U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

Mark One

x

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

 

For the quarterly period ended March 31, 2015

 

¨

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

 

For the transition period from ______ to _______

 

Commission File No. 333-185083

 

THE STAFFING GROUP LTD. 

(Exact name of registrant as specified in its charter)

 

Nevada		99-0377457
(State or jurisdiction of incorporation or organization)		IRS Employer Identification Number

 

400 Poydras Street, Suite 1165

New Orleans, LA 70130 

(Address of principal executive offices)

 

(504) 525-7955

(Issuer’s telephone number)

 

Indicate by checkmark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x   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 x

 

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

 

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

 

Class	Outstanding as of  May 7, 2015
Common Stock, $0.001	37,220,013

  

 

THE STAFFING GROUP LTD.

 

Form 10-Q

 

Part 1	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 1.A	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Mine Safety Disclosures	17
Item 5.	Other Information	17
Item 6.	Exhibits	17

 

 

The Staffing Group Ltd., and Subsidiary

CONDENSED CONSOLIDATED BALANCE SHEETS

            

		March 31,				December 31,
		2015				2014
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	94,941			$	4,216
Accounts receivable, net			1,767,092				1,621,861
Prepaid expenses and other current assets			42,423				158,592
Total Current Assets			1,904,456				1,784,669
Property and equipment, net			19,999				22,174
Security deposits			28,055				29,055
TOTAL ASSETS		$	1,952,510			$	1,835,898
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	209,699			$	167,035
Accrued payroll			381,611				91,717
Line of credit			1,274,378				1,364,543
Notes payable			107,000				107,000
Current portion of payroll related liabilities			197,688				197,688
Total Current Liabilities			2,170,376				1,927,983
Long term portion of payroll related liabilities			227,473				273,730
Due to stockholders			472,545				472,287
TOTAL LIABILITIES			2,870,394				2,674,000
Commitments and contingencies (Note 10)
STOCKHOLDERS' DEFICIT
Preferred stock, no par value: 5,000,000 shares authorized, none issued
and outstanding.			-				-
Common stock par value $0.001: 75,000,000 shares authorized;
37,220,013 shares issued and outstanding as of
March 31, 2015 and December 31, 2014, respectively			37,220				37,220
Additional paid-in capital			1,633,704				1,633,704
Accumulated deficit			(2,588,808	)			(2,509,026	)
TOTAL STOCKHOLDERS' DEFICIT			(917,884	)			(838,102	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	1,952,510			$	1,835,898

 

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

 

 

The Staffing Group Ltd., and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the Three Months Ended
		March 31,
		2015				2014
NET REVENUES
Contract staffing services		$	4,001,468			$	5,718,321
COST OF SERVICES
			3,305,046				5,014,135
GROSS PROFIT			696,422				704,186
SELLING, GENERAL AND ADMINISTRATIVE
Payroll and related expenses			345,118				344,885
Selling, general and administrative expenses			373,768				418,244
TOTAL SELLING, GENERAL AND ADMINISTRATIVE			718,886				763,129
LOSS FROM OPERATIONS			(22,464	)			(58,943	)
OTHER EXPENSES
Interest expense			(51,353	)			(31,636	)
Other expense			(5,965	)			(14,297	)
TOTAL OTHER EXPENSES			(57,318	)			(45,933	)
LOSS FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES			(79,782	)			(104,876	)
Benefit for income taxes			-				48
NET LOSS			(79,782	)			(104,828	)
NET LOSS PER COMMON SHARE
Basic and Diluted		$	0.00			$	0.00
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic and diluted			37,220,012				35,075,567

 

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

 

 

The Staffing Group Ltd., and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (UNAUDITED)

 

		For the Three Months Ended
		March 31,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(79,782	)		$	(104,828	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense			2,175				2,175
Interest and fees on line of credit			43,780				88,400
Interest on stockholder loans			10,258				9,307
Amortization of deferred financing costs			-				6,164
Deferred tax asset			-				(353	)
Changes in operating assets and liabilities:
Accounts receivable, net			(145,231	)			(177,686	)
Prepaid expenses and other current assets			116,169				(6,059	)
Security deposits			1,000				(825	)
Accounts payable and accrued expenses			42,664				(62,197	)
Accrued payroll			289,894				348,173
Payroll related liabilities			(46,257	)			(27,245	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			234,670				75,026
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from merger			-				150,000
NET CASH PROVIDED BY INVESTING ACTIVITIES			-				150,000
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) proceeds from line of credit			(133,945	)			(272,287	)
Proceeds from stockholder loans			-				869
Proceeds from sale of common stock			-				90,000
Payments to stockholder			(10,000	)			-
NET CASH USED IN  FINANCING ACTIVITIES			(143,945	)			(181,418	)
Net increase in cash and cash equivalents			90,725				43,608
Cash and cash equivalents, beginning of period			4,216				2,757
Cash and cash equivalents, end of period		$	94,941			$	46,365
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for taxes		$	-			$	165
NON-CASH ACTIVITIES
Prepaids and other current assets received in connection with reverse merger		$	-			$	4,000

 

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

 

 

The Staffing Group, Ltd. and Subsidiary

 

NOTES TO consolidated FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

 

Note 1 - Description of Business

 

EmployUS, LLC (“EmployUS”) a Delaware Limited Liability Company, was formed on September 30, 2010 having a perpetual existence and is a full service turnkey staffing company. Initially established to respond to the relief and recovery of the major oil spill in the Gulf of Mexico, EmployUS, has since expanded to provide services on most major construction, chemical, and maritime projects in the Southeast United States. From its single initial project four years ago, EmployUS, has grown to nine offices in three states, with more than 300 customers and has provided employment to over 4,500 individuals as of March 31, 2015. During the three months ended March 31, 2015, EmployUS had more than 145 customers and has provided employment to over 1,371 individuals.

 

On January 22, 2014, The Staffing Group, Ltd. (“the Company”) entered into a Share Exchange Agreement (the “Exchange Agreement”) with EmployUS, Ltd., all of the stockholders of EmployUS, Ltd. (the “EmployUS, Ltd. Shareholders”), and the Company’s controlling stockholders. The Exchange Agreement closed on February 14, 2014. Pursuant to the terms and conditions of the final, fully executed Exchange Agreement and upon the consummation of the closing, the Company issued an aggregate of 13,153,800 to the shareholders of EmployUS Ltd in exchange for the transfer of the EmployUS, Ltd. common stock. Additionally, three of the Company’s stockholders agreed to cancel an aggregate of 13,153,798 of the Company’s common stock.

   

Following the Exchange Agreement, there were 35,100,011 shares of the Company’s common stock issued and outstanding, which include 13,153,800 shares held by the former stockholders of EmployUS, Ltd. and 6,050,000 shares held by Brian McLoone, EmployUS Ltd.’s Chief Operating Officer but not a stockholder of EmployUs Ltd. prior to the merger. As a result, EmployUS, Ltd. pre-merger stockholders, including Brian McLoone, held approximately 54.72% of the Company’s issued and outstanding shares of common stock and the former stockholders of the Company hold approximately 45.28%.

 

Upon closing of the Exchange Agreement, EmployUS, Ltd. became a wholly owned subsidiary of the Company. The Company ceased its prior operations and became engaged in the business of EmployUS, Ltd. As the Company was formerly a shell company, no pro forma disclosures are required. The Exchange Agreement was accounted for as a reverse merger and recapitalization and EmployUS, Ltd. is deemed to be the acquirer in the reverse merger for accounting purposes and the Company is deemed the legal acquirer. The Company will therefore, take on EmployUS, Ltd.’s operating history. In connection with the reverse merger, Brent Callais, CEO of EmployUS, Ltd., became a director of the Company due to his expertise and experience.

    

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, 2015 are not necessarily indicative of the results that may be expected for any subsequent quarter of for the year ending December 31, 2015. 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 14, 2015 for the year ended December 31, 2014.

 

 

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 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, and valuation allowance for deferred tax assets. 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.

 

Concentration of Credit Risk

 

For the three months ended March 31, 2015 and 2014, Customer A accounted for 23% and 42% of the Company’s net revenue, respectively. Customer A’s accounts receivable was 18% and 29% of the Company’s total accounts receivable as of March 31, 2015 and December 31, 2014, respectively. Customer B accounted for 19% of the Company’s net revenue for the three months ended March 31, 2014 and Customer C accounted for 22% of the Company’s total accounts receivable as of March 31, 2015.

  

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 $47,500 and $53,368 was considered necessary as of March 31, 2015 and December 31, 2014, respectively. 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.

 

Advertising

 

The Company charges advertising costs to expense as incurred. Advertising costs were $1,853 and $3,863 for three months ended March 31, 2015 and 2014, respectively.

 

 

Recent Accounting Pronouncements

 

In February 2015, the FASB issued new guidance to improve consolidation guidance for legal entities (Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis), effective for fiscal years beginning after December 15, 2015 and interim periods within those years and early adoption is permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current GAAP by reducing the number of consolidation models. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

Note 3 - Liquidity and Capital Resources

 

As of March 31, 2015, the Company had a stockholders’ deficit of $917,884. For the three months ended March 31, 2015 and 2014, the Company had a net loss of $79,782 and $104,828, respectively. At March 31, 2015, the Company had a working capital deficit of $265,920 compared to $143,314 at December 31, 2014. The Company’s stockholders’ deficiency is primarily due to, among other reasons, penalties and interest relating to unpaid payroll tax liabilities in 2011, and an increase in staff payroll and rent, due to an expansion of operations. The Company currently has a past due payroll tax liability from 2011 of approximately $425,161. Since 2012, the Company has been remitting payroll taxes in accordance with the Internal Revenue Service (“IRS”) and is currently on an installment agreement with the IRS to pay back the outstanding payroll tax liability.

   

The Company’s principal sources of liquidity include cash from operations and proceeds from debt and equity financings. The balance due to Crestmark on the Company’s line of credit was $1,274,378 as of March 31, 2015, a decrease of $90,165 from December 31, 2014. As of March 31, 2015, the Company had cash balances of $94,941 as compared to $4,216 as of December 31, 2014.

 

The Company anticipates that its current available working capital and credit facilities should be adequate to sustain current operations, in addition to repaying certain debt obligations, including the past due payroll liabilities, as they become due. 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.

 

Note 4 - Line of Credit

 

In October 2011, the Company entered into an account purchase agreement with Crestmark Bank (“Crestmark”) to provide working capital financing. The account purchase agreement allows Crestmark to advance the Company funds on eligible accounts receivable at its sole discretion. The term of the facility is three years with an interest rate equal to the Prime Rate plus 2.75% per annum (6% floor), a maintenance fee of 0.6% per month of the average monthly loan balance, and a facility fee equal to 1% of the maximum loan amount. The line is secured by collateral consisting of all of the Company’s assets and is also personally guaranteed by Brent Callais, a director of the Company.

 

On September 24, 2014, the Company entered into a Loan and Security Agreement with Crestmark which supersedes and replaces the original account purchase agreement.  The term of the facility is three years with an interest rate equal to the Prime Rate plus 5.75% per annum (6% floor), and a facility fee equal to 1% of the maximum loan amount. The Company is currently compliant with all covenants. The balance due to Crestmark as of March 31, 2015 and December 31, 2014 was $1,274,378 and $1,364,543 respectively. Interest and fees paid to Crestmark for the three months ended March 31, 2015 and 2014 were $43,780 and $88,400, respectively, which were satisfied by additional borrowings under the line of credit.

 

 

Interest and fees consisted of the following for the three months ended March 31:

 

		2015				2014
Interest		$	37,694			$	25,488
Fees			6,086				62,912
Total		$	43,780			$	88,400

 

Note 5 - Notes Payable

 

Notes Payable

 

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. Interest expense for the three months ended March 31, 2015 was $2,363 and is included in accrued expenses as of March 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. Interest expense for the three months ended March 31, 2015 was $312 and is included in accrued expenses as of March 31, 2015.

   

Note 6 - Due to Stockholders

 

Amounts due to stockholders of the Company of $472,545 and $472,287 as of March 31, 2015 and December 31, 2014, respectively, arose from cash advances made to the Company for working capital purposes. These balances include accrued interest in the amount of 9% per annum, which aggregated $109,016 and $98,758 as of March 31, 2015 and December 31, 2014, respectively. The stockholders have agreed to forbear from demanding payment until July 1, 2016 of the principal and any accrued interest previously due on demand. Interest expense for the three months ended March 31, 2015 and 2014 was $10,258 and $9,934, respectively, which was satisfied by being added to the outstanding balance.

 

Note 7 - Payroll Liabilities

 

The Company has past due payroll liabilities due to the Internal Revenue Service (“IRS”) for unpaid payroll taxes, penalties and interest for 2011 and 2010. The original unpaid payroll taxes to the IRS for these periods totaled $891,386.

 

The Company has a payment plan in place with the IRS, whereby effective on April 25, 2012, it made an initial payment of $4,118, and subsequent monthly payments of $16,474 on the 28th of every month thereafter starting on May 28, 2012 until such time the liability is paid in full, with an additional payment of $200,000 due on April 28, 2014. The Company made such $200,000 payment on the required date.

 

As of March 31, 2015 and December 31, 2014 the past due balance due to the IRS, including penalties, interest, and fees, totaled $425,161 and $471,418, respectively. The Company incurred $3,165 in interest and $22,176 in penalties and interest from the IRS during the three months ended March 31, 2015 and 2014, respectively. The IRS had previously issued a notice of Federal Tax Lien pertaining to the outstanding liabilities associated with the fourth quarter 2010 and second quarter 2011. Such Federal Tax Lien was released on March 11, 2015.

 

 

Note 8 – Stockholders Equity

 

Preferred Stock

 

The Company has authorized 5,000,000 shares of preferred stock, no par value. As these are considered “black check” preferred shares, the terms of the preferred stock are to be determined by the board of directors of the Company in the near future.

 

Common Stock

 

The Company did not issue any new shares of common stock during the three months ended March 31, 2015.

 

Note 9 - Contingencies and Commitments

 

Litigation

 

The Company is a defendant in 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 eight of its branch offices, which are located either in downtown or suburban business centers, and for its corporate headquarters, located in New Orleans, Louisiana. Locations are generally leased over periods from one to three years, and also on a month-to-month basis. For the three months ended March 31, 2015 and 2014, rent expense was $22,915 and $31,185, respectively.

 

As of March 31, 2015, 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
2015 (remaining)		$	37,060
2016			18,921
Total		$	55,981

 

Note 10- Subsequent Events

 

The Company has evaluated subsequent events through the date these consolidated financial statements were issued. 

 

 

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, 2015 and 2014, 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), Microwave, Electrical and Ionizing detection, shielding and protection in Poland. We were unsuccessful in operating our business and on August 27, 2013 we entered into a binding letter of intent with EmployUS. It was in connection with that letter of intent that our prior officer and director, Liudmila Yuziuk, resigned and we appointed Mr. Brian McLoone as our sole officer and director. In addition, we changed our name to The Staffing Group, Ltd. to better represent our new business operations.

 

On January 22, 2014, The Staffing Group, Ltd. (“the Company”) entered into a Share Exchange Agreement (the “Exchange Agreement”) with EmployUS, all of the stockholders of EmployUS (the “EmployUS, Ltd. Shareholders”), and the Company’s controlling stockholders. The Exchange Agreement closed on February 14, 2014.

   

The purposes of the transactions described above were to complete a reverse merger with the result being that EmployUS became a wholly-owned subsidiary of The Staffing Group, Ltd.  The Staffing Group, Ltd.’s business operations will now focus on the business of EmployUS.

 

Following the Exchange Agreement, there were 35,100,011 shares of the Company’s common stock issued and outstanding, which include 13,153,800 shares held by the former stockholders of EmployUS and 6,050,000 shares held by Brian McLoone, EmployUS Chief Operating Officer, but not a stockholder of EmployUS prior to the merger. As a result, the Company’s pre-merger stockholders, excluding Brian McLoone, held approximately 45.28% of the Company’s issued and outstanding shares of common stock and the former stockholders of EmployUS, including Brian McLoone held approximately 54.72%.

 

The Company ceased its prior operations and became engaged in the business of EmployUS. As the Company was formerly a shell company, no pro forma disclosures are required. The Exchange Agreement is being accounted for as a reverse merger and recapitalization and EmployUS is deemed to be the acquirer in the reverse merger for accounting purposes and the Company is deemed the legal acquirer. The Company will therefore, take on EmployUS’s operating history. In connection with the reverse merger, Brent Callais, CEO of EmployUS, became a director of the Company due to his expertise and experience. 

 

EmployUS is a full service turnkey staffing company formed in September of 2010. Initially established to respond to the relief and recovery of the major oil spill in the Gulf of Mexico, EmployUS has since expanded to work in the light industrial industry as well as on many of the construction projects in the Southeast United States. EmployUS, quickly expanded operations throughout the state of Louisiana. From its single initial project four years ago, EmployUS, has grown to 9 offices in 3 states with more than 300 customers serviced in 2014 and has provided employment to over 4,500 individuals over that same period of time. During the three months ended March 31, 2015, EmployUS had more than 145 customers and has provided employment to over 1,371 individuals.

 

 

EmployUS is led by a management team consisting of industry professionals that capitalizes on their team’s extensive business experience, track record of profitable growth and nationwide network of client relationships. EmployUS recruits, hires, employs and manages skilled workers, eliminating the need for the client do so. By eliminating this necessary administrative requirement of identifying and employing skilled workers, the client has the ability to focus on the important task of managing and growing their own business without needing to worry about the company’s labor needs.

  

The benefits of utilizing The Staffing Group Ltd. include:

 

	·	Employer related payroll taxes covered by the Company
	·	Workers’ compensation Insurance
	·	General liability insurance
	·	Professional risk management team
	·	24/7 availability of office staff
	·	Safety equipment & training programs
	·	Drug & alcohol screenings
	·	Background checks/MVR reports
	·	Temporary to permanent workers.

   

Three Months Ended March 31, 2015 compared to 2014

 

The following table presents a summary of operating information by our single operating segment for the three months ended March 31, 2015 and 2014:

 

		2015				2014
Net Revenues
Contract staffing services		$	4,001,468			$	5,718,321
Cost of Services			3,305,046				5,014,135
Gross Profit			696,422				704,186
Selling, General and Administrative
Payroll and related expenses			345,118				344,885
Selling, general and administrative expenses			373,768				418,244
Total Selling, General and Administrative			718,886				763,129
Loss from Operations			(22,464	)			(58,943	)
Other Expenses
Interest expense			(51,353	)			(31,636	)
Other expense			(5,965	)			(14,297	)
Total Other Expenses			(57,318	)			(45,933	)
Loss before Benefit for Income Taxes			(79,782	)			(104,876	)
Benefit for Income Taxes			--				48
Net Loss		$	(79,782	)		$	(104,828	)

 

 

Contract Staffing Services:

 

Contract staffing services decreased by $1,716,853 or approximately 30.02% from $5,718,321 for the three months ended March 31, 2014 to $4,001,468 for the three months ended March 31, 2015.  The decrease was due primarily to a reduction in services provided to Progressive Waste. It was determined that Progressive Waste and their already low margins were not profitable once the workers compensation exposure was recognized, so a decision was made in the fourth quarter of 2014 to have a gradual pull out from their facilities.

 

Cost of Services:

 

Cost of services decreased by $1,709,089 or approximately 34.09% from $5,014,135 for the three months ended March 31, 2014 to $3,305,046 for the three months ended March 31, 2015.  This decrease exemplifies the lack of profitability that was associated with Progressive Waste account, this reduction was directly related to decreasing services to Progressive Waste.

   

Gross profit:

 

Gross profit decreased by $7,764, or approximately 1.10%, from $704,186 for the three months ended March 31, 2014 to $696,422 for the three months ended March 31, 2015.  The gross profit margin percentage increased by 5.10%, from 12.31% for the three months ended March 31, 2014 to 17.41% for the three months ended March 31, 2015. The reason for the profit margin increase was the reduction of a high volume account in 2015 that had a very low margin once the workers compensation exposure was realized.

 

Selling, General and Administrative Expenses:

 

Selling, general and administrative expenses were $373,768 for the three months ended March 31, 2015, a decrease of $44,476 or approximately 10.63%, from $418,244 for the three months ended March 31, 2014. This decrease was related to the closing of two locations that exclusively serviced Progressive Waste.

 

Payroll and Related Expenses:

 

Payroll and related expenses were $345,118 for the three months ended March 31, 2015, an increase of $233 or approximately 0.07%, from $344,885 for the three months ended March 31, 2014. The payroll related costs did not change because although we eliminated two offices, we added additional sales force and made some modifications to a few employees’ compensation based on changing roles.

 

Other Expenses:

 

Other expenses were $57,318 for the three months ended March 31, 2015, an increase of $11,385 or approximately 24.79%, from $45,933 for the three months ended March 31, 2014. This increase is due to a revised banking arrangement with our bank. We structured a new deal that eliminates finance fees, however that resulted in an increase of 3% to the annual interest rate we pay to borrow money.

 

Net Loss:

 

As a result of the above factors, we recognized a net loss of $79,782 for the three months ended March 31, 2015, as compared to a net loss of $104,828 for the three months ended March 31, 2014, a decrease of $25,046. The net loss was due primarily to the issuing in 2014 of 1,000,000 shares of stock to a company that does investor relations, the shares were issued when the stock was valued at $.54 which resulted in a non-cash charge of $127,500 for each of the last four quarters. This is the last quarter that this will impact us. This cost was not recognized in the first quarter of 2014, which means from an operational standpoint, we showed a positive net income of $47,000 which has us improving by $152,000 compared to the first quarter 2014 net loss of $105,000.

 

Liquidity and Capital Resources

 

As of March 31, 2015, the Company had a stockholders’ deficit of $917,884. For the three months ended March 31, 2015 and 2014, the Company had a net loss of $79,782 and $104,828, respectively. At March 31, 2015, the Company had a working capital deficit of $265,920 compared to $143,314 at December 31, 2014. The Company’s stockholders’ deficiency is primarily due to, among other reasons, penalties and interest relating to unpaid payroll tax liabilities in 2011 and an increase in staff payroll and rent, due to an expansion of operations. The Company currently has a past due payroll tax liability from 2011. Since 2012, the Company has been remitting payroll taxes in accordance with the Internal Revenue Service (“IRS”) and is currently on an installment agreement with the IRS to pay back the outstanding payroll tax liability.

 

 

Our principal sources of liquidity include cash from operations and proceeds from debt and equity financings. The balance due to Crestmark on the Company’s line of credit was $1,274,378 as of March 31, 2015, a decrease of $90,165 from December 31, 2014. As of March 31, 2015, we had cash balances of $94,941 as compared to $4,216 as of December 31, 2014, representing an increase of $90,725.

   

Net cash provided by operating activities was $234,670 for the three months ended March 31, 2015 as compared to $75,026 for the three months ended March 31, 2014. The increase of $159,644 was principally due to more timely and consistent collection of accounts receivable during the three months ended March 31, 2015, as well as improved margins from the existing customers.

 

For the three months ended March 31, 2015 there was no net cash provided by or used in investing activities. However, during the three months ended March 31, 2014, upon consummating the merger, EmployUS was the beneficiary of $150,000 of bridge funding into the Company prior to the merger.

 

Net cash used in financing activities amounted to $143,945 for the three months ended March 31, 2015, compared to $31,418 for the three months ended March 31, 2014 representing an increase of $112,527.  The increase quarter over quarter is due to not raising any proceeds from the sale of common stock for the three months ended March 31, 2015 compared to $240,000 of proceeds during the three months ended March 31, 2014. This is being offset by a reduction in fees related to the line of credit.

 

Bank loans/Line of Credit

 

EmployUS, Ltd. has a line of credit with Crestmark Bank for working capital and capital investment and one loan from an investor made in connection with the merger. 

 

We believe that our currently available working capital and credit facilities referred to above should be adequate to sustain our operations at the current level for the next twelve months.

   

2015-2016 Outlook

 

EmployUS has grown organically from one location in the beginning of 2011 to nine locations by the end of 2014 with annual sales exceeding $20,000,000. The 2015 – 2016 growth plan consists of a three tiered approach. The first tier involves growing the volume of our current locations and more importantly improving the margins at those locations. During 2014, we took on some lower margin and higher risk business locations. We have now decided that the lower margin business is not allowing us to operate efficiently and we have closed two of those locations which allowed us to reduce the number of locations we operate from 11 locations back down to 9 locations. The two locations that we closed accounted for nearly $5,000,000 in sales but provided zero profitability to the Company. The expectation is that we should collectively increase the annual sales by 15% from our remaining nine locations. Tier two involves organic expansion. By maximizing the current relationships with our existing customers, EmployUS intends to open three additional locations by the end of 2015 and then 3 additional locations in 2016. The final tier will be growth through acquisition. 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. EmployUS intends to pursue possibly acquiring one or two small staffing companies each year.

 

In order to successfully complete our 2015-2016 outlook, we anticipate continuing to rely on equity sales of our common shares in order to continue to fund our business operations. 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.

 

 

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, 2015 and December 31, 2014.

 

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 three months ended March 31, 2015 and 2014 are not necessarily indicative of operating results expected for future periods.

 

Principles of Consolidation

 

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

 

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 and evaluation of impairment of long lived assets. 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 reasonable assured; and (iv) services have been rendered.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

No report required.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

An evaluation was conducted under the supervision and with the participation of our management of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2015. Based on that evaluation, our management concluded that our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Such officer also confirmed that there was no change in our internal control over financial reporting during the three months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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 FACTOS

 

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.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema
101.CAL		XBRL Taxonomy Calculation Linkbase
101.DEF		XBRL Taxonomy Definition Linkbase
101.LAB		XBRL Taxonomy Label Linkbase
101.PRE		XBRL Taxonomy Presentation Linkbase

 

* 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.

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	The Staffing Group Ltd.
Dated: May 14, 2015	By: /s/ Brian McLoone
	Brian McLoone, President and Chief Executive Officer and Chief Financial Officer