Labor Smart Inc (LTNC)

[DD2Gain]

Repeated fallacies about LTNC that need clearing up

1. The 2014 IRS agreement first reported in the 2014 1Q10Q includes no penalties

Frankly, this is plain ignorant especially considering LaborSMART was charged hefty penalties for being late with far less payroll taxes for 2012. Though late for 2012, LaborSMART managed to pay quickly enough to receive a PARTIAL refund of penalties and interest in 2014. That refund was applied toward a SECOND instance of being late for $1.012 million in 2013 payroll taxes that required a fully structured payment arrangement with the IRS. As anyone with any knowledge of how the IRS works, the second time around with being delinquent is not received kindly in the slightest, but a payment arrangement was achieved all the same. Since the amount delinquent is over $50,000 the IRS typically structures payments over a period of 10 years as that is the statute of limitations for collection action. If Labor SMART is late even once with the payment arrangement, then the IRS initiates seizure of assets as expedited through the placement of a lien on assets THAT IS CURRENTLY IN PLACE against LTNC to secure the delinquent principle of a little over $1 million in payroll taxes. Additionally, the payment structure and principle owed as first outlined in the 2014 2Q10Q (principle not previously reported) clearly shows that $1,690,000 will be required to be paid back over the full life of the agreement. A little further math shows that there are most certainly steep penalties for habitually playing games with the IRS as anyone with any sense would expect when we consider that just simple 4% interest over 10 years with no payments toward principle would total only $420,000 leaving AT LEAST $270,000 in penalties.

2. The IRS lien is subordinate to other loans

This is a laughable claim. Subordination of an IRS lien is done on a case-by-case basis...RARELY. In order for the IRS to approve subordination it must be demonstrated that subordination to any particular loan will improve the likelihood of recovery of a delinquency. For example: an aspiring home buyer might be able to subordinate an IRS lien to a NEW MORTGAGE if the buyer can demonstrate that the monthly mortgage payments would be less than rent thereby increasing monthly capital that can be applied toward the IRS agreement. In the case of LaborSMART, there were no loans that would be in consideration of subordination. There is a factor financing agreement, but it was already in place and it was(is) immaterial to LaborSMART's ability to make monthly payments when the lien was placed. Per every public record, there is no subordination of the IRS lien.

3. There is a "floor" of .15 on a $1.15 million convertible note

Again, this is ignorance of the nature of toxic financing which is the ONLY financing Schadel has been able to achieve beyond factor financing. There is not a single note with LaborSMART with a conversion "floor". The one in question is with Redwood (Aug 20th Form 8-K) which states:

The Debentures bear interest at the rate of 11% per year (half of which is guaranteed, and in addition to the original issue discount) and are convertible into common stock at a conversion price of $0.15 per share (subject to adjustment in the event of stock splits, stock dividends, and similar transactions, and in the event of subsequent sales of common stock at a lower purchase price (subject to certain exceptions), and provided that, in the event the Company fails to make amortization payments on February 18, 2015 and March 1, 2015, each for 50% of the original principal amount of the Debentures, the conversion price will be adjusted to a variable price equal to the lower of $0.15 or 60% of the lowest volume weighted average price of the common stock for the 20 prior trading days). The Debentures mature one year from the date of issuance. The Company may make payments on the Debentures in cash (in which event the Company will pay a 30% premium) or, subject to certain conditions, in shares of common stock valued at 60% of the lowest volume weighted average price of the common stock for the 20 prior trading days.

Which is a lot of legal jargon that can be simplified to:

The Debentures bear interest at the rate of 11% per year (half of which is guaranteed)...convertible into common stock at a conversion price of $0.15 per share...subject to...subsequent sales of common stock at a lower purchase price. The Company may make payments...in shares of common stock valued at 60% of the lowest volume weighted average price of the common stock for the 20 prior trading days.

Furthermore, if the associated tranche agreements are read in the 2014 3Q10Q we clearly see that there is no mention whatsoever of .15 anything and we again see a 130% repayment rate if PAID ON TIME PLUS 5.5-11% INTEREST!!!

4. The company is transparent and the CEO is open with investors.

In a certain sense, the first part is correct. The filings and PRs all provide enough information to understand the operational health of this company IF you take the time to do the math beyond the given numbers. With branches projected to average less than $800,000 in annual revenue in 2014 though in both 2012 and 2013 branches averaged over $1 million each we can clearly see that while the numbers are given, it's not the whole story since that decline in averaged revenue isn't ever addressed or mentioned.

As for the CEO, the delinquent taxes are enough to demonstrate he has limited interest in being forthright. The $1 million in delinquent payroll taxes were for 2013, the IRS lien was placed in January, and the payment agreement was finalized in March. The 2013 10K made no mention of late taxes despite including subsequent events through April, the payment arrangement for a delinquency wasn't revealed until the 1Q, and the $1 million delinquent principle wasn't revealed until the 2Q...IN AUGUST!!!


This is a deeply troubled company with millions of dollars in losses that is solely dependent on millions of dollars in toxic financing to operate in an industry with very little overhead. Is it an OTC scam? That's for each investor to determine on his or her own.