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 or other jurisdiction of incorporation) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number, including area code)
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. Yes ☐
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.) Yes ☐
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 13, 2023, 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, per share and par values)
| As of | As of | |||||||
July 1, 2023 | December 31, 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’ (DEFICIT) 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 - non current | ||||||||
| Other long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value, shares authorized; | ||||||||
| Series J Preferred Stock, shares designated, $ par value, and shares issued and outstanding as of July 1, 2023 and January 1, 2022, respectively | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, as of July 1, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| 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, per share and per share values)
(UNAUDITED)
| THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||
| 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 | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Expenses: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of debt discount and deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Re-measurement loss on intercompany note | ( | ) | ( | ) | ||||||||||||
| Other loss, net | ||||||||||||||||
| Total Other Expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss Before Benefit from Income Tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision from Income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss – Basic and Diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted Average Shares Outstanding – Basic and 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
(All amounts in thousands)
(UNAUDITED)
| QUARTERS ENDED | SIX MONTHS ENDED | |||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||
| Net Loss | $ | ( |
) | $ | ( |
) | $ | ( | ) | $ | ( | ) | ||||
| Other Comprehensive Income (Loss) | ||||||||||||||||
| Foreign exchange translation adjustment | ( |
) | ( | ) | ||||||||||||
| Comprehensive Loss 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
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(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 (loss) | Deficit | Equity | |||||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||||||||||
| Employees, directors and consultants | ||||||||||||||||||||||||||||||||
| Series J Preferred Stock dividend issued | ( | ) | — | |||||||||||||||||||||||||||||
| Series J Preferred Stock redemption | — | — | ||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance July 2, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional paid in | Accumulated other comprehensive | Accumulated | Total | |||||||||||||||||||||||||
| Series J | Common Stock | capital | loss | Deficit | Equity | |||||||||||||||||||||||||||
| Balance, April 3, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||||||||||
| Employees, directors and consultants | — | |||||||||||||||||||||||||||||||
| Series J Preferred Stock dividend issued | — | |||||||||||||||||||||||||||||||
| Series J Preferred Stock redemption | ( | ) | — | |||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, July 2, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
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 | Additional paid in | Accumulated other comprehensive | Accumulated | Total | |||||||||||||||||||
| Common Stock | capital | loss | Deficit | Equity | ||||||||||||||||||||
| Balance, December 31, 2022 | $ | 1 | $ | 111,586 | $ | (2,219 | ) | $ | (101,015 | ) | $ | 8,353 | ||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||
| Employees, directors and consultants | — | 941 | — | — | 941 | |||||||||||||||||||
| Sale of common stock and warrants | — | 4,113 | — | — | 4,113 | |||||||||||||||||||
| Foreign currency translation gain | — | — | — | 139 | — | 139 | ||||||||||||||||||
| Net income | — | — | — | — | (5,734 | ) | (5,734 | ) | ||||||||||||||||
| Balance, July 1, 2023 | $ | 1 | $ | 116,639 | $ | (2,080 | ) | $ | (106,749 | ) | $ | 7,811 | ||||||||||||
| Shares | Par Value | Additional paid in | Accumulated other comprehensive | Accumulated | Total | |||||||||||||||||||
| Common Stock | capital | loss | Deficit | Equity | ||||||||||||||||||||
| Balance, April 1, 2023 | $ | 1 | $ | 116,419 | $ | (2,196 | ) | $ | (103,870 | ) | $ | 10,353 | ||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||
| Employees, directors and consultants | — | 221 | — | — | 221 | |||||||||||||||||||
| Sale of common stock and warrants | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||
| Foreign currency translation gain | — | — | — | 116 | — | 116 | ||||||||||||||||||
| Net income | — | — | — | — | (2,879 | ) | (2,879 | ) | ||||||||||||||||
| Balance, July 1, 2023 | $ | 1 | $ | 116,639 | $ | (2,080 | ) | $ | (106,749 | ) | $ | 7,811 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(UNAUDITED)
| July 1, 2023 | July 2, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount and deferred financing costs | ||||||||
| Bad debt expense | ( | ) | ||||||
| Right of use assets depreciation | ||||||||
| Shares issued for services | ||||||||
| Re-measurement loss on intercompany note | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| 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 | ( | ) | ||||||
| Repayment of term loan | ( | ) | ( | ) | ||||
| Proceeds from term loan | ||||||||
| Repayments on accounts receivable financing, net | ( | ) | ( | ) | ||||
| Payments made on earnouts | ( | ) | ||||||
| Payments made on Redeemable Series H Preferred stock | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| NET CASH PROVIDED BY (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, par values 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 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. The model is based on finding and acquiring suitable, mature, profitable, operating, domestic and international staffing companies focused specifically on the accounting and finance, information technology (“IT”), engineering, administration (“Professional”) and light industrial (“Commercial”) disciplines. 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. To date, we have completed 11 acquisitions since November 2013.
The
Company focuses on five strategic verticals that represent sub-segments of the staffing industry. These five strategic pillars, accounting
& finance, information technology, engineering, administration, and commercial are the basis for the Company’s sales and revenue
generation and its growth acquisition targets. The Headway Acquisition in May 2022 added
| 9 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
The Company has developed a centralized, sales and recruitment hub in both the U.S. and U.K. markets. The addition of Headway, with its single office in Raleigh, North Carolina, and nationwide coverage for operations, supports and accelerates the Company’s objective of driving efficiencies through the use of technology, deemphasizing bricks and mortar, supporting more efficient and cost-effective service delivery for all Brands.
The Company has a management team with significant operational and M&A experience. The combination of this management experience and the increased opportunity for expansion of its core Brands with EOR services and nationwide expansion, provide for the opportunity of significant organic growth, while plans to continue its business model, finding and acquiring suitable, mature, profitable, operating, U.S. and U.K. based staffing companies continues.
We
effected a
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
These condensed 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, per share and par values, unless otherwise indicated.
The accompanying condensed 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 the GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Liquidity
The
accompanying condensed consolidated 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 the six months ended July 1, 2023, the Company has an accumulated deficit of $
The financial statements included in this Quarterly Report on Form 10-Q 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, the notes 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.
As
of the date of the filing of this Quarterly Report on Form 10-Q, the entire outstanding principal balance of the Jackson Notes,
which was $
| 10 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
Going Concern
The accompanying condensed consolidated 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
In May 2023, the World Health Organization determined that COVID-19 no longer fit the definition of a public health emergency and the U.S. government announced its plan to let the declaration of a public health emergency associated with COVID-19 expire on May 11, 2023. COVID-19 is expected to remain a serious endemic threat for an indefinite future period and may continue to adversely affect the global economy, and we are unable to predict the full extent of potential delays or impacts on our business, our clinical studies, our research programs, the recoverability of our assets, and our manufacturing. The effects of the COVID-19 endemic may continue to disrupt or delay our business operations, including but not limited to with respect to efforts relating to potential business development transactions and our ability to deploy staffing workforce effectively during social distancing and shelter-in-place directives and it could continue to disrupt the marketplace which could have an adverse effect on our operations. As such, it is uncertain as to the full magnitude that COVID-19 and its ongoing effects 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. The Company is not able to estimate the effects of the COVID-19 endemic on its results of operations, financial condition, or liquidity for fiscal year 2023.
The Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to COVID-19 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 condensed 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 six months ended July 1, 2023 and July 2, 2022 include the valuation of intangible assets, including goodwill, liabilities associated with testing long-lived assets for impairment and valuation reserves against deferred tax assets.
| 11 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
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 December 31, 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 $
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.
| 12 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
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. Revenue for the three and six months ended July 1, 2023 was comprised of $
Income Taxes
The Company utilizes Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company applies the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in the financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of the date of this filing, the Company is current on all corporate, federal and state tax returns. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax expense.
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 (“ASC”) 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.
| 13 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
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 placed were estimated using a Black Scholes model. Refer to Note 10 – Stockholders Equity for further details.
Recent Accounting Pronouncements
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 smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company adopted this ASU on January 1, 2023. The adoption of this standard did not have a material impact on the consolidated financial statements.
The Company utilizes the guidance per ASC 260, “Earnings per Share”. Basic earnings per share are calculated by dividing income/loss available to stockholders by the weighted average number of common stock shares outstanding during each period. For the six months ended July 1, 2023 and July 2, 2022, as a result of the net loss attributable to common stockholders, losses were not allocated to the participating securities.
| 14 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
Diluted earnings per share are computed using the weighted average number of common stock shares and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents consist of shares of common stock issuable upon the conversion of preferred stock, convertible notes, unvested equity awards and the exercise of stock options and warrants (calculated using the modified treasury stock method). Such securities, shown below, presented on a common stock equivalent basis and outstanding as of July 1, 2023 and July 2, 2022 have not been included in the diluted earnings per share computations, as their inclusion would be anti-dilutive due to the Company’s net loss as of July 1, 2023 and July 2, 2022:
| July 1, 2023 | July 2, 2022 | |||||||
| Warrants | ||||||||
| Restricted shares – unvested | ||||||||
| Options | ||||||||
| Total | ||||||||
NOTE 4 – ACCOUNTS RECEIVABLE FINANCING
Midcap Funding X Trust
Prior
to September 15, 2017, certain U.S. subsidiaries of the Company were party to a $
On October 26, 2020, the Company entered into Amendment No. 17 to that certain Credit and Security Agreement, dated April 8, 2017, by and among, the Company, as the parent, Monroe Staffing Services, LLC, a Delaware limited liability company, Faro Recruitment America, Inc., a New York corporation, Lighthouse Placement Services, Inc., a Massachusetts corporation, Staffing 360 Georgia, LLC, a Georgia limited liability company, and Key Resources, Inc., a North Carolina corporation, as borrowers (the “Credit Facility Borrowers”), MidCap Funding IV Trust as successor by assignment to MidCap (as agent for lenders), and other financial institutions or other entities from time to time parties thereto as lenders (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit and Security Agreement”) pursuant to which, among other things, the parties 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 and the Credit Facility Borrowers 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 and the lenders
party thereto. Amendment No. 27, among other things, (i) increases the revolving loan commitment amount from $
In
addition,
The facility provides events of default including: (i) failure to make payment of principal or interest on any 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 in the financial condition of business prospectus of any Borrower (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. At the election of agent or required lenders (or automatically in case of bankruptcy or insolvency events of default), upon the occurrence of any event of default and for so long as it continues, 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.
| 15 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
The
balance of the MidCap facility as of July 1, 2023 and December 31, 2022 was $
HSBC Invoice Finance (UK) Ltd
On
February 8, 2018, CBS Butler Holdings Limited (“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, the Company’s subsidiary, Clement May Limited (“CML”) entered into a new agreement with a minimum
term of 12 months for purchase of debt (“APD”) with HSBC, joining CBS Butler, 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
six months ended July 1, 2023, and July 2, 2022, the collection of UK factoring facility deferred purchase price totaled $
NOTE 5 – INTANGIBLE ASSETS
The following provides a breakdown of intangible assets as of:
| July 1, 2023 | ||||||||||||||||
| Tradenames | Non-Compete | Customer Relationship | Total | |||||||||||||
| Intangible assets, gross | $ | $ | $ | $ | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Intangible assets, net | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Tradenames | Non-Compete | Customer Relationship | Total | |||||||||||||
| Intangible assets, gross | $ | $ | $ | $ | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Intangible assets, net | $ | $ | $ | $ | ||||||||||||
On
April 18, 2022, the Company entered into a Stock Purchase Agreement (the “Headway Purchase Agreement”) with Headway
Workforce Solutions (“Headway”), 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 $
| 16 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
As of July 1, 2023, estimated annual amortization expense for each of the next five fiscal years is as follows:
| Fiscal quarter ended July 1st | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
Amortization
of intangible assets for the three and six months ended July 1, 2023 and July 2, 2022 was $
NOTE 6 – GOODWILL
The following table provides a roll forward of goodwill:
| July 1, 2023 | December 31, 2022 | |||||||
| Beginning balance, gross | $ | $ | ||||||
| Acquisition | ||||||||
| Accumulated disposition | ( | ) | ( | ) | ||||
| Accumulated impairment losses | ( | ) | ( | ) | ||||
| Currency translation adjustment | ( | ) | ||||||
| Ending balance, net | $ | $ | ||||||
Goodwill by reportable segment is as follows:
| July 1, 2023 | December 31, 2022 | |||||||
| Professional Staffing - US | $ | $ | ||||||
| Commercial Staffing - US | ||||||||
| Professional Staffing - UK | ||||||||
| 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. ASC 280-10-50-11 states that operating segments often exhibit similar long-term financial
performance if they have similar economic characteristics. In fiscal 2022, 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 $
During the year ended December 31, 2022, the Company changed its measurement date from the last day of the fiscal year end to the first day of the fiscal fourth quarter. The Company performed its annual goodwill impairment test and no impairment was recognized other than the charge recognized by the Staffing UK reporting unit. To estimate the fair value of the reporting units the Company employed a combination of market approach (valuations using comparable company multiples) and income approach (discounted cash flow analysis) to derive the fair value of the reporting unit when performing its annual impairment testing. Volatility in the Company’s stock price can result in the net book value of our reporting unit approximating, or even temporarily exceeding market capitalization, however, the fair value of our reporting unit is not driven solely by the market price of our stock. As described above, fair value of our reporting unit is derived using a combination of an asset approach, an income approach and a market approach. These valuation techniques consider several other factors beyond our market capitalization, such as the estimated future cash flows of our reporting units, the discount rate used to present value such cash flows and the market multiples of comparable companies. Changes to input assumptions used in the analysis could result in materially different evaluations of goodwill impairment.
| 17 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
NOTE 7 – 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 the Headway Purchase Agreement with Headway, 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 $
| 18 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
The following table summarizes the 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 $
NOTE 8 – DEBT
| July 1, 2023 | December 31, 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 - Related Party | ( | ) | ( | ) | ||||
| Less: Non-Current Portion | ( | ) | ( | ) | ||||
| Total Current Debt, Net | $ | $ | ||||||
Jackson Notes
The
entire outstanding principal balance of the Second Amended and Restated Note Purchase Agreement between the Company, Jackson and the
guarantor parties thereto was due and payable on September 30, 2022. On October 27, 2022, the Company entered into the Third Amended
and Restated Note and Warrant Purchase Agreement (the “Third A&R Agreement”) with Jackson, which amended and restated
the Second Amended Note Purchase Agreement, dated October 26, 2020, as amended, and issued to Jackson the Third Amended and Restated
Senior Secured
On June 30, 2023, the Company and Jackson entered into an amendment (“Amendment No. 1”) to the 2022 Jackson Note to amend the interest payment dates of July 1, 2023, August 1, 2023, and September 1, 2023 to October 1, 2023, November 1, 2023 and December 1, 2023, respectively.
On
August 30, 2023, the Company and the guarantor parties thereto (together with the Company, the “Obligors”) entered into that
certain First Omnibus Amendment and Reaffirmation Agreement to the Note Documents (the “First Omnibus Amendment Agreement”)
with Jackson, which First Omnibus Amendment Agreement, among other things:
| 19 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
In
addition, pursuant to the terms of the Third A&R Agreement, as amended by the First Omnibus Amendment Agreement, until all
principal interest and fees due pursuant to the Third A&R Agreement and the Jackson Notes are paid in full by the Company and are
no longer outstanding, Jackson shall have a first call over
HSBC Loan
On
February 8, 2018, CBS Butler, Staffing 360 Solutions Limited and The JM Group, entered into
a new arrangement with 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 the Headway 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 9 – LEASES
As
of July 1, 2023 and December 31, 2022, we recorded a right of use (“ROU”) lease asset of approximately $
| 20 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
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 $