Staffing 360 Solutions, Inc. - Annual Report: 2014 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended May 31, 2014

or

For the transition period from _____to _____

COMMISSION FILE NUMBER: 000-54515

STAFFING 360 SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

641 Lexington Avenue, Suite 1526

New York, New York 10022

(Address of principal executive offices)

(212) 634-6410

(Registrant’s telephone number)

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.00001

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: (Check one) 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act): Yes ¨  No x

As of November 29, 2013, the last business day of the registrant’s most recently completed second fiscal quarter the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was approximately $15,946,021 based on the closing price (last sale of the day) for the registrant’s common stock on the OTC Bulletin Board on November 29, 2013 of $2.09 per share.

As of September 15, 2014, 33,659,804 shares of common stock, $0.00001 par value, were outstanding.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Annual Report”) 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. Forward-looking statements include those that address activities, developments or events that we expect or anticipate will or may occur in the future. All statements other than statements of historical facts contained in this Annual Report, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We undertake no obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. We advise you to carefully review the reports and documents we file from time to time with the Securities and Exchange Commission (the “SEC”), particularly our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.

As used in this Annual Report, the terms “we,” “us,” “our,” “Staffing 360” and the “Company” mean Staffing 360 Solutions, Inc. and its subsidiaries, unless otherwise indicated. All dollar amounts in this Annual Report are expressed in U.S. dollars, unless otherwise indicated.

The disclosures set forth in this report should be read in conjunction with our financial statements and notes thereto for the year ended May 31, 2014.

PART I

ITEM 1. BUSINESS

BUSINESS

General

We were incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation (“Golden Fork”). On July 31, 2012, the Company commenced operations in the staffing sector. Our business model is to find and acquire suitable, mature, profitable operating staffing companies. We are an emerging public company in the international staffing sector engaged in the acquisition of domestic and international staffing companies. As part of our targeted consolidation model, we are pursuing a broad spectrum of staffing companies supporting the information technology (“IT”), accounting and finance, engineering, administration and cyber security industries. Our headquarters are located at 641 Lexington Avenue, Suite 1526, New York, NY 10022. Our telephone number is (212) 634-6410.

Corporate History

The Company was incorporated in the State of Nevada on December 22, 2009, as Golden Fork.

On February 17, 2012, TRIG Special Purpose 1, LLC, a Nevada Corporation, (“TRIG”) purchased 78.7%, or 2,000,000 shares of common stock with a par value of $0.00001 (the “Shares”), of Golden Fork Corporation for $240,000 in a private cash transaction. As a result of the transaction, the Company became a 78.7% owned subsidiary of TRIG. These Shares were subsequently distributed to Trilogy Capital Partners, Inc., Grandview Capital Partners, Inc., and Robert Y. Lee, who made distributions to other third parties in the aggregate of 600,000 shares. TRIG no longer owns any Shares.

On March 16, 2012, Golden Fork filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) to change its name from Golden Fork to Staffing 360 Solutions, Inc. Upon filing of the Amendment, the Company began its operations in the international staffing sector.

On April 13, 2012, the Company received approval from the Financial Industry Regulatory Authority (“FINRA”) to effect its name change and to change its trading symbol from “GDNF” to “STAF”. Simultaneously therewith, the Company received approval to conduct a forward split of its issued and outstanding shares of common stock at a ratio of one for three (the “Forward Split”). Following the Forward Split, the Company’s issued and outstanding shares of common stock increased from 2,540,000 to 7,620,000.

On July 31, 2012, the Company formed Staffing 360 Alliance, Inc. (“Staffing Alliance”), a wholly-owned subsidiary, incorporated in the State of Nevada. For a short period of time, Staffing Alliance had operations in the staffing sector and provided trained employees to clients who worked in word processing, data entry, administrative support staff and other areas. Such operations have ceased.

On April 19, 2013, we formed Staffing 360 Group, Inc., a wholly-owned subsidiary of the Company, in the State of Nevada (“Staffing Group”). Staffing Group was formed to be the principle acquisition vehicle for the Company.

On April 26, 2013, we completed our first acquisition when we purchased 100% of the issued and outstanding stock of The Revolution Group, Ltd. (“TRG”) pursuant to a stock purchase agreement, dated March 21, 2013, entered into by and among the Company, TRG and the shareholders of TRG (the “TRG Shareholders” and such agreement, the “TRG Purchase Agreement”). As a result of the acquisition (the “TRG Acquisition”), TRG became a wholly-owned subsidiary of the Company. The TRG Acquisition is described in detail below.

On June 28, 2013, we filed a Certificate of Amendment to our Articles of Incorporation with the State of Nevada (the “2013 Amendment”), whereby increasing the number of shares of common stock that the Company is authorized to issue from 75,000,000 to 200,000,000. The 2013 Amendment also allowed the Company to issue 20,000,000 shares of blank check preferred stock, having such rights, designations, preferences and privileges as our board of directors (the “Board”) determines from time to time in their sole discretion.

On November 4, 2013, we completed our second acquisition when we purchased 100% of the issued and outstanding stock of Control Solutions International, Inc., a Florida corporation (“CSI”), pursuant to a stock purchase agreement, dated August 14, 2013, entered into by and among the Company, NewCSI, Inc., a Delaware corporation (“NCSI”), the sole shareholder of CSI and the shareholders of NCSI (the “NCSI Shareholders” and such agreement, the “CSI Purchase Agreement”). As a result of the acquisition (the “CSI Acquisition”), CSI became a wholly-owned subsidiary of the Company. The CSI Acquisition is described in detail below.

On January 3, 2014, we completed our third acquisition when we purchased 100% of the issued and outstanding stock of Initio International Holdings Limited, a company organized under the laws of England and Wales (“Initio”) and its respective subsidiaries, including but not limited to Monroe Staffing Services, LLC, a Delaware limited liability company (“Monroe,” and together with all of Initio’s subsidiaries, the “Subsidiaries”). This acquisition was completed pursuant to a 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 (the “Initio Shareholders” and such agreement, as amended, the “Initio Purchase Agreement”). As a result of the acquisition (the “Initio Acquisition”), Initio and its Subsidiaries became wholly-owned subsidiaries of the Company. On January 6, 2014, Initio changed its name to Staffing 360 Solutions Limited. The Initio Acquisition is described in detail below.

On February 28, 2014, we completed our fourth acquisition (the “Poolia Acquisition”) when we purchased, through our wholly-owned United Kingdom (“UK”) subsidiary Staffing 360 Solutions (UK) Limited, substantially all of the business and assets of Poolia UK Ltd., including but not limited to all contracts, business information, records, book debts and good will, pursuant to an asset purchase agreement, dated February 2, 2014. The Poolia Acquisition is described in detail below.

On May 17, 2014, we completed our fifth acquisition when we purchased 100% of the issued and outstanding capital stock of PeopleSERVE, Inc., a Massachusetts corporation (“PS”), and 49% of the issued and outstanding capital stock of PeopleSERVE PRS, Inc., a Massachusetts corporation (“PRS”), pursuant to a definitive stock purchase agreement, dated May 17, 2014, by and among the Company, PS, PRS and Linda Moraski, sole stockholder of PS and PRS (the “PeopleSERVE Purchase Agreement”). As a result of the acquisition (the “PeopleSERVE Acquisition”), PS became a wholly-owned subsidiary of the Company and PRS became a 49% owned subsidiary of the Company. The PeopleSERVE Acquisition is described in detail below.

Business Model and Acquisitions

We are a public company in the international staffing sector engaged in the acquisition of domestic and international staffing companies. As part of our consolidation model, we pursue a broad spectrum of staffing companies supporting the IT, financial, accounting, engineering, administrative and light industrial sectors. Our standard acquisition model is to pay consideration for companies as follows: (i) 33.3% of the total consideration in cash; (ii) 33.3% of the total consideration in stock of the Company; and (iii) 33.3% of the consideration in a three (3) year note or earn-out, although the final terms may differ substantially from this model. In accordance with and in furtherance of our business model, on April 26, 2013, November 4, 2013, January 3, 2014, February 28, 2014 and May 17, 2014, we consummated the TRG Acquisition, CSI Acquisition, Initio Acquisition, Poolia Acquisition and PeopleSERVE Acquisition, respectively. Prior to and since the PeopleSERVE Acquisition we have continued to engage in discussions of further acquisitions with a significant number of other suitable, mature operating staffing companies.

The Revolution Group, Ltd.

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 TRG Shareholders. The aggregate consideration paid by the Company to the TRG Shareholders was $2,509,342 (the “TRG Purchase Price”), payable as follows: at the closing of the TRG Acquisition (the “TRG Closing”), the Company made cash payments to the TRG Shareholders in an aggregate of $907,287 and paid the remaining $410,055 of the TRG Purchase Price by issuing to the TRG Shareholders 512,569 restricted shares of its common stock at a price of $0.80 per share. In addition to the TRG Purchase Price, the Company will pay to the TRG Shareholders, from the date of the TRG Closing through the end of the sixteenth quarter following the TRG Closing (the “TRG Earn Out Period”), performance based compensation in an amount in cash equal to the following percentages of TRG’s Gross Profit (as defined in the TRG Purchase Agreement), not to exceed a total of $1,500,000: (i) 20% of the amount of TRG’s Gross Profit up to an aggregate of $5,000,000 during the TRG Earn Out Period; plus (ii) 7% of the amount of TRG’s gross profit, if any, in excess of an aggregate of $5,000,000 during the TRG Earn Out Period. The Company estimates that the performance based compensation will total $1,192,000. The earn-out liability is calculated in accordance with the terms of the TRG Purchase Agreement. The liability was valued by a third party financial advisory firm based on management's best estimates of the projected financial results of TRG over the next four (4) years. The Company adjusts the earn-out liability on a quarterly basis based on actual results. At May 31, 2014 the balance of the earn-out liability was $929,145. As a result of the Acquisition, TRG became a wholly-owned subsidiary of the Company, and TRG subsequently changed its name to Cyber 360 Solutions, Inc. (“Cyber 360”).

Cyber 360 is a staffing services and consulting company with competency in various information technology fields, with a specialized focus on cyber security. Cyber 360 provides the following services to its customers: consulting staffing (primarily IT), permanent placement (primarily IT), consulting to permanent placement (primarily IT) and information security/cyber security services involving penetration testing, vulnerability testing and regulatory and compliance support. Cyber 360 is one of the few cyber security consulting firms in the United States (“US”) solely dedicated to identifying the top 10% of highly-trained cyber security professionals available for consulting assignments.

Control Solutions International, Inc.

On November 4, 2013, the Company consummated the CSI Acquisition pursuant to the CSI Purchase Agreement, dated August 14, 2013, by and among the Company, NCSI, and the NCSI Shareholders. The aggregate consideration paid by the Company to the NCSI Shareholders was $3,530,454, which was paid at the closing: (i) cash payments to the NCSI Shareholders in an aggregate of $1,311,454 and (ii) the remaining $119,000 of the aggregate consideration through the issuance of 136,000 restricted shares of the Company’s common stock at a price of $0.875 per share to the NCSI Shareholders. In addition to the aggregate consideration, the Company will pay to the NCSI shareholders performance based compensation in an amount in cash equal to 20% of the amount of the consolidated gross profit of NCSI and Canada Control Solutions International, Inc., a British Columbia corporation and wholly-owned subsidiary of NCSI (“CCSI”), from the closing date of the CSI Acquisition through the end of the sixteenth (16th) quarter following such closing date, not to exceed a total of $2,100,000. As a result of the CSI Acquisition, NCSI has become a wholly-owned subsidiary of the Company.

CSI is a professional services company specializing in a broad spectrum of risk management, financial, internal audit and IT solutions. In particular, CSI provides consulting and risk advisory services in the U.S. and Canada and also has a network of affiliated entities across a 33 additional countries.

Initio International Holdings Limited

On January 3, 2014, the Company consummated the Initio Acquisition pursuant to the Initio Purchase Agreement. The aggregate consideration paid at the closing by the Company to the Initio Shareholders for the purchase of all the shares of Initio and the Subsidiaries was as follows: (i) $12.79 million (the "Purchase Price") in cash, shares and promissory notes of the Company; plus (ii) $500,000 (the aggregate of (i) an (ii) together, the “Total Purchase Price”). The Purchase Price was paid as follows: (i) at the closing of the Initio Acquisition, the Company paid to the Initio Shareholders an aggregate of $6,440,000 in immediately available funds equal to 40% of the Purchase Price plus $500,000; (ii) at the closing, the Company issued 3,296,702 shares of its common stock valued at $2,884,614, representing 33.3% of the Purchase Price, to the Initio Shareholders, valued at a price of $0.875 per share, which such shares are subject to piggy-back registration rights; and (iii) at the closing, the Company executed and delivered to the Initio Shareholders a three year promissory note (subject to adjustment if certain post-closing results are not achieved) in the aggregate principal amount of $3,964,949 equal to 26.7% of the Purchase Price, each promissory note bearing interest at the rate of six (6%) percent per annum, amortized on a five year straight line basis.

Initio is a U.K. domiciled full service staffing company with established brands in the US, UK and Spain. Initio’s US division, Monroe, was established in 1969 and is a full-service consulting and staffing agency serving companies ranging from Fortune 100 companies to new startup organizations. Monroe has approximately 14 offices located in the US, including offices in Connecticut, Massachusetts, Rhode Island, New Hampshire and North Carolina. Initio’s U.K. division, consisting of four distinct entities (the “Longbridge Entities”), was established in 1989 and is an international multi-sector recruitment company, catering to the sales and marketing, technology, legal and information technology solutions sectors. Initio’s Spanish business was not acquired as part of the Initio Acquisition.

Poolia

On February 28, 2014, we, through our wholly-owned U.K. subsidiary Staffing 360 Solutions (UK) Limited (“Staffing UK”), completed the acquisition of the business and certain assets of Poolia UK Ltd. (“Poolia”). The Poolia Acquisition was completed pursuant to that certain asset purchase agreement dated February 2, 2014, by and between Staffing UK, and Poolia (“Poolia Purchase Agreement”). Pursuant to the Poolia Purchase Agreement, the Company purchased from Poolia substantially all of Poolia’s business and assets, including but not limited to contracts, business information, records, book debts and goodwill.

The aggregate consideration paid by the Company to Poolia for the sale and purchase of the business and assets was £500,000 (approximately $825,000 USD) (the “Fixed Consideration”), plus an amount equal to the net asset value at the completion date of the acquisition (the “NAV Consideration,” together with the Fixed Consideration, collectively, the “Purchase Price”). The Fixed Consideration and a sum of £250,000 (approximately $412,500 USD), being an advance payment of the NAV Consideration, was paid in full in cash at Closing. The balance of the NAV Consideration was to be paid by the Company to Poolia UK Ltd. by April 30, 2014 for total consideration of $1,626,266.  

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.

PeopleSERVE

On May 17, 2014, we consummated the acquisition of 100% of the issued and outstanding capital stock of PeopleSERVE, Inc., and forty-nine percent (49%) of the issued and outstanding capital stock of PeopleSERVE PRS, Inc., pursuant to the PeopleSERVE Purchase Agreement, dated May 17, 2014, by and among the Company, PS, PRS and Linda Moraski, sole owner of all of the issued and outstanding capital stock of PS and PRS.

In connection with the PeopleSERVE Acquisition, we agreed to pay to Ms. Moraski an aggregate purchase price of approximately $6,764,188 based upon a formula in the PeopleSERVE Purchase Agreement (the “PeopleSERVE Purchase Price”).

At the closing of the PeopleSERVE Acquisition, the Company paid to Ms. Moraski the purchase price as follows: (i) cash in the amount of $2,705,675; (ii) restricted shares of the Company’s Common Stock, based on the closing price of $1.93 on the date of acquisition, May 17, 2014,or 1,127,365 shares of Common Stock for a total fair value of $2,175,814; (iii) an unsecured promissory note (“the Promissory Note”) with an initial principal amount equal to $2,367,466; (iv) pursuant to the terms of the PS Purchase Agreement, the PS Seller is entitled to receive from the Acquired Companies all of the Net Working Capital as of the Closing Date (as defined in the PS Purchase agreement filed in Form 8-K dated May 20, 2014) valued at $1,138,153, and the Company and the Acquired Companies shall have no right to, or obligations with respect to, such Net Working Capital, except as otherwise set forth in the PS Purchase Agreement.

Pursuant to the terms of the PeopleSERVE Purchase Agreement, Ms. Moraski is entitled to receive from PS and PRS all of the Net Working Capital (as defined in the PS Purchase agreement filed in Form 8-K dated May 20, 2014) as of the closing date, and the Company and PRS and PS shall have no right to, or obligations with respect to, such Net Working Capital, except as otherwise set forth in the PeopleSERVE Purchase Agreement.

The purchase price is subject to a post-closing purchase price adjustment, whereby within sixty (60) days of the closing date, audited financial statements for each of PS and PRS will be provided to the Company. The parties have agreed to defer the delivery date of the audited financial statements until after the filing of the Company’s Form 10-K. Upon receipt of such audited financial statements, the Company will prepare and deliver to Ms. Moraski a certificate that sets forth the Company’s determination of (i) the PeopleSERVE Purchase Price, including the calculation of the Adjusted EBITDA (as defined in the PS Purchase agreement filed in Form 8-K dated May 20, 2014) of PS and PRS for the audited period and (ii) the calculation of the Net Working Capital. Once the Company and the Ms. Moraski have agreed on the final financial statements as disclosed above, the PeopleSERVE Purchase Price shall be adjusted based on the purchase price adjustment amount, which means an amount equal to the final determined PeopleSERVE Purchase Price as shown in the final financial statements minus the amount of the Estimated PeopleSERVE Purchase Price. In the event the PeopleSERVE Purchase Price is adjusted, the difference will either be paid to Ms. Moraski or returned to the Company, as the case may be, in the same percentages of cash, shares of common stock and the PeopleSERVE Promissory Note as the purchase price paid at closing (with a one-time payment by the appropriate party to catch-up on principal payments previously made under the PeopleSERVE Promissory Note). PeopleSERVE provides IT staffing support to companies in the governmental, commercial and educational sectors principally in the State of Massachusetts.

Operating History

The Company has demonstrated that it is able to expand its business through its acquisition model. Our business is subject to risks inherent in growing an enterprise, including limited capital resources and possible rejection of our business model and/or sales methods.

We cannot guarantee we will be successful in our business operations. Among other risks, our business is subject to risks inherent in the establishment of a new business enterprise, including executing our roll-up strategy, limited capital resources and possible cost overruns.

We are seeking additional debt and equity financing in order to obtain the capital required to implement our business plan and continue operations. We have no assurance that future financing will be available to us on acceptable terms or at all. If financing is not available to us on satisfactory terms, we may be unable to continue, develop or expand our operations. Equity financing, if received, will result in additional dilution to our existing shareholders.

Industry Background

The staffing industry is divided into three major segments: temporary help services, professional employer organizations and placement agencies. Temporary help services provide workers for limited periods, often to substitute for absent permanent workers or to help during periods of peak demand. These workers, who are employees of the temporary help agency, will generally fill clerical, technical, or industrial positions. Professional employer organizations (PEOs), sometimes referred to as employee leasing agencies, contract to provide workers to customers for specific functions, often related to human resource management. In many cases, customers’ employees are hired by a PEO and then contracted back to the customer. Placement agencies, sometimes referred to as executive recruiters or headhunters, find workers to fill permanent positions at customer companies. These agencies may specialize in placing senior managers, mid-level managers, technical workers, or clerical and other support workers.

The Company considers itself to be a temporary staffing company within the broader staffing industry. However, the Company provides permanent placements at the request of existing clients and consulting services such as risk audits, due diligence for mergers and acquisition targets, and internal audit assessments.

Staffing companies identify potential employees through online advertising and referrals, and interview, test and counsel workers before sending them to the customer for approval. Pre-employment screening can include skills assessment, drug tests and criminal background checks. The personnel staffing industry has been radically changed by the internet. Many employers list available positions with one or several internet personnel sites like www.monster.com or www.careerbuilder.com, and on their own site. Personnel agencies operate their own sites and often still work as intermediaries by helping employers accurately describe job openings and by screening candidates who submit applications.

Job growth drives demand for the personnel staffing industry. The profitability of individual companies depends on good marketing and availability of qualified employees. Large companies enjoy economies of scale in marketing and back-office operations. Small companies can compete successfully by specializing in an industry or a job function.

To a great extent, clients follow the seasonal retail cycles but precede them by 2-3 months. There are two distinct “peak” seasons: August to October, preceding the Holiday season; April to June, preceding the summer season. Both provide extended spikes to the baseline revenue average of companies in the staffing sector.

Major end-use customers include businesses from a wide range of industries. Marketing involves direct sales presentations, referrals from existing clients and advertising. Agencies compete both for customers and workers. Depending on market supply and demand at any given time, agencies may allocate more resources either to finding potential employers or potential workers. Permanent placement agencies work either on a retainer or a contingency basis. Clients may retain an agency for a specific job search or on contract for a specific period. Temporary help services charge customers a fixed price per hour or a standard markup on prevailing hourly rates.

For many staffing companies, demand is lower late in the fourth calendar quarter and early in the first calendar quarter, partly because of holidays, and higher during the rest of the year. Staffing companies may have high receivables from customers. Temp agencies and PEOs must manage a high cash flow and may maintain high cash balances because they funnel payroll payments from employers.

Staffing companies are regulated by the U.S. Department of Labor (DOL) and the Equal Employment Opportunity Commission (EEOC), and often by state authorities. At issue is the relationship between the agency and the temporary employees, or employee candidates. Many federal anti-discrimination rules regulate the type of information that employment firms can request from candidates or provide to customers about candidates. PEOs are often considered co-employers along with the client, but the PEO is responsible for employee wages, taxes and benefits. State regulation aims to ensure that PEOs provide the benefits they promise to workers.

We believe demand for personnel staffing services is strongest in areas with strong employment growth, and geographic location can determine an agency's success in attracting employees and employers. Customers generally prefer a staffing service that can provide workers for all of their office locations. Temporary employee candidates are often unwilling to relocate for a position.

The revenue of personnel agencies depends on the number of jobs they fill, which in turn depends on economic growth. During economic slowdowns, many client companies stop hiring altogether. Internet employment sites expand a companies' ability to find workers without the help of traditional agencies. Personnel agencies often work as intermediaries, helping employers accurately describe job openings and screen candidates. Increasing the use of sophisticated, automated job description and candidate screening tools could make many traditional functions of personnel agencies obsolete. Free social networking sites such as LinkedIn and Facebook are also becoming a common way for recruiters and employees to connect without the assistance of a staffing agency.

To avoid large placement agency fees, big companies may use in-house personnel staff, current employee referrals, or human resources consulting companies to find and hire new personnel. Because placement agencies typically charge a fee based on a percentage of the first year's salary of a new worker, companies with many jobs to fill have a large financial incentive to avoid agencies.

Many personnel agencies are small and may depend heavily on a few big customers for a large portion of revenue. Large customers may lead to increased revenues, but also expose agencies to higher risks. When major accounts experience financial hardships, and have less need for temporary employment services, agencies stand to lose large portions of revenue.

The loss of a staff member who handles a large volume of business can result in a large loss of revenue for an agency. Individual staff members, rather than the agency itself, usually develop strong relationships with customers. Staff members who move to another agency are often able to move customers with them.

Some of the best opportunities for temporary employment are in industries traditionally active in seasonal cycles, such as manufacturing, construction, wholesale and retail. However, seasonal demand for workers creates cash flow fluctuations throughout the year. Cash flow imbalances also occur because agencies must pay workers even though they haven't been paid by customers.

Many personnel firms have been accused of employment discrimination based on age, race, religion, or sex. Age discrimination is a rapidly growing type of employment charge filed with the US EEOC. Allegations of discrimination by temporary workers results in high insurance costs for staffing agencies.

Because worker leasing and the large-scale use of temporary workers are relatively new phenomena, federal and state labor laws do not directly address many of the issues these employer-employee relationships create. However, because clients have used PEOs to evade labor laws in the past, regulations are being tightened. PEOs are regulated in an increasing number of states, including Florida and Texas, where a significant number operate.

Trends in the Staffing Business

Startup costs for a personnel agency are very low. Individual offices can be profitable, but consolidation is driven mainly by the opportunity for large agencies to develop national relationships with big customers. Some agencies expand by starting new offices in promising markets, but most prefer to buy existing independent offices with proven staff and an existing customer roster.

Temporary workers are becoming such a large factor at some companies that personnel agency staff sometimes work at the customer's site to recruit, train, and manage. The Company has a number of on-sight relationships with its customers. Agencies try to match the best qualified employees for the customer's needs, but often provide additional training specific to that company, such as instruction in the use of proprietary software.

Some personnel consulting firms and human resource departments are increasingly using psychological tests to evaluate potential job candidates. Psychological, or liability, testing has gained popularity due to fraud scandals. In addition to stiffer background checks, headhunters check the credit of prospective employees.

We believe the trends of outsourcing entire departments and dependence on temporary and leased workers will expand opportunities for personnel agencies. Taking advantage of their expertise in assessing worker capabilities, some agencies manage clients’ entire human resource functions. Human resources outsourcing (HRO) may include management of payroll, tax filings, and benefit administration services. HRO may also include recruitment process outsourcing (RPO), where an agency manages all recruitment activities for a client.

New online technology is improving staffing efficiency. For example, some online applications coordinate workflow for staffing agencies, their clients and temporary workers, and allow agencies and customers to share work order requests, submit and track candidates, approve timesheets and expenses, and run reports. Interaction between candidates and potential employers is increasingly being handled online.

Initially viewed as rivals, some Internet job-search companies and traditional employment agencies are now collaborating. While some Internet sites do not allow agencies to use their services to post jobs or look through resumes, others find that agencies are their biggest customers, earning the sites a large percentage of their revenue. Some staffing companies contract to help client employers find workers online.

Competition

The Company’s staffing divisions face competition in attracting clients as well as temporary candidates. The staffing business is highly competitive, with a number of firms offering services similar to those provided by the Company, on a national, regional or local basis. In many areas the local companies are the strongest competitors. The most significant competitive factors in the staffing business are price and reliability of service. The Company believes its competitive advantage is from its experience in niche markets, and commitment to the specialized employment market, along with its growing global presence.

The staffing industry is characterized by a large number of competing companies in a fragmented sector. Major competitors also exist across the sector, but as the industry affords low barriers to entry, new entrants are constantly introduced to the marketplace.

The top layer of competitors are large corporate staffing and employment companies which have yearly revenues of $75 million or more. The next (middle) layer of the competition consists of medium-sized entities with yearly revenues of $10 million or more. The largest portion of the marketplace is the bottom rung of this competitive landscape consisting of small individual-sized or family-run operations. As barriers to entry are low, sole proprietors, partnerships and small entities routinely enter the industry.

Employees

We currently employ one hundred thirty-seven (137) full-time employees and five (5) part-time employees as part of our internal operations. Three (3) of our employees are employed in general or administrative functions at our headquarters in New York, New York. Twelve (12) of our employees, all of whom worked for TRG prior to the TRG Acquisition, are employed in our Massachusetts office. Five (5) of our employees, all of whom worked for CSI or NCSI prior to the CSI Acquisition, are employed in our Massachusetts office. Additionally, one hundred eleven (111) of our employees, all of whom worked for Initio or its Subsidiaries prior to the Initio Acquisition, are employed in the following offices: Connecticut, Massachusetts, Rhode Island, New Hampshire, North Carolina and London. This does not include persons that we place directly with clients, which currently totals more than 3,200 individuals across our various staffing subsidiary operations.

ITEM 1A. RISK FACTORS.

Not required for smaller reporting companies

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

The Company currently leases 20 facilities: Our New York properties are as follows: Our corporate headquarters is located at 641 Lexington Avenue, Suite 1526, New York, NY 10022 - month to month basis. Our Massachusetts properties are as follows: 607 North Ave, Wakefield, MA 01880 - tenancy at will; 187 Plymouth Avenue, Fall River, MA 02722 – twenty-four (24) month term; 1985 Main Street, Springfield, MA 01103 – twenty-four (24) month term; 29 Mountain East Street, Worcester, MA – twenty-four (24) month term; 855 Worcester Road, Framingham, MA – twenty-four (24) month term; 643 Veterans of Foreign Wars Pkwy, Chestnut Hill, MA 02467 – twelve (12) month term; 500 West Cummings Park, Suite 2550 Woburn, MA 01801 – sixty (60) month term, Our Connecticut office spaces are as follows: 35 Corporate Drive, Trumbull, CT 06611 – sixty-five (65) month term; 1800 Barnum Avenue, Stratford CT 06614 – forty-five (45) month term; 20 North Plains Industrial Road, Wallington, CT 06492 – twelve (12) month term; 887 Main Street, Manchester, CT 06040 – thirty-six (36) month term; 767 Wolcott Street, Waterbury, CT – sixty (60) month term; 973 Orange Avenue, West Haven, CT 06516 – sixty (60) month term; Our Rhode Island property is located at 400 Reservoir Avenue, 2J, Providence, RI 02907 – twenty-four (24) month term; Our New Hampshire property are as follows: 814 Elm Street, Manchester, New Hampshire – thirty-six (36) month term; 60 Main Street Nashua, NH – thirty-six (36) month term; Our North Carolina property is located at 718 Jake Alexander Blvd West, Salisbury NC 28147 – twenty-four (24) month term. Our United Kingdom property is located at 18 King William Street, London – twenty-four (24) month term.

These leases expire at various times from 2014 until 2017.

ITEM 3. LEGAL PROCEEDINGS.

In May 2014, NewCSI Inc., (“NCSI”) the former owners of Control Solutions International, filed a complaint against the Company, alleging that the Company breached the terms of the Stock Purchase Agreement dated August 14, 2013 between NCSI and the Company (the “SPA”) by failing to calculate and pay NCSI 50% of certain “Deferred Tax Assets” defined in the SPA (the “Action”). In the Action, NCSI seeks to accelerate the earn out payment provided for in the SPA in the amount of $1.4 million plus $154,433 representing a Deferred Tax Assets claim, together with other unspecified damages and legal fees. The Company filed an Answer denying the material allegations in the plaintiff’s complaint and interposing numerous affirmative defenses. The Action is currently pending in the U.S. District Court for the Western District of Texas and is in the early stages of discovery and the Company intends to aggressively defend against NCSI’s claims which the Company believes are not meritorious.

From time to time, the Company, including its subsidiaries, may enter into legal disputes in the ordinary course of business. However, other than as described above, the Company believes there are no material legal or administrative matter pending that are likely to have, individually or in the aggregate, a material adverse effect on its business or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY.

Market Information

The Company's common stock is traded on the OTCBB tier of the over-the-counter securities market run by FINRA, as well as OTCQB run by OTC Markets, under the symbol “STAF”. The Company’s common stock began trading on the OTCBB on February 15, 2013, although there has not been a lot of trading volume to date. The following table sets forth the high and low intraday price information for the period since the Company’s common stock began trading:

As of September 12, 2014, the Company’s common stock was trading at $1.54.

Holders of Common Stock

We have 401 record holders of our common stock as of September 1, 2014.

Dividends

We have never paid any cash dividends on our common stock, and we do not anticipate paying any dividends with respect to those securities in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion and development of our business.

Recent Sales of Unregistered Securities

Other than those sales of unregistered securities that have been disclosed by the Company in quarterly reports on Form 10-Q, current reports on Form 8-K, and as described in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Financings,” the Company has not recently sold any unregistered securities.

ITEM 6. SELECTED FINANCIAL DATA.

Not required for smaller reporting companies.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 Annual 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.”

On July 31, 2012, the Company formed Staffing Alliance. In September 2012, Staffing Alliance commenced operations and in October 2012, we began generating revenues. Staffing Alliance is a wholly-owned subsidiary of the Company. The Company ceased operations in Staffing Alliance during 2014.

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 13 to the financial statements in this Annual Report on Form 10-K for a more complete description of the acquisition of Cyber 360 Solutions.

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 13 to the financial statements in this Annual Report on Form 10-K for a more complete description of the acquisition of CSI.

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 13 to the financial statements in this Annual Report on Form 10-K for a more complete description of the acquisition of Initio.

On February 28, 2014, the Company purchased from Poolia UK substantially all of Poolia UK’s business and assets, including but not limited to contracts, business information, records, book debts and goodwill.  The acquisition was completed pursuant to that certain asset purchase agreement, dated February 28, 2014. See Note 13 to the financial statements in this Annual Report on Form 10-K for a more complete description of the acquisition of Poolia UK.

On May 17, 2014, the Company consummated the acquisition of 100% of the issued and outstanding stock of PeopleSERVE, Inc. pursuant to a definitive stock purchase agreement dated May 17, 2014 by and among the Company and the shareholders of PeopleSERVE, Inc. See Note 13 to the financial statements in this Annual Report on Form 10-K for a more complete description of the acquisition of PeopleSERVE, Inc.

On May 17, 2014, the Company consummated the acquisition of 49% of the issued and outstanding stock of PeopleSERVE, PRS pursuant to a definitive stock purchase agreement dated May 17, 2014 by and among the Company and the shareholders of PeopleSERVE, PRS. See Note 13 to the financial statements in this Annual Report on Form 10-K for a more complete description of the acquisition of PeopleSERVE, PRS.

Operating History

We intend to acquire domestic and international staffing companies. To date, we have six operating divisions: Cyber 360, CSI, Staffing 360 Solutions (UK), Poolia (UK), PeopleSERVE, Inc., and PeopleSERVE, PRS Inc. We are currently negotiating with other potential acquisitions. We began generating revenues in October 2012. As a result of these current acquisitions, we generated in excess of $45 million in revenues in fiscal 2014. 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.

Prior Financings

Bridge Financing

From November 13, 2013 through December 6, 2013, the Company completed multiple closings of its “best efforts” private placement offering (the “Bridge Offering”) of 12% Unsecured Convertible Promissory Notes (the “Convertible Notes”) with certain accredited investors (the “Bridge Purchasers”).

Pursuant to the purchase agreements between the Company and the Bridge Purchasers in connection with the Convertible Notes (the “Subscription Agreements”), we issued Convertible Notes for an aggregate amount of $1,655,000 to 23 accredited investors. In addition to the Convertible Notes, each Bridge Purchaser received equity consideration at a rate of 12,500 shares of common stock for each $50,000 investment. Accordingly, the Company issued an aggregate of 413,750 shares of common stock to the Bridge Purchasers. 

In connection with the Bridge Offering, the Company retained Accelerated Capital Group, Inc. (“Accelerated Capital”) as the placement agent. For acting as placement agent, the Company agreed to pay Accelerated Capital: (i) a fee in cash up to an amount equal to ten percent (10%) of the aggregate gross proceeds raised by such brokers in the Bridge Offering, (ii) a non-accountable expense allowance of up to two percent (2%) of the aggregate gross proceeds raised by such broker in the Bridge Offering, and (iii) shares of common stock of the Company equal to an amount of up to ten percent (10%) of the aggregate number of shares of common stock of the Company issued in connection with funds raised by the broker in the Bridge Offering. As of the final closing on December 6, 2013, the Company paid the placement agent an aggregate consideration of $198,600 and issued an aggregate of 41,375 shares of common stock.

Subsequently, on the final closing of the private placement offering (the “PIPE Financing”), as described below, all of the Bridge Purchasers elected to convert all of the respective Convertible Notes, plus accrued interest, into Units at the same terms of the PIPE Financing. This resulted in the aggregate issuance of an additional 1,727,058 shares of common stock to the Bridge Purchasers. Further, in connection with this conversion, the Company issued to Accelerated Capital, as placement agent for the Bridge Offering, an additional 345,412 shares of common stock, which is equal to 20% of the shares of common stock issued to the Bridge Purchasers upon such conversion.

PIPE Financing

From January 3, 2014 through March 13, 2014, the company completed multiple closings of its PIPE Financing up to $10,000,000 consisting of up to 400 units (the “Units”) of the Company, each Unit consisting of (i) 25,000 shares of Common Stock of the Company, priced at $1.00 per share (“PIPE Shares”) and (ii) warrants (the “PIPE Warrants”) to purchase 12,500 shares of the Company’s common stock at an exercise price of $2.00 per share. As of the final closing on March 13, 2014, 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 consisted of a total of 10,000,000 shares of common stock and 5,000,000 Warrants.

In connection with the PIPE Financing, the Company retained Accelerated Capital as the placement agent. For acting as placement agent, the Company agreed to pay Accelerated Capital: (i) a fee in cash up to an amount equal to ten percent (10%) of the aggregate gross proceeds raised by such broker in the PIPE Financing, (ii) a non-accountable expense allowance of up to two percent (2%) of the aggregate gross proceeds raised by such broker in the PIPE Financing, and (iii) shares of common stock equal to an amount of up to ten percent (10%) of the aggregate number of shares of common stock of the Company issued in connection with funds raised by the broker in the PIPE Financing. As of the final closing, the Company paid Accelerated Capital an aggregate consideration of $1,105,380 and issued an aggregate of 921,150 shares of common stock.

Bond Financing

From May 19, 2014 through July 29, 2014, the Company completed multiple closings of its best efforts private offering (the “Bond Financing”) of 12% Convertible Bonds (the “Convertible Bonds”) with certain accredited investors (the “Bond Purchasers”). Pursuant to purchase agreements with each of the Bond Purchasers (the “Bond Agreements”), the Company issued Convertible Bonds for an aggregate of $4,058,500 to a total of 70 accredited investors. On or prior to the maturity date of each of the Convertible Bonds, the Bond Purchasers must notify the Company whether the payment for the Convertible Bond will be made in cash or as payment-in-kind in comparably valued common stock of the Company. The Bond Purchasers may elect to convert the Convertible Bonds, including all accrued but unpaid coupon payments, at any time prior to the maturity date, into restricted shares of common stock of the Company, at a conversion price of $1.50 per share. The Convertible Bonds have a maturity date of October 15, 2014.

In addition to the Convertible Bonds, each Bond Purchaser received equity consideration at a rate of 5,000 shares of the Company’s common stock for each $50,000 investment. Accordingly, the Company issued an aggregate of 405,850 shares of its common stock to the Bond Purchasers. 

In connection with the Bond Financing, the Company retained Accelerated Capital as the placement agent. For acting as placement agent, the Company agreed to pay Accelerated Capital: (i) a cash fee up to an amount equal to ten percent (10%) of the aggregate gross proceeds raised by Accelerated Capital in the Bond Financing, (ii) a non-accountable expense allowance of up to two percent (2%) of the aggregate gross proceeds raised by Accelerated Capital in the Bond Financing, and (iii) shares of common stock equal to an amount no greater than ten percent (10%) of the Bond Financing. As of the final closing, the Company paid Accelerated Capital an aggregate consideration of $ 487,020 and issued to Accelerated Capital an aggregate of 40,585 shares of common stock.

Short Term Financings

From April 21, 2014 through May 27, 2014, the Company also conducted a note offering, whereby the Company raised approximately $950,000 from 2 accredited investor through the issuance of five (5) short-term 12% convertible promissory notes (the “April Notes”). The purchaser of the April Notes received an aggregate of 150,000 shares of restricted common stock. The April Notes are due and payable upon demand by the holder with advance written notice fifteen (15) days prior to the desired payment date. Commencing on dates ranging from July 15, 2014 to August 1, 2014, the holder is entitled to receive shares ranging from an additional 2,500 to 5,000 shares of the Company’s restricted common stock per $100,000 note payable in arrears per month that any principal amount or interest remains outstanding under the note. The holder of the April Notes may convert, at its sole election, the principal amount and any accrued but unpaid interest due under the April Notes into restricted shares of common stock at a price of $1.50 per share. The April Notes and shares of common stock issued in connection with the April Notes 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 was to an accredited investor and did not involve a “public offering.”

From May 14, 2014 through May 19, 2014, the Company conducted an additional note offering whereby the Company raised approximately $600,000 from 5 accredited investors through the issuance of five (5) short-term 12% convertible promissory notes (the “May Notes”). The May Notes were payable upon the earlier of (i) completion of the Company’s convertible bond offering, (ii) completion of the Company’s senior debt facility or (iii) July 14, 2014. The purchasers of the May Notes received an aggregate of 120,000 shares of restricted common stock. The holders of the May Notes were entitled to convert, at their sole election, the principal amount and any accrued but unpaid interest due under the May Notes into restricted shares of common stock at a price of $1.50 per share. The May Notes and shares of common stock issued in connection with the May Notes 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 were only made to accredited investors and did not involve a “public offering.” On July 14, 2014, all five (5) of the holders of the May Notes converted such May Notes into an aggregate of 407,915 shares of common stock.

On May 27, 2014, the Company conducted an additional note offering whereby the Company raised approximately $50,000 from one accredited investor through the issuance of a short-term 12% convertible promissory note (the “May 27 Note”). The May 27 Note was payable upon the earlier of (i) completion of the Company’s convertible bond offering, (ii) completion of the Company’s senior debt facility or (iii) July 12, 2014. The purchasers of the May 27 Note received an aggregate of 50,000 shares of restricted common stock. The holder of the May 27 Note was entitled to convert, at his sole election, the principal amount and any accrued but unpaid interest due under the May 27 Note into restricted shares of common stock at a price of $1.50 per share. The May 27 Note and shares of common stock issued in connection with the May 27 Note 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 were only made to accredited investors and did not involve a “public offering.” On July 25, 2014, the Company repaid the May 27 Note, including all accrued and unpaid interest.

In connection with the May 27, 2014 Note, and pursuant to that certain placement agent agreement, dated January 23, 2014, between the Company and Corinthian Partners (“Corinthian”), the Company paid Corinthian, in connection with the introduction of the investor to the Company, a cash fee of $5,000 and issued 1,000 shares of common stock.

On June 22, 2014, the Company conducted an additional note offering whereby the Company raised approximately $100,000 from one accredited investor through the issuance of a short-term 12% convertible promissory note (the “June Note”). The June Note is also payable upon the earlier of (i) completion of the Series A Bond Offering, (ii) completion of the Company’s senior debt facility or (iii) eight (8) weeks from the original issuance date of the June Note. The purchaser of the June Note received an aggregate of 20,000 shares of restricted common stock. The holder of the June Note may convert, at his sole election, the principal amount and any accrued but unpaid interest due under the June Note into restricted shares of Common Stock at a price of $1.50 per share. The June Note and shares of common stock issued in connection with the June Note 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 were only made to accredited investors and did not involve a “public offering.” In August 2014, the Company repaid the June 22 Note, including all accrued and unpaid interest.

In June 2014, the Company issued a promissory note for consideration totaling $100,000 to Robert Mayer, a director and shareholder of the Company. The promissory note was non-interest bearing and due on demand. The Company issued 5,000 shares to Mr. Mayer as additional consideration. This note was paid in full in June, 2014.

In July 2014, the Company issued three non-interest bearing promissory notes in the aggregate amount of $280,000 to three related parties. The promissory notes were due upon demand. The first note was issued on July 16, 2014 to Trilogy Capital Partners, which is owned by the Company’s President, Alfonso J. Cervantes, in the amount of $30,000. This note was repaid in full on July 25, 2014. The second note was issued on July 17, 2014 to Jeff Mitchell, the Company’s CFO, in the amount of $150,000. The Company issued 10,000 Common Stock shares to Mr. Mitchell as additional consideration. This note was repaid in full on July 25, 2014. The third note was issued on July 8, 2014 to Robert Mayer, a director and shareholder of the Company, in the amount of $100,000. The Company issued 7,000 shares to Mr. Mayer as additional consideration. This note was paid in full on July 29, 2014.

In August 2014, the Company issued a promissory note for consideration totaling $125,000 to Robert Mayer, a director and shareholder of the Company. The promissory note was non-interest bearing and due on demand. The Company issued 7,500 shares to Mr. Mayer as additional consideration. This note is still outstanding.

In July and August 2014, the Company issued promissory notes to Sterling National bank for consideration totaling $625,000. The notes bear interest at 18% per annum and are due upon demand. As of the date of this filing, the Company has repaid $488,992 in principal and $5,271 in interest. The balance outstanding as of the date of this filing is $136,008.

In August 2014, the Company issued a non-interest bearing promissory note in the amount of $150,000 to Barry Cervantes, a brother of the Company’s President, Alfonso J. Cervantes. The promissory note is due upon demand. The Company issued 7,500 shares to Barry Cervantes as additional consideration. This note remains outstanding.

Accounts Receivable Credit Facilities

In May 2013 and November 2013, respectively, Staffing 360 Group, Inc. d/b/a Cyber 360 Solutions and Control Solutions International, Inc., both wholly owned subsidiaries of the Company, entered into financing services agreements by which they assign accounts receivable to fund working capital with Sterling National Bank (“Sterling”). Pursuant to these agreements, Sterling may advance up to 90% of the face value of eligible accounts receivable.  The borrowings carry interest at a rate of .025% per day, or 9% per annum, from the date of the advance until the date of repayment.  There is no ending date to the agreement, only a closing fee of $500 upon termination.

In February 2014, Staffing 360 Solutions (UK) Limited, a wholly owned subsidiary of the Company, entered into an agreement with ABN AMRO Commercial Finance PLC under which it borrows money against open accounts receivable. Under this agreement, the Borrower receives advances of up to 90% on temporary placements and 75% on permanent placements of the face value of eligible receivables.  The borrowings carry interest at a rate of 2.50% above the Sterling Libor rate (3.90%).  The maximum loan amount is 1,250,000 Pounds Sterling. The agreement terminates on its second anniversary. Additionally, it entered a term loan with ABN-AMRO Commercial Finance PLC for £200,000, to fund part of the Poolia Acquisition. This agreement is paid over a 24 month period starting in March 2014 and has a personal guarantee of the Executive Chairman, Brendan Flood.

Effective November 1, 2012, the Company’s subsidiary, Monroe Staffing, a subsidiary of Staffing (UK), entered into a $14,000,000 line of credit (“Credit and Security Agreement”) with Wells Fargo Bank, NA. The Credit and Security Agreement is subject to accounts receivable limitations and bears interest at Libor plus 5% (5.15% as of May 31, 2014) on the greater of $5,000,000 or the actual loan balance outstanding, and expires on October 31, 2015. The Agreement is subject to an annual facility fee, certain covenants and is secured by all of the assets of Monroe Staffing. The covenants are as follows:

In March 2014, the Company obtained a one-time waiver relating to the above covenants, specifically as it relates to the failure to maintain a working capital ratio of 1:1 and positive cash flow for the quarterly period ended December 2013.

Effective July 25, 2014, the Company joined with its subsidiaries, Monroe Staffing Services, LLC, PeopleSERVE, Inc. and PeopleSERVE PRS, Inc., (collectively referred to as “Borrowers”) in an Amended and Restated Credit and Security Agreement and a new Credit and Security Agreement (“Credit Facility”) with Wells Fargo Bank, NA. This Credit Facility increased the line of credit amount from $14,000,000 to $15,000,000 and modified the covenant to permit, with certain limitations, the transfer of funds amongst the Borrowers. All of terms and conditions remain unchanged. At May 31, 2014, $11,260,207 was recorded as a liability relating to the Line of Credit.

Going concern

Through August 2012, 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 October 2012. 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. In May 2014, PeopleSERVE, Inc. and PeopleSERVE, PRS commenced operations and began generating revenues. Since inception, the Company has been able to operate under a going concern audit opinion and meet its financial obligations. Since the Company has incurred losses and currently has negative working capital, these 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 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 May 31, 2014, the Company had a working capital deficiency of $7,158,462, and had an accumulated deficit of $16,337,118 and for the year ended May 31, 2014 had net losses and net cash used in operations of $12,657,739 and $4,287,975 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 $4.0 million over the next twelve (12) months for working capital. 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 consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

From inception through May 31, 2014, the Company has raised capital by conducting financings through debt and equity transactions. During the fiscal year ended May 31, 2014, the Company conducted various note offerings (See Note 5 to the financial statements with this Annual Report), whereby the Company raised $3,255,000 for the issuance of 12% convertible promissory notes. The notes have varying due dates and triggering events. However, they are all short-term notes. The purchaser of the notes also received additional equity consideration in the form of restricted Common Stock. The notes and shares of common stock issued in connection with the notes 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 was to an accredited investor and did not involve a “public offering.” In addition, the Company conducted note offerings (see Note 6 to the financial statements with this Annual Report), whereby the Company raised $340,000 pursuant to 12% promissory note agreements dated September 27, 2013, October 18, 2013 and October 28, 2013, in the amount of $40,000, $200,000 and $100,000, respectively. As additional consideration, the note holders received additional equity consideration in the form of restricted Common Stock. On December 6, 2014, the Company raised $1,655,000 in the form of 12% convertible promissory notes relating to its $1.75 million bridge financing. In April 2014, the Company converted the entire $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). On March 13, 2014, the Company successfully completed its private placement offering of the maximum amount of $10,000,000 which consisted of common stock and warrants. Each unit consisted of (i) 25,000 shares of common stock priced at $1.00 per share and (ii) warrants to purchase 12,500 shares, at an exercise price of $2.00 per share. Since the issuance of these securities by the Company did not involve a “public offering” and the Company only accepted investments from accredited investors, the sale of the units qualified for exemption under Rule 506(b) promulgated under Section 4(a)(2) of the Securities Act. For the aggregate amount of $10,000,000 and the 400 units through May 31, 2014, the Company issued a total of 10,000,000 shares of common stock and 5,000,000 warrants.

In April, 2014, the Company commenced its best efforts private offering (the “Bond Offering”) of 12% Convertible Bonds (the “Bonds”) with certain accredited investors (the “Purchasers”). As of May 31, 2014, the Company issued Bonds for an aggregate of $2,998,500 (see Note 7 to the financial statements with this Annual Report). On July 29, 2014, the Company completed the Bond Offering for an aggregate of $4,058,500. These Bonds mature on October 15, 2014, unless voluntarily converted. In addition to the Bonds, each Purchaser of the Bonds received equity consideration at a rate of 5,000 shares (the “Equity Consideration”) of Common Stock for each $50,000 investment for a total of 405,850 shares of common stock. From April 21, 2014 through May 27, 2014, the Company also conducted a note offering, whereby the Company raised approximately $950,000 from 2 accredited investors through the issuance of five (5) short-term 12% convertible promissory notes (the “April Notes”). The purchaser of the April Notes received an aggregate of 150,000 shares of common stock. From May 14, 2014 through May 19, 2014, the Company conducted an additional note offering whereby the Company raised approximately $600,000 from 5 accredited investors through the issuance of five (5) short-term 12% convertible promissory notes (the “May Notes”). The purchasers of the May Notes received an aggregate of 120,000 shares of restricted common stock. On May 27, 2014, the Company conducted an additional note offering whereby the Company raised approximately $50,000 from one accredited investor through the issuance of a short-term 12% convertible promissory note (the “May 27 Note”). The purchaser of the May 27 Note received an aggregate of 10,000 shares of restricted common stock. In July 2014, the Company issued three non-interest bearing promissory notes in the aggregate amount of $280,000 to three related parties. The promissory notes were due upon demand. The first note was issued on July 16, 2014 to Trilogy Capital Partners, which is owned by the Company’s President, Alfonso J. Cervantes, in the amount of $30,000. The second note was issued on July 17, 2014 to Jeff Mitchell, the Company’s CFO, in the amount of $150,000. The Company issued 10,000 shares of common stock to Mr. Mitchell as additional consideration. The third note was issued on July 8, 2014 to Robert Mayer, a director and shareholder of the Company, in the amount of $100,000. The Company issued 7,000 shares to Mr. Mayer as additional consideration. In August 2014, the Company issued a non-interest bearing promissory note in the amount of $150,000 to Barry Cervantes, a brother of the Company’s President, Alfonso J. Cervantes. The promissory note is due upon demand. The Company issued 7,500 shares to Barry Cervantes as additional consideration. In August 2014, the Company issued a non-interest bearing promissory note in the amount of $125,000 to Robert Mayer, a director and shareholder of the Company. The promissory note is due upon demand. The Company issued 7,500 shares to Mr. Mayer as additional consideration. In July and August 2014, the Company issued promissory notes to Sterling National bank for consideration totaling $625,000. These notes bear interest at 18% per annum and are due upon demand.

In total, for the fiscal year ended May 31, 2014, the Company raised an aggregate of $17,158,500 in capital by conducting financings through debt and equity transactions. In addition, from June 1, 2014 through the date of this filing, the Company raised an aggregate of $2,240,000. The Company intends to continue to conduct additional short-term note financings to provide necessary working capital to the Company, as needed

Results of Operations

The Company is still in the early stages of its development and the acquisition of five (5) additional staffing companies. As a consequence of this, and specifically the transaction costs of the acquisition program and the cost of obtaining financing, the Company generated a loss of $12.6 million in the year-ended May 31, 2014. In addition, during 2014, the Company recorded approximately $3.5 million of non-cash impairment charges against the first two acquisitions.  Additionally, the Company incurred approximately $1.1 million of non-cash amortization of intangibles. While we accept that these two acquisitions have under-performed from a GAAP perspective, we view our M&A program in its totality. Without the Cyber360 acquisition we could not have made the Control Solutions International acquisition and without both, we would not have been able to consummate our transformative acquisition of Initio International Holdings. The acquisition of Initio allowed us to complete both Poolia UK and PeopleSERVE. In the medium to long-term we will view this impairment as a cost of getting our growth program in place. 

From a revenue perspective, the Company delivered $45.8 million for the year, of which $25.6 million was in the final quarter of the year. The fourth quarter revenue is consistent with what will be expected each quarter on a go forward basis not taking into account any potential acquisitions. The Company believes the acquisitions consummated during calendar year 2014 are performing as expected. We are confident that we can continue to grow these businesses and that they will allow us to attract further acquisitions in line with our stated Strategic Plan of getting to $300 million of annualized revenues.

The Company is vigilant in managing its operations and has developed a “Path to Profitability” program that is monitored constantly. This Path to Profitability includes overhead control, operational reviews, cash management, adequate capitalization, and our M&A program. Young, growing companies often confront struggles such as integration, financing, etc. We have invested for our future in building a strong corporate team which allows stronger financial reporting, compliance and commercial management. This investment has contributed to our losses in the short-term but would not need material additions to it as we grow, both organically and through acquisition.

The following table sets forth the results of our operations for the years ended May 31, 2014 and 2013 indicated as a percentage of net revenues:

Service revenues

We began to generate revenues in October 2012. As of May 31, 2014, the Company had six entities – Cyber 360, Control Solutions International (CSI), Staffing (UK), Poolia (UK), PeopleSERVE, Inc. and PeopleSERVE PRS.

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 year ended May 31, 2014, Cyber 360 had revenues of $4,580,331 compared to $475,506 for the year ended May 31, 2013. The revenues for the year ended May 31, 2013 are from date of acquisition through the fiscal year end (approximately one month period). 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 U.S. and Canada but also has a network of affiliated entities across 33 countries through which our services are provided. 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 year ended May 31, 2014, CSI added revenue to the Company of $3,564,249 compared to $0 for the year ended May 31, 2013.

Staffing UK (including its subsidiary Monroe) 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 year ended May 31, 2014, Staffing UK (including Monroe) added revenue to the Company of $35,234,255 compared to $0 for the year ended May 31, 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 year ended May 31, 2014, Poolia UK added revenue to the Company of $1,586,630 compared to $0 for the year ended May 31, 2013.

PeopleSERVE, Inc. was acquired on May 17, 2014. It provides temporary staffing and permanent placement services primarily in the IT sector. 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 year ended May 31, 2014, PeopleSERVE, Inc. added revenue to the Company of $434,410 compared to $0 for the year ended May 31, 2013.

PeopleSERVE, PRS was acquired on May 17, 2014. It provides temporary staffing and payrolling services primarily in the IT sector. 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 year ended May 31, 2014, PeopleSERVE, PRS added revenue to the Company of $300,879 compared to $0 for the year ended May 31, 2013.

For the year ended May 31, 2014, we, on a consolidated basis, had net revenues of $45,778,493 compared to $647,731 for the year ended May 31, 2013. The dramatic increase in revenues is due to the full year impact of the five acquisitions the Company has consummated.

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 year ended May 31, 2014 and 2013, cost of revenues was $36,694,123 and $448,507, respectively. The increase is related to the cost of revenues of the Company’s five (5) acquisitions, which took place after the year ended May 31, 2013.

Gross profit and gross margin

Our gross profit for the year ended May 31, 2014 and 2013 was $9,084,370 and $199,224, respectively, representing gross margin of 20% and 31% respectively. The decrease is related to the gross profit margin of the Company’s five (5) acquisition, four (4) of which took place after the year ended May 31, 2013 as compared to the gross profit of its lone subsidiary in 2013.

Operating expenses

For the year ended May 31, 2014, operating expenses amounted to $15,404,177 as compared to $2,632,924 for the year ended May 31, 2013, an increase of $12,771,253. For the year ended May 31, 2014 and 2013, operating expenses consisted of the following:

For the year ended May 31, 2014, the increase in our operating expenses as compared to the year ended May 31, 2013 was primarily attributable to:

Other Expenses

For the years ended May 31, 2014 and 2013, we incurred interest and financing expense of $2,272,109 and $1,011,482, respectively, relating to interest from convertible notes payables, accounts receivable financing, amortization of beneficial conversion feature, debt discount and amortization of deferred financing costs.

Net Loss

As a result of the factors described above, our net losses for the years ended May 31, 2014 and 2013 were $12,657,739 and $3,405,182, respectively, or a net loss per common share of $0.65 and $0.43 (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 promissory notes, the sale of the Company’s common stock through private offerings and from advances from our majority shareholders/officers/directors.

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. In May 2014, PeopleSERVE, Inc. and PeopleSERVE, PRS commenced operations and began generating revenues. Since the Company has incurred losses and currently has negative working capital, these 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 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 May 31, 2014, the Company had a working capital deficiency of $7,158,462, and had an accumulated deficit of $16,337,118 and for the year ended May 31, 2014 has a net loss and net cash used in operations of $12,657,739 and $4,287,975, 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 growing the business, implementing our business plan and funding operations. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:

In October 2012, we began to generate revenues. At May 31, 2014, we had cash of $1,324,711. We have funded our operations as follows:

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, and banking industries and for working capital for the next twelve (12) 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 organically and through further acquisitions. 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 to the next twelve (12) months. 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. Currently, dilutive common share equivalents totaling 12,544,071 consist of shares issuable upon the conversion of existing convertible notes and the exercise of stock options and warrants. 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.

Operating activities

For the year ended May 31, 2014, net cash used in operations of $4,287,975 was primarily attributable to the net loss of $12,657,739 offset by changes in operating assets and liabilities totaling $79,739, which primarily relates to accounts receivable of $203,039, prepaid expenses of $18,321, deferred finance costs of $1,349,128, other assets of $212,102, accounts payable and accrued expenses of $555,810, accounts payable and accrued expenses – related parties of $124,676, accrued payroll and taxes of $785,820 and other current liabilities of $43,177, non-cash adjustments of $3,364,000 of depreciation and amortization, impairment of intangibles and goodwill totaling $3,533,847 and share based compensation totaling $1,551,656. Cash used in operations of $1,423,484 in 2013 was primarily attributable to the net loss of $3,405,182 offset by changes in operating assets and liabilities totaling $608,717, which primarily relates to accounts payable and accrued expenses of $1,119,262, prepaid expenses of $18,452 and accounts receivable of $528,997, non-cash adjustments of $954,018 of depreciation and amortization, share based compensation of $458,963 and gain on settlement of debt totaling $40,000.

 Investing activities

For the year ended May 31, 2014, net cash flows used in investing activities was $11,612,461 and was attributable to the acquisition related cash acquired of $835,342, the purchase of fixed assets of $144,964, payments due to sellers of Poolia and People Serve totaling $137,591 and the payments of $525,572 made for the earn-out agreement relating to the acquisition of Cyber 360 on April 26, 2013 and CSI on November 3, 2013. The Company also made cash payments totaling $11,639,676 towards the purchases of CSI, Staffing UK, Poolia UK, PeopleSERVE, Inc. and PeopleSERVE, PRS. For the year ended May 31, 2013, the Company made cash payments totaling $907,287 towards the purchase of Cyber 360 Solutions.

Financing activities

For the year ended May 31, 2014, net cash flows provided by financing activities totaled $16,962,325 and was attributable to proceeds relating to accounts receivable financing of $1,602,780, proceeds of $3,255,000 from the issuance of convertible promissory notes, proceeds of $340,000 from the issuance of promissory notes, proceeds of $2,998,500 from the issuance of series A convertible bonds and $10,565,000 relating to proceeds from the sale of Common Stock and warrants. In addition, the Company repaid $688,075 in convertible notes, and made payments to a private placement agent totaling $1,110,880. For the year ended May 31, 2013, net cash flows provided by financing activities totaled $2,574,726 and was attributable to proceeds from convertible notes payable of $925,000, cash received from related parties notes of $56,500 offset by the repayment of related parties notes of $66,100, proceeds of $259,326 relating to accounts receivable financing and $1,400,000 relating to proceeds from the sale of common stock.

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 3 to our consolidated financial statements for the fiscal year ended May 31, 2014 contained herein.

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board ("FASB") issued new authoritative guidance related to share-based payments where performance targets can be achieved subsequent to the requisite service period. The guidance, effective in fiscal year ended 2015, is not expected to have a material impact on its results of operations, financial position or cash flows.

In May 2014, the FASB issued new authoritative guidance related to revenue recognition. This guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance allows for two methods of adoption: (a) full retrospective adoption, meaning the guidance is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying this guidance is recognized as an adjustment to the Accumulated deficit balance. The Company is evaluating the two adoption methods as well as the impact this new guidance will have on the consolidated financial statements and related disclosures and will be effective in the Company’s fiscal year ended 2018.

In April 2014, the FASB issued authoritative guidance, which specifies that only disposals, such as a disposal of a major line of business, representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements, absent any disposition representing a strategic shift in the Company's operations.

In July 2013, the FASB issued authoritative guidance that requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.

In March 2013, FASB issued authoritative guidance that resolves the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This guidance will be effective for the Company beginning in the first quarter of fiscal 2015. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements, absent any material transactions involving derecognition of subsidiaries or groups of assets within a foreign entity.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for smaller reporting companies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

TABLE OF CONTENTS      

805 Third Avenue Suite 902 New York, NY 10022 212.838-5100 212.838.2676/ Fax www.rbsmllp.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Staffing 360 Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Staffing 360 Solutions, Inc. (the “Company”) as of May 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the two years ended May 31, 2014 and 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Staffing 360 Solutions, Inc. at May 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the two years ended May 31, 2014 and 2013, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2 to the consolidated financial statements, the Company has incurred recurring operating losses and has a working capital deficiency. These conditions among others raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 2. The 2014 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

New York, NY

September 15, 2014

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

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

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Staffing 360 Solutions, Inc. (“we,” “us,” “our,” “Staffing 360,” or the “Company”) was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation (“Golden Fork”). 

On February 17, 2012, TRIG Special Purpose 1, LLC, a Nevada Corporation, (“TRIG”) purchased 78.7%, or 2,000,000 shares of Common Stock with a par value of $0.00001 (the “Common Stock”), of Golden Fork Corporation for $240,000 in a private cash transaction. As a result of the transaction, the Company became a 78.7% owned subsidiary of TRIG. These shares were subsequently distributed to Trilogy Capital Partners, Inc., Grandview Capital Partners, Inc., and Robert Y. Lee, who made distributions to other third parties in the aggregate of 600,000 shares. TRIG no longer owns any shares. 

On March 16, 2012, Golden Fork filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) to change its name from Golden Fork to Staffing 360 Solutions, Inc. Upon filing of the Amendment, the Company began its operations in the international staffing sector.

On April 13, 2012, the Company received approval from the Financial Industry Regulatory Authority (“FINRA”) to effect its name change and to change its trading symbol from “GDNF” to “STAF”. Simultaneously therewith, the Company received approval to conduct a forward split of its issued and outstanding shares of Common Stock at a ratio of one for three (the “Forward Split”). Following the Forward Split, the Company’s issued and outstanding shares of Common Stock increased from 2,540,000 to 7,620,000.

On July 31, 2012, the Company formed Staffing 360 Alliance, Inc. (“Staffing Alliance”), a wholly-owned subsidiary, incorporated in the State of Nevada. For a short period of time, Staffing Alliance had operations in the staffing sector and provided trained employees to clients who worked in word processing, data entry, administrative support staff and other areas. In February 2014, such operations had ceased.

On April 26, 2013, the Company purchased 100% of the issued and outstanding stock of The Revolution Group, Ltd. (“TRG”). The aggregate consideration paid by the Company to the TRG shareholders was $2,509,342 (the “TRG Purchase Price”), payable as cash at closing, issuing Common Stock of the Company and a percentage of future gross profits. As a result of the Acquisition, TRG became a wholly-owned subsidiary of the Company and now operates under the name “Cyber 360 Solutions” (“Cyber Solutions”). (See Note 13).

On June 28, 2013, the Company filed a Certificate of Amendment to its Articles of Incorporation with the State of Nevada (the “2013 Amendment”), whereby increasing the number of shares of Common Stock that the Company is authorized to issue from 75,000,000 to 200,000,000. The 2013 Amendment also allowed the Company to issue 20,000,000 shares of blank check preferred stock, having such rights, designations, preferences and privileges as the board of directors (the “Board”) determines from time to time in their sole discretion.

On November 4, 2013, the Company purchased 100% of the issued and outstanding Common Stock (the “CSI Acquisition”) of Control Solutions International, Inc. (“CSI”), a Florida corporation and its wholly owned subsidiary, Canada Control Solutions International, Inc., an Ontario, Canada corporation (“CCSI”) pursuant to a Stock Purchase Agreement dated August 14, 2013 by and among the Company, NewCSI, Inc., a Delaware corporation (“NCSI”), and the shareholders of NCSI. The aggregate consideration paid by the Company for the CSI Acquisition was $3,530,454, payable as cash at closing, issuing Common Stock of the Company and a percentage of future gross profits. As a result of the Acquisition, CSI became a wholly-owned subsidiary of the Company. (See Note 13).

On January 3, 2014, the Company purchased 100% of the issued and outstanding Common Stock (the “Initio Acquisition”) of Initio International Holdings Limited (“Initio”), a company organized under the laws of England and Wales and its respective subsidiaries, including but not limited to Monroe Staffing Services, LLC, a Delaware limited liability company (“Monroe,” and together with all of Initio’s subsidiaries, the “Subsidiaries”).  The aggregate consideration paid by the Company for the Initio Acquisition was $13.29 million, payable with cash at closing, issuing Common Stock of the Company and promissory notes. As a result of the Acquisition, Initio and its Subsidiaries became wholly-owned subsidiaries of the Company. Initio was renamed Staffing 360 Solutions (UK) Limited (“Staffing UK”). (See Note 13).

Initio is a U.K. domiciled full-service staffing company with established brands in the United Kingdom and United States. Initio’s U.K. division, Longbridge, was established in 1989 as an international multi-sector recruitment company, with a long history of success catering to the sales and marketing, technology, legal and IT solutions sectors. Initio’s U.S. division, Monroe Staffing, was established in 1969 as a full-service consulting and staffing agency serving companies ranging from Fortune 100 to new start-up organizations. Monroe has 14 offices throughout Connecticut, Massachusetts, Rhode Island, New Hampshire and North Carolina. 

Upon closing of the Initio Acquisition, certain of the Initio Shareholders were appointed to the Company’s Board of Directors and entered into employment agreements with the Company and/or one of its subsidiaries.

On February 28, 2014, the Company, through its wholly owned subsidiary, Staffing UK, purchased substantially all of the business and certain assets, including but not limited to contracts, business information, records, book debt and goodwill (the “Poolia Acquisition”) of Poolia UK Ltd. (“Poolia UK”). The aggregate consideration paid by the Company was £500,000 (the “Fixed Consideration”), plus an amount equal to the net asset value at the completion date of the acquisition (the “NAV Consideration,” together with the Fixed Consideration, collectively, the “Poolia Purchase Price”). The Fixed Consideration and a sum of £250,000, being an advance payment of the NAV Consideration, was paid in cash at closing. The balance of the NAV Consideration was to be paid subsequently by the Company to Poolia UK Ltd. for total consideration of $1,626,266. (See Note 13)

On May 17, 2014, the Company purchased 100% of the issued and outstanding Common Stock of PeopleSERVE, Inc., a Massachusetts corporation (“PSI”), and 49% of the issued and outstanding Common Stock of PeopleSERVE PRS, Inc., a Massachusetts corporation (“PRS”, together with PSI, collectively the “Acquired Companies” or “PS”), pursuant to a Stock Purchase Agreement (the “PS Purchase Agreement”) dated May 17, 2014, by and among the Company, the Acquired Companies and Linda Moraski (“PS Seller”), sole owner of all of the issued and outstanding Common Stock of the Acquired Companies.

In connection with the purchase of the Acquired Companies, the Company agreed to pay to PS Seller an aggregate purchase price (the “PS Purchase Price”) of approximately $8.4 million based upon a formula in the PS Purchase Agreement. Immediately prior to the closing, the PS Seller provided the Company with a certificate setting forth the Seller’s good faith estimate of (i) the Purchase Price (the “Estimated Purchase Price”), including the calculation of the Adjusted EBITDA of each Acquired Company for the twelve (12) fiscal months period ending April 26, 2014, and (ii) the Net Working Capital.

At the PS closing, the Company paid to the PS Seller the PS Purchase Price as follows: (i) cash in the amount of $2,705,675; (ii) restricted shares of the Company’s Common Stock, based on the closing price of $1.93 on the date of acquisition, May 17, 2014, or 1,127,365 shares of Common Stock for a total fair value of $2,175,814; (iii) an unsecured promissory note with an initial principal amount equal to $2,367,466; (iv) pursuant to the terms of the PS Purchase Agreement, the PS Seller is entitled to receive from the Acquired Companies all of the Net Working Capital as of the Closing Date valued at $1,138,153, and the Company and the Acquired Companies shall have no right to, or obligations with respect to, such Net Working Capital, except as otherwise set forth in the PS Purchase Agreement.

The PS Purchase Price was subject to a Post-Closing Purchase Price Adjustment within sixty (60) days of the Closing Date, based on audited financial statements for each of the Acquired Companies. Upon receipt of such audited financial statements, the Company will prepare and deliver to Seller a certificate that sets forth the Company’s determination of (i) the PS Purchase Price, including the calculation of the Adjusted EBITDA of each Acquired Company for the audited period and (ii) the calculation of the Net Working Capital. Once the Company and the PS Seller have agreed on the final financial statements as disclosed above, the PS Purchase Price shall be adjusted based on the PS Purchase Price Adjustment Amount, which means an amount equal to the finally determined PS Purchase Price as shown in the final financial statements minus the amount of the Estimated Purchase Price. In the event the PS Purchase Price is adjusted, the difference will either be paid to the Seller or returned to the Company, as the case may be, in the same percentages of cash, shares of Common Stock and Promissory Note as the PS Purchase Price paid on the Closing with a one-time payment by the appropriate party to catch-up on principal payments previously made under the Promissory Note.

NOTE 2 – GOING CONCERN

The accompanying 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.  As of May 31, 2014, the Company had a working capital deficiency of $7,158,462 and had an accumulated deficit of $16,337,118, and for the year ended May 31, 2014 had net loss and net cash used in operations of $12,657,739 and $4,287,975, respectively.  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, the Company does not have sufficient working capital to fund the expansion of its operations and to provide the working capital necessary for its ongoing operations and obligations. The Company will need to raise significant additional capital to fund its operating expenses, pay its 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 gross margin by driving organic sales growth and well executed strategic acquisitions, managing and reducing operating and overhead costs, and conducting additional financings through debt and equity transactions to fund working capital and acquire additional entities. The Company anticipates it will require $4.0 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 secure 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 consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

If management is unsuccessful in the execution of its aforementioned plans to address issues which create substantial doubt about its ability to continue as a going concern, the Company may be forced to take one of the following actions:

Any of the above scenarios will decrease stockholder value significantly and may result in the value of the Company’s securities becoming worthless.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Year End and Principles of Consolidation

These consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles (“GAAP”) in the United States, and are expressed in U.S. dollars. The Company’s consolidated fiscal year-end is May 31. Some of the Company’s subsidiaries have varying year-ends.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. As described below, the Company consolidates PRS, an entity of which it owns 49%, since the Company is deemed to be the primary beneficiary of this entity. All significant inter-company transactions are eliminated.

Variable Interest Entities

Current accounting guidance provides a framework for identifying a Variable Interest Entity (“VIE”) and determining when a company should include the assets, liabilities, non-controlling interests, and results of activities of the VIE in its consolidated financial statements. In general, a VIE is an entity or other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Generally, a VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities, and non-controlling interest at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. On May 17, 2014, the Company purchased 49% of the issued and outstanding Common Stock of PRS. Pursuant to ASC 810, PRS is deemed to be a variable interest entity since the Company is the primary beneficiary of PRS. Accordingly, the Company consolidated the results of PRS from May 17, 2014 through May 31, 2014. As of May 31, 2014 the total assets and liabilities of PRS which were consolidated were $1,226,766 and $1,206,870, respectively. The total revenues and expenses consolidated since May 17, 2014 were $300,879 and $281,983, respectively.

Non-controlling Interests

Non-controlling interests in our subsidiaries are recorded in accordance with the provisions of ASC 810 “Consolidation”, and are reported as a component of equity, separate from the parent company’s equity.  Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions.  Results of operations attributable to the non-controlling interests are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

Use of Estimates

The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to valuation, impairment testing, earn-out liabilities, stock-based compensation and deferred income tax assets valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. Significant estimates for the years ended May 31, 2014 and 2013, respectively, include the valuation of intangible assets, including goodwill, liabilities associated with earn-out obligations and testing our long-lived assets for impairment.

In recording the purchase accounting for previous acquisitions we had estimated the fair value of identifiable intangible assets and goodwill reflected in the Company’s previously issued interim financial statements. Upon retaining the services of an independent valuation consultant, the allocations previously estimated by the Company have been revised and the results of the independent valuation consultant have been retroactively reflected in the Company’s consolidated financial statements for the fiscal year ended May 31, 2014. The Company originally estimated its goodwill and intangibles to total $14,828,837 and $3,832,924, respectively. Based upon the results of the independent valuation, the Company adjusted the goodwill and intangible totals to $6,229,013 and $12,482,121, respectively. These amounts were subsequently tested for impairment which resulted in impairment of goodwill and intangibles in the amounts of $2,700,255 and $833,592, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with original maturities of three months or less when acquired, to be cash equivalents.  The Company had no cash equivalents at May 31, 2014 or May 31, 2013.

Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At May 31, 2014 and 2013, the Company had an allowance for doubtful accounts of $561,311 and $0, respectively.

Income Taxes

The Company is governed by the Income Tax Law of the United States. The Company utilizes ASC Topic 740, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in the financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of the date of this filing, the Company is current on all corporate, federal and state tax returns.

The U.K. entities are domiciled in the U.K. and file their tax returns in those jurisdictions.

Foreign Currency Translation

Assets and liabilities of subsidiaries operating in foreign countries are translated into U.S. dollars using both the exchange rate in effect at the balance sheet date or historical rate, as applicable. Results of operations are translated using the average exchange rates prevailing throughout the year. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included in a separate component of stockholders’ equity (accumulated other comprehensive loss), while gains and losses resulting from foreign currency transactions are included in operations.

Amortization of Deferred Financing Costs

Costs incurred in connection with obtaining financing are deferred and amortized on a straight-line basis over the term of the related loan, which is not materially different than the effective interest method. As of May 31, 2014 and 2013, accumulated amortization of deferred financing costs totaled $1,006,383 and $0, respectively.

Business Combinations

In accordance with Accounting Standards Codification 805, "Business Combinations" ("ASC 805") the Company records acquisitions under the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. The Company utilizes management estimates and, in some instances, may retain the services of an independent third-party valuation firm to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance.

Fair Value of Financial Instruments

In accordance with Accounting Standards Codification 820, “Fair Value Measurements and Disclosures” (“ASC 820”), the Company measures and accounts for certain assets and liabilities at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, and establishes a framework for measuring fair value and standards for disclosure about such fair value measurements.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

The Company did not have any Level 2 or Level 3 assets or liabilities as of May 31, 2014 or 2013, with the exception of its notes payable (See Note 6), convertible notes payable (See Note 5), bonds payable (See Note 7) and its earn out liabilities (See Note 13).

Cash is considered to be highly liquid and easily tradable as of May 31, 2014 and 2013 and therefore classified as Level 1 within our fair value hierarchy.

Accounting Standards Codification 825-10-25, “Fair Value Option” (ASC 825-10-25) expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.

Convertible Instruments

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with accounting standards for “Accounting for Derivative Instruments and Hedging Activities.”

Accounting standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.  Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.

Revenue Recognition

Cyber 360 Solutions: The Company derives its revenues from three segments: contingent staffing, permanent placement staffing, and consulting. The Company recognizes revenue in accordance with ASC Topic 605-45 “Revenue Recognition – Principal Agent Considerations.” The Company records revenue on a gross basis. The Company has concluded that the gross reporting is appropriate because the Company (i) has the duty of identifying and hiring qualified employees, (ii) uses its judgment to select the employees and establish their price, and (iii) bears the risk for services that are not fully paid by the customers. Pursuant to the guidance of ASC 605, the Company recognizes revenue when an arrangement exists, services have been rendered, the purchase price is fixed or determinable and collectability is reasonable assured.

Control Solutions International Inc.: The Company recognizes revenues primarily on a time and materials basis as the services are performed and amounts are earned. The Company considers amounts to be earned once evidence of an arrangement has been obtained, services are rendered, fees are fixed or determinable, and collectability is reasonably assured.

Staffing 360 Solutions (UK) Limited: The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.  The Company recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

Poolia (UK) Limited: The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.  The Company recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

PeopleSERVE, Inc. and PeopleSERVE PRS, Inc.: The Company recognizes revenues from the sale of staffing services as the services are performed, along with related labor costs and payroll taxes. The Company recognizes revenue for permanent employee placements when contractual contingencies, generally the passage of time, are satisfied. The Company’s revenue recognition policies comply with ASC 605, “Revenue Recognition.” The Company is the primary obligor in its transactions, and has responsibility for fulfillment, including the acceptability of services ordered and purchased by customers. In addition, the Company has all credit risk, retains substantially all risk and rewards of the services rendered, has sole discretion in staffing engagements and sets the billing rates of its consultants. Accordingly, the Company records all transactions at the gross revenue amount billed, consistent with the provisions of ASC 605. Typically, contracts require clients to pay for out-of-pocket expenses, principally travel related expenses. Accordingly, revenue includes amounts billed for these costs and the cost of revenue includes the corresponding actual costs. The Company provides certain customers a 5.0% discount on certain contracts if paid within 30 days of the invoice date. Accounts receivable result from services provided to clients. The Company carries its accounts receivable at net realizable value. At the closing of the Company’s fiscal period, a portion of receivables may not be invoiced. These unbilled receivables are typically billed within thirty days of the close of the fiscal period.

Stock-Based Compensation

The Company accounts for stock-based instruments issued to employees in accordance with ASC Topic 718. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. The Company accounts for non-employee share-based awards in accordance with ASC Topic 505-50.

Earnings (Loss) per Common Share

The Company utilizes the guidance per FASB Codification “ASC 260 "Earnings per Share."  Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common shares and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the conversion of convertible notes and the exercise of stock options and warrants (calculated using the modified-treasury stock method).  Such securities, shown below, presented on a common share equivalent basis and outstanding as of May 31, 2014 and 2013 have been excluded from the per share computations, since its inclusion would be anti-dilutive:

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed on the straight-line method. The depreciation and amortization methods are designed to amortize the cost of the assets over their estimated useful lives, in years, of the respective assets as follows:

Amortization of leasehold improvements is computed using the straight-line method over the shorter of the life of the lease or the estimated useful life of the assets. Maintenance and repairs are charged to expense as incurred. Improvements of a major nature are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in income.

Impairment of Long-Lived Assets

In accordance with ASC 360 “Property, Plant, and Equipment,” we periodically review our long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.  We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset.  The amount of impairment is measured as the difference between the estimated fair value and the book value of the underlying asset.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350-30-35-4 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. During fiscal years 2014 and 2013, the Company impaired $2,700,255 and $0, respectively, of goodwill associated with the Cyber 360 and Control Solutions, Inc. acquisitions.

Intangible Assets

In connection with the acquisition of TRG (See Note 13), the Company identified and recognized an intangible asset of $1,054,801 representing trade name, customer relationships and employment agreements/non-competes. The assets are being amortized on the straight line basis over their estimated life of four (4) years, other than the trade name which is amortized over fifteen (15) years. TRG customer relationships were valued based on the discounted cash flow method applied to projected future cash flows as estimated by Company management. This method results in the sum of the future net cash flows discounted to its present day value. The valuation provided for the trade name, customer relationships and employment agreements/non-competes is based on independent professional valuation services’ calculations. The intangible asset balance, net of accumulated amortization, at May 31, 2014 was $823,567. An impairment was necessary as of May 31, 2014. The Company fully impaired trade name, customer relationships and employment agreements/non-competes valued at $823,567, resulting in a net intangible asset balance of $0 at May 31, 2014.

In connection with the acquisition of CSI (See Note 13), the Company identified and recognized an intangible asset of $912,000 representing trade name, customer relationships and employment agreements/non-competes. The assets are being amortized on the straight line basis over their estimated life of four (4) years, other than the trade name which is amortized over fifteen (15) years. CSI customer relationships were valued based on the discounted cash flow method. This method results in the sum of the future net cash flows discounted to its present day value. The valuation provided for the trade name, customer relationships and employment agreements/non-competes is based on independent professional valuation services’ calculations. The intangible asset balance, net of accumulated amortization, at May 31, 2014 was $804,346. An impairment was necessary as of May 31, 2014. The Company impaired trade name, customer relationships and employment agreements/non-competes valued at $10,025. At May 31, 2014, the intangible asset balance, net of accumulated amortization and after impairment of $10,025, is $794,321. 

In connection with the acquisition of Staffing 360 Solutions (UK) (See Note 13), the Company identified and recognized an intangible asset of $10,050,000 representing trade name, customer relationships and employment agreements/non-competes. The assets are being amortized on the straight line basis over their estimated life of four (4) years, other than the trade name which is amortized over fifteen (15) years. Staffing UK customer relationships were valued based on an estimate of the discounted cash flow method applied to projected future cash flows. This method results in the sum of the future net cash flows discounted to its present day value. The valuation provided for the trade name, customer relationships and employment agreements/non-competes is based on independent professional valuation services’ calculations. The intangible asset balance, net of accumulated amortization, at May 31, 2014 is $9,337,785. In addition, the Company recognized intangible assets of $261,465 upon acquisition of Staffing 360 Solutions (UK). In total the intangible assets balance, net of accumulated amortization, at May 31, 2014 is $9,599,250.

In connection with the acquisition of Poolia UK (See Note 13), the Company identified and recognized an intangible asset of $465,321 representing customer relationships and employment agreements/non-competes. The assets are being amortized on a straight line basis over the estimated life of four years. Poolia UK customer relationships were valued based on an estimate of the discounted cash flow method. This method results in the sum of the future net cash flows discounted to its present day value. The valuation provided for the trade name, customer relationships and employment agreements/non-competes is based on independent professional valuation services’ calculations. The intangible asset balance, net of accumulated amortization, at May 31, 2014 is $436,238.

In connection with the acquisition of PeopleSERVE, Inc. and PeopleSERVE PRS, Inc. (See Note 13), the Company identified and recognized an intangible asset of $2,999,100 representing trade name, customer relationships and employment agreements/non-competes. The assets are being amortized on the straight line basis over their estimated life of four (4) years, other than the trade name which is amortized over fifteen (15) years. PS customer relationships were valued using the discounted replacement cost approach. This method is based on acquisition costs invested to attract each customer and relied on actual selling costs incurred and allocated to new customer generation over the preceding four years. The valuation provided for the trade name, customer relationships and employment agreements/non-competes is based on independent professional valuation services’ calculations. The intangible asset balance, net of accumulated amortization, at May 31, 2014 is $2,973,497.

Reclassifications

Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.

Forward Stock Split

The Company effected a one-for-three forward stock split on April 13, 2013. Following the forward split, the Company’s issued and outstanding shares of Common Stock increased from 2,540,000 to 7,620,000. All share and per share information has been retroactively adjusted to reflect this forward stock split.

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board ("FASB") issued new authoritative guidance related to share-based payments where performance targets can be achieved subsequent to the requisite service period. The guidance, effective in fiscal year ended 2015, is not expected to have a material impact on its results of operations, financial position or cash flows.

In May 2014, the FASB issued new authoritative guidance related to revenue recognition. This guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance allows for two methods of adoption: (a) full retrospective adoption, meaning the guidance is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying this guidance is recognized as an adjustment to the accumulated deficit balance. The Company is evaluating the two (2) adoption methods as well as the impact this new guidance will have on the consolidated financial statements and related disclosures and will be effective in the Company’s fiscal year ended 2018.

In April 2014, the FASB issued authoritative guidance, which specifies that only disposals, such as a disposal of a major line of business, representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements, absent any disposition representing a strategic shift in the Company's operations.

In July 2013, the FASB issued authoritative guidance that requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.

In March 2013, FASB issued authoritative guidance that resolves the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This guidance will be effective for the Company beginning in the first quarter of fiscal 2015. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements, absent any material transactions involving derecognition of subsidiaries or groups of assets within a foreign entity.  

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Depreciation and amortization expense for the years ended May 31, 2014 and 2013 was $113,827 and $1,924, respectively.

NOTE 5 - CONVERTIBLE NOTES PAYABLE

Convertible notes consist of the following as of:

NOTE 6 – PROMISSORY NOTES

Promissory notes – short-term consisted of the following:

Promissory notes –long-term consisted of the following:

Short-term promissory notes: Pursuant to the promissory note agreements dated September 27, 2013, October 18, 2013 and October 28, 2013, the Company issued notes in the amount of $40,000, $200,000 and $100,000, respectively. The promissory notes bear interest at the rate of twelve percent (12%) per annum and were due at the earlier of the completion of the Company’s $1.5 million bridge financing or 90 days from the date of the note. As additional consideration, the note holders received an aggregate of 25,000 shares of Common Stock for each $100,000 invested or a prorated portion thereof. The Company issued 85,000 common shares. As a result of the share issuance, the Company recorded a debt discount of $61,026 and amortization of $61,026. On November 12, 2013 and November 19, 2013, the Company re-paid $300,000 in principal and $3,189 in interest. On March 21, 2014, the Company repaid $40,000 in principal and $1,933 in interest. As of May 31, 2014, all principal and interest has been paid. For the years ended May 31, 2014 and 2013, interest expense related to the promissory notes amounted to $5,122 and $0, respectively.

Promissory notes - Staffing 360 Solutions (UK): Pursuant to the purchase of Staffing 360 Solutions (UK), the Company executed and delivered to the Staffing 360 Solutions (UK) shareholders a three (3) year promissory note (the “Initio Promissory Notes”) in the aggregate principal amount of $3,964,949 to the shareholders of Staffing 360 Solutions (UK). Each Initio Promissory Note bears interest at the rate of six (6%) percent per annum and is amortizes over a five (5) year, straight line basis. As of May 31, 2014, the Company has repaid $348,106 in principal. The remaining principal balance outstanding is $3,616,843. At May 31, 2014, the current portion of the outstanding balance is $789,136 with the remaining $2,827,738 recorded as promissory notes - long-term. For the years ended May 31, 2016 and 2017, the Company’s future payments towards the long-term portion of the promissory note consists of $789,136 and $2,038,602 respectively. During the year ended May 31, 2014, the Company recorded $91,645 of interest expense of which $83,329 has been paid.

Brendan Flood, the Company’s Executive Chairman was a shareholder of Staffing 360 Solutions (UK), and was issued a three (3) year promissory note. Mr. Flood’s portion of the $3,964,949 aggregate principal amount totaled $2,064,880. Mr. Flood has been paid $172,073 in principal and $43,466 in interest through May 31, 2014. As of May 31, 2014, the balance due to Mr. Flood amounted to $1,892,807 and $4,978 in principal and interest, respectively.

In addition, Matt Briand, the Company’s Chief Executive Officer was a shareholder of Staffing 360 Solutions (UK), was issued a three (3) year promissory note. Mr. Briand’s portion of the $3,964,949 aggregate principal amount totaled $1,115,144. Mr. Briand has been paid $92,929 in principal and $23,474 in interest through May 31, 2014. As of May 31, 2014, the balance due to Mr. Briand amounted to $1,022,215 and $2,688 in principal and interest, respectively.

Promissory note - PeopleSERVE: Pursuant to the purchase of PeopleSERVE, the Company executed and delivered to the PeopleSERVE shareholder a three (3) year promissory note (the “PS Promissory Note”) in the aggregate principal amount of $2,367,466 to the shareholder of PeopleSERVE, Linda Moraski. Ms. Moraski is current serving as President and Chief Executive of PeopleSERVE. The PS Promissory Note bears interest at the rate of six (6%) percent per annum and is amortized over a five year straight line basis. As of May 31, 2014, the Company has repaid $0 in principal and interest. The remaining principal balance outstanding is $2,367,466. At May 31, 2014, the current portion of the outstanding balance is $789,155 with the remaining $1,578,311 recorded as promissory notes - long-term. For the years ended May 31, 2016 and 2017, the Company’s future payments towards the long-term portion of the promissory note consists of $789,155 and $789,155 respectively. 

For the years ended May 31, 2014 and 2013, the Company’s interest expense for long-term notes amounted to $97,093 ($91,645 from the Initio Promissory Notes and $5,448 from the PS Promissory Note) and $0, respectively. As of May 31, 2014 and 2013, accrued and unpaid interest under the long-term notes amounted to $13,764 ($8,316 from the Initio Promissory Notes and $5,448 from PS Promissory Note) and $0, respectively, and are included in accrued expenses on the accompanying consolidated balance sheets.

NOTE 7 – BONDS – SERIES A

Bonds – Series A consisted of the following:

From April 17, 2014 through May 31, 2014, the Company completed multiple closings of its best efforts private offering (the “Bond Financing”) of twelve percent (12%) Convertible Bonds (the “Convertible Bonds”) with certain accredited investors (the “Bond Purchasers”). Pursuant to purchase agreements with each of the Bond Purchasers (the “Bond Agreements”), the Company issued Convertible Bonds for an aggregate of $2,998,500. On or prior to the maturity date, October 15, 2014, of each of the Convertible Bonds, the Bond Purchasers must notify the Company whether the payment for the Convertible Bond will be made in cash or as payment-in-kind in comparably valued Common Stock of the Company. The Bond Purchasers may elect to convert the Convertible Bonds, including all unpaid coupon payments, at any time prior to the maturity date, into restricted shares of Common Stock of the Company, at a conversion price of $1.50 per share.

Each Bond Purchaser received equity consideration at a rate of 5,000 restricted shares of the Company’s Common Stock for each $50,000 investment. Accordingly, the Company issued an aggregate of 299,850 shares of its Common Stock to the Bond Purchasers.  As a result of the 299,850 restricted shares issued, the Company recorded a debt discount of $488,176 and amortization of $97,364. The Company also recorded a beneficial conversion of $1,379,997 and amortization of $271,970. At May 31, 2014, the principal amount outstanding remains $2,998,500. Net of the remaining debt discount and beneficial conversion of $369,334, the remaining loan balance is $1,499,660.

For the years ended May 31, 2014 and 2013, interest expense related to the Bond Financing amounted to $33,980 and $0, respectively. As of May 31, 2014 and 2013, accrued interest under the Bond Financing amounted to $33,980 and $0, respectively, and are included in accrued expenses on the accompanying consolidated balance sheets.

As the retained placement agent, Accelerated Capital Group, Inc., the Company agreed to pay: (i) a fee in cash up to an amount equal to ten percent (10%) of the aggregate gross proceeds raised by such brokers, (ii) a non-accountable expense allowance of up to two percent (2%) of the aggregate gross proceeds raised by such broke, and (iii) shares of Common Stock equal to an amount up to ten percent (10%) of the aggregate number of shares of Common Stock issued in connection with funds raised by the broker. As of the final closing, the Company paid the placement agent an aggregate cash amount of $142,825 and issued an aggregate of 29,985 shares of Common Stock valued at $57,271. As a result, the Company recorded deferred finance cost totaling $200,096 and accumulated amortization totaling $16,115.

NOTE 8 - RELATED PARTY TRANSACTIONS

Director and Related Parties Consulting Fees

During the years ended May 31, 2014 and 2013, the Company incurred $60,000 and $90,895, respectively in consulting fees to Trilogy Capital Partners, Inc., which has been included in director and related parties consulting fees on the accompanying consolidated statements of operations. The Company’s Vice Chairman and President, Alfonso J. Cervantes, is the majority owner of Trilogy. At May 31, 2014, the Company has $7,500 recorded on the balance sheet in the Accounts Payable and Accrued Expenses – Related Parties account.

During the years ended May 31, 2014 and 2013, the Company incurred $105,000 and $121,000, respectively in consulting fees to Robert Y. Lee, which has been included in director and related parties consulting fees on the accompanying consolidated statements of operations. This contract was mutually discontinued on December 31, 2013.

During the years ended May 31, 2014 and 2013, the Company incurred $155,000 and $113,750, respectively in consulting fees to Grandview Capital Partners, Inc., which has been included in director and related parties consulting fees on the accompanying consolidated statements of operations. At May 31, 2014, the Company has $50,000 recorded on the balance sheet in the Accounts Payable and Accrued Expenses – Related Parties account.

During the years ended May 31, 2014 and 2013, the Company incurred $0 and $38,750, respectively in accounting fees to Chord Advisors, Inc. David Horin, the former Chief Financial Officer of Staffing 360 Solutions, Inc., is the President of Chord Advisors, LLC. Additionally, on December 2, 2013, the Company converted an accounts payable balance of $27,500 balance into 27,500 shares of Common Stock, valued at $24,063, as full satisfaction of the outstanding fees. Mr. Horin resigned as Chief Financial Officer on April 15, 2013. 

During the years ended May 31, 2014 and 2013, the Company incurred $0 and $50,000, respectively in consulting fees to Richard M. Cohen. Mr. Cohen is the Chairman of Chord Advisors, LLC. Additionally, on November 14, 2013, the Company converted an existing $60,000 payable balance into 60,000 shares of Common Stock, valued at $52,500, as full satisfaction of the outstanding fees.

For the years ended May 31, 2014 and 2013, the Company incurred $30,000 and $22,500, respectively in Board of Director fees to Dimitri Villard. Additionally, the Company paid $10,000 in advisory fees to Mr. Villard from January 1, 2014 through April 30, 2014. In May 2014, Mr. Villard was named the Chairman of the Corporate Governance and Nominating Committee. Through May 31, 2014, the Company incurred $1,667 in fees associated with Mr. Villard’s role as Chairman of the Corporate Governance and Nominating Committee. All such fees have been included in director and related parties consulting fees on the accompanying consolidated statements of operations. At May 31, 2014, the Company has $14,167 recorded on the balance sheet in the Accounts Payable and Accrued Expenses – Related Parties account.

For the years ended May 31, 2014 and 2013, the Company incurred $30,000 and $0, respectively in Board of Director fees to Robert Mayer. Additionally, the Company paid $10,000 in advisory fees to Mr. Mayer from January 1, 2014 through April 30, 2014. All such fees have been included in director and related parties consulting fees on the accompanying consolidated statements of operations. At May 31, 2014, the Company has recorded an overpayment of $10,000 in accounts payable – related parties. The overpayment will be applied against future director fees.

For the years ended May 31, 2014 and 2013, the Company incurred $10,000 and $0, respectively in Board of Director fees to Jeff Grout. In February 2014, Mr. Grout was named the Chairman of the Compensation Committee. Through May 31, 2014, the Company incurred $6,667 in fees associated with Mr. Grout’s role as Chairman of the Compensation Committee. All such fees have been included in director and related parties consulting fees on the accompanying consolidated statements of operations.

For the years ended May 31, 2014 and 2013, the Company incurred $1,250 and $0, respectively in Board of Director fees to Nick Florio. In May 2014, Mr. Florio was named the Chairman of the Audit Committee. Through May 31, 2014, the Company incurred $833 in fees associated with Mr. Florio’s role as Chairman of the Audit Committee. All such fees have been included in director and related parties consulting fees on the accompanying consolidated statements of operations. At May 31, 2014, the Company has recorded $2,083 on the balance sheet in the Accounts Payable and Accrued Expenses – Related Parties account.

From time to time, TRIG Special Purpose 1, LLC, which is beneficially owned by the Company’s Vice Chairman and President Alfonso J. Cervantes, the Company’s former principal financial officer and director, Peter Goldstein, and Robert Y. Lee, a shareholder of the Company provided working capital advances to the Company. During the years ended May 31, 2014 and 2013, TRIG Special Purpose 1, LLC advanced the Company $12,000 and $33,000, respectively for working capital purposes. As of May 31, 2014, the Company recorded a current liability of $27,279 on the accompanying consolidated balance sheets. These advances are short-term in nature and non-interest bearing.

NOTE 9 – ACCOUNTS RECEIVABLE FINANCING

In May 2013 and November 2013, respectively, Staffing 360 Group, Inc. d/b/a Cyber 360 Solutions and Control Solutions International, Inc., both wholly owned subsidiaries of the Company, entered into financing services agreements by which they assign accounts receivable to fund working capital with Sterling National Bank (“Sterling”). Pursuant to these agreements, Sterling may advance up to 90% of the face value of eligible accounts receivable.  The borrowings carry interest at a rate of .025% per day, or 9% per annum, from the date of the advance until the date of repayment.  There is no ending date to the agreement, only a closing fee of $500 upon termination.

In February 2014, Staffing 360 Solutions (UK) Limited, a wholly owned subsidiary of the Company, entered into an agreement with ABN AMRO Commercial Finance PLC under which it borrows money against open accounts receivable. Under this agreement, the Borrower receives advances of up to 90% on temporary placements and 75% on permanent placements of the face value of eligible receivables.  The borrowings carry interest at a rate of 2.50% above the Sterling Libor rate (3.90%).  The maximum loan amount is 200,000 Pounds Sterling with an Aggregate Limit of 1,250,000 Pounds Sterling. The agreement terminates on its second anniversary.

Effective November 1, 2012, the Company’s subsidiary, Monroe Staffing, a subsidiary of Staffing (UK), entered into a $14,000,000 line of credit (“Credit and Security Agreement”) with Wells Fargo Bank, NA. The Credit and Security Agreement is subject to accounts receivable limitations and bears interest at Libor plus 5% (5.15% as of May 31, 2014) on the greater of $5,000,000 or the actual loan balance outstanding, and expires on October 31, 2015. The Credit and Security Agreement is subject to an annual facility fee, certain covenants and is secured by all of the assets of Monroe Staffing. The covenants are as follows:

In March 2014, the Company obtained a one-time waiver relating to the above covenants, specifically as it relates to the failure to maintain a working capital ratio of 1:1 and positive cash flow for the quarterly period ended December 2013.

Effective July 25, 2014, the Company joined with its subsidiaries, Monroe Staffing Services, LLC, PeopleSERVE, Inc. and PeopleSERVE PRS, Inc., (collectively referred to as “Borrowers”) in an Amended and Restated Credit and Security Agreement and a new Credit and Security Agreement (“Credit Facility”) with Wells Fargo Bank, NA. This Credit Facility increased the line of credit amount from $14,000,000 to $15,000,000 and modified the covenant to permit, with certain limitations, the transfer of funds amongst the Borrowers. All of terms and conditions remain unchanged.

At May 31, 2014, $11,260,207 was recorded as a liability relating to the Accounts Receivable Financing account.

NOTE 10 – STOCKHOLDERS’ EQUITY

Common Stock

On May 7, 2013, the Company increased the number of shares of Common Stock from 75,000,000 shares to 200,000,000 shares and authorized the creation of 20,000,000 shares of blank check preferred stock, par value $0.00001 per share with such designations, rights and preferences as may be determined from time to time by the Board.

As of May 31, 2014 and 2013, the Company has issued and outstanding 32,950,537 and 12,288,138 shares of Common Stock, respectively.

The issuance of Common Stock during the year ended May 31, 2013 is summarized in the table below:

The issuance of Common Stock during the year ended May 31, 2014 is summarized in the table below: