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STAFFING 360 SOLUTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions. Overview The Company was incorporated in the State of Nevada on December 22, 2009, with the name "Golden Fork Corporation". On March 16, 2013, the Company filed the Amendment to change its name from "Golden Fork Corporation" to "Staffing 360 Solutions, Inc." 36 On July 31, 2013, the Company formed Staffing Alliance. In September 2013, Staffing Alliance commenced operations and in October 2013, we began generating revenues. Staffing Alliance is a wholly-owned subsidiary of the Company. Currently, Staffing Alliance provides temporary staffing solutions to 4 customers and payroll processing services to one customer. On February 11, 2013, the Company negotiated and entered into the New IDC LOI with IDC. As of the date hereof, we have been unable to finalize a definitive stock purchase agreement with IDC. The Company is no longer pursuing this transaction. On April 26, 2013, the Company consummated the TRG Acquisition, pursuant to the TRG Purchase Agreement dated March 21, 2013, entered into by and among the Company, TRG and the shareholders of TRG. As a result of the Acquisition, TRG became a wholly-owned subsidiary of the Company and now operates under the name "Cyber 360 Solutions" (see Note 11). On November 4, 2013, the Company consummated the acquisition of 100% of the issued and outstanding stock of CSI pursuant to a definitive stock purchase agreement dated August 14, 2013 by and among the Company, NCSI, and the shareholders of NCSI (see Note 11). On January 3, 2014, the company consummated and closed the acquisition of 100% of the issued and outstanding stock of Staffing 360 Solutions (UK) Limited (formerly Initio International Holdings Limited) and its respective Subsidiaries, including but not limited to Monroe The acquisition was completed pursuant to that certain share purchase agreement, dated October 30, 2013, as amended by Amendment No. 1 to the share purchase agreement, dated December 10, 2013, by and among the Company and the shareholders of Initio. See Note 11 to the financial statements in this Quarterly Report on Form 10-Q for a more complete description of the acquisition of Initio. On February 28, 2014, the Company consummated and closed the acquisition of 100% of the issued and outstanding stock of Poolia UK Limited and its respective Subsidiaries. The acquisition was completed pursuant to that certain asset purchase agreement, dated February 28, 2014. See Note 11 to the financial statements in this Quarterly Report on Form 10-Q for a more complete description of the acquisition of Poolia. Operating History We intend to acquire domestic and international staffing companies. To date, we operate five entities, Staffing Alliance, Cyber 360, CSI, Staffing 360 Solutions (UK) and Poolia (UK). We are currently negotiating with other potential acquisitions. We began generating revenues in October 2013. As a result of these current acquisitions, we are currently generating in excess of $20 million in revenues however our business plan is subject to risks inherent in growing an enterprise, including limited capital resources and possible rejection of our business model and/or sales methods and cost overruns. From inception to February 28, 2014, we raised $16,914,591 in the form of convertible notes payable, related party notes, accounts receivable financing and through the sale of Common Stock and warrants. On December 6, 2013, the Company completed its fifth and final closing of its private placement offering of promissory notes for up to $1,750,000. As of the final closing of the note offering, the Company received an aggregate amount of$1,655,000. On January 3, 2014 and January 7, 2014, the Company completed its first and second closings, respectfully, in the aggregate amount of $8,261,500 in connection with its "best efforts" private placement offering of units up to $10,000,000. Through February 28, 2014, the Company raised $9,144,000 through the private placement unit offering. On March 13, 2014, the Company successfully completed its Unit Offering of the maximum amount of $10,000,000. We will be seeking additional financing in the future in order to obtain the capital required to implement our business plan and purchase and operate staffing companies. We have no assurance that future financing will be available to us on acceptable terms. If financing is not available to us on satisfactory terms, we will be unable to continue, develop or expand our operations. Equity financing will result in additional dilution to our existing shareholders. 36 Going concern Through August 2013, the Company was presented as a development stage company. Activities during the development stage included organizing the business and raising capital. In September 2012, Staffing Alliance commenced operations and the Company began to generate revenues. In April 2013, Cyber 360 Solutions commenced operations and began generating revenues. In November 2013, NCSI commenced operations and began generating revenues. In January 2014, Staffing UK commenced operations and began generating revenues. In February 2014, Poolia UK commenced operations and began generating revenues. Since the Company has incurred losses and currently has negative working capital, these unaudited condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. Realization value may be substantially different from carrying values as shown and these unaudited condensed consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern. As of February 28, 2014, the Company had a working capital deficiency of $5,103,748, and had an accumulated deficit of $7,284,506 and for the nine months ended February 28, 2014 has a net loss and net cash used in operations of $3,614,764 and $1,476,078, respectively. The continuation of the Company as a going concern is dependent upon the continued financial support from its major shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and through profitable operations from existing subsidiaries and the acquisition of additional entities. These factors raise substantial doubt regarding the Company's ability to continue as a going concern and the outcome of these uncertainties cannot be predicted. Currently, we do not have sufficient working capital to fund the expansion of our operations and to provide working capital necessary for our ongoing operations and obligations. We will need to raise significant additional capital to fund our operating expenses, pay our obligations, and acquire additional entities. In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources. Management's plan to continue as a going concern includes raising capital through increased sales and conducting additional financings through debt and equity transactions in order to acquire additional entities. The Company anticipates it will require $2 million over the next twelve months for working capital purposes; this amount does not include capital needed to fund additional acquisitions. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon the management's ability to successfully implement the plans described above, including securing additional sources of financing and attain profitable operations. Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for the Company to raise additional capital on an immediate basis. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Through February 28, 2014, the Company has raised capital by conducting financings through debt and equity transactions. On December 6, 2013, the Company completed its final closing of its Private Placement Offering of Notes with certain Purchasers (the "Note Offering"). As of the final closing of the Note Offering, the Company received an aggregate amount of $1,655,000. On January 3, 2014 and January 7, 2014, the Company completed its first and second closings, respectfully, in a private placement of units for up to $10,000,000 (the "Unit Offering") consisting of Common Stock and warrants, in the aggregate amount of $8,261,500. Further, as of February 28, 2014, the Company raised $9,144,000 in the Unit Offering for a total of 365.76 units. Each unit (the "Unit") consists of (i) 25,000 shares (the "Shares") of Common Stock priced at $1.00 per share and (ii) warrants (the "Warrants") to purchase 12,500 shares (the "Warrant Shares"), at an exercise price of $2.00 per Warrant Share. The sale of the Units qualified for exemption under Rule 506(b) promulgated under Section 4(a)(2) of the Securities Act since the issuance of these securities by the Company did not involve a "public offering" and the Company only accepted investments from accredited investors. For the aggregate amount of $9,144,000 and the 365.76 Units through February 28, 2014, consists of a total of 9,114,000 shares of Common Stock and 4,572,000 Warrants. On March 13, 2014, the Company successfully completed its Unit Offering of $10,000,000. As of the final closing of the Unit Offering, the Company received an aggregate amount of $10,000,000 from a total of 137 accredited investors and issued an aggregate of 400 Units, which consists of a total of 10,000,000 shares of Common Stock and 5,000,000 Warrants. 37 Results of Operations For the three months ended February 28, 2014 as compared to the three months ended February 28, 2013 The following table sets forth the results of our operations for the three months ended February 28, 2014 and 2013 indicated as a percentage of net revenues: Quarter Ended February 28, 2014 2013 Service revenues $ 16,908,799 100 % $ 69,723 100 % Direct cost of services 13,406,858 79 % 39,126 56 % Gross profit 3,501,941 21 % 30,597 44 % Operating expenses 4,555,664 27 % 793,561 1138 % Loss from operations (1,053,723 ) (6 )% (762,964 ) (1094 )% Other expenses (709,638 ) (4 )% (23,444 ) (34 )% Net loss $ (1,763,361 ) (10 )% $ (786,408 ) (1,128 )% Service revenues We began to generate revenues in October 2013. As of February 28, 2014, the Company had five entities - Staffing Alliance, Cyber 360, Control Solutions International (CSI), Staffing (UK) and Poolia (UK). Staffing Alliance provides temporary staffing and payroll processing services. Payroll services are performed for which the Company handles basic human resources functions, weekly payroll, direct deposit, W-2's and workers' compensation insurance. Temp staff services include assistance in sourcing and recruitment strategy. Staffing Alliance revenues are derived from gross billings, which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its worksite employees. Revenues, which exclude the payroll cost component of gross billings, and therefore, consist solely of markup, are recognized ratably over the payroll period as worksite employees perform their service at the client worksite. Gross billings for the quarter ended February 28, 2014 totaled $480,128. Staffing Alliance reduced its the gross billings by $399,768 for employee payroll costs representing wages and associated payroll expenses (taxes, unemployment, workers compensation) paid to employees and tax authorities on behalf of clients for which the Company provides payroll processing services. For the three months ended February 28, 2014, Staffing Alliance had net revenues of $80,360. Gross billings for the quarter ended February 28, 2013 totaled $516,441. Staffing Alliance reduced its the gross billings by $446,718 for employee payroll costs representing wages and associated payroll expenses (taxes, unemployment, workers compensation) paid to employees and tax authorities on behalf of clients for which the Company provides payroll processing services. For the three months ended February 28, 2013, Staffing Alliance had net revenues of $69,723. Cyber 360 was acquired on April 26, 2013. Cyber 360 primarily provides IT and information security temporary staffing services for an array of large institutions. They also provide permanent placement, consulting to permanent placement and consulting. Contingent staffing and consulting revenues are recognized when the services are rendered by the Company's contingent employees and consultants. The Company pays all related costs of employment, including workers' compensation insurance, state and federal unemployment taxes, social security and certain fringe benefits. For the three months ended February 28, 2014, Cyber 360 had revenues of $1,109,104 compared to $0 for the three months ended February 28, 2013. Permanent placement staffing revenues are recognized when employment candidates typically start their first day of work. The Company offers a 30/60/90 day guarantee. If the employee is terminated or leaves voluntarily during this period, a pro-rated refund is provided. The Company has a substantial history of estimating the effect of permanent placement candidates who do not remain with its client through the guarantee period. Fees to clients are generally calculated as a percentage of the new employee's annual compensation. Control Solutions International (CSI) was acquired on November 4, 2013. It provides consulting and risk advisory services principally in the US and Canada but also has a network of affiliated entities across a further 33 countries. It recognizes revenue ratably over the period in which the service is provided. The costs of the service provision are recognized as the cost and time is incurred. For the three months to February 28, 2014, CSI added revenue to the Company of $1,928,435 compared to $0 for the three months ended February 28, 2013. Staffing UK was acquired on January 3, 2014. It provides temporary staffing and permanent placement services in the US and the UK. Revenues are derived from gross billings, which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its worksite employees. For the three months to February 28, 2014, Staffing UK added revenue to the Company of $13,801,537 compared to $0 for the three months ended February 28, 2013. Poolia UK was acquired on February 28, 2014. Poolia UK operates its professional staffing services from its office in London and focuses on providing temporary, contract and permanent qualified professionals to various banking, financial and commercial clients across the United Kingdom. For the three months ended February 28, 2014, Poolia UK did not have any revenues. 38 For the three months ended February 28, 2014, we, on a consolidated basis, had net revenues of $16,908,799 compared to $69,723 for the three months ended February 28, 2013. Direct cost of services Cost of revenues includes the cost of labor and other overhead costs (payroll wages, taxes and related insurance) as they relate to employees (temporary and permanent) as well as sub-contractors and consultants. For the three months ended February 28, 2014 and 2013, cost of revenues was $13,406,858 and $39,126, respectively. The increase is related to the cost of revenues of the Company's four acquisition, which took place after the quarter ended February, 2013. Gross profit and gross margin Our gross profit for the three months ended February 28, 2014 and 2013 was $3,501,941 and $30,597, respectively, representing gross margin of 21% and 41% respectively. The decrease is related to the gross profit of the Company's four acquisition, which took place after the quarter ended February, 2013 as compared to the gross profit of its lone subsidiary in 2013. Operating expenses For the three months ended February 28, 2014, operating expenses amounted to $4,555,664 as compared to $793,561 for the three months ended February 28, 2013, an increase of $3,762,103. For the three months ended February 28, 2014 and 2013, operating expenses consisted of the following: Three Months Ended February 28, 2014 2013 General and administrative $ 1,758,547 $ 76,343 Compensation 1,830,173 55,049 Consulting fees - related parties 100,000 352,796 Depreciation 244,211 - Professional fees 622,733 309,373 Total operating expenses $ 4,455,664 $ 793,561 For the three months ended February 28, 2014, the increase in our operating expenses as compared to the three months ended February 28, 2013 was primarily attributable to: ¨ An increase of $1,682,204 in general and administrative expenses for the three months ended February 28, 2014 as compared to the three months ended February 28, 2013. The increase is primarily attributable to the implementation of the Company's business plan as well as office expenses related to the Company's subsidiaries, four of which did not exist in 2013. ¨ An increase in compensation of $1,775,124. The Company has increased its workforce due to the increase related to the acquisitions made in April 2013, November 2013 and January 2014. In 2013, the Company hired the president of the Company as well as two senior vice presidents. In addition the increase in compensation also relates to the compensation of the employees working for the Company's subsidiaries. ¨ A decrease in consulting fees to related parties incurred for administrative overhead services and business development services of $100,000. The decrease is primarily attributable to the Company hiring executive officers rather than hiring consultants in order to implement the Company's business plan specifically researching and adding potential target acquisitions as well as implementing the Company's plan relating to its existing subsidiaries. ¨ The Company's intangible assets which has been deemed Contractual and Non Contractual Customer Relationships are being amortized over the estimated life of the asset of four years. The intangible asset is related to the acquisitions of Cyber 360 on April 26, 2013, Control Solutions International on November 4, 2013 and Staffing UK on January 3, 2014. The amortization of the intangible was calculated for the three months ended February 28, 2014. During the quarter ended February 28, 2014 and 2013 the Company recognized amortization expense of $200,510 and $0, respectively. 39 ¨ An increase of $43,701 in depreciation expense. The increase relates to the fixed assets of the Company's subsidiaries and the fixed assets the Company acquired. ¨ An increase of $313,360 in professional fees in the three months ended February 28, 2014 as compared to the three months ended February 28, 2013. The increase primarily relates to increases in accounting, consulting and legal fees relating to the implementation of the Company's business plan specifically due diligence (legal and accounting) of potential acquisition targets. The increase also relates to the professional fees relating to running public companies (accounting, auditing, legal, transfer agent, filing fees). Other Expenses For the three months ended February 28, 2014, we incurred interest and financing expense of $709,638 (2013: $207,408) relating to interest from convertible notes payables, accounts receivable financing, amortization of debt discount and amortization of deferred financing costs. Net Loss As a result of the factors described above, our net losses for the three months ended February 28, 2014 and 2013 were $1,763,361 and $970,372, respectively, or a net loss per common share of $0.24 and $0.08 (basic and diluted), respectively. For the nine months ended February 28, 2014 as compared to the nine months ended February 28, 2013 The following table sets forth the results of our operations for the nine months ended February 28, 2014 and 2013 indicated as a percentage of net revenues: Nine months Ended February 28, 2014 2013 Service revenues $ 20,215,781 100 % $ 90,777 100 % Direct cost of services 15,689,615 78 % 50,603 56 % Gross profit 4,526,166 22 % 40,174 44 % Operating expenses 7,223,883 36 % 1,210,845 1,334 % Loss from operations (2,697,717 ) (13 )% (1,166,616 ) (1,285 )% Other expenses (917,047 ) (5 )% (44,299 ) 49 % Net loss $ (3,614,764 ) (18 )% $ (1,210,915 ) (13,335 )% Service revenues Staffing Alliance provides temporary staffing and payroll processing services. Payroll services are performed for which the Company handles basic human resources functions, weekly payroll, direct deposit, W-2's and workers' compensation insurance. Gross billings for the nine months ended February 28, 2014 totaled $947,222. Staffing Alliance reduced its the gross billings by $693,938 for employee payroll costs representing wages and associated payroll expenses (taxes, unemployment, workers compensation) paid to employees and tax authorities on behalf of clients for which the Company provides payroll processing services giving a net revenue for the nine months to February 28, 2014 of $253,284. Gross billings for the nine months ended February 28, 2013 totaled $234,484. Staffing Alliance reduced its the gross billings by $143,707 for employee payroll costs representing wages and associated payroll expenses (taxes, unemployment, workers compensation) paid to employees and tax authorities on behalf of clients for which the Company provides payroll processing services. For the nine months ended February 28, 2013, Staffing Alliance had net revenues of $90,777. Cyber 360 was acquired on April 26, 2013. Cyber 360 primarily provides IT and information security temporary staffing services for an array of large institutions. They also provide permanent placement, consulting to permanent placement and consulting. Contingent staffing and consulting revenues are recognized when the services are rendered by the Company's contingent employees and consultants. The Company pays all related costs of employment, including workers' compensation insurance, state and federal unemployment taxes, social security and certain fringe benefits. For the nine months ended November, 2013, Cyber 360 had revenues of $3,585,069. Permanent placement staffing revenues are recognized when employment candidates typically start their first day of work. The Company offers a 30/60/90 day guarantee. If the employee is terminated or leaves voluntarily during this period, a pro-rated refund is provided. The Company has a substantial history of estimating the effect of permanent placement candidates who do not remain with its client through the guarantee period. Fees to clients are generally calculated as a percentage of the new employee's annual compensation. 40 Control Solutions International (CSI) was acquired on November 4, 2013. It provides consulting and risk advisory services principally in the US and Canada but also has a network of affiliated entities across a further 33 countries. It recognizes revenue ratably over the period in which the service is provided. The costs of the service provision are recognized as the cost and time is incurred. For the nine months to February 28, 2014, CSI added revenue to the Company of $2,575,891 compared to $0 for the nine months ended February 28, 2013. Staffing UK was acquired on January 3, 2014. It provides temporary staffing and permanent placement services in the US and the UK. Revenues are derived from gross billings, which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its worksite employees. For the nine months to February 28, 2014, Staffing UK added revenue to the Company of $13,801,537 compared to $0 for the nine months ended February 28, 2013. For the nine months ended February 28, 2014, the Company, on a consolidated basis, had net revenues of $20,215,781 compared to $90,777 for the nine months ended February 28, 2013. Direct cost of services Cost of revenues includes the cost of labor and other overhead costs (payroll wages, taxes and related insurance) as they relate to employees (temporary and permanent) as well as sub-contractors and consultants. For the nine months ended February 28, 2014 and 2013, cost of revenues was $15,689,615 and $50,603, respectively. The increase is related to the cost of revenues of the Company's four acquisition, which took place after the quarter ended February, 2013. Gross profit and gross margin Our gross profit for the nine months ended February 28, 2014 and 2013 was $4,526,166 and $40,174, respectively, representing gross margin of 22% and 44% respectively. The increase is related to the gross profit of the Company's four acquisition, which took place after the quarter ended February, 2013 as compared to the gross profit of its lone subsidiary in 2013. Operating expenses For the nine months ended February 28, 2014, operating expenses amounted to $7,223,883 as compared to $1,210,845 for the nine months ended February 28, 2013, an increase of $6,013,038. For the nine months ended February 28, 2014 and 2013, operating expenses consisted of the following: Nine months Ended February 28, 2014 2013 General and administrative $ 2,456,820 $ 135,837 Compensation 2,554,632 114,274 Consulting fees - related parties 370,000 402,004 Depreciation and amortization 408,084 - Professional fees 1,434,347 554,675 Total operating expenses $ 7,223,883 $ 1,206,790 41 For the nine months ended February 28, 2014, the increase in our operating expenses as compared to the nine months ended February 28, 2013 was primarily attributable to: ¨ An increase of $2,320,983 in general and administrative expenses for the nine months ended February 28, 2014 as compared to the nine months ended February 28, 2013. The increase is primarily attributable to the implementation of the Company's business plan as well as office expenses related to the Company's subsidiaries which did not exist in 2013. ¨ An increase in compensation of $2,440,358. The Company has increased its workforce due to the increase related to the acquisitions made in April 2013, November 2013 and January 2014. In 2013, the Company hired the president of the Company as well as two senior vice presidents. In addition the increase in compensation also relates to the compensation of the employees working for the Company's subsidiaries. ¨ A decrease in consulting fees to related parties incurred for administrative overhead services and business development services of $32,004. The decrease is primarily attributable to the Company hiring executive officers rather than hiring consultants in order to implement the Company's business plan specifically researching and adding potential target acquisitions as well as implementing the Company's plan relating to its existing subsidiaries. ¨ The Company's intangible asset which has been deemed Contractual and Non Contractual Customer Relationships is being amortized over the estimated life of the asset of four years. The intangible asset is related to the acquisitions of Cyber 360 on April 26, 2013, Control Solutions International on November 4, 2013 and Staffing UK on January 3, 2014. The amortization of the intangible was calculated for the three months ended February 28, 2014. During the nine months ended February 28, 2014 and 2013 the Company recognized amortization expense of $355,345 and $0, respectively. ¨ An increase of $52,739 in depreciation expense. The increase relates to the fixed assets of the Company's subsidiaries and the fixed assets the Company acquired. ¨ An increase of $879,672 in professional fees in the nine months ended February 28, 2014 as compared to the nine months ended February 28, 2013. The increase primarily relates to increases in accounting, consulting and legal fees relating to the implementation of the Company's business plan specifically due diligence (legal and accounting) of potential acquisition targets. The increase also relates to the professional fees relating to public companies (accounting, auditing, legal, transfer agent, filing fees). Other Expenses For the nine months ended February 28, 2014, we incurred interest and financing expense of $917,047 (2013: $44,299) relating to interest from convertible notes payables, accounts receivable financing, amortization of debt discount and amortization of deferred financing costs. Net Loss As a result of the factors described above, our net losses for the nine months ended February 28, 2014 and 2013 were $3,614,764 and $1,214,970, respectively, or a net loss per common share of $0.23 and $0.24 (basic and diluted), respectively. Liquidity and Capital Resources Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. We have been funding our operations through the sale of our promissory notes, the sale of the Company's Common Stock through private offerings and from advances from our majority shareholders/officers/directors. 42 Through August 2013, the Company was presented as a development stage company. Activities during the development stage included organizing the business and raising capital. In September 2013, Staffing Alliance commenced operations and the Company began to generate revenues. In April 2013, Cyber 360 commenced operations and began generating revenues. Since the Company has incurred losses and currently has negative working capital these unaudited condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. Realization value may be substantially different from carrying values as shown and these unaudited condensed consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern. As of February 28, 2014, the Company has a working capital deficiency of $5,103,748 and has an accumulated deficit of $7,284,505, and for the nine months ended February 28, 2014 has a net loss and net cash used in operations of $3,614,764 and $1,476,078, respectively. The continuation of the Company as a going concern is dependent upon the continued financial support from its major shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and through profitable operations from existing subsidiaries and the acquisition of additional entities. These factors raise substantial doubt regarding the Company's ability to continue as a going concern and the outcome of these uncertainties cannot be predicted. Our primary uses of cash have been for professional fees related to our operations and financial reporting requirement and for the payment of compensation and benefits and consulting fees to related parties. All funds received have been expended in the furtherance of growing the business and implementing our business plan. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term: ¨ An increase in working capital requirements to finance targeted acquisitions, ¨ Addition of administrative and sales personnel as the business grows, ¨ Increases in advertising, public relations and sales promotions for existing and new brands as we expand within existing markets or enters new markets, ¨ The cost of being a public company, and ¨ Capital expenditures to add technologies. In October 2013, we began to generate revenues. At February 28, 2014, we had cash of $844,198. We have funded our operations as follows: ¨ During the period from March 2013 through February, 2014, we entered into Note Purchase Agreements with various investors in the aggregate principal amount of $425,000. The Notes bear interest at the rate of 12% per annum. On January 17, 2013, the Company closed a financing, by entering into a Note Purchase Agreement with an investor whereby the Company sold to the Holder a certain Promissory Note for the principal amount of $750,000.The Promissory Note accrues interest at a rate of 12% per annum. ¨ During the year ended May 31, 2013, we entered into note agreements with various shareholders/directors/officers of the Company in the aggregate amount of $56,500. These notes are unsecured, bear interest at 5.0% and are due one year from the respective note date. ¨ During the year ended May 31, 2013, we entered into an agreement under which we borrow money against open accounts receivable. Under this accounts receivable financing arrangement, the Company receives an advance of 90% of the face value of an eligible receivable. Upon collection of the receivable, the advance is repaid and the remaining funds are remitted to the Company. The borrowings carry interest at a rate of .025% per day (9% per annum). At February 28, 2014, $2,958,790 was recorded (including interest) to the accounts receivable financing liability. 43 ¨ During the year ended May 31, 2013, the Company completed a closing of a private offering of units with certain accredited investors for total gross proceeds of $1,050,000. Pursuant to a subscription agreement with the Purchasers, the Company issued to the Purchasers units consisting of (i) 27,778 shares of Common Stock and (ii) a three year warrant to purchase 13,889 shares of Common Stock at an exercise price of $1.80 per Share, for a purchase price of $25,000 per Unit. In total, the Company sold 42 units totaling 1,166,676 common shares and 583,338 warrants. In addition, on July 2, 2013 the Company completed a closing of a second private offering for total gross proceeds of $565,000. The terms of the second offering mirror the first offering. In total, the Company sold 22.6 units totaling 627,783 common shares and 313,892 warrants. - On August 28, 2013, a related party loaned the Company $155,000 for short term obligations. This loan was non-interest bearing and was repaid on September 3, 2013. - During the nine months ended February 28, 2014, the Company issued promissory notes to four investors for a total of $340,000. The loans bear interest at 12% per annum and were due at the earlier of the completion of the Company's $1.75 million bridge financing or 90 days from the date of the note. To date, $300,000 was repaid. - During the nine months ended February 28, 2014 the Company raised $1,655,000 in the form of convertible promissory notes relating to its $1.75 million bridge financing. The loans bear interest at 12% per annum and are due within 10 days following the closing of a $10 million private placement financing or February 28, 2014 (the "Maturity Date"). In April 2014, the Company converted $1,655,000 of principal and $72,044 of interest and issued 1,727,044 shares (1,655,000 relating to principal and 72,044 relating to accrued interest) - Through February 28, 2014, in connection with the Company's private placement offering of Units for up to $10,000,000 raised $9,144,000 for a total of 365.76 units. Each unit consisting of (i) 25,000 shares of Common Stock priced at $1.00 per share and (ii) warrants to purchase 12,500 shares (the "Warrant Shares"), at an exercise price of $2.00 per Warrant Share. In connection with such Unit Offering, as of February 28, 2014, the Company issued a total of 9,144,000 shares of Common Stock and 4,572,000 Warrants. On March 13, 2014, the Company successfully completed its Unit Offering of the maximum amount of $10,000,000. As a result of these financings and additional financings in the near future, we believe that we will be able to implement our business plan and pursue the acquisition of a broad spectrum of staffing agencies in the IT, financial, accounting, healthcare and banking industries and for working capital for the next 6 months. This does not include payments for closing certain acquisitions that we have entered into agreements and/or term sheets with, none of which may ultimately close. Currently, we do not have sufficient working capital to fund the expansion of our operations and to provide working capital necessary for our ongoing operations and obligations. We will need to raise significant additional capital to fund our operating expenses, pay our obligations, and grow our company. Therefore our future operations will be dependent on our ability to secure additional financing. We estimate that based on current plans and assumptions, that our available cash will not be sufficient to satisfy our cash requirements under our present operating expectations, without further financing, for up to six months. The Company anticipates it will require $2 million over the next six months; this amount does not include capital needed to fund additional acquisitions. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our Common Stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our Common Stock. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations. We anticipate that depending on market conditions and our current state of operations, we will incur additional operating losses in the foreseeable future. Therefore, our auditors have raised substantial doubt about our ability to continue as a going concern. Our liquidity may be negatively impacted by the significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. 44 Operating activities For the nine months ended February 28, 2014, net cash used in operations of $1,476,078 was primarily attributable to the net loss of $3,614,764 offset by adjustments totaling $1,038,072, which primarily relates to accounts receivable of $1,200,223, prepaid expenses of $124,276, other assets of $99,172, accounts payable - related parties, accounts payable and accrued expenses of $258,977, non-cash adjustments of $1,095,280 of depreciation and amortization and share based compensation totaling $5,334. Cash used in operations of $781,524 in 2013 was primarily attributable to the net loss of $1,210,915 offset by adjustments totaling $429,391, which primarily relates to accounts payable - related parties, accounts payable and accrued expenses of $503,465, prepaid expenses of $768 and accounts receivable of $74,842. Investing activities For the nine months ended February 28, 2014, net cash flows used in investing activities was $8,787,595 and was attributable to the acquisition related cash acquired of $615,075, the purchase of fixed assets of $61,475 and the payments of $407,194 made for the earn-out agreement relating to the acquisition of Cyber 360 on April 26, 2013 and CSI on November 3, 2013. In addition the Company made cash payments totaling $8,934,001 towards the purchases of CSI, Staffing UK and Poolia UK. For the nine months ended February 28, 2013, the Company did not record any investing activities. Financing activities For the nine months ended February 28, 2014, net cash flows provided by financing activities totaled $10,845,049 and was attributable to proceeds relating to accounts receivable financing of $2,700,464, proceeds of $1,655,000 from the issuance of convertible promissory notes, proceeds of $340,000 from the issuance of promissory notes and $9,359,000 relating to proceeds from the sale of Common Stock and warrants. In addition, the Company repaid $406,253 in promissory notes, repaid $1,703,582 towards a portion of its line of credit and made payments to a private placement agent totaling $1,099,580. For the nine months ended February 28, 2013, net cash flows provided by financing activities totaled $929,250 and was attributable to proceeds from convertible notes payable of $925,000, cash received from related parties notes of $36,750 offset by the repayment of related parties notes of $32,500. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Critical Accounting Policies and Estimates Our significant accounting policies are fully described in Note 1 to our unaudited condensed consolidated financial statements for the quarter ended February 28, 2014 contained herein. Recent Accounting Pronouncements Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statement presentation or disclosure upon adoption. 45 |