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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 30, 2023

 

or

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER: 001-37575

 

 

 

STAFFING 360 SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   68-0680859

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

757 3rd Avenue

27th Floor

New York, New York 10017

(Address of principal executive offices) (Zip code)

 

(646) 507-5710

(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
Common stock, par value $0.00001 per share   STAF   NASDAQ

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No

 

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 ☒ No☐

 

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 (§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 ☒ No ☐

 

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
Non-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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No

 

As  of July 1, 2023, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was approximately $2,902(000s) based on the closing price (last sale of the day) for the registrant’s common stock on the Nasdaq Capital Market on June 30, 2023, of $0.65 per share.

 

As of June 7, 2024, 6,391,388 shares of common stock, $0.00001 par value, were outstanding.

 

 

 

 

 

 

Staffing 360 Solutions, Inc.

 

TABLE OF CONTENTS

 

    PAGE
  PART I  
ITEM 1. Business 3
ITEM 1A. Risk Factors 5
ITEM 1B. Unresolved Staff Comments 21
ITEM 1C. Cybersecurity 22
ITEM 2. Properties 23
ITEM 3. Legal Proceedings 23
ITEM 4. Mine Safety Disclosures 23
   
  PART II  
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24
ITEM 6. [Reserved] 24
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 40
ITEM 8. Financial Statements and Supplementary Data 41
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 42
ITEM 9A. Controls and Procedures 42
ITEM 9B. Other Information 44
ITEM 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections 44
     
  PART III  
ITEM 10. Directors, Executive Officers and Corporate Governance 45
ITEM 11. Executive Compensation 51
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 56
ITEM 13. Certain Relationships and Related Transactions, and Director Independence 67
ITEM 14. Principal Accountant Fees and Services 69
     
  PART IV  
ITEM 15. Exhibit and Financial Statement Schedules 70
ITEM 16. Form 10-K Summary 76
     
SIGNATURES 77

 

i

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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,” “could,” “should,” “intends,” “plans,” “estimates,” “goal,” “target,” “possible,” “potential” 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: our ability to regain and maintain compliance with the Nasdaq Capital Market’s (“Nasdaq”) listing standards, our ability to continue as a going concern, 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; the termination of a major customer contract or project; 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; negative outcome of pending and future claims and litigation; government policies, legislation or judicial decisions adverse to our businesses; potential cost overruns and possible rejection of our business model and/or sales methods; 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. 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 Annual Report, including the “Risk Factors” in Item 1A of this Annual Report and the other reports and documents we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.

 

As used in this Annual Report, the terms “we,” “us,” “our,” “Staffing 360” and the “Company” mean Staffing 360 Solutions, Inc. and its subsidiaries, unless otherwise indicated. All dollar amounts in this Annual Report are expressed in thousands except for share and per share values, unless otherwise indicated.

 

The disclosures set forth in this report should be read in conjunction with our financial statements and notes thereto for the period ended December 30, 2023.

 

2
 

 

PART I

 

ITEM 1. BUSINESS

 

General

 

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, we changed our domicile to the State of Delaware. As a rapidly growing public company in the domestic staffing sector, our high-growth business model is based on finding and acquiring, suitable, mature, profitable, operating, domestic staffing companies. Our targeted consolidation model is focused specifically on the accounting and finance, information technology (“IT”), engineering, administration and light industrial disciplines.

 

All amounts in this Annual Report are expressed in thousands, except share and per share amounts, or unless otherwise indicated.

 

Business Model and Acquisitions

 

We are a high-growth domestic staffing company engaged in the acquisition of United States (“U.S.”) based staffing companies. As part of our consolidation model, we pursue a broad spectrum of staffing companies supporting primarily accounting and finance, IT, engineering, administration (collectively, the “Professional Business Stream”) and commercial (“Commercial Business Stream”) 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 10 acquisitions since November 2013.

 

Operating History

 

We generated revenue of $190,876 and $184,884 for the years ended December 30, 2023 (“Fiscal 2023”) and December 31, 2022 (“Fiscal 2022”), respectively. This increase was primarily caused by the acquisition of Headway Workforce Solutions (“Headway”), partly offset due to the decline in commercial staffing revenue.

 

Headway Acquisition and Series H Convertible Preferred Stock

 

On April 18, 2022, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Headway and Chapel Hill Partners, LP, as the representatives of all the stockholders of Headway (“Chapel Hill”), 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) 9,000,000 shares of our Series H Convertible Preferred Stock (the “Series H 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 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.

 

2023 Letter Agreement

 

On July 31, 2023, we, Chapel Hill and Jean-Pierre Sakey (“Sakey”) entered into a letter agreement (the “Letter Agreement”) in connection with the Stock Purchase Agreement. Pursuant to the Letter Agreement, if on or prior to September 30, 2023, we pay an aggregate of $11,340 (the “Agreed Amount”) to the holders of the Series H Preferred Stock and Chapel Hill for the redemption of the 9,000,000 shares of Series H Preferred Stock issued and outstanding with the remaining amount to be paid to Chapel Hill, less $525 to be paid to third-parties to satisfy existing incentives and fees due, with such fees and incentive payments to be allocated at the discretion of Chapel Hill and Sakey, then our obligation to redeem the Series H Preferred Stock pursuant to the Purchase Agreement and Certificate of Designation of Preferences, Rights and Limitations of Series H Convertible Preferred Stock, as amended (the “Series H COD”), shall be deemed satisfied, and our contingent liabilities, covenants and indemnification obligations pursuant to the Stock Purchase Agreement shall be extinguished and of no further force and effect.

 

Pursuant to the Letter Agreement, if on or prior to September 30, 2023, we do not redeem the Series H Preferred Stock and remit the Contingent Payment (as defined in the Purchase Agreement), then we shall make the Contingent Payment in the amount of $5,000, as set forth in the Stock Purchase Agreement, in five equal installments of $1,000 each, less $134 per installment to be paid to third-parties to satisfy existing incentives and fees due, with such fees and incentive payments to be allocated at the discretion of Chapel Hill and Sakey (the “Contingent Payment Installments”), with such Contingent Payment Installments to be made on or before December 31, 2023, March 31, 2024, June 30, 2024, September 30, 2024 and December 31, 2024 (each such date, a “Contingent Installment Payment Date”). On each Contingent Installment Payment Date, we shall additionally redeem 100,000 shares of Series H Preferred Stock at a price per share equal to $0.0000001 per share. As of the date of this Annual Report, the Contingent Payment Installments due on December 31, 2023 and March 31, 2024, have not been paid. 

 

Pursuant to the Letter Agreement, we shall also have no obligation to pay the Preferred Dividend (as defined in the Series H COD) on June 30, 2023, September 30, 2023 and December 31, 2023.

 

On February 22, 2024, Company, Chapel Hill Partners and JP Sakey entered into a Forbearance Agreement (the “Forbearance Agreement”) pursuant to which the holders of the Series H Preferred Stock and Chapel Hill agreed to forebear from exercising their right with respect to the failure to repay the payment due on December 31, 2023 and March 31, 2024 until April 30, 2024, in consideration for a fee of $50 for each installation payment and a reduction on the recovery of Series H Preferred Stock of $100 for each installation payment. The contingent payments due on December 31, 2023 and March 31, 2023 were not paid.

 

Industry Background

 

The staffing industry is divided into three major segments: temporary staffing services, professional employer organizations (“PEOs”) and placement agencies. Temporary staffing services provide workers for limited periods, often to substitute for absent permanent workers or to help during periods of peak demand. These workers, who are often employees of the temporary staffing agency, will generally fill clerical, technical, or industrial positions. PEOs, sometimes referred to as employee leasing agencies, contract to provide workers to customers for specific functions, often related to human resource management. In many cases, a customer’s employees are hired by a PEO and then contracted back to the customer. Placement agencies, sometimes referred to as executive recruiters or headhunters, find workers to fill permanent positions at customer companies. These agencies may specialize in placing senior managers, mid-level managers, technical workers, or clerical and other support workers.

 

We consider ourselves a temporary staffing company within the broader staffing industry. However, we provide permanent placements at the request of existing clients and some consulting services clients.

 

Staffing companies identify potential candidates through online advertising and referrals, and interview, test and counsel workers before sending them to the customer for approval. Pre-employment screening can include skills assessment, drug tests and criminal background checks. The personnel staffing industry has been radically changed by the internet. Many employers list available positions with one or several internet personnel sites like www.monster.com or www.careerbuilder.com, and on their own sites. Personnel agencies operate their own sites and often still work as intermediaries by helping employers accurately describe job openings and by screening candidates who submit applications.

 

Major end-use customers include businesses from a wide range of industries such as manufacturing, construction, wholesale and retail. Marketing involves direct sales presentations, referrals from existing clients and advertising. Agencies compete both for customers and workers. Depending on market supply and demand at any given time, agencies may allocate more resources either to finding potential employers or potential workers. Permanent placement agencies work either on a retained or on a contingency basis. Clients may retain an agency for a specific job search or on contract for a specific period. Temporary staffing services charge customers a fixed price per hour/day or a standard markup on prevailing hourly/daily rates.

 

For many staffing companies, demand is lower late in the fourth calendar quarter and early in the first calendar quarter, partly because of holidays, and higher during the rest of the year. Staffing companies may have high receivables from customers. Temporary staffing agencies and PEOs must manage a high cash flow because they funnel payroll payments from employers. Cash flow imbalances also occur because agencies must pay workers even though they haven’t been paid by clients.

 

3
 

 

The revenue of staffing companies depends on the number of jobs they fill, which in turn can depend upon the economic environment. During economic slowdowns, many client companies stop hiring altogether. Internet employment sites expand a company’s ability to find workers without the help of traditional agencies. Staffing companies often work as intermediaries, helping employers accurately describe job openings and screen candidates. Increasing the use of sophisticated, automated job description and candidate screening tools could make many traditional functions of personnel agencies obsolete. Free social networking sites such as LinkedIn and Facebook are also becoming a common way for recruiters and employees to connect without the assistance of a staffing agency.

 

To avoid large placement agency fees, big companies may use in-house personnel staff, current employee referrals, or human resources consulting companies to find and hire new personnel. Because placement agencies typically charge a fee based on a percentage of the first year’s salary of a new worker, companies with many jobs to fill have a financial incentive to avoid agencies.

 

Many staffing companies are small and may depend heavily on a few big customers for a large portion of revenue. Large customers may lead to increased revenue, but also expose agencies to higher risks. When major accounts experience financial hardships, and have less need for temporary employment services, agencies stand to lose large portions of revenue.

 

The loss of a staff member who handles a large volume of business may result in a large loss of revenue for a staffing company. Individual staff members, rather than the staffing company itself, often develop strong relationships with customers. Staff members who move to another staffing company are often able to move customers with them.

 

Some of the best opportunities for temporary employment are in industries traditionally active in seasonal cycles, such as manufacturing, construction, wholesale and retail. However, seasonal demand for workers creates cash flow fluctuations throughout the year.

 

Staffing companies are regulated by the U.S. Department of Labor and the Equal Employment Opportunity Commission, and often by state authorities. Many federal anti-discrimination rules regulate the type of information that employment firms can request from candidates or provide to customers about candidates. In addition, the relationship between the agency and the temporary employees, or employee candidates may not always be clear, resulting in legal and regulatory uncertainty. PEOs are often considered co-employers along with the client, but the PEO is responsible for employee wages, taxes and benefits. State regulation aims to ensure that PEOs provide the benefits they promise to workers.

 

Trends in the Staffing Business

 

Start-up costs for a staffing company are very low. Individual offices can be profitable, but consolidation is driven mainly by the opportunity for large agencies to develop national relationships with big customers. Some agencies expand by starting new offices in promising markets, but most prefer to buy existing independent offices with proven staff and an existing customer roster.

 

At some companies, temporary workers have become such a large part of the workforce that staffing company employees sometimes work at the customer’s site to recruit, train, and manage temporary employees. The Company has a number of onsite relationships with its customers. Staffing companies try to match the best qualified employees for the customer’s needs, but often provide additional training specific to that company, such as instruction in the use of proprietary software.

 

Some personnel consulting firms and human resource departments are increasingly using psychological tests to evaluate potential job candidates. Psychological or liability testing has gained popularity, in part, due to recent fraud scandals. In addition to stiffer background checks, headhunters often check the credit history of prospective employees.

 

We believe the trends of outsourcing entire departments and dependence on temporary and leased workers will expand opportunities for staffing companies. Taking advantage of their expertise in assessing worker capabilities, some staffing companies manage their clients’ entire human resource functions. Human resources outsourcing (“HRO”) may include management of payroll, tax filings, and benefit administration services. HRO may also include recruitment process outsourcing (“RPO”), whereby an agency manages all recruitment activities for a client.

 

New online technology is improving staffing efficiency. For example, some online applications coordinate workflow for staffing agencies, their clients and temporary workers, and allow agencies and customers to share work order requests, submit and track candidates, approve timesheets and expenses, and run reports. Interaction between candidates and potential employers is increasingly being handled online.

 

4
 

 

Initially viewed as rivals, some Internet job-search companies and traditional employment agencies are now collaborating. While some Internet sites do not allow agencies to use their services to post jobs or look through resumes, others find that agencies are their biggest customers, earning the sites a large percentage of their revenue. Some staffing companies contract to help client employers find workers online.

 

Competition

 

Our staffing divisions face competition in attracting clients as well as temporary candidates. The staffing industry is highly competitive, with a number of firms offering services similar to those provided by us on a national, regional or local basis. In many areas, the local staffing companies are our strongest competitors. The most significant competitive factors in the staffing business are price and reliability of service. We believe its competitive advantage stems from its experience in niche markets, and commitment to the specialized employment market, along with its growing global presence.

 

The staffing industry is characterized by a large number of competing companies in a fragmented sector. Major competitors also exist across the sector, but as the industry affords low barriers to entry, new entrants are constantly introduced to the marketplace.

 

The top layer of competitors includes large corporate staffing and employment companies which have yearly revenue of $75 million or more. The next (middle) layer of the competition consists of medium-sized entities with yearly revenue of $10 million or more. The largest portion of the marketplace is the bottom layer of this competitive landscape consisting of small, individual-sized or family-run operations. As barriers to entry are low, sole proprietors, partnerships and small entities routinely enter the industry.

 

Employees

 

We employ approximately 150 full-time employees as part of our internal operations. Additionally, we employ more than 4,500 individuals that are placed directly with our clients through our various operating subsidiaries.

 

Available Information

 

We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, we file periodic reports, proxy statements and other information with the SEC. We make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports on our website at www.staffing360solutions.com as soon as reasonably practicable after those reports and other information is electronically filed with, or furnished to, the SEC.

 

ITEM 1A. RISK FACTORS.

 

There are numerous and varied risks that may prevent us from achieving our goals, including those described below. You should carefully consider the risks described below and the other information included in this Annual Report, including our consolidated financial statements and related notes. Our business, financial condition, and results of operations could be harmed by any of the following risks. If any of the events or circumstances described below were to occur, our business, the financial condition and the results of operations could be materially adversely affected. As a result, the trading price of our common stock could decline, and investors could lose part or all of their investment. The risks below are not the only risks we face. Additional risks not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition or results of operations.

 

Risk Factor Summary

 

Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Annual Report and our other filings with the SEC, before making an investment decision regarding our common stock.

 

5
 

 

  We have incurred significant losses since our inception and may continue to incur losses and thus may never achieve or maintain profitability;
  Our debt level could negatively impact our financial condition, results of operations and business prospects;
  Our debt instruments contain covenants that could limit our financing options and liquidity position, which would limit our ability to grow our business;
  The Jackson Notes are secured by substantially all of our assets that are not secured by our revolving loans facility with Midcap., and the terms of the Jackson Notes may restrict our current and future operations. Additionally, Jackson may be able to exert significant influence over us as our senior secured lender (each as defined herein);
  We will need to raise additional capital to meet our business requirements in the future, which is likely to be challenging, could be highly dilutive and may cause the market price of our common stock to decline;
  We have significant working capital needs and if we are unable to satisfy those needs from cash generated from our operations or borrowings under our debt instruments, we may not be able to continue our operations;
  Our revenue can vary because our customers can terminate their relationship with us at any time with limited or no penalty;
  We operate in an intensely competitive and rapidly changing business environment, and there is a substantial risk that our services could become obsolete or uncompetitive;
  We have been and may be exposed to employment-related claims and losses, including class action lawsuits, which could have a material adverse effect on our business;
  Our growth of operations could strain our resources and cause our business to suffer;
  Our strategy of growing through acquisitions may impact our business in unexpected ways;
  A more active, liquid trading market for our common stock may not develop, and the price of our common stock may fluctuate significantly;
  We depend on attracting, integrating, managing, and retaining qualified personnel;
  If we are unable to retain existing customers or attract new customers, our business and results of operations could suffer;
  We are dependent upon technology services, and if we experience damage, service interruptions or failures in our computer and telecommunications systems, our customer relationships and our ability to attract new customers may be adversely affected;
  Our management has identified a material weakness in our internal control over financial reporting relating 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. This material weakness, if not remediated, could result in material misstatements in our consolidated financial statements. We may be unable to develop, implement and maintain appropriate internal controls over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results and current and potential stockholders may lose confidence in our financial reporting.

 

Risks Relating to Our Organization and Our Financial Condition

 

We have incurred significant losses since our inception and may continue to incur losses and thus may never achieve or maintain profitability.

 

We have incurred substantial losses since our inception, anticipate that we will continue to incur losses for the foreseeable future and may not achieve or sustain profitability. Because of the numerous risks and uncertainties associated with the staffing industry, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Expected future operating losses will have an adverse effect on our cash resources, stockholders’ equity and working capital. Our negative working capital and liquidity position raise substantial doubt about our ability to continue as a going concern.

 

6
 

 

Our failure to become and remain profitable could depress the value of our common stock and impair our ability to raise capital, expand our business, maintain our development efforts, diversify our portfolio of staffing companies, or continue our operations. A decline in the value of our common stock could also cause you to lose all or part of your investment.

 

Our independent registered public accounting firms have included an explanatory paragraph in its report as of and for the year ended December 30, 2023 expressing substantial doubt in our ability to continue as a going concern based on our negative working capital and liquidity position and other macro-economic indicators. Our consolidated financial statements do not include any adjustments that might result from the outcome of this going concern uncertainty and have been prepared under the assumption that we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we are unable to continue as a going concern, we may be forced to liquidate our assets which would have an adverse impact on our business and developmental activities. In such a scenario, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The reaction of investors to the inclusion of a going concern statement by our independent registered public accounting firm and our potential inability to continue as a going concern may materially adversely affect our stock price and our ability to raise new capital or to enter into strategic alliances.

 

Our debt level could negatively impact our financial condition, results of operations and business prospects.

 

As of December 30, 2023, our total gross debt was approximately $19,116. Our level of debt could have significant consequences to our stockholders, including the following:

 

  requiring the dedication of a substantial portion of cash flow from operations to make payments on debt, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities;
  requiring a substantial portion of our corporate cash reserves to be held as a reserve for debt service, limiting our ability to invest in new growth opportunities;
  limiting the ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate and other activities;
  limiting the flexibility in planning for, or reacting to, changes in the business and industry in which we operate;
  increasing our vulnerability to both general and industry-specific adverse economic conditions
  putting us at a competitive disadvantage versus less leveraged competitors; and
  increasing vulnerability to changes in the prevailing interest rates.

 

Our ability to make payments of principal and interest, or to refinance our indebtedness, depends on our future performance, which is subject to economic, financial, competitive and other factors. We had negative cash flows from operations for the fiscal year ended December 30, 2023, and we may not generate cash flow in the future sufficient to service our debt because of factors beyond our control, including but not limited to our ability to expand our operations. If we are unable to generate sufficient cash flows, we may be required to adopt one or more alternatives, such as restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. A default on our debt obligations could have a material adverse effect on our business, financial condition and results of operations and may cause you to lose all or part of your investment.

 

Further, the outstanding Amended and Restated Senior Secured 12% Promissory Note (the “2022 Jackson Note”) and the 12% Senior Secured Promissory Note (the “2023 Jackson Note” and together with the 2022 Jackson Note, the “Jackson Notes”) each issued to Jackson Investment Group LLC (“Jackson”) and due October 14, 2024 contain certain customary financial covenants, and we have 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 we 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. Our financing with MidCap Funding X Trust (“MidCap”) includes customary financial covenants and we have had instances of non-compliance. We have been able to obtain forbearance of any non-compliance from MidCap, and management expects to continue to be able to obtain necessary forbearance in the event of future non-compliance; however, there can be no assurance that we will be able to obtain such forbearance, and should MidCap refuse to provide a forbearance in the future, the outstanding debt under the agreement could become due immediately, which exceeds our current cash balance.

 

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Our debt instruments contain covenants that could limit our financing options and liquidity position, which would limit our ability to grow our business.

 

Covenants in our debt instruments impose operating and financial restrictions on us. These restrictions prohibit or limit our ability to, among other things:

 

  pay cash dividends to our stockholders, subject to certain limited exceptions;
  redeem or repurchase our common stock or other equity;
  incur additional indebtedness;
  permit liens on assets;
  make certain investments (including through the acquisition of stock, shares, partnership or limited liability company interests, any loan, advance or capital contribution);
  sell, lease, license, lend or otherwise convey an interest in a material portion of our assets;
  cease making public filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and
  sell or otherwise issue shares of our common stock or other capital stock subject to certain limited exceptions.

 

Our failure to comply with the restrictions in our debt instruments could result in events of default, which, if not cured or waived, could result in us being required to repay these borrowings before their due date. The holders of our debt may require fees and expenses to be paid or other changes to terms in connection with waivers or amendments. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and rates. In addition, these restrictions may limit our ability to obtain additional financing, withstand downturns in our business or take advantage of business opportunities.

 

The Jackson Notes are secured by substantially all of our assets that are not secured by our revolving loan facility with Midcap and the terms of the Jackson Notes may restrict our current and future operations. Additionally, Jackson may be able to exert significant influence over us as our senior secured lender.

 

The Jackson Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that we believe may be in our long-term best interests. The Jackson Notes include covenants limiting or restricting, among other things, our ability to:

 

  incur or guarantee additional indebtedness;
  pay distributions on, redeem or repurchase shares of our capital stock or redeem or repurchase any of our subordinated debt;
  make certain investments;
  sell assets;
  enter into agreements that restrict distributions or other payments from our restricted subsidiaries;
  incur or allow the existence of liens;
  consolidate, merge or transfer all or substantially all of our assets; and
  engage in transactions with affiliates.

 

In addition, the Jackson Notes contain financial covenants including, among other things, a fixed charge coverage ratio, minimum liquidity requirements and total leverage ratio. A breach of any of these financial covenants could result in a default under the Jackson Notes. If any such default occurs, Jackson may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable, which would adversely impact our financial condition and operations. In addition, following an event of default under the Jackson Notes, Jackson will have the right to proceed against the collateral granted to it to secure the debt, which includes our available cash. If the debt under the Jackson Notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full our debt.

 

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We review the recoverability of goodwill and other indefinite lived intangible assets annually as of the first day of our fiscal fourth quarter, and whenever events or circumstances indicate that the carrying value of a reporting unit, including goodwill, or an indefinite lived intangible asset may not be recoverable.

 

To evaluate goodwill and other indefinite lived intangible assets for impairment, we may use qualitative assessments to determine whether it is more likely than not that the fair value of a reporting unit, including goodwill, or an indefinite lived intangible asset is less than its carrying amount. The qualitative assessments require assumptions to be made regarding multiple factors, including the current operating environment, historical and future financial performance and industry and market conditions. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. Alternatively, we may elect to bypass the qualitative assessment and instead perform a quantitative impairment test to calculate the fair value of the reporting unit in comparison to its associated carrying value.

 

The quantitative impairment tests require us to make an estimate of the fair value of our reporting units. An impairment could be recorded as a result of changes in assumptions, estimates or circumstances, some of which are beyond our control. Because a number of factors may influence determinations of fair value of goodwill, we are unable to predict whether impairments of goodwill will occur in the future, and there can be no assurance that continued conditions will not result in future impairments of goodwill. The future occurrence of a potential indicator of impairment could include matters such as (i) a decrease in expected net earnings; (ii) adverse equity market conditions; (iii) a decline in current market multiples; (iv) a decline in our common stock price; (v) a significant adverse change in legal factors or the general business climate; and (vi) a significant downturn in employment markets in the United States. Any such impairment would result in us recognizing a non-cash charge in our consolidated statement of operations, which could adversely affect our business, results of operations and financial condition.

 

We cannot accurately predict the effect of the weakness in the national economy on our future operating results or the market price of our voting common stock.

 

The national economy in general is currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current economic downturn, which has adversely impacted the markets we serve. Any further deterioration in national or local economic conditions would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our voting common stock to decline. While it is impossible to predict how long these conditions may exist, the current economic downturn could present substantial risks for some time for the banking industry and for us. The Company currently does not have any exposure to Silicon Valley Bank (now owned by First Citizens Bank), Signature Bank (now owned by New York Community Bancorp), Republic Bank (now owned by JPMorgan Chase & Co.) or Pacific Western Bank (now owned by Bank of California) during the regional banking of crisis of 2023, nor does the Company believe that any of the banks with which it does business currently face a material risk of collapse.

 

We will need to raise additional capital to meet our business requirements in the future, which is likely to be challenging, could be highly dilutive and may cause the market price of our common stock to decline.

 

As of December 30, 2023, we had a working capital deficiency of $45,419, an accumulated deficit of $125,056 and a net loss for the fiscal year ended December 30, 2023 of $26,041. We will need to raise additional capital to pursue growth opportunities, improve our infrastructure, finance our operations and otherwise make investments in assets and personnel that will allow us to remain competitive. Additional capital would be used to accomplish the following:

 

  financing our current operating expenses;
  pursuing growth opportunities;
  making capital improvements to improve our infrastructure;
  hiring and retaining qualified management and key employees;
  responding to competitive pressures;
  complying with regulatory requirements; and
  maintaining compliance with applicable laws.

 

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of those securities could result in substantial dilution for our current stockholders. The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then-outstanding. We may issue additional shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock in connection with hiring or retaining personnel, option or warrant exercises, future acquisitions or future placements of our securities for capital-raising or other business purposes. The issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline further and existing stockholders may not agree with our financing plans or the terms of such financings. In connection with this offering, we may agree to amend the terms of certain of our outstanding warrants held by certain purchasers in this offering. Any such amendments may, among other things, decrease the exercise prices or increase the term of exercise of those warrants.

 

In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.

 

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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 we 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.

 

We review the recoverability of goodwill and other indefinite lived intangible assets annually as of the first day of our fiscal fourth quarter, and whenever events or circumstances indicate that the carrying value of a reporting unit, including goodwill, or an indefinite lived intangible asset may not be recoverable.

 

To evaluate goodwill and other indefinite lived intangible assets for impairment, we may use qualitative assessments to determine whether it is more likely than not that the fair value of a reporting unit, including goodwill, or an indefinite lived intangible asset is less than its carrying amount. The qualitative assessments require assumptions to be made regarding multiple factors, including the current operating environment, historical and future financial performance and industry and market conditions. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. Alternatively, we may elect to bypass the qualitative assessment and instead perform a quantitative impairment test to calculate the fair value of the reporting unit in comparison to its associated carrying value.

 

The quantitative impairment tests require us to make an estimate of the fair value of our reporting units. An impairment could be recorded as a result of changes in assumptions, estimates or circumstances, some of which are beyond our control. Because a number of factors may influence determinations of fair value of goodwill, we are unable to predict whether impairments of goodwill will occur in the future, and there can be no assurance that continued conditions will not result in future impairments of goodwill. The future occurrence of a potential indicator of impairment could include matters such as (i) a decrease in expected net earnings; (ii) adverse equity market conditions; (iii) a decline in current market multiples; (iv) a decline in our common stock price; (v) a significant adverse change in legal factors or the general business climate; and (vi) a significant downturn in employment markets in the U.S. Any such impairment would result in us recognizing a non-cash charge in our consolidated statement of operations, which could adversely affect our business, results of operations and financial condition.

 

We have significant working capital needs and if we are unable to satisfy those needs from cash generated from our operations or borrowings under our debt instruments, we may not be able to continue our operations.

 

We require significant amounts of working capital to operate our business. We often have high receivables from our customers, and as a staffing company, we are prone to cash flow imbalances because we have to fund payroll payments to temporary workers before receiving payments from clients for our services. Cash flow imbalances also occur because we must pay temporary workers even when we have not been paid by our customers. If we experience a significant and sustained drop in operating profits, or if there are unanticipated reductions in cash inflows or increases in cash outlays, we may be subject to cash shortfalls. If such a shortfall were to occur for even a brief period of time, it may have a significant adverse effect on our business. In particular, we use working capital to pay expenses relating to our temporary workers and to satisfy our workers’ compensation liabilities. As a result, we must maintain sufficient cash availability to pay temporary workers and fund related tax liabilities prior to receiving payment from customers.

 

In addition, our operating results tend to be unpredictable from quarter to quarter. Demand for our services is typically lower during traditional national vacation periods when customers and candidates are on vacation. No single quarter is predictive of results of future periods. Any extended period of time with low operating results or cash flow imbalances could have a material adverse effect on our business, financial condition and results of operations.

 

We derive working capital for our operations through cash generated by our operating activities, equity raises, and borrowings under our debt instruments. If our working capital needs increase in the future, we may be forced to seek additional sources of capital, which may not be available on commercially reasonable terms. The amount we are entitled to borrow under our debt instruments is calculated monthly based on the aggregate value of certain eligible trade accounts receivable generated from our operations, which are affected by financial, business, economic and other factors, as well as by the daily timing of cash collections and cash outflows. The aggregate value of our eligible accounts receivable may not be adequate to allow for borrowings for other corporate purposes, such as capital expenditures or growth opportunities, which could reduce our ability to react to changes in the market or industry conditions.

 

We face risks associated with litigation and claims.

 

We are a party to certain legal proceedings as further described under “Legal Proceedings”. In addition, from time to time, we may become involved in various claims, disputes and legal or regulatory proceedings that arise in the ordinary course of business and relate to contractual and other obligations. Due to the uncertainties of litigation, we can give no assurance that we will prevail on any claims made against us in any such lawsuit. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results. Adverse outcomes in some or all of these claims may result in significant monetary damages that could adversely affect our ability to conduct our business.

 

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Our revenue can vary because our customers can terminate their relationship with us at any time with limited or no penalty.

 

We focus on providing mid-level professional and light industrial personnel on a temporary assignment-by-assignment basis, which customers can generally terminate at any time or reduce their level of use when compared with prior periods. To avoid large placement agency fees, large companies may use in-house personnel staff, current employee referrals, or human resources consulting companies to find and hire new personnel. Because placement agencies typically charge a fee based on a percentage of the first year’s salary of a new worker, companies with many jobs to fill have a large financial incentive to avoid agencies.

 

Our business is also significantly affected by our customers’ hiring needs and their views of their future prospects. Our customers may, on very short notice, terminate, reduce or postpone their recruiting assignments with us and, therefore, affect demand for our services. As a result, a significant number of our customers can terminate their agreements with us at any time, making us particularly vulnerable to a significant decrease in revenue within a short period of time that could be difficult to quickly replace. This could have a material adverse effect on our business, financial condition and results of operations.

 

Most of our contracts do not obligate our customers to utilize a significant amount of our staffing services and may be cancelled on limited notice, so our revenue is not guaranteed.

 

Substantially all of our revenue is derived from multi-year contracts that are terminable for convenience. Under our multi-year agreements, we contract to provide customers with staffing services through work or service orders at the customers’ request. Under these agreements, our customers often have little or no obligation to request our staffing services. In addition, most of our contracts are cancellable on limited notice, even if we are not in default under the contract. We may hire employees permanently to meet anticipated demand for services under these agreements that may ultimately be delayed or cancelled. We could face a significant decline in revenues and our business, financial condition or results of operations could be materially adversely affected if:

 

  we see a significant decline in the staffing services requested from us under our service agreements; or
  our customers cancel or defer a significant number of staffing requests; or our existing customer agreements expire or lapse and we cannot replace them with similar agreements.

 

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We could be adversely affected by risks associated with acquisitions and joint ventures.

 

We are engaged in the acquisition of staffing companies, and our typical acquisition model is based on paying consideration in the form of cash, stock, earn-outs and/or promissory notes. To date, we have completed 10 acquisitions. We intend to expand our business through acquisitions of complementary businesses, services or products, subject to our business plans and management’s ability to identify, acquire and develop suitable investments or acquisition targets in both new and existing service categories. In certain circumstances, acceptable investments or acquisition targets might not be available. Acquisitions involve a number of risks, including:

 

  difficulty in integrating the operations, technologies, products and personnel of an acquired business, including consolidating redundant facilities and infrastructure;
  potential disruption of our ongoing business and the distraction of management from our day-to-day operations;
  difficulty entering markets in which we have limited or no prior experience and in which competitors have a stronger market position;
  difficulty maintaining the quality of services that such acquired companies have historically provided; potential legal and financial responsibility for liabilities of acquired businesses;
  overpayment for the acquired company or assets or failure to achieve anticipated benefits, such as cost savings and revenue enhancements;
  increased expenses associated with completing an acquisition and amortizing any acquired intangible assets;
  challenges in implementing uniform standards, accounting policies, customs, controls, procedures and policies throughout an acquired business;
  failure to retain, motivate and integrate key management and other employees of the acquired business; and
  loss of customers and a failure to integrate customer bases.

 

Our business plan for continued growth through acquisitions is subject to certain inherent risks, including accessing capital resources, potential cost overruns and possible rejection of our business model and/or sales methods. Therefore, we provide no assurance that we will be successful in carrying out our business plan. We continue to pursue additional debt and equity financing to fund our business plan. We have no assurance that future financing will be available to us on acceptable terms or at all.

 

In addition, if we incur indebtedness to finance an acquisition, it may reduce our capacity to borrow additional amounts and require us to dedicate a greater percentage of our cash flow from operations to payments on our debt, thereby reducing the cash resources available to us to fund capital expenditures, pursue other acquisitions or investments in new business initiatives and meet general corporate and working capital needs. This increased indebtedness may also limit our flexibility in planning for, and reacting to, changes in or challenges relating to our business and industry. The use of our common stock or other securities (including those convertible into or exchangeable or exercisable for our common stock) to finance any such acquisition may also result in dilution of our existing shareholders.

 

The potential risks associated with future acquisitions could disrupt our ongoing business, result in the loss of key customers or personnel, increase expenses and otherwise have a material adverse effect on our business, results of operations and financial condition.

 

Our business is subject to cybersecurity risks and we could be harmed by improper disclosure or loss of sensitive or confidential company, employee, associate or customer data, including personal data.

 

Our operations are increasingly dependent on information technologies and services and in connection with the operation of our business, we store, process and transmit a large amount of data, including personnel and payment information, about our employees, customers, associates and candidates, a portion of which is confidential and/or personally sensitive. We rely on our own technology and systems, and those of third-party vendors we use for a variety of processes. We and our third-party vendors have established policies and procedures to help protect the security and privacy of this information. Threats to information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow, and include, among other things, storms and natural disasters, terrorist attacks, utility outages, theft, viruses, phishing, malware, design defects, human error, and complications encountered as existing systems are maintained, repaired, replaced, or upgraded. Risks associated with these threats include, among other things:

 

theft or misappropriation of funds;
loss, corruption, or misappropriation of proprietary, confidential or personally identifiable information (including employee data);
disruption or impairment of our and our business operations and safety procedures;
damage to our reputation with our potential partners, clients, and the market;
exposure to litigation;
increased costs to prevent, respond to or mitigate cybersecurity events.

 

Additionally, unauthorized disclosure or loss of sensitive or confidential data may occur through a variety of methods. These include, but are not limited to, systems failure, employee negligence, fraud or misappropriation, or unauthorized access to or through our information systems, whether by our employees or third parties, including a cyberattack by computer programmers, hackers, members of organized crime and/or state-sponsored organizations, who may develop and deploy viruses, worms or other malicious software programs.

 

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Such disclosure, loss or breach could harm our reputation and subject us to government sanctions and liability under our contracts and laws that protect sensitive or personal data and confidential information, resulting in increased costs or loss of revenues. Moreover, we have no control over the information technology systems of third-party vendors and others with which our systems may connect and communicate. It is possible that security controls over sensitive or confidential data and other practices we and our third-party vendors follow may not prevent the improper access to, disclosure of, or loss of such information. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions in which we provide services. Any failure or perceived failure to successfully manage the collection, use, disclosure, or security of personal information or other privacy related matters, or any failure to comply with changing regulatory requirements in this area, could result in legal liability or impairment to our reputation in the marketplace.

 

We have cybersecurity insurance coverage in the event we become subject to various cybersecurity attacks, however, we cannot ensure that it will be sufficient to cover any particular losses we may experience as a result of such cyberattacks. Any cyber incident could have a material adverse effect on our business, financial condition and results of operations.

 

We have been and may be exposed to employment-related claims and losses, including class action lawsuits, which could have a material adverse effect on our business.

 

We employ people internally and in the workplaces of other businesses. Many of these individuals have access to customer information systems and confidential information. The risks of these activities include possible claims relating to:

 

  discrimination and harassment;
  wrongful termination or denial of employment;
  violations of employment rights related to employment screening or privacy issues;
  classification of temporary workers;
  assignment of illegal aliens;
  violations of wage and hour requirements;
  retroactive entitlement to temporary worker benefits;
  errors and omissions by our temporary workers;
  misuse of customer proprietary information;
  misappropriation of funds;
  damage to customer facilities due to negligence of temporary workers; and
  criminal activity.

 

We may incur fines and other losses or negative publicity with respect to these problems. In addition, these claims may give rise to litigation, which could be time-consuming and expensive. New employment and labor laws and regulations may be proposed or adopted that may increase the potential exposure of employers to employment-related claims and litigation. There can be no assurance that the corporate policies we have in place to help reduce our exposure to these risks will be effective or that we will not experience losses as a result of these risks. There can also be no assurance that the insurance policies we have purchased to insure against certain risks will be adequate or that insurance coverage will remain available on reasonable terms or be sufficient in amount or scope of coverage.

 

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”) and our amended and restated bylaws (the “Bylaws”) may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors (the “Board”). Because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include that:

 

  our Board has the exclusive right to expand the size of our Board and to elect directors to fill a vacancy created by the expansion of the Board or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board;

 

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  a special meeting of stockholders may be called only by a majority of the Board, the executive chairman or the president, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
  our stockholders do not have the right to cumulate votes in the election of directors, which limits the ability of minority stockholders to elect director candidates;
  our Board may alter our Bylaws without obtaining stockholder approval;
  stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the Board or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company; and
  our Board is authorized to issue shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror.

 

In addition, the terms of the Jackson Notes limit our ability to consolidate, merge, or transfer all or substantially all of our assets or to effect a change in control of ownership of our company. A breach of such restrictions could result in a default under the Jackson Notes, under which Jackson may elect to declare all outstanding borrowings under the Jackson Notes, together with accrued interest and other amounts payable thereunder, to be immediately due and payable.

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

Furthermore, our Certificate of Incorporation specifies that, unless we consent in writing to the selection of an alternative forum, a state court located within the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders, which may include federal claims and derivative actions, except that if no state court located within the State of Delaware has jurisdiction over such claims (including subject matter jurisdiction), the sole and exclusive forum for such claim shall be the federal district court for the District of Delaware. We believe these provisions may benefit us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, these provisions may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in the Certificate of Incorporation to be inapplicable or unenforceable in such action. Specifically, the choice of forum provision in requiring that the state courts of the State of Delaware be the exclusive forum for certain suits would (i) not be enforceable with respect to any suits brought to enforce any liability or duty created by the Exchange Act and (ii) have uncertain enforceability with respect to claims under the Securities Act of 1933, as amended (the “Securities Act”). The choice of forum provision in the Certificate of Incorporation does not have the effect of causing our stockholders to have waived our obligation to comply with the federal securities laws and the rules and regulations thereunder.

 

Certain of our warrants contain provisions that may prevent us from effectuating a change in control transaction, or obligate us to make cash payments to the holders of such warrants upon a change of control transaction, which may affect our liquidity, financial condition, and results of operations.

 

The warrants issued on February 20, 2023, to a certain investor (the “February 2023 Investor Warrants”) in the public offering consummated in February 2023 (“February 2023 Offering”), and the warrants issued to H.C. Wainwright & Co., LLC and its designees as placement agent compensation in connection with the February 2023 Offering (the “February 2023 Wainwright Warrants,” collectively with February 2023 Investor Warrants, the “February 2023 Warrants”), contain certain provisions that may make it difficult for us to effectuate a change in control transaction, or obligate us to make cash payments to such holders upon a change in control transaction.

 

Pursuant to the terms of the February 2023 Warrant, in the event of a fundamental transaction (as defined in the February 2023 Warrants, and includes, among other events, any merger any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% or more of the voting power represented by our outstanding common stock), the holders of the February 2023 Warrants will be entitled to receive upon exercise of the February 2023 Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the February 2023 Warrants immediately prior to such fundamental transaction. In addition, upon a fundamental transaction, the holder of a February 2023 Warrant will have the right to require us to repurchase such holder’s February 2023 Warrants at the Black-Scholes value; provided, however, that, if the fundamental transaction is not within our control, including not approved by our Board, then the holder will only be entitled to receive the same type or form of consideration (and in the same proportion), at the Black-Scholes value of the unexercised portion of the February 2023 Warrant that is being offered and paid to the holders of our common stock in connection with the fundamental transaction. Such amount calculated at the Black-Scholes value could be significantly more than the holders would otherwise receive if they were to exercise their warrants and receive the same consideration as the other holders of common stock, which in turn could reduce the consideration that holders of common stock would be concurrently entitled to receive in such fundamental transaction. The foregoing obligation to repurchase the February 2023 Warrants in cash equal to the Black-Scholes value may impair our cash position, as well as delay, hinder or prevent us from completing such fundamental transaction or prevent a third party from acquiring us, which may in turn affect our liquidity and financial condition and results of operations.

 

Risks Relating to Our Business and Industry

 

Our growth of operations could strain our resources and cause our business to suffer.

 

While we plan to continue growing our business organically through expansion, sales efforts, and strategic acquisitions, while maintaining tight controls on our expenses and overhead, lean overhead functions combined with focused growth may place a strain on our management systems, infrastructure and resources, resulting in internal control failures, missed opportunities, and staff attrition which could impact our business and results of operations.

 

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Our strategy of growing through acquisitions may impact our business in unexpected ways.

 

Our growth strategy involves acquisitions that help us expand our service offerings and diversify our geographic footprint. We continuously evaluate acquisition opportunities, but there are no assurances that we will be able to identify acquisition targets that complement our strategy and are available at valuation levels accretive to our business.

 

Even if we are successful in acquiring, our acquisitions may subject our business to risks that may impact our results of operations, including:

 

  inability to integrate acquired companies effectively and realize anticipated synergies and benefits from the acquisitions;
  diversion of management’s attention to the integration of the acquired businesses at the expense of delivering results for the legacy business;
  inability to appropriately scale critical resources to support the business of the expanded enterprise and other unforeseen challenges of operating the acquired business as part of our operations;
  inability to retain key employees of the acquired businesses and/or inability of such key employees to be effective as part of our operations;
  impact of liabilities of the acquired businesses undiscovered or underestimated as part of the acquisition due diligence;
  failure to realize anticipated growth opportunities from a combined business, because existing and potential clients may be unwilling to consolidate business with a single supplier or to stay with the acquirer post-acquisition;
  impacts of cash on hand and debt incurred to finance acquisitions, thus reducing liquidity for other significant strategic or operational objectives; and
  internal controls, disclosure controls, corruption prevention policies, human resources and other key policies and practices of the acquired companies may be inadequate or ineffective.

 

We operate in an intensely competitive and rapidly changing business environment, and there is a substantial risk that our services could become obsolete or uncompetitive.

 

The markets for our services are highly competitive. Our markets are characterized by pressures to provide high levels of service, incorporate new capabilities and technologies, accelerate job completion schedules and reduce prices. Furthermore, we face competition from a number of sources, including other executive search firms and professional search, staffing and consulting firms. Several of our competitors have greater financial and marketing resources than we do. New and existing competitors are aided by technology, and the market has low barriers to entry. Furthermore, Internet employment sites expand a company’s ability to find workers without the help of traditional agencies. Personnel agencies often work as intermediaries, helping employers accurately describe job openings and screen candidates. Increasing the use of sophisticated, automated job description and candidate screening tools could make many traditional functions of staffing companies obsolete. Specifically, the increased use of the internet may attract technology-oriented companies to the professional staffing industry. Free social networking sites such as LinkedIn and Facebook are also becoming a common way for recruiters and employees to connect without the assistance of a staffing company.

 

Our future success will depend largely upon our ability to anticipate and keep pace with those developments and advances. Current or future competitors could develop alternative capabilities and technologies that are more effective, easier to use or more economical than our services. In addition, we believe that, with continuing development and increased availability of information technology, the industries in which we compete may attract new competitors. If our capabilities and technologies become obsolete or uncompetitive, our related sales and revenue would decrease. Due to competition, we may experience reduced margins on our services, loss of market share, and loss of customers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business, financial condition and results of operations could be materially adversely affected.

 

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Risks Relating to our Common Stock

 

We may not meet the continued listing requirements of Nasdaq, which could result in a delisting of our common stock.

 

On July 17, 2023, we received a letter from the Listing Qualifications Staff of the Nasdaq Stock Market indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period between June 1, 2023, through July 14, 2023, we did not meet the minimum bid price of $1.00 per share required for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The letter also indicated that we will be provided with a compliance period of 180 calendar days, or until January 15, 2024 (the “Compliance Period”), in which to regain compliance pursuant to the Minimum Bid Price Requirement. In order to regain compliance with the Minimum Bid Price Requirement, our common stock must maintain a minimum closing bid price of $1.00 for at least ten consecutive business days during the Compliance Period.

 

On January 16, 2024, we received a letter from Nasdaq notifying us that we have been granted an additional 180-day period, or until July 15, 2024, to regain compliance with the Minimum Bid Price Requirement. The new compliance period is an extension of the initial Compliance Period provided for in Nasdaq’s deficiency notice to us, dated July 17, 2023. If compliance with the Minimum Bid Price Requirement cannot be demonstrated by July 15, 2024, Nasdaq will provide us with written notification that our common stock could be delisted. In such event, Nasdaq rules permit us to appeal any delisting determination to a Nasdaq Hearings Panel. Accordingly, there can be no assurance that we will be able to regain compliance with the Nasdaq listing rules or maintain our listing on the Nasdaq Capital Market.

 

We expect to take actions intended to restore our compliance with the listing requirements, however, we can provide no assurance that any action taken by us would be successful. If Nasdaq delists our common stock from trading on its exchange for failure to meet Nasdaq’s listing standards for continued listing, an investor would likely find it significantly more difficult to dispose of or obtain our shares, and our ability to raise future capital through the sale of our shares or issue our shares as consideration in acquisitions could be severely limited. Additionally, we may not be able to list our common stock on another national securities exchange, which could result in our securities being quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.

 

A more active, liquid trading market for our common stock may not develop, and the price of our common stock may fluctuate significantly.

 

Historically, the market price of our common stock has fluctuated over a wide range. There has been relatively limited trading volume in the market for our common stock, and a more active, liquid public trading market may not develop or may not be sustained. Limited liquidity in the trading market for our common stock may adversely affect a stockholder’s ability to sell its shares of common stock at the time it wishes to sell them or at a price that it considers acceptable. If a more active, liquid public trading market does not develop we may be limited in our ability to raise capital by selling shares of common stock and our ability to acquire other companies or assets by using shares of our common stock as consideration. In addition, if there is a thin trading market or “float” for our stock, the market price for our common stock may fluctuate significantly more than the stock market as a whole. Without a large float, our common stock would be less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile and it would be harder for a stockholder to liquidate any investment in our common stock. Furthermore, the stock market is subject to significant price and volume fluctuations, and the price of our common stock could fluctuate widely in response to several factors, including:

 

  our quarterly or annual operating results;
  changes in our earnings estimates;
  investment recommendations by securities analysts following our business or our industry;
  additions or departures of key personnel;
  changes in the business, earnings estimates or market perceptions of our competitors;
  our failure to achieve operating results consistent with securities analysts’ projections;
  changes in industry, general market or economic conditions; and
  announcements of legislative or regulatory changes.

 

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The stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in the staffing industry. The changes often appear to occur without regard to specific operating performance. The price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our stock price.

 

We have suspended our dividends in the past and we may not pay dividends on our common stock for the foreseeable future.

 

We initiated a dividend program in early 2019 under which we intended to pay a regular quarterly cash dividend of $0.10 per share to holders of our common stock. The first such dividend was paid on February 28, 2019, to shareholders of record as of February 15, 2019, but subsequent dividends were suspended by our Board. In the future, our Board may, without advance notice, determine to initiate, reduce or suspend our dividends in order to maintain our financial flexibility and best position us for long-term success. The declaration and amount of future dividends is at the discretion of our Board and will depend on our financial condition, results of operations, cash flows, prospects, industry conditions, capital requirements and other factors and restrictions our Board deems relevant. In addition, we are limited in our ability to pay dividends by certain of our existing agreements. In particular, our debt agreements only permit us to pay a quarterly cash dividend of one cent per share of common stock issued and outstanding, provided, that such cash dividend does not exceed $100 in the aggregate per fiscal quarter. We may not pay such dividends if any events of default exist under our debt agreements.

 

Accordingly, we cannot be certain if we will be able to pay quarterly cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must mainly rely on sales of their common stock after price appreciation, which may never occur, as the primary way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

Upon our dissolution, you may not recoup all or any portion of your investment.

 

In the event of our liquidation, dissolution or winding-up, our proceeds and/or assets remaining after giving effect to such transaction, and the payment of all of our debts and liabilities will be distributed to the stockholders of common stock on a pro rata basis. There can be no assurance that we will have available assets to pay to the holders of common stock, or any amounts, upon such our liquidation, dissolution or winding-up. In this event, you could lose some or all of your investment.

 

General Risk Factors

 

Global, market and economic conditions may negatively impact our business, financial condition and share price.

 

Concerns over inflation, geopolitical issues, the U.S. financial markets, capital and exchange controls, unstable global credit markets and financial conditions, have led to periods of significant economic instability, declines in consumer confidence and discretionary spending, diminished expectations for the global economy and expectations of slower global economic growth going forward, and increased unemployment rates. Our general business strategy may be adversely affected by any such economic downturns, volatile business environments and continued unstable or unpredictable economic and market conditions. If these conditions deteriorate or do not improve, it may make any necessary debt or equity financing more difficult to complete, more costly, and more dilutive. In addition, there is a risk that one or more of our current or future service providers and other partners could be negatively affected by difficult economic times, which could adversely affect our ability to attain our operating goals on schedule and on budget or meet our business and financial objectives.

 

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In addition, we face several risks associated with international business and are subject to global events beyond our control, including war, public health crises, such as pandemics and epidemics, trade disputes, economic sanctions, trade wars and their collateral impacts and other international events. Any of these changes could have a material adverse effect on our reputation, business, financial condition or results of operations. There may be changes to our business if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. In 2022, armed conflict escalated between Russia and Ukraine and in 2023, armed conflict escalated between Israel and Palestine. The sanctions announced by the U.S. and other countries, following Russia’s invasion of Ukraine against Russia to date include restrictions on selling or importing goods, services or technology in or from affected regions and travel bans and asset freezes impacting connected individuals and political, military, business and financial organizations in Russia. The U.S. and other countries could impose wider sanctions and take other actions should the conflict further escalate. It is not possible to predict the broader consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, currency exchange rates and financial markets, all of which could impact our business, financial condition and results of operations.

 

The COVID-19 endemic and its ongoing effects has adversely affected our business and may continue to adversely affect our business.

 

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, including but not limited to supply chain issues, global shortages of supplies, material and products, volatile market conditions and rising global inflation may continue to disrupt or delay our business operations, including with respect to efforts relating to potential business development transactions, and it could continue to disrupt the marketplace which could have an adverse effect on our operations.

 

Our business was impacted in the year ended December 31, 2022, by numerous government-mandated lockdown periods in the U.S. and U.K. This had a large impact on the financial results of our numerous business streams, which differed in their financial recoveries primarily due to the geographies and industries in which they operate. To the extent that any measures such as social distancing and shelter-in-place directives are reinstated due to a resurgence in COVID-19 cases or any new variants of the virus, our business and financial results may be adversely affected.

 

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We depend on attracting, integrating, managing, and retaining qualified personnel.

 

Our success is substantially dependent upon our ability to attract, integrate, manage and retain personnel who possess the skills and experience necessary to fulfill our customers’ needs. Our ability to hire and retain qualified personnel could be impaired by any diminution of our reputation, decrease in compensation levels relative to our competitors or modifications to our total compensation philosophy or competitor hiring programs. If we cannot attract, hire and retain qualified personnel, our business, financial condition and results of operations may suffer. Our future success also depends upon our ability to manage the performance of our personnel. Failure to successfully manage the performance of our personnel could affect our profitability by causing operating inefficiencies that could increase operating expenses and reduce operating income. An overall tightening and competitive labor market in the U.S. employment market generally, has been observed in the U.S. A sustained labor shortage or increased turnover rates within our employee base, as a result of general macroeconomic factors, could lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees, and could negatively affect our ability to efficiently operate and our overall business. If we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures, we may take to respond to a decrease in labor availability have unintended negative effects, our business could be adversely affected. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation as a result of general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity or cash flows.

 

We depend on our ability to attract and retain qualified temporary workers.

 

In addition to the members of our own team, our success is substantially dependent on our ability to recruit and retain qualified temporary workers who possess the skills and experience necessary to meet the staffing requirements of our customers. We are required to continually evaluate our base of available qualified personnel to keep pace with changing customer needs. Competition for individuals with proven professional skills is intense, and demand for these individuals is expected to remain strong for the foreseeable future. There can be no assurance that qualified personnel will continue to be available.

 

If we are unable to retain existing customers or attract new customers, our business and results of operations could suffer.

 

Increasing the growth and profitability of our business is particularly dependent upon our ability to retain existing customers and capture additional customers. Our ability to do so is dependent upon our ability to provide high quality services and offer competitive prices. If we are unable to execute these tasks effectively, we may not be able to attract a significant number of new customers and our existing customer base could decrease, either or both of which could have an adverse impact on our business and revenues.

 

We are dependent upon technology services, and if we experience damage, service interruptions or failures in our computer and telecommunications systems, our customer relationships and our ability to attract new customers may be adversely affected.

 

Our business could be interrupted by damage to or disruption of our computer and telecommunications equipment and software systems, and we may lose data. Our customers’ businesses may be adversely affected by any system or equipment failure we experience. As a result of any of the foregoing, our relationships with our customers may be impaired, we may lose customers, our ability to attract new customers may be adversely affected and we could be exposed to contractual liability. Precautions in place to protect us from, or minimize the effect of, such events may not be adequate. If an interruption by damage to or disruption of our computer and telecommunications equipment and software systems occurs, we could be liable, and the market perception of our services could be harmed.

 

Our management has identified a material weakness in our internal control over financial reporting relating 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 us. This material weakness, if not remediated, could result in material misstatements in our consolidated financial statements. We may be unable to develop, implement and maintain appropriate internal controls over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results and current and potential stockholders may lose confidence in our financial reporting.

 

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Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and the Sarbanes-Oxley Act of 2002 and the SEC rules require that our management report annually on the effectiveness of our internal control over financial reporting and our disclosure controls and procedures. Among other things, our management must conduct an assessment of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

 

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. During the preparation of our financial statements for the year ended December 30, 2023, we and our auditors identified a material weakness in our internal control over financial reporting. We lack a sufficient complement of competent finance personnel to appropriately account for, review, and disclose the completeness and accuracy of transactions entered into by us. In addition, the Company has ineffective design and operating effectiveness over forecasts used in our annual goodwill and intangibles evaluation. As part of our remediation plan, we hired additional employees and external consultants who have the technical skillset to improve our financial reporting; implement new policies, procedures and controls; properly review transactions recorded and classified in the financial statements; provide effective design and operating effectiveness over forecasts; and ensure proper accounting and related disclosures for complex accounting matters when necessary.

 

Although we are working to remedy the material weaknesses in our internal controls over financial reporting discussed above and have so far implemented additional controls relating to payroll, treasury, and accounts payable, there can be no assurance as to when the remediation plan will be fully developed, when it will be fully implemented or the aggregate cost of implementation. Until our remediation plan is fully implemented, our management will continue to devote significant time and attention to these efforts. If we do not complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that we will be unable to timely file future periodic reports with the SEC and that our future consolidated financial statements could contain errors that will be undetected. Further and continued determinations that there are material weaknesses in the effectiveness of our internal control over financial reporting relating the above items could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures of both money and our management’s time to comply with applicable requirements.

 

Any failure to implement or maintain required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in material misstatements in our consolidated financial statements. These misstatements could result in a restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations, reduce our ability to obtain financing or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

 

There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.

 

The ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 require us to identify material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the U.S. Our management, including our Chief Executive Officer and Principal Financial Officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our business have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of our business or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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In addition, discovery and disclosure of a material weakness could have a material adverse impact on our financial statements. Such an occurrence could discourage certain customers or suppliers from doing business with us, cause downgrades in our future debt ratings leading to higher borrowing costs and affect how our stock trades. This could, in turn, negatively affect our ability to access public debt or equity markets for capital.

 

Our compliance with complicated regulations concerning corporate governance and public disclosure has resulted in additional expenses.

 

We are faced with expensive, complicated and evolving disclosure, governance and compliance laws, regulations and standards relating to corporate governance and public disclosure. In addition, as a staffing company, we are regulated by the U.S. Department of Labor, the Equal Employment Opportunity Commission, and often by state authorities. New or changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing compliance work.

 

Our failure to comply with all laws, rules and regulations applicable to U.S. public companies could subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and stock price. Our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

The requirements of being a public company place significant demands on our resources.

 

As a public company, we incur significant legal, accounting, and other expenses. In addition, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules subsequently implemented by the SEC and Nasdaq, have imposed various requirements on public companies. New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and changes in required accounting practices and rules adopted by the SEC and Nasdaq, would likely result in increased costs to us as we respond to their requirements.

 

Shareholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and will make some activities more time consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain and maintain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

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ITEM 1C. CYBERSECURITY.

 

We operate in the domestic staffing sector, which is subject to various cybersecurity risks that could adversely affect our business, financial condition, and results of operations, including intellectual property theft; fraud; extortion; harm to employees or customers; violation of privacy laws and other litigation and legal risk; and reputational risk. We recognize the critical importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity, and availability of our data. We currently have security measures in place to protect [client/‌patient/‌customers’/‌employees’/‌vendors’ information] and prevent data loss and other security breaches, including a cybersecurity risk assessment program. Both management and the Board of Directors are actively involved in the continuous assessment of risks from cybersecurity threats, including prevention, mitigation, detection, and remediation of cybersecurity incidents.

 

Our current cybersecurity risk assessment program consists of a cybersecurity incident response program. This program outlines governance, policies and procedures, and technology we use to oversee and identify risks from cybersecurity threats and is informed by previous cybersecurity incidents we have observed both within the Company and in our industry.

 

The Security Response team is responsible for day-to-day assessment and management of risks from cybersecurity threats, including the prevention, mitigation, detection, and remediation of cybersecurity incidents. The individuals that comprise this team are the Chief Operating Officer, the Director of IT, the Corporate Controller, the Senior Vice President, Corporate Finance and the Vice President People and Culture. Upon occurrence of an event the Chief Operating Officer is notified of the occurrence and then updated periodically about the event until resolution.

 

Dimitri Villard, a member of our Board of Directors, is responsible for oversight of risks from cybersecurity threats in conjunction with the Chief Executive Officer and the Chief Operating Officer. The Board receives regular reports and updates from the Chief Operating Officer with respect to the management of risks from cybersecurity threats. Such reports cover the Company’s information technology security program, including its current status, capabilities, objectives and plans, as well as the evolving cybersecurity threat landscape. Additionally, the Board considers risks from cybersecurity threats as part of its oversight of the Company’s business strategy, risk management, and financial oversight.

 

We undertake activities to prevent, detect, and minimize the effects of cybersecurity incidents, including required employee training in security awareness when hired and then annually. In addition, we maintain business continuity, contingency, and recovery plans for use in the event of a cybersecurity incident.

 

We also have policies and procedures to oversee and identify the risks from cybersecurity threats associated with our use of third-party service providers. Many of our systems and networks are cloud-based, the Company cannot control the future performance and reliability of these systems. The risk of a cyberattack on one of these third-party vendors carries the same risk as any internally maintained system. We seek to reduce this risk by performing vendor due diligence prior to engaging any vendor that has access to sensitive data. In addition, on at least an annual basis, we obtain SOC 1 and/or SOC 2 reports to ensure the vendor has the proper internal controls in place to secure our data.

 

To date, no cybersecurity incident (or aggregation of incidents) or cybersecurity threat has materially affected our results of operations or financial condition. However, an actual or perceived breach of our security could damage our reputation, cause existing clients/customers to terminate their contracts, prevent us from attracting new clients, maintaining current clients, results of operations, or financial condition or subject us to third-party lawsuits, regulatory fines or other actions or liabilities, any of which could adversely affect our business, operating results or financial condition. For further information, see “Risk Factors—[caption of specific cybersecurity risk factor]” in Item 1A of this Annual Report on Form 10-K. We have attempted to preemptively mitigate the financial impact of any cybersecurity incident and currently maintain a cyber liability insurance policy. However, our cyber liability insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our cyber liability insurance policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention from our business and operations.

 

The company faces cybersecurity risks and threats that could have a material impact on the Company are discussed further in Item 1A Risk Factors. Those sections of Item 1A should be read in conjunction with this Item 1C.

 

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ITEM 2. PROPERTIES.

 

The Company leases 6,960 square feet of space at 757 Third Avenue, 27th Floor, New York, NY 10017, its headquarters and principal location. The Company’s lease for this space will expire in 2029. The Company currently has a total of 16 facilities. This includes offices in the following states : New York, Connecticut, Massachusetts, Rhode Island, and North Carolina.

 

All offices are operated from leased space ranging from approximately 1,600 to 12,000 square feet, typically through operating leases with terms that range from three months to ten years, and thus with expirations from 2024 through 2029. We believe that our facilities are adequate for our current requirements and that the Company’s leasing strategies provide us with sufficient flexibility to accommodate our business needs.

 

ITEM 3. LEGAL PROCEEDINGS.

 

From time to time, we may become involved in lawsuits, investigations and claims that arise in the ordinary course of business.

 

Whitaker v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.

 

On March 9th, 2024, a Settlement and Release Agreement was entered into by both parties. Under this agreement, which was entered into to avoid costly court fees, the Company agreed to make a payment, in full and final settlement, of $2 million plus interest across the following dates and amounts: $115 on May 1, 2024, $114 on June 1, 2024, $114 on July 1, 2024, $113 on August 1, 2024, $112 on September 1, 2024, and a final payment of $1,511 on October 1, 2024. There is a five day cure period for each payment and there is a Confession of Judgement in favor of the defendant for the full amount of the original Earnout plus interest, in the event of non-compliance.

 

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 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Shares of the Company’s common stock are traded on Nasdaq under the ticker symbol “STAF.”

 

Holders of Common Stock

 

As of June 7, 2024, there were approximately 503 shareholders of record of the Company’s common stock.

 

Recent Sales of Unregistered Securities

 

Other than those sales of unregistered securities that have been disclosed by the Company in its Quarterly Reports on Form 10-Q or its Current Reports on Form 8-K, the following are the only sales of unregistered securities during the period January 2, 2022 through December 31, 2022 - we issued 5,000 shares of common stock to each of Terri MacInnis and Harvey Bibicoff, with an aggregate value of $30 in return for investor relations advisory services. The shares were issued in reliance upon an exemption pursuant to Section 4(a)(2) of the Securities Act.

 

Dividends

 

We initiated a dividend program in early 2019 under which we intended to pay a regular quarterly cash dividend of $0.10 per share to holders of our common stock. The first such dividend was paid on February 28, 2019 to shareholders of record as of February 15, 2019, but subsequent dividends were suspended by our Board. In the future, our Board may, without advance notice, determine to initiate, reduce or suspend our dividends in order to maintain our financial flexibility and best position us for long-term success. The declaration and amount of future dividends is at the discretion of our Board and will depend on our financial condition, results of operations, cash flows, prospects, industry conditions, capital requirements and other factors and restrictions our Board deems relevant. In addition, we are limited in our ability to pay dividends by certain of our existing agreements. In particular, our debt agreements only permit us to pay a quarterly cash dividend of one cent per share of common stock issued and outstanding, provided that such cash dividend does not exceed $100 in the aggregate per fiscal quarter.

 

ITEM 6. [RESERVED].

 

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ITEM 7. 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 Annual Report. 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: our ability to regain and maintain compliance with the Nasdaq Capital Market’s (“Nasdaq”) listing standards, our ability to continue as a going concern, 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 Annual Report on Form 10-K (the “Annual Report”), including the “Risk Factors” in Item 1A of this Annual Report and the other reports and documents we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.

 

Overview

 

We are incorporated in the state of Delaware. We are a rapidly growing public company in the domestic staffing sector. Our high-growth business model is based on finding and acquiring suitable, mature, profitable, operating, U.S. -based 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. 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 ten acquisitions since November 2013. In February 2024 the Company disposed of its UK operations accordingly, all of the figures, including share and per share information, in this MD&A exclude the UK operations except where specifically referenced.

 

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 (as defined herein) in May 2022 added 12.7% in revenue, or $23.5 million to $184.9 million of revenue delivered in 2022. The non-Headway business showed a reduction in revenue of $17.5 million, principally in the Commercial Staffing Business Stream.

 

The Headway business included approximately $60 million in EOR (“Employer of Record”) service contracts. EOR projects are typically large volume, long-term providing HR outsourcing of payroll and benefits for a contingent workforce. EOR projects, while priced with lower gross margin percentages than traditional temporary staffing assignments, yield a comparable contribution as a result of lower costs to deliver these services. Typical contribution for EOR projects would be 80-85% of the gross profit earned, compared to 40-50% for traditional staffing which negates the impact of lower gross margins. This EOR service offering could be easily added to the Company’s other Brands, providing for a growth element within the existing client base. The Headway business also brought an active workforce in all 50 states in the US, as well as Puerto Rico and Washington DC. This will provide for potential expansion of accounts for all brands in the group’s portfolio (“Brands”).

 

The Company has developed a centralized, sales and recruitment hub. The addition of Headway, with its single office, 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 staffing companies continues.

 

We effected a one-for-ten reverse stock split on June 24, 2022 (the “Reverse Stock Split”). All share and per share information in this Annual Report and the accompanying consolidated financial statements and notes thereto have been retroactively adjusted to reflect the Reverse Stock Split.

 

Business Model, Operating History and Acquisitions

 

We are a high-growth domestic staffing company engaged in the acquisition of 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. To date, we have completed ten acquisitions since November 2013.

 

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Recent Developments

 

Headway Acquisition and Series H Convertible Preferred Stock

 

On April 18, 2022, we entered into a Stock 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 $14, and (ii) 9,000,000 shares of our Series H Convertible Redeemable 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 $9 million subject to adjustment as provided in the Stock Purchase Agreement. Pursuant to certain covenants in the Stock Purchase Agreement, we 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). The purpose of the acquisition was to expand the market share of our primary business by providing future economic benefit of expanding services. We anticipate that the Headway Acquisition will provide us the ability to integrate the business of Headway into our existing temporary professional staffing business in the US within the expected timeframe which would enable us to operate more effectively and efficiently and to create synergy and to lower costs of operations.

 

2023 Letter Agreement

 

On July 31, 2023, we, Chapel Hill Partners, L.P. (“Chapel Hill”) and Jean-Pierre Sakey (“Sakey”) entered into a letter agreement (the “Letter Agreement”) in connection with the Stock Purchase Agreement. Pursuant to the Letter Agreement, if on or prior to September 30, 2023, we pay an aggregate of $11,340 (the “Agreed Amount”) to the holders of the Series H Preferred Stock and Chapel Hill for the redemption of the 9,000,000 shares of Series H Preferred Stock issued and outstanding with the remaining amount to be paid to Chapel Hill, less $525 to be paid to third-parties to satisfy existing incentives and fees due, with such fees and incentive payments to be allocated at the discretion of Chapel Hill and Sakey, then our obligation to redeem the Series H Preferred Stock pursuant to the Purchase Agreement and Certificate of Designation of Preferences, Rights and Limitations of Series H Convertible Preferred Stock, as amended (the “Series H COD”), shall be deemed satisfied, and our contingent liabilities, covenants and indemnification obligations pursuant to the Stock Purchase Agreement shall be extinguished and of no further force and effect.

 

Pursuant to the Letter Agreement, if on or prior to September 30, 2023, we do not redeem the Series H Preferred Stock and remit the Contingent Payment (as defined in the Purchase Agreement), then we shall make the Contingent Payment in the amount of $5,000, as set forth in the Stock Purchase Agreement, in five equal installments of $1,000 each, less $134 per installment to be paid to third-parties to satisfy existing incentives and fees due, with such fees and incentive payments to be allocated at the discretion of Chapel Hill and Sakey (the “Contingent Payment Installments”), with such Contingent Payment Installments to be made on or before December 31, 2023, March 31, 2024, June 30, 2024, September 30, 2024 and December 31, 2024 (each such date, a “Contingent Installment Payment Date”). On each Contingent Installment Payment Date, we shall additionally redeem 100,000 shares of Series H Preferred Stock at a price per share equal to $0.0000001 per share. As of the date of this Annual Report, the Contingent Payment Installment due on December 31, 2023 and March 31, 2024, was not paid.

 

Pursuant to the Letter Agreement, we shall also have no obligation to pay the Preferred Dividend (as defined in the Series H COD) on June 30, 2023, September 30, 2023, and December 31, 2023.

 

On February 22, 2024, Company, Chapel Hill Partners and JP Sakey entered into a Forbearance Agreement (the “Forbearance Agreement”) pursuant to which the holders of the Series H Preferred Stock and Chapel Hill agreed to forebear from exercising their right with respect to the failure to repay the payment due on December 31, 2023, and March 31, 2024 until April 30, 2024, in consideration for a fee of $50 for each installation payment and a reduction on the recovery of Series H Preferred Stock of $100 for each installation payment. The contingent payments due on December 31, 2023 and March 31, 2023 were not paid.

 

Nasdaq Minimum Bid Price Requirement

 

On July 17, 2023, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period between June 1, 2023, through July 14, 2023, we did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market (“Nasdaq”) pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The letter also indicated that we would be provided with a compliance period of 180 calendar days, or until January 15, 2024 (the “Compliance Period”), in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).

 

On January 16, 2024, we received a letter from the Nasdaq Stock Market notifying us that we have been granted an additional 180-day period, or until July 15, 2024, to regain compliance with the Minimum Bid Price Requirement. The new compliance period is an extension of the initial Compliance Period provided for in Nasdaq’s deficiency notice to us, dated July 17, 2023. Nasdaq’s determination was based on our meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on Nasdaq, with the exception of the Minimum Bid Price Requirement, and our written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.

 

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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 used the net proceeds received from the private placement for general working capital purposes.

 

September 2023 Capital Raise

 

On September 1, 2023, we entered into an inducement offer letter agreement (the “Inducement Letter”) with a certain holder (the “Holder”) of certain of our existing warrants to purchase up to an aggregate of 2,761,170 shares of common stock issued to the Holder on July 7, 2022 (as amended on February 10, 2023 (the “July 2022 Warrants”)) and (ii) February 10, 2023 (the “February 2023 Warrants” and together with the July 2022 Warrants, the “Existing Warrants”).

 

Pursuant to the Inducement Letter, the Holder agreed to exercise for cash its Existing Warrants to purchase an aggregate of 2,761,170 shares of common stock at a reduced exercise price of $0.83 per share in consideration of our agreement to issue new unregistered common stock purchase warrants (the “New Warrants”), to purchase up to an aggregate of 5,522,340 shares of our common stock (the “New Warrant Shares”).

 

The closing of the transactions contemplated pursuant to the Inducement Letter occurred on or about September 6, 2023 (the “Closing Date”), subject to satisfaction of customary closing conditions. We received aggregate gross proceeds of approximately $2.3 million from the exercise of the Existing Warrants by the Holder, before deducting placement agent fees and other offering expenses payable by us. We used 50% of the net proceeds from the exercise of the Existing Warrants to repay a portion of our outstanding obligations under the existing 2022 Jackson Note (as defined herein) issued to Jackson Investment Group, LLC (“Jackson”) and 50% of the net proceeds from the Exercise to repay a portion of outstanding obligations pursuant to the Credit and Security Agreement with MidCap (defined herein).

 

On October 24, 2023, we held a special meeting of stockholders (the “Special Meeting”). The main purpose of which was to authorize, for purposes of complying with Nasdaq Listing Rule 5635(d), the issuance of shares of common stock underlying the New Warrants and certain warrants issued to the placement agent or its designees in connections with the transactions contemplated by the Inducement Letter, issued by the Company pursuant to the Inducement Letter, and the Engagement Agreement between the Company and H.C. Wainwright & Co., LLC, dated as of January 4, 2023, as amended on January 19, 2023, in an amount equal to or in excess of 20% of the Company’s common stock outstanding immediately prior the issuance of such warrants.

 

Rights Agreement

 

On September 27, 2023 the Board of Directors (the “Board”) of Staffing 360 Solutions, Inc. (the “Company”) declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.00001 per share, of the Company (the “Common Stock”) and .3889 Rights for each outstanding share of Series H Convertible Preferred Stock, par value $0.00001 per share, of the Company (the “Series H Preferred Stock” and together with the Common Stock, the “Voting Stock”). The dividend is payable on October 21, 2023 to the stockholders of record at the close of business on October 21, 2023 (the “Record Date”). Each Right initially entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.00001 per share, of the Company (the “Preferred Stock”) at a price of $2.75 per one one-thousandth of a share of Preferred Stock (the “Purchase Price”), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement, dated as of October 1, 2023, as the same may be amended from time to time (the “Rights Agreement”), between the Company and Securities Transfer Corporation, as Rights Agent.

 

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Until the close of business on the earlier of (i) 10 business days following the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) by the Company or an Acquiring Person (as defined below) that an Acquiring Person has become such, or such other date, as determined by the Board, on which a Person has become an Acquiring Person, or (ii) 10 business days (or such later date as may be determined by action of the Board prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date of the commencement of, or the first public announcement of an intention to commence, a tender or exchange offer the consummation of which would result in any person or group of affiliated or associated persons becoming an Acquiring Person (the earlier of such dates being called the “Distribution Date”), (x) the Rights will be evidenced by the certificates representing the Voting Stock registered in the names of the holders thereof (or by book entry shares in respect of such Voting Stock) and not by separate Right Certificates (as defined below), and (y) the Rights will be transferable only in connection with the transfer of Voting Stock.

 

Until the Distribution Date (or earlier expiration of the Rights), (i) new Voting Stock certificates issued after the Record Date upon transfer or new issuances of Voting Stock will contain a legend incorporating the terms of the Rights Agreement by reference, and (ii) the surrender for transfer of any certificates representing Voting Stock (or book entry shares of Voting Stock) outstanding as of the Record Date will also constitute the transfer of the Rights associated with the shares of Voting Stock represented thereby. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights (“Right Certificates”) will be mailed to holders of record of the Voting Stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights.

 

Except as otherwise provided in the Rights Agreement, the Rights are not exercisable until the Distribution Date. The Rights will expire on the earliest of (i) October 2, 2026 or such later date as may be established by the Board prior to the expiration of the Rights, (ii) the time at which the Rights are redeemed pursuant to the terms of the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company pursuant to an agreement of the type described in the Rights Agreement at which time the Rights are terminated, or (iv) the time at which such Rights are exchanged pursuant to the terms of the Rights Agreement.

 

The Purchase Price payable, and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights is subject to adjustment from time to time, among others, (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe for or purchase Preferred Stock at a price, or securities convertible into Preferred Stock with a conversion price, less than the then-current market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in Preferred Stock) or of subscription rights or warrants (other than those referred to above).

 

Note Purchase Agreement, Omnibus Amendment and Reaffirmation Agreement and Jackson Notes with Jackson Investment Group, LLC

 

On October 27, 2022, the Company entered into the 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, dated October 26, 2020, as amended, and issued to Jackson a 12% Senior Secured Promissory Note (the “2022 Jackson Note”), with a remaining outstanding principal balance of approximately $9.0 million. Additionally, 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 (the “Pledge Agreement”) and (ii) the Amended and Restated Security Agreement, dated as of September 15, 2017, as amended (the “Security Agreement”), to reflect certain of the terms as updated and amended by the Third A&R Agreement.

 

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Under the terms of the Third Amended and Restated Note Purchase Agreement, the First Omnibus Amendment Agreement (as defined below) and 2022 Jackson Note, the Company is required to pay interest on the 2022 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 2022 Jackson Note as of the date of the First Omnibus Amendment Agreement or on or before October 27, 2023, then interest on the outstanding principal balance of the 2022 Jackson Note shall continue to accrue at 16% per annum of the outstanding principal balance of the 2022 Jackson Note until the 2022 Jackson Note is repaid in full. As we did not repay at least 50% of the 2022 Jackson Note by October 27, 2023, interest is now accruing at a rate of 16% on the 2022 Jackson Note. The Third Amended and Restated Note Purchase Agreement also extends the maturity date of the 2022 Jackson Note from October 28, 2022, to October 14, 2024.

 

Additionally, pursuant to the First Omnibus Amendment Agreement, all accrued and unpaid interest on the outstanding principal of the 2022 Jackson Note shall be due and payable in arrears in cash on a monthly basis; provided that (i) the interest payment that would be due on September 1, 2023 shall instead be due December 1, 2023, and (ii) the amount of each such deferred interest payment shall be added to the principal amount of the 2022 Jackson Note. Notwithstanding the foregoing, the amount necessary to satisfy such accrued but unpaid interest on the 2022 Jackson Note as of the date of the First Omnibus Amendment was retained by Jackson from the aggregate purchase price of the 2023 Jackson Note (as defined below), along with certain out-of-pocket fees and expenses, including reasonable attorney’s fees, incurred by Jackson in connection with the First Omnibus Amendment Agreement, the 2023 Jackson Note and related documents thereto.

 

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 2022 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 2022 Jackson Note continues to be secured by substantially of the Company and its subsidiaries’ assets pursuant to the Security Agreement and as further amended by the Omnibus Agreement.

 

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 September 30, 2023, August 1, 2023, and September 1, 2023 to October 1, 2023, November 1, 2023 and December 1, 2023, respectively, with certain such dates further amended by the First Omnibus Amendment Agreement (as defined below)

 

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 (the “First Omnibus Amendment Agreement”) with Jackson, which First Omnibus Amendment Agreement, among other things: (i) amends the Third Amended and Restated Note Purchase Agreement, (ii) provided for the issuance of a new 12% Senior Secured Promissory Note due October 14, 2024 (the “2023 Jackson Note” and together with the 2022 Jackson Note, the “Jackson Notes”) to Jackson, and (iii) joins certain subsidiaries of the Company to (a) the Pledge Agreement and (b) the Security Agreement, as either subsidiary guarantors or pledgors (as applicable) and amends certain terms and conditions of each of the Pledge Agreement and the Security Agreement.

 

Pursuant  to the terms of the Third Amended and Restated Note Purchase Agreement as amended by the First Omnibus Amendment Agreement, simultaneously with the execution of the First Omnibus Amendment Agreement, the Company issued to Jackson a new 12% Senior Secured Promissory Note due October 14, 2024 (the “2023 Jackson Note”) in the principal amount of $2,000, the proceeds of which will be used by the Company to repay certain of its indebtedness, among others. Pursuant to the terms of the First Omnibus Amendment Agreement and the 2023 Jackson Note, the Company is required to pay interest on the 2023 Jackson Note at a per annum rate of 12%. In the event the Company has not repaid in cash at 50% of the outstanding principal balance of the 2023 Jackson Note on or before October 27, 2023, then interest on the outstanding principal balance of the 2023 Jackson Note will accrue at 16% per annum until the 2023 Jackson Note is repaid in full. All accrued and unpaid interest on the outstanding principal of the 2023 Jackson Note shall be due and payable in arrears in cash on a monthly basis.

 

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In connection with the Third Amended and Restated Note Purchase Agreement, the Company issued to Jackson (i) 100,000 shares of its common stock and (ii) a warrant to purchase up to 24,332 shares of common stock at an exercise price of $3.06 per share which is exercisable six months from October 27, 2022, and expires on October 27, 2027.

 

Additionally, 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 Reverse Stock Split, effectuated by the Company on June 24, 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.

 

Credit and Security Agreement with MidCap

 

On October 27, 2022, the Company entered into Amendment No. 27 (“Amendment No. 27”) and Joinder Agreement to the Credit and Security Agreement (the “Credit and Security Agreement”) with MidCap Funding IV Trust, as agent for the lenders (as successor by assignment to MidCap Funding X Trust, “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 increased 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%.

 

On August 30, 2023, the Company and MidCap entered into Amendment No. 28 to Credit and Security Agreement (“Amendment No. 28”), which, among other things: (i) increases the applicable margin (a) from 4.25% to 4.50% with respect to the Loan (other than Letter of Credit Liabilities) and (b) from 3.75% to 4.50% with respect to Letter of Credit Liabilities, (ii) revises the definition of borrowing base to include the amount of any reserves and/or adjustments provided for in the Credit and Security Agreement, including, but not limited to, the Additional Reserve Amount (as defined in the in Amendment No. 28), (iii) requires that the Company complies with a fixed charge coverage ratio of at least 1:00 to 1:00, and (iv) waives the existing event of default that occurred under the Credit and Security Agreement due to the Credit Parties’ failure to maintain the Minimum Liquidity amount for the fiscal month ending June 30, 2023 (each as defined in the Credit and Security Agreement).

 

In addition, pursuant Amendment No. 28, no later than five business days following the receipt of any cash proceeds from any equity issuance or other cash contribution from the Company’s equity holders, the Company shall prepay the Loan by an amount equal to (i) the sum of $1,300, less the current funded Additional Reserve Amount, multiplied by (ii) 50%.

 

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In connection with Amendment No. 27, the Company paid to MidCap a modification fee of $135, 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. In connection with Amendment No. 28, the Company paid MidCap (i) a modification fee of $68, and (ii) $32 in overdue interest amount.

 

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 Notes 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 “Intercreditor Agreement”). 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.

 

On August 30, 2023, in connection with the Amendment Agreement, the 2023 Jackson Note and Amendment No. 28, we, Jackson, and MidCap entered into the Sixth Amendment to Intercreditor Agreement (the “Sixth Amendment”), which amended the Intercreditor Agreement, by and among the Company, Jackson and MidCap. The Sixth Amendment, among other things, provides for (i) consent by Jackson to the First Omnibus Amendment Agreement and (ii) consent by Jackson to Amendment No. 28.

 

February 2023 Public Offering

 

On February 7, 2023, we entered into a securities purchase agreement with an institutional, accredited investor for the issuance and sale, in a best efforts public offering (the “February 2023 Offering”), of (i) 315,000 units (the “Units”), each Unit consisting of one share of our common stock and one warrant (the “February 2023 Warrants”) to purchase one share of common stock, and (ii) 1,569,516 pre-funded units (the “Pre-Funded Units”), each Pre-Funded Unit consisting of one pre-funded warrant (the “February 2023 Pre-Funded Warrants”) to purchase one share of common stock and one February 2023 Warrant. The public offering price was $2.6532 per Unit and $2.6522 per Pre-Funded Unit. The February 2023 Warrants are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance.

 

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In connection with the February 2023 Offering, the investor entered into a warrant amendment agreement (the “February 2023 Warrant Amendment Agreement”) with us to amend the exercise price of certain existing warrants to purchase up to an aggregate of 876,654 shares of common stock that were previously issued to the investor, with an exercise price of $5.85 per share and an expiration date of January 7, 2028. Pursuant to the February 2023 Warrant Amendment Agreement, the amended warrants have a reduced exercise price of $2.47 per share following the closing of the February 2023 Offering.

 

We used the net proceeds from the February 2023 Offering for general working capital purposes.

 

On September 1, 2023, the investor entered into an inducement offer whereby the exercise price was further reduced to $0.83. On the same day, the investor was granted new warrants, 5,522,340 warrant shares at an exercise price of $0.83 with an expiration date of September 30, 2028.

 

Year Ended December 30, 2023 Compared to Year Ended December 31, 2022

 

   Twelve Months Ended       Twelve Months Ended         
   December 30, 2023   % of Revenue   December 31, 2022   % of Revenue   Growth 
Revenue  $190,876    100.0%  $184,884    100.0%   3.2%
Cost of revenue   162,347    85.1%   152,135    82.3%   6.7%
Gross profit   28,529    14.9%   32,749    17.7%   -12.9%
Operating expenses   40,115    21.0%   34,515    18.7%   16.2%
Gain (Loss) from operations   (11,586)   -6.1%   (1,766)   -1.0%   556.0%
Other (expenses) income   (5,137)   -2.7%   (2,954)   -1.6%   73.9%
Loss from discontinued operations   (9,014)   -4.7%   (12,496)   -6.8%   -27.9%
Benefit (Provision) for income taxes   (304)   0.2%   222   -0.1%   -236.9%
Net (loss) income  $(26,041)   -13.6%  $(16,994)   -2.4%   53.2%

 

Revenue

 

For the year ended December 30, 2023 (“Fiscal 2023”), revenue increased by 3.2% to $190,876 as compared to $184,884 for the year ended December 31, 2022 (“Fiscal 2022”). Of that increase, $23,554 was attributable to the Headway Acquisition, organic revenue declined by $17,512 from the prior year. Our Commercial Staffing business consists of our Monroe Staffing Services and Key Resources brands while our Professional Staffing business is made up of Lighthouse Professional Services and Headway. The following graph shows how our business has become more balanced in 2023 versus 2022.

 

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99.3% of our revenue in 2023 was for hourly paid workers (either temporary contracts or EOR) and was essentially unchanged against the 99.1% split in 2022. 

 

Gross profit and gross margin

 

The main differences between revenue and gross profit are the payroll and related tax/benefits/burden costs of our temporary contracting/payrolling/EOR workforce. As Direct Hire has none of these costs its revenue and gross profit are the same. Our direct hire gross profit dropped from $1,663 in 2022 to $1,281 in 2023 as the increase in post-Covid hiring ended.

 

Gross profit for the year ended December 30, 2023, was $28,529, a decrease of 12.9% from $32,749 from the year ended December 31, 2022, representing gross margin of 14.9% and 17.7% for each period, respectively. There are a number of moving parts within the analysis of our gross profit. The following charts show the same breakdown between our Professional and Commercial segments

The Headway business is affected by political cycles. As the year ended December 31, 2022 year involved more interim elections than the year ended December 30, 2023, the EOR business as related to election research was higher in Fiscal 2022 as compared to Fiscal 2023. As the gross margin for the EOR business is lower than traditional recruiting an increase in revenue in this business segment does not always reflect an increase in gross profit overall when the mix of products being sold skews towards EOR. The gross margins for our Commercial Staffing business was 18.3% and while Professional Staffing was 11.8% as compared to 17.7% and 17.7% in such segments for the year ended December 31, 2022, respectively. In the year ended December 30, 2023 Headway delivered a gross margin of 9.6% while Lighthouse contributed 25.2%. The EOR business requires significantly less internal resources to manage and deliver versus traditional staffing and, therefore, its contribution at the AEBITDA level is comparable.

 

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Operating expenses

 

Operating expenses for the year ended December 30, 2023, were $40,115 an increase of 21.0% from $34,515 for the year ended December 31, 2022. The increase was a reflection of the integration of Headway into the group and also headcount reductions recognizing the challenged economic environment in which the whole staffing industry faced in 2023.

 

Other (Expenses) Income

 

Other (expenses) income including the loss for discontinued operations for the year ended December 30, 2023, were ($14,151), a decrease of 7.4% from ($15,450) for the year ended December 31, 2022. The decrease was driven primarily by interest expense, divesting of the UK business, restructuring costs, legal fees and insurance restructuring. During Q4 2023 the Board decided to discontinue its operation in the UK and Grant Thornton UK LLP was engaged in December to manage any possible Administration process related to the discontinuation. In January 2024, a Notice of Intention to Appoint an Administrator was filed with High Court of Justice and the Administrator was appointed on February 12, 2024, and the UK operations were then sold. As a consequence, we have noted the impact on our Financial Statements of a charge for the discontinued operation of $9,014. Interest expense and amortization of debt discount and deferred financing costs were $5,461 in the year ended December 30, 2023, compared with $3,680 in the year ended December 31, 2022, with increases due to the floating rates of interest governing the Company’s asset-based lines of credit being substantially offset by reductions in secured indebtedness relating to the issuance of equity securities during both fiscal periods. Other income of $324 for the year ended December 30, 2023 related primarily to a prior year overstated tax liability accrual as compared to $726 for the year ended December 31, 2022.

 

Non-GAAP Measures

 

To supplement our consolidated financial statements presented in accordance with accounting principles generally accepted in the U.S. (“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 the Company’s mix of Revenue and respective profitability between its two main lines of business due to their differing margins. For clarity, these lines of business are not the Company’s 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 the Company against the industry.

 

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The following table details Revenue and Gross Profit by Business Streams:

 

   Twelve Months Ended 
   December 30, 2023   Mix   December 31, 2022   Mix 
                 
Revenue                    
Commercial Staffing - US  $91,874    48%  $108,205    59%
Professional Staffing - US   99,002    52%   76,679    41%
Total Service Revenue  $190,876        $184,884      
                     
Gross Profit                    
Commercial Staffing - US  $16,805    59%  $19,182    59%
Professional Staffing - US   11,724    41%   13,567    41%
Total Gross Profit  $28,529        $32,749      
                     
Gross Margin                    
Commercial Staffing - US   18.3%        17.7%     
Professional Staffing - US   11.8%        17.7%     
Total Gross Margin   14.9%        17.7%     

 

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; other income; and charges the Company considers 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 the profit and cash flow generation of the Company.

 

   Twelve Months Ended 
   December 30, 2023   December 31, 2022 
Net loss   $(26,041)  $(16,994)
           
Interest expense   5,009    3,077 
Expense (benefit) from income taxes   304    (222)
Depreciation and amortization   1,901    1,959 
EBITDA loss  $(18,827)  $(12,180)
           
Acquisition, capital raising and other non-recurring expenses (1)   15,609    6,169 
Other non-cash charges (2)   195    790 
Disposition of UK   9,014    12,496 
Other loss   (324)   (726)
Adjusted EBITDA  $5,667   $6,549 
           
Adjusted Gross Profit   $28,529   $32,749 
           
Adjusted EBITDA as percentage of Adjusted Gross Profit   19.9%   20.0%

 

  (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 the year ended January 1, 2022.

 

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  (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.

 

Operating Leverage This measure is calculated by dividing the growth in Adjusted EBITDA by the growth in Gross Profit, on a trailing 12-month basis. We use this KPI because we believe it provides a measure of the Company’s efficiency for converting incremental gross profit into Adjusted EBITDA.

 

   December 30, 2023   December 31, 2022 
         
Gross Profit - TTM (Current Period)  $28,529   $32,749 
Gross Profit - TTM (Prior Period)   32,749    33,867 
Gross Profit – Growth (Decline)  $(4,220)  $(1,118)
           
Adjusted EBITDA - TTM (Current Period)  $5,667   $6,549 
Adjusted EBITDA - TTM (Prior Period)   6,549    2,434 
Adjusted EBITDA – Growth (Decline)  $(883)  $4,115 

 

Leverage Ratio This measure is calculated as Total Debt, Net, gross of any Original Issue Discount, divided by Pro Forma Adjusted EBITDA for the trailing 12-months. We use this KPI as an indicator of the Company’s ability to service its debt prospectively.

 

   December 30, 2023    December 31, 2022 
          
Total Term Debt, Net  $18,453    $17,303 
Addback: Total Debt Discount and Deferred Financing Costs   663     962 
Total Debt  $19,116    $18,265 
            
TTM Adjusted EBITDA  $5,667    $6,549 
            
Pro Forma TTM Adjusted EBITDA  $5,667    $6,549 
            
Pro Forma Leverage Ratio   3.37x    2.79x

 

Operating Cash Flow Including Proceeds from Accounts Receivable Financing This measure is calculated as net cash (used in) provided by continuing operating activities plus net proceeds from accounts receivable financing. Because much of the Company’s temporary payroll expenses are 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 the Company’s underlying operating cash flow.

 

   Twelve Months Ended 
   December 30, 2023   December 31, 2022 
         
Net cash flow used in continuing operating activities  $(13,794)  $(18,177)
           
Repayments on accounts receivable financing   (3,510)   (2,624)
           
Net cash used in operating activities including proceeds from accounts receivable financing  $(17,304)  $(20,801)

 

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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.

 

Liquidity, Capital Resources and Going Concern

 

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 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.

 

For the year ended December 30, 2023, the Company had a working capital deficit of $45,419, an accumulated deficit of $127,056, and a net loss of $26,041.

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has unsecured payments due in the next 12 months associated with a historical acquisition and secured current debt arrangements representing approximately $18,453 which are in excess of cash and cash equivalents on hand as of December 30, 2023, in addition to funding operational growth requirements. 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 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.

 

In addition, beginning in January 2024 the Company has numerous contractual lease obligations representing an aggregate of approximately $5,248 related to current lease agreements. The Company intends 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.

 

The accompanying financial statements 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 Fiscal 2023, net cash used in operating activities of $11,667 was primarily attributable to changes in operating assets and liabilities totaling $7,088 and a net loss of $26,041, offset by non-cash adjustments of $5,159 and net cash provided by discontinued operations of $2,127. Changes in operating assets and liabilities primarily relate to a decrease in accounts receivable of $3,431, increase in accounts payable and accrued expenses of $4,508, decrease in other current liabilities of $152, decrease in other assets of $3,157, and decrease in prepaid expenses of $457, and a decrease in other long-term liabilities of $4,313. Non-cash add backs of $5,159 primarily relate to depreciation and amortization of intangible assets of $1,901, right of use assets depreciation of $1,317, amortization of debt discount and deferred financing of $452 and stock-based compensation of $1,393.

 

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For Fiscal 2022, net cash used in operating activities of $9,331 was primarily attributable to changes in operating assets and liabilities totaling $5,474 and a net loss of $16,994, offset by non-cash adjustments of $4,291 and net cash provided by discontinued operations of $8,844. Changes in operating assets and liabilities primarily relate to an decrease in accounts receivable of $3,414, decrease in accounts payable and accrued expenses of $712, decrease in other current liabilities of $439, increase in other assets of $2,178, and increase in prepaid expenses of $1,768, offset by increase in accounts payable – related party of $218 and decrease in other long-term liabilities of $4,009. Non-cash add backs of $4,291 primarily relates to depreciation and amortization $1,959, right of use assets depreciation of $1,390, amortization of debt discount and deferred financing of $603 and stock-based compensation of $623.

 

Investing activities

 

For Fiscal 2023, net cash flows used in investing activities was $2,028, primarily due to the disposal of the UK operation $1,708 and the purchase of fixed assets of $320.

 

For Fiscal 2022, net cash flows provided by investing activities was $1,702, primarily due to the Headway Acquisition. Acquisition of business net of cash acquired totaled $2,498, offset by equipment purchases of $215 and discontinued operations of $581.

 

Financing activities

 

For Fiscal 2023, net cash flows provided by financing activities totaled $10,711, of which $4,993 related to proceeds from common stock, $2,000 related to proceeds from term loan, $2,292 related to proceeds from a warrant inducement offset by $738 of repayments on term loan, $3,510 of repayments on accounts receivable financing, net, payment of third-party financing costs of $1,223 and $6,897 related to discontinued operations.

 

For Fiscal 2022, net cash flows provided by financing activities totaled $7,361, of which $4,013 related to proceeds from common stock, $67 related to proceeds from term loan, offset by $14 of repayments on term loan, $2,624 of repayments on accounts receivable financing, net, payment of third-party financing costs of $619, earnout payments $160 and $6,698 related to discontinued operations.

 

Critical Accounting Policies and 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 Fiscal 2023 and Fiscal 2022 include the measurement of credit losses, valuation of intangible assets, including goodwill, borrowing rate consideration for right-of-use (“ROU”), liabilities associated with earn-out obligations, testing long-lived assets for impairment, valuation reserves against deferred tax assets and penalties in connection with outstanding payroll tax liabilities, stock based compensation and fair value of warrants and options.

 

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Legal Contingencies and Expenses

 

From time to time, the Company may become involved in various claims, disputes and legal or regulatory proceedings that arise in the ordinary course of business and relate to contractual and other obligations. The Company assesses its potential contingent and other liabilities by analyzing its claims, disputes and legal and regulatory matters using all available information and developing its views on estimated losses in consultation with its legal and other advisors. The Company determines whether a loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. If the contingency is not probable or cannot be reasonably estimated, disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss may be incurred. Expenses associated with legal contingencies are expensed as incurred.

 

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.

 

Business Combinations

 

In accordance with ASC 805, “Business Combinations,” the Company records acquisitions under the purchase method of accounting, 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 us to make significant assumptions, including projections of future events and operating performance.

 

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.

 

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In accordance with ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, or ASU 2011-08, 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.

 

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 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.

 

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740), which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The new guidance requires consistent categorization and greater disaggregation of information in the rate reconciliation, as well as further disaggregation of income taxes paid. This change is effective for annual periods beginning after December 15, 2024. This change will apply on a prospective basis to annual financial statements for periods beginning after the effective date. However, retrospective application in all prior periods presented is permitted. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

 

Known Trends, Events and Uncertainties

 

Demand for staffing and permanent placement services is highly dependent on growth in specific industries, geographic economic activity, workforce flexibility trends, and the overall strength of the economy. This creates a high degree of volatility in the industry based on overall economic conditions. Historically, economic recovery periods have resulted in growth primarily in the temporary contractor segment. It is uncertain whether this trend will continue or whether the reopening of key contractor industries will present a recovery that is more in line with historical trends.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not required for smaller reporting companies.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

TABLE OF CONTENTS

 

    Page
     
Report of Independent Registered Public Accounting Firm (RBSM LLP, New York, NY: PCAOB ID #587)   F-1
     
Report of Independent Registered Public Accounting Firm (Baker Tilly US, LLP: PCAOB ID #23)   F-3
     
Consolidated Balance Sheets at December 30, 2023 and December 31, 2022   F-4
     
Consolidated Statements of Operations for the fiscal years ended December 30, 2023 and December 31, 2022   F-5
     
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 30, 2023 and December 31, 2022   F-6
     
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the fiscal years ended December 30, 2023 and December 31, 2022   F-7
     
Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2023 and December 31, 2022   F-9
     
Notes to Consolidated Financial Statements   F-10

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the

Board of Directors of

Staffing 360 Solutions, Inc. and subsidiaries

New York, NY

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Staffing 360 Solutions, Inc. and its subsidiaries (the Company) as of December 30, 2023, the related consolidated statement of operations, stockholders’ deficit and cash flows for the year ended December 30, 2023, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2023, and the results of its operations and its cash flow for the year ended December 30, 2023, in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred substantial operating losses and will require additional capital to continue as a going concern. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

Retrospective Adjustment for Disposal of Operations in the United Kingdom (UK)

 

We also have audited the retrospective adjustments to the 2022 consolidated financial statements to retrospectively apply the reclassifications to discontinued operations the Company’s UK operations for the year ended December 31, 2022, as described in Note 19. In our opinion, such retrospective adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2022 consolidated financial statements of the Company other than with respect to these retrospective adjustments for the discontinued operations and, accordingly, we do not express an opinion or any other form of assurance on the 2022 consolidated financial statements taken as a whole.

 

Basis for Opinion

 

These financial statement are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

F-1
 

 

Goodwill and Other Intangibles Impairment Assessments

 

Critical Audit Matter Description

 

As described in Note 7 to the consolidated financial statements, the Company’s goodwill asset balance was $19,891 as of December 30, 2023. As described in Note 6, the Company also has amortizable identifiable intangible assets of $11,193 which are being amortized over their estimated useful lives. Management tests these assets annually for impairment or more frequently when potential impairment triggering events are present. Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit to its carrying value. Management uses a weighted approach to estimate the fair value of its reporting unit.

 

The principal considerations for our determination that performing procedures relating to the goodwill and intangible asset impairment assessments is a critical audit matter because (i) the significant judgment used by management when determining the fair value estimates of the reporting units; (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the significant assumptions used in management’s fair value estimates; and (iii) the audit effort involved in the use of professionals with specialized skill and knowledge.

 

How the Critical Audit Matter Was Addressed in the Audit

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

 

  These procedures included, among others, (i) testing management’s process for determining the fair value estimates; (ii) testing the completeness and accuracy of the underlying data used in the market approach; and (iii) evaluating the reasonableness of the significant assumptions used by management related to market multiples, peer group and comparable transaction selection and selection of relevant financial matrices for concluding the fair value of reporting unit and future levels of revenue growth.
  Evaluating management’s assumptions related to the future levels of revenue growth involved evaluating whether the assumptions were reasonable considering (i) current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
  Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the market approach and (ii) the reasonableness of significant assumptions related to the market multiples, peer group and comparable transaction selection and selection of relevant financial matrices for concluding the fair value of reporting unit and future levels of revenue growth.

 

/s/ RBSM LLP

 

We have served as the Company’s auditor since 2024.

 

New York, NY

 

June 11, 2024

 

PCAOB ID Number 587

 

F-2
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the shareholders and the board of directors of Staffing 360 Solutions, Inc.:

 

Opinion on the Consolidated Financial Statements

 

We have audited, before the effects of the adjustments to retrospectively apply the change in accounting described in Note 19, the accompanying consolidated balance sheet of Staffing 360 Solutions, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows, for the year ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). The 2022 consolidated financial statements before the effects of the adjustments described in Note 19 are not presented herein. In our opinion, the consolidated financial statements, before the effects of the adjustments to retrospectively apply the change in accounting described in Note 19, present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

 

We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in accounting described in Note 19 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ Baker Tilly US, LLP

We served as the Company’s auditor from 2022 to 2023.

Uniondale, New York

May 19, 2023

 

F-3
 

 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(All amounts in thousands, except share and par values)

 

   As of   As of 
   December 30, 2023   December 31, 2022 
ASSETS          
Current Assets:          
Cash  $721   $1,455 
Accounts receivable, net   17,783    21,310 
Prepaid expenses and other current assets   1,080    1,537 
Current assets held for sale   9,116    

10,689

 
Total Current Assets   28,700    34,991 
           
Property and equipment, net   536    471 
Goodwill   19,891    19,891 
Intangible assets, net   11,193    12,839 
Other assets   5,592    7,789 
Right of use asset   4,813    5,678 
Total Assets  $70,725   $81,659 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY          
           
Current Liabilities:          
Accounts payable and accrued expenses  $

13,976

   $10,734 
Accrued payroll taxes   6,193    3,189 
Accrued expenses - related party   257    218 
Current Debt - related party   9,826    - 
Redeemable Series H preferred stock, net   8,627    - 
Earnout liabilities   9,054    8,344 
Accounts receivable financing   14,698    18,176 
Leases - current liabilities   1,035    1,044 
Other current liabilities   376    2,856 
Current liabilities held for sale   10,077    

6,403

 
Total Current Liabilities   74,119    50,964 
           
Long-term debt – Related party   -    8,661 
Redeemable Series H preferred stock, net   -    8,393 
Leases - non current   4,213    5,110 
Other long-term liabilities   203    178 
Total Liabilities   78,535    73,306 
           
Commitments and contingencies        
           
Stockholders’ (Deficit) Equity:          
Preferred stock, $0.00001 par value, 20,000,000 shares authorized;   -    - 
Common stock, $0.00001 par value, 250,000,000 shares authorized; 5,601,020 and 2,629,199 shares issued and outstanding, as of December 30, 2023 and December 31, 2022, respectively   1    1 
Additional paid in capital   119,214    111,586 
Accumulated other comprehensive (loss) income   31    (2,219)
Accumulated deficit   (127,056)   (101,015)
Total Stockholders’ (Deficit) Equity   (7,810)   8,353 
Total Liabilities and Stockholders’ (Deficit) Equity  $70,725   $81,659 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(All amounts in thousands, except share and per share values)

 

   December 30, 2023   December 31, 2022 
   Fiscal Years Ended 
   December 30, 2023   December 31, 2022 
Revenue  $190,876   $184,884 
           
Cost of Revenue, excluding depreciation and amortization stated below   162,347    152,135 
           
Gross Profit   28,529    32,749 
           
Operating Expenses:          
Selling, general and administrative expenses   38,214    32,556 
Depreciation and amortization   1,901    1,959 
Total Operating Expenses   40,115    34,515 
           
Net Loss From Operations   (11,586)   (1,766)
           
Other (Expenses) Income:          
Interest expense   (5,009)   (3,077)
Amortization of debt discount and deferred financing costs   (452)   (603)
Other income, net   324    726 
Total Other Income (Expenses), net   (5,137)   (2,954)
           
Net Operating Loss    (16,723)   (4,720)
           
Discontinued Operations   (9,014)   (12,496)
           
Net Loss Before Benefit from Income Tax   (25,737)   (17,216)
           
Benefit (Provision) from Income taxes   (304)   222
           
Net Loss   (26,041)   (16,994)
           
Net Loss Attributable to Common Stockholders  $(26,041)  $(16,994)
           
Net Loss Attributable to Common Stockholders - Basic  $(5.40)  $(8.04)
           
Weighted Average Shares Outstanding – Basic   4,821,318    2,113,509 
           
Earnings allocated to participating securities– Diluted (Footnote 3)  $(26,041)  $(16,994)
           
Earnings Income (Loss) per Share Attributed to Common Stockholders - Diluted  $(5.40)  $(8.04)
           
Weighted Average Shares Outstanding – Diluted   4,821,318    2,113,509 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5
 

 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(All amounts in thousands)

 

         
   Fiscal Years Ended 
   December 30, 2023   December 31, 2022 
Net Loss  $(26,041)  $(16,994)
           
Other Comprehensive (Loss) Income          
Foreign exchange translation adjustment   2,250    (2,381)
Comprehensive Loss Attributable to the Company  $(23,791)  $(19,375)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6
 

 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY

(All amounts in thousands, except share and par values)

 

   Shares   Par
Value
   Additional paid in    Accumulated other comprehensive    Accumulated    Total 
   Common Stock   capital   income (loss)   Deficit   Equity 
Balance, January 1, 2022   1,758,835   $1   $107,183   $162   $(84,021)  $23,325 
Shares issued to/for:                              
Employees, directors and consultants   99,000        623            623 
Sales of common stock and warrants, net   657,858        3,433            3,433 
Shares issued to related party   100,000         257              257 
Warrants issued to related party             60              60 
Modification of warrants issued to related party             30              30 
Warrants Modification             837              837 
Equity issuance cost             (837)             (837)
Retrospective effect of 1:10 reverse stock split on June 24, 2022   13,506                         
Foreign currency translation gain               (2,381)       (2,381)
Net loss                   (16,994)   (16,994)
Balance, December 31, 2022   2,629,199   $1   $111,586   $(2,219)  $(101,015)  $8,353 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7
 

 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY

(All amounts in thousands, except share and par values)

 

   Shares   Par
Value
   Additional paid in    Accumulated other comprehensive    Accumulated    Total (Deficit)  
   Common Stock   capital   income   Deficit   Equity 
Balance, December 31, 2022   2,629,199   $1   $111,586   $(2,219)  $(101,015)  $8,353 
Shares issued to/for:                              
Employees, directors and consultants   337,305        1,393            1,393 
Sale of common stock and warrants   1,884,516        4,113            4,113 
Warrants Exercised   550,000         1,994              1,994 
Shares issued in connection with debt - related party   200,000         128              128 
Foreign currency translation loss               2,250        2,250 
Net loss                   (26,041)   (26,041)
Balance, December 30, 2023   5,601,020   $1   $119,214   $31   $(127,056)  $(7,810)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-8
 

 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(All amounts in thousands)

 

   December 30, 2023   December 31, 2022 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Loss  $(26,041)  $(16,994)
Adjustments to reconcile net loss income to net cash used in operating activities:          
Depreciation and amortization   1,901    1,959 
Amortization of debt discount and deferred financing costs   452    603 
Bad debt expense   96    (284)
Right of use assets depreciation   1,317    1,390 
Stock based compensation   1,393    623 
Changes in operating assets and liabilities:          
Accounts receivable   3,431    3,414 
Prepaid expenses and other current assets   457    (1,768)

Other assets

   3,157    (2,178)
Accounts payable and accrued expenses   4,508   (712)
Accounts payable, related party       218 
Other current liabilities   (152)   (439)
Other long-term liabilities and other   (4,313)   (4,009)
NET CASH USED IN CONTINUING OPERATING ACTIVITIES   (13,794)   (18,177)
Net cash provided by discontinued operating activities:   2,127    8,844
NET CASH USED IN CONTINUING OPERATING ACTIVITIES   (11,667)   (9,333)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (320)   (215)
Acquisition of business, net of cash acquired       2,498 
NET (USED IN) CASH PROVIDED BY CONTINUING INVESTING ACTIVITIES   (320)   2,283 
Net cash used in discontinued investing activities   (1,708)   (581)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES   (2,028)   1,702
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Third party financing costs   

(1,223

)   (619)
Repayment of term loan   (738)   (14)
Proceeds from term loan   2,000    67 
Repayments on accounts receivable financing, net   (3,510)   (2,624)
Warrant Inducement   2,292     
Proceeds from sale of common stock   4,993    4,013 
Payments made on earnouts       (160)
NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES   3,814    663 
Net cash provided by discontinued financing activities   6,897    6,698
NET CASH PROVIDED BY FINANCING ACTIVITIES   10,711    7,361 
           
NET DECREASE IN CASH   (2,984)   (270)
           
Effect of exchange rates on cash   2,250    

(2,381

)
           
Cash - Beginning of year   1,455    4,106 
           
Cash - End of year  $721   $1,455 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-9
 

 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FISCAL YEARS ENDED DECEMBER 30, 2023 AND DECEMBER 31, 2022

(All amounts in thousands)

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

We are incorporated in the state of Delaware. We are a public company in the domestic staffing sector. Our\business model is based on finding and acquiring suitable, mature, profitable, operating, U.S. -based 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. 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 ten acquisitions since November 2013. In February 2024 the Company disposed of its UK operations accordingly, all of the figures, including share and per share information, except where specifically referenced have been revised to reflect only the results of continuing operations

 

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 (as defined herein) in May 2022 added 12.7% in revenue, or $23.5 million to $184.9 million of revenue delivered in 2022. The non-Headway business showed a reduction in revenue of $17.5 million, principally in the Commercial Staffing Business Stream.

 

The Headway business included approximately $60 million in EOR (“Employer of Record”) service contracts. EOR projects are typically large volume, long-term providing HR outsourcing of payroll and benefits for a contingent workforce. EOR projects, while priced with lower gross margin percentages than traditional temporary staffing assignments, yield a comparable contribution as a result of lower costs to deliver these services. Typical contribution for EOR projects would be 80-85% of the gross profit earned, compared to 40-50% for traditional staffing which negates the impact of lower gross margins. This EOR service offering could be easily added to the Company’s other Brands, providing for a growth element within the existing client base. The Headway business also brought an active workforce in all 50 states in the US, as well as Puerto Rico and Washington DC. This will provide for potential expansion of accounts for all brands in the group’s portfolio (“Brands”).

 

The Company has developed a centralized, sales and recruitment hub. The addition of Headway, with its single office, 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 staffing companies continues.

 

F-10
 

 

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 the GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Year End

 

The Company’s fiscal year end follows a 52-53-week year ending on the Saturday closest to the 31st of December. This report is for the period from January 1, 2023 to December 30, 2023 (“Fiscal 2023”). The prior year’s report was for the period from January 2, 2022 to December 31, 2022, (“Fiscal 2022”).

 

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. 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. As shown in the accompanying financial statements as of the year ended December 30, 2023, the Company has an accumulated deficit of $127,056 and a working capital deficit of $45,419. At December 30, 2023, we had total gross debt of $19,116 and $721 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.

 

Due to the timing of select liabilities coming due we are in discussion with our lenders to determine the best manner to settle these liabilities.

 

The entire outstanding principal balance of the Jackson Notes, which is $10,116 as of December 30, 2023, shall be due and payable on October 14, 2024. The debt represented by the Jackson Notes continues to be secured by substantially all of the Company’s domestic subsidiaries’ assets pursuant to the Amended and Restated Security Agreement with Jackson, dated September 15, 2017, as amended. The Company also has a $32,500 revolving loan facility with MidCap. The MidCap Facility has a maturity date of September 6, 2024.

 

Going Concern

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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 Board of the Company is reviewing all of the strategic options open to it in determining how to resolve the Going Concern qualification and will update Stockholders as and when any material solution has been determined and ready to be acted upon. These solutions may include, but are not limited to, the restructuring of debt and raising of additional debt, management of expenditures, raising of additional equity, potential dispositions of assets, in addition to what has already happened in disposing of the UK operation to protect cashflows.

 

F-11
 

 

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.

 

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 Fiscal 2023 and Fiscal 2022 include the measurement of credit losses, valuation of intangible assets, including goodwill, borrowing rate consideration for right-of-use (“ROU”), liabilities associated with earn-out obligations, testing long-lived assets for impairment, valuation reserves against deferred tax assets and penalties in connection with outstanding payroll tax liabilities, stock based compensation and fair value of warrants and options.

 

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. Revenue in Fiscal 2023 was comprised of $189,595 of temporary contractor revenue and $1,281 of permanent placement revenue compared with $183,262 of temporary contractor revenue and $1,622 of permanent placement revenue for Fiscal 2022, respectively. Refer to Note 15 for further details on breakdown by segments.

 

Taxes Collected from Customers and Remitted to Governmental Agencies

 

The Company records taxes on customer transactions due to governmental agencies as a receivable and a liability on the consolidated balance sheets. Sales taxes are recorded net on the consolidated statement of operations.

 

Advertising Costs

 

Costs for advertising are expensed when incurred. Advertising expenses for the Company were $769 and $1,444 for Fiscal 2023 and 2022, respectively.

 

Legal Contingencies and Expenses

 

From time to time, the Company may become involved in various claims, disputes and legal or regulatory proceedings that arise in the ordinary course of business and relate to contractual and other obligations. The Company assesses its potential contingent and other liabilities by analyzing its claims, disputes and legal and regulatory matters using all available information and developing its views on estimated losses in consultation with its legal and other advisors. The Company determines whether a loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. If the contingency is not probable or cannot be reasonably estimated, disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss may be incurred. Expenses associated with legal contingencies are expensed as incurred.

 

F-12
 

 

Restructuring Charges 

 

The Company records a liability for significant costs associated with exit or disposal activities, including lease termination costs, certain employee severance costs associated with formal restructuring plans, facility closings or other similar activities and related asset impairments, when the liability is incurred.

 

The determination of when the Company accrues for severance and related costs depends on whether the termination benefits are provided under a one-time benefit arrangement or under an ongoing benefit arrangement. Where the Company has either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan, it recognizes severance costs when they are both probable and estimable. Costs associated with restructuring actions that include one-time severance benefits are only recorded once a liability has been incurred, including when management with the proper level of authority has committed to a restructuring plan and the plan has been communicated to employees. These charges are included in operational restructuring and other charges on the consolidated statements of operations. Other charges include knowledge transfer costs directly related to the restructuring initiatives and are expensed as incurred.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents held at financial institutions may at times exceed federally insured amounts. We believe we mitigate such risk by investing in or through major financial institutions. The Company had no cash equivalents at the end of Fiscal 2023 or Fiscal 2022.

 

Accounts Receivable

 

Accounts receivables are presented net of an allowance for credit losses for estimated losses. On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The Company reviews the accounts receivable on a periodic basis by evaluating the age of the balance, a customer’s historical payment history, its current creditworthiness and current economic trends. The Company then records general and specific allowances when there is doubt as to the collectability of individual balances. Accounts are written off after all efforts to collect have been exhausted. As of the end of Fiscal 2023 and the end of Fiscal 2022, the Company had an allowance for credit losses of $75 and $48, respectively.

 

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.

 

F-13
 

 

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 such as income tax expense.

 

Foreign Currency Translation

 

Assets and liabilities of subsidiaries operating in foreign countries are translated into U.S. dollars using the exchange rate in effect at the balance sheet date and equity is translated at historical rate. Results of operations are translated using average exchange rates. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included in a separate component of stockholders’ equity (accumulated other comprehensive income), while gains and losses resulting from foreign currency transactions are included in operations.

 

Deferred Financing Costs

 

Costs incurred in connection with obtaining certain financing are deferred and amortized on an effective interest method basis over the term of the related obligation. In accordance with Accounting Standards Update (“ASU”) 2015-03, “Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs,” debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the debt liability, consistent with the presentation of a debt discount.

 

Business Combinations

 

In accordance with ASC 805, “Business Combinations,” the Company records acquisitions under the purchase method of accounting, 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 us to make significant assumptions, including projections of future events and operating performance.

 

Fair Value of Financial Instruments

 

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company measures and accounts for certain assets and liabilities at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements and establishes a framework for measuring fair value and standards for disclosure about such fair value measurements.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

There were no Level 1or 2 assets or liabilities or Level 3 assets in any period. The Company’s Level 3 liabilities were its warrants issued to Jackson and contingent consideration in connection with acquisitions.

 

F-14
 

 

The table below represents a rollforward of the Level 3 contingent consideration:

 

   Contingent Consideration 
Balance at January 1, 2022  $4,054 
      
Headway deferred consideration   4,290