Item 1. Business.
Our Company and Corporate History
We were originally incorporated under the laws of the State of Nevada on June 11, 2012 under the name Aviana, Corp. Our original business was a Poland based corporation that operated a consulting business in EMF (electromagnetic fields), Microwave, Electrical and Ionizing detection, shielding and protection in Poland. We were unsuccessful in operating our business and on August 27, 2013 we entered into a binding letter of intent with EmployUS, Ltd. (“EmployUS”). It was in connection with that letter of intent that our prior officer and director, Liudmila Yuziuk, resigned and we appointed Mr. Brian McLoone as our sole officer and director. In addition, we changed our name to The Staffing Group Ltd. to better represent our new business operations.
On January 22, 2014, we entered into the Exchange Agreement with EmployUS which agreement closed on February 14, 2014. Pursuant to the terms and conditions of the final, fully executed Exchange Agreement, and upon the consummation of the closing:
● Each share of EmployUS’s common stock issued and outstanding immediately prior to the closing of the Exchange Agreement was converted into the right to receive an aggregate of 263,076 shares of our common stock.
● Three of our shareholders agreed to cancel the following shares:
(i) Joseph Albunio agreed to cancel 167,728 shares of his common stock. After the cancellation he owns 10,000 shares of our common stock.
(ii) Brian McLoone agreed to cancel 56,728 shares of his common stock. After the cancellation he owns 121,000 shares of our common stock.
(iii) Luidmila Yuziuk agreed to cancel 38,619 shares of her common stock. After the cancellation, she does not own any shares of our common stock.
Following the Exchange Agreement, there were 702,000 shares of our common stock issued and outstanding, which included 263,076 shares held by former stockholders of EmployUS and 121,000 by Brian McLoone, EmployUS’s Chief Operations Officer and The Staffing Group, Ltd’s Chief Executive Officer, but not a stockholder of EmployUS prior to the merger. As a result, the Company’s pre-merger stockholders, excluding Brian McLoone, held approximately 45.28% of the Company’s issued and outstanding shares of common stock and the former stockholder of EmployUS, including Brian McLoone, held approximately 54.72%.
The Exchange Agreement was accounted for as a reverse merger and recapitalization and EmployUS was deemed to be the acquirer in the reverse merger for accounting purposes. Consequently, the assets and liabilities and the historical operations of the Company that are reflected in the financial statements prior to the closing are those of EmployUS, and the consolidated financial statements of the Company after completion of the reverse merger will include the assets and liabilities of EmployUS, historical operations of EmployUS and operations of EmployUS from the Closing Date of the Exchange Agreement.
On November 13, 2015, the Board of Directors approved the issuance of two (2) shares of Series A Preferred Stock to each of its current directors, at that time, Brian McLoone and Brent Callais.
On December 18, 2015, the Board approved the issuance of one (1) share of Series A Preferred Stock to Labor Smart, Inc., a 18.45% shareholder of common stock, in conjunction with the issuance of a convertible promissory note dated December 18, 2015.
On December 22, 2015, the Company entered into a Licensing Agreement with Labor Smart, Inc. 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 100% owned subsidiary, Staff Fund I, LLC, a Nevada Limited Liability Company. This subsidiary currently operates one staffing location in Montgomery, Alabama. Staff Fund I, LLC has reserved 49% of its outstanding membership units for sale to new investors.
On December 31, 2015, 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 agree 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. It additional all existing operations of the Company were disposed of in the split-off transaction except for the business continued in our subsidiary, Staff Fund I, LLC.
In conjunction with the split-off transaction, the Company received notice of the resignation of Brian McLoone as Chief Executive Officer and Director, and Brent Callais as Director and the Board of Directors of the Company appointed Ms. Kimberly Thompson as Interim Chief Executive Officer of the Company.
In January 2016, the Company commenced operations of one (1) staffing location Montgomery, Alabama through the subsidiary, Staff Fund I, LLC. This subsidiary recruits, hires, employs and manages skilled and unskilled workers that it places with its client companies.
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 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 (“CEO”) 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 December 31, 2016, Kimberly Thompson controlled the majority of shareholder votes.
On September 12, 2016, the Company cancelled the Licensing Agreement with Labor Smart, Inc and, as such, no longer operates under the Labor Smart trademarked name. The Company currently operates under its legal name, The Staffing Group Ltd.
Subsidiaries
On December 28, 2015, the Company incorporated a 100% owned subsidiary, Staff Fund I, LLC, a Nevada Limited Liability Company. This subsidiary currently operates one staffing location in Montgomery, Alabama. Staff Fund I, LLC has reserved 49% of its outstanding membership units for sale to new investors.
Description of Business
Prior to the split-off transaction, the Company reviewed the historical financial performance of EmployUS, Ltd. and gave consideration to other opportunities for growth in other segments in the staffing industry which the Company believes will be more profitable. As a result, on December 31, 2015, the Company disposed of its wholly owned subsidiary, EmployUS Ltd., in a split-off transaction which included all the assets, liabilities and operations of EmployUS Ltd.
The Company currently operates five (5) staffing locations in Charlotte and Raleigh, North Carolina, Indianapolis, Indiana, Nashville, Tennessee, Montgomery, Alabama. Our Montgomery location is operated through our subsidiary, Staff Fund I, LLC. Staff Fund I, LLC recruits, hires, employs and manages skilled and unskilled workers that we place with our client companies.
Services offered include:
· Payroll related taxes
· Workers’ compensation coverage
· General liability insurance
· Professional risk management team
· 24/7 availability of office staff
· Safety equipment & training programs
· Drug & alcohol screenings
· Background checks/MVR reports
· Temporary to permanent workers
Since December 31, 2015, to grow our business, we have employed a professional selling branch manager and administrative support staff at the Montgomery branch. The Company plans an aggressive expansion throughout the Southeast U.S. whereby we will open additional branches. We expect to incorporate a new company each time we open a new branch. The startup capital for each branch is expected to be raised by crowdfunding with new investor ownership limited to 49% of each branch.
Our Industry
We are primarily focused in the on-demand blue collar staffing industry. The primary placements we make are to companies in the construction industry, light industrial, refuse industry, retail, and hospitality businesses.
In addition, the Company is actively sourcing acquisition targets in the staffing industry. While our current focus is blue collar staffing, we are seeking acquisition opportunities in every staffing vertical segment with planned targets in IT Staffing, home healthcare, professional firms and disaster response.
Products and Services
We are a service provider that is in the business of providing temporary staffing solutions. We provide general laborers to construction, light industrial, refuse, retail, and hospitality businesses and recruit, hire, train and manage skilled workers so our clients doesn’t have to. By eliminating the administrative requirements of finding and employing skilled and unskilled workers our clients have the ability to focus on the important task of managing and growing their business and not worry about staffing their projects. We currently operate five branch locations.
Additionally, we plan to seek out acquisition targets in other segments of the staffing industry as we execute an aggressive buy and build roll-up strategy to grow our business.
Seasonality of the Business
Generally, we expect our revenues to be higher and gross margin percent to be higher during the second and third fiscal quarters as compared to the first and fourth fiscal quarters each year. During the second and third quarters we receive the majority of our contracts to supply labor to construction firms. Contracts for construction work tends to be both larger in dollar amount and to be more profitable than our other contracts.
Concentration or Dependence on Key Vendors, Suppliers or Clients
We, are not dependent on any single supplier or client. From time to time, we may experience high customer concentration, especially in our busier quarterly periods.
Marketing
After the split-off transaction of the EmployUS assets and liabilities on December 31, 2015, our marketing efforts have changed to be more focused on attracting acquisition targets, in line with our new focus of growth by acquisitions. As we acquire new staffing businesses, we intend to analyze each business to determine the best mix of marketing expenditures to maximize return on investment. We anticipate that online and social media marketing will become a large part of our marketing efforts. Additionally, we intend to rely on telemarketing and direct mail as a means to market the services. We use licensed customer relationship management software to manage new leads and opportunities. This software allows us to automate many marketing functions and will be more relied upon as we scale up our business.
Competition
The staffing industry is highly competitive and fragmented throughout the United States. There are multiple staffing companies that fill a wide variety of positions and service a wide variety of industries. There is no one company dominant in the temporary staffing industry, however, there are several large competitors with substantially more resources and market visibility than us. The Company believes that the primary factors in obtaining and retaining customers are the cost of services, the quality of employees provided, the responsiveness of service, and the number of markets that can be serviced.
Regulatory Matters/Compliance
We are not aware of any need for any government approval of our principal services. We do not anticipate any governmental regulations on our business. However, we do provide workers compensation insurance for all our employees and we must ensure we are adhering to all OSHA requirements. We are responsible for all federal, state and local taxes for our employees. When working in a port all employees must have a T.W.I.C. identification card which ensures they are authorized to work in heightened security atmosphere. Employees that work on federally funded projects have their wages determined and validated by the federal government based on The Davis Bacon Act. Like all large employers the Company, its current and future subsidiaries will also have to adhere to the Affordable Care Act.
Intellectual Property
We do not have any intellectual property or proprietary rights to any of our services. On September 12, 2016, the Company cancelled the Licensing Agreement with Labor Smart, Inc and, as such, no longer operates under the Labor Smart trademarked name. The Company currently operates under its legal name, The Staffing Group Ltd.
Research and Development
We are a provider of staffing services for blue-collar jobs. We do not spend any resources on research and development. As our business grows, we expect to develop and train our staff to better understand our clients and to ensure that we are meeting the needs of our clients.
Employees
As of May 19, 2017, we have one (1) full time executive and (13) full-time branch level employees, including those of our subsidiary, Staff Fund I, LLC. None of these employees are represented by collective bargaining agreements and the Company considers it relations with its employees to be good.
Additionally, we do employ a number of part-time employees that are staffed with our clients. These employees are hired on a part-time and as-needed basis.
Corporation Information
Our principal executive offices are located at 125 Townpark Drive, Suite 300, Kennesaw GA 30144. Our telephone number is 678-881-0834. Our website is www.staffinggroupltd.com.
Item 1A.
Item 1A. Risk Factors.
This information is not required for smaller reporting companies.
Item 1B.
Item 1B. Unresolved Staff Comments.
This information is not required for smaller reporting companies.
Item 2.
Item 2. Properties.
The Company’s corporate headquarters are located in Kennesaw, Georgia. The Company currently leases space located at 125 Townpark Drive, Suite 300, Kennesaw, GA 30144. The lease is for a term of 12 months beginning on January 1, 2016 and was renewed for a further 12 months beginning January 1, 2017. Our lease payments are $169 and $176 per month in 2016 and 2017, respectively. The Company believes that the current location is sufficient for the Company’s needs at this time.
The Company currently has no investment policies as they pertain to real estate, real estate interests, or real estate mortgages.
We also have five (5) other offices. A brief summary of locations, term of lease and monthly rent is as follows:
The offices are used as a place to recruit local staff to service our clients. We also have sales staff at each location to meet with prospective clients.
Item 3.
Item 3. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
From August 2013 until October 2013, the Company’s common stock has been listed for quotation on the OTCBB under the symbol “AVIA”. Since October 2013, the Company’s common stock has been listed for quotation on the OTCBB under the symbol “TSGL.”
Price Range of Common Stock
The following table shows, for the periods indicated, the high and low bid prices per share of our common stock as reported by the OTCBB quotation service. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.
Approximate Number of Equity Security Holders
As of June 1, 2017, there were 52 stockholders of record. Because shares of our common stock are held by depositaries, brokers and other nominees, the number of beneficial holders of our shares is substantially larger than the number of stockholders of record.
Dividends
There are no restrictions in the Company’s articles of incorporation or bylaws that prevent the Company from declaring dividends. The Nevada Revised Statutes, however, do prohibit the Company from declaring dividends where, after giving effect to the distribution of the dividend:
1. The Company would not be able to pay the debts as they become due in the usual course of business; or
2. The Company’s total assets would be less than the sum of the total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
The Company has not declared any dividends, and the Company does not plan to declare any dividends in the foreseeable future.
Unregistered Sales of Equity Securities
Common Stock
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, 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.
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) which was 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).
On December 19, 2016, Group 10 Holdings LLC, the holder of a Convertible Promissory Note (see Note 10) converted 63,300 shares of common stock of the Company with a fair value of $12,660 to settle $5,570 of principal and interest.
All of the securities issued herein were not registered under the Securities Act, or the securities laws of any state, and were offered and sold pursuant to the exemption from registration under the Securities Act provided by Section 4(2) and Regulation D (Rule 506) under the Securities Act.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have in effect any compensation plans under which our equity securities are authorized for issuance.
Item 6.
Item 6. Selected Financial Data.
We are not required to provide the information required by this Item because we are a smaller reporting company.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the results of operations and financial condition of The Staffing Group Ltd. for the years ended December 31, 2016 and 2015, should be read in conjunction with the Selected Consolidated Financial Statements, of The Staffing Group Ltd.’s, financial statements, and the notes to those consolidated financial statements that are included elsewhere in this Current Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this Current Report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Overview
We were originally incorporated under the laws of the State of Nevada on June 11, 2012 under the name Aviana, Corp. Our original business was a Poland based corporation that operated a consulting business in EMF (electromagnetic fields), Microwave, Electrical and Ionizing detection, shielding and protection in Poland. We were unsuccessful in operating our business and on August 27, 2013 we entered into a binding letter of intent with EmployUS, Ltd. (“EmployUS”). It was in connection with that letter of intent that our prior officer and director, Liudmila Yuziuk, resigned and we appointed Mr. Brian McLoone as our sole officer and director. In addition, we changed our name to The Staffing Group Ltd. to better represent our new business operations.
On January 22, 2014, we entered into the Exchange Agreement with EmployUS which agreement closed on February 14, 2014. Pursuant to the terms and conditions of the final, fully executed Exchange Agreement, and upon the consummation of the closing:
● Each share of EmployUS’s common stock issued and outstanding immediately prior to the closing of the Exchange Agreement was converted into the right to receive an aggregate of 263,076 shares of our common stock.
● Three of our shareholders agreed to cancel the following shares:
(i) Joseph Albunio agreed to cancel 167,728 shares of his common stock. After the cancellation he owns 10,000 shares of our common stock.
(ii) Brian McLoone agreed to cancel 56,728 shares of his common stock. After the cancellation he owns 121,000 shares of our common stock.
(iii) Luidmila Yuziuk agreed to cancel 38,619 shares of her common stock. After the cancellation, she does not own any shares of our common stock.
Following the Exchange Agreement, there were 702,000 shares of our common stock issued and outstanding, which included 263,076 shares held by former stockholders of EmployUS and 121,000 by Brian McLoone, EmployUS’s Chief Operations Officer and The Staffing Group, Ltd’s Chief Executive Officer, but not a stockholder of EmployUS prior to the merger. As a result, the Company’s pre-merger stockholders, excluding Brian McLoone, held approximately 45.28% of the Company’s issued and outstanding shares of common stock and the former stockholder of EmployUS, including Brian McLoone, held approximately 54.72%.
The Exchange Agreement was accounted for as a reverse merger and recapitalization and EmployUS was deemed to be the acquirer in the reverse merger for accounting purposes. Consequently, the assets and liabilities and the historical operations of the Company that are reflected in the financial statements prior to the closing are those of EmployUS, and the consolidated financial statements of the Company after completion of the reverse merger will include the assets and liabilities of EmployUS, historical operations of EmployUS and operations of EmployUS from the Closing Date of the Exchange Agreement.
On November 13, 2015, the Board of Directors approved the issuance of two (2) shares of Series A Preferred Stock to each of its current directors, at that time, Brian McLoone and Brent Callais.
On December 18, 2015, the Board approved the issuance of one (1) share of Series A Preferred Stock to Labor Smart, Inc., a 18.45% shareholder of common stock, in conjunction with the issuance of a convertible promissory note dated December 18, 2015.
On December 22, 2015, the Company entered into a Licensing Agreement with Labor Smart, Inc. 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 100% owned subsidiary, Staff Fund I, LLC, a Nevada Limited Liability Company. This subsidiary currently operates one staffing location in Montgomery, Alabama. Staff Fund I, LLC has reserved 49% of its outstanding membership units for sale to new investors.
On December 31, 2015, 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 agree 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. It additional all existing operations of the Company was disposed of in the split-off transaction except for the business continued in our subsidiary, Staff Fund I, LLC.
In conjunction with the split-off transaction, the Company received notice of the resignation of Brian McLoone as Chief Executive Officer and Director, and Brent Callais as Director and the Board of Directors of the Company appointed Ms. Kimberly Thompson as Interim Chief Executive Officer of the Company.
The split-off of EmployUS, Ltd. to the controlling shareholders is a common control transaction and recorded at book value. Any difference between the proceeds received by the Company and the book value of assets and liabilities of EmployUS, Ltd. is recognized as a capital transaction with no gain and loss recorded. EmployUS, Ltd., as a subsidiary, was determined to be a component of Company and disposed of by other than sale.
In January 2016, the Company commenced operations of one (1) staffing location Montgomery, Alabama through the subsidiary, Staff Fund I, LLC. This subsidiary recruits, hires, employs and manages skilled and unskilled workers that it places with its client companies.
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 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 December 31, 2016, Kimberly Thompson controlled the majority of shareholder votes. These consolidated financial statements report the financial position, operations and cash flows of the acquired business (the “Predecessor”). SEC Regulations require the Predecessor to be reported when the acquired business succeeds substantially all of the business and the Company’s own operations before the succession appear insignificant to the operations acquired.
On September 12, 2016, the Company cancelled the Licensing Agreement with Labor Smart, Inc and, as such, no longer operates under the Labor Smart trademarked name. The Company currently operates under its legal name, The Staffing Group Ltd.
On December 31, 2016, the Company operated five (5) staffing locations in Charlotte, North Carolina, Indianapolis, Indiana, Nashville, Tennessee Raleigh, North Carolina and Montgomery, Alabama. Our Montgomery, Alabama staffing location is operated through our subsidiary, Staff Fund I, LLC. During the year ended December 31, 2016. Staff Fund I, LLC issued membership interests for cash proceeds of $14,000. At December 31, 2016, 7% of Staff Fund I, LLC membership interest are held by non-controlling interests.
We are a service provider that is in the business of providing temporary staffing solutions. We provide general laborers to construction, light industrial, refuse, retail, and hospitality businesses and recruit, hire, train and manage skilled workers so our clients doesn’t have to. By eliminating the administrative requirements of finding and employing skilled and unskilled workers our clients the ability to focus on the important task of managing and growing their business and not worry about staffing their projects
Additionally, we plan to seek out acquisition targets in other segments of the staffing industry as we execute a buy and build roll-up strategy to grow our business.
Seasonality
Generally, we expect our revenues to be higher and gross margin percent to be higher during the second and third fiscal quarters as compared to the first and fourth fiscal quarters each year. During the second and third quarters we receive the majority of our contracts to supply labor to construction firms. Contracts for construction work tends to be both larger in dollar amount and to be more profitable than our other contracts.
Use of Non-GAAP Financial Information
In addition to results in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), this annual report on Form 10-K also includes certain non-GAAP financial measures as defined by the Securities and Exchange Commission. The Company defines EBITDA as loss from continuing operations, plus interest expense net of interest income, provision for income taxes, depreciation and amortization. The Company defines Adjusted EBITDA as these items plus change in fair value of derivative liabilities, pretax. EBITDA and Adjusted EBITDA are measures used by management to evaluate ongoing operations and as a general indicator of its operating cash flow (in conjunction with a cash flow statement that also includes, among other items, changes in working capital and the effect of non-cash charges). Management believes these measurements are useful to investors because they are frequently used by securities analysts, investors and other interested parties in the comparative evaluation of companies. Because not all companies use identical calculations, the Company’s presentation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA are not recognized terms under GAAP, do not purport to be alternatives to, and should be considered in addition to, and not as a substitute for or superior to, net income (loss) as a measure of operating performance or to cash flows from operating activities or any other performance measures derived in accordance with GAAP as a measure of liquidity. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use as they do not reflect certain cash requirements, such as interest payments, tax payments and debt service requirements.
Pursuant to the requirements of Regulation G, a reconciliation of EBITDA and Adjusted EBITDA to GAAP, loss from continuing operations has been provided in the table below.
RECONCILIATION OF GAAP, LOSS FROM CONTINUING OPERATIONS TO EBITDA AND ADJUSTED EBITDA
Year Ended December 31, 2016 compared to 2015
The following table presents a summary of continuing operations for the year ended December 31, 2016 with comparative operations from the Four Branches (Charlotte, North Carolina, Indianapolis, Indiana, Nashville, Tennessee and Raleigh, North Carolina) acquired on April 1, 2016 from the carved-out financial statements Labor Smart, Inc for the year ended December 31, 2015 (the “Predecessor”).
Net Revenues:
Contract staffing services were $4,277,777 for the year ended December 31, 2016, a decrease of $1,684,477 or 28.3% from $5,962,254 (Predecessor) for the year ended December 31, 2015. The decrease in revenue is primarily due the Company’s decision of not accepting new contracts from third party vendors. Many of the contracts with third party vendors have gross margins less than 8%. The Company currently will only bid on contracts with expected gross greater than 30%.
Cost of Services:
Cost of staffing services were $2,907,847 for the year ended December 31, 2016, a decrease of $1,561,139 or 34.9% from $4,468,986 (Predecessor) for the year ended December 31, 2015. The decrease in cost of services is due to the decrease in net revenues and increase in gross profit percentage. Fluctuations in cost of sales items are based on the number of contracts on going at a given point in time.
Gross Profit:
Gross profit was $1,369,930 for the year ended December 31, 2016, which is approximately 32.0% of contract staffing services revenue, from $1,493,268 (Predecessor) for the year ended December 31, 2015, which is approximately 25.1% of contract staffing services revenue. The increase in gross profit is due to the Company seeking out contracts with higher gross profit percentage.
Selling, General and Administrative Expenses:
Amortization of intangible assets of $180,000 relates to identifiable intangible assets of $1,200,000 acquired on April 1, 2016 which are being amortized on a straight-line over 5 years.
An identifiable intangible asset and goodwill impairment charge totaling $1,374,000 was recorded as of December 31, 2016. The impairment was due to the loss of significantly all of the customers at the Nashville, TN and Raleigh, NC branches acquired on April 1, 2016. The loss of the customers was caused by administrative issues on sale. The remaining goodwill, non-compete agreements and customer relationships reported on the consolidated balance sheet at December 31, 2016 related to the Charlotte, NC and Indianapolis, IN locations.
Payroll and related expenses were $441,837 for the year ended December 31, 2016, an increase of $12,445 or 2.9% from $429,392 (Predecessor) for the year ended December 31, 2015. The increase in primarily due to stock-based compensation valued at $109,200 paid during the year ended December 31, 2016. On April 25, 2016, 60,000 shares of common stock were issued to Kimberly Thompson, our CEO. The Predecessor did not issued stock-based compensation for the comparable period Selling, general and administrative expense comprise legal, audit, accounting, transfer agent, printing and other costs related to SEC filings and matters relating to being a public company.
Selling, general and administrative expenses were $778,886 for the year ended December 31, 2016, a decrease of $234,385 or approximately 23.1%, from $1,013,271 (Predecessor) for the year ended December 31, 2015.
Income from Operations:
Loss from operations was $1,404,793 for the year ended December 31, 2016, a decrease of $1,354,188 or approximately 2,676%, from income from operations of $50,605 (Predecessor) for the year ended December 31, 2015.
Other Expenses:
Other expenses were $2,449,003 for the year ended December 31, 2016, an increase of $2,573,824 or approximately 2,062%, from $(124,821) (Predecessor) for the year ended December 31, 2015.
The increase in other (expenses) income is primarily due to:
i)The Company incurred interest expense of $2,581,198 during the year ended December 31, 2016 for amortization of debt discount and interest due on notes payable and convertible promissory notes payable. On April 1, 2016, the Company issued thirty (30) shares of the Company’s Series B Stock to TCA as 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.
ii)
iii)Other expenses include a decrease in the fair value of the derivative liabilities of $132,195 for the year ended December 31, 2016.
In the comparative period for the year ended December 31, 2015, the Predecessor incurred carved-out interest expense of $124,821 for costs incurred for factoring accounts receivable. The Predecessor did not incur comparable expenses for amortization of debt discount and interest due on notes payable and convertible promissory notes payable and change in the fair value of directive liabilities.
Liquidity and Capital Resources
As of December 31, 2016, we had a minimal cash balance.
Net cash provided by operating activities was $156,607 for the year ended December 31, 2016 as compared to net cash provided by operating activities of $515,571 (Predecessor) for the year ended December 31, 2015. The net cash used by operating activities was primarily due to our net loss of $3,853,796 and increase of accounts receivable of $881,775 which was offset by amortization of debt discount of $2,366,870, impairment of intangible assets of $1,374,000 and increase of accounts payable and accrued liabilities of $952,158.
Net cash used by investing activities was $1,081,364 for the purchase of equipment of $1,364 and business acquisition of the Four Branches of $1,080,000 for the year ended December 31, 2016 as compared to $0 (Predecessor) for the year ended December 31, 2015.
Net cash provided by financing activities amounted to $924,757 for the year ended December 31, 2016, compared to net cash used by financing activities of $515,571 (Predecessor) for the year ended December 31, 2015. Cash flows provided from financing activities includes proceeds from the issuance of convertible notes of $1,430,710, a $28,500 advance from Labor Smart, Inc., a shareholder of the Company, and $14,000 received from member’s subscription in Staff Fund I, LLC which was offset by repayment of convertible notes of $678,609.
Note Payable - Related Party
On April 1, 2016, in conjunction with the Agreement for Purchase and Sale of Assets (Note 4), 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 December 31, 2016, the promissory note has been recorded net of debt discount of $163,801. Amortization of debt discount of $85,199 has been included in interest expense in the consolidated statements of loss for the year ended December 31, 2016, respectively. The debt discount is being amortized on the effective interest method.
Convertible Note Payable - 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. As December 31, 2016, the Note is past due. 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 December 31, 2016, the Note includes principal of $80,000 and accrued interest of $39,432. See Note 11 - Convertible Promissory Note Derivative Liability - Related Party.
Convertible Notes Payable
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 year ended December 31, 2016, the Company paid $620,511 in cash for principal and $129,942 for interest and fees. At December 31, 2016, the Note includes principal of $679,489 and accrued interest of $203,025 and the Note is past due. See Note 11 - Convertible Promissory Note Derivative Liability.
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. During the year ended December 31, 2016, the Company issued 63,300 shares of common stock for principal and interest of $5,570. At December 31, 2016, the Note includes principal of $94,430 and accrued interest of $87,881. See Note 11 - 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. During the year ended December 31, 2016, the Company paid $58,096 in cash for principal and interest. At December 31, 2016, the Note includes principal of $178,229 and accrued interest of $42,186 less unamortized debt discount of $174,816. See Note 11 - Convertible Promissory Note Derivative Liability.
Going Concern
The accompanying 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 December 31, 2016, the Company had a stockholders’ deficit of $2,984,065 and a working capital deficit of $3,506,230. For the year ended December 31, 2016, the Company had a net loss of $3,853,796. The Company’s stockholders’ deficiency is primarily due to, among other reasons, funding its historical costs.
The Company’s principal sources of liquidity include cash from operations and proceeds from debt and equity financings. As of December 31, 2016, the Company had minimal 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 within one year from the date of this filing. 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.
2017 Outlook
On December 31, 2015, we refocused our growth strategy. Going forward, we intend to focus on strategic growth acquisitions. As a result of the split-off transactions on December 31, 2015, we believe that the likelihood of successful acquisitions has increased as significant liabilities have been derecognized from our consolidated balance sheet.
Our goal in 2017 is to complete a platform acquisition for a number of branch offices. Thereafter, we plan to continue to grow by way of acquisition of additional branch offices. We will also seek to fully grow and develop new branch locations.
Due to increased regulations, rising state unemployment insurance rates that are required to be paid by businesses, rising workers insurance compensation rates and uncertainty regarding the Affordable Care Act, we believe that small staffing companies are prime for acquisition.
In order to successfully complete our growth plan as outline in the 2017 outlook, we anticipate using cash from operations to continue to fund our business operations and as the Company implements its planned expansion throughout the Southeast U.S. The startup capital for each branch is expected to be raised by crowdfunding with new investor ownership limited to 49% of each branch.
In the event that we need to access the capital markets and sell equity in order to fund operations or further our growth strategy, issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned activities.
We expect that working capital requirements will continue to be funded through a combination of our existing funds and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with US GAAP requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with US 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, evaluation of impairment of long lived 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 reasonable assured; and (iv) services have been rendered.
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.
ii)Debt Discount
The Company determines if the convertible debenture should be accounted for as 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.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as of December 31, 2016 and 2015.
Recent Accounting Pronouncements
We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration. Those standards have been addressed in Note 2 to the audited financial statement included elsewhere and in this, our Annual Report, filed on Form 10-K for the year ended December 31, 2016.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are not required to provide the information required by this Item because we are a smaller reporting company
Item 8.
Item 8. Financial Statements.
The Staffing Group Ltd.
December 31, 2016 and 2015
Index to the Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders 	
of The Staffing Group, Ltd.
We have audited the accompanying consolidated balance sheets of The Staffing Group, Ltd. (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These 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 purpose 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Staffing Group, Ltd. as of December 31, 2016 and 2015, the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Marcum llp
New York, NY	
June 20, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders 	
of Labor Smart, Inc.
We have audited the accompanying carve-out balance sheet of the four branches of Labor Smart, Inc. (a segment of Labor Smart, Inc.) (the “Predecessor”) as of December 31, 2015 and the related carve-out statements of operations, stockholder’s deficit and cash flows for the three months ended March 31, 2016 and the year ended December 31, 2015. These financial statements are the responsibility of the Predecessor’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 Predecessor 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 purpose of expressing an opinion on the effectiveness of the Predecessor’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 carve-out financial statements referred to above present fairly, in all material respects, the financial position of four branches of Labor Smart, Inc. as of December 31, 2015, the results of its operations and its cash flows for the three months ended March 31, 2016 and year ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
As described in Note 1 of the consolidated financial statements, the carve-out financial statements of the four branches of Labor Smart, Inc. (a segment of Labor Smart, Inc.) reflect the assets, liabilities, revenues, and expenses directly attributable to the Predecessor, as well as allocations deemed reasonable by management, to present the financial position, results of operations and cash flows of the Predecessor on a stand-alone basis and do not necessarily reflect the financial position, results of operations and cash flows of the Predecessor in the future or what they would have been had the Predecessor been a separate, stand-alone entity during the periods presented.
Marcum llp
New York, NY	
June 20, 2017
The Staffing Group Ltd., and Subsidiary
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements
The Staffing Group Ltd., and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements
The Staffing Group Ltd., and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
The accompanying notes are an integral part of these consolidated financial statements
The Staffing Group Ltd., and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 1 - Description of Business
EmployUS, LLC (“EmployUS”) a Delaware Limited Liability Company, was formed on September 30, 2010 having a perpetual existence and was a full service turnkey staffing company. Initially established to respond to the relief and recovery of the major oil spill in the Gulf of Mexico, EmployUS, was expanded to provide services on most major construction, chemical, and maritime projects in the Southeast United States. From its single initial project four years ago, EmployUS, grew to nine offices in three states, with more than 300 customers and that provided employment to over 4,500 individuals as of December 31, 2014.
Effective July 1, 2013, EmployUS, changed its corporate status from a limited liability company to a “C” corporation and its state of registration from Delaware to Nevada. As a result of these changes, the new name of EmployUS became EmployUS, Ltd. (“EmployUS, Ltd.”).
On January 22, 2014, The Staffing Group Ltd. (“the Company”) entered into a Share Exchange Agreement (the “Exchange Agreement”) with EmployUS, Ltd., all of the stockholders of EmployUS, Ltd. (the “EmployUS, Ltd. Shareholders”), and the Company’s controlling stockholders. The Exchange Agreement closed on February 14, 2014. Pursuant to the terms and conditions of the final, fully executed Exchange Agreement and upon the consummation of the closing, the Company issued an aggregate of 263,076 to the shareholders of EmployUS Ltd in exchange for the transfer of the EmployUS, Ltd. common stock. Additionally, three of the Company’s stockholders agreed to cancel an aggregate of 263,076 of the Company’s common stock.
Following the Exchange Agreement, there are 702,000 shares of the Company’s common stock issued and outstanding, which include 263,076 shares held by the former stockholders of EmployUS, Ltd. and 121,000 shares held by Brian McLoone, EmployUS Ltd.’s Chief Operating Officer but not a stockholder of EmployUS Ltd. prior to the merger. As a result, EmployUS, Ltd. pre-merger stockholders, including Brian McLoone, hold approximately 54.72% of the Company’s issued and outstanding shares of common stock and the former stockholders of the Company hold approximately 45.28%.
Upon closing of the Exchange Agreement, EmployUS, Ltd. became a wholly owned subsidiary of the Company. The Company ceased its prior operations and became engaged in the business of EmployUS, Ltd. As the Company was formerly a shell company, no pro forma disclosures were required. The Exchange Agreement was accounted for as a reverse merger and recapitalization and EmployUS, Ltd. was deemed to be the acquirer in the reverse merger for accounting purposes and the Company was deemed the legal acquirer. The Company therefore, take on EmployUS, Ltd.’s operating history.
On November 13, 2015, the Board of Directors approved the issuance of two (2) shares of Series A Preferred Stock to each of its current, at that time, directors, Brian McLoone and Brent Callais.
On December 18, 2015, the Board approved the issuance of one (1) share of Series A Preferred Stock to Labor Smart, Inc., a 18.45% shareholder of common stock, in conjunction with the issuance of a convertible promissory note dated December 18, 2015.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 1 - Description of Business (Continued)
The fair value of Series A Preferred Stock was determined to be $0 per share as the holders do not have the right to receive dividends or distributions, the holders do not have the right to receive asset upon any liquidation of the Company and the Company may redeem Series A Preferred Stock for no consideration.
On December 22, 2015, the Company entered into a Licensing Agreement with Labor Smart, Inc. 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 assumes 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 agree 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 the current year. (See Note 4).
In January 2016, the Company commenced operations of one (1) staffing location Montgomery, Alabama through the subsidiary, Staff Fund I, LLC. This subsidiary recruits, hires, employs and manages skilled and unskilled workers that it places with its client companies. During the year ended December 31, 2016. Staff Fund I, LLC issued membership interests for cash proceeds of $14,000. At December 31, 2016, 7% of Staff Fund I, LLC’s membership interest are held by non-controlling interest.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 1 - Description of Business (Continued)
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 December 31, 2016, Kimberly Thompson controlled the majority of shareholder votes. (See Note 4). These consolidated financial statements report the financial position, operations and cash flows of the acquired business (the “Predecessor”). SEC Regulations require the Predecessor to be reported when the acquired business succeeds substantially all of the business and the Company’s own operations before the succession appear insignificant to the operations acquired.
On September 12, 2016, the Company cancelled the licensing agreement with Labor Smart, Inc and, as such, no longer operates under the Labor Smart trademarked name. The Company currently operates under its legal name, The Staffing Group Ltd.
Note 2 - Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements and with Form 10-K and article 8 of the Regulation S-X of the United States Securities and Exchange Commission (“SEC”).
As a result of the split-off of EmployUs, Ltd. the consolidated balance sheets as of December 31, 2015 and 2015 and the related consolidated statements of operations and cash flows present the results and accounts of EmployUs, Ltd. as discontinued operations. All prior periods presented in the consolidated statements of operations and consolidated statement of cash flows discussed herein have been restated to conform to such presentation.
The carve-out financial statements have been prepared to demonstrate the historical results of operations, financial position, equity and cash flows of the Four Branches for the indicated periods under the Seller’s management. Accordingly, the carve-out financial statements do not reflect the presentation and classification of the Four Branches’ operations in the same manner as the Company. These financial statements were prepared on a "carve-out" basis from Labor Smart's accounts and reflects the historical accounts directly attributable to these four branches together with allocations of costs and expenses. The predecessor financial statement may not be indicative of future performance and my not reflect what their results of operations, financial position and cash flows would have been had those four units operated as an independent entity. Certain estimates, including allocation from Labor Smart, have been made to provide financial statements for stand-alone reporting purposes. Allocation of cost was based on the percentage of revenue. All inter-company transactions between Labor Smart and these four units are classified as net transfer to parent in the financial statements.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions are eliminated.
Use of Estimates
The preparation of 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, evaluation of impairment of long lived 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.
Cost of Contract Staffing Services
The cost of contract staffing services includes the wages, related payroll taxes, and employee benefits of the Company’s employees while they work on contract assignments for the period in which the related revenue is recognized.
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 December 31, 2016 and 2015, the Company did not have any cash equivalents.
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. No cash was considered restricted at December 31, 2016 and 2015. (See Note 8)
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
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 of $44,978, and $0 (Predecessor) at December 31, 2016 and 2015, respectively, was recorded in these consolidated financial statements. 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. For the year ended December 31, 2016, the Company had potentially 14,522,170 dilutive shares of common stock related to convertible notes payable as determined using the if-converted method and no potentially dilutive securities for the year ended December 31, 2015.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to expense when incurred, while renewals and betterments that materially extend the life of an asset are capitalized.
The costs of assets sold, retired, or otherwise disposed of, and the related allowance for depreciation, are eliminated from the accounts, and any resulting gain or loss is recognized in the results from operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:
Computer and office equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Shorter of improvements’ useful life
or remaining lease term
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
Long-Lived Assets
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s long-lived assets may be impaired. An asset’s value may be impaired only if management’s estimate of the aggregate future cash flows, on an undiscounted basis, to be generated by the asset are less than the carrying value of the asset.
If impairment has occurred, the loss is measured as the excess of the carrying amount of the asset over its fair value. The Company’s estimates of aggregate future cash flows expected to be generated by each long-lived asset are based on a number of assumptions that are subject to economic and market uncertainties. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in their impairment analyses may not be achieved.
Identifiable Intangible Assets
Identifiable intangible assets consist primarily of customer relationships and non-compete contracts. These assets are tested for impairment using undiscounted 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.
An identifiable intangible assets impairment charge of $613,000 (comprising customer relationships of $577,000 and non-compete agreements of $36,000) was recorded as at December 31, 2016.
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.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
A goodwill impairment charge of $761,000 was recorded as at December 31, 2016. The impairment of goodwill was due to the loss of significantly all of the customers at the Nashville, TN and Raleigh, NC branches acquired on April 1, 2016. See Note 4 - Business Acquisition.
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 additional 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).
The carrying amounts reported in the Company’s consolidated financial statements for accounts receivable, prepaid expenses, accounts payable, accrued expenses, and payroll liabilities approximate their fair value because of the immediate or short-term nature of these consolidated financial instruments. The carrying amounts reported in the consolidated balance sheet 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 consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
Impairment
Goodwill and other indefinite-lived intangible assets are tested for impairment annually, at the end of the fourth quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate it is more likely than not that the carrying amount may be impaired. Additionally, the Company continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. The factors used to determine fair value are subject to management’s judgement and expertise and include, but are not limited to, the present value of future cash flows, net of estimated operating costs, internal forecasts, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected.
These assumptions represent level 3 inputs. Impairment of the Company’s goodwill and intangibles for the year ended December 31, 2016 was $761,000 and 613,000, respectively. There were no impairment charges during the year ended December 31, 2015.
Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
Assets measured at fair value on a non-recurring basis are as follows:
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
Advertising
The Company charges advertising costs to expense as incurred. Advertising costs were $8,231 and $11,614 (Predecessor) for the years ended December 31, 2016 and 2015, respectively.
Concentration of Credit Risk
The Company did not have any other customers that exceeded 10% of either revenue or accounts receivable in either 2016 or 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.
ii)Debt Discount
The Company determines if the convertible debenture should be accounted for as 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 Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
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.
Income Taxes
For the period prior to July 1, 2013, the Company was not subject to Federal and State income taxes, as it was a limited liability company. Each member was responsible for the tax liability, if any, related to its proportionate share of the Company’s taxable income. Accordingly, no provision for income taxes was reflected in the accompanying consolidated financial statements through June 30, 2013. The Company had concluded that it was a pass-through entity through June 30, 2013 and a taxable entity thereafter.
Effective July 1, 2013, the Company changed its corporate status from a limited liability company to a “C” corporation and its state of registration from Delaware to Nevada. The Company is subject to file tax returns in the states of North Carolina, Indiana, Tennessee, Louisiana, Alabama and Mississippi. Generally, federal, state and local authorities may examine the Company’s tax returns for three years from the date of filing and the current and prior three years remain subject to examination as of December 31, 2016.
There were no uncertain tax positions that would require recognition in the financial statements through December 31, 2016. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment as a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors.
The Company accounts for income taxes under ASC 740-10-30. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which was issued by the FASB in August 2015 and extended the original effective date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14 upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.
In November 2015, the FASB issued ASU 2015-17, Income Taxes. The new standard simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements
In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements
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 consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies (Continued)
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments in ASU 2017-01 is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 along with amending other parts of the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. At adoption, this update will require a prospective approach. The Company is currently evaluating the impact of adopting this guidance.
Note 3 - going concern and Capital resources
The accompanying 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 December 31, 2016, the Company had a stockholders’ deficit of $2,984,065 and a working capital deficit of $3,506,230. For the year ended December 31, 2016 the Company had a net loss of $3,853,796. 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 December 31, 2016, the Company had $123,156 in bank indebtedness.
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 within one year from the date of this filing. 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.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 4 - 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 (Charlotte, North Carolina, Indianapolis, Indiana, Nashville, Tennessee and Raleigh, North Carolina), 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, 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. 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 December 31, 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:
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 4 - business acquisition (Continued)
Unaudited pro forma results of operations information for the year ended December 31, 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.
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, deferred 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.
Predecessor financial information has been provided in these 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 historical results of operations, financial position, equity and cash flows of the Four Branches may not be indicative of what they actually would have been had the Four Branches been a separate stand-alone entity, nor are they indicative of what the Four Branches’ results of operations, financial position, equity and cash flows may be in the future. The carve-out financial statements have been prepared to demonstrate the historical results of operations, financial position, equity and cash flows of the Four Branches for the indicated periods under the Seller’s management. Accordingly, the carve-out financial statements do not reflect the presentation and classification of the Four Branches’ operations in the same manner as the Company.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
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 following table summarizes the results from discontinued operations for the year ended December 31, 2015:
Note 6 - Identifiable Intangible Assets
Intangible assets comprise customer relationships and non-compete agreements which are recorded at cost.
On April 1, 2016, the Company acquired customer relationships and non-compete agreements costing $1,130,000 and $70,000, respectively, and commenced amortization upon closing of the business acquisition for the Four Branches.
An identifiable intangible assets impairment charge of $613,000 (comprising customer relationships of $577,000 and non-compete agreements of $36,000) was recorded as at December 31, 2016. The impairment of identifiable intangible assets was due to the loss of significantly all of the customers at the Nashville, TN and Raleigh, NC branches acquired on April 1, 2016. See Note 4 - Business Acquisition.
During the year ended December 31, 2016 and 2015, $180,000 (comprising customer relationships of $169,500 and non-compete agreements of $10,500) and $0, respectively, was recorded as amortization. The Company estimates amortization over the next four years is $95,865 per annum and amortization of $23,940 in the fifth year.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 7 - accounts payable - related party
At December 31, 2016 and 2015, $430,978 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 years ended December 31, 2016 and 2015 was $46,050 and $15,251, respectively. The Company recorded late fees payable of $59,000 and $22,400 and accrued interest payable of $24,131 and $14,681, as of December 31, 2016 and December 31, 2015, respectively, and is included in accounts payable and accrued expenses - related party as of December 31, 2016 and 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 year ended December 31, 2016 and 2015 was $37,850 and $1,833, respectively. The Company recorded late fees payable of $53,500 and $16,900 and accrued interest payable of $3,083 and $1,833, as of December 31, 2016 and 2015, respectively, and is included in accounts payable and accrued expenses - related party as of December 31, 2016 and 2015.
On April 1, 2016, in conjunction with Agreement for Purchase and Sale of Assets (Note 4), 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 December 31, 2016, the promissory note has been recorded net of debt discount of $163,801. Amortization of debt discount of $85,199 has been included in interest expense in the consolidated statements of loss for the year ended December 31, 2016, respectively. The debt discount is being amortized on the effective interest method.
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. . As December 31, 2016, the Note is past due. 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 December 31, 2016, the Note includes principal of $80,000 and accrued interest of $39,431 See Note 11 - Convertible Promissory Note Derivative Liability - Related Party.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
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 year ended December 31, 2016, the Company paid $620,511 in cash for principal and $129,942 for interest and fees. At December 31, 2016, the Note includes principal of $679,489 and accrued interest of $203,025 and the Note is past due. See Note 11 - Convertible Promissory Note Derivative Liability.
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. During the year ended December 31, 2016, the Company issued 63,300 shares of common stock for principal and interest of $5,570. At December 31, 2016, the Note includes principal of $94,430 and accrued interest of $87,881 See Note 11 - 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. During the year ended December 31, 2016, the Company paid $58,096 in cash for principal and interest. At December 31, 2016, the Note includes principal of $178,229 and accrued interest of $42,186 less unamortized debt discount of $174,816. See Note 11 - Convertible Promissory Note Derivative Liability.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 11 - 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 December 31, 2016 using the binominal lattice model.
The inputs into the binominal lattice model are as follows:
Changes in convertible promissory note derivative liability during the year ended December 31, 2016 were as follows:
Note 12 - due to stockholder
Amounts due to stockholder of $28,500 is non-interest bearing, unsecured and have no specific terms of repayment.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
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’ Equity
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.
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, no par value. As these are considered “black check” preferred shares, the terms of the preferred stock are to be determined by the board of directors of the Company.
On November 13, 2015, the Company’s Board of Directors approved and filed a Certificate of Designation designating five (5) shares of the blank check preferred stock as Series A Preferred Stock par value $0.001 as defining the rights, preferences and privileges of such series of Preferred Stock. For each share of Series A Preferred Stock, the holder has a voting right 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. The Series A Preferred Stock does not have the right to receive dividends and distributions and does not have the right to received assets upon any liquidation. The Series A Preferred Stock may be redeemed by the Company at no consideration.
On November 13, 2015, the Board of Directors approved the issuance of two (2) shares of Series A Preferred Stock to each of its then current directors, Brian McLoone and Brent Callais.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 14 - Stockholders’ Equity (Continued)
On December 18, 2015, the Board approved the issuance of one (1) share of Series A Preferred Stock to Labor Smart, Inc., a 18.45% shareholder of common stock, in conjunction with the issuance of a convertible promissory note dated December 18, 2015.
The fair value of Series A Preferred Stock was determined to be $0 per share as the holders do not have the right to receive dividends or distributions, the holders do not have the right to receive asset upon any liquidation of the Company and the Company may redeem Series A Preferred Stock for no consideration.
On December 31, 2015, 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 assumes 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 agree 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.
Common Stock
On November 30, 2015, the Company entered into a private placement securities purchase agreement with Labor Smart, Inc. to which the Company issued 40,000 shares of its common stock at a price of $2.00 per share for an aggregate purchase price of $80,000 in gross proceeds.
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, 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.
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 consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 14 - Stockholders’ Equity (Continued)
On December 19, 2016, Group 10 Holdings LLC, the holder of a Convertible Promissory Note (see Note 10) converted 63,300 shares of common stock of the Company with a fair value of $12,660 to settle $5,570 of principal and interest.
Non-controlling interest
During the year ended December 31, 2016, the subsidiary of the Company, Staff Fund I, LLC, issued membership interests for cash proceeds of $14,000.
Note 15 - Income Tax Provision
The Company had no income tax expense due to operating losses incurred for the year ended December 31, 2016 and 2015.
The reconciliation between the statutory income tax rate and the effective tax rate is as follows:
The types of temporary differences that give rise to deferred tax assets and liabilities are as follows:
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 15 - Income Tax Provision (Continued)
As of December 31, 2016, the Company has net operating loss carryforwards of approximately $483,200 for federal and state tax purposes, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2034 and 2036. Based on the Company’s preliminary analysis, management believes that its ability to utilize previously accumulated net operating loss carryforwards are subject to annual limitations due to a change in ownership occurred during the year. The estimated annual limitation is approximately $23,000. As of December 31, 2016, the Company recorded the impact of such limitations.
The Company, after considering all available evidence, fully reserved its deferred tax asset since it is more likely than not that such benefits will not be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. During the year ended December 31, 2016, the Company increased its valuation allowance by $417,650.
As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general and administrative expense in the consolidated statements of operations. As of December 31, 2016 and 2015, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2016 and 2015. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 16 - 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 years ended December 31, 2016 and 2015 rent expense was $78,466 and $6,000 (Predecessor), respectively.
As of December 31, 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:
Note 17- Subsequent Events
From January 1, 2017 to May 9, 2017, the holders of Convertible Promissory Notes (see Note 10) converted 292,100 shares of common stock of the Company to settle $16,344 of principal and interest.
On February 26, 2017, the holder of Series B Preferred Stock (see Note 13) converted 64,870 shares of the Company to settle one-half (0.5) share of Series B Stock of the Company with a liquidation preference of $12,974.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
The Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2016, the end of the period covered by this report. Based upon that evaluation, the Company’s CEO concluded that the Company’s disclosure controls and procedures are not effective at the reasonable assurance level due to the material weaknesses described below:
1. The Company’s board of directors has no audit committee, independent director or member with financial expertise which causes ineffective oversight of the Company’s external financial reporting and internal control over financial reporting.
2. The Company does not have sufficient segregation of duties within its accounting functions, which is a basic internal control. Due to its size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of its failure to have segregation of duties on its assessment of its disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
In light of the material weaknesses, the management of the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America. Accordingly, we believe that our consolidated financial statements included herein fairly present, in all material respects, our consolidated financial condition, consolidated results of operations and cash flows as of and for the reporting periods then ended.
Remediation of Material Weaknesses
We intend to remediate the material weaknesses in our disclosure controls and procedures identified above by adding independent directors or members with financial expertise and/or hiring a full-time CFO, with SEC reporting experience, in the future when working capital permits and by working with our independent registered public accounting firm and refining our disclosure controls and procedures. To date, we have not been successful in reducing the number of audit adjustments, but will continue our efforts in the coming fiscal year as more fully detailed below.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officer and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the issuer; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of the end of our most recent fiscal year, management assessed the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework 2013 and SEC guidance on conducting such assessments. Based on that evaluation, management concluded that, as of December 31, 2016, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors and a financial expert on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets (3) we have not conducted a formal assessment of whether the policies that have been implemented address the specific risks of misstatement, due to the change control (4) we do not have not have a fully effective mechanism for monitoring the system of internal controls (5) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of December 31, 2016.
To address the material weaknesses set forth above, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only the management's report in this annual report.
Management's Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
We will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. First, we will create a position to segregate duties consistent with control objectives of having separate individuals perform (i) the initiation of transactions, (ii) the recording of transactions and (iii) the custody of assets. Second, we will create a senior position to focus on financial reporting and standardizing and documenting our accounting procedures with the goal of increasing the effectiveness of the internal controls in preventing and detecting misstatements of accounting information. Third, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.
We anticipate that these initiatives will be at least partially, if not fully, implemented by December 31, 2017 when funding is available. Additionally, we plan to test our updated controls and remediate our deficiencies by December 31, 2017.
Changes in Internal Controls over Financial Reporting
Except for actions taken to remedy the material weaknesses described above and change in management and accounting staff due to the split-off transaction, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the evaluation date.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Our directors, executive officers and key employees are listed below. The number of directors is determined by our board of directors. All directors hold office until the next annual meeting of the board or until their successors have been duly elected and qualified. Officers are elected by the board of directors and their terms of office are, except to the extent governed by employment contract, at the discretion of the board of directors.
Set forth below is a brief description of the background and business experience of our executive officers and directors for the past five years.
Kimberly Thompson
Kimberly Thompson, our Interim Chief Executive Office appointed on December 31, 2016, has 25 years of operational expertise. Ms. Thompson is also serving as Chief Operating Officer of Labor Smart, Inc., our controlling shareholder. Ms. Thompson has held this office since November 2014. Ms. Thompson was previously an operations manager for Tip Top Roofers, Inc., from August 2000 to November 2014. Mrs. Thompson is an energetic leader and excels in implementing processes that drive revenue growth, financial performance, and operational excellence with a strong focus on customer satisfaction and brand loyalty. In her most recent position, Mrs. Thompson lead the operations team for the largest commercial roofing company in the southeast US.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
• been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
• had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
• been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
• been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
• been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
• been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Code of Ethics
The Company does not currently have a code of ethics, and because the Company has only limited business operations and only two officers and directors, the Company believes that a code of ethics would have limited utility. The Company intends to adopt such a code of ethics as the Company’s business operations expand and the Company has more directors, officers, and employees.
Board of Directors and Director Nominees
Since our board of directors has no independent directors, the decisions of the Board regarding director nominees are made by persons who have an interest in the outcome of the determination. The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise determined, at any time not less than 10 days prior to the next annual board meeting at which a slate of director nominees is adopted, the board of directors will accept written submissions from proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the security holder submitting the proposed nominee believes that the nomination would be in the best interests of our security holders. If the proposed nominee is not the same person as the security holder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee's qualifications to serve on the board of directors, as well as a list of references.
The board of directors identifies director nominees through a combination of referrals from different people, including management, existing board members and security holders. Once a candidate has been identified, the board of directors reviews the individual's experience and background and may discuss the proposed nominee with the source of the recommendation. If the board of directors believes it to be appropriate, board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of the slate of director nominees submitted to security holders for election to the board of directors.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company does not have a class of securities registered under the Exchange Act and therefore its directors, executive officers, and any persons holding more than ten percent of the Company’s common stock are not required to comply with Section 16 of the Exchange Act.
Item 11.
Item 11. Executive Compensation.
Summary Compensation Table
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the years ended December 31, 2016 and 2015 in all capacities for the accounts of our executives.
Director Compensation
We have provided no compensation to our directors for their services provided as directors.
Employment Agreements
The Company has not entered into any employment agreements with any of its officers.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information regarding our shares of common stock beneficially owned as of May 9, 2017, for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of April 7, 2016. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of April 7, 2016 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. Unless otherwise specified, the address of each of the persons set forth below is care of the company at the address of: 400 Poydras St., Suite 1165, New Orleans, LA 70130.
(1) Based on 1,689,706 shares of common stock outstanding.
(2) Ryan Schadel has sole voting and dispositive power and control over Labor Smart Inc.
We are not aware of any arrangement, including any pledge by any person of securities of the registrant or any of its parents, the operation of which may at a subsequent date result in a change in control of the registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Party Transactions
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 December 31, 2016, the Note includes principal of $80,000 and accrued interest of $39,431 less unamortized debt discount of $0.
At December 31, 2016 and 2015, the Company had outstanding notes outstanding of $107,000 from a stockholder and accrued interest and late fees of $139,715 and $55,814, respectively.
On April 1, 2016, in conjunction with Agreement for Purchase and Sale of Assets (Note 4), 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 December 31, 2016, the promissory note has been recorded net of debt discount of $163,801. Amortization of debt discount of $85,199 has been included in interest expense in the consolidated statements of loss for the year ended December 31, 2016, respectively. The debt discount is being amortized on the effective interest method.
At December 31, 2016 and 2015, convertible promissory note derivative liability due to Labor Smart Inc. is $82,865 and $0, respectively.
Director Independence
Currently, we have no independent directors. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
● the director is, or at any time during the past three years was, an employee of the Company;
● the director or a family member of the director accepted any compensation from the Company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
● a family member of the director is, or at any time during the past three years was, an executive officer of the Company;
● the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
● the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the Company served on the compensation committee of such other entity; or
● the director or a family member of the director is a current partner of the Company’s outside auditor, or at any time during the past three years was a partner or employee of the Company’s outside auditor, and who worked on the company’s audit.
Corporate Governance
For reasons similar to those described above, the Company does not have a nominating nor audit committee of the board of directors. The board of directors consists of one director. At such time that the Company has a larger board of directors and generates revenue, the Company will propose creating committees of its board of directors, including both a nominating and an audit committee. Accordingly, the Company does not have an audit committee financial expert.
Item 14.
Item 14. Principal Accounting Fees and Services.
The total fees charged to the Company for audit services were $151,648, for audit-related services were $0, for tax services were $0, and for other services were $0 during the year ended December 31, 2016.
The total fees charged to the Company for audit services were $98,600, for audit-related services were $0, for tax services were $0, and for other services were $0 during the year ended December 31, 2015.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
(1) Incorporated by reference to the exhibit in the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on November 21, 2012.
(2) Incorporated by reference to the exhibit in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 30, 2013.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE STAFFING GROUP LTD.
Dated: May 20, 2017 By: /s/ Kimberly Thompson
Kimberly Thompson
Duly Authorized Officer, Interim Chief Executive Officer
And Sole Director
(Principal Executive Officer and Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/Kimberly Thompson
Interim Chief Executive Office and Sole Director
May 20, 2017
Kimberly Thompson
(Principal Executive Officer and Principal Financial and
Accounting Officer)