ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion and analysis of our results of operations and financial condition should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. This section includes a number
of forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect our current
views with respect to future events and financial performance. All statements that address expectations or projections about the
future, including, but not limited to, statements about our plans, strategies, adequacy of resources and future financial results
(such as revenue, gross profit, operating profit, cash flow), are forward-looking statements. Some of the forward-looking statements
can be identified by words like “anticipates,” “believes,” “expects,” “may,” “will,”
“can,” “could,” “should,” “intends,” “project,” “predict,”
“plans,” “estimates,” “goal,” “target,” “possible,” “potential,”
“would,” “seek,” and similar references to future periods. These statements are not guarantees of future
performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. Because these forward-looking
statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties,
many of which are beyond our control or are subject to change, actual outcomes and results may differ materially from what is
expressed or forecasted in these forward-looking statements. Important factors that could cause actual results to differ materially
from these forward-looking statements include, but are not limited to: negative outcome of pending and future claims and litigation;
our ability to access the capital markets by pursuing additional debt and equity financing to fund our business plan and expenses
on terms acceptable to us or at all; and our ability to comply with our contractual covenants, including in respect of our debt;
potential cost overruns and possible rejection of our business model and/or sales methods; weakness in general economic conditions
and levels of capital spending by customers in the industries we serve; weakness or volatility in the financial and capital markets,
which may result in the postponement or cancellation of our customers’ capital projects or the inability of our customers
to pay our fees; delays or reductions in U.S. government spending; credit risks associated with our customers; competitive market
pressures; the availability and cost of qualified labor; our level of success in attracting, training and retaining qualified
management personnel and other staff employees; changes in tax laws and other government regulations, including the impact of
health care reform laws and regulations; the possibility of incurring liability for our business activities, including, but not
limited to, the activities of our temporary employees; our performance on customer contracts; and government policies, legislation
or judicial decisions adverse to our businesses. Readers are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. We assume no obligation to update such statements, whether as a result of new information,
future events or otherwise, except as required by law. We recommend readers to carefully review the entirety of this Annual Report,
including the “Risk Factors” in Item 1A of this Annual Report and the other reports and documents we file from time
to time with the Securities and Exchange Commission (“SEC”), particularly our Quarterly Reports on Form 10-Q and our
Current Reports on Form 8-K.
Overview
We
are incorporated in the State of Delaware. As a rapidly growing public company in the international staffing sector, our high-growth
business model is based on finding and acquiring suitable, mature, profitable, operating, U.S. and U.K. based staffing companies.
Our targeted consolidation model is focused specifically on the Professional Business Stream and Commercial Business Stream disciplines.
Recent
Developments
COVID-19
In
December 2019, a strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has spread
globally, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected
countries. The COVID-19 pandemic is impacting worldwide economic activity, and activity in the United States and the United Kingdom
where our operations are based. Much of the independent contractor work we provide to our clients is performed at the site of
our clients. As a result, we are subject to the plans and approaches our clients have made to address the COVID-19 pandemic, such
as whether they support remote working or if they have simply closed their facilities and furloughed employees. To the extent
that our clients were to decide or are required to close their facilities, or not permit remote work when they close facilities,
we would no longer generate revenue and profit from that client. In addition, in the event that our clients’ businesses
suffer or close as a result of the COVID-19 pandemic, we may experience decline in our revenue or write-off of receivables from
such clients. Moreover, developments such as social distancing and shelter-in-place directives have impacted our ability to deploy
our staffing workforce effectively, thereby impacting contracts with customers in our commercial staffing and professional staffing
business streams, where we have had declines in revenues during Q2 2020, Q3 2020 and Q4 2020 compared with the respective periods
in 2019. While some government-imposed precautionary measures have been relaxed in certain countries or states, more strict measures
have been or may be put in place again due to a resurgence in COVID-19 cases, as has occurred recently in the United Kingdom in
response to the spread of a new strain of COVID-19. As a result of the newly imposed government restrictions in the United Kingdom,
we had to close both of our offices in the United Kingdom, and our employees have been forced to operate remotely from their homes.
Employees are returning to our offices in the United Kingdom on a voluntary basis on March 29, 2021. Therefore, the ongoing COVID-19
pandemic may continue to affect our operation and to disrupt the marketplace in which we operate and may negatively impact our
sales in fiscal year 2021 and our overall liquidity.
While
the ultimate economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, including
new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact,
among others, the pandemic has resulted in significant disruptions in general commercial activity and the global economy and caused
financial market volatility and uncertainty in significant and unforeseen ways in the recent months. A continuation or worsening
of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access
capital and on the market price of our common stock, and we may not be able to successfully raise needed capital. If we are unsuccessful
in raising capital in the future, we may need to reduce activities, curtail or cease operations.
In
addition, the continuation or worsening of the COVID-19 pandemic or an outbreak of other infectious diseases could result in a
widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn
that could impact our business, financial condition and results of operations.
Nasdaq
Minimum Stockholders’ Equity Requirement
On
June 3, 2020, we received a letter from the Listing Qualifications Department notifying us that we are no longer in compliance
with the minimum stockholders’ equity requirement for continued listing on Nasdaq. Nasdaq Listing Rule 5550(b)(1) requires
listed companies to maintain stockholders’ equity of at least $2.5 million. Further, as of June 9, 2020, we did not meet
the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.
In
accordance with the Nasdaq Listing Rules, we were afforded the opportunity to submit a plan to regain compliance with the minimum
stockholders’ equity standard. Based on our submissions, the Listing Qualifications Department granted us an extension to
regain compliance with Rule 5550(b)(1) until November 30, 2020.
On
December 1, 2020, we received notice that because we had not met the terms of the extension, our common stock would be subject
to delisting from Nasdaq, unless we timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”.) We timely
requested a hearing before the Panel, which automatically stayed any suspension or delisting action pending the issuance of a
decision by the Panel following the hearing and the expiration of any additional extension period granted by the Panel. The hearing
occurred on January 21, 2021. At the hearing, we provided the Panel with an update on our compliance plan and requested a further
extension of time in which to regain compliance. On February 3, 2021, we received a letter from the Panel noting it has granted
our request for an extension until February 28, 2021 to regain compliance with the minimum $2.5 million stockholders’ equity
requirement, or the alternative compliance standards as set forth in Nasdaq Listing Rule 5550(b)(1). On March 4, 2021 the Company
received a letter extending the deadline for compliance to May 31, 2021.
Although
we are taking actions intended to restore our compliance with the listing requirements, we can provide no assurance that any action
taken by us will be successful. Should a delisting occur, an investor would likely find it significantly more difficult to dispose
of, or to obtain accurate quotations as to the value of our common stock, and our ability to raise future capital through the
sale of our common stock could be severely limited. In addition, delisting could harm our ability to raise capital through alternative
financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers,
customers and employees and fewer business development opportunities.
December
2020 Public Offering
On
December 29, 2020, we closed the sale of an aggregate of 4,816,665 shares of common stock in an underwritten public offering (the
“December 2020 Public Offering”), at an offering price to the public of $0.60 per share. We received net proceeds
from the December 2020 Public Offering, after deducting underwriting discounts and commissions and other estimated offering expenses
payable by us, of approximately $2.4 million. We used 75% of the net proceeds from such underwritten offering to redeem a portion
of our outstanding Jackson Note due September 30, 2022, and 25% of the net proceeds from such underwritten offering to redeem
a portion of our Series E Preferred Stock.
December
2020 Registered Direct Offering
On
December 31, 2020, we closed the sale of an aggregate of 2,662,596 shares of common stock in a registered direct offering (the
“December 2020 Registered Direct Offering”), at an offering price of $0.66 per share. We received net proceeds from
the December 2020 Registered Direct Offering, after deducting placement agent fees and other estimated offering expenses payable
by us, of approximately $1.5 million. We used 75% of the net proceeds from such registered direct offering to redeem a portion
of our outstanding Jackson Note, and 25% of the net proceeds from such registered direct offering to redeem a portion of our Base
Series E Preferred Stock.
February
2021 Public Offering
On
February 9, 2021, we announced the pricing of a public offering of an aggregate of 21,855,280 shares of its common stock at a
public offering price of $0.90 per share (the “Offering”.) The Offering was made pursuant to the Company’s registration
statement on Form S-1 initially filed on January 13, 2021, as subsequently amended and declared effective on February 9, 2021.
The Offering was made only by means of a prospectus forming a part of the effective registration statement.
The
Offering closed on February 12, 2021. In the Offering, the Company issued 20,851,199 shares of common stock and pre-funded warrants
to purchase up to 1,004,081 shares of common stock, at an exercise price of $0.0001 per share (the “Pre-funded Warrants”.)
The Pre-funded Warrants were sold at $0.8999 per Pre-Funded Warrant. The Pre-funded Warrants were immediately exercisable and
could be exercised at any time after their original issuance until such Pre-funded Warrants were exercised in full. The Pre-funded
Warrants were exercised immediately upon issuance, and 1,004,081 shares of common stock were issued on February 12, 2021.
The
net proceeds to the Company from the Offering were approximately $18.1 million, after deducting placement agent fees and estimated
offering expenses payable by the Company. While the Company’s Series E Preferred Stock is outstanding, the Company is required
to use the proceeds of any sales of equity securities, including the securities offered in the Offering, exclusively to redeem
any outstanding shares of the Company’s Series E Preferred Stock, subject to certain limitations. On February 12, 2021,
the Company used approximately 75% of the net proceeds from the Offering to redeem a portion of the outstanding Jackson Note,
which had an outstanding principal amount and accrued interest of $32,710 as of February 9, 2021, and 25% of the net proceeds
from the Offering to redeem a portion of the Company’s Series E Preferred Stock. Pursuant to the Limited Consent (as defined
below), upon closing of the Offering, the Company redeemed a portion of the 2020 Jackson Note with an outstanding principal amount
of $13,556 and interest accrued thereon and redeemed 4,518 shares of the Base Series E Preferred Stock. Following the redemption
of the Base Series E Preferred Stock, the Company has 6,172 shares of Base Series E Preferred Stock outstanding with an aggregate
stated value of $6,172.
Jackson
Waivers
On
February 5, 2021, we entered into a Limited Consent and Waiver (the “Limited Consent”) with Jackson Investment Group,
LLC (“Jackson”) whereby, among other things, Jackson agreed that we may use 75% of the proceeds from the Offering
to redeem a portion of the 2020 Jackson Note, which at the time had an outstanding principal amount and accrued interest of $32,710,
and 25% of the net proceeds from the Offering to redeem a portion of our Base Series E Preferred Stock, notwithstanding certain
provisions of the Series E Certificate of Designation that would have required us to use all the proceeds from the Offering to
redeem the Base Series E Preferred Stock. In addition, we also agreed in the Limited Consent to additional limits on our ability
to incur other indebtedness, including limits on advances under our revolving loan facility with MidCap Funding [X] Trust. We
also agreed that to the extent that any of our PPP Loans are forgiven after the Offering, Jackson may convert the Base Series
E Preferred Stock and Series E-1 Preferred Stock that remains outstanding into a secured note that is substantially similar to
the 2020 Jackson Note. On April 8, 2021, the limited waiver was extended to June 17 ,2021.
Jackson
also entered into a Limited Waiver and Agreement with us on February 5, 2021, whereby Jackson agreed that it would not convert
any shares of the Base Series E Preferred Stock or Series E-1 Preferred Stock into shares of our common stock or exercise any
warrants to purchase shares to the extent that doing so would cause the number of our authorized shares of common stock to be
less than the number of shares being offered in the Offering. Jackson also waived any event of default under the Series E Certificate
of Designation and the 2020 Jackson Note that would have resulted from the Company having an insufficient number of authorized
shares of common stock to honor conversions of the Base Series E Preferred Stock and the exercise of Jackson’s warrants.
On April 8, 2021, the limited waiver was extended to June 17 ,2021.
Business
Model, Operating History and Acquisitions
We
are a high-growth international staffing company engaged in the acquisition of U.S. and U.K. based staffing companies. As part
of our consolidation model, we pursue a broad spectrum of staffing companies supporting primarily the Professional and Commercial
Business Streams. Our typical acquisition model is based on paying consideration in the form of cash, stock, earn-outs and/or
promissory notes. In furthering our business model, the Company is regularly in discussions and negotiations with various suitable,
mature acquisition targets. Since November 2013, the Company has completed ten acquisitions.
Clement
May Acquisition
On
June 28, 2018, the Company and Staffing 360 Solutions Limited (formerly known as Longbridge Recruitment 360 Limited), a wholly
owned subsidiary of the Company, entered into share purchase agreements (“Share Purchase Agreements”) of the share
capital of Clement May Limited (“CML”.) Consideration for the acquisition of all the shares was (i) an aggregate cash
payment of £1,550 ($2,047), (ii) 15,000 shares of the Company’s common stock, (iii) the assignment of certain outstanding
debt owed to the CML Majority Holder to the Principal as set forth in that Share Purchase Agreement, (iv) an earn-out payment
of up to £500, the amount to be calculated and paid on or around December 28, 2019 pursuant to the Share Purchase Agreement,
and (v) deferred consideration of £350, to be paid on or around June 28, 2019, depending on the satisfaction of certain
conditions set forth in that Share Purchase Agreement. To finance the above transaction, the Company entered into a term loan
with HSBC Bank plc.
Key
Resources Inc. Acquisition
On
August 27, 2018, the Company and Monroe Staffing Services, LLC (“Monroe Staffing”), an indirect subsidiary of the
Company, entered into a share purchase agreement with Pamela D. Whitaker (for purposes of this paragraph, the “Seller”),
pursuant to which the Seller sold 100% of the common shares of Key Resources Inc. (“KRI”) to Monroe Staffing (the
“KRI Transaction”.) The KRI Transaction closed simultaneously with the signing of the share purchase agreement. The
purchase price in connection with the KRI Transaction was approximately $12,163, of which (a) approximately $8,109 was paid to
the Seller at closing, (b) up to approximately $2,027 is payable as earnout consideration to the Seller on August 27, 2019 and
(c) up to $2,027 is payable as earnout consideration to the Seller on August 27, 2020. While the Company had recognized the liability
for the earnout consideration due the seller of KRI, Pamela D. Whitaker (“Whitaker”), within current liabilities as
of December 28, 2019, in February 2020 the Company filed an action against Whitaker for breach of contract, which more than offsets
the earnout consideration recognized. The Company paid interest of $30 in Fiscal 2019 and $40 in Fiscal 2020. Refer to legal proceedings
below for action filed against Whitaker, the former owner of KRI.
To
finance the above transaction, the Company entered into an agreement with Jackson on August 27, 2018, pursuant to which the note
purchase agreement dated as of September 15, 2017 was amended to add an additional senior debt investment of approximately $8,428
in the Company.
firstPRO
Transaction
On
September 24, 2020, we and Staffing 360 Georgia, LLC d/b/a firstPRO, our wholly-owned subsidiary (for purposes of this
paragraph and the succeeding two paragraphs, the “Seller”), entered into an Asset Purchase Agreement with firstPRO
Recruitment, LLC (for purposes of this paragraph, the “Buyer”), pursuant to which the Seller sold to the Buyer substantially
all of the Seller’s assets used in or related to the operation or conduct of its professional staffing and recruiting business
in Georgia (the “Assets,” and such sale, the “firstPRO Transaction”). In addition, the Buyer agreed
to assume certain liabilities related to the Assets. The purchase price in connection with the firstPRO Transaction was
$3,300, of which (a) $1,220 was paid at closing (the “Initial Payment”) and (b) $2,080 was held in a separate escrow
account (the “Escrow Funds”), which will be released upon receipt of the forgiveness of the Seller’s Paycheck
Protection Program loan by the SBA. In the event that all or any portion of the PPP Loan is not forgiven by the SBA, all or portion
of the certain funds being held in escrow will be used to repay any unforgiven portion of the PPP Loan in full. The firstPRO
Transaction closed on September 24, 2020. In September, we submitted the PPP Loan forgiveness applications to the SBA. As of the
date of this filing, the PPP Loan has not been approved for forgiveness, and there is no guarantee that all or portion of the
PPP Loan will be forgiven.
In
connection with execution of the Asset Purchase Agreement, we and certain of our subsidiaries entered into a Consent Agreement
with Jackson (the “Consent”), a noteholder pursuant to that certain Amended and Restated Note Purchase Agreement,
dated as of September 15, 2017, as amended (the “Existing Note Purchase Agreement”). Under the terms of the Consent
and the Series E Certificate of Designation, in consideration for Jackson’s consent to the firstPRO Transaction,
the Initial Payment was used to redeem a portion of the Series E Preferred Stock, and the Escrow Funds, subject to the forgiveness
of PPP Loan discussed above, will be used to redeem a portion of the Series E Preferred Stock. As this provision results in a
contingent redemption feature, approximately $2.1 million of the Series E Preferred Stock was reclassified to mezzanine equity
during the year ended January 2, 2021.
To
induce the Buyer to enter into the Asset Purchase Agreement, the Seller also entered into a Transition Services Agreement with
the Buyer, pursuant to which each party will provide certain transition services to minimize any disruption to the businesses
of the Seller and the Buyer arising from the firstPRO Transaction.
For
Fiscal 2020 and Fiscal 2019
|
|
Fiscal
2020
|
|
|
% of Revenue
|
|
|
Fiscal
2019
|
|
|
% of Revenue
|
|
|
Growth
|
|
Revenue
|
|
$
|
204,527
|
|
|
|
100.0
|
%
|
|
$
|
278,478
|
|
|
|
100.0
|
%
|
|
|
(26.6
|
)%
|
Cost of revenue
|
|
|
169,714
|
|
|
|
83.0
|
%
|
|
|
230,169
|
|
|
|
82.7
|
%
|
|
|
(26.3
|
)%
|
Gross profit
|
|
|
34,813
|
|
|
|
17.0
|
%
|
|
|
48,309
|
|
|
|
17.3
|
%
|
|
|
(27.9
|
)%
|
Operating expenses
|
|
|
43,593
|
|
|
|
21.3
|
%
|
|
|
47,686
|
|
|
|
17.1
|
%
|
|
|
(8.6
|
)%
|
(Loss) Income from operations
|
|
|
(8,780
|
)
|
|
|
(4.3
|
)%
|
|
|
623
|
|
|
|
0.2
|
%
|
|
|
(1509.3
|
)%
|
Other expenses
|
|
|
(6,962
|
)
|
|
|
(3.4
|
)%
|
|
|
(5,852
|
)
|
|
|
(2.1
|
)%
|
|
|
19.0
|
%
|
Benefit for income taxes
|
|
|
100
|
|
|
|
(0.0
|
)%
|
|
|
335
|
|
|
|
0.1
|
%
|
|
|
(70.1
|
)%
|
Net loss
|
|
$
|
(15,642
|
)
|
|
|
(7.6
|
)%
|
|
$
|
(4,894
|
)
|
|
|
(1.8
|
)%
|
|
|
219.6
|
%
|
Revenue
Fiscal
2020 revenue decreased by 26.6% to $204,527 as compared with $278,478 for Fiscal 2019. Of that decline, $74,386 was attributable
to organic revenue decline, slightly offset by $435 of favorable foreign currency translation. Within organic revenue, temporary
contractor revenue declined $69,321 and permanent placement declined $5,065. The revenue decline in 2020 as compared to 2019 is
the result of the impact of the Covid-19 pandemic. In addition, the sale of firstPRO in September 2020 resulted in 9 months
of revenue for fiscal 2020 versus 12 months in fiscal 2019.
Revenue
in Fiscal 2020 was comprised of $198,066 of temporary contractor revenue and $6,461 of permanent placement revenue, compared with
$266,974 and $11,504 for Fiscal 2019, respectively.
Cost
of revenue, Gross profit and gross margin
Cost
of revenue includes the variable cost of labor and various non-variable costs (e.g., workers’ compensation insurance) relating
to employees (temporary and permanent) as well as sub-contractors and consultants. For Fiscal 2020, cost of revenue was $169,714,
a decrease of 26.3% from $230,169 in Fiscal 2019, compared with revenue decline of 26.6%.
Gross
profit for Fiscal 2020 was $34,813, a decrease of 27.9% from $48,309 for Fiscal 2019, representing gross margin of 17.0% and 17.3%
for each period, respectively. The decline was driven by $13,557 of organic decline and only nine months of activity for firstPRO,
slightly offset by $61 of favorable foreign currency translation.
Operating
expenses
Operating
expenses for Fiscal 2020 were $43,593, a decrease of 8.6% from $47,686 for Fiscal 2019. The decrease in operating expenses was
driven by headcount reductions, only nine months of activity for firstPRO, goodwill impairment of firstPRO, lower
variable costs and savings attributable to synergies within the subsidiaries, and cost savings initiatives.
Other
Expenses
Other expenses for Fiscal 2020 were $6,962,
an increase of 19.0% from $5,852 in Fiscal 2019. The increase was driven by the following: $41 interest income restructuring
charge in Fiscal 2020 versus $0 in Fiscal 2019; a $124 gain on sales of firstPRO in Fiscal 2020 versus a gain of $1,077
on CBS Butler earnout settlement in Fiscal 2019 and $847 gain on settlement of firstPRO deferred consideration in Fiscal
2019. These were partially offset by $584 gain in remeasuring the intercompany note in Fiscal 2020 compared with a gain of
$383 in Fiscal 2019; other income of $125 in Fiscal 2020 versus $326 in Fiscal 2019; $433 lower interest expense recorded
in Fiscal 2020 versus Fiscal 2019 due to the restructuring of $35 million debt in Fiscal 2020; and $298 of lower net amortization
of debt discount and deferred financing costs.
Non-GAAP
Measures
To
supplement our consolidated financial statements presented in accordance with accounting principles generally accepted in the
United States of America (“GAAP”), we also use non-GAAP financial measures and Key Performance Indicators (“KPIs”)
in addition to our GAAP results. We believe non-GAAP financial measures and KPIs may provide useful information for evaluating
our cash operating performance, ability to service debt, compliance with debt covenants and measurement against competitors. This
information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the
related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be comparable
to similarly entitled measures reported by other companies.
We
present the following non-GAAP financial measure and KPIs in this report:
Revenue
and Gross Profit by Business Streams We use this KPI to measure the Company’s mix of Revenue and respective profitability
between its two main lines of business due to their differing margins. For clarity, these lines of business are not the Company’s
operating segments, as this information is not currently regularly reviewed by the chief operating decision maker to allocate
capital and resources. Rather, we use this KPI to benchmark the Company against the industry.
The
following table details Revenue and Gross Profit by Business Streams:
|
|
Fiscal 2020
|
|
|
Mix
|
|
|
Fiscal 2019
|
|
|
Mix
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
$
|
113,970
|
|
|
|
56
|
%
|
|
$
|
127,330
|
|
|
|
46
|
%
|
Professional Staffing - US
|
|
|
23,477
|
|
|
|
11
|
%
|
|
|
37,294
|
|
|
|
13
|
%
|
Professional Staffing - UK
|
|
|
67,080
|
|
|
|
33
|
%
|
|
|
113,854
|
|
|
|
41
|
%
|
Total Service Revenue
|
|
$
|
204,527
|
|
|
|
|
|
|
$
|
278,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
$
|
17,845
|
|
|
|
51
|
%
|
|
$
|
20,080
|
|
|
|
42
|
%
|
Professional Staffing - US
|
|
|
7,546
|
|
|
|
22
|
%
|
|
|
14,081
|
|
|
|
29
|
%
|
Professional Staffing - UK
|
|
|
9,422
|
|
|
|
27
|
%
|
|
|
14,148
|
|
|
|
29
|
%
|
Total Gross Profit
|
|
$
|
34,813
|
|
|
|
|
|
|
$
|
48,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
|
15.7
|
%
|
|
|
|
|
|
|
15.8
|
%
|
|
|
|
|
Professional Staffing - US
|
|
|
32.1
|
%
|
|
|
|
|
|
|
37.8
|
%
|
|
|
|
|
Professional Staffing - UK
|
|
|
14.0
|
%
|
|
|
|
|
|
|
12.4
|
%
|
|
|
|
|
Total Gross Margin
|
|
|
17.0
|
%
|
|
|
|
|
|
|
17.3
|
%
|
|
|
|
|
Adjusted
EBITDA This measure is defined as net loss attributable to common stock before: interest expense, benefit from (provision
for) income taxes; income (loss) from discontinued operations, net of tax; other (income) expense, net, in operating income (loss);
amortization and impairment of intangible assets; impairment of goodwill; depreciation; operational restructuring and other charges;
other income (expense), net, below operating income (loss); non-cash expenses associated with stock compensation; and charges
the Company considers to be non-recurring in nature such as legal expenses associated with litigation, professional fees associated
potential and completed acquisitions. We use this measure because we believe it provides a more meaningful understanding of the
profit and cash flow generation of the Company.
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Net loss
|
|
$
|
(15,642
|
)
|
|
$
|
(4,894
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
7,195
|
|
|
|
7,628
|
|
Benefit from income taxes
|
|
|
(100
|
)
|
|
|
(335
|
)
|
Depreciation and amortization
|
|
|
3,677
|
|
|
|
4,226
|
|
EBITDA
|
|
$
|
(4,870
|
)
|
|
$
|
6,625
|
|
|
|
|
|
|
|
|
|
|
Acquisition, capital raising and other non-recurring expenses (1)
|
|
|
6,714
|
|
|
|
4,956
|
|
Other non-cash charges (2)
|
|
|
662
|
|
|
|
840
|
|
Impairment of Goodwill
|
|
|
2,969
|
|
|
|
—
|
|
Re-measurement gain on intercompany note
|
|
|
(584
|
)
|
|
|
(383
|
)
|
Gain on settlement of deferred consideration
|
|
|
—
|
|
|
|
(1,924
|
)
|
Restructuring charges
|
|
|
21
|
|
|
|
(10
|
)
|
Gain from sale of business
|
|
|
(124
|
)
|
|
|
—
|
|
Other income
|
|
|
(125
|
)
|
|
|
(326
|
)
|
Adjusted EBITDA
|
|
$
|
4,663
|
|
|
$
|
9,778
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA of Divested Business (3)
|
|
$
|
(507
|
)
|
|
$
|
(908
|
)
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjusted EBITDA (4)
|
|
$
|
4,156
|
|
|
$
|
8,870
|
|
|
|
|
|
|
|
|
|
|
Adjusted Gross Profit (5)
|
|
$
|
31,199
|
|
|
$
|
40,425
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA as percentage of Adjusted Gross Profit
|
|
|
14.9
|
%
|
|
|
24.2
|
%
|
|
(1)
|
Acquisition,
capital raising and other non-recurring expenses primarily relate to capital raising
expenses, acquisition and integration expenses and legal expenses incurred in relation
to matters outside the ordinary course of business. In addition, the Company included
non-recurring expenses related to salaries, rent and bad debts which were a direct result
of the Covid-19 pandemic. Due to government mandated restrictions, the Company had
to temporarily close all of its offices and, due to social distancing restrictions, could
not make full use of these facilities for significant periods of time during the year,
both in the US and UK. These restrictions are still ongoing in 2021. The Company calculated
an adjustment of $1.4 million for the time these offices were closed or partially not
used due to Covid-19 related restrictions. In addition, the Company reduced headcounts
throughout the Company. The reduction in 2019 related to performance and in 2020 related
to Covid-19 staff reductions. These positions are no longer included in the current cost
structure. The Company had internal staff of 291 just before the onset of the pandemic
and 196 by the end of the Fiscal 2020. Salary adjustments are standard treatment for
adjustment to EBITDA for management reporting purposes.
|
|
(2)
|
Other
non-cash charges primarily relate to staff option and share compensation expense, expense for shares issued to directors
for board services, and consideration paid for consulting services.
|
|
|
|
|
(3)
|
Adjusted
EBITDA of Divested Business for the period prior to the divestment date.
|
|
|
|
|
(4)
|
Pro
Forma Adjusted EBITDA excludes the Adjusted EBITDA of Divested Business for the period prior to the divestment date.
|
|
|
|
|
(5)
|
Adjusted
Gross Profit excludes gross profit of business divested in September 2020, for the period prior to divestment date.
|
Operating
Leverage This measure is calculated by dividing the growth in Adjusted EBITDA by the growth in Gross Profit, on a trailing
12-month basis. We use this KPI because we believe it provides a measure of the Company’s efficiency for converting incremental
gross profit into Adjusted EBITDA.
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
|
|
|
|
|
|
|
Gross Profit - TTM (Current Period)
|
|
$
|
34,813
|
|
|
$
|
48,309
|
|
Gross Profit - TTM (Prior Period)
|
|
|
48,309
|
|
|
|
48,304
|
|
Gross Profit – Growth (Decline)
|
|
$
|
(13,496
|
)
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA - TTM (Current Period)
|
|
$
|
4,663
|
|
|
$
|
9,778
|
|
Adjusted EBITDA - TTM (Prior Period)
|
|
|
9,778
|
|
|
|
9,007
|
|
Adjusted EBITDA – Growth (Decline)
|
|
$
|
(5,115
|
)
|
|
$
|
771
|
|
|
|
|
|
|
|
|
|
|
Operating Leverage
|
|
|
38
|
%
|
|
|
15420
|
%
|
Leverage
Ratio Calculated as Total Debt, Net, gross of any Original Issue Discount, divided by Pro Forma Adjusted EBITDA for the trailing
12-months. We use this KPI as an indicator of the Company’s ability to service its debt prospectively.
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
|
|
|
|
|
|
|
Total Term Debt, Net
|
|
$
|
54,810
|
|
|
$
|
38,816
|
|
Addback: Total Debt Discount and Deferred Financing Costs
|
|
|
559
|
|
|
|
497
|
|
Total Debt
|
|
$
|
55,369
|
|
|
$
|
39,313
|
|
|
|
|
|
|
|
|
|
|
TTM Adjusted EBITDA
|
|
$
|
4,663
|
|
|
$
|
9,778
|
|
|
|
|
|
|
|
|
|
|
Pro Forma TTM Adjusted EBITDA
|
|
$
|
4,156
|
|
|
$
|
8,870
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Leverage Ratio
|
|
|
13.32x
|
|
|
|
4.43x
|
|
Operating
Cash Flow Including Proceeds from Accounts Receivable Financing calculated as net cash (used in) provided by operating activities
plus net proceeds from accounts receivable financing. Because much of the Company’s temporary payroll expense is paid weekly
and in advance of clients remitting payment for invoices, operating cash flow is often weaker in staffing companies where revenue
and accounts receivable are growing. Accounts receivable financing is essentially an advance on client remittances and is primarily
used to fund temporary payroll. As such, we believe this measure is helpful to investors as an indicator of the Company’s
underlying operating cash flow.
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
|
|
|
|
|
|
|
Net cash flow used in operating activities
|
|
$
|
(14,256
|
)
|
|
$
|
(10,840
|
)
|
|
|
|
|
|
|
|
|
|
Collection of UK factoring facility deferred purchase price
|
|
|
8,654
|
|
|
|
13,970
|
|
|
|
|
|
|
|
|
|
|
Repayments on accounts receivable financing
|
|
|
(2,426
|
)
|
|
|
(2,708
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities including proceeds from accounts receivable financing
|
|
$
|
(8,028
|
)
|
|
$
|
422
|
|
The
Leverage Ratio and Operating Cash Flow Including Proceeds from Accounts Receivable Financing should be considered together with
the information in the “Liquidity and Capital Resources” section, immediately below.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. Historically, we have funded our operations through term loans, promissory notes, bonds, convertible
notes, private placement offerings and sales of equity.
Our
primary uses of cash have been for professional fees related to our operations and financial reporting requirements and for the
payment of compensation, benefits and consulting fees. The following trends may occur as the Company continues to execute on its
strategy:
|
●
|
An
increase in working capital requirements to finance organic growth,
|
|
●
|
Addition
of administrative and sales personnel as the business grows,
|
|
●
|
Increases
in advertising, public relations and sales promotions for existing and new brands as we expand within existing markets or
enter new markets,
|
|
●
|
A
continuation of the costs associated with being a public company, and
|
|
●
|
Capital
expenditures to add technologies.
|
Our
liquidity may be negatively impacted by the significant costs associated with our public company reporting requirements, costs
associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002
and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations
could significantly increase our legal and financial compliance costs and increase the use of resources.
For
Fiscal 2020 the Company had a working capital deficiency of $20,793, an accumulated deficit of $92,179, and a net loss of $15,642.
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has unsecured
payment due in the next 12 months associated with a historical acquisition and secured current debt arrangements which are in
excess of cash and cash equivalents on hand, in addition to funding operational growth requirements. Historically, the Company
has funded such payments either through cash flow from operations or the raising of capital through additional debt or equity.
If the Company is unable to obtain additional capital, such payments may not be made on time. Additionally, with the onset of
COVID-19 pandemic, there is further uncertainty related to our future revenues, gross profit and cash flows. These factors raise
substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not
include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern.
Operating
activities
For Fiscal 2020, net cash used in operations
of $14,256 was primarily attributable to changes in operating assets and liabilities totalling $7,800 and a net
loss of $15,642, offset by non-cash adjustments of $9,186. Changes in operating assets and liabilities primarily
relates to a decrease in accounts receivable of $7,314, decrease in other assets of $941, increase in accounts payable
and accrued expenses of $1,659, decrease in other current liabilities of $2,058, and decrease in other long-term
liabilities of $1,657, offset by increase in accounts payable – related party of $1,598, increase in prepaid
expenses of $427, and increase in other of $424. Non-cash add backs of $9,186 primarily relates to amortization
of intangible assets and depreciation of $3,275, right of use assets amortization of $1,521, amortization of debt discount
and deferred financing of $559, stock-based compensation of $637, bad debt expense of $933, and write-off of goodwill of
$2,969, offset by remeasurement gain on intercompany note of $584 and gain on sale of subsidiary of $124.
For
Fiscal 2019, net cash used in operations of $10,840 was primarily attributable to changes in operating assets and liabilities
totalling $10,230 and a net loss of $4,894, offset by non-cash adjustments of $4,284. Changes in operating assets
and liabilities primarily relates to an increase in accounts receivable of $7,574, increase in other assets of $2,123,
decrease in accounts payable and accrued expenses of $1,893, decrease in other current liabilities of $94, and decrease in other
long-term liabilities of $85, offset by increase in accounts payable – related party of $1,114, decrease in prepaid expenses
of $367, and increase in other of $58. Non-cash add backs of $4,284 primarily relates to amortization of intangible assets
and depreciation of $3,369, right of use assets amortization of $1,533, amortization of debt discount and deferred financing
of $857, and stock-based compensation of $832, offset by remeasurement gain on intercompany note of $383 and gain on settlement
of deferred consideration of $1,924.
Investing
activities
For
Fiscal 2020, net cash flows provided by investing activities was $11,697, of which $8,654 was from the collection of UK factoring
facility deferred purchase price and $3,300 was attributable to proceeds from the sale of a subsidiary, partially offset by purchase
of property and equipment of $257.
For
Fiscal 2019, net cash flows provided by investing activities was $13,460, of which $13,970 was related to the collection of the
UK factoring facility deferred purchase price, partially offset by purchase of property and equipment of $510.
Financing
activities
For
Fiscal 2020, net cash flows provided by financing activities totalled $11,553, of which $2,426 relates to repayments
on accounts receivable financing, net, payment of third-party financing costs of $795, dividends paid to related parties
of $3,333, redemption of Series E Preferred Stock of $1,920, repayment of term loans of $4,734; and financing costs
– related party of $488; offset by proceeds from equity raise of $4,634, proceeds from PPP loans of $19,395 and proceeds
from term loans of $1,220.
For
Fiscal 2019, net cash flows used in financing activities totalled $4,389, of which $2,708 relates to repayments on accounts
receivable financing, net, payment on deferred consideration for $6,230, payment of third-party financing costs of $1,154, dividends
paid to related parties of $1,175, dividends paid to shareholders of $337, and repayment on HSBC loan of $650; financing costs
– related party of $188; offset by proceeds from equity raise of $5,515 and proceeds from related party term loan of $2,538.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
See Note 2 in the accompanying financial statements.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
TABLE
OF CONTENTS
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated Balance Sheets at January 2, 2021 and December 28, 2019
|
F-2
|
|
|
Consolidated Statements of Operations for the fiscal year ended January 2, 2021 and December 28, 2019
|
F-3
|
|
|
Consolidated Statements of Comprehensive Loss for the fiscal year ended January 2, 2021 and December 28, 2019
|
F-4
|
|
|
Consolidated Statements of Changes in Stockholders’ Deficit for the fiscal year ended January 2, 2021 and December 28, 2019
|
F-5
|
|
|
Consolidated Statements of Cash Flows for the fiscal year ended January 2, 2021 and December 28, 2019
|
F-7
|
|
|
Notes to Consolidated Financial Statements
|
F-8
|
Report
of Independent Registered Public Accounting Firm
Board
of Directors and Shareholders
Staffing
360 Solutions, Inc.
New
York, NY
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Staffing 360 Solutions, Inc. (the “Company”) as of January
2, 2021 and December 28, 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ deficit,
and cash flows for each of the two years in the period ended January 2, 2021, and the related notes (collectively referred to
as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company at January 2, 2021 and December 28, 2019, and the results of its
operations and its cash flows for each of the two years in the period ended January 2, 2021, in conformity with accounting
principles generally accepted in the United States of America.
Ability
to Continue as a Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As described in Note 2 to the consolidated financial statements, the Company has suffered recurring losses, has a net capital
deficiency, and faces uncertainty as to the operational impact of the COVID-19 outbreak, that raises substantial doubt about its
ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical
Audit Matter
The
critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit
matter or on the accounts or disclosures to which it relates.
Goodwill
Impairment Quantitative Assessment
At
January 2, 2021, the Company’s consolidated goodwill balances was approximately $27 million, which is allocated between
four reporting units. As discussed in Note 7 to the consolidated financial statements, the Company tests goodwill for impairment
at least annually at the reporting unit level. The Company determines the fair value of the reporting unit using a combination
of an income approach and a market approach. The determination of the fair value of the reporting units requires management to
make significant estimates and assumptions related to forecasts of future cash flow, discount rates and market multiples of comparable
companies. These assumptions are affected by expected future market or economic conditions, including the impact of COVID-19.
We
identified the goodwill impairment quantitative assessment as a critical audit matter because of the significant assumptions management
makes as part of the assessment to estimate the fair value of the reporting units. The income approach requires significant management
assumptions in projecting future cash flows, including, revenue growth rate and discount rates. The market approach requires significant
judgment in selecting the appropriate peer companies and the valuation multiples. These assumptions are further impacted by the
inherent uncertainties resulting from COVID-19 pandemic related to the timing and extent of economic and market recovery. Auditing
these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address
these matters, including the involvement of professionals with specialized skill or knowledge.
The
primary procedures we performed to address this critical matter included:
|
●
|
Evaluating
the reasonableness of management’s assumptions in the calculation of fair value of reporting units, including the revenue
growth rate in the projected future cash flows by comparing to prior period forecasts, historical operating performance, internal
and external communications by the Company and publicly available industry data of peer companies.
|
|
|
|
|
●
|
Evaluating
the reasonableness of management’s assumptions related to the extent of business disruption and timing of recovery by
i) comparing management’s analysis of the expected business disruption attributed to the pandemic to actual results
observed since the pandemic began during the Company’s fiscal year 2020, and ii) comparing management’s analysis
of the timing of economic recovery to published industry forecasts and analyst reports in order to consider contradictory
evidence regarding the expected impact of the COVID-19 disruption and timing of recovery.
|
|
|
|
|
●
|
Assessing
the Company’s ability to estimate future cash flows, including projected revenues by comparing the Company’s historical
cash flow forecasts to actual results.
|
|
|
|
|
●
|
Utilizing
personnel with specialized knowledge and skill in valuation to assist in: i) assessing the appropriateness and relative weighting
of valuation methodology, ii) evaluating the reasonableness of the discount rate used in the income approach, and iii) evaluating
the reasonableness of the assumptions used to select peer companies and valuation multiples in market approach.
|
/s/
BDO USA LLP
We
have served as the Company’s auditor since 2017.
New
York, NY
April
16, 2021
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(All
amounts in thousands, except share and par values)
|
|
As of
January 2, 2021
|
|
|
As of
December 28,
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,256
|
|
|
$
|
1,196
|
|
Cash in escrow
|
|
|
2,080
|
|
|
|
—
|
|
Accounts receivable, net
|
|
|
24,568
|
|
|
|
26,604
|
|
Prepaid expenses and other current assets
|
|
|
1,251
|
|
|
|
842
|
|
Total Current Assets
|
|
|
36,155
|
|
|
|
28,642
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,066
|
|
|
|
1,528
|
|
Goodwill
|
|
|
27,045
|
|
|
|
31,049
|
|
Intangible assets, net
|
|
|
16,017
|
|
|
|
19,511
|
|
Other assets
|
|
|
3,168
|
|
|
|
3,223
|
|
Right of use assets
|
|
|
3,433
|
|
|
|
4,888
|
|
Total Assets
|
|
$
|
86,884
|
|
|
$
|
88,841
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
15,030
|
|
|
$
|
16,577
|
|
Accrued expenses - related party
|
|
|
2,306
|
|
|
|
3,884
|
|
Current debt, related party
|
|
|
1,139
|
|
|
|
37,780
|
|
Current portion of debt
|
|
|
1,260
|
|
|
|
676
|
|
PPP Loans
|
|
|
12,468
|
|
|
|
—
|
|
Accounts receivable financing
|
|
|
16,986
|
|
|
|
19,374
|
|
Leases - current liabilities
|
|
|
1,211
|
|
|
|
1,797
|
|
Other current liabilities
|
|
|
6,548
|
|
|
|
3,907
|
|
Total Current Liabilities
|
|
|
56,948
|
|
|
|
83,995
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, related party
|
|
|
32,182
|
|
|
|
—
|
|
Long-term debt
|
|
|
834
|
|
|
|
360
|
|
PPP Loans, non-current
|
|
|
6,927
|
|
|
|
—
|
|
Leases – non-current
|
|
|
2,226
|
|
|
|
3,183
|
|
Other long-term liabilities
|
|
|
3,787
|
|
|
|
1,670
|
|
Total Liabilities
|
|
|
102,904
|
|
|
|
89,208
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
Series E-1 Preferred Stock, 6,500 designated, $0.00001 par value, 1,363 and 729 shares issued and outstanding as of January 2, 2021 and December 28, 2019, respectively
|
|
|
—
|
|
|
|
—
|
|
Contingently redeemable Series E Preferred Stock
|
|
|
2,080
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
Staffing 360 Solutions, Inc. Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par value, 20,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, related party, 1,663,008 designated, $0.00001
par value, $1.00 stated value, 1,663,008 and 1,039,380 shares issued and outstanding as of January 2, 2021 and December
28, 2019, respectively
|
|
|
—
|
|
|
|
—
|
|
Series E Preferred Stock, 13,000 designated, $0.00001 par value, 11,080 and 13,000 shares issued and outstanding as of January 2, 2021 and December 28, 2019, respectively
|
|
|
11
|
|
|
|
13
|
|
Common stock, $0.00001 par value, 40,000,000 shares authorized; 16,818,624 and 8,785,748 shares issued and outstanding as of January 2, 2021 and December 28, 2019, respectively
|
|
|
1
|
|
|
|
1
|
|
Additional paid in capital
|
|
|
73,844
|
|
|
|
76,214
|
|
Accumulated other comprehensive income (loss)
|
|
|
223
|
|
|
|
(58
|
)
|
Accumulated deficit
|
|
|
(92,179
|
)
|
|
|
(76,537
|
)
|
Total Stockholders’ Deficit
|
|
|
(18,100
|
)
|
|
|
(367
|
)
|
Total Liabilities, Contingently Redeemable Preferred
Stock and Stockholders’ Deficit
|
|
$
|
86,884
|
|
|
$
|
88,841
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(All
amounts in thousands, except share and per share values)
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Revenue
|
|
$
|
204,527
|
|
|
$
|
278,478
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
169,714
|
|
|
|
230,169
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
34,813
|
|
|
|
48,309
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
37,506
|
|
|
|
44,317
|
|
Impairment of goodwill
|
|
|
2,969
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
3,118
|
|
|
|
3,369
|
|
Total Operating Expenses
|
|
|
43,593
|
|
|
|
47,686
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income From Operations
|
|
|
(8,780
|
)
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
Other (Expenses) Income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,195
|
)
|
|
|
(7,628
|
)
|
Amortization of debt discount and deferred financing costs
|
|
|
(559
|
)
|
|
|
(857
|
)
|
Re-measurement gain on intercompany note
|
|
|
584
|
|
|
|
383
|
|
Gain from sale of business
|
|
|
124
|
|
|
|
—
|
|
Gain on settlement of deferred consideration
|
|
|
—
|
|
|
|
1,924
|
|
Interest expense - restructuring
|
|
|
(41
|
)
|
|
|
—
|
|
Other income, net
|
|
|
125
|
|
|
|
326
|
|
Total Other Expenses, net
|
|
|
(6,962
|
)
|
|
|
(5,852
|
)
|
|
|
|
|
|
|
|
|
|
Loss Before Provision For Income Tax
|
|
|
(15,742
|
)
|
|
|
(5,229
|
)
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
|
100
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(15,642
|
)
|
|
|
(4,894
|
)
|
|
|
|
|
|
|
|
|
|
Dividends - Series A preferred stock - related party
|
|
|
125
|
|
|
|
200
|
|
Dividends - Series E preferred stock - related party
|
|
|
2,472
|
|
|
|
1,560
|
|
Dividends - Series E-1 preferred stock - related party
|
|
|
756
|
|
|
|
728
|
|
Deemed dividend
|
|
|
4,690
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss Attributable to Common Stockholders
|
|
$
|
(23,685
|
)
|
|
$
|
(7,382
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1.74
|
)
|
|
$
|
(0.60
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Stockholders
|
|
$
|
(2.64
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding – Basic and Diluted
|
|
|
8,970,871
|
|
|
|
8,198,519
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(All
amounts in thousands)
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Net Loss
|
|
$
|
(15,642
|
)
|
|
$
|
(4,894
|
)
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
Foreign exchange translation gain (loss)
|
|
|
281
|
|
|
|
(2,111
|
)
|
Comprehensive Loss Attributable to the Company
|
|
$
|
(15,361
|
)
|
|
$
|
(7,005
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(All
amounts in thousands, except share and par values)
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Additional paid in
|
|
|
Accumulated other comprehensive
|
|
|
Accumulated
|
|
|
Total Equity
|
|
|
|
Series E-1
|
|
|
Series A
|
|
|
Series E
|
|
|
Common Stock
|
|
|
capital
|
|
|
income (loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance December 29, 2018
|
|
|
81
|
|
|
$
|
—
|
|
|
|
1,663,008
|
|
|
$
|
—
|
|
|
|
13,000
|
|
|
$
|
13
|
|
|
|
5,326,068
|
|
|
$
|
—
|
|
|
$
|
73,772
|
|
|
$
|
2,053
|
|
|
$
|
(71,643
|
)
|
|
$
|
4,195
|
|
Shares issued to/for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees, directors and consultants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,400
|
|
|
|
—
|
|
|
|
832
|
|
|
|
—
|
|
|
|
—
|
|
|
|
832
|
|
Sale of common stock, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,331,280
|
|
|
|
1
|
|
|
|
4,360
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,361
|
|
Share issuance - Jackson
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
Dividends - Series A Preferred Stock - Related Party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(200
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(200
|
)
|
Dividends - Series E Preferred Stock - Related Party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,560
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,560
|
)
|
Dividends - Series E-1 Preferred Stock - Related Party
|
|
|
648
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(728
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(728
|
)
|
Dividends - Common stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(337
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(337
|
)
|
Foreign currency translation loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,111
|
)
|
|
|
—
|
|
|
|
(2,111
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,894
|
)
|
|
|
(4,894
|
)
|
Balance December 28, 2019
|
|
|
729
|
|
|
$
|
—
|
|
|
|
1,663,008
|
|
|
$
|
—
|
|
|
|
13,000
|
|
|
$
|
13
|
|
|
|
8,785,748
|
|
|
$
|
1
|
|
|
$
|
76,214
|
|
|
$
|
(58
|
)
|
|
$
|
(76,537
|
)
|
|
$
|
(367
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(All
amounts in thousands, except share and par values)
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Additional paid in
|
|
|
Accumulated other comprehensive (loss)
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Series E-1
|
|
|
Series A
|
|
|
Series E
|
|
|
Common Stock
|
|
|
capital
|
|
|
income
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance December 28, 2019
|
|
|
729
|
|
|
$
|
—
|
|
|
|
1,663,008
|
|
|
|
|
|
|
$
|
13,000
|
|
|
$
|
13
|
|
|
|
8,785,748
|
|
|
$
|
1
|
|
|
$
|
76,214
|
|
|
$
|
(58
|
)
|
|
$
|
(76,537
|
)
|
|
$
|
(367
|
)
|
Shares issued to/for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees, directors and consultants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,400
|
|
|
|
—
|
|
|
|
581
|
|
|
|
—
|
|
|
|
—
|
|
|
|
581
|
|
Related party from Debt Arrangement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
324
|
|
|
|
—
|
|
|
|
—
|
|
|
|
324
|
|
Series A Preferred Conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
(623,628
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,215
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Sales of common stock, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,479,261
|
|
|
|
—
|
|
|
|
3,894
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,894
|
|
Warrants issued for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56
|
|
Warrant modification – related party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126
|
|
Dividends - Series A Preferred Stock - Related Party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(125
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(125
|
)
|
Redemption of Series E Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,920
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,918
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,920
|
)
|
Dividends - Series E Preferred Stock - Related Party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,472
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,472
|
)
|
Dividends - Series E-1 Preferred Stock - Related Party
|
|
|
634
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(756
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(756
|
)
|
Redeemable portion of Series E Preferred Stock – Related Party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,080
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,080
|
)
|
Beneficial conversion feature for fair value modification – Series E Preferred Stock – Related Party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,690
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,690
|
|
Deemed dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,690
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,690
|
)
|
Foreign currency translation gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
281
|
|
|
|
—
|
|
|
|
281
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,642
|
)
|
|
|
(15,642
|
)
|
Balance January 2, 2021
|
|
|
1,363
|
|
|
$
|
—
|
|
|
|
1,039,380
|
|
|
$
|
—
|
|
|
|
11,080
|
|
|
$
|
11
|
|
|
|
16,818,624
|
|
|
$
|
1
|
|
|
$
|
73,844
|
|
|
$
|
223
|
|
|
$
|
(92,179
|
)
|
|
$
|
(18,100
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(All
amounts in thousands)
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,642
|
)
|
|
$
|
(4,894
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of intangible assets
|
|
|
3,275
|
|
|
|
3,369
|
|
Amortization of debt discount and deferred financing costs
|
|
|
559
|
|
|
|
857
|
|
Gain on settlement of deferred consideration
|
|
|
—
|
|
|
|
(1,924
|
)
|
Bad debt expense
|
|
|
933
|
|
|
|
—
|
|
Goodwill impairment
|
|
|
2,969
|
|
|
|
—
|
|
Right of use assets amortization
|
|
|
1,521
|
|
|
|
1,533
|
|
Stock based compensation
|
|
|
637
|
|
|
|
832
|
|
Gain from sale of business
|
|
|
(124
|
)
|
|
|
—
|
|
Re-measurement gain on intercompany note
|
|
|
(584
|
)
|
|
|
(383
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,314
|
)
|
|
|
(7,574
|
)
|
Prepaid expenses and other current assets
|
|
|
(427
|
)
|
|
|
367
|
|
Other assets
|
|
|
(941
|
)
|
|
|
(2,123
|
)
|
Accounts payable and accrued expenses
|
|
|
(1,659
|
)
|
|
|
(1,893
|
)
|
Accounts payable - Related parties
|
|
|
(1,598
|
)
|
|
|
1,114
|
|
Other current liabilities
|
|
|
2,058
|
|
|
|
(94
|
)
|
Other long-term liabilities
|
|
|
1,657
|
|
|
|
(85
|
)
|
Other, net
|
|
|
424
|
|
|
|
58
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(14,256
|
)
|
|
|
(10,840
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Collection of UK factoring facility deferred purchase price
|
|
|
8,654
|
|
|
|
13,970
|
|
Proceeds from sale of subsidiary
|
|
|
3,300
|
|
|
|
—
|
|
Purchase of property and equipment
|
|
|
(257
|
)
|
|
|
(510
|
)
|
NET CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
11,697
|
|
|
|
13,460
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Third-party financing costs
|
|
|
(795
|
)
|
|
|
(1,154
|
)
|
Related-party financing costs
|
|
|
(488
|
)
|
|
|
(188
|
)
|
Payments for earn-outs
|
|
|
—
|
|
|
|
(6,230
|
)
|
Proceeds from term loans - related party
|
|
|
—
|
|
|
|
2,538
|
|
Proceeds from term loans
|
|
|
1,220
|
|
|
|
—
|
|
Repayment of term loans
|
|
|
(4,734
|
)
|
|
|
(650
|
)
|
Repayments on accounts receivable financing, net
|
|
|
(2,426
|
)
|
|
|
(2,708
|
)
|
Dividends - related party
|
|
|
(3,333
|
)
|
|
|
(1,175
|
)
|
Redemption of Series E preferred Stock, Related party
|
|
|
(1,920
|
)
|
|
|
—
|
|
Proceeds from sale of common stock
|
|
|
4,634
|
|
|
|
5,515
|
|
Proceeds from PPP loans
|
|
|
19,395
|
|
|
|
—
|
|
Dividends paid on common stock
|
|
|
—
|
|
|
|
(337
|
)
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
11,553
|
|
|
|
(4,389
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH
|
|
|
8,994
|
|
|
|
(1,769
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
146
|
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND RESTRICTED CASH - Beginning of period
|
|
|
1,196
|
|
|
|
3,181
|
|
|
|
|
|
|
|
|
|
|
CASH AND RESTRICTED CASH - End of period
|
|
$
|
10,336
|
|
|
$
|
1,196
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Staffing
360 Solutions, Inc. (“we,” “us,” “our,” “Staffing 360,” or the “Company”)
was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation, which changed its name to Staffing 360
Solutions, Inc., ticker symbol “STAF,” on March 16, 2012. On June 15, 2017, the Company reincorporated in the State
of Delaware. We are a rapidly growing public company in the international staffing sector. Our high-growth business model is based
on finding and acquiring, suitable, mature, profitable, operating, domestic and international staffing companies. Our targeted
consolidation model is focused specifically on the accounting and finance, information technology (“IT”), engineering,
administration (“Professional”) and light industrial (“Commercial”) disciplines.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
These
consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles
in the United States (“GAAP”), expressed in U.S. dollars. All amounts are in thousands, except share and par values,
unless otherwise indicated.
The
accompanying consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion
of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented
in accordance with the GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Change
of Year End
On
February 28, 2017, the board of directors (the “Board”) approved the change of the Company’s fiscal year end
from May 31 to a 52-53-week year ending on the Saturday closest to the 31st of December. This report is for the period
from December 29, 2019 to January 2, 2021, “Fiscal 2020.” The prior year’s report was for the period from December
30, 2018 to December 28, 2019, “Fiscal 2019”.
Liquidity
The
accompanying financial statements do not include any adjustments or classifications that may result from the possible inability
of the Company to continue as a going concern. The accompanying financial statements have been prepared on a basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial
statements as of the year ended January 2, 2021, the Company has an accumulated deficit of $92,179 and a working capital deficit
of $20,793. At January 2, 2021, we had total gross debt of $55,369 and $8,256 of cash on hand. We have historically met our cash
needs through a combination of cash flows from operating activities, term loans, promissory notes, convertible notes, private
placement offerings and sales of equity. Our cash requirements are generally for operating activities and debt repayments. Subsequent
to the year ended January 2, 2021, we have continued to fund our operations and make required capital payments utilizing our available
cash and, as of the date of this filing, we have approximately $1,050 in available cash.
The
financial statements included in this annual report have been prepared assuming that we will continue as a going concern, which
contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions
underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity,
capital requirements and that our credit facilities with our lenders will remain available to us.
Further,
our note issued to Jackson Investment Group LLC (“Jackson”) includes certain financial customary covenants and the
Company has had instances of non-compliance. Management has historically been able to obtain from Jackson waivers of any non-compliance
and management expects to continue to be able to obtain necessary waivers in the event of future non-compliance; however, there
can be no assurance that the Company will be able to obtain such waivers, and should Jackson refuse to provide a waiver in the
future, the outstanding debt under the agreement could become due immediately, which exceeds our current cash balance.
Going
Concern
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”), which contemplate continuation of the Company as a going concern. Historically, the Company
has funded such payments either through cash flow from operations or the raising of capital through additional debt or equity.
If the Company is unable to obtain additional capital, such payments may not be made on time.
The
Novel Coronavirus Disease 2019 (“COVID-19”), is impacting worldwide economic activity, and activity in the United
States and the United Kingdom where our operations are based. The nature of work of the contractors we support mostly are on the
site of our clients. As a result, we are subject to the plans and approaches of our clients to work during this period. This includes
whether they support remote working when they have decided to close their facilities. To the extent that our clients have decided
to or are required to close their facilities or not permit remote work when they decide to close facilities, we would no longer
generate revenue and profit from that client. Developments such as social distancing and shelter-in-place directives have impacted
the Company’s ability to deploy its staffing workforce effectively thereby impacting contracts with customers in the Company’s
Commercial Staffing and Professional Staffing business streams where we have seen declines in revenues during Fiscal 2020. While
expected to be temporary, prolonged workforce disruptions can negatively impact sales in fiscal year 2021 and the Company’s
overall liquidity.
The
Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic
reaction to the COVID-19 pandemic raise substantial doubt about the Company’s ability to continue as a going concern.
The
full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full
magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations.
Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, industry,
and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is
not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for
fiscal year 2021.
COVID-19
The
full impact of the COVID-19 pandemic continues to evolve as of the date of this annual report. As such, it is uncertain as to
the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations.
Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, industry,
and workforce. Developments such as social distancing and shelter-in-place directives have impacted the Company’s ability
to generate revenues. Given the daily evolution of the COVID-19 pandemic, including new information which may emerge concerning
the severity of COVID-19 and the global responses to curb its spread and to treat its impact, the Company is not able to estimate
the duration of the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity beyond fiscal
year 2020, however the Company continues to take action to reduce the negative effects of the COVID-19 pandemic on its operations
through various cost cutting initiatives including reductions to support personnel, temporary salary reductions, and elimination
of other non-essential spend. Should the impact from the pandemic go on for an extended period of time, management has developed
further plans to partially mitigate the impact of the pandemic.
On
March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.”
The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side
social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net
interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax
depreciation methods for qualified improvement property. It also appropriated funds for the SBA Paycheck Protection Program (“PPP”)
loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to
provide liquidity to small businesses harmed by COVID-19.
On
May 12, 2020, Monroe Staffing Services, LLC (“Monroe Staffing”), an indirect subsidiary of the Company, entered into
a note (the “May 12 Note”) with Newton Federal Bank (the “Bank”), pursuant to the PPP of the CARES Act
administered by the U.S. Small Business Administration (“SBA”). The principal amount of the May 12 Note is $10,000.
In
accordance with the requirements of the CARES Act, the Company and Monroe Staffing (collectively, the “May 12 Note Borrowers”)
intends to use the proceeds from the May 12 Note in accordance with the requirements of the PPP to cover certain qualified expenses,
including payroll costs, rent and utility costs. Interest accrues on the May 12 Note at the rate of 1.00% per annum. The May 12
Note Borrowers may apply for forgiveness of the amount due under the May 12 Note, in an amount equal to the sum of qualified expenses
under the PPP. The May 12 Note Borrowers intend to use the entire proceeds under the May 12 Note for such qualifying expenses.
Subject
to any forgiveness under the PPP, the May 12 Note matures two years following the date of issuance of the May 12 Note and includes a
period for the first six months during which time required payments of interest and principal are deferred. Beginning on the eleventh
month following the date of the May 12 Note, the May 12 Note Borrowers are required to make 14 monthly payments of principal and
interest. The May 12 Note may be prepaid at any time prior to maturity. The May 12 Note provides for customary events of default, including,
among others, those relating to breaches of obligations under the May 12 Note, including a failure to make payments, any bankruptcy or
similar proceedings involving the May 12 Note Borrowers, and certain material effects on the May 12 Note Borrowers’ ability to
repay the May 12 Note. The May 12 Note Borrowers did not provide any collateral or guarantees for the May 12 Note.
On
May 20, 2020, Key Resources Inc. (“KRI”), Lighthouse Placement Services, LLC (“LH”) and Staffing 360 Georgia,
LLC (“SG”), each a wholly owned direct or indirect subsidiary of the Company, entered into the following notes, each
dated May 20, 2020, with the Bank, pursuant to the PPP of the CARES Act administered by the SBA. KRI entered into a note (the
“KRI Note”) for the principal amount of approximately $5,443, LH entered into a note (the “LH Note”) for
the principal amount of approximately $1,890, and SG entered into a note (the “SG Note,” and, together with the KRI
Note and LH Note, the “May 20 Notes”) for the principal amount of approximately $2,063. The combined total of the
May 20 Notes is approximately $9,395.
In
accordance with the requirements of the CARES Act, the Company, KRI, LH and SG (collectively, the “May 20 Note Borrowers”)
intends to use the proceeds from the May 20 Notes in accordance with the requirements of the PPP to cover certain qualified expenses,
including payroll costs, rent and utility costs. Interest accrues on each of the May 20 Notes at the rate of 1.00% per annum.
The May 20 Note Borrowers may apply for forgiveness of the amount due under the May 20 Notes, in an amount equal to the sum of
qualified expenses under the PPP. The May 20 Note Borrowers intend to use the entire proceeds under the May 20 Notes for such
qualifying expenses.
Subject
to any forgiveness under the PPP, each of the May 20 Notes mature two years following the date of issuance of the May 20 Notes and include
a period for the first six months during which time required payments of interest and principal are deferred. Beginning on the eleventh
month following the date of each of the May 20 Notes, the May 20 Note Borrowers are required to make 14 monthly payments of principal
and interest. Based upon these payment terms the Company has recognized $6,927 of the PPP loan as a short-term obligation and
$12,468 as long term. The May 20 Notes may be prepaid at any time prior to maturity. The May 20 Notes provide for customary events
of default, including, among others, those relating to breaches of obligations under the May 20 Notes, including a failure to make payments,
any bankruptcy or similar proceedings involving the Borrowers, and certain material effects on the Borrowers’ ability to repay
the May 20 Notes. The May 20 Note Borrowers did not provide any collateral or guarantees for the May 20 Notes.
The
application for these funds required the Company to certify in good faith that the current economic uncertainty made the loan
request necessary to support the ongoing operations of the Company. This certification further required the Company to take into
account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations
in a manner that is not significantly detrimental to the business. The Company made this good faith assertion based upon the adverse
impact the COVID-19 pandemic had on our business and the degree of uncertainty introduced to the capital markets. While the Company
has made this assertion in good faith based upon all available guidance, management will continue to assess their continued qualification
if and when updated guidance is released by the Treasury Department.
All
or a portion of the PPP Loan may be forgiven by the SBA upon application by the Company beginning 60 days but not later than 120
days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act,
loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered
utilities during the eight-week period beginning on the date of loan approval. For purposes of the CARES Act, payroll costs exclude
compensation of an individual employee in excess of $100, prorated annually. Not more than 40% of the forgiven amount may be for
non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries
of $100 or less annually are reduced by more than 25%. The ultimate forgiveness of the PPP loan is also predicated upon regulatory
authorities concurring with management’s good faith assessment that the current economic uncertainty made the loan request
necessary to support ongoing operations. If, despite the Company’s good-faith belief that given the circumstances the Company
satisfied all eligibility requirements for the PPP Loan, the Company is later determined to have violated any applicable laws
or regulations or it is otherwise determined that the Company was ineligible to receive the PPP Loan, the Company may be required
to repay the PPP Loan in its entirety and/or be subject to additional penalties. In the event the PPP Loan, or any portion thereof,
is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal.
Effective
March 27, 2020, the Company is deferring Federal Insurance Contributions Act taxes under the CARES Act section 2302. Payment of
these tax deferrals of $2,473 and $2,473 are delayed to December 31, 2021 and December 31, 2022, respectively.
Acquisitions
Clement
May Acquisition
On
June 28, 2018, the Company and Staffing 360 Solutions Limited (formerly known as Longbridge Recruitment 360 Limited), a wholly
owned subsidiary of the Company, entered into share purchase agreements (“Share Purchase Agreements”) to acquire all
of the share capital of Clement May Limited (“CML”.) Consideration for the acquisition of all the shares was (i) an
aggregate cash payment of £1,550 ($2,047), (ii) 15,000 shares of the Company’s common stock, (iii) an earn-out payment
of up to £500, the amount to be calculated and paid on or around January 2, 2021 pursuant to the Share Purchase Agreement,
and (iv) deferred consideration of £350, to be paid on or around June 28, 2019, depending on the satisfaction of certain
conditions set forth in that Share Purchase Agreement. To finance the above acquisition, the Company entered into a term loan
with HSBC Bank plc. The Company paid deferred consideration of £350 ($444) on June 26, 2019. The earnout payment of £500
($656) was fully paid in December 2019.
Key
Resources Inc. Acquisition
On
August 27, 2018, the Company and Monroe Staffing Services, LLC (“Monroe Staffing”), an indirect wholly owned subsidiary
of the Company, entered into a share purchase agreement with Pamela D. Whitaker (“Seller”), pursuant to which the
Seller sold 100% of the common shares of Key Resources Inc. (“KRI”) to Monroe Staffing (the “KRI Transaction”.)
The
KRI Transaction closed simultaneously with the signing of the share purchase agreement. The purchase price in connection with
the KRI Transaction was approximately $12,163, of which (a) approximately $8,109 was paid to the Seller at closing, (b) up to
approximately $2,027 is payable as earnout consideration to the Seller on August 27, 2019 and (c) up to $2,027 is payable as earnout
consideration to the Seller on August 27, 2020. The payment of the earnout consideration is contingent on KRI’s achievement
of certain trailing gross profit amounts.
To
finance the KRI Transaction, the Company entered into an agreement with Jackson Investment Group, LLC (“Jackson”)
on August 27, 2018, pursuant to which the note purchase agreement dated as of September 15, 2017 was amended to add an additional
senior debt investment of approximately $8,428. On September 11, 2019, the Company entered into an amended agreement with the
seller to delay the payment of the first year earnout of $2,027 until no later than February 27, 2020. For each full calendar
month beyond August 27, 2019, that such payment is delayed, the Company shall pay the seller interest in the amount of $10 with
the first such payment of interest due on September 30, 2019. In addition, the amended agreement was further amended to change
the due date for the second year earnout payment of $2,027 from August 27, 2020, to February 27, 2020. The seller of KRI, Pamela
D. Whitaker (“Whitaker”) has filed a lawsuit against the Company asserting claims for breach of contract and declaratory
judgment against the Company due under a share purchase agreement and is seeking $4,054 in alleged damages. While the Company
had recognized the liability for the earnout consideration of $4,054 due to Whitaker, within current liabilities as of January
2, 2021, in February 2020, the Company filed an action against Whitaker for breach of contract which more than offsets the earnout
consideration recognized. The Company paid interest of $30 in Fiscal 2019 and $40 in Fiscal 2020.
Divesture
of Business
On
September 24, 2020, the Company and Staffing 360 Georgia, LLC d/b/a firstPRO, a wholly owned subsidiary of the Company
(the “Seller”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with firstPRO
Recruitment, LLC (the “Buyer”), pursuant to which the Seller sold to the Buyer substantially all of the Seller’s
assets used in or related to the operation or conduct of its professional staffing and recruiting business in Georgia (the “Assets,”
and such sale, the “firstPRO Transaction”.) The Buyer is a former employee of Staffing 360 Georgia, LLC d/b/a
firstPRO.
In
addition, the Buyer has agreed to assume certain liabilities related to the Assets. The purchase price in connection with the
firstPRO Transaction was $3,300, of which (a) $1,220 was paid at closing (the “Initial Payment”) and (b) $2,080
was held in a separate escrow account (the “Escrow Funds”), which will be released upon receipt of the forgiveness
of the Company’s PPP loan by the U.S. Small Business Administration (the “SBA”.) In the event that all or any
portion of the PPP Loan is not forgiven by the SBA, all or portion of the Escrow Funds will be used to repay any unforgiven portion
of the PPP Loan in full. The firstPRO Transaction closed on September 24, 2020. In September, the Company submitted the
PPP Loan forgiveness applications to the SBA. The Monroe Staffing PPP loan forgiveness status was recently changed from pending
to under review. Under review status is the last stage before forgiveness or rejection. All other PPP loans within the Company
remain in pending status. As of the date of this filing, the PPP Loan has not been approved for forgiveness, and there is no guarantee
that all or portion of the PPP Loan will be forgiven. As of January 2, 2021, the escrow funds of $2,080 are presented as restricted
cash.
The
Asset Purchase Agreement contains non-competition and non-solicitation provisions customary for agreements of this type. In addition,
under the terms of the Asset Purchase Agreement, the Company has agreed to indemnify the Buyer against certain liabilities, subject
to certain conditions and limitations as set forth in the Asset Purchase Agreement.
In
connection with execution of the Asset Purchase Agreement, the Company and certain of its subsidiaries entered into a Consent
Agreement (the “Consent”) with Jackson, a noteholder under the Existing Note Purchase Agreement. Under the terms of
the Consent and the Certificate of Designation of the Company’s Series E Convertible Preferred Stock (the “Series
E Preferred Stock”), in consideration for Jackson’s consent to the firstPRO Transaction, the Initial Payment
was used to redeem 1,300 shares of the Series E Preferred Stock. The Escrow Funds of $2,080, subject to the forgiveness of the
PPP Loan discussed above, will be used to redeem a portion of the Series E Preferred Stock. The $2,080 is recorded as Contingently
Redeemable series E Preferred Stock.
To
induce the Buyer to enter into the Asset Purchase Agreement, the Company also entered into a Transition Services Agreement with
the Buyer, pursuant to which each party will provide certain transition services such as payrolling through to year end 2020 to
minimize any disruption to the businesses of the Seller and the Buyer arising from the firstPRO Transaction.
Use
of Estimates
The
preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
in the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors
that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between
estimates and the actual results, future results of operations will be affected. Significant estimates for Fiscal 2020 and Fiscal
2019 include the valuation of intangible assets, including goodwill, liabilities associated with earn-out obligations, testing
long-lived assets for impairment and valuation reserves against deferred tax assets.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria
must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract;
and (5) recognize revenue when or as the Company satisfies a performance obligation.
The
Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the
parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client
and the services offered.
The
Company has primarily two main forms of revenue – temporary contractor revenue and permanent placement revenue. Temporary
contractor revenue is accounted for as a single performance obligation satisfied over time because the customer simultaneously
receives and consumes the benefits of the Company’s performance on an hourly basis. The contracts stipulate weekly billing
and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred
at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed
to date. Permanent placement revenue is recognized on the date the candidate’s full-time employment with the customer has
commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms, typically
30 days. The contract with the customer stipulates a guarantee period whereby the customer may be refunded if the employee is
terminated within a short period of time, however this has historically been infrequent, and immaterial upon occurrence. As such,
the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has transferred
to the customer. Revenue in Fiscal 2020 was comprised of $198,066 of temporary contractor revenue and $6,461 of
permanent placement revenue, compared with $266,974 and $11,504 for Fiscal 2019, respectively. Refer to Note 14 for further details
on breakdown by segments.
Taxes
Collected from Customers and Remitted to Governmental Agencies
The
Company records taxes on customer transactions due to governmental agencies as a receivable and a liability on the consolidated
balance sheets. Sales taxes are recorded net on the consolidated statement of operations.
Advertising
Costs
Costs
for advertising are expensed when incurred. Advertising expenses for the Company were $1,302 and $1,365 for Fiscal 2020 and 2019,
respectively.
Legal
Contingencies and Expenses
From
time to time, the Company may become involved in various claims, disputes and legal or regulatory proceedings that arise in the
ordinary course of business and relate to contractual and other obligations. The Company assesses its potential contingent and
other liabilities by analyzing its claims, disputes and legal and regulatory matters using all available information and developing
its views on estimated losses in consultation with its legal and other advisors. The Company determines whether a loss from a
contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. If the contingency
is not probable or cannot be reasonably estimated, disclosure of the contingency shall be made when there is at least a reasonable
possibility that a loss may be incurred. Expenses associated with legal contingencies are expensed as incurred.
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.
The
Briand Separation Agreement
Matthew
Briand, the Company’s former employee, board member and officer, resigned from his positions with the Company and subsidiaries.
The Company entered into an agreement (the “Briand Separation Agreement”) with Mr. Briand dated December 21, 2017,
with an effective date (“Separation Date”) of January 31, 2018, pursuant to which Mr. Briand may provide advisory
services, if requested by the Company, through the effective date. The Company paid approximately $190 and $690 in Fiscal 2019
and Fiscal 2018, respectively, to Mr. Briand, in full settlement of his separation agreement.
The
Faiman Separation Agreement
On
September 11, 2019, David Faiman, the Company’s Chief Financial Officer, and the Company entered into an agreement whereby
Mr. Faiman agreed to transition his position and responsibilities with the Company (“Faiman Separation Agreement”),
and Mr. Faiman’s Employment Agreement, dated February 5, 2016, was terminated.
Under
the terms of the Faiman Separation Agreement, Mr. Faiman will continue as the Company’s Chief Financial Officer, including
acting as the Company’s principal financial officer, for a period lasting until the earlier of (i) December 31, 2019 and
(ii) either (a) such date that is a reasonable time, as determined by the Company, prior to the commencement of a new position
by Mr. Faiman, or (b) upon the Company’s termination of Mr. Faiman’s obligation to provide transition services for
Cause.
Pursuant
to the Faiman Separation Agreement, Mr. Faiman will be entitled to receive, among other things, (i) pay in an amount equal to
his base salary through the separation date, payable in equal installments in accordance with the Company’s normal payroll
policies, (ii) continuation of Mr. Faiman’s current Company-sponsored employee benefits through the separation date, (iii)
accelerated vesting of any outstanding equity awards held by Mr. Faiman and the elimination of any obligations to forfeit such
awards upon the termination of Mr. Faiman’s employment (provided that no award shall be extended beyond its original term)
and (iv) a positive reference from the management of the Company. Effective January 1, 2020, Mr. Faiman was no longer with the
Company. The Company recognized approximately $190 in severance costs related to Mr. Faiman and paid $91 in the fiscal year ended
2020.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with original maturities of three months or less when acquired, to be cash equivalents.
Cash and cash equivalents held at financial institutions may at times exceed federally insured amounts. We believe we mitigate
such risk by investing in or through major financial institutions. The Company had no cash equivalents at the end of Fiscal 2020
or Fiscal 2019.
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 creditworthiness and current economic trends. Accounts are
written off after all efforts to collect have been exhausted. As of the end of Fiscal 2020 and the end of Fiscal 2019,
the Company had an allowance for doubtful accounts of $62 and $210, respectively.
Income
Taxes
The
Company utilizes Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period
end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to
be realized.
The
Company applies the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification
related to the process associated with accounting for uncertain tax positions recognized in the financial statements. Audit periods
remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute
of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such
adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part,
upon the results of operations for the given period. As of the date of this filing, the Company is current on all corporate, federal
and state tax returns. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as
income tax expense.
Foreign
Currency Translation
Assets
and liabilities of subsidiaries operating in foreign countries are translated into U.S. dollars using the exchange rate in effect
at the balance sheet date and equity is translated at historical rate. Results of operations are translated using average exchange
rates. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are
included in a separate component of stockholders’ equity (accumulated other comprehensive income), while gains and losses
resulting from foreign currency transactions are included in operations.
Deferred
Financing Costs
Costs
incurred in connection with obtaining certain financing are deferred and amortized on an effective interest method basis over
the term of the related obligation. In accordance with Accounting Standards Update (“ASU”) 2015-03, “Imputation
of Interest – Simplifying the Presentation of Debt Issuance Costs,” debt issuance costs related to a recognized debt
liability are presented in the balance sheet as a direct deduction from the debt liability, consistent with the presentation of
a debt discount.
Business
Combinations
In
accordance with ASC 805, “Business Combinations,” the Company records acquisitions under the purchase method of accounting,
under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective
fair values. The Company utilizes management estimates and, in some instances, may retain the services of an independent third-party
valuation firm to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted.
Such estimates and valuations require us to make significant assumptions, including projections of future events and operating
performance.
Fair
Value of Financial Instruments
In
accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company measures and accounts for certain
assets and liabilities at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied
to existing generally accepted accounting principles that require the use of fair value measurements, and establishes a framework
for measuring fair value and standards for disclosure about such fair value measurements.
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level
1:
|
Observable
inputs such as quoted market prices in active markets for identical assets or liabilities
|
Level
2:
|
Observable
market-based inputs or unobservable inputs that are corroborated by market data
|
Level
3:
|
Unobservable
inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
There
were no Level 1or 2 assets or liabilities or Level 3 assets in any period. The Company’s Level 3 liabilities were its warrants
issued to Jackson and contingent consideration in connection with acquisitions. The Company had accounted for the warrants issued
to Jackson as a liability under ASC 815-40 due to certain anti-dilution protection provisions. On April 25, 2018, the Company
and Jackson amended the Warrant to remove the anti-dilution clauses. No economic terms were adjusted. These clauses were the basis
for recording the warrants as a liability. Therefore, upon execution of this amendment, the Company recorded a mark-to-market
gain and reclassed the remaining liability to Additional paid-in capital.
The
table below represents a rollforward of the Level 3 warrant liability and contingent consideration:
|
|
Contingent
Consideration
|
|
Balance at December 29, 2018
|
|
$
|
9,731
|
|
CBS Butler earnout payment
|
|
|
(3,930
|
)
|
CBS Butler gain on settlement of earnout
|
|
|
(1,077
|
)
|
KRI deferred consideration
|
|
|
408
|
|
Clement May earnout
|
|
|
(656
|
)
|
Change in fair value
|
|
|
(537
|
)
|
Balance at December 28, 2019
|
|
$
|
3,939
|
|
KRI deferred consideration
|
|
|
115
|
|
Balance at January 2, 2021
|
|
$
|
4,054
|
|
Cash
is considered to be highly liquid and easily tradable 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/(expenses.)
Long-Lived
Assets
In
accordance with ASC 360 “Property, Plant, and Equipment,” the Company periodically reviews its long-lived assets,
including 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
relates to amounts that arose in connection with various acquisitions and represents the difference between the purchase price
and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting.
Goodwill is not amortized, but it is subject to periodic review for impairment. Events that would indicate impairment and trigger
an interim impairment assessment include, but are not limited to, current economic and market conditions, a decline in the equity
value of the business, a significant adverse change in certain agreements that would materially affect reported operating results,
business climate or operational performance of the business and an adverse action or assessment by a regulator.
In
accordance with ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, or ASU 2011-08, the
Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators
of impairment present. During the year ended January 2, 2021 the Company changed its annual measurement date from the first
day of the fiscal fourth quarter to the last day of the fiscal year end. A reporting unit is either the equivalent of, or
one level below, an operating segment. The Company early adopted the provisions in ASU 2017-04, which eliminates the second step
of the goodwill impairment test. As a result, the Company’s goodwill impairment tests include only one step, which is a
comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of
goodwill allocated to that reporting unit, is impaired.
The
carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit.
Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the
reporting unit and the asset and liability is considered in the determination of the reporting unit fair value.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, “Derivative
and Hedging.”
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 host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported 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 deemed 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, “Compensation –
Stock Compensation,” 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, “Equity-Based Payments to Non-Employees.”
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt
instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments
with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature
in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination
of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible
instrument that is within the scope of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for
calculating diluted earnings per share and treasury stock method will be no longer available. ASU 2020-06 is applicable for fiscal
years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15,
2020. The Company is still contemplating early adoption and continues to evaluate the impact of the provisions of ASU 2020-06 on its
consolidated financial statements.
On
December 31, 2019, the FASB issued ASC 2019-12 “Income Taxes: Simplifying the Accounting for Income Taxes” (Topic
740.) The amendments in this update simplify the accounting for income taxes by removing the certain exceptions. For public business
entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public
business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for
which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments
in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period.
Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company will adopt the
guidance when it becomes effective.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments” (“ASU 2016-13”.) This standard requires an impairment model (known as the current expected
credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance,
each reporting entity should estimate an allowance for expected credit losses, which is intended to result in more timely recognition
of losses. This model replaces multiple existing impairment models in current U.S. GAAP, which generally requires a loss to be
incurred before it is recognized. The new standard applies to trade receivables arising from revenue transactions such as contract
assets and accounts receivable. Under ASC 606, revenue is recognized when, among other criteria, it is probable that an entity
will collect the consideration it is entitled to when goods or services are transferred to a customer. When trade receivables
are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual
life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable
forecasts. This guidance is effective for smaller reporting companies for annual periods beginning after December 15, 2022, including
the interim periods in the year. Early adoption is permitted. The Company will adopt the guidance when it becomes effective.
NOTE
3 – LOSS PER COMMON SHARE
The
Company utilizes the guidance per ASC 260, “Earnings per Share.” Basic earnings per share are calculated by dividing
income/loss available to stockholders by the weighted average number of common stock shares outstanding during each period. Our
Series A preferred stockholders receive certain dividends or dividend equivalents that are considered participating securities
and our loss per share is computed using the two-class method. 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, certain equity awards and the exercise of
stock options and warrants (calculated using the modified treasury stock method.) Such securities, shown below, presented on a
common share equivalent basis and outstanding as of the end of Fiscal 2020 and Fiscal 2019, have been excluded from the per share
computations since their inclusion would be anti-dilutive:
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Warrants
|
|
|
1,576,879
|
|
|
|
925,935
|
|
Long term incentive plan (LTIP)
|
|
|
155,000
|
|
|
|
365,000
|
|
Options
|
|
|
76,500
|
|
|
|
76,500
|
|
Convertible preferred shares
|
|
|
12,443,000
|
|
|
|
7,785,766
|
|
Restricted shares - unvested
|
|
|
77,815
|
|
|
|
590,440
|
|
Total
|
|
|
14,329,194
|
|
|
|
9,743,641
|
|
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
Computer software
|
|
$
|
471
|
|
|
$
|
342
|
|
Office equipment
|
|
|
1,115
|
|
|
|
1,043
|
|
Computer equipment
|
|
|
1,160
|
|
|
|
1,195
|
|
Furniture and fixtures
|
|
|
1,123
|
|
|
|
1,312
|
|
Leasehold improvements
|
|
|
713
|
|
|
|
965
|
|
Total property and equipment, gross
|
|
|
4,582
|
|
|
|
4,857
|
|
Accumulated depreciation
|
|
|
(3,516
|
)
|
|
|
(3,329
|
)
|
Total property and equipment, net
|
|
$
|
1,066
|
|
|
$
|
1,528
|
|
Depreciation
expense for Fiscal 2020 and Fiscal 2019 was $595 and $643, respectively.
NOTE
5 – OTHER NON-CURRENT ASSETS
The
following provides a breakdown of other non-current assets:
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
Collateral associated with workers’ compensation insurance
|
|
$
|
3,134
|
|
|
$
|
3,204
|
|
Other non-current assets
|
|
|
34
|
|
|
|
19
|
|
Total
|
|
$
|
3,168
|
|
|
$
|
3,223
|
|
NOTE 6 – INTANGIBLE ASSETS
The following provides a breakdown of intangible
assets as of:
|
|
January 2, 2021
|
|
|
|
Tradenames
|
|
|
Non-Compete
|
|
|
Customer
Relationships
|
|
|
Total
|
|
Intangible assets, gross
|
|
$
|
9,582
|
|
|
|
2,500
|
|
|
|
21,810
|
|
|
|
33,892
|
|
Accumulated amortization
|
|
|
(4,283
|
)
|
|
|
(2,440
|
)
|
|
|
(11,152
|
)
|
|
|
(17,875
|
)
|
Intangible assets, net
|
|
$
|
5,299
|
|
|
|
60
|
|
|
|
10,658
|
|
|
|
16,017
|
|
|
|
December 28, 2019
|
|
|
|
Tradenames
|
|
|
Non-Compete
|
|
|
Customer
Relationships
|
|
|
Total
|
|
Intangible assets, gross
|
|
$
|
9,458
|
|
|
$
|
2,488
|
|
|
$
|
22,757
|
|
|
$
|
34,703
|
|
Accumulated amortization
|
|
|
(3,558
|
)
|
|
|
(2,349
|
)
|
|
|
(9,285
|
)
|
|
|
(15,192
|
)
|
Intangible assets, net
|
|
$
|
5,900
|
|
|
$
|
139
|
|
|
$
|
13,472
|
|
|
$
|
19,511
|
|
On September 24, 2020, the Company entered into
an Asset Purchase Agreement with firstPRO Recruitment, LLC, pursuant to which the Company sold to firstPRO
Recruitment, LLC. substantially all of the Staffing 360 Georgia, LLC assets used in or related to the operation or conduct of its
professional staffing and recruiting business. As a result of the sale, the Company wrote off gross intangibles of $2,660 and
accumulated amortization of $1,352.
As of January 2, 2021, estimated annual amortization
expense for each of the next five fiscal years is as follows:
Fiscal year ended December
|
|
Amount
|
|
2021
|
|
$
|
2,302
|
|
2022
|
|
|
2,254
|
|
2023
|
|
|
2,254
|
|
2024
|
|
|
2,254
|
|
2025
|
|
|
2,184
|
|
Thereafter
|
|
|
4,769
|
|
Total
|
|
$
|
16,017
|
|
Amortization of intangible assets for the period
ended Fiscal 2020 and Fiscal 2019 was $2,523 and $2,726, respectively. The weighted average useful life remaining of intangible assets
remaining is 7 years.
NOTE 7 – GOODWILL
The following table provides a roll forward of goodwill:
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
Beginning balance, gross
|
|
$
|
31,049
|
|
|
$
|
38,139
|
|
Accumulated impairment losses
|
|
|
(2,969
|
)
|
|
|
(6,078
|
)
|
Beginning balance, net
|
|
|
28,080
|
|
|
|
32,061
|
|
Disposition of business
|
|
|
(1,577
|
)
|
|
|
—
|
|
Currency translation adjustment
|
|
|
542
|
|
|
|
(1,012
|
)
|
Ending balance, net
|
|
$
|
27,045
|
|
|
$
|
31,049
|
|
Goodwill by reportable segment is as follows:
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
Professional Staffing - US
|
|
$
|
6,222
|
|
|
$
|
10,527
|
|
Commercial Staffing - US
|
|
|
5,860
|
|
|
|
6,102
|
|
Professional Staffing - UK
|
|
|
14,963
|
|
|
|
14,420
|
|
Ending balance, net
|
|
$
|
27,045
|
|
|
$
|
31,049
|
|
Goodwill represents the excess of the purchase price
over the fair value of net assets acquired in business combinations. ASC 350, requires that goodwill be tested for impairment at the
reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances
indicate that the recoverability of the carrying amount of goodwill may be in doubt. During the first quarter of 2020 the Company identified
a triggering event in response the COVID-19 pandemic. In accordance with ASC 350 the Company tested its goodwill for impairment and the
Company recognized an impairment with respect to its firstPRO reporting unit of $2,969. The impairment resulted from a continued
decline in that reporting unit’s revenue which experienced significant and prolonged declines as a result of the COVID-19 pandemic.
To determine the impairment, the Company employed a combination of market approach (valuations using comparable company multiples), income
approach (discounted cash flow analysis) and prevailing market conditions to derive the fair value of the reporting unit. Under ASU 2017-04,
which the Company early adopted, the impairment amount represents the excess of the carrying value over the fair value of the reporting
unit.
During the year ended January 2, 2021 the
Company changed its measurement date from the first day of the fiscal fourth quarter to the last day of the fiscal year end.
The Company performed its annual goodwill impairment test and no impairment was recognized. To estimate the fair value of
the reporting units the Company employed a combination of market approach (valuations using comparable company multiples) and
income approach (discounted cash flow analysis) to derive the fair value of the reporting unit when performing its annual impairment
testing. Volatility in the Company’s stock price can result in the net book value of our reporting unit approximating, or
even temporarily exceeding market capitalization, however, the fair value of our reporting unit is not driven solely by the market
price of our stock. As described above, fair value of our reporting unit is derived using a combination of an asset approach,
an income approach and a market approach. These valuation techniques consider several other factors beyond our market capitalization,
such as the estimated future cash flows of our reporting units, the discount rate used to present value such cash flows and the
market multiples of comparable companies. Changes to input assumptions used in the analysis could result in materially different
evaluations of goodwill impairment.
NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
The following provides a breakdown of accounts payable
and accrued expenses:
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
Accounts payable
|
|
$
|
28
|
|
|
$
|
1,412
|
|
Accrued payroll, taxes and bonuses
|
|
|
12,913
|
|
|
|
12,700
|
|
Severance costs
|
|
|
—
|
|
|
|
190
|
|
Other accrued expenses
|
|
|
2,089
|
|
|
|
2,275
|
|
Total
|
|
$
|
15,030
|
|
|
$
|
16,577
|
|
NOTE 9 – ACCOUNTS RECEIVABLE FINANCING
Midcap Funding [X] Trust
Prior to September 15, 2017, certain U.S. subsidiaries
of the Company were parties to a $25,000 revolving loan facility with MidCap Funding X Trust (“MidCap”), with the option
to increase the amount by an additional $25,000, with a maturity of April 8, 2019. The facility provided for borrowing of 85% against
eligible receivables and carried an interest rate of LIBOR plus 4.0%, with a LIBOR floor of 1.0% per annum. The Company could 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.
On September 15, 2017, the Company amended the facility
with Midcap to allow for additional borrowing against unbilled receivables up to 85% with a cap of $1,300 borrowing against such receivables.
In addition, the maturity date of the facility was extended to April 8, 2020 and the prepayment premiums reset to: (i) 2% if prepaid
in the first or second year post the amendment; and (ii) 1.0% if prepaid thereafter. No other material terms were amended on this date.
On August 2, 2019, the Company amended the facility
with Midcap to allow for additional borrowing against the unbilled receivables by $1,000 to a cap of $2,300 and extended the maturity
of the facility to August 2020.
On October 26, 2020, the Company entered into Amendment
No. 17 to Credit and Security Agreement with MidCap, whereby, among other things, MidCap agreed to extend the maturity date of our outstanding
asset based revolving loan until September 1, 2022. In addition, the Company also agreed to certain amendments to the financial covenants.
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.
The balance of the Midcap Facility as of January
2, 2021 and December 28, 2019 was $14,842 and $17,298, respectively, and is included in Accounts receivable financing
on the Consolidated Balance Sheet.
HSBC Invoice Finance (UK) Ltd – New Facility
On February 8, 2018, CBS Butler, Staffing 360 Solutions
Limited and The JM Group, entered into a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC
to purchase the subsidiaries’ accounts receivable up to an aggregate amount of £11,500 ($15,724) across all three subsidiaries.
The terms of the arrangement provide for HSBC to fund 90% of the purchased accounts receivable upfront and, a secured borrowing line
of 70% of unbilled receivables capped at £1,000 ($1,367) (within the overall aggregate total facility of £11,500 ($15,724).)
The arrangement has an initial term of 12 months, with an automatic rolling three-month extension and carries a service charge of 1.80%.
On June 28, 2018, CML, the Company’s new subsidiary
entered into a new agreement with a minimum term of 12 months for purchase of debt (“APD”) with HSBC, joining CBS Butler,
Staffing 360 Solutions Limited and The JM Group (collectively, with CML, the “Borrowers”) as “Connected Clients”
as defined in the APD. The new Connected Client APDs carry an aggregate Facility Limit of £20,000 across all Borrowers. The obligations
of the Borrowers are secured by a fixed charge and a floating charge on the Borrowers’ respective accounts receivable and are subject
to cross-company guarantees among the Borrowers. In addition, the secured borrowing line against unbilled receivables was increased to
£1,500 for a period of 90 days. In July 2019, the aggregate Facility Limit was extended to £22,500 across all Borrowers.
Under ASU 2016-16, “Statement of Cash Flows
(Topic 230, Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force), the
upfront portion of the sale of accounts receivable is classified within operating activities, while the deferred purchase price portion
(or beneficial interest), once collected, is classified within investing activities.
NOTE 10 – DEBT
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
Jackson Investment Group - related party
|
|
$
|
33,880
|
|
|
$
|
38,278
|
|
PPP Loans
|
|
|
19,395
|
|
|
|
-
|
|
HSBC Term Loan
|
|
|
2,094
|
|
|
|
1,035
|
|
Total Debt, Gross
|
|
|
55,369
|
|
|
|
39,313
|
|
Less: Debt Discount and Deferred Financing Costs, Net
|
|
|
(559
|
)
|
|
|
(497
|
)
|
Total Debt, Net
|
|
|
54,810
|
|
|
|
38,816
|
|
Less: Non-Current Portion
|
|
|
(39,943
|
)
|
|
|
(360
|
)
|
Total Current Debt, Net
|
|
$
|
14,867
|
|
|
$
|
38,456
|
|
Jackson Note – Related Party
On September 15, 2017, the Company entered into a
$40,000 note agreement with Jackson (the “2017 Jackson Note”.) The proceeds of the sale of the 2017 Jackson Note were used
to repay the existing subordinated notes previously issued to Jackson pursuant to the existing note purchase agreement in the aggregate
principal amount of $11,165 and to fund a portion of the purchase price consideration of the firstPRO Acquisition and the CBS
Butler Acquisition and repay certain other outstanding indebtedness of the Company. The maturity date for the amounts due under the 2017
Jackson Note was September 15, 2020. The 2017 Jackson Note will accrue interest at 12% per annum, due quarterly on January 1, April 1,
July 1 and October 1 in each year, with the first such payment due on January 1, 2018. Interest on any overdue payment of principal or
interest due under the 2017 Jackson Note will accrue at a rate per annum that is 5% in excess of the rate of interest otherwise payable
thereunder.
On August 27, 2018, Company entered into an amended
agreement with Jackson, pursuant to which the note purchase agreement dated as of September 15, 2017 was amended and made a new senior
debt investment of approximately $8,428. Terms of the additional investment are the same as the 2017 Jackson Note. From the proceeds
of the additional investment, the Company paid a closing fee of $280 and legal fees of $39 and issued 192,000 shares of the Company’s
common stock as a closing commitment fee.
On August 29, 2019, the Company entered into a Fourth
Omnibus Amendment and Reaffirmation Agreement with Jackson, as lender, which, among other things, amends that certain Amended and Restated
Note Purchase Agreement, dated as of September 15, 2017, as amended (the “Existing Note Purchase Agreement”.) Pursuant to
the Existing Note Purchase Agreement, the Company agreed to issue and sell to Jackson that certain 18% Senior Secured Note due December
31, 2019 in the aggregate principal amount of $2,538 (the “2019 Jackson Note”.) All accrued and unpaid interest on the outstanding
principal balance of the 2019 Jackson Note was due and payable monthly on the first day of each month, beginning on October 1, 2019.
Pursuant to the terms of the 2019 Jackson Note, if the 2019 Jackson Note was not repaid by December 31, 2019, the Company was required
to issue 100,000 shares of its common stock to Jackson on a monthly basis until the 2019 Jackson Note is fully repaid, subject to certain
exceptions to comply with Nasdaq listing standards. The Company booked additional expense of $324 related to the issuances of 500,000
shares of common stock to Jackson in 2020. The Company paid the 2019 Jackson Note in full on May 28, 2020.
On October 26, 2020, the Company and Jackson entered
into the Second Amended and Restated Note Purchase Agreement (the “Amended Note Purchase Agreement”) and the Amended and
Restated Senior Secured 12% Promissory Note (the “2020 Jackson Note”), which amended and restated the Existing Note Purchase
Agreement. The Amended Note Purchase Agreement refinanced an aggregate of $35.7 million of debt provided by Jackson, extending the maturity
to September 30, 2022. In connection with the amendment and restatement, the Company paid Jackson an amendment fee of $488. The Company
accounted for the Amended Note Purchase Agreement as a modification of the debt. Accordingly, fees totaling $488 paid to Jackson as well
as the modification of 905,508 warrants from a strike price of $1.66 to $1.00 and extension of expiration date of January 26, 2024 to
January 26, 2026, resulting in a fair value adjustment of $126, were recorded as additional debt discount which will be amortized over
the term of the 2020 Jackson Note using the effective interest method.
Under the terms of the Amended Note Purchase Agreement
and the 2020 Jackson Note, the Company is required to pay interest on the debt at a per annum rate of 12%. The interest is payable monthly
in cash; provided that, the Company may elect to pay up to 50% of monthly interest in-kind (“PIK Interest”) by adding such
PIK Interest to the outstanding principal balance of the 2020 Jackson Note. For any month that the Company elects to pay interest in-kind,
the Company is required to pay Jackson a fee in shares of our common stock (“PIK Fee Shares”) in an amount equal to $25 divided
by the average closing price, as reported by Nasdaq, of such shares of common stock over the 5 trading days prior to the applicable monthly
interest payment date. If such average market price is less than $0.50, or is otherwise undeterminable because such shares of common
stock are no longer publicly traded or the closing price is no longer reported by Nasdaq, then the average closing price for these purposes
shall be deemed to be $0.50, and if such average closing price is greater than $3.50, then the average closing price for these purposes
shall be deemed to be $3.50. For the period of November 2020 through and including March 2021, each monthly interest due and payable
shall be reduced by $166, and for the period commencing May 2021 through and including September 2021, each monthly interest due and
payable shall be increased by $166.
Under the terms of the Amended Note Purchase Agreement,
the Company is required to make a mandatory prepayment of the principal amount of the 2020 Jackson Note of not less than $3,000 no later
January 31, 2021. Payments were made in December 2020 and January 2021 totaling $3,029 in full satisfaction of the mandatory prepayment.
The entire outstanding principal balance of the 2020 Jackson Note shall be due and payable on September 30, 2022. The debt continues
to be secured by substantially all of the Company’s domestic subsidiaries’ assets pursuant to the Amended and Restated Security
Agreement with Jackson, dated September 15, 2017.
The Amended Note Purchase Agreement includes certain
financial customary covenants, including a leverage ratio covenant. Delivery of financial covenants will commence with the fiscal month
ending March 2021.
PPP Loans
On May 12, 2020, Monroe Staffing, an indirect
subsidiary of the Company, entered into the May 12 Note with the Bank, pursuant to the PPP of the CARES Act administered by the SBA.
The principal amount of the May 12 Note is $10,000.
In accordance with the requirements of the CARES
Act, the May 12 Note Borrower intends to use the proceeds from the May 12 Note in accordance with the requirements of the PPP to cover
certain qualified expenses, including payroll costs, rent and utility costs. Interest accrues on the May 12 Note at the rate of 1.00%
per annum. The May 12 Note Borrowers may apply for forgiveness of the amount due under the May 12 Note, in an amount equal to the sum
of qualified expenses under the PPP. The May 12 Note Borrowers intend to use the entire proceeds under the May 12 Note for such qualifying
expenses.
Subject to any forgiveness under the PPP, the
May 12 Note matures two years following the date of issuance of the May 12 Note and includes a period for the first six months during
which time required payments of interest and principal are deferred. Beginning on the eleventh month following the date of the May 12
Note, the May 12 Note Borrowers are required to make 14 monthly payments of principal and interest. The May 12 Note may be prepaid at
any time prior to maturity. The May 12 Note provides for customary events of default, including, among others, those relating to breaches
of obligations under the May 12 Note, including a failure to make payments, any bankruptcy or similar proceedings involving the May 12
Note Borrowers, and certain material effects on the May 12 Note Borrowers’ ability to repay the May 12 Note. The May 12 Note Borrowers
did not provide any collateral or guarantees for the May 12 Note.
On May 20, 2020, KRI, LH and SG, each a wholly
owned direct or indirect subsidiary of the Company, entered into the following notes, each dated May 20, 2020, with the Bank, pursuant
to the PPP of the CARES Act administered by the U.S. Small Business Administration. KRI entered into the KRI Note for the principal amount
of approximately $5,443, LH entered into the LH Note for the principal amount of approximately $1,890, and SG entered into the SG Note,
and, together May 20 Notes for the principal amount of approximately $2,063. The combined total of the May 20 Notes is approximately
$9,395.
In accordance with the requirements of the CARES
Act, the “May 20 Note Borrowers, intends to use the proceeds from the May 20 Notes in accordance with the requirements of the PPP
to cover certain qualified expenses, including payroll costs, rent and utility costs. Interest accrues on each of the May 20 Notes at
the rate of 1.00% per annum. The May 20 Note Borrowers may apply for forgiveness of the amount due under the May 20 Notes, in an amount
equal to the sum of qualified expenses under the PPP. The May 20 Note Borrowers intend to use the entire proceeds under the May 20 Notes
for such qualifying expenses.
Subject to any forgiveness under
the PPP, each of the May 20 Notes mature two years following the date of issuance of the May 20 Notes and include a period
for the first six months during which time required payments of interest and principal are deferred. Beginning on the
eleventh month following the date of each of the May 20 Notes, the May 20 Note Borrowers are required to make 14 monthly
payments of principal and interest. Based upon these payment terms the Company has recognized $6,927 of the PPP loan as a
short-term obligation and $12,468 as long term as of January 2, 2021. The May 20 Notes may be prepaid at any time prior to maturity. The May 20
Notes provide for customary events of default, including, among others, those relating to breaches of obligations under the
May 20 Notes, including a failure to make payments, any bankruptcy or similar proceedings involving the Borrowers, and
certain material effects on the Borrowers’ ability to repay the May 20 Notes. The May 20 Note Borrowers did not provide
any collateral or guarantees for the May 20 Notes.
The application for these funds required the Company
to certify in good faith that the current economic uncertainty made the loan request necessary to support the ongoing operations of the
Company. This certification further required the Company to take into account our current business activity and our ability to access
other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.
The Company made this good faith assertion based upon the adverse impact the COVID-19 pandemic had on our business and the degree of
uncertainty introduced to the capital markets. While the Company has made this assertion in good faith based upon all available guidance,
management will continue to assess their continued qualification if and when updated guidance is released by the Treasury Department.
All or a portion of the PPP Loan may be forgiven
by the SBA upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of
expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll
costs, covered rent payments, covered mortgage interest and covered utilities during the eight-week period beginning on the date of loan
approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100, prorated annually.
Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if
salaries and wages for employees with salaries of $100 or less annually are reduced by more than 25%. The ultimate forgiveness of the
PPP loan is also predicated upon regulatory authorities concurring with management’s good faith assessment that the current economic
uncertainty made the loan request necessary to support ongoing operations. If, despite the Company’s good-faith belief that given
the circumstances the Company satisfied all eligibility requirements for the PPP Loan, the Company is later determined to have violated
any applicable laws or regulations or it is otherwise determined that the Company was ineligible to receive the PPP Loan, the Company
may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. In the event the PPP Loan, or any portion
thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. As of the date of this filing, the
PPP Loans have not been approved for forgiveness. The Monroe Staffing PPP loan forgiveness status was changed from pending to under review.
Under review status is the last stage before forgiveness or rejection.
Debt Exchange Agreement
On November 15, 2018 the Company, entered into a
Debt Exchange Agreement (the “Exchange Agreement”) with Jackson, pursuant to which, among other things, Jackson agreed to
exchange $13,000 (the “Exchange Amount”) of indebtedness of the Company held by Jackson in exchange for 13,000 shares of
a newly created class of preferred stock designated as the Series E Preferred Stock, par value $0.00001 per share, of the Company (the
“Series E Preferred Stock”.)
The Series E Preferred Stock ranks senior to the
Company’s common stock and any other series or classes of preferred stock now or after issued or outstanding with respect to dividend
rights and rights on liquidation, winding up and dissolution. Each share of Series E Preferred Stock is initially convertible into 561
shares of common stock of the Company at any time after October 31, 2020 or the occurrence of a Preferred Default (as defined in the
Certificate of Designation for the Series E Preferred Stock.) A holder of Series E Preferred Stock is not required to pay any additional
consideration in exchange for conversion of such Series E Preferred Stock into the Company’s common stock. Series E Preferred Stock
is redeemable by the Company at any time at a price per share equal to the stated value ($1,000 per share) plus all accrued and unpaid
dividends thereon.
The Series E Preferred Stock carries quarterly dividend
rights of (a) cash dividends accruing (i) at an annual rate per share equal to 12% from the date of issuance and (ii) 17% after the occurrence
of a Preferred Default, and (b) a dividend payable in shares of Series E-1 Convertible Preferred Stock. The shares of Series E-1 Preferred
Stock have all the same terms, preferences and characteristics as the Series E Preferred Stock (including, without limitation, the right
to receive cash dividends), except (i) Series E-1 Convertible Preferred Stock are mandatorily redeemable by the Company within thirty
(30) days after written demand received from any holder at any time after the earlier of the occurrence of a Preferred Default or November
15, 2020, for a cash payment equal to the Liquidation Value (as defined in the Certificate of Designation for the Series E Preferred
Stock) plus any accrued and unpaid dividends thereon, (ii) each share of Series E-1 Preferred Stock is initially convertible into 602
shares of the Company’s common stock, and (iii) Series E-1 Convertible Preferred Stock may be cancelled and extinguished by the
Company if all shares of Series E Preferred Stock are redeemed by the Company on or prior to October 31, 2020.
On October 26, 2020, in connection with the entry
into the Amended Note Purchase Agreement, the Company filed with the Secretary of State of the State of Delaware the second Certificate
of Amendment (the “Amendment”) to the Certificate of Designation of the Series E Convertible Preferred Stock (the “Base
Series E Preferred Stock”) and Series E-1 Convertible Preferred Stock (the “Series E-1 Preferred Stock,” and collectively
with the Base Series E Preferred Stock, the “Series E Preferred Stock”.) Under the amended terms, holders of Series E Preferred
Stock are entitled to monthly cash dividends on Series E Preferred Stock at a per annum rate of 12%. At the Company’s option, up
to 50% of the cash dividend on the Base Series E Preferred Stock may be paid in kind by adding such 50% portion to the outstanding liquidation
value of the Base Series E Preferred Stock (the “PIK Dividend Payment”), commencing on October 26, 2020 and ending on October
25, 2020. If the PIK Dividend Payment is elected, a holder of Series E Preferred Stock is entitled to additional fee to be paid in shares
of our common stock an amount equal to $10,000 divided by the average closing price, as reported by Nasdaq of such shares of common stock
over the 5 trading days prior to the applicable monthly interest payment date. If such average market price is less than $0.50, or is
otherwise undeterminable because such shares are no longer publicly traded or the closing price is no longer reported by Nasdaq, then
the average closing price for these purposes shall be deemed to be $0.50, and if such average closing price is greater than $3.50 then
the average closing price for these purposes shall be deemed to be $3.50. Dividends on the Series E-1 Preferred Stock may only be paid
in cash. If the Company fails to make dividend payments on the Series E Preferred Stock, it will be an event of default under the Amended
Note Purchase Agreement.
Under the terms of the Amendment, shares of Series
E-1 Preferred Stock will be convertible into common stock at a conversion rate equal to the liquidation value of each shares of Series
E-1 Preferred Stock divided by $1.00 per share commencing October 31, 2020. Each share of Series E-1 Preferred Stock has a liquidation
value of $1,000 per share. The shares of Base Series E Preferred Stock will be also convertible into shares of common stock after October
31, 2022. The conversion rate for the Base Series E Preferred Stock is equal to the liquidation value of each shares of Base Series E
Preferred Stock divided by $1.00 per share. Each share of Base Series E Preferred Stock has a liquidation value of $1,000 per share.
The amendment resulted in the original conversion price of $1.78 and $1.66 of the Series E and E-1 Preferred Stock, respectively, being
reduced to $1.00 for both instruments.
The Company accounted for the Amendment as a modification
to the Series E and E-1 Preferred Stock. The change in fair value as a result of the modification amounted to $410 and was recognized
as a deemed dividend. Further, the Company recognized a beneficial conversion feature (BCF) of $4,280 as a result of the decrease in
the conversion price to $1.00 in comparison to the Company’s stock price on the date of the amendment. The BCF was recognized as
a deemed dividend. As the Company lacks retained earnings, the deemed dividend was recorded as a reduction in additional paid-in capital
resulting in a net impact to additional paid-in capital of $0.
Lastly, under the terms of the Consent
and the Series E Certificate of Designation, in consideration for Jackson’s consent to the firstPRO Transaction, the Initial
Payment was used to redeem a portion of the Series E Preferred Stock, and the Escrow Funds, subject to the forgiveness of PPP Loan, will
be used to redeem a portion of the Series E Preferred Stock. As this provision results in a contingent redemption feature, approximately
$2.1 million of the Series E Preferred Stock was reclassified to mezzanine equity during the year ended January 2, 2021.
Jackson Waivers
On February 5, 2021, we entered into a Limited Consent
and Waiver with Jackson whereby, among other things, Jackson agreed that we may use 75% of the proceeds from the offering to redeem a
portion of the 2020 Jackson Note, and 25% of the net proceeds from the offering to redeem a portion of the Base Series E Preferred Stock
notwithstanding certain provisions of the certificate of designation for the Base Series E Preferred Stock that would have required the
Company to use all the proceeds from the offering to redeem the Base Series E Preferred Stock. In addition, the Company also agreed in
the Limited Consent and Waiver to additional limits on its ability to incur other indebtedness, including limits on advances under our
revolving loan facility with MidCap Funding [X] Trust. The Company also agreed that to the extent that any of our PPP Loans are forgiven
after the offering, Jackson may convert the Base Series E Preferred Stock and Series E-1 Preferred Stock that remains outstanding into
a secured note that is substantially similar to the 2020 Jackson Note. On April 8, 2021, the limited waiver was extended to June 17 ,2021.
HSBC Loan
On April 20, 2020, the terms of the loan with HSBC
were amended such that no capital repayments would be required between April 2020 to September 2020, and only interest payments would
be made during such time. Since such time, capital repayments have resumed. On May 15, 2020, the Company entered into a 3-year term loan
with HSBC in the UK for £1,000.
NOTE 11 – LEASES
On December 30, 2018, the Company adopted ASC 842
using the modified retrospective transition approach allowed under ASU 2018-11 which releases companies from presenting comparative periods
and related disclosures under ASC 842 and requires a cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The Company has elected to apply the short-term lease exception to all leases of one year or less. In Fiscal 2020
and 2019, as a result of the adoption of ASC 842, we recorded a right of use (“ROU”) lease asset of approximately $3,432
with a corresponding lease liability of approximately $3,437 and ROU of approximately $4,888 with a corresponding lease liability of
approximately $4,980, respectively, based on the present value of the minimum rental payments of such leases. The Company’s finance
leases are immaterial both individually and in the aggregate.
Quantitative information regarding the Company’s
leases for Fiscal 2020 is as follows:
Lease Cost
|
|
Classification
|
|
Fiscal 2020
|
|
Operating lease cost
|
|
SG&A Expenses
|
|
|
1,659
|
|
Other information
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
3.91
|
|
Weighted average discount rate
|
|
|
6.26
|
%
|
|
|
|
|
|
Future Lease Payments
|
|
|
|
|
2021
|
|
$
|
1,313
|
|
2022
|
|
|
735
|
|
2023
|
|
|
447
|
|
2024
|
|
|
338
|
|
2025
|
|
|
326
|
|
Thereafter
|
|
|
839
|
|
|
|
$
|
3,998
|
|
Less: Imputed Interest
|
|
|
561
|
|
|
|
$
|
3,437
|
|
|
|
|
|
|
Leases - Current
|
|
$
|
1,211
|
|
Leases - Non current
|
|
$
|
2,226
|
|
As most of the Company’s leases do not provide
an implicit rate, we use the Company’s incremental borrowing rate based on the information available at commencement date in determining
the present value of lease payments. This methodology was deemed to yield a measurement of the Right of Use Asset and associated lease
liability that was appropriately stated in all material respects.
NOTE 12 – STOCKHOLDERS’ EQUITY
The Company issued the following shares of common
stock during the Fiscal 2020:
|
|
Number of
|
|
|
Fair Value
|
|
|
Fair Value at Issuance
|
|
|
|
Common Shares
|
|
|
of Shares
|
|
|
(minimum and maximum
|
|
Shares issued to/for:
|
|
Issued
|
|
|
Issued
|
|
|
per share)
|
|
Equity raise
|
|
|
7,479,261
|
|
|
$
|
4,634
|
|
|
$
|
0.60
|
|
|
$
|
0.66
|
|
Consultants
|
|
|
15,000
|
|
|
|
18
|
|
|
|
1.22
|
|
|
|
1.22
|
|
Conversion of Series A
|
|
|
16,215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Board and committee members
|
|
|
22,400
|
|
|
|
15
|
|
|
|
0.56
|
|
|
|
0.85
|
|
Jackson Investment Group
|
|
|
500,000
|
|
|
|
324
|
|
|
|
0.36
|
|
|
|
0.92
|
|
|
|
|
8,032,876
|
|
|
$
|
4,991
|
|
|
|
|
|
|
|
|
|
The Company issued the following shares of common
stock during the Fiscal 2019:
|
|
Number of
|
|
|
Fair Value
|
|
|
Fair Value at Issuance
|
|
|
|
Common Shares
|
|
|
of Shares
|
|
|
(minimum and maximum
|
|
Shares issued to/for:
|
|
Issued
|
|
|
Issued
|
|
|
per share)
|
|
Equity raise
|
|
|
3,331,280
|
|
|
$
|
5,515
|
|
|
$
|
1.40
|
|
|
$
|
2.00
|
|
Consultants
|
|
|
6,000
|
|
|
|
10
|
|
|
|
1.56
|
|
|
|
1.56
|
|
Board and committee members
|
|
|
22,400
|
|
|
|
32
|
|
|
|
0.83
|
|
|
|
1.79
|
|
Jackson Investment Group
|
|
|
100,000
|
|
|
|
75
|
|
|
|
0.75
|
|
|
|
0.75
|
|
|
|
|
3,459,680
|
|
|
$
|
5,632
|
|
|
|
|
|
|
|
|
|
The Company’s authorized common stock consists
of 40,000,000 shares having a par value of $0.00001. As of the end of Fiscal 2020 and Fiscal 2019, the Company has issued and outstanding
16,818,624 and 8,785,748 common shares, respectively.
In May 2017, the Company entered into an At-The-Market
offering (“ATM”) agreement with Joseph Gunnar & Co., LLC to establish an at-the-market equity offering program pursuant
to which they are able, with the Company’s authorization, to offer and sell up to $3 million of the Company’s common stock
at prevailing market prices from time to time. In Fiscal 2020 and Fiscal 2019, the Company sold 0 and 428,600 shares of common stock
under this program for net proceeds value of $0 and $528 (gross $600), respectively.
On January 22, 2019 the Company issued and sold 387,500
shares of the Company’s common stock to an institutional purchaser at a purchase price of $2.00 per share, for aggregate gross
proceeds of approximately $775, before placement fees and estimated offering expenses. The offering of the Securities was made under
the Company’s shelf registration statement on Form S-3 (Registration No. 333-208910) (the “Registration Statement”),
including a base prospectus, previously filed with and declared effective by the Securities and Exchange Commission (the “SEC”)
on March 22, 2016. The offering of the Securities was made only by means of a prospectus supplement that forms a part of the registration
statement.
On February 12, 2019, the Company closed its previously
announced firm commitment underwritten public offering in which, pursuant to an underwriting agreement between the Company and the underwriter,
dated as of February 8, 2019, the Company issued and sold 2,425,000 shares of its common stock, at a public offering price of $1.65 per
share. The gross proceeds from the offering were approximately $4,001 (net $3,078), excluding underwriting discounts and commissions
and other estimated offering expenses. Pursuant to the underwriting agreement, the Company granted the underwriter an over-allotment
option, which is exercisable for up to 45 days following the date of the prospectus for the offering, to purchase up to 363,750 additional
shares of common stock.
On March 14, 2019, our underwriters exercised a portion
of the over-allotment option for 90,180 shares at an exercise price of $1.65 per share. The Company received a total of $138 in net proceeds.
On December 23, 2020, the Company entered into an
underwriting agreement with H.C. Wainwright & Co., LLC (“Wainwright”.) Pursuant to the agreement, the Company agreed
to sell 4,188,405 shares of the Company’s common stock to Wainwright at an offering price to the public of $0.60 per share, less
underwriting discounts and commissions. In addition, the Company granted Wainwright a 30-day option to purchase up to an additional 628,260
shares of common stock at the same offering price to the public, less underwriting discounts and commissions. On December 28, 2020, Wainwright
exercised its option in full to purchase such additional 628,260 shares of common stock. As a result, the Company issued an aggregate
of 4,816,665 shares of common stock under the Underwriting Agreement.
On December 30, 2020, the Company entered into a
securities purchase agreement with certain institutional and accredited investors. Pursuant to the agreement, the Company agreed to sell,
in a registered direct offering, 2,662,596 shares of common stock at an offering price of $0.66 per share.
February 2021 Public Offering
On February 9, 2021, we announced the pricing of
a public offering of an aggregate of 21,855,280 shares of its common stock at a public offering price of $0.90 per share (the “Offering”.)
The Offering was made pursuant to the Company’s registration statement on Form S-1 initially filed on January 13, 2021, as subsequently
amended and declared effective on February 9, 2021. The Offering was made only by means of a prospectus forming a part of the effective
registration statement.
The Offering closed on February 12, 2021. In the
Offering, the Company issued 20,851,199 shares of common stock and pre-funded warrants to purchase up to 1,004,081 shares of common stock,
at an exercise price of $0.0001 per share (the “Pre-funded Warrants”.) The Pre-funded Warrants were sold at $0.8999 per Pre-Funded
Warrant. The Pre-funded Warrants were immediately exercisable and could be exercised at any time after their original issuance until
such Pre-funded Warrants were exercised in full. The Pre-funded Warrants were exercised immediately upon issuance, and 1,004,081 shares
of common stock were issued on February 12, 2021.
The net proceeds to the Company from the Offering
were approximately $18.1 million, after deducting placement agent fees and estimated offering expenses payable by the Company. While
the Company’s Series E Preferred Stock is outstanding, the Company is required to use the proceeds of any sales of equity securities,
including the securities offered in the Offering, exclusively to redeem any outstanding shares of the Company’s Series E Preferred
Stock, subject to certain limitations. On February 5, 2021, the Company used approximately 75% of the net proceeds from the Offering
to redeem a portion of the outstanding Jackson Note and 25% of the net proceeds from the Offering to redeem a portion of the Company’s
Series E Preferred Stock. Pursuant to the Limited Consent, upon closing of the Offering, the Company redeemed a portion of the 2020 Jackson
Note and redeemed 4,518 shares of the Base Series E Preferred Stock. Following the redemption of the Base Series E Preferred Stock, the
Company has 6,172 shares of Base Series E Preferred Stock outstanding with an aggregate stated value of $6,172.
Restricted Shares
The Company has issued shares to employees
and board and committee members under its 2015 Omnibus Incentive Plan and 2016 Omnibus Incentive Plan. Under these plans, the
shares are restricted for a period of three years from issuance. As of Fiscal 2020, the Company has a total of 61,600 shares
unvested issued to employees and Board and committee members. In accordance with ASC 718, Compensation – Stock Compensation,
the Company recognizes stock-based compensation from restricted stock based upon the fair value of the award at issuance over
the vesting term on a straight-line basis. The fair value of the award is calculated by multiplying the number of restricted shares
by the Company’s stock price on the date of issuance. The impact of forfeitures has historically been immaterial to the
financial statements. In Fiscal 2020 and Fiscal 2019, the Company recorded compensation expense associated with these restricted
shares of $252 and $539, respectively. The table below is a rollforward of unvested restricted shares issued to employees and
board of directors.
|
|
Restricted Shares
|
|
|
Weighted
Average
Price Per Share
|
|
Balance at December 29, 2018
|
|
|
572,256
|
|
|
$
|
3.47
|
|
Granted
|
|
|
22,400
|
|
|
|
1.48
|
|
Vested/adjustments
|
|
|
(4,216
|
)
|
|
|
5.52
|
|
Balance at December 28, 2019
|
|
|
590,440
|
|
|
$
|
3.12
|
|
Granted
|
|
|
38,615
|
|
|
|
0.76
|
|
Vested/adjustments
|
|
|
(567,455
|
)
|
|
|
3.16
|
|
Balance at January 2, 2021
|
|
|
61,600
|
|
|
$
|
1.25
|
|
Series A Preferred Stock – Related Party
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. On June 15, 2017, the Company reincorporated
in the State of Delaware. The Series A Preferred Stock has a stated value of $1.00 per share and is entitled to a 12% dividend.
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, 2020 (the “Redemption Date”),
at a conversion rate of one and three tenths (1.3) shares of common stock for every 50 shares of Series A Preferred Stock that the Holder
elects to convert. Originally the redemption date was December 31, 2018 and this was extended to December 31, 2020 in January 2019. 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 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 Preferred 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 (as defined
in each employment agreement) associated with their employment agreements. The Certificate of Designation was approved and related issuances
were ratified by the Company’s Board 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 $50.00
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.
On January 21, 2020, the
Company converted the 623,628 Series A Preferred Shares awarded to Mr. Briand into 16,215 shares of common stock. As of Fiscal 2020 and
Fiscal 2019, we had issued and outstanding 1,039,380 and 1,663,008 Series A Preferred Stock shares and $125 and $0 accrued dividends,
respectively. In Fiscal 2020 and Fiscal 2019, the Company paid dividends of $0 and $200, respectively. Subsequent to Fiscal 2020, on
January 8, 2021, the remaining 1,039,380 Series A Preferred Shares were converted into 27,024 shares of our common stock.
Series E Preferred Stock
The Series E Preferred Stock ranks senior to common
stock and any other series or classes of preferred stock now or after issued or outstanding with respect to dividend rights and rights
on liquidation, winding up and dissolution. Each share of Series E Preferred Stock was initially convertible into 561.8 shares of our
common stock at any time after October 31, 2020 or the occurrence of a Preferred Default. A holder of Series E Preferred Stock is not
required to pay any additional consideration in exchange for conversion of such Series E Preferred Stock into our common stock. Series
E Preferred Stock is redeemable by the Company at any time at a price per share equal to the stated value ($1,000 per share) plus all
accrued and unpaid dividends thereon. While the Series E Preferred Stock is outstanding, the Company is required to use the proceeds
of any sales of equity securities, exclusively to redeem any outstanding shares of Series E Preferred Stock, except that the Company
is permitted to use up to an aggregate of $3,000 of the gross proceeds from any equity offering completed on or before November 15, 2019
for working capital purposes. On January 22, 2019, the Company completed a registered direct offering of our common stock that generated
$775 in gross proceeds that are to be used for working capital purposes. On February 12, 2019, the Company closed its previously announced
firm commitment underwritten public offering in which, pursuant to an underwriting agreement between the Company and the underwriter,
dated as of February 8, 2019, the Company issued and sold 2,425,000 shares of its common stock, at a public offering price of $1.65 per
share. Notwithstanding the terms of the certificate of designations for Series E Preferred Stock, Jackson, the holder our outstanding
shares of Series E Preferred Stock, did not require us to use the proceeds from our recent offerings in excess of $3,000 to redeem outstanding
shares of the Series E Preferred Stock. Instead, the Company used such excess proceeds to make a terminal payment to the sellers of firstPRO
in final settlement of all deferred consideration due under our asset purchase agreement with such sellers.
In the event of liquidation, dissolution or winding
up, the holders of the Series E Preferred Stock are entitled to receive out of the Company assets legally available for distribution,
prior to and in preference to distributions to the holders of common stock or classes and series of securities which by their terms do
not rank senior to the Series E 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 E Preferred Stock plus any accrued but unpaid dividends.
On October 23, 2020, the Company filed the second
amendment to the Certificate of Designation of the Series E Preferred Stock and Series E-1 Preferred Stock. Under the amended terms,
holders of Series E Preferred Stock are entitled to monthly cash dividends on the Company’s Series E Preferred Stock at a per annum
rate of 12%. At the Company’s option, up to 50% of the cash dividend on the Base Series E Preferred Stock may be paid in kind by
adding such 50% portion to the outstanding liquidation value of the Base Series E Preferred Stock, commencing on October 26, 2020 and
ending on October 25, 2021. If the PIK Dividend Payment is elected, a holder of Series E Preferred Stock is entitled to additional fee
to be paid in shares of the Company’s common stock an amount equal to $10 divided by the average closing price, as reported by
Nasdaq of such shares of common stock over the 5 trading days prior to the applicable monthly interest payment date. If such average
market price is less than $0.50, or is otherwise undeterminable because such shares are no longer publicly traded or the closing price
is no longer reported by Nasdaq, then the average closing price for these purposes shall be deemed to be $0.50, and if such average closing
price is greater than $3.50 then the average closing price for these purposes shall be deemed to be $3.50. Dividends on the Series E-1
Preferred Stock may only be paid in cash. If the Company fails to make dividend payments on the Series E Preferred Stock, it will be
an event of default under the Amended Note Purchase Agreement.
Under the terms of the Amendment, shares of Series
E-1 Preferred Stock are convertible into the Company common stock at a conversion rate equal to the liquidation value of each shares
of Series E-1 Preferred Stock divided by $1.00 per share commencing October 31, 2020. Each share of Series E-1 Preferred Stock has a
liquidation value of $1,000 per share. The Company’s shares of Base Series E Preferred Stock are also convertible into shares of
our common stock after October 31, 2022. The conversion rate for our Base Series E Preferred Stock is equal to the liquidation value
of each shares of Base Series E Preferred Stock divided by $1.00 per share. Each share of Base Series E Preferred Stock has a liquidation
value of $1,000 per share. On September 28, 2020, the Company redeemed 1,300 shares of Base Series E Preferred Stock for $1,300, as such
there is currently 11,700 shares of Base Series E Preferred Stock outstanding.
As of January 2, 2021, 11,080,000 shares and 1,363,000
shares of common stock were issuable upon the potential conversion of Series E Preferred Stock and Series E-1 Preferred Stock, respectively.
Due to the contingent nature of the cash redemption feature of the Series E-1 Preferred Stock, the Company classified the shares as mezzanine
equity on the consolidated balance sheets.
As a result of the February 2021 public offering,
whereby the Company issued 21,855,280 shares of its common stock, the Company no longer has sufficient authorized shares to settle the
Series E and E-1 Preferred stock upon conversion. The Company will recognize the accounting impact of this transaction during the first
quarter of fiscal 2021.
Warrants
On January 26, 2017, the Company issued the Warrant
to Jackson which entitled Jackson to purchase up to 630,000 shares of common stock at an initial exercise price of $6.75 per share (subject
to adjustment.) The Warrant is exercisable beginning on July 25, 2017 for a term of four and a half (4.5) years thereafter. The exercise
price was subject to anti-dilution protection, including protection in circumstances where common stock is issued pursuant to the terms
of certain existing convertible securities, provided that the exercise price shall not be adjusted below a price that is less than the
consolidated closing bid price of the common stock. The Warrant had anti-dilution provisions which provided the holder with additional
warrants and adjusted strike price in the event of stock repurchases by the Company or additional shares being issued in connection with
the Series D Preferred Shares or Lighthouse promissory notes. As such, the Company has historically classified the Warrant as a liability.
On July 17, 2020, the Company issued warrants to
purchase 90,000 shares to a consultant. The warrants have a 5-year term, an exercise price of $1.00 per share and are valued at $56.
In connection with the additional investment from
Jackson, the Company entered into Amendment No. 1 to Amended and Restated Warrant Agreement (“Warrant agreement”) with Jackson.
The Warrant Amendment amended that certain Amended and Restated Warrant Agreement with Jackson, dated as of April 25, 2018 (the “Warrant”),
to reduce the exercise price of the Warrant from $5.00 per share to $3.50 per share. The incremental fair value of repricing the Warrants
to $3.50 per share is $135 and was recognized as deferred financing costs to be amortized over the term of the Jackson Note.
On October 26, 2020, in connection with the entry
into the Amended Note Purchase Agreement, the Company entered into Amendment No. 3 to the Amended and Restated Warrant Agreement, dated
April 25, 2018, as amended (the “Warrant”), with Jackson. Pursuant to Amendment No. 3, the exercise price of the Warrant
was reduced from $1.66 per share to $1.00 per share and the term of the Warrant was extended to January 26, 2026. The modification of
the warrants resulting in a fair value adjustment of $126 were recorded as debt discount which will be amortized over the term of the
2020 Jackson Note using the effective interest method.
On December 29, 2020, as partial compensation for
Wainwright’s services as underwriter in the December 23, 2020 underwriting agreement, the Company issued to Wainwright’s
designees warrants to purchase 361,250 shares of common stock. The warrants have a term of five (5) years from the commencement of sales
under the offering, an exercise price of $0.75 per share and are valued at $248.
On December 31, 2020, as partial compensation for
Wainwright’s services as placement agent in the December 30, 2020 securities purchase agreement, the Company issued to Wainwright’s
designees warrants to purchase up to 199,695 shares of common stock. The warrants have a term of five (5) years from the commencement
of sales under the offering, an exercise price of $0.82per share and are valued at $127.
Transactions involving the Company’s warrant
issuances are summarized as follows:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at December 29, 2018
|
|
|
925,934
|
|
|
$
|
1.76
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 28, 2019
|
|
|
925,934
|
|
|
$
|
1.76
|
|
Issued
|
|
|
650,945
|
|
|
|
0.81
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding at January 2, 2021
|
|
|
1,576,879
|
|
|
$
|
0.99
|
|
The following table
summarizes warrants outstanding as of January 2, 2021:
|
|
|
Number
|
|
|
Weighted Average
Remaining
|
|
Weighted
|
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
Average
|
|
Exercise Price
|
|
|
and Exercisable
|
|
|
Life (years)
|
|
Exercise price
|
|
|
$0.75 - $62.50
|
|
|
|
1,576,879
|
|
|
4.03
|
|
$
|
0.99
|
|
Incentive Plans
2014 Equity Incentive Plan
On January 28, 2014, our Board adopted the 2014 Equity
Incentive Plan (the “2014 Plan”.) Under the 2014 Plan, we may grant options to employees, directors, senior management of
the Company and, under certain circumstances, consultants. The purpose of the 2014 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 50,000 shares of common stock has been
reserved for issuance under this plan. The 2014 Plan expires on January 28, 2024. As of January 2, 2021, the Company had issued 50,000
options and shares of common stock pursuant to the 2015 Plan and therefore there are no remaining shares eligible to be issued under
the 2014 Plan.
2015 Omnibus Incentive Plan
On September 23, 2015, our Board adopted the 2015
Omnibus Incentive Plan (the “2015 Plan”.) This plan has not been approved by our stockholders. Under the 2015 Plan, we may
grant a variety of equity instruments to employees, directors, senior management of the Company and, under certain circumstances, consultants.
The purpose of the 2015 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 2015 Plan provides for an aggregate of 90,000
shares of common stock to be available for awards under the 2015 Plan (“Awards”.) The number of shares available for grant
pursuant to Awards under the 2015 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 2015 Plan.
The Plan will have a term of ten years and no further
Awards may be granted under the 2015 Plan after that date. As of January 2, 2021, the Company had issued 90,000 in options and shares
of common stock and had 0 unissued securities remaining under this plan.
2016 Omnibus Incentive Plan
On October 25, 2016, our Board adopted the 2016 Omnibus
Incentive Plan (the “2016 Plan”) to, among other things, attract and retain the best available personnel, to provide additional
incentive to employees, directors and consultants and to promote the success of the Company’s business. The 2016 Plan’s terms
and conditions are similar to that of the 2015 Plan. On January 26, 2017, our stockholders approved the 2016 Plan, pursuant to which
500,000 shares of the Company’s common stock will be reserved for issuance under stock, restricted stock and stock option awards.
On May 30, 2018, our stockholders approved an amendment to the 2016 Plan to increase the total number of shares reserved for issuance
under the 2016 Plan to 1,250,000 shares of the Company’s common stock. As of January 2, 2021, we had issued 1,234,276 shares and
options to purchase shares of common stock pursuant to the 2016 Plan, leaving 15,724 shares remaining under the 2016 Plan.
A summary of option activity
during the Fiscal 2020 and Fiscal 2019 of the Company’s 2014 Equity Incentive Plan, 2015 Omnibus Incentive Plan and the 2016 Omnibus
Incentive Plan is presented below:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 29, 2018
|
|
|
111,400
|
|
|
$
|
28.46
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
(34,900
|
)
|
|
|
29.99
|
|
Outstanding at December 28, 2019
|
|
|
76,500
|
|
|
$
|
27.76
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding at January 2, 2021
|
|
|
76,500
|
|
|
$
|
27.76
|
|
During the Fiscal 2020 and Fiscal 2019, the Company
recorded total share-based payment expense of $27 and $49, respectively, in connection with all options outstanding.
The total compensation cost related to options not
yet amortized is $31 at Fiscal 2020. The Company will recognize this charge over approximately 1.5 years.
2016 Long-Term Incentive Plan
In May 2016, the Company’s Board approved the
2016 Long-Term Incentive Plan (the “2016 LTIP”.) This plan was approved by our stockholders on January 26, 2017.
The material features of the 2016 LTIP are:
|
●
|
The maximum number of shares of common stock to
be issued under the 2016 LTIP is 260,000 shares;
|
|
|
|
|
●
|
The award of performance units is permitted;
|
|
|
|
|
●
|
The term of the 2016 LTIP expired on December
31, 2018.
|
Board selected 260,000 shares to adequately motivate
the participants and drive performance for the period.
The estimated fair value of the 2016 LTIP plan based
on third party valuation was $136. As of Fiscal 2017, all units had been issued and all compensation expense amortized. For Fiscal 2019
and Fiscal 2018, the Company recorded $0 and $0 in compensation expense, respectively, associated with the 2016 LTIP. All the units under
this plan expired on December 31, 2018.
2019 Long-Term Incentive Plan
In January 2019, the Company’s Board approved
the 2019 Long-Term Incentive Plan (the “2019 LTIP”.)
The Board granted 365,000 units to adequately motivate
the participants and drive performance for the period.
Units vest upon the following:
|
●
|
50% upon the employee being in good standing on
December 31, 2020; and,
|
|
|
|
|
●
|
50% upon the average share price of the Company’s
common stock during the 90-day period leading up to December 31, 2020, based upon the following Vesting Rate table:
|
Average 2019 Price
|
|
Vesting Rate
|
<$8 per share
|
|
0
|
>$8 per share
|
|
Pro-rated
|
>=$12 per share
|
|
Full Vesting
|
The company has recognized expense of $284 related
to the 2019 LTIP in Fiscal 2020.
2020 Omnibus Incentive Plan
On June 30, 2020, the Board approved the 2020 Omnibus
Incentive Plan (the “2020 Plan”) pursuant to which we may grant equity incentive awards to key employees, key contractors,
and non-employee directors of the Company. The 2020 Plan provides for the granting of incentive stock options, nonqualified stock options,
stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards,
which may be granted singly or in combination, and that may be paid in cash, shares of our common stock, or a combination of cash and
common stock. A total of 750,000 shares of common stock are reserved for grant under the 2020 Plan, plus any awards reserved under the
Company’s prior equity incentive plans, subject to adjustment in certain circumstances to prevent dilution or enlargement. On September
29, 2020, our stockholders approved the 2020 Plan. As of January 2, 2021, we had issued 31,003 shares and options to purchase shares
of common stock pursuant to the 2020 Plan, therefore leaving 718,997 shares remaining under the 2020 Plan. The 2020 Plan will terminate
on June 30, 2030.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Flood Employment Agreement
On January 3, 2014, in connection with our acquisition
of Initio, we entered into a services agreement (the “Flood Employment Agreement”) with Brendan Flood. Pursuant to the Flood
Employment Agreement, Mr. Flood initially served as Executive Chairman of the Board. Mr. Flood was initially paid a salary of £192
per annum, less statutory deductions, plus other benefits including reimbursement for reasonable expenses, paid vacation and insurance
coverage for his roles with both the Company and our U.K. subsidiary. Under the Flood Employment Agreement, Mr. Flood’s salary
is required to be adjusted (but not decreased) annually in connection with the CPI Adjustment (as defined in the Flood Employment Agreement.)
Mr. Flood is also entitled to an annual bonus of up to 50% of his annual base salary based reaching certain financial milestones. Additionally,
Mr. Flood was entitled to a gross profit appreciation participation, which entitled 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 was 62.5%. On May 29, 2015, the Gross Profit Appreciation Bonus associated with this
employment agreement was converted into 1,039,380 shares of Series A Preferred Stock. On January 8, 2021, all of his Series A Preferred
Stock were converted into 27,024 shares of our common stock.
The Flood Employment Agreement had an initial term
of five years and automatically renews thereafter unless 12 months’ written notice is provided by either party. It also includes
customary non-compete/solicitation language for a period of 12 months after termination of employment, and in the event of a change in
control, we may request that Mr. Flood continue employment with the new control entity. In December 2017, upon the reorganization of
the Company and departure of Mr. Briand, Mr. Flood’s title was changed to Chairman and he assumed the roles of Chief Executive
Officer and President of the Company. On January 1, 2018 the Company increased his salary by the CPI Adjustment. On January 1, 2019 and
on January 1, 2020, Mr. Flood was eligible for a CPI salary adjustment and chose to waive this adjustment. All other terms of the Flood
Employment Agreement remained unchanged.
The Barker Employment Agreement
The Company entered into an employment agreement
with Alicia Barker that appointed her as our Chief Operating Officer effective July 1, 2018 (the “Barker Employment Agreement”.)
Ms. Barker also serves as a member of our Board and receives stock compensation for her service as a member of the Board.
Under the terms of the Barker Employment Agreement,
Ms. Barker currently receives an annual base salary of $250 and is entitled to receive an annual performance bonus of up to 75% of her
base salary based on the achievement of certain performance metrics. Ms. Barker’s base salary is required to be reviewed by the
Board on an annual basis and may be increased, but not decreased, in its sole discretion. Ms. Barker is also entitled to reimbursement
of certain out-of-pocket expenses incurred in connection with her services to the Company and to participate in the benefit plans generally
made available to other executives of the Company.
In the event Ms. Barker is terminated without cause
or for good reason (as such terms are defined in the Barker Employment Agreement), she is entitled to receive (subject to certain requirements,
including signing a general release of claims): (i) any earned but unpaid base salary and vacation time, as well as unreimbursed expenses,
through her termination date; (ii) severance pay in an amount equal to 12 months’ base salary; and (iii) any earned but unpaid
performance bonus. In the event Ms. Barker is terminated for cause or without good reason, she is only entitled to receive any earned
but unpaid base salary and vacation time, as well as unreimbursed expenses, through her termination date.
The Barker Employment Agreement also contains customary
confidentiality, non-solicitation and non-disparagement clauses.
The Anwar Employment Agreement
The Company entered into an employment agreement
with Khalid Anwar that appointed him as our Senior Vice President, Corporate Finance effective June 29, 2020 (the “Anwar Employment
Agreement”.)
Under the terms of the Anwar Employment Agreement,
Mr. Anwar currently receives an annual base salary of $200 and is entitled to receive an annual performance bonus of up to 50% of his
base salary based on the achievement of certain performance metrics. The Anwar Employment Agreement will automatically renew for successive
one-year terms after the initial employment term unless terminated by either party upon written notice provided not less than three months
before the end of the initial term or renewal term. Mr. Anwar is also entitled to reimbursement of certain out-of-pocket expenses incurred
in connection with his services to the Company and to participate in the benefit plans generally made available to other executives of
the Company.
In the event Mr. Anwar is terminated without cause
or for good reason (as such terms are defined in the Anwar Employment Agreement), he is entitled to receive (subject to certain requirements,
including signing a general release of claims) (i) any earned but unpaid base salary and vacation time, as well as unreimbursed expenses,
through his termination date and (ii) any earned but unpaid performance bonus. In the event Mr. Anwar is terminated for cause or without
good reason, he is only entitled to receive any earned but unpaid base salary and vacation time, as well as unreimbursed expenses, through
his termination date.
Effective December 15, 2020, Mr. Anwar was appointed
the Company’s principal financial officer and principal accounting officer.
The Anwar Employment Agreement also contains customary
confidentiality, non-solicitation and non-disparagement clauses.
The Viswakula Employment Agreement
The Company entered into an employment agreement
with Sharnika Viswakula that appointed her as our Corporate Controller effective November 7, 2016 (the “Viswakula Employment Agreement”.)
Under the terms of the Viswakula Employment Agreement,
Ms. Viswakula received an annual base salary of $170,000 and was entitled to receive an annual performance bonus of up to 35% of her
base salary based on the achievement of certain performance metrics. In addition, Ms. Viswakula received 25,000 restricted shares, vesting
50% on her 1st anniversary and 50% on her 2nd anniversary. Ms. Viswakula was also entitled to reimbursement of
certain out-of-pocket expenses incurred in connection with her services to the Company and to participate in the benefit plans generally
made available to other executives of the Company. On December 31, 2019, upon her appointment of Ms. Viswakula as our principal financial
officer and principal accounting officer, her salary was increased to $190,000. In addition, on April 20, 2020, her salary was increased
to $200,000. On December 15, 2020 Ms. Viswakula, tendered her resignation from all positions with the Company. Upon her resignation,
the Viswakula Employment Agreement was terminated.
Earn-out Liabilities
While the Company had recognized the liability for
the contingent earn-out due the sellers of CBS Butler, in March 2019 the Company filed a warranty claim against the sellers asserting
certain misrepresentations for an amount which offsets the contingent earn-out. In April 2019, the sellers of CBS Butler responded denying
the Company’s warranty claim and asserting that the earn-out amount is due. On July 5, 2019, the Company entered into a settlement
agreement with the selling shareholders of CBS Butler for the full and final satisfaction of claims in exchange for a payment of approximately
£2,150 by the Company to the CBS Butler shareholders. The payment was due no later than July 26, 2019. The Company did not make
the payment on July 26, 2019, as such the parties agreed to adjust the amount payable to £2,500. The Company paid this in full
on August 30, 2019 and recorded a gain of approximately £894 ($1,077) on final settlement. The Company used the proceeds from the
term note entered into with Jackson on August 29, 2019 for $2,538, to satisfy this obligation.
Pursuant to the acquisition of substantially all
of the assets of firstPRO Inc. by Staffing 360 Georgia LLC on September 15, 2017, the purchase price included deferred quarterly
installments of $75 beginning on October 1, 2017, and $2,675 was payable annually in three equal installments beginning on September
15, 2018. The Company made $300 and $892 in quarterly installments and annual installment in Fiscal 2018. On March 1, 2019, the Company
paid $1,125 in full satisfaction of the remaining liability, recognizing a gain of $847.
Pursuant to the acquisition of Clement May on June
28, 2018, the purchase price includes an earnout payment of up to £500 to be paid on or around December 28, 2019; and deferred
consideration of £350, the amount to be calculated and paid pursuant to the terms of the acquisition agreement, on or around June
28, 2019. The Company paid deferred consideration of £350 ($444) on June 26, 2019. The earnout payment of £500 ($656) was
paid in December 2019.
Pursuant to
the acquisition of KRI on August 27, 2018, the purchase price includes earnout consideration payable to the seller of $2,027 each on
August 27, 2019 and August 27, 2020. The payment of the earnout consideration was contingent on KRI’s achievement of certain trailing
gross profit amounts. On September 11, 2019, the Company entered into an amended agreement with the seller to delay the payment of the
first year earnout of $2,027 until no later than February 27, 2020. For each full calendar month beyond August 27, 2019, that such payment
is delayed, the Company is required pay the seller interest in the amount of $10 with the first such payment of interest due on September
30, 2019. In addition, the amended agreement was further amended to change the due date for the second year earnout payment of $2,027
from August 27, 2020 to February 27, 2020. The seller of KRI, Pamela D. Whitaker (“Whitaker”) has filed a lawsuit against
the Company asserting claims for breach of contract and declaratory judgment against the Company due under a share purchase agreement
and is seeking $4,054 in alleged damages. While the Company had recognized the liability for the earnout consideration of $4,054 due
to Whitaker, within current liabilities as of January 2, 2021 and December 28, 2019, in February 2020, the Company filed an action against
Whitaker for breach of contract which more than offsets the earnout consideration recognized. The Company paid interest of $40 during
the period ended September 26, 2020. Refer to legal proceedings below for action filed against Whitaker, the former owner of KRI.
Lease Obligations
The Company is
party to multiple lease agreements for office space. The agreements require monthly rental payments through September 2029. Total
minimum obligations are approximately $1,313, $735, $447, $338, $326 and $839 for the twelve months ended fiscal
2021, 2022, 2023, 2024, 2025 and beyond, respectively. For Fiscal 2020 and Fiscal 2019, rent expense amounted to $1,659 and $1,732,
respectively.
Legal Proceedings
Whitaker v. Monroe Staffing Services, LLC &
Staffing 360 Solutions, Inc.
On December 5, 2019, former owner of Key Resources,
Inc. (“KRI”), Pamela D. Whitaker (“Whitaker,” “Plaintiff”), filed a complaint in Guilford County,
North Carolina (the “North Carolina Action”) asserting claims for breach of contract and declaratory judgment against Monroe
Staffing Services LLC (“Monroe”) and the Company (the “Defendants” arising out of the alleged non-payment of
certain earn-out payments and interest purportedly due under a Share Purchase Agreement pursuant to which Whitaker sold all issued and
outstanding shares in her staffing agency, KRI to Monroe in August 2018. Whitaker is seeking $4,054 in alleged damages.
Defendants removed the action to the Middle District
of North Carolina on January 7, 2020, and Plaintiff moved to remand on February 4, 2020. Briefing on the motion to remand concluded on
February 24, 2020. Separately, Defendants moved to dismiss the action on January 14, 2020 based on Plaintiff’s failure to state
a claim, improper venue, and lack of personal jurisdiction as to defendant Staffing 360 Solutions, Inc. Alternatively, Defendants sought
a transfer of the action to the Southern District of New York, based on the plain language of the Share Purchase Agreement’s forum
selection clause. Briefing on Defendants’ motion to dismiss concluded on February 18, 2020. On February 28, 2020, Plaintiff moved
for leave to file an amended complaint. Defendants filed their opposition to the motion for leave on March 19, 2020. Plaintiff has filed
a reply.
On June 29, 2020, Magistrate Judge Webster issued
a Report and Recommendation on the pending motions, recommending that Defendants’ motion to dismiss be granted with regard to Defendants’
request to transfer the matter to the Southern District of New York, and denied in all other regards without prejudice to Defendants
raising those arguments again in the new forum. Magistrate Judge Webster also recommended that Plaintiff’s motion to remand be
denied and motion to amend be left to the discretion of the Southern District of New York.
Plaintiff filed an objection to the Report and Recommendation
on July 9, 2020. Defendants responded on July 23, 2020. On February 19, 2021, the Middle District of North Carolina issued a decision
that reversed the Magistrate Judge’s Order, granting Plaintiff’s motion to remand and denying Defendants’ motion to
dismiss as moot. Defendants filed a Notice of Appeal to the Fourth Circuit on February 25, 2021. On March 18, 2021 the Fourth Circuit
selected the case for mandatory mediation. The mediation is scheduled to take place on April 6, 2021.
Separately, on February 26, 2020, the Company and
Monroe filed an action against Whitaker in the United States District Court for the Southern District of New York (Case No. 1:20-cv-01716)
(the “New York Action”.) The New York Action concerns claims for breach of contract and fraudulent inducement arising from
various misrepresentations made by Whitaker to the Company and Monroe in advance of, and included in, the share purchase agreement. The
Company and Monroe are seeking damages in an amount to be determined at trial but in no event less than $6 million. On April 28, 2020,
Whitaker filed a motion to dismiss the New York Action on both procedural and substantive grounds. On June 11, 2020, Monroe and the Company
filed their opposition to Whitaker’s motion to dismiss. On July 9, 2020 Whitaker filed reply papers in further support of the motion.
On October 13, 2020, the Court denied Whitaker’s
motion to dismiss, in part, and granted the motion, in part. The Court rejected Whitaker’s procedural arguments, but granted
the motion on substantive grounds. However, the Court ordered that Monroe and the Company may seek leave to amend the complaint
by letter application by December 1, 2020. Monroe and the Company filed a letter of motion for leave to amend and a proposed Amended
Complaint on December 1, 2020. On January 5, 2021, Whitaker filed an opposition to the letter motion. On January 25, 2021, Monroe
and the Company filed a reply in further support of the letter motion. On March 9, 2021, the Court granted Monroe and the Company’s
motion for leave to amend, in part, and denied the motion, in part. The Court rejected Monroe and the Company’s claim for
fraudulent inducement, but granted the motion for leave to amend their breach of contract claim. Monroe and the Company filed
their amended complaint on March 12, 2021. On April 9, 2021, Whitaker renewed her motion to dismiss on procedural grounds,
requesting dismissal of the action or, in the alternative, a stay of the proceeding pending adjudication on the merits of the
North Carolina Action. Monroe and the Company’s opposition to the motion to dismiss is due on April 23, 2021
Monroe and the Company intend to pursue their claims
vigorously.
As of the date of this filing, we are not aware of
any other material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, other
than as disclosed above.
NOTE 14 – SEGMENT INFORMATION
In December 2017, the Company reorganized its operations
into three reportable segments: Commercial – US; Professional – US and Professional - UK.
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Commercial Staffing - US
|
|
$
|
113,970
|
|
|
$
|
127,330
|
|
Professional Staffing - US
|
|
|
23,477
|
|
|
|
37,294
|
|
Professional Staffing - UK
|
|
|
67,080
|
|
|
|
113,854
|
|
Total Revenue
|
|
$
|
204,527
|
|
|
$
|
278,478
|
|
|
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
$
|
17,845
|
|
|
$
|
20,080
|
|
Professional Staffing - US
|
|
|
7,546
|
|
|
|
14,081
|
|
Professional Staffing - UK
|
|
|
9,422
|
|
|
|
14,148
|
|
Total Gross Profit
|
|
$
|
34,813
|
|
|
$
|
48,309
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(37,526
|
)
|
|
$
|
(44,327
|
)
|
Impairment of goodwill
|
|
|
(2,969
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(3,118
|
)
|
|
|
(3,369
|
)
|
Operating income - restructuring
|
|
|
20
|
|
|
|
10
|
|
Interest expense
|
|
|
(6,697
|
)
|
|
|
(7,628
|
)
|
Amortization of debt discount and deferred financing costs
|
|
|
(596
|
)
|
|
|
(857
|
)
|
Re-measurement gain (loss) on intercompany note
|
|
|
584
|
|
|
|
(383
|
)
|
Gain from sale of business
|
|
|
124
|
|
|
|
-
|
|
Gain on settlement of deferred consideration
|
|
|
-
|
|
|
|
1,924
|
|
Other income
|
|
|
84
|
|
|
|
326
|
|
Loss Before Provision for Income Tax
|
|
$
|
(15,281
|
)
|
|
$
|
(5,229
|
)
|
For Fiscal 2020 and Fiscal 2019, the Company generated
revenue in the U.S. and the U.K. as follows:
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
United States
|
|
$
|
137,447
|
|
|
$
|
164,624
|
|
United Kingdom
|
|
|
67,080
|
|
|
|
113,854
|
|
Total Revenue
|
|
$
|
204,527
|
|
|
$
|
278,478
|
|
For the period ended Fiscal 2020 and Fiscal 2019,
the Company has assets in the U.S. and the U.K. as follows:
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
United States
|
|
$
|
73,691
|
|
|
$
|
74,671
|
|
United Kingdom
|
|
|
13,233
|
|
|
|
14,170
|
|
Total Assets
|
|
$
|
86,924
|
|
|
$
|
88,841
|
|
Total assets by segment is not presented as it is
not reviewed by the Chief Operating Decision Maker in his evaluation of how to allocate capital and resources.
For the period ended Fiscal 2020 and Fiscal 2019,
the Company has goodwill in the U.S. and the U.K. as follows:
|
|
January 2, 2021
|
|
|
December 28, 2019
|
|
United States
|
|
$
|
12,082
|
|
|
$
|
16,630
|
|
United Kingdom
|
|
|
14,963
|
|
|
|
14,419
|
|
Total Goodwill
|
|
$
|
27,045
|
|
|
$
|
31,049
|
|
NOTE 15 – RELATED PARTY TRANSACTIONS
In addition to the Series A Preferred Shares and
notes and warrants issued to Jackson, the following are other related party transactions:
Board and Committee Members
|
|
Fiscal 2020
|
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
Dimitri Villard
|
|
$
|
75
|
|
|
|
5,600
|
|
|
$
|
4
|
|
|
$
|
12
|
|
Jeff Grout
|
|
|
75
|
|
|
|
5,600
|
|
|
|
4
|
|
|
|
12
|
|
Nick Florio
|
|
|
75
|
|
|
|
5,600
|
|
|
|
4
|
|
|
|
12
|
|
Alicia Barker
|
|
|
-
|
|
|
|
5,600
|
|
|
|
4
|
|
|
|
6
|
|
|
|
$
|
225
|
|
|
|
22,400
|
|
|
$
|
16
|
|
|
$
|
42
|
|
|
|
Fiscal 2019
|
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
Dimitri Villard
|
|
$
|
75
|
|
|
|
5,600
|
|
|
$
|
12
|
|
|
$
|
68
|
|
Jeff Grout
|
|
|
75
|
|
|
|
5,600
|
|
|
|
12
|
|
|
|
70
|
|
Nick Florio
|
|
|
75
|
|
|
|
5,600
|
|
|
|
12
|
|
|
|
69
|
|
Alicia Barker
|
|
|
-
|
|
|
|
5,600
|
|
|
|
8
|
|
|
|
4
|
|
|
|
$
|
225
|
|
|
|
22,400
|
|
|
$
|
32
|
|
|
$
|
94
|
|
Appointment of Officers
On March 28, 2018, the Company appointed Alicia Barker
to fill the Class II director vacancy created by the departure of Mr. Briand earlier in the year, such appointment was effective April
1, 2018. Ms. Barker joined the Company’s board of directors as an independent director and serves on the Board’s Compensation
and Human Resources Committee and on the Nominating and Corporate Governance Committee.
Effective July 1, 2018, the Company entered into
an Employment Agreement with Alicia Barker that appointed her as the Company’s Chief Operating Officer. Ms. Barker will continue
as a member of the Company’s board of directors, but effective with her appointment will no longer be a member of any Board committee,
nor an independent member of the Board, bringing the number of independent directors to three of five Board members.
The Company appointed Khalid Anwar as the Company’s
principal financial officer and principal accounting officer, effective as of December 15, 2020.
NOTE 16 – SUPPLEMENTAL CASH FLOW INFORMATION
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
8,596
|
|
|
$
|
7,225
|
|
Income taxes
|
|
|
278
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Deferred purchase price of UK factoring facility
|
|
$
|
8,036
|
|
|
$
|
13,856
|
|
Shares issued in connection with Jackson term loan
|
|
|
324
|
|
|
|
75
|
|
Increase in lease liabilities from obtaining right-of-use assets – ASC 842 adoption
|
|
|
450
|
|
|
|
5,965
|
|
Warrants adjustments in connection with Jackson term loan
|
|
|
126
|
|
|
|
—
|
|
Deemed dividend
|
|
|
4,690
|
|
|
|
—
|
|
NOTE 17 – INCOME TAXES
The components of loss before
provision for income taxes for Fiscal 2020 and Fiscal 2019, are as follows:
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Domestic
|
|
$
|
(13,491
|
)
|
|
$
|
(4,795
|
)
|
Foreign
|
|
|
(2,251
|
)
|
|
|
(434
|
)
|
Loss before provision for income taxes
|
|
$
|
(15,742
|
)
|
|
$
|
(5,229
|
)
|
The provision for income taxes consisted of the following:
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
190
|
|
|
|
119
|
|
Foreign
|
|
|
—
|
|
|
|
21
|
|
Total current tax expense
|
|
|
190
|
|
|
|
140
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(76
|
)
|
|
|
49
|
|
State
|
|
|
27
|
|
|
|
186
|
|
Foreign
|
|
|
(241
|
)
|
|
|
(710
|
)
|
Total deferred tax expense
|
|
|
(290
|
)
|
|
|
(475
|
)
|
Total tax benefit
|
|
$
|
(100
|
)
|
|
$
|
(335
|
)
|
The difference between the
income tax provision on income (loss) and the amount computed at the U.S. federal statutory rate is due to:
|
|
Fiscal
2020
|
|
|
Fiscal 2019
|
|
Benefit at Federal Statutory Rate
|
|
$
|
(3,306
|
)
|
|
|
21.00
|
%
|
|
$
|
(1,098
|
)
|
|
|
21.00
|
%
|
State taxes, net
|
|
|
(1,666
|
)
|
|
|
10.59
|
%
|
|
|
(1,741
|
)
|
|
|
33.30
|
%
|
Foreign operations
|
|
|
45
|
|
|
|
-0.29
|
%
|
|
|
(13
|
)
|
|
|
0.25
|
%
|
Permanent differences
|
|
|
87
|
|
|
|
0.55
|
%
|
|
|
349
|
|
|
|
-6.67
|
%
|
True-up adjustments
|
|
|
(589
|
)
|
|
|
3.74
|
%
|
|
|
(325
|
)
|
|
|
6.22
|
%
|
Change in valuation allowance
|
|
|
5,139
|
|
|
|
-32.64
|
%
|
|
|
2,399
|
|
|
|
-45.88
|
%
|
Other
|
|
|
190
|
|
|
|
-1.21
|
%
|
|
|
94
|
|
|
|
-1.80
|
%
|
Total Tax Benefit for Income Taxes
|
|
$
|
(100
|
)
|
|
|
0.64
|
%
|
|
$
|
(335
|
)
|
|
|
6.42
|
%
|
The Company’s effective tax rate differed
from the U.S. federal statutory rate primarily due to mix of pre-tax income (loss) results by jurisdictions taxed at different rates
than 21%, state taxes net of federal benefit, permanent differences, deferred tax balance adjustments that includes but is not limited
to the UK tax rate change from 17% to 19%, and changes in valuation allowance in the U.S.
Deferred income taxes are provided for the tax
effect of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Significant components
of the Company’s deferred tax assets and (liabilities) are as follows:
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
7,276
|
|
|
$
|
5,858
|
|
Tax credit, deduction and capital loss carryforward
|
|
|
2,880
|
|
|
|
2,327
|
|
Share-based compensation
|
|
|
749
|
|
|
|
847
|
|
Debt issuance costs
|
|
|
1
|
|
|
|
333
|
|
Accrued expenses and other liabilities
|
|
|
1,741
|
|
|
|
454
|
|
Interest limitation and carryforward
|
|
|
6,194
|
|
|
|
3,639
|
|
Operating lease liabilities
|
|
|
628
|
|
|
|
731
|
|
Total deferred tax assets
|
|
|
19,469
|
|
|
|
14,189
|
|
Less: valuation allowance
|
|
|
(17,087
|
)
|
|
|
(11,948
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
2,382
|
|
|
|
2,241
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deprecation
|
|
|
1,521
|
|
|
|
1,557
|
|
Basis differences in acquired intangibles
|
|
|
1,430
|
|
|
|
1,433
|
|
Operating lease - Right-of-use assets
|
|
|
621
|
|
|
|
731
|
|
Total deferred tax liabilities
|
|
|
3,572
|
|
|
|
3,721
|
|
Deferred tax liability
|
|
$
|
(1,190
|
)
|
|
$
|
(1,480
|
)
|
During Fiscal 2020 and Fiscal 2019, the
Company has federal net operating losses (“NOLs”) of $16,915 and $14,371. Of the $16,915 in federal NOL
carryforwards, $3,369 will begin to expire in 2032 and $2,288 can be carried forward indefinitely, subject to an 80% taxable income
limitation in the year of utilization. As of November 15, 2018, the Company had a change in ownership under Section 382 which
limits the amount of useable NOLs going forward. As such, the Company reduced the Federal NOL available by $7,220. The Company
has not identified subsequent 382 Limitations as of January 2, 2021 or December 28, 2019. As of January 2, 2021 and December
28, 2019, the Company has state operating losses of $62,174 and $47,581 that begin to expire in 2022, and foreign NOLs totaling
$2,990 and $1,514 with an indefinite life. As of January 2, 2021 and December 28, 2019, the Company also has capital loss carryforward
of $9,467 and $7,531, which, if unused, will begin to expire in 2023 and a general business credit carryforward of $76 and $248.
Effective for the year ended December 28, 2018,
the Tax Act resulted in a new limitation on interest expense under IRC Section 163(j). New IRC Section 163(j) limits the Company’s
annual deduction of interest expense to the sum of business interest income and 30 percent of the adjusted taxable income of the Company.
As a result of the CARES Act the limitation has been increased to 50% for tax years 2019 and 2020. The limitation for the year ended
January 2, 2021 resulted in disallowed interest of $20,917, which can be carried forward indefinitely.
The Company has not recorded deferred taxes or
withholding taxes for any undistributed foreign earnings, nor have any taxes been provided for the outside basis difference inherent
in these entities as the Company’s assertion is to indefinitely reinvest in foreign operations. It is not practicable to estimate
any taxes to be provided on outside basis differences at this time. Based on the amount of foreign undistributed earnings through January
2, 2021, we believe any such tax liability would be insignificant to the financial statements.
In assessing the realizability of deferred tax assets,
management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences
become deductible and/or net operating loss carryforwards can be utilized. We consider the level of historical taxable income, scheduled
reversal of temporary differences, tax planning strategies, and projected future taxable income in determining whether a valuation allowance
is warranted.
During Fiscal 2020, the Company maintained a valuation
allowance against its U.S. deferred tax assets. The Company’s valuation allowance increased by $5,139 during Fiscal 2020 primarily
attributable to the Section 163(j) interest limitation.
During 2020, we maintained our federal and state
tax attributes for unrecognized tax benefits related primarily to the treatment of stock compensation and stock options. If recognized,
$656 of the unrecognized tax benefits are likely to offset to a corresponding full valuation allowance provided for
the reduction of federal NOLs, thereby there is no impact to the effective rate. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Beginning balance
|
|
$
|
674
|
|
|
$
|
670
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
|
|
4
|
|
Reductions for tax positions of prior years
|
|
|
(18
|
)
|
|
|
—
|
|
Loss before provision for income taxes
|
|
$
|
656
|
|
|
$
|
674
|
|
It is reasonably possible
that the amount of the unrecognized tax benefits with respect to our unrecognized tax positions will increase or decrease in the next
12 months. These changes may be the result of, among other things, method changes. However, quantification of an estimated range cannot
be made at this time. The Company has accrued zero interest and penalties as of January 2, 2021 and December 28, 2019.
The Company files its tax
returns in the U.S., United Kingdom, Canada and certain state and local tax jurisdictions with various statutes of limitations.
The Company has no tax years subject to audit by certain jurisdictions at this time. To the extent utilized in future years’
tax returns, NOLs carryforwards at January 2, 2021 and December 28, 2019 will remain subject to examination until the respective tax
year is closed.