July 30, 2014 09:00 ET

Labor SMART, Inc. Sends Letter to Shareholders

Company Announces Conference Call on August 14, 2014

HIRAM, GA--(Marketwired - Jul 30, 2014) -  Labor SMART, Inc. (OTCQB: LTNC) (the "Company"), a leader in providing on-demand blue collar staffing primarily in the southeastern United States, today issued the following letter to shareholders:

Dear Fellow Shareholder,

It's certainly been a very exciting first half of 2014. We are on track to post a record year for Labor SMART.

There has been so much accomplished and the outlook continues to be so strong that I felt it important to correspond with you directly and highlight our accomplishments as well as provide an outlook for the remainder of the year.

Briefly, our highlights:

  • Most significant is the most recent -- we are now self-insured in 14 states. This is a key part of our growth strategy as it has the potential to improve our cash flow and lower our cost of sales. Already this has had an immediate positive effect on our gross profit margins.
  • Record revenues continue to be achieved on a monthly basis. In June alone we recorded $2,209,702. Furthermore at those branches that have been open for a year or more, revenue increased by 23 percent, year-over-year.
  • Expansion has been strong. We doubled our footprint from 15 offices to 30 in the first six months of 2014. This expansion has been geographic as well with an entry into the Western US with new offices in Denver and Texas as well as our recent acquisition in Oklahoma.
  • Our gross margins are increasing monthly -- this is a stated goal of the company to continue to improve our gross margins. As noted above, the recent self-insurance will contribute substantially to achieving this goal sooner than we originally planned.
  • Our client base continues to increase and we are seeing repeat business on a regular basis. This repeat business is a strong endorsement of both your company and the workers we supply to these businesses. As our footprint has expanded, so has the number of clients we service across multiple cities. We continue to diversify our client roster to include non-seasonal types of customers, such as those in the hospitality industry.
  • The addition of Jay Reynolds to our team as Director of Business Development. Jay brings a strong background and is leading our sales team as we enhance our sales culture and continue to execute our business plan.
  • We negotiated better terms with Transfac Capital on funding against our accounts receivable to 85% from the 70% earlier level. This improvement is as a result of the strengthening of our business position.

These are significant achievements in the first half of 2014, which as you will recall, started off with three months of very slow economic growth due to weather-related issues nationwide. At Labor SMART we were an anomaly as we achieved record revenues during all three of these months - something that we had not anticipated and which frankly was a very pleasant surprise for us. This unusual weather did however cause a slow start to our expansion season for 2014.

Now, the challenges ahead....and we are confident that we can meet them head on and surmount them.

  • The growth of the company -- while growth is extremely important to provide additional revenue, it is also costly and time consuming to bring new branch offices on board. It can take six to nine months for a new branch to reach a profitable sales level and 12-18 months for a new branch to produce the long term revenue level we expect, which is at a run rate of $1.5 million annually per office. 
  • Our convertible debt is a challenge. We have taken steps to secure this in small tranches so that no one individual or entity can force conversion. We continue to pay the overwhelming majority of this debt with cash, thereby keeping dilution to a minimum. Since inception, we have strived to take advantage of every resource available to us to grow as quickly as necessary to reach critical mass, which I believe has been achieved. While convertible debt is not ideal, it has provided us the quick capital that was needed to grow from startup to 30 branch offices in 2 years. With less than $3 million in paid in capital, we have built a business that should generate millions in profits in the years to come. Now, it is time to remove this debt from the balance sheet and graduate to more traditional funding for future growth. Therefore, we are aggressively exploring our options to achieve this in the best manner possible for the company and its shareholders.
  • Acquisitions. Our business is highly fragmented. We intend to continue to acquire other offices. We have very specific criteria however, and the most important is that the work culture be similar to our existing commitment to customers. There are many potential targets that we are considering at the present time.
  • General economic conditions -- as the economy continues to gain strength our customer mix may continue to change -- we believe it will grow as construction picks up and large companies bring manufacturing back to the US -- with a significant presence in our strong area of the country -- the Southeastern US. This is both a challenge as well as an opportunity in that the worker pool may become smaller, yet the potential for business grows. We believe we are equipped and nimble enough to deal with this challenge/opportunity should it arise.

I'd like to expand a little on what I consider major fundamental changes to our organization, but first I need to provide some background. Our operating plan, growth strategy, and even revenue projections since inception, were drafted and prepared long before Labor SMART began its rapid growth. In fact, in early 2011 my original "Waffle House napkin" projection for revenue in 2012 was only $4 million. We actually came in at $7.1million. The 2013 projection was only $12 million. We produced over $16.6 million. I prepared these projections based on a combination of expected scenarios, obstacles, opportunities, and challenges. Each year, the world class Labor SMART team has delivered above and beyond my expectations.

One of the critical components of the five year plan launched in 2012 was to quickly scale our business to a size that would be big enough to secure a large deductible insurance policy for worker's compensation, and this would need to be achieved no later than 2016. Being substantially self-insured puts us in the driver's seat for one of our largest expense items. I anticipated us being able to achieve this goal sometime in 2015. Yet again, the Labor SMART team delivered beyond my expectations when we bound a large deductible policy on June 14, 2014, a full year ahead of schedule.

And here we are. One of the driving necessities behind our rapid organic expansion (getting big enough to be self-insured), has been secured. For Labor SMART, rapid organic expansion is no longer a requirement to meet our future goals, and for the first time since inception, goals that we set years ago need to be adjusted to reflect the better than expected reality we in which we now operate.

While we intend to continue and even hasten our growth, some course adjustments need to be made that will help us concentrate on achieving overall profitability while growing at the same time.

First, with our new self-insurance, we needed to "clean out" any book of business that didn't fit squarely in our model and that task has been completed as of last week. Compared to 2013, we have shed approximately $320,000 average monthly revenue in low margin, higher risk business. These adjustments to our business mix will have a minor negative impact on 2014 revenue and a very positive impact on 2014 gross profit margins. Additionally and more importantly, we have reduced our risk exposure from a safety and credit perspective and will continue to take a risk averse position in regards to safety. The effects of shedding this business requires a reduction of 2014 revenue projections from $30 million to $25-27 million but at the same time an increase in our 2014 gross margin projections from our original goal of reaching 22% gross margin by Q4 to our new goal of 23.5% gross margin for the entire year and reaching 25% in Q4 2014.

Second, we need to evaluate the most effective way to continue rapid revenue growth, while showing profitability. Expanding organically takes a dramatic toll on our profitability, as costs are expensed and cannot be amortized over time. Now that our organization has reached a sizeable scale, it is my belief that we must take advantage of our scale, our world class infrastructure and our lowered workers compensation costs to grow the company even faster, but more through acquisitions than organic growth. Therefore, we are adjusting our growth strategy for 2015 to reflect a much higher appetite for acquisitions.

Historically, we have been able to execute acquisitions at a multiple of 1-2 times EBITDA. I expect to expand this range up to as much as 4 times EBITDA, which is still extremely below public valuation and very accretive to Labor SMART earnings. The acquisitions we have completed were structured in such a way that allows for up to a 100% return on cash within 24 months and all have been purchased with cash plus seller notes, with no Labor SMART stock being issued. I believe this is a sound acquisition model than can be replicated. Labor SMART has an experienced management team that can quickly and efficiently integrate $20-40 million in acquisitions next year.

As I said at the beginning, 2014 so far has been a banner year for your company and all signs point to that continuing in the remaining months.

With all of this good news and opportunity, I know that many of you are very concerned about the share price of the company. Obviously, I share that concern as the single largest shareholder. We believe the current share price certainly does not reflect either the value of the company at its present time or the potential that we see on the horizon. While we are just as disappointed in the current level of our share price, we believe that as we perform and continue to build this business the share price will reflect that value and provide superior returns to early investors in our young company. One important point to remember is that we still are an emerging growth company and not yet able to uplist to a major exchange and as a result, our shares can oftentimes be traded in ways that have absolutely nothing to do with our underlying business. The key focus remains growing the business -- and as the business grows that will become reflected in the value of the company as seen in its market cap.

Very shortly we will file our 10Q for the second quarter and six month period ending June 27, 2014. On August 14 at 10AM Eastern Time, we will hold a conference call to review our second quarter results as well as the content of this letter and provide updates to our business plan. The call information is below:

Conference ID: 82219278
Participants' toll-free dial-in number (U.S. and Canada): (855) 582-8078

I invite all shareholders to attend. There will be a time allotted for Q&A and I look forward to speaking with you.

We tell our story to new investors and will continue to do so in the future. If you have any questions please feel free to contact either Bev Jedynak at 312-943-1123 ( or Jim Janis, 312-882-9535 ( of Martin E. Janis & Company, Inc., our public relations/investor relations firm.

Please know that all of us at Labor SMART, in whatever role we play, are committed to becoming THE leader in the blue-collar, on-demand staffing industry and with your support, we can continue in this endeavor.

Thank you,

C. Ryan Schadel
President & CEO

Safe Harbor Statement

This letter and the accompanying release contain statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements appear in a number of places in this release and include all statements that are not statements of historical fact regarding the intent, belief or current expectations of Labor SMART, Inc., its directors or its officers with respect to, among other things: (i) financing plans; (ii) trends affecting its financial condition or results of operations; (iii) growth strategy and operating strategy. The words "may", "would", "will", "expect", "estimate", "can", "believe", "potential", and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond Labor SMART, Inc.'s ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. More information about the potential factors that could affect the business and financial results is and will be included in Labor SMART, Inc.'s filings with the U.S. Securities and Exchange Commission.

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