NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Staffing
360 Solutions, Inc. (“we,” “us,” “our,” “Staffing 360,” or the “Company”)
was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation, which changed its name to Staffing 360 Solutions,
Inc., ticker symbol “STAF,” on March 16, 2012. On June 15, 2017, the Company reincorporated 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, 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
condensed consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles
in the United States (“GAAP”), expressed in U.S. dollars.
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
These
unaudited condensed consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion
of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented
in accordance with the GAAP.
These
unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements
and notes thereto for the fiscal year ended January 2, 2021 which are included in the Company’s January 2, 2021 Form 10-K (“Fiscal
2020”), filed with the United States Securities and Exchange Commission on April 16, 2021. The Company assumes that the users of
the interim financial information herein have read, or have access to, the audited consolidated financial statements for the preceding
period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results
of operations for the period ended April 3, 2021 are not necessarily indicative of results for the entire year end. This report is for
the period January 3, 2021 to April 3, 2021 (“Q1 2021 YTD”) and December 29, 2019 to March 28, 2020 (“Q1 2020
YTD”). The Company uses a 4-4-5 calendar month which only has 364 days and as such an extra week would need to be added every few
years. In October of 2020, the Company’s board of directors (the “Board”) approved the addition of such an extra
week to last year’s fiscal year end resulting in the last year ended on January 2, 2021.
Liquidity
The
accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the
Company to continue as a going concern. The accompanying financial statements have been prepared on a basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as
of the quarter ended April 3, 2021, the Company has an accumulated deficit of $93,867 and a working capital deficit of $27,001.
At April 3, 2021, we had total debt of $40,352 and $2,363 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.
The
financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates
the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this
belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements
and that our credit facilities with our lenders will remain available to us.
Further,
the Second Amended and Restated 12% Senior Secured Note, due September 30, 2022 (the “Jackson Note”) that the Company
issued on October 26, 2020 to Jackson Investment Group LLC (“Jackson”) pursuant to that certain Second Amended
and Restated Note Purchase Agreement, dated October 26, 2020, among the Company, certain of its subsidiaries and Jackson (the “Amended
Note Purchase Agreement”), and the Company’s accounts receivable financing facility with Midcap include certain customary
financial covenants and the Company has had instances of non-compliance, including the current quarter ended April 3, 2021.
Management has historically been able to obtain from Jackson and Midcap waivers of any non-compliance, including the current
quarter ended April 3, 2021 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 and Midcap refuse
to provide a waiver in the future, the outstanding debt under the Amended Note Purchase Agreement and the Jackson Note and the Midcap
accounts receivable financing facility could become due immediately, which exceeds our current cash balance.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
On
February 12, 2021, the Company closed an offering (the “February 2021 Offering”) of 20,851,199 shares of common
stock and pre-funded warrants to purchase up to 1,004,081 shares of common stock. The Pre-funded Warrants were sold at $0.8999
per Pre-Funded Warrant. The Pre-Funded Warrants were exercised immediately upon issuance, whereupon 1,004,081 shares of
common stock were issued on February 12, 2021.
The
net proceeds to the Company from the February 2021 Offering were approximately $18.1 million, after deducting placement
agent fees and estimated offering expenses totaling $1,596 payable by the Company. The Company also incurred
professional fees related to the February 2021 Offering totaling $227. Prior to the exchange of the Company’s Series
E Convertible Preferred Stock for newly issued Series G Convertible Preferred Stock, consummated on May 6, 2021, the Company
was required to use the proceeds of any sales of equity securities, including the securities offered in the February
2021 Offering, exclusively to redeem any outstanding shares of the Company’s Series E Convertible Preferred Stock, subject
to certain limitations. On February 5, 2021, the Company received a Limited Consent and Waiver from Jackson Investment Group,
LLC (the “Limited Consent”), the sole holder of the Company’s outstanding shares of Series E Convertible
Preferred Stock, to use approximately (i) 75% of the net proceeds from the February 2021 Offering to redeem a portion of
the Jackson Note, which had an outstanding principal amount of $32,710 as of February 9, 2021, and (ii) 25% of the net
proceeds from the February 2021 Offering to redeem a portion of the Company’s Series E Convertible Preferred Stock.
Pursuant to the Limited Consent, upon closing of the February 2021 Offering, the Company redeemed a portion of the Jackson
Note with an outstanding principal amount of $13,556 and redeemed 4,518 shares of the Base Series E Preferred Stock. Following
the redemption of the portion of the Jackson Note and Base Series E Preferred Stock, the Jackson Note balance was $19,154
and the Company had 6,172 shares of Base Series E Preferred Stock outstanding with an aggregate stated value of $6,172.
On
April 21, 2021, the Company entered into a securities purchase agreement with certain institutional and accredited investors for the
issuance and sale of an aggregate of 4,697.6328 shares of Series F Convertible Preferred Stock at a price of $1,000 per share
and warrants (the “Warrants”) to purchase up to an aggregate of 7,829,388 shares of common stock, at an exercise price
of $0.60 per share. The Warrants are exercisable upon the later of the effective date of a reverse stock split or six months following
the closing of the private placement and will expire five years following the date that the Warrants first become exercisable.
The
Series F Convertible Preferred Stock is convertible into an aggregate of approximately 7,829,388 shares of common stock
at a conversion price of $0.60 per share, subject to certain ownership limitations, upon the Company amending its certificate of incorporation
to effect a reverse split within a range of 2-into-1 to up to 20-into-1 to be determined by the Board.
The
net proceeds to the Company from the securities purchase agreement were approximately $4.2 million, after deducting placement agent fees
and estimate offering expenses payable by the Company. The Company used $3.2 million of the net proceeds to redeem a portion of the outstanding
Second Amended and Restated 12% Senior Secured Note due September 30, 2022, which had an outstanding principal amount of $19,154 immediately
prior to such redemption. In addition, the Company used $1,000 of the net proceeds for working capital purposes.
Going
concern
The
accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going
concern. The Company’s debt obligations and certain unsecured payments associated with historical acquisitions are due in the next
12 months, and the Company’s debt obligations with Jackson and MidCap may become due on demand due to certain covenant violations
discussed above, which are in excess of cash on hand. Lastly, the Company has short term debt obligations amounting to $16,624 from
loans received under the Payroll Protection Plan, for which forgiveness cannot be assured. 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 had 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.
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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
In
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
Paycheck Protection Program (“PPP”) loans (the “PPP Loans”) by the U.S. Small Business Administration
(the “SBA”). In the event that all or any portion of the PPP Loans is not forgiven by the SBA, all or portion of the
Escrow Funds will be used to repay any unforgiven portion of the PPP Loans in full. The firstPRO Transaction closed
on September 24, 2020. In September, the Company submitted the PPP Loan forgiveness applications to the SBA. As of the date of this quarterly
report, the PPP Loans have not been approved for forgiveness, and there is no guarantee that all or portion of the PPP Loans will
be forgiven. The consideration of $2,080 is presented as cash in escrow in the Company’s consolidated balance sheet
as of April 3, 2021 and January 2, 2021 due to the escrow arrangement and restrictions set forth by Jackson.
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 our Amended and Restated Note Purchase Agreement, dated September 15,
2017 (the “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 a portion of the Series E Preferred Stock subsequent
to September 26, 2020, and the Escrow Funds, subject to the forgiveness of the PPP Loans discussed above, were agreed to
be used to redeem a portion of the Series E Preferred Stock. On September 28, 2020, the Company redeemed 1,300 shares of Base E Series
E Preferred Stock for $1,300.
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 agreed to 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.
COVID-19
The
full impact of the COVID-19 pandemic continues to evolve as of the date of this quarterly 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”)
used 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
applied 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 used the entire proceeds under the May 12 Note for such qualifying expenses.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
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 included
a period for the first ten 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”)
used 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 used 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 included
a period for the first ten 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 $16,624 of the PPP Loans as a short-term
obligation and $2,771 as non-current. 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
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. The Company provided all documents in accordance with the SBA requirements.
The SBA has yet to respond and the timeline provided has expired. The Company continues to wait for a response. 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.
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.
In
Q1 and Q3 of 2020, the Company determined that the COVID-19 outbreak is, and its continued impact on certain reporting
units was a triggering event due to its possible impact on industry and market conditions and the possible negative effect
on earnings and cash flows, and overall financial performance. 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 impairment testing. Volatility in the Company’s stock price can result in the net book value of the Company’s
reporting units approximating, or even temporarily exceeding market capitalization, however, the fair value of the Company’s reporting
units is driven solely by the market price of the Company’s common stock. As described above, fair value of the Company’s
reporting units 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.
The
Company recognized an impairment with respect to its firstPro reporting unit of $2,969 during the quarter ended March 28,
2020. 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
No
impairments to goodwill were recognized subsequent to Q1 2020. Management has made assumptions regarding partial recovery
from the COVID-19 pandemic in 2021 and 2022. If the assumptions utilized by management are not achieved and declines to operations are
greater than anticipated, while failing to achieve growth in future periods as a result of the prolonged impact of COVID-19 pandemic,
an impairment to goodwill could be recorded and such amount could be material to the financial statements. A reduction in the projected
long-term operating performance of the reporting units, market declines, changes in discount rates or other conditions could result in
a material impairment in the future.
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 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 Q1 2021 YTD was comprised of
$47,918 of temporary contractor revenue and $1,033 of permanent placement revenue, compared with $55,996 and $2,696 for Q1 2020 YTD,
respectively. Refer to Note 10 for further details on breakdown by segments.
Reclassifications
We
may make certain reclassifications to prior period amounts to conform with the current year’s presentation. These reclassifications
did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.
Income
Taxes
The
Company’s provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign
income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances,
if any, as compared with those forecasted at the beginning of the fiscal year and each interim period thereafter.
The
effective income tax rate was 2.2% and 2.4% for the three months ended April 3, 2021 and March 28, 2020,
respectively. The Company’s effective tax rate differs from the U.S. federal statutory rate of 21%, primarily due to
changes in valuation allowances in the U.S., which eliminates the effective tax rate on current year losses, offset by current state
taxes.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Foreign
Currency
The
Company recorded a non-cash foreign currency remeasurement gain (loss) of $128 and $(675), respectively, associated with its U.S dollar
denominated intercompany note.
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.
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 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.
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, Series E and Series E-1 Preferred Stockholders (related parties) receive certain dividends or dividend equivalents that are considered
participating securities and our loss per share is computed using the two-class method. For Q1 2021 YTD and Q1 2020 YTD,
pursuant to the two-class method, as a result of the net loss attributable to common stockholders, losses were not allocated to the participating
securities.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Diluted
earnings per share are computed using the weighted average number of common stock shares and dilutive common stock equivalents outstanding
during the period. Dilutive common stock equivalents consist of shares of common stock issuable upon the conversion of preferred stock,
convertible notes, unvested equity awards and the exercise of stock options and warrants (calculated using the modified treasury stock
method). Such securities, shown below, presented on a common stock equivalent basis and outstanding as of April 3, 2021 and March 28,
2020 have not been included in the diluted earnings per share computations, as their inclusion would be anti-dilutive due to the Company’s
net loss as of April 3, 2021 and March 28, 2020:
|
|
April 3, 2021
|
|
|
March 28, 2020
|
|
Convertible preferred shares
|
|
|
7,638,000
|
|
|
|
7,867,142
|
|
Warrants
|
|
|
1,576,879
|
|
|
|
925,935
|
|
Restricted shares – unvested
|
|
|
318,000
|
|
|
|
450,915
|
|
Long term incentive plan (2019 LTIP)
|
|
|
—
|
|
|
|
355,000
|
|
Options
|
|
|
76,500
|
|
|
|
76,500
|
|
Total
|
|
|
9,609,379
|
|
|
|
9,675,492
|
|
NOTE
4 – ACCOUNTS RECEIVABLE BASED FINANCING FACILITIES
HSBC
Invoice Finance (UK) Ltd – New Facility
On
February 8, 2018, CBS Butler Holdings Limited (“CBS Butler”), Staffing 360 Solutions Limited and The JM Group, entered
into a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’
accounts receivable up to an aggregate amount of £11,500 ($15,894) 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 ($1,382) (within the overall aggregate total facility of £11,500 ($15,894).) The arrangement
has an initial term of 12 months, with an automatic rolling three-month extension and carries a service charge of 1.80%.
On
June 28, 2018, Clement May Limited (“CML”), the Company’s new subsidiary entered into a new agreement with a
minimum term of 12 months for purchase of debt (“APD”) with HSBC, joining CBS Butler, Staffing 360 Solutions Limited and
The JM Group (collectively, with CML, the “Borrowers”) as “Connected Clients” as defined in the APD. The new
Connected Client APDs carry an aggregate Facility Limit of £20,000 across all Borrowers. The obligations of the Borrowers are secured
by a fixed charge and a floating charge on the Borrowers’ respective accounts receivable and are subject to cross-company guarantees
among the Borrowers. In addition, the secured borrowing line against unbilled receivables was increased to £1,500 for a period
of 90 days. In July 2019, the aggregate Facility Limit was extended to £22,500 across all Borrowers.
Under
ASU 2016-16, “Statement of Cash Flows (Topic 230, Classification of Certain Cash Receipts and Cash Payments, a consensus of
the FASB Emerging Issues Task Force), the upfront portion of the sale of accounts receivable is classified within operating activities,
while the deferred purchase price portion (or beneficial interest), once collected, is classified within investing activities.
Midcap
Funding Trust
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
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, the facility will bear interest at a rate equal to the lesser of:
(i) 3.0% above the rate of interest applicable to such obligations immediately prior to the occurrence of the event of default; and (ii)
the maximum rate allowable under law.
Under
the terms of this agreement, the Company is subject to affirmative covenants which are customary for financings of this type, including
covenants to: (i) maintain good standing and governmental authorizations, (ii) provide certain information and notices to MidCap,
(iii) deliver monthly reports and quarterly financial statements to MidCap, (iv) maintain insurance, (v) discharge all taxes, (vi) protect
its intellectual property, and (vii) generally protect the collateral granted to MidCap. The Company is also subject to negative
covenants customary for financings of this type, including that it may not: (i) enter into a merger or consolidation or certain change
of control events, (ii) incur liens on the collateral, (iii) except for certain permitted acquisitions, acquire any significant assets
other than in the ordinary course of business, (iv) assume certain additional senior debt, or (v) amend any of its organizational
documents. The Company is not in compliance with its April 3, 2021 covenants and received a waiver from Midcap.
The
balance of the Midcap Facility as of April 3, 2021 and January 2, 2021 was $9,329 and $14,842, respectively, and is included in Accounts
receivable financing on the Consolidated Balance Sheet.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE
5 – GOODWILL
The
following table provides a roll forward of goodwill:
|
|
April 3, 2021
|
|
|
January 2, 2021
|
|
Beginning balance, net
|
|
$
|
27,045
|
|
|
$
|
31,049
|
|
Accumulated impairment losses
|
|
|
—
|
|
|
|
(2,969
|
)
|
Disposition of business
|
|
|
—
|
|
|
|
(1,577
|
)
|
Currency translation
|
|
|
117
|
|
|
|
542
|
|
Ending balance, net
|
|
$
|
27,162
|
|
|
$
|
27,045
|
|
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 to 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
6 – DEBT
|
|
April 3, 2021
|
|
|
January 2, 2021
|
|
Jackson Investment Group - related party
|
|
$
|
19,154
|
|
|
$
|
33,880
|
|
PPP Loans
|
|
|
19,395
|
|
|
|
19,395
|
|
HSBC Term Loan
|
|
|
1,803
|
|
|
|
2,094
|
|
Total Debt, Gross
|
|
|
40,352
|
|
|
|
55,369
|
|
Less: Debt Discount and Deferred Financing Costs
|
|
|
(486
|
)
|
|
|
(559
|
)
|
Total Debt, Net
|
|
|
39,866
|
|
|
|
54,810
|
|
Less: Non Current Portion
|
|
|
(22,150
|
)
|
|
|
(39,943
|
)
|
Total Current Debt, Net
|
|
$
|
17,716
|
|
|
$
|
14,867
|
|
Jackson
Debt
On
October 26, 2020, the Company, certain of its subsidiaries and Jackson entered into the Amended Note Purchase Agreement and
the 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 the extension of the warrant 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 Jackson
Note using the effective interest method.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Under
the terms of the Amended Note Purchase Agreement and the 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 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 The Nasdaq Capital Market (“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 amount due and payable was reduced by $166, and for
the period commencing April 2021 through and including September 2021, each monthly interest amount due and payable shall
be increased by $166.
Under
the terms of the Amended Note Purchase Agreement, the Company was required to make a mandatory prepayment of the principal amount
of the Jackson Note of not less than $3,000 no later than January 31, 2021. Payments were made in December 2020 and January 2021
totaling $3,029 in full satisfaction of the mandatory prepayment.
On January 4, 2021, the Company used $1,558
in net proceeds from a securities purchase agreement dated December 30, 2020 and redeemed $1,168 of the Jackson Note with an outstanding
principal amount of $33,878 and redeemed 390 shares of the Base Series E Preferred Stock with an aggregate value of $390. Following
the redemption of the portion of the Jackson Note and Base Series E Preferred Stock, the Jackson Note balance was $32,710 and
the Company had 10,690 shares of Base Series E Preferred Stock outstanding with an aggregate stated value of $10,690.
On February 5, 2021, the Company received the
Limited Consent from Jackson, the sole holder of the Company’s outstanding shares of Series E Convertible Preferred Stock, to use
approximately (i) 75% of the net proceeds from the February 2021 Offering to redeem a portion of the Jackson Note, which had an outstanding
principal amount of $32,710 as of February 9, 2021, and (ii) 25% of the net proceeds from the February 2021 Offering
to redeem a portion of the Company’s Series E Convertible Preferred Stock. Pursuant to the Limited Consent, upon closing of the
February 2021 Offering, the Company redeemed a portion of the Jackson Note with an outstanding principal amount of $13,556 and redeemed
4,518 shares of the Base Series E Preferred Stock.
The entire outstanding principal balance of the Jackson
Note shall be due and payable on September 30, 2022. The debt represented by the Jackson Note 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 customary financial covenants, including a leverage ratio covenant and a minimum adjusted EBITDA covenant.
Delivery of financial covenants commenced with the fiscal month ending March 2021. The Company is not in compliance with
its April 3, 2021 covenants and received a waiver from Jackson.
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 used 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 applied 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 used 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 included
a period for the first ten 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
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,” used 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 used
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 included
a period for the first ten 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. The Company provided all documents in accordance with the SBA requirements.
The SBA has yet to respond and the timeline provided has expired. The Company continues to wait for a response. 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Debt
Exchange Agreement
On
November 15, 2018 the Company, entered into a Debt 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 Convertible Preferred Stock, par value $0.00001 per share,
of the Company (the “Series E Preferred Stock”).
The
Series E Preferred Stock ranked senior to the Company’s common stock and any other series or classes of preferred stock
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 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 (the “Series E Certificate
of Designation”.)) A holder of Series E Preferred Stock was 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 was 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 carried 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 had 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 were 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 Series E Certificate of Designation) plus any accrued and unpaid dividends thereon, (ii) each share of
Series E-1 Preferred Stock was initially convertible into 602 shares of the Company’s common stock, and (iii) Series E-1
Convertible Preferred Stock could 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 Series E Certificate of Designation.
Under the amended terms, holders of Series E Preferred Stock were 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
could 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 was
elected, a holder of Series E Preferred Stock was 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 was less than $0.50, or was otherwise undeterminable
because such shares were no longer publicly traded or the closing price was no longer reported by Nasdaq, then the average
closing price for these purposes was to be deemed to be $0.50, and if such average closing price were greater than $3.50
then the average closing price for these purposes would be deemed to be $3.50. Dividends on the Series E-1 Preferred Stock could
only be paid in cash. If the Company failed to make dividend payments on the Series E Preferred Stock, it would be
an event of default under the Amended Note Purchase Agreement.
Under
the terms of the Amendment, shares of Series E-1 Preferred Stock were convertible into common stock at a conversion rate equal
to the liquidation value of each share of Series E-1 Preferred Stock divided by $1.00 per share commencing October 31, 2020. Each share
of Series E-1 Preferred Stock had a liquidation value of $1,000 per share. The shares of Base Series E Preferred Stock were
also convertible into shares of common stock after October 31, 2022. The conversion rate for the Base Series E Preferred Stock was
equal to the liquidation value of each share of Base Series E Preferred Stock divided by $1.00 per share. Each share of Base Series
E Preferred Stock had 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
Company 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 as of the fiscal year ended January 2, 2021. 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 lacked retained earnings at the time of determination, 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.
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, were 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.
Lastly, under the terms of the
Limited Consent and Waiver with Jackson dated February 5, 2021, it was agreed that to the extent that any of the PPP Loans are
forgiven after the February 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 Jackson Note. As this provision results in a contingent
redemption feature, approximately $4.1 million of the Series E Preferred Stock that remains outstanding as of April 3, 2021 was
reclassified to mezzanine equity. The Company assessed the fair value of the instrument just before and after this modification and
recorded a deemed dividend totaling $389 upon remeasurement of the Series E Preferred Stock.
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 three-year term loan with HSBC in the UK for £1,000.
NOTE
7 – 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 Q1 2021 YTD and Q1 2020 YTD, as a result of the adoption of ASC 842, the Company
recorded a right of use (“ROU”) lease asset of approximately $3,302 with a corresponding lease liability of approximately
$3,264 and ROU of approximately $4,478 with a corresponding lease liability of approximately $4,557, 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Quantitative
information regarding the Company’s leases for the period ended April 3, 2021 is as follows:
Lease Cost
|
|
Classification
|
|
Q1 2021 YTD
|
|
Operating lease cost
|
|
SG&A Expenses
|
|
|
268
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
3.78
|
|
Weighted average discount rate
|
|
|
|
|
6.27
|
%
|
|
|
|
|
|
|
|
Future Lease Payments
|
|
|
|
|
|
|
2021
|
|
|
|
$
|
989
|
|
2022
|
|
|
|
|
827
|
|
2023
|
|
|
|
|
471
|
|
2024
|
|
|
|
|
340
|
|
2025
|
|
|
|
|
327
|
|
Thereafter
|
|
|
|
|
842
|
|
|
|
|
|
$
|
3,796
|
|
Less: Imputed Interest
|
|
|
|
|
532
|
|
|
|
|
|
|
3,264
|
|
|
|
|
|
|
|
|
Leases – Current
|
|
|
|
|
1,304
|
|
Leases – Non-Current
|
|
|
|
|
1,960
|
|
As
most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments.
NOTE
8 – EQUITY
Common
Stock
The
Company issued the following shares of common stock during the three-month period ended April 3, 2021:
Shares issued to/for:
|
|
Number of Common Shares Issued
|
|
|
Fair Value of
Shares Issued
|
|
|
Fair Value at Issuance
(minimum and maximum per share)
|
|
Equity Raise
|
|
|
21,855,280
|
|
|
$
|
19,670
|
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
Preferred Series A Conversion
|
|
|
27,024
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Employees
|
|
|
305,000
|
|
|
|
275
|
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
Board and Committee members
|
|
|
5,600
|
|
|
|
5
|
|
|
$
|
0.86
|
|
|
$
|
0.86
|
|
Long-term incentive plan
|
|
|
155,000
|
|
|
|
133
|
|
|
$
|
0.86
|
|
|
$
|
0.86
|
|
|
|
|
22,347,904
|
|
|
$
|
20,083
|
|
|
|
|
|
|
|
|
|
The
Company issued the following shares of common stock during the three-month period ended March 28, 2020:
Shares issued to/for:
|
|
Number of Common Shares Issued
|
|
|
Fair Value of
Shares Issued
|
|
|
Fair Value at Issuance
(minimum and maximum per share)
|
|
Jackson Investment Group
|
|
|
300,000
|
|
|
$
|
244
|
|
|
$
|
0.67
|
|
|
$
|
0.92
|
|
Preferred Series A Conversion
|
|
|
16,215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Board and Committee members
|
|
|
5,600
|
|
|
|
5
|
|
|
|
0.85
|
|
|
|
0.85
|
|
|
|
|
321,815
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
February
2021 Public Offering
On
February 9, 2021, the Company 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 February 2021 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 February 2021 Offering was made only by means of a prospectus forming a part of the effective registration
statement.
The
February 2021 Offering closed on February 12, 2021. In the February 2021 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 February 2021 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 February 2021 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 February 2021 Offering to redeem a portion of the outstanding
Jackson Note and 25% of the net proceeds from the February 2021 Offering to redeem a portion of the Company’s Series E Preferred
Stock. Pursuant to the Limited Consent, upon closing of the February 2021 Offering, the Company redeemed a portion of the 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.
Prior to the February 2021 Offering, the Company
entered into a Limited Consent and Waiver with Jackson, dated February 5, 2021, whereby, among other things, Jackson agreed that we may
use 75% of the proceeds from the Offering to redeem a portion of the Jackson Note, which at the time had an outstanding principal
amount 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, the Company 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. 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 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 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, and on May 6, 2021 the limited waiver was extended to June 30, 2021.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Restricted
Shares
The
Company has issued shares of restricted stock to employees and members of the board of directors (the “Board”) under its
2015 Omnibus Incentive Plan, 2016 Omnibus Incentive Plan and 2020 Omnibus Inventive Plan. Under these plans, the shares are restricted
for a period of three years from issuance. As of April 3, 2021, the Company has issued a total of 318,000 restricted shares of
common stock to employees and Board members that remain restricted. In accordance with ASC 718, Compensation – Stock Compensation,
the Company recognizes stock-based compensation from restricted stock based upon the fair value of the award at issuance over the vesting
term on a straight-line basis. The fair value of the award is calculated by multiplying the number of restricted shares by the Company’s
stock price on the date of issuance. The impact of forfeitures has historically been immaterial to the financial statements. The Company
recorded compensation expense associated with these restricted shares of $209 and $94, for the periods ended Q1 2021 YTD and Q1
2020 YTD, respectively.
Stock
Options
The
Company recorded share-based payment expense of $7 and $8 for the periods ended Q1 2021 YTD and Q1 2020 YTD, respectively.
Convertible
Preferred Shares
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, 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.
In
the periods ended Q1 2021 YTD and Q1 2020 YTD, the Company paid $0 and $0, respectively, in dividends to its Series A Preferred Stockholders.
On January 21, 2020, the Company converted the shares of Series A Preferred Stock awarded to Mr. Briand into 16,215 shares of common
stock. On January 8, 2021, the Company converted the shares awarded to Mr. Flood into 27,024 shares of common stock. The Company has
$125 and $31 of dividends payable to Series A Preferred Stockholders at the end of Q1 2021 YTD and Q1 2020 YTD.
Series
E Preferred Stock - Related Party
The
Series E Preferred Stock ranks senior to common stock and any other series or classes of preferred stock now or after issued or outstanding
with respect to dividend rights and rights on liquidation, winding up and dissolution. Each share of Series E Preferred Stock 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
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.
As
of April 3, 2021, 6,172,000 shares and 1,466,000 shares of common stock were issuable upon the potential conversion of
Series E Preferred Stock and Series E-1 Preferred Stock, respectively. As of the date of this filing, the Company does not have sufficient
authorized shares to cover the conversion of these instruments. Due to the contingent nature of the redemption features present
within the Series E and E-1 Preferred Stock, as of April 3, 2021, the Company classified the shares as mezzanine equity on
the consolidated balance sheets.
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
|
On
January 8, 2021, the Company issued 155,000 shares to the remaining 50% of eligible employees in good standing on December 31, 2020.
The remaining shares available in this plan expired. The Company recognized expense of $4 related to the 2019 LTIP in Q1 2021.
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 April 3, 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
Whitaker
v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.
On
December 5, 2019, former owner of KRI, Pamela D. Whitaker (“Whitaker” or “Plaintiff”), filed a complaint in Guilford
County, North Carolina (the “North Carolina Action”) asserting claims for breach of contract and declaratory judgment against
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 Staffing 360’s subsidiary, Monroe Staffing Services 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 District Court issued a decision that reversed the Magistrate Judge’s Order. The District Court granted Plaintiff’s motion
to remand and denied Defendants’ motion to dismiss as moot. Defendants filed a Notice of Appeal to the Fourth Circuit on February
25, 2021 and filed their opening brief on April 21, 2021. Plaintiff’s response brief is due on May 21, 2021, and Defendant’s
reply is due on June 11, 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.
On May 14, 2021, Monroe and the Company filed an opposition to the motion to dismiss. Whitaker’s reply in further support of
the motion, if any, is due June 21, 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.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE
10 – SEGMENTS
The
Company generated revenue and gross profit by segment as follows:
|
|
Q1 2021 YTD
|
|
|
Q1 2020 YTD
|
|
Commercial Staffing – US
|
|
$
|
30,121
|
|
|
$
|
28,743
|
|
Professional Staffing – US
|
|
|
3,771
|
|
|
|
8,660
|
|
Professional Staffing – UK
|
|
|
15,059
|
|
|
|
21,289
|
|
Total Revenue
|
|
$
|
48,951
|
|
|
$
|
58,692
|
|
|
|
|
|
|
|
|
|
|
Commercial Staffing – US
|
|
$
|
4,838
|
|
|
$
|
4,294
|
|
Professional Staffing – US
|
|
|
954
|
|
|
|
3,080
|
|
Professional Staffing – UK
|
|
|
2,223
|
|
|
|
3,274
|
|
Total Gross Profit
|
|
$
|
8,015
|
|
|
$
|
10,648
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(7,929
|
)
|
|
$
|
(10,961
|
)
|
Depreciation and amortization
|
|
|
(731
|
)
|
|
|
(785
|
)
|
Impairment of goodwill
|
|
|
—
|
|
|
|
(2,969
|
)
|
Interest expense and amortization of debt discount and deferred financing costs
|
|
|
(1,241
|
)
|
|
|
(2,417
|
)
|
Re-measurement gain (loss) on intercompany note
|
|
|
128
|
|
|
|
(675
|
)
|
Other income
|
|
|
107
|
|
|
|
(14
|
)
|
Loss Before (Provision
for) Benefit from Income Tax
|
|
$
|
(1,651
|
)
|
|
$
|
(7,173
|
)
|
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
following table disaggregates revenues by segments:
|
|
Q1 2021 YTD
|
|
|
|
|
|
|
Commercial Staffing – US
|
|
|
Professional Staffing - US
|
|
|
Professional Staffing - UK
|
|
|
Total
|
|
Permanent Revenue
|
|
$
|
41
|
|
|
$
|
257
|
|
|
$
|
735
|
|
|
$
|
1,033
|
|
Temporary Revenue
|
|
|
30,080
|
|
|
|
3,514
|
|
|
|
14,324
|
|
|
|
47,918
|
|
Total
|
|
$
|
30,121
|
|
|
$
|
3,771
|
|
|
$
|
15,059
|
|
|
$
|
48,951
|
|
|
|
Q1 2020 YTD
|
|
|
|
|
|
|
Commercial Staffing – US
|
|
|
Professional Staffing - US
|
|
|
Professional Staffing - UK
|
|
|
Total
|
|
Permanent Revenue
|
|
$
|
46
|
|
|
$
|
1,444
|
|
|
$
|
1,206
|
|
|
$
|
2,696
|
|
Temporary Revenue
|
|
|
28,697
|
|
|
|
7,216
|
|
|
|
20,083
|
|
|
|
55,996
|
|
Total
|
|
$
|
28,743
|
|
|
$
|
8,660
|
|
|
$
|
21,289
|
|
|
$
|
58,692
|
|
As
of April 3, 2021 and January 2, 2021, the Company has assets in the U.S. and the U.K. as follows:
|
|
April 3, 2021
|
|
|
January 2, 2021
|
|
United States
|
|
$
|
66,753
|
|
|
$
|
73,691
|
|
United Kingdom
|
|
|
13,203
|
|
|
|
13,233
|
|
Total Assets
|
|
$
|
79,956
|
|
|
$
|
86,924
|
|
NOTE
11 – OTHER RELATED PARTY TRANSACTIONS
In
addition to the shares of Series E and Series E-1 Preferred Stock and notes issued to Jackson, the following are other related party
transactions:
Board
and Committee Members
The
Company had the following activity with its Board and Committee Members:
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
|
|
Q1 2021 YTD
|
|
|
Q1 2020 YTD
|
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
Dimitri Villard
|
|
$
|
19
|
|
|
|
1,400
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
19
|
|
|
|
1,400
|
|
|
$
|
1
|
|
|
$
|
5
|
|
Jeff Grout
|
|
|
19
|
|
|
|
1,400
|
|
|
|
1
|
|
|
|
2
|
|
|
|
19
|
|
|
|
1,400
|
|
|
|
1
|
|
|
|
5
|
|
Nick Florio
|
|
|
19
|
|
|
|
1,400
|
|
|
|
1
|
|
|
|
2
|
|
|
|
19
|
|
|
|
1,400
|
|
|
|
1
|
|
|
|
5
|
|
Alicia Barker
|
|
|
—
|
|
|
|
1,400
|
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
1,400
|
|
|
|
1
|
|
|
|
1
|
|
|
|
$
|
57
|
|
|
|
5,600
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
57
|
|
|
|
5,600
|
|
|
$
|
4
|
|
|
$
|
16
|
|
NOTE
12 – SUPPLEMENTAL CASH FLOW INFORMATION
|
|
Q1 2021 YTD
|
|
|
Q1 2020 YTD
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
775
|
|
|
$
|
689
|
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Deferred purchase price of UK factoring facility
|
|
|
1,612
|
|
|
$
|
2,270
|
|
Shares issued to Jackson Investment Group
|
|
|
—
|
|
|
|
244
|
|
Dividends accrued to related parties
|
|
|
389
|
|
|
|
603
|
|
Deemed Dividend
|
|
|
389
|
|
|
|
—
|
|
NOTE
13 – SUBSEQUENT EVENTS
April
2021 Securities Purchase Agreement
On
April 21, 2021, the Company entered into a securities purchase agreement with certain institutional and accredited investors for the
issuance and sale of an aggregate of 4,697.6328 shares of Series F convertible preferred stock at a price of $1,000 per share and warrants
to purchase up to an aggregate of 7,829,388 shares of common stock, at an exercise price of $0.60 per share. The Warrants are exercisable
upon the later of the effective date of a reverse stock split or six months following the closing of the private placement and will expire
five years following the date that the Warrants first become exercisable.
The
Series F Preferred Stock is convertible into an aggregate of approximately 7,829,388 shares of Common Stock at a conversion price of
$0.60 per share, subject to certain ownership limitations, upon the Company amending its certificate of incorporation to effect a reverse
split within a range of 2-into-1 to up to 20-into-1 to be determined by the Company’s board of directors.
The
net proceeds to the Company from the securities purchase agreement were approximately $4.2 million, after deducting placement agent fees
and estimate offering expenses payable by the Company. The Company used $3.2 million of the net proceeds to redeem a portion of the outstanding
Second Amended and Restated 12% Senior Secured Note due September 30, 2022, which had an outstanding principal amount of $19,154 as of
April 21, 2021. In addition, the Company used $1,000 of the net proceeds for working capital purposes. This transaction will be accounted
for during the second quarter of Fiscal 2021.
Subject
to certain beneficial ownership limitations, the Series F Preferred Stock shall vote on an “as converted” basis on all matters
submitted to the holders of Common Stock for approval; provided, however, that solely for purposes of determining the number of votes
that the Series F Preferred Stock is entitled to, the “Conversion Price” of the Series F Preferred Stock shall be deemed
$0.725. In addition, as long as any shares of the Series F Preferred Stock are outstanding, the Company shall not, without the affirmative
vote of the holders of a majority of the then outstanding shares of the Series F Preferred Stock, (a) alter or change adversely the powers,
preferences or rights given to the Series F Preferred Stock, (b) amend its certificate of incorporation or other charter documents in
any manner that adversely affects any rights of the holders of the Series F Preferred Stock, or (c) increase the number of authorized
shares of the Series F Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Series
G Preferred Stock – Related Party
On
May 6, 2021, the Company, entered into an Exchange Agreement with Jackson, pursuant to which,
among other things, Jackson agreed to exchange 6,172 shares of the Company’s Series E Convertible Preferred Stock, and 1,493 shares
of the Series E-1 Convertible Preferred Stock for an equivalent number of shares of the Company’s
newly issued Series G Convertible Preferred Stock, and Series G-1 Convertible Preferred Stock. Series G Convertible Preferred Stock is subject to the same terms stated in the limited waiver dated February
5, 2021 and described in Note 8.
The
Series G Preferred Stock ranks senior to each of the Company’s common stock, Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock, and any other classes and series of stock of the Company now or hereafter authorized,
issued or outstanding, which by their terms expressly provide that they are junior to the Series G Preferred Stock or which do not specify
their rank (which includes the Series F Convertible Preferred Stock). Each share of Series G Preferred Stock is initially convertible
into 1,000 shares of common stock at any time from and after, (i) with respect to the Series G Convertible Preferred Stock, the earlier
of October 31, 2022 or the occurrence of a default and, (ii) with respect to the Series G-l Convertible Preferred Stock, October 31,
2020. A holder of Series G Preferred Stock is not required to pay any additional consideration in exchange for conversion of the Series
G Preferred Stock into the Company’s common stock.
The
Series G Convertible Preferred Stock carries monthly dividend rights of (a) cash dividends accruing (i) at an annual rate per share equal
to 12% from the date of issuance (plus any accrued dividends with respect to the Series E Preferred Stock unpaid as of the date of the
Exchange) and (ii) 17% after the occurrence of a default, and (b) a dividend payable in shares of Series G-1 Convertible Preferred Stock.
The shares of Series G-1 Convertible Preferred Stock have all the same terms, preferences and characteristics as the Series G Convertible
Preferred Stock (including, without limitation, the right to receive cash dividends), except Series G-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 September 30, 2022, for a cash payment equal to the liquidation value plus any accrued and
unpaid dividends thereon.
The
Series G Preferred Stock shall vote on an “as converted” basis on all matters submitted to the holders of common stock for
approval.