The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
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 (“Golden Fork”), which changed its name to Staffing 360 Solutions, Inc., ticker symbol “STAF”, on March 16, 2012.
The Company effected a one-for-ten reverse stock split on September 17, 2015. Following the reverse split, the Company’s issued and outstanding shares of Common Stock decreased from 45,732,674 to 4,573,360. All share and per share information in these consolidated financial statements have been retroactively adjusted to reflect this reverse stock split.
Discontinued Operations
On February 27, 2015, the Company entered into a Stock Purchase Agreement to sell Cyber 360, Inc. (“Cyber 360”) to former owners of The Revolution Group with an effective date of January 1, 2015 for an aggregate purchase price of $1.00 (whole dollars) and the settlement of the remaining earn-out obligation under the original purchase agreement. In connection with the sale, all agreements executed in connection with the original acquisition of Cyber 360’s business and all obligations thereunder, except as set forth below, were terminated. As a result of the sale, the Company no longer owns Cyber 360, Inc.
In connection with the sale and in full settlement of the remaining earn-out obligations, the Company issued 113,405 shares of the Company’s common stock with a fair value of $3.00 per share.
In accordance with Accounting Standards Codification (“ASC”) 205-20 “Discontinued Operations”, the results of the discontinued business have been presented as discontinued operations for the fiscal year ended May 31, 2015. The operational results of Cyber 360 are presented in the “Net loss from discontinued operations” line item on the fiscal 2015 Consolidated Statements of Operations.
Revenue, operating loss, and net loss from discontinued operations were as follows:
|
|
For the Years Ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
1,936
|
|
Operating loss
|
|
$
|
—
|
|
|
$
|
(44
|
)
|
Net loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(47
|
)
|
The accompanying consolidated financial statements have been prepared on a going concern basis which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. As of May 31, 2016, the Company had a working capital deficiency of $16,559, an accumulated deficit of $44,121, for the year ended May 31, 2016 a net loss of $9,485, and, as of the date these financial statements are issued, the Company has approximately
$9.3 million associated with long term debt and other amortizing obligations,
due in the next 12 months. In addition, subsequent to year end, the Company received an unfavorable ruling in the matter of
Staffing 360 Solutions, Inc. v. Former Officers of Staffing 360 Solutions, Inc., resulting in the Company having to accrue $1,313 as of May 31, 2016. The timing of payment of this loss is awaiting determination by the arbitrator in the matter but is expected to be due within in a few months.
The Company’s projected cash flows from operations for the same period are not sufficient to address these obligations in the normal course. As a result, the Company will need to seek additional funding through capital raises to meet some of these short term obligations.
Management’s plan to continue as a going concern includes raising capital in the form of debt or equity, increased gross profit from organic revenue growth and managing and reducing operating and overhead costs
. As of the date of these financial statements are being issued, the Company has received a memorandum of understanding and is in discussions with one investor for capital that would be at least sufficient to meet all of the obligations discussed above. In addition, the Company has the ability to raise additional capital through private investments.
However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon the management’s ability to successfully secure additional sources of financing and increased profitable operations.
Management also cannot provide any assurance that unforeseen
F-8
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
circumstances that could occur at any time within the next twelve months or t
hereafter will not increase the need for the Company to raise additional capital on an immediate basis.
However, based upon an evaluation of the Company’s continued growth trajectory, past success in raising capital and meetings its obligations as well as its plans for raising capital discussed above, management believes that the Company is a going concern.
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.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. As described below, the Company consolidates PeopleSERVE PRS, Inc. (“PRS”), an entity of which it previously owned 49%, since the Company was deemed to be the primary beneficiary of this entity. All inter-company transactions have been eliminated. On April 29, 2016, the Company acquired the remaining 51% for $101.
Variable Interest Entities
On May 17, 2014, the Company purchased 49% of the issued and outstanding common stock of PRS. At the date of acquisition, we concluded that Staffing 360 is the primary beneficiary of PRS's results as it would have effective control over the operations of PRS, similarly to PeopleSERVE, Inc. (“PSI”), and expected to absorb the majority of PRS’ expected losses and expected residual returns. Accordingly, the Company consolidated the results of PRS. In April 2016, the Company acquired the remaining 51% for $101. As a result, as of May 31, 2016, PRS is no longer a variable interest entity.
As of May 31, 2015, the total assets and liabilities of PRS are $2,531 and $1,610, respectively.
The total revenue and expenses for the year ended May 31, 2015 are $11,177 and $10,254, respectively.
Non-controlling interest in PRS was recorded in accordance with the provisions of Accounting Standards Codification (“ASC”) 810 “Consolidation”, and reported as a component of equity, separate from the parent company’s equity. As a result of the acquisition of the remaining 51%, PRS, the Company will no longer report non-controlling interest for PRS.
On April 29, 2016, the Company entered into an Agreement whereby it purchased the remaining 51% of ownership of PRS. The purchase was recorded in the consolidated balance sheet as a $981 increase in paid in capital and a $1,082 reduction in non-controlling interest. On the date of the Agreement, the Company paid cash of $101 to the PRS shareholder. Upon payment and as of May 31, 2016, the Company now owns 100% of PRS.
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. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe 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 us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. Significant estimates for the years ended May 31, 2016 and 2015, respectively, include the valuation of intangible assets, including goodwill, liabilities associated with earn-out obligations and testing our long-lived assets for impairment.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
F-9
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
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.
Advertising Costs
Costs for advertising are expensed when incurred. Advertising expenses for the Company are not material.
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 develop 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.
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. The Company had no cash equivalents at May 31, 2016 or 2015.
Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after all efforts to collect have been exhausted. At May 31, 2016 and 2015, the Company had an allowance for doubtful accounts of $382 and $270, respectively.
Income Taxes
The Company is governed by the Income Tax Law of the United States. The Company utilizes 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
F-10
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
The Company applied 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 United Kingdom and Canadian domiciled entities file separate tax returns in their respective jurisdictions.
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 financing are deferred and amortized on a straight-line basis over the term of the related loan.
Business Combinations
In accordance with Accounting Standards Codification 805, "Business Combinations" ("ASC 805") 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 “Fair Value Measurements and Disclosures” 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 “Fair Value Measurements and Disclosures” 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.
|
The Company did not have any Level 2 or Level 3 assets or liabilities as of May 31, 2016 or 2015, with the exception of its convertible notes payable, promissory notes and bonds payable.
F-11
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Cash is considered to be highly liquid and easily tradable as of May 31, 2016 and 2015 and therefore classified as Level 1
within our fair value hierarchy.
ASC 825-10-25, “Fair Value Option” expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over the estimated useful lives for each category as follows:
|
|
|
Computers
|
3-5 years
|
|
Computer equipment
|
3-5 years
|
|
Network equipment
|
3-5 years
|
|
Software
|
3-5 years
|
|
Office equipment
|
3-7 years
|
|
Furniture and fixtures
|
3-7 years
|
|
Leasehold improvements
|
3-5 years
|
|
Amortization of leasehold improvements is computed using the straight-line method over the shorter of the life of the lease or the estimated useful life of the assets. Maintenance and repairs are charged to expense as incurred. Major improvements are capitalized.
At the time of retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in Other income/ (expense).
Long-Lived Assets
In accordance with ASC 360 - Property, Plant, and Equipment (“ASC 360”), the Company periodically reviews its long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount. The amount of impairment is measured as the difference between the estimated fair value and the book value of the underlying asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350-30-35-4, “requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt”. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. There were no impairments recorded for the periods presented.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with accounting standards for “Accounting for Derivative Instruments and Hedging Activities.”
Accounting standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the
F-12
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value report
ed in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is de
emed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts (“OID”) under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control and could require net cash settlement, then the contract shall be classified as an asset or a liability.
Stock-Based Compensation
The Company accounts for stock-based instruments issued to employees in accordance with ASC Topic 718, which requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. The Company accounts for non-employee share-based awards in accordance with ASC Topic 505-50.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consisted of cumulative foreign currency translation adjustments at both May 31, 2016 and 2015.
Reclassifications
Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no impact on reported results of operations.
Recent Accounting Pronouncements
In March 2016, the
Financial Accounting Standards Board (“FASB”)
issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively depending on the amendment(s) applied.
The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. 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 Company is currently evaluating the impact of adopting this guidance.
F-13
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
In January 2016, the FASB issued ASU 2016-01, which amends the guidance relating to the
classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financi
al instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal year
s and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effect
ive. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluati
ng the impact of adopting this guidance.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement–Period Adjustments”. Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact of adopting this guidance.
In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)”. The amendments in this ASU defer the effective date of ASU 2014-09 “Revenue From Contracts With Customers (Topic 606)”. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.
In April 2015, the FASB issued ASU 2015-03, “Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability, consistent with the presentation of a debt discount. This amendment is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this new guidance but at this time does not expect it to have a material impact on the Company’s consolidated financial statements.
F-14
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 3 –
EARNINGS (LOSS) PER COMMON SHARE
The Company utilizes the guidance per ASC 260, “Earnings per Share”. Basic earnings per share are calculated by dividing income available to stockholders by the weighted average number of common stock shares outstanding during each period. 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 share equivalents consist of common shares issuable upon the conversion of preferred stock, convertible notes 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 May 31, 2016 and 2015 have been excluded from the per share computations, since its inclusion would be anti-dilutive:
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible bonds - Series A
|
|
|
—
|
|
|
|
19,376
|
|
Convertible bonds - Series B
|
|
|
5,582
|
|
|
|
83,433
|
|
Convertible promissory notes
|
|
|
1,761,380
|
|
|
|
64,137
|
|
Convertible preferred shares
|
|
|
524,630
|
|
|
|
216,191
|
|
Warrants
|
|
|
83,764
|
|
|
|
1,245,903
|
|
Options
|
|
|
320,500
|
|
|
|
337,500
|
|
Total
|
|
|
2,695,856
|
|
|
|
1,966,540
|
|
NOTE 4 –
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Computer software
|
|
$
|
90
|
|
|
$
|
139
|
|
Office equipment
|
|
|
33
|
|
|
|
30
|
|
Computer equipment
|
|
|
546
|
|
|
|
313
|
|
Furniture and fixtures
|
|
|
224
|
|
|
|
185
|
|
Leasehold improvements
|
|
|
456
|
|
|
|
76
|
|
Total cost
|
|
|
1,349
|
|
|
|
743
|
|
Accumulated depreciation
|
|
|
(469
|
)
|
|
|
(237
|
)
|
Total
|
|
$
|
880
|
|
|
$
|
506
|
|
Depreciation expense for the years ended May 31, 2016 and 2015 was $232 and $158 respectively. In addition, the Company wrote off fixed assets totaling $49 and $46 for the years ended May 31, 2016 and 2015, respectively.
NOTE 5 –
OTHER NON-CURRENT ASSETS
The following provides a breakdown of other non-current assets:
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Surety bond
|
|
$
|
1,405
|
|
|
$
|
—
|
|
Investment in captive insurance entity
|
|
|
2,378
|
|
|
|
1,799
|
|
Other non-current assets
|
|
|
163
|
|
|
|
105
|
|
Total
|
|
$
|
3,946
|
|
|
$
|
1,904
|
|
F-15
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 6 –
IDENTIFIABLE INTANGIBLE ASSETS
The following provides a breakdown of identifiable intangible assets as of:
|
|
May 31, 2016
|
|
|
|
Tradenames
|
|
|
Non-Compete
|
|
|
Customer Relationships
|
|
|
Total
|
|
Gross balance
|
|
$
|
6,289
|
|
|
$
|
2,368
|
|
|
$
|
9,890
|
|
|
$
|
18,547
|
|
Accumulated impairment losses
|
|
|
(311
|
)
|
|
|
(142
|
)
|
|
|
(1,084
|
)
|
|
|
(1,537
|
)
|
Accumulated amortization
|
|
|
(1,241
|
)
|
|
|
(1,345
|
)
|
|
|
(3,683
|
)
|
|
|
(6,269
|
)
|
Net balance
|
|
$
|
4,737
|
|
|
$
|
881
|
|
|
$
|
5,123
|
|
|
$
|
10,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2015
|
|
|
|
Tradenames
|
|
|
Non-Compete
|
|
|
Customer Relationships
|
|
|
Total
|
|
Gross balance
|
|
$
|
5,892
|
|
|
$
|
2,368
|
|
|
$
|
7,483
|
|
|
$
|
15,743
|
|
Accumulated impairment losses
|
|
|
(311
|
)
|
|
|
(142
|
)
|
|
|
(1,084
|
)
|
|
|
(1,537
|
)
|
Accumulated amortization
|
|
|
(666
|
)
|
|
|
(801
|
)
|
|
|
(2,170
|
)
|
|
|
(3,637
|
)
|
Net balance
|
|
$
|
4,915
|
|
|
$
|
1,425
|
|
|
$
|
4,229
|
|
|
$
|
10,569
|
|
The weighted average useful life remaining of identifiable intangible assets remaining is 7.3 years.
Amortization of identifiable intangible assets for the years ended May 31, 2016 and 2015 was $2,632 and $2,553 respectively.
As of May 31, 2016, estimated annual amortization expense for each of the next five fiscal years is as follows:
Year ended May 31,
|
|
Amount
|
|
2017
|
|
$
|
2,728
|
|
2018
|
|
|
2,085
|
|
2019
|
|
|
629
|
|
2020
|
|
|
629
|
|
2021
|
|
|
629
|
|
Thereafter
|
|
|
4,041
|
|
Total
|
|
$
|
10,741
|
|
NOTE 7 –
GOODWILL
The following table provides a roll forward of goodwill:
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance, gross
|
|
$
|
9,688
|
|
|
$
|
9,607
|
|
Accumulated impairment losses
|
|
|
(1,288
|
)
|
|
|
(1,288
|
)
|
Beginning balance, net
|
|
|
8,400
|
|
|
|
8,319
|
|
Acquisitions
|
|
|
6,433
|
|
|
|
—
|
|
Purchase accounting adjustment
|
|
|
—
|
|
|
|
81
|
|
Ending balance
|
|
$
|
14,833
|
|
|
$
|
8,400
|
|
F-16
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 8 –
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
The following provides a breakdown of accounts payable and accrued expenses:
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts payable
|
|
$
|
5,530
|
|
|
$
|
3,816
|
|
Accrued payroll, taxes and bonuses
|
|
|
6,218
|
|
|
|
4,016
|
|
Other accrued expenses
|
|
|
5,847
|
|
|
|
3,450
|
|
Total
|
|
$
|
17,595
|
|
|
$
|
11,282
|
|
NOTE 9 –
ACCOUNTS RECEIVABLE FINANCING
In November 2013 CSI entered into a financing services agreement by which it assigns accounts receivable to fund working capital with Sterling National Bank (“Sterling”). Pursuant to this agreement, Sterling may advance up to 90% of the face value of eligible accounts receivable. The borrowings carry interest at a rate of 0.025% per day, or 9.0% per annum, from the date of the advance until the date of repayment. There is no ending date to the agreement, only a closing fee of $500 (whole dollars) upon termination.
In February 2014, Staffing U.K. entered into an agreement with ABN AMRO Commercial Finance PLC (“ABN AMRO”) under which it borrows money against open accounts receivable. Under this agreement, the Borrower may receive advances of up to 90% on temporary placements and 75% on permanent placements of the face value of eligible receivables. The borrowings carried interest at a rate of 2.50% above the Sterling Libor rate of 3.90%. The aggregate limit is £1,250, which is cross guaranteed by all of the U.K. subsidiaries and backed by all of the assets of the U.K. entities.
On November 5, 2015, an amendment to the existing agreement with ABN AMRO was entered into, raising the limit on the line from £1.25 million to £3.5 million at a 2.5% interest rate plus the Bank of England base rate of 0.5%. With this new agreement the borrower receives advances of 90% on both temporary and permanent placements of the face value of eligible receivables. Additionally, a two-year term loan was entered into with ABN-AMRO Commercial Finance for £750 to partially fund the acquisition of The JM Group Limited and it bears an interest rate of 3% plus the Bank of England base rate of 0.5%. The new facility and the term loan are cross guaranteed by all of the UK subsidiaries and backed by all of the assets of the UK entities.
Effective November 1, 2012, the Company’s subsidiary, Monroe Staffing Services, LLC (“Monroe”) entered into a $14.0 million line of credit (“Credit and Security Agreement”) with Wells Fargo Bank, NA. The Credit and Security Agreement was subject to certain accounts receivable limitations with interest at one month Libor plus 5.0% on the greater of $5.0 million or the actual loan balance outstanding, and was to expire on October 31, 2015. The Credit and Security Agreement was subject to an annual facility fee, certain covenants and was secured by all of the assets of Monroe.
Effective July 25, 2014, the Company joined with its subsidiaries, Monroe, PSI and PRS, (collectively the “Borrowers”) in an Amended and Restated Credit and Security Agreement and a new Credit and Security Agreement (“Credit Facility”) with Wells Fargo Bank, NA. This Credit Facility increased the line of credit amount from $14.0 million to $15.0 million and modified the covenants to permit, with certain limitations, the transfer of funds amongst the Borrowers. All other terms and conditions remained unchanged. On April 8, 2015, the Company effectively cancelled the Wells Fargo Credit Facility. Associated with this cancellation, the Company paid an early termination fee of $100. The effective rate during the year ended May 31, 2015 was 5.15%. At May 31, 2016 and 2015, the balance outstanding under this Credit Facility was $0.
On April 8, 2015, Monroe and PSI, each a wholly owned subsidiary of Staffing 360 Solutions, Inc., entered into a $22.0 million revolving loan facility with MidCap Funding X Trust (“MidCap”), with the option to increase the amount to up to $47.0 million. On July 13, 2015, in connection with the Company’s acquisition of Lighthouse Placement Services (“Lighthouse”), the $22.0 million revolving loan facility was amended to include Lighthouse and the Company’s existing subsidiary, Faro Recruitment America, Inc., as borrowers. The revolving loan’s term is four years. The interest rate is LIBOR plus 4.0%, with a LIBOR floor of 1.0% per annum. The Company may prepay all or any portion of the balance at any time subject to a prepayment premium of: (i) 2.0% if prepaid in the first year of the loan; and (ii) 1.0% if prepaid thereafter. This loan is secured by a first priority lien in favor of MidCap on all of the Company’s US based assets except for the CSI assets. The Company entered into customary pledge and guaranty agreements to evidence the security interest in favor of MidCap.
F-17
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
On April 8, 2015, PRS entered into a $3.0 million revolving loan facility with MidCap. At the time, the Company he
ld a 49% equity interest in PRS. The revolving loan’s term is four years. The interest rate is LIBOR plus 4.0%, with a LIBOR floor of 1.0% per annum. The Company may prepay all or any portion of the balance at any time subject to a prepayment premium of: (
i) 2.0% if prepaid in the first year of the loan; and (ii) 1.0% if prepaid thereafter. This loan is secured by a first priority lien in favor of MidCap on all of the Company’s US based assets except for the CSI assets. The Company entered into customary pl
edge and guaranty agreements to evidence the security interest in favor of MidCap.
On July 11, 2016, the Company, PRS and MidCap amended the agreements to join the PRS facility with Monroe and PSI’s facility.
The facility provides events of default including: (i) failure to make payment of principal or interest on any MidCap loans when required, (ii) failure to perform obligations under the facility and related documents, (iii) not paying its debts as such debts become due and similar insolvency matters, and (iv) material adverse changes to the Company (subject to a 10-day notice and cure period). Upon an event of default, the Company’s obligations under the credit facility may, or in the event of insolvency or bankruptcy will automatically, be accelerated. Upon the occurrence of any event of default, facility will bear interest at a rate equal to the lesser of: (i) 3.0% above the rate of interest applicable to such obligations immediately prior to the occurrence of the event of default; and (ii) the maximum rate allowable under law.
Under the terms of this agreement, the Company is subject to affirmative covenants which are customary for financings of this type, including: (i) maintain good standing and governmental authorizations, (ii) provide certain information and notices to MidCap, (iii) deliver monthly reports and quarterly financial statements to MidCap, (iv) maintain insurance, (v) discharge all taxes, (vi) protect their intellectual property, and (vii) generally protect the collateral granted to MidCap. The Company is also subject to negative covenants customary for financings of this type, including that it may not: (i) enter into a merger or consolidation or certain change of control events, (ii) incur liens on the collateral, (iii) except for certain permitted acquisitions, acquire any significant assets other than in the ordinary course of business, (iv) assume certain additional senior debt, or (v) amend any of their organizational documents. During the period August 31, 2015 through May 31, 2016, the Company was not in compliance with one or more of the covenants, however, did receive a waiver from MidCap for such covenants during this period. On July 11, 2016, the Company and MidCap amended the agreement and related covenants prospectively.
At May 31, 2016 and 2015, the total outstanding balance of all facilities was $14,729, and $13,016, respectively.
F-18
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 10
–
DEBT
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Bonds:
|
|
|
|
|
|
|
|
|
Bonds - Series A
|
|
$
|
—
|
|
|
$
|
175
|
|
Bonds - Series B
|
|
|
55
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes:
|
|
|
|
|
|
|
|
|
12% Convertible Note
|
|
|
—
|
|
|
|
100
|
|
8% Convertible Note - February 5, 2015
|
|
|
—
|
|
|
|
204
|
|
Non-interest bearing convertible note - June 23, 2015
|
|
|
—
|
|
|
|
—
|
|
Non-interest bearing convertible note - January 6, 2016
|
|
|
359
|
|
|
|
—
|
|
8% Convertible Note - July 8, 2015
|
|
|
3,920
|
|
|
|
—
|
|
8% Convertible Note - February 8, 2016
|
|
|
728
|
|
|
|
—
|
|
Lighthouse #1 - Seller Note
|
|
|
2,124
|
|
|
|
—
|
|
Lighthouse #2 - Seller Note
|
|
|
390
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Promissory Notes:
|
|
|
|
|
|
|
|
|
Sterling National Bank
|
|
|
272
|
|
|
|
52
|
|
The JM Group - Seller Note
|
|
|
—
|
|
|
|
—
|
|
Staffing (UK) - Seller Note
|
|
|
144
|
|
|
|
199
|
|
PeopleServe - Seller Note
|
|
|
789
|
|
|
|
1,578
|
|
Midcap Financial Trust - Term Loan
|
|
|
2,375
|
|
|
|
2,937
|
|
Midcap Financial Trust - Additional Term Loan
|
|
|
1,300
|
|
|
|
700
|
|
ABN AMRO - Term Loan
|
|
|
821
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Less debt discount
|
|
|
(1,414
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
11,863
|
|
|
|
6,754
|
|
|
|
|
|
|
|
|
|
|
Less: Current Portion
|
|
|
(6,741
|
)
|
|
|
(2,934
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
5,122
|
|
|
$
|
3,820
|
|
From April 21, 2014 through May 27, 2014, the Company raised $950 from two accredited investors through the issuance of five short-term, 12% convertible promissory notes. The holders of these notes received an aggregate of 19,000 common stock shares. These notes had varying maturity dates.
During July 2014, the Company amended and restated each of the five aforementioned promissory notes. Other than for $150, which was repaid, the remaining balance of $800 was amended and restated with the same basic terms as the original promissory notes, other than that they became due upon demand. These note holders received either 250 or 500 common stock shares monthly for every $100 loaned. The holders may convert, at their sole election, the principal amount and unpaid interest into common stock shares at $15.00 per share. These notes were paid in full in April 2015.
From May 14, 2014 through May 19, 2014, the Company raised $600 from five accredited investors through the issuance of five short-term 12% convertible promissory notes. These notes were payable upon the earlier of the (i) completion of the Company’s Series A Bond offering, (ii) completion of the Company’s senior debt facility, or (iii) July 12, 2014. These note holders received an aggregate of 12,000 common stock shares. These holders were entitled to convert, at their sole election, the principal amount and any unpaid interest into common stock shares at $15.00 per share. On July 14, 2014, all five of these holders converted principal of $600 into 40,000 common stock shares and accrued interest of $12 into 792 common stock shares.
On May 27, 2014, the Company raised $50 from an accredited investor through the issuance of a short-term 12% convertible promissory note. This note was payable upon the earlier of the (i) completion of the Company’s Series A Bond offering, (ii)
F-19
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
completion of the Company’s senior debt facility, or (iii) July 12, 2014. The note holder received 1,000 common stock shares. The note holder was entitled to convert, at his sole election, the principal amount and any unpaid interest into co
mmon stock shares at $15.00 per share. On July 25, 2014, the Company repaid this note.
On June 22, 2014, the Company raised $100 from an accredited investor through the issuance of a short-term 12% convertible promissory note. This note was payable upon the earlier of the (i) completion of the Series A Bond Offering, (ii) completion of the Company’s senior debt facility, or (iii) eight weeks from the original issuance date. The note holder received 2,000 common stock shares. The holder was entitled to convert, at his sole election, the principal amount and any unpaid interest due under the note into common stock shares at $15.00 per share. The Company recorded a debt discount of $29 and a beneficial conversion feature of $64 for the issuance of the 2,000 common stock shares
.
In August 2014, this note was repaid in full.
Series A Bonds:
On July 29, 2014, the Company completed the Series A bond financing. The Company raised an aggregate of $4,059 from 70 accredited investors and issued an aggregate of 40,585 common stock shares. As part of the Series A Bond offering, the placement agent was entitled to: (i) a fee in cash up to an amount equal to 10% of the aggregate gross proceeds, (ii) a non-accountable expense allowance of up to 2% of the aggregate gross proceeds, and (iii) common stock shares equal to 10% of the aggregate number of common stock shares issued. The placement agent was paid $487 and issued 1,210 common stock shares.
Each Bond Purchaser received additional equity consideration of 500 common stock shares for each $50 investment. Accordingly, the Company issued an aggregate of 40,585 common stock shares to the Bond Purchasers and recorded a debt discount of $662 and beneficial conversion of $1,883. Through May 31, 2015, the debt discount and beneficial conversion feature were fully amortized.
On or about September 10, 2014, the Company offered an early conversion incentive to all outstanding Series A Bonds to convert principal and interest on or prior to the maturity date of October 15, 2014. The conversion terms offered a discount from the original terms of $15.00 per common stock share with no warrants to conversion at $10.00 per common stock share and one warrant exercisable until October 15, 2017 at $20.00 per common stock share for every $2.00 of principal and interest converted. The modification of conversion price from $20.00 to $10.00 resulted in the Company recording a modification expense of $1,977. On October 15, 2014, certain bondholders elected to convert a portion of the outstanding Series A Bonds under the conversion terms totaling $3,529 in principal and $181 in accrued interest into 370,969 common stock shares and 185,486 warrants exercisable at $20.00 per common stock share. The additional modification associated with the inclusion of warrants resulted in the Company recording a modification expense of $951.
On October 15, 2014, the Company agreed with the remaining 10 bond holders to extend the maturity date of the outstanding Convertible Bonds, $530 in principal and $27 in accrued interest. In addition, the Company accelerated the remaining interest expense and recorded $24 of interest expense as part of the restructuring. Eight of these bond holders totaling $430 in principal agreed to extend the maturity to April 15, 2015 in exchange for 4,513 common stock shares, valued at $63. The remaining two bond holders totaling $100 in principal and $7 in accrued interest were repaid in full on December 11, 2014.
On May 11, 2015, the Company agreed with three of the remaining 10 bond holders to extend the maturity date of the outstanding Convertible Bonds, $175 in principal and $16 in accrued interest. The three remaining bond holders agreed to extend the maturity to October 15, 2015 in exchange for 7,382 common stock shares, valued at $48. The remaining seven bond holders totaling $255 in principal and $286 in accrued interest were repaid in full in May 2015.
On November 10, 2015, the Company agreed to amend and extend the maturity date of the bonds to April 15, 2016. The three remaining bond holders agreed to extend the maturity to April 15, 2016 in exchange for 4,375 common stock shares, valued at $244.
During the fiscal years ended May 31, 2016 and 2015, the Company recorded $18 and $202 of interest expense. In addition, t
he Company recorded amortization of debt discount and beneficial conversion feature of $0 and $2,176, respectively.
Through May 31, 2015, the debt discount and beneficial conversion feature were fully amortized.
Net of the remaining unamortized debt discount of $0, the remaining loan balance is $0.
In May 2016, the Series A Bonds were paid in full.
Series B Bonds -
From October 3, 2014 through November 24, 2014, the Company completed multiple closings of its best efforts private offering of 12% Series B Convertible Bonds (“Series B Bonds”) with certain accredited investors. Pursuant to purchase agreements, the Company issued Series B Bonds in the aggregate of $982 to 21 accredited investors.
F-20
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
In addition to the Series B Bonds, each holder received 500 co
mmon stock shares (“Equity Consideration”) for each $50 principal amount of Series B Bond investment. Accordingly, the Company issued an aggregate of 9,815 common stock shares to the holders. As a result, the Company recorded a debt discount of $124 and a
beneficial conversion of $100.
As part of the Series B Bond offering, the placement agent was entitled to: (i) a fee in cash of $88, 9% of the aggregate gross proceeds raised, plus reimbursement of certain expense, (ii) 589 common stock shares equal to 6% of the Equity Consideration issued, and (iii) a three year warrant, exercisable at $20.00 per share, to purchase 2,945 common stock shares with such exercise price subject to certain adjustments.
On or prior to the Maturity Date, September 30, 2015, the holder must notify the Company whether the repayment will be made in cash or in common stock shares of the Company. At the maturity date, if the Series B Bond will be repaid in common stock shares, then the Series B Bond shall be repaid in common stock shares as follows: (i) in the event the Company’s common stock shares are trading at $26.70 or higher based on a 10-Day VWAP immediately prior to the Maturity Date, then the repayment conversion price shall be set at $20.00 per share, or (ii) in the event the Company’s common stock shares are trading below $26.70 based on a 10-Day Volume Weighted Average Price (“VWAP”), then the repayment conversion price shall be set at a 25% discount to the 10-Day VWAP calculated immediately prior to the Maturity Date, provided however, that in no event will the repayment conversion price be less than $15.00. The holders may elect to convert the Series B Bonds, including all unpaid coupon payments, at any time prior to the Maturity Date into common stock shares at a conversion price of $20.00 per share.
On November 13, 2014, the Series B Bond agreement was amended as follows: (i) in the event the Company’s common stock shares are trading at $26.70 or higher based on a 10-Day VWAP immediately prior to the Maturity Date, then the repayment price shall be set at $20.00 per share, or (ii) in the event the Company’s common stock shares are trading below $26.70 based on a 10-Day VWAP, then the repayment price shall be set at a 25% discount to the 10-Day VWAP calculated immediately prior to the Maturity Date, provided however, that in no event will the repayment conversion price be less than $12.00. The purchasers may elect to convert the Series B Bonds, including all accrued but unpaid coupon payments at any time prior to the Maturity Date into common stock shares at a conversion price of $20.00 per share. As a result of the amendment, the Company recorded a modification expense totaling $154.
Effective October 30, 2015, the Company entered into the following amended agreements:
|
|
|
|
·
|
Amendment 1 - Series B Holders owning an aggregate principal amount of $55 in Series B Bonds agreed to extend the Maturity Date of the Series B Bond to March 31, 2016 and decrease the conversion rate and the price of common stock issued as interest payments on the Series B Bonds to $10.00 per share. As consideration for amending the terms of the Series B Bonds, these Series B Holders received 2,500 shares of common stock for each $100 of principal amount of Series B Bond investment. The principal and accrued but unpaid interest will be due on the date of maturity.
|
|
|
|
|
·
|
Amendment 2a - Series B Holders owning an aggregate principal amount of $427 in Series B Bonds agreed to modify the terms of the Series B Bonds to provide that (i) the Company shall make payments on the principal amount of the Series B Bonds in six equal tranches, every month, beginning on December 15, 2015 and (ii) the Company shall pay all accrued interest on the Series B Bonds by December 11, 2015, as calculated through December 15, 2015, at an increased rate of 18% beginning September 30, 2015. The interest rate reverted back to 12% for all interest payments made after December 15, 2015. In addition, the conversion rate and the price of common stock issued as interest payments on the Series B Bonds decreased from $12.00 to $10.00 per share. In May 2016, these bonds were paid in full.
|
|
·
|
Amendment 2b - On December 8, 2015 and December 9, 2015, two Series B Bond Holders owning an aggregate principal amount of $400 in Series B Bonds agreed to modify the terms of the Series B Bonds to provide that (i) the Company shall make payments on the principal amount of the Series B Bonds in six equal tranches, every month, beginning on December 15, 2015, (ii) the Company shall pay all accrued interest on the Series B Bond, as calculated through December 15, 2015, at an increased rate of 18% beginning September 30, 2015. The interest rate reverted back to 12% for all interest payments made after December 15, 2015. In addition, the conversion rate and the price of common stock issued as interest payments on the Series B Bonds decreased from $12.00 to $10.00 per share.
In May 2016, these bonds were paid in full.
|
|
|
|
|
·
|
Amendment 3a - Series B Holders owning an aggregate principal amount of $75 in Series B Bonds agreed to extend the Maturity Date until November 6, 2015. These bond holders were paid in full ($75 in principal and $3 in accrued interest) in accordance with the term of the amendment. In May 2016, these bonds were paid in full.
|
As a result of the change in conversion rate from $12.00 per share to $10.00 per share in Amendments 1, 2a and 2b, the Company recorded a modification expense totaling $72.
F-21
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
The remaining Series B Holder who did not agree to the amended terms described above was paid in full ($25 in principal and $1 in accrued interest) in accordance with the original terms of the Series B Bonds.
As part of the Series B Bond amendments, the placement agent was entitled to 2% of the aggregate amount extended under amendments 1, 2a and 2b as equity consideration for a total of 17,630 common stock shares valued at $80.
On March 30, 2016, the Series B holders of Amendment 1, further extended the maturity date to September 30, 2016.
As consideration for amending the terms of the Series B Bonds, they received 2,750 shares of common stock valued at $5. The principal and accrued but unpaid interest will be due on the date of maturity.
For the years ended May 31, 2016 and 2015, interest expense associated with the Series B Bonds was $96 and $74, respectively. The Company has paid $169 in accrued interest since the inception of the Series B Bonds. As of May 31, 2016, accrued interest under the Series B Bond is $1 and is included in accounts payable and accrued expenses.
In addition, t
he Company recorded amortization of debt discount and beneficial conversion feature of $70 and $154, respectively.
Through May 31, 2015, the debt discount and beneficial conversion feature were fully amortized.
Through May 31, 2016, the Company paid a total of $926 in principal. Net of the unamortized debt discount and beneficial conversion of $0, the remaining loan balance is $55.
12% Convertible Note:
On December 10, 2014, the Company issued a 12% promissory note in the amount of $100. On or prior to the maturity date, April 15, 2015, the holder may elect to convert all or part of the principal and accrued interest into common stock shares at $10.00 per share. In addition, for every $1.00 of principal converted, the Company will issue a warrant to purchase one-half of a common stock share at $20.00 per common stock share exercisable for a term of three years. As additional consideration, the Company agreed to issue 1,000 common stock shares upon execution of this agreement. Accordingly, the Company recorded an original issue discount of $5 for the 1,000 common stock shares issued which was fully amortized as of May 31, 2015.
On May 11, 2015, the Company agreed to extend the maturity date of the note, $100 in principal and $11 in accrued interest and agreed to extend the maturity to October 15, 2015 in exchange for 2,787 common stock shares, valued at $18.
On November 10, 2015, the Company agreed to further amend and extend the maturity date of the note to April 15, 2016 and agreed to pay one-sixth of the principal amount on the 15
th
of every month, beginning on December 15, 2015, until paid in full. The Company also agreed to pay all unpaid and accrued interest through the date of the amended agreement and prepay interest through December 15, 2015. In addition, the holder of the amended note can, at any time, convert any unpaid principal and accrued interest at a conversion rate of $10.00 per share. In addition, for every $1.00 of principal converted, the Company will issue a warrant to purchase one-half of a common stock share at $20.00 per common stock share exercisable for a term of three years.
In May 2016, this note was repaid in full.
8% Convertible Note:
On February 5, 2015, the Company issued an 8% promissory note in the amount of $204 due on November 5, 2015, with a conversion feature commencing 180 days after the loan issuance date. The loan is convertible at a 39% discount to the average share price on the lowest three trading prices during the ten days prior to conversion. In connection with this note, the Company recorded a $178 discount related to the beneficial conversion feature of the note to be amortized over the life of the note or until the note was converted or repaid. The Company recorded amortization expense amounting to $36 and $760 for the fiscal years ended May 31, 2016 and 2015, respectively. In July 2015, the Company repaid the note in full prior to it becoming convertible.
On July 24, 2015, the Company paid the note holder $283 as full payment of the debt. The cash payment was applied against the principal balance of $204, accrued interest of $8 and a prepayment fee of $71. In accordance with ASC 470-50-40-2 “Debt Modifications and Extinguishments”, the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt shall be recognized in income as gains and losses. In addition, the reporting entity should derecognize the beneficial conversion feature (“BCF”) by calculating the intrinsic value of the conversion option at the extinguishment date and allocate that amount to additional paid in capital to redeem the BCF. As a result of the early extinguishment, the Company reversed the remaining unamortized portion of the debt discount of $66 and recognized it as a loss. In addition, the Company derecognized the BCF by calculating the intrinsic value of the conversion feature on the date of extinguishment amounting to $170 and allocated to additional
F-22
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
paid in capital. The net effect amounted in
a gain on early debt extinguishment amounting to $32. During the fiscal year ended May 31, 2016, the Company recorded $2 of interest expense and paid in full all accrued interest related to this loan totaling $8.
Non-interest bearing convertible note - June 23, 2015:
On June 23, 2015, the Company issued a non-interest bearing $359 convertible promissory note. The financing has an OID of $54, a term of six months and is convertible into common stock at a price of $11.50 per share. As part of the debt raise, other debt issuance costs amounted to $5 which related to legal fees and $54 related to the OID. This note was paid in full in December 2015.
Non-interest bearing convertible note – January 6, 2016:
On January 6, 2016, the Company issued a non-interest bearing $359 convertible promissory note. The financing has an OID of $54, a term of six months and is convertible into common stock at a price of $11.50 per share. As part of the debt raise, other debt issuance costs amounted to $5 which related to legal fees and $54 related to the OID. For the fiscal year ended May 31, 2016, the Company recorded amortization expense related to the OID totaling $44. Net of the remaining unamortized debt discount of $10, the remaining loan balance is $349. On July 8, 2016, the Company paid $59 in the form of an extension fee and extended the term for an additional six months.
8% Convertible Note – July 8, 2015:
On July 8, 2015, the Company issued an 8% convertible debenture valued at $3.92 million with a maturity date of April 1, 2017. Principal payments are due as follows: July 1, 2016 - $980, October 2016 - $980, January 1, 2017 - $980 and April 1, 2017 - $980. The financing has an OID of $280, a term of 21 months and is convertible into common stock at a price of $10.00 per share at the lender’s election. In connection with the financing, the Company issued 125,000 shares of common stock and 392,000 warrants exercisable for a term of five years at an initial exercise price of $10.00 (subject to adjustment). As part of the debt raise, other debt issuance costs amounted to $409, $129 of which related to legal and due diligence fees and $280 related to the OID. On December 30, 2015, the Company converted the 392,000 warrants to 100,000 Series B preferred shares. As a result of the conversion of warrants to preferred shares, the Company reduced the debt discount by $855. As a result of the OID, the common shares and preferred shares issued, the Company recorded a debt discount and beneficial conversion expense of $2,820. For the fiscal years ended May 31, 2016 and 2015, the Company recorded amortization expense totaling $1,619 and $0, respectively. Net of the remaining unamortized debt discount of $1,201, the remaining loan balance is $2,719. During the fiscal years ended May 31, 2016 and 2015, the Company incurred $285 and $0 in interest expense, respectively. In April the Company paid $234 in accrued interest. Accrued interest at May 31, 2016 totaled $51.
8% Convertible Note – February 8, 2016:
On February 8, 2016, the Company issued an 8% convertible debenture valued at $728 with a maturity date of July 1, 2017. Principal payments are due as follows: January 1, 2017 - $364 and July 1, 2017 - $364. The financing has a 12% OID amounting to $78, a term of 15 months and is convertible into common stock at a price of $10.00 per share at the lender’s election. In connection with the financing, the Company issued 13,000 shares of series B preferred stock. As a result of the OID, the debt issuance costs, and preferred shares issued, the Company recorded a debt discount of $187. For the fiscal years ended May 31, 2016 and 2015, the Company recorded amortization expense totaling $42 and $0, respectively. Net of the remaining unamortized debt discount of $145, the remaining loan balance is $583. As part of the debt raise, other debt issuance costs amounted to $150, $72 of which related to legal fees and commissions and $78 related to the OID. During the fiscal years ended May 31, 2016 and 2015, the Company incurred $18 and $0 in interest expense, respectively. In April the Company paid $9 in accrued interest. Accrued interest at May 31, 2016 totaled $9.
Lighthouse Promissory Notes:
On July 8, 2015, the Company acquired Lighthouse. In connection with the acquisition, the Company issued an unsecured promissory note of $2,498 bearing interest at 6% over three years (“Lighthouse Promissory Note #1”), and an unsecured promissory note of $625 bearing interest at 6% over two years (“Lighthouse Promissory Note #2”). The remaining principal payments for Lighthouse Note 1 are due as follows: July 8, 2016 - $125, October 8, 2016 - $125, January 8, 2017 - $125, April 8, 2017 - $125, July 8, 2017 - $125, October 8, 2017 - $375, January 8, 2018 - $375, April 8, 2018 - $375 and July 8, 2018 - $375. The remaining principal payments for Lighthouse Note 2 are due as follows: July 8, 2016 - $78, October 8, 2016 - $78, January 8, 2017 - $78, April 8, 2017 - $78 and July 8, 2017 - $78. The notes and any unpaid accrued interest are convertible at any time prior to maturity at a conversion price equal to the greater of (i) 80% of the VWAP price as of the date of notice given and (ii) the Company’s common stock price as of the date of notice given. During the fiscal year ended May 31, 2016, the Company paid $609 in principal towards the Lighthouse notes. In addition, the Company incurred $154 in interest expense and made interest payments totaling $133. Accrued interest at May 31, 2016 totaled $21.
Sterling National Bank Promissory Note:
On July 24, 2015, the Company, through its wholly owned subsidiary CSI, issued a promissory note to Sterling National Bank in the amount of $350. The note bears interest at 18% per annum and has a maturity date of October 24, 2017. The remaining principal and interest payments are paid monthly at $18 per month through maturity. For the fiscal
F-23
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
years ended May 31, 2016 and 2015, the Company’s recorded interest expense totaling $51 and $0, respectively. Through May 31, 2016, the company paid accrued interest
totaling $50. As of May 31, 2016 and 2015, accrued and unpaid interest amounted to $1 and $0, respectively.
On December 16, 2014, the Company issued a promissory note to Sterling National bank in the amount of $250. The note bears interest at 18% per annum
and originally had a maturity date of March 31, 2015 that has subsequently been modified to have no maturity date. Through May 31, 2015, the Company had repaid principal of $198 leaving $52 outstanding.
The JM Group Promissory Note:
Pursuant to the acquisition of The JM Group on November 5, 2015, the Company executed and delivered to the sellers a six-month promissory note (“The JM Group Promissory Note”) in the principal amount of £500 ($770). The JM Group Promissory Note bears interest at the rate of 6% per annum. Payments will be made in three monthly installments beginning on the four-month anniversary of the closing date
.
The monthly installments shall first be applied to accrued interest and then to principal. This note was paid in full in May 2016.
ABN AMRO Term Loan:
On November 5, 2015, the Company entered into a two-year term loan agreement with ABN AMRO Bank in the amount of £750 ($1,096) Principal payments will be made in monthly installments of £31. This loan bears interest at 3.0% plus the Bank of England base rate of 0.5%. For the fiscal years ended May 31, 2016 and 2015, the Company’s recorded interest expense totaling $20 and $0, respectively. Through May 31, 2016, the company paid principal and accrued interest totaling $274 and $18, respectively. As of May 31, 2016 and 2015, accrued and unpaid interest amounted to $2 and $0, respectively. In June 2016, the Company borrowed £250. All terms of the original loan remain unchanged.
Midcap Financial Trust – Term Loan:
On April 8, 2015, the Company entered in to a four-year Term Loan agreement with Midcap Financial Trust in the amount of $3,000. This loan bears interest at 9.0% plus LIBOR, with a LIBOR floor of 1.0% per annum with principal payments of $62.5 per month. On February 8, 2016 the Company amended the terms of the agreement to modify the principal amortization and the maturity date to September 1, 2018. As a result, principal payments for the Midcap Financial Trust - Term Loan are as follows: March 2016 to June 2016, no principal due; July 2016 to October 2016, $37.5 per month; November 2016 to August 2018 - $100 per month; and $25 due on September 1, 2018.
Through May 31, 2016, the Company repaid principal and accrued interest of $625 and $285, respectively. As of May 31, 2016, the remaining principal balance is $2,375. For the fiscal years ended May 31, 2016 and 2015, interest expense related to the Term Loan amounted to $261 and $44, respectively. As of May 31, 2016, the accrued interest balance of $20 is included in accounts payable and accrued expenses.
Midcap Financial Trust – Additional Term Loan:
On April 8, 2015, the Company entered into an additional four-year term loan with Midcap, associated with the accounts receivable financing line of credit, of up to $1,300 bearing interest at 4.0% plus LIBOR, with a LIBOR floor of 1.0% per annum, provided, that the Additional Term Loan shall be limited to an amount equal to 5.0% of each $1,000 of the aggregate net amount of the Eligible Accounts (as such term is defined in the S360 Credit Agreement) minus the amount of any reserves and/or adjustments provided for in the S360 Credit Agreement. The initial borrowing of the Additional Term Loan was $700 and shall be payable in full on April 8, 2019. As of May 31, 2015, the outstanding balance was $700. Subsequently, there were two additional borrowings for $50 each.
On February 8, 2016, the Company amended the terms of the agreement to draw an additional $500 and adjust the interest rate to 9.0% plus LIBOR, with a LIBOR floor of 1%. The maturity date was unchanged. As part of the amendment, the Company issued Midcap 25,000 shares of common stock and recorded a debt discount of $65. For the fiscal years ended May 31, 2016 and 2015, the Company recorded amortization expense totaling $8 and $0, respectively. Net of the remaining unamortized debt discount of $57, the remaining loan balance is $1,243. As of May 31, 2016, the outstanding balance is $1,300.
Scheduled principal payments for the debt after May 31, 2016 are as follows:
Year ended May 31,
|
|
Amount
|
|
2017
|
|
$
|
8,025
|
|
2018
|
|
|
3,252
|
|
2019
|
|
|
2,000
|
|
Total
|
|
$
|
13,277
|
|
F-24
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 11 –
STOCKHOLDERS’ EQUITY
On September 17, 2015, the Company effected a one-for-ten reverse stock split. Following the reverse split, the Company’s issued and outstanding shares of Common Stock decreased from 45,732,674 to 4,573,360. All share and per share information has been retroactively adjusted to reflect this reverse stock split.
On March 23, 2016, the Company’s universal shelf registration statement (“Shelf Registration”), originally filed on Form S-3 on January 4, 2016 with the United States Securities and Exchange Commission was declared effective.
On April 4, 2016, the Company, through a public offering under the Shelf Registration, sold 527,000 shares of common stock at $2.85 for a total of $1,502.
In May 2016, the Company, through a public offering under the Shelf Registration, sold 361,705 shares of common stock at $2.35 for a total of $850.
The issuance of 1,937,820 common stock shares during the year ended May 31, 2016 is summarized below:
|
|
Number of
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
Common Stock
|
|
|
Fair Value at
|
|
|
Issuance
|
|
Shares issued to/for:
|
|
Shares
|
|
|
Issuance
|
|
|
(per share)
|
|
Consultants
|
|
|
81,746
|
|
|
$
|
349
|
|
|
$
|
2.59
|
|
-
|
$
|
8.20
|
|
Restricted shares issued with issuance of convertible debt
|
|
|
125,000
|
|
|
|
507
|
|
|
$
|
4.10
|
|
-
|
$
|
4.10
|
|
Board and committees members
|
|
|
107,000
|
|
|
|
531
|
|
|
$
|
2.40
|
|
-
|
$
|
8.00
|
|
Employees
|
|
|
260,310
|
|
|
|
879
|
|
|
$
|
2.40
|
|
-
|
$
|
8.00
|
|
Acquisition of subsidiaries
|
|
|
102,460
|
|
|
|
700
|
|
|
$
|
4.70
|
|
-
|
$
|
8.20
|
|
Extension of Series A convertible bonds
|
|
|
4,375
|
|
|
|
24
|
|
|
$
|
5.48
|
|
-
|
$
|
5.48
|
|
Extension of Series B convertible bonds
|
|
|
2,750
|
|
|
|
12
|
|
|
$
|
3.38
|
|
-
|
$
|
5.00
|
|
Private placement agents
|
|
|
29,731
|
|
|
|
114
|
|
|
$
|
2.82
|
|
-
|
$
|
5.00
|
|
Bonuses
|
|
|
17,709
|
|
|
|
42
|
|
|
$
|
2.40
|
|
-
|
$
|
2.40
|
|
Additional consideration with issuance of promissory note
|
|
|
25,000
|
|
|
|
65
|
|
|
$
|
2.61
|
|
-
|
$
|
2.61
|
|
Private placements
|
|
|
888,705
|
|
|
|
2,090
|
|
|
$
|
2.35
|
|
-
|
$
|
2.85
|
|
Tender offer
|
|
|
164,477
|
|
|
|
(18
|
)
|
|
$
|
2.82
|
|
-
|
$
|
2.82
|
|
Warrant exchange
|
|
|
128,557
|
|
|
|
(430
|
)
|
|
$
|
1.99
|
|
-
|
$
|
1.99
|
|
|
|
|
1,937,820
|
|
|
|
4,865
|
|
|
|
|
|
|
|
|
|
As of May 31, 2016 and 2015, the Company has issued and outstanding 6,306,744 and 4,368,924 common stock shares, respectively.
In June 2016, the Company, through a public offering under the Shelf Registration, sold 210,645 shares of common stock at $2.35 for a total of $495.
Convertible Preferred Shares
Series A Preferred Stock.
On May 29, 2015, the Company filed a Certificate of Designations, Preferences and Rights of Series A Preferred Stock with the Nevada Secretary of State, whereby the Company designated 1,663,008 shares of Preferred Stock as Series A Preferred Stock, par value $0.00001 per share. The Series A Preferred Stock has a stated value of $10.00 per share and is entitled to a 12% dividend, payable pursuant to Nevada law.
Shares of the Series A Preferred Stock are convertible into shares of Common Stock at the holder’s election at any time prior to December 31, 2018 (the “Redemption Date”), at a conversion rate of one and three tenths (1.3) shares of Common Stock for every 10 shares of Series A Preferred Stock that the Holder elects to convert. Except as otherwise required by law, the Series A Preferred Stock shall have no voting rights.
In the event of a liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock shall be entitled to receive out of the assets of the Company legally available for distribution, prior to and in preference to distributions to the holders of the Company’s common stock, par value $0.00001 per share or classes and series of securities of the Company which by their terms
F-25
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
do not rank senior to the Series A Preferred Stock,
and either in preference to or pari passu with the holders of any other series of Preferred Stock that may be issued in the future that is expressly made senior or pari passu, as the case may be, an amount equal to the Stated Value of the Series A Preferr
ed Stock less any dividends previously paid out on the Series A Preferred Stock.
The holders will be entitled to receive cash dividends at the rate of 12% of the Stated Value per annum, payable monthly in cash, prior to and in preference to any declaration or payment of any dividend on the Common Stock. So long as any shares of Series A Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividend on any shares of Common Stock, unless at the time of such dividend the Company shall have paid all accrued and unpaid dividends on the outstanding shares of Series A Preferred Stock.
The Certificate of Designation filed on May 29, 2015, designating the Series A Preferred Stock, was filed in connection with the Company’s issuance of an aggregate of 1,663,008 shares of Series A Preferred Stock to Brendan Flood and Matthew Briand for the conversion of the Gross Profit Appreciation Bonus associated with their employment agreements. The Certificate of Designation was approved and related issuances were ratified by the Company’s board of directors and compensation committee on May 29, 2015.
Up until the Redemption Date, holders may convert their shares into Common Stock at their election. On the Redemption Date, the Company shall redeem all of the shares of Series A Preferred Stock of each Holder, for cash or for shares of Common Stock in the Company’s sole discretion. If the Redemption Purchase Price is paid in shares of Common Stock, the holders shall initially receive one and three tenths (1.3) shares of Common Stock for each $10.00 of the Redemption Purchase Price. If the Redemption Purchase Price is paid in cash, the redemption price paid to each Holder shall be equal to the Stated Value for each share of Series A Preferred Stock, multiplied by the number of shares of Series A Preferred Stock held by such Holder, less the aggregate amount of dividends paid to such Holder through the Redemption Date.
As of May 31, 2016 and 2015, we had issued and outstanding 1,663,008 Series A Preferred Stock shares and accrued dividends totaling $250 and $50, respectively.
Under Nevada law, except as otherwise provided in the articles of incorporation, no distribution (including dividends on, or redemption or repurchases of, shares of capital stock) may be made if, after giving effect to such distribution, the corporation would not be able to pay its debts as they become due in the usual course of business, or the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed at the time of a liquidation to satisfy the preferential rights of preferred stockholders. As a result, the Company has not paid any dividends associated with the Series A Preferred Stock.
Series B Preferred Stock.
On December 30, 2015, Staffing 360 filed a Certificate of Designations, Preferences and Rights of Series B Preferred Stock with the Nevada Secretary of State, pursuant to which the Company designated 200,000 shares as Series B Preferred Stock, par value $0.00001 per share. The Series B Preferred Stock shall have a stated value of $10.00 per share. Except as otherwise required by law, the Series B Preferred Stock shall have no voting rights.
In the event of a liquidation, dissolution or winding up of the Company, the remaining assets of the Company available for distribution to its stockholders shall be distributed on a pari passu basis among the holders of shares of the Series B Preferred Stock and the holders of the Company’s common stock, par value $0.00001 per share, pro rata based on the number of shares held by each such holder.
There will be no dividends associated with the Series B Preferred Stock or payable to the holders. If a holder elects to convert the Series B Preferred Stock into common stock, then the holder will have the same rights and receive the same dividends, if any, as the holders of the common Stock.
At any time, each holder may elect to convert the shares of Series B Preferred Stock held by such holder into shares of common stock. Upon the Series B Conversion, a holder shall receive one share of common stock for every one share of Series B Preferred Stock that the holder elects to convert; provided, however, that (i) to the extent that the holder’s right to receive such amount of common Stock upon conversion of the shares of Series B Preferred Stock would result in the holder holding in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon exercise of the Series B Preferred Stock, then the holder shall not be entitled to convert such shares of Series B Preferred Stock into a number of common stock that exceeds such beneficial ownership limitation, and (ii) notwithstanding any other provision of the Certificate of Designation to the contrary, in no event can conversion of the Series B Preferred Stock pursuant the Certificate of Designation result in the issuance of shares of common stock that would exceed the “Exchange Cap”. The "Exchange Cap" shall be deemed to have been reached if, at any time prior to the shareholders of the Company approving any transaction(s) pursuant to which Series B Preferred
F-26
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Stock, any stock or other securities convertible into or exchangeable for common stock and/or comm
on stock are issuable that may be aggregated with such shares of common stock issuable upon conversion of Series B Preferred Stock, the number of shares of common stock issuable under outstanding shares of Series B Preferred Stock and other convertible sec
urities and shares of common stock issued pursuant to such transactions(s) would exceed 19.9% of the shares of common stock outstanding as of the date of the earliest transaction(s).
The holders of two-thirds of the Series B Preferred Stock then outstanding, upon notice to the Company, may increase or decrease the beneficial ownership limitation; provided, that the beneficial ownership limitation in no event shall exceed 9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the outstanding Series B Preferred Stock.
On December 30, 2015, the Company converted 392,000 warrants to 100,000 Series B Preferred Stock. In connection with the February 8, 2016 Note, the Company issued 13,000 shares of Series B Preferred Stock. In April 2016, the Company issued 20,000 shares of Series B Preferred Stock for advisory services rendered.
As of May 31, 2016, we had issued and outstanding 133,000 shares of Series B Preferred Stock.
On July 8, 2016, holders of Series B Preferred Stock elected to convert all 133,000 shares to 133,000 shares of Common Stock.
Series C Preferred Stock.
On April 6, 2016, the Company filed a Certificate of Designation of Series C Preferred Shares with the Nevada Secretary of State, whereby the Company designated 500,000 shares as Series C Preferred Shares, par value $0.00001 per share. The Series C Preferred Shares shall have a stated value of $1.00 per share (the “Stated Value”). The Certificate of Designation sets forth the voting powers, designations, preferences, privileges, limitations, restrictions and relative rights applicable to the Series C Preferred Shares. Except as otherwise required by law, the Series C Preferred Shares shall have no voting rights.
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of shares of the Series C Preferred Shares shall (i) first be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to $0.00001 for each share of Series C Preferred Shares before any distribution or payment shall be made to the holders of any junior securities and (ii) then be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of Company’s Common Stock would receive if the Series C Preferred Shares were fully converted (disregarding for such purposes any conversion limitations under the Certificate of Designation) to Common Stock which amounts shall be paid pari passu with all holders of Common Stock.
Except for stock dividends or distributions for which adjustments are to be made pursuant to the Certificate of Designation, Holders are entitled to dividends on shares of Series C Preferred Shares equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock. No other dividends shall be paid on shares of Series C Preferred Shares.
Each share of Series C Preferred Shares shall be convertible at the option of the Holder thereof, into that number of shares of Common Stock (subject to the limitations set forth in the Certificate of Designation) determined by dividing the Stated Value of such share of Series C Preferred Shares by the conversion price for the Series C Preferred Shares, which shall equal $1.00, subject to adjustment in accordance with the Certificate of Designation. Holders may effect conversions by providing the Company with a conversion notice in accordance with form and procedures set forth in the Certificate of Designation. The shares of common stock underlying the Series C Preferred Shares offered by this prospectus supplement will be fully paid and non-assessable.
The “Beneficial Ownership Limitation” with respect to the Series C Preferred Shares is 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of Series C Preferred Shares held by the applicable Holder. A Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation applicable to its Series C Preferred Shares; provided, that the Beneficial Ownership Limitation in no event shall exceed 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of Series C Preferred Shares held by the applicable Holder.
On April 7, 2016 the Company issued 175,439 shares of Series C Preferred Shares at $2.85 for a total of $500.
F-27
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
On June 16, 2016,
the Company filed an Amendment to the Certificate of Designation for the Series C Preferred Stock, par value $0.00001 per share. The Amendment increased the number of Series C Preferred Stock from 500,000 shares authorized to 2,000,000 shares authorized.
On June 24, 2016, holders of Series C Preferred Stock elected to convert all 175,439 shares to Common Stock.
Series D Preferred Stock.
On June 27, 2016, the Company filed a Certificate of Designation of Series D Preferred Stock with the Nevada Secretary of State, whereby the Company designated 5,000 shares as Series D Preferred, par value $0.00001 per share (the “Series D Preferred Stock”). The Series D Preferred Stock shall have a face value of $10,000 (whole dollars) per share (the “Face Value”), original issue discount of 5% (“OID”) and conversion price of $2.50 per share. The Certificate of Designation sets forth the voting powers, designations, preferences, privileges, limitations, restrictions and relative rights applicable to the Series D Preferred Stock. Except as otherwise required by law, the Series D Preferred Stock shall have no voting rights, except: (a) during a period where a dividend (or part of a dividend) is in arrears; (b) on a proposal to reduce the Company's share capital; (c) on a resolution to approve the terms of a buy-back agreement; (d) on a proposal to wind up the Company; (e) on a proposal for the disposal of all or substantially all the Company's property, business and undertaking; and (f) during the winding-up of the entity.
Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Company, pari passu with any distribution or payment made to the holders of Preferred Stock and Common Stock by reason of their ownership thereof, the holders of Series D Preferred Stock (each a “Holder”) will be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series D Preferred Stock equal to $10,000.00 (whole dollars), plus an amount equal to any accrued but unpaid In-Kind Accrual thereon.
Commencing on the date of the issuance of any such shares of Series D Preferred Stock, each outstanding share of Series D Preferred Stock will accrue a cumulative in-kind payment accrual (“In-Kind Accrual”), at a rate equal to 6.50% per annum, subject to adjustment as provided in this Certificate of Designations, of the Face Value. In-Kind Accrual will be payable with respect to any shares of Series D Preferred Stock upon any of the following: (a) upon redemption of such shares in accordance with the Certificate of Designation; (b) upon conversion of such shares in accordance with the Certificate of Designation; and (c) when, as and if otherwise declared by the board of directors of the Company.
Each share of Series D Preferred Stock shall be convertible at the option of the Company and Holder thereof, in accordance with the Certificate of Designation, into that number of shares of Common Stock (subject to the limitations set forth in the Certificate of Designation) determined by dividing the Face Value of such share of Series D Preferred Stock by the conversion price for the Series D Preferred Stock, which shall equal $2.50, subject to adjustment in accordance with the Certificate of Designation. Holders may effect conversions by providing the Company with a conversion notice in accordance with form and procedures set forth in the Certificate of Designation. The shares of common stock underlying the Series D Preferred Stock offered by this prospectus supplement will be fully paid and non-assessable.
The Company may not issue shares of Common Stock to any Holder which, when aggregated with all other shares of Common Stock then deemed beneficially owned by such Holder, would result in such Holder owning more than 4.99% of all Common Stock outstanding immediately after giving effect to such issuance; provided, however, that such Holder may increase such amount to 9.99% upon not less than 61 days’ prior notice to the Company.
On June 24, 2016, the Company entered into a Securities Purchase Agreement with certain purchasers pursuant to which the Company sold to the purchasers 211 shares of the Company’s Series D Preferred Stock at a face value of $10,000 (whole dollars) per share of Series D Preferred, and Original Issue Discount of 5% and a conversion price into common stock of $2.50 per share, for aggregate proceeds of approximately $2,000 before placement fees and estimated offering expenses. The offering of the Series D Preferred Stock was made under the Company’s Shelf Registration.
Subsequent to May 31, 2016, holders of this series converted 65 shares of Series D Preferred Stock to 670,887 shares of Common Stock.
Warrants
On March 29, 2016, the Company filed a Tender Offer Statement (“Tender Offer”), offering to certain holders of the Company’s outstanding warrants to elect to receive an aggregate of 906,633 shares of the Company’s common stock, by agreeing to receive 20
F-28
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
common stock shares in exchange for every 100 warrants tendered by the holders of Warrants. The Warrants consisted of (i) warrants to purchase an aggregate of 89,729 Shares issued to certain investors in connection with private placement offerings
from April and June of 2013, (ii) warrants to purchase an aggregate of 86,362 Shares issued to certain investors in connection with a bridge financing from November and December of 2013, (iii) warrants to purchase an aggregate of 500,000 Shares that were i
ssued to certain investors in connection with the Company’s private placement offerings from January through March of 2014, (iv) warrants to purchase an aggregate of 185,510 Shares that were issued upon the conversion of outstanding Series A Bonds that wer
e issued in July 2014, (v) warrants to purchase 2,945 Shares issued to the placement agent in connection with the offering of Series B Bonds in October and November of 2014, (vi) warrants to purchase 12,000 Shares issued to MidCap Financial Trust in connec
tion with the Company’s accounts receivable credit facility and term loan in April of 2015, (vii) warrants to purchase 30,087 Shares issued to a placement agent in connection with several of the Company’s capital raises across the calendar year 2015.
The Tender Offer expired on April 26, 2016 and as of that date, a total of 822,224 warrants were validly tendered and not withdrawn. Such tendered warrants represented approximately 91% of the warrants included in the Tender Offer. Under the terms of the Tender Offer, the Company accepted all tendered warrants, and issued an aggregate of 164,477 shares of our common stock in exchange.
In the month of May 2016, in separate agreements, various other warrant holders elected to receive an aggregate of 128,557 shares of the Company’s common stock, by agreeing to receive 35 shares of common stock in exchange for every 100 warrants.
Transactions involving the Company’s warrant issuance are summarized as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Price
Per
Share
|
|
Outstanding at May 31, 2014
|
|
|
671,180
|
|
|
$
|
19.70
|
|
Issued
|
|
|
572,014
|
|
|
|
15.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding at May 31, 2015
|
|
|
1,243,194
|
|
|
|
17.60
|
|
Issued
|
|
|
422,087
|
|
|
|
11.10
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Converted to common shares
|
|
|
(1,189,517
|
)
|
|
|
10.49
|
|
Converted to preferred shares
|
|
|
(392,000
|
)
|
|
|
10.00
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding at May 31, 2016
|
|
|
83,764
|
|
|
$
|
19.42
|
|
The following table summarizes warrants outstanding as of May 31, 2016:
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Exercise
|
|
Number
|
|
|
Remaining
Contractual
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
Price
|
|
Outstanding
|
|
|
Life (years)
|
|
|
Exercise price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
$ 10.00 - $ 20.00
|
|
|
83,764
|
|
|
|
1.24
|
|
|
$
|
19.42
|
|
|
|
83,764
|
|
|
$
|
19.42
|
|
Stock Options
2014 Equity Plan
On January 28, 2014, our Board of Directors adopted the 2014 Equity Plan. This plan has not yet been approved by our stockholders. Under this plan, we may grant options to employees, directors, senior management of the company and, under certain circumstances, consultants. The purpose of the 2014 Equity Plan is to retain the services of the group of persons eligible to receive option awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the company and its affiliates. A maximum of 250,000 shares of common stock has been reserved for issuance under this plan. The plan expires on January 28, 2024.
Our board of directors will administer the plan unless and until the board of directors delegates administration to a committee, consisting of one or more members, that has been appointed by the board of directors, except that once our common stock begins
F-29
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
trading publicly, the committee will consist solely of two or more outside directors as defined in the Treasury Regulations promulgated under Section 162(m) of the Internal Rev
enue Code of 1986, as amended. The authority to administer the 2014 Equity Plan currently resides with the Compensation Committee. They have the power to determine which persons eligible under the plan will be granted option awards.
Transferability
Option awards are not transferable other than by will or by the laws of descent and distribution unless otherwise provided in the individual option agreement.
Change of Control Event
In the event of a change in control, then, without the consent or action required of any holder of an option award (in such holder’s capacity as such):
(i) Any surviving corporation or acquiring corporation or any parent or affiliate thereof, as determined by the board of directors in its discretion, will assume or continue any option awards outstanding under the plan in all or in part or shall substitute to similar stock awards in all or in part; or
(ii) In the event any surviving corporation or acquiring corporation does not assume or continue any option awards or substitute to similar stock awards, for those outstanding under the plan, then: (a) all unvested option awards will expire (b) vested options will terminate if not exercised at or prior to such change in control; or
(iii) Upon change in control the board of directors may, in its sole discretion, accelerate the vesting, partially or in full, in the sole discretion of the board of directors and on a case-by-case basis of one or more option awards as the board of directors may determine to be appropriate prior to such events.
Notwithstanding the above, in case of change in control, in the event all or substantially all of the shares of common stock of the company are to be exchanged for securities of another company, then each holder of an option award shall be obliged to sell or exchange, as the case may be, any shares such holder hold or purchased under the plan, in accordance with the instructions issued by the board of directors, whose determination shall be final.
Termination of Employment/Relationship
In the event of termination of the option holders employment with the Company or any of its affiliates, or if applicable, the termination of services given to the Company or any of its affiliates by consultants of the Company or any of its affiliates for cause (as defined in the plan), all outstanding option awards granted to such option holder (whether vested or not) will immediately expire and terminate on the date of such termination and the holder of option awards will not have any right in connection to such outstanding option awards, unless otherwise determined by the board of directors. The shares of common stock covered by such option awards will revert to the plan.
2015 Omnibus Incentive Plan
On September 23, 2015, our Board adopted the 2015 Omnibus Incentive Plan. This plan has not been approved by our stockholders. Under this plan, we may grant options to employees, directors, senior management of the company and, under certain circumstances, consultants. The purpose of the 2015 Omnibus Incentive Plan is to retain the services of the group of persons eligible to receive option awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the company and its affiliates.
The Plan provides for an aggregate of 450,000 shares of Common Stock to be available for Awards. The number of shares available for grant pursuant to Awards under the Plan is referred to as the “Available Shares”. If an Award is forfeited, canceled, or if any Option terminates, expires or lapses without being exercised, the Common Stock subject to such Award will again be made available for future grant. However, shares that are used to pay the exercise price of an Option or that are withheld to satisfy the Participant’s tax withholding obligation will not be available for re-grant under the Plan.
The Plan will have a term of ten years and no further Awards may be granted under the Plan after that date.
F-30
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Awards Available for Grant
The Committee may grant Awards of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Stock Bonus Awards, Performance Compensation Awards (including cash bonus awards) or any combination of the foregoing. Notwithstanding, the Committee may not grant to any one person in any one calendar year Awards (i) for more than 150,000 Common Shares in the aggregate or (ii) payable in cash in an amount exceeding $600 in the aggregate.
Transferability
Each Award may be exercised during the participant’s lifetime only by the participant or, if permissible under applicable law, by the participant’s guardian or legal representative and may not be otherwise transferred or encumbered by a participant other than by will or by the laws of descent and distribution. The Committee, however, may permit Awards (other than Incentive Stock Options) to be transferred to family members, a trust for the benefit of such family members, a partnership or limited liability company whose partners or stockholders are the participant and his or her family members or anyone else approved by it.
Change in Control
Except to the extent otherwise provided in an Award, in the event of a Change in Control, all outstanding Options and equity awards (other than performance compensation awards) issued under the Plan will become fully vested and performance compensation awards will vest, as determined by the Committee, based on the level of attainment of the specified performance goals. In general, the Committee may, in its discretion, cancel outstanding Awards and pay the value of such Awards to the participants in connection with a Change in Control. The Committee can also provide otherwise in an Award under the Plan.
Through May 31, 2016, the Company had granted 242,500 options to purchase common stock with an exercise price of $20.00 per share and 107,000 options to purchase common stock with an exercise price of $10.00 per share. On December 8, 2014, the Company modified the exercise price on its unvested 138,000 options from an exercise price of $20.00 per share to $10.00 per share. There are 75,000 options with an exercisable term of five years and all others have an exercisable term of ten years.
The fair value of stock options granted was estimated at the date of grant using the Black-Scholes options pricing model. The Company used the following assumptions for determining the fair value of options granted under the Black-Scholes option pricing model:
Exercise price:
|
|
$10.00 - $20.00
|
Market price at date of grant:
|
|
$3.00 - $19.90
|
Volatility:
|
|
50.57% - 162.52%
|
Expected dividend rate:
|
|
0% - 0%
|
Expected terms (years):
|
|
5 - 10
|
Risk-free interest rate:
|
|
1.45% - 2.77%
|
F-31
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
A summary of the activity during the years ended May 31, 2016 and 2015 of the Company’s 2014 Equity Plan and 2015 Omnibus Incentive Plan is presented below:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at May 31, 2014
|
|
|
190,000
|
|
|
$
|
20.00
|
|
|
$
|
—
|
|
Granted
|
|
|
147,000
|
|
|
|
17.20
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Decrease in weighted average exercise price due to
modification (1)
|
|
|
—
|
|
|
|
(4.10
|
)
|
|
|
—
|
|
Outstanding at May 31, 2015
|
|
|
337,000
|
|
|
|
13.10
|
|
|
|
—
|
|
Granted
|
|
|
12,500
|
|
|
|
10.00
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
(27,500
|
)
|
|
|
—
|
|
|
|
—
|
|
Outstanding at February 29, 2016
|
|
|
322,000
|
|
|
$
|
13.20
|
|
|
|
—
|
|
|
(1)
|
On December 8, 2014, the Company modified the exercise price on its unvested 138,000 options from an exercise price of $20.00 per share to $10.00 per share.
|
During the years ended May 31, 2016 and 2015, the Company recorded share-based payment expense of $358 and $338, respectively, in connection with all options outstanding.
The total compensation cost related to options not yet amortized is $736 at May 31, 2016. The Company will recognize this charge over the next 2.9 years.
Long-Term Incentive Plan
In May 2016, the Company’s Board of Directors (“BOD”) approved the 2016 Long-Term Incentive Plan (“2016 LTIP”). This plan has not yet been approved by our stockholders. The 2016 LTIP provides each participant with an award based on the performance of a share of Common Stock through the period ending on and including December 31, 2018 (the “Performance Period’) or, in the event of a change in control, the value per Common Stock share from such transaction. The award will set forth the number of performance units awarded to the participant (the “Performance Units”) and the final award will be determined by multiplying the Performance Units by the vesting rate, as set forth in the table below (the “Vesting Rate”), which is to be determined by the average closing price of a share of Common Stock during the 90 period immediately preceding and including December 31, 2018 (the “2018 Price”):
|
|
2018 Price
|
Vesting Rate
|
Less than $10.9396
|
0.00%
|
Greater than or equal to $10.9396
|
25.00%
|
Greater than or equal to $16.4094
|
41.67%
|
Greater than or equal to $21.8792
|
66.67%
|
Greater than $27.3490
|
100.00%
|
The shares of Common Stock under the award will be issued to the participant within 30 days of December 31, 2018 but in no event later than March 15, 2019 (the “Issuance Date”); provided, that Participant has been continuously employed with the Company through the Issuance Date.
F-32
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Except for shares of Company Stock that may be used for withholding purposes or for fulfilling any personal income tax obligations
resulting from the issuance of shares of Common Stock under an award (but only up to an amount necessary to satisfy such personal income tax obligations), upon issuance of shares of Company Stock, a participant must retain such shares for a period of six
(6) months from the Issuance Date (the “Stock Retention Period”). If the Company proposes to register any of its Common Stock during the Stock Retention Period, it will provide prompt written notice to the participant of its intention to effect such regist
ration. Within ten days of receiving such written notice, the participant may make a written request that the Company include in the proposed registration all or a portion of the share of Common Stock owned by the participant pursuant to an award. Once the
Stock Retention Period has lapsed, such shares of Common Stock will not be subject to any restrictions on transferability, sale or disposition.
The total number of Performance Units available for issuance under the Plan shall not exceed 1.3 million shares. As of May 31, 2016, no Awards had been communicated to employees.
Due to the limited number of days between the grant dates and May 31, 2016, the compensation expense associated with the 2016 LTIP was not material.
NOTE 12 –
COMMITMENTS AND CONTINGENCIES
Employment Agreements
On January 3, 2014, in connection with the Initio Acquisition, the Company entered into an employment agreement with Brendan Flood (“Flood Employment Agreement”). Pursuant to the Flood Employment Agreement, Mr. Flood will serve as Executive Chairman of the board of directors, as well as, Chief Executive Officer of Initio. Mr. Flood will be paid a salary of £192 (At May 31, 2016, the foreign currency year-to-date average exchange rate of 1.49476 makes this approximately $287) per annum, less statutory deductions, plus other benefits including reimbursement for reasonable expenses, paid vacation and insurance coverage for his roles with both Staffing 360 Solutions, Inc. and Staffing (UK). Mr. Flood’s salary will be adjusted (but not decreased) annually based upon the Consumer Price Index for All Urban Consumers for the Northeast Region as determined by the United States Department of Labor Bureau of Labor Statistics. Mr. Flood will also be entitled to an annual bonus of up to 50% of his annual base salary based reaching certain financial milestones. Additionally, Mr. Flood is entitled to Gross Profit Appreciation Participation, which entitles the participants to 10% of Initio’s Excess Gross Profit, which is defined as the increase in Initio gross profits in excess of 120% of the base year’s gross profit, up to $400. Mr. Flood’s participating level is 62.5%. On May 29, 2015, the Gross Profit Appreciation Bonus associated with this employment agreement was converted into Series A Preferred Stock. The Flood Employment Agreement has a term of five years and will automatically renew thereafter unless 12 months written notice is provided by either party. This employment agreement includes customary non-compete/solicitation language for a period of 12 months after termination of employment. Effective September 18, 2015, the Board appointed Brendan Flood, the Company’s Executive Chairman, to serve as the interim Chief Financial Officer while the Company actively searched for a permanent Chief Financial Officer. Mr. Flood did not receive additional compensation for his role as interim Chief Financial Officer.
On January 1, 2016, the Company amended the employment agreement with Mr. Brendan Flood, Chairman. Mr. Flood will receive a salary of £270 (approximately $404), a car allowance of £15 (approximately $22) per annum and a pension contribution of £6 (approximately $9) per annum. All other terms of Mr. Flood’s employment agreement will remain unchanged.
On January 3, 2014, in connection with the Initio Acquisition, the Company entered into an employment agreement with Matt Briand (“Briand Employment Agreement”). Pursuant to the Briand Employment Agreement, Mr. Briand will serve as Co-Chief Executive Officer of the Company, as well as, Chief Executive Officer of Monroe. Mr. Briand will be paid a salary of $300 per annum, plus other benefits including reimbursement for reasonable expenses, paid vacation and insurance coverage for his roles with both Staffing 360 Solutions, Inc. and Monroe. Mr. Briand will also be entitled to an annual bonus of up to 50% of his annual base salary based on reaching certain financial milestones. Additionally, Mr. Briand is entitled to Gross Profit Appreciation Participation, which entitles the participants to 10% of Initio’s Excess Gross Profit, which is defined as the increase in Initio gross profits in excess of 120% of the base year’s gross profit, up to $400. Mr. Briand’s participating level is 37.5%. On May 29, 2015, the Gross Profit Appreciation Bonus associated with this employment agreement was converted into Series A Preferred Stock. The Briand Employment Agreement has a term of five years and will automatically renew thereafter unless 12 months written notice is provided by either party. This employment agreement includes customary non-compete/solicitation language for a period of 12 months after termination of employment. On January 27, 2015, Mr. Briand was given the additional title of President.
On January 1, 2016, the Company amended the employment agreement with Mr. Matt Briand, Chief Executive Officer. Mr. Briand will receive a salary of $350. All other terms of Mr. Briand’s employment agreement will remain unchanged.
F-33
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
On February 24, 2013, the Company entered into an employment agreement with Darren Minton (“Min
ton Employment Agreement”), to serve as a Senior Vice President of the Company. Pursuant to the terms of the Minton Employment Agreement, the Company paid Mr. Minton $48 annually. Mr. Minton was also entitled to receive as additional compensation 2,000 c
ommon stock shares. On February 24, 2014, the Company entered into a new employment agreement with Mr. Minton to serve as Executive Vice President of the Company. Pursuant to the terms of the Minton Employment Agreement, the Company agreed to pay Mr. Minto
n $180 annually. Mr. Minton received an additional grant of 2,000 common stock shares. The employment agreement had a term of 18 months.
On January 15, 2016, the Company entered into a new employment agreement with Mr. Darren Minton, Executive Vice Preside
nt. Pursuant to the terms of the agreement, the Company agreed to pay Mr. Minton $180 annually. The employment agreement has a term of 18 months.
On February 5, 2016, the Company entered into a Letter of Employment with Mr. David Faiman that appointed him as the Company’s Chief Financial Officer effective March 1, 2016. Under the Letter of Employment, Mr. Faiman will receive an annual base salary of $275. Mr. Faiman will also receive a grant of 50,000 restricted shares of the Company’s common stock, which will vest as follows: (i) 25,000 shares on the first year anniversary, and (ii) 25,000 shares on the second anniversary of Mr. Faiman’s employment. Annual adjustments to salary, as well as bonus and additional stock option awards will be granted at the discretion of the Board based on meeting personal and corporate objectives each year. His annual bonus target will be 50% of annual base salary.
Earn-out Liabilities and Stock Value Guarantees
The earn-out liability is comprised of contractual contingent liabilities resulting from the Company’s acquisitions. The provisions basically state that the seller of a business may receive additional future compensation based upon the business achieving certain future financial performance levels. The earn-out transactions were accounted for under the purchase method in accordance with ASC 805.
Pursuant to the acquisition of CSI, the purchase price includes monthly cash payments to the former owners and shareholders of CSI for performance-based compensation equal to 20% of CSI’s consolidated gross profit from the date of closing through the end of the sixteenth quarter following the date of closing not to exceed a total of $2,100. At closing, the Company estimated the performance-based compensation would be $2,100. During the fiscal years ended May 31, 2016 and 2015, the Company paid $159 and $280, respectively, towards the earn-out liability. At May 31, 2016 the remaining balance was $1,399 of which $174 is recorded in other current liabilities and $1,225 is recorded in other long-term liabilities.
Pursuant to the acquisition of Lighthouse, the sellers received 62,460 shares of Common Stock. In the event that the VWAP price for the 90 days prior to the anniversary of the acquisition date, is less than $10.00 per share, then the Company shall pay to the sellers an amount equal to $10.00 per share less the VWAP price multiplied by each share.
Pursuant to the acquisition of The JM Group Limited (“The JM Group”), the purchase price includes a cash payment to the shareholders for performance-based compensation of (a) £850 if the gross profit for the 12 month period ending on the anniversary date of the date of completion (the “Anniversary TTM Gross Profit”) is equal to 90% or more of the gross profit for the twelve months ending October 31, 2015 (the “Completion TTM Gross Profit”); or (b) if the Anniversary TTM Gross Profit is less than 90% of the Completion TTM Gross Profit, a sum equal to £850 multiplied by the Anniversary TTM Gross Profit/Completion TTM Gross Profit. The Company recorded the maximum contingent liability amount of £850 ($1,180). At May 31, 2016 the remaining balance was $1,242 and is recorded in other current liabilities.
In addition, the Company will issue an aggregate of 20,000 shares of Common Stock valued at $4.70 totaling $94, if the Anniversary Gross Profit (defined) of The JM Group is 100% or more the Completion Gross Profit (defined). If the Anniversary Gross Profit is greater than or equal to 75% of the Completion Gross Profit, but less than 100% of The JM Group’s Completion Gross Profit, an amount of shares equal to the product of (i) the Anniversary Gross Profit divided by the Completion Gross Profit and (ii) 20,000. If the Anniversary Gross Profit is less than 75% of the Completion Gross Profit, no shares are due.
Pursuant to the acquisition of The JM Group, in addition the 20,000 contingent shares discussed above, the sellers received 40,000 shares of Common Stock. In the event that the VWAP price for the 90 days prior to the anniversary of the acquisition date, is less than $10.00 per share, then the Company shall pay to the sellers an amount equal to $10.00 per share less the VWAP price multiplied by each share.
F-34
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Lease Obligations
The Company is party to multiple lease agreements for office space. The agreements require monthly rental payments through May 2020. Total minimum lease obligation approximate $1,394, $136, $144, $155 and $0 for the years ended May 31, 2017, 2018, 2019, 2020 and beyond, respectively. For the years ended May 31, 2016 and 2015, rent expense amounted to $1,067 and $1,034, respectively.
Legal Proceedings
NewCSI, Inc. vs. Staffing 360 Solutions, Inc.
On May 22, 2014, NewCSI, the former owners of Control Solutions International, filed a complaint in the United States District Court for the Western District of Texas, Austin Division, against the Company arising from the terms of the CSI Stock Purchase Agreement dated August 14, 2013. NewCSI claims that the Company breached a provision of the CSI Stock Purchase Agreement (“SPA § 2.7”) that required the Company to calculate and pay to NewCSI 50% of certain “Deferred Tax Assets” within 90 days after December 31, 2013. The Complaint sought payment of the amount allegedly owed under SPA § 2.7 and acceleration of earn-out payments provided for in the CSI Stock Purchase Agreement of $1,400, less amounts paid to date, and attorneys’ fees. The Company responded denying the material allegations and interposing numerous affirmative defenses. On October 8, 2014, NewCSI filed a Motion of Summary Judgment (the “Motion”). On March 30, 2015, a Magistrate Judge of the District Court issued a Report and Recommendation that the District Court deny the Motion. The Recommendation became a final decision on April 13, 2015.
On December 31, 2014, NewCSI filed an amended complaint to which NewCSI added an additional count asserting an “Adjustment Event” had occurred requiring an acceleration of earn-out payments provided for in the CSI Stock Purchase Agreement of $2,100, less amounts paid to date ($1,671 at December 31, 2014), should Staffing 360 or CSI “be unable, or admit in writing its inability, to pay its debts as they mature.” The Company responded denying the material allegations and interposing numerous affirmative defenses, including that the earn-out liability was fully expensed at the time of the acquisition and fully accrued for on the Company’s balance sheet as part of the purchase accounting at the time of the acquisition. The final pretrial conference in this matter was held April 22, 2015. A jury was selected on May 14, 2015, and the trial was held May 18-20, 2015. On May 20, 2015, the jury rendered a verdict, finding that Staffing 360 had not complied with SPA § 2.7 and owed $154, but that NewCSI had not proven that Staffing 360 or CSI had become unable to pay debts as they came due. The Court had held that it was not a question for the jury to decide if damages for breach of SPA § 2.7 should include accelerated earn-out payments.
On June 3, 2015, NewCSI filed a Motion for Entry of Judgment as Matter of Law seeking entry of a judgment in the amount of $154, plus accelerated earn-out payments in the amount of $1,152, plus statutory interest. NewCSI did not challenge the jury verdict on the ability to pay issue. Also on June 3, 2015, Staffing 360 filed a Motion for Entry of Judgment as a Matter of Law seeking entry of judgment against NewCSI on the jury’s finding that Staffing 360 had not complied with SPA § 2.7, or, in the alternative, for a reduction of damages to $54 and to hold that NewCSI may not be awarded accelerated earn-out payments as that would result in an illegal penalty.
On October 21, 2015, judgment was entered in this action in favor of NewCSI and against the Company in the amount of $1,307, plus pre-judgment interest, post-judgment interest, and costs.
On January 26, 2016, the District Court set the bond in respect of the NewCSI litigation at $1,384. The Company has filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit seeking reversal of the judgment and posted a supersedeas bond to stay the execution of the judgment pending appeal. On April 18, 2016, the Court granted the NewCSI shareholders’ request for payment of attorneys’ fees, but reserved judgment on the amount of fees to award pending the outcome of the Company’s appeal. As of January 2016, the NewCSI shareholders have claimed they have incurred $552 in attorney’s fees, which could increase during the pendency of the appeal. On August 3, 2016, the Company was notified that oral argument for the appeal is tentatively scheduled for the week of October 31, 2016.
We believe that the Company acted in a manner consistent with our contractual rights, and we intend to aggressively defend the Company against NewCSI. Nevertheless, there can be no assurance that the outcome of this litigation, which is now pending before the Fifth Circuit, will be favorable to the Company.
F-35
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Staffing 360 Solutions, Inc. v. Former Officers of Staffing 360 Solutions, Inc.
On November 13, 2015, in a separate proceeding, Staffing 360 initiated an arbitration before JAMS against three officers of Staffing 360, each a former Staffing 360 officer and employee. In its demand for arbitration and statement of claim, Staffing 360 alleged that these individuals breached their employment agreements with Staffing 360 and the fiduciary duties each owed to the Company. The three respondents responded with a counterclaim alleging wrongful termination and have moved to dismiss the arbitration, as well as moved for severance in relation to the remainder of their contracts, which is estimated to be at least $1,313 in the aggregate. On July 20, 2016, the arbitrator decided in favor of both of the respondents’ motions. This amount has already been fully accrued for and expensed on the Company’s balance sheet. Due to the subsequent notice of this ruling, the accrual for this loss represents the primary difference to the preliminary results reported by the Company in its pre-announcement of earnings on June 23, 2016. The Company is awaiting the respondents’ motion to confirm the award. The final amount, which will be fixed by the arbitrator following additional submissions, may exceed $1,313.
Other Claims
On February 17, 2016, a previous law firm filed suit in the Supreme Court of the State of New York alleging that the Company owes $759, for legal services rendered. The Company disagreed with the quantity and quality of legal services provided by the firm to the Company. On March 17, 2016, the Company reached a settlement with the law firm in the amount of $505 to be paid in equal installments over 24 months beginning in April 2016.
NOTE 13 –
SEGMENTS
The Company’s operating segments, which are consistent with its reportable segments, are organized by geography in accordance with its internal management and reporting structure.
For the years ended May 31, 2016 and 2015, the Company generated revenue in the U.S., the U.K. and Canada as follows:
|
|
For the years Ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
143,460
|
|
|
$
|
120,418
|
|
United Kingdom
|
|
|
21,994
|
|
|
|
133
|
|
Canada
|
|
|
98
|
|
|
|
8,278
|
|
Total Revenue
|
|
$
|
165,552
|
|
|
$
|
128,829
|
|
As of May 31, 2016 and 2015, the Company has assets in the U.S., the U.K. and Canada as follows:
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
45,020
|
|
|
$
|
40,682
|
|
United Kingdom
|
|
|
10,067
|
|
|
|
1,592
|
|
Canada
|
|
|
9
|
|
|
|
58
|
|
Total Assets
|
|
$
|
55,096
|
|
|
$
|
42,332
|
|
NOTE 14 –
ACQUISITIONS
In accordance with ASC 805, the Company accounts for acquisitions using the purchase method under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. The Company utilizes management estimates and, in some instances, may retain the services of an independent third-party valuation firm to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted. Such estimates and valuations require the Company to make significant assumptions, including projections of future events and operating performance.
On July 8, 2015, the Company purchased 100% of the membership interests in
Lighthouse. The aggregate purchase price was $6,133, paid as follows: (i) cash of $2,498; (ii) 62,460 restricted common stock shares valued at $8.20 totaling $512; (iii) three year unsecured promissory note of $2,498 and (iv) two-year unsecured promissory note of $625.
F-36
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
In connection with the acquisition of Li
ghthouse, the Company identified and recognized intangible assets of $1,154 representing trade name and customer relationships. The customer relationship asset is being amortized on a straight line basis over its estimated life of 10 years; the trade name
is being amortized over 15 years. The fair value allocation for the trade name and customer relationships resulting from the acquisition of Lighthouse was based on a valuation performed by management.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Current assets
|
|
$
|
154
|
|
Intangible assets
|
|
|
1,154
|
|
Goodwill
|
|
|
4,979
|
|
Total
|
|
|
6,287
|
|
|
|
|
|
|
Current liabilities
|
|
|
154
|
|
Net purchase price
|
|
$
|
6,133
|
|
On November 5, 2015, the Company, through Longbridge Recruitment 360 Limited, a subsidiary of Staffing (UK), completed the acquisition of The JM Group by purchasing 100% of the issued and outstanding equity interests. The aggregate purchase price was $3,517, paid as follows: (i) cash of £750 (approximately $1,155); (ii) 40,000 restricted common stock shares valued at $4.70 totaling $188; (iii) six-month unsecured promissory note of £500 (approximately $770), (iv) performance based compensation in an amount in cash equal to £850 (approximately $1,310) and (v) an aggregate of 20,000 shares of Common Stock valued at $4.70 totaling $94, if the Anniversary Gross Profit (defined) of The JM Group is 100% or more than the Completion Gross Profit (defined). If the Anniversary Gross Profit is greater than or equal to 75% of the Completion Gross Profit, but less than 100% of The JM Group’s Completion Gross Profit, an amount of shares equal to the product of (i) the Anniversary Gross Profit divided by the Completion Gross Profit and (ii) 20,000. If the Anniversary Gross Profit is less than 75% of the Completion Gross Profit, no shares are due.
In connection with the acquisition of The JM Group, the Company identified and recognized intangible assets of $1,651 representing trade name and customer relationships. The customer relationship asset is being amortized on a straight line basis over its estimated life of 10 years; the trade name is being amortized over 15 years. The fair value allocation for the trade name and customer relationships resulting from the acquisition of The JM Group was based on a valuation performed by management.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Current assets
|
|
$
|
4,011
|
|
Intangible assets
|
|
|
1,651
|
|
Goodwill
|
|
|
1,454
|
|
Total
|
|
|
7,116
|
|
|
|
|
|
|
Current liabilities
|
|
|
3,599
|
|
Net purchase price
|
|
$
|
3,517
|
|
For the year ended May 31, 2016, the aggregate revenue and net income of Lighthouse and JM Group included in the Statement of Operations was $28.1 million and $1.7 million, respectively.
The following unaudited pro forma consolidated results of operations have been prepared, as if the acquisition of Lighthouse and The JM Group had occurred as of June 1, 2015 and 2014:
|
|
For the Years May 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenues
|
|
$
|
176,757
|
|
|
$
|
169,947
|
|
|
Net loss from continuing operations
|
|
$
|
(8,449
|
)
|
|
$
|
(16,478
|
)
|
|
Weighted average number of common stock shares – Basic
and diluted
|
|
|
4,933,236
|
|
|
|
3,839,410
|
|
|
Net loss per share from continuing operations
|
|
$
|
(1.71
|
)
|
|
$
|
(4.29
|
)
|
|
F-37
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 15 –
RELATED PARTY TRANSACTIONS
Consulting Fees – Related Party
Board and Committee Members
During the years ended May 31, 2016 and 2015, the Company incurred $30, respectively, in board of director fees to Dimitri Villard. In May 2014, Mr. Villard was named the Chairman of the Corporate Governance and Nominating Committee. During the years ended May 31, 2016 and 2015, the Company incurred $20, respectively to Mr. Villard for his role as Chairman of the Corporate Governance and Nominating Committee. In addition, during the years ended May 31, 2016 and 2015, Mr. Villard received 6,000 common stock shares valued at $29 and 8,500 shares valued at $66, respectively, for his services as a board and committee member. In addition, on October 30, 2015, Mr. Villard received 30,000 shares valued at $150 as a bonus. At May 31, 2016, the Company has $0 accrued in accounts payable and accrued expenses – related parties account.
During the years ended May 31, 2016 and 2015, the Company incurred $0 and $48, respectively in board of director fees to Robert Mayer. Additionally, for the years ended May 31, 2016 and 2015, Mr. Mayer received 0 common stock shares and 6,750 shares valued at $59, respectively for his services as a board and committee member. On May 8, 2015, Mr. Mayer submitted his resignation from his position as Director. At May 31, 2016, the Company has $0 accrued in accounts payable and accrued expenses – related parties account.
During the years ended May 31, 2016 and 2015, the Company incurred $30, respectively, in board of director fees to Jeff Grout. In February 2014, Mr. Grout was named the Chairman of the Compensation Committee. During the years ended May 31, 2016 and 2015, the Company incurred $20, respectively to Mr. Grout for his role as Chairman of the Compensation Committee. In addition, during the years ended May 31, 2016 and 2015, Mr. Grout received 6,000 common stock shares valued at $29 and 5,000 common stock shares valued at $47, respectively, for his service as a board and committee member. In addition, on October 30, 2015, Mr. Grout received 30,000 shares valued at $150 as a bonus. At May 31, 2016, the Company has $0 accrued in accounts payable and accrued expenses – related parties account.
During the years ended May 31, 2016 and 2015, the Company incurred $30, respectively in board of director fees to Nick Florio. In May 2014, Mr. Florio was named the Chairman of the Audit Committee. In September 2014, Mr. Florio was named the Chairman of the Restructuring Committee. During the years ended May 31, 2016 and 2015, the Company incurred $20, respectively to Mr. Florio for his role as Chairman of the Audit Committee. In addition, for the years ended May 31, 2016 and 2015, Mr. Florio received 5,000 common stock shares valued at $24 and 10,000 common stock shares valued a $111 for his services as a board and committee member. In addition, on October 30, 2015, Mr. Florio received 30,000 shares valued at $150 as a bonus. At the request of Mr. Florio, all cash payments, common stock issuances and stock option issuances have been made in the name of Citrin Cooperman & Company, LLP. At May 31, 2016, the Company has accrued $8 in accounts payable and accrued expenses – related parties account.
Trilogy Capital Partners Agreement
During the years ended May 31, 2016 and 2015, the Company incurred $0 and $325, respectively in consulting fees to Trilogy Capital Partners, Inc. (“Trilogy”). The Company’s former employee, Vice Chairman, President and Secretary, is the majority owner of Trilogy. Effective December 31, 2014, he voluntarily resigned from his positions with the Company and subsidiaries. The Company entered into an Advisory Agreement with Trilogy, effective as of January 1, 2015, pursuant to which Trilogy may provide advisory services, if requested by the Company, for a period of twelve months. Pursuant to the Advisory Agreement, the Company agreed to, among other things: (a) pay Trilogy $300, in equal monthly installments; and (b) issue to Trilogy, 25,000 common stock shares on or before January 30, 2015; and (c) grant to Trilogy 2,500 common stock shares, in complete settlement of any past due fees and costs owed to Trilogy. The Advisory Agreement terminated by its terms on December 31, 2015. The Company did not renew this advisory agreement. At May 31, 2016, the Company has $0 accrued in accounts payable and accrued expenses.
Grandview Capital Partners, Inc.
The Grandview Advisory Agreement requires that the Company pay Grandview $10 per month for a period of 18 months, increasing to $15, per month following the completion of the first acquisition of a temporary staffing company by the Company and contemporaneous financing. On January 3, 2014, the Company and Grandview entered into an amendment to the Grandview Advisory Agreement. Pursuant to the terms of the amendment, Grandview’s compensation was reduced back to $10 per month effective immediately. Additionally, as a result of the amendment, the Grandview Advisory Agreement terminated on September 30, 2014.
F-38
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Peter Goldstein, the former Chairman of the Board, principal financial officer, treasurer and director of the Company, is the founder, chairman, chief executive officer a
nd registered principal of Grandview Capital Partners, Inc.
During the years ended May 31, 2016 and 2015, the Company incurred $0 and $45, respectively, in consulting fees to Grandview Capital Partners, Inc. (“Grandview”). The Company’s former Chairman and
Chief Financial Officer, is the majority owner of Grandview. This agreement expired in September 2014. At May 31, 2016, the Company has $0 in accounts payable and accrued expenses.
Staffing 360 Solutions (UK) Promissory Notes
Brendan Flood, the Company’s Executive Chairman, was issued a three year promissory note. Mr. Flood’s portion of the $3,965 aggregate principal amount totaled $2,065. Mr. Flood was paid $379 in principal and $98 in interest since the date of issuance through November 30, 2014. On November 30, 2014, Mr. Flood converted the remaining promissory note principal, $1,721, and interest through maturity of $170, into (i) 189,099 common stock shares, at the rate of $10.00 per share, and (ii) warrants to purchase 208,008 common stock shares at the price of $12.50 per share, exercisable for ten years from the date of conversion. This conversion satisfied his note in full as of November 30, 2014.
Matt Briand, the Company’s Chief Executive Officer and President, was issued a three year promissory note. Mr. Briand’s portion of the $3,965 aggregate principal amount totaled $1,115. Mr. Briand was paid $204 in principal and $53 in interest since the date of issuance of the note through November 30, 2014. On November 30, 2014, Mr. Briand converted the remaining Promissory note principal, $929, and interest through maturity, $92, into (i) 102,123 common stock shares, at the rate of $10.00 per share, and (ii) warrants to purchase 112,336 common stock shares at the price of $12.50 per share, exercisable for ten years from the date of conversion. The conversion was effective as of November 30, 2014 with the common stock shares and warrants being issued on January 2, 2015. This conversion satisfied his note in full as of January 2, 2015.
Short-term promissory notes
In June 2014, the Company issued a promissory note for consideration totaling $100 to Robert Mayer, a former director and shareholder of the Company. The promissory note was non-interest bearing and due on demand. The Company issued 500 shares to Mr. Mayer as additional consideration. This note was paid in full in June, 2014.
In July 2014, the Company issued three promissory notes for an aggregate consideration of $280 to three related parties. The promissory notes were non-interest bearing and due on demand. The first note was issued to Trilogy Capital Partners for consideration totaling $30. The Company’s President, Alfonso J. Cervantes is the majority owner of Trilogy. This note was paid in full in July, 2014. The second note was issued to Jeff Mitchell, the Company’s CFO for consideration totaling $150. The Company issued 1,000 shares to Mr. Mitchell as additional consideration. This note was paid in full in July, 2014. The third note was issued to Robert Mayer, a former director and shareholder of the Company for consideration totaling $100. The Company issued 700 shares to Mr. Mayer as additional consideration. This note was paid in full in July 2014.
In August 2014, the Company issued a 12% interest bearing promissory note in the amount of $150 to Barry Cervantes, a brother of a former employee, Vice Chairman, President and Secretary of the Company, Alfonso J. Cervantes. The promissory note is due upon demand. The Company issued 1,500 common stock shares to Barry Cervantes as additional consideration. This note was paid in full in April 2015.
On September 2, 2014, the Company issued a promissory note in the amount of $125 to a company of which Robert Mayer, a former director and shareholder of the Company, is a Managing Member. The promissory note was due upon demand. The Company issued 750 common stock shares to the note holder as additional consideration. This note was paid in full in April 2015.
On September 15, 2014, the Company issued a promissory note in the amount of $50 to a company of which Robert Mayer, a former director and shareholder of the Company, is a Managing Member. The promissory note was due upon demand. The Company issued 250 common stock shares to the note holder as additional consideration. This note was paid in full in April 2015.
F-39
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 16 –
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
For the Years Ended
|
|
|
|
2016
|
|
|
2015
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,241
|
|
|
$
|
1,000
|
|
Income taxes
|
|
$
|
55
|
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
Non Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Common stock issued in connection with purchase
of subsidiary
|
|
$
|
700
|
|
|
$
|
—
|
|
Promissory notes issued in connection with acquisitions
|
|
$
|
3,817
|
|
|
$
|
—
|
|
Conversion of accounts payable to common stock
|
|
$
|
—
|
|
|
$
|
216
|
|
Conversion of a convertible note payable
|
|
$
|
—
|
|
|
$
|
600
|
|
Conversion of a convertible bonds
|
|
$
|
—
|
|
|
$
|
3,529
|
|
Conversion of accrued interest to common stock
|
|
$
|
—
|
|
|
$
|
203
|
|
Shares issued in connection with bonds
|
|
$
|
—
|
|
|
$
|
360
|
|
Shares issued to placement agent
|
|
$
|
116
|
|
|
$
|
28
|
|
Shares issued in connection with convertible
promissory notes
|
|
$
|
—
|
|
|
$
|
123
|
|
Shares issued in connection with promissory notes
|
|
$
|
65
|
|
|
$
|
—
|
|
Conversion of promissory notes
|
|
$
|
—
|
|
|
$
|
2,994
|
|
NOTE 17 –
INCOME TAXES
The Company accounts for income taxes under ASC 740, “Expenses – Income Taxes”. ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization is dependent upon future taxable income during the periods in which those temporary differences become deductible or are utilized. All of the Company’s tax returns have been filed through the fiscal year ended May 31, 2015. These returns remain subject to examination by major tax jurisdictions as of May 31, 2016.
The Company has not recorded a deferred tax liability with respect to its investment in certain foreign corporate subsidiaries as an exception to ASC 740, since the underlying earnings of the foreign subsidiaries are indefinitely reinvested in accordance with ASC 740-10-25-3(a)(1).
During previous fiscal years, the Company acquired both CSI and Monroe, both of whose businesses had acquired net operating losses. In addition, the Company has undergone several events which qualify as owner shifts pursuant to IRC section 382 since its own inception. As a consequence of these shifts, the Company has undergone ownership changes which, pursuant to IRC section 382, result in a limitation in the annual utilization of the Company’s net operating loss carryforwards of approximately $496. The annual Section 382 limitation may be increased based on the recognition of unrealized built-in gains during the five years following the most recent ownership change allowing for a greater utilization of the Company’s pre-change losses. The deferred tax asset derived from these tax loss carry-forwards have been included in the consolidated deferred tax asset from net operating losses shown below.
The components of income (loss) before provision for income taxes for the years ended May 31, 2016 and 2015 are as follows:
|
|
Years Ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
(9,113
|
)
|
|
$
|
(18,078
|
)
|
Foreign
|
|
|
(355
|
)
|
|
|
515
|
|
Income before provision for income taxes
|
|
$
|
(9,468
|
)
|
|
$
|
(17,563
|
)
|
F-40
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
The provision for income taxes consisted of the following:
|
|
Years Ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(206
|
)
|
State
|
|
|
—
|
|
|
|
43
|
|
Foreign
|
|
|
17
|
|
|
|
103
|
|
Total current tax expense (benefit)
|
|
|
17
|
|
|
|
(60
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax expense
|
|
|
—
|
|
|
|
—
|
|
Deferred tax asset, net of allowance
|
|
$
|
17
|
|
|
$
|
(60
|
)
|
The difference between the income tax provision on income (loss) and the amount computed at the U.S. federal statutory rate is due to:
|
|
Years Ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Income tax (benefit) provision at Federal
statutory rate
|
|
$
|
(3,242
|
)
|
|
|
34.0
|
%
|
|
$
|
(5,971
|
)
|
|
|
34.0
|
%
|
State income taxes, net of Federal Benefit
|
|
|
(363
|
)
|
|
|
3.8
|
%
|
|
|
(716
|
)
|
|
|
4.1
|
%
|
International permanent differences
|
|
|
84
|
|
|
|
(0.9
|
%)
|
|
|
14
|
|
|
|
(0.1
|
%)
|
International tax rate differentials
|
|
|
64
|
|
|
|
(0.7
|
%)
|
|
|
(87
|
)
|
|
|
0.5
|
%
|
U.S. Permanent differences
|
|
|
966
|
|
|
|
(10.1
|
%)
|
|
|
2,606
|
|
|
|
(14.8
|
%)
|
Change in valuation allowance
|
|
|
2,508
|
|
|
|
(26.3
|
%)
|
|
|
4,094
|
|
|
|
(23.3
|
%)
|
Tax provision
|
|
$
|
17
|
|
|
|
(0.2
|
%)
|
|
$
|
(60
|
)
|
|
|
0.4
|
%
|
Our deferred tax assets (liabilities) are as follows:
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
7,731
|
|
|
$
|
7,120
|
|
Tax credit, deduction and capital loss carryforward
|
|
|
1,038
|
|
|
|
1,038
|
|
Share-based compensation
|
|
|
366
|
|
|
|
215
|
|
Depreciation
|
|
|
11
|
|
|
|
1
|
|
Accrued expenses and other liabilities
|
|
|
797
|
|
|
|
355
|
|
Total deferred tax assets
|
|
|
9,943
|
|
|
|
8,729
|
|
Less: valuation allowance
|
|
|
(7,310
|
)
|
|
|
(6,069
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
2,633
|
|
|
|
2,660
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
50
|
|
|
|
102
|
|
Basis differences in acquired intangibles
|
|
|
2,583
|
|
|
|
2,551
|
|
Total deferred tax liabilities
|
|
$
|
2,633
|
|
|
$
|
2,653
|
|
Deferred tax asset, net of allowance
|
|
$
|
—
|
|
|
$
|
7
|
|
The company has adapted Accounting Standard Update 2015-17
retrospectively
,
to all periods presented
.
To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
F-41
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
As of May 31, 2016 the Company has a net operating loss (“NOL”) carryforwards of approximately $17,441 in the U.S., $4,194 in the U.K., expiring at various points through the year 2036. The NOL’s may be available to reduce future years’ taxable income.
NOTE 18 –
SUBSEQUENT EVENTS
Where applicable, all material subsequent events have been disclosed in their respective footnotes.
F-42