April 25, 2016, the Board
of Directors authorized the issuance of 60,000 shares of common stock of the Company to Kimberly Thompson, the Chief Executive
Officer of the Company, for compensation valued at $109,200 ($1.82 per share) is expensed immediately and is included in selling,
general and administrative expense in the consolidated statement of operations.
On July 11, 2016, the Company
issued 7,000 shares of common stock for $7,000 in cash ($1.00 per share).
The Staffing Group, Ltd. and Subsidiary
NOTES
TO CONDENSED consolidated FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Non-controlling
interest
During the nine months ended
September 30, 2016, the subsidiary of the Company, Staff Fund I, LLC, issued membership interests for cash proceeds of $14,000.
Opening balance at December 31, 2015
|
|
$
|
0
|
|
Issue of membership interest
|
|
|
14,000
|
|
Net loss attributed to non-controlling interest
|
|
|
(1,278
|
)
|
Closing balance at September 30, 2016
|
|
$
|
12,722
|
|
Opening balance at June 30, 2016
|
|
$
|
12,440
|
|
Net income (loss) attributed to non-controlling interest
|
|
|
282
|
|
Closing balance at September 30, 2016
|
|
$
|
12,722
|
|
Note
15 - Contingencies and Commitments
Litigation
The Company may be subject
to various claims relating to matters arising in the ordinary course of business that are typically covered by insurance. The amount
of liability, if any, from these claims cannot be determined with certainty; however, management is of the opinion that the outcomes
will not have a material adverse impact on the Company’s financial position or results of operations.
Leases
The Company leases space
for five of its branch offices and for its corporate headquarters, located in Kennesaw, Georgia. For the three and nine months
ended September 30, 2016 rent expense was $19,316 and $50,744, respectively.
As of September 30, 2016,
future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain
closed offices, are as follows:
Years
|
|
Amount
|
|
|
2016 (remaining)
|
|
$
|
26,062
|
|
|
2017
|
|
|
87,514
|
|
|
2018
|
|
|
48,133
|
|
|
2019
|
|
|
16,511
|
|
|
Total
|
|
$
|
178,220
|
|
|
Note 16 - Subsequent
Events
In a letter dated December
13, 2016, the Company received from TCA Global Credit Master Fund, LP, a Notice of Default (“Notice”), concerning the
Senior Secured Revolving Credit Facility Agreement (the “Credit Agreement”) with an effective date of April 5, 2016,
for not filing a timely Form 10-Q for the quarter ended September 30, 2016 with the Securities Exchange Commission. The Company
has ten (10) days from the date of the letter to remedy and cure this default or the default will constitute an “Event of
Default” under the Credit Agreement. The Company believes this default is fully remedied and cured with the filing of this
Form 10-Q.