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EX-31.1 - EXHIBIT 31.1 - Staffing Group, Ltd.tsgl-20160331_10qex31z1.htm
EX-32.1 - EXHIBIT 32.1 - Staffing Group, Ltd.tsgl-20160331_10qex32z1.htm
 
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2016

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ______ to ______

Commission File Number: 333-185083

 

THE STAFFING GROUP LTD.

(Exact name of registrant as specified in its charter)

 

Nevada   99-0377457
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     

125 Townpark Drive, Suite 300

Kennesaw, GA 30144

  30144
(Address of principal executive offices)   (Zip Code)

 

  (678) 881-0834  
  (Registrant’s telephone number, including area code)  
     

 

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 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 ☒ 
(Do not check if a 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 ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at May 13, 2016
Common Stock, $0.001 par value per share   1,202,436 shares
 
 
 

THE STAFFING GROUP LTD.

 

Form 10-Q

 

Table of contents

 

      Pages
PART 1. FINANCIAL INFORMATION 1
       
  ITEM 1. Condensed Consolidated Financial Statements 1
    Condensed Consolidated Balance Sheets
    Condensed Consolidated Statements of Operations
    Condensed Consolidated Statements of Cash Flows
    Notes to Condensed Consolidated Financial Statements
  ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 25
  ITEM 4. Controls and Procedures 25
       
PART II. OTHER INFORMATION 27
       
  ITEM 1. Legal Proceedings 27
  ITEM 1A. Risk Factors 27
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
  ITEM 3. Defaults Upon Senior Securities 27
  ITEM 4. Mine Safety Disclosures 27
  ITEM 5. Other Information 27
  ITEM 6. Exhibits 27
       
SIGNATURES   28

 

 
 

 The Staffing Group Ltd., and Subsidiary

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   March 31, 2016  December 31, 2015
ASSETS          
           
CURRENT ASSETS          
Cash  $10,862   $—   
Accounts receivable   14,793    —   
Deferred finance costs   10,000    —   
Prepaid expenses and other current assets   1,331    —   
Total Current Assets   36,986    —   
           
TOTAL ASSETS  $36,986   $—   
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
CURRENT LIABILITIES          
Accounts payable  $41,468   $—   
Accrued liabilities   65,900    —   
Accrued liabilities - related party   76,690    55,815 
Convertible note payable - related party, including accrued interest of $11,266 and $1,408, net of debt discount of $57,143 and $77,143, respectively   34,123    4,265 
Notes payable - related payable   107,000    107,000 
Convertible promissory note derivative lability - related party   99,617    178,959 
Due to stockholder   28,500    —   
Total Current Liabilities   453,298    346,039 
           
TOTAL LIABILITIES   453,298    346,039 
           
Commitments and contingencies (Note 10)          
           
STOCKHOLDERS' DEFICIT          
Preferred stock, no par value: 5,000,000 shares authorized 5 shares of Preferred Stock, par value $0.001, designated as Series A Preferred Stock, 1 and 1 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively   —      —   
60 shares of Preferred Stock, par value $0.001, designated as Series B Preferred Stock, no shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively   —      —   
Common stock par value $0.001: 150,000,000 shares authorized; 602,436 and 602,436 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively   602    602 
Additional paid-in capital   2,434,749    2,434,749 
Accumulated deficit   (2,864,101)   (2,781,390)
TOTAL THE STAFFING GROUP LTD. STOCKHOLDERS' DEFICIT   (428,750)   (346,039)
Non-controlling interest   12,438    —   
TOTAL STOCKHOLDERS' DEFICIT   (416,312)   (346,039)
           
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $36,986   $—   

The accompanying notes are an integral part of these condensed consolidated financial statements

  -1- 

 The Staffing Group Ltd., and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   For the Three Months Ended March 31,
   2016  2015
NET REVENUES          
Contract staffing services  $21,805   $—   
           
COST OF SERVICES   16,535    —   
           
GROSS PROFIT   5,270    —   
           
SELLING, GENERAL AND ADMINSTRATIVE          
Payroll and related expenses   18,286    —   
Selling, general and administrative expenses   99,867    133,948 
TOTAL SELLING, GENERAL AND ADMINISTRATIVE   118,153    133,948 
           
(LOSS) FROM OPERATIONS   (112,883)   (133,948)
           
OTHER (EXPENSES) INCOME          
Interest expense   (50,733)   (2,675)
Change in fair value of derivative liabilities   79,342    —   
TOTAL OTHER EXPENSE   28,609    (2,675)
           
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES   (84,274)   (136,623)
           
Provision for income taxes   —      —   
           
LOSS FROM CONTINUING OPERATIONS   (84,274)   (136,623)
           
INCOME FROM DISCONTINUED OPERATIONS (including income taxes of $0 and $0 for 2016 and 2015, respectively (Note 4)   —      56,841 
           
NET LOSS   (84,274)   (79,782)
           
NET LOSS ATTRIBUTED TO NON-CONTROLLING INTEREST   (1,562)   —   
           
NET LOSS ATTRIBUTED TO THE STAFFING GROUP LTD.  $(82,712)  $(79,782)
           
BASIC AND DILUTED NET (LOSS) PER COMMON SHARE FROM          
CONTINUING OPERATIONS  $(0.14)  $(0.18)
BASIC NET INCOME PER COMMON SHARE FROM          
DISCONTINUED OPERATIONS  $—     $0.07 
BASIC AND DILUTED NET (LOSS) PER COMMON SHARE  $(0.14)  $(0.11)
           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES          
OUTSTANDING - Basic and diluted   602,436    744,400 

The accompanying notes are an integral part of these condensed consolidated financial statements

  -2- 

 The Staffing Group Ltd., and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Three Months Ended March 31,
   2016  2015
       
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(84,274)  $(79,782)
Adjustments to reconcile net loss to net          
cash (used in) provided by operating activities:          
Accrued interest   9,858    —   
Amortization of deferred financing costs   20,000    —   
Change in fair value of derivative liabilities   (79,342)   —   
Changes in operating assets and liabilities:          
Accounts receivable   (14,793)   —   
Prepaid expenses and other current assets   (1,331)   120,548 
Accounts payable   41,469    —   
Accured liabilities   65,900    —   
Accrued liabilities - related party   20,875    2,675 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES   (21,638)   43,441 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Finance costs   (10,000)   —   
Net cash provided by discontinued operations   —      100,504 
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES   (10,000)   100,504 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Advance from stockholder   28,500    —   
Non-controlling interest   14,000    —   
Net cash (used in) discontinued operations   —      (143,945)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   42,500    (143,945)
           
NET INCREASE IN CASH   10,862    —   
           
CASH, BEGINNING OF PERIOD   —      —   
           
CASH, END OF PERIOD  $10,862   $—   
           
SUPPLEMENTAL CASH FLOW INFORMATION          
Cash paid for taxes  $—     $—   
Cash paid for interest  $—     $—   

The accompanying notes are an integral part of these condensed consolidated financial statements

  -3- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO CONDENSED consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

  

Note 1 - Description of Business

 

On December 22, 2015, the Company entered into a Licensing Agreement with Labor Smart, Inc., a stockholder of the Company, whereby Labor Smart, Inc. has granted the Company an exclusive license to use their trademarked name in connection with general advertising materials, point of sale displays and other promotional materials. As consideration for the use of the trademarked name, the Company agreed to pay to Labor Smart, Inc. a one-time fee of $5,000 for each newly opened branch location that is opened under the name of Labor Smart, Inc.

 

On December 28, 2015, the Company incorporated a subsidiary, Staff Fund I, LLC, a Nevada Limited Liability Company.

 

On December 31, 2015, the Company entered into a Stock Purchase Agreement (“SPA”) with Pour Les Enfant, LLC, a Louisiana limited liability company (“Pour Les Enfant”). Pursuant to the SPA, the Company, as sole shareholder of EmployUS, Ltd. completed the split-off by transferring to Pour Les Enfant all outstanding shares and tangible assets of EmployUS, Ltd. (the “split-off transaction”). In consideration thereof, Pour Les Enfant 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 2015. See Note 4.

 

The Company currently operates one (1) staffing location Montgomery, Alabama through the subsidiary, Staff Fund I, LLC. This subsidiary operates under a licensing agreement with Labor Smart, Inc. Staff Fund I, LLC recruits, hires, employs and manages skilled and unskilled workers that it places with its client companies. During the three months ended March 31, 2016. Staff Fund I, LLC issued membership interests for cash proceeds of $14,000. At March 31, 2016, 7% of Staff Fund I, LLC’s membership interest are held by non-controlling interest.

 

On April 1, 2016, the Company purchased the operating assets of four (4) branch locations in Charlotte, NC, Indianapolis, IN, Nashville, TN and Raleigh, NC from Labor Smart, Inc., a shareholder of the Company, for a total purchase price of $2,915,000 (See Note 11 – Subsequent Events).

    

  -4- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Note 2 - Summary of Significant Accounting Policies

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for any subsequent quarter of for the year ending March 31, 2016. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed on April 13, 2016 for the year ended December 31, 2015.

 

principles of consolidation

 

The condensed consolidated financial statements include the accounts of the Company’s one operating subsidiary.  All significant inter-company transactions and balances are eliminated in consolidation.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant matters requiring the use of estimates and assumptions include, but may not be limited to, accounts receivable allowances, 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.

 

  -5- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

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 March 31, 2016 and December 31, 2015, the Company did not have any cash equivalents.

 

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 $0 and $0 was considered necessary. 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.

 

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).

 

  -6- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Convertible promissory note derivative liability – related party is measured at fair value on a recurring basis using Level 3 inputs.

 

The carrying amounts reported in the Company’s condensed consolidated financial statements for accounts receivable, prepaid expenses, accounts payable, 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 condensed 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.

 

Convertible Promissory Notes

 

i)Beneficial Conversion Feature

If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.

 

ii)Debt Discount

The Company determines if the convertible debenture should be accounted for as liability or equity under ASC 480, Liabilities — Distinguishing Liabilities from Equity. ASC 480, applies to certain contracts involving a Company's own equity, and requires that issuers classify the following freestanding financial instruments as liabilities. Mandatorily redeemable financial instruments, obligations that require or may require repurchase of the issuer's equity shares by transferring assets (e.g., written put options and forward purchase contracts), and certain obligations where at inception the monetary value of the obligation is based solely or predominantly on:

– A fixed monetary amount known at inception, for example, a payable settleable with a variable number of the issuer's equity shares with an issuance date fair value equal to a fixed dollar amount,

– Variations in something other than the fair value of the issuer's equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuer's equity shares, or

– Variations inversely related to changes in the fair value of the issuer's equity shares, for example, a written put that could be net share settled.

If the entity determined the instrument meets the guidance under ASC 480 the instrument is accounted for as a liability with a respective debt discount. The Company records debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized to non-cash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

  -7- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

iii)Derivative Financial Instruments

Derivative financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

 

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments including senior convertible promissory notes payable and freestanding stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our consolidated financial statements.

 

Recent Accounting Pronouncements

 

In April 2015, the FASB issued a new accounting standard which changes the presentation of debt issuance costs in financial statements. Under the new standard, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The accounting standard is effective for annual reporting periods beginning after December 15, 2015 and was adapted in the first quarter of 2016.

 

In March 2016, the FASB issued a new accounting standard which is intended to simplify the accounting for share-based compensation. This standard simplifies the accounting for income taxes in relation to share-based compensation, modifies the accounting for forfeitures, and modifies the statutory tax withholding requirements. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the new accounting standard will have on its consolidated financial position, results of operations or cash flows.

 

  -8- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Note 3 - Liquidity 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 March 31, 2016, the Company had a stockholders’ deficit of $416,312 and a working capital deficit of $416,312. For the three months ended March 31, 2016 and 2015, the Company had a net losses of $84,274 and $79,782, respectively. 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 March 31, 2016, the Company had $10,862 in cash. The Company completed a split-off transaction on December 31, 2015 by which all of the assets of the Company were disposed of. In addition, the Company has not generated any significant revenues from its continuing operations, incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. The Company does not expect significant funding from its controlling shareholder, Labor Smart Inc.

 

In addition to the current liabilities of $453,298 reported on March 31, 2016, in conjunction with the Agreement for Purchase and Sale of Assets (See Note 11 – Subsequent Events) the Company issued:

 

i)                     On April 1, 2016, a non-interest bearing promissory note with principal of $755,000 due on April 1, 2018.

ii)                   On April 5, 2016, entered into an initial Revolving Note in the amount of $1,300,000.

 

The Company is funding its operations primarily through the sale of equity, convertible notes payable and shareholder loans. In the event the Company experiences liquidity and capital resources constraints because of greater than anticipated sales growth or acquisition needs, the Company may need to raise additional capital in the form of equity and/or debt financing including refinancing its current debt. Issuances of additional shares will result in dilution to its existing shareholders. There is no assurance that the Company will achieve any additional sales of its equity securities or arrange for debt or other financing to fund any potential acquisition needs or increased growth. If such additional capital is not available on terms acceptable to the Company, or at all, then the Company may need to curtail its operations and/or take additional measures to conserve and manage its liquidity and capital resources, any of which would have a material adverse effect on its business, results of operations and financial condition. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties. In order to mitigate the risk related with this uncertainty, the Company plans to issue additional shares of common stock for cash and services during the next 12 months.

 

  -9- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Note 4 – DISCONTINUED OPERATIONS

 

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.. In consideration thereof, Pour Les Enfant assumed all liabilities of EmployUS, Ltd. Associated with monies owed to the Internal Revenue Service for late payroll taxes; and all corporate, personal, and validity guarantees associated the Crestmark Bank Loan and Security Agreement. Pursuant to the SPA, Brent Callais and Brian McLoone, directors, executives and controlling shareholders of the Company, each agree to transfer to the Company 91,000 shares of the Company’s common stock and one share of the Company’s preferred stock, for immediate cancellation.

 

The following table summarizes the results from discontinued operations:

 

  

Three Months

Ended

March 31,

2015

      
NET REVENUES     
Contract staffing services  $4,001,468 
      
COST OF SERVICES   3,305,046 
GROSS PROFIT   696,422 
SELLING, GENERAL AND ADMINISTRATIVE   584,938 
      
INCOME FROM OPERATIONS   111,484 
OTHER EXPENSE   (54,643)
      
INCOME FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES   56,841 
      
(Provision) benefit for income taxes   —   
      
NET  INCOME OF EMPLOYUS, LTD.  $56,841 

 

  -10- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Note 5 – notes payable – related party

 

On May 20, 2014, the Company issued a promissory note for $94,500 for cash to a shareholder of the Company that is to be repaid in full by May 20, 2015. The note accrues interest expense at 10% per annum and in accordance with the promissory note, there is a late fee of $100 per day for each day the note remains unpaid beyond the maturity date. Interest and late fee expense for the three months ended March 31, 2016 and 2015 was $11,463 and $2,363, respectively. The Company recorded late fees payable of $31,500 and $22,400 and accrued interest payable of $17,044 and $15,251, as of March 31, 2016 and December 31, 2015, respectively, and is included in accounting payable and accrued expenses – related party as of March 31, 2016 and December 31, 2015.

 

On July 14, 2014, the Company issued a promissory note for $12,500 for cash to a shareholder of the Company that is to be repaid in full by July 14, 2015. The note accrues interest expense at 10% per annum and in accordance with the promissory note, there is a late fee of $100 per day for each day the note remains unpaid beyond the maturity date. Interest and late fee expense for the three months ended March 31, 2016 and 2015 was $9,413 and $313, respectively. The Company recorded late fees payable of $26,000 and $16,900 and accrued interest payable of $2,146 and $1,833, as of March 31, 2016 and December 31, 2015, respectively, and is included in accounting payable and accrued expenses – related party as of March 31, 2016 and December 31, 2015.

 

Note 6 – convertible promissory note – related party

 

On December 18, 2015, the Company entered into a Convertible Promissory Note (“Note”) with Labor Smart Inc. (“Holder”) in the original principal amount of $80,000 bearing a 12% annual interest rate and maturing on December 16, 2016. In conjunction with the issuance of the Note, as further consideration, the Company issued the Holder one (1) share of Series A Preferred Stock of the Company. At March 31, 2016, Labor Smart Inc. holds the sole outstanding share of Series A Preferred Stock. 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 March 31, 2016, Labor Smart Inc. controlled the majority of shareholder votes. 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 March 31, 2016, the Note includes principal of $80,000 and accrued interest of $11,266 less unamortized debt discount of $57,143. See Note 7 – Convertible Promissory Note Derivative Liability – Related Party.

 

  -11- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Note 7 – Convertible Promissory Note Derivative Liability – Related Party

 

The Convertible Promissory Notes with Labor Smart, Inc. with an issue date of December 18, 2015 was 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 liability has been measured at fair value at March 31, 2016 using the binominal model.

 

The inputs into the binominal lattice model are as follows:

 

Conversion price   $1.80 per share 
Risk free rate   0.64%
Expected volatility   236%
Dividend yield   0%
Expected life   0.71 years 

 

Change in convertible promissory note derivative liability – related party during the three months ended March 31, 2016 were as follows:

 

Opening balance at December 31, 2015  $178,959 
Change in fair value of derivative
Liability
   (79,342)
Closing balance at March 31, 2016  $99,617 

 

Note 8 – due to stockholder

 

Amounts due to stockholder is non-interest bearing, unsecured and have no specific terms of repayment.

 

  -12- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Note 9 – 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.

 

Non-controlling interest

 

During the three months ended March 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   (1,562)
Closing balance at March 31, 2016  $12,438 

 

Note 10 - 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 one of its branch offices and for its corporate headquarters, located in Kennesaw, Georgia. For the three months ended March 31, 2016 rent expense was $4,422.

 

As of March 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
2016 (remaining)   $ 13,266
2017     9,135
Total   $ 22,401

 

  -13- 

The Staffing Group, Ltd. and Subsidiary

NOTES TO consolidated FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Note 11- Subsequent Events

 

On March 29, 2016, with an effective date of April 5, 2016, 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 ($3,000,000.00) to us for working capital purposes. A total of $1,300,000 was funded by TCA in connection with the closing. 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 51% owned 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 18% 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. We also agreed to pay TCA an advisory fee of $750,000, payable in thirty (30) shares of the Company’s Series B Preferred Stock.

 

In conjunction with the Credit Agreement, 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 1, 2016, the Company entered into an Agreement for Purchase and Sale of Assets (the “Agreement”) with Labor Smart, Inc. (the “Seller”). Pursuant to the Agreement, the Company will purchase from the Seller the operating assets of four (4) branch locations, which shall only include customer lists, title to certain leases for real or personal property, contracts, fixed assets, and business records (collectively the “Purchased Assets”). The Seller shall retain all open accounts receivable related to the prior operations of the branch locations. In consideration for the Purchased Assets, the Company shall pay to the Seller a purchase price equal to $2,915,000, paid as follows: (i) $890,890 in cash, (ii) 600,000 shares of the Company’s common stock at a fair value of $1.80 per share, (iii) a promissory note executed by the Company in favor of the Seller in the amount of $755,000, (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 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. On May 13, 2016, these shares have not been issued.

  -14- 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of the results of operations and financial condition of The Staffing Group Ltd. for the three months ended March 31, 2016 and 2015, should be read in conjunction with the Selected Condensed Consolidated Financial Statements, of The Staffing Group Ltd.’s, financial statements, and the notes to those consolidated financial statements that are included elsewhere in this Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this Report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Overview

 

We were originally incorporated under the laws of the State of Nevada on June 11, 2012 under the name Aviana, Corp.  Our original business was a Poland based corporation that operated a consulting business in EMF (electromagnetic fields).

 

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. 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. Upon closing of the Exchange Agreement, EmployUS, Ltd. became a wholly owned subsidiary of the Company. 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, took 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 directors, at that time, Brian McLoone and Brent Callais.

 

On December 18, 2015, the Board approved the issuance of one (1) share of Series A Preferred Stock to Labor Smart, Inc., a 18.45% shareholder of common stock, in conjunction with the issuance of a convertible promissory note dated December 18, 2015.

 

  -15- 

On December 22, 2015, the Company entered into a Licensing Agreement with Labor Smart, Inc. whereby Labor Smart, Inc. has granted the Company an exclusive license to use their trademarked name in connection with general advertising materials, point of sale displays and other promotional materials. As consideration for the use of the trademarked name, the Company agreed to pay to Labor Smart, Inc. a one-time fee of $5,000 for each newly opened branch location that is opened under the name of Labor Smart, Inc.

 

On December 28, 2015, the Company incorporated a 100% owned subsidiary, Staff Fund I, LLC, a Nevada Limited Liability Company. This subsidiary currently operates one staffing location in Montgomery, Alabama, under our licensing agreement with Labor Smart, Inc. Staff Fund I, LLC has reserved 49% of its outstanding membership units for sale to new investors.

 

On December 31, 2015, the Company entered into a Stock Purchase Agreement (“SPA”) with Pour Les Enfant, LLC, a Louisiana limited liability company (“Pour Les Enfant”). Pursuant to the SPA, the Company, as sole shareholder of EmployUS, Ltd. completed the split-off by transferring to Pour Les Enfant all outstanding shares and tangible assets of EmployUS, Ltd. (the “split-off transaction”). In consideration thereof, Pour Les Enfant assumed all liabilities of EmployUS, Ltd. associated with monies owed to the Internal Revenue Service for late payroll taxes; and all corporate, personal, and validity guarantees associated the Crestmark Bank Loan and Security Agreement. Pursuant to the SPA, Brent Callais and Brian McLoone, directors, executives and controlling shareholders of the Company, each agree to transfer to the Company 91,000 shares of the Company’s common stock and one share of the Company’s preferred stock, for immediate cancellation. As a result of the cancellation of the two (2) preferred shares by Brent Callais and Brian McLoone, there was a change in control of the Company as Labor Smart, Inc. holds the one (1) remaining outstanding preferred share of the Company. It additional all existing operations of the Company was disposed of in the split-off transaction except for the business continued in our subsidiary, Staff Fund I, LLC.

 

In conjunction with the split-off transaction, the Company received notice of the resignation of Brian McLoone as Chief Executive Officer and Director, and Brent Callais as Director and the Board of Directors of the Company appointed Ms. Kimberly Thompson as Interim Chief Executive Officer of the Company.

 

The split-off of EmployUS, Ltd. to the controlling shareholders is a common control transaction and recorded at book value. Any difference between the proceeds received by the Company and the book value of assets and liabilities of EmployUS, Ltd. is recognized as a capital transaction with no gain and loss recorded. EmployUS, Ltd., as a subsidiary, was determined to be a component of Company and disposed of by other than sale.

 

 

  -16- 

On March 8, 2016, the Company approved and effected a 1-for 50 reverse stock split of issued and outstanding common shares. All share information has been revised to reflect the reverse stock split from the Company’s inception.

 

On March 31, 2016, the Company operated one (1) staffing location in Montgomery, Alabama through our subsidiary, Staff Fund I, LLC. This subsidiary operates under a licensing agreement with Labor Smart, Inc., a related party. Staff Fund I, LLC recruits, hires, employs and manages skilled and unskilled workers that we place with our client companies. During the three months ended March 31, 2016. Staff Fund I, LLC issued membership interests for cash proceeds of $14,000. At March 31, 2016, 7% of Staff Fund I, LLC membership interest are held by non-controlling interest.

 

On April 1, 2016, the Company purchased the operating assets of four (4) branch locations in Charlotte, NC, Indianapolis, IN, Nashville, TN and Raleigh, NC from Labor Smart, Inc., a shareholder of the Company, for a total purchase price of $2,915,000.

 

We are a service provider that is in the business of providing temporary staffing solutions. We provide general laborers to construction, light industrial, refuse, retail, and hospitality businesses and recruit, hire, train and manage skilled workers so our clients doesn’t have to. By eliminating the administrative requirements of finding and employing skilled and unskilled workers our clients the ability to focus on the important task of managing and growing their business and not worry about staffing their projects. We currently operate one branch location in Montgomery, Alabama, under our licensing agreement with Labor Smart, Inc.

 

In conjunction with the Senior Secured Revolving Credit Facility Agreement with an effective date of April 5, 2016, 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.

 

Additionally, we plan to seek out acquisition targets in other segments of the staffing industry as we execute a buy and build roll-up strategy to grow our business.  

 

Seasonality

Generally, we expect our revenues to be higher and gross margin percent to be higher during the second and third fiscal quarters as compared to the first and fourth fiscal quarters each year. During the second and third quarters we receive the majority of our contracts to supply labor to construction firms. Contracts for construction work tends to be both larger in dollar amount and to be more profitable than our other contracts.

  -17- 

Three months ended March 31, 2016 compared to 2015

 

The following table presents a summary of continuing operations:

 

   For the Three Months
   Ended March 31,
   2016  2015
Net Revenues          
Contract staffing services  $21,805   $—   
           
Cost of Services   16,535    —   
           
Gross Margin   5,270    —   
           
Selling, General and Administrative          
Payroll and related expenses   18,286    —   
General and administrative expenses   99,867    133,948 
Total Selling, General and Administrative   118,153    133,948 
           
(Loss) from Operations   (112,883)   (133,948)
           
Other (Expenses) Income          
Interest expense   (50,733)   (2,675)
Change in fair value of derivative liabilities   79,342    —   
    28,609    (2,675)
           
(Loss) from continuing operations before provision for income taxes   (84,274)   (136,623)
           
Income from discontinued operations (including income taxes of $0 and $0 for 2016 and 2015, respectively)   —      56,841 
           
Net loss   (84,274)   (79,782)
           
Net (loss) income attributed to non-controlling interest   1,562    —   
           
Net (loss) income attributed to The Staffing Group Ltd.  $(82,712)  $(79,782)

 

The following table summarizes the results from discontinued operations comprising operations of EmployUS Ltd. which was disposed of in the split-off transaction on December 31, 2015.

 

  -18- 
   Three Months Ended March 31, 2015
      
Net Revenues     
Contract staffing services  $4,001,468 
      
Cost of Services   3,305,046 
      
Gross Profit   696,422 
      
Selling, General and Administrative     
Payroll and related expenses   345,118 
General and administrative expenses   239,820 
Total Selling, General and Administrative   584,938 
      
Income from Operations   111,484 
      
Other (Expenses) Income     
Interest expense   (48,678)
Other (expense) income   (5,965)
      
Total Other Expenses   (54,643)
      
Income  before Provision for Income Taxes   56,841 
      
Provision for Income Taxes   —   
      
Net income of EmployUS, Ltd.  $56,841 

 

Continuing Operations

 

Net Revenues:

 

Contract staffing services were $21,805 for the three months ended March 31, 2016, an increase of $21,805 or 100% from $0 for the three months ended March 31, 2015. Staff Fund I, LLC, the subsidiary of the Company, commenced operations during the period at its branch in Montgomery, Alabama.

 

Cost of Services:

 

Cost of staffing services were $16,535 for the three months ended March 31, 2016, an increase of $16,535 or 100% from $0 for the three months ended March 31, 2015. Staff Fund I, LLC, the subsidiary of the Company, commenced operations during the period at its branch in Montgomery, Alabama.

 

  -19- 

Gross Profit:

 

Gross profit was $5,270 for the three months ended March 31, 2016, which is approximately 24% of contract staffing services revenue, from $0 for the three months ended March 31, 2015.

 

Selling, General and Administrative Expenses:

 

Payroll and related expenses were $18,286 for the three months ended March 31, 2016, an increase of $18,286 or 100% from $0 for the three months ended.

 

Selling, general and administrative expenses were $99,867 for the three months ended March 31, 2016, a decrease of $34,081 or approximately 24%, from $133,948 for the three months ended March 31, 2015. Selling, general and administrative expense comprise legal, audit, accounting, transfer agent, printing and other costs related to SEC filings and matters relating to being a public company.

 

Loss from Operations:

 

Loss from operations was $112,883 for the three months ended March 31, 2016, a decrease of $21,065 or approximately 16%, from $133,948 for the three months ended March 31, 2015.

 

Other Expenses:

 

Other (expenses) income were $28,609 for the three months ended March 31, 2016, an increase of $31,284 or approximately 1,1709%, from $(2,675) for the three months ended March 31, 2015.

 

The decrease is primarily due to a change in fair value of derivative liabilities of $79,342 and $0 for 2016 and 2015, respectively. On March 31, 2016 and December 31, 2015, the Company recognized a convertible promissory note derivative liability due to a conversion price not considered predominately based on a fixed monetary amount embedded in a convertible promissory note issued to Labor Smart, Inc., a related party. The income is due to the change in the derivative liability recorded on December 31, 2016 and March 31, 2016.

 

In addition, the Company incurred interest expense of $50,733 during the three months ended March 31, 2016 for late fees, amortization of debt discount and interest due on notes payable and convertible promissory notes payable.

 

Discontinued Operations:

 

As a result of the split-off of EmployUS, Ltd. on December 31, 2015, the consolidated balance sheets as of December 31, 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. Net income of EmployUS, Ltd. is $56,841 for the three months ended March 31, 2015.

 

  -20- 

Liquidity and Capital Resources

 

As of March 31, 2016, we had cash balance of $10,862.

 

Net cash provided by (used in) operating activities was $(31,638) for the three months ended March 31, 2016 as compared to net cash used of $43,441 for the three months ended March 31, 2015. The net cash used by operating activities was primarily due to our net loss.

 

Net cash provided by investing activities was $0 for the three months ended March 31, 2016 as compared to $100,504 from discontinued operations for the three months ended March 31, 2015.

 

Net cash provided by financing activities amounted to $42,500 for the three months ended March 31, 2016, compared to net cash used by financing activities of $143,945 from discontinued operations for the three months ended March 31, 2015. Cash flows provided from financing activities includes a $28,500 advance from Labor Smart, Inc., a shareholder of the Company, and $14,000 received from member’s subscription in Staff Fund I, LLC.

 

Convertible Note Payable – Related Party

On December 18, 2015, the Company entered into a Convertible Promissory Note (“Note”) with Labor Smart Inc. (“Holder”) in the original principal amount of $80,000 bearing a 12% annual interest rate and maturing December 16, 2015. In conjunction with the issuance of the Note, as further consideration, the Company issued the Holder one (1) share Series A Preferred Stock of the Company. 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 120days 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. 

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2016, the Company had a stockholders’ deficit of $416,312 and a working capital deficit of $416,312. For the three months ended March 31, 2016 and 2015, the Company had a net losses of $84,274 and $79,782, respectively. The Company’s stockholders’ deficiency is primarily due to, among other reasons, funding its historical costs.

 

The Company’s principal sources of liquidity include cash from operations and proceeds from debt and equity financings. As of March 31, 2016, the Company had $10,862 in cash. The Company completed a split-off transaction on December 31, 2015 by which all of the assets of the Company were disposed of. In addition, the Company has not generated any significant revenues from its continuing operations, incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. The Company does not expect significant funding from its controlling shareholder, Labor Smart Inc.

 

  -21- 

In addition to the current liabilities of $453,298 reported on March 31, 2016, in conjunction with the Agreement for Purchase and Sale of Assets, the Company issued:

 

i)On April 1, 2016, a non-interest bearing promissory note with principal of $755,000 due on April 1, 2018.

ii)                   On April 5, 2016, entered into an initial Revolving Note in the amount of $1,300,000.

 

The Company is funding its operations primarily through the sale of equity, convertible notes payable and shareholder loans. In the event the Company experiences liquidity and capital resources constraints because of greater than anticipated sales growth or acquisition needs, the Company may need to raise additional capital in the form of equity and/or debt financing including refinancing its current debt. Issuances of additional shares will result in dilution to its existing shareholders. There is no assurance that the Company will achieve any additional sales of its equity securities or arrange for debt or other financing to fund any potential acquisition needs or increased growth. If such additional capital is not available on terms acceptable to the Company, or at all, then the Company may need to curtail its operations and/or take additional measures to conserve and manage its liquidity and capital resources, any of which would have a material adverse effect on its business, results of operations and financial condition. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties. In order to mitigate the risk related with this uncertainty, the Company plans to issue additional shares of common stock for cash and services during the next 12 months.

 

2016 Outlook

 

On December 31, 2015, we refocused our growth strategy. Going forward, we intend to focus on strategic growth acquisitions. As a result of the split-off transactions on December 31, 2015, we believe that the likelihood of successful acquisitions has increased as significant liabilities have been derecognized from our consolidated balance sheet.

 

Our goal in 2016 is to complete a platform acquisition for a number of branch offices with Labor Smart, Inc., our controlling shareholder. Thereafter, we plan to continue to grow by way of acquisition of additional branch offices. We will also seek to fully grow and develop new branch locations under the licensing agreement with Labor Smart, Inc. We currently operate one branch location under the license agreement.

 

Due to increased regulations, rising state unemployment insurance rates that are required to be paid by businesses, rising workers insurance compensation rates and uncertainty regarding the Affordable Care Act, we believe that small staffing companies are prime for acquisition.

 

In order to successfully complete our growth plan as outline in the 2016 outlook, we anticipate using cash from operations to continue to fund our business operations and as the Company implements its planned expansion throughout the Southeast U.S. As we will open additional branches under the licensing agreement we expect to incorporate a new company each time we open a new branch. The startup capital for each branch is expected to be raised by crowdfunding with new investor ownership limited to 49% of each branch.

 

In the event that we need to access the capital markets and sell equity in order to fund operations or further our growth strategy, issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned activities. 

 

  -22- 

We expect that working capital requirements will continue to be funded through a combination of our existing funds and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements as of March 31, 2016 and December 31, 2015.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Critical Accounting Policies

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.

 

The condensed consolidated financial statements include all adjustments including normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows of the Staffing Group, Ltd. for the periods presented. The results of operations for the six months ended June 30, 2015 and 2015 are not necessarily indicative of operating results expected for future periods.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant matters requiring the use of estimates and assumptions include, but may not be limited to, accounts receivable allowances, evaluation of impairment of long lived assets, valuation allowance for deferred tax assets and valuation of derivative liabilities. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.

 

  -23- 

Revenue Recognition

 

Contract staffing service revenues are recognized when services are rendered. The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition”, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence that an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonable assured; and (iv) services have been rendered.

 

Convertible Promissory Notes

 

i)Beneficial Conversion Feature

If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.

 

ii)Debt Discount

The Company determines if the convertible debenture should be accounted for as liability or equity under ASC 480, Liabilities — Distinguishing Liabilities from Equity. ASC 480, applies to certain contracts involving a company's own equity, and requires that issuers classify the following freestanding financial instruments as liabilities. Mandatorily redeemable financial instruments, obligations that require or may require repurchase of the issuer's equity shares by transferring assets (e.g., written put options and forward purchase contracts), and certain obligations where at inception the monetary value of the obligation is based solely or predominantly on:

– A fixed monetary amount known at inception, for example, a payable settleable with a variable number of the issuer's equity shares with an issuance date fair value equal to a fixed dollar amount,

– Variations in something other than the fair value of the issuer's equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuer's equity shares, or

– Variations inversely related to changes in the fair value of the issuer's equity shares, for example, a written put that could be net share settled.

If the entity determined the instrument meets the guidance under ASC 480 the instrument is accounted for as a liability with a respective debt discount. The Company records debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized to non-cash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

iii)Derivative Financial Instruments

Derivative financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

 

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments including senior convertible promissory notes payable and freestanding stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our consolidated financial statements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

No report required.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

With respect to the quarterly period ending March 31, 2016, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our management has concluded that our disclosure controls and procedures were not effective as of March 31, 2016 due to our limited internal resources and lack of ability to have multiple levels of transaction review. In connection with this evaluation, management identified the following control deficiencies that represent material weaknesses as of March 31, 2016:

 

(1) Lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and

   

(2) Inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets; and  
   
(3) We have not conducted a formal assessment of whether the policies that have been implemented address the specific risks of misstatement, due to the change control; and
   
(4) We do not have not have a fully effective mechanism for monitoring the system of internal controls.

 

  -25- 

However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals. We also plan to improve the effectiveness of the accounting group by continuing to augment our existing resources with additional consultants or employees to improve segregation procedures and to assist in the analysis and recording of complex accounting transactions. We plan to hire additional senior accounting personnel or additional independent consultants once we generate significantly more revenue or raise significant additional working capital.  We will also improve segregation procedures by strengthening cross approval of various functions including quarterly internal audit procedures where appropriate. We believe that the foregoing steps will remediate the significant deficiency identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

 

Management is in the process of determining how best to change our current system and implement a more effective system to insure that information required to be disclosed in this quarterly report on Form 10-Q has been recorded, processed, summarized and reported accurately. Our management acknowledges the existence of this problem, and intends to developed procedures to address them to the extent possible given limitations in financial and manpower resources. While management is working on a plan, no assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.

 

Changes in Internal Controls over Financial Reporting.

 

There have been no changes in our internal control over financial reporting during the three months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

  -26- 

PART II. OTHER INFORMATION

  

ITEM 1. LEGAL PROCEEDINGS

 

Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Quarterly Report, no director, officer or affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.

 

ITEM 1A. RISK FACTORS

 

Not required for smaller reporting companies.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

  

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

  Description
31.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1*   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
101.1NS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definitions Linkbase Document

 

*   The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q is being furnished and is not deemed filed with the Securities and Exchange Commission.

 

  -27- 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  The Staffing Group Ltd.
   
Dated: May 16, 2016 By: /s/ Kimberly Thompson
  Kimberly Thompson
  Duly Authorized Officer, Interim Chief Executive Officer and Sole Director
  (Principal Executive Officer and Principal Financial and Accounting Officer)

 

  -28-