The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Staffing 360 Solutions, Inc. (“we,” “us,” “our,” “Staffing 360,” or the “Company”) was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation, which changed its name to Staffing 360 Solutions, Inc., ticker symbol “STAF,” on March 16, 2012. On June 15, 2017, the Company changed its state of domicile to Delaware.
The Company effected a one-for-ten reverse stock split on September 17, 2015 and a one-for-five reverse stock split on January 3, 2018. All share and per share information in these consolidated financial statements has been retroactively adjusted to reflect these reverse stock splits.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
These condensed consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”), expressed in U.S. dollars.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
These unaudited condensed consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with the GAAP.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 29, 2018 are included in the Company’s December 29, 2018 Form 10-K (“Fiscal 2018”), filed with the United States Securities and Exchange Commission on March 25, 2019. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited consolidated financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the period ended September 28, 2019 are not necessarily indicative of results for the entire year ending December 28, 2019. This report is for the period December 30, 2018 to September 28, 2019 (“Q3 2019 YTD”), June 30, 2019 to September 28, 2019 (“Q3 2019”), December 31, 2017 to September 29, 2018 (“Q3 2018 YTD”) and July 1, 2018 to September 29, 2018 (“Q3 2018”).
Liquidity
The accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern. The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of the quarter ended September 28, 2019, the Company has an accumulated deficit of $73,993 and a working capital deficit of $51,005. At September 28, 2019, we had total debt of $39,409 and $1,797 of cash on hand. We have historically met our cash needs through a combination of cash flows from operating activities, term loans, promissory notes, bonds, convertible notes, private placement offerings and sales of equity. Our cash requirements are generally for operating activities and debt repayments
The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available to us.
Further, our note issued to Jackson Investment Group LLC(“Jackson”) includes certain financial customary covenants and the Company has had instances of non-compliance. Management has historically been able to obtain from Jackson waivers of any non-compliance and management expects to continue to be able to obtain necessary waivers in the event of future non-compliance; however, there can be no assurance that the Company will be able to obtain such waivers, and should Jackson refuse to provide a waiver in the future, the outstanding debt under the agreement could become due immediately.
7
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
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. The Company debt obligations and certain unsecured payments associated with historical acquisitions are due in the next 12 months and are in excess of cash and cash equivalents on hand. 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.
Goodwill
During Q3 2019, the Company performed an interim goodwill impairment test for three of its reporting units, resulting in each case, the fair value of each reporting unit exceeding their carrying values by a minimal percentage. Goodwill, in the aggregate, for these three reporting units is approximately $26 million. A reduction in the projected long-term operating performance of any of these reporting units, market declines, changes in discount rates or other conditions could result in an impairment in the future. In connection with the interim impairment test, the Company used a combination of the income approach, which incorporates the use of a discounted cash flow method, and the market approach, which incorporates the use of earnings and cash flow multiples based on market data. The income approach and the market approach both require the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
Revenue Recognition
On December 31, 2017, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers for all open contracts and related amendments as of December 31, 2017 using the modified retrospective method. The adoption had no impact to the reported results. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while the comparative information will not be restated and will continue to be reported under the accounting standards in effect for those periods.
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.
8
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
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 basis. The contracts stipulate weekly 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 Q3 2019 YTD was comprised of $205,809 of temporary contractor revenue and $8,835 of permanent placement revenue, compared with $178,518 and $8,317 for Q3 2018 YTD, respectively. Revenue in Q3 2019 was comprised of $63,821 of temporary contractor revenue and $3,499 of permanent placement revenue, compared with $68,683 and $2,634 for Q3 2018, respectively. Refer to Note 9 for further details on breakdown by segments.
Reclassifications
We may make certain reclassifications to prior period amounts to conform with the current year’s presentation. These reclassifications did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.
Income Taxes
The Company's provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.
The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, and tax audit settlements. The effective income tax rate was (2.6)%, (0.31)%, 11.2% and 1.59% for the period ending Q3 2019, Q3 2018, Q3 2019 YTD and Q3 2018 YTD, respectively.
Foreign Currency
The Company recorded a non cash foreign currency remeasurement loss of $467, $186, $484 and $332 in Q3 2019, Q3 2018, Q3 2019 YTD and Q3 2018 YTD, respectively, associated with its U.S dollar denominated intercompany note.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). The Company adopted this guidance effective December 30, 2018. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The new standard provides a number of optional practical expedients in transition. The Company has elected to apply the ‘package of practical expedients’ which allow us to not reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. The Company has also elected to apply i) the practical expedient which allows us to not separate lease and non-lease components, and (2) the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new standard. The adoption of the new standard resulted in the recognition of additional lease liabilities of approximately $5,344, and right-of-use assets of approximately $5,262 as of September 28, 2019 related to the Company’s operating leases. The new standard did not have a material impact to the Company’s consolidated statement of operations or consolidated statement of cash flows.
9
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 3 – LOSS PER COMMON SHARE
The Company utilizes the guidance per ASC 260, “Earnings per Share.” Basic earnings per share are calculated by dividing income/loss available to stockholders by the weighted average number of common stock shares outstanding during each period. Our Series A preferred stock holders (related parties) receive certain dividends or dividend equivalents that are considered participating securities and our loss per share is computed using the two-class method. For Q3 2019 and Q3 2018, pursuant to the two-class method, as a result of the net loss attributable to common stock holders, losses were not allocated to the participating securities.
Diluted earnings per share are computed using the weighted average number of common stock shares and dilutive common share equivalents outstanding during the period. Dilutive common stock equivalents consist of common shares issuable upon the conversion of preferred stock, convertible notes, unvested equity awards and the exercise of stock options and warrants (calculated using the modified treasury stock method). Such securities, shown below, presented on a common share equivalent basis and outstanding as of September 28, 2019 and September 29, 2018 have not been included in the diluted earnings per share computations, as their inclusion would be anti dilutive due to the Company’s net loss as of September 28, 2019 and September 29, 2018:
|
|
September 28,
|
|
|
September 29,
|
|
|
|
2019
|
|
|
2018
|
|
Convertible preferred shares
|
|
|
7,688,175
|
|
|
|
43,239
|
|
Warrants
|
|
|
925,935
|
|
|
|
925,935
|
|
Restricted shares - unvested
|
|
|
495,690
|
|
|
|
595,272
|
|
Long term incentive plan (LTIP)
|
|
|
380,000
|
|
|
|
123,515
|
|
Options
|
|
|
79,560
|
|
|
|
125,400
|
|
Total
|
|
|
9,569,360
|
|
|
|
1,813,361
|
|
NOTE 4 – ACCOUNTS RECEIVABLE BASED FINANCING FACILITIES
HSBC Invoice Finance (UK) Ltd – New Facility
On February 8, 2018, CBS Butler Holdings Limited (“CBS Butler”), Staffing 360 Solutions Limited and The JM Group, entered into a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’ accounts receivable up to an aggregate amount of £11,500 across all three subsidiaries. The terms of the arrangement provide for HSBC to fund 90% of the purchased accounts receivable upfront and, a secured borrowing line of 70% of unbilled receivables capped at £1,000 (within the overall aggregate total facility of £11,500). The arrangement has an initial term of 12 months, with an automatic rolling three-month extension and carries a service charge of 1.80%.
On June 28, 2018, Clement May Limited (“CML”), the Company’s new subsidiary entered into a new agreement with a minimum term of 12 months for purchase of debt (“APD”) with HSBC, joining CBS Butler, Staffing 360 Solutions Limited and The JM Group (collectively, with CML, the “Borrowers”) as “Connected Clients” as defined in the APD. The new Connected Client APDs carry an aggregate Facility Limit of £20,000 across all Borrowers. The obligations of the Borrowers are secured by a fixed charge and a floating charge on the Borrowers’ respective accounts receivable and are subject to cross-company guarantees among the Borrowers. In addition, the secured borrowing line against unbilled receivables was increased to £1,500 for a period of 90 days. In July 2019, the aggregate Facility Limit was extended to £22,500 across all Borrowers.
Under ASU 2016-16, “Statement of Cash Flows (Topic 230, Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force), the upfront portion of the sale of accounts receivable is classified within operating activities, while the deferred purchase price portion (or beneficial interest), once collected, is classified within investing activities.
Midcap Funding Trust
On August 2, 2019, the Company amended the facility with Midcap to allow for additional borrowing against the unbilled receivables by $1,000 to a cap of $2,300 and extended the maturity of the facility to August 2020.
ABN AMRO Commercial Finance
In conjunction with the HSBC Invoice Finance (UK) Ltd – New Facility, on February 8, 2018, Staffing 360 Solutions Limited and The JM Group terminated its facility with ABN AMRO Commercial Finance and the remaining balance was paid in full.
10
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 5 – DEBT
|
|
September 28,
|
|
|
December 29,
|
|
|
|
2019
|
|
|
2018
|
|
Jackson Investment Group - related party
|
|
$
|
38,278
|
|
|
$
|
35,740
|
|
HSBC Term Loan
|
|
|
1,131
|
|
|
|
1,653
|
|
Total Debt, Gross
|
|
|
39,409
|
|
|
|
37,393
|
|
Less: Debt Discount and Deferred Financing Costs
|
|
|
(867
|
)
|
|
|
(1,171
|
)
|
Total Debt, Net
|
|
|
38,542
|
|
|
|
36,222
|
|
Less: Current Portion, Net
|
|
|
(38,068
|
)
|
|
|
(657
|
)
|
Total Long-Term Debt, Net
|
|
$
|
474
|
|
|
$
|
35,565
|
|
On August 29, 2019, the Company, entered into a Fourth Omnibus Amendment and Reaffirmation Agreement with Jackson, as lender, which, among other things, amends the Amended and Restated Note Purchase Agreement, dated as of September 15, 2017. Pursuant to this agreement, the Company agreed to issue and sell to Jackson a 18% Senior Secured Note due December 31, 2019 in the aggregate principal amount of $2,538. All accrued and unpaid interest on the outstanding principal balance of this term note will be due and payable monthly on the first day of each month, beginning on October 1, 2019. Pursuant to the terms of this note, if this term note is not repaid by December 31, 2019, the Company will be required to issue 100,000 shares of its common stock to Jackson on a monthly basis until this term note is fully repaid, subject to certain exceptions to comply with Nasdaq listing standards.
As of September 28, 2019, the Company was not in compliance with all covenants. On November 12, 2019, the Company received a waiver from Jackson curing the non-compliance as of September 28, 2019 and the past due interest payments that were due on October 1, 2019 and November 1, 2019. In return for the waiver, Jackson received 100,000 shares of common stock which is to be registered under Form S-3 as soon as practicable.
NOTE 6 – LEASES
On December 30, 2018, the Company adopted ASC 842 using the modified retrospective transition approach allowed under ASU 2018-11 which releases companies from presenting comparative periods and related disclosures under ASC 842 and requires a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected to apply the short-term lease exception to all leases of one year or less. As of September 28, 2019, as a result of the adoption of ASC 842, we have recorded a right of use (“ROU”) lease asset of approximately $5,262 with a corresponding lease liability of approximately $5,344 based on the present value of the minimum rental payments of such leases. The Company’s finance leases are immaterial both individually and in the aggregate.
Quantitative information regarding the Company’s leases for the period ended September 28, 2019 is as follows:
Lease Cost
|
|
Classification
|
Q3 2019 YTD
|
|
Operating lease cost
|
|
SG&A Expenses
|
|
1,285
|
|
Other information
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
3.7
|
|
Weighted average discount rate
|
|
|
6.4
|
%
|
|
|
|
|
|
Future Lease Payments
|
|
|
|
|
2019
|
|
$
|
624
|
|
2020
|
|
|
1,734
|
|
2021
|
|
|
1,432
|
|
2022
|
|
|
583
|
|
2023
|
|
|
326
|
|
Thereafter
|
|
|
1,464
|
|
|
|
$
|
6,163
|
|
11
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
As most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
NOTE 7 – EQUITY
Common Stock
The Company issued the following shares of common stock during the nine month period ended September 28, 2019:
Shares issued to/for:
|
|
Number of Common Shares Issued
|
|
|
Fair Value of
Shares Issued
|
|
|
Fair Value at Issuance
(minimum and maximum per share)
|
|
Equity raise
|
|
|
3,331,280
|
|
|
$
|
5,515
|
|
|
$
|
1.40
|
|
|
$
|
2.00
|
|
Consultants
|
|
|
6,000
|
|
|
|
10
|
|
|
|
1.56
|
|
|
|
1.56
|
|
Board and Committee members
|
|
|
16,800
|
|
|
|
28
|
|
|
|
1.58
|
|
|
|
1.79
|
|
|
|
|
3,354,080
|
|
|
$
|
5,553
|
|
|
|
|
|
|
|
|
|
The Company issued the following shares of common stock during the nine month period ended September 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to/for:
|
|
Number of Common Shares Issued
|
|
|
Fair Value of
Shares Issued
|
|
|
Fair Value at Issuance
(minimum and maximum per share)
|
|
At-the-Market Facility
|
|
|
726,821
|
|
|
$
|
2,286
|
|
|
$
|
1.61
|
|
|
$
|
3.59
|
|
Jackson Investment Group
|
|
|
192,000
|
|
|
|
371
|
|
|
|
1.93
|
|
|
|
1.93
|
|
Employees
|
|
|
125,000
|
|
|
|
199
|
|
|
|
1.54
|
|
|
|
1.61
|
|
Consultants
|
|
|
19,383
|
|
|
|
55
|
|
|
|
1.40
|
|
|
|
3.42
|
|
Acquisition
|
|
|
15,000
|
|
|
|
21
|
|
|
|
1.38
|
|
|
|
1.38
|
|
Board and Committee members
|
|
|
15,400
|
|
|
|
32
|
|
|
|
1.40
|
|
|
|
3.25
|
|
Reverse stock split (rounding up shares)
|
|
|
426
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,094,030
|
|
|
$
|
2,964
|
|
|
|
|
|
|
|
|
|
Restricted Shares
The Company has issued shares to employees and board and committee members under its 2015 Omnibus Incentive Plan and 2016 Omnibus Incentive Plan. Under these plans, the shares are restricted for a period of three years from issuance. As of September 28, 2019, the Company has a total of 495,690 shares issued to employees and Board and committee members that remain restricted. In accordance with ASC 718, Compensation – Stock Compensation, the Company recognizes stock based compensation from restricted stock based upon the fair value of the award at issuance over the vesting term on a straight-line basis. The fair value of the award is calculated by multiplying the number of restricted shares by the Company’s stock price on the date of issuance. The impact of forfeitures has historically been immaterial to the financial statements. The Company recorded compensation expense associated with these restricted shares of $132, $407, $248 and $728, for the periods ended Q3 2019, Q3 2019 YTD, Q3 2018 and Q3 2018 YTD, respectively.
Stock Options
The Company recorded share based payment expense of $7, $43, $33 and $168 for the periods ended Q3 2019, Q3 2019 YTD, Q3 2018 and Q3 2018 YTD, respectively.
Convertible Preferred Shares
Series A Preferred Stock – Related Party
In the periods ended Q3 2019, Q3 2019 YTD, Q3 2018 and Q3 2018 YTD, the Company paid $50, $150, $50 and $150, respectively, in dividends to its Series A preferred stock holders. The Company did not have any Series A dividends payable to preferred stock holders at the end of Q3 2019 YTD and Q3 2018 YTD.
12
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Series E Preferred Stock - Related Party
The Series E Preferred Stock ranks senior to common stock and any other series or classes of preferred stock now or after issued or outstanding with respect to dividend rights and rights on liquidation, winding up and dissolution. Each share of Series E Preferred Stock is initially convertible into 561.8 shares of our common stock at any time after October 31, 2020 or the occurrence of a Preferred Default. A holder of Series E Preferred Stock is not required to pay any additional consideration in exchange for conversion of such Series E Preferred Stock into our common stock. Series E Preferred Stock is redeemable by the Company at any time at a price per share equal to the stated value ($1,000 per share) plus all accrued and unpaid dividends thereon. While the Series E Preferred Stock is outstanding, the Company is required to use the proceeds of any sales of equity securities, exclusively to redeem any outstanding shares of Series E Preferred Stock, except that the Company is permitted to use up to an aggregate of $3,000 of the gross proceeds from any equity offering completed on or before November 15, 2019 for working capital purposes.
On January 22, 2019, the Company completed a registered direct offering of 387,500 common stock that generated $775 in gross proceeds that were used for working capital purposes. On February 12, 2019, the Company closed its previously announced firm commitment underwritten public offering in which, pursuant to an underwriting agreement between the Company and the underwriter, dated as of February 8, 2019, the Company issued and sold 2,425,000 shares of its common stock, at a public offering price of $1.65 per share. Notwithstanding the terms of the certificate of designations for Series E Preferred Stock, Jackson, the holder our outstanding shares of Series E Preferred Stock, did not require us to use the proceeds from our recent offerings in excess of $3,000 to redeem outstanding shares of the Series E Preferred Stock. Instead, we used such excess proceeds to make a terminal payment to the sellers of FirstPro Inc. in final settlement of all deferred consideration due under our asset purchase agreement with such sellers.
As of September 28, 2019, 7,303,371 shares and 341,566 of common stock were issuable upon the potential conversion of Series E Preferred Stock and Series E-1 Preferred Stock, respectively. Due to the contingent nature of the cash redemption feature of the Series E-1 Preferred Stock, the Company classified the shares as mezzanine equity on the consolidated balance sheets.
In the period ended Q3 2019, the Company paid $975 in dividends to its Series E preferred stock holders.
Warrants
The Company had accounted for certain warrants issued to Jackson as a liability under ASC 815-40 due to certain anti-dilution protection provisions. The warrants issued to Jackson are considered to be Level 3 liabilities under ASC 820. On April 25, 2018, the Company and Jackson amended the warrant to remove the anti-dilution clauses. No economic terms were adjusted. These clauses were the basis for recording the warrants as a liability. Therefore, upon execution of this amendment, the Company recorded a mark-to-market gain and reclass the remaining liability to Additional paid-in capital. The Company recorded a change in fair value of the warrant liability of $0 and $879 in Q3 2018 and Q3 2018 YTD, respectively, using Black-Scholes valuation model.
2019 Long-Term Incentive Plan
In January 2019, the Company’s Board approved the 2019 Long-Term Incentive Plan (the “2019 LTIP”).
The Board granted 380,000 units to adequately motivate the participants and drive performance for the period.
Units vest upon the following:
|
•
|
50% upon the employee being in good standing on December 31, 2020; and,
|
|
•
|
50% upon the average share price of the Company’s common stock during the 90-day period leading up to December 31, 2020, based upon the following Vesting Rate table:
|
|
|
Average 2019 Price
|
Vesting Rate
|
<$8 per share
|
0
|
>$8 per share
|
Pro-rated
|
>=$12 per share
|
Full Vesting
|
13
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The Company performed a valuation of these units and determined them to be valued at $519 using a combination of Black-Sholes and Monte Carlo valuation models. The Company recorded share based expense of approximately $72 and $161 in Q3 2019 and Q3 2019 YTD in connection with these awards.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Earn-out Liabilities and Stock Value Guarantees
Pursuant to the acquisition of CBS Butler on September 15, 2017, the purchase price includes an earn-out payment of up to £4,214 (payable in December 2018, based upon CBS Butler’s operating performance during the period September 1, 2017 through August 31, 2018) and deferred consideration of £150 less the aggregate amount of any net asset shortfall amount, if any, as determined pursuant to the acquisition agreements for the acquisition of CBS Butler. In September 2018, the Company paid the deferred consideration of £150 ($195).
While the Company had recognized the liability for the contingent earn-out due the sellers of CBS Butler within current liabilities as of December 29, 2018, in March 2019 the Company filed a warranty claim against the sellers asserting certain misrepresentations for an amount which approximates the contingent earn-out. In April 2019, the sellers of CBS Butler responded denying the Company’s warranty claim and asserting that the earn-out amount is due. On July 5, 2019, the Company entered into a settlement agreement with the selling shareholders of CBS Butler for the full and final satisfaction of claims in exchange for a payment of approximately £2,150 by the Company to the CBS Butler shareholders. The payment was due no later than July 26, 2019. The Company did not make the payment on July 26, 2019, as such the parties agreed to adjust the amount payable to £2,500. The Company paid this in full on August 30, 2019 and recorded a gain of approximately £894 ($1,138) on final settlement. The Company used the proceeds from the term note entered into with Jackson on August 29, 2019 for $2,538, to satisfy this obligation.
Pursuant to the acquisition of FirstPro Inc., on September 15, 2017, the purchase price includes deferred quarterly installments of $75 beginning on October 1, 2017, and $2,675 is payable annually in three equal installments beginning on September 15, 2018. On March 1, 2019, the Company paid $1,125 in full satisfaction of the remaining liability, recognizing a gain of $847.
Pursuant to the acquisition of CML on June 28, 2018, the purchase price includes an earnout payment of up to £500 to be paid on or around December 28, 2019; and deferred consideration of £350, the amount to be calculated and paid pursuant to the Share Purchase Agreement, on or around June 28, 2019. The Company paid deferred consideration of £350 ($444) on June 26, 2019.
Pursuant to the acquisition of Key Resources Inc. (“KRI”) on August 27, 2018, the purchase price includes earnout consideration payable to the seller of $2,027 each on August 27, 2019 and August 27, 2020. The payment of the earnout consideration is contingent on KRI’s achievement of certain trailing gross profit amounts. On September 11, 2019, the Company entered into an amended agreement with the seller to delay the payment of the first year earnout of $2,027 until no later than February 27, 2020. For each full calendar month beyond August 27, 2019, that such payment is delayed, the Company shall pay the seller interest in the amount of $10 with the first such payment of interest due on September 30, 2019. In addition, the amended agreement was further amended to change the due date for the second year earnout payment of $2,027 from August 27, 2020 to February 27, 2020. The Company paid interest of $10 in September 2019.
14
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 9 – SEGMENTS
The Company generated revenue and gross profit by segment as follows:
|
|
Q3 2019
|
|
|
Q3 2018
|
|
|
Q3 2019 YTD
|
|
|
Q3 2018 YTD
|
|
Commercial Staffing - US
|
|
$
|
31,644
|
|
|
$
|
28,496
|
|
|
$
|
94,280
|
|
|
$
|
73,441
|
|
Professional Staffing - US
|
|
|
9,387
|
|
|
|
11,301
|
|
|
|
28,449
|
|
|
|
40,034
|
|
Professional Staffing - UK
|
|
|
26,289
|
|
|
|
31,520
|
|
|
|
91,915
|
|
|
|
73,360
|
|
Total Revenue
|
|
$
|
67,320
|
|
|
$
|
71,317
|
|
|
$
|
214,644
|
|
|
$
|
186,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
$
|
5,107
|
|
|
$
|
4,463
|
|
|
$
|
14,823
|
|
|
$
|
12,278
|
|
Professional Staffing - US
|
|
|
3,701
|
|
|
|
4,069
|
|
|
|
10,904
|
|
|
|
12,268
|
|
Professional Staffing - UK
|
|
|
3,677
|
|
|
|
3,964
|
|
|
|
10,968
|
|
|
|
11,413
|
|
Total Gross Profit
|
|
$
|
12,485
|
|
|
$
|
12,496
|
|
|
$
|
36,695
|
|
|
$
|
35,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(11,361
|
)
|
|
$
|
(11,097
|
)
|
|
$
|
(32,552
|
)
|
|
$
|
(33,315
|
)
|
Depreciation and amortization
|
|
|
(867
|
)
|
|
|
(741
|
)
|
|
|
(2,621
|
)
|
|
|
(2,251
|
)
|
Interest expense and amortization of debt discount and deferred financing costs
|
|
|
(2,059
|
)
|
|
|
(2,435
|
)
|
|
|
(5,977
|
)
|
|
|
(6,578
|
)
|
Gain in fair value of warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
879
|
|
Re-measurement loss on intercompany note
|
|
|
(467
|
)
|
|
|
(186
|
)
|
|
|
(484
|
)
|
|
|
(332
|
)
|
Gain on sale of business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
238
|
|
Gain on settlement of deferred consideration
|
|
|
1,138
|
|
|
|
—
|
|
|
|
1,985
|
|
|
|
—
|
|
Other income, net
|
|
|
51
|
|
|
|
(14
|
)
|
|
|
308
|
|
|
|
227
|
|
Loss Before Provision for Income Tax
|
|
$
|
(1,080
|
)
|
|
$
|
(1,977
|
)
|
|
$
|
(2,646
|
)
|
|
$
|
(5,173
|
)
|
15
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The following table disaggregates revenues by segments:
|
|
Q3 2019
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
|
Professional Staffing - US
|
|
|
Professional Staffing - UK
|
|
|
Total
|
|
Permanent Revenue
|
|
$
|
104
|
|
|
$
|
1,953
|
|
|
$
|
1,442
|
|
|
$
|
3,499
|
|
Temporary Revenue
|
|
|
31,540
|
|
|
|
7,434
|
|
|
|
24,847
|
|
|
|
63,821
|
|
Total
|
|
$
|
31,644
|
|
|
$
|
9,387
|
|
|
$
|
26,289
|
|
|
$
|
67,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2018
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
|
Professional Staffing - US
|
|
|
Professional Staffing - UK
|
|
|
Total
|
|
Permanent Revenue
|
|
$
|
13
|
|
|
$
|
1,714
|
|
|
$
|
907
|
|
|
$
|
2,634
|
|
Temporary Revenue
|
|
|
28,483
|
|
|
|
9,587
|
|
|
|
30,613
|
|
|
|
68,683
|
|
Total
|
|
$
|
28,496
|
|
|
$
|
11,301
|
|
|
$
|
31,520
|
|
|
$
|
71,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2019 YTD
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
|
Professional Staffing - US
|
|
|
Professional Staffing - UK
|
|
|
Total
|
|
Permanent Revenue
|
|
$
|
201
|
|
|
$
|
5,430
|
|
|
$
|
3,204
|
|
|
$
|
8,835
|
|
Temporary Revenue
|
|
|
94,079
|
|
|
|
23,019
|
|
|
|
88,711
|
|
|
|
205,809
|
|
Total
|
|
$
|
94,280
|
|
|
$
|
28,449
|
|
|
$
|
91,915
|
|
|
$
|
214,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2018 YTD
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
|
Professional Staffing - US
|
|
|
Professional Staffing - UK
|
|
|
Total
|
|
Permanent Revenue
|
|
$
|
128
|
|
|
$
|
4,887
|
|
|
$
|
3,302
|
|
|
$
|
8,317
|
|
Temporary Revenue
|
|
|
73,313
|
|
|
|
35,147
|
|
|
|
70,058
|
|
|
|
178,518
|
|
Total
|
|
$
|
73,441
|
|
|
$
|
40,034
|
|
|
$
|
73,360
|
|
|
$
|
186,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 28, 2019 and December 29, 2018, the Company has assets in the U.S., the U.K. and Canada as follows:
|
|
September 28,
|
|
|
December 29,
|
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
75,239
|
|
|
$
|
70,267
|
|
United Kingdom
|
|
|
22,201
|
|
|
|
26,170
|
|
Total Assets
|
|
$
|
97,440
|
|
|
$
|
96,437
|
|
NOTE 10 – ACQUISITIONS
The following unaudited pro forma consolidated results of operations have been prepared, as if the acquisition of KRI and CML were acquired on January 1, 2017.
|
|
Q3 2018
|
|
|
Q3 2018 YTD
|
|
Revenues
|
|
$
|
76,749
|
|
|
$
|
234,001
|
|
Net loss from continuing operations
|
|
|
(2,269
|
)
|
|
|
(5,392
|
)
|
Included in revenues for Q3 2018 and Q3 2018 YTD, is $0 and $7,653 associated with PeopleServe Inc., which was disposed in June 2018.
16
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 11 – OTHER RELATED PARTY TRANSACTIONS
In addition to the Series E and Series E-1 Preferred Shares and notes issued to Jackson, the following are other related party transactions:
Board and Committee Members
The Company had the following activity with its Board and Committee Members:
|
Q3 2019
|
|
|
Q3 2018
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
Dimitri Villard
|
$
|
19
|
|
|
|
1,400
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
19
|
|
|
|
1,400
|
|
|
$
|
2
|
|
|
$
|
22
|
|
Jeff Grout
|
|
19
|
|
|
|
1,400
|
|
|
|
2
|
|
|
|
8
|
|
|
|
19
|
|
|
|
1,400
|
|
|
|
2
|
|
|
|
22
|
|
Nick Florio
|
|
19
|
|
|
|
1,400
|
|
|
|
2
|
|
|
|
8
|
|
|
|
19
|
|
|
|
1,400
|
|
|
|
2
|
|
|
|
22
|
|
Alicia Barker
|
|
—
|
|
|
|
1,400
|
|
|
|
2
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1,400
|
|
|
|
2
|
|
|
|
—
|
|
|
$
|
57
|
|
|
|
5,600
|
|
|
$
|
8
|
|
|
$
|
25
|
|
|
$
|
57
|
|
|
|
5,600
|
|
|
$
|
8
|
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2019 YTD
|
|
|
Q3 2018 YTD
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
Dimitri Villard
|
$
|
56
|
|
|
|
4,200
|
|
|
$
|
7
|
|
|
$
|
23
|
|
|
$
|
56
|
|
|
|
4,200
|
|
|
$
|
9
|
|
|
$
|
62
|
|
Jeff Grout
|
|
56
|
|
|
|
4,200
|
|
|
|
7
|
|
|
|
23
|
|
|
|
56
|
|
|
|
4,200
|
|
|
|
9
|
|
|
|
62
|
|
Nick Florio
|
|
56
|
|
|
|
4,200
|
|
|
|
7
|
|
|
|
23
|
|
|
|
56
|
|
|
|
4,200
|
|
|
|
9
|
|
|
|
62
|
|
Alicia Barker
|
|
-
|
|
|
|
4,200
|
|
|
|
7
|
|
|
|
3
|
|
|
|
19
|
|
|
|
2,800
|
|
|
|
4
|
|
|
|
-
|
|
|
$
|
168
|
|
|
|
16,800
|
|
|
$
|
28
|
|
|
$
|
72
|
|
|
$
|
187
|
|
|
|
15,400
|
|
|
$
|
31
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Briand Separation Agreement
Matthew Briand, the Company’s former employee, board member and officer, resigned from his positions with the Company and subsidiaries. The Company entered into an agreement (the “Briand Separation Agreement”) with Mr. Briand dated December 21, 2017, with an effective date (“Separation Date”) of January 31, 2018, pursuant to which Mr. Briand may provide advisory services, if requested by the Company, through the effective date. The Company paid approximately $190 in Q3 2019 YTD to Mr. Briand in full settlement of his separation agreement.
The Faiman Separation Agreement
On September 11, 2019, David Faiman, the Company’s Chief Financial Officer, and the Company entered into an agreement whereby Mr. Faiman agreed to transition his position and responsibilities with the Company (“Faiman Separation Agreement”), and Mr. Faiman’s Employment Agreement, dated February 5, 2016, was terminated.
Under the terms of the Faiman Separation Agreement, Mr. Faiman will continue as the Company’s Chief Financial Officer, including acting as the Company’s principal financial officer, for a period lasting until the earlier of (i) December 31, 2019 and (ii) either (a) such date that is a reasonable time, as determined by the Company, prior to the commencement of a new position by Mr. Faiman, or (b) upon the Company’s termination of Mr. Faiman’s obligation to provide transition services for Cause.
Pursuant to the Faiman Separation Agreement, Mr. Faiman will be entitled to receive, among other things, (i) pay in an amount equal to his base salary through the separation date, payable in equal installments in accordance with the Company’s normal payroll policies, (ii) continuation of Mr. Faiman’s current Company-sponsored employee benefits through the separation date, (iii) accelerated vesting of any outstanding equity awards held by Mr. Faiman and the elimination of any obligations to forfeit such awards upon the termination of Mr. Faiman’s employment (provided that no award shall be extended beyond its original term) and (iv) a positive reference from the management of the Company.
17
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
In exchange for the consideration described above, Mr. Faiman granted a general release of claims in favor of the Company covering the period leading up to, and including, the date of the Separation Agreement. The Separation Agreement provides that, following the Separation Date and subject to Mr. Faiman executing another general release of claims in favor of the Company covering any claims leading up to, and including, the Separation Date, Mr. Faiman will also be entitled to additional consideration of, among other things, (i) severance in an amount equal to Mr. Faiman’s annual base salary for six (6) months, payable in equal installments in accordance with the Company’s normal payroll policies, and (ii) coverage under COBRA, payable directly by the Company, for all health insurance plan benefits to which Mr. Faiman was entitled prior to the Separation Date for a six (6) month period.
NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION
|
|
Q3 2019 YTD
|
|
|
Q3 2018 YTD
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,494
|
|
|
$
|
4,775
|
|
Income taxes
|
|
|
146
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Deferred purchase price of UK factoring facility
|
|
$
|
10,833
|
|
|
$
|
8,418
|
|
Shares issued in connection with acquisition of business
|
|
|
—
|
|
|
|
21
|
|
Shares issued in connection with Jackson term loan
|
|
|
—
|
|
|
|
371
|
|
Warrants issued in connection with Jackson term loan
|
|
|
—
|
|
|
|
682
|
|
18