UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________________________________
Form 10-K
___________________________________________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER
26, 2014
Commission file number 000-54654
LABOR SMART, INC.
(Exact name of registrant as specified in its
charter)
Nevada |
|
45-2433287 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
3270
Florence Road, Ste. 200 |
|
|
Powder
Springs, GA |
|
30027 |
(Address of principal executive offices) |
|
(Zip Code) |
(770) 222-5888
(Registrant’s telephone number, including
area code)
Securities
registered pursuant to Section 12(b) of the Exchange Act: |
Title
of each class |
|
Name
of each exchange on which registered |
Common Stock |
|
N/A |
Securities
registered pursuant to Section 12(g) of the Exchange Act: |
Common
Stock, $0.00001 Par Value |
(Title
of each class) |
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No
☒
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
Accelerated filer |
☐ |
Non-accelerated filer | ☐ |
Smaller reporting company |
☒ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On
June 27, 2014, the last business day of the registrant’s most recently completed second quarter, the aggregate market value
of the Common Stock held by non-affiliates of the registrant was $2,126,675,
based upon the closing price on that date of the Common Stock of the registrant on OTC Markets.com of $0.219. For purposes
of this response, the registrant has assumed that its directors, executive officers and beneficial owners of 5% or more of its
Common Stock are deemed affiliates of the registrant.
As of March 30, 2015, the registrant
had 3,088,060,356 shares of and Common Stock, $0.00001 par value, outstanding.
Documents incorporated by reference:
None
TABLE OF CONTENTS
SPECIAL NOTE ABOUT FORWARD-LOOKING
INFORMATION
Certain statements in this Annual Report
on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking
statements are typically identified by the use of the words “believe,” “may,” “could,” “should,”
“expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,”
“intend,” and similar words and expressions. Statements that describe our future strategic plans, goals, or objectives
are also forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements. The forward-looking statements included in this report
are made only as of the date of this report.
The forward-looking information is based
on present circumstances and on our predictions regarding events that have not occurred, that may not occur, or that may occur
with different consequences from those now assumed or anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements. The forward-looking statements included in this report are made only as of the date of this
report.
|
We may be deemed to be insolvent and may face liquidation. |
|
The auditors’ report for our most recent fiscal year contains an explanatory paragraph about our ability to continue as a going concern. |
|
We will require substantial amounts of additional capital from external sources. |
|
Any substantial increase in sales will require skilled management of growth. |
|
We cannot predict the impact on our activities of the current economic crises. |
|
We are authorized to issue substantial additional shares of stock, which would dilute the ownership of our stockholders. |
|
Penny stock regulations will impose certain restrictions on resales of our securities, which may cause an investor to lose some or all of its investment . |
|
The factors set forth under “Management’s Discussion and Analysis of Analysis of Financial Condition and Results of Operation” and other factors that are not currently known to us that may emerge from time to time. |
PART I
ITEM 1. BUSINESS
Use of Certain Defined Terms
Except as otherwise indicated by the context, references
in this report to:
• |
“Labor Smart” “Labor Smart, Inc.,” “we,” “us,” or “our,” “Successor” and the “Company” are references to the business of Labor Smart, Inc. |
• |
“Securities Act” refers to the Securities Act of 1933, as amended, and “Exchange Act” refers to the Securities Exchange Act of 1934, as amended |
About Labor Smart
Labor Smart, Inc. was incorporated in
the State of Nevada on May 31, 2011. Since inception, the Company has been engaged in organizational efforts, obtaining financing
and deployment of our business model. Labor Smart 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.
Industry
Summary
The on-demand temporary staffing industry
developed out of the need for businesses to have flexible staffing options that would allow them to respond quickly to changing
business conditions. Cyclical business environments and competitive pressures have prompted businesses to focus on cost reduction,
sometimes replacing full-time employees when absent due to illness, vacation, or unplanned termination and utilizing temporary
staff during peak seasons.
The on-demand temporary staffing industry
is highly fragmented and the industry continues to develop specialized market segments that reflect the diverse needs of the businesses
it serves. Technical skills, work history, duration of assignment, and background check requirements vary among industries and
employers. We operate primarily within the short-term, skilled and unskilled segments of the on-demand temporary staffing industry.
We oversee the operation of multiple locations from a single corporate office. We are a business to business service provider.
Methods used to sell and market our services to local and regional businesses vary depending on local economic factors, types of
business in the geographic area, and other competitive considerations. Our sales processes can take place at varying locations
including our branch offices, the customers’ worksite, or via e-commerce. Temporary employees are recruited by our branch
staff for placement with our customers based upon customer requirements.
Business
Strategies
Our
objective is to aggressively grow our share of the on demand temporary staffing market. We plan to achieve this objective by:
-Growing
revenue in existing locations
-Growing
revenue through new branch openings and acquisitions
-Leveraging
customer relationships across vertical markets
Growing
revenue in existing locations: As a branch location matures, the Company seeks to increase its revenues by expanding sales
opportunities with existing customers and aggressively increasing the number of customers served. By servicing our customers with
a high level of responsiveness and attention to detail, we believe additional market share and revenue growth is obtainable.
Growing
revenue through new branch openings: In 2014 we opened and acquired a total of 15 branches. We will continue to rapidly
open new locations based on the availability of talent in target markets and financial resources of the company. We believe that
having the right talent to oversee the day to day operations of a branch is key to the success of the branch and the company as
a whole. The Company plans to open new branches when a strategic competitive advantage can be gained in the marketplace. For 2015,
the Company expects to complete more acquisitions than new organic branch openings.
Leveraging customer relationships across vertical markets: Due to the extensive fragmentation of our industry, the
Company believes our expanding footprint of branches provides a competitive edge when servicing customers with a regional presence.
The company intends to leverage local customer relationships to seek out opportunities on a macro scale with new and existing customers.
Branch Expansion
The Company has grown rapidly from
6 branch locations in 2012 to 30 branch locations at December 26, 2014. The Company’s expansion has been achieved
by opening company owned branch locations and by acquisitions of branch locations that are managed day to day by Branch Managers.
The Company currently anticipates opening
up to 5 new branch locations in 2015. The Company intends to pursue more acquisitions than in prior years.
Operations
Branch Locations. Branch locations
are offices where temporary and prospective temporary employees report prior to being placed on an assignment. Branch locations
open between 5am and 6am daily depending on customer needs. Generally, the Branch Manager will coordinate assignment of temporary
employees to customer work orders. Prior to dispatching the temporary employee, branch staff will ensure that temporary employees
have the necessary Personal Protective Equipment (PPE) as needed for the assignment they are placed on. The Company provides PPE
needed to the temporary employee at no cost to the temporary employee. Temporary employees are matched to customer assignments
primarily based on the customer specific requirements such as skills, experience, and availability.
Most work orders from customers are
scheduled in advance. However, a significant portion of work orders are requested on short notice by the customer.
The temporary employees are provided
a work order by a branch staff member that is completed and signed by the customer. The work order shows the hours worked and allows
the customer to note a request for the same or different temporary employee at a future date.
Branch locations are generally staffed
with at least two full time employees including the Branch Manager and a Customer Service Representative or an Account Executive.
Each branch locations sets their own hours based on business volume for accepting applications from prospective temporary employees.
Customers. The Company’s
customers are primarily businesses that require employees for manual labor such as hauling, cleaning, digging, loading, and assembly.
The Company’s customers are generally engaged in construction, freight handling, landscaping, warehousing, janitorial, disaster
response, light manufacturing, retail or wholesale operations.
A new branch location initially targets
the construction and janitorial industries for potential customers. The Company has identified these industries as having a relatively
short sales cycle and ever changing workforce needs. As the branch matures, the customer base broadens and diversifies. The Company
currently derives its business from a large number of customers.
Sales and Marketing. Generally,
each branch location is responsible for its own sales and marketing efforts. The Branch Manager is primarily responsible for new
customer acquisition and customer service with all branch employees being involved in customer service, and to some degree, the
sales process. The Company’s goal is for each branch to make contact with 125-200 potential customers weekly.
The Company also supports branch sales
efforts from a national approach. The Company will continue to implement sales and marketing strategies that reflect its expanding
branch footprint and growing corporate infrastructure.
Management Employees and Training.
The Company seeks to hire experienced branch and multi-unit managers as part of its expansion strategy. After
a thorough interview process, new staff members undergo two weeks of training at an existing branch and classroom style training
at the corporate facility. The Company’s training program emphasizes Company sales and service philosophies and approaches.
Workers’ Compensation Program.
The Company maintains workers’ compensation insurance as required by state laws. In 2013, the Company’s
workers’ compensation insurance for all states was carried by Lumbermen’s Underwriting, except for Ohio and Washington,
states that provide state administered workers compensation pools. In January 2013, the Company began coverage with Zurich Insurance
Group. Both of these policies are guaranteed cost policies in which the Company pays a percentage of payroll as premium but assumes
no financial liability beyond the premiums. During the quarter ended September 26, 2014, the Company entered into an insurance
contract for workers compensation insurance for the policy period of June 14, 2014 to June 14, 2015. The policy coverage is for
seventeen states and carries a deductible of $250,000 per occurrence, making the Company substantially self-insured. In states
not covered by this policy, the Company secures workers’ compensation insurance through the available state insurance pools.
Safety Program. The Company,
has deployed a general safety program that focuses on prevention. The Company believes that safety awareness and injury prevention
will help control long term worker’s compensation costs as rates are increased or reduced annually based on accident frequency,
amount of claims, and overall loss runs.
Competition. The on demand temporary
staffing industry is highly fragmented and competitive with limited barriers to entry. There is no one company dominant in the
on demand temporary staffing industry, however, there are several large competitors. 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. The Company believes it may face pricing pressures until and unless it has the
ability to service larger customers on a national scale.
Emerging Growth Company
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”
including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely
on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market
for our common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS
Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging
growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private
companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.
We will remain an “emerging growth
company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more
than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates
exceeds $700 million as of any May 30.
Because of the exemptions from various
reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition
period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult
for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies
in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are
unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially
and adversely affected.
Where You Can Find Us
The address of our principal executive
office is:
Labor
Smart, Inc,
3270 Florence
Road, Ste 200
Powder Springs, GA 30027
Our telephone number is (770) 222-5888.
Our facsimile number is (770) 222-5550. Our website can be viewed at www.laborsmart.com.
ITEM 1A. RISK FACTORS
The
following risk factors should be considered carefully in addition to the other information contained in this report. This report
contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We
generally identify forward-looking statements by terminology such as “may,” “should,” “expects,”
“plans,” “anticipates,” “could,” “intends,” “target,” “projects,”
“contemplates,” “believes,” “estimates,” “predicts,” “potential” or
“continue” or the negative of these terms or other similar words. These statements are only predictions. The outcome
of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors
that may cause our customers’ or our industry’s actual results, levels of activity, performance or achievements expressed
or implied by these forward-looking statements, to differ. “Risk Factors,” “Management’s Discussion and
Analysis” and “Business,” as well as other sections in this report, discuss some of the factors that could contribute
to these differences.
The
forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake
no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events.
Investment
in the securities offered herein is speculative, involves a high degree of uncertainty, is subject to a number of risks and is
suitable only for investors of substantial financial means. Prospective investors should carefully consider the following risk
factors in addition to the other information contained in this prospectus, before making an investment decision concerning the
common stock offered in this prospectus. Only those investors who are prepared to potentially risk a total financial loss of their
investment in this company should consider investing. Any of the following risks could have a material adverse effect on the Company’s
business, financial condition, operations or prospects and cause the value of our common stock to decline, which could cause you
to lose all or part of your investment. When determining whether to invest, you should also refer to and consider the other information
in this annual report, including, but not limited to, the financial statements and related notes.
The
factors set forth below, along with the other information contained herein, should be considered carefully in evaluating our prospects.
Further, this document contains certain forward-looking statements that involve risks and uncertainties, such as statements of
our plans, goals, objectives, expectations and intentions. The cautionary statements made in this section apply to all forward-looking
statements wherever they appear in this document. Readers are cautioned that, while the forward-looking statements reflect our
good faith beliefs, they are not guarantees of future performance, and involve risks and uncertainties. In addition, actual results
could differ materially from those discussed herein and our business, our financial condition or the results of operations could
be materially and adversely affected. In such case, some of the factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this document. In the event that actual results do not meet expectations,
there could be a consequent negative effect on the position of investors.
The following
are risk factors which are directly related to the Company’s business and financial condition. Investing in our securities
involves a high degree of risk and you should not invest in these securities unless you can afford to lose your entire investment.
You should read these risk factors in conjunction with other more detailed disclosures located elsewhere in this annual report.
OUR BUSINESS IS SIGNIFICANTLY
AFFECTED BY FLUCTUATIONS IN GENERAL ECONOMIC CONDITIONS
The
demand for our blue-collar staffing services is highly dependent upon the state of the economy and upon staffing needs of our
customers. As economic activity slows, companies tend to reduce their use of temporary employees before terminating their regular
employees. Significant declines in demand and corresponding revenues, can result in expense de-leveraging, which would result
in lower profit levels. Any variation in the economic condition or unemployment levels of the United States or in the economic
condition of any region or specific industry in which we have a significant presence may severely reduce the demand for our services
and thereby significantly decrease our revenues and profits.
WE MAY INCUR EMPLOYMENT
RELATED AND OTHER CLAIMS THAT COULD MATERIALLY HARM OUR BUSINESS.
We
employ individuals on a temporary basis and place them in our customers' workplaces. We have minimal control over our customers'
workplace environments. As the employer of record of our temporary workers, we incur a risk of liability for various workplace
events, including claims for personal injury, wage and hour violations, discrimination or harassment, and other actions or inactions
of our temporary workers. In addition, some or all of these claims may give rise to litigation including class action litigation.
A material adverse impact on our financial statements also could occur for the period in which the effect of an unfavorable final
outcome becomes probable and can be reasonably estimated.
We
cannot be certain that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us.
Should the ultimate judgments or settlements exceed our insurance coverage, they could have a material effect on our business.
We cannot be certain we will be able to obtain appropriate types or levels of insurance in the future, that adequate replacement
policies will be available on acceptable terms or that the companies from which we have obtained insurance will be able to pay
claims we make under such policies.
WE OPERATE IN A HIGHLY
COMPETITIVE BUSINESS AND MAY BE UNABLE TO RETAIN CUSTOMERS OR MARKETSHARE.
The
staffing services business is highly competitive and the barriers to entry are low. There are new competitors entering the market
which may increase pricing pressures. In addition, long-term contracts form only a small portion of our revenue. Therefore, there
can be no assurance that we will be able to retain customers or market share in the future. Nor can there be any assurance that
we will, in light of competitive pressures, be able to remain profitable or, if profitable, maintain our current profit margins.
WE MAY BE UNABLE TO ATTRACT
AND RETAIN SUFFICIENT QUALIFIED TEMPORARY WORKERS.
We
compete with other temporary staffing companies to meet our customer needs and we must continually attract qualified temporary
workers to fill positions. Attracting and retaining some skilled temporary employees depends on factors such as desirability of
the assignment, location, and the associated wages and other benefits. We have in the past experienced worker shortages and we
may experience such shortages in the future. Further, if there is a shortage of temporary workers, the cost to employ these individuals
could increase. If we are unable to pass those costs through to our customers, it could materially and adversely affect our business.
LOSS
OF RYAN SCHADEL, OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, COULD IMPAIR OUR ABILITY TO OPERATE.
If
we lose our key employees, such as Ryan Schadel, our President and Chief Executive Officer, our business could suffer. Our success
is highly dependent on our ability to attract and retain qualified management personnel. We are highly dependent on our management
and the loss of Mr. Schadel’s services could have a material adverse effect on our operations. If we were to lose Mr. Schadel’s
services, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.
IF
WE ARE UNABLE TO CONTINUE AS A GOING CONCERN, INVESTORS MAY FACE A COMPLETE LOSS OF THEIR INVESTMENT.
Our
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern
in the independent registered public accounting firm’s report to the financial statements included in this Form 10-K. If
our business fails, the investors may face a complete loss of their investment.
BECAUSE WE ARE A NEWLY FOUNDED COMPANY, WE FACE A HIGH
RISK OF BUSINESS FAILURE.
We
were incorporated on May 31, 2011. We have no significant operating history nor do we have anyone experienced in managing a public
company. There is no assurance that we will be able to maintain any sustainable operations. It is not possible at this time to
predict success with any degree of certainty. An investor should consider the risks, expenses and uncertainties that a developing
company like ours faces. Potential investors should be aware that there is
a
substantial risk of failure associated with any new business venture as a result of problems encountered in connection with the
commencement of new operations. These problems include, but are not limited to, an unstable economy, unanticipated problems relating
to the entry of new competition, unanticipated moves by existing competition and unexpected additional costs and expenses that
may exceed current estimates. Also, to date, we have completed only partial development of our intended operations and we can
provide no assurance that our company will have a successful commercial application. There is no operating history upon which
to base any projections as to the likelihood that we will prove successful in our current business plan, and thus there can be
no assurance that we will be a viable, ongoing concern.
WE
MAY NOT BE ABLE TO ATTAIN PROFITABILITY WITHOUT ADDITIONAL FUNDING, WHICH MAY BE UNAVAILABLE.
Unless
we begin to generate sufficient revenues, on a consistent basis, to sustain an ongoing business operation, we may experience liquidity
and solvency problems. Such liquidity and solvency problems may force us to cease operations if additional financing, under acceptable
terms and conditions, is not available. In the event our cash resources are insufficient to continue operations we intend to consider
raising additional capital through offerings and sales of equity or debt securities. In the event we are unable to raise sufficient
funds, we will be forced to terminate business operations. The possibility of such an outcome presents the risk of a complete
loss of your investment in our common stock.
INVESTORS
MAY LOSE THEIR ENTIRE INVESTMENT IF THE COMPANY FAILS TO IMPLEMENT ITS BUSINESS PLAN.
We
expect to face substantial risks, uncertainties, expenses and difficulties. Since inception, we have accumulated deficits of $8,313,284.
Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies
in their early stages of operation. These risks include, without limitation, an unstable economy, competition, inexperienced management,
lack of sufficient capital, and lack of brand recognition. We cannot guarantee that we will be successful in accomplishing our
objectives.
THE
COSTS, EXPENSES AND COMPLEXITY OF SEC REPORTING AND COMPLIANCE MAY INHIBIT OR SEVERELY RESTRICT OUR OPERATIONS.
We
are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. The costs of complying with
these complex requirements are substantial and require extensive consumption of our time as well as retention of expensive specialists
in this area. In the event we are unable to establish a base of operations that generates sufficient cash flows or cannot obtain
additional equity or debt financing, the costs of maintaining our status as a reporting entity may inhibit our ability to continue
our operations.
THE COMPANY MAY NOT BE
ABLE TO GENERATE SUFFICIENT REVENUES TO STAY IN BUSINESS.
We
expect to earn revenues solely in our chosen business area. In the opinion of our management, we reasonably believe that the Company
will begin to generate reasonable revenues. However, failure to generate sufficient and consistent revenues to fully execute and
adequately maintain our business plan may result in failure of our business and the loss of your investment.
COMPETITORS WITH MORE RESOURCES
MAY FORCE US OUT OF BUSINESS.
The
market for customers is intensely competitive and such competition is expected to continue to increase. Generally, our actual
and potential competitors are larger companies with longer operating histories, greater financial and marketing resources, with
superior name recognition and an entrenched client base. Therefore, many of these competitors may be able to devote greater resources
to attracting customers and be able to grant preferred pricing. Competition by existing and future competitors could result in
our inability to secure an adequate customer base sufficient enough to support our endeavors. We cannot be assured that we will
be able to compete successfully against present or future competitors or that the competitive pressure we may face will not force
us to cease operations.
OUR
COMMON STOCK IS ILLIQUID AND THE PRICE OF OUR COMMON STOCK MAY BE NEGATIVELY IMPACTED BY FACTORS WHICH ARE NOT RELATED TO OUR
OPERATIONS.
Our
common stock currently trades on a limited basis on the OTC. Trading of our stock through the over-the-counter markets is frequently
thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be
difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors,
trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments
affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility
has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
INVESTORS
MAY HAVE DIFFICULTY LIQUIDATING THEIR INVESTMENT BECAUSE OUR STOCK IS SUBJECT TO PENNY STOCK REGULATION.
The
SEC has adopted rules that regulate broker/dealer practices in connection with transactions in penny stocks. Penny stocks generally
are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities
is provided by the exchange system). The rules, in part, require broker/dealers to provide penny stock investors with increased
risk disclosure documents and make a special written determination that a penny stock is a suitable investment for the purchaser
and receive the purchaser’s written agreement to the transaction. These heightened disclosure requirements may have the
effect of reducing the number of broker/dealers willing to make a market in our shares, thereby reducing the level of trading
activity in any secondary market that may develop for our shares. Consequently, shareholders in our securities may find it difficult
to sell their securities, if at all.
WE
DO NOT CURRENTLY INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK SO CONSEQUENTLY YOUR ABILITY TO ACHIEVE A RETURN ON YOUR INVESTMENT
WILL DEPEND ON APPRECIATION IN THE PRICE OF OUR COMMON STOCK.
Prospective
investors should not anticipate receiving any dividends from our common stock. We intend to retain future earnings, if any, to
finance our growth and development and do not plan to pay cash or stock dividends. The lack of dividend potential may discourage
prospective investors from purchasing our common stock.
THE
CONTINUED SALE OF OUR EQUITY SECURITIES WILL DILUTE THE OWNERSHIP PERCENTAGE OF OUR EXISTING STOCKHOLDERS AND MAY DECREASE THE
MARKET PRICE FOR OUR COMMON STOCK.
Given
our lack of financial resources and the doubtful prospect that we will earn significant profits in the next several years, we
will require additional financing which will result in dilution to our existing stockholders. In short, our continued need to
sell equity will result in reduced percentage ownership interests for all of our investors, which may decrease the market price
for our common stock.
THE
COMPANY MAY LOSE ITS TOP MANAGEMENT WITHOUT EMPLOYMENT AGREEMENTS.
Our
operations depend substantially on the skills, knowledge and experience of the present management. The Company does not
maintain key man life insurance. Without an employment contract, we may lose the present management of the Company to other pursuits
without a sufficient warning and, consequently, we may be forced to terminate our operations.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
The Company
leases all of its branch locations. Branch location leases have, at minimum, a one year term and require additional payments for
taxes, insurance, maintenance and renewal options. In addition to branch locations, the Company oversees companywide operations
at a leased corporate office space located in an office building at 3270 Florence Road, Suite 200 in Powder Springs, Georgia.
ITEM
3. LEGAL PROCEEDINGS
From
time to time we are subject to compliance audits by federal, state, and local authorities relating to a variety of regulations
including wage and hour laws, taxes, workers’ compensation, immigration, and safety. We are also subject to legal proceedings
in the ordinary course of our operations. We know of no material, active or pending legal proceedings against our company, nor
are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our
directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest
adverse to our interest.
ITEM
4. MINE SAFETY DISCLOSURES
Not applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
The
Company’s common stock is traded on the over-the-counter markets under the symbol LTNC. As of March 26, 2014, the Company’s
common stock was held by 40 shareholders of record, which does not include shareholders whose shares are held in street or nominee
name.
The
Company’s shares commenced trading on or about June 29, 2012. The following chart is indicative of the fluctuations in the
stock prices:
|
|
For
the Years Ended December 31, |
|
|
|
2014 |
|
|
201 |
|
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
0.49 |
|
|
$ |
0.19 |
|
|
$ |
0.32 |
|
|
$ |
0.19 |
|
Second Quarter |
|
$ |
0.40 |
|
|
$ |
0.205 |
|
|
$ |
0.352 |
|
|
$ |
0.2311 |
|
Third Quarter |
|
$ |
0.24 |
|
|
$ |
0.097 |
|
|
$ |
0.52 |
|
|
$ |
0.245 |
|
Fourth Quarter |
|
$ |
0.11 |
|
|
$ |
0.0012 |
|
|
$ |
0.735 |
|
|
$ |
0.211 |
|
The
Company’s transfer agent is West Coast Stock Transfer, Inc., located in San Diego, CA.
The
Company’s common stock is subject to Rule 15g-9 of the Securities and Exchange Commission, known as the Penny Stock Rule.
This rule imposes requirements on broker/dealers who sell securities subject to the rule to persons other than established customers
and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination
for purchasers of the securities and receive the purchaser's written agreement to the transaction prior to sale. The Securities
and Exchange Commission also has rules that regulate broker/dealer practices in connection with transactions in "penny stocks."
Penny stocks generally are equity securities with a price of less than $5.00, other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions
in that security is provided by the exchange or system. The Penny Stock Rules requires a broker/dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission
that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also
must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and
its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer
orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's
confirmation. These disclosure requirements have the effect of reducing the level of trading activity in the secondary market
for our common stock. As a result of these rules, investors may find it difficult to sell their shares.
Dividend
Policy
No
cash dividends have been paid by the Company on its common stock. It is anticipated that the Company’s future earnings will
be retained to finance its continuing development. The payment of any future dividends will be at the discretion of the Company’s
board of directors and will depend upon, among other things, future earnings, any contractual restrictions, success of business
activities, regulatory and corporate law requirements and the general financial condition of the Company.
Equity
Compensation Plan Information
2012
Stock Option Plan
Effective
July 13, 2012, we adopted the 2012 Stock Incentive Plan (the “2012 Plan"). The 2012 Plan allows us to grant certain
options to our directors, officers, employees and eligible consultants. The purpose of the 2012 Plan is to enhance our long-term
stockholder value by offering opportunities to our directors, officers, employees and eligible consultants to acquire and maintain
stock ownership in us in order to give these persons the opportunity to participate in our growth and success, and to encourage
them to remain in our service.
The
2012 Plan allows us to grant options to our officers, directors and employees. In addition, we may grant options to individuals
who act as our consultants, so long as those consultants do not provide services connected to the offer or sale of our securities
in capital raising transactions and do not directly or indirectly promote or maintain a market for our securities.
A total
of 6,000,000 shares of our common stock are available for issuance under the 2012 Plan. The 2012 Plan provides for the grant of
incentive stock options and non-qualified stock options. Incentive stock options granted under the 2012 Plan are those intended
to qualify as “incentive stock options” as defined under Section 422 of the Internal Revenue Code. However, in order
to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code, the 2012 Plan must be approved
by our stockholders within 12 months of its adoption. The 2012 Plan has not been approved by our stockholders. Non-qualified stock
options granted under the 2012 Plan are option grants that do not qualify as incentive stock options under Section 422 of the
Internal Revenue Code.
Options granted
under the 2012 Plan are non-transferable, other than by will or the laws of descent and distribution.
The 2012 Plan
terminates on July 13, 2022, unless sooner terminated by action of our Board of Directors. No option is exercisable by any person
after such expiration. If an award expires, terminates or is canceled, the shares of our common stock not purchased there under
shall again be available for issuance under the 2012 Plan.
The following table summarizes
stock option activity during fiscal 2013 and 2014:
|
Number
of Options |
|
Weighted
Average Exercise
Price
Per Share |
Outstanding
– January 1, 2013 |
130,000 |
|
$ 0.50 |
Granted |
4,110,037 |
|
0.16 |
Forfeited
or expired |
(356,582) |
|
0.05 |
Exercised |
- |
|
- |
Outstanding -
December 31, 2013 |
3,883,455 |
|
0.18 |
Granted |
50,000 |
|
0.06 |
Forfeited
or expired |
(1,057,478) |
|
0.05 |
Exercised |
- |
|
- |
Outstanding
– December 26, 2014 |
2,875,977 |
|
$ 0.19 |
Exercisable
– December 26, 2014 |
1,885,000 |
|
$ 0.33 |
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
We
did not purchase any of our shares of common stock or other securities during our fiscal year ended December 26, 2014.
Recent
Sales of Unregistered Securities
On February
11, 2014, the Company issued 100,000 shares of common stock for professional services valued at $21,000 ($0.02 per share).
On July
11, 2014, the Company issued 100,000 shares common stock in satisfaction of stock payable for $23,000 in stock-based compensation
for professional fees.
On November
1, 2014, the Company issued 500,000 shares of common stock for investor relations valued at $11,100 ($0.0222 per share) based
on the quoted market price of the shares at time of issuance.
On
December 9, 2014, the Company issued 390,000 of shares of common stock to employees for services rendered by them for an aggregate
fair value of $429 ($0.0.0021 per share) based on the quoted market price of the shares at time of issuance.
During
the year ended December 26, 2014, the holders of Convertible Promissory Notes converted 158,382,363 shares of common stock of
the Company with a fair value of $3,448,803 to settle $1,575,531 of principal and interest.
ITEM 6. SELECTED FINANCIAL
DATA
As the Company is a “smaller
reporting company,” this item is not applicable.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
report on Form 10-K contains forward-looking statements within the meaning of Rule 175 of the Securities Act of 1933, as amended,
and Rule 3b-6 of the Securities Act of 1934, as amended, that involve substantial risks and uncertainties. These forward-looking
statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry,
our beliefs and our assumptions. Words such as “anticipate”, “expects”, “intends”, “plans”,
“believes”, “seeks” and “estimates” and variations of these words and similar expressions
are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject
to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of this Form 10-K. Investors should carefully consider
all of such risks before making an investment decision with respect to the Company’s stock. The following discussion and
analysis should be read in conjunction with our consolidated financial statements. Such discussion represents only the best present
assessment from our Management.
Overview
Labor
Smart, Inc. was incorporated in the State of Nevada on May 31, 2011. We are an emerging provider of temporary employees to the
construction, manufacturing, hospitality, restoration and retail industries. We provide unskilled and semi-skilled temporary workers
to our customers. The Company has rapidly grown from two branch offices at November 2011 to thirty branch offices at December
26, 2014. The majority of our growth in branch offices was achieved by opening Company-owned locations. A total of four branch
offices were opened due to our purchase of the customer lists of Qwik Staffing and Shirley’s Employment. The Company's annual
revenues grew from approximately $16.6 million to $23.9 million from 2013 to 2014. This revenue growth has been generated both
by opening new branch offices and by continuing to increase revenue at existing branch offices.
Our
mission is to be the provider of choice to our growing community of customers, with a service-focused approach, that positions
us as a resource and partner for their 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. However, the effects of seasonality is partially muted by our rapid revenue growth rate.
Growth
Strategy
Historically,
our growth strategy has been heavily focused on new branch office openings, growth in revenue from existing offices, and closing
one small acquisition per year. On June 14, 2014, we secured a large deductible worker’s compensation insurance policy which
resulted in us becoming substantially self-insured. We have adjusted our growth strategy based on this significant change to the
fundamentals of our business.
During
the fiscal 2015, we expect to open no more than five new branches, however, we are aggressively pursuing acquisitions that fit
well with our culture and will continue to seek more acquisition opportunities than in prior years. This major shift in focus
is directly related to our new large deductible worker’s compensation policy. Our industry is very fragmented. We have invested
heavily in our corporate infrastructure in the last two years. We believe we can execute acquisitions with an investment of one
to four times EBITDA of the seller and immediately recognize economies of scale and a reduced cost of sales for the acquired customer
lists as it is integrated into our operations. With our experienced management team, we believe we can successfully execute and
close acquisitions totaling $20-$40 million in revenue in 2015. This goal is contingent upon successful financing.
In
fiscal 2015, we will seek opportunities to open new branches, though our new branch openings will be much less substantial than
in prior years as we shift our expansion strategy to be more acquisition centric. Selection of these locations will be more strategic
than in prior years. We will, when possible, open locations based on needs of already existing clients.
At
December 31, 2013, we had 15 branches and at December 26, 2014, we had 30 branches. The increase in branches was due to fourteen
branches added through internal growth and three branches added through acquisition. At the same time we closed one underperforming
branch location and consolidated one acquired branch with an existing branch.
Use
of Non-GAAP Financial Information
In
addition to GAAP results, this quarterly 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 net income, plus interest and finance
expense net of interest income, provision for income taxes, depreciation and amortization. The Company defines
Adjusted EBITDA as these items plus non-recurring acquisition and expansion costs, 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, Labor Smart’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 net loss has been provided in the
table below.
RECONCILIATION
OF GAAP NET INCOME (LOSS) TO EBITDA
(UNAUDITED)
| |
Six Months Ended December 26, 2014 |
GAAP, net loss | |
$ | (3,122,152 | ) |
Add: | |
| | |
Provision for income taxes | |
| — | |
Interest and finance expense, net | |
| 3,077,998 | |
Depreciation and amortization | |
| 96,744 | |
EBITDA | |
| 52,590 | |
Non-recurring acquisition and expansion costs | |
| 406,539 | |
Adjusted EBITDA | |
$ | 459,129 | |
Results
of Operations
Summary
of Operations:
Revenue
for the year ended December 26, 2014 was $23,978,136 as compared to $16,651,885 for the year ended December 31, 2013. An increase
for the year ended December 26, 2014 of $7,326,251 or 44%. This increase was due to improved revenue from existing branches and
the opening of new branches during fiscal 2014 as well as our purchase of the customer lists of Qwik Staffing and Shirley’s
Employment. Of the 15 branches that were open at December 31, 2013, revenue for the year ended December 26, 2014 was $21,968,480,
representing a 31.93% increase in same branch revenue in a year over year comparison.
Cost
of Revenues:
Cost
of services was 75% of revenue for the year ended December 26, 2014 and 84% for the year ended December 31, 2013. Cost of services
mainly consists of payroll and worker’s compensation expense for our laborers which was $17,296,609 or 72% and $653,551
or 3% of revenues, respectively for the year ended December 26, 2014 and $13,485,552 or 81% and $467,570 or 3% of revenues, respectively
for the year ended December 31, 2013.
Selling,
General and Administrative Expenses (SG&A):
General
and administrative fees were 16% of revenue for the year ended December 26, 2014 and 15% for the year ended December 31, 2013.
For the
year ended December 26, 2014, of our total of $6,497,548 in operating expenses, $2,478,439 is attributable to staff payroll expenses
and $244,420 to bad debts.
For the
year ended December 31, 2013, of our total $4,436,247 in operating expenses, $308,515 is attributable to professional fees including
legal, accounting, and consulting services, $801,915 in stock based compensation related to consulting fees, $1,620,859 to staff
payroll expenses, $215,255 to bad debt and $90,826 for loss on sale of receivables.
We have
funded our operations to date primarily through the sale of equity, invoice factoring, convertible notes payable and shareholder
loans. Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations
into the coming months. We will require additional cash to fund our operating plan past that time. If the level of sales anticipated
by our financial plan are not achieved or our working capital requirements are higher than planned, we will need to raise additional
cash sooner or take actions to reduce operating expenses. We have implemented plans to reduce our costs of capital and improve
our revenue. If we cannot generate adequate cash by implementing these steps, we plan to obtain additional cash through the issuance
of equity or debt securities. There can be no assurance that additional cash will be available or that, if available, it will
be available on terms acceptable to us on a timely basis. If adequate funds are not available on a timely basis, we intend to
limit our operations to extend our funds as we pursue other financing opportunities and business relationships. This limitation
of operations could include reducing our planned investment in working capital to fund revenue growth and result in reductions
in staff, operating costs, and capital expenditures. Should we require additional funds for an extended period of time
we may be forced to sell our operations.
Net cash
used in operations was $3,457,450 during the year ended December 26, 2014. Net cash flows used in operating activities for the
year ended December 26, 2014 mainly consisted of a net loss of $5,119,506 adjusted for stock based compensation of $104,360, financing
fees of $4,139,495, by an increase of $1,371,781 in accounts receivable and an increase of $1,038,790 in other assets.
Net cash
used in operations was $3,457,450 during the year ended December 31, 2013. Net cash flows used in operating activities
for the year ended December 31, 2013 mainly consisted of a net loss of $2,722,980 adjusted for stock based compensation of $801,915,
financing fees of $698,585, an increase of our off-balance sheet receivables factoring of $291,708, by an increase of $1,153,774
in accounts receivable and an increase of $908,507 in payroll taxes payable.
Cash
used in investing activities totaled $283,113 for the year ended December 26, 2014. Net cash flows used by investing activities
consists of assets acquired in asset purchase agreement of $120,797, the purchase of fixed assets of $111,975 and $96,203 in the
purchase of marketable securities offset by $146,544 in proceeds from the sale of marketable securities.
Cash
used in investing activities totaled $130,433 for the year ended December 31, 2013. Net cash flows used by investing activities
consists of assets acquired in asset purchase agreement of $150,000 and $1,853,884 in the purchase of marketable securities offset
by $1,833,129 in proceeds from the sale of marketable securities.
Net cash
provided by financing activities totaled $3,630,996 for the year ended December 26, 2014. Net cash flows from financing activities
consisted of proceeds from convertible notes payable of $4,131,823, offset by payments on a convertible note payable of $1,137,621,
payments on related party notes of $30,081, net amount received of $773,450 from factor and payments towards a contingent liabilities
of $106,575.
Net cash
provided by financing activities totaled $1,709,059 for the year ended December 31, 2013. Net cash flows from financing activities
consisted of proceeds from the sale of common stock of $100,000, proceeds from convertible promissory notes payable of $1,630,200,
offset by payments on a convertible promissory note payable of $607,500, payments on related party notes of $173,962, net amount
of $865,321 from factor, payments towards a contingent liabilities of $89,840 and payment for financed insurance premiums of $15,160.
Our continued
capital needs will depend on branch operating performance, our ability to control costs, and the continued impact from our expansion
plans in 2015.
Assets
and Liabilities:
At December
26, 2014, we had total current assets of approximately $4,013,920 and current liabilities of approximately $7,767,796. Included
in current assets are trade accounts receivable of approximately $3,068,798 and prepaid expenses of $322,855, accounts receivable
are recorded at the invoiced amounts. We regularly review our accounts receivable for collectability. We will typically refer
overdue balances to a collection agency at 120 days and the collection agent pursues collection for another 60 days. Most balances
over 120 days past due are written off, as it is probable the receivable will not be collected. We wrote down $244,420 in bad
debt included in S,G,&A during the year ended December 26, 2014. As our business matures, we will continue to monitor and
seek to improve our historical collection ratio and aging experience with respect to trade accounts receivable. As we grow, our
historical collection ratio and aging experience with respect to trade accounts receivable will continue to be important factors
affecting our liquidity.
Financing:
On July
24, 2013, the Company terminated a month-to-month financing agreement with Riviera Finance LLC (“Riviera”) that included
a non-recourse factoring arrangement that provides notification factoring on substantially all of the Company’s sales. Receivables
were factored at a rate of 85% of the invoice face value on accepted accounts.
Our total
financing costs through our facility with Riviera for the year ended December 26, 2014 and December 31, 2013 was $0 and $90,826,
respectively, which is reflected on our Statements of Operations as a loss on sale of receivables. As collateral for repayment
of any and all obligations, we granted Riviera a security interest in all our property, including, but not limited to, accounts
receivable, intangible assets, contract rights, investment property, deposit accounts, and other such assets.
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.
Our total
financing costs through our facility with Transfac for the years ended December 26, 2014 and 2013 was $401,278 and $103,165, respectively,
which is reflected on our Statements of Operations as interest and finance expense. As collateral for repayment of any and all
obligations, we granted Transfac a security interest in all our property, including, but not limited to, accounts receivable,
intangible assets, contract rights, investment property, deposit accounts, and other such assets.
Off-Balance
Sheet Arrangements
As of
December 26, 2014, we do not have any off-balance sheet arrangements except for our factored receivables under our agreements
with Transfac Capital, Inc. The cash received from our factored receivables finance
the Company’s operating expenses and are a significant source of liquidity for the Company. For more information about the
factoring terms, see “Financing” discussion above.
Inflation
Inflation
has not had a material impact on our business and we do not expect inflation to have an impact on our business in the near future.
Critical
Accounting Policies
Our
financial statements are based on the application of accounting principles generally accepted in the United States
(“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also
affect supplemental information contained in our external disclosures including information regarding contingencies, risk and
financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently
and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe
to be reasonable under the circumstances. Actual results may differ materially from these estimates under different
assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial
statements.
Our significant
accounting policies are summarized in Note 2 of our financial statements. While all these significant accounting policies impact
our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on our financial statements and require management to use a greater degree
of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and
circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause an effect on
our results of operations, financial position or liquidity for the periods presented in this report.
Recent Accounting Pronouncements
In May
2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“FASB ASU 2014-09”).
This standard update clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. generally
accepted accounting principles (GAAP) and International Financial Reporting Standards. The standard update intends to provide
a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities,
industries, jurisdictions, and capital markets; and provide more useful information to users of financial statements through improved
disclosure requirements. Upon adoption of this standard update, the Company expects that the allocation and timing of revenue
recognition will be impacted. The provisions of FASB ASU 2014-09 are effective for annual reporting periods beginning after December
15, 2016, including interim periods within that reporting period, and are to be applied retrospectively to each prior period presented
or retrospectively with the cumulative effect recognized as of the date of adoption. Early application is not permitted. The Company
is currently evaluating the impact that this standard update will have on its financial statements.
In August
2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern. The new standard requires management
of public and private companies to evaluate whether there is substantial doubt about the entity’s ability to continue as
a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether its plans alleviate
that doubt. The standard requires management to evaluate, for each reporting period, whether there are conditions or events that
raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial
statements are issued. The new standard is effective for annual periods ending after December 15, 2016, and interim periods within
annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of the
ASU to have a significant impact on our financial statements.
The Company
has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not
believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its
financial statements.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As the Company is a “smaller
reporting company,” this item is not applicable.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Reports of Independent Registered Public
Accounting Firms |
F-2 - F-3 |
|
|
Balance Sheets as of December 26, 2014
and December 31, 2013 |
F-4 |
|
|
Statements of Operations and Comprehensive
Loss for the Years Ended December 26, 2014 and December 31, 2013 |
F-5 |
|
|
Statements of Stockholders' Equity (Deficit)
for the Years Ended December 26, 2014 and December 31, 2013 |
F-6 |
|
|
Statements of Cash Flows for the Years
Ended December 26, 2014 and December 31, 2013 |
F-7 |
|
|
Notes to Financial Statements |
F-8 |
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
Labor Smart, Inc.
We have audited the accompanying balance sheets
of Labor Smart, Inc. (the “Company”) as of December 31, 2013 and 2012 and the related statements of operations and
comprehensive loss, stockholders’ deficit and cash flows for the years then ended. Labor Smart, Inc.’s management is
responsible for these financial statements. 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 audits
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 financial position of Labor Smart, Inc. as of December 31, 2013 and 2012
and the 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.
The accompanying financial statements have
been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company
has suffered losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ De Joya Griffith, LLC
Henderson, Nevada
April 11, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
Labor Smart, Inc.
We have audited the accompanying balance sheet of Labor Smart, Inc. as of December 26, 2014, and the related statements of operations
and comprehensive loss, stockholders’ deficit, and cash flows for the fiscal year 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 audit.
We conducted our audit 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 audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of Labor Smart, Inc. as of December 26, 2014, and the
results of its operations and its cash flows for the fiscal year then ended in conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has suffered recurring losses from operations and its total liabilities exceed
its total assets. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans
in regard to these matters also are described in Note 2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/SingerLewak, LLP
Los Angeles, California
April 10, 2015
LABOR
SMART, INC.
BALANCE
SHEETS
December
26, 2014 and December 31, 2013
(Audited)
| |
December 26, 2014 | |
December 31, 2013 |
ASSETS | |
| | | |
| | |
Current assets | |
| | | |
| | |
Cash | |
$ | 68,972 | | |
$ | 178,539 | |
Accounts receivable, net | |
| 3,068,798 | | |
| 1,941,437 | |
Marketable securities, available for sale | |
| 99,954 | | |
| 4,972 | |
Prepaid expense | |
| 322,855 | | |
| 45,497 | |
Other assets | |
| 453,341 | | |
| 11,591 | |
Total current assets | |
| 4,013,920 | | |
| 2,182,036 | |
| |
| | | |
| | |
Deferred financing costs | |
| — | | |
| 57,748 | |
Deposits | |
| 80,283 | | |
| 20,014 | |
Property and equipment, net | |
| 98,790 | | |
| 7,894 | |
Customer relationships, net | |
| 385,436 | | |
| 228,028 | |
Workers' compensation insurance collateral | |
| 536,771 | | |
| — | |
Total long-term assets | |
| 1,101,280 | | |
| 313,684 | |
| |
| | | |
| | |
Total assets | |
$ | 5,115,200 | | |
$ | 2,495,720 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 190,517 | | |
$ | 135,524 | |
Loan payable to factor | |
| 1,638,771 | | |
| 865,321 | |
Payroll taxes payable | |
| 1,303,337 | | |
| 1,487,907 | |
Notes payable, related party | |
| 14,725 | | |
| 44,806 | |
Contingent liability, current portion | |
| 122,129 | | |
| — | |
Convertible notes payable, net of unamortized discount of $1,487,875 | |
| | | |
| | |
and $578,848, respectively | |
| 3,894,678 | | |
| 1,057,679 | |
Warrants and bifurcated conversion features | |
| 603,639 | | |
| 20,701 | |
Total current liabilities | |
| 7,767,796 | | |
| 3,611,938 | |
| |
| | | |
| | |
Contingent liability | |
| 43,733 | | |
| 79,221 | |
| |
| | | |
| | |
Total liabilities | |
| 7,811,529 | | |
| 3,691,159 | |
| |
| | | |
| | |
Stockholders' deficit | |
| | | |
| | |
Preferred stock, ($.0001 par value, 5,000,000
| |
| | | |
| | |
shares authorized; none issued and outstanding) | |
| — | | |
| — | |
Series A Preferred stock, ($.0001 par value, 51
| |
| | | |
| | |
shares authorized; 51 and none issued and outstanding as of | |
| — | | |
| — | |
December 26, 2014 and December 31, 2013, respectively. | |
| | | |
| | |
Common stock; $0.00001 par value; 20,000,000,000 shares authorized, | |
| | | |
| | |
180,455,103 and 20,982,740 issued and outstanding as of | |
| | | |
| | |
December 26, 2014 and December 31, 2013, respectively. | |
| 1,805 | | |
| 210 | |
Additional paid-in capital | |
| 5,550,383 | | |
| 1,998,815 | |
Accumulated deficit | |
| (8,313,284 | ) | |
| (3,193,778 | ) |
Accumulated other comprehensive income (loss) | |
| 64,767 | | |
| (686 | ) |
Total stockholder's deficit | |
| (2,696,329 | ) | |
| (1,195,439 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' deficit | |
$ | 5,115,200 | | |
$ | 2,495,720 | |
See the
accompanying notes to the financial statements
LABOR
SMART, INC.
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS
For
years ended December 26, 2014 and December 31, 2013
(Audited)
| |
For the year ended December 26, 2014 | |
For the year ended December 31, 2013 |
| |
| | | |
| | |
Revenues, net | |
$ | 23,978,136 | | |
$ | 16,651,885 | |
| |
| | | |
| | |
Cost of revenues | |
| 17,950,160 | | |
| 13,953,122 | |
| |
| | | |
| | |
Gross profit | |
| 6,027,976 | | |
| 2,698,763 | |
| |
| | | |
| | |
Operating expenses | |
| | | |
| | |
Payroll expenses | |
| 2,478,439 | | |
| 1,620,859 | |
Bad debt expense | |
| 244,420 | | |
| 215,255 | |
Loss on sale of receivables | |
| — | | |
| 90,826 | |
General and administrative expense | |
| 3,774,689 | | |
| 2,509,307 | |
| |
| | | |
| | |
Total operating expenses | |
| 6,497,548 | | |
| 4,436,247 | |
| |
| | | |
| | |
Operating loss | |
| (469,572 | ) | |
| (1,737,484 | ) |
| |
| | | |
| | |
Other income (expenses) | |
| | | |
| | |
Interest and finance expense | |
| (4,826,309 | ) | |
| (1,035,031 | ) |
Interest income | |
| — | | |
| 73 | |
Gain on change in fair value in derivative liability | |
| 197,187 | | |
| 45,222 | |
Gain (loss) on sale of securities | |
| (20,812 | ) | |
| 4,240 | |
| |
| | | |
| | |
Total other income (expenses) | |
| (4,649,934 | ) | |
| (985,496 | ) |
| |
| | | |
| | |
Net loss | |
$ | (5,119,506 | ) | |
$ | (2,722,980 | ) |
| |
| | | |
| | |
Other comprehensive income (loss): | |
| | | |
| | |
Unrealized gain (loss) on marketable securities | |
| 65,453 | | |
| (6,938 | ) |
Other comprehensive income (loss) | |
| 65,453 | | |
| (6,938 | ) |
| |
| | | |
| | |
Comprehensive loss | |
$ | (5,054,053 | ) | |
$ | (2,729,918 | ) |
| |
| | | |
| | |
Basic and diluted loss per common share | |
$ | (0.15 | ) | |
$ | (0.14 | ) |
| |
| | | |
| | |
Basic and diluted weighted average common | |
| | | |
| | |
shares outstanding | |
| 34,841,494 | | |
| 19,337,142 | |
See the
accompanying notes to the financial statements
LABOR
SMART, INC.
STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT)
For
years ended December 26, 2014 and December 31, 2013
(Audited)
| |
| |
| |
| |
| |
| |
| |
Accumulated | |
Total |
| |
| |
| |
| |
| |
Additional | |
| |
Other | |
Stockholders' |
| |
Preferred Stock | |
Common Stock | |
Paid-in | |
Accumulated | |
Comprehensive | |
Equity |
| |
Shares | |
Amount | |
Shares | |
Amount | |
Capital | |
Deficit | |
Income | |
(Deficit) |
| |
| |
| |
| |
| |
| |
| |
| |
|
Balance, December 31, 2012 | |
| — | | |
$ | — | | |
| 16,757,000 | | |
$ | 168 | | |
$ | 365,427 | | |
$ | (470,798 | ) | |
$ | 6,252 | | |
$ | (98,951 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued for services | |
| — | | |
| — | | |
| 1,833,500 | | |
| 18 | | |
| 444,377 | | |
| — | | |
| — | | |
| 444,395 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued for cash | |
| — | | |
| — | | |
| 200,000 | | |
| 2 | | |
| 99,998 | | |
| — | | |
| — | | |
| 100,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of convertible notes | |
| — | | |
| — | | |
| 2,152,240 | | |
| 22 | | |
| 678,008 | | |
| — | | |
| — | | |
| 678,030 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commitment fees | |
| — | | |
| — | | |
| 40,000 | | |
| — | | |
| 10,800 | | |
| — | | |
| — | | |
| 10,800 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued for finance costs | |
| — | | |
| — | | |
| — | | |
| — | | |
| 57,359 | | |
| — | | |
| — | | |
| 57,359 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Options issued for employee compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 342,846 | | |
| — | | |
| — | | |
| 342,846 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net change in unrealized gain on marketable securities | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (6,938 | ) | |
| (6,938 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,722,980 | ) | |
| — | | |
| (2,722,980 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 31, 2013 | |
| — | | |
| — | | |
| 20,982,740 | | |
| 210 | | |
| 1,998,815 | | |
| (3,193,778 | ) | |
| (686 | ) | |
| (1,195,439 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Preferred shares issued to CEO | |
| 51 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued for services | |
| — | | |
| — | | |
| 1,090,000 | | |
| 11 | | |
| 55,908 | | |
| — | | |
| — | | |
| 55,919 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of convertible notes | |
| — | | |
| — | | |
| 158,382,363 | | |
| 1,584 | | |
| 3,447,219 | | |
| — | | |
| — | | |
| 3,448,803 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Options issued for employee compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 48,441 | | |
| — | | |
| — | | |
| 48,441 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net change in unrealized gain on marketable securities | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 65,453 | | |
| 65,453 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (5,119,506 | ) | |
| — | | |
| (5,119,506 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 26, 2014 | |
| 51 | | |
$ | — | | |
| 180,455,103 | | |
$ | 1,805 | | |
$ | 5,550,383 | | |
$ | (8,313,284 | ) | |
$ | 64,767 | | |
$ | (2,696,329 | ) |
See the
accompanying notes to the financial statements
LABOR
SMART, INC.
STATEMENTS
OF CASH FLOWS
For
years ended December 26, 2014 and December 31, 2013
(Audited)
| |
For the year ended December 26, 2014 | |
For the year ended December 31, 2013 |
| |
| |
|
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (5,119,506 | ) | |
$ | (2,722,980 | ) |
Adjustments to reconcile net loss to net | |
| | | |
| | |
cash used by operating activities: | |
| | | |
| | |
Stock-based compensation | |
| 104,360 | | |
| 801,915 | |
Interest and financing costs | |
| 4,139,495 | | |
| 698,585 | |
Depreciation and amortization | |
| 167,662 | | |
| 70,020 | |
Bad debt expense | |
| 244,420 | | |
| 215,255 | |
(Gain) loss on sale of securities | |
| 20,812 | | |
| (4,240 | ) |
(Gain) on change in fair value of derivative liability | |
| (197,187 | ) | |
| (45,222 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Decrease in off-balance sheet receivable factoring | |
| — | | |
| (291,708 | ) |
Increase in accounts receivable | |
| (1,371,781 | ) | |
| (1,153,774 | ) |
Increase in prepaid expense and deposits | |
| (277,358 | ) | |
| (25,458 | ) |
Increase in other assets | |
| (1,038,790 | ) | |
| 15,306 | |
Increase in accounts payable and accrued liabilities | |
| 54,993 | | |
| 8,819 | |
Increase in payroll taxes payable | |
| (184,570 | ) | |
| 908,507 | |
Net cash used by operating activities | |
| (3,457,450 | ) | |
| (1,524,975 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Assets acquired in asset purchase agreement | |
| (120,797 | ) | |
| (150,000 | ) |
Purchase of fixed assets | |
| (111,975 | ) | |
| (1,188 | ) |
Proceeds from sale of marketable securities | |
| 96,203 | | |
| 1,853,884 | |
Purchase of marketable securities | |
| (146,544 | ) | |
| (1,833,129 | ) |
Net cash used by investing activities | |
| (283,113 | ) | |
| (130,433 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from common stock | |
| — | | |
| 100,000 | |
Proceeds from convertible notes payable | |
| 4,131,823 | | |
| 1,630,200 | |
Payment on convertible notes payable | |
| (1,137,621 | ) | |
| (607,500 | ) |
Payment on notes payable - related party | |
| (30,081 | ) | |
| (173,962 | ) |
Proceeds from loan payable to factor | |
| 773,450 | | |
| 865,321 | |
Payments on contingent liability | |
| (106,575 | ) | |
| (89,840 | ) |
Payment on financed insurance | |
| — | | |
| (15,160 | ) |
Net cash provided by financing activities | |
| 3,630,996 | | |
| 1,709,059 | |
| |
| | | |
| | |
Net change in cash | |
| (109,567 | ) | |
| 53,651 | |
| |
| | | |
| | |
Cash, beginning of period | |
| 178,539 | | |
| 124,888 | |
| |
| | | |
| | |
Cash, end of period | |
$ | 68,972 | | |
$ | 178,539 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 719,121 | | |
$ | 227,854 | |
Taxes paid | |
$ | — | | |
$ | — | |
Non-cash investing and financing activities | |
| | | |
| | |
Warrants issued as part of deferred finance costs | |
$ | — | | |
$ | 57,359 | |
Finance costs included in convertible note value | |
$ | — | | |
$ | 104,550 | |
Commitment fees | |
$ | — | | |
$ | 10,800 | |
Shares issued for convertible notes | |
$ | 1,575,532 | | |
$ | 678,030 | |
Contingent liability associated with asset purchase | |
$ | 183,194 | | |
$ | 158,490 | |
Convertible note payable derivative liability | |
$ | 733,565 | | |
$ | — | |
Warrant derivative liability | |
$ | 46,560 | | |
$ | — | |
See the
accompanying notes to the financial statements
LABOR SMART,
INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
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. At December 26, 2014,
the Company has an accumulated deficit of $8,313,284 and negative working capital of $3,753,876. Also, the Company had
a net loss of $5,119,506 for the year ended December 26, 2014. Additionally, the operating activities of the Company used $3,457,450
net cash during the same one year 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.
On May 20, 2014, the Board of
Directors of the Company determined it is in the best interests of the Company to change its fiscal year end from December
31 to a 52-53 week fiscal year ending on the Friday closest to December 31. The
change is intended to align the Company’s fiscal periods more closely with the seasonality of its business and
improve comparability with industry peers. This change is effective with the end of the registrant’s
fiscal second quarter ended June 26, 2014. The change to a 52-53 week fiscal year will be retroactively applied as if it was adopted
as of January 1, 2014. The registrant’s current fiscal year ended on December 26, 2014 and comprises 360 days.
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). |
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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 December 26, 2014 and December 31, 2013 as follows:
|
Fair Value Measurements as of December 26, 2014 Using: |
|
|
Total Carrying Value as of |
|
|
Quoted Market Prices in Active Markets |
|
|
Significant Other Observable Inputs |
|
|
Significant Unobservable Inputs |
|
|
12/26/14 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
$ |
52,610 |
|
$ |
52,610 |
|
$ |
0 |
|
$ |
0 |
Warrant |
|
47,344 |
|
|
0 |
|
|
0 |
|
|
47,344 |
Total |
$ |
99,954 |
|
$ |
52,610 |
|
$ |
0 |
|
$ |
47,344 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable derivative liability |
$ |
601,345 |
|
$ |
0 |
|
$ |
0 |
|
$ |
601,345 |
Warrant derivative liability |
|
2,294 |
|
|
0 |
|
|
0 |
|
|
2,294 |
Contingent consideration payable |
|
165,862 |
|
|
0 |
|
|
0 |
|
|
165,862 |
Total |
$ |
769,501 |
|
$ |
0 |
|
$ |
0 |
|
$ |
769,501 |
|
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: |
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable derivative liability |
$ |
20,701 |
|
$ |
0 |
|
$ |
0 |
|
$ |
20,701 |
Contingent consideration payable |
|
79,221 |
|
|
0 |
|
|
0 |
|
|
79,221 |
Total |
$ |
99,922 |
|
$ |
0 |
|
$ |
0 |
|
$ |
79,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Change in convertible note payable derivative
liability during the year ended December 26, 2014 were as follows:
Opening balance at December 31, 2013 |
$ 20,701 |
Initial valuation of derivatives |
733,565 |
Initial loss on derivatives |
32,906 |
Gain on change in fair value of derivative
liability |
(185,827) |
Closing balance at December 26, 2014 |
$ 601,345 |
Change in warrant derivative liability
during the year ended December 26, 2014 were as follows:
Opening balance at December 31, 2013 |
$ 0 |
Initial valuation of derivatives |
46,560 |
Gain on change in fair value of derivative
liability |
(44,266) |
Closing balance at December 26, 2014 |
$ 2,294 |
Equity securities comprise publicly
traded shares of common stock. The warrant gives the Company, the right but not the obligation, to purchase 100,000 shares
of Argon Beauty Corp. (OTCBB:ABXX). The warrant is valued at the end of each accounting period using the Black Scholes option
valuation model using the following inputs at December 26, 2014: stock price $0.50, exercise price $0.50, expected life 2.73 years,
volatility 233%, dividends 0% and discount rate 1.08%.
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. The Company maintains its cash in bank deposit accounts which may exceed federally insured limits. As of December 26, 2014,
the Company’s accounts are insured for $250,000 by FDIC for US bank deposits.
Income Taxes
The Company follows the liability method
of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax balances. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply
to the taxable income in the years in which those 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 income in the period that includes the date of enactment or substantive
enactment. Deferred income taxes are reported for timing differences between items of income or expense reported in the financial
statements and those reported for income tax purposes in accordance with FASB ASC 740-10, “Income Taxes,” which requires
the use of the asset/liability method of accounting for income taxes.
The Company provides for deferred taxes
for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than
not.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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 recorded 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 statements 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 Agreements and Accounts
Receivable
The Company had a month-to-month financing
agreement with Riviera Finance LLC (“Riviera”) which was terminated on July 24, 2013. On
July 31, 2013 the Company entered into a Purchase and Sale Agreement with Transfac Capital, Inc. (“Transfac”). The
agreement with Riviera includes a non-recourse factoring arrangement that provided notification factoring on substantially all
of the Company’s sales. Riviera, based on credit approved orders, assumed the accounts receivable risk of the Company’s
customers in the event of insolvency or non-payment. All other receivable risks for customer deductions that reduce the customer
receivable balances were retained by the Company, including, but not limited to, allowable customer markdowns, disputes, and discounts.
The Company assumes the risk on accounts receivable not factored to Riviera, which is shown as accounts receivable on the balance
sheets, net of factored accounts receivable. 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 December 26, 2014 and December 31, 2013, factored accounts
receivable total $1,638,771 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 December 26, 2014 and December 31, 2013, the Company has recorded an allowance of $110,605
and $156,297, respectively.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Property and 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.
|
|
December 26, 2014 |
|
December 31, 2013 |
Office equipment and furniture |
|
$ 131,295 |
|
$ 11,842 |
Less: accumulated depreciation |
|
(32,505) |
|
(3,948) |
|
|
$ 98,790 |
|
$ 7,894 |
Depreciation expense for the years
ended December 26, 2014 and December 31, 2013 is $21,079 and $3,948, respectively.
Customer Relationships
Customer relationships comprise
customer lists acquired from Qwik Staffing Solutions, Inc. on April 29, 2013 with an estimated fair value of $294,100, from Shirley’s
Employment Service, Inc. on April 9, 2014 with an estimated fair value of $162,461 and from Kwik Jobs on September 26, 2014 with
an estimated fair value of $141,529. Customer lists are amortized on a straight-line basis over three years.
|
|
December 26, 2014 |
|
December 31, 2013 |
Customer lists |
|
$ 598,090 |
|
$ 294,100 |
Less: accumulated amortization |
|
(212,654) |
|
(66,072) |
|
|
$ 385,436 |
|
$ 228,028 |
Amortization expense for the years
ended December 26, 2014 and December 31, 2013 is $146,583 and $66,072, respectively.
Earnings (loss) 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. Potentially dilutive
common shares outstanding stock options assumed to be exercised or vested and paid out of shares of common stock and warrants assumed
to be exercised. Outstanding stock options and warrants are disclosed in Note 12 Shareholders’ Equity.
Convertible Notes Payable
| i) | Beneficial Conversion Feature |
The conversion features are
first analyzed for bifurcation under ASC 815, then 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.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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 (see Note 10). 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 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.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers (“FASB ASU 2014-09”). This standard update clarifies
the principles for recognizing revenue and develops a common revenue standard for U.S. generally accepted accounting principles
(GAAP) and International Financial Reporting Standards. The standard update intends to provide a more robust framework for addressing
revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital
markets; and provide more useful information to users of financial statements through improved disclosure requirements. Upon adoption
of this standard update, the Company expects that the allocation and timing of revenue recognition will be impacted. The provisions
of FASB ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within
that reporting period, and are to be applied retrospectively to each prior period presented or retrospectively with the cumulative
effect recognized as of the date of adoption. Early application is not permitted. The Company is currently evaluating the impact
that this standard update will have on its consolidated financial statements.
In August 2014, the FASB issued ASU
2014-15, Presentation of Financial Statements - Going Concern. The new standard requires management of public and private companies
to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose
that fact. Management will also be required to evaluate and disclose whether its plans alleviate that doubt. The standard requires
management to evaluate, for each reporting period, whether there are conditions or events that raise substantial doubt about a
company’s ability to continue as a going concern within one year from the date the financial statements are issued. The new
standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after
December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of the ASU to have a significant impact
on our consolidated financial statements
The Company has implemented all new
accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any
other new accounting pronouncements that have been issued that might have a material impact on its financial statements.
NOTE 4 – PREPAID
As of December 26, 2014 and December
31, 2013, the Company had prepaid expenses of $322,855 and $45,497, respectively. Prepaid expenses at December 26, 2014
comprises primarily of prepaid lease payments, insurance and services.
NOTE 5 – CUSTOMER RELATIONSHIPS,
NET
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 its customer list. In consideration for the customer list, the
Company agreed to pay $300,000 in cash minus the open accounts receivable of Shirley’s. At closing, it was estimated by the
Company that $170,797 will be paid for the customer list after deducting accounts receivable. The first $70,797 was paid one
day prior to the delivery and transfer of the customer list. The remaining $100,000 is due in monthly installments by paying
an amount equal to 5.0% of the monthly accounts receivable collected at 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.
The total purchase price for Shirley’s
was approximately $162,461. The purchase price consisted of approximately (i) $70,797 in cash, (ii) Estimated fair value
of consideration payable on collection 5.0% of the monthly accounts receivable collected by operating the Tulsa, Oklahoma location
over the next 18 months of $91,664. The Company expected to pay total consideration of $100,000 in equal installments over 18 months.
The fair value of the consideration was estimated by discounting the monthly installments by 12% per annum.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 5 – CUSTOMER RELATIONSHIPS,
NET (CONTINUED)
The determination of the estimated fair
value of the acquired assets and liabilities assumed required management to make significant estimates and assumptions. We determined
the fair value by applying established valuation techniques, based on information that management believed to be relevant to this
determination. The following table summarizes the purchase price allocation of the fair value of the assets acquired and liabilities
assumed at the date of purchase:
Customer relationships |
$ 162,461 |
Net assets acquired |
$ 162,461 |
|
|
Cash |
$ 70,797 |
Contingent consideration |
91,664 |
Consideration paid |
$ 162,461 |
On September 26, 2014, the Company entered
into an Asset Purchase Agreement (“Agreement”) with Kwik Jobs, Inc. (“Kwik’s”). Under the terms
of the Agreement, Kwik’s sold the customer list of Kwik’s. The first $50,000 was paid on closing. The remaining
estimated $100,000 is due in monthly installments by paying an amount equal 5.0% of the monthly accounts receivable collected at
the Birmingham Alabama and Decatur Georgia locations.
The fair value of the total purchase
price for Kwik’s was approximately $141,529. The purchase price consisted of (i) $50,000 in cash, (ii) Estimated
fair value of consideration payable on collection 5.0% of the monthly accounts receivable collected at the Birmingham, Alabama
and Decatur, Georgia locations over the next 18 months of $91,529. The Company estimates that it will pay total consideration of
$100,000 in equal installments over 18 months. The fair value of the consideration was estimated by discounting the monthly installments
by 12% per annum.
The determination of the estimated fair
value of the acquired assets and liabilities assumed required management to make significant estimates and assumptions. We determined
the fair value by applying established valuation techniques, based on information that management believed to be relevant to this
determination. The following table summarizes the purchase price allocation of the fair value of the assets acquired and liabilities
assumed at the date of purchase:
Customer relationships |
$ 141,529 |
Net assets acquired |
$ 141,529 |
|
|
Cash |
$ 50,000 |
Contingent consideration |
91,529 |
Consideration paid |
$ 141,529 |
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 5 – CUSTOMER RELATIONSHIPS,
NET (CONTINUED)
On April 29, 2013 the Company entered
into an Asset Purchase Agreement (“Agreement”) with Qwik Staffing Solutions, Inc. (“Qwik”). Under
the terms of the Agreement, Qwik sold the customer list of Qwik, excluding cash and accounts receivable. In consideration
for the customer list, the Company agreed to pay $320,000 in cash. The first $150,000 is due one day prior to the delivery
and transfer of the Assets. The remaining $170,000 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. In the event these
aggregate monthly payments total less than $170,000, after 14 months, Qwik will issue the Company a credit memo for the difference.
The total purchase price for Qwik was
approximately $308,490. The purchase price consisted of approximately (i) $150,000 in cash, (ii) Estimated fair value
of consideration payable on collection 6.5% of the monthly accounts receivable collected by operating the Orlando, Jacksonville
and Tampa, Florida locations over the next fourteen months of $158,490. The Company expected to pay total consideration of $170,000
in equal installments over 14 months. The fair value of the consideration was estimated by discounting the monthly installments
by 12% per annum.
Equipment |
$ 10,654 |
Prepaid supplies |
3,736 |
Customer relationships |
294,100 |
Net assets acquired |
$ 308,490 |
|
|
Cash |
$ 150,000 |
Contingent consideration |
158,490 |
Consideration paid |
$ 308,490 |
As of December 26, 2014 and December
31, 2013, the customer list was valued at $228,028 and $0, respectively. Amortization expense was $66,072 and $0 for the years
ended December 26, 2014 and December 31, 2013, respectively.
NOTE 6 – FACTORING AGREEMENT
On July 24, 2013, the Company terminated
a month-to-month financing agreement with Riviera Finance LLC (“Riviera”) that included a non-recourse factoring arrangement
that provided notification factoring on substantially all of the Company’s sales. Receivables were factored at a rate of
eighty-five percent (85%) of the invoice face value on accepted accounts up to $500,000. A reserve of eight percent (8%) of the
invoice face value was held by Riviera in case of customer disputes.
Fees charged by Riviera were two (2)
percent of the unpaid invoice face value for the first twenty-five (25) days after the factored date and 0.8% of the invoice face
value for every ten (10) days thereafter up to a total of seven (7) percent, including the initial two (2) percent. Administrative
charges based on various rates were charged on the gross face amount of all accounts with minimum fees as defined in the agreement.
The following table details the amounts of the factoring agreement with Riviera as of December 26, 2014 and December 31, 2013.
|
| |
Receivables Factored | |
Reserve Deposit | |
Fees | |
Administrative Charges |
|
December 26, 2014 | |
$ | 0 | | |
$0 | |
$ | 0 | | |
$0 |
|
December 31, 2013 | |
$ | 0 | | |
$0 | |
$ | 90,826 | | |
$0 |
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 6 – FACTORING
AGREEMENT (CONTINUED)
The reserve deposits were included in
other current assets within the balance sheets and receivables factored are netted against accounts receivable. Fees or charges
billed by Riviera Finance as of December 26, 2014 and December 31, 2013 were $0 and $90,826, respectively.
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 eighty-five percent (85%) 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 December 26, 2014 and December 31, 2013 under the agreement with Transfac,
the Company had factored receivables in the amounts of $1,699,900 and $1,281,122, recorded reserve deposits of $448,968 and $693
included in other current assets, and recorded a liability of $1,638,771 and $865,321, respectively. Discounts and interest provided
during factoring of the accounts receivable have been expensed on the statements of operations as interest expense. For the years
ended December 26, 2014 and December 31, 2013, interest expense related to the factoring arrangement was $401,278 and $103,165,
respectively.
NOTE 7 – 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 December 26, 2014, $161,043 of this note has been
repaid and $14,725 (December 31, 2013 - $44,806) of this note remains outstanding.
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES
Unless otherwise stated in Note 9, these
convertible promissory notes have been accounted for in accordance with ASC 480 Distinguishing Liabilities from Equity.
On
September 20, 2012, the Company entered into a Convertible Promissory Note with Evolution Capital, LLC, (the ‘Holder’)
in the original principal amount of $130,000 bearing a 12% annual interest rate and maturing June 20, 2013. 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 50% 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. On March 28, 2013, Evolution Capital,
LLC elected to convert $130,000 of principal amount for 604,651 shares of common stock of the Company valued at $268,088 ($0.44
per share) in accordance with the terms of the Note. After conversion the Convertible Promissory Note was paid in full.
On January 17, 2013, 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 October 21, 2013. 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 51% 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 60 days of date of issue at 130% of the original principal amount plus interest, between 60 days and 120 days
at 140% of the original principal amount plus interest and between 120 days and 180 days at 150% of the original principal amount
plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $100,000,
which was net of original issue discount of $105,478. On April 16, 2013, the Company elected to prepay the Convertible
Promissory Note dated January 17, 2013 with Asher Enterprises, Inc. for $146,647 in cash. The payment included prepayment of $103,500
in original principal, a prepayment penalty and outstanding accrued interest of $43,147.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On February 25, 2013, the Company entered
into a Convertible Promissory Note with Evolution Capital Fund I, L.P. (“Holder”) in the original principal amount
of $106,000 bearing a 12% annual interest rate and maturing November 25, 2013. This convertible 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 as 52% 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 140% of the original principal amount plus interest, between 121 days and 150 days at
145% of the original principal amount plus interest and between 151 days and 180 days at 150% of the original principal amount
plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $101,000, which
was net of original issue discount of $106,628. On September 28, 2013, the Holder converted 221,108 shares of common stock of the
Company with a fair market value of $61,910 for $27,529 and $2,471 in principal and interest, respectively. On October 29, 2013,
the Holder converted 227,342 shares of common stock of the Company with a fair market value of $65,929 for $23,859 and $2,141 in
principal and interest, respectively. On November 26, 2013, the Holder converted 418,060 shares of common stock of the Company
with a fair market value of $96,154 for $45,882 and $4,118 in principal and interest, respectively. On November 26, 2013, the Holder
waived $9,514 of interest and the Convertible Promissory Note was paid in full.
On March 4, 2013, the Company issued
a Convertible Promissory Note (“Note”) to Vista Capital Investments, LLC (“Holder”), in the original principal
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 Note any time and if repaid within 90 days of date of issue with an interest
rate is 0%. This 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.
i) | On March 6, 2013, the Company received cash proceeds of $25,000 on
the first tranche of the Note, which was net of original issue discount of $20,533. During the year ended December 31, 2013, the
Holder converted 217,374 shares of common stock of the Company with a fair value of $61,667 for $25,000 and $5,800 in principal
and interest, respectively. On November 21, 2013, the first tranche of the Note was paid in full. |
ii) | On October 30, 2013, the Company received cash proceeds of $25,000
on the second tranche of the Note, which was net of original issue discount of $18,667. During the year ended December 26, 2014,
the Holder converted 239,246 shares of common stock of the Company with a fair value of $57,856 for $27,500 and $3,300 in principal
and interest, respectively. On March 3, 2013, the second tranche of the Note was paid in full. |
iii) | On
January 14, 2014, the Company received cash proceeds of $25,000 on the third tranche
of the Note. During the year ended December 26, 2014, the Holder converted 1,431,373
shares of common stock of the Company with a fair value of $51,654 for $20,540 of principal
and interest. At December 26, 2014, the Note is recorded at a fully accreted value
of $16,311 less unamortized debt discount of $188. |
iv) | On
March 19, 2014, the Company received cash proceeds of $25,000 on the fourth tranche of
the Note. During the year ended December 26, 2014, the Holder converted 3,800,000 shares
of common stock of the Company with a fair value of $33,410 for $17,364 in principal
and interest, respectively. At December 26, 2014, the Note is recorded at a fully
accreted value of $20,734 less unamortized debt discount of $1,530.
|
v) | On
May 27, 2014, the Company received cash proceeds of $25,000 on the fifth tranche of the
Note. At December 26, 2014, the Note is recorded at a fully accreted value of $49,118
less unamortized debt discount of $7,818. |
vi) | On
July 24, 2014, the Company received cash proceeds of $25,000 on the sixth tranche of
the Note. At December 26, 2014, the Note is recorded at a fully accreted value of
$48,244 less unamortized debt discount of $10,881. |
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On March 6, 2013, the Company issued
a Convertible Promissory Note (“Note”) to JMJ Financial (“Holder”), in the original principal amount of
$275,000 bearing a 12% annual interest rate and maturing in one year for $250,000 of consideration paid in cash and a $25,000 original
issue discount. The Company may repay the Note any time and if repaid within 90 days of date of issue with an interest rate is
0%. This 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.
| i) | On March 6, 2013, the Company received cash of $46,000 in the first
tranche, which was net of original issue discount of $41,067. During the year ended December 31, 2013, the Holder converted 433,705
shares of common stock of the Company with a fair value of $115,758 for $55,000 and $6,600 in principal and interest, respectively.
On November 12, 2013, the first tranche was paid in full. |
| ii) | On June 27, 2013, the Company received the second tranche of $50,000
in cash, which was net of original issue discount of $43,750. During the year ended December 26, 2014, the Holder converted 603,943
shares of common stock of the Company with a fair value of $142,804 for $56,250 and $6,750 in principal and interest, respectively.
On March 3, 2014, the second tranche of the Note was paid in full. |
| iii) | On September 27, 2013, the Company received the third tranche of
$50,000 in cash, which was net of original issue discount of $42,000. During the year ended December 26, 2014, the Holder converted
552,632 shares of common stock of the Company with a fair value of $243,158 for $56,250 and $6,750 in principal and interest, respectively.
On March 26, 2014, the third tranche of the Note was paid in full. |
| iv) | On December 9, 2013, the Company received the fourth tranche of $40,000
in cash, which was net of original issue discount of $36,497. During the year ended December 26, 2014, the Holder converted 432,629
shares of common stock of the Company with a fair value of $96,576 for $45,000 and $5,400 in principal and interest, respectively.
On July 22, 2014, the fourth tranche of the Note was paid in full. |
On April 10, 2013, the Company issued
a Convertible Promissory Note to Iconic Holding, LLC (“Holder”), in the original principal amount of $115,500 bearing
a 5% annual interest rate and maturing April 10, 2014 for $101,200 of consideration paid in cash, $8,800 in issuer expenses and
a $5,500 original issue discount. This unsecured convertible promissory note is convertible into shares of common stock at the
Holder’s option at a variable conversion price calculated at 65% of the lowest trading price of any day during the 10 consecutive
trading days prior to the dated on which the Holder elects to convert all or part of the Note. The Company may repay the convertible
promissory note within 60 days of date of issue at 110% of the original principal amount plus interest, between 60 days and 120
days at 120% of the original principal amount plus interest and between 120 days and 180 days at 130% of the original principal
amount plus interest and 30,000 shares of common stock of the Company with a fair market value of $8,550. Thereafter, the Note
may only be repaid with the consent of the Holder. The Company received cash proceeds of $101,200, which was net of unamortized
discount of $62,192. On October 7, 2013, Company elected to prepay the Convertible Promissory Note for $149,500 in cash. The payment
includes prepayment of $115,500 in original principal a prepayment penalty and outstanding accrued interest of $34,000.
On April 29, 2013, the Company entered
into a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principal amount of $128,500
bearing an 8% annual interest rate and maturing January 31, 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, between 61 days and 90 days at 125% of the original principal amount plus interest,
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. The Company received
cash proceeds of $125,000, which was net of original issue discount of $93,052. On October 24, 2013, Company elected to prepay
the Convertible Promissory Note for $176,291 in cash. The payment includes prepayment of $128,500 in original principal a prepayment
penalty and outstanding accrued interest of $47,791.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On May 17, 2013, the Company entered
into a Convertible Promissory Note with Redwood Fund II, LLC (“Holder”) in the original principal amount of $101,000
bearing a 10% annual interest rate and maturing November 17, 2013. This convertible 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
as 58% of the lowest trading price, determined on the then current trading market for the Company’s common stock, for 20
trading days prior to conversion. The Company received cash proceeds of $101,000, which was net of original issue discount of $76,825.
At December 31, 2013, $60,547 of discount has been amortized. On November 19, 2013, Company elected to prepay the Convertible Promissory
Note for $138,875 in cash. The payment includes prepayment of $101,000 in original principal a prepayment penalty and outstanding
accrued interest of $37,875.
On May 20, 2013, the Company entered
into a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principal amount of $53,000
bearing an 8% annual interest rate and maturing February 20, 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, between 61 days and 90 days at 125% of the original principal amount plus interest,
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. The Company received
cash proceeds of $50,000, which was net of original issue discount of $40,701. On November 20, 2013, Company elected to prepay
the Convertible Promissory Note for $73,641 in cash. The payment includes prepayment of $53,000 in original principal a prepayment
penalty and outstanding accrued interest of $20,641.
On June 4, 2013, the Company entered
into a Convertible Promissory Note with Evolution Capital Fund I, L.P. (“Holder”) in the original principal amount
of $106,000 bearing a 12% annual interest rate and maturing March 4, 2014. This convertible 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 as 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 140% of the original principal amount plus interest, between 121 days and 150 days at
145% of the original principal amount plus interest and between 151 days and 180 days at 150% of the original principal amount
plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $101,000, which
was net of original issue discount of $81,648. On December 31, 2013, Company elected to prepay the Convertible Promissory Note
for $148,400 in cash. The payment includes prepayment of $106,000 in original principal a prepayment penalty and outstanding accrued
interest of $42,400.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On July 11, 2013, the Company entered
into a Convertible Promissory Note (“Note”) with Asher Enterprises, Inc. (“Holder”) in the original principal
amount of $63,000 bearing an 8% annual interest rate and maturing April 15, 2014. 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 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 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, between 61 days and 90 days at 125% of the original principal amount plus interest, 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. The Company received cash proceeds of $60,000,
which was net of original issue discount of $48,400. On January 9, 2014, the Company elected to pay the Note in full for $87,466
in cash allocated to $63,000 and $24,466 in principal and interest, respectively.
On September 16, 2013, the Company entered
into a Convertible Promissory Note (“Note”) with Willow Creek Capital Group, LLC (“Holder”) in the original
principal amount of $130,000 bearing a 12% annual interest rate and maturing July 16, 2014. 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 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, 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 $0.34 per share. The Conversion Price is subject to an anti-dilution adjustment in
the event the Company at any time, while the Notes are outstanding, 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 may repay the Note at 135%
of the original principal amount plus interest. The Company received cash proceeds of $125,000, which was net of original issue
discount of $103,516 and convertible note payable derivative liability of $65,723. During the year ended December 26, 2014, the
Company elected to pay $79,099 in cash and the Holder converted 509,965 shares of common stock of the Company with a fair value
of $113,922 for $53,353 in principal and interest. On July 16, 2014, the Note was paid in full.
On October 31, 2013, the Company issued
a Convertible Promissory Note (“Note”) to Iconic Holding, LLC (“Holder”), in the original principal amount
of $110,250 bearing a 0% annual interest rate and maturing October 31, 2014 for $105,000 of consideration paid in cash and a $5,250
original issue discount. This unsecured Note is convertible into shares of common stock at the Holder’s option at a variable
conversion price calculated at 60% of the lowest trading price of any day during the 10 consecutive trading days prior to the dated
on which the Holder elects to convert all or part of the Note. The Company may repay the Note within 60 days of date of issue at
125% of the original principal amount plus interest, between 60 days and 120 days at 130% of the original principal amount plus
interest plus 30,000 shares of common stock of the Company and between 120 days and 180 days at 135% of the original principal
amount plus interest plus 60,000 shares of common stock of the Company. Thereafter, the Note may only be repaid with the consent
of the Holder. The Company received cash proceeds of $105,000, which was net of unamortized discount of $73,500. At December 31,
2013, $12,284 of discount has been amortized. During the year ended December 26, 2014, the Holder converted 811,462 shares of common
stock of the Company with a fair value of $208,845 for $110,250 of principal and interest. On June 5, 2014, the Note was paid in
full.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On November 4, 2013, the Company entered
into a Convertible Promissory Note (“Note”) with Asher Enterprises, Inc. (“Holder”) in the original principal
amount of $128,500 bearing an 8% annual interest rate and maturing November 4, 2014. 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 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 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, between 61 days and 90 days at 125% of the original principal amount plus interest, 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. The Company received cash proceeds of $125,000,
which was net of original issue discount of $100,496. On May 21, 2014, the Company elected to pay the Note in full for $178,545
in cash allocated to $128,500 and $50,045 in principal and interest, respectively.
On December 9, 2013, the Company entered
into a Convertible Promissory Note (“Note”) with Group 10 Holdings, LLC (“Holder”) in the original principal
amount of $106,000 bearing a 12% annual interest rate and maturing December 9, 2014. 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 10 consecutive trading days prior to the dated on which the
Holder elects to convert all or part of the Note. The Company may repay the 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. Thereafter, the Company subject to the approval of the Holder, may repay the Note at 135% of the original principal
amount plus interest. The Company received cash proceeds of $101,000 which was net of original issue discount of $97,135. During
the year ended December 26, 2014, the Holder converted 993,428 shares of common stock of the Company with a fair value of $214,959
for $105,000 of principal and interest. On September 17, 2014, the Note was paid in full.
On December 12, 2013 the Company entered
into a Convertible Promissory Note (“Note”) with Tonaquint Inc. (“Holder”) in the original principal amount
of $115,000 bearing a 10% annual interest rate and maturing November 12, 2014. The Note is due is 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 Note if the Company pays the holder 125% of the outstanding balance. The Company received cash proceeds of $100,000, which
was net of original issue discount of $83,703. During the year ended December 26, 2014, the Company elected to pay $57,452 in cash
and the Holder converted 713,167 shares of common stock of the Company with a fair market value of $138,205 for $77,528 in principal
and interest. At July 17, 2014, the Note was paid in full.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On December 13, 2013 the Company entered
into a Convertible Promissory Note (“Note”) with Tailwind Partners, LLC (“Holder”) in the original principal
amount of $106,000 bearing a 12% annual interest rate and maturing November 12, 2014. 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 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 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. The Company received cash proceeds of $101,000, which was net of original issue
discount of $83,673. During the year ended December 26, 2014, the Holder converted 761,005 shares of common stock of the Company
with a fair value of $169,979 for $106,000 of principal and interest. On June 24, 2014, the Note was paid in full.
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 Note at any time for a net payment of $136,350. On June 27,
2014, the Company paid the Note in full for $136,350 in cash.
On January 2, 2014, the Company entered
into a Convertible Promissory Note (“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 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 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. During the year ended December 26, 2014, the Holder converted 1,075,051 shares
of common stock of the Company with a fair value of $225,761 for $106,000 of principal and interest. On July 25, 2014, the Note
was paid in full.
On January 8, 2014, the Company entered
into a Convertible Promissory Note (“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 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 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 July 11, 2014, the Company elected to pay
the Note in full for $87,535 in cash allocated to $63,000 and $24,535 in principal and interest, respectively. On July 11, 2014,
the Note was paid in full.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
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 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 July 11, 2014, the Company elected to pay
the Note in full for $144,780 in cash allocated to $101,000 and $43,780 in principal and interest, respectively. On July 11, 2014,
the Note was paid in full.
On January 22, 2014, the Company entered
into a Convertible Promissory Note (“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 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 July 25, 2014, the Company elected to pay the Note in full for $144,443
in cash allocated to $101,000 and $43,443 in principal and interest, respectively.
On January 31, 2014, the Company entered
into a Convertible Promissory Note (“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 Note is due in six equal monthly installments plus interest (“Installment Amount”)
commencing nine 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 Note if the Company pays the
holder 125% of the outstanding balance. In October 2014, the Company paid principal and interest of $88,577 in cash. At December
26, 2014, the Note is recorded at a fully accreted value of $44,039 less unamortized debt discount of $0.
On February 13, 2014, the Company entered
into an Original Issue Discount Secured Promissory Note (“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 prepay this 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 July 7, 2014, the Company paid the Note
is full for $136,350 in cash.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On March 5, 2014, the Company entered
into a Convertible Promissory Note (“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 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 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. During the year ended December 26, 2014, the Holder converted 12,355,951 shares of common stock of the Company
with a fair value of $275,164 for $113,866 of principal and interest. On December 22, 2014, the Note was paid in full.
On March 10, 2014, the Company entered
into a Convertible Promissory Note (“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 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 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. During the year ended December 26, 2014, the Holder converted 4,519,019 shares of
common stock of the Company with a fair value of $194,724 for $101,000 of principal and interest. On November 3, 2014, the Note
was paid in full.
On March 12, 2014, the Company entered
into a Convertible Promissory Note (“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 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 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. During the year ended December 26, 2014, the
Holder converted 3,071,221 shares of common stock of the Company with a fair value of $185,620 for $103,500 of principal and interest.
On October 13, 2014, the Note was paid in full.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On March 24, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Carebourn Capital, L.P. (“Holder”) in the original principal
amount of $112,500 bearing an 8% annual interest rate and maturing November 24, 2014. 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 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 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. During the year ended December 26, 2014, the Company elected to pay $75,289 in cash and
the Holder converted 1,043,153 shares of common stock of the Company with a fair value of $115,166 for $60,000 in principal and
interest. At September 29, 2014, the Note was paid in full.
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 Note at 130%
of the original principal amount plus interest. During the year ended December 26, 2014, the Holder converted 2,386,034 shares
of common stock of the Company with a fair value of $143,162 for $30,000 of principal and interest. At December 26, 2014, the
Note is recorded at a fully accreted value of $317,423 less unamortized debt discount of $814.
On April 2, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Coventry Enterprises, LLC (“Holder”) in the original
principal amount of $101,000 less transaction costs of $13,000 bearing a 10% annual interest rate and maturing April 5, 2015.
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 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 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. During the year ended December 26, 2014, the Holder converted 27,737,439 shares of common stock of the
Company with a fair value of $306,184 for $98,856 of principal and interest. At December 26, 2014, the Note is recorded at
a fully accreted value of $15,205 less unamortized debt discount of $413.
On April 14, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Group 10 Holdings, LLC (“Holder”) in the original principal
amount of $113,000 less original issue discount of $12,000 bearing a 12% annual interest rate and maturing April 17, 2015. 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 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 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 Note at 145% of the original principal
amount plus interest. During the year ended December 26, 2014, the Holder converted 26,340,100 shares of common stock of the Company
with a fair value of $170,445 for $71,944 of principal and interest. At December 26, 2014, the Note is recorded at a fully
accreted value of $90,790 less unamortized debt discount of $10,429.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On April 16, 2014, the Company entered
into a Convertible Promissory Note (“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 $13,000 bearing a 10% annual interest
rate and maturing March 16, 2015. The Note is due in six equal monthly installments plus interest (“Installment Amount”)
commencing nine 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 Note if the Company pays the
holder 125% of the outstanding balance. During the year ended December 26, 2014, the Holder converted 18,429,925 shares of common
stock of the Company with a fair value of $94,398 for $69,530 of principal and interest. At December 26, 2014, the Note is
recorded at a fully accreted value of $88,577 less unamortized debt discount of $18,605.
On April 21, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Tailwind Partners 3, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing January 21, 2015. 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 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 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. During the year ended December 26, 2014,
the Holder converted 459,281 shares of common stock of the Company with a fair value of $103,600 for $71,000 of principal and
interest. During the year ended December 26, 2014, the Holder converted 8,620,690 shares of common stock of the Company with a
fair value of $142,698 for $49,000 of principal and interest. At December 26, 2014, the Note is recorded at a fully accreted
value of $136,503 less unamortized debt discount of $4,156.
On May 14, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with KBM Worldwide, Inc. (“Holder”) in the original principal
amount of $103,500 less transaction costs $3,500 bearing an 8% annual interest rate and maturing February 16, 2015. 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 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 Note if repaid within 60 days of date of issue at 119% of the original principal amount plus interest, between 61 days and
90 days at 125% of the original principal amount plus interest, between 91 days and 120 days at 130% of the original principal
amount plus interest and 121 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the Company
does not have the right of prepayment. During the year ended December 26, 2014, the Holder converted 33,354,930 shares of common
stock of the Company with a fair value of $98,434 for $60,345 of principal and interest. At December 26, 2014, the Note is
recorded at a fully accreted value of $83,014 less unamortized debt discount of $5,595.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On May 27, 2014, the Company issued
a Convertible Promissory Note (“Note”) to JMJ Financial (“Holder”), in the original principal amount of
$330,000 bearing a 12% annual interest rate and maturing in one year for $300,000 of consideration paid in cash and a $30,000
original issue discount. The Company may repay the Note any time and if repaid within 90 days of date of issue with an interest
rate is 0%. This 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) $0.30 or (b) 60% of the lowest trade occurring during the 25
consecutive trading days immediately preceding the conversion date. On May 27, 2014, the Company received cash of $100,000 in
the first tranche, which was net of original issue discount of $10,000. On August 19, 2014, the Company received cash of $50,000
in the second tranche, which was net of original issue discount of $5,000 bearing a 8% annual interest and maturing in one year.
During the year ended December 26, 2014, the Holder converted 8,600,000 shares of common stock of the Company with a fair value
of $25,880 for $14,256 of principal and interest. At December 26, 2014, the first tranche of the Note is recorded at a fully
accreted value of $155,292 less unamortized debt discount of $34,471. At December 26, 2014, the second tranche of the Note is
recorded at a fully accreted value of $87,135 less unamortized debt discount of $27,215.
On June 6, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Firehole River Capital, LLC (“Holder”) in the original
principal amount of $106,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing March 6, 2015. 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 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 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 26, 2014, the Note
is recorded at a fully accreted value of $195,256 less unamortized debt discount of $19,354.
On June 9, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Group 10 Holdings, LLC (“Holder”) in the original principal
amount of $113,000 less an original issue discount of $12,000 bearing a 12% annual interest rate and maturing June 9, 2015. 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 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 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 Note at 145% of the original principal
amount plus interest. At December 26, 2014, the Note is recorded at a fully accreted value of $219,302 less unamortized debt
discount of $42,917.
On July 2, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with KBM Worldwide, Inc. (“Holder”) in the original principal
amount of $78,500 less transaction costs $3,500 bearing an 8% annual interest rate and maturing April 7, 2015. 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 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 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, between 61 days and 90 days at 125% of the original principal amount plus interest,
between 91 days and 120 days at 130% of the original principal amount plus interest and 121 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 26, 2014, the Note
is recorded at a fully accreted value of $4,673 less unamortized debt discount of $0.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On July 3, 2014, the Company received
cash proceed of a Convertible Promissory Note (“Note”) dated June 26, 2014 with JSJ Investment Inc. (“Holder”)
in the original principal amount of $101,000 bearing a 10% annual interest rate and maturing December 27, 2014. 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 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. Upon the maturity date, this note has
a cash redemption value of 135%. This provision only may be exercise if the consent of the Note holder is obtained. At December
26, 2014, the Note is recorded at a fully accreted value of $182,582 less unamortized debt discount of $0.
On July 8, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Tailwind Partners, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing April 8, 2015. 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 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 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 26, 2014, the Note is recorded at a fully
accreted value of $193,334 less unamortized debt discount of $29,073.
On July 11, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Tonaquint Inc. (“Holder”) in the original principal amount
of $225,000 less an original issuer’s discount of $20,000 and transaction costs of $16,000 bearing a 10% annual interest
rate and maturing June 11, 2015. The Note is due in six equal monthly installments plus interest (“Installment Amount”)
commencing nine 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 Note if the Company pays the
holder 125% of the outstanding balance. At December 26, 2014, the Note is recorded at a fully accreted value of $393,021 less
unamortized debt discount of $123,793.
On July 11, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Macallan Partners, LLC (“Holder”) in the original principal
amount of $115,000 less an original issue discount of $14,000 and transaction costs of $8,080 bearing a 0% annual interest rate
and maturing January 7, 2015. 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 58% of the lowest trading price of any day
during the 15 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 60 days of date of issue at 125% of the original principal amount plus interest, and between
61 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. At December 26, 2014, the Note
is recorded at a fully accreted value of $198,276 less unamortized debt discount of $31,888.
On July 15, 2014, the Company issued
a Convertible Promissory Note (“Note”) to Iconic Holding, LLC (“Holder”), in the original principal amount
of $110,250 less an original issue discount of $5,250 and transaction costs of $8,340 bearing a 0% annual interest rate and maturing
July 15, 2015. This unsecured Note is convertible into shares of common stock at the Holder’s option at a variable conversion
price calculated at 60% of the lowest trading price of any day during the 10 consecutive trading days prior to the dated on which
the Holder elects to convert all or part of the Note. The Company may repay the Note within 60 days of date of issue at 125% of
the original principal amount plus interest, between 60 days and 120 days at 130% of the original principal amount plus interest
plus 30,000 shares of common stock of the Company and between 120 days and 180 days at 135% of the original principal amount plus
interest plus 60,000 shares of common stock of the Company. Thereafter, the Note may only be repaid with the consent of the Holder.
At December 26, 2014, the Note is recorded at a fully accreted value of $183,750 less unamortized debt discount of $41,796.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On July 22, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Firehole River Capital, LLC (“Holder”) in the original
principal amount of $106,000 less transaction costs of $8,080 bearing a 12% annual interest rate and maturing April 22, 2015.
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 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 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 26, 2014, the Note
is recorded at a fully accreted value of $192,492 less unamortized debt discount of $44,500.
On July 23, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with WHC Capital, LLC (“Holder”) in the original principal
amount of $101,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing July 23, 2015. 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 58% of the market price which means the average of the lowest three trading prices during the fifteen
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 26, 2014, the Note is recorded at a fully
accreted value of $183,355 less unamortized debt discount of $42,520.
On August 6, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with LG Capital Funding, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 10% annual interest rate and maturing August 6, 2015. 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 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 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. At December 26, 2014, the Note is recorded at a fully accreted value of
$190,820 less unamortized debt discount of $44,627.
On August 8, 2014, the Company entered
into a Convertible Debenture (“Note”) with Daniel James Management, Inc. (“Holder”) in the original principal
amount of $101,000 bearing a 12% annual interest rate and maturing August 8, 2015. 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 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. At
December 26, 2014, the Note is recorded at a fully accreted value of $182,439 less unamortized debt discount of $46,680.
On August 18, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Redwood Fund III, LLC (“Holder”) in the original principal
amount of $262,500 less original issue discount of $12,500 and transaction costs of $22,000 bearing a 11% annual interest rate
and maturing August 18, 2015. 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 as 60% of the lowest trading price, determined
on the then current trading market for the Company’s common stock, for 20 trading days prior to conversion. The Company
may repay any portion of the principal amount at 130% of such amount along with any accrued interest of this Debenture at any
time upon five days written notice to the Holder. At December 26, 2014, the Note is recorded at a fully accreted value of $455,547
less unamortized debt discount of $199,861.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On August 18, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Redwood Management, LLC (“Holder”) in the original principal
amount of $105,000 less original issue discount $5,000 bearing a 11% annual interest rate and maturing August 18, 2015. 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 as 60% of the lowest trading price, determined on the then current trading market for
the Company’s common stock, for 20 trading days prior to conversion. The Company may repay any portion of the principal
amount at 130% of such amount along with any accrued interest of this Debenture at any time upon five days written notice to the
Holder. At December 26, 2014, the Note is recorded at a fully accreted value of $182,219 less unamortized debt discount of
$76,764.
On September 19, 2014, the Company
entered into a Convertible Promissory Note (“Note”) with Eastmore Capital, LLC (“Holder”) in the original
principal amount of $110,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing September 18, 2015.
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 market price which means the average of the lowest trading price
during the fifteen trading day period ending on the latest complete trading day prior to the conversion date. For six months,
the Company may repay any portion of the principal amount at 130% of such amount along with any accrued interest of this Debenture
at any time upon five days written notice to the Holder. Thereafter, the Company does not have the right of prepayment. At
December 26, 2014, the Note is recorded at a fully accreted value of $189,542 less unamortized debt discount of $55,681.
On September 19, 2014, the Company
entered into a Convertible Promissory Note (“Note”) with RDW Capital, LLC (“Holder”) in the original principal
amount of $131,250 less original issue discount of $6,250 bearing a 11% annual interest rate and maturing September 19, 2015.
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 as 60% of the lowest trading price, determined on the then current trading market
for the Company’s common stock, for 20 trading days prior to conversion. The Company may repay any portion of the principal
amount at 130% of such amount along with any accrued interest of this Debenture at any time upon five days written notice to the
Holder. At December 26, 2014, the Note is recorded at a fully accreted value of $225,635 less unamortized debt discount of
$102,059.
On September 24, 2014, the Company
entered into a Convertible Promissory Note (“Note”) with Carebourn Capital, L.P. (“Holder”) in the original
principal amount of $125,289 less transaction costs $6,300 bearing an 12% annual interest rate and maturing June 24, 2015. 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 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 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 and 121 days and 150
days at 130% and between 151 days and 180 days at 135% of the original principal amount plus interest of the original principal
amount plus interest. Thereafter, the Company does not have the right of prepayment. At December 26, 2014, the Note is recorded
at a fully accreted value of $215,542 less unamortized debt discount of $56,696.
On October 1, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with KBM Worldwide, Inc. (“Holder”) in the original principal
amount of $95,000 less transaction costs $10,000 bearing an 8% annual interest rate and maturing July 6, 2015. 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 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 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, between 61 days and 90 days at 125% of the original principal amount plus interest,
between 91 days and 120 days at 130% of the original principal amount plus interest and 121 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 26, 2014, the Note
is recorded at a fully accreted value of $167,105 less unamortized debt discount of $98,311.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES (CONTINUED)
On October 31, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Tailwind Partners, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing July 31, 2015. 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 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 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 26, 2014, the Note is recorded at a fully
accreted value of $186,475 less unamortized debt discount of $146,173.
On November 12, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with LG Capital Funding, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 10% annual interest rate and maturing November 12, 2015. 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 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 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. At December 26, 2014, the Note is recorded at a fully accreted value of
$185,246 less unamortized debt discount of $162,962.
At December 26, 2014 and December
31, 2013, convertible notes payable include accrued interest of $103,555 and $0, respectively, for Notes that principal has been
fully paid.
NOTE 9 – CONVERTIBLE NOTE PAYABLE
DERIVATIVE LIABILITY
The Convertible Promissory Notes (see
Note 8) with Willow Creek Capital Group, LLC with an issue date September 16, 2013, Gemini Master Fund Ltd. with an issue date
of March 27, 2014, JMJ Financial Tranche 1 with an issue date of May 27, 2014, Tonaquint, Inc. with an issue date of April 16,
2014, Tonaquint, Inc. with an issue date of July 11, 2014, Redwood Fund III, Ltd. with an issue date of August 18, 2014, Redwood
Management LLC with an issue date of August 18, 2014, JMJ Financial Tranche 2 with an issue date of August 19, 2014 and RDW Capital,
LLC with an issue date of September 19, 2014 have an initial conversion price that 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
original conversion price.
The Company’s convertible promissory
note derivative liabilities due to anti-dilution adjustments has been measured at fair value at December 26, 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 models
are as follows:
Conversion price | |
| $0.25 - $0.50 | |
Risk free rate | |
| 0.03% - 0.11% | |
Expected volatility | |
| 196% - 282% | |
Dividend yield | |
| 0 | % |
Expected life | |
| 0.03 years – 0.73 years | |
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 9 – CONVERTIBLE NOTE PAYABLE
DERIVATIVE LIABILITY (CONTINUED)
Additionally, the Convertible Promissory
Notes with KBM Worldwide, Inc. with an issue date of October 1, 2014, Tailwind Partner 3, LLC with an issue date of October 31,
2014 and LG Capital Funding, LLC with an issued date of November 12, 2014 were all 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
liabilities has been measured at fair value at December 26, 2014 and December 31, 2013 using the Black-Scholes model.
The inputs into the Black-Scholes models
are as follows:
Conversion price | |
| $0.0008 - $0.0141 | |
Risk free rate | |
| 0.05 | % |
Expected volatility | |
| 130% - 211% | |
Dividend yield | |
| 0 | % |
Expected life | |
| 0.53 years – 1.00 years | |
NOTE 10 – WARRANT DERIVATIVE
LIABILITY
On July 11, 2014, in conjunction with
the issuance of the Convertible Promissory Note issued to Tonaquint, Inc. on July 11, 2014 (see Note 8), the Company issued a warrant
to purchase 271,084 shares of common stock with an exercise price of $0.45 per share and a life of five years.
The warrant 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 $0.45 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, is recorded as a liability.
The warrant derivative liability has
been measured at fair value at July 11, 2014 and December 26, 2014 using a binomial model. Since the Conversion Price contains
an anti-dilution adjustment, the probability that the exercise 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:
Risk free rate | |
| 1.75 | % |
Expected volatility | |
| 170 | % |
Dividend yield | |
| 0 | % |
Expected life | |
| 4.5 years | |
NOTE 11 – CONTINGENT LIABILITY
The Company incurred a contingent liability
related to the 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. The obligation to Qwik was paid in full during
May 2014.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 11 – CONTINGENT
LIABILITY (CONTINUED)
The Company incurred a contingent liability
related to the Asset Acquisition Agreement with Shirley’s Employment Service, Inc. on April 13, 2014. The obligation is due
in monthly installments by paying an amount equal to 5.0% of the monthly accounts receivable collected by operating the Tulsa,
Oklahoma location. The total payments are not to exceed $100,000. The fair value of the obligation is determined by estimating
discounted monthly installments at an interest rate of 12% per annum.
The Company incurred a contingent liability
related to the Asset Acquisition Agreement with Kwik Jobs, Inc. on September 26, 2014. The obligation is due in monthly installments
by paying an amount equal to 5.0% of the monthly accounts receivable collected by operating the Birmingham, Alabama and Decatur,
Georgia locations. The total payments are not expected to exceed $100,000. 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 | |
| Purchase of Shirley’s customer list – April 13, 2014 | | |
| 91,664 | |
| Purchase of Kwik customer list – September 26, 2014 | | |
| 141,529 | |
| Payments | | |
| (156,575 | ) |
| Interest | | |
| 10,023 | |
| Closing balance at December 26, 2014 | | |
$ | 165,862 | |
NOTE 12 – STOCKHOLDERS’
EQUITY
On October 6, 2014 the Company filed
a Certificate of Designation with the Nevada Secretary of State to amend its Articles of Incorporation to create and designate
the rights and preferences of a new series of preferred stock designated the Series A Preferred Stock. The number of shares authorized
as Series A Preferred Stock shall be fifty one (51) shares. Each share of Series A Preferred Stock shall be convertible into one
(1) share of common stock of the Company at the election of the holder and shall have voting rights equal to: (x) 0.019607 multiplied
by the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote (the “Numerator”),
divided by (y) 0.49, minus (z) the Numerator.
On October 22, 2014, the Board of Directors
adopted and approved and the majority shareholder, Ryan Schadel, ratified a Company proposed amendment to the Articles of Incorporation
to increase the number of authorized shares of the Company’s common stock from 150,000,000 to 1,000,000,000. The amendment
is effective November 25, 2014.
Effective February 16, 2015, the Company
filed a Certificate of Amendment to the Articles of Incorporation to increase the number of authorized shares of the Company’s
common stock from 1,000,000,000 to 20,000,000,000 and to decrease the par value common stock from $0.001 per share to $0.00001
per share. The increase in authorized shares and change in par value have been accounted for retroactively in these financial
statements.
Preferred Stock – The Company
has 5,000,000 shares of “blank check” preferred stock authorized. As of December 26, 2014 and December 31, 2013, the
Company had no preferred shares issued and outstanding, respectively.
On October 20, 2014, the Company issued fifty-one
(51) shares of Series A Preferred Stock to Ryan Schadel for his service as the Chief Executive Officer and director of the Company.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 12 – STOCKHOLDERS’
EQUITY (CONTINUED)
Common Stock - The Company has
20,000,000,000 shares of $0.00001 par value common stock authorized. As of December 26, 2014 and December 31, 2013, the Company
had 180,485,103 and 20,982,740 shares issued and outstanding, respectively.
On January 28, 2013, the Company entered
into a Consultant Agreement for a term of six months for general corporate and due diligence services. As compensation, the Company
agreed to issue to the consultant 300,000 shares of unrestricted common stock valued at $72,000 ($0.24 per share) in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012.
On January 28, 2013, the Company entered
into a Consultant Agreement for a term of six months for general corporate and due diligence services. As compensation, the Company
agreed to issue to the consultant 700,000 shares of unrestricted common stock valued at $168,000 ($0.24 per share) in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012.
On January 28, 2013, the Company entered
into a Consultant Agreement for a term of six months. As compensation, the Company agreed to issue to the consultant 500,000 shares
of common stock valued at $120,000 ($0.24 per share) of the Company.
On January 28, 2013, the Company entered
into a Consultant Agreement for services. As compensation, the Company agreed to issue to the consultant 300,000 shares of unrestricted
common stock valued at $72,000 ($0.24 per share) in conjunction with the Form S-8 Registration Statement as filed on July 13, 2012.
In February 21, 2013, the Company issued
50,000 stock options to a director of the Company with an exercise price of $0.56 per share, expiring on February 21, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on February 21,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.86%); expected volatility (166%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $26,244 and expensed in our accompanying
statement of operations.
On February 25, 2013, the Company issued
warrants to purchase 202,000 shares of common stock of the Company with an exercise price of $0.40 per share and no specific term.
These warrants were issued in conjunction to the Convertible Promissory Note the Company entered into on February 25, 2013.
The warrants were measured at their fair value on February 25, 2013 using the following Black-Scholes Model Assumptions: risk free
interest (1.93%); expected volatility (166%); expected life (10 years); no dividends. These warrants were valued at their relative
fair value of $57,359, recorded as a discount to convertible note payable and are deferred and amortized in our accompanying statement
of operations using the straight-line method, which approximates the effective interest method, over the term of the associated
Convertible Promissory Note.
In March 14, 2013, the Company issued
50,000 stock options to a director of the Company with an exercise price of $0.62 per share, expiring on March 14, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on March 14,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.88%); expected volatility (166%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $29,057 and expensed in our accompanying
statement of operations.
On March 20, 2013, the Company agreed
to issue 100,000 shares of its common stock for cash. The shares were issued at $0.50 per share for an aggregate of $50,000.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 12 – STOCKHOLDERS’
EQUITY (CONTINUED)
On April 5, 2013, the Company agreed
to issue 100,000 shares of its common stock for cash. The shares were issued at $0.50 per share for an aggregate of $50,000.
In April 19, 2013, the Company issued
30,000 stock options for employee compensation with an exercise price of $0.41 per share, expiring on April 19, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on April 19,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.72%); expected volatility (167%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $11,559 and expensed in our accompanying
statement of operations.
On May 24, 2013, the Company issued
33,500 of shares of common stock to employees for services rendered by them for an aggregate fair value of $12,395 ($0.37 per share)
based on the quoted market price of the shares at time of issuance in conjunction with the Form S-8 Registration Statement as filed
on July 13, 2012.
In October 28, 2013, the Company issued
1,500,000 stock options for employee compensation with an exercise price of $0.30 per share, expiring on April 28, 2015 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on October 28,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.215%); expected volatility (148%); expected life
(1.5 years); no dividends. These options were immediately vested and exercisable, valued at $226,882 and expensed in our accompanying
statement of operations.
On October 8, 2013, the Company issued
30,000 shares of its common stock with an aggregate fair value of $8,550 ($0.285 per share) based on the quoted market price of
the shares at time of issue to Iconic Holding, LLC for finance costs upon the election of the Company to prepay the Convertible
Promissory Note dated April 10, 2013.
On October 9, 2013, the Company agreed
to issue options to purchase 2,405,037 shares of common stock to nineteen (19) employees of the Company with an exercise price
of $0.05 per share of common stock and a contractual life of ten years in conjunction with the Form S-8 Registration Statement
as filed on July 13, 2012. The stock options as vest follows: 25% on October 9, 2016, 35% on October 9, 2017 and the remaining
40% on October 9, 2018. The options were measured at their fair value on October 9, 2013 using the following Black-Scholes Model
Assumptions: risk free interest (1.73%); expected volatility (147%); expected life (ten years); no dividends. Share-based compensation
related to these common stock option grants for the years ended December 26, 2014 and December 31, 2013 amounted to $29,783 and
$0, respectively, and is reported as stock-based compensation in the statement of operations and additional paid-in capital in
the statement of stockholders’ equity.
In October 28, 2013, the Company issued
50,000 stock options for employee compensation with an exercise price of $0.295 per share, expiring on September 24, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on October 28,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.72%); expected volatility (164%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $13,792 and expensed in our accompanying
statement of operations.
On December 12, 2013, the Company issued
to Group 10 Holdings, LLC in conjunction with the Convertible Promissory Note issued to Group 10 Holdings, LLC on December 9, 2013
40,000 shares of common stock with an aggregate fair value of $10,800 ($0.27 per share) based on the quoted market price of the
for a commitment fee. The commitment fee is included in deferred finance costs and amortized on a straight line, which approximates
the effective interest method, over the life the Convertible Promissory Note.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 12 – STOCKHOLDERS’
EQUITY (CONTINUED)
In December 24, 2013, the Company issued
25,000 stock options for employee compensation with an exercise price of $0.25 per share, expiring on December 24, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on December 24,
2013 using the following Black-Scholes Model Assumptions: risk free interest (1.73%); expected volatility (147%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $5,529 and expensed in our accompanying
statement of operations.
During the year ended December 31, 2013,
the holders of Convertible Promissory Notes (see Note 8) converted 2,152,240 shares of common stock of the Company with a fair
value of $678,030 to settle $328,400 of principal and interest.
On February 11, 2014, the Company issued
100,000 shares of common stock for professional services valued at $21,000 ($0.02 per share).
On July 11, 2014, the Company issued
100,000 shares common stock in satisfaction of stock payable for $23,000 in stock-based compensation for professional fees.
On November 1, 2014, the Company issued
500,000 shares of common stock for investor relations valued at $11,100 ($0.0222 per share) based on the quoted market price of
the shares at time of issuance.
On May 24, 2013, the Company issued
390,000 of shares of common stock to employees for services rendered by them for an aggregate fair value of $429 ($0.0.0021 per
share) based on the quoted market price of the shares at time of issuance.
During the year ended December 26, 2014,
the holders of Convertible Promissory Notes (see Note 8) converted 158,382,363 shares of common stock of the Company with a fair
value of $3,448,803 to settle $1,575,531 of principal and interest.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 12 – STOCKHOLDERS’
EQUITY (CONTINUED)
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 | |
| 50,000 | | |
$ | 0.06 | |
Forfeited or expired | |
| (1,057,478 | ) | |
$ | 0.05 | |
Exercised | |
| — | | |
| — | |
Outstanding– December 26, 2014 | |
| 2,875,977 | | |
$ | 0.19 | |
Exercisable – December 26, 2014 | |
| 1,885,000 | | |
$ | 0.33 | |
The following table summarizes information
on stock options exercisable as of December 26, 2014:
| Exercise Price | | |
| Number Outstanding at December 26, 2014 | | |
| Average Remaining Life (Years) | | |
| Aggregate Intrinsic Value | |
$ | 0.021 | | |
| 25,000 | | |
| 4.86 | | |
| — | |
$ | 0.105 | | |
| 25,000 | | |
| 4.77 | | |
| — | |
$ | 0.25 | | |
| 25,000 | | |
| 4.00 | | |
| — | |
$ | 0.295 | | |
| 50,000 | | |
| 3.75 | | |
| — | |
$ | 0.30 | | |
| 1,500,000 | | |
| 0.34 | | |
| — | |
$ | 0.41 | | |
| 30,000 | | |
| 3.32 | | |
| — | |
$ | 0.50 | | |
| 130,000 | | |
| 4.00 | | |
| — | |
$ | 0.56 | | |
| 50,000 | | |
| 3.16 | | |
| — | |
$ | 0.62 | | |
| 50,000 | | |
| 3.22 | | |
| — | |
The following table summarizes information
on stock options outstanding as of December 26, 2014:
| Exercise Price | | |
| Number Outstanding at December 26, 2014 | | |
| Average Remaining Life (Years) | | |
| Aggregate Intrinsic Value | |
$ | 0.21 | | |
| 25,000 | | |
| 4.86 | | |
| — | |
$ | 0.05 | | |
| 990,977 | | |
| 8.79 | | |
| — | |
$ | 0.105 | | |
| 25,000 | | |
| 4.77 | | |
| — | |
$ | 0.25 | | |
| 25,000 | | |
| 4.00 | | |
| — | |
$ | 0.295 | | |
| 50,000 | | |
| 3.75 | | |
| — | |
$ | 0.30 | | |
| 1,500,000 | | |
| 0.34 | | |
| — | |
$ | 0.41 | | |
| 30,000 | | |
| 3.32 | | |
| — | |
$ | 0.50 | | |
| 130,000 | | |
| 4.00 | | |
| — | |
$ | 0.56 | | |
| 50,000 | | |
| 3.16 | | |
| — | |
$ | 0.62 | | |
| 50,000 | | |
| 3.22 | | |
| — | |
The following is a summary of warrants
activity during December 26, 2014:
| |
Number of Shares | |
Weighted Average Exercise Price |
Balance, January 1, 2014 | |
| 502,000 | | |
$ | 0.40 | |
Warrants granted and assumed Warrants canceled | |
| 1,339,286 | | |
$ | 0.04 | |
Warrants expired | |
| — | | |
| — | |
Balance, December 26, 2014 | |
| 1,841,286 | | |
$ | 0.14 | |
| (1) | The
number of warrants is equal to $56,250 divided by the market price. Market price is defined
as greater of (i) the closing price of common stock on the issue date and (ii) the VWAP
of the common stock for the trading day that is 2 trading days prior to the exercise
price. At December 26, 2014, the number of warrants granted and assumed is calculated
to be 1,339,286. The initial exercise price of the warrants is $0.45 per common share
subject to adjustment for dilutive issuances. As December 26, 2014, the exercise price
was $0.04 per share. |
All
warrants outstanding as of December 26, 2014 are exercisable.
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
NOTE 13 – INCOME
TAXES
As of December 26, 2014, the Company
had net operating loss carry forwards of $2,880,251 that may be available to reduce future years’ taxable income
through 2032 and 2034. Future tax benefits which may arise as a result of these losses have not been recognized in these
financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation
allowance for the deferred tax asset relating to these tax loss carryforwards.
Components of net deferred tax assets,
including a valuation allowance, are as follows at December 26, 2014 and December 31, 2013:
| |
2014 | |
2013 |
| |
| | | |
| | |
Net loss before taxes | |
$ | (5,119,506 | ) | |
$ | (2,722,980 | ) |
| |
| | | |
| | |
Permanent adjustments: | |
| | | |
| | |
Stock based compensation | |
| 104,360 | | |
| 801,915 | |
Meals and Entertainment | |
| 55,661 | | |
| 12,926 | |
Amortized debt discount | |
| 4,146,475 | | |
| 682,603 | |
Non-deductible expenses | |
| 123,022 | | |
| | |
Temporary adjustments: | |
| | | |
| | |
Bad debt expense | |
| — | | |
| 113,538 | |
NOL loss carryforward | |
| (689,988 | ) | |
| (1,111,998 | ) |
| |
| | | |
| | |
Tax rate | |
| 35 | % | |
| 35 | % |
Recovery) Provision for income taxes | |
| (241,496 | ) | |
| (389,000 | ) |
Less: Valuation allowance | |
| 241,496 | | |
| 389,000 | |
Net deferred tax asset | |
$ | — | | |
$ | — | |
The valuation allowance for deferred
tax assets as of December 26, 2014 was $1,008,088. In assessing the recovery of the deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences
become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income,
and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred
tax assets would not be realized as of December 26, 2014 and December 31, 2013.
Reconciliation between the statutory
rate and the effective tax rate is as follows at December 26, 2014 and December 31, 2013:
|
2013 |
2013 |
Federal statutory tax rate |
(35.0)% |
(35.0)% |
Valuation allowance |
35.0% |
35.0% |
|
- % |
- % |
LABOR SMART, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 26, 2014
Below is a chart showing the estimated
corporate federal net operating loss (NOL) and the year in which it will expire.
Year | |
Amount | |
Expiration |
| 2014 | | |
$ | 689,988 | | |
| 2034 | |
| 2013 | | |
$ | 1,903,087 | | |
| 2033 | |
| 2012 | | |
$ | 287,176 | | |
| 2032 | |
The tax years 2014, 2013, 2012 and 2011
remain open to examination by the major taxing jurisdictions in which the Company operates. The Company expects no material changes
to unrecognized tax positions within the next twelve months.
NOTE 14 – COMMITMENTS
The Company leases office premises under
31 operating leases with terms from month to month to five years. Rental expenses was $443,802 and $236,734 for the years ended
December 26, 2014 and December 31, 2013, respectively.
The following table is a schedule
of future minimum lease commitments for the Company:
Period ending December 31, |
2015 |
$ 483,201 |
|
2016 |
382,161 |
|
2017 |
260,679 |
|
2018 |
185,301 |
|
2019 |
105,565 |
|
|
$ 1,416,907 |
NOTE 15 – SUBSEQUENT
EVENTS
From December 27, 2014 to March
30, 2015, the holders of Convertible Promissory Notes (see Note 8) converted 2,907,605,253 shares of common stock of the Company
with a fair value of $920,071 to settle $463,833 of principal and interest.
On January 13, 2015, the
Company entered into a Second Amendment to Purchase and Sale Agreement (the “Amendment”) with Transfac. The Amendment
amended the original Purchase and Sale Agreement entered into July 31, 2013, as amended on February 27, 2014 (the “Agreement”).
Under the terms of the Amendment, the definition of “Advance Rate” was amended to read: “Advance Rate”
means 90% or such other percent as may be determined from time to time by Transfac in its sole discretion. The previous “Advance
Rate” was 85%. The definition of “Account Due Date” was amended to read: “Account Due Date” 90 days
from the date of the invoice evidencing the Account. The previous “Account Due Date” was 80 days. The definition of
“Maximum Advances” was amended to read: “Maximum Advances” means the maximum aggregate amount of Outstanding
Advances, which amount shall not exceed $4,000,000, or such other amount as may be determined from time to time by Transfac in
its sole discretion. The previous “Maximum Advances” were $2,000,000. The definition of “Contract Term”
was amended to read: “Contract Term” means an initial period of 24 months commencing on the date of this signed Second
Amendment to Purchase and Sale Agreement and renewal periods of 1 year thereafter. The previous “Contract Term” was
18 months. Finally, the following definition was added: “Origination Fee” means 0.25% of the Maximum Advances
which was due and payable on the date of this signed Second Amendment to Purchase and Sale Agreement. All other provisions of
the Agreement remain in full force and effect.
On January 27, 2015, the Company
entered into a Partial Note Prepayment Agreement with Firehole River Capital, LLC (“Lender”) for the Convertible Promissory
Note with a face value of $106,000 dated June 6, 2014. The Lender agreed to allow the Company to pay off $20,000 of principal by
paying $25,000 in cash.
On January 27, 2015, the Company
entered into a Partial Note Prepayment Agreement with Tailwind Partners, LLC (“Lender”) for the Convertible Promissory
Note with a face value of $106,000 dated July 8, 2014. The Lender agreed to allow the Company to pay off $53,000 of principal by
paying $64,000 in cash.
On January 27, 2015, the Company
entered into a Partial Note Prepayment Agreement with Firehole River Capital, LLC (“Lender”) for the Convertible Promissory
Note with a face value of $106,000 dated July 22, 2014. The Lender agreed to allow the Company to pay off $53,000 of principal
by paying $64,000 in cash.
Effective February 16, 2015, the Company
filed a Certificate of Amendment to the Articles of Incorporation to increase the number of authorized shares of the Company’s
common stock from 1,000,000,000 to 20,000,000,000 and to decrease the par value common stock from $0.001 per share to $0.00001
per share.. The increase in authorized shares and change in par value have been accounted for retroactively in these financial
statements.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No events occurred requiring
disclosure under Item 304 of Regulation S-K during the fiscal year ending December 26, 2014.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As required
by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this annual report, being December 26, 2014. This evaluation was
carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer.
Disclosure
controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Securities Exchange Act of 1934 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 controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed
under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Based
upon that evaluation, including our Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure
controls and procedures were not effective as of the end of the period covered by this annual report.
Management’s
Report on Internal Control over Financial Reporting
Our management
is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934). Management has assessed the effectiveness of our internal control over financial reporting
as of December 26, 2014 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 26, 2014,
our internal control over financial reporting was not effective. Our management identified the following material weaknesses in
our internal control over financial reporting, which are indicative of many small companies with small staff: (i) we do not have
an audit committee of the Board of Directors or a financial expert serving on the Board of Directors (ii) inadequate segregation
of duties and effective risk assessment; and (iii) insufficient written policies and procedures for accounting and financial reporting
with respect to the requirements and application of both US GAAP and SEC guidelines (iv) deficient design of our management information
systems and information technology because the potential for unauthorized access to certain information systems and software applications
existed during 2014 in several departments, including corporate accounting. Certain key controls for maintaining the overall integrity
of systems and data processing were not properly designed and operating effectively.
We plan
to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by
this annual report on Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such
weaknesses, we hope to implement the following changes during our fiscal year ending December 25, 2015: (i) appoint additional
qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written
policies and procedures for accounting and financial reporting. The remediation efforts set out in (i) and (ii) are largely dependent
upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing
such funds, remediation efforts may be adversely affected in a material manner.
This
annual report does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting
firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer
Protection Act.
ITEM 9B. OTHER INFORMATION
None.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
The directors and executive
officers of the Company are:
Name Age Position
Ryan
Schadel |
|
36 |
|
Chief
Executive Officer, Chief Financial Officer, Chairman |
Kimberly
Thompson |
|
47 |
|
Chief
Operating Officer |
James
Robert Edmonds |
|
36 |
|
Director |
Matthew
Rodgers |
|
51 |
|
Director
(resigned March 9, 2015) |
Ryan
Schadel , our founder, Chief Executive Officer, Chief Financial Officer and Chairman, has nearly 13 years’ experience
in the temporary staffing industry. During these 12 years he has held numerous positions, starting as a sales rep in January 2000
with a nationwide temporary staffing company. Of his nearly 13 years’ experience in our industry, 11 have been in a management
or executive capacity, and 8 of those years in a multi-unit management capacity. Mr. Schadel’s experience as our founder
qualifies him to serve on our board of directors.
Kimberly
Thompson has served as our Chief Operating Officer 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.
James
Robert Edmonds has served as a member of our board of directors since October 2014. Mr. Edmonds is a
principal product manager at ServiceNow, Inc. in Santa Clara, California. His tenure with ServiceNow began in 2009 as
a consultant. In 2011 he was promoted to Technical Architect, and in 2013 he was promoted to principal product manager. Prior
to his tenure with ServiceNow, Mr. Edmonds was a technical consultant with C3i Business Solutions where he served from 2007 until
2009. Prior to his position at C3i, Mr. Edmonds served as the Mobile Solutions Engineer for Cox Communications, Virginia.
His tenure at Cox began in 2000 and he served until 2007.
Matthew
Rodgers has served as a member of our board of directors since October 2014. Mr. Rodgers is the President of iprospectcheck.com,
a privately held employment screening firm located in Folsom, California. His tenure with iprospectcheck.com began in 2009. Prior
to his tenure with iprospectcheck.com, Mr. Rodgers was the President and Chief Executive Officer of Interim Healthcare Staffing
where he served from 2003 until 2012. Prior to his position at Interim HealthCare Staffing, Mr. Rodgers served as Executive Vice
President and Chief Operating Officer of Labor Ready, Inc. His tenure at Labor Ready began in 1998 and he served until 2003. Mr.
Rodger resigned as a member of the Board of Directors on March 9, 2015.
The board
of directors has no nominating, auditing or compensation committees.
None
of our directors qualify as “independent” as that term is defined under the applicable rules and regulations of the
SEC, meaning that our directors may have business interests in the Company that would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. We believe that our chief executive officer is capable of analyzing
and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We believe
that retaining an independent director who would qualify as an "audit committee financial expert" would be overly costly
and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not
generated any material net income to date. In addition, we currently do not have nominating, compensation or audit committees
or committees performing similar functions nor do we have a written nominating, compensation or audit committee charter. Our board
of directors does not believe that it is necessary to have such committees because it believes the functions of such committees
can be adequately performed by our board of directors. Further, we are not a "listed company" under SEC rules and thus
we are not required to have a compensation committee or a nominating committee.
We do
not have any defined policy or procedure requirements for shareholders to submit recommendations or nominations for directors.
Our board of directors believes that, given the early stages of our development, a specific nominating policy would be premature
and of little assistance until our business operations develop to a more advanced level. We do not currently have any specific
or minimum criteria for the election of nominees to our board of directors and we do not have any specific process or procedure
for evaluating such nominees. Our board of directors assesses all candidates, whether submitted by management or shareholders,
and makes recommendations for election or appointment.
A shareholder
who wishes to communicate with our board of directors may do so by directing a written request addressed to our Chief Executive
Officer at the address appearing on the face page of this Prospectus.
Term of Office
Our directors
are appointed to hold office until removed from office or until his successor has been elected and qualified in accordance with
our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
All officers
and directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors
have been duly elected and qualified. There are no agreements with respect to the election of Directors. Officers are appointed
annually by our Board of Directors and each Executive Officer serves at the discretion of our Board of Directors. We do not have
any standing committees. Our Board of Directors may in the future determine to pay Directors’ fees and reimburse Directors
for expenses related to their activities.
None
of our Officers and/or Directors have filed any bankruptcy petition, been convicted of or been the subject of any criminal proceedings
or the subject of any order, judgment or decree involving the violation of any state or federal securities laws within the past
five (5) years.
Audit
Committee
We do
not have an audit committee of the Board of Directors. Management has determined not to establish an audit committee at present
because of our limited resources and limited operating activities do not warrant the formation of an audit committee or the expense
of doing so. We do not have a financial expert serving on the Board of Directors or employed as an officer based on management’s
belief that the cost of obtaining the services of a person who meets the criteria for a financial expert under Section 407 of
the Sarbanes-Oxley Act of 2002 and Item 407(d) of Regulation S-K is beyond our limited financial resources and the financial skills
of such an expert are simply not required or necessary for us to maintain effective internal controls and procedures for financial
reporting in light of the limited scope and simplicity of accounting issues raised in our financial statements at this stage of
our development.
Family
Relationships
None.
Involvement
in Certain Legal Proceedings
Our
directors, executive officers and control persons have not been involved in any of the following events during the past five years:
1.
|
any bankruptcy petition
filed by or against any business of which such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time; |
2.
|
any conviction in
a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
3.
|
being subject to
any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or
banking activities; or |
4.
|
being found by a
court of competent jurisdiction (in a civil action), 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. |
Section
16(a) Beneficial Ownership Compliance
Section
16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common
stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission
and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written
representations from certain reporting persons, we believe that during fiscal year ended December 26, 2014, all filing requirements
applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.
Code
of Ethics
At
this time the Company has not established any code of conduct and ethics
ITEM 11. EXECUTIVE COMPENSATION
The following
table sets forth information concerning the annual and long-term compensation awarded to, earned by, or paid to the named executive
officer for all services rendered in all capacities to our company, or any of its subsidiaries, for the years ended December 26,
2014 and December 31, 2013:
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
and |
|
|
All Other |
|
|
|
|
Name and |
|
|
|
|
|
Compen- |
|
|
|
|
|
Stock |
|
|
Warrant |
|
|
Compen- |
|
|
|
|
Principal Position |
|
|
Salary |
|
|
sation |
|
|
Bonus |
|
|
Awards |
|
|
Awards |
|
|
sation |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ryan Schadel |
2014 |
|
$ |
133,330 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
133,330 |
|
Chief Executive
Officer and Chief Financial Officer |
2013 |
|
$ |
104,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kimberly Thompson |
2014 |
|
$ |
14,618 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
14,618 |
|
Chief Operating Office |
2013 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
Employment Agreements
The Company has no formal
employment agreements.
Compensation
of Directors
The
general policy of the Board of Directors is that compensation for independent Directors should be a nominal cash fee plus equity-based
compensation. We do not pay employee Directors for Board service in addition to their regular employee compensation. The Board
of Directors have the primary responsibility for considering and determining the amount of Director compensation.
The
following table shows amounts earned by each Director in the fiscal year ended December 26, 2014.
| |
| |
| |
| |
| |
Change in | |
| |
|
| |
| |
| |
| |
| |
Pension | |
| |
|
| |
Fees | |
| |
| |
| |
Value
and | |
| |
|
| |
Earned | |
| |
| |
Non-Equity | |
Nonqualified | |
| |
|
| |
or
Paid | |
| |
| |
Incentive | |
Deferred | |
| |
|
| |
in | |
Stock | |
Warrant | |
Plan | |
Compensation | |
All Other | |
|
Director | |
Cash | |
Awards | |
Awards | |
Compensation | |
Earnings | |
Compensation | |
Total |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ryan Schadel | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Matthew Rodgers | |
$ | — | | |
$ | 2,218 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 2,218 | |
Matthew Rodgers | |
$ | — | | |
$ | 484 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 484 | |
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following
table sets forth information with respect to the beneficial ownership of our Common Stock as of March 26, 2014 for:
| l | each
of our executive officers and directors; |
| l | all
of our executive officers and directors as a group; and |
| l | any
other beneficial owner of more than 5% of our outstanding Common Stock. |
Beneficial
ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities
to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares
issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days. Except as otherwise
indicated, all persons listed below have sole voting and investment power with respect to the shares beneficially owned by
them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for
any other purpose.
Except
as otherwise noted, the address of the individuals in the following table below is c/o Labor Smart Inc., 3270 Florence Road, Suite
200, Powder Springs, GA 30127.
| |
Number of | |
|
| |
Shares | |
|
| |
Beneficially | |
|
Name of Beneficial Owner | |
Owned | |
Percentage (1) |
Officers and Directors | |
| | | |
| | |
Ryan Schadel | |
| 35,054,792 | (2) | |
| 1.1 | % |
Kimberly Thompson | |
| 198,300 | | |
| * | |
Matthew Rodgers | |
| 125,000 | (3) | |
| * | |
James Edmonds | |
| 309,750 | | |
| * | |
All officers and directors as a group (4 persons) | |
| 35,687,842 | | |
| 1.2 | % |
(1) |
|
Based
on 3,088,060,356 shares of common stock issued and outstanding as of March 30, 2015. |
(2) |
|
Includes
51 shares issuable upon conversion of 51 shares of Series A Preferred Stock. Excludes 50,000 shares owned by the Mr. Schadel’s
wife and 210,000 shares issuable upon exercise of options held by Mr. Schadel’s spouse. Each share of Series A Preferred
Stock has voting rights equal to: (x) 0.019607 multiplied by the total issued and outstanding shares of common stock eligible
to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. |
(3) |
|
Represents
shares issuable upon exercise of options. |
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
No
director, executive officer, principal shareholder holding at least 5% of our common shares, or any family member thereof, had
any material interest, direct or indirect, in any transaction, or proposed transaction, during the year ended December 26, 2014,
in which the amount involved in the transaction exceeded or exceeds the lesser of $120,000 or one percent of the average of our
total assets at the year end for the last three completed fiscal years.
ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
The
following table sets forth the fees billed and to be billed by
our principal independent accountants, SingerLewark and De Joya Griffith, LLC, for each of our last two fiscal years for
the categories of services indicated.
|
Years
Ended December 31, |
Category
|
2014 |
2013 |
Audit Fees |
$ |
88,500 |
$ |
44,225 |
Audit Related Fees |
|
* |
|
* |
Tax Fees |
|
* |
|
* |
All Other Fees |
|
* |
|
* |
Total |
$ |
88,500 |
$ |
44,225 |
Audit
fees. Consists of fees billed for the audit of our annual financial statements and review of our interim financial information
and services that are normally provided by the accountant in connection with year-end and quarter-end statutory and regulatory
filings or engagements.
Audit-related
fees. Consists of fees billed for services relating to review of other regulatory filings including registration statements,
periodic reports and audit related consulting.
Tax
fees. Consists of professional services rendered by our principal accountant for tax compliance, tax advice and tax planning.
Other
fees. Other services provided by our accountants.
ITEM 15. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES
___________
(1) Filed
herewith
Financial
Statement Schedules
None
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.
|
Labor Smart, Inc.
|
|
|
|
|
|
|
April 10, 2015 |
By: |
/s/
Ryan Schadel |
|
|
Ryan Schadel |
|
|
President,
Treasurer, Director, Chief Executive and
Chief Accounting
Officer (Principal Executive and Principal 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.
April 10, 2015 |
/s/
Ryan Schadel |
|
Ryan Schadel
President,
Treasurer, Director, Chief Executive and
Chief Accounting
Officer |
|
|
|
|