| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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. 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) 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 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. 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. 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 Advertising The Company charges advertising
costs to expense as incurred. Advertising costs were $8,231 and $11,614 (Predecessor) for the years ended December 31, 2016 and
2015, respectively. Concentration
of Credit Risk The Company did not have any other
customers that exceeded 10% of either revenue or accounts receivable in either 2016 or 2015. Convertible
Promissory Notes
i) Beneficial Conversion Feature If the conversion features of conventional
convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion
feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt
with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related
to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
ii) Debt Discount The Company determines if the convertible
debenture should be accounted for as liability or equity under ASC 480, Liabilities — Distinguishing Liabilities from Equity.
ASC 480, applies to certain contracts involving a Company's own equity, and requires that issuers classify the following freestanding
financial instruments as liabilities. Mandatorily redeemable financial instruments, obligations that require or may require repurchase
of the issuer's equity shares by transferring assets (e.g., written put options and forward purchase contracts), and certain obligations
where at inception the monetary value of the obligation is based solely or predominantly on: – A fixed monetary amount known
at inception, for example, a payable settleable with a variable number of the issuer's equity shares with an issuance date fair
value equal to a fixed dollar amount, – Variations in something other
than the fair value of the issuer's equity shares, for example, a financial instrument indexed to the S&P 500 and settleable
with a variable number of the issuer's equity shares, or – Variations inversely related
to changes in the fair value of the issuer's equity shares, for example, a written put that could be net share settled. If the entity determined the instrument
meets the guidance under ASC 480 the instrument is accounted for as a liability with a respective debt discount. The Company records
debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized to non-cash
interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized
amounts is immediately expensed.
iii) Derivative Financial Instruments Derivative financial instruments,
as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial
instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or
other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing
or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured
at fair value and recorded as liabilities or, in rare instances, assets. The 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. 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. 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. |
