THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH
RULE 144 UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
OR AN OPINION OF COUNSEL SATISFACTORY TO MAKER THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION.

 

UNSECURED PROMISSORY NOTE

 

Issuance Date: May 17, 2014, 11:59 P.M.

Principal Amount: $2,367,466

 

For value received, Staffing 360 Solutions, Inc., a Nevada corporation
(“Maker”), promises to pay to Linda Moraski (“Payee”) the principal sum of
$2,367,466, together with interest accrued but unpaid thereon, at the rate and
on the terms set forth below in this promissory note (this “Note”). The date of
this Note is as of 11:59 P.M. on May 17, 2014 (the “Issuance Date”). This Note
is being issued in connection with that certain Stock Purchase Agreement, dated
as of 11:59 p.m. on May 17, 2014 (the “Purchase Agreement”), by and among Payee,
PeopleSERVE, Inc. a Massachusetts corporation, PeopleSERVE PRS, Inc., a
Massachusetts corporation, and Maker. All capitalized terms used but not defined
herein shall have the meanings ascribed to such terms in the Purchase Agreement.
The principal amount of this Note, and the dollar amount of the Monthly
Installments (as defined below) may be increased or decreased, as the case may
be, in accordance with Section 2.6 of the Purchase Agreement.

 

1.          Repayment. All payments of interest and principal shall be in lawful
money of the United States of America in immediately available funds, at the
address of Payee on the books of Maker or at such other place, or by wire
transfer of funds to such account of Payee, as Payee may designate in writing to
Maker. Unless this Note is paid or otherwise satisfied in full as set forth
herein, and unless a Suspension of Payment occurs and is continuing and
otherwise subject to Section 3 of this Note, payments of principal shall be made
in monthly installments in the monthly amount of one-thirty-sixth (1/36th) of
the principal due on the Issuance Date (the “Monthly Installment”), and any
remaining principal amount of, and all unpaid accrued interest on, this Note
shall be due and payable on the thirty-six (36) month anniversary of the
Issuance Date (the “Maturity Date”); provided, however, that in the event that a
Suspension of Payment occurs pursuant to Section 3 below, for each month that a
Suspension of Payment is in effect (each, a “Suspension Month”), the Maturity
Date shall be extended after the thirty-six (36) month anniversary for another
month, up to an aggregate total of six (6) months (the Maturity Date after such
six (6) month extension, the “Final Maturity Date”). The Monthly Installments
shall be applied to principal under this Note, but all other payments or deemed
payments, including any offsets under Section 7 hereof, shall be applied first
to any accrued and unpaid interest on principal amounts previously paid, then to
accrued interest on unpaid principal, and thereafter to any remaining unpaid
principal.

 

2.          Interest Rate and Payments; No Security Interest. Interest on the
outstanding principal amount shall accrue daily at a rate equal to six percent
(6%) per annum. Interest will be calculated on the basis of a 365-day year for
the actual number of days elapsed. So long as there is no Suspension of Payment,
interest will accrue from the date hereof until the outstanding principal amount
is paid or otherwise satisfied in full or forfeited pursuant to Section 3. The
Monthly Installment shall be payable on a monthly basis, no later than the
fifteenth (15th) day of such month (a “Payment Date”), and such Monthly
Installments shall begin on the first such Payment Date which shall be begin in
June, 2014. On the Maturity Date (as it may be extended pursuant to Section 1 as
a result of any Suspension of Payment), Maker will pay all remaining principal
hereof and accrued but unpaid interest, subject to Section 3 below. Whenever any
payment or other obligation hereunder shall be due on a day other than a
Business Day, such payment shall be made on the next succeeding Business Day.
This Note is subject to the express condition that at no time shall Maker be
obligated or required to pay interest on the principal balance at a rate which
could subject Maker to Payee to either civil or criminal liability as a result
of being in excess of the maximum rate which Maker is permitted by applicable
law to contract or agree to pay. If by the terms of this Note, Maker is at any
time required or obligated to pay interest on the principal balance at a rate in
excess of such maximum rate, the rate of interest under this Note shall be
deemed to be immediately reduced to such maximum rate and interest payable
hereunder shall be computed at such maximum rate. This Note is an unsecured
promissory note.

 

 

 

 

3.          Suspension of Payments. Notwithstanding any other provisions of this
Note, payments of principal due hereunder shall immediately be suspended and no
interest shall continue to accrue on any unpaid principal amounts (a “Suspension
of Payment”) if the Gross Profit for any trailing twelve (12) full fiscal month
period after the Issuance Date (the “TTM”) is less than eighty percent (80%) of
the Closing Gross Profit (the “Target Gross Profit”); provided, that in the
event that Payee’s employment with PS is terminated (i) by Payee for Good Reason
(as such term is defined in the Employment Agreement, dated as of the date
hereof, by and between Payee and PS (the “PS Employment Agreement”)) or (ii) by
PS without Cause (as such term is defined in the PS Employment Agreement) (other
than due to Payee’s death or disability), the Target Gross Profit for all
periods from and after the effective date of such termination of employment (the
“Termination Date”) shall be equal to sixty (60%) of the Closing Gross Profit .
Payment of principal shall only be reinstated, and accrual of interest on unpaid
principal amounts shall recommence, when the Gross Profit for the TTM equals or
exceeds the Target Gross Profit; provided, however, that no such suspension
shall occur if the shortfall in Gross Profit referred to in the prior clause
directly results from (a) legal or regulatory action by a Governmental Authority
(excluding any action relating to a Government Contract or that is caused by a
default or violation of applicable Law by Payee or either Company or their
respective Subsidiaries) that directly impacts the Companies and/or their
respective Subsidiaries in a materially negative manner or (b) is attributable
to or is decreased directly as a result of any act, omission, transaction or
arrangement carried out by or at the written request of Maker over the
reasonable written objection of Payee. Notwithstanding anything to the contrary
contained in this Note, in the event that there are more than six (6) Suspension
Months in the aggregate (whether or not consecutive) under this Note on or prior
to the Final Maturity Date, then: (i) on the Final Maturity Date, Maker shall
pay to Payee the Monthly Installment due on the Final Maturity Date (unless a
Suspension of Payment has occurred for such month), together with all interest
accrued on the principal amount of this Note paid from the Issuance Date through
and including the Final Maturity Date (but excluding any interest which did not
accrue due to any Suspension of Payment as set forth in the first sentence of
this paragraph); and (ii) all remaining principal of this Note and any accrued
interest attributable to such remaining principle shall be cancelled and
forfeited by Payee and be deemed to be null and void, and no further interest
shall accrue thereon. For purposes hereof: (i) “Gross Profit” shall mean, with
respect to any applicable period, the consolidated Revenues of the Companies and
their respective Subsidiaries, if any, less the consolidated direct Costs of
Services of the Companies and their respective Subsidiaries, calculated in
accordance with GAAP as consistently applied by Maker, and with the Companies
and their Subsidiaries, if any, being consolidated as if they were wholly-owned
by the same stockholder for such calculations; (ii) “Revenue” shall mean, as
determined in accordance with GAAP as consistently applied by Maker and its
Subsidiaries, all revenue from the operation of the businesses of the Companies
and their respective Subsidiaries, if any, from whatever source, including
without limitation: (A) revenue for temporary services (recognized at the time
that the service is provided and revenue is recorded on a time and materials
basis); (B) temporary contracting revenue (recognized as gross when a Company
acts as principal in the transaction and is at risk for collection); (C) revenue
that does not meet the criteria for gross revenue reporting (reported on a net
basis); (D) revenue generated when a Company permanently places an individual
with a client on a contingent basis (recorded at the time of acceptance of
employment); and (E) revenue generated when a Company places an individual with
a client on a retained basis (recorded ratably over the period the services are
rendered); (iii) “Cost of Services” means the direct costs to generate the
Revenues, including payroll expenses to independent contractors, payroll
burdens, payroll taxes and insurance obligations and reimbursable expenses, as
determined in accordance with GAAP as consistently applied by Maker and its
Subsidiaries; and (iv) “Closing Gross Profit” means the Gross Profit for the
trailing twelve (12) full fiscal month period ending April 26, 2014. For
purposes of calculating the Gross Profit, if at any time while any obligations
remain outstanding under this Note, (i) PS is not operated as a separate
subsidiary of Maker, but is merged into Maker or a Subsidiary or Affiliate of
Maker, and/or (ii) PRS is not operated as a stand-alone company, but is merged
into Maker or a Subsidiary or Affiliate of Maker other than PS or its
Subsidiaries, the Gross Profit will include the division(s) or other internal
organization(s) of Maker (and/or such Subsidiary or Affiliate) which includes
the business formerly conducted by PS and/or PRS. For illustration purposes, the
calculation of Gross Profit for PS, as set forth on PS’s year-to-date P&L
statement dated as of April 26, 2014 is as set forth on Exhibit A hereto. Any
ambiguities in the calculation of the Gross Profit shall be determined in a
manner consistent with Exhibit A, or if there is a change in GAAP after the
Issuance Date such that the manner contemplated by Exhibit A is no longer in
compliance with GAAP, then in such manner that is as close as possible to that
contemplated under Exhibit A that is in compliance with the new GAAP principles.
In the event any such change in GAAP causes the manner of calculating Gross
Profit going forward to differ significantly from the manner in which the
Closing Gross Profit was previously calculated, the parties shall adjust the
Closing Gross Profit by re-calculating the Gross Profit for the trailing twelve
(12) full fiscal month period ending April 26, 2014 as if such new GAAP
requirements were in effect at the time.

 

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4.          Procedures for Determining Gross Profit. Together with each Monthly
Installment (or if no Monthly Installment is to be paid for such month as a
result of a Suspension of Payment as determined by Maker, within fifteen (15)
days after the end of each fiscal month), Maker will prepare and deliver to
Seller a written statement (each, a “Gross Profit Statement”) that sets forth
Maker’s determination in accordance with the terms of this Note of the Gross
Profit for the fiscal month most recently ended (the “Subject Month”) and the
TTM ending as of the Subject Month (the “Subject TTM”), and whether or not a
Suspension of Payment has occurred for the Subject Month. Seller and its
Representatives will provide Maker and its Representatives with reasonable
access to the books and records, personnel and properties of PRS and its
Subsidiaries, if any, and any other information of PRS or its Subsidiaries, if
any, that Maker reasonably requests in connection with Maker’s preparation of
each Gross Profit Statement. In the event that Maker notifies Payee that there
is a Suspension of Payment for the Subject Month, Seller will have the right to
have an independent certified public accountant (the “CPA”) review and inspect
the records of PS and PRS (any any other records of Maker or its Subsidiaries to
the extent relating to the Gross Profit determination) and their respective
Subsidiaries, if any, for the Subject Month and the Subject TTM for the purpose
of determining the accuracy of the Gross Profit Statement and the Gross Profit
calculated therein by delivering written notice thereof within fifteen (15) days
after the delivery of the Gross Profit Statement for the Subject Month. The CPA
selected to conduct such review must be acceptable to both Maker and Seller
(provided, that if the CPA does not accept its appointment or Maker and Seller
cannot agree on the CPA, in either case within ten (10) days after Maker’s
receipt of the notice from Seller requesting the CPA, either Maker or Seller may
require, by written notice to the other, that the CPA be selected by the New
York City Regional Office of the American Arbitration Association in accordance
with the procedures of the American Arbitration Association). Each party will
execute a reasonable and customary engagement letter with the CPA with respect
to its review that is consistent with the terms of this Section 4 (including the
responsibility of the parties for the CPA’s costs and expenses). In connection
with the CPA’s review, (i) Maker will permit the CPA, upon reasonable prior
written notice, to have access during normal business hours to such records and
finance personnel of PS and its Subsidiaries, if any (and any other records of
Maker and its Subsidiaries to the extent relating to the determination of Gross
Profit and Subject TTM), and (ii) Seller will permit the CPA, upon reasonable
prior written notice, to have access during normal business hours to such
records and finance personnel of PRS and its Subsidiaries, if any, in either
case of clauses (i) or (ii), as may be reasonably necessary to verify Maker’s
calculation of the Gross Profit hereunder for the Subject Month and the Subject
TTM, including their books, records and working papers. The CPA will promptly
and diligently conduct its review and will provide its final determination with
respect to the Gross Profit and the Subject TTM, and whether or not the
Suspension of Payment was properly instituted, in writing to each party within
thirty (30) days after its engagement. Each party will use its commercially
reasonable efforts to permit the CPA to timely complete its review. In the event
that the CPA reasonably determines that there should not have been a Suspension
of Payment for the Subject Month, (i) the parties will be bound by such
determination, (ii) Maker shall be responsible for the reasonable fees and
expenses charged by the CPA with respect to its review of the Subject Month and
the Subject TTM, (iii) Maker will pay to Seller the Monthly Installment for the
Subject Month within fifteen (15) days after Maker’s receipt of the CPA’s
written report and (iv) interest with respect to the Monthly Installment for the
Subject Month shall be reinstituted retroactively to the date of Suspension of
Payment, and continue to accrue as if there had been no Suspension of Payment
for the Subject Month. In the event that the CPA reasonably determines that the
Suspension of Payment for the Subject Month was properly instituted, (i) the
parties will be bound by such determination, (ii) Seller shall be responsible
for the reasonable fees and expenses charge by the CPA with respect to its
review of the Subject Month and the Subject TTM, and (iii) the provisions of
Section 3 will apply to such Subject Month. Any calculations of Gross Profit for
any subsequent fiscal month that includes the Subject Month or any portion of
the Subject TTM in the TTM for such subsequent month will apply the
determinations of the CPA with respect to the Subject Month and the portion of
the Subject TTM that is included in the TTM for such subsequent month.
Notwithstanding the foregoing in this Section 4, the CPA shall not make any
determinations with respect to the matters described in proviso to the first
sentence of Section 3 of this Note, and any determination made by the CPA shall
be further subject to such proviso.

 

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5.          Prepayment. Maker may, in its discretion, prepay this Note in whole
or in part prior to the Maturity Date.

 

6.          Events of Default and Remedies.

 

(a)          Events of Default. Each of the following shall constitute an “Event
of Default”:

 

(i)          the failure of Maker to pay or otherwise satisfy any amounts due
under this Note when due (subject to the Suspension of Payment provided for in
Section 3 and the procedure for resolving any disputes), which failure is not
cured within ten (10) Business Days after written notice of such failure is
received by Maker from Payee;

 

(ii)         the material default by Maker of any of its other material
covenants or agreements under this Note, or the material breach by Maker of its
representations made under Section 5.4 of the Purchase Agreement, which material
default or material breach is not cured within thirty (30) Business Days after
written notice of such material default or material breach is received by Maker
from Payee;

 

(iii)        a decree, judgment, or order by a court of competent jurisdiction
shall have been entered adjudging Maker as bankrupt or insolvent, or approving
as properly filed a petition seeking reorganization of Maker under any
bankruptcy or similar law, and such decree of order shall have continued
undischarged and unstayed for a period of ninety (90) days; or a decree or order
of a court of competent jurisdiction ordering the appointment of a receiver,
liquidator, trustee, or assignee in bankruptcy or insolvency of Maker, or for
the winding up or liquidation of the affairs of Maker, shall have been entered,
and such decree, judgment, or order shall have remained in force undischarged
and unstayed for a period of sixty (60) days;

 

4

 

 

(iv)        Maker shall institute proceedings to be adjudicated a voluntary
bankrupt, or shall consent to the filing of a bankruptcy proceeding against it,
or shall file a petition or answer or consent seeking reorganization under any
bankruptcy or similar law or similar statute, or shall consent to the filing of
any such petition, or shall consent to the appointment of a custodian, receiver,
liquidator, trustee, or assignee in bankruptcy or insolvency of it or any of its
assets or property, or shall make a general assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts generally as
they become due;

 

(v)         the dissolution, termination of existence or liquidation of Maker
(other than in connection with an internal corporate reorganization or a change
of control of Maker, in either case, in which the successor to Maker assumes all
of Maker’s obligations under this Note); or

 

(vi)        any of the following transactions shall be consummated without the
consent of Payee, except in each case if taken in connection with a sale of all
or substantially all of the assets of Maker and its Subsidiaries, taken as a
whole, or otherwise in connection with a change of control of Maker (provided,
that, in each case, if not assumed as a matter of law, the obligations of Maker
under the Note are expressly assumed in writing by the acquirer or its affiliate
in such transaction): (A) the merger or consolidation of PS with any other
Person (other than a wholly-owned subsidiary of PS where PS is the surviving
entity); (B) the sale of all or substantially all of the assets of PS and its
Subsidiaries, taken as a whole, to any other Person (other than a wholly-owned
subsidiary of PS where PS is the surviving entity); (C) the sale of a majority
of the equity interests of PS to any Person (other than an Affiliate of Maker);
or (D) the liquidation, dissolution, or termination of the existence of PS.

 

(b)          Acceleration of Maturity Date. If an Event of Default occurs and is
continuing, then Payee, by providing written notice to Maker (an “Acceleration
Notice”), may declare all of the outstanding principal under this Note, together
with all interest that has accrued thereon and on the principal of the Note that
has previously been paid, to be due and payable immediately; provided, that if
at the time when Maker receives an Acceleration Notice there has been more than
six (6) Suspension Months in the aggregate (whether or not consecutive) under
this Note, the principal amounts under this Note attributable to each Suspension
Month in excess of the sixth Suspension Month, along with the accrued interest
attributable to such principal amounts, shall not be accelerated, and such
obligations shall be cancelled forfeited by Payee upon delivery of such
Acceleration Notice); and provided, further, that the amounts described above
shall immediately accelerate and become due without the requirement of an
Acceleration Notice or any other action on the part of Payee upon the occurrence
of any Event of Default listed in clause (iii), (iv) or (v) of Section 6(a).

 

7.          Right to Set-Off. The obligations of Maker under this Note may be
offset as set forth in Article VII of the Purchase Agreement.

 

8.          Attorneys’ Fees. Except with respect to the costs of the review by
the CPA as set forth in Section 4, the non-prevailing party to any claim that is
finally determined under this Note will pay its own expenses and the reasonable
documented out-of-pocket expenses, including reasonable attorneys’ fees and
costs, reasonably incurred by the other party. For purposes of this Section 8,
in any claim hereunder in which the requirement to make a payment or the amount
thereof is at issue, in the event that the final determination of the court does
not specifically award costs and expenses based on this Section 8, the party
seeking such payment will be deemed to be the non-prevailing party unless the
applicable court of competent jurisdiction awards such party more than one-half
(1/2) of the amount in dispute, in which case, the party against whom payment is
sought shall be deemed to be the non-prevailing party.

 

5

 

 

9.          No Transfer of Rights to Receive Payments. Without limiting anything
contained in this Note, without the prior written consent of Maker (which may be
withheld in its sole discretion), Payee shall not transfer, assign, convey or
subject to any Lien any of Payee’s rights under this Note to receive any
payments; provided, that this Section 9 shall not prevent transfers of such
rights by Payee to (i) Payee’s estate or heirs (by will or intestate succession)
upon Payee’s death or (ii) one or more trusts for the benefit of the immediate
family members of Payee, provided that, in each case, the transferee
acknowledges and agrees to the terms, conditions and obligations set forth in
this Note.

 

10.         Incorporation of Purchase Agreement Provisions. The parties hereby
agree that Sections 9.2 through 9.12 of the Purchase Agreement are hereby
incorporated herein as if set forth in this Agreement, with any reference to the
Purchase Agreement therein referring to this Note instead.

 

11.         Entire Agreement. This Note (and to the extent incorporated herein,
the Purchase Agreement) constitutes the entire agreement between the parties
with respect to the subject matter hereof and referenced herein, and supersedes
and terminates any prior agreements or understanding between the parties or
their respective Affiliates (written or oral) with respect to the subject matter
hereof.

 

[Remainder of page intentionally left blank; signature page follows]

 

6

 

 

IN WITNESS WHEREOF, Maker has caused this Unsecured Promissory Note to be duly
executed and delivered as of the date first set forth above.

 

    STAFFING 360 SOLUTIONS, INC.           By:         Name:  Alfonso J.
Cervantes       Title:  Vice Chairman and President       Acknowledged and
agreed as of the date first set forth above:       Payee:                 Linda
Moraski    

 

[Signature page to Note]

 

 

 

 

Exhibit A

Sample Gross Profit Calculation

 

See attachment.