NOTES TO FINANCIAL STATEMENTS
NOTE 1 – NATURE OF OPERATIONS
Nature of Business
Labor Smart, Inc. (the “Company”)
was incorporated in the State of Nevada on May 31, 2011. Labor Smart, Inc. provides temporary blue-collar staffing services. It
supplies general laborers on demand to the light industries, including manufacturing, logistics, and warehousing, skilled trades’
people, and general laborers to commercial construction industries.
NOTE 2 – GOING CONCERN
The accompanying 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. The Company requires capital for its contemplated operational and marketing activities. The Company’s
ability to raise additional capital through the future issuances of common stock is unknown. Accordingly, the Company had a net
loss of $1,064,508 for the three months ended March 31, 2014. Additionally, the operating activities of the Company used $379,623
net cash during the same three month period. The obtainment of additional financing and increasingly profitable operations are
necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about
the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result
from this uncertainty.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
These financial statements are presented in
United States dollars and have been prepared in accordance with generally accepted accounting principles in the United States of
America. The Company has adopted a December 31 fiscal year end.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair statement of results in accordance with US GAAP have
been included and properly prepared within reasonable limits of materiality and within the framework of the significant accounting
policies summarized below:
Fair Value of Financial Instruments
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).
|
Pursuant to ASC 825, the fair value of cash
and marketable securities is determined based on “Level 1” inputs, which consist of quoted prices in active markets
for identical assets. The Company believes that the recorded values of cash, accounts receivables, marketable securities, accounts
payable and accrued liabilities, and notes payable approximate their current fair values because of their nature and respective
relatively short maturity dates or durations.
Assets measured at fair value on a recurring
basis were presented on the Company’s balance sheets as of March 31, 2014 and December 31, 2013 as follows:
|
Fair Value Measurements as of March 31, 2014 Using:
|
|
|
Total Carrying Value as of
|
|
|
Quoted Market Prices in Active Markets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
03/31/14
|
|
|
(Level 1)
|
|
|
(Level 2
)
|
|
|
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
$
|
40,200
|
|
$
|
40,200
|
|
$
|
0
|
|
$
|
0
|
Total
|
$
|
40,200
|
|
$
|
40,200
|
|
$
|
0
|
|
$
|
0
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
$
|
122,506
|
|
$
|
0
|
|
$
|
122,506
|
|
$
|
0
|
Contingent liability
|
|
37,145
|
|
|
0
|
|
|
0
|
|
|
37,145
|
Total
|
$
|
159,651
|
|
$
|
0
|
|
$
|
122,506
|
|
$
|
37,145
|
|
Fair Value Measurements as of December 31, 2013 Using:
|
|
|
Total Carrying Value as of
|
|
|
Quoted Market Prices in Active Markets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
12/31/13
|
|
|
(Level 1)
|
|
|
(Level 2
)
|
|
|
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
$
|
4,972
|
|
$
|
4,972
|
|
$
|
0
|
|
$
|
0
|
Total
|
$
|
4,972
|
|
$
|
4,972
|
|
$
|
0
|
|
$
|
0
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
$
|
20,701
|
|
$
|
0
|
|
$
|
20,701
|
|
$
|
0
|
Contingent liability
|
|
79,221
|
|
|
0
|
|
|
0
|
|
|
79,221
|
Total
|
$
|
99,922
|
|
$
|
0
|
|
$
|
20,701
|
|
$
|
79,221
|
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and
short-term investments with original maturities of less than 90 days. Cash equivalents are placed with high credit quality financial
institutions and are primarily in money market funds. The carrying value of those investments approximates fair value.
Revenue Recognition
The Company recognizes revenues and the related
costs when persuasive evidence of an arrangement exists, delivery and acceptance has occurred or service has been rendered, the
price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Amounts invoiced or collected
in advance of product delivery or providing services are recorded as deferred revenue. The Company accrues for customer credits,
bad debts, and other allowances based on its historical experience. Staffing revenue is recognized as the services are performed.
Revenue also includes billable travel and other reimbursable costs and is record net of sales tax.
Deferred Financing Costs
Deferred financing costs consist of costs incurred
to obtain debt financing, including legal fees, origination fees and administration fees. Costs associated with the Convertible
Promissory Note are deferred and amortized in our accompanying statement of operations
using the straight-line method, which
approximates the effective interest method, over the terms of the respective financing instrument.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. These estimates and judgments are based on historical information, information that is currently available
to the Company, and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results
could differ from those estimates.
Factoring Agreement and Accounts Receivable
On
July
31, 2013 the Company entered into a Purchase and Sale Agreement with Transfac Capital, Inc. (“Transfac”).
Advances
to the Company from Transfac are with recourse and are secured by assets of the Company and are treated as a secured financing
arrangement. As of March 31, 2014 and December 31, 2013, factored accounts receivable total $763,335 and $865,321, respectively.
Allowance for Doubtful Accounts
The Company allows for an estimated amount
of receivables that may not be collected. The Company estimates its allowance for doubtful accounts based on historical experience
and customer relationships. As of March 31, 2014 and December 31, 2013, the Company has recorded an allowance of $168,279 and $156,297,
respectively.
Equipment
Property and equipment are stated at the lower
of cost or fair value. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, as follows:
Description
|
Estimated Life
|
Office equipment and furniture
|
3 years
|
The estimated useful lives are based on the
nature of the assets as well as current operating strategy and legal considerations such as contractual life. Future events, such
as property expansions, property developments, new competition, or new regulations, could result in a change in the manner in which
the Company uses certain assets requiring a change in the estimated useful lives of such assets.
|
|
March 31, 2014
|
|
December 31, 2013
|
Office equipment and furniture
|
|
$
|
48,466
|
|
|
$
|
11,841
|
|
Less: accumulated depreciation
|
|
|
(7,986
|
)
|
|
|
(3,948
|
)
|
|
|
$
|
40,480
|
|
|
$
|
7,894
|
|
Customer Relationships
Customer relationships comprise customer lists
acquired from Qwik Staffing Solutions, Inc. on April 29, 2013. Customer lists are amortized on a straight-line basis over three
years.
|
|
|
March 31, 2014
|
|
|
|
December 31, 2013
|
|
Customer lists
|
|
$
|
294,100
|
|
|
$
|
294,100
|
|
Less: accumulated amortization
|
|
|
(90,245
|
)
|
|
|
(66,072
|
)
|
|
|
$
|
203,855
|
|
|
$
|
228,028
|
|
Earnings Per Share
Basic earnings (loss) per common share is computed
by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding
during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average
number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock
that would have been outstanding if potentially dilutive securities had been issued.
Convertible Debentures
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.
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 respective debt discount. The Company records debt
discounts in connection with raising funds through the issuance of convertible debt (see Note 8). 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.
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 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 financial statements.
Stock-based compensation
The Company records stock based compensation
in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value
of its employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value
and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of
all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments
issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions
reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated
fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for
consideration other than employee services is determined on the earliest of a performance commitment or completion of performance
by the provider of goods or services as defined by FASB ASC 505-50.
Recent Accounting Pronouncements
The Company does not expect the adoption of
recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial
position, or cash flow.
NOTE 4 – RELATED PARTY
On April 25, 2013, the Company entered into
a loan agreement with the CEO of the Company in the amount of $175,768. This loan is payable on demand, unsecured, and bears 0%
interest per annum. This loan consolidates all previous loans issued. As of March 31, 2014, $138,462 of this note has been repaid
and $37,306 of this note remains outstanding.
NOTE 5 – PREPAID EXPENSES
As of March 31, 2014 and December 31, 2013,
the Company had prepaid expenses of $54,628 and $45,497, respectively. Prepaid expenses at March 31, 2014 comprises prepaid lease
payments.
NOTE 6 – PAYROLL TAXES PAYABLE
On March 17, 2014, the Internal Revenue Service
agreed not to take collection action against the Company for payroll tax liabilities as long the Company remains current and makes
monthly installments against outstanding liabilities. The agreed monthly installments are $5,000 which increase to $10,000 on July
28, 2014 which further increase to $15,000 on July 28, 2016.
NOTE 7 – FACTORING AGREEMENT
On
July
31, 2013 the Company entered into a Purchase and Sale Agreement with Transfac Capital, Inc. (“Transfac”). Under
the terms of the Purchase and Sale Agreement, Transfac shall have the right, but not the obligation, to purchase up to Two Million
Dollars ($2,000,000) worth of accounts receivable (the “Maximum Advances”) of the Company. For each account receivable
purchased, Transfac shall advance seventy percent (70%) of the face value of the account and the balance after receipt of full
payment on the account. As consideration, the Company shall pay Transfac two percent (2%) of the average monthly balance
of the outstanding accounts purchased, with a minimum of one half of one percent (0.5%) of the Maximum Advances per month, as long
as the Purchase and Sale Agreement remains in effect.
The factoring line of credit with Transfac
has been treated as a secured financing arrangement. As of March 31, 2014 and December 31, 2013 under the agreement with Transfac,
the Company had factored receivables in the amount of $1,041,824 and $1,281,122, respectively, and recorded a liability of $763,335
and $865,321, respectively. Discounts and interest provided during factoring of the accounts receivable have been expensed on the
accompanying combined statements of operations as interest expense. For the three months ended March 31, 2014, interest expense
related to the factoring arrangement was $69,799.
NOTE 8– CONVERTIBLE PROMISSORY NOTES
On January 1, 2014, the Company entered into
an Original Issue Discount Secured Promissory Note dated December 27, 2014 with Beaufort Ventures PLC (“Holder”) for
a purchase price of $101,000 and a face amount of $136,350 and maturing June 27, 2014. After the maturity date, the Notes accrues
interest at 22% per annum and the 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 58% of the market price which means the lowest
trading price of the prior 15 trading days, determined on the then current trading market of the Company’s common stock,
for 10 trading days prior to conversion. The Company may repay the convertible promissory note at any time for a net payment of
$136,350
On January 2, 2014, the Company entered into
a Convertible Promissory Note with Metolius Capital, LLC (“Holder”) in the original principal amount of $106,000 bearing
a 12% annual interest rate and maturing October 4, 2014. This convertible promissory 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 58% of the market price which means the average of the lowest three trading prices during the ten trading day period ending
on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory 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.
On January 8, 2014, the Company entered into
a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principal amount of $63,000 bearing
an 8% annual interest rate and maturing September 8, 2014. This convertible promissory 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 58% of the market price which means the average of the lowest three trading prices during the ten trading day period ending
on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if repaid
within 30 days of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119% of
the original principal amount plus interest and between 61 days and 90 days at 125% of the original principal amount plus interest
and between 91 days and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135%
of the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment.
On January 14, 2014, the Company entered into
a Convertible Debenture with Daniel James Management, Inc. (“Holder”) in the original principal amount of $101,000
bearing a 12% annual interest rate and maturing January 14, 2015. This convertible promissory 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 58% of the market price which means the lowest closing bid price during the ten trading day period ending on the
latest complete trading day prior to the conversion date. The Company may repay any portion of the principal amount at 135% of
such amount along with any accrued interest of this Debenture at any time upon seven days written notice to the Holder.
On March 4, 2013, the Company issued a Convertible
Note to Vista Capital Investments, LLC (“Holder”), in the original principle amount of $275,000 bearing a 12% annual
interest rate and maturing one year for $250,000 of consideration paid in cash and a $25,000 original issue discount. The Company
may repay the convertible note any time and if repaid within 90 days of date of issue with an interest rate is 0%. This convertible
note together with any unpaid accrued interest is convertible into shares of common stock at the Holder’s option at a variable
conversion price calculated as lessor of (a) $0.62 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days
immediately preceding the conversion date. On January 14, 2014, the Company received cash proceeds of $25,000 on the third tranche
of the Convertible Note. On March 19, 2014, the Company received cash proceeds of $25,000 on the fourth tranche of the Convertible
Note.
On January 22, 2014, the Company entered into
a Convertible Promissory Note with WHC Capital, LLC (“Holder”) in the original principal amount of $101,000 bearing
a 12% annual interest rate and maturing January 22, 2015. This convertible promissory 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 58% of the market price which means the lowest bid price during the fifteen trading day period ending on the latest complete
trading day prior to the conversion date. The Company may repay outstanding principal and interest due at 135% of such amount within
180 days of the execution of the Note.
On January 31, 2014, the Company entered into
a Convertible Promissory Note with Tonaquint Inc. (“Holder”) in the original principal amount of $115,000 less an original
issuer’s discount of $10,000 and transaction costs of $5,000 bearing a 0% annual interest rate and maturing December 31,
2014. The Convertible Promissory Note is due in six equal monthly installments plus interest (“Installment Amount”)
commencing six months after the issue date. At the option of the Holder, the Installment Amount is convertible into shares of common
stock of the Company at a variable conversion price calculated at 60% of the market price which means the average of the lowest
two trading prices during the twenty trading day period ending on the latest complete trading day prior to the conversion date.
The Company may elect to prepay in cash all or any portion of the outstanding balance of the convertible promissory note if the
Company pays the holder 125% of the outstanding balance.
On February 13, 2014, the Company entered into
an Original Issue Discount Secured Promissory Note with Beaufort Ventures PLC (“Holder”) for a purchase price of $101,000
and a face amount of $136,350 and maturing August 13, 2014. After the maturity date, the Notes accrues interest at 22% per annum
and the 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 58% of the market price which means the lowest trading price of the prior 15
trading days, determined on the then current trading market of the Company’s common stock, for 10 trading days prior to conversion.
The Company may repay the convertible promissory note, if repaid within 90 days of date of issue, for a net payment of $136,350
plus 70,000 shares of common stock of the Company.
On March 5, 2014, the Company entered into
a Convertible Promissory Note with LG Capital Funding, LLC (“Holder”) in the original principal amount of $101,000
bearing a 10% annual interest rate and maturing March 5, 2015. This convertible promissory 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 58% of the market price which means the lowest bid price during the twelve trading day period ending on the latest
complete trading day prior to the conversion date. The Company may repay the convertible promissory note if repaid within 90 days
of date of issue at 125% of the original principal amount plus interest, between 91 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.
On March 10, 2014, the Company entered into
a Convertible Promissory Note with Adar Bays, LLC (“Holder”) in the original principal amount of $101,000 bearing a
10% annual interest rate and maturing March 10, 2015. This convertible promissory 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 58% of the market price which means the average of the lowest three trading prices during the ten trading day period ending
on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if repaid
within 90 days of date of issue at 125% of the original principal amount plus interest, between 91 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.
On March 12, 2014, the Company entered into
a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principal amount of $103,500
bearing an 8% annual interest rate and maturing December 17, 2014. This convertible promissory 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 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 30 days of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119%
of the original principal amount plus interest and between 61 days and 90 days at 125% of the original principal amount plus interest
and between 91 days and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135%
of the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment.
On March 24, 2014, the Company entered
into a Convertible Promissory Note with Carebourn Capital, L.P. ("Holder") in the original principle amount of $112,500
bearing an 8% annual interest rate and maturing November 24, 2014. This convertible promissory 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 58% of the market price which means the average of the lowest three trading prices during the ten trading
day period ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible
promissory note if repaid within 30 days of date of issue at 110% of the original principal amount plus interest, between 31
days and 60 days at 115% of the original principal amount plus interest, between 61 days and 90 days at 120% of the original
principal amount plus interest, between 91 days and 120 days 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.
On March 27, 2014, the Company entered into
a 10% Original Issue Discount Convertible Promissory Note (“Note”) with Gemini Master Fund, Ltd. (“Holder”)
in the original principal amount of $220,000 bearing a 10% annual interest rate and maturing January 1, 2015. At the option of
the Holder:
|
i)
|
The Note together with any unpaid accrued interest is convertible
into shares of common stock of the Company at a variable conversion price calculated at 65% of the market price which means the
average of the lowest volume weighted average price during the twenty trading day period ending prior to the conversion date, or
|
|
ii)
|
All principal, costs, charges and interest amounts outstanding may
be exchanged for shares of the Company’s common stock at the Conversion Price of $0.25 per share. The Conversion Price is
subject to an anti-dilution adjustment.
|
The Company may repay the convertible promissory
note at 130% of the original principal amount plus interest.
NOTE 9 – CONVERTIBLE NOTE PAYABLE
DERIVATIVE LIABILITY
The Convertible Promissory Note with Willow
Creek Capital Group, LLC is subject to anti-dilution adjustments that allow for the reduction in the Conversion Price in the event
the Company subsequently issues equity securities including common stock or any security convertible or exchangeable for shares
of common stock for no consideration or for consideration less than $0.34 a share. The Company accounted for the conversion
option in accordance with ASC Topic 815. Accordingly, the Conversion Option is not considered to be solely indexed to the Company’s
own stock and, as such, recorded as a liability.
The Company’s convertible promissory
note derivative liability has been measured at fair value at March 31, 2014 and December 31, 2013 using a binomial model. Since
the Conversion Price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease
as the share price decreased was incorporated into the valuation calculation.
The inputs into the binomial model are as follows:
|
December 31, 2013
|
March 31, 2014
|
Closing share price
|
$0.248
|
$0.420
|
Conversion price
|
$0.34
|
$0.34
|
Risk free rate
|
0.10%
|
0.04%
|
Expected volatility
|
99%
|
91%
|
Dividend yield
|
0%
|
0%
|
Expected life
|
7 months
|
4 months
|
The fair value of the convertible note payable
derivative liability is $36,865 at March 31, 2014. The increase in the fair value of the convertible note payable derivative liability
of $16,164 is recorded as a loss in the statement of operations three months ended March 31, 2014.
The Convertible Promissory Note with Gemini Master Fund, Ltd. is subject to anti-dilution adjustments that allow for the reduction in the Conversion Price in the event the Company subsequently issues equity securities including common stock or any security convertible or exchangeable for shares of common stock for no consideration or for consideration less than $0.25 a share. The Company accounted for the conversion option in accordance with ASC Topic
815. Accordingly, the Conversion Option is not considered to be solely indexed to the Company’s own stock and, as such, recorded as a liability.
The Company’s convertible promissory
note derivative liability has been measured at fair value at March 27, 2014 and March 31, 2014 using a binomial model. Since the
Conversion Price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as
the share price decreased was incorporated into the valuation calculation.
The inputs into the binomial model are as follows:
|
March 27, 2014
|
March 31, 2014
|
Closing share price
|
$0.49
|
$0.42
|
Conversion price
|
$0.43
|
$0.43
|
Risk free rate
|
0.09%
|
0.09%
|
Expected volatility
|
120%
|
120%
|
Dividend yield
|
0%
|
0%
|
Expected life
|
9 months
|
9 months
|
The fair value of the convertible note payable
derivative liability is $85,642 at March 31, 2014. The decrease in the fair value of the convertible note payable derivative liability
of $26,816 is recorded as a gain in the statement of operations three months ended March 31, 2014.
NOTE 10 – CONTINGENT LIABILITY
The Company has a contingent liability related
to Asset Acquisition Agreement with Qwik Staffing Solutions, Inc. on April 29, 2013. The obligation is due in monthly installments
by paying an amount equal to 6.5% of the monthly accounts receivable collected by operating the Orlando, Jacksonville and Tampa,
Florida locations. The total payments are not to exceed $170,000. The fair value of the obligation is determined by estimating
discounted monthly installments at an interest rate of 12% per annum.
Opening balance at December 31, 2013
|
$ 79,221
|
Payments
|
(43,796)
|
Interest
|
1,720
|
Closing balance at March 31, 2014
|
$ 37,145
|
NOTE 11 – STOCKHOLDERS’ EQUITY
The Company has 75,000,000 shares of $0.001
par value common stock authorized. As of March 31, 2014 and December 31, 2013, the Company had 22,239,315 and 20,982,740 shares
issued and outstanding, respectively.
On January 6, 2014, JMJ Financial elected to
convert 110,000 shares of common shares with an aggregate fair value of $27,390 ($0.249 per share) based on the quoted market price
of shares at the time of issuance for $11,352 in principal and interest and $16,038 for debt discount.
On January 16, 2014, JMJ Financial elected
to convert 120,000 shares of common shares with an aggregate fair value of $28,188 ($0.2349 per share) based on the quoted market
price of shares at the time of issuance for $12,684 in principal and interest and $16,504 for debt discount.
On January 31, 2014, JMJ Financial elected
to convert 130,000 shares of common shares with an aggregate fair value of $28,600 ($0.22 per share) based on the quoted market
price of shares at the time of issuance for $13,650 in principal and interest and $13,150 for debt discount.
On February 11, 2014, the Company issued 100,000
shares of common stock for professional services valued at $21,000 ($0.21 per share).
On February 12, 2014, JMJ Financial elected
to convert 120,000 shares of common shares with an aggregate fair value of $28,680 ($0.239 per share) based on the quoted market
price of shares at the time of issuance for $12,600 in principal and interest and $16,080 for debt discount.
On February 12, 2014, JMJ Financial elected
to convert 123,943 shares of common shares with an aggregate fair value of $29,746 ($0.24 per share) based on the quoted market
price of shares at the time of issuance for $13,014 in principal and interest and $16,732 for debt discount.
On March 26, 2014, JMJ Financial elected to
convert 552,632 shares of common shares with an aggregate fair value of $243,158 ($0.44 per share) based on the quoted market price
of shares at the time of issuance for $63,000 in principal and interest and $180,158 for debt discount.
The following is a summary of the common stock
options granted, forfeited or expired and exercised:
|
Number of Options
|
|
Weighted Average Exercise
Price Per Share
|
Outstanding - January 1, 2014
|
3,883,455
|
|
$ 0.18
|
Granted
|
-
|
|
-
|
Forfeited or expired
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
Outstanding– March 31, 2014
|
3,883,455
|
|
$ 0.18
|
Exercisable – March 31, 2014
|
1,835,000
|
|
$ 0.33
|
The following table summarizes information
on stock options exercisable as of March 31, 2014:
Exercise Price
|
|
Number Outstanding at March 31, 2014
|
|
Average Remaining Life (Years)
|
|
Aggregate Intrinsic Value
|
$
|
0.25
|
|
|
|
25,000
|
|
|
|
4.74
|
|
|
$
|
4,250
|
|
$
|
0.295
|
|
|
|
50,000
|
|
|
|
4.49
|
|
|
$
|
6,250
|
|
$
|
0.30
|
|
|
|
1,500,000
|
|
|
|
1.32
|
|
|
$
|
180,000
|
|
$
|
0.41
|
|
|
|
30,000
|
|
|
|
4.55
|
|
|
$
|
300
|
|
$
|
0.50
|
|
|
|
130,000
|
|
|
|
5.00
|
|
|
|
—
|
|
$
|
0.56
|
|
|
|
50,000
|
|
|
|
4.40
|
|
|
|
—
|
|
$
|
0.62
|
|
|
|
50,000
|
|
|
|
4.45
|
|
|
|
—
|
|
The following table summarizes information
on stock options outstanding as of March 31, 2014:
Exercise Price
|
|
Number Outstanding at March 31, 2014
|
|
Average Remaining Life (Years)
|
|
Aggregate Intrinsic Value
|
$
|
0.05
|
|
|
|
2,048,455
|
|
|
|
9.53
|
|
|
$
|
757,928
|
|
$
|
0.25
|
|
|
|
25,000
|
|
|
|
4.74
|
|
|
$
|
4,250
|
|
$
|
0.295
|
|
|
|
50,000
|
|
|
|
4.49
|
|
|
$
|
6,250
|
|
$
|
0.30
|
|
|
|
1,500,000
|
|
|
|
1.32
|
|
|
$
|
180,000
|
|
$
|
0.41
|
|
|
|
30,000
|
|
|
|
4.55
|
|
|
$
|
300
|
|
$
|
0.50
|
|
|
|
130,000
|
|
|
|
5.00
|
|
|
|
—
|
|
$
|
0.56
|
|
|
|
50,000
|
|
|
|
4.40
|
|
|
|
—
|
|
$
|
0.62
|
|
|
|
50,000
|
|
|
|
4.45
|
|
|
|
—
|
|
The following is a summary of warrants activity
during March 31, 2014:
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
Balance, January 1, 2014
|
|
|
502,000
|
|
|
|
0.40
|
|
Warrants granted and assumed
Warrants canceled
|
|
|
-
-
|
|
|
|
-
-
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
Balance, March 31, 2014
|
|
|
502,000
|
|
|
|
0.40
|
|
All warrants
outstanding as of March 31, 2014 are exercisable.
NOTE 12 – COMMITMENTS
On January 15, 2014, the Company entered into
a 39 month lease agreement with Joe’s Creek Industrial Park, Ltd., commencing February 1, 2014, to rent office space at 4632
28th Street North, St. Petersburg, Florida. Monthly minimum lease payments are $1,500 for the first year of occupancy, $1,545 for
the second year of occupancy, $1,591 for the third year of occupancy and $1,691 for the last three months of occupancy.
On March 12, 2014, the Company entered into
a 63 month lease agreement with AZG Summit Square LLC., commencing April 1, 2014, to rent office space at 8114 North Federal Blvd.,
Westminster, CO. The fixed minimum rent for the first six months is $0 per month. Monthly minimum lease payments are $1,964 for
the next nine months of occupancy. Monthly minimum lease payments increase by approximately 3% per annum thereafter.
On March 5, 2014, the Company entered into
a 60 month lease agreement HB Jacinto Investors, LLC, commencing April 1, 2014, to rent office space at 11420 East Freeway (I-10).
Suite 310, Jacinto City, Texas. Monthly minimum lease payments are $1,728 for the term of the lease.
On January 15, 2014, the Company entered into
a 38 month lease agreement with Joseph Vinh Properties., commencing April 1, 2014, to rent office space at 5833 Clinton Highway,
Knoxville, TN. Rent is abated for two months of the lease. Monthly minimum lease payments are $1,690 for the first and second year
of occupancy.
The following table is a schedule
of future minimum lease commitments for the Company:
Nine months ended December 31,
|
2014
|
$ 238,525
|
Year ended December 31,
|
2015
|
254,870
|
Year ended December 31,
|
2016
|
150,034
|
Year ended December 31,
|
2017
|
88,306
|
Year ended December 31,
|
2018
|
66,696
|
Year ended December 31,
|
2019
|
25,074
|
|
|
$ 823,505
|
NOTE 13 – SUBSEQUENT EVENTS
On April 2, 2014, the Company entered into
a Convertible Promissory Note with Coventry Enterprises, LLC (“Holder”) in the original principal amount of $101,000
bearing a 10% annual interest rate and maturing April 5, 2015. This convertible promissory 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 58% of the lowest bid price during the twelve trading days prior to the conversion date including the day upon which
a Notice of Conversion is received by the Company. The Company may repay the convertible promissory note if repaid within 180 days
of date of issue at 135% of the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment.
On April 9, 2014, the Company entered into
an Asset Purchase Agreement (“Agreement”) with Shirley’s Employment Service, Inc. (“Shirley’s”).
Under the terms of the Agreement, Shirley’s sold all of the operating assets (“Assets”) of Shirley’s,
excluding cash and accounts receivable. In consideration for the Assets, the Company agreed to pay $300,000 in cash minus
the open accounts receivable of Shirley’s. The consideration to be paid will be determined on closing. It is currently estimated
by the Company that $180,000 will be paid for the Assets after deducting accounts receivable. The first $80,000 is due one
day prior to the delivery and transfer of the Assets. The remaining $100,000 is due in monthly installments by paying an
amount equal 5.0% of the monthly accounts receivable collected by operating the Tulsa, Oklahoma location. In the event these
aggregate monthly payments total less than $100,000, after 18 months, Shirley’s will issue the Company a credit memo for
the difference.
On April 17, 2014, the Company entered into
a Convertible Promissory Note with Group 10 Holdings, LLC (“Holder”) in the original principal amount of $113,000 bearing
a 12% annual interest rate and maturing April 17, 2015. This convertible promissory 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 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 convertible promissory note if repaid within 30 days of date of issue
at 125% of the original principal amount plus interest and between 31 days and 179 days at 135% of the original principal amount
plus interest and thereafter, the Company may repay the convertible promissory note at 145% of the original principal amount plus
interest.
On April 21, 2014, the Company entered into
a Convertible Promissory Note with Tailwind Partners, LLC (“Holder”) in the original principal amount of $106,000 bearing
a 12% annual interest rate and maturing January 21, 2015. This convertible promissory 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 58% of the market price which means the average of the lowest three trading prices during the ten trading day period ending
on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory 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 130% of the original principal amount plus interest. Thereafter, the Company does not have the
right of prepayment.
On May 5, 2014, Vista Capital Investments,
LLC elected to convert 51,867 shares of common stock to convert $7,500 principal amount of a Convertible Promissory Note.
On May 5, 2014, Iconic Holdings, LLC elected
to convert 276,625 shares of common stock to convert $40,000 principal amount of a Convertible Promissory Note.