UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION
FILE NUMBER:
(Exact name of registrant as specified in its charter)
(State of incorporation) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number)
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data 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 such files.)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐
As of November 21, 2022, shares of common stock, $0.00001 par value, were outstanding.
Form 10-Q Quarterly Report
INDEX
| 2 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share and par values)
| As of | As of | |||||||
| October 1, 2022 | January 1, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Right of use asset | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued expenses - related party | ||||||||
| Current portion of debt | ||||||||
| Accounts receivable financing | ||||||||
| Leases - current liabilities | ||||||||
| Earnout liabilities | ||||||||
| Other current liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Long-term debt | ||||||||
| Redeemable Series H preferred stock, net | ||||||||
| Leases - noncurrent | ||||||||
| Other long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value, shares authorized; | ||||||||
| Series J Preferred Stock, designated, $ par value, and shares issued and outstanding as of October 1, 2022 and January 1, 2022, respectively | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, as of October 1, 2022 and January 1, 2022, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except share and per share values)
(UNAUDITED)
| THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
| October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of Revenue, excluding depreciation and amortization stated below | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income (Loss) From Operations | ( | ) | ( | ) | ||||||||||||
| Other (Expenses) Income: | ||||||||||||||||
| Interest expense and amortization of debt discount and deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Re-measurement loss on intercompany note | ( | ) | ( | ) | ||||||||||||
Gain on extinguishment of debt - PPP Loan | ||||||||||||||||
| Other income (loss), net | ||||||||||||||||
| Total Other (Expenses) Income, net | ( | ) | ||||||||||||||
| Income (Loss) Before Benefit from Income Tax | ( | ) | ||||||||||||||
| Benefit (Provision) from Income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Income (Loss) | ( | ) | ||||||||||||||
| Dividends - Series E Preferred Stock - related party | ||||||||||||||||
| Dividends - Series E-1 Preferred Stock - related party | ||||||||||||||||
| Dividends - Series G Preferred Stock - related party | ||||||||||||||||
| Dividends - Series G-1 Preferred Stock - related party | ||||||||||||||||
| Deemed Dividend | ||||||||||||||||
| Earnings allocated to participating securities | ( | ) | ( | ) | ||||||||||||
| Net Income (Loss) Attributable to Common Stockholders | $ | $ | $ | ( | ) | $ | ||||||||||
| Net Income (Loss) Attributable to Common Stockholders - Basic | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted Average Shares Outstanding – Basic | $ | |||||||||||||||
| Earnings (Loss) allocated to participating securities– Diluted (Footnote 3) | $ | $ | $ | ( | ) | $ | ||||||||||
| Earnings (Loss) per Share Attributed to Common Stockholders - Diluted | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted Average Shares Outstanding – Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(All amounts in thousands)
(UNAUDITED)
| THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
| October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Net Income (Loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Other Comprehensive (Loss) Income | ||||||||||||||||
| Foreign exchange translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive (Loss) Income Attributable to the Company | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(All amounts in thousands, except share and par values)
(UNAUDITED)
| Shares | Par
Value | Shares | Par
Value | Shares | Par
Value | Shares | Par Value | Shares | Par
Value | Shares | Par Value | Additional paid in | Accumulated other comprehensive | Accumulated | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Series E-1 | Series G-1 | Series A | Series E | Series F | Common Stock | capital | income (loss) | Deficit | (Deficit) Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance January 2, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Employees, directors and consultants | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Conversion | — | — | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales of common stock and warrants, net | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Series F Preferred Stock, net | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series F Preferred Stock | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series E Preferred Stock - Related Party | — | — | — | ( | ) | ( | ) | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends - Series E Preferred Stock - Related Party | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends - Series E-1 Preferred Stock - Related Party | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends - Series G Preferred Stock - Related Party | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends - Series G-1 Preferred Stock - Related Party | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series E Preferred Stock - Related Party to Series G preferred Stock - Related Party | ( | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series G Preferred Stock - Related Party to Long Term Debt - Related Party | — | ( | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable portion of Series E Preferred Stock - Related Party | — | — | — | ( | ) | ( | ) | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Series F Preferred Stock - Beneficial Conversion Feature | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Modification - Series E Preferred Stock - Related Party | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed Dividend | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, October 2, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par
Value | Shares | Par
Value | Shares | Par Value | Additional paid in | Accumulated other comprehensive | Accumulated | Total | |||||||||||||||||||||||||||||||
| Series G-1 | Series F | Common Stock | capital | income (loss) | Deficit | Equity | ||||||||||||||||||||||||||||||||||
| Balance July 3, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||||||||||||||||||
| Employees, directors and consultants | — | — | 167 | |||||||||||||||||||||||||||||||||||||
| Conversion of Series F Preferred Stock | — | ( | ) | 130,490 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Sales of common stock and warrants, net | — | — | 494,277 | |||||||||||||||||||||||||||||||||||||
| Dividends - Series G Preferred Stock - Related Party | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Dividends - Series G-1 Preferred Stock - Related Party | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Conversion of Series G Preferred Stock - Related Party to Long Term Debt - Related Party | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance October 2, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(All amounts in thousands, except share and par values)
(UNAUDITED)
| Shares | Par
Value | Shares | Par Value | Additional paid in | Accumulated other comprehensive | Accumulated | Total | |||||||||||||||||||||||||
| Series J | Common Stock | capital | income | Deficit | Equity | |||||||||||||||||||||||||||
| Balance, July 2, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||||||||||
| Employees, directors and consultants | — | — | ||||||||||||||||||||||||||||||
| Sale of common stock and warrants | — | |||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Balance, October 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Shares | Par
Value | Shares | Par Value | Additional paid in | Accumulated other comprehensive | Accumulated | Total | |||||||||||||||||||||||||
| Series J | Common Stock | capital | income | Deficit | Equity | |||||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | ( | ) | |||||||||||||||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||||||||||
| Employees, directors and consultants | — | |||||||||||||||||||||||||||||||
| Sale of common stock and warrants | — | |||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, October 1, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(UNAUDITED)
NINE MONTHS ENDED | ||||||||
| October 1, 2022 | October 2, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (Loss) Income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount and deferred financing costs | ||||||||
| Bad debt (recovery) expense | ( | ) | ||||||
| Right of use assets depreciation | ||||||||
| Stock based compensation | ||||||||
| Forgiveness of PPP loan and related interest | ( | ) | ||||||
| Re-measurement (loss) gain on intercompany note | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Accounts payable, related party | ( | ) | ||||||
| Other current liabilities | ( | ) | ||||||
| Other long-term liabilities and other | ( | ) | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of business, net of cash acquired | ||||||||
| Collection of UK factoring facility deferred purchase price | ||||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Third party financing costs | ( | ) | ( | ) | ||||
| Proceeds from term loan - Related party | ||||||||
| Repayment of term loan | ( | ) | ( | ) | ||||
| Proceeds from term loan | ||||||||
| Repayments on accounts receivable financing, net | ( | ) | ( | ) | ||||
| Dividends paid to related parties | ( | ) | ||||||
| Redemption of Series E preferred stock, related party | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| Payments made on earnouts | ( | ) | ||||||
| Proceeds from sale of Series F preferred stock | ||||||||
| NET CASH USED IN FINANCING ACTIVITIES | ( | ) | ( | ) | ||||
| NET DECREASE IN CASH | ( | ) | ( | ) | ||||
| Effect of exchange rates on cash | ( | ) | ( | ) | ||||
| Cash - Beginning of period | ||||||||
| Cash - End of period | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 8 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
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, which changed its name to Staffing 360 Solutions, Inc., ticker symbol “STAF,” on March 16, 2012. On June 15, 2017, the Company reincorporated in the state of Delaware. We are a rapidly growing public company in the international staffing sector. Our high-growth business model is based on finding and acquiring, suitable, mature, profitable, operating, domestic and international staffing companies. Our targeted consolidation model is focused specifically on the accounting and finance, information technology (“IT”), engineering, administration (“Professional”) and light industrial (“Commercial”) disciplines.
Headway Acquisition
On
April 18, 2022, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Headway Workforce Solutions
(“Headway”), and Chapel Hill Partners, LP, as the representatives of all the stockholders (collectively, the “Sellers”)
of Headway (the “Sellers’ Representative”), pursuant to which, among other things, we agreed to purchase all of the
issued and outstanding securities of Headway in exchange for (i) a cash payment of $
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”), expressed in U.S. dollars. All amounts are in thousands, except share and par values, unless otherwise indicated.
The accompanying consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Reverse Stock Split
The
Company effected a
Liquidity
The
accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of
the Company to continue as a going concern. The accompanying financial statements have been prepared on a basis which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying
financial statements as of October 1, 2022, the Company has an accumulated deficit of $
The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available to us.
Further, our note issued to Jackson Investment Group, LLC (“Jackson”) includes certain financial customary covenants and the Company has had instances of non-compliance. Management has historically been able to obtain from Jackson waivers of any non-compliance and management expects to continue to be able to obtain necessary waivers in the event of future non-compliance; however, there can be no assurance that the Company will be able to obtain such waivers, and should Jackson refuse to provide a waiver in the future, the outstanding debt under the agreement could become due immediately, which exceeds our current cash balance.
On
October 27, 2022, we entered into a Third Amended and Restated Note Purchase Agreement (the “Third Amended and Restated Note
Purchase Agreement”) with Jackson, which amended and restated the Amended Note Purchase Agreement (as defined herein), and
issued to Jackson the Third Amended and Restated Senior Secured
Going Concern
The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. Historically, the Company has funded such payments either through cash flow from operations or the raising of capital through additional debt or equity. If the Company is unable to obtain additional capital, such payments may not be made on time.
The Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to the COVID-19 pandemic raise substantial doubt about the Company’s ability to continue as a going concern.
COVID-19
The novel Coronavirus disease 2019 (“COVID-19”) and its ongoing effects are continuing to impact worldwide economic activity, and activity in the United States and the United Kingdom where our operations are based. The nature of work of the contractors we support mostly are on the site of our clients. Given that the magnitude and duration of COVID-19’s impact on our business and operations remain uncertain, the continued spread of COVID-19 (including the emergence and persistence of variants relating thereto) and the imposition of related public health containment measures and travel and business restrictions could have a material adverse impact on our business, financial condition, operating results, and cash flows. While expected to be temporary, prolonged workforce disruptions can negatively impact sales in fiscal year 2022 and the Company’s overall liquidity.
| 9 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The full impact of the COVID-19 pandemic and its ongoing effects continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 pandemic, its ongoing effects and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2022.
The Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to the COVID-19 pandemic and its ongoing effects contribute to the substantial doubt about the Company’s ability to continue as a going concern.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP 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 revenue and expenses in the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes 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 the Company may differ materially and adversely from its estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected. Significant estimates for the nine months ended October 1, 2022 and October 2, 2021 include the valuation of intangible assets, including goodwill, liabilities associated with testing long-lived assets for impairment, contingent considerations, fair value of financial instruments and valuation reserves against deferred tax assets.
Goodwill
Goodwill relates to amounts that arose in connection with various acquisitions and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but it is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, a decline in the equity value of the business, a significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator.
In accordance with ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. During the year ended January 1, 2022 the Company changed its annual measurement date from the last day of the fiscal year end to the first day of the fiscal fourth quarter. A reporting unit is either the equivalent of, or one level below, an operating segment. The Company early adopted the provisions in ASU 2017-04, which eliminates the second step of the goodwill impairment test. As a result, the Company’s goodwill impairment tests include only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated to that reporting unit, is impaired.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value.
The
Company recognized an impairment with respect to its Staffing UK reporting unit of $
| 10 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
The
Company has primarily two main forms of revenue – temporary contractor revenue and permanent placement revenue. Temporary
contractor revenue is accounted for as a single performance obligation satisfied over time because the customer simultaneously
receives and consumes the benefits of the Company’s performance on an hourly or daily basis. The contracts stipulate weekly or
monthly billing, and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the
hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of
performance completed to date. Permanent placement revenue is recognized on the date the candidate’s full-time employment with
the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms,
typically 30 days. The contract with the customer stipulates a guarantee period whereby the customer may be refunded if the employee
is terminated within a short period of time, however this has historically been infrequent, and immaterial upon occurrence. As such,
the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has
transferred to the customer. Revenues for the three
months ended October 1, 2022 was comprised of $
Income Taxes
The Company’s provision for income taxes is based on the discrete method for the quarter applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared with those forecasted at the beginning of the fiscal year and each interim period thereafter.
The
effective income tax rate was
Foreign Currency
The
Company recorded a non-cash foreign currency remeasurement loss of $
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the warrants the Company has privately placed were estimated using a Black Scholes model. Refer to Note 8 for further details.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and treasury stock method will be no longer available. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company adopted this ASU in this fiscal year. This standard did not have an impact on our financial statements.
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. This ASU replaces the probable, incurred loss model for those assets. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022, for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company is currently evaluating the impacts of this pronouncement and does not expect it to have a material impact on the financial statements.
| 11 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share (“ASC 260”), which requires earnings per share for each class of stock (common stock and participating preferred stock) to be calculated using the two-class method. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings for the reporting period are allocated between common shareholders and other security holders based on their respective participation rights in undistributed earnings.
Basic earnings per common share is computed by dividing income or loss available to common stockholders by the weighted average number of shares of basic common stock outstanding. The Company’s Series F convertible preferred stock, which was convertible into shares of the Company’s common stock at any time and from time to time from and after the issue date, and the Company’s Series F warrants, were classified as participating securities in accordance with ASC 260. Net income allocated to the holders of Series F convertible preferred stock and Series F warrants was calculated based on the shareholders’ proportionate share of weighted average shares of common stock outstanding on an if-converted basis.
For purposes of determining diluted earnings per common share, basic earnings per common share was further adjusted to include the effect of potential dilutive common shares outstanding, including unvested restricted stock using the more dilutive of either the two-class method or the treasury stock method, and Series G and G-1 Preferred Stock using the if-converted method. Stock options and warrants that were out-of-the-money were not included in the denominator for the calculation diluted EPS. Under the two-class method of calculating diluted earnings per share, net income is reallocated to common stock, the Series F Preferred stock, the Series F warrants, and all dilutive securities based on the contractual participating rights of the security to share in the current earnings as if all of the earnings for the period had been distributed. In the computation of diluted earnings per share, the if-converted method for the Series F Preferred Stock resulted in a more dilutive earnings per share than the two-class method. As such, the if-converted method was utilized for the calculation of diluted EPS.
On June 24, 2022, the Company effected the Reverse Stock Split. As required in accordance with GAAP, all share and earnings per share information in this Quarterly Report on Form 10-Q, including those noted below have been retroactively adjusted to reflect the Reverse Stock Split.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net Income (Loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Less: Dividends paid to Series A preferred shareholders | ||||||||||||||||
| Less: Dividends paid to Series E, E-1, G, G-1 preferred shareholders | ( | ) | ( | ) | ||||||||||||
| Less: Deemed dividend | ( | ) | ||||||||||||||
| Less: Net income allocated to participating equity | ( | ) | ( | ) | ||||||||||||
| Net Income (Loss) Attributable to Common Equity | $ | $ | $ | ( | ) | $ | ||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Add: Dividends paid to Series E, E-1, G, G-1 preferred shareholders | ||||||||||||||||
| Net income available to common and preferred shareholders for diluted earnings per share | $ | $ | ||||||||||||||
| Denominator: | ||||||||||||||||
| Weighted average basic common shares outstanding | ||||||||||||||||
| Weighted average additional common shares outstanding if preferred shares converted to common shares (if dilutive) | ||||||||||||||||
| Total weighted average common shares outstanding if preferred shares converted to common shares | ||||||||||||||||
| Effect of dilutive securities: | — | — | ||||||||||||||
| Restricted shares | ||||||||||||||||
| Weighted average diluted shares outstanding | ||||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||
| Basic | $ | $ | $ | ( | ) | $ | ||||||||||
| Diluted | $ | $ | $ | ( | ) | $ | ||||||||||
NOTE 4 – ACCOUNTS RECEIVABLE FINANCING
Midcap Funding X Trust
Prior
to September 15, 2017, certain U.S. subsidiaries of the Company were parties to a $
On October 26, 2020, the Company entered into Amendment No. 17 to Credit and Security Agreement with MidCap, whereby, among other things, MidCap agreed to extend the maturity date of our outstanding asset based revolving loan until September 1, 2022. In addition, the Company also agreed to certain amendments to the financial covenants. On October 27, 2022, the Company entered into Amendment No. 27 with MidCap (see Note 14).
The facility provides events of default including: (i) failure to make payment of principal or interest on any MidCap loans when required, (ii) failure to perform obligations under the facility and related documents, (iii) not paying its debts as such debts become due and similar insolvency matters, and (iv) material adverse changes to the Company (subject to a 10-day notice and cure period.) Upon an event of default, the Company’s obligations under the credit facility may, or in the event of insolvency or bankruptcy will automatically, be accelerated. Upon the occurrence of any event of default, the facility will bear interest at a rate equal to the lesser of: (i) 3.0% above the rate of interest applicable to such obligations immediately prior to the occurrence of the event of default; and (ii) the maximum rate allowable under law.
Under the terms of this agreement, the Company is subject to affirmative covenants which are customary for financings of this type, including covenants to: (i) maintain good standing and governmental authorizations, (ii) provide certain information and notices to MidCap, (iii) deliver monthly reports and quarterly financial statements to MidCap, (iv) maintain insurance, (v) discharge all taxes, (vi) protect its intellectual property, and (vii) generally protect the collateral granted to MidCap. The Company is also subject to negative covenants customary for financings of this type, including that it may not: (i) enter into a merger or consolidation or certain change of control events, (ii) incur liens on the collateral, (iii) except for certain permitted acquisitions, acquire any significant assets other than in the ordinary course of business, (iv) assume certain additional senior debt, or (v) amend any of its organizational documents.
| 12 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
balance of the MidCap facility as of October 1, 2022 and January 1, 2022 was $
White Oak Commercial Finance, LLC
As
a result of the Headway Acquisition, the Company’s wholly owned Headway subsidiary, has a line of credit with White Oak
Commercial Finance, LLC (“White Oak”), that provided working capital and supports general corporate needs of Headway
(the “White Oak Agreement”). Under the terms of the White Oak Agreement, the line of credit matures in June 2024. White
Oak may terminate the Agreement at any time upon providing 30-days written notice. The White Oak Agreement is secured by all the
assets of Headway and is personally guaranteed up to $
Under
the terms of the White Oak Agreement, the maximum borrowing capacity is $
From
time to time, White Oak may cause letters of credit to be opened to be issued for Headway’s benefit. The aggregate face amount
of all letters of credit outstanding will become the letter of credit reserve, which reduces the borrowing base under the Agreement.
Under the terms of the agreement the letter of credit sub-line may not exceed $
The White Oak Agreement operates similarly to a factoring arrangement whereby Headway’s receivables are bought by White Oak. However, receivables purchased by White Oak are required to be repurchased by Headway in the event the Company’s customer disputes the invoice amount or if the receivable remains unpaid past a certain number of days from the invoice date. Due to the recourse provisions in the arrangement, Headway accounts for transactions under the credit facility as secured borrowings.
As of October 27, 2022, the White Oak Agreement was paid in full and terminated. See Note 14.
HSBC Invoice Finance (UK) Ltd – New Facility
On
February 8, 2018, CBSbutler, Staffing 360 Solutions Limited and The JM Group, entered into a new arrangement with HSBC Invoice Finance
(UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’ accounts receivable up to an aggregate amount
of £
On
June 28, 2018, CML, the Company’s new subsidiary entered into a new agreement with a minimum term of 12 months for purchase of
debt (“APD”) with HSBC, joining CBSbutler, Staffing 360 Solutions Limited and The JM Group (collectively, with CML, the “Borrowers”)
as “Connected Clients” as defined in the APD. In 2021, the subsidiaries were reorganized and are now Staffing 360 Solutions
Limited and Clement May. The new Connected Client APDs carry an aggregate Facility Limit of £
Under
ASU 2016-16, “Statement of Cash Flows (Topic 230, Classification of Certain Cash Receipts and Cash Payments, a consensus of
the FASB Emerging Issues Task Force), the upfront portion of the sale of accounts receivable is classified within operating activities,
while the deferred purchase price portion (or beneficial interest), once collected, is classified within investing activities. For the
nine months ended October 1, 2022 and October 2, 2021, the collection of UK factoring facility deferred purchase price totaled $
NOTE 5 – GOODWILL
The following table provides a roll forward of goodwill:
| October 1, 2022 | January 1, 2022 | |||||||
| Beginning balance, gross | $ | $ | ||||||
| Acquisition | ||||||||
| Accumulated disposition | ( | ) | ||||||
| Accumulated impairment losses | ( | ) | ||||||
| Currency translation adjustment | ( | ) | ( | ) | ||||
| Ending balance, net | $ | $ | ||||||
Goodwill
represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350, 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.
During the fourth quarter of 2021 the Company identified a triggering event in response the COVID-19 pandemic. In accordance with ASC
350 the Company tested its goodwill for impairment and the Company recognized an impairment with respect to its Staffing UK reporting
unit of $
| 13 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 6 – DEBT
| October 1, 2022 | January 1, 2022 | |||||||
| Jackson Investment Group - related party | $ | $ | ||||||
| Redeemable Series H Preferred Stock | ||||||||
| HSBC Term Loan | ||||||||
| Total Debt, Gross | ||||||||
| Less: Debt Discount and Deferred Financing Costs, Net | ( | ) | ( | ) | ||||
| Total Debt, Net | ||||||||
| Less: Non-Current Portion | ( | ) | ( | ) | ||||
| Total Current Debt, Net | $ | $ | ||||||
Jackson Debt
On
September 15, 2017, the Company entered into a $
On
August 27, 2018, the Company entered into an amended agreement with Jackson, pursuant to which the note purchase agreement dated as of
September 15, 2017 was amended and made a new senior debt investment of approximately $
On
August 29, 2019, the Company entered into a Fourth Omnibus Amendment and Reaffirmation Agreement with Jackson, as lender, which, among
other things, amends that certain amended and restated note purchase agreement, dated as of September 15, 2017, as amended (the “Existing
Note Purchase Agreement”). Pursuant to the Existing Note Purchase Agreement, the Company agreed to issue and sell to Jackson that
certain
| 14 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
On
October 26, 2020, the Company, certain of its subsidiaries and Jackson entered into the Amended Note Purchase Agreement and the 2020
Jackson Note, which amended and restated the Existing Note Purchase Agreement. The Amended Note Purchase Agreement refinanced an aggregate
of approximately $
Under
the terms of the Amended Note Purchase Agreement and the 2020 Jackson Note, the Company is required to pay interest on the debt at a
per annum rate of
Under
the terms of the Amended Note Purchase Agreement, the Company was required to make a mandatory prepayment of the principal amount of
the 2020 Jackson Note of not less than $
On
January 4, 2021, the Company used $
On
April 21, 2021, the Company entered into the April 2021 Purchase Agreement. The net proceeds to the Company were approximately $
| 15 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
On
July 20, 2021, the Company entered into the July 2021 Purchase Agreement. As the Company’s Series G Preferred Stock (as defined
below) was outstanding, it was required to use the proceeds of any sales of equity securities, including the common stock offered in
the July 2021 Offerings, exclusively to redeem any outstanding shares of Series G Preferred Stock, subject to certain limitations. The
Company received a waiver from Jackson, the sole holder of the outstanding shares of its Series G Preferred Stock, to pay accrued and
unpaid interest and prepay a portion of the outstanding principal balance of the 2020 Jackson Note and paid accrued and unpaid dividends
on the Series G-1 Convertible Preferred Stock upon conversion of such preferred stock into the New Note (as defined below). The net proceeds
to the Company from the July 2021 Offerings were approximately $
On
July 21, 2021, the Company entered into a non-cash financing transaction whereby it exchanged its outstanding shares of Series
G Convertible Preferred Stock (“Series G Preferred Stock”) and shares of Series G-1 Convertible Preferred Stock for
senior indebtedness by entering into a new
Under
the terms of the New Note, the Company is required to pay interest on the New Note at a per annum rate of
On
August 5, 2021, the Company entered into the First August 2021 Purchase Agreement. The net proceeds to the Company from the First August
2021 Offerings were approximately $
On
October 28, 2021, the Company entered into a securities purchase agreement (the “November 2021 Private Placement”). This
placement closed on November 2, 2021 and was announced on November 3, 2021. The net proceeds of the November 2021 Private Placement were
approximately $
The
entire outstanding principal balance of the 2020 Jackson Note was due and payable on September 30, 2022. On October 27, 2022, the Company entered into the Third Amended and Restated
Note Purchase Agreement with Jackson, which amended and restated the Amended Note Purchase Agreement, dated October 26, 2020, as amended,
and issued to Jackson the Jackson Note, with a remaining outstanding principal balance of approximately $
Debt Exchange Agreement
On
November 15, 2018, the Company, entered into a Debt Exchange Agreement with Jackson, pursuant to which, among other things, Jackson agreed
to exchange $
| 16 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The Series E Preferred Stock ranked senior to the Company’s common stock and any other series or classes of preferred stock issued or outstanding with respect to dividend rights and rights on liquidation, winding up and dissolution. Each share of Series E Preferred Stock was initially convertible into shares of common stock of the Company at any time after October 31, 2020 or the occurrence of a Preferred Default (as defined in the Certificate of Designation for the Series E Preferred Stock (the “Series E Certificate of Designation”)). A holder of Series E Preferred Stock was not required to pay any additional consideration in exchange for conversion of such Series E Preferred Stock into the Company’s common stock. Series E Preferred Stock was redeemable by the Company at any time at a price per share equal to the stated value ($ per share) plus all accrued and unpaid dividends thereon.
The Series E Preferred Stock carried quarterly dividend rights of (a) cash dividends accruing (i) at an annual rate per share equal to 12% from the date of issuance and (ii) 17% after the occurrence of a Preferred Default, and (b) a dividend payable in shares of Series E-1 Convertible Preferred Stock (the “Series E-1 Convertible Preferred Stock” and, collectively with the Series E Convertible Preferred Stock, the “Series E Preferred Stock”). The shares of Series E-1 Convertible Preferred Stock had all the same terms, preferences and characteristics as the Series E Preferred Stock (including, without limitation, the right to receive cash dividends), except (i) Series E-1 Convertible Preferred Stock were mandatorily redeemable by the Company within thirty (30) days after written demand received from any holder at any time after the earlier of the occurrence of a Preferred Default or November 15, 2020, for a cash payment equal to the Liquidation Value (as defined in the Series E Certificate of Designation) plus any accrued and unpaid dividends thereon, (ii) each share of Series E-1 Convertible Preferred Stock was initially convertible into 11 shares of the Company’s common stock, and (iii) Series E-1 Convertible Preferred Stock could be cancelled and extinguished by the Company if all shares of Series E Convertible Preferred Stock are redeemed by the Company on or prior to October 31, 2020.
Under
the terms of the Amendment, shares of Series E-1 Convertible Preferred Stock were convertible into common stock at a conversion rate
equal to the liquidation value of each share of Series E-1 Convertible Preferred Stock divided by $ per share commencing October
31, 2020. Each share of Series E-1 Convertible Preferred Stock had a liquidation value of $
The
Company accounted for the Amendment as a modification to the Series E Convertible Preferred Stock and Series E-1 Convertible Preferred
Stock. The change in fair value as a result of the modification amounted to $410 and was recognized as a deemed dividend as of the fiscal
year ended January 2, 2021. Further, the Company recognized a beneficial conversion feature (BCF) of $
| 17 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Under
the terms of the Consent and the Series E Certificate of Designation, in consideration for Jackson’s consent to the firstPRO
Transaction, the Initial Payment was used to redeem a portion of the Series E Preferred Stock, and the Escrow Funds, subject to the forgiveness
of PPP Loan, were agreed to be used to redeem a portion of the Series E Preferred Stock. As this provision results in a contingent redemption
feature, approximately $
Lastly,
under the terms of the Limited Consent and Waiver with Jackson dated February 5, 2021, it was agreed that to the extent that any of the
PPP Loans are forgiven after the February 2021 Offering, Jackson may convert the Series E Convertible Preferred Stock and Series E-1
Convertible Preferred Stock that remains outstanding into a secured note that is substantially similar to the 2020 Jackson Note. As this
provision results in a contingent redemption feature, approximately $
Jackson Waivers
On
February 5, 2021,
Series G Preferred Stock – Related Party
On May 6, 2021, the Company, entered into an Exchange Agreement with Jackson (the “Exchange Agreement”), pursuant to which, among other things, Jackson agreed to exchange shares of the Company’s Series E Convertible Preferred Stock and shares of the Series E-1 Preferred Stock for an equivalent number of shares of the Company’s newly issued Series G Convertible Preferred Stock and Series G-1 Convertible Preferred Stock, respectively (collectively, the “Series G Preferred Stock” and the transaction, the “Exchange”). The Series G Preferred Stock was subject to the same terms stated in the Limited Waiver, as defined herein and described in Note 12.
The
Series G Preferred Stock ranked senior to each of the Company’s common stock, Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock, and any other classes and series of stock of the Company now or hereafter authorized,
issued or outstanding, which by their terms expressly provide that they are junior to the Series G Preferred Stock or which do not specify
their rank (which includes the Series F Convertible Preferred Stock).
| 18 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
On July 20, 2021, the Company entered into the July 2021 Purchase Agreement. As the Company’s Series G Preferred Stock was outstanding, it was required to use the proceeds of any sales of equity securities, including the common stock offered in the July 2021 Registered Direct Offering, exclusively to redeem any outstanding shares of Series G Preferred Stock, subject to certain limitations. The Company received a waiver from Jackson, the sole holder of the outstanding shares of its Series G Preferred Stock, to pay accrued and unpaid interest and prepay a portion of the outstanding principal balance of the 2020 Jackson Note, and paid accrued and unpaid dividends on the Series G-1 Convertible Preferred Stock upon conversion of such preferred stock into the New Note. While under the terms of the Certificate of Designation governing the Series G Preferred Stock and Series G-1 Preferred Stock, shares and shares of common stock were issuable upon the conversion of Series G Preferred Stock and Series G-1 Preferred Stock, respectively, the shares of Series G Preferred Stock and Series G-1 Convertible Preferred Stock were not converted to common stock and instead were converted on July 21, 2021 to debt. The terms of this note match the terms of the Amended Note Purchase Agreement from October 26, 2020.
As of October 1, 2022, there were no shares of Series G or Series G-1 Convertible Preferred Stock outstanding.
HSBC Loan
On
February 8, 2018, CBS Butler Holdings Limited (“CBS Butler”), Staffing 360 Solutions Limited and The JM Group, entered into
a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’
accounts receivable up to an aggregate amount of £
Redeemable Series H Preferred Stock
On
May 18, 2022, the Company entered into a stock purchase agreement with Headway. Consideration for the Purchase of
In
accordance with ASC 480-10-15-3, the agreement includes certain rights and options including: redemption, dividend, voting, and conversion
which have characteristics akin to liability and equity. The Series H Preferred Stock is redeemable and has a defined maturity date upon
the third anniversary of the original issue date. As such and based on the authoritative guidance, the Series H Preferred Stock meets
the definition of a debt instrument. The Company obtained a third-party valuation report to calculate the fair value of Series H Preferred
Stock. As of May 18, 2022, the fair value of the Redemption Price was calculated as $
NOTE 7 – LEASES
As
of October 1, 2022 and January 1, 2022, as a result of the adoption of ASC 842, we recorded a right of use (“ROU”) lease
asset of approximately $
In
September 2021, the Company entered into a new lease agreement for an office lease in New York for a term of
| 19 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Quantitative information regarding the Company’s leases for the three months ended October 1, 2022 is as follows:
| Lease Cost | Classification | Fiscal 2022 | ||||
| Operating lease cost | SG&A Expenses | |||||
| Other information | ||||||
| Weighted average remaining lease term (years) | ||||||
| Weighted average discount rate | % | |||||
| Future Lease Payments | ||||||
| 2022 | $ | |||||
| 2023 | ||||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| Thereafter | ||||||
| $ | ||||||
| Less: Imputed Interest | ||||||
| $ | ||||||
| Leases - Current | $ | |||||
| Leases - Non current | $ |
As most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This methodology was deemed to yield a measurement of the Right of Use Asset and associated lease liability that was appropriately stated in all material respects.
NOTE 8 – STOCKHOLDERS’ EQUITY
The Company issued the following shares of common stock during the nine months ended October 1, 2022:
| Number of Common Shares | Fair Value of Shares | Fair Value at Issuance (minimum and maximum | ||||||||||||||
| Shares issued to/for: | Issued | Issued | per share) | |||||||||||||
| Equity raise | $ | $ | $ | |||||||||||||
| Board and committee members | ||||||||||||||||
| Consultants | ||||||||||||||||
| $ | ||||||||||||||||
The Company issued the following shares of common stock during the nine months ended October 2, 2021:
| Number of Common Shares | Fair Value of Shares | Fair Value at Issuance (minimum and maximum | ||||||||||||||
| Shares issued to/for: | Issued | Issued | per share) | |||||||||||||
| Equity raise | $ | $ | $ | |||||||||||||
| Conversion of Series F Preferred Stock | ||||||||||||||||
| Consultants | ||||||||||||||||
| Conversion of Series A Preferred Stock | ||||||||||||||||
| Employees | ||||||||||||||||
| Board and Board committee members | ||||||||||||||||
| Long Term Incentive Plan | ||||||||||||||||
| $ | ||||||||||||||||
Reverse Stock Split
The Company effected the Reverse Stock Split on June 24, 2022.
Increase of Authorized Common Stock
On December 27, 2021, the Company’s stockholders approved an amendment to the Amended and Restated Certificate of Incorporation of the Company to effect an increase to its number of shares of authorized common stock, par value $ from to .
| 20 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Series A Preferred Stock – Related Party
As
of both October 1, 2022 and October 2, 2021, the Company had $
Series J Preferred Stock
On May 3, 2022, the Company’s Board of Directors (the “Board”) declared a dividend of one one-thousandth of a share of Series J Preferred Stock, par value $ per share (“Series J Preferred Stock”) for each outstanding share of common stock to stockholders of record as of 5:00 p.m. Eastern Time on May 13, 2022. The outstanding shares of Series J Preferred Stock were entitled to vote together with the outstanding shares of the Company’s common stock, as a single class, exclusively with respect to a proposal giving the Board the authority, as it determines appropriate, to implement a reverse stock split within twelve months following the approval of such proposal by the Company’s stockholders (the “Reverse Stock Split Proposal”), as well as any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Reverse Stock Split Proposal (the “Adjournment Proposal”).
Under the Certificate of Designations, each holder of Series J Preferred Stock was entitled to consideration in connection with the applicable redemption of $ in cash for each ten whole shares of Series J Preferred Stock beneficially owned at the applicable redemption time. The Company issued shares of Series J Preferred Stock. Accordingly, the aggregate consideration due to the holders of Series J Preferred Stock in connection with the redemptions is $ (minus amounts disregarded due to rounding each beneficial owner’s holdings of Series J Preferred Stock down to the nearest integer multiple of ten for purposes of calculating the applicable redemption price).
Restricted Shares
The Company has issued shares of restricted stock to employees and members of the Board under its 2015 Omnibus Incentive Plan, 2016 Omnibus Incentive Plan, 2020 Omnibus Plan and 2021 Omnibus Inventive Plan. Under these plans, the shares are restricted for a period of from issuance. As of Fiscal 2021, the Company has issued a total of restricted shares of common stock to employees and Board members that remain restricted. In accordance with ASC 718, Compensation – Stock Compensation, the Company recognizes stock-based compensation from restricted stock based upon the fair value of the award at issuance over the vesting term on a straight-line basis. The fair value of the award is calculated by multiplying the number of restricted shares by the Company’s stock price on the date of issuance. The impact of forfeitures has historically been immaterial to the financial statements. The Company recorded compensation expense associated with these restricted shares of $, $, $ and $, for the three and nine months ended October 1, 2022 and October 2, 2021, respectively. The table below is a roll forward of unvested restricted shares issued to employees and board of directors.
| Weighted | ||||||||
| Restricted | Average | |||||||
| Shares | Price Per Share | |||||||
| Balance at January 2, 2021 | $ | |||||||
| Granted | ||||||||
| Vested/adjustments | ( | ) | ||||||
| Balance at January 1, 2022 | ||||||||
| Granted | ||||||||
| Vested/adjustments | ( | ) | ||||||
| Balance at October 1, 2022 | ||||||||
Warrants
In connection with the private placement
consummated in July 2022 (the “July 2022 Private Placement”), on July 7, 2022, the Company entered into warrant
amendment agreements (the “Warrant Amendment Agreements”) with each of the nine existing participating investors, which
amended warrants to purchase up to
Transactions involving the Company’s warrant issuances are summarized as follows:
| Weighted | ||||||||
| Number of | Average | |||||||
| Shares | Exercise Price | |||||||
| Outstanding at January 2, 2021 | ||||||||
| Issued | ||||||||
| Exercised | ( | ) | ||||||
| Expired or cancelled | ||||||||
| Outstanding at January 1, 2022 | ||||||||
| Issued | ||||||||
| Exercised | ||||||||
| Expired or cancelled | ) | |||||||
| Outstanding at October 1, 2022 | ||||||||
The following table summarizes warrants outstanding as of October 1, 2022:
| Weighted Average | ||||||||||||
| Number | Remaining | Weighted | ||||||||||
| Outstanding | Contractual | Average | ||||||||||
| Exercise Price | and Exercisable | Life (years) | Exercise price | |||||||||
| $ | ||||||||||||
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STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Stock Options
| Weighted | ||||||||
| Average | ||||||||
| Options | Exercise Price | |||||||
| Outstanding at January 2, 2021 | ||||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired or cancelled | ||||||||
| Outstanding at January 1, 2022 | ||||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired or cancelled | ||||||||
| Outstanding at October 1, 2022 | ||||||||
The Company recorded share-based payment expense of $, $, $ and $ for the three and nine months ended October 1, 2022 and October 2, 2021, respectively.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Headway Earn-out Liability
Pursuant
to the Headway acquisition that closed on May 18, 2022, the purchase price includes an earnout payment totaling up to $
The
Company performed an analysis over the contingent payment and prepared a forecast to determine the likelihood of the Adjusted EBITDA
payout. The adjusted EBITDA TTM forecast, as of April 2023, is above the $
| 22 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Legal Proceedings
Whitaker v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.
On
December 5, 2019, former owner of Key Resources, Inc. (“KRI”), Pamela D. Whitaker (“Whitaker” or “Plaintiff”),
filed a complaint in Guilford County, North Carolina (the “North Carolina Action”) asserting claims for breach of contract
and declaratory judgment against Monroe Staffing Services LLC (“Monroe”) and the Company (collectively, the “Defendants”)
arising out of the alleged non-payment of certain earn-out payments and interest purportedly due under a Share Purchase Agreement pursuant
to which Whitaker sold all issued and outstanding shares in her staffing agency, KRI, to Monroe in August 2018. Whitaker sought $
Defendants removed the action to the Middle District of North Carolina on January 7, 2020, and Plaintiff moved to remand on February 4, 2020. Briefing on the motion to remand concluded on February 24, 2020. Separately, Defendants moved to dismiss the action on January 14, 2020, based on Plaintiff’s failure to state a claim, improper venue, and lack of personal jurisdiction as to defendant Staffing 360 Solutions, Inc. Alternatively, Defendants sought a transfer of the action to the Southern District of New York, based on the plain language of the Share Purchase Agreement’s forum selection clause. Briefing on Defendants’ motion to dismiss concluded on February 18, 2020. On February 28, 2020, Plaintiff moved for leave to file an amended complaint. Defendants filed their opposition to the motion for leave on March 19, 2020. Plaintiff thereafter filed a reply.
On June 29, 2020, Magistrate Judge Joe L. Webster issued a Report and Recommendation on the pending motions, recommending that Defendants’ motion to dismiss be granted with regard to Defendants’ request to transfer the matter to the Southern District of New York, and denied in all other regards without prejudice to Defendants raising those arguments again in the new forum. Magistrate Judge Webster also recommended that Plaintiff’s motion to remand be denied and motion to amend be left to the discretion of the Southern District of New York.
Plaintiff filed an objection to the Report and Recommendation on July 9, 2020. Defendants responded on July 23, 2020. On February 19, 2021, the District Court issued a decision that reversed the Magistrate Judge’s Order. The District Court granted Plaintiff’s motion to remand and denied Defendants’ motion to dismiss as moot. Defendants filed a Notice of Appeal to the Fourth Circuit on February 25, 2021, and filed their opening brief on April 21, 2021. Plaintiff filed her response brief on May 21, 2021, and Defendants replied on June 11, 2021. Oral argument was held on March 9, 2022. On July 22, 2022, the Fourth Circuit issued a decision to vacate the District Court’s decision and ordered the North Carolina District Court to transfer the North Carolina Action to the Southern District of New York for adjudication there in accordance with the Share Purchase Agreement’s forum selection clause.
Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc. v. Whitaker
Separately,
on February 26, 2020, the Company and Monroe filed an action against Whitaker in the United States District Court for the Southern District
of New York (Case No. 1:20-cv-01716) (the “New York Action”.) The New York Action concerns claims for breach of contract
and fraudulent inducement arising from various misrepresentations made by Whitaker to the Company and Monroe in advance of, and included
in, the share purchase agreement. The Company and Monroe are seeking damages in an amount to be determined at trial but in no event less
than $
| 23 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
On October 13, 2020, the Court denied Whitaker’s motion to dismiss, in part, and granted the motion, in part. The Court rejected Whitaker’s procedural arguments but granted the motion on substantive grounds. However, the Court ordered that Monroe and the Company may seek leave to amend the complaint by letter application by December 1, 2020. Monroe and the Company filed a letter of motion for leave to amend and a proposed Amended Complaint on December 1, 2020. On January 5, 2021, Whitaker filed an opposition to the letter motion. On January 25, 2021, Monroe and the Company filed a reply in further support of the letter motion. On March 9, 2021, the Court granted Monroe and the Company’s motion for leave to amend, in part, and denied the motion, in part. The Court rejected Monroe and the Company’s claim for fraudulent inducement but granted the motion for leave to amend their breach of contract claim. Monroe and the Company filed their amended complaint on March 12, 2021.
On April 9, 2021, Whitaker renewed her motion to dismiss on procedural grounds, requesting dismissal of the action or, in the alternative, a stay of the proceeding pending adjudication on the merits of the North Carolina Action. On May 14, 2021, Monroe and the Company filed an opposition to the motion to dismiss. On June 21, 2021, Whitaker filed a reply in further support of the motion. The Court referred the case to Magistrate Judge Moses, who held oral argument on the motion on November 9, 2021. On March 8, 2022, Magistrate Judge Barbara Moses stayed the action pending a decision by the Fourth Circuit on the appeal filed by Monroe and the Company in The North Carolina Action.
In light of the Fourth Circuit’s issuance of its July 22, 2022, decision and order transferring the North Carolina Action to the Southern District of New York on August 1, 2022, the parties to the New York Action wrote to the Magistrate overseeing the matter to request a conference to address, inter alia, the resumption of discovery in light of the Fourth Circuit’s Order issued on July 22, 2022. On August 3, 2022, Magistrate Judge Moses lifted the stay previously imposed in the matter and ordered the parties to appear at a teleconference held on August 16, 2022. At the teleconference, the parties agreed that the North Carolina Action would be dismissed following its transfer to the Southern District of New York without prejudice to Whitaker’s right to assert the same causes of action, based on substantially similar allegations, as counterclaims in the New York Action and that Whitaker would have until September 30, 2022, to do so. The Court ordered the parties to submit a stipulation to this effect by August 23, 2022. Per the Court’s Order, on August 22, 2022, the parties filed a stipulation and proposed order whereby the parties agreed that Whitaker would voluntarily dismiss the North Carolina Action, and would reassert the causes of action set forth in the Proposed Amended Complaint filed in the North Carolina Action as counterclaims in the New York Action; and set forth deadlines for the filing of Whitaker’s answer and counterclaims Plaintiffs’ response to such counterclaims. The Court so-ordered that stipulation on August 23, 2022.
On September 30, 2022, Whitaker filed an answer and
counterclaims, including (1) a cause of action for breach of contract, which was substantially similar to Whitaker’s breach of contract
in the North Carolina Action (the “Breach of Contract Counterclaim”), and (2) a cause of action under New York and North Carolina
consumer protection statutes, asserting that that Plaintiffs exhibited a pattern and practice in the purchase of businesses similar to
KRI by which they allegedly, “endeavor[ ] to acquire the purchased company at a discount of the agreed-upon purchase price by making
an initial down payment, then reneging on payment of deferred compensation or earnouts and fabricating a pretextual reason for nonpayment
at the time the deferred compensation or earnouts become due” (the Consumer Protection Counterclaim”). For the Consumer Protection
Counterclaim, Defendant seeks to recover the full amount of the Earnout Payments ($
On October 12, 2022, the parties filed a joint pre-conference statement pursuant to the court’s August 24, 2022, order scheduling an initial case management conference. Pursuant to that order, on October 19, 2022, the Court held an initial case management conference. Later that day, the Court issued an initial case management order which set forth relevant deadlines, including the close of fact discovery on April 21, 2023, and the close of all discovery (including expert discovery) on July 19, 2023.
On November 11, 2022, Plaintiffs moved to dismiss the Consumer Protection Counterclaim.
Monroe and the Company intend to pursue their claims vigorously.
As of the date of this filing, we are not aware of any other material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, other than as disclosed above.
NOTE 10 – ACQUISITION
In accordance with ASC 805, the Company accounts for acquisitions using the purchase method 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 the Company to make significant assumptions, including projections of future events and operating performance.
On
April 18, 2022, the Company entered into a Stock Purchase Agreement with Headway Workforce Solutions, pursuant to which, among other
things, the Company agreed to purchase all of the issued and outstanding securities of Headway in exchange for (i) a cash payment of
$
The
purchase price in connection with the Headway Acquisition was $
| 24 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The fair values assigned in the preliminary allocation of purchase price included in the table below are based on information that was available as of the date of the acquisition and such amounts are considered preliminary and are based on the information that was available as of the date of the acquisition. We were not able to complete our final purchase price allocation based on the timing of the acquisition and our need to engage third party valuation specialists to assist with the valuation of the contingent consideration as well as requiring additional time to further analyze the initial amounts recorded. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, establishment of potential acquisition contingencies, and the determination of any residual amount that will be allocated to goodwill. As additional information becomes available, the preliminary purchase price allocation may be revised during the remainder of the measurement period, which will not exceed 12 months from the acquisition date. Any such revisions or changes may be material.
The following table summarizes the preliminary allocation of the purchase price of the fair value of the assets acquired and liabilities assumed at the date of the acquisition:
| Current assets | $ | |||
| Fixed assets | ||||
| Other non-current assets | ||||
| Intangible assets | ||||
| Goodwill | ||||
| Current liabilities | ( | ) | ||
| Other non-current liabilities | ( | ) | ||
| Consideration | $ |
In
connection with the acquisition of Headway, the Company recorded $
The
Company recorded a total of $
The following unaudited pro forma consolidated results of operation have been prepared, as if the acquisition of Headway had occurred as of January 3, 2022 and January 1, 2021, respectively.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Net Income (Loss) from continuing operations | $ | $ | $ | ( | ) | $ | ||||||||||
NOTE 11 – SEGMENT INFORMATION
The Company generated revenue and gross profit by segment as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Commercial Staffing - US | $ | $ | $ | $ | ||||||||||||
| Professional Staffing - US | ||||||||||||||||
| Professional Staffing - UK | ||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
| Commercial Staffing - US | $ | $ | $ | $ | ||||||||||||
| Professional Staffing - US | ||||||||||||||||
| Professional Staffing - UK | ||||||||||||||||
| Total Gross Profit | $ | $ | $ | $ | ||||||||||||
| 25 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The following table disaggregates revenues by segments:
| Three Months Ended October 1, 2022 | ||||||||||||||||
| Commercial Staffing - US | Professional Staffing - US | Professional Staffing - UK | Total | |||||||||||||
| Permanent Revenue | $ | $ | $ | $ | ||||||||||||
| Temporary Revenue | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Three Months Ended October 2, 2021 | ||||||||||||||||
| Commercial Staffing - US | Professional Staffing - US | Professional Staffing - UK | Total | |||||||||||||
| Permanent Revenue | $ | $ | $ | $ | ||||||||||||
| Temporary Revenue | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Nine Months Ended October 1, 2022 | ||||||||||||||||
| Commercial Staffing - US | Professional Staffing - US | Professional Staffing - UK | Total | |||||||||||||
| Permanent Revenue | $ | $ | $ | $ | ||||||||||||
| Temporary Revenue | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Nine Months Ended October 2, 2021 | ||||||||||||||||
| Commercial Staffing - US | Professional Staffing - US | Professional Staffing - UK | Total | |||||||||||||
| Permanent Revenue | $ | $ | $ | $ | ||||||||||||
| Temporary Revenue | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
As of October 1, 2022 and January 1, 2022, the Company has assets in the U.S. and the U.K. as follows:
| October 1, 2022 | January 1, 2022 | |||||||
| United States | $ | $ | ||||||
| United Kingdom | ||||||||
| Total Assets | $ | $ | ||||||
NOTE 12 – RELATED PARTY TRANSACTIONS
In addition to the Series A Preferred Stock, the following are other related party transactions:
Board and Committee Members
| Nine Months Ended October 1, 2022 | ||||||||||||||||
| Cash Compensation | Shares Issued | Value of Shares Issued | Compensation Expense Recognized | |||||||||||||
| Dimitri Villard | $ | $ | $ | |||||||||||||
| Jeff Grout | ||||||||||||||||
| Nick Florio | ||||||||||||||||
| Vincent Cebula | ||||||||||||||||
| Alicia Barker | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| Nine Months Ended October 2, 2021 | ||||||||||||||||
| Cash Compensation | Shares Issued | Value of Shares Issued | Compensation Expense Recognized | |||||||||||||
| Dimitri Villard | ||||||||||||||||
| Jeff Grout | ||||||||||||||||
| Nick Florio | ||||||||||||||||
| Vincent Cebula | ||||||||||||||||
| Alicia Barker | ||||||||||||||||
| 26 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 13 – SUPPLEMENTAL CASH FLOW INFORMATION
| Nine Months Ended | ||||||||
| October 1, 2022 | October 2, 2021 | |||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Non-Cash Investing and Financing Activities: | ||||||||
| Deferred purchase price of UK factoring facility | $ | $ | ||||||
| Redeemable Series H Preferred Stock, net | ||||||||
| Debt discount | ||||||||
| Earnout liability | ||||||||
| Goodwill | ||||||||
| Intangible assets | ||||||||
| Warrant Modification | ||||||||
| Dividends accrued to related parties | ||||||||
| Deemed dividend | ||||||||
| Acquisition of Right of Use Assets | ||||||||
| Conversion of Series E Preferred Stock – Related Party | ||||||||
| Conversion of Series E-1 Preferred Stock – Related Party | ||||||||
| Conversion of Series G Preferred Stock – Related Party to debt | ||||||||
| Conversion of Series G-1 Preferred Stock – Related Party to debt | ||||||||
NOTE 14 – SUBSEQUENT EVENTS
Note Purchase Agreement with Jackson Investment Group, LLC
On
October 27, 2022, the Company entered into the Third Amended and Restated Note Purchase Agreement with Jackson, which amended and restated
the Amended Note Purchase Agreement, dated October 26, 2020, as amended, and issued to Jackson the Jackson Note, with a remaining outstanding principal balance of approximately $
Under
the terms of the Third Amended and Restated Note Purchase Agreement and Jackson Note,
In addition, pursuant to the terms of the Third Amended and Restated Note Purchase Agreement, until all principal interest and fees due pursuant to the Third Amended and Restated Note Purchase Agreement and the Jackson Note are paid in full by the Company and are no longer outstanding, Jackson shall have a first call over 50% of the net proceeds from all common stock equity raises the Company conducts, which shall be used to pay down any outstanding obligations due pursuant to the Note Documents. The Jackson Note continues to be secured by substantially of the Company and its subsidiaries’ assets pursuant to the Amended and Restated Security Agreement with Jackson, dated September 15, 2017, as amended, and as further amended by the Omnibus Agreement (as defined below) on October 27, 2022.
Omnibus Amendment and Reaffirmation Agreement with Jackson
On October 27, 2022, in connection with the Third Amended and Restated Note Purchase Agreement, the Company entered into an Omnibus Amendment and Reaffirmation Agreement (the “Omnibus Agreement”) with Jackson, which, among other things, amends (i) the Amended and Restated Pledge Agreement, dated as of September 15, 2017, as amended and (ii) the Amended and Restated Pledge Agreement, dated as of September 15, 2017, as amended, to reflect certain of the terms as updated and amended by the Third Amended and Restated Note Purchase Agreement.
Amendment to Warrant Agreement with Jackson
On
October 27, 2022, in connection with the entry into the Third Amended and Restated Note Purchase Agreement, the Company entered into
Amendment No. 4 (“Amendment No. 4”) to the Amended and Restated Warrant Agreement, dated April 25, 2018 (as amended prior to Amendment No. 4, the “Existing Warrant”), with Jackson.
Pursuant to the Existing Warrant and after giving effect to the
Amendment to Credit and Security Agreement with MidCap
On
October 27, 2022, the Company entered into Amendment No. 27 and Joinder Agreement to the Credit and Security Agreement (“Amendment
No. 27”) with MidCap Funding IV Trust as successor by assignment to MidCap, dated April 8, 2015,
which amended the Credit and Security Agreement. Amendment
No. 27, among other things, (i) increases the revolving loan commitment amount from $
In
addition,
In
connection with Amendment No. 27, the Company paid to MidCap a modification fee of $
Amendment to Intercreditor Agreement with Jackson and MidCap
On
October 27, 2022, in connection with the Third Amended and Restated Note Purchase Agreement, the Jackson Note and Amendment No. 27, the Company, Jackson
and MidCap entered into the Fifth Amendment to Intercreditor Agreement (the “Fifth Amendment”), which amended the Intercreditor
Agreement, dated September 15, 2017, by and between the Company, Jackson and MidCap, as amended. The Fifth Amendment, among other things,
permits the increase of the credit commitments under the Credit and Security Agreement as amended by Amendment No. 27 to $
| 27 |
ITEM 2. 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 consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This section includes a number of forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect our current views with respect to future events and financial performance. All statements that address expectations or projections about the future, including, but not limited to, statements about our plans, strategies, adequacy of resources and future financial results (such as revenue, gross profit, operating profit, cash flow), are forward-looking statements. Some of the forward-looking statements can be identified by words like “anticipates,” “believes,” “expects,” “may,” “will,” “can,” “could,” “should,” “intends,” “project,” “predict,” “plans,” “estimates,” “goal,” “target,” “possible,” “potential,” “would,” “seek,” and similar references to future periods. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Important factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to: negative outcome of pending and future claims and litigation; our ability to access the capital markets by pursuing additional debt and equity financing to fund our business plan and expenses on terms acceptable to us or at all; and our ability to comply with our contractual covenants, including in respect of our debt; potential cost overruns and possible rejection of our business model and/or sales methods; weakness in general economic conditions and levels of capital spending by customers in the industries we serve; weakness or volatility in the financial and capital markets, which may result in the postponement or cancellation of our customers’ capital projects or the inability of our customers to pay our fees; delays or reductions in U.S. government spending; credit risks associated with our customers; competitive market pressures; the availability and cost of qualified labor; our level of success in attracting, training and retaining qualified management personnel and other staff employees; changes in tax laws and other government regulations, including the impact of health care reform laws and regulations; the possibility of incurring liability for our business activities, including, but not limited to, the activities of our temporary employees; our performance on customer contracts; and government policies, legislation or judicial decisions adverse to our businesses. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except as required by law. We recommend readers to carefully review the entirety of this Quarterly Report, including the “Risk Factors” in Item 1A of this Quarterly Report and the other reports and documents we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.
| 28 |
Overview
We are incorporated in the state of Delaware. As a rapidly growing public company in the international staffing sector, our high-growth business model is based on finding and acquiring suitable, mature, profitable, operating, U.S. and U.K. based staffing companies. Our targeted consolidation model is focused specifically on the Professional Business Stream and Commercial Business Stream disciplines.
We effected a one-for-ten reverse stock split on June 24, 2022 (the “Reverse Stock Split”). All share and per share information in the consolidated financial statements has been retroactively adjusted to reflect the Reverse Stock Split.
Recent Developments
COVID-19
In December 2019, a strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has spread globally, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected countries. The COVID-19 pandemic and its ongoing effects are continuing to impact worldwide economic activity, and activity in the United States and the United Kingdom where our operations are based. Much of the independent contractor work we provide to our clients is performed at the site of our clients. Given that the magnitude and duration of COVID-19’s impact on our business and operations remain uncertain, the continued spread of COVID-19 (including the emergence and persistence of variants relating thereto) and the imposition of related public health containment measures and travel and business restrictions could have a material adverse impact on our business, financial condition, operating results, and cash flows. While expected to be temporary, prolonged workforce disruptions can negatively impact revenue in fiscal year 2022 and the Company’s overall liquidity.
While the ultimate economic impact brought by, and the duration of, the COVID-19 pandemic and its ongoing effects may be difficult to assess or predict, the pandemic has resulted in significant disruptions in general commercial activity and the global economy and caused financial market volatility and uncertainty in significant and unforeseen ways in the recent years. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital and on the market price of our common stock, and we may not be able to successfully raise needed capital. If we are unsuccessful in raising capital in the future, we may need to reduce activities, curtail, or cease operations.
In addition, the continuation or worsening of the COVID-19 pandemic, its ongoing effects or an outbreak of other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition, and results of operations.
| 29 |
Nasdaq Bid Price Requirement
On June 3, 2020, we received a letter from the Staff (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying us that we were no longer in compliance with the minimum stockholders’ equity requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2,500 (the “Stockholders’ Equity Requirement”). A hearing before the Nasdaq Hearings Panel (the “Panel”) was held on January 21, 2021, and we were granted an extension to regain compliance until February 28, 2021, which was subsequently further extended to May 31, 2021. On June 28, 2021, we received a letter from the Staff notifying us that the Panel determined that we had regained compliance with the Stockholders’ Equity Requirement. The Panel also imposed a panel monitor (the “Panel Monitor”) under Nasdaq Listing Rule 5815(d)(4)(A) for a period of one year from the date of the June 28, 2021 letter, during which period we were expected to remain in compliance with all of Nasdaq’s continued listing requirements.
On February 23, 2022, we received a letter from the Listing Qualifications of Nasdaq notifying us that we were no longer in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”), for continued listing on Nasdaq. Pursuant to the Panel Decision, we were not eligible for the 180-day bid price compliance period set forth in the Listing Rules. On March 2, 2022, we timely requested a hearing before the Panel, which was held on March 31, 2022. On April 12, 2022, we received a letter from Nasdaq notifying us that the Panel determined to grant our request for continued listing on Nasdaq, subject to the following: (i) on or about May 2, 2022, we would advise the Panel of the status of the proxy statement it plans to file to obtain shareholder approval for a reverse stock split, (ii) on or about May 23, 2022, we would advise the Panel on the status of the shareholder meeting we plan to hold to obtain approval of the reverse stock split, (iii) on or about May 26, 2022, we would affect a reverse stock split and (iv) on or before about June 22, 2022, we would demonstrate compliance with the Bid Price Requirement by evidencing a closing bid price above $1.00 per share for the previous ten consecutive trading sessions. On each of April 19, 2022 and May 20, 2022, we received letters from the Staff notifying us that as we had not yet filed our Form 10-K for the period ended January 1, 2022 and our Form 10-Q for the period ended April 2, 2022, each such matter serving as an additional basis for delisting our securities from Nasdaq under Nasdaq Listing Rule 5810(c)(2)(A). On May 4, 2022 the Panel granted us an extension request until July 11, 2022 to demonstrate compliance with the Bid Price Requirement.
On June 23, 2022, we effected the Reverse Stock Split, on June 24, 2022, we filed our Annual Report on Form 10-K for the year ended January 1, 2022, and on July 14, 2022, we filed our Quarterly Report on Form 10-Q for the period ended April 2, 2022. On July 15, 2022, we received a letter from the Staff informing the Company that it had regained compliance with the Rule and the subsequent delinquency concerns as described above. The letter additionally informed us that we are in compliance with the terms of the Panel Monitor. We are now in compliance with the listing requirements required for continued listing on Nasdaq. Accordingly, the Panel determined to continue the listing of our securities on Nasdaq and the matter is now closed.
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July 2022 Private Placement
On July 1, 2022, we entered into a securities purchase agreement with certain institutional and accredited investors for the issuance and sale of a private placement of 657,858 shares of common stock or pre-funded warrants to purchase shares of common stock, and warrants (the “July 2022 Warrants”) to purchase up to 657,858 shares of common stock, with an exercise price of $5.85 per share. The July 2022 Warrants are exercisable immediately upon issuance and have a term of exercise equal to five and one-half years from the date of issuance. The combined purchase price for one share of common stock (or pre-funded warrant) and one associated warrant to purchase one share of common stock was $6.10.
In connection with the private placement, each investor entered into Warrant Amendment Agreements to amend the exercise prices of certain existing warrants to purchase up to an aggregate of 657,858 shares of our common stock that were previously issued to the investors, with exercise prices ranging from $18.50 to $38.00 per share and expiration dates ranging from July 22, 2026 to November 1, 2026. The Warrant Amendment Agreements became effective upon the closing of the July 2022 Private Placement and pursuant to the Warrant Amendment Agreements, the amended warrants have a reduced exercise price of $5.85 per share and expire five and one-half years following the closing of the July 2022 Private Placement.
We intend to use the net proceeds received from the private placement for general working capital purposes.
Business Model, Operating History and Acquisitions
We are a high-growth international staffing company engaged in the acquisition of U.S. and U.K. based staffing companies. As part of our consolidation model, we pursue a broad spectrum of staffing companies supporting primarily the Professional and Commercial Business Streams. Our typical acquisition model is based on paying consideration in the form of cash, stock, earn-outs and/or promissory notes. In furthering our business model, we are regularly in discussions and negotiations with various suitable, mature acquisition targets. Since November 2013, we have completed eleven acquisitions.
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For the Nine Months Ended October 1, 2022 and October 2, 2021
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||
| October 1, 2022 | % of Revenue | October 2, 2021 | % of Revenue | Growth | ||||||||||||||||
| Revenue | $ | 175,066 | 100.0 | % | $ | 146,982 | 100.0 | % | 19.1 | % | ||||||||||
| Cost of revenue | 143,709 | 82.1 | % | 120,324 | 81.9 | % | 19.4 | % | ||||||||||||
| Gross profit | 31,357 | 17.9 | % | 26,658 | 18.1 | % | 17.6 | % | ||||||||||||
| Operating expenses | 32,556 | 18.6 | % | 27,933 | 19.0 | % | 16.6 | % | ||||||||||||
| Loss from operations | (1,199 | ) | -0.7 | % | (1,275 | ) | -0.9 | % | -6.0 | % | ||||||||||
| Other (expenses) income | (2,292 | ) | -1.3 | % | 16,250 | 11.1 | % | -114.1 | % | |||||||||||
| Benefit (Provision) for income taxes | (65 | ) | 0.0 | % | (102 | ) | -0.1 | % | -36.3 | % | ||||||||||
| Net (loss) income | $ | (3,556 | ) | -2.0 | % | $ | 14,873 | 10.1 | % | -123.9 | % | |||||||||
Revenue
For the nine months ended October 1, 2022, revenue increased by 19.1% to $175,066 as compared with $146,982 for the nine months ended October 2, 2021. Of that $28,084 increase, $33,074 was attributable to the Headway acquisition, partially offset by $311 organic revenue decline and $4,679 of unfavorable foreign currency translation.
Revenue for the nine months ended October 1, 2022 was comprised of $170,699 of temporary contractor revenue and $4,367 of permanent placement revenue, compared with $143,274 of temporary contractor revenue and $3,708 of permanent placement revenue for the nine months ended October 2, 2021, respectively.
Cost of revenue, Gross profit and Gross margin
Cost of revenue, excluding depreciation and amortization, includes the variable cost of labor and various non-variable costs (e.g., workers’ compensation insurance) relating to employees (temporary and permanent) as well as sub-contractors and consultants. For the nine months ended October 1, 2022, cost of revenue was $143,709, an increase of 19.4% from $120,324 for the nine months ended October 2, 2021, compared with revenue growth of 19.1%. Of that $23,385 increase, $28,049 was attributable to the Headway acquisition offset by a $778 decline in associated costs of our operations and $3,886 of favorable foreign currency translation.
Gross profit for the nine months ended October 1, 2022 was $31,357, an increase of 17.9% from $26,658 for the nine months ended October 2, 2021, representing gross margin of 17.9% and 18.1% for each period, respectively. The $4,699 increase was driven by $5,025 from the Headway acquisition and $468 of organic growth and partially offset by $794 of unfavorable foreign currency translation.
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Operating expenses
Total operating expenses for the nine months ended October 1, 2022 were $32,556, an increase of 16.6% from $27,933 for the nine months ended October 2, 2021. The increase of $4,623 was driven primarily by Headway operating expenses of $4,450 as well as higher non-recurring costs, legal costs, and other costs associated with acquisitions efforts.
Other expenses
Total other (expenses) income for the nine months ended October 1, 2022 were $(2,292), a decrease of 114.1% from $16,250 in the nine months ended October 2, 2021. The decrease was driven by the following: PPP forgiveness gain of $19,395 for the nine months ended October 2, 2021 compared to $0 for the nine months ended October 1, 2022, $3,030 interest expense and amortization of debt discount and deferred financing costs in the nine months ended October 1, 2022, which includes interest expense and amortization of $299 from the Headway acquisition, compared with the nine months ended October 2, 2021 of $(3,432), remeasuring our intercompany note for the nine months ended October 1, 2022 of $0 compared with losses from remeasuring our intercompany note in the nine months ended October 2, 2021 of $219. In addition, for the nine months ended October 1, 2022, we had other income of $738 compared to other income of $292 for the nine months ended October 2, 2021.
For the Three Months Ended October 1, 2022 and October 2, 2021
| Three Months Ended | Three Months Ended | |||||||||||||||||||
| October 1, 2022 | % of Revenue | October 2, 2021 | % of Revenue | Growth | ||||||||||||||||
| Revenue | $ | 66,120 | 100.0 | % | $ | 47,501 | 100.0 | % | 39.2 | % | ||||||||||
| Cost of revenue | 53,795 | 81.4 | % | 37,877 | 79.7 | % | 42.0 | % | ||||||||||||
| Gross profit | 12,325 | 18.6 | % | 9,624 | 20.3 | % | 28.1 | % | ||||||||||||
| Operating expenses | 11,830 | 17.9 | % | 9,151 | 19.3 | % | 29.3 | % | ||||||||||||
| Loss from operations | 495 | 0.7 | % | 473 | 1.0 | % | 4.7 | % | ||||||||||||
| Other (expenses) income | 599 | 0.9 | % | 8,371 | 17.6 | % | -92.8 | % | ||||||||||||
| Benefit (expense) from income taxes | (62 | ) | -0.1 | % | (131 | ) | -0.3 | % | -52.7 | % | ||||||||||
| Net (loss) income | $ | 1,032 | 1.6 | % | $ | 8,713 | 18.3 | % | -88.2 | % | ||||||||||
Revenue
For the three months ended October 1, 2022, revenue increased by 39.2% to $66,120 as compared with $47,501 for the three months ended October 2, 2021. Of that $18,619 increase, $21,822 was attributable to the Headway acquisition which was partially offset by a $770 decrease in the Company’s other operations and $2,433 of unfavorable foreign currency translation.
Revenue for the three months ended October 1, 2022 was comprised of $64,733 of temporary contractor revenue and $1,387 of permanent placement revenue, compared with $46,168 and $1,333 for the three months ended October 2, 2021, respectively.
Cost of revenue, Gross profit and Gross margin
Cost of revenue, excluding depreciation and amortization, includes the variable cost of labor and various non-variable costs (e.g., workers’ compensation insurance) relating to employees (temporary and permanent) as well as sub-contractors and consultants. For the three months ended October 1, 2022, cost of revenue was $53,795, an increase of 42.0% from $37,877 in the three months ended October 2, 2021, compared with revenue growth of 39.2%. Of that $15,918 increase, $18,129 was attributable to the Headway acquisition which was partially offset by a $209 decline in associated costs of the Company’s other operations and $2,002 of favorable foreign currency translation.
Gross profit for the three months ended October 1, 2022 was $12,325, an increase of 28.1% from $9,624 for the three months ended October 2, 2021, representing gross margin of 18.6% and 20.3% for each period, respectively. The increase of $2,701 was driven by $3,693 from the Headway acquisition and partially offset by $564 of loss from our other operations and $428 of unfavorable foreign currency translation.
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Operating expenses
Total operating expenses for the three months ended October 1, 2022 were $11,830, an increase of 29.3% from $9,151 for the three months ended October 2, 2021. The increase of $2,679 was driven primarily by Headway operating expenses of $2,856 which was offset by a reduction in non-recurring costs, legal, and other costs associated with acquisitions efforts.
Other expenses
Total other expenses for the three months ended October 1, 2022 was $410, a decrease of 92.8% from other income of $8,371 in the three months ended October 2, 2021. The decrease was driven by the following: PPP forgiveness gain of $9,504 for the three months ended October 2, 2021 compared to $0 for the three months ended October 1, 2022, $1,127 interest expense and amortization of debt discount and deferred financing costs in the three months ended October 1, 2022, which includes interest expense and amortization of $187 from the Headway acquisition, compared with the three months ended October 2, 2021 of $1,006, gain from remeasuring our intercompany note in the three months ended October 1, 2022 of $1,009 compared with loss from remeasuring our intercompany note in the three months ended October 2, 2021 of $315. In addition, in the three months ended October 1, 2022, we had other income of $717 compared with other loss of $188 for the three months ended October 2, 2021.
Non-GAAP Measures
To supplement our consolidated financial statements presented in accordance with GAAP, we also use non-GAAP financial measures and Key Performance Indicators (“KPIs”) in addition to our GAAP results. We believe non-GAAP financial measures and KPIs may provide useful information for evaluating our cash operating performance, ability to service debt, compliance with debt covenants and measurement against competitors. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be comparable to similarly entitled measures reported by other companies.
We present the following non-GAAP financial measure and KPIs in this report:
Revenue and Gross Profit by Business Streams We use this KPI to measure our mix of Revenue and respective Gross Profit between its two main lines of business due to their differing margins. For clarity, these lines of business are not our operating segments, as this information is not currently regularly reviewed by the chief operating decision maker to allocate capital and resources. Rather, we use this KPI to benchmark us against the industry.
The following table details Revenue and Gross Profit by sector:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| October 1, 2022 | Mix | October 2, 2021 | Mix | October 1, 2022 | Mix | October 2, 2021 | Mix | |||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||
| Commercial Staffing - US | $ | 25,940 | 39 | % | $ | 29,601 | 62 | % | $ | 83,350 | 48 | % | $ | 88,240 | 60 | % | ||||||||||||||||
| Professional Staffing - US | 25,756 | 39 | % | 4,536 | 10 | % | 45,292 | 26 | % | 12,215 | 8 | % | ||||||||||||||||||||
| Professional Staffing - UK | 14,424 | 22 | % | 13,364 | 28 | % | 46,424 | 27 | % | 46,527 | 32 | % | ||||||||||||||||||||
| Total Service Revenue | $ | 66,120 | $ | 47,501 | $ | 175,066 | $ | 146,982 | ||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||||||||||
| Commercial Staffing - US | $ | 5,034 | 41 | % | $ | 5,195 | 54 | % | $ | 15,197 | 48 | % | $ | 15,422 | 58 | % | ||||||||||||||||
| Professional Staffing - US | 4,715 | 38 | % | 1,200 | 12 | % | 8,286 | 26 | % | 3,146 | 12 | % | ||||||||||||||||||||
| Professional Staffing - UK | 2,576 | 21 | % | 3,229 | 34 | % | 7,874 | 25 | % | 8,090 | 30 | % | ||||||||||||||||||||
| Total Gross Profit | $ | 12,325 | $ | 9,624 | $ | 31,357 | $ | 26,658 | ||||||||||||||||||||||||
| Gross Margin | ||||||||||||||||||||||||||||||||
| Commercial Staffing - US | 19.4 | % | 17.6 | % | 18.2 | % | 17.5 | % | ||||||||||||||||||||||||
| Professional Staffing - US | 18.3 | % | 26.5 | % | 18.3 | % | 25.8 | % | ||||||||||||||||||||||||
| Professional Staffing - UK | 17.9 | % | 24.2 | % | 17.0 | % | 17.4 | % | ||||||||||||||||||||||||
| Total Gross Margin | 18.6 | % | 20.3 | % | 17.9 | % | 18.1 | % | ||||||||||||||||||||||||
Adjusted EBITDA This measure is defined as net income (loss) attributable to common stock before: interest expense, benefit from income taxes; depreciation and amortization; acquisition, capital raising and other non-recurring expenses; other non-cash charges; impairment of goodwill; re-measurement gain on intercompany note; restructuring charges; gain from sale of business; PPP Forgiveness Gain; other income; and charges we consider to be non-recurring in nature such as legal expenses associated with litigation, professional fees associated potential and completed acquisitions. We use this measure because we believe it provides a more meaningful understanding of our profit and cash flow generation.
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| Three Months Ended | Nine Months Ended | Trailing Twelve Months | ||||||||||||||||||||||
| October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||||||||
| Net loss | $ | 1,032 | $ | 8,713 | $ | (3,556 | ) | $ | 14,873 | $ | (10,200 | ) | $ | 12,632 | ||||||||||
| Interest expense | 891 | 814 | 2,512 | 3,068 | 3,301 | 4,506 | ||||||||||||||||||
| (Benefit) expense from income taxes | 62 | 131 | 65 | 102 | (392 | ) | 247 | |||||||||||||||||
| Depreciation and amortization | 1,023 | 880 | 2,658 | 2,486 | 3,289 | 3,330 | ||||||||||||||||||
| EBITDA | $ | 3,008 | $ | 10,538 | $ | 1,679 | $ | 20,529 | $ | (4,073 | ) | $ | 20,715 | |||||||||||
| Acquisition, capital raising and other non-recurring expenses (1) | 1,788 | 321 | 4,375 | 2,802 | 4,847 | 5,024 | ||||||||||||||||||
| Other non-cash charges (2) | 7 | 8 | 32 | 344 | 253 | 450 | ||||||||||||||||||
| Impairment of Goodwill | - | - | - | - | 3,104 | - | ||||||||||||||||||
| Re-measurement gain on intercompany note | (1,009 | ) | 315 | - | 219 | - | (712 | ) | ||||||||||||||||
| Deferred consideration settlement | - | - | - | - | - | 41 | ||||||||||||||||||
| PPP Forgiveness Gain | - | (9,504 | ) | - | (19,609 | ) | - | (19,609 | ) | |||||||||||||||
| Gain on sale of business | - | - | - | - | - | 95 | ||||||||||||||||||
| Other (income) loss | (717 | ) | (188 | ) | (738 | ) | (292 | ) | (412 | ) | (296 | ) | ||||||||||||
| Adjusted EBITDA | $ | 3,077 | $ | 1,490 | $ | 5,348 | $ | 3,993 | $ | 3,719 | $ | 5,708 | ||||||||||||
| Adjusted EBITDA of Divested Business (3) | $ | - | $ | 101 | ||||||||||||||||||||
| Pro Forma Adjusted EBITDA (4) | $ | 3,719 | $ | 5,809 | ||||||||||||||||||||
| Adjusted Gross Profit (5) | $ | 35,866 | $ | 34,945 | ||||||||||||||||||||
| Adjusted EBITDA as percentage of Adjusted Gross Profit | 10.4 | % | 16.6 | % | ||||||||||||||||||||
| (1) | Acquisition, capital raising, and other non-recurring expenses primarily relate to capital raising expenses, acquisition and integration expenses, and legal expenses incurred in relation to matters outside the ordinary course of business. Due to government mandated restrictions, the Company had to temporarily close some of its offices and, due to social distancing restrictions, could not make full use of these facilities for significant periods of time during 2021. | |
| (2) | Other non-cash charges primarily relate to staff option and share compensation expense, expense for shares issued to directors for board services, and consideration paid for consulting services. | |
| (3) | Adjusted EBITDA of Divested Business for the period prior to the divestment date. | |
| (4) | Pro Forma Adjusted EBITDA excludes the Adjusted EBITDA of Divested Business for the period prior to the divestment date. | |
| (5) | Adjusted Gross Profit excludes gross profit of business divested in September 2020, for the period prior to divestment date. |
Operating Leverage This measure is calculated by dividing the growth in Adjusted EBITDA by the growth in Adjusted Gross Profit, on a trailing 12-month basis. We use this KPI because we believe it provides a measure of our efficiency for converting incremental gross profit into Adjusted EBITDA.
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| October 1, 2022 | October 2, 2021 | |||||||
| Gross Profit - TTM (Current Period) | $ | 35,866 | $ | 34,945 | ||||
| Gross Profit - TTM (Prior Period) | 34,945 | 32,479 | ||||||
| Gross Profit – Growth (Decline) | $ | 921 | $ | 2,466 | ||||
| Adjusted EBITDA - TTM (Current Period) | $ | 3,719 | $ | 5,708 | ||||
| Adjusted EBITDA - TTM (Prior Period) | 5,708 | 5,442 | ||||||
| Adjusted EBITDA – Growth (Decline) | $ | (1,989 | ) | $ | 266 | |||
| Operating Leverage | -216.0 | % | 10.8 | % | ||||
Leverage Ratio Calculated as Total Debt, Net, gross of any Original Issue Discount (includes Redeemable Series H Preferred Stock), divided by Pro Forma Adjusted EBITDA for the trailing 12-months. We use this KPI as an indicator of our ability to service debt prospectively.
| October 1, 2022 | October 2, 2021 | |||||||
| Total Term Debt, Net | $ | 17,701 | $ | 14,357 | ||||
| Addback: Total Debt Discount and Deferred Financing Costs | 660 | 235 | ||||||
| Total Debt | $ | 18,361 | $ | 14,592 | ||||
| TTM Adjusted EBITDA | $ | 3,759 | $ | 5,708 | ||||
| Pro Forma TTM Adjusted EBITDA | $ | 3,759 | $ | 5,809 | ||||
| Pro Forma Leverage Ratio | 4.88 | x | 2.5 | x | ||||
Operating Cash Flow Including Proceeds from Accounts Receivable Financing calculated as net cash (used in) provided by operating activities plus net proceeds from accounts receivable financing. Because much of our temporary payroll expense is paid weekly and in advance of clients remitting payment for invoices, operating cash flow is often weaker in staffing companies where revenue and accounts receivable are growing. Accounts receivable financing is essentially an advance on client remittances and is primarily used to fund temporary payroll. As such, we believe this measure is helpful to investors as an indicator of our underlying operating cash flow.
On February 8, 2018, CBS Butler Holdings Limited (“CBS Butler”), Staffing 360 Solutions Limited and The JM Group, entered into a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’ accounts receivable up to an aggregate amount of £11,500 across all three subsidiaries. The terms of the arrangement provide for HSBC to fund 90% of the purchased accounts receivable upfront and a secured borrowing line of 70% of unbilled receivables capped at £1,000 (within the overall aggregate total facility of £11,500). The arrangement has an initial term of 12 months, with an automatic rolling three-month extension and carries a service charge of 1.80%. Under ASU 2016-16, “Statement of Cash Flows (Topic 230, Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force), the upfront portion of the sale of accounts receivable is classified within operating activities, while the deferred purchase price portion (or beneficial interest), once collected, is classified within investing activities. On April 20, 2020, the terms of the loan with HSBC were amended whereby no capital repayments will be made between April 2020 to September 2020, and only interest payments will be made during this time. On May 15, 2020, we entered into a three-year term loan with HSBC in the UK for £1,000.
| Nine Months Ended | ||||||||
| October 1, 2022 | October 2, 2021 | |||||||
| Net cash flow used in operating activities | $ | (8,282 | ) | $ | (9,774 | ) | ||
| Collection of UK factoring facility deferred purchase price | 5,282 | 5,349 | ||||||
| Repayments on accounts receivable financing | (3,345 | ) | (3,659 | ) | ||||
| Net cash used in operating activities including proceeds from accounts receivable financing | $ | (6,345 | ) | $ | (8,084 | ) | ||
The Leverage Ratio and Operating Cash Flow Including Proceeds from Accounts Receivable Financing should be considered together with the information in the “Liquidity and Capital Resources” section, immediately below.
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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. Historically, we have funded our operations through term loans, promissory notes, bonds, convertible notes, private placement offerings and sales of equity.
Our primary uses of cash have been for debt repayments, repayment of deferred consideration from acquisitions, professional fees related to our operations and financial reporting requirements and for the payment of compensation, benefits and consulting fees. The following trends may occur as the Company continues to execute on its strategy:
| ● | An increase in working capital requirements to finance organic growth, | |
| ● | Addition of administrative and sales personnel as the business grows, | |
| ● | Increases in advertising, public relations and sales promotions for existing and new brands as we expand within existing markets or enter new markets, | |
| ● | A continuation of the costs associated with being a public company, and | |
| ● | Capital expenditures to add technologies. |
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 SEC. We expect all of these applicable rules and regulations could significantly increase our legal and financial compliance costs and increase the use of resources.
As of and for the nine months ended October 1, 2022, we had a working capital deficiency of $13,761, accumulated deficit of $87,506, and a net loss of $3,485.
The accompanying financial statements have been prepared in conformity with GAAP, which contemplate our continuation as a going concern. We have unsecured payments due in the next 12 months associated with a historical acquisition and secured current debt arrangements representing approximately $9,361 which are in excess of cash and cash equivalents on hand, in addition to funding operational growth requirements. Historically, we have funded such payments either through cash flow from operations or the raising of capital through additional debt or equity. If we are unable to obtain additional capital, such payments may not be made on time. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments or classifications that may result from our possible inability to continue as a going concern.
In addition, beginning in January 2023, we will have numerous contractual lease obligations representing an aggregate of approximately $8,693 related to current lease agreements. We intend to fund the majority of this by a combination of cash flow from operations, as well as the raising of capital through additional debt or equity.
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The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available to us.
Operating activities
For the nine months ended October 1, 2022, net cash used in operating activities of $8,282 was primarily attributable to net loss of $3,556 and changes in operating assets and liabilities totaling $8,473, offset by non-cash adjustments of $3,747. Changes in operating assets and liabilities primarily relate to a decrease in accounts receivable of $6,114, decrease in prepaid expenses and other current assets of $1,854, decrease in other assets of $944, increase in other current liabilities of $357, increase in other long-term liabilities of $1,040 and a decrease in accounts payable and accrued expense of $1,083. Total non-cash adjustments of $3,747 primarily include depreciation and amortization of intangible assets of $2,140, stock-based compensation of $325, amortization of debt discounts and deferred financing of $518, right of use assets amortization of $1,066 and bad debt expense of $302.
For the nine months ended October 2, 2021, net cash used in operations of $9,774 was primarily attributable to net income of $14,873 and changes in operating assets and liabilities totaling $(9,206), offset by non-cash adjustments of $(15,441). Changes in operating assets and liabilities primarily relate to a decrease in accounts receivable of $5,343, decrease in prepaid expenses and other current assets of $289, decrease in other assets of $438, decrease in current liabilities of $105, decrease in long term liabilities of $349, decrease in accounts payable and accrued expense of $2,356 and decrease in payables to related parties of $326. Total non-cash adjustments of $(15,441) primarily include forgiveness of PPP loan and related accrued interest of $19,609, offset by foreign currency re-measurement loss on intercompany loan of $219, depreciation and amortization of intangible assets of $2,122, stock-based compensation of $350, amortization of debt discounts and deferred financing of $365, right of use assets amortization of $852 and bad debt expense of $260.
Investing activities
For the nine months ended October 1, 2022, net cash flows provided by investing activities totaled $5,958 primarily due to the acquisition of Headway, net of cash acquired, totaling $1,395 and $5,282 related to collection of UK factoring facility deferred purchase price, partially offset by purchase of property and equipment of $719.
For the nine months ended October 2, 2021, net cash flows provided by investing activities was $5,249, of which $5,349 was related to collection of the beneficial interest from HSBC and partially offset by purchase of property and equipment of $100.
Financing activities
For the nine months ended October 1, 2022, net cash flows used in financing activities totaled $358 primarily due to proceeds from sale of common stock of $4,013, and proceeds from term loan of $67, offset by repayments of $3,345 on accounts receivable financing, net, repayment of term loan of $379, payment of $160 towards the Headway earnout, and third party financing costs of $554.
For the nine months ended October 2, 2021, net cash flows used in financing activities totaled $3,574 primarily due to proceeds from sale of common stock of $33,769, proceeds from related party note of $130, and proceeds from sale of Series F Preferred Stock of $4,698, offset by repayments of $3,659 on accounts receivable financing, net, repayment of term loan of $29,244, dividends paid to Jackson of $591, redemption of Series E preferred stock of $4,908 and third party financing costs of $3,769.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Critical Accounting Policies and Estimates
Refer to the Annual Report on Form 10-K filed with the SEC on June 24, 2022 for the fiscal year ended January 1, 2022. There have been no changes to our critical policies during the nine months ended October 1, 2022.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and treasury stock method will be no longer available. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company adopted this ASU in this fiscal year. This standard did not have an impact on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (each as defined in Rules) as of the end of the period covered by this quarterly report.
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We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Based on that evaluation, the Company identified a material weakness related to the lack of a sufficient complement of competent finance personnel to appropriately account for, review and disclose the completeness and accuracy of transactions entered into by the Company. Our management has also identified a material weakness in our internal control over our goodwill assessment relating to the lack of a sufficient process for determining the valuation of goodwill assets.
Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this quarterly report (“Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were ineffective, due to the material weakness in our control environment and financial reporting process discussed above.
Management believes that the condensed consolidated financial statements in this quarterly report on Form 10-Q fairly present, in all material respects, the Company’s financial condition as of the Evaluation Date, and results of its operations and cash flows for the Evaluation Date, in conformity with GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the three months ended October 1, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
Whitaker v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.
On December 5, 2019, former owner of Key Resources, Inc. (“KRI”), Pamela D. Whitaker (“Whitaker” or “Plaintiff”), filed a complaint in Guilford County, North Carolina (the “North Carolina Action”) asserting claims for breach of contract and declaratory judgment against Monroe Staffing Services LLC (“Monroe”) and the Company (collectively, the “Defendants”) arising out of the alleged non-payment of certain earn-out payments and interest purportedly due under a Share Purchase Agreement pursuant to which Whitaker sold all issued and outstanding shares in her staffing agency, KRI, to Monroe in August 2018. Whitaker sought $4,054 in alleged damages. As of October 1, 2022, the $4,054 is included with the Headway earnout as part of Earnout liabilities.
Defendants removed the action to the Middle District of North Carolina on January 7, 2020, and Plaintiff moved to remand on February 4, 2020. Briefing on the motion to remand concluded on February 24, 2020. Separately, Defendants moved to dismiss the action on January 14, 2020, based on Plaintiff’s failure to state a claim, improper venue, and lack of personal jurisdiction as to defendant Staffing 360 Solutions, Inc. Alternatively, Defendants sought a transfer of the action to the Southern District of New York, based on the plain language of the Share Purchase Agreement’s forum selection clause. Briefing on Defendants’ motion to dismiss concluded on February 18, 2020. On February 28, 2020, Plaintiff moved for leave to file an amended complaint. Defendants filed their opposition to the motion for leave on March 19, 2020. Plaintiff thereafter filed a reply.
On June 29, 2020, Magistrate Judge Joe L. Webster issued a Report and Recommendation on the pending motions, recommending that Defendants’ motion to dismiss be granted with regard to Defendants’ request to transfer the matter to the Southern District of New York, and denied in all other regards without prejudice to Defendants raising those arguments again in the new forum. Magistrate Judge Webster also recommended that Plaintiff’s motion to remand be denied and motion to amend be left to the discretion of the Southern District of New York.
Plaintiff filed an objection to the Report and Recommendation on July 9, 2020. Defendants responded on July 23, 2020. On February 19, 2021, the District Court issued a decision that reversed the Magistrate Judge’s Order. The District Court granted Plaintiff’s motion to remand and denied Defendants’ motion to dismiss as moot. Defendants filed a Notice of Appeal to the Fourth Circuit on February 25, 2021, and filed their opening brief on April 21, 2021. Plaintiff filed her response brief on May 21, 2021, and Defendants replied on June 11, 2021. Oral argument was held on March 9, 2022. On July 22, 2022, the Fourth Circuit issued a decision to vacate the District Court’s decision and ordered the North Carolina District Court to transfer the North Carolina Action to the Southern District of New York for adjudication there in accordance with the Share Purchase Agreement’s forum selection clause.
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Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc. v. Whitaker
Separately, on February 26, 2020, the Company and Monroe filed an action against Whitaker in the United States District Court for the Southern District of New York (Case No. 1:20-cv-01716) (the “New York Action”.) The New York Action concerns claims for breach of contract and fraudulent inducement arising from various misrepresentations made by Whitaker to the Company and Monroe in advance of, and included in, the share purchase agreement. The Company and Monroe are seeking damages in an amount to be determined at trial but in no event less than $6,000. On April 28, 2020, Whitaker filed a motion to dismiss the New York Action on both procedural and substantive grounds. On June 11, 2020, Monroe and the Company filed their opposition to Whitaker’s motion to dismiss. On July 9, 2020 Whitaker filed reply papers in further support of the motion.
On October 13, 2020, the Court denied Whitaker’s motion to dismiss, in part, and granted the motion, in part. The Court rejected Whitaker’s procedural arguments but granted the motion on substantive grounds. However, the Court ordered that Monroe and the Company may seek leave to amend the complaint by letter application by December 1, 2020. Monroe and the Company filed a letter of motion for leave to amend and a proposed Amended Complaint on December 1, 2020. On January 5, 2021, Whitaker filed an opposition to the letter motion. On January 25, 2021, Monroe and the Company filed a reply in further support of the letter motion. On March 9, 2021, the Court granted Monroe and the Company’s motion for leave to amend, in part, and denied the motion, in part. The Court rejected Monroe and the Company’s claim for fraudulent inducement but granted the motion for leave to amend their breach of contract claim. Monroe and the Company filed their amended complaint on March 12, 2021.
On April 9, 2021, Whitaker renewed her motion to dismiss on procedural grounds, requesting dismissal of the action or, in the alternative, a stay of the proceeding pending adjudication on the merits of the North Carolina Action. On May 14, 2021, Monroe and the Company filed an opposition to the motion to dismiss. On June 21, 2021, Whitaker filed a reply in further support of the motion. The Court referred the case to Magistrate Judge Barbara Moses, who held oral argument on the motion on November 9, 2021. On March 8, 2022, Magistrate Judge Moses stayed the action pending a decision by the Fourth Circuit on the appeal filed by Monroe and the Company in the North Carolina Action.
In light of the Fourth Circuit’s issuance of its July 22, 2022, decision and order transferring the North Carolina Action to the Southern District of New York, on August 1, 2022, the parties to the New York Action wrote to the Magistrate overseeing the matter to request a conference to address, inter alia, the resumption of discovery in light of the Fourth Circuit’s Order issued on July 22, 2022. On August 3, 2022, Magistrate Judge Moses lifted the stay previously imposed in the matter and ordered the parties to appear at a teleconference held on August 16, 2022. At the teleconference, the parties agreed that the North Carolina Action would be dismissed following its transfer to the Southern District of New York without prejudice to Whitaker’s right to assert the same causes of action, based on substantially similar allegations, as counterclaims in the New York Action and that Whitaker would have until September 30, 2022, to do so. The Court ordered the parties to submit a stipulation to this effect by August 23, 2022. Per the Court’s Order, on August 22, 2022, the parties filed a stipulation and proposed order whereby the parties agreed that Whitaker would voluntarily dismiss the North Carolina Action, and would reassert the causes of action set forth in the Proposed Amended Complaint filed in the North Carolina Action as counterclaims in the New York Action; and set forth deadlines for the filing of Whitaker’s answer and counterclaims Plaintiffs’ response to such counterclaims. The Court so-ordered that stipulation on August 23, 2022.
On September 30, 2022, Whitaker filed an answer and counterclaims, including (1) a cause of action for breach of contract, which was substantially similar to Whitaker’s breach of contract in the North Carolina Action (the “Breach of Contract Counterclaim”), and (2) a cause of action under New York and North Carolina consumer protection statutes, asserting that that Plaintiffs exhibited a pattern and practice in the purchase of businesses similar to KRI by which they allegedly, “endeavor[] to acquire the purchased company at a discount of the agreed-upon purchase price by making an initial down payment, then reneging on payment of deferred compensation or earnouts and fabricating a pretextual reason for nonpayment at the time the deferred compensation or earnouts become due” (the Consumer Protection Counterclaim”). For the Consumer Protection Counterclaim, Defendant seeks to recover the full amount of the Earnout Payments ($4,054,396)—the very same damages sought by Defendant’s Contract Counterclaim—as well as trebled damages pursuant to the North Carolina statute, and interest.
On October 12, 2022, the parties filed a joint pre-conference statement pursuant to the court’s August 24, 2022, order scheduling an initial case management conference. Pursuant to that order, on October 19, 2022, the Court held an initial case management conference. Later that day, the Court issued an initial case management order which set forth relevant deadlines, including the close of fact discovery on April 21, 2023, and the close of all discovery (including expert discovery) on July 19, 2023.
On November 11, 2022, Plaintiffs moved to dismiss the Consumer Protection Counterclaim.
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As of the date of this filing, we are not aware of any other material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, other than as disclosed above.
Item 1A. Risk Factors.
You should carefully consider and evaluate the information in this Quarterly Report on Form 10-Q and the risk factors set forth under the caption “Item 1A. Risk Factors” in our Annual Report on form 10-K for the fiscal year ended January 1, 2022. Except as set forth below, there have been no material developments to alter the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.
We may not be able to obtain funding or obtain funding on acceptable terms. This may hinder or prevent us from meeting our future capital needs.
Our credit facilities with MidCap and Jackson each contain certain financial covenants and we have had instances of non-compliance. As of October 1, 2022, the Company were in compliance with its financial covenants with MidCap and Jackson. In future periods, our failure to meet these financial covenants could constitute an event of default under the Credit and Security Agreement with MidCap and the Third Amended and Restated Note Purchase Agreement with Jackson.
These instances of non-compliance and the deterioration of the credit and capital markets increase uncertainty that additional funding will be available to us if needed or when needed. Furthermore, any additional debt or equity financing that we may need may not be available on terms favorable to us, or at all. If we are unable to obtain such additional financing on a timely basis, we may have to curtail our development activities and growth plans and/or be forced to sell assets, perhaps on unfavorable terms, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately could be forced to discontinue our operations and liquidate, in which event it is unlikely that stockholders would receive any distribution on their shares. Further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There have been no unregistered sales of securities during the period covered by this Quarterly Report on Form 10-Q that have not been previously reported in a Current Report on Form 8-K. We have not made any purchases of our own securities during the time period covered by this Quarterly Report on Form 10-Q.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Other Information.
None.
Item 6. Exhibits.
| * | Filed herewith |
| ** | Furnished herewith |
| (1) | Certain of the schedules (and similar attachments) to this Exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K under the Securities Act because they do not contain information material to an investment or voting decision and that information is not otherwise disclosed in the Exhibit or the disclosure document. The registrant hereby agrees to furnish a copy of all omitted schedules (or similar attachments) to the SEC upon its request. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| STAFFING 360 SOLUTIONS, INC. | ||
| Date: November 21, 2022 | By: | /s/ Brendan Flood |
| Brendan Flood | ||
| Chairman and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 21, 2022 | By: | /s/ Nick Koutsivitis |
| Nick Koutsivitis | ||
| Senior Vice President, Corporate Controller | ||
| (Principal Accounting Officer) | ||
| 44 |
Exhibit 31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Brendan Flood, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Staffing 360 Solutions, Inc. (“Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: November 21, 2022 | /s/ Brendan Flood |
| Brendan Flood | |
|
Chairman and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
OF PRINCIPAL ACCOUNTING OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Nick Koutsivitis, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Staffing 360 Solutions, Inc. (“Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: November 21, 2022 | /s/ Nick Koutsivitis |
| Nick Koutsivitis | |
| Senior Vice President, Corporate Controller | |
| (Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
PURSUANT TO 18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Staffing 360 Solutions, Inc. (the “Company”) on Form 10-Q for the period ended October 1, 2022 (the “Report”), I, Brendan Flood, Chairman and Chief Executive Officer of the Company, and I, Nick Koutsivitis, Senior Vice President, Corporate Controller of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: November 21, 2022 | /s/ Brendan Flood |
| Brendan Flood | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 21, 2022 | /s/ Nick Koutsivitis |
| Nick Koutsivitis | |
| Senior Vice President, Corporate Controller | |
| (Principal Accounting Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed from within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares |
Oct. 01, 2022 |
Jan. 01, 2022 |
|---|---|---|
| Preferred stock, par or stated value per share | $ 0.00001 | $ 0.00001 |
| Preferred stock, shares authorized | 20,000,000 | 20,000,000 |
| Common stock, par or stated value per share | $ 0.00001 | $ 0.00001 |
| Common stock, shares authorized | 40,000,000 | 40,000,000 |
| Common stock, shares issued | 2,433,199 | 1,758,835 |
| Common stock, shares outstanding | 2,433,199 | 1,758,835 |
| Series J Preferred Stock [Member] | ||
| Preferred stock, par or stated value per share | $ 0.00001 | $ 0.00001 |
| Preferred stock, shares authorized | 40,000 | 40,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Oct. 01, 2022 |
Oct. 02, 2021 |
Oct. 01, 2022 |
Oct. 02, 2021 |
|
| Income Statement [Abstract] | ||||
| Net Income (Loss) | $ 1,032 | $ 8,713 | $ (3,556) | $ 14,873 |
| Other Comprehensive (Loss) Income | ||||
| Foreign exchange translation adjustment | (2,729) | 67 | (3,247) | 117 |
| Comprehensive (Loss) Income Attributable to the Company | $ (1,697) | $ 8,780 | $ (6,803) | $ 14,990 |
ORGANIZATION AND DESCRIPTION OF BUSINESS |
9 Months Ended |
|---|---|
Oct. 01, 2022 | |
| Accounting Policies [Abstract] | |
| ORGANIZATION AND DESCRIPTION OF BUSINESS | 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, which changed its name to Staffing 360 Solutions, Inc., ticker symbol “STAF,” on March 16, 2012. On June 15, 2017, the Company reincorporated in the state of Delaware. We are a rapidly growing public company in the international staffing sector. Our high-growth business model is based on finding and acquiring, suitable, mature, profitable, operating, domestic and international staffing companies. Our targeted consolidation model is focused specifically on the accounting and finance, information technology (“IT”), engineering, administration (“Professional”) and light industrial (“Commercial”) disciplines.
Headway Acquisition
On April 18, 2022, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Headway Workforce Solutions (“Headway”), and Chapel Hill Partners, LP, as the representatives of all the stockholders (collectively, the “Sellers”) of Headway (the “Sellers’ Representative”), pursuant to which, among other things, we agreed to purchase all of the issued and outstanding securities of Headway in exchange for (i) a cash payment of $14, and (ii) shares of our Series H Convertible Preferred Stock, with a value equal to the Closing Payment, as defined in the Stock Purchase Agreement (the “Headway Acquisition”). On May 18, 2022, the Headway Acquisition closed. The purchase price in connection with the Headway Acquisition was approximately $9,000. Pursuant to the Stock Purchase Agreement and in connection with the closing of the Headway Acquisition, on May 17, 2022, we filed a certificate of designation with the Secretary of State of Delaware designating the rights, preferences and limitations of the Series H Convertible Preferred Stock (the “Series H Preferred Stock”), par value $ per share.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
9 Months Ended |
|---|---|
Oct. 01, 2022 | |
| Accounting Policies [Abstract] | |
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”), expressed in U.S. dollars. All amounts are in thousands, except share and par values, unless otherwise indicated.
The accompanying consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Reverse Stock Split
The Company effected a one-for-ten reverse stock split on June 24, 2022 (the “Reverse Stock Split”). All share and per share information in this quarterly report have been retroactively adjusted to reflect the Reverse Stock Split.
Liquidity
The accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern. The accompanying financial statements have been prepared on a basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of October 1, 2022, the Company has an accumulated deficit of $87,577 and a working capital deficit of $13,761. At October 1, 2022, we had total gross debt of $18,361 (which includes redeemable Series H Preferred Stock) and $1,753 of cash on hand. We have historically met our cash needs through a combination of cash flows from operating activities, term loans, promissory notes, convertible notes, private placement offerings and sales of equity. Our cash requirements are generally for operating activities and debt repayments. Subsequent to the nine months ended October 1, 2022, we have continued to fund our operations and make required capital payments utilizing our available cash and, as of the date of this filing, we have approximately $2,817 in available cash.
The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available to us.
Further, our note issued to Jackson Investment Group, LLC (“Jackson”) includes certain financial customary covenants and the Company has had instances of non-compliance. Management has historically been able to obtain from Jackson waivers of any non-compliance and management expects to continue to be able to obtain necessary waivers in the event of future non-compliance; however, there can be no assurance that the Company will be able to obtain such waivers, and should Jackson refuse to provide a waiver in the future, the outstanding debt under the agreement could become due immediately, which exceeds our current cash balance.
On October 27, 2022, we entered into a Third Amended and Restated Note Purchase Agreement (the “Third Amended and Restated Note Purchase Agreement”) with Jackson, which amended and restated the Amended Note Purchase Agreement (as defined herein), and issued to Jackson the Third Amended and Restated Senior Secured 12% Promissory Note (the “Jackson Note”), with a remaining outstanding principal balance of approximately $9.0 million. See Note 6. The debt represented by the Jackson Note continues to be subject to a second lien secured by substantially all of the Company’s domestic subsidiaries’ assets as well as a first lien secured by the UK subsidiaries shares owned by the Company pursuant to the Amended and Restated Security Agreement with Jackson, dated September 15, 2017, as amended by the Omnibus Amendment and Reaffirmation Agreement, dated as of October 27, 2022, to reflect certain of the terms as updated and amended by the Amended Note Purchase Agreement. We also have a $25,000 revolving loan facility with MidCap Funding X Trust (“MidCap”). On October 27, 2022, we entered into Amendment No. 27 to the Credit and Security Agreement with MidCap, which among others, extended the commitment expiry date from October 27, 2027 to September 6, 2024. See Note 14.
Going Concern
The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. Historically, the Company has funded such payments either through cash flow from operations or the raising of capital through additional debt or equity. If the Company is unable to obtain additional capital, such payments may not be made on time.
The Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to the COVID-19 pandemic raise substantial doubt about the Company’s ability to continue as a going concern.
COVID-19
The novel Coronavirus disease 2019 (“COVID-19”) and its ongoing effects are continuing to impact worldwide economic activity, and activity in the United States and the United Kingdom where our operations are based. The nature of work of the contractors we support mostly are on the site of our clients. Given that the magnitude and duration of COVID-19’s impact on our business and operations remain uncertain, the continued spread of COVID-19 (including the emergence and persistence of variants relating thereto) and the imposition of related public health containment measures and travel and business restrictions could have a material adverse impact on our business, financial condition, operating results, and cash flows. While expected to be temporary, prolonged workforce disruptions can negatively impact sales in fiscal year 2022 and the Company’s overall liquidity.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
The full impact of the COVID-19 pandemic and its ongoing effects continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 pandemic, its ongoing effects and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2022.
The Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to the COVID-19 pandemic and its ongoing effects contribute to the substantial doubt about the Company’s ability to continue as a going concern.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP 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 revenue and expenses in the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes 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 the Company may differ materially and adversely from its estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected. Significant estimates for the nine months ended October 1, 2022 and October 2, 2021 include the valuation of intangible assets, including goodwill, liabilities associated with testing long-lived assets for impairment, contingent considerations, fair value of financial instruments and valuation reserves against deferred tax assets.
Goodwill
Goodwill relates to amounts that arose in connection with various acquisitions and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but it is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, a decline in the equity value of the business, a significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator.
In accordance with ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. During the year ended January 1, 2022 the Company changed its annual measurement date from the last day of the fiscal year end to the first day of the fiscal fourth quarter. A reporting unit is either the equivalent of, or one level below, an operating segment. The Company early adopted the provisions in ASU 2017-04, which eliminates the second step of the goodwill impairment test. As a result, the Company’s goodwill impairment tests include only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated to that reporting unit, is impaired.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value.
The Company recognized an impairment with respect to its Staffing UK reporting unit of $3,104 during the quarter ended January 1, 2022. The impairment resulted from a continued decline in that reporting unit’s revenue which experienced significant and prolonged declines as a result of the COVID-19 pandemic. To determine the impairment, the Company employed a combination of market approach (valuations using comparable company multiples), income approach (discounted cash flow analysis) and prevailing market conditions to derive the fair value of the reporting unit. Under ASU 2017-04, which the Company early adopted, the impairment amount represents the excess of the carrying value over the fair value of the reporting unit.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
The Company has primarily two main forms of revenue – temporary contractor revenue and permanent placement revenue. Temporary contractor revenue is accounted for as a single performance obligation satisfied over time because the customer simultaneously receives and consumes the benefits of the Company’s performance on an hourly or daily basis. The contracts stipulate weekly or monthly billing, and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed to date. Permanent placement revenue is recognized on the date the candidate’s full-time employment with the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms, typically 30 days. The contract with the customer stipulates a guarantee period whereby the customer may be refunded if the employee is terminated within a short period of time, however this has historically been infrequent, and immaterial upon occurrence. As such, the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has transferred to the customer. Revenues for the three months ended October 1, 2022 was comprised of $64,733 of temporary contractor revenue and $1,387 of permanent placement revenues compared with $46,168 of temporary contractor revenue and $1,333 of permanent placement revenues for the three months ended October 2, 2021, respectively. Revenue for the nine months ended October 1, 2022 was comprised of $170,698 of temporary contractor revenue and $4,368 permanent placement revenue, compared with $143,274 of temporary contractor revenue and $3,708 permanent placement revenue for the nine months ended October 2, 2021. Refer to Note 11 for further details on breakdown by segments.
Income Taxes
The Company’s provision for income taxes is based on the discrete method for the quarter applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared with those forecasted at the beginning of the fiscal year and each interim period thereafter.
The effective income tax rate was 5.43%, 1.48%, (1.87)% and 0.67% for the three and nine months ending October 1, 2022 and October 2, 2021, respectively. The Company’s effective tax rate differs from the U.S. federal statutory rate of 21%, primarily due to changes in valuation allowances in the U.S., which eliminates the effective tax rate on current year losses, offset by current state taxes and changes to goodwill naked credit. The Company may have experienced an IRC Section 382 limitation during 2021, for which it is in process of conducting an analysis to determine the tax consequences of such a limitation.
Foreign Currency
The Company recorded a non-cash foreign currency remeasurement loss of $315 and $219 for the three and nine months ended October 2, 2021, respectively, associated with its U.S dollar denominated intercompany note. In 2022, the Company applied ASC 830-20-35-3 which states gains and losses on certain foreign currency transactions should not be included in net income but should be reported in the same manner as translation adjustments.
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the warrants the Company has privately placed were estimated using a Black Scholes model. Refer to Note 8 for further details.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and treasury stock method will be no longer available. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company adopted this ASU in this fiscal year. This standard did not have an impact on our financial statements.
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. This ASU replaces the probable, incurred loss model for those assets. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022, for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company is currently evaluating the impacts of this pronouncement and does not expect it to have a material impact on the financial statements.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
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| EARNINGS (LOSS) PER COMMON SHARE |
The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share (“ASC 260”), which requires earnings per share for each class of stock (common stock and participating preferred stock) to be calculated using the two-class method. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings for the reporting period are allocated between common shareholders and other security holders based on their respective participation rights in undistributed earnings.
Basic earnings per common share is computed by dividing income or loss available to common stockholders by the weighted average number of shares of basic common stock outstanding. The Company’s Series F convertible preferred stock, which was convertible into shares of the Company’s common stock at any time and from time to time from and after the issue date, and the Company’s Series F warrants, were classified as participating securities in accordance with ASC 260. Net income allocated to the holders of Series F convertible preferred stock and Series F warrants was calculated based on the shareholders’ proportionate share of weighted average shares of common stock outstanding on an if-converted basis.
For purposes of determining diluted earnings per common share, basic earnings per common share was further adjusted to include the effect of potential dilutive common shares outstanding, including unvested restricted stock using the more dilutive of either the two-class method or the treasury stock method, and Series G and G-1 Preferred Stock using the if-converted method. Stock options and warrants that were out-of-the-money were not included in the denominator for the calculation diluted EPS. Under the two-class method of calculating diluted earnings per share, net income is reallocated to common stock, the Series F Preferred stock, the Series F warrants, and all dilutive securities based on the contractual participating rights of the security to share in the current earnings as if all of the earnings for the period had been distributed. In the computation of diluted earnings per share, the if-converted method for the Series F Preferred Stock resulted in a more dilutive earnings per share than the two-class method. As such, the if-converted method was utilized for the calculation of diluted EPS.
On June 24, 2022, the Company effected the Reverse Stock Split. As required in accordance with GAAP, all share and earnings per share information in this Quarterly Report on Form 10-Q, including those noted below have been retroactively adjusted to reflect the Reverse Stock Split.
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ACCOUNTS RECEIVABLE FINANCING |
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| Receivables [Abstract] | |
| ACCOUNTS RECEIVABLE FINANCING | NOTE 4 – ACCOUNTS RECEIVABLE FINANCING
Midcap Funding X Trust
Prior to September 15, 2017, certain U.S. subsidiaries of the Company were parties to a $25,000 revolving loan facility with MidCap, with the option to increase the amount by an additional $25,000, with a maturity of April 8, 2019.
On October 26, 2020, the Company entered into Amendment No. 17 to Credit and Security Agreement with MidCap, whereby, among other things, MidCap agreed to extend the maturity date of our outstanding asset based revolving loan until September 1, 2022. In addition, the Company also agreed to certain amendments to the financial covenants. On October 27, 2022, the Company entered into Amendment No. 27 with MidCap (see Note 14).
The facility provides events of default including: (i) failure to make payment of principal or interest on any MidCap loans when required, (ii) failure to perform obligations under the facility and related documents, (iii) not paying its debts as such debts become due and similar insolvency matters, and (iv) material adverse changes to the Company (subject to a 10-day notice and cure period.) Upon an event of default, the Company’s obligations under the credit facility may, or in the event of insolvency or bankruptcy will automatically, be accelerated. Upon the occurrence of any event of default, the facility will bear interest at a rate equal to the lesser of: (i) 3.0% above the rate of interest applicable to such obligations immediately prior to the occurrence of the event of default; and (ii) the maximum rate allowable under law.
Under the terms of this agreement, the Company is subject to affirmative covenants which are customary for financings of this type, including covenants to: (i) maintain good standing and governmental authorizations, (ii) provide certain information and notices to MidCap, (iii) deliver monthly reports and quarterly financial statements to MidCap, (iv) maintain insurance, (v) discharge all taxes, (vi) protect its intellectual property, and (vii) generally protect the collateral granted to MidCap. The Company is also subject to negative covenants customary for financings of this type, including that it may not: (i) enter into a merger or consolidation or certain change of control events, (ii) incur liens on the collateral, (iii) except for certain permitted acquisitions, acquire any significant assets other than in the ordinary course of business, (iv) assume certain additional senior debt, or (v) amend any of its organizational documents.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
The balance of the MidCap facility as of October 1, 2022 and January 1, 2022 was $11,612 and $13,405, respectively, and is included in Accounts receivable financing on the Consolidated Balance Sheet.
White Oak Commercial Finance, LLC
As a result of the Headway Acquisition, the Company’s wholly owned Headway subsidiary, has a line of credit with White Oak Commercial Finance, LLC (“White Oak”), that provided working capital and supports general corporate needs of Headway (the “White Oak Agreement”). Under the terms of the White Oak Agreement, the line of credit matures in June 2024. White Oak may terminate the Agreement at any time upon providing 30-days written notice. The White Oak Agreement is secured by all the assets of Headway and is personally guaranteed up to $1,000 by a former member of management of Headway.
Under the terms of the White Oak Agreement, the maximum borrowing capacity is $10,000,000. The borrowing base is defined as the sum of the following: (a) 95% of the eligible ordinary receivables, as defined, and (b) the lessor of (i) $3,000,000 or (ii) 95% of the Company’s outstanding eligible unbilled receivables, as defined, less the sum of the following: (c) 100% of the undrawn amount of all letters of credit outstanding, (d) the special availability reserve, (e) the quarterly tax reserve and (f) the amount all other availability reserves in effect as such time. The line of credit bears interest at LIBOR plus 5.00% with a floor of 7.00% (7.00% at December 31, 2021) on all outstanding balances and 0.25% for any unused portion of the line of credit. At October 1, 2022, borrowings of $7,417, were outstanding under the credit facility.
From time to time, White Oak may cause letters of credit to be opened to be issued for Headway’s benefit. The aggregate face amount of all letters of credit outstanding will become the letter of credit reserve, which reduces the borrowing base under the Agreement. Under the terms of the agreement the letter of credit sub-line may not exceed $2,000,000. The Company is required to pay interest monthly on the face amount of all letters of credit at a rate of LIBOR plus 6.25%. At October 1, 2022, there were $0 of standby letters of credit that had been issued.
The White Oak Agreement operates similarly to a factoring arrangement whereby Headway’s receivables are bought by White Oak. However, receivables purchased by White Oak are required to be repurchased by Headway in the event the Company’s customer disputes the invoice amount or if the receivable remains unpaid past a certain number of days from the invoice date. Due to the recourse provisions in the arrangement, Headway accounts for transactions under the credit facility as secured borrowings.
As of October 27, 2022, the White Oak Agreement was paid in full and terminated. See Note 14.
HSBC Invoice Finance (UK) Ltd – New Facility
On February 8, 2018, CBSbutler, Staffing 360 Solutions Limited and The JM Group, entered into a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’ accounts receivable up to an aggregate amount of £11,500 across all three subsidiaries. The terms of the arrangement provide for HSBC to fund 90% of the purchased accounts receivable upfront and a secured borrowing line of 70% of unbilled receivables capped at £1,000 (within the overall aggregate total facility of £11,500.) The arrangement has an initial term of 12 months, with an automatic rolling three-month extension and carries a service charge of 1.80%.
On June 28, 2018, CML, the Company’s new subsidiary entered into a new agreement with a minimum term of 12 months for purchase of debt (“APD”) with HSBC, joining CBSbutler, Staffing 360 Solutions Limited and The JM Group (collectively, with CML, the “Borrowers”) as “Connected Clients” as defined in the APD. In 2021, the subsidiaries were reorganized and are now Staffing 360 Solutions Limited and Clement May. The new Connected Client APDs carry an aggregate Facility Limit of £20,000 across all Borrowers. The obligations of the Borrowers are secured by a fixed charge and a floating charge on the Borrowers’ respective accounts receivable and are subject to cross-company guarantees among the Borrowers. In addition, the secured borrowing line against unbilled receivables was increased to £1,500 for a period of 90 days. In July 2019, the aggregate Facility Limit was extended to £22,500 across all Borrowers. In January 2022, the secured borrowing line against unbilled receivables was terminated.
Under ASU 2016-16, “Statement of Cash Flows (Topic 230, Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force), the upfront portion of the sale of accounts receivable is classified within operating activities, while the deferred purchase price portion (or beneficial interest), once collected, is classified within investing activities. For the nine months ended October 1, 2022 and October 2, 2021, the collection of UK factoring facility deferred purchase price totaled $4,683 and $5,234, respectively.
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GOODWILL |
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| GOODWILL | NOTE 5 – GOODWILL
The following table provides a roll forward of goodwill:
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350, 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. During the fourth quarter of 2021 the Company identified a triggering event in response the COVID-19 pandemic. In accordance with ASC 350 the Company tested its goodwill for impairment and the Company recognized an impairment with respect to its Staffing UK reporting unit of $3,104. The impairment resulted from a continued decline in that reporting unit’s revenue which experienced significant and prolonged declines as a result of the COVID-19 pandemic. To determine the impairment, the Company employed a combination of market approach (valuations using comparable company multiples), income approach (discounted cash flow analysis) and prevailing market conditions to derive the fair value of the reporting unit. Under ASU 2017-04, which the Company early adopted, the impairment amount represents the excess of the carrying value over the fair value of the reporting unit. On May 18, 2022, the Company closed on the acquisition of Headway (see Note 10). The Company’s estimated value of the Goodwill is $5,974. The estimated value is preliminary and subject to change.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
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| DEBT | NOTE 6 – DEBT
Jackson Debt
On September 15, 2017, the Company entered into a $40,000 note agreement with Jackson (the “2017 Jackson Note”). The proceeds of the sale of the 2017 Jackson Note were used to repay the existing subordinated notes previously issued to Jackson pursuant to the existing note purchase agreement in the aggregate principal amount of $11,165 and to fund a portion of the purchase price consideration of the firstPRO Acquisition and the CBSbutler Acquisition and repay certain other outstanding indebtedness of the Company. The maturity date for the amounts due under the 2017 Jackson Note was September 15, 2020. The 2017 Jackson Note will accrue interest at 12% per annum, due quarterly on January 1, April 1, July 1 and October 1 in each year, with the first such payment due on January 1, 2018. Interest on any overdue payment of principal or interest due under the 2017 Jackson Note will accrue at a rate per annum that is 5% in excess of the rate of interest otherwise payable thereunder.
On August 27, 2018, the Company entered into an amended agreement with Jackson, pursuant to which the note purchase agreement dated as of September 15, 2017 was amended and made a new senior debt investment of approximately $8,428. Terms of the additional investment were the same as the 2017 Jackson Note. From the proceeds of the additional investment, the Company paid a closing fee of $280 and legal fees of $39 and issued shares of the Company’s common stock as a closing commitment fee.
On August 29, 2019, the Company entered into a Fourth Omnibus Amendment and Reaffirmation Agreement with Jackson, as lender, which, among other things, amends that certain amended and restated note purchase agreement, dated as of September 15, 2017, as amended (the “Existing Note Purchase Agreement”). Pursuant to the Existing Note Purchase Agreement, the Company agreed to issue and sell to Jackson that certain 18% Senior Secured Note due December 31, 2019 in the aggregate principal amount of $2,538 (the “2019 Jackson Note”). All accrued and unpaid interest on the outstanding principal balance of the 2019 Jackson Note was due and payable monthly on the first day of each month, beginning on October 1, 2019. Pursuant to the terms of the 2019 Jackson Note, if the 2019 Jackson Note was not repaid by December 31, 2019, the Company was required to issue shares of its common stock to Jackson on a monthly basis until the 2019 Jackson Note is fully repaid, subject to certain exceptions to comply with Nasdaq listing standards. The Company booked additional expense of $324 related to the issuances of shares of common stock to Jackson in 2020. The Company paid the 2019 Jackson Note in full on May 28, 2020.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
On October 26, 2020, the Company, certain of its subsidiaries and Jackson entered into the Amended Note Purchase Agreement and the 2020 Jackson Note, which amended and restated the Existing Note Purchase Agreement. The Amended Note Purchase Agreement refinanced an aggregate of approximately $35,700 of debt provided by Jackson, extending the maturity to September 30, 2022. In connection with the amendment and restatement, the Company paid Jackson an amendment fee of $488. The Company accounted for the Amended Note Purchase Agreement as a modification of the debt. Accordingly, fees totaling $488 paid to Jackson as well as the modification of 15,092 warrants from a strike price of $99.60 to $60.00 and the extension of the warrant expiration date of January 26, 2024 to January 26, 2026, resulting in a fair value adjustment of $126, were recorded as additional debt discount which will be amortized over the term of the 2020 Jackson Note using the effective interest method. On October 27, 2022, the Company amended the existing 2020 Jackson Note. See Note 14.
Under the terms of the Amended Note Purchase Agreement and the 2020 Jackson Note, the Company is required to pay interest on the debt at a per annum rate of 12%. The interest is payable monthly in cash; provided that, the Company may elect to pay up to 50% of monthly interest in-kind (“PIK Interest”) by adding such PIK Interest to the outstanding principal balance of the 2020 Jackson Note. For any month that the Company elects to pay interest in-kind, the Company is required to pay Jackson a fee in shares of our common stock (“PIK Fee Shares”) in an amount equal to $25 divided by the average closing price, as reported by The Nasdaq Capital Market (“Nasdaq”), of such shares of common stock over the 5 trading days prior to the applicable monthly interest payment date. If such average market price is less than $30.00 or is otherwise undeterminable because such shares of common stock are no longer publicly traded or the closing price is no longer reported by Nasdaq, then the average closing price for these purposes shall be deemed to be $30.000, and if such average closing price is greater than $210.00, then the average closing price for these purposes shall be deemed to be $210.00. For the period of November 2020 through and including March 2021, each monthly interest amount due and payable was reduced by $166, and for the period commencing April 2021 through and including September 2021, each monthly interest amount due and payable was increased by $166.
Under the terms of the Amended Note Purchase Agreement, the Company was required to make a mandatory prepayment of the principal amount of the 2020 Jackson Note of not less than $3,000 no later than January 31, 2021. Payments were made in December 2020 and January 2021 totaling $3,029 in full satisfaction of the mandatory prepayment.
On January 4, 2021, the Company used $1,558 in net proceeds from a securities purchase agreement dated December 30, 2020 and redeemed $1,168 of the 2020 Jackson Note with an outstanding principal amount of $33,878 and redeemed shares of the Series E Convertible Preferred Stock with an aggregate value of $390. Following the redemption of the portion of the 2020 Jackson Note and Series E Convertible Preferred Stock, the 2020 Jackson Note balance was $32,710 and the Company had shares of Series E Convertible Preferred Stock outstanding with an aggregate stated value of $10,690.
On February 5, 2021, the Company received the Limited Consent from Jackson, the sole holder of the Company’s outstanding shares of Series E Convertible Preferred Stock, to use approximately (i) 75% of the net proceeds from the February 2021 Offering to redeem a portion of the 2020 Jackson Note, which had an outstanding principal amount of $32,710 as of February 9, 2021, and (ii) 25% of the net proceeds from the February 2021 Offering to redeem a portion of the Company’s Series E Convertible Preferred Stock. Pursuant to the Limited Consent, upon closing of the February 2021 Offering, the Company paid $13,556 of the 2020 Jackson Note and redeemed 4,518 shares of the Series E Convertible Preferred Stock.
On April 21, 2021, the Company entered into the April 2021 Purchase Agreement. The net proceeds to the Company were approximately $4,200, after deducting placement agent fees and estimate offering expenses payable by the Company. The Company used $3,200 of the net proceeds to redeem a portion of the 2020 Jackson Note, which had an outstanding principal amount of $19,154 immediately prior to such redemption.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
On July 20, 2021, the Company entered into the July 2021 Purchase Agreement. As the Company’s Series G Preferred Stock (as defined below) was outstanding, it was required to use the proceeds of any sales of equity securities, including the common stock offered in the July 2021 Offerings, exclusively to redeem any outstanding shares of Series G Preferred Stock, subject to certain limitations. The Company received a waiver from Jackson, the sole holder of the outstanding shares of its Series G Preferred Stock, to pay accrued and unpaid interest and prepay a portion of the outstanding principal balance of the 2020 Jackson Note and paid accrued and unpaid dividends on the Series G-1 Convertible Preferred Stock upon conversion of such preferred stock into the New Note (as defined below). The net proceeds to the Company from the July 2021 Offerings were approximately $6,760, after deducting placement agent fees and estimated offering expenses payable by the Company. The Company used $5,000 of the net proceeds to redeem a portion of the 2020 Jackson Note, which had an outstanding principal amount of approximately $21,700 immediately prior to such redemption.
On July 21, 2021, the Company entered into a non-cash financing transaction whereby it exchanged its outstanding shares of Series G Convertible Preferred Stock (“Series G Preferred Stock”) and shares of Series G-1 Convertible Preferred Stock for senior indebtedness by entering into a new 12% Senior Secured Note, in aggregate principal amount of $7,733 (the “New Note”), which amount represented all of the outstanding Series G Preferred Stock, totaling $6,172, and Series G-1 Convertible Preferred Stock, totaling $1,561, held by Jackson as of July 21, 2021, under the Amended Note Purchase Agreement. The New Note was deemed issued pursuant to the Amended Note Purchase Agreement.
Under the terms of the New Note, the Company is required to pay interest on the New Note at a per annum rate of 12%, in cash only, accruing from and after the date of the New Note and until the entire principal balance of the New Note shall have been repaid in full, and on and at all times during which the “Default Rate” (as defined in the Amended Note Purchase Agreement) applies, to the extent permitted by law, at a per annum rate of 17%. The entire outstanding principal balance of the New Note is due and payable in full on September 30, 2022. Upon an Event of Default (as defined in the Amended Note Purchase Agreement), the principal of the New Note and all accrued and unpaid interest thereon may be accelerated and declared or otherwise become due and payable in accordance with the terms of the Amended Note Purchase Agreement.
On August 5, 2021, the Company entered into the First August 2021 Purchase Agreement. The net proceeds to the Company from the First August 2021 Offerings were approximately $3,217, after deducting placement agent fees and offering expenses payable by the Company. The Company used a portion of the net proceeds from the First August 2021 Offerings together with other cash on hand to redeem $3,281 of the 2020 Jackson Note, which had an outstanding principal amount of approximately $16,730 immediately prior to such redemption.
On October 28, 2021, the Company entered into a securities purchase agreement (the “November 2021 Private Placement”). This placement closed on November 2, 2021 and was announced on November 3, 2021. The net proceeds of the November 2021 Private Placement were approximately $9.25 million. The Company used a portion of the net proceeds from the November 2021 Private Placement to redeem $4,500 of the 2020 Jackson Note, which had an outstanding principal amount of approximately $13,449 immediately prior to such redemption.
The entire outstanding principal balance of the 2020 Jackson Note was due and payable on September 30, 2022. On October 27, 2022, the Company entered into the Third Amended and Restated Note Purchase Agreement with Jackson, which amended and restated the Amended Note Purchase Agreement, dated October 26, 2020, as amended, and issued to Jackson the Jackson Note, with a remaining outstanding principal balance of approximately $9.0 million (See Note 14).
Debt Exchange Agreement
On November 15, 2018, the Company, entered into a Debt Exchange Agreement with Jackson, pursuant to which, among other things, Jackson agreed to exchange $13,000 (the “Exchange Amount”) of indebtedness of the Company held by Jackson in exchange for shares of Series E Preferred Stock, par value $ per share.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
The Series E Preferred Stock ranked senior to the Company’s common stock and any other series or classes of preferred stock issued or outstanding with respect to dividend rights and rights on liquidation, winding up and dissolution. Each share of Series E Preferred Stock was initially convertible into shares of common stock of the Company at any time after October 31, 2020 or the occurrence of a Preferred Default (as defined in the Certificate of Designation for the Series E Preferred Stock (the “Series E Certificate of Designation”)). A holder of Series E Preferred Stock was not required to pay any additional consideration in exchange for conversion of such Series E Preferred Stock into the Company’s common stock. Series E Preferred Stock was redeemable by the Company at any time at a price per share equal to the stated value ($ per share) plus all accrued and unpaid dividends thereon.
The Series E Preferred Stock carried quarterly dividend rights of (a) cash dividends accruing (i) at an annual rate per share equal to 12% from the date of issuance and (ii) 17% after the occurrence of a Preferred Default, and (b) a dividend payable in shares of Series E-1 Convertible Preferred Stock (the “Series E-1 Convertible Preferred Stock” and, collectively with the Series E Convertible Preferred Stock, the “Series E Preferred Stock”). The shares of Series E-1 Convertible Preferred Stock had all the same terms, preferences and characteristics as the Series E Preferred Stock (including, without limitation, the right to receive cash dividends), except (i) Series E-1 Convertible Preferred Stock were mandatorily redeemable by the Company within thirty (30) days after written demand received from any holder at any time after the earlier of the occurrence of a Preferred Default or November 15, 2020, for a cash payment equal to the Liquidation Value (as defined in the Series E Certificate of Designation) plus any accrued and unpaid dividends thereon, (ii) each share of Series E-1 Convertible Preferred Stock was initially convertible into 11 shares of the Company’s common stock, and (iii) Series E-1 Convertible Preferred Stock could be cancelled and extinguished by the Company if all shares of Series E Convertible Preferred Stock are redeemed by the Company on or prior to October 31, 2020.
On October 26, 2020, in connection with the entry into the Amended Note Purchase Agreement, the Company filed with the Secretary of State of the State of Delaware the second Certificate of Amendment (the “Amendment”) to the Series E Certificate of Designation. Under the amended terms, holders of Series E Preferred Stock were entitled to monthly cash dividends on Series E Preferred Stock at a per annum rate of 12%. At the Company’s option, up to 50% of the cash dividend on the Series E Convertible Preferred Stock could be paid in kind by adding such 50% portion to the outstanding liquidation value of the Series E Convertible Preferred Stock (the “PIK Dividend Payment”), commencing on October 26, 2020 and ending on October 25, 2020. If the PIK Dividend Payment was elected, a holder of Series E Preferred Stock was entitled to additional fee to be paid in shares of our common stock an amount equal to $10,000 divided by the average closing price, as reported by Nasdaq of such shares of common stock over the 5 trading days prior to the applicable monthly interest payment date. If such average market price was less than $35.00 or was otherwise undeterminable because such shares were no longer publicly traded or the closing price was no longer reported by Nasdaq, then the average closing price for these purposes was to be deemed to be $35.00, and if such average closing price were greater than $210.00 then the average closing price for these purposes would be deemed to be $210.00. Dividends on the Series E-1 Convertible Preferred Stock could only be paid in cash. If the Company failed to make dividend payments on the Series E Convertible Preferred Stock, it would be an event of default under the Amended Note Purchase Agreement.
Under the terms of the Amendment, shares of Series E-1 Convertible Preferred Stock were convertible into common stock at a conversion rate equal to the liquidation value of each share of Series E-1 Convertible Preferred Stock divided by $ per share commencing October 31, 2020. Each share of Series E-1 Convertible Preferred Stock had a liquidation value of $10,000 per share. The shares of Series E Convertible Preferred Stock were also convertible into shares of common stock after October 31, 2022. The conversion rate for the Series E Convertible Preferred Stock was equal to the liquidation value of each share of Series E Convertible Preferred Stock divided by $ per share. Each share of Series E Convertible Preferred Stock had a liquidation value of $10,000 per share. The Amendment resulted in the original conversion price of $106.80 and $99.60 of the Series E Convertible Preferred Stock and E-1 Convertible Preferred Stock, respectively, being reduced to $60.00 for both instruments.
The Company accounted for the Amendment as a modification to the Series E Convertible Preferred Stock and Series E-1 Convertible Preferred Stock. The change in fair value as a result of the modification amounted to $410 and was recognized as a deemed dividend as of the fiscal year ended January 2, 2021. Further, the Company recognized a beneficial conversion feature (BCF) of $4,280 as a result of the decrease in the conversion price to $60.00 in comparison to the Company’s stock price on the date of the Amendment. The BCF was recognized as a deemed dividend. As the Company lacked retained earnings at the time of determination, the deemed dividend was recorded as a reduction in additional paid-in capital resulting in a net impact to additional paid-in capital of $0.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
Under the terms of the Consent and the Series E Certificate of Designation, in consideration for Jackson’s consent to the firstPRO Transaction, the Initial Payment was used to redeem a portion of the Series E Preferred Stock, and the Escrow Funds, subject to the forgiveness of PPP Loan, were agreed to be used to redeem a portion of the Series E Preferred Stock. As this provision results in a contingent redemption feature, approximately $2,100 of the Series E Preferred Stock was reclassified to mezzanine equity during the year ended January 1, 2022. On July 22, 2021, after conversion of the Series G Preferred Stock to the New Note, the Company redeemed $2,080 of the 2020 Jackson Note using the Escrow Funds.
Lastly, under the terms of the Limited Consent and Waiver with Jackson dated February 5, 2021, it was agreed that to the extent that any of the PPP Loans are forgiven after the February 2021 Offering, Jackson may convert the Series E Convertible Preferred Stock and Series E-1 Convertible Preferred Stock that remains outstanding into a secured note that is substantially similar to the 2020 Jackson Note. As this provision results in a contingent redemption feature, approximately $4,100 of the Series E Preferred Stock was reclassified to mezzanine equity. The Company assessed the fair value of the instrument just before and after this modification and recorded a deemed dividend totaling $389 upon remeasurement of the Series E Preferred Stock.
Jackson Waivers
On February 5, 2021, the Company entered into a Limited Consent and Waiver with Jackson whereby, among other things, Jackson agreed that we may use 75% of the proceeds from the offering to redeem a portion of the 2020 Jackson Note, and 25% of the net proceeds from the offering to redeem a portion of the Base Series E Preferred Stock notwithstanding certain provisions of the certificate of designation for the Base Series E Preferred Stock that would have required the Company to use all the proceeds from the offering to redeem the Base Series E Preferred Stock. In addition, the Company also agreed in the Limited Consent and Waiver to additional limits on its ability to incur other indebtedness, including limits on advances under our revolving loan facility with MidCap. The Company also agreed that to the extent that any of our PPP Loans are forgiven after the offering, Jackson may convert the Base Series E Preferred Stock and Series E-1 Preferred Stock that remains outstanding into a secured note that is substantially similar to the 2020 Jackson Note.
Series G Preferred Stock – Related Party
On May 6, 2021, the Company, entered into an Exchange Agreement with Jackson (the “Exchange Agreement”), pursuant to which, among other things, Jackson agreed to exchange shares of the Company’s Series E Convertible Preferred Stock and shares of the Series E-1 Preferred Stock for an equivalent number of shares of the Company’s newly issued Series G Convertible Preferred Stock and Series G-1 Convertible Preferred Stock, respectively (collectively, the “Series G Preferred Stock” and the transaction, the “Exchange”). The Series G Preferred Stock was subject to the same terms stated in the Limited Waiver, as defined herein and described in Note 12.
The Series G Preferred Stock ranked senior to each of the Company’s common stock, Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock, and any other classes and series of stock of the Company now or hereafter authorized, issued or outstanding, which by their terms expressly provide that they are junior to the Series G Preferred Stock or which do not specify their rank (which includes the Series F Convertible Preferred Stock). Each share of Series G Preferred Stock was initially convertible into 1,000 shares of common stock at any time from and after, (i) with respect to the Series G Preferred Stock, the earlier of October 31, 2022 or the occurrence of a default and, (ii) with respect to the Series G-l Convertible Preferred Stock, October 31, 2020. A holder of Series G Preferred Stock was not required to pay any additional consideration in exchange for conversion of the Series G Preferred Stock into the Company’s common stock.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
The Series G Preferred Stock carried monthly dividend rights of (a) cash dividends accruing (i) at an annual rate per share equal to 12% from the date of issuance (plus any accrued dividends with respect to the Series E Preferred Stock unpaid as of the date of the Exchange) and (ii) 17% after the occurrence of a default, and (b) a dividend payable in shares of Series G-1 Convertible Preferred Stock. The shares of Series G-1 Convertible Preferred Stock had all the same terms, preferences and characteristics as the Series G Preferred Stock (including, without limitation, the right to receive cash dividends), except Series G-1 Convertible Preferred Stock were mandatorily redeemable by the Company within thirty (30) days after written demand received from any holder at any time after the earlier of the occurrence of a Preferred Default or September 30, 2022, for a cash payment equal to the liquidation value plus any accrued and unpaid dividends thereon.
On July 20, 2021, the Company entered into the July 2021 Purchase Agreement. As the Company’s Series G Preferred Stock was outstanding, it was required to use the proceeds of any sales of equity securities, including the common stock offered in the July 2021 Registered Direct Offering, exclusively to redeem any outstanding shares of Series G Preferred Stock, subject to certain limitations. The Company received a waiver from Jackson, the sole holder of the outstanding shares of its Series G Preferred Stock, to pay accrued and unpaid interest and prepay a portion of the outstanding principal balance of the 2020 Jackson Note, and paid accrued and unpaid dividends on the Series G-1 Convertible Preferred Stock upon conversion of such preferred stock into the New Note. While under the terms of the Certificate of Designation governing the Series G Preferred Stock and Series G-1 Preferred Stock, shares and shares of common stock were issuable upon the conversion of Series G Preferred Stock and Series G-1 Preferred Stock, respectively, the shares of Series G Preferred Stock and Series G-1 Convertible Preferred Stock were not converted to common stock and instead were converted on July 21, 2021 to debt. The terms of this note match the terms of the Amended Note Purchase Agreement from October 26, 2020.
As of October 1, 2022, there were no shares of Series G or Series G-1 Convertible Preferred Stock outstanding.
HSBC Loan
On February 8, 2018, CBS Butler Holdings Limited (“CBS Butler”), Staffing 360 Solutions Limited and The JM Group, entered into a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’ accounts receivable up to an aggregate amount of £11,500 across all three subsidiaries. The terms of the arrangement provide for HSBC to fund 90% of the purchased accounts receivable upfront and, a secured borrowing line of 70% of unbilled receivables capped at £1,000 (within the overall aggregate total facility of £11,500). The arrangement has an initial term of 12 months, with an automatic rolling three-month extension and carries a service charge of 1.80%. Under ASU 2016-16, “Statement of Cash Flows (Topic 230, Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force), the upfront portion of the sale of accounts receivable is classified within operating activities, while the deferred purchase price portion (or beneficial interest), once collected, is classified within investing activities. On April 20, 2020, the terms of the loan with HSBC were amended such that no capital repayments would be required between April 2020 to September 2020, and only interest payments would be made during such time. Since such time, capital repayments have resumed. On May 15, 2020, the Company entered into a three-year term loan with HSBC in the UK for £1,000. As of October 1, 2022, the balance for the HSBC loan is $345.
Redeemable Series H Preferred Stock
On May 18, 2022, the Company entered into a stock purchase agreement with Headway. Consideration for the Purchase of 100% of Headway was the issuance of an aggregate of shares of Series H Preferred Stock. Each share of Series H Preferred Stock shall have a par value of $ per share and a stated value equal to $1.00 and is convertible at any time into an aggregate of shares of common stock. This is determined by dividing the stated value of such share of Preferred Stock by the conversion Price. The conversion price equals $25.714. Holders of Series H Preferred Stock are entitled to quarterly cash dividends at a per annum rate of 12%. The shares of the Series H Preferred Stock may be redeemed by the Company through a cash payment at a per share equal to the stated value, plus all accrued but unpaid dividends, at any time. On May 18, 2025, the Company shall redeem all of the shares of the Series H Preferred Stock. The redemption price represents the number of shares of the Preferred Stock (9,000,000), plus all accrued but unpaid dividends, multiplied by the Stated Value ($1). On May 18, 2022, the Company paid $14 towards the Series H Preferred Stock balance. As of October 1, 2022 the redemption price was $9,000.
In accordance with ASC 480-10-15-3, the agreement includes certain rights and options including: redemption, dividend, voting, and conversion which have characteristics akin to liability and equity. The Series H Preferred Stock is redeemable and has a defined maturity date upon the third anniversary of the original issue date. As such and based on the authoritative guidance, the Series H Preferred Stock meets the definition of a debt instrument. The Company obtained a third-party valuation report to calculate the fair value of Series H Preferred Stock. As of May 18, 2022, the fair value of the Redemption Price was calculated as $8,265 utilizing the CRR Binomial Lattice model. The difference in fair value was $735 is accounted as a deferred financing charge and will be amortized over the life of the term. The quarterly dividends will be reflected as interest expense.
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LEASES |
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| LEASES | NOTE 7 – LEASES
As of October 1, 2022 and January 1, 2022, as a result of the adoption of ASC 842, we recorded a right of use (“ROU”) lease asset of approximately $8,693 with a corresponding lease liability of approximately $9,487 and ROU of approximately $5,578 with a corresponding lease liability of approximately $5,574, respectively, based on the present value of the minimum rental payments of such leases. The Company’s finance leases are immaterial both individually and in the aggregate.
In September 2021, the Company entered into a new lease agreement for an office lease in New York for a term of 8 years. This resulted in increases to right of use assets and lease liabilities of $2,761. On May 18, 2022, the Company acquired Headway and assumed an office lease in North Carolina for a remaining term of six years and eight months. This resulted in increases to right of use assets of $1,635 and lease liabilities of $1,829. In April 2022, the Company entered into a new lease agreement for an office lease in London, England for a term of 10 years. This resulted in increases to right of use assets and lease liabilities of $2,048. In May 2022, the Company entered into a new lease agreement for an office lease in Redhill, England for a term of 10 years. This resulted in increases to right of use assets and lease liabilities of $1,555.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
Quantitative information regarding the Company’s leases for the three months ended October 1, 2022 is as follows:
As most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This methodology was deemed to yield a measurement of the Right of Use Asset and associated lease liability that was appropriately stated in all material respects.
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STOCKHOLDERS’ EQUITY |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| STOCKHOLDERS’ EQUITY | NOTE 8 – STOCKHOLDERS’ EQUITY
The Company issued the following shares of common stock during the nine months ended October 1, 2022:
The Company issued the following shares of common stock during the nine months ended October 2, 2021:
Reverse Stock Split
The Company effected the Reverse Stock Split on June 24, 2022.
Increase of Authorized Common Stock
On December 27, 2021, the Company’s stockholders approved an amendment to the Amended and Restated Certificate of Incorporation of the Company to effect an increase to its number of shares of authorized common stock, par value $ from to .
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
Series A Preferred Stock – Related Party
As of both October 1, 2022 and October 2, 2021, the Company had $125 of dividends payable to the Series A Preferred Stockholder.
Series J Preferred Stock
On May 3, 2022, the Company’s Board of Directors (the “Board”) declared a dividend of one one-thousandth of a share of Series J Preferred Stock, par value $ per share (“Series J Preferred Stock”) for each outstanding share of common stock to stockholders of record as of 5:00 p.m. Eastern Time on May 13, 2022. The outstanding shares of Series J Preferred Stock were entitled to vote together with the outstanding shares of the Company’s common stock, as a single class, exclusively with respect to a proposal giving the Board the authority, as it determines appropriate, to implement a reverse stock split within twelve months following the approval of such proposal by the Company’s stockholders (the “Reverse Stock Split Proposal”), as well as any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Reverse Stock Split Proposal (the “Adjournment Proposal”).
The Company held a special meeting of stockholders on June 23, 2022 (the “Special Meeting”) for the purpose of voting on a Reverse Stock Split Proposal and an Adjournment Proposal. Each share of Series J Preferred Stock entitled the holder thereof to 1,000,000 votes per share and each fraction of a share of Series J Preferred Stock had a ratable number of votes. Thus, each one-thousandth of a share of Series J Preferred Stock entitled the holder thereof to 1,000 votes. All shares of Series J Preferred Stock that were not present in person or by proxy at the Special Meeting as of immediately prior to the opening of the polls at such meeting (the “Initial Redemption Time”) were automatically redeemed by the Company at the Initial Redemption Time before the vote without further action on the part of the Company or the holder of shares of Series J Preferred Stock (the “Initial Redemption”). All shares that were not redeemed pursuant to the Initial Redemption were redeemed automatically upon the approval by the Company’s stockholders of the Reverse Stock Split Proposal at the Special Meeting (the “Subsequent Redemption”). As a result, no shares of Series J Preferred Stock remain outstanding.
Under the Certificate of Designations, each holder of Series J Preferred Stock was entitled to consideration in connection with the applicable redemption of $ in cash for each ten whole shares of Series J Preferred Stock beneficially owned at the applicable redemption time. The Company issued shares of Series J Preferred Stock. Accordingly, the aggregate consideration due to the holders of Series J Preferred Stock in connection with the redemptions is $ (minus amounts disregarded due to rounding each beneficial owner’s holdings of Series J Preferred Stock down to the nearest integer multiple of ten for purposes of calculating the applicable redemption price).
Restricted Shares
The Company has issued shares of restricted stock to employees and members of the Board under its 2015 Omnibus Incentive Plan, 2016 Omnibus Incentive Plan, 2020 Omnibus Plan and 2021 Omnibus Inventive Plan. Under these plans, the shares are restricted for a period of from issuance. As of Fiscal 2021, the Company has issued a total of restricted shares of common stock to employees and Board members that remain restricted. In accordance with ASC 718, Compensation – Stock Compensation, the Company recognizes stock-based compensation from restricted stock based upon the fair value of the award at issuance over the vesting term on a straight-line basis. The fair value of the award is calculated by multiplying the number of restricted shares by the Company’s stock price on the date of issuance. The impact of forfeitures has historically been immaterial to the financial statements. The Company recorded compensation expense associated with these restricted shares of $, $, $ and $, for the three and nine months ended October 1, 2022 and October 2, 2021, respectively. The table below is a roll forward of unvested restricted shares issued to employees and board of directors.
Warrants
In connection with the private placement consummated in July 2022 (the “July 2022 Private Placement”), on July 7, 2022, the Company entered into warrant amendment agreements (the “Warrant Amendment Agreements”) with each of the nine existing participating investors, which amended warrants to purchase up to 657,858 shares of common stock (prior to amendment, the “Original Warrants”). The Original Warrants had exercise price that ranged from $18.50 to $38.00 per share and expiration dates that ranged from July 22, 2026 to November 1, 2026. The Warrant Amendment Agreements reduced the exercise price of the Original Warrants to $5.85 per share and extended the expiration date to January 7, 2028, the date that is five and one-half years following the closing of the July 2022 Private Placement. The Company calculated an incremental fair value of $837 by calculating the excess, of the fair value of the modified over the fair value of that instrument immediately before it is modified. This increase in fair value was recorded in additional paid in capital.
Transactions involving the Company’s warrant issuances are summarized as follows:
The following table summarizes warrants outstanding as of October 1, 2022:
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
Stock Options
The Company recorded share-based payment expense of $, $, $ and $ for the three and nine months ended October 1, 2022 and October 2, 2021, respectively.
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COMMITMENTS AND CONTINGENCIES |
9 Months Ended |
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Oct. 01, 2022 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| COMMITMENTS AND CONTINGENCIES | NOTE 9 – COMMITMENTS AND CONTINGENCIES
Headway Earn-out Liability
Pursuant to the Headway acquisition that closed on May 18, 2022, the purchase price includes an earnout payment totaling up to $4,450 of earn out provision. Upon the attainment of certain trailing twelve month (“TTM”) EBITDA achievements the Company will pay to the Headway seller a contingent payment in accordance with the following:
Adjusted EBITDA of $0 or less than $0= no Contingent Payment Adjusted EBITDA of $500 x 2.5 multiple= $1,250 Contingent Payment Adjusted EBITDA of $1,000 x 2.5 multiple= $2,500 Contingent Payment Adjusted EBITDA of $1,800 x 2.5 multiple= $4,500 Contingent Payment Adjusted EBITDA of $2,000 or more x 2.5 multiple= $5,000 Contingent Payment
The Company performed an analysis over the contingent payment and prepared a forecast to determine the likelihood of the Adjusted EBITDA payout. The adjusted EBITDA TTM forecast, as of April 2023, is above the $2,000 threshold amount, such that the $5,000 was recorded as consideration. The estimated value calculated in the forecast is preliminary and subject to change. A payment of $160 was made on May 18, 2022, the date of the Headway closing. In addition, $550 related to a retention bonus of certain Headway employees was recorded as other current liabilities. The balance at October 1, 2022 is $4,290.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
Legal Proceedings
Whitaker v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.
On December 5, 2019, former owner of Key Resources, Inc. (“KRI”), Pamela D. Whitaker (“Whitaker” or “Plaintiff”), filed a complaint in Guilford County, North Carolina (the “North Carolina Action”) asserting claims for breach of contract and declaratory judgment against Monroe Staffing Services LLC (“Monroe”) and the Company (collectively, the “Defendants”) arising out of the alleged non-payment of certain earn-out payments and interest purportedly due under a Share Purchase Agreement pursuant to which Whitaker sold all issued and outstanding shares in her staffing agency, KRI, to Monroe in August 2018. Whitaker sought $4,054 in alleged damages. As of October 1, 2022, the $4,054 is included with the Headway earnout as part of Earnout liabilities.
Defendants removed the action to the Middle District of North Carolina on January 7, 2020, and Plaintiff moved to remand on February 4, 2020. Briefing on the motion to remand concluded on February 24, 2020. Separately, Defendants moved to dismiss the action on January 14, 2020, based on Plaintiff’s failure to state a claim, improper venue, and lack of personal jurisdiction as to defendant Staffing 360 Solutions, Inc. Alternatively, Defendants sought a transfer of the action to the Southern District of New York, based on the plain language of the Share Purchase Agreement’s forum selection clause. Briefing on Defendants’ motion to dismiss concluded on February 18, 2020. On February 28, 2020, Plaintiff moved for leave to file an amended complaint. Defendants filed their opposition to the motion for leave on March 19, 2020. Plaintiff thereafter filed a reply.
On June 29, 2020, Magistrate Judge Joe L. Webster issued a Report and Recommendation on the pending motions, recommending that Defendants’ motion to dismiss be granted with regard to Defendants’ request to transfer the matter to the Southern District of New York, and denied in all other regards without prejudice to Defendants raising those arguments again in the new forum. Magistrate Judge Webster also recommended that Plaintiff’s motion to remand be denied and motion to amend be left to the discretion of the Southern District of New York.
Plaintiff filed an objection to the Report and Recommendation on July 9, 2020. Defendants responded on July 23, 2020. On February 19, 2021, the District Court issued a decision that reversed the Magistrate Judge’s Order. The District Court granted Plaintiff’s motion to remand and denied Defendants’ motion to dismiss as moot. Defendants filed a Notice of Appeal to the Fourth Circuit on February 25, 2021, and filed their opening brief on April 21, 2021. Plaintiff filed her response brief on May 21, 2021, and Defendants replied on June 11, 2021. Oral argument was held on March 9, 2022. On July 22, 2022, the Fourth Circuit issued a decision to vacate the District Court’s decision and ordered the North Carolina District Court to transfer the North Carolina Action to the Southern District of New York for adjudication there in accordance with the Share Purchase Agreement’s forum selection clause.
Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc. v. Whitaker
Separately, on February 26, 2020, the Company and Monroe filed an action against Whitaker in the United States District Court for the Southern District of New York (Case No. 1:20-cv-01716) (the “New York Action”.) The New York Action concerns claims for breach of contract and fraudulent inducement arising from various misrepresentations made by Whitaker to the Company and Monroe in advance of, and included in, the share purchase agreement. The Company and Monroe are seeking damages in an amount to be determined at trial but in no event less than $6,000. On April 28, 2020, Whitaker filed a motion to dismiss the New York Action on both procedural and substantive grounds. On June 11, 2020, Monroe and the Company filed their opposition to Whitaker’s motion to dismiss. On July 9, 2020 Whitaker filed reply papers in further support of the motion.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
On October 13, 2020, the Court denied Whitaker’s motion to dismiss, in part, and granted the motion, in part. The Court rejected Whitaker’s procedural arguments but granted the motion on substantive grounds. However, the Court ordered that Monroe and the Company may seek leave to amend the complaint by letter application by December 1, 2020. Monroe and the Company filed a letter of motion for leave to amend and a proposed Amended Complaint on December 1, 2020. On January 5, 2021, Whitaker filed an opposition to the letter motion. On January 25, 2021, Monroe and the Company filed a reply in further support of the letter motion. On March 9, 2021, the Court granted Monroe and the Company’s motion for leave to amend, in part, and denied the motion, in part. The Court rejected Monroe and the Company’s claim for fraudulent inducement but granted the motion for leave to amend their breach of contract claim. Monroe and the Company filed their amended complaint on March 12, 2021.
On April 9, 2021, Whitaker renewed her motion to dismiss on procedural grounds, requesting dismissal of the action or, in the alternative, a stay of the proceeding pending adjudication on the merits of the North Carolina Action. On May 14, 2021, Monroe and the Company filed an opposition to the motion to dismiss. On June 21, 2021, Whitaker filed a reply in further support of the motion. The Court referred the case to Magistrate Judge Moses, who held oral argument on the motion on November 9, 2021. On March 8, 2022, Magistrate Judge Barbara Moses stayed the action pending a decision by the Fourth Circuit on the appeal filed by Monroe and the Company in The North Carolina Action.
In light of the Fourth Circuit’s issuance of its July 22, 2022, decision and order transferring the North Carolina Action to the Southern District of New York on August 1, 2022, the parties to the New York Action wrote to the Magistrate overseeing the matter to request a conference to address, inter alia, the resumption of discovery in light of the Fourth Circuit’s Order issued on July 22, 2022. On August 3, 2022, Magistrate Judge Moses lifted the stay previously imposed in the matter and ordered the parties to appear at a teleconference held on August 16, 2022. At the teleconference, the parties agreed that the North Carolina Action would be dismissed following its transfer to the Southern District of New York without prejudice to Whitaker’s right to assert the same causes of action, based on substantially similar allegations, as counterclaims in the New York Action and that Whitaker would have until September 30, 2022, to do so. The Court ordered the parties to submit a stipulation to this effect by August 23, 2022. Per the Court’s Order, on August 22, 2022, the parties filed a stipulation and proposed order whereby the parties agreed that Whitaker would voluntarily dismiss the North Carolina Action, and would reassert the causes of action set forth in the Proposed Amended Complaint filed in the North Carolina Action as counterclaims in the New York Action; and set forth deadlines for the filing of Whitaker’s answer and counterclaims Plaintiffs’ response to such counterclaims. The Court so-ordered that stipulation on August 23, 2022.
On September 30, 2022, Whitaker filed an answer and counterclaims, including (1) a cause of action for breach of contract, which was substantially similar to Whitaker’s breach of contract in the North Carolina Action (the “Breach of Contract Counterclaim”), and (2) a cause of action under New York and North Carolina consumer protection statutes, asserting that that Plaintiffs exhibited a pattern and practice in the purchase of businesses similar to KRI by which they allegedly, “endeavor[ ] to acquire the purchased company at a discount of the agreed-upon purchase price by making an initial down payment, then reneging on payment of deferred compensation or earnouts and fabricating a pretextual reason for nonpayment at the time the deferred compensation or earnouts become due” (the Consumer Protection Counterclaim”). For the Consumer Protection Counterclaim, Defendant seeks to recover the full amount of the Earnout Payments ($4,054)—the very same damages sought by Defendant’s Contract Counterclaim—as well as trebled damages pursuant to the North Carolina statute, and interest.
On October 12, 2022, the parties filed a joint pre-conference statement pursuant to the court’s August 24, 2022, order scheduling an initial case management conference. Pursuant to that order, on October 19, 2022, the Court held an initial case management conference. Later that day, the Court issued an initial case management order which set forth relevant deadlines, including the close of fact discovery on April 21, 2023, and the close of all discovery (including expert discovery) on July 19, 2023.
On November 11, 2022, Plaintiffs moved to dismiss the Consumer Protection Counterclaim.
Monroe and the Company intend to pursue their claims vigorously.
As of the date of this filing, we are not aware of any other material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, other than as disclosed above.
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ACQUISITION |
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| Business Combination and Asset Acquisition [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACQUISITION | NOTE 10 – ACQUISITION
In accordance with ASC 805, the Company accounts for acquisitions using the purchase method 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 the Company to make significant assumptions, including projections of future events and operating performance.
On April 18, 2022, the Company entered into a Stock Purchase Agreement with Headway Workforce Solutions, pursuant to which, among other things, the Company agreed to purchase all of the issued and outstanding securities of Headway in exchange for (i) a cash payment of $14, and (ii) shares of our Series H Preferred Stock, with a value equal to the Closing Payment, as defined in the Stock Purchase Agreement. On May 18, 2022, the Headway Acquisition closed.
The purchase price in connection with the Headway Acquisition was $9,000, subject to adjustment as provided in the Stock Purchase Agreement. Pursuant to certain covenants in the Stock Purchase Agreement, the Company may be subject to a Contingent Payment of up to $4,450 based on the Adjusted EBITDA (such term as defined in the Stock Purchase Agreement) of Headway during the Contingent Period (such term as defined in the Stock Purchase Agreement), subject to additional potential adjustments tied to customary purchase price adjustments described in the Stock Purchase Agreement. The purpose of the acquisition was to expand the market share of the Company’s primary business by providing future economic benefit of expanding services. The Company anticipates that the acquisition will provide the Company the ability to integrate the business of Headway into the Company’s existing temporary professional staffing business in the US within the expected timeframe which would enable the Company to operate more effectively and efficiently and to create synergy hence lower costs of operations.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The fair values assigned in the preliminary allocation of purchase price included in the table below are based on information that was available as of the date of the acquisition and such amounts are considered preliminary and are based on the information that was available as of the date of the acquisition. We were not able to complete our final purchase price allocation based on the timing of the acquisition and our need to engage third party valuation specialists to assist with the valuation of the contingent consideration as well as requiring additional time to further analyze the initial amounts recorded. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, establishment of potential acquisition contingencies, and the determination of any residual amount that will be allocated to goodwill. As additional information becomes available, the preliminary purchase price allocation may be revised during the remainder of the measurement period, which will not exceed 12 months from the acquisition date. Any such revisions or changes may be material.
The following table summarizes the preliminary allocation of the purchase price of the fair value of the assets acquired and liabilities assumed at the date of the acquisition:
In connection with the acquisition of Headway, the Company recorded $5,800 in intangible assets, based on its preliminary internal calculations.
The Company recorded a total of $449 in third party expenses associated with consummating the Headway acquisition, which are included in Selling, general and administrative expenses, excluding depreciation and amortization stated on the Consolidated Statement of Operations.
The following unaudited pro forma consolidated results of operation have been prepared, as if the acquisition of Headway had occurred as of January 3, 2022 and January 1, 2021, respectively.
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SEGMENT INFORMATION |
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| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT INFORMATION | NOTE 11 – SEGMENT INFORMATION
The Company generated revenue and gross profit by segment as follows:
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
The following table disaggregates revenues by segments:
As of October 1, 2022 and January 1, 2022, the Company has assets in the U.S. and the U.K. as follows:
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RELATED PARTY TRANSACTIONS |
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| Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RELATED PARTY TRANSACTIONS | NOTE 12 – RELATED PARTY TRANSACTIONS
In addition to the Series A Preferred Stock, the following are other related party transactions:
Board and Committee Members
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
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SUPPLEMENTAL CASH FLOW INFORMATION |
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| Supplemental Cash Flow Elements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | NOTE 13 – SUPPLEMENTAL CASH FLOW INFORMATION
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SUBSEQUENT EVENTS |
9 Months Ended |
|---|---|
Oct. 01, 2022 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 14 – SUBSEQUENT EVENTS
Note Purchase Agreement with Jackson Investment Group, LLC
On October 27, 2022, the Company entered into the Third Amended and Restated Note Purchase Agreement with Jackson, which amended and restated the Amended Note Purchase Agreement, dated October 26, 2020, as amended, and issued to Jackson the Jackson Note, with a remaining outstanding principal balance of approximately $9.0 million.
Under the terms of the Third Amended and Restated Note Purchase Agreement and Jackson Note, the Company is required to pay interest on the Jackson Note at a per annum rate of 12% and in the event the Company has not repaid in cash at least 50% of the outstanding principal balance of the Jackson Note by October 27, 2023, then interest on the outstanding principal balance of the Jackson Note shall continue to accrue at 16% per annum of the outstanding principal balance of the Jackson Note until the Jackson Note is repaid in full. The Third Amended and Restated Note Purchase Agreement also extends the maturity date of the Jackson Note from October 28, 2022 to October 14, 2024.
In addition, pursuant to the terms of the Third Amended and Restated Note Purchase Agreement, until all principal interest and fees due pursuant to the Third Amended and Restated Note Purchase Agreement and the Jackson Note are paid in full by the Company and are no longer outstanding, Jackson shall have a first call over 50% of the net proceeds from all common stock equity raises the Company conducts, which shall be used to pay down any outstanding obligations due pursuant to the Note Documents. The Jackson Note continues to be secured by substantially of the Company and its subsidiaries’ assets pursuant to the Amended and Restated Security Agreement with Jackson, dated September 15, 2017, as amended, and as further amended by the Omnibus Agreement (as defined below) on October 27, 2022.
Omnibus Amendment and Reaffirmation Agreement with Jackson
On October 27, 2022, in connection with the Third Amended and Restated Note Purchase Agreement, the Company entered into an Omnibus Amendment and Reaffirmation Agreement (the “Omnibus Agreement”) with Jackson, which, among other things, amends (i) the Amended and Restated Pledge Agreement, dated as of September 15, 2017, as amended and (ii) the Amended and Restated Pledge Agreement, dated as of September 15, 2017, as amended, to reflect certain of the terms as updated and amended by the Third Amended and Restated Note Purchase Agreement.
Amendment to Warrant Agreement with Jackson
On October 27, 2022, in connection with the entry into the Third Amended and Restated Note Purchase Agreement, the Company entered into Amendment No. 4 (“Amendment No. 4”) to the Amended and Restated Warrant Agreement, dated April 25, 2018 (as amended prior to Amendment No. 4, the “Existing Warrant”), with Jackson. Pursuant to the Existing Warrant and after giving effect to the 1-for-6 reverse stock split, effectuated by the Company on June 30, 2021 and the 1-for-10 reverse stock split, effectuated by the Company on June 23, 2022, Jackson was entitled to purchase 15,093 shares of common stock at an exercise price of $60.00 per share. Pursuant to Amendment No. 4, the exercise price of the Existing Warrant was reduced to $3.06 per share and the term extended to January 26, 2028.
Amendment to Credit and Security Agreement with MidCap
On October 27, 2022, the Company entered into Amendment No. 27 and Joinder Agreement to the Credit and Security Agreement (“Amendment No. 27”) with MidCap Funding IV Trust as successor by assignment to MidCap, dated April 8, 2015, which amended the Credit and Security Agreement. Amendment No. 27, among other things, (i) increases the revolving loan commitment amount from $25 million to $32.5 million (the “Loan”), (ii) extends the commitment expiry date from October 27, 2022 to September 6, 2024, and (iii) modifies certain of the financial covenants. Pursuant to Amendment No. 27, as long as no default or event of default under the Credit and Security Agreement as amended by Amendment No. 27 exists, upon written request by the Company and with the prior written consent of the agent and lenders, the Loan may be increased by up to $10 million in minimum amounts of $5 million tranches each, for an aggregate loan commitment amount of $42.5 million.
In addition, Amendment No. 27 increases the applicable margin from 4.0% to 4.25%, with respect to the Loan (other than Letter of Credit Liabilities (as defined in the Credit and Security Agreement)), and from 3.5% to 3.75% with respect to the Letter of Credit Liabilities. Amendment No. 27 also replaces the interest rate benchmark from LIBOR to SOFR and provides that the Loan shall bear interest at the sum of a term-based SOFR rate (plus a SOFR adjustment of 0.11448%) plus the Applicable Margin, subject to certain provisions for the replacement of SOFR with an alternate benchmark in connection with SOFR no longer being provided by its administrator. Notwithstanding the foregoing, the SOFR interest rate shall not be at any time less than 1.00%.
In connection with Amendment No. 27, the Company paid to MidCap a modification fee of $135,000, after deducting certain credits and fees paid in connection with previous amendments to the Credit and Security Agreement and certain waiver agreements, and agreed to pay reasonable costs and fees of MidCap’s legal counsel in connection with Amendment No. 27. On October 27, 2022, the Company drew down approximately $8 million on the Loan to pay off in full certain outstanding existing debt of Headway and its subsidiaries with respect to White Oak, which were acquired in May 2022 pursuant to the Headway acquisition.
Amendment to Intercreditor Agreement with Jackson and MidCap
On October 27, 2022, in connection with the Third Amended and Restated Note Purchase Agreement, the Jackson Note and Amendment No. 27, the Company, Jackson and MidCap entered into the Fifth Amendment to Intercreditor Agreement (the “Fifth Amendment”), which amended the Intercreditor Agreement, dated September 15, 2017, by and between the Company, Jackson and MidCap, as amended. The Fifth Amendment, among other things, permits the increase of the credit commitments under the Credit and Security Agreement as amended by Amendment No. 27 to $32.5 million. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
9 Months Ended |
|---|---|
Oct. 01, 2022 | |
| Accounting Policies [Abstract] | |
| Basis of Presentation and Principles of Consolidation | Basis of Presentation and Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”), expressed in U.S. dollars. All amounts are in thousands, except share and par values, unless otherwise indicated.
The accompanying consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
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| Reverse Stock Split | Reverse Stock Split
The Company effected a one-for-ten reverse stock split on June 24, 2022 (the “Reverse Stock Split”). All share and per share information in this quarterly report have been retroactively adjusted to reflect the Reverse Stock Split.
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| Liquidity | Liquidity
The accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern. The accompanying financial statements have been prepared on a basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of October 1, 2022, the Company has an accumulated deficit of $87,577 and a working capital deficit of $13,761. At October 1, 2022, we had total gross debt of $18,361 (which includes redeemable Series H Preferred Stock) and $1,753 of cash on hand. We have historically met our cash needs through a combination of cash flows from operating activities, term loans, promissory notes, convertible notes, private placement offerings and sales of equity. Our cash requirements are generally for operating activities and debt repayments. Subsequent to the nine months ended October 1, 2022, we have continued to fund our operations and make required capital payments utilizing our available cash and, as of the date of this filing, we have approximately $2,817 in available cash.
The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available to us.
Further, our note issued to Jackson Investment Group, LLC (“Jackson”) includes certain financial customary covenants and the Company has had instances of non-compliance. Management has historically been able to obtain from Jackson waivers of any non-compliance and management expects to continue to be able to obtain necessary waivers in the event of future non-compliance; however, there can be no assurance that the Company will be able to obtain such waivers, and should Jackson refuse to provide a waiver in the future, the outstanding debt under the agreement could become due immediately, which exceeds our current cash balance.
On October 27, 2022, we entered into a Third Amended and Restated Note Purchase Agreement (the “Third Amended and Restated Note Purchase Agreement”) with Jackson, which amended and restated the Amended Note Purchase Agreement (as defined herein), and issued to Jackson the Third Amended and Restated Senior Secured 12% Promissory Note (the “Jackson Note”), with a remaining outstanding principal balance of approximately $9.0 million. See Note 6. The debt represented by the Jackson Note continues to be subject to a second lien secured by substantially all of the Company’s domestic subsidiaries’ assets as well as a first lien secured by the UK subsidiaries shares owned by the Company pursuant to the Amended and Restated Security Agreement with Jackson, dated September 15, 2017, as amended by the Omnibus Amendment and Reaffirmation Agreement, dated as of October 27, 2022, to reflect certain of the terms as updated and amended by the Amended Note Purchase Agreement. We also have a $25,000 revolving loan facility with MidCap Funding X Trust (“MidCap”). On October 27, 2022, we entered into Amendment No. 27 to the Credit and Security Agreement with MidCap, which among others, extended the commitment expiry date from October 27, 2027 to September 6, 2024. See Note 14.
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| Going Concern | Going Concern
The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. Historically, the Company has funded such payments either through cash flow from operations or the raising of capital through additional debt or equity. If the Company is unable to obtain additional capital, such payments may not be made on time.
The Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to the COVID-19 pandemic raise substantial doubt about the Company’s ability to continue as a going concern.
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| COVID-19 | COVID-19
The novel Coronavirus disease 2019 (“COVID-19”) and its ongoing effects are continuing to impact worldwide economic activity, and activity in the United States and the United Kingdom where our operations are based. The nature of work of the contractors we support mostly are on the site of our clients. Given that the magnitude and duration of COVID-19’s impact on our business and operations remain uncertain, the continued spread of COVID-19 (including the emergence and persistence of variants relating thereto) and the imposition of related public health containment measures and travel and business restrictions could have a material adverse impact on our business, financial condition, operating results, and cash flows. While expected to be temporary, prolonged workforce disruptions can negatively impact sales in fiscal year 2022 and the Company’s overall liquidity.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
The full impact of the COVID-19 pandemic and its ongoing effects continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 pandemic, its ongoing effects and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2022.
The Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to the COVID-19 pandemic and its ongoing effects contribute to the substantial doubt about the Company’s ability to continue as a going concern.
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| Use of Estimates | Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP 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 revenue and expenses in the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes 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 the Company may differ materially and adversely from its estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected. Significant estimates for the nine months ended October 1, 2022 and October 2, 2021 include the valuation of intangible assets, including goodwill, liabilities associated with testing long-lived assets for impairment, contingent considerations, fair value of financial instruments and valuation reserves against deferred tax assets.
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| Goodwill | Goodwill
Goodwill relates to amounts that arose in connection with various acquisitions and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but it is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, a decline in the equity value of the business, a significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator.
In accordance with ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. During the year ended January 1, 2022 the Company changed its annual measurement date from the last day of the fiscal year end to the first day of the fiscal fourth quarter. A reporting unit is either the equivalent of, or one level below, an operating segment. The Company early adopted the provisions in ASU 2017-04, which eliminates the second step of the goodwill impairment test. As a result, the Company’s goodwill impairment tests include only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated to that reporting unit, is impaired.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value.
The Company recognized an impairment with respect to its Staffing UK reporting unit of $3,104 during the quarter ended January 1, 2022. The impairment resulted from a continued decline in that reporting unit’s revenue which experienced significant and prolonged declines as a result of the COVID-19 pandemic. To determine the impairment, the Company employed a combination of market approach (valuations using comparable company multiples), income approach (discounted cash flow analysis) and prevailing market conditions to derive the fair value of the reporting unit. Under ASU 2017-04, which the Company early adopted, the impairment amount represents the excess of the carrying value over the fair value of the reporting unit.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
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| Revenue Recognition | Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
The Company has primarily two main forms of revenue – temporary contractor revenue and permanent placement revenue. Temporary contractor revenue is accounted for as a single performance obligation satisfied over time because the customer simultaneously receives and consumes the benefits of the Company’s performance on an hourly or daily basis. The contracts stipulate weekly or monthly billing, and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed to date. Permanent placement revenue is recognized on the date the candidate’s full-time employment with the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms, typically 30 days. The contract with the customer stipulates a guarantee period whereby the customer may be refunded if the employee is terminated within a short period of time, however this has historically been infrequent, and immaterial upon occurrence. As such, the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has transferred to the customer. Revenues for the three months ended October 1, 2022 was comprised of $64,733 of temporary contractor revenue and $1,387 of permanent placement revenues compared with $46,168 of temporary contractor revenue and $1,333 of permanent placement revenues for the three months ended October 2, 2021, respectively. Revenue for the nine months ended October 1, 2022 was comprised of $170,698 of temporary contractor revenue and $4,368 permanent placement revenue, compared with $143,274 of temporary contractor revenue and $3,708 permanent placement revenue for the nine months ended October 2, 2021. Refer to Note 11 for further details on breakdown by segments.
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| Income Taxes | Income Taxes
The Company’s provision for income taxes is based on the discrete method for the quarter applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared with those forecasted at the beginning of the fiscal year and each interim period thereafter.
The effective income tax rate was 5.43%, 1.48%, (1.87)% and 0.67% for the three and nine months ending October 1, 2022 and October 2, 2021, respectively. The Company’s effective tax rate differs from the U.S. federal statutory rate of 21%, primarily due to changes in valuation allowances in the U.S., which eliminates the effective tax rate on current year losses, offset by current state taxes and changes to goodwill naked credit. The Company may have experienced an IRC Section 382 limitation during 2021, for which it is in process of conducting an analysis to determine the tax consequences of such a limitation.
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| Foreign Currency | Foreign Currency
The Company recorded a non-cash foreign currency remeasurement loss of $315 and $219 for the three and nine months ended October 2, 2021, respectively, associated with its U.S dollar denominated intercompany note. In 2022, the Company applied ASC 830-20-35-3 which states gains and losses on certain foreign currency transactions should not be included in net income but should be reported in the same manner as translation adjustments.
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| Warrants | Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the warrants the Company has privately placed were estimated using a Black Scholes model. Refer to Note 8 for further details.
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| Recent Accounting Pronouncements | Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and treasury stock method will be no longer available. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company adopted this ASU in this fiscal year. This standard did not have an impact on our financial statements.
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. This ASU replaces the probable, incurred loss model for those assets. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022, for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company is currently evaluating the impacts of this pronouncement and does not expect it to have a material impact on the financial statements.
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EARNINGS (LOSS) PER COMMON SHARE (Tables) |
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| Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF EARNINGS PER SHARE,BASIC AND DILUTED |
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GOODWILL (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Oct. 01, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF GOODWILL | The following table provides a roll forward of goodwill:
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DEBT (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Oct. 01, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF DEBT |
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LEASES (Tables) |
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Oct. 01, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF LEASE, COST | Quantitative information regarding the Company’s leases for the three months ended October 1, 2022 is as follows:
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| SCHEDULE OF OPERATING LEASE LIABILITY MATURITY |
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STOCKHOLDERS’ EQUITY (Tables) |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF STOCKHOLDERS EQUITY | The Company issued the following shares of common stock during the nine months ended October 1, 2022:
The Company issued the following shares of common stock during the nine months ended October 2, 2021:
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| SCHEDULE OF UNVESTED RESTRICTED SHARES ACTIVITY |
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| SCHEDULE OF WARRANTS ACTIVITY | Transactions involving the Company’s warrant issuances are summarized as follows:
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| SCHEDULE OF WARRANTS OUTSTANDING | The following table summarizes warrants outstanding as of October 1, 2022:
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| SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY |
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ACQUISITION (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Oct. 01, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Combination and Asset Acquisition [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF BUSINESS ACQUISITION PURCHASE PRICE FAIR VALUE | The following table summarizes the preliminary allocation of the purchase price of the fair value of the assets acquired and liabilities assumed at the date of the acquisition:
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| SCHEDULE OF UNAUDITED PRO FORMA | The following unaudited pro forma consolidated results of operation have been prepared, as if the acquisition of Headway had occurred as of January 3, 2022 and January 1, 2021, respectively.
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SEGMENT INFORMATION (Tables) |
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Oct. 01, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT | The Company generated revenue and gross profit by segment as follows:
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share, per share and stated value per share) (UNAUDITED)
The following table disaggregates revenues by segments:
As of October 1, 2022 and January 1, 2022, the Company has assets in the U.S. and the U.K. as follows:
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RELATED PARTY TRANSACTIONS (Tables) |
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Oct. 01, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF RELATED PARTY TRANSACTIONS |
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SUPPLEMENTAL CASH FLOW INFORMATION (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Oct. 01, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Supplemental Cash Flow Elements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION |
|
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ORGANIZATION AND DESCRIPTION OF BUSINESS (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands |
May 18, 2022 |
Apr. 18, 2022 |
Oct. 01, 2022 |
Jan. 01, 2022 |
|---|---|---|---|---|
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||||
| Preferred stock, par or stated value per share | $ 0.00001 | $ 0.00001 | ||
| Stock Purchase Agreement [Member] | ||||
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||||
| Cash payment | $ 14 | |||
| Convertible preferred stock, shares | 9,000,000 | |||
| Stock Purchase Agreement [Member] | Series H Convertible Preferred Stock [Member] | ||||
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||||
| Convertible preferred stock, shares | 9,000,000 | |||
| Payments to acquire businesses, gross | $ 9,000 | $ 9,000 | ||
| Preferred stock, par or stated value per share | $ 0.00001 |
ACCOUNTS RECEIVABLE FINANCING (Details Narrative) £ in Thousands, $ in Thousands |
1 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 |
Jun. 28, 2018
GBP (£)
|
Feb. 08, 2018
GBP (£)
|
Sep. 15, 2017
USD ($)
|
Jul. 31, 2019
GBP (£)
|
Oct. 01, 2022
USD ($)
|
Oct. 02, 2021
USD ($)
|
Jan. 01, 2022
USD ($)
|
|
| Collection of UK factoring facility deferred purchase price | $ 5,282 | $ 5,349 | ||||||
| ASU 2016-16 [Member] | ||||||||
| Collection of UK factoring facility deferred purchase price | 4,683 | $ 5,234 | ||||||
| Midcap Financial Trust [Member] | ||||||||
| Letter of credit | $ 25,000 | 11,612 | $ 13,405 | |||||
| Line of credit facility additional borrowing capacity | $ 25,000 | |||||||
| Line of credit facility, maturity date | Apr. 08, 2019 | |||||||
| White Oak Commercial Finance LLC [Member] | ||||||||
| Letter of credit | 0 | |||||||
| Guaranteed amount | 1,000 | |||||||
| Line of credit facility aggregate amount | $ 10,000,000 | |||||||
| Line of credit, description | The borrowing base is defined as the sum of the following: (a) 95% of the eligible ordinary receivables, as defined, and (b) the lessor of (i) $3,000,000 or (ii) 95% of the Company’s outstanding eligible unbilled receivables, as defined, less the sum of the following: (c) 100% of the undrawn amount of all letters of credit outstanding, (d) the special availability reserve, (e) the quarterly tax reserve and (f) the amount all other availability reserves in effect as such time. | |||||||
| Line of credit bear interest | 0.25% | |||||||
| Line of credit facility borrowing outstanding | $ 7,417 | |||||||
| Line of credit | $ 2,000,000 | |||||||
| Letter of credit percentage | 6.25% | |||||||
| White Oak Commercial Finance LLC [Member] | Interest Rate Floor [Member] | ||||||||
| Line of credit bear interest | 7.00% | 7.00% | ||||||
| White Oak Commercial Finance LLC [Member] | London Interbank Offered Rate (LIBOR) [Member] | ||||||||
| Line of credit bear interest | 5.00% | |||||||
| HSBC Invoice Finance (UK) Ltd [Member] | New Facility [Member] | ||||||||
| Line of credit facility aggregate amount | £ | £ 11,500 | |||||||
| Borrowing fund description | The terms of the arrangement provide for HSBC to fund 90% of the purchased accounts receivable upfront and a secured borrowing line of 70% of unbilled receivables capped at £1,000 (within the overall aggregate total facility of £11,500.) | |||||||
| Line of credit facility increase decrease for period net | £ | £ 20,000 | £ 11,500 | £ 22,500 | |||||
| Line of credit facility, commitment fee percentage | 1.80% | |||||||
| Line of credit facility unbilled receivables | £ | £ 1,500 | £ 1,000 | ||||||
SCHEDULE OF GOODWILL (Details) - USD ($) $ in Thousands |
9 Months Ended | 12 Months Ended |
|---|---|---|
Oct. 01, 2022 |
Jan. 01, 2022 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Beginning balance, gross | $ 23,828 | $ 31,591 |
| Acquisition | 5,974 | |
| Accumulated disposition | (1,577) | |
| Accumulated impairment losses | (6,073) | |
| Currency translation adjustment | (2,106) | (113) |
| Ending balance, net | $ 27,696 | $ 23,828 |
GOODWILL (Details Narrative) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | 12 Months Ended | |
|---|---|---|---|---|
Jan. 01, 2022 |
Oct. 01, 2022 |
Jan. 01, 2022 |
May 18, 2022 |
|
| Goodwill [Line Items] | ||||
| Goodwill, impairment loss | $ 6,073 | |||
| Goodwill | $ 23,828 | $ 27,696 | $ 23,828 | $ 5,974 |
| Staffing UK Reporting Unit [Member] | ||||
| Goodwill [Line Items] | ||||
| Goodwill, impairment loss | $ 3,104 |
SCHEDULE OF DEBT (Details) - USD ($) $ in Thousands |
Oct. 01, 2022 |
Jan. 01, 2022 |
|---|---|---|
| Short-Term Debt [Line Items] | ||
| Total Debt, Gross | $ 18,361 | $ 9,758 |
| Less: Debt Discount and Deferred Financing Costs, Net | (660) | (256) |
| Total Debt, Net | 17,701 | 9,502 |
| Less: Non-Current Portion | (17,356) | (279) |
| Total Current Debt, Net | 345 | 9,223 |
| Series H Preferred Stock [Member] | ||
| Short-Term Debt [Line Items] | ||
| Total Debt, Gross | 9,000 | |
| Jackson Investment Group - Related Party [Member] | ||
| Short-Term Debt [Line Items] | ||
| Total Debt, Gross | 9,016 | 8,949 |
| HSBC Term Loan [Member] | ||
| Short-Term Debt [Line Items] | ||
| Total Debt, Gross | $ 345 | $ 809 |
SCHEDULE OF LEASE, COST (Details) $ in Thousands |
9 Months Ended |
|---|---|
|
Oct. 01, 2022
USD ($)
| |
| Weighted average remaining lease term (years) | 6 years 3 months 7 days |
| Weighted average discount rate | 6.30% |
| Selling, General and Administrative Expenses [Member] | |
| Operating lease cost | $ 1,285 |
SCHEDULE OF OPERATING LEASE LIABILITY MATURITY (Details) - USD ($) $ in Thousands |
Oct. 01, 2022 |
May 31, 2022 |
May 18, 2022 |
Apr. 30, 2022 |
Jan. 01, 2022 |
|---|---|---|---|---|---|
| Leases | |||||
| 2022 | $ 365 | ||||
| 2023 | 1,688 | ||||
| 2024 | 1,618 | ||||
| 2025 | 1,531 | ||||
| 2026 | 1,545 | ||||
| Thereafter | 5,546 | ||||
| Total | 12,293 | ||||
| Less: Imputed Interest | 2,806 | ||||
| Operating lease, liability | 9,487 | $ 1,555 | $ 1,829 | $ 2,048 | |
| Leases - Current | 1,010 | $ 1,006 | |||
| Leases - Non current | $ 8,477 | $ 4,568 |
LEASES (Details Narrative) - USD ($) $ in Thousands |
Oct. 01, 2022 |
May 31, 2022 |
May 18, 2022 |
Apr. 30, 2022 |
Jan. 01, 2022 |
Sep. 30, 2021 |
Jan. 02, 2021 |
|---|---|---|---|---|---|---|---|
| Operating lease, right-of-use asset | $ 8,693 | $ 1,635 | $ 5,578 | ||||
| Operating lease liability | 9,487 | $ 1,555 | $ 1,829 | $ 2,048 | |||
| Operating lease term | 10 years | 10 years | |||||
| New Lease Agreement [Member] | |||||||
| Operating lease liability | $ 2,761 | ||||||
| Lessee, operating lease, renewal term | 8 years | ||||||
| Accounting Standards Update 2018-11 [Member] | |||||||
| Operating lease, right-of-use asset | 8,693 | $ 5,578 | |||||
| Operating lease liability | $ 9,487 | $ 5,574 |
SCHEDULE OF UNVESTED RESTRICTED SHARES ACTIVITY (Details) - $ / shares |
9 Months Ended | 12 Months Ended |
|---|---|---|
Oct. 01, 2022 |
Jan. 01, 2022 |
|
| Equity [Abstract] | ||
| Restricted Shares, Beginning balance | 5,947 | 1,030 |
| Weighted Average Price Per Share, Beginning balance | $ 50.00 | $ 75.00 |
| Restricted Shares, Granted | 2,000 | 19,115 |
| Weighted Average Price Per Share, Granted | $ 8.55 | $ 29.20 |
| Restricted Shares, Vested/adjustments | (259) | (14,198) |
| Weighted Average Price Per Share, Vested/adjustments | $ 101.60 | $ 29.00 |
| Restricted Shares, Ending balance | 7,688 | 5,947 |
| Weighted Average Price Per Share, Ending balance | $ 36.64 | $ 50.00 |
SCHEDULE OF WARRANTS ACTIVITY (Details) - $ / shares |
9 Months Ended | 12 Months Ended |
|---|---|---|
Oct. 01, 2022 |
Jan. 01, 2022 |
|
| Equity [Abstract] | ||
| Number of Shares, Outstanding Beginning Balance | 972,495 | 26,285 |
| Weighted Average Exercise Price, Outstanding Beginning Balance | $ 26.88 | $ 59.40 |
| Number of Shares, Issued | 1,365,053 | 995,452 |
| Weighted Average Exercise Price, Issued | $ 5.91 | $ 25.97 |
| Number of Shares, Exercised | (49,242) | |
| Weighted Average Exercise Price, Exercised | $ 0.0001 | |
| Number of Shares, Expired or Cancelled | (658,192) | |
| Weighted Average Exercise Price, Expired or Cancelled | $ 26.08 | |
| Number of Shares, Outstanding Ending Balance | 1,679,356 | 972,495 |
| Weighted Average Exercise Price, Outstanding Ending Balance | $ 10.21 | $ 26.88 |
SCHEDULE OF WARRANTS OUTSTANDING (Details) |
9 Months Ended |
|---|---|
|
Oct. 01, 2022
$ / shares
shares
| |
| Class of Warrant or Right, Number Outstanding and Exercisable | shares | 1,679,690 |
| Weighted Average Remaining Contractual Life (years) | 5 years 3 months 3 days |
| Weighted Average Exercise Price | $ 10.21 |
| Minimum [Member] | |
| Exercise Price | 5.80 |
| Maximum [Member] | |
| Exercise Price | $ 3,750,000 |
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY (Details) - $ / shares |
9 Months Ended | 12 Months Ended |
|---|---|---|
Oct. 01, 2022 |
Jan. 01, 2022 |
|
| Equity [Abstract] | ||
| Options Outstanding, Beginning Balance | 1,302 | 1,302 |
| Weighted Average Exercise Price, Beginning Balance | $ 1,665.60 | $ 1,665.60 |
| Options Granted | 50,000 | |
| Weighted Average Exercise Price, Granted | $ 7.80 | |
| Options Exercised | ||
| Weighted Average Exercise Price, Exercised | ||
| Options Expired or Cancelled | ||
| Weighted Average Exercise Price, Expired or Cancelled | ||
| Options Outstanding, Ending Balance | 51,302 | 1,302 |
| Weighted Average Exercise Price, Ending Balance | $ 50.06 | $ 1,665.60 |
STOCKHOLDERS’ EQUITY (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Jul. 07, 2022 |
May 03, 2022 |
Oct. 01, 2022 |
Jul. 02, 2022 |
Oct. 02, 2021 |
Oct. 02, 2022 |
Oct. 01, 2022 |
Oct. 02, 2021 |
Jan. 01, 2022 |
Dec. 27, 2021 |
Dec. 26, 2021 |
|
| Class of Stock [Line Items] | |||||||||||
| Common stock, par value | $ 0.00001 | $ 0.00001 | $ 0.00001 | $ 0.00001 | |||||||
| Common stock, shares authorized | 40,000,000 | 40,000,000 | 40,000,000 | 200,000,000 | 40,000,000 | ||||||
| Preferred stock, par value | $ 0.00001 | $ 0.00001 | $ 0.00001 | ||||||||
| Grants in period shares | 2,000 | 19,115 | |||||||||
| Share based compensation expense | $ 325 | $ 350 | |||||||||
| Omnibus Incentive Plan [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Share based compensation expense | $ 17 | $ 54 | $ 6 | 19 | |||||||
| Minimum [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Warrants exercise price | $ 5.80 | $ 5.80 | |||||||||
| Maximum [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Warrants exercise price | $ 3,750,000 | $ 3,750,000 | |||||||||
| Restricted Stocks [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Share based compensation expense | $ 21 | $ 5 | $ 64 | $ 323 | |||||||
| April 2021 Securities Purchase Agreement [Member] | Second Amended and Restated 12% Senior Secured Note [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Share based payment award vesting period terms | three years | ||||||||||
| Grants in period shares | 1,000 | ||||||||||
| Warrant Purchase Agreement [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Warrants expiration description | expiration dates that ranged from July 22, 2026 to November 1, 2026 | ||||||||||
| Warrant Purchase Agreement [Member] | Minimum [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Warrants exercise price | $ 18.50 | ||||||||||
| Warrant Purchase Agreement [Member] | Maximum [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Warrants exercise price | $ 38.00 | ||||||||||
| Warrant Purchase Agreement [Member] | Nine Existing Participating Investors [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Warrants to purchase | 657,858 | ||||||||||
| Amended Warrant Agreements [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Warrants exercise price | $ 5.85 | ||||||||||
| Warrants expiration description | extended the expiration date to January 7, 2028, the date that is five and one-half years following the closing of the July 2022 Private Placement | ||||||||||
| Fair value of warrants | $ 837 | ||||||||||
| Series A Preferred Stock [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Dividends, Preferred Stock | $ 125 | $ 125 | |||||||||
| Series J Preferred Stock [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Preferred stock, par value | $ 0.00001 | $ 0.00001 | $ 0.00001 | $ 0.00001 | |||||||
| Series preferred stock, shares designated | 0.0001 | ||||||||||
| Issued shares | 17,618.3 | ||||||||||
| Redemption share price | $ 0.1761 | ||||||||||
| Series J Preferred Stock [Member] | Stock Purchase Agreement [Member] | |||||||||||
| Class of Stock [Line Items] | |||||||||||
| Preferred stock, voting rights | The Company held a special meeting of stockholders on June 23, 2022 (the “Special Meeting”) for the purpose of voting on a Reverse Stock Split Proposal and an Adjournment Proposal. Each share of Series J Preferred Stock entitled the holder thereof to 1,000,000 votes per share and each fraction of a share of Series J Preferred Stock had a ratable number of votes. Thus, each one-thousandth of a share of Series J Preferred Stock entitled the holder thereof to 1,000 votes. All shares of Series J Preferred Stock that were not present in person or by proxy at the Special Meeting as of immediately prior to the opening of the polls at such meeting (the “Initial Redemption Time”) were automatically redeemed by the Company at the Initial Redemption Time before the vote without further action on the part of the Company or the holder of shares of Series J Preferred Stock (the “Initial Redemption”). All shares that were not redeemed pursuant to the Initial Redemption were redeemed automatically upon the approval by the Company’s stockholders of the Reverse Stock Split Proposal at the Special Meeting (the “Subsequent Redemption”). As a result, no shares of Series J Preferred Stock remain outstanding. | ||||||||||
SCHEDULE OF BUSINESS ACQUISITION PURCHASE PRICE FAIR VALUE (Details) - Headway Workforce Solutions [Member] - USD ($) $ in Thousands |
Oct. 02, 2022 |
Oct. 01, 2022 |
|---|---|---|
| Business Acquisition [Line Items] | ||
| Current assets | $ 10,833 | |
| Fixed assets | 150 | |
| Other non-current assets | 3,070 | |
| Intangible assets | 5,800 | $ 5,800 |
| Goodwill | 5,974 | |
| Current liabilities | (12,931) | |
| Other non-current liabilities | (167) | |
| Consideration | $ 12,729 |
SCHEDULE OF UNAUDITED PRO FORMA (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Oct. 01, 2022 |
Oct. 02, 2021 |
Oct. 01, 2022 |
Oct. 02, 2021 |
|
| Business Combination and Asset Acquisition [Abstract] | ||||
| Revenues | $ 66,120 | $ 73,492 | $ 244,609 | $ 224,072 |
| Net Income (Loss) from continuing operations | $ 1,032 | $ 9,924 | $ (1,710) | $ 26,645 |
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION (Details) - USD ($) $ in Thousands |
9 Months Ended | |
|---|---|---|
Oct. 01, 2022 |
Oct. 02, 2021 |
|
| Supplemental Cash Flow Elements [Abstract] | ||
| Interest | $ 2,849 | $ 3,507 |
| Income taxes | 150 | 396 |
| Deferred purchase price of UK factoring facility | 3,456 | 5,234 |
| Redeemable Series H Preferred Stock, net | 8,265 | |
| Debt discount | 735 | |
| Earnout liability | 4,450 | |
| Goodwill | 5,974 | |
| Intangible assets | 5,800 | |
| Warrant Modification | 837 | |
| Dividends accrued to related parties | 795 | |
| Deemed dividend | 1,798 | |
| Acquisition of Right of Use Assets | 2,735 | |
| Conversion of Series E Preferred Stock – Related Party | 6,172 | |
| Conversion of Series E-1 Preferred Stock – Related Party | 1,493 | |
| Conversion of Series G Preferred Stock – Related Party to debt | 6,172 | |
| Conversion of Series G-1 Preferred Stock – Related Party to debt | $ 1,561 | |
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