The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The Staffing Group Ltd., and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Year Ended December 31,
|
|
|
For the Three Months Ended March 31, 2016
|
|
For the Year Ended December 31, 2015
|
|
|
2016
|
|
2015
|
|
|
(Predecessor)
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,853,796
|
)
|
|
$
|
(272,364
|
)
|
|
|
$
|
(125,471
|
)
|
|
$
|
(74,216
|
)
|
Adjustments to reconcile net loss to net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
44,978
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Depreciation
|
|
|
—
|
|
|
|
—
|
|
|
|
|
993
|
|
|
|
3,971
|
|
Amortization of intangible assets
|
|
|
180,000
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of customer relationships and non-compete agreements
|
|
|
613,000
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of goodwill
|
|
|
761,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
2,366,870
|
|
|
|
4,265
|
|
|
|
|
11,489
|
|
|
|
124,821
|
|
Stock-based compensation
|
|
|
109,200
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Change in fair value of derivative liabilities
|
|
|
(132,195
|
)
|
|
|
98,959
|
|
|
|
|
—
|
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(881,775
|
)
|
|
|
—
|
|
|
|
|
(22,569
|
)
|
|
|
162,081
|
|
Prepaid expenses and other current assets
|
|
|
(2,833
|
)
|
|
|
120,548
|
|
|
|
|
—
|
|
|
|
600
|
|
Accounts payable
|
|
|
396,080
|
|
|
|
49,431
|
|
|
|
|
129,895
|
|
|
|
298,314
|
|
Accounts payable - related party
|
|
|
430,978
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Accrued liabilities
|
|
|
41,200
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Accrued liabilities - related party
|
|
|
83,900
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Net cash (used in) discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
156,607
|
|
|
|
839
|
|
|
|
|
(5,663
|
)
|
|
|
515,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(1,364
|
)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Business acquisition - purchase of four branches
|
|
|
(1,080,000
|
)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Cash used for split-off of subsidiary, EmployUS, Ltd.
|
|
|
—
|
|
|
|
(25,710
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) discontinued operations
|
|
|
—
|
|
|
|
272,062
|
|
|
|
|
—
|
|
|
|
—
|
|
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
|
|
(1,081,364
|
)
|
|
|
246,352
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in bank indebtedness
|
|
|
123,156
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from common stock
|
|
|
7,000
|
|
|
|
80,000
|
|
|
|
|
—
|
|
|
|
—
|
|
Net cash used to repay loan payable to factor
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(220,105
|
)
|
|
|
(209,752
|
)
|
Proceeds from convertible notes payable
|
|
|
1,430,710
|
|
|
|
80,000
|
|
|
|
|
—
|
|
|
|
—
|
|
Repayment of convertible notes payable
|
|
|
(678,609
|
)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Advance from stockholder
|
|
|
28,500
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Repayment to stockholder
|
|
|
—
|
|
|
|
(8,609
|
)
|
|
|
|
—
|
|
|
|
—
|
|
Non-controlling interest
|
|
|
14,000
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Net distribution to Labor Smart, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
|
225,768
|
|
|
|
(305,819
|
)
|
Net cash (used in) discontinued operations
|
|
|
—
|
|
|
|
(398,582
|
)
|
|
|
|
—
|
|
|
|
—
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
924,757
|
|
|
|
(247,191
|
)
|
|
|
|
5,663
|
|
|
|
(515,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF YEAR
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF YEAR
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash paid for interest
|
|
$
|
129,942
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock issued in connection with issuance of convertible notes payable
|
|
$
|
750,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Note payable issued in connection with business acquisition
|
|
$
|
506,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued in connection with business acquisition
|
|
$
|
1,080,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued convertible stock
|
|
$
|
5,570
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 1 - Description of Business
EmployUS, LLC (“EmployUS”) a Delaware Limited Liability Company, was formed on September 30, 2010 having a perpetual existence and was a full service turnkey staffing company. Initially established to respond to the relief and recovery of the major oil spill in the Gulf of Mexico, EmployUS, was expanded to provide services on most major construction, chemical, and maritime projects in the Southeast United States. From its single initial project four years ago, EmployUS, grew to nine offices in three states, with more than 300 customers and that provided employment to over 4,500 individuals as of December 31, 2014.
Effective July 1, 2013, EmployUS, changed its corporate status from a limited liability company to a “C” corporation and its state of registration from Delaware to Nevada. As a result of these changes, the new name of EmployUS became EmployUS, Ltd. (“EmployUS, Ltd.”).
On January 22, 2014, The Staffing Group Ltd. (“the Company”) entered into a Share Exchange Agreement (the “Exchange Agreement”) with EmployUS, Ltd., all of the stockholders of EmployUS, Ltd. (the “EmployUS, Ltd. Shareholders”), and the Company’s controlling stockholders. The Exchange Agreement closed on February 14, 2014. Pursuant to the terms and conditions of the final, fully executed Exchange Agreement and upon the consummation of the closing, the Company issued an aggregate of 263,076 to the shareholders of EmployUS Ltd in exchange for the transfer of the EmployUS, Ltd. common stock. Additionally, three of the Company’s stockholders agreed to cancel an aggregate of 263,076 of the Company’s common stock.
Following the Exchange Agreement, there are 702,000 shares of the Company’s common stock issued and outstanding, which include 263,076 shares held by the former stockholders of EmployUS, Ltd. and 121,000 shares held by Brian McLoone, EmployUS Ltd.’s Chief Operating Officer but not a stockholder of EmployUS Ltd. prior to the merger. As a result, EmployUS, Ltd. pre-merger stockholders, including Brian McLoone, hold approximately 54.72% of the Company’s issued and outstanding shares of common stock and the former stockholders of the Company hold approximately 45.28%.
Upon closing of the Exchange Agreement, EmployUS, Ltd. became a wholly owned subsidiary of the Company. The Company ceased its prior operations and became engaged in the business of EmployUS, Ltd. As the Company was formerly a shell company, no pro forma disclosures were required. The Exchange Agreement was accounted for as a reverse merger and recapitalization and EmployUS, Ltd. was deemed to be the acquirer in the reverse merger for accounting purposes and the Company was deemed the legal acquirer. The Company therefore, take on EmployUS, Ltd.’s operating history.
On November 13, 2015, the Board of Directors approved the issuance of two (2) shares of Series A Preferred Stock to each of its current, at that time, directors, Brian McLoone and Brent Callais.
On December 18, 2015, the Board approved the issuance of one (1) share of Series A Preferred Stock to Labor Smart, Inc., a 18.45% shareholder of common stock, in conjunction with the issuance of a convertible promissory note dated December 18, 2015.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 1 - Description of
Business (Continued)
The fair value of Series A Preferred Stock was determined to be $0 per share as the holders do not have the right to receive dividends or distributions, the holders do not have the right to receive asset upon any liquidation of the Company and the Company may redeem Series A Preferred Stock for no consideration.
On December 22, 2015, the Company entered into a Licensing Agreement with Labor Smart, Inc. whereby Labor Smart, Inc. has granted the Company an exclusive license to use their trademarked name in connection with general advertising materials, point of sale displays and other promotional materials. As consideration for the use of the trademarked name, the Company agreed to pay to Labor Smart, Inc. a one-time fee of $5,000 for each newly opened branch location that is opened under the name of Labor Smart, Inc.
On December 28, 2015, the Company incorporated a subsidiary, Staff Fund I, LLC, a Nevada Limited Liability Company.
On December 31, 2015, the Company entered into a Stock Purchase Agreement (“SPA”) with Pour Les Enfant, LLC, a Louisiana limited liability company (“Pour Les Enfant”). Pursuant to the SPA, the Company, as sole shareholder of EmployUS, Ltd. completed the split-off by transferring to Pour Les Enfant all outstanding shares and tangible assets of EmployUS, Ltd. (the “split-off transaction”). In consideration thereof, Pour Les Enfant assumes all liabilities of EmployUS, Ltd. associated with monies owed to the Internal Revenue Service for late payroll taxes; and all corporate, personal, and validity guarantees associated the Crestmark Bank Loan and Security Agreement. Pursuant to the SPA, Brent Callais and Brian McLoone, directors, executives and controlling shareholders of the Company, each agree to transfer to the Company 91,000 shares of the Company’s common stock and one share of the Company’s preferred stock, for immediate cancellation. As a result of the cancellation of the two (2) preferred shares by Brent Callais and Brian McLoone, there was a change in control of the Company as Labor Smart, Inc. holds the one (1) remaining outstanding preferred share of the Company.
The financial results of EmployUS, Ltd. qualifies for reporting as a discontinued operations. A substantial portion of the Company’s 2015 financial statements have been reclassified to conform to the reporting of discontinued operations adopted in the current year. (See Note 4).
In January 2016, the Company commenced operations of one (1) staffing location Montgomery, Alabama through the subsidiary, Staff Fund I, LLC. This subsidiary recruits, hires, employs and manages skilled and unskilled workers that it places with its client companies. During the year ended December 31, 2016. Staff Fund I, LLC issued membership interests for cash proceeds of $14,000. At December 31, 2016, 7% of Staff Fund I, LLC’s membership interest are held by non-controlling interest.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 1 - Description of
Business (Continued)
On April 1, 2016, the Company purchased the operating assets of four (4) branch locations in Charlotte, NC, Indianapolis, IN, Nashville, TN and Raleigh, NC from Labor Smart, Inc. for consideration with a fair value of $2,666,000. The one-time fee of $5,000 for the (4) newly opened branches which were opened under the Labor Smart, Inc. name totaling $20,000 was waived. As a requirement of the purchase of the operating assets, the one (1) issued and outstanding share of Series A Preferred Stock owed by Labor Smart, Inc. was transferred to Kimberly Thompson, the Chief Executive Officer of the Company in addition the CEO stepped down from any former position she held with Labor Smart, Inc. Each share of Series A Preferred Stock gives the holder voting rights equal to 2 votes for every one share of common stock outstanding at the time of a vote of shareholders and does not have any additional rights or preferences. As such, at December 31, 2016, Kimberly Thompson controlled the majority of shareholder votes. (See Note 4). These consolidated financial statements report the financial position, operations and cash flows of the acquired business (the “Predecessor”). SEC Regulations require the Predecessor to be reported when the acquired business succeeds substantially all of the business and the Company’s own operations before the succession appear insignificant to the operations acquired.
On September 12, 2016, the Company cancelled the licensing agreement with Labor Smart, Inc and, as such, no longer operates under the Labor Smart trademarked name. The Company currently operates under its legal name, The Staffing Group Ltd.
Note 2 - Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements and with Form 10-K and article 8 of the Regulation S-X of the United States Securities and Exchange Commission (“SEC”).
As a result of the split-off of EmployUs, Ltd. the consolidated balance sheets as of December 31, 2015 and 2015 and the related consolidated statements of operations and cash flows present the results and accounts of EmployUs, Ltd. as discontinued operations. All prior periods presented in the consolidated statements of operations and consolidated statement of cash flows discussed herein have been restated to conform to such presentation.
The carve-out financial statements have been prepared to demonstrate the historical results of operations, financial position, equity and cash flows of the Four Branches for the indicated periods under the Seller’s management. Accordingly, the carve-out financial statements do not reflect the presentation and classification of the Four Branches’ operations in the same manner as the Company. These financial statements were prepared on a "carve-out" basis from Labor Smart's accounts and reflects the historical accounts directly attributable to these four branches together with allocations of costs and expenses. The predecessor financial statement may not be indicative of future performance and my not reflect what their results of operations, financial position and cash flows would have been had those four units operated as an independent entity. Certain estimates, including allocation from Labor Smart, have been made to provide financial statements for stand-alone reporting purposes. Allocation of cost was based on the percentage of revenue. All inter-company transactions between Labor Smart and these four units are classified as net transfer to parent in the financial statements.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions are eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant matters requiring the use of estimates and assumptions include, but may not be limited to, accounts receivable allowances, evaluation of impairment of long lived assets, valuation allowance for deferred tax assets and valuation of derivative liabilities. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.
Revenue Recognition
Contract staffing service revenues are recognized when services are rendered. The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition”, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence that an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) services have been rendered.
Cost of Contract Staffing Services
The cost of contract staffing services includes the wages, related payroll taxes, and employee benefits of the Company’s employees while they work on contract assignments for the period in which the related revenue is recognized.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or less when purchased as cash equivalents. At times throughout the year, the Company might maintain bank balances that may exceed Federal Deposit Insurance Corporation (FDIC) insured limits. Periodically, the Company evaluates the credit worthiness of the financial institutions, and has not experienced any losses in such accounts. As of December 31, 2016 and 2015, the Company did not have any cash equivalents.
Cash - Restricted
Restricted cash represents cash in a lockbox account by held by TCA Global Credit Master Fund, LP in accordance with the Senior Secured Revolving Credit Facility Agreement. No cash was considered restricted at December 31, 2016 and 2015. (See Note 8)
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
Accounts Receivable
The Company extends credit to its customers based on an evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. An allowance for doubtful accounts is recorded as a charge to bad debt expense where collection is considered doubtful due to credit issues. This allowance reflects management’s estimate of the potential losses inherent in the accounts receivable balance, based on historical loss statistics and known factors impacting its customers. The nature of the contract service business, where companies are dependent on employees for their production cycle, generally results in a nominal provision for doubtful accounts. Based on management’s review of accounts receivable, an allowance for doubtful accounts of $44,978, and $0 (Predecessor) at December 31, 2016 and 2015, respectively, was recorded in these consolidated financial statements. The Company charges uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The Company does not accrue interest on past due receivables.
Net (Loss) Income per Common Share
Net (loss) income per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of shares of common stock and potentially dilutive outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through contingent share arrangements, stock options and warrants. For the year ended December 31, 2016, the Company had potentially 14,522,170 dilutive shares of common stock related to convertible notes payable as determined using the if-converted method and no potentially dilutive securities for the year ended December 31, 2015.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to expense when incurred, while renewals and betterments that materially extend the life of an asset are capitalized.
The costs of assets sold, retired, or otherwise disposed of, and the related allowance for depreciation, are eliminated from the accounts, and any resulting gain or loss is recognized in the results from operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:
Computer and office equipment
|
5 years
|
Furniture and fixtures
|
7 years
|
Leasehold improvements
|
Shorter of improvements’ useful life
or remaining lease term
|
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
Long-Lived Assets
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s long-lived assets may be impaired. An asset’s value may be impaired only if management’s estimate of the aggregate future cash flows, on an undiscounted basis, to be generated by the asset are less than the carrying value of the asset.
If impairment has occurred, the loss is measured as the excess of the carrying amount of the asset over its fair value. The Company’s estimates of aggregate future cash flows expected to be generated by each long-lived asset are based on a number of assumptions that are subject to economic and market uncertainties. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in their impairment analyses may not be achieved.
Identifiable Intangible Assets
Identifiable intangible assets consist primarily of customer relationships and non-compete contracts. These assets are tested for impairment using undiscounted cash flow methodology annually and whenever there is an impairment indicator. Estimating future cash flows requires significant judgment and projections may vary from cash flows eventually realized. Several impairment indicators are beyond the Company’s control, and determining whether or not they will occur cannot be predicted with any certainty. Customer relationships and non-compete contracts are amortized on a straight-line basis over an estimated life of five years.
An identifiable intangible assets impairment charge of $613,000 (comprising customer relationships of $577,000 and non-compete agreements of $36,000) was recorded as at December 31, 2016.
Goodwill
Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company’s business combinations. The Company performs a goodwill impairment test on at least an annual basis at the reporting unit level. Application of the goodwill impairment test requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company will conduct its annual goodwill impairment test as of December 31 of each year or more frequently if indicators of impairment exist. The Company periodically analyzes whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained significant decline in our stock price and market capitalization, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, adverse actions or assessments by a regulator, among others. The Company compares the fair value of its reporting unit to its respective carrying value, including related goodwill.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
A goodwill impairment charge of $761,000 was recorded as at December 31, 2016. The impairment of goodwill was due to the loss of significantly all of the customers at the Nashville, TN and Raleigh, NC branches acquired on April 1, 2016. See Note 4 – Business Acquisition.
Opening balance at December 31, 2015
|
$ 0
|
Purchase of goodwill
|
1,466,000
|
Impairment of goodwill
|
(761,000)
|
Closing balance at December 31, 2016
|
$ 705,000
|
Future changes in the industry could impact the results of future annual impairment tests. There can be no assurance that future tests of goodwill impairment will not result in additional impairment charges.
Fair Value Measurement
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC (“ASC 820-10”), fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
Level 2
|
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
|
The carrying amounts reported in the Company’s consolidated financial statements for accounts receivable, prepaid expenses, accounts payable, accrued expenses, and payroll liabilities approximate their fair value because of the immediate or short-term nature of these consolidated financial instruments. The carrying amounts reported in the consolidated balance sheet for its line of credit and convertible notes payable approximates fair value as the contractual interest rate and features are consistent with similar instruments of similar risk in the market place.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
Impairment
Goodwill and other indefinite-lived intangible assets are tested for impairment annually, at the end of the fourth quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate it is more likely than not that the carrying amount may be impaired. Additionally, the Company continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. The factors used to determine fair value are subject to management’s judgement and expertise and include, but are not limited to, the present value of future cash flows, net of estimated operating costs, internal forecasts, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected.
These assumptions represent level 3 inputs. Impairment of the Company’s goodwill and intangibles for the year ended December 31, 2016 was $761,000 and 613,000, respectively. There were no impairment charges during the year ended December 31, 2015.
Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
|
|
December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,099,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
178,958
|
|
Assets measured at fair value on a non-recurring basis are as follows:
|
December 31, 2016
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total Impairments
|
Assets:
|
|
|
|
|
Intangible assets
|
$ -
|
$ -
|
$ 407,000
|
$ 613,000
|
Goodwill
|
$ -
|
$ -
|
$ 705,000
|
$ 761,000
|
Total assets
|
$ -
|
$ -
|
$ 1,112,000
|
$ 1,374,000
|
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
Advertising
The Company charges advertising costs to expense as incurred. Advertising costs were $8,231 and $11,614 (Predecessor) for the years ended December 31, 2016 and 2015, respectively.
Concentration of Credit Risk
The Company did not have any other customers that exceeded 10% of either revenue or accounts receivable in either 2016 or 2015.
Convertible Promissory Notes
|
i)
|
Beneficial Conversion Feature
|
If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
The Company determines if the convertible debenture should be accounted for as liability or equity under ASC 480, Liabilities — Distinguishing Liabilities from Equity. ASC 480, applies to certain contracts involving a Company's own equity, and requires that issuers classify the following freestanding financial instruments as liabilities. Mandatorily redeemable financial instruments, obligations that require or may require repurchase of the issuer's equity shares by transferring assets (e.g., written put options and forward purchase contracts), and certain obligations where at inception the monetary value of the obligation is based solely or predominantly on:
– A fixed monetary amount known at inception, for example, a payable settleable with a variable number of the issuer's equity shares with an issuance date fair value equal to a fixed dollar amount,
– Variations in something other than the fair value of the issuer's equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuer's equity shares, or
– Variations inversely related to changes in the fair value of the issuer's equity shares, for example, a written put that could be net share settled.
If the entity determined the instrument meets the guidance under ASC 480 the instrument is accounted for as a liability with a respective debt discount. The Company records debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized to non-cash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
|
iii)
|
Derivative Financial Instruments
|
Derivative financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments including senior convertible promissory notes payable and freestanding stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our consolidated financial statements.
Income Taxes
For the period prior to July 1, 2013, the Company was not subject to Federal and State income taxes, as it was a limited liability company. Each member was responsible for the tax liability, if any, related to its proportionate share of the Company’s taxable income. Accordingly, no provision for income taxes was reflected in the accompanying consolidated financial statements through June 30, 2013. The Company had concluded that it was a pass-through entity through June 30, 2013 and a taxable entity thereafter.
Effective July 1, 2013, the Company changed its corporate status from a limited liability company to a “C” corporation and its state of registration from Delaware to Nevada. The Company is subject to file tax returns in the states of North Carolina, Indiana, Tennessee, Louisiana, Alabama and Mississippi. Generally, federal, state and local authorities may examine the Company’s tax returns for three years from the date of filing and the current and prior three years remain subject to examination as of December 31, 2016.
There were no uncertain tax positions that would require recognition in the financial statements through December 31, 2016. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment as a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors.
The Company accounts for income taxes under ASC 740-10-30. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which was issued by the FASB in August 2015 and extended the original effective date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14 upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.
In November 2015, the FASB issued ASU 2015-17, Income Taxes. The new standard simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements
In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 is intended to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect that ASU 2016-15 will have on the Company’s consolidated financial position and results of operations.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 2 - Summary of Significant Accounting Policies
(Continued)
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments in ASU 2017-01 is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 along with amending other parts of the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. At adoption, this update will require a prospective approach. The Company is currently evaluating the impact of adopting this guidance.
Note 3 – going concern and Capital resources
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2016, the Company had a stockholders’ deficit of $2,984,065 and a working capital deficit of $3,506,230. For the year ended December 31, 2016 the Company had a net loss of $3,853,796. The Company’s stockholders’ deficiency is primarily due to, among other reasons, funding its historical net losses.
The Company’s principal sources of liquidity include cash from operations and proceeds from debt and equity financings. As of December 31, 2016, the Company had $123,156 in bank indebtedness.
The Company is funding its operations primarily through the sale of equity, convertible notes payable and shareholder loans. In the event the Company experiences liquidity and capital resources constraints because of greater than anticipated sales growth or acquisition needs, the Company may need to raise additional capital in the form of equity and/or debt financing including refinancing its current debt. Issuances of additional shares will result in dilution to its existing shareholders. There is no assurance that the Company will achieve any additional sales of its equity securities or arrange for debt or other financing to fund any potential acquisition needs or increased growth. If such additional capital is not available on terms acceptable to the Company, or at all, then the Company may need to curtail its operations and/or take additional measures to conserve and manage its liquidity and capital resources, any of which would have a material adverse effect on its business, results of operations and financial condition. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date of this filing. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties. In order to mitigate the risk related with this uncertainty, the Company plans to issue additional shares of common stock for cash and services during the next 12 months.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 4 – business acquisition
On April 1, 2016, the Company entered into an Agreement for Purchase and Sale of Assets (the “Agreement”) with Labor Smart, Inc. (the “Seller”), related party and shareholder of the Company. Pursuant to the Agreement, the Company purchased from the Seller the operating assets of four (4) branch locations (Charlotte, North Carolina, Indianapolis, Indiana, Nashville, Tennessee and Raleigh, North Carolina), which includes customer lists, title to certain leases for real or personal property, contracts, fixed assets, and business records (collectively the “Four Branches”). The Seller retained all open accounts receivable related to the prior operations of the branch locations and was responsible for all operating liabilities. In consideration for the Four Branches, the Company paid the Seller total consideration with a fair value of $2,666,000, paid as follows: (i) $890,890 in cash, (ii) 600,000 shares of the Company’s common stock at a fair value of $1,080,000 ($1.80 per share based on the closing price of the Company common stock on March 31, 2016), (iii) a non-interest bearing promissory note due on April 1, 2018 with a face amount of $755,000 and a fair value of $506,000. The Company assumed no liabilities in the business acquisition. In accordance with FASB ASC 835-30 "Imputation of Interest", interest has been imputed on the promissory note at an annual market interest rate of 20% per annum. (iv) payoff of certain of the Seller’s outstanding debt totaling $29,110, and (v) direct payment to the IRS on behalf of the Seller in the amount of $160,000 (the “Purchase Price”).
On April 1, 2016, as a requirement of the purchase of the operating assets, the one (1) issued and outstanding share of Series A Preferred Stock owed by Labor Smart, Inc. was transferred to Kimberly Thompson, the Chief Executive Officer of the Company. Each share of Series A Preferred Stock gives the holder voting rights equal to 2 votes for every one share of common stock outstanding at the time of a vote of shareholders and does not have any additional rights or preferences. As such, at December 31, 2016, Kimberly Thompson controlled the majority of shareholder votes.
Assets acquired and liabilities assumed in the Agreement were recorded on the Company’s Consolidated Balance Sheet as of the acquisition date of April 1, 2016 based upon their estimated fair values. The results of operations of businesses acquired by the Company have been included in the statements of operations since the date of acquisition. The excess of the purchase price over the estimated fair values of the underlying identifiable assets acquired and liabilities assumed were allocated to goodwill.
The preliminary allocation of the purchase price and the estimated fair market values of the assets acquired and liabilities assumed are shown below:
Customer Relationships
|
$ 1,130,000
|
Non-compete Agreements
|
70,000
|
Goodwill
|
1,466,000
|
Purchase Price
|
$ 2,666,000
|
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 4 – business acquisition (Continued)
Unaudited pro forma results of operations information for the year ended December 31, 2015 as if the Company and the entities described above had been combined on January 1, 2015 are as follows. The pro forma results include estimates and assumptions which management believes are reasonable. The pro forma results do not include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results that would have occurred if the business combinations had been in effect on the dates indicated, or which may result in the future.
|
|
For the Year Ended December 31, 2016
|
|
For the Year Ended December 31, 2015
|
Net revenues
|
|
$
|
5,617,446
|
|
|
$
|
5,962,254
|
|
Income (loss) from operations
|
|
$
|
(1,518,775
|
)
|
|
$
|
(275,909
|
)
|
Net loss
|
|
$
|
(3,979,267
|
)
|
|
$
|
(346,580
|
)
|
Net loss per share
|
|
$
|
(3.62
|
)
|
|
$
|
(0.47
|
)
|
Revenue and costs are generally allocated using specific identification and include corporate administrative expenses, finance, legal, tax, treasury and other general corporate services.
The carve-out financial information include revenue and expenses of Labor Smart, Inc., allocated to the Four Branches (“Predecessor”) for certain functions provided by Labor Smart, including compensation and benefits, occupancy, information technology costs, finance and interest costs, legal, tax, deferred tax, treasury and other general corporate services. These expenses have been allocated to the results of the Four Branches based on one of four allocation cost drivers:
1)
Revenues attributable to the Four Branches,
2)
The headcount of employees within the Four Branches and Labor Smart
3)
The identification of costs specific to the Four Branches; and
4)
Allocation of finance and interest costs based on proceeds from the sales of the Four Branches by Labor Smart.
Management considers the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to, or the benefit received by, the Four Branches, The allocations may not; however, reflect the expenses the Four Branches would have incurred as an independent entity for the periods presented.
Predecessor financial information has been provided in these consolidated financial statements as the Company acquired the Four Branches and the operations of the Company before the acquisition of the Four Branches were insignificant relative to the operations acquired. The historical results of operations, financial position, equity and cash flows of the Four Branches may not be indicative of what they actually would have been had the Four Branches been a separate stand-alone entity, nor are they indicative of what the Four Branches’ results of operations, financial position, equity and cash flows may be in the future. The carve-out financial statements have been prepared to demonstrate the historical results of operations, financial position, equity and cash flows of the Four Branches for the indicated periods under the Seller’s management. Accordingly, the carve-out financial statements do not reflect the presentation and classification of the Four Branches’ operations in the same manner as the Company.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 5 – DISCONTINUED OPERATIONS
On December 31, 2015, the Company entered into a Stock Purchase Agreement (“SPA”) with Pour Les Enfant, LLC, a Louisiana limited liability company (“Pour Les Enfant”). Pursuant to the SPA, the Company, as sole shareholder of EmployUS, Ltd. Completed the split-off by transferring to Pour Les Enfant all outstanding shares and tangible assets of EmployUS, Ltd.. In consideration thereof, Pour Les Enfant assumed all liabilities of EmployUS, Ltd. Associated with monies owed to the Internal Revenue Service for late payroll taxes; and all corporate, personal, and validity guarantees associated with the Crestmark Bank Loan and Security Agreement. Pursuant to the SPA, Brent Callais and Brian McLoone, directors, executives and controlling shareholders of the Company, each agreed to transfer to the Company 91,000 shares of the Company’s common stock and one share of the Company’s preferred stock, for immediate cancellation.
The following table summarizes the results from discontinued operations for the year ended December 31, 2015:
NET REVENUES
|
|
|
|
|
Contract staffing services
|
|
$
|
13,657,933
|
|
|
|
|
|
|
COST OF SERVICES
|
|
|
11,125,247
|
|
GROSS PROFIT
|
|
|
2,532,686
|
|
SELLING, GENERAL AND ADMINISTRATIVE
|
|
|
2,156,504
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
376,182
|
|
OTHER EXPENSE
|
|
|
(168,808
|
)
|
|
|
|
|
|
INCOME FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES
|
|
|
207,374
|
|
|
|
|
|
|
(Provision) benefit for income taxes
|
|
|
-
|
|
|
|
|
|
|
NET INCOME OF EMPLOYUS, LTD.
|
|
$
|
207,374
|
|
Note 6 – Identifiable Intangible Assets
Intangible assets comprise customer relationships and non-compete agreements which are recorded at cost.
|
|
December 31, 2016
|
|
December 31, 2015
|
Customer relationships
|
|
$
|
451,000
|
|
|
$
|
—
|
|
Non-compete agreements
|
|
|
28,000
|
|
|
|
—
|
|
|
|
|
479,000
|
|
|
|
—
|
|
Accumulated amortization
|
|
|
(72,000
|
)
|
|
|
—
|
|
Identifiable Intangible Assets
|
|
$
|
407,000
|
|
|
$
|
—
|
|
On April 1, 2016, the Company acquired customer relationships and non-compete agreements costing $1,130,000 and $70,000, respectively, and commenced amortization upon closing of the business acquisition for the Four Branches.
An identifiable intangible assets impairment charge of $613,000 (comprising customer relationships of $577,000 and non-compete agreements of $36,000) was recorded as at December 31, 2016. The impairment of identifiable intangible assets was due to the loss of significantly all of the customers at the Nashville, TN and Raleigh, NC branches acquired on April 1, 2016. See Note 4 – Business Acquisition.
During the year ended December 31, 2016 and 2015, $180,000 (comprising customer relationships of $169,500 and non-compete agreements of $10,500) and $0, respectively, was recorded as amortization. The Company estimates amortization over the next four years is $95,865 per annum and amortization of $23,940 in the fifth year.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 7 – accounts payable – related party
At December 31, 2016 and 2015, $430,978 and $0, respectively, is due to Labor Smart Inc for trade payables related to payroll costs.
NOTE
8 – notes payable – related party
On May 20, 2014, the Company issued a promissory note for $94,500 for cash to a shareholder of the Company that is to be repaid in full by May 20, 2015. The note accrues interest expense at 10% per annum and in accordance with the promissory note, there is a late fee of $100 per day for each day the note remains unpaid beyond the maturity date. Interest and late fee expense for the years ended December 31, 2016 and 2015 was $46,050 and $15,251, respectively. The Company recorded late fees payable of $59,000 and $22,400 and accrued interest payable of $24,131 and $14,681, as of December 31, 2016 and December 31, 2015, respectively, and is included in accounts payable and accrued expenses – related party as of December 31, 2016 and 2015.
On July 14, 2014, the Company issued a promissory note for $12,500 for cash to a shareholder of the Company that is to be repaid in full by July 14, 2015. The note accrues interest expense at 10% per annum and in accordance with the promissory note, there is a late fee of $100 per day for each day the note remains unpaid beyond the maturity date. Interest and late fee expense for the year ended December 31, 2016 and 2015 was $37,850 and $1,833, respectively. The Company recorded late fees payable of $53,500 and $16,900 and accrued interest payable of $3,083 and $1,833, as of December 31, 2016 and 2015, respectively, and is included in accounts payable and accrued expenses – related party as of December 31, 2016 and 2015.
On April 1, 2016, in conjunction with Agreement for Purchase and Sale of Assets (Note 4), the Company issued an unsecured non-interest bearing promissory note to Labor Smart, Inc., due on April 1, 2018 with a face amount of $755,000 and a fair value of $506,000. In accordance with FASB ASC 835-30 "Imputation of Interest", interest has been imputed on the promissory note at a market interest rate of 20% per annum. At December 31, 2016, the promissory note has been recorded net of debt discount of $163,801. Amortization of debt discount of $85,199 has been included in interest expense in the consolidated statements of loss for the year ended December 31, 2016, respectively. The debt discount is being amortized on the effective interest method.
Note 9 – convertible promissory note – related party
On December 18, 2015, the Company entered into a Convertible Promissory Note (“Note”) with Labor Smart Inc. (“Holder”) in the original principal amount of $80,000 bearing a 12% annual interest rate and maturing on December 16, 2016. . As December 31, 2016, the Note is past due. In conjunction with the issuance of the Note, as further consideration, the Company issued the Holder one (1) share of Series A Preferred Stock of the Company. Each share of Series A Preferred Stock gives the holder voting rights equal to 2 votes for every one share of common stock outstanding at the time of a vote of shareholders and does not have any additional rights or preferences. This Note together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated at 75% of the market price which means the lowest trading price during the thirty trading day period ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 120 days of date of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at 130% of the original principal amount plus interest and between 151 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment. At December 31, 2016, the Note includes principal of $80,000 and accrued interest of $39,431 See Note 11 – Convertible Promissory Note Derivative Liability – Related Party.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 10 – convertible promissory notes
On March 29, 2016, with an effective date of April 5, 2016, in conjunction with the Agreement for Purchase and Sale of Assets (Note 3), the Company entered into a Senior Secured Revolving Credit Facility Agreement (the “Credit Agreement”) with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership (“TCA”), pursuant to which TCA agreed to loan up to a maximum of three million dollars ($3,000,000) to us for working capital purposes. A total of $1,300,000 was funded by TCA in connection with the closing of the Agreement. The amounts borrowed pursuant to the Credit Agreement are evidenced by a Senior Secured Revolving Convertible Promissory Note (the “Revolving Note”), the repayment of which is secured by Security Agreements executed by us and our subsidiary, The Staff Fund I, LLC. Pursuant to the Security Agreements, the repayment of the Revolving Note is secured by a security interest in substantially all of our assets in favor of TCA. The initial Revolving Note in the amount of $1,300,000 is due and payable along with interest thereon on October 5, 2016, and bears interest at the minimum rate of 12% per annum, increasing to 22% per annum upon the occurrence of an Event of Default, as defined in the Credit Agreement. Upon an Event of Default, TCA shall have the right to convert all or any portion of the Revolving Note into shares of the Company’s common stock. The conversion rate shall be 85% of the lowest VWAP of the Company’s stock for the five days preceding the conversion date. The Credit Agreement provides for certain contractual rights to TCA. TCA has influence and veto power over key decisions which effect operating, investing and financing activities of the Company including the right to approve the transfer agent, maintenance of insurance, approve the selection of management after performing background investigations, approve all capital expenditures, approve issuance of stock, approve opening new bank accounts and approve change in control of the Company. The Credit Agreement also provides that all cash receipts from customers are required to be deposited in a lock box account. Distributions from the lock box account are made to the Company only after obligations to TCA are satisfied. TCA with absolute discretion may withhold cash in the lock box in order to protect collateral. During the year ended December 31, 2016, the Company paid $620,511 in cash for principal and $129,942 for interest and fees. At December 31, 2016, the Note includes principal of $679,489 and accrued interest of $203,025 and the Note is past due. See Note 11 – Convertible Promissory Note Derivative Liability.
On May 26, 2016, the Company entered into a Convertible Promissory Note (“Note”) with Group 10 Holdings, LLC (“Holder”) in the original principal amount of $100,000 bearing a 10% annual interest rate and maturing December 26, 2016. This Note together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated at 55% of the lowest trading price of any day during the 25 consecutive trading days prior to the date on which the Holder elects to convert all or part of the Note. The Company may prepay the Note at any time while outstanding for no prepayment penalty. During the year ended December 31, 2016, the Company issued 63,300 shares of common stock for principal and interest of $5,570. At December 31, 2016, the Note includes principal of $94,430 and accrued interest of $87,881 See Note 11 – Convertible Promissory Note Derivative Liability.
On September 27, 2016, the Company entered into a Convertible Promissory Note (“Note”) with Carebourn Capital, L.P. (“Holder”) in the original principal amount of $236,325 less transaction costs of $36,325 bearing a 12% annual interest rate and maturing September 27, 2017. This Note together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated at 60% of the average of the three lowest trading prices of any day during the 20 consecutive trading days prior to the date on which the Holder elects to convert all or part of the Note. The Company may repay the Note if repaid within 180 days of date of issue at 130% of the original principal amount plus interest and between 181 days and 364 days at 150% of the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment. During the year ended December 31, 2016, the Company paid $58,096 in cash for principal and interest. At December 31, 2016, the Note includes principal of $178,229 and accrued interest of $42,186 less unamortized debt discount of $174,816. See Note 11 – Convertible Promissory Note Derivative Liability.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 11 – Derivative Liability
The Convertible Promissory Notes with Labor Smart, Inc. with an issue date of December 18, 2015, TCA Global Credit Master Fund, LP with an issue date of April 5, 2016, Group 10 Holdings, LLC with an issue date of May 26, 2016 and Carebourn Capital, L.P. with and issue date of September 27, 2016 were accounted for under ASC 815. The variable conversion price is not considered predominately based on a fixed monetary amount settleable with a variable number of shares due to the volatility and trading volume of the Company’s common stock. The Company’s convertible promissory note derivative liability has been measured at fair value at December 31, 2016 using the binominal lattice model.
The inputs into the binominal lattice model are as follows:
|
|
Inception
|
|
December 31, 2015
|
|
December 31, 2016
|
Conversion price
|
|
$0.0188 - $1.4178 per share
|
|
$0.0225 per share
|
|
$0.099 - $0.135 per share
|
Risk free rate
|
|
|
0.51% - 0.64
|
%
|
|
|
0.64
|
%
|
|
|
0.62
|
%
|
Expected volatility
|
|
|
188% – 355
|
%
|
|
|
355
|
%
|
|
|
185% – 205
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
|
0.50 – 1.0 years
|
|
|
|
0.96 years
|
|
|
|
0.50 – 0.74 years
|
|
Changes in convertible promissory note derivative liability during the year ended December 31, 2016 were as follows:
|
|
December 31, 2016
|
|
December 31, 2015
|
Opening balance
|
|
$
|
178,959
|
|
|
$
|
0
|
|
Initial valuation of derivatives
|
|
|
1,052,612
|
|
|
|
99,554
|
|
Initial loss on derivatives
|
|
|
0
|
|
|
|
(19,554
|
)
|
Change in fair value of derivative
Liability
|
|
|
(132,195
|
)
|
|
|
98,959
|
|
Closing balance
|
|
$
|
1,099,376
|
|
|
$
|
178,959
|
|
Note 12 – due to stockholder
Amounts due to stockholder of $28,500 is non-interest bearing, unsecured and have no specific terms of repayment.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 13 – Series B Preferred Stock
On March 29, 2016, the Board of Directors Board designated sixty (60) shares of preferred stock, par value $0.001 per share as Series B Preferred Stock (“Series B Stock”). The Series B Stock is being issued to the owner of the Series B Preferred Stock (“Holder”) in connection with the Senior Secured Revolving Credit Facility Agreement between the Company and TCA, effective as of April 5, 2016 (Note 3). The Series B Stock is non-voting and not entitled to dividends. Upon liquation, dissolution or winding up of the Company, the Holder is entitled to a liquidation preference of $25,000 per share of Series B Stock. The Holder may convert Series B Stock into shares of authorized but unissued common stock equal to $25,000 divided by the average VWAP for five business days immediately prior to the conversion date.
The Company has classified Series B Stock as a liability in these consolidated financial statements in accordance with ASC 480, Liabilities – Distinguishing Liabilities from Equity, as the Series B Stock has a fixed monetary amount known at inception and is settable in a variable amount shares based on the fair value of the shares of the Company’s common stock.
On April 1, 2016, the Company issued thirty (30) shares of the Company’s Series B Stock to TCA an advisory fee with a fair value of $750,000. The Series B Stock was issued in conjunction with the convertible note payable issued to TCA and was recorded as debt discount. The amount was classified as a current liability as the shares are expected to be redeemed within one year.
Note 14 – Stockholders’ Equity
On March 8, 2016, the Company approved and effected a 1-for 50 reverse stock split of issued and outstanding common shares. All share information has been revised to reflect the reverse stock split from the Company’s inception.
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, no par value. As these are considered “black check” preferred shares, the terms of the preferred stock are to be determined by the board of directors of the Company.
On November 13, 2015, the Company’s Board of Directors approved and filed a Certificate of Designation designating five (5) shares of the blank check preferred stock as Series A Preferred Stock par value $0.001 as defining the rights, preferences and privileges of such series of Preferred Stock. For each share of Series A Preferred Stock, the holder has a voting right equal to 2 votes for every one share of common stock outstanding at the time of a vote of shareholders and does not have any additional rights or preferences. The Series A Preferred Stock does not have the right to receive dividends and distributions and does not have the right to received assets upon any liquidation. The Series A Preferred Stock may be redeemed by the Company at no consideration.
On November 13, 2015, the Board of Directors approved the issuance of two (2) shares of Series A Preferred Stock to each of its then current directors, Brian McLoone and Brent Callais.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 14 – Stockholders’ Equity (Continued)
On December 18, 2015, the Board approved the issuance of one (1) share of Series A Preferred Stock to Labor Smart, Inc., a 18.45% shareholder of common stock, in conjunction with the issuance of a convertible promissory note dated December 18, 2015.
The fair value of Series A Preferred Stock was determined to be $0 per share as the holders do not have the right to receive dividends or distributions, the holders do not have the right to receive asset upon any liquidation of the Company and the Company may redeem Series A Preferred Stock for no consideration.
On December 31, 2015, Company entered into a Stock Purchase Agreement (“SPA”) with Pour Les Enfant, LLC, a Louisiana limited liability company (“Pour Les Enfant”). Pursuant to the SPA, the Company, as sole shareholder of EmployUS, Ltd. completed the split-off by transferring to Pour Les Enfant all outstanding shares and tangible assets of EmployUS, Ltd. (the “split-off transaction”). In consideration thereof, Pour Les Enfant assumes all liabilities of EmployUS, Ltd. associated with monies owed to the Internal Revenue Service for late payroll taxes; and all corporate, personal, and validity guarantees associated the Crestmark Bank Loan and Security Agreement. Pursuant to the SPA, Brent Callais and Brian McLoone, directors, executives and controlling shareholders of the Company, each agree to transfer to the Company 91,000 shares of the Company’s common stock and one share of the Company’s preferred stock, for immediate cancellation. As a result of the cancellation of the two (2) preferred shares by Brent Callais and Brian McLoone, there was a change in control of the Company as Labor Smart, Inc. holds the one (1) remaining outstanding preferred share of the Company.
Common Stock
On November 30, 2015, the Company entered into a private placement securities purchase agreement with Labor Smart, Inc. to which the Company issued 40,000 shares of its common stock at a price of $2.00 per share for an aggregate purchase price of $80,000 in gross proceeds.
On April 1, 2016, the Company issued 600,000 shares of common stock with a fair value of $1,080,000 ($1.80 per share based on the closing price of the Company common stock on March 31, 2016) in conjunction with the Agreement for Purchase and Sale of Assets (Note 3).
On April 1, 2016, as a requirement of the purchase of the operating assets, the one (1) issued and outstanding share of Series A Preferred Stock owed by Labor Smart, Inc. was transferred to Kimberly Thompson, the Chief Executive Officer of the Company.
On April 25, 2016, the Board of Directors authorized the issuance of 60,000 shares of common stock of the Company to Kimberly Thompson, the Chief Executive Officer of the Company, for compensation valued at $109,200 ($1.82 per share) is expensed immediately and is included in selling, general and administrative expense in the consolidated statement of operations.
On July 11, 2016, the Company issued 7,000 shares of common stock for $7,000 in cash ($1.00 per share).
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 14 – Stockholders’ Equity (Continued)
On December 19, 2016, Group 10 Holdings LLC, the holder of a Convertible Promissory Note (see Note 10) converted 63,300 shares of common stock of the Company with a fair value of $12,660 to settle $5,570 of principal and interest.
Non-controlling interest
During the year ended December 31, 2016, the subsidiary of the Company, Staff Fund I, LLC, issued membership interests for cash proceeds of $14,000.
Opening balance at December 31, 2015
|
|
$
|
0
|
|
Issue of membership interest
|
|
|
14,000
|
|
Net loss attributed to non-controlling interest
|
|
|
(1,989
|
)
|
Closing balance at December 31, 2016
|
|
$
|
12,011
|
|
Note 15 – Income Tax Provision
The Company had no income tax expense due to operating losses incurred for the year ended December 31, 2016 and 2015.
The reconciliation between the statutory income tax rate and the effective tax rate is as follows:
|
|
|
|
|
|
|
(Predecessor)
|
|
|
December 31,
|
|
December 31,
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
2015
|
Computed expected tax expense
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
|
|
|
(34
|
%)
|
State taxes, net of federal benefit
|
|
|
(4
|
%)
|
|
|
(1
|
%)
|
|
|
|
(1
|
%)
|
Permanent difference
|
|
|
23
|
%
|
|
|
7
|
%
|
|
|
|
0
|
%
|
Write-off of net operating losses due to Section 382
|
|
|
4
|
%
|
|
|
11
|
%
|
|
|
|
0
|
%
|
Change in valuation allowance
|
|
|
11
|
%
|
|
|
17
|
%
|
|
|
|
35
|
%
|
Income tax provision (benefit)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
0
|
%
|
The types of temporary differences that give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
(Predecessor)
|
|
|
December 31,
|
|
December 31,
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
182,100
|
|
|
$
|
300,050
|
|
|
|
$
|
25,975
|
|
Intangible assets
|
|
|
535,600
|
|
|
|
—
|
|
|
|
|
—
|
|
Valuation allowance
|
|
|
(717,700
|
)
|
|
|
(300,050
|
)
|
|
|
|
(25,975
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 15 – Income Tax Provision (Continued)
As of December 31, 2016, the Company has net operating loss carryforwards of approximately $483,200 for federal and state tax purposes, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2034 and 2036. Based on the Company’s preliminary analysis, management believes that its ability to utilize previously accumulated net operating loss carryforwards are subject to annual limitations due to a change in ownership occurred during the year. The estimated annual limitation is approximately $23,000. As of December 31, 2016, the Company recorded the impact of such limitations.
The Company, after considering all available evidence, fully reserved its deferred tax asset since it is more likely than not that such benefits will not be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. During the year ended December 31, 2016, the Company increased its valuation allowance by $417,650.
As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general and administrative expense in the consolidated statements of operations. As of December 31, 2016 and 2015, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2016 and 2015. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.
The Staffing Group Ltd. and Subsidiary
NOTES TO consolidated FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Note 16 - Contingencies and Commitments
Litigation
The Company may be subject to various claims relating to matters arising in the ordinary course of business that are typically covered by insurance. The amount of liability, if any, from these claims cannot be determined with certainty; however, management is of the opinion that the outcomes will not have a material adverse impact on the Company’s financial position or results of operations.
Leases
The Company leases space for five of its branch offices and for its corporate headquarters, located in Kennesaw, Georgia. For the years ended December 31, 2016 and 2015 rent expense was $78,466 and $6,000 (Predecessor), respectively.
As of December 31, 2016, future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices, are as follows:
Years
|
|
Amount
|
|
2017
|
|
|
$
|
89,626
|
|
|
2018
|
|
|
|
48,133
|
|
|
2019
|
|
|
|
16,512
|
|
|
Total
|
|
|
$
|
154,271
|
|
Note 17- Subsequent Events
From January 1, 2017 to May 9, 2017, the holders of Convertible Promissory Notes (see Note 10) converted 292,100 shares of common stock of the Company to settle $16,344 of principal and interest.
On February 26, 2017, the holder of Series B Preferred Stock (see Note 13) converted 64,870 shares of the Company to settle one-half (0.5) share of Series B Stock of the Company with a liquidation preference of $12,974.