The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompany notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 1 –
ORGANIZATION AND DESCRIPTION OF BUSINESS
Staffing 360 Solutions, Inc. (“we,” “us,” “our,” “Staffing 360,” or the “Company”) was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation, which changed its name to Staffing 360 Solutions, Inc., ticker symbol “STAF”, on March 16, 2012. On June 15, 2017, the Company reincorporated in the State of Delaware. We are a rapidly growing public company in the international staffing sector. Our high-growth business model is based on finding and acquiring, suitable, mature, profitable, operating, domestic and international staffing companies. Our targeted consolidation model is focused specifically on the accounting and finance, information technology (“IT”), engineering, administration (“Professional”) and light industrial (“Commercial”) disciplines.
The Company effected a one-for-ten reverse stock split on September 17, 2015 and a one-for-five reverse stock split on January 3, 2018. All share and per share information in these consolidated financial statements has been retroactively adjusted to reflect this reverse stock split.
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”), expressed in U.S. dollars. All amounts are in thousands, except share and par values, unless otherwise indicated.
The accompanying consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with the GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Change of Year End
On February 28, 2017, the board of directors (the “Board”) approved the change of the Company’s fiscal year end from May 31 to a 52-53-week year ending on the Saturday closest to the 31
st
of December, effective December 31, 2016. On April 12, 2017, the company filed a transition report (“Transition Report”), Form 10-K/T, for the period from June 1, 2016 through December 31, 2016, (“Transition Period”). Following that Transition Report, we will file annual reports for each twelve-month period ending the Saturday closest to December 31 of each year beginning with December 30, 2017 (“Fiscal 2017”), which was filed on March 29, 2018. This report is for the period from December 31, 2017 to December 29, 2018, “Fiscal 2018”.
Acquisitions
Clement May Acquisition
On June 28, 2018, the Company and Staffing 360 Solutions Limited (formerly known as Longbridge Recruitment 360 Limited), a wholly-owned subsidiary of the Company, entered into share purchase agreements (“Share Purchase Agreements”) to acquire all of the share capital of Clement May Limited (“CML”). Consideration for the acquisition of all the shares was (i) an aggregate cash payment of £1,550 ($2,047), (ii) 15,000 shares of the Company’s common stock, (iii) an earn-out payment of up to £500, the amount to be calculated and to paid on or around December 28, 2019 pursuant to the Share Purchase Agreement, and (iv) deferred consideration of £350, to be paid on or around June 28, 2019, depending on the satisfaction of certain conditions set forth in that Share Purchase Agreement. To finance the above transaction, the Company entered into a term loan with HSBC Bank plc.
Key Resources Inc. Acquisition
On August 27, 2018, the Company and Monroe Staffing Services, LLC (“Monroe Staffing”), an indirect wholly-owned subsidiary of the Company, entered into a share purchase agreement with Pamela D. Whitaker (“Seller”), pursuant to which the Seller sold 100% of the common shares of Key Resources Inc. (“KRI”) to Monroe Staffing (the “KRI Transaction”).
The KRI Transaction closed simultaneously with the signing of the share purchase agreement. The purchase price in connection with the KRI Transaction was approximately $12,163, of which (a) approximately $8,109 was paid to the Seller at closing, (b) up to approximately $2,027 is payable as earnout consideration to the Seller on August 27, 2019 and (c) up to $2,027 is payable as earnout
F-8
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
consideration to the Seller on August 27, 2020. The payment of the Earnout Consideration is contingent on KRI’s achievemen
t of certain trailing gross profit amounts.
To finance the above transaction, the Company entered into an agreement with Jackson Investment Group, LLC (“Jackson”) on August 27, 2018, pursuant to which the note purchase agreement dated as of September 15, 2017 was amended to add an additional senior debt investment of approximately $8,428.
PeopleServe Disposition
On June 6, 2018, the Company divested the stock of PeopleServe Inc., and PeopleServe PRS, Inc. for total consideration of $1,502. The Company recorded a gain of $238 from the sale of the business.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected. Significant estimates for Fiscal 2018 and Fiscal 2017 include the valuation of intangible assets, including goodwill, liabilities associated with earn-out obligations, testing long-lived assets for impairment and valuation reserves against deferred tax assets.
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 consolidated statement of financial position, results of operations or cash flows.
Revenue Recognition
On December 31, 2017, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers for all open contracts and related amendments as of December 31, 2017 using the modified retrospective method. The adoption had no impact to the reported results. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while the comparative information will not be restated and will continue to be reported under the accounting standards in effect for those periods.
The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
The Company
has primarily two main forms of revenue – temporary contractor revenue and permanent placement revenue. Temporary contractor revenue is accounted for as a single performance obligation satisfied over time because the customer simultaneously receives and consumes the benefits of the Company’s performance on an hourly basis. The contracts stipulate weekly billing and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed to date. Permanent placement revenue is recognized on the date the candidate’s full-time employment with the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms, typically 30 days. The contract with the customer stipulates a guarantee period whereby the customer may be refunded if the employee is terminated within a short period of time, however this has historically been infrequent, and immaterial upon occurrence. As such, the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has transferred to
F-9
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
the c
ustomer.
Revenue in Fiscal 2018 was comprised of 250,416 of temporary contractor revenue and $10,510 of permanent placement revenue, compared with $187,249 and $5,401 for Fiscal 2017, respectively. Refer to Note 8 for further
details on breakdown by segmen
ts.
Taxes Collected from Customers and Remitted to Governmental Agencies
The Company records taxes on customer transactions due to governmental agencies as a receivable and a liability on the consolidated balance sheets. Sales taxes are recorded net on the consolidated statement of operations.
Advertising Costs
Costs for advertising are expensed when incurred. Advertising expenses for the Company were $1,332 and $815 for Fiscal 2018 and Fiscal 2017, respectively.
Legal Contingencies and Expenses
From time to time, the Company may become involved in various claims, disputes and legal or regulatory proceedings that arise in the ordinary course of business and relate to contractual and other obligations. The Company assesses its potential contingent and other liabilities by analyzing its claims, disputes and legal and regulatory matters using all available information and developing its views on estimated losses in consultation with its legal and other advisors. The Company determines whether a loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. If the contingency is not probable or cannot be reasonably estimated, disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss may be incurred. Expenses associated with legal contingencies are expensed as incurred.
Restructuring Charges
The Company records a liability for significant costs associated with exit or disposal activities, including lease termination costs, certain employee severance costs associated with formal restructuring plans, facility closings or other similar activities and related asset impairments, when the liability is incurred.
The determination of when the Company accrues for severance and related costs depends on whether the termination benefits are provided under a one-time benefit arrangement or under an ongoing benefit arrangement. Where the Company has either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan, it recognizes severance costs when they are both probable and estimable. Costs associated with restructuring actions that include one-time severance benefits are only recorded once a liability has been incurred, including when management with the proper level of authority has committed to a restructuring plan and the plan has been communicated to employees. These charges are included in operational restructuring and other charges on the consolidated statements of operations. Other charges include knowledge transfer costs directly related to the restructuring initiatives and are expensed as incurred. On December 22, 2017, the Company announced the departure of Mr. Briand, former Chief Executive Officer, effective January 31, 2018. The Company has paid approximately $690 in severance costs during 2018 and has an accrued balance of approximately $201 as of December 29, 2018.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with original maturities of three months or less when acquired, to be cash equivalents. The Company had no cash equivalents at the end of Fiscal 2018 or Fiscal 2017.
Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after all efforts to collect have been exhausted. As of the end of Fiscal 2018 and the Fiscal 2017, the Company had an allowance for doubtful accounts of $248 and $159, respectively.
F-10
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Income Taxes
The Company utilizes Accounting Standards Codification (“ASC”) Topic 740, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company applies the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in the financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of the date of this filing, the Company is current on all corporate, federal and state tax returns. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax expense.
Foreign Currency Translation
Assets and liabilities of subsidiaries operating in foreign countries are translated into U.S. dollars using the exchange rate in effect at the balance sheet date and equity is translated at historical rate. Results of operations are translated using average exchange rates. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included in a separate component of stockholders’ equity (accumulated other comprehensive income), while gains and losses resulting from foreign currency transactions are included in operations.
Deferred Financing Costs
Costs incurred in connection with obtaining certain financing are deferred and amortized on an effective interest method basis over the term of the related obligation. In accordance with
Accounting Standards Update (“ASU”) 2015-03, “Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs”, debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the debt liability, consistent with the presentation of a debt discount.
Business Combinations
In accordance with ASC 805, "Business Combinations”, the Company records acquisitions under the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. The Company utilizes management estimates and, in some instances, may retain the services of an independent third-party valuation firm to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance.
Fair Value of Financial Instruments
In accordance with ASC 820, “Fair Value Measurements and Disclosures”, the Company measures and accounts for certain assets and liabilities at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, and establishes a framework for measuring fair value and standards for disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1:
|
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
F-11
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
There were no Level 1or 2 assets or liabilities or Level 3 assets in any period. The Company’s Level 3 liabilities were its warrants issued to Jackson and contingent consideration in connection with acquisitions.
The Co
mpany had accounted for the warrants issued to Jackson as a liability under ASC 815-40 due to certain anti-dilution protection provisions.
On April
25
, 2018, the Company and Jackson amended the Warrant to remove the anti-dilution clauses. No economic terms
were adjusted. These clauses were the basis for recording the warrants as a liability. Therefore, upon execution of this amendment, the Company recorded a mark-to-market gain and reclassed the remaining liability to Additional paid-in capital. The Company
recorded a change in fair value of the warrant liability of $879 and $383 in Fiscal 2018 and Fiscal 2017, respectively.
The tables below represents a rollforward of the Level 3 warrant liability and contingent consideration:
|
|
Contingent Consideration
|
|
Balance at December 31, 2016
|
|
$
|
2,346
|
|
Payments
|
|
|
(1,125
|
)
|
Payment with surety bond
|
|
|
(1,207
|
)
|
Acquisition of CBS Butler
|
|
|
4,885
|
|
Change in fair value
|
|
|
130
|
|
Balance at December 30, 2017
|
|
$
|
5,029
|
|
CBS Butler earnout adjustment
|
|
|
(146
|
)
|
CBS Butler interest accretion
|
|
|
682
|
|
KRI deferred consideration
|
|
|
3,531
|
|
Clement May earnout
|
|
|
635
|
|
Balance at December 29, 2018
|
|
$
|
9,731
|
|
|
|
|
|
|
Cash is considered to be highly liquid and easily tradable and therefore classified as Level 1 within our fair value hierarchy.
ASC 825-10-25, “Fair Value Option” expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over the estimated useful lives for each category as follows:
Computers
|
|
3-5 years
|
Computer equipment
|
|
3-5 years
|
Network equipment
|
|
3-5 years
|
Software
|
|
3-5 years
|
Office equipment
|
|
3-7 years
|
Furniture and fixtures
|
|
3-7 years
|
Leasehold improvements
|
|
3-5 years
|
Amortization of leasehold improvements is computed using the straight-line method over the shorter of the life of the lease or the estimated useful life of the assets. Maintenance and repairs are charged to expense as incurred. Major improvements are capitalized.
At the time of retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in Other income/(expenses).
Long-Lived Assets
In accordance with ASC 360 “Property, Plant, and Equipment”, the Company periodically reviews its long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not
F-12
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
be fully recoverable
. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount. The amount of impairment is measured as the difference between the estimated fair value and
the book value of the underlying asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.
Due to the Company’s year end being the Saturday closest to the 31
st
of December, the Company performs impairment testing annually on the first day of its fourth fiscal quarter of every year, to coincide with the Company’s annual planning cycle. The Company performed impairment testing as of September 30, 2018.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment”. The amendments in this update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under the new standard, a Company is required to recognize an impairment charge to goodwill equal to the difference between the carrying value of the reporting unit as compared to its estimated fair value not to exceed the carrying value of goodwill. The guidance is effective for periods fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company early adopted this guidance during impairment testing performed as of October 1, 2017.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, “Derivative and Hedging”.
Accounting standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts (“OID”) under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
F-13
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control and could require net cash settlement, then the contract shall be classified as an asset or a liabili
ty.
Stock-Based Compensation
The Company accounts for stock-based instruments issued to employees in accordance with ASC Topic 718, “Compensation – Stock Compensation”, which requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. The Company accounts for non-employee share-based awards in accordance with ASC Topic 505-50, “Equity-Based Payments to Non-Employees”.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment”. The amendments in this update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The guidance is effective for annual periods fiscal years beginning after December 15, 2019. The Company early adopted this guidance during impairment testing performed on October 1, 2017.
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The new standard is effective for the Company on December 30, 2018, with early adoption permitted. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company has adopted the standard effective December 30, 2018 and has chosen to use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to December 30, 2018. The new standard provides a number of optional practical expedients in transition. The Company has elected to apply the ‘package of practical expedients’ which allow us to not reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. The Company has also elected to apply i) the practical expedient which allows us to not separate lease and non-lease components, and (2) the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new standard. In preparation for adoption of the standard, the Company has implemented internal controls to enable the preparation of financial information including the assessment of the impact of the standard. The adoption of the new standard is expected to result in the recognition of additional lease liabilities of approximately $5,423, and right-of-use assets of approximately $5,338 million as of December 30, 2018 related to the Company’s operating leases. The Company does not expect that the new standard will have a material impact to the Company’s consolidated statement of operations or consolidated statement of cash flows.
F-14
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 3 –
LOSS PER COMMON SHARE
The Company utilizes the guidance per ASC 260, “Earnings per Share”. Basic earnings per share are calculated by dividing income/loss available to stockholders by the weighted average number of common stock shares outstanding during each period. Our Series A preferred stock holders receive certain dividends or dividend equivalents that are considered participating securities and our loss per share is computed using the two-class method. Diluted earnings per share are computed using the weighted average number of common stock shares and dilutive common share equivalents outstanding during the period. Dilutive common stock share equivalents consist of common shares issuable upon the conversion of preferred stock, certain equity awards and the exercise of stock options and warrants (calculated using the modified treasury stock method). Such securities, shown below, presented on a common share equivalent basis and outstanding as of the end of Fiscal 2018 and Fiscal 2017, have been excluded from the per share computations since their inclusion would be anti-dilutive:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Warrants
|
|
|
925,935
|
|
|
|
925,935
|
|
Long term incentive plan (LTIP)
|
|
|
—
|
|
|
|
178,728
|
|
Options
|
|
|
111,400
|
|
|
|
122,400
|
|
Convertible preferred shares
|
|
|
7,395,404
|
|
|
|
43,239
|
|
Restricted shares - unvested
|
|
|
572,256
|
|
|
|
471,132
|
|
Total
|
|
|
9,004,995
|
|
|
|
1,741,434
|
|
The Series D Preferred Stock contained beneficial conversion features; a portion was quantifiable at the date of issuance in the amount of $615, which was recognized immediately due to the immediate convertibility of the Series D Preferred Stock and that it had no true redemption date. The additional beneficial conversion feature was quantifiable only at the date of each subsequent conversion. Both beneficial conversion features represent additional value to the holders not known at the date of issuance. As such, they represent a dividend on the Series D Preferred Stock and recorded as a Deemed Dividend. These Deemed Dividends are presented on the Statement of Operations for purposes of calculating Earnings Per Share only and have no net impact on Shareholders’ Deficit. In April 2017, the Company entered into an agreement with Holders of the Series D Preferred shares to redeem the remaining 62 shares of Series D Preferred Stock and terminate all future conversion rights, in return for $1,500 in cash and 60,000 shares of common stock. Deemed Dividends recorded were $2,009 in Fiscal 2017.
NOTE 4 –
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Computer software
|
|
$
|
251
|
|
|
$
|
192
|
|
Office equipment
|
|
|
208
|
|
|
|
131
|
|
Computer equipment
|
|
|
960
|
|
|
|
835
|
|
Furniture and fixtures
|
|
|
965
|
|
|
|
824
|
|
Leasehold improvements
|
|
|
862
|
|
|
|
655
|
|
Total property and equipment, gross
|
|
|
3,246
|
|
|
|
2,637
|
|
Accumulated depreciation
|
|
|
(1,607
|
)
|
|
|
(1,019
|
)
|
Total property and equipment, net
|
|
$
|
1,639
|
|
|
$
|
1,618
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for Fiscal 2018 and Fiscal 2017 was $588 and $402 , respectively.
F-15
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 5 –
OTHER NON-CURRENT ASSETS
The following provides a breakdown of other non-current assets:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Collateral associated with wokmans' compensation insurance
|
|
$
|
2,956
|
|
|
$
|
2,842
|
|
Other non-current assets
|
|
|
—
|
|
|
|
39
|
|
Total
|
|
$
|
2,956
|
|
|
$
|
2,881
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 –
INTANGIBLE ASSETS
The following provides a breakdown of intangible assets as of:
|
|
Fiscal 2018
|
|
|
|
Tradenames
|
|
|
Non-Compete
|
|
|
Customer
Relationships
|
|
|
Total
|
|
Intangible assets, gross
|
|
$
|
9,580
|
|
|
$
|
2,487
|
|
|
$
|
23,234
|
|
|
$
|
35,301
|
|
Accumulated amortization
|
|
|
(2,747
|
)
|
|
|
(2,259
|
)
|
|
|
(7,638
|
)
|
|
|
(12,644
|
)
|
Intangible assets, net
|
|
$
|
6,833
|
|
|
$
|
228
|
|
|
$
|
15,596
|
|
|
$
|
22,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
|
Tradenames
|
|
|
Non-Compete
|
|
|
Customer
Relationships
|
|
|
Total
|
|
Intangible assets, gross
|
|
$
|
8,538
|
|
|
$
|
2,226
|
|
|
$
|
17,406
|
|
|
$
|
28,170
|
|
Accumulated amortization
|
|
|
(1,778
|
)
|
|
|
(2,205
|
)
|
|
|
(7,042
|
)
|
|
|
(11,025
|
)
|
Intangible assets, net
|
|
$
|
6,760
|
|
|
$
|
21
|
|
|
$
|
10,364
|
|
|
$
|
17,145
|
|
In connection with the acquisition of Clement May and KRI, the Company intangible assets of $1,194 and $7,400, respectively, representing trade names, non compete and customer relationships. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 10 years.
O
n June 6, 2018, the Company divested the stock of PeopleServe Inc., and PeopleServe PRS, Inc. and
wrote off gross intangibles of $2,999 and accumulated amortization of $2,460.
As of December 29, 2018, estimated annual amortization expense for each of the next five fiscal years is as follows:
As of December 29,
|
|
Amount
|
|
2019
|
|
$
|
2,810
|
|
2020
|
|
|
2,647
|
|
2021
|
|
|
2,601
|
|
2022
|
|
|
2,555
|
|
2023
|
|
|
2,555
|
|
Thereafter
|
|
|
9,489
|
|
Total
|
|
$
|
22,657
|
|
Amortization of intangible assets for the period ended Fiscal 2018 and Fiscal 2017 was $2,536 and $3,164, respectively. The weighted average useful life remaining of intangible assets remaining is 8.5 years.
F-16
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 7 –
GOODWILL
The following table provides a roll forward of goodwill:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Beginning balance, gross
|
|
$
|
33,247
|
|
|
$
|
17,067
|
|
Accumulated impairment losses
|
|
|
(6,078
|
)
|
|
|
(1,288
|
)
|
Beginning balance, net
|
|
|
27,169
|
|
|
|
15,779
|
|
Acquisitions
|
|
|
4,892
|
|
|
|
16,180
|
|
Impairment
|
|
|
—
|
|
|
|
(4,790
|
)
|
Ending balance, net
|
|
$
|
32,061
|
|
|
$
|
27,169
|
|
|
|
|
|
|
|
|
|
|
The Company recorded goodwill of $1,545 and $3,347 related to the acquisition of Clement May and KRI, respectively.
Goodwill by reportable segment is as follows:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Commercial Staffing - US
|
|
$
|
2,756
|
|
|
$
|
2,756
|
|
Professional Staffing - US
|
|
|
13,873
|
|
|
|
10,527
|
|
Professional Staffing - UK
|
|
|
15,432
|
|
|
|
13,886
|
|
Ending balance, net
|
|
$
|
32,061
|
|
|
$
|
27,169
|
|
|
|
|
|
|
|
|
|
|
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. The Company performed its annual goodwill impairment testing as of October 1, 2017 and recognized an impairment with respect to its PeopleServe reporting unit of $4,790 in Fiscal 2017, fully impairing the goodwill of this reporting unit. The impairment resulted from a continued decline in that reporting unit’s revenue which has lower margin than other reporting units. To determine the impairment, 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. 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. No impairment was recognized in Fiscal 2018.
The Company performed its annual goodwill impairment testing as of September 30, 2018 and no impairment was recognized. 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.
NOTE 8 –
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following provides a breakdown of accounts payable and accrued expenses:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Accounts payable
|
|
$
|
3,213
|
|
|
$
|
4,371
|
|
Accrued payroll, taxes and bonuses
|
|
|
11,378
|
|
|
|
7,061
|
|
Severance costs
|
|
|
201
|
|
|
|
780
|
|
Legal cost accrual
|
|
|
—
|
|
|
|
608
|
|
Other accrued expenses
|
|
|
3,491
|
|
|
|
2,529
|
|
Total
|
|
$
|
18,283
|
|
|
$
|
15,349
|
|
F-17
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 9 –
ACCOUNTS RECEIVABLE
FINANCING
Sterling National Bank
In November 2013, Control Solutions International, Inc. (“CSI”), entered into a financing services agreement by which it assigned accounts receivable to fund working capital with Sterling National Bank (“Sterling”).
In conjunction with the closing of the Jackson Note, the Company’s accounts receivable based lending facility with Sterling National Bank was closed.
ABN AMRO Commercial Finance
In February 2014, Longbridge entered into an agreement with ABN AMRO Commercial Finance PLC (“ABN AMRO”) under which it could borrow money against eligible accounts receivable.
On March 29, 2017, Longbridge and The JM Group each received a reservation of rights letter from ABN AMRO bank with respect to technical noncompliance with certain financial covenants contained in their financing documents with the bank. There was no financial impact of receiving this letter as ABN AMRO informed the Company they intended to take no action.
The balance of the ABN AMRO Facility as of Fiscal 2017 was $1,321 and included in Accounts receivable financing on the Consolidated Balance Sheet.
In conjunction with the HSBC Invoice Finance (UK) Ltd – New Facility, on February 8, 2018, Staffing 360 Solutions Limited and The JM Group terminated this facility and the remaining balance was paid in full.
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 September 15, 2017, the Company amended the facility with Midcap to allow for additional borrowing against unbilled receivables up to 85% with a cap of $1,300 borrowing against such receivables. In addition, the maturity date of the facility was extended to April 8, 2020 and the prepayment premiums reset to: (i) 2% if prepaid in the first or second year post the amendment; and (ii) 1.0% if prepaid thereafter. No other material terms were amended.
The availability to the Company under the Midcap Facility is reduced by any outstanding letters of credit. The Midcap Facility allows the Company to issue letters of credit up to $150. As of December 29, 2018, $85 letters of credit were issued and outstanding.
The facility provides events of default including: (i) failure to make payment of principal or interest on any MidCap loans when required, (ii) failure to perform obligations under the facility and related documents, (iii) not paying its debts as such debts become due and similar insolvency matters, and (iv) material adverse changes to the Company (subject to a 10-day notice and cure period). Upon an event of default, the Company’s obligations under the credit facility may, or in the event of insolvency or bankruptcy will automatically, be accelerated. Upon the occurrence of any event of default, facility will bear interest at a rate equal to the lesser of: (i) 3.0% above the rate of interest applicable to such obligations immediately prior to the occurrence of the event of default; and (ii) the maximum rate allowable under law.
Under the terms of this agreement, the Company is subject to affirmative covenants which are customary for financings of this type, including: (i) maintain good standing and governmental authorizations, (ii) provide certain information and notices to MidCap, (iii) deliver monthly reports and quarterly financial statements to MidCap, (iv) maintain insurance, (v) discharge all taxes, (vi) protect their intellectual property, and (vii) generally protect the collateral granted to MidCap. The Company is also subject to negative covenants customary for financings of this type, including that it may not: (i) enter into a merger or consolidation or certain change of control events, (ii) incur liens on the collateral, (iii) except for certain permitted acquisitions, acquire any significant assets other than in the ordinary course of business, (iv) assume certain additional senior debt, or (v) amend any of their organizational documents. During the period August 31, 2015 through May 31, 2016, the Company was not in compliance with one or more of the covenants, however, did receive a waiver from MidCap for such covenants during this period. On July 11, 2016, the Company and MidCap amended the agreement and related covenants prospectively. The Company has since been in compliance with the covenants.
F-18
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
The balance of the Midcap Facility as of
Fiscal 2018 and Fiscal 2017 was $17,893 and $16,913, respectively and is included in Accounts receivable financing on the Consolidated Balance Sheet.
HSBC Invoice Finance (UK) Ltd
CBS Butler had a revolving accounts receivable financing arrangement with HSBC Invoice Finance (UK) Ltd “HSBC”. The facility, whose maximum capacity was £8,500, had an original expiration of January 2011, and provided for termination by either party with 90 days notice. Under the arrangement, CBS Butler could borrow against eligible short-term trade receivables in exchange for cash and a subordinated interest. The Company would receive cash equal to approximately 90% (varies slightly by geographical location of the receivable) of the value of the eligible receivables.
In conjunction with the HSBC Invoice Finance (UK) Ltd – New Facility, on February 8, 2018, CBS Butler terminated this facility and the remaining balance was paid in full.
HSBC Invoice Finance (UK) Ltd – New Facility
On February 8, 2018, CBS Butler,
Staffing 360 Solutions Limited
and The JM Group, entered into a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’ accounts receivable up to an aggregate amount of £11,500 across all three subsidiaries. The terms of the arrangement provide for HSBC to fund 90% of the purchased accounts receivable upfront and, a secured borrowing line of 70% of unbilled receivables capped at £1,000 (within the overall aggregate total facility of £11,500). The arrangement has an initial term of 12 months, with an automatic rolling three-month extension and carries a service charge of 1.80%.
On June 28, 2018, 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.
Under ASU 2016-16, “Statement of Cash Flows (Topic 230,
Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force
), the upfront portion of the sale of accounts receivable is classified within operating activities, while the deferred purchase price portion (or beneficial interest), once collected, is classified within investing activities.
NOTE 10 –
DEBT
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Term Loans:
|
|
|
|
|
|
|
|
|
Jackson Investment Group - related party
|
|
|
35,740
|
|
|
|
40,000
|
|
HSBC Term Loan
|
|
|
1,653
|
|
|
|
—
|
|
ABN AMRO
|
|
|
—
|
|
|
|
254
|
|
Total Debt
|
|
|
37,393
|
|
|
|
40,254
|
|
|
|
|
|
|
|
|
|
|
Less Deferred Financing Costs and/or Debt Discount
|
|
|
(1,171
|
)
|
|
|
(1,260
|
)
|
|
|
|
|
|
|
|
|
|
Total Debt, Net
|
|
|
36,222
|
|
|
|
38,994
|
|
|
|
|
|
|
|
|
|
|
Less: Current Portion
|
|
|
(657
|
)
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
$
|
35,565
|
|
|
$
|
38,749
|
|
F-19
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Series B Bonds
The balance of $50 was paid in full in Fiscal 2017.
Non-interest bearing convertible note – January 6, 2016
On January 6, 2016, the Company issued a non-interest bearing $359 convertible promissory note. This note was paid in full in January 2017.
Non-interest bearing convertible note - September 10, 2016
On September 10, 2016, the Company entered into a non-interest bearing convertible note for $477, whereby the Company received cash of $400. This note was due to mature in March 2017. In March 2017, the Company extended the note to September 2017 with a new maturity value of $565. The Company paid this in full on September 18, 2017.
Non-interest bearing convertible note - April 11, 2017
On April 11, 2017, the Company entered into a non-interest bearing convertible note for $477, whereby the Company received cash of $400, maturing in October 2017. The Company paid this in full on September 18, 2017.
8% Convertible Note (July 8, 2015) and 8% Convertible Note (February 8, 2016)
On July 8, 2015, the Company issued an 8% convertible debenture valued at $3.92 million with a maturity date of April 1, 2017. On July 1, 2016, the Company paid cash of $980 in principal and on October 1, 2016, the Company separately converted $980 in principal into 178,182 shares of common stock.
On February 8, 2016, the Company issued an 8% convertible debenture valued at $728 with a maturity date of July 1, 2017.
On January 3, 2017, the Company entered into an amendment agreement pursuant to which, the parties refinanced an aggregate amount of $2,688 of indebtedness and extended all amortization payments for the two 8% convertible notes dated July 8, 2015 and February 8, 2016 (collectively, the “Amendment”) to October 1, 2018, which was approximately 21 months from the date of the refinancing.
The Amendment had a new face value of $3,126, and an 8% interest rate per annum, with no interest payments due until October 1, 2017, payable quarterly thereafter, and an overall term of 21 months with principal due at maturity. The Amendment was convertible into shares of common stock at a price of $3.00 per share at holder’s election, and the holder agreed to eliminate the 20% pre-payment penalty for an early redemption. In connection with the refinancing, the Company issued the holder 24,000 shares of common stock, valued at $498. The Amendment resulted in the extinguishment of the old notes of $2,688 and recording of the new debt and debt issue costs. The Company recorded a $870 loss upon extinguishment. On January 26, 2017, the Amendment was paid in full resulting a loss of $498.
Lighthouse Promissory Notes
On July 8, 2015, the Company acquired Lighthouse. In connection with the acquisition, the Company issued an unsecured promissory note of $2,498 bearing interest at 6% per annum due over three years (“Lighthouse - Seller Note #1”), and an unsecured promissory note of $625 bearing interest at 6% per annum due over two years (“Lighthouse - Seller Note #2”) (collectively, the “Lighthouse Notes”). The Company paid these notes in full on September 18, 2017.
Sterling National Bank Promissory Note
On July 24, 2015, the Company, through its wholly owned subsidiary CSI, issued a promissory note to Sterling National Bank in the amount of $350. The note bore interest at 18% per annum and has a maturity date of October 24, 2017. The Company paid this note in full on September 18, 2017 with the funding received from the Jackson Note.
ABN AMRO Term Loan
On November 5, 2015, the Company entered into a two-year term loan agreement with ABN AMRO Bank in the amount of £750 ($1,096). In June 2016, the Company borrowed an additional £250. On February 8, 2018, the entire remaining balance was paid off.
Midcap Financial Trust – Term Loan
On April 8, 2015, the Company entered in to a four-year term loan agreement with Midcap Financial Trust in the amount of $3,000. This loan bears interest at 9.0% plus LIBOR, with a LIBOR floor of 1.0% per annum with principal payments of $62.5 per month. On
F-20
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
February 8, 2016 the Company amended the term
s of the agreement to modify the principal amortization and the maturity date to September 1, 2018.
The Company paid this note in full on September 18, 2017 with the funding received from the Jackson Note. The Company wrote off $533 in deferred financing c
osts associated with the settlement of this term loan.
Midcap Financial Trust – Additional Term Loan
On April 8, 2015, the Company entered into an additional four-year term loan with Midcap Financial Trust, associated with the accounts receivable financing line of credit, of up to $1,300 bearing interest at 4.0% plus LIBOR, with a LIBOR floor of 1.0% per annum. The initial borrowing of the Additional Term Loan was $700 and was payable in full on April 8, 2019.
On February 8, 2016, the Company amended the terms of the agreement to draw an additional $500 and adjust the interest rate to 9.0% plus LIBOR, with a LIBOR floor of 1%.
On January 26, 2017, the payment terms of the Additional Term Loan were amended. Commencing on February 1, 2017 and continuing the first day of each calendar month, the Company shall make principal payments of $50 each month with the entire remaining balance due on the maturity date. The Company paid this note in full on September 18, 2017 with the funding received from the Jackson Note.
Jackson Investment Group Term Loan Note #1
On January 26, 2017, the Company entered into a note and warrant purchase agreement with Jackson for $7,400. Under the terms of this agreement, the Company issued to Jackson 330,000 shares of common stock and a warrant to purchase up to 630,000 shares of common stock at an initial exercise price of $6.75 per share (the “Warrant”). The note accrues interest on the principal amount at a rate of 6% per annum and has a maturity date of July 25, 2018. No interest or principal is payable until maturity. At any time during the term of the note, upon notice to Jackson, the Company may also, at its option, redeem all or some of the then outstanding principal amount of the note by paying to Jackson an amount not less than $100 of the outstanding principal (and in multiples of $100), plus any accrued but unpaid interest and liquidated damages and other amounts due under the note. The note’s principal is not convertible into shares of common stock; however, 50% of the accrued interest on the note may be converted into shares of common stock, at the sole election of Jackson at maturity or upon prepayment by the Company, at a conversion price equal to $10.00 per share. On March 14, 2017, the Company and Jackson amended the warrant to include a blocker preventing Jackson from owning more than 19.99% of the Company’s shares outstanding as of January 26, 2017, until such ownership is approved by the shareholders consistent with Nasdaq Rule 5635(b). On June 15, 2017, our stockholders approved the issuance of shares of the Company’s common stock under the warrant to Jackson that may result in Jackson owning in excess of 19.99% of the Company’s outstanding shares.
The warrant is exercisable beginning on July 25, 2017 for a term of four and a half (4.5) years thereafter. The exercise price is subject to anti-dilution protection, including protection in circumstances where common stock is issued pursuant to the terms of certain existing convertible securities, provided that the exercise price shall not be adjusted below a price that is less than the consolidated closing bid price of the common stock. The Company has accounted for these warrants as a liability under ASC 815-40 due to certain anti-dilution protection provisions.
On April
25
, 2018, the Company and Jackson amended the Warrant to remove the anti-dilution clauses. No economic terms were adjusted. These clauses were the basis for recording the warrants as a liability. Therefore, upon execution of this amendment, the Company recorded a mark-to-market gain and reclass the remaining liability to Additional paid-in capital. The Company recorded a gain from the change in fair value of the warrant liability of $879 and $383 in Fiscal 2018 and Fiscal 2017, respectively, using Black-Scholes valuation model.
In connection with the debt exchange agreement with Jackson on November 15, 2018, the Company entered into Amendment No. 2 to the Amended and Restated Warrant Agreement with Jackson, where by the exercise price of the Warrant was reduced from $3.50 per share to $1.66 per share and the period within which the Warrant may be exercised was extended from January 26, 2022 to January 26, 2024. The Company calculated the $357 incremental fair value by calculating the fair value of the warrants immediately before and immediately after the modification, and recorded this in additional paid in capital.
The Company paid this note in full on September 18, 2017 and entered in a new note with Jackson (refer to “Jackson Note”).
F-21
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Jackson Investment Group Term Loan Note #2
– Related Party
On April 5, 2017, the Company amended the note and warrant purchase agreement and entered into a second subordinated secured note for $1,650. Under the terms of this amended agreement, the Company issued to Jackson 59,397 shares of common stock, with an additional 74,184 shares of common stock that was issued after obtaining shareholder approval for issuance of shares to Jackson in excess of the 19.99% limit in June 2017. Also on April 5, 2017, the Company amended the Warrant to allow Jackson to purchase up to an additional 825,463 shares of common stock, modified the initial exercise price of the Warrant to $5.00 per share and modified the conversion price of accrued interest on the note issued to Jackson in January 2017 to $7.50. The Warrant was also amended to increase the amount of common stock issuable to Jackson pursuant to the anti-dilution clause contained therein. The second note accrues interest on the principal amount at a rate of 6% per annum and has a maturity date of June 8, 2019; however, in the event the Company satisfies all of its outstanding obligations with Midcap Financial Trust, the maturity date will be adjusted to July 25, 2018. No interest or principal is payable on the second note until maturity. At any time during the term of the second note, upon notice to Jackson, the Company may also, at its option, redeem all or some of the then outstanding principal amount of the note by paying to Jackson an amount not less than $100 of the outstanding principal (and in multiples of $100), plus any accrued but unpaid interest and liquidated damages and other amounts due under the note. The second note’s principal is not convertible into shares of common stock; however, 50% of the accrued interest on the second note can be converted into shares of common stock, at the sole election of Jackson at maturity or in the event of a prepayment by the Company, at a conversion price equal to $7.50 per share. The proceeds of this transaction were used to redeem the remaining shares and conversion rights of the Series D Preferred Stock. The Company has accounted for these warrants as a liability under ASC 815-40 due to certain anti-dilution protection provisions. On April
25
, 2018, the Company and Jackson amended the Warrant to remove the anti-dilution clauses, as discussed above.
The Company paid this note in full on September 18, 2017 and entered into a new note with Jackson (refer to “Jackson Note – Related Party”)
Jackson Investment Group Term Loan Note #3 – Related Party
In August 2017, the Company entered into a promissory note for $1,600, with a term of 60 days at interest of 10% per annum and issued 32,000 shares of common stock. The proceeds of the note were used to fund the satisfaction of a judgment entered in the matter of
Staffing 360 Solutions, Inc. v. Former Officers of Staffing 360 Solutions, Inc.
The Company paid this in full on September 18, 2017 and entered into a new note with Jackson (refer to “Jackson Note”).
Jackson Investment Group Term Loan Note #4 – Related Party
On September 1, 2017, the Company entered into a promissory note for $515, with a term of 31 days at an interest of 12% per annum. The proceeds of the note were used to fund other debt obligations. The Company paid this in full on September 18, 2017 and entered into a new note with Jackson (refer to “Jackson Note”).
Jackson Note – Related Party
On September 15, 2017, the Company entered into a $40,000 note agreement with Jackson. The proceeds of the sale of the secured note were used to repay the existing subordinated notes previously issued to Jackson pursuant to the existing note purchase agreement in the aggregate principal amount of $11,165 and to fund a portion of the purchase price consideration of the Firstpro Acquisition and the CBS Butler Acquisition and repay certain other outstanding indebtedness of the Company. The maturity date for the amounts due under the Jackson Note is September 15, 2020. The Jackson Note will accrue interest at 12% per annum, due quarterly on January 1, April 1, July 1 and October 1 in each year, with the first such payment due on January 1, 2018. Interest on any overdue payment of principal or interest due under the Jackson Note will accrue at a rate per annum that is 5% in excess of the rate of interest otherwise payable thereunder.
The Company paid a closing fee of $1,000 in connection with its entry into the A&R Note Purchase Agreement and agreed to issue 450,000 shares of the Company’s common stock as a closing commitment fee. These shares are subject to registration rights in favor of Jackson which was included in a new resale registration statement which was filed by the Company on November 1, 2017. The Jackson Note resulted in the extinguishment of the old notes of $11,165 and recording of the new debt of $40,000 at fair value. The Company recorded $4,764 loss upon extinguishment of debt, and deferred debt issuance costs of $1,385 to be amortized over the term of the new loan.
Immediately prior to closing the Jackson Note, Jackson owned 526,697 shares of common stock and 905,508 warrants.
F-22
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
On August 27, 2018, Company entered into an amended agreement with Jackson, pursuant to which the note purchase agreement dated as of September 15
, 2017 was amended and made a new senior debt investment of approximately $8,428. Terms of the additional investment are the same as the Jackson Note.
From the proceed of the additional investment, the Company paid a closing fee of $280 and legal fees of $
39 and
issued
192,000 shares of the Company’s common stock as a closing commitment fee.
In connection with the additional investment, the Company entered into Amendment No. 1 to Amended and Restated Warrant Agreement (“Warrant Agreement”) with Jackson. The Warrant Amendment amended that certain Amended and Restated Warrant Agreement with Jackson, dated as of April 25, 2018 (the “Warrant”), to reduce the exercise price of the Warrant from $5.00 per share to $3.50 per share. The incremental fair value of repricing the Warrant to $3.50 per share is $135 and was recognized as deferred financing costs to be amortized over the term of the loan.
Debt Exchange Agreement
On November 15, 2018 the Company, entered into a Debt Exchange Agreement (the “Exchange Agreement”) with Jackson, pursuant to which, among other things, Jackson agreed to exchange $13,000 (the “Exchange Amount”) of indebtedness of the Company held by Jackson in exchange for 13,000 shares of a newly created class of preferred stock designated as the Series E Convertible Preferred Stock, par value $0.00001 per share, of the Company (the “Series E Preferred Stock”). The Company evaluated the accounting for the conversion of debt to preferred stock and concluded this conversion is a troubled debt restructuring. Accordingly, the issuance of the Series E Preferred Stock to Jackson in full settlement of the $13,000 in debt is accounted for similar to the transfer of assets, with the equity interest being measured at its fair value, less legal fees and other direct costs. ASC 470-60 requires that the excess of the carrying amount of the payable over the fair value of the assets or equity interest transferred be recognized as a gain. However, given that Jackson is a related party, ASC 470-50-40-2 states that this type of restructuring is in essence a capital transaction. As a result, no gain was recorded. Instead, the difference between the fair value of the Preferred Stock and Term Loan being extinguished was recorded within additional paid in capital. The Company recorded a total of $12,214 related to this conversion, net of legal fees and other direct costs including the write off of $445 in deferred financing costs related to the $13,000 debt.
The Series E Preferred Stock ranks senior to the Company’s common stock and any other series or classes of preferred stock now or after issued or outstanding with respect to dividend rights and rights on liquidation, winding up and dissolution. Each share of Series E Preferred Stock is initially convertible into 561 shares of common stock of the Company at any time after October 31, 2020 or the occurrence of a Preferred Default (as defined in the Certificate of Designation for the Series E Preferred Stock). A holder of Series E Preferred Stock is not required to pay any additional consideration in exchange for conversion of such Series E Preferred Stock into the Company’s common stock. Series E Preferred Stock is redeemable by the Company at any time at a price per share equal to the stated value ($1,000 per share) plus all accrued and unpaid dividends thereon.
The Series E Preferred Stock carries quarterly dividend rights of (a) cash dividends accruing (i) at an annual rate per share equal to 12% from the date of issuance and (ii) 17% after the occurrence of a Preferred Default, and (b) a dividend payable in shares of Series E-1 Convertible Preferred Stock. The shares of Series E-1 Preferred Stock have all the same terms, preferences and characteristics as the Series E Preferred Stock (including, without limitation, the right to receive cash dividends), except (i) Series E-1 Convertible Preferred Stock are mandatorily redeemable by the Company within thirty (30) days after written demand received from any holder at any time after the earlier of the occurrence of a Preferred Default or November 15, 2020, for a cash payment equal to the Liquidation Value (as defined in the Certificate of Designation for the Series E Preferred Stock) plus any accrued and unpaid dividends thereon, (ii) each share of Series E-1 Preferred Stock is initially convertible into 602 shares of the Company’s common stock, and (iii) Series E‑1 Convertible Preferred Stock may be cancelled and extinguished by the Company if all shares of Series E Preferred Stock are redeemed by the Company on or prior to October 31, 2020.
In connection with the debt exchange agreement with Jackson on November 15, 2018, the Company entered into Amendment No. 2 to the Amended and Restated Warrant Agreement with Jackson, where by the exercise price of the Warrant was reduced from $3.50 per share to $1.66 per share and the period within which the Warrant may be exercised was extended from January 26, 2022 to January 26, 2024. The Company calculated the $357 incremental fair value by calculating the fair value of the warrants immediately before and immediately after the modification, and recorded this in additional paid in capital.
The Jackson Note includes certain financial customary covenants, including a leverage ratio covenant. As of December 29, 2018, the Company was in compliance with this covenant.
F-23
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 11 –
STOCKHOLDERS’ EQUITY
The Company effected a one-for-ten reverse stock split on September 17, 2015 and
a one-for-five reserve stock split effective after the market close on January 3, 2018. All share and per share information in these consolidated financial statements has been retroactively adjusted to reflect this reverse stock split.
The issuance 1,416,954 of common shares during Fiscal 2018 is summarized below:
|
|
Number of
|
|
|
Fair Value
|
|
|
Fair Value at Issuance
|
|
|
|
Common Shares
|
|
|
of Shares
|
|
|
(minimum and maximum
|
|
Shares issued to/for:
|
|
Issued
|
|
|
Issued
|
|
|
per share)
|
|
At-The-Market facility
|
|
|
742,980
|
|
|
$
|
2,315
|
|
|
$
|
1.61
|
|
$
|
4.23
|
|
Jackson Investment Group
|
|
|
492,000
|
|
|
|
899
|
|
|
|
1.76
|
|
|
1.93
|
|
Employees
|
|
|
125,000
|
|
|
|
198
|
|
|
|
1.54
|
|
|
1.61
|
|
Board and committee members
|
|
|
21,000
|
|
|
|
44
|
|
|
|
1.40
|
|
|
3.25
|
|
Consultants
|
|
|
20,548
|
|
|
|
57
|
|
|
|
1.40
|
|
|
3.42
|
|
Acquisition
|
|
|
15,000
|
|
|
|
21
|
|
|
|
1.38
|
|
|
1.38
|
|
Reverse stock split (rounding up shares)
|
|
|
426
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
|
1,416,954
|
|
|
$
|
3,534
|
|
|
|
|
|
|
|
|
The Company’s authorized common stock consists of 40,000,000 shares having a par value of $0.00001. As of the end of Fiscal 2018 and Fiscal 2017, the Company has issued and outstanding 5,326,068 and 3,909,114 common shares, respectively. On January 26, 2017, the Company received shareholder approval to amend the Company’s Articles of Incorporation to increase the number of shares of common stock available for issuance from 20,000,000 to 40,000,000.
In May 2017, the Company entered into an At-The-Market offering (“ATM”) agreement with Joseph Gunnar & Co., LLC to establish an at-the-market equity offering program pursuant to which they are able, with the Company’s authorization, to offer and sell up to $3 million of the Company’s common stock at prevailing market prices from time to time. In Fiscal 2018 and Fiscal 2017, the Company sold 742,980 and 125,253 shares of common stock under this program at a net value of $2,245 and $367, respectively.
On January 22, 2019 the Company issued and sold 387,500 shares of the Company’s common stock to an institutional purchaser at a purchase price of $2.00 per share, for aggregate gross proceeds of approximately $775, before placement fees and estimated offering expenses. The offering of the Securities was made under the Company’s shelf registration statement on Form S-3 (Registration No. 333-208910) (the “Registration Statement”), including a base prospectus, previously filed with and declared effective by the Securities and Exchange Commission (the “SEC”) on March 22, 2016. The offering of the Securities was made only by means of a prospectus supplement that forms a part of the registration statement.
On February 12, 2019, the Company closed its previously announced firm commitment underwritten public offering in which, pursuant to an underwriting agreement between the Company and the underwriter, dated as of February 8, 2019, the Company issued and sold 2,425,000 shares of its common stock, at a public offering price of $1.65 per share. The gross proceeds from the offering were approximately $4,000, excluding underwriting discounts and commissions and other estimated offering expenses. Pursuant to the underwriting agreement, the Company granted the underwriter an over-allotment option, which is exercisable for up to 45 days following the date of the prospectus for the offering, to purchase up to 363,750 additional shares of Common Stock. If exercised in full, the Company would receive approximately $600 in additional gross proceeds, excluding underwriting discounts and commissions and other estimated offering expenses.
On March 14, 2019, our underwriters exercised a portion of the over-allotment option for 90,180 shares at an exercise price of $1.65 per share. The Company received a total of $138 in net proceeds.
Restricted Shares
The Company has issued shares to employees and board and committee members under its 2015 Omnibus Incentive Plan and 2016 Omnibus Incentive Plan. Under these plans, the shares are restricted for a period of three years from issuance. As of Fiscal 2018, the Company has a total of 572,256
shares unvested issued to employees and Board and committee members. In accordance with ASC 718, Compensation – Stock Compensation, the Company recognizes stock based compensation from restricted stock based upon the fair value of the award at issuance over the vesting term on a straight line basis. The fair value of the award is calculated by
F-24
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
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 fi
nancial statements. In Fiscal 2018 and Fiscal 2017, the Company recorded compensation expense associated with these restricted shares of $896 and
$844,
respectively. The table below is a rollforward of unvested restricted shares issued to employees and boa
rd of directors.
|
Restricted Shares
|
|
|
Weighted
Average
Price Per Share
|
|
Balance at December 31, 2016
|
|
79,912
|
|
|
$
|
19.91
|
|
Granted
|
|
391,220
|
|
|
|
3.33
|
|
Vested
|
|
-
|
|
|
|
-
|
|
Balance at December 30, 2017
|
|
471,132
|
|
|
$
|
6.14
|
|
Granted
|
|
168,424
|
|
|
|
1.66
|
|
Vested
|
|
(67,300
|
)
|
|
|
19.90
|
|
Balance at December 29, 2018
|
|
572,256
|
|
|
$
|
3.47
|
|
Series A Preferred Stock – Related Party
On May 29, 2015, the Company filed a Certificate of Designations, Preferences and Rights of Series A Preferred Stock with the Nevada Secretary of State, whereby the Company designated 1,663,008 shares of preferred stock as Series A Preferred Stock, par value $0.00001 per share. On June 15, 2017, the Company reincorporated in the State of Delaware. The Series A Preferred Stock has a stated value of $1.00 per share and is entitled to a 12% dividend.
Shares of the Series A Preferred Stock are convertible into shares of common stock at the holder’s election at any time prior to December 31, 2020 (the “Redemption Date”), at a conversion rate of one and three tenths (1.3) shares of common stock for every 50 shares of Series A Preferred Stock that the Holder elects to convert. Originally the redemption date was December 31, 2018 and this was extended to December 31, 2020 in January 2019. Except as otherwise required by law, the Series A Preferred Stock shall have no voting rights.
In the event of a liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock shall be entitled to receive out of the assets of the Company legally available for distribution, prior to and in preference to distributions to the holders of the Company’s common stock, par value $0.00001 per share or classes and series of securities of the Company which by their terms do not rank senior to the Series A Preferred Stock, and either in preference to or pari passu with the holders of any other series of Preferred Stock that may be issued in the future that is expressly made senior or pari passu, as the case may be, an amount equal to the Stated Value of the Series A Preferred Stock less any dividends previously paid out on the Series A Preferred Stock.
The holders will be entitled to receive cash dividends at the rate of 12% of the Stated Value per annum, payable monthly in cash, prior to and in preference to any declaration or payment of any dividend on the common stock. So long as any shares of Series A Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividend on any shares of common stock, unless at the time of such dividend the Company shall have paid all accrued and unpaid dividends on the outstanding shares of Series A Preferred Stock.
The Certificate of Designation filed on May 29, 2015, designating the Series A Preferred Stock, was filed in connection with the Company’s issuance of an aggregate of 1,663,008 shares of Series A Preferred Stock to Brendan Flood and Matthew Briand for the conversion of the Gross Profit Appreciation Bonus (as defined in each employment agreement) associated with their employment agreements. The Certificate of Designation was approved and related issuances were ratified by the Company’s Board and compensation committee on May 29, 2015.
Up until the Redemption Date, holders may convert their shares into common stock at their election. On the Redemption Date, the Company shall redeem all of the shares of Series A Preferred Stock of each Holder, for cash or for shares of common stock in the Company’s sole discretion. If the Redemption Purchase Price is paid in shares of common stock, the holders shall initially receive one and three tenths (1.3) shares of common stock for each $50.00 of the Redemption Purchase Price. If the Redemption Purchase Price is paid in cash, the redemption price paid to each Holder shall be equal to the Stated Value for each share of Series A Preferred Stock, multiplied by the number of shares of Series A Preferred Stock held by such Holder, less the aggregate amount of dividends paid to such Holder through the Redemption Date.
F-25
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
As of Fiscal 2018 and Fiscal 2017, we had issued and outstanding 1,663,008 Series A Preferred Stock shares and no accrued dividends. In
Fiscal 2018 and Fiscal 2017, the Company paid dividends of $200 and $566
, respectively.
Series D Preferred Stock
On June 27, 2016, the Company filed a Certificate of Designation of Series D Preferred Stock with the Nevada Secretary of State, whereby the Company designated 5,000 shares as Series D Preferred, par value $0.00001 per share (the “Series D Preferred Stock”). On June 15, 2017, the Company reincorporated in the State of Delaware. The Series D Preferred Stock have a face value of $10 (whole dollars) per share (the “Face Value”), original issue discount of 5% (“OID”) and conversion price of $2.50 per share. The Certificate of Designation sets forth the voting powers, designations, preferences, privileges, limitations, restrictions and relative rights applicable to the Series D Preferred Stock. Except as otherwise required by law, the Series D Preferred Stock shall have no voting rights, except: (a) during a period where a dividend (or part of a dividend) is in arrears; (b) on a proposal to reduce the Company's share capital; (c) on a resolution to approve the terms of a buy-back agreement; (d) on a proposal to wind up the Company; (e) on a proposal for the disposal of all or substantially all the Company's property, business and undertaking; and (f) during the winding-up of the entity.
Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Company, pari passu with any distribution or payment made to the holders of Preferred Stock and common stock by reason of their ownership thereof, the holders of Series D Preferred Stock (each a “Holder”) will be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series D Preferred Stock equal to $10 (whole dollars), plus an amount equal to any accrued but unpaid In-Kind Accrual thereon.
Commencing on the date of the issuance of any such shares of Series D Preferred Stock, each outstanding share of Series D Preferred Stock will accrue a cumulative in-kind payment accrual (“In-Kind Accrual”), at a rate equal to 6.50% per annum, subject to adjustment as provided in the Certificate of Designations, of the Face Value. In-Kind Accrual will be payable with respect to any shares of Series D Preferred Stock upon any of the following: (a) upon redemption of such shares in accordance with the Certificate of Designation; (b) upon conversion of such shares in accordance with the Certificate of Designation; and (c) when, as and if otherwise declared by the Board of the Company.
Each share of Series D Preferred Stock shall be convertible at the option of the Company and Holder thereof, in accordance with the Certificate of Designation, into that number of shares of common stock (subject to the limitations set forth in the Certificate of Designation) determined by dividing the Face Value of such share of Series D Preferred Stock by the conversion price per share for the Series D Preferred Stock, which shall equal $2.50, subject to adjustment in accordance with the Certificate of Designation. Holders may effect conversions by providing the Company with a conversion notice in accordance with form and procedures set forth in the Certificate of Designation. The shares of common stock underlying the Series D Preferred Stock will be fully paid and non-assessable.
The Company may not issue shares of common stock to any Holder which, when aggregated with all other shares of common stock then deemed beneficially owned by such Holder, would result in such Holder owning more than 4.99% of all common stock outstanding immediately after giving effect to such issuance; provided, however, that such Holder may increase such amount to 9.99% upon not less than 61 days prior notice to the Company.
On June 24, 2016, the Company entered into a Securities Purchase Agreement with certain purchasers pursuant to which the Company sold to the purchasers 211 shares of the Company’s Series D Preferred Stock at a face value of $10 (whole dollars) per share of Series D Preferred, and Original Issue Discount of 5% and a conversion price into common stock of $2.50 per share, for aggregate proceeds of approximately $2,000 before placement fees and estimated offering expenses. The offering of the Series D Preferred Stock was made under the Company’s Shelf Registration.
During the Transition Period, holders of this series converted 118 shares of Series D Preferred Stock to 268,192 shares of common stock. During Fiscal 2017, holders converted an additional 31 shares of Series D Preferred Stock to 334,600 shares of common stock.
The Series D Preferred Stock contained beneficial conversion features; a portion was quantifiable at the date of issuance in the amount of $615, which was recognized immediately due to the immediate convertibility of the Series D Preferred Stock and that it had no true redemption date. The additional contingent beneficial conversion feature was quantifiable only at the date of each subsequent conversion. Both beneficial conversion features represent additional value to the holders. As such, they represent a dividend on the Series D Preferred Stock and recorded as a Deemed Dividend. These Deemed Dividends are presented on the Statement of Operations
F-26
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
for purposes of calculation Earnings Per Share only and have no net impact on Shareholders’ Deficit. Deemed Dividends recorded were $2,009 for Fiscal 2017.
On April 5, 2017, the Company entered into an agreement with holders of the Series D Preferred shares to redeem the remaining 62 shares of Series D Preferred Stock and terminate all future conversion rights, in return for $1,500 in cash and 60,000 shares of common stock. Due to the contingent nature of the cash redemption feature of the Series D Preferred Stock, the Company classified the shares as mezzanine equity on the consolidated balance sheets.
Series E Preferred Stock
The Series E Preferred Stock ranks senior to common stock and any other series or classes of preferred stock now or after issued or outstanding with respect to dividend rights and rights on liquidation, winding up and dissolution. Each share of Series E Preferred Stock is initially convertible into 561.8 shares of our common stock at any time after October 31, 2020 or the occurrence of a Preferred Default. A holder of Series E Preferred Stock is not required to pay any additional consideration in exchange for conversion of such Series E Preferred Stock into our common stock. Series E Preferred Stock is redeemable by the Company at any time at a price per share equal to the stated value ($1,000 per share) plus all accrued and unpaid dividends thereon. While the Series E Preferred Stock is outstanding, the Company is required to use the proceeds of any sales of equity securities, exclusively to redeem any outstanding shares of Series E Preferred Stock, except that the Company is permitted to use up to an aggregate of $3,000 of the gross proceeds from any equity offering completed on or before November 15, 2019 for working capital purposes. On January 22, 2019, the Company completed a registered direct offering of 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, we 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.
The Series E Preferred Stock carries quarterly dividend rights of (a) cash dividends accruing (i) at an annual rate per share equal to 12% from the date of issuance and (ii) 17% after the occurrence of a Preferred Default, and (b) a dividend payable in shares of Series E-1 Convertible Preferred Stock equal to 5% per annum of the liquidation value of the outstanding Series E Preferred Stock. The shares of Series E-1 Preferred Stock have all the same terms, preferences and characteristics as the Series E Preferred Stock (including, without limitation, the right to receive cash dividends), except (i) Series E-1 Convertible Preferred Stock are mandatorily redeemable by us within thirty (30) days after written demand received from any holder at any time after the earlier of the occurrence of a Preferred Default or November 15, 2020, for a cash payment equal to the Liquidation Value (as defined in the Certificate of Designation for the Series E Preferred Stock) plus any accrued and unpaid dividends thereon, (ii) each share of Series E-1 Preferred Stock is initially convertible into 602 shares of our common stock, and (iii) Series E-1 Convertible Preferred Stock may be cancelled and extinguished by us if all shares of Series E Preferred Stock are redeemed by us on or prior to October 31, 2020. As of December 29, 2018, 7,303,371 shares and 48,795 of common stock were issuable upon the potential conversion of Series E Preferred Stock and Series E-1 Preferred Stock, respectively.
Due to the contingent nature of the cash redemption feature of the Series E-1 Preferred Stock, the Company classified the shares as mezzanine equity on the consolidated balance sheets.
Warrants
On January 26, 2017, the Company issued the Warrant to Jackson which entitled Jackson to purchase up to 630,000 shares of common stock at an initial exercise price of $6.75 per share (subject to adjustment). The Warrant is exercisable beginning on July 25, 2017 for a term of four and a half (4.5) years thereafter. The exercise price was subject to anti-dilution protection, including protection in circumstances where common stock is issued pursuant to the terms of certain existing convertible securities, provided that the exercise price shall not be adjusted below a price that is less than the consolidated closing bid price of the common stock. The Warrant had anti-dilution provisions which provided the holder with additional warrants and adjusted strike price in the event of stock repurchases by the Company or additional shares being issued in connection with the Series D Preferred Shares or Lighthouse promissory notes. As such, the Company has historically classified the Warrant as a liability.
F-27
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
On April 5, 2017, the Company amended the Warrant and entered into a second subordinated secured note with Jackson for $1,650. Under the terms of the amended Warrant, Jackson may purchase up
to an additional 275,508 shares of common stock
at $5.00 per share. The Warrant was amended to increase the amount of common stock issuable to Jackson pursuant to the anti-dilution clause contained therein, and to adjust the initial exercise price to $5.00 per share. The modification cost associated with this change was not material.
The Company had accounted for the warrants issued to Jackson as a liability under ASC 815-40 due to certain anti-dilution protection provisions. The warrants issued to Jackson were considered to be Level 3 liabilities under ASC 820. On April
25
, 2018, the Company and Jackson amended the Warrant to remove the anti-dilution clauses. No economic terms were adjusted. These clauses were the basis for recording the warrants as a liability. Therefore, upon execution of this amendment, the Company recorded a mark-to-market gain and reclassed the remaining liability to Additional paid-in capital. The Company recorded a gain from the change in fair value of the warrant liability of $879 and $383 in Fiscal 2018 and Fiscal 2017, respectively, using Black-Scholes valuation model.
In connection with the additional investment from Jackson, the Company entered into Amendment No. 1 to Amended and Restated Warrant Agreement (“Warrant agreement”) with Jackson. The Warrant Amendment amended that certain Amended and Restated Warrant Agreement with Jackson, dated as of April 25, 2018 (the “Warrant”), to reduce the exercise price of the Warrant from $5.00 per share to $3.50 per share. The incremental fair value of repricing the Warrants to $3.50 per share is $135 and was recognized as deferred financing costs to be amortized over the term of the Jackson Note.
In connection with the debt exchange agreement with Jackson on November 15, 2018, the Company entered into Amendment No. 2 to the Amended and Restated Warrant Agreement with Jackson, where by the exercise price of the Warrant was reduced from $3.50 per share to $1.66 per share and the period within which the Warrant may be exercised was extended from January 26, 2022 to January 26, 2024. The Company calculated the $357 incremental fair value by calculating the fair value of the warrants immediately before and immediately after the modification and recorded this in additional paid in capital.
On September 15, 2017, the Company issued 20,000 three-year cashless warrants with an exercise price of $5.00 valued at $28.
Transactions involving the Company’s warrant issuances are summarized as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at December 31, 2016
|
|
|
6,726
|
|
|
$
|
97.62
|
|
Issued
|
|
|
925,508
|
|
|
|
5.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
(6,300
|
)
|
|
|
100.00
|
|
Outstanding at December 30, 2017
|
|
|
925,934
|
|
|
$
|
5.03
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 29, 2018
|
|
|
925,934
|
|
|
$
|
1.76
|
|
The following table summarizes warrants outstanding as of Fiscal 2018:
|
|
Number
|
|
|
Weighted
Average
|
|
|
Weighted
|
|
|
|
|
Outstanding
|
|
|
Remaining
Contractual
|
|
|
Average
|
|
|
Exercise Price
|
|
and Exercisable
|
|
|
Life (years)
|
|
|
Exercise price
|
|
|
$1.66 - $62.50
|
|
|
925,934
|
|
|
|
3.09
|
|
|
$
|
1.76
|
|
|
Incentive Plans
2014 Equity Incentive Plan
On January 28, 2014, our Board adopted the 2014 Equity Incentive Plan (the “2014 Plan”). Under the 2014 Plan, we may grant options to employees, directors, senior management of the company and, under certain circumstances, consultants. The purpose of the 2014 Plan is to retain the services of the group of persons eligible to receive option awards, to secure and retain the services of new
F-28
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
members of this group and to provide incentives fo
r such persons to exert maximum efforts for the success of the company and its affiliates. A maximum of 50,000 shares of common stock has been reserved for issuance under this plan. The 2014 Plan expires on January 28, 2024. As of Fiscal 2018, all 50,000 s
hares have been issued.
2015 Omnibus Incentive Plan
On September 23, 2015, our Board adopted the 2015 Omnibus Incentive Plan (the “2015 Plan”). This plan has not been approved by our stockholders. Under the 2015 Plan, we may grant a variety of equity instruments to employees, directors, senior management of the company and, under certain circumstances, consultants. The purpose of the 2015 Plan is to retain the services of the group of persons eligible to receive option awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the company and its affiliates.
The 2015 Plan provides for an aggregate of 90,000 shares of common stock to be available for awards under the 2015 Plan (“Awards”). The number of shares available for grant pursuant to Awards under the 2015 Plan is referred to as the “Available Shares”. If an Award is forfeited, canceled, or if any Option terminates, expires or lapses without being exercised, the common stock subject to such Award will again be made available for future grant. However, shares that are used to pay the exercise price of an Option or that are withheld to satisfy the Participant’s tax withholding obligation will not be available for re-grant under the 2015 Plan.
The Plan will have a term of ten years and no further Awards may be granted under the 2015 Plan after that date.
2016 Omnibus Incentive Plan
On October 25, 2016, our Board adopted the 2016 Omnibus Incentive Plan (the “2016 Plan”) to, among other things, attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. The 2016 Plan’s terms and conditions are similar to that of the 2015 Plan. On January 26, 2017, our stockholders approved the 2016 Plan, pursuant to which 500,000 shares of the Company’s common stock will be reserved for issuance
under stock, restricted stock and stock option awards
. On May 30, 2018, our stockholders approved an amendment to the 2016 Plan to increase the total number of shares reserved for issuance under the 2016 Plan to 1,250,000 shares of the Company’s common stock. To date, the Company has issued 641,288 shares and options to purchase shares of common stock and therefore has 608,712 shares remaining under this plan. No stock options were granted in 2018. The fair value of stock options granted in Fiscal 2017 was estimated at the date of grant using the Black-Scholes option pricing model. The Company used the following assumptions for determining the fair value of options granted under the Black-Scholes option pricing model:
Exercise price:
|
|
$
|
6.75
|
|
Market price at date of grant:
|
|
$
|
0.62
|
|
Volatility:
|
|
99.38%
|
|
Expected dividend rate:
|
|
|
—
|
|
Expected terms (years):
|
|
5
|
|
Risk-free interest rate:
|
|
1.93%
|
|
A summary of the activity during the Fiscal 2018 and Fiscal 2017 of the Company’s 2014 Equity Incentive Plan, 2015 Omnibus Incentive Plan and the 2016 Omnibus Incentive Plan is presented below:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2016
|
|
|
62,760
|
|
|
$
|
82.03
|
|
Granted
|
|
|
65,700
|
|
|
|
6.75
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
(3,060
|
)
|
|
|
82.68
|
|
Outstanding at December 30, 2017
|
|
|
125,400
|
|
|
$
|
43.98
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
(14,000
|
)
|
|
|
85.00
|
|
Outstanding at December 29, 2018
|
|
|
111,400
|
|
|
$
|
28.46
|
|
F-29
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
During the Fiscal 2018 and
Fiscal 2017, the Company recorded total share-based payment expense of $198 and $389, respectively, in connection with all options outstanding
.
The total compensation cost related to options not yet amortized is $106 at Fiscal 2018. The Company will recognize this charge over approximately 3.5 years.
2016 Long-Term Incentive Plan
In May 2016, the Company’s Board approved the 2016 Long-Term Incentive Plan (the “2016 LTIP”). This plan was approved by our stockholders on January 26, 2017.
The material features of the 2016 LTIP are:
|
•
|
The maximum number of shares of common stock to be issued under the 2016 LTIP is 260,000 shares;
|
|
•
|
The award of performance units is permitted;
|
|
•
|
The term of the 2016 LTIP expired on December 31, 2018.
|
Board selected 260,000 shares to adequately motivate the participants and drive performance for the period.
The estimated fair value of the 2016 LTIP plan based on third party valuation was $136. As of Fiscal 2017, all units had been issued and all compensation expense amortized. For Fiscal 2018 and Fiscal 2017, the Company recorded $0 and $91 in compensation expense, respectively, associated with the 2016 LTIP. All the units under this plan expired on December 31, 2018.
2019 Long-Term Incentive Plan
In January 2019, the Company’s Board approved the 2019 Long-Term Incentive Plan (the “2019 LTIP”).
The Board initially granted 405,000 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
|
A fair valuation of the 2019 LTIP has not been completed; however, it is not expected to be material.
NOTE 12 –
COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Flood Employment Agreement
On January 3, 2014, in connection with the acquisition of Initio, the Company entered into a services agreement (the “Flood Employment Agreement”) with Brendan Flood. Pursuant to the Flood Employment Agreement, Mr. Flood initially served as Executive Chairman of the Board. Mr. Flood was initially paid a salary of £192 per annum, less statutory deductions, plus other benefits including reimbursement for reasonable expenses, paid vacation and insurance coverage for his roles with both the Company and our U.K. subsidiary. Under the agreement, Mr. Flood’s salary is required to be adjusted (but not decreased) annually in connection with the CPI Adjustment (as defined in the Flood Employment Agreement). Mr. Flood is also entitled to an annual bonus of up to 50%
F-30
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
of his annual base salary based reaching certain financial milestones. Additionally, Mr. Flood was entit
led to a gross profit appreciation participation, which entitled the participants to 10% of Initio’s “Excess Gross Profit,” which is defined as the increase in Initio gross profits in excess of 120% of the base year’s gross profit, up to $400. Mr. Flood’s
participating level was 62.5%. On May 29, 2015, the Gross Profit Appreciation Bonus associated with this employment agreement was converted into Series A Preferred Stock.
The Flood Employment Agreement has a term of five years and will automatically renew thereafter unless 12 months written notice is provided by either party. This employment agreement includes customary non-compete/solicitation language for a period of 12 months after termination of employment, and in the event of a change in control, the Company may request that Mr. Flood continue employment with the
new control entity
.
On January 1, 2017 the Company increased his salary by the CPI Adjustment and provided an additional bonus of up to 25% of his base salary based upon achieving a certain leverage ratio. In December 2017, upon the reorganization of the Company and departure of Mr. Briand, Mr. Flood’s title was changed to Chairman and Chief Executive Officer of the Company. On January 1, 2018 the Company increased his salary by the CPI Adjustment. On January 1, 2019, Mr. Flood was eligible for a CPI salary adjustment and chose to waive this adjustment. All other terms of Mr. Flood’s employment agreement remained unchanged.
The Faiman Employment Agreement
On February 5, 2016, the Company entered into an employment agreement (the “Faiman Employment Agreement”) with David Faiman.
Pursuant to the Faiman Employment Agreement, Mr. Faiman was appointed as Chief Financial Officer effective March 1, 2016 and was granted an initial base salary of $275 per annum. Mr. Faiman was later appointed Treasurer and Executive Vice President of the Company.
The Faiman Employment Agreement provides for severance payments of continued regular salary through the end of the year in the event of a termination by the Company not for cause or a resignation by the employee for good reason, which includes a change in title, duties, responsibilities or direct report superior.
Mr. Faiman’s salary is required to be increased (but not decreased) annually in connection with the CPI Adjustment as defined in the Faiman Employment Agreement. In connection with his employment,
Mr. Faiman also received a grant of 10,000 restricted shares of the Company’s common stock, which fully vested on the second anniversary of Mr. Faiman’s employment start date. Annual adjustments to salary, as well as bonus and additional stock option awards may be granted at the discretion of the Board based on meeting personal and corporate objectives each year. Mr. Faiman’s annual bonus target is 50% of annual base salary.
On January 1, 2017 the Company increased his salary by the CPI Adjustment
and provided an additional bonus of up to 25% of his base salary based upon achieving a certain leverage ratio
. On January 1, 2018 the Company increased his salary to an annualized salary of $320. On
January 1, 2019 the Company increased his salary by the CPI Adjustment. All other terms of Mr. Faiman’s employment agreement remained unchanged
.
The Lutzo Employment Agreement
Effective August 10, 2018, Mr. Lutzo is no longer with the Company. As part of his severance, he received severance pay in an amount equal to his annual base salary for six months and for a period of six months following his separation, all health insurance plan benefits which he was entitled to receive prior to the separation date.
The Barker Employment Agreement
T
he Company entered into an Employment Agreement with Alicia Barker that appointed her as the Company’s Chief Operating Officer effective July 1, 2018. Ms. Barker also serves as a member of our Board, but effective as of her appointment as our Chief Operating Officer, she no longer serves as a member of any Board committee and is not considered an independent director. Ms. Barker receives stock compensation for her service as a member of the Board.
Under the terms of her employment agreement, Ms. Barker currently receives an annual base salary of $250 and is entitled to receive an annual performance bonus of up to 50% of her base salary based on the achievement of certain performance metrics. Ms. Barker’s base salary is required to be reviewed by the Board on an annual basis and may be increased, but not decreased, in its sole discretion. Ms. Barker’s employment agreement also entitles her to reimbursement of certain out-of-pocket expenses incurred in connection with her services to the Company and to participate in the benefit plans generally made available to other executives of the Company.
In the event Ms. Barker is terminated without cause or for good reason (as such terms are defined in her employment agreement), she is entitled to receive (subject to certain requirements, including signing a general release of claims): (i) any earned but unpaid base salary and vacation time, as well as unreimbursed expenses, through her termination date; (ii) severance pay in an amount equal to 12 months base salary; and (iii) any earned but unpaid performance bonus. In the event Ms. Barker is terminated for cause or without
F-31
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
good reason, she is only entitled t
o receive any earned but unpaid base salary and vacation time, as well as unreimbursed expenses, through her termination date. Ms. Barker’s employment agreement also contains customary confidentiality, non-solicitation and non-disparagement clauses.
Earn-out Liabilities and Stock Value Guarantees
Pursuant to the acquisition of Control Solutions International, Inc. (“CSI”) on November 4, 2013, the purchase price included monthly cash payments to the former owner and shareholder of CSI for performance-based compensation equal to 20% of CSI’s consolidated gross profit from the date of closing through the end of the sixteenth quarter following the date of closing not to exceed a total of $2,100. During Fiscal 2017, the Company paid $98, towards the earn-out liability. No further payments were due in Fiscal 2018.
Pursuant to the acquisition of The JM Group on November 5, 2015, the purchase price includes a cash payment to the shareholders for performance-based compensation of (a) £850 if the gross profit for the 12 month period ending on the anniversary date of the date of completion (the “Anniversary TTM Gross Profit”) is equal to 90% or more of the gross profit for the twelve months ending October 31, 2015 (the “Completion TTM Gross Profit”); or (b) if the Anniversary TTM Gross Profit is less than 90% of the Completion TTM Gross Profit, a sum equal to £850 multiplied by the Anniversary TTM Gross Profit/Completion TTM Gross Profit. The Company recorded the maximum contingent liability amount of £850 ($1,180). At December 31, 2016, the remaining balance was $1,026 and was recorded in other current liabilities. While unpaid, the balance accrued interest at 10.25% per annum. The balance was paid in full in January 2017.
Pursuant to the acquisition of CBS Butler Holdings Limited (“CBS Butler”) on September 15, 2017, the purchase price includes an earn-out payment of up to £4,214 (payable in December 2018, based upon CBS Butler’s operating performance during the period September 1, 2017 through August 31, 2018), and (iv) deferred consideration of £150 less the aggregate amount of each CBS Butler Shareholder’s portion of the net asset shortfall amount, if any, as determined pursuant to the Share Purchase Agreement and the Option Purchase Agreement. In September 2018, the Company paid the deferred consideration of £150 ($195). In December 2018, we adjusted the earnout payment to £4,100 due to a decline in CBS Butlers operating performance period from September 1, 2017 through August 31, 2018, and this amount remains payable as of December 29, 2018.
Pursuant to the acquisition of FirstPro Inc. (“FirstPro”) on September 15, 2017, the purchase price includes deferred quarterly installments of $75 beginning on October 1, 2017, and $2,675 is payable annually in three equal installments beginning on September 15, 2018. The Company made $300 and $892 in quarterly installments and annual installment in Fiscal 2018. Subsequent to December 29, 2018, the Company paid $1,200 in full satisfaction of the remaining liability.
Pursuant to the acquisition of Clement May on June 28, 2018, the purchase price includes an earnout payment of up to
£500 to be paid on or around December 28, 2019; and deferred consideration of £350, the amount to be calculated and paid pursuant to the Share Purchase Agreement, on or around June 28, 2019.
Pursuant to the acquisition of KRI on August 27, 2018, the purchase price includes earnout consideration payable to the seller of $2,027 and $2,027 on August 27, 2019 and August 27, 2020, respectively. The payment of the earnout consideration is contingent on KRI’s achievement of certain trailing gross profit amounts.
Lease Obligations
The Company is party to multiple lease agreements for office space. The agreements require monthly rental payments through September 2027. Total minimum obligations are approximately $1,666, $1,520, $1,311, $515, $296 and $610 for the twelve months ended fiscal 2019, 2020, 2021, 2022, 2023 and beyond, respectively. For Fiscal 2018 and Fiscal 2017, rent expense amounted to $1,775 and $1,268, respectively.
Legal Proceedings
NewCSI, Inc. vs. Staffing 360 Solutions, Inc.
On May 22, 2014, NewCSI, Inc. (“NewCSI”), the former owners of Control Solutions International, filed a complaint in the United States District Court for the Western District of Texas, Austin Division, against the Company arising from the terms of the Stock Purchase Agreement dated August 14, 2013 between the Company and NewCSI. NewCSI claims that the Company breached a provision of the Stock Purchase Agreement (“SPA § 2.7”) that required the Company to calculate and pay to NewCSI 50% of certain “Deferred Tax Assets” within 90 days after December 31, 2013, subject to certain criteria. The Complaint sought payment of the amount allegedly owed under SPA § 2.7 and acceleration of earn-out payments provided for in the Stock Purchase Agreement of $1,400, less amounts paid to date, and attorneys’ fees.
F-32
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
On December 31, 2014, NewCSI filed an amended complaint to which NewCSI added an additional count asserting an “Adjustment Event” had occurred requiring an acceleration of earn-out payments provided for in the CSI Stock Purchase Agreement of $2,100, less amounts paid as of December 31, 2014 totaling $429 (balance of $1,671 at December 31, 2014), should the Company or CSI “be unable, or admit in writing its inability, to pay its debts as they mature.” The Company responded denying the material allegations and interposing numerous affirmative defenses, including that the earn-out liability was fully expensed at the time of the acquisition and fully accrued for on the Company’s balance sheet as part of the purchase accounting at the time of the acquisition. A the trial was held May 18-20, 2015. On May 20, 2015, the jury rendered a verdict, finding that the Company had not complied with SPA § 2.7 and owed $154, but that NewCSI had not proven that the Company or CSI had become unable to pay debts as they came due.
On June 3, 2015, NewCSI filed a Motion for Entry of Judgment as Matter of Law seeking entry of a judgment in the amount of $154, plus accelerated earn-out payments in the amount of $1,152, plus statutory interest. NewCSI did not challenge the jury verdict on the ability to pay issue. Also on June 3, 2015, the Company filed a Motion for Entry of Judgment as a Matter of Law seeking entry of judgment against NewCSI on the jury’s finding that the Company had not complied with SPA § 2.7, or, in the alternative, for a reduction of damages to $154 and to hold that NewCSI may not be awarded accelerated earn-out payments as that would result in an illegal penalty.
On October 21, 2015, judgment was entered in this action in favor of NewCSI and against the Company in the amount of $1,307, plus pre-judgment interest, post-judgment interest, and costs.
On January 26, 2016, the District Court set the bond in respect of the NewCSI litigation at $1,384. The Company has filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit (“Appellate Court”) seeking reversal of the judgment and posted a supersedeas bond to stay the execution of the judgment pending appeal. On April 18, 2016, the Court granted the NewCSI shareholders’ request for payment of attorneys’ fees, but reserved judgment on the amount of fees to award pending the outcome of the Company’s appeal. On November 3, 2016, oral arguments for the appeal were heard and on July 26, 2017, the Appellate Court affirmed the trial Court’s decision but left the legal fee award open for determination by further proceedings in the trial court. On August 29, 2017 the surety company released the supersedeas bond to the New CSI shareholders’ counsel, which was amount was approximately $5 less than the judgment amount with accumulated interest. Payment of this remaining balance has been made by the Company.
On September 29, 2017 NewCSI filed a Supplemental Motion in the United States District Court for the Western District of Texas, Austin Division, seeking $629 in attorneys’ fees. The Company opposed this motion but the magistrate judge issued a report and recommendation on November 17, 2017 recommending an award of fees in the amount of $606. The Company filed an objection with the trial judge to the magistrate’s report and recommendation. On May 30, 2018 the trial judge issued an order adopting the report and recommendation of the magistrate judge and awarding NewCSI the amount of $606 in legal fees, plus interest at the statutory rate of 2.27% per annum. The Company paid $606 in full settlement of this matter in June 2018.
Staffing 360 Solutions, Inc. v. Former Officers of Staffing 360 Solutions, Inc.
On November 13, 2015, in a separate proceeding, Staffing 360 initiated an arbitration before JAMS entitled
Staffing 360 Solutions, Inc. v. Former Officers of Staffing 360 Solutions, Inc.
, against three officers of Staffing 360, each a former Staffing 360 officer and employee. In its demand for arbitration and statement of claim, Staffing 360 alleged that these individuals breached their employment agreements with Staffing 360 and the fiduciary duties each owed to the Company. The three respondents responded with a counterclaim alleging wrongful termination and have moved to dismiss the arbitration, as well as moved for severance in relation to the remainder of their contracts.
On July 20, 2016, the arbitrator decided in favor of both of the respondents’ motions. Further on September 21, 2016 the arbitrator rendered the final award, which was set at $1,433. The former officers brought an action in US District Court in New York City under the caption
Dealy et al., v. Staffing 360 Solutions, Inc.
, requesting that the Court convert this arbitration award into a judgment
.
On July 11, 2017, the Court entered an order confirming the arbitrator’s award and granting judgement against the Company. In August 2017, the Company paid $1,582 in full satisfaction of this matter.
Other Matters
On February 17, 2016, a previous law firm filed suit in the Supreme Court of the State of New York alleging that the Company owes $759, for legal services rendered. The Company disagreed with the quantity and quality of legal services provided by the firm to the Company. On March 17, 2016, the Company reached a settlement with the law firm in the amount of $505 to be paid in equal installments over 24 months beginning April 2016. The final payment was made on March 1, 2018.
F-33
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 13 –
SEGMENT INFORMATION
In December 2017, the Company reorganized its operations into three reportable segments: Commercial – US; Professional – US and Professional - UK.
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Commercial Staffing - US
|
|
$
|
107,318
|
|
|
$
|
96,399
|
|
Professional Staffing - US
|
|
|
49,752
|
|
|
|
51,104
|
|
Professional Staffing - UK
|
|
|
103,856
|
|
|
|
45,147
|
|
Total Revenue
|
|
$
|
260,926
|
|
|
$
|
192,650
|
|
|
|
|
|
|
|
|
|
|
Commercial Staffing - US
|
|
$
|
17,496
|
|
|
$
|
16,913
|
|
Professional Staffing - US
|
|
|
15,610
|
|
|
|
10,619
|
|
Professional Staffing - UK
|
|
|
15,198
|
|
|
|
9,209
|
|
Total Gross Profit
|
|
$
|
48,304
|
|
|
$
|
36,741
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(43,579
|
)
|
|
$
|
(32,819
|
)
|
Depreciation and amortization
|
|
|
(3,124
|
)
|
|
|
(3,566
|
)
|
Impairment of goodwill
|
|
|
-
|
|
|
|
(4,790
|
)
|
Operating expenses - restructuring
|
|
|
57
|
|
|
|
(780
|
)
|
Interest expense
|
|
|
(8,386
|
)
|
|
|
(3,745
|
)
|
Amortization of debt discount and deferred
financing costs
|
|
|
(580
|
)
|
|
|
(2,745
|
)
|
Change in fair value of warrant liability
|
|
|
879
|
|
|
|
383
|
|
Re-measurement loss on intercompany note
|
|
|
(686
|
)
|
|
|
-
|
|
Gain from sale of business
|
|
|
238
|
|
|
|
-
|
|
Loss on extinguishment of debt, net
|
|
|
-
|
|
|
|
(6,132
|
)
|
Other expense
|
|
|
398
|
|
|
|
(106
|
)
|
Loss Before Provision for Income Tax
|
|
$
|
(6,479
|
)
|
|
$
|
(17,559
|
)
|
|
|
|
|
|
|
|
|
|
For Fiscal 2018 and Fiscal 2017, the Company generated revenue in the U.S., the U.K. and Canada as follows:
|
|
Fiscal 2018
|
|
Fiscal 2017
|
|
United States
|
|
$
|
156,923
|
|
$
|
147,373
|
|
United Kingdom
|
|
|
103,856
|
|
|
45,147
|
|
Canada
|
|
|
147
|
|
|
130
|
|
Total Revenue
|
|
$
|
260,926
|
|
$
|
192,650
|
|
For the period ended Fiscal 2018 and Fiscal 2017, the Company has assets in the U.S., the U.K. and Canada as follows:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
United States
|
|
$
|
70,267
|
|
|
$
|
53,814
|
|
United Kingdom
|
|
|
26,047
|
|
|
|
32,861
|
|
Canada
|
|
|
123
|
|
|
|
73
|
|
Total Assets
|
|
$
|
96,437
|
|
|
$
|
86,748
|
|
F-34
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Total assets by segment is not presented as it is not reviewed by the Chief Operating Decision Maker in his evaluation of how to allocate capital and resources.
For the period ended Fiscal 2018 and Fiscal 2017, the Company has goodwill in the U.S., the U.K. and Canada as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
United States
|
|
$
|
16,630
|
|
|
$
|
13,283
|
|
United Kingdom
|
|
|
15,431
|
|
|
|
13,886
|
|
Canada
|
|
|
—
|
|
|
|
—
|
|
Total Goodwill
|
|
$
|
32,061
|
|
|
$
|
27,169
|
|
NOTE 14 –
ACQUISITIONS
In accordance with ASC 805, the Company accounts for acquisitions using the purchase method under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. The Company utilizes management estimates and, in some instances, may retain the services of an independent third-party valuation firm to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted. Such estimates and valuations require the Company to make significant assumptions, including projections of future events and operating performance.
On September 15, 2017, Staffing 360 Georgia, LLC (“Staffing Georgia”), a wholly-owned subsidiary of the Company entered into an asset purchase agreement with Firstpro Inc. (“FPI”), Firstpro Georgia, LLC (“FPL”), and certain individuals, pursuant to which the FPI and FPL sold substantially all of their assets to Staffing Georgia (“Firstpro Acquisition”). The purchase price was $8,000, of which, (a) $4,500 was paid at closing, (b) $825 is payable in quarterly installments of $75 beginning on October 1, 2017, and (c) $2,675 is payable annually in three equal installments beginning on September 15, 2018. The Company made $300 and $892 in quarterly installments and annual installment in Fiscal 2018. Subsequent to December 29, 2018, the Company paid $1,200 in full satisfaction of the remaining liability.
On September 15, 2017, the Company and Longbridge Recruitment 360 Limited (“Longbridge”), a wholly-owned subsidiary of the Company, entered into an agreement (“Share Purchase Agreement”) with the holders of share capital of CBS Butler Holdings Limited (“CBS Butler”) and an agreement (“Option Purchase Agreement”) with the holders of outstanding options of CBS Butler, pursuant to which the holders of the share capital of CBS Butler and holders of outstanding options of CBS Butler sold all of their shares and options of CBS Butler to Longbridge (the “CBS Butler Acquisition”), in exchange for (i) an aggregate cash payment of £13,810, (ii) an aggregate of 100,000 shares of the Company’s common stock, (iii) an earn-out payment of up to £4,214 (payable in December 2018 based upon CBS Butler’s operating performance during the period September 1, 2017 through August 31, 2018), and (iv) deferred consideration of £150 less the aggregate amount of each CBS Butler Shareholder’s portion of the net asset shortfall amount, if any, as determined pursuant to the Share Purchase Agreement and the Option Purchase Agreement.
In September 2018, the Company paid the deferred consideration of £150 ($195). In December 2018, we
adjusted the earnout payment to
£4,100 due to a decline in CBS Butlers operating performance period September 1, 2017 through August 31, 2018, and this amount remains payable as of December 29, 2018.
On June 28, 2018, the Company and Staffing 360 Solutions Limited (formerly known as Longbridge Recruitment 360 Limited), a whollyowned subsidiary of the Company, entered into share purchase agreements (“Share Purchase Agreements”) to acquire all of the share capital of Clement May Limited (“CML”). Consideration for the acquisition of all the shares was (i) an aggregate cash payment of £1,550 ($2,047), (ii) 15,000 shares of the Company’s common stock, (iii) an earn-out payment of up to £500, the amount to be calculated and paid on or around December 28, 2019 pursuant to the Share Purchase Agreement, and (iv) deferred consideration of £350, to be paid on or around June 28, 2019, depending on the satisfaction of certain conditions set forth in that Share Purchase Agreement. To finance the above transaction, the Company entered into a term loan with HSBC Bank plc.
On August 27, 2018, the Company and Monroe Staffing Services, LLC (“Monroe Staffing”), an indirect wholly-owned subsidiary of the Company, entered into a share purchase agreement with Pamela D. Whitaker (“Seller”), pursuant to which the Seller sold 100% of the common shares of Key Resources Inc. (“KRI”) to Monroe Staffing (the “KRI Transaction”). The KRI Transaction closed simultaneously with the signing of the share purchase agreement. The purchase price in connection with the KRI Transaction was approximately $12,163, of which (a) approximately $8,109 was paid to the Seller at closing, (b) up to approximately $2,027 is payable as earnout consideration to the Seller on August 27, 2019 and (c) up to $2,027 is payable as earnout consideration to the Seller on
F-35
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
August 27, 2020. The p
ayment of the Earnout Consideration is contingent on KRI’s achievement of certain trailing gross profit amounts.
To finance the above transaction, the Company entered into an agreement with Jackson Investment Group, LLC (“Jackson”) on August 27, 2018, pursuant to which the note purchase agreement dated as of September 15, 2017 was amended to add an additional senior debt investment of approximately $8,428 in the Company.
In connection with the acquisition of KRI and Clement May, the Company recorded the following intangible assets, based on valuation performed.
|
KRI
|
|
|
Clement May
|
|
Goodwill
|
$
|
3,347
|
|
|
$
|
1,545
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
Tradenames
|
|
1,000
|
|
|
|
470
|
|
Non-compete
|
-
|
|
|
273
|
|
Customer Relationships
|
|
6,400
|
|
|
451
|
|
|
$
|
7,400
|
|
|
$
|
1,194
|
|
The following table summarizes the final allocation of the purchase price to the estimated fair values of net assets acquired at the date of the acquisition:
|
|
KRI
|
|
|
Clement May
|
|
Purchase price
|
|
$
|
11,537
|
|
|
$
|
3,543
|
|
Less:
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
(790
|
)
|
|
|
(804
|
)
|
Intangibles
|
|
|
(7,400
|
)
|
|
|
(1,194
|
)
|
Goodwill
|
|
$
|
3,347
|
|
|
$
|
1,545
|
|
|
|
|
|
|
|
|
|
|
Goodwill of Clement May is included in the Company’s Professional-UK reportable segment. Goodwill of KRI is included in the Company’s Professional-US reportable segment.
Identified intangible assets for Clement May are being amortized on a straight-line basis over their weighted average estimated useful life of
8.4
years. The Company acquired a total
of $14,305 i
n receivables and fair value of these receivables equals the contract value; and recorded contingent consideration associated with Clement May of £850 ($1,122).
Identified intangible assets of KRI are being amortized on a straight-line basis over their weighted average estimated useful life of
10 y
ears. The Company acquired a total
of $2,531 i
n receivables and fair value of these receivables equals the contract value; and recorded contingent consideration associated with KRI of $3,427, net of discounting.
In Fiscal 2018,
the Company recorded a total of $105 and $35 in third party expenses associated with consummating the Clement May and KRI acquisitions, respectively, which are included in Selling, general and administrative expenses, excluding depreciation and amortization stated on the Consolidated Statement of Operations. In Fiscal 2017, the Company recorded a total of $469 in third party expenses associated with consummating the CBS Butler and Firstpro acquisitions, which are included in Selling, general and administrative expenses, excluding depreciation and amortization stated on the Consolidated Statement of Operations.
The following unaudited pro forma consolidated results of operation have been prepared, as if the acquisition of FirstPro and CBS Butler had occurred as of June 1, 2016, and acquisition of KRI and Clement May occurred on January 1, 2017.
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Revenues
|
$
|
308,093
|
|
|
$
|
323,044
|
|
Net loss from continuing operations
|
|
(6,189
|
)
|
|
|
(16,102
|
)
|
Weighted average number of common stock shares - basic and diluted
|
|
4,378,447
|
|
|
|
3,412,426
|
|
Net loss per share from continuing operations
|
$
|
(1.41
|
)
|
|
$
|
(4.72
|
)
|
F-36
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
The Company recorded revenues of
$42,060 from the acquisitions completed during Fiscal 2018.
NOTE 15 –
RELATED PARTY TRANSACTIONS
In addition to the Series A Preferred Shares and notes and warrants issued to Jackson, the following are other related party transactions:
Board and Committee Members
|
Fiscal 2018
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
Dimitri Villard
|
$
|
75
|
|
|
|
5,600
|
|
|
$
|
12
|
|
|
$
|
68
|
|
Jeff Grout
|
|
75
|
|
|
|
5,600
|
|
|
|
12
|
|
|
|
70
|
|
Nick Florio
|
|
75
|
|
|
|
5,600
|
|
|
|
12
|
|
|
|
69
|
|
Alicia Barker
|
|
19
|
|
|
|
4,200
|
|
|
|
7
|
|
|
|
1
|
|
|
$
|
244
|
|
|
|
21,000
|
|
|
$
|
43
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
Cash Compensation
|
|
|
Shares Issued
|
|
|
Value of Shares Issued
|
|
|
Compensation Expense Recognized
|
|
Dimitri Villard
|
$
|
69
|
|
|
|
16,300
|
|
|
$
|
66
|
|
|
$
|
75
|
|
Jeff Grout
|
|
69
|
|
|
|
16,300
|
|
|
|
66
|
|
|
|
75
|
|
Nick Florio
|
|
69
|
|
|
|
16,500
|
|
|
|
67
|
|
|
|
74
|
|
|
$
|
207
|
|
|
|
49,100
|
|
|
$
|
199
|
|
|
$
|
224
|
|
The Briand Separation Agreement
Company’s former employee, board member and officer resigned from his positions with the Company and subsidiaries. The Company entered into an agreement (the “Briand Separation Agreement”) with Mr. Briand dated December 21, 2017, with an effective date (“Separation Date”) of January 31, 2018, pursuant to which Mr. Briand may provide advisory services, if requested by the Company, through the effective date. The Company paid $690 in Fiscal 2018 to Mr. Briand as part of this separation agreement. The accrued balance due to Mr. Briand as of December 29, 2018 is $201.
Appointment of Officers
On March 28, 2018, the Company appointed Alicia Barker to fill the Class II director vacancy created by the departure of Mr. Briand earlier this year, such appointment was effective April 1, 2018. Ms. Barker joined the company’s board of directors as an independent director and serves on the Board’s Compensation and Human Resources Committee and on the Nominating and Corporate Governance Committee.
Effective July 1, 2018, the Company entered into an Employment Agreement with Alicia Barker that appointed her as the Company’s Chief Operating Officer. Ms. Barker will continue as a member of the Company’s board of directors, but effective with her appointment will no longer be a member of any Board committee, nor an independent member
of the Board, bringing the number of independent directors to three of five Board members.
F-37
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
NOTE 16 –
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,657
|
|
|
$
|
1,861
|
|
Income taxes
|
|
|
268
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
Non Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Shares issued for purchase consideration
|
|
$
|
21
|
|
|
$
|
430
|
|
Deferred purchase price of UK factoring facility
|
|
|
12,586
|
|
|
|
-
|
|
Deemed dividend
|
|
|
-
|
|
|
|
2,009
|
|
Warrants adjustments in connection with Jackson term loan
|
|
|
682
|
|
|
|
1,426
|
|
Shares issued in connection with convertible note
|
|
|
-
|
|
|
|
498
|
|
Shares issued in connection with Jackson term loan
|
|
|
899
|
|
|
|
2,527
|
|
Shares issued in connection with Series D redemption
|
|
|
-
|
|
|
|
208
|
|
Settlement of litigation (payment with surety bond)
|
|
|
-
|
|
|
|
1,305
|
|
NOTE 17 –
INCOME TAXES
The components of loss before provision for income taxes for Fiscal 2017 and Fiscal 2018, are as follows:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Domestic
|
|
$
|
(4,840
|
)
|
|
$
|
(17,667
|
)
|
Foreign
|
|
|
(1,639
|
)
|
|
|
108
|
|
Loss before provision for income taxes
|
|
$
|
(6,479
|
)
|
|
$
|
(17,559
|
)
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consisted of the following:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
152
|
|
State
|
|
|
60
|
|
|
|
250
|
|
Foreign
|
|
|
39
|
|
|
|
62
|
|
Total current tax expense
|
|
|
99
|
|
|
|
464
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
35
|
|
|
|
41
|
|
State
|
|
|
11
|
|
|
|
8
|
|
Foreign
|
|
|
(123
|
)
|
|
|
419
|
|
Total deferred tax expense
|
|
|
(77
|
)
|
|
|
468
|
|
Total Tax Expense
|
|
$
|
22
|
|
|
$
|
932
|
|
|
|
|
|
|
|
|
|
|
F-38
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
The difference between the income tax provision on income (loss) and the amount computed at the U.S. federal statutory rate is due to:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Income benefit provision at Federal statutory rate
|
|
$
|
(1,360
|
)
|
|
|
21.0
|
%
|
|
$
|
(5,953
|
)
|
|
|
34.0
|
%
|
State income taxes, net of Federal Benefit
|
|
|
244
|
|
|
|
(3.77
|
%)
|
|
|
(383
|
)
|
|
|
2.2
|
%
|
International tax rate differentials
|
|
|
348
|
|
|
|
(5.37
|
%)
|
|
|
231
|
|
|
|
(1.3
|
%)
|
U.S. Permanent differences
|
|
|
111
|
|
|
|
(1.71
|
%)
|
|
|
142
|
|
|
|
(0.8
|
%)
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
%
|
|
|
1,628
|
|
|
|
(903.0
|
%)
|
Other True-Ups
|
|
|
514
|
|
|
|
(7.94
|
%)
|
|
|
1,035
|
|
|
|
(5.9
|
%)
|
Impact of Federal Rate change
|
|
|
—
|
|
|
|
—
|
%
|
|
|
3,665
|
|
|
|
(20.9
|
%)
|
Change in valuation allowance
|
|
|
165
|
|
|
|
(2.56
|
%)
|
|
|
567
|
|
|
|
(3.3
|
%)
|
Tax provision
|
|
$
|
22
|
|
|
|
(0.35
|
%)
|
|
$
|
932
|
|
|
|
(5.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code which includes a reduction of the corporate income tax rate from 35% to 21%, generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, imposes a new minimum tax on global intangible low taxed income (“GILTI”), limits the amount of deductible interest expense, and imposes new limitations on the deductibility of certain executive compensation.
Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 18), which provides guidance on accounting for the Tax Act’s impact. SAB 18 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in god faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with SAB 118, the Company must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete.
As of December 29, 2018, in accordance with SAB 118, the Company has completed its accounting for all the enactment-date income tax effects of the tax act including the tax effects of the one-time transition tax imposed by the Tax Act. Based on the company's evaluation, the one-time transition tax was fully offset by one hundred percent by $1,649 of net operating losses.
Effective for the year ended December 29, 2018, the Tax Act resulted in a new limitation on interest expense under IRC Section 163(j). New IRC Section 163(j) limits the Company’s annual deduction of interest expense to the sum of business interest income and 30 percent of the adjusted taxable income of the Company. The limitation for the year ended December 29, 2018 resulted in disallowed interest of $5,393, which can be carried forward indefinitely.
The Company has not provided for additional income or withholding taxes for any undistributed foreign earnings, including those subject to the one-time transition tax nor have any taxes been provided for the outside basis difference inherent in these entities as the Company’s assertion is to indefinitely reinvest in foreign operations. Additionally, due to withholding tax, basis computations, and other related tax considerations, it is not practicable to estimate any taxes to be provided on outside basis differences at this time.
F-39
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
Our deferred tax assets (liabilities) are as follows:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
5,393
|
|
|
$
|
7,103
|
|
Tax credit, deduction and capital loss carryforward
|
|
|
2,504
|
|
|
|
764
|
|
Share-based compensation
|
|
|
687
|
|
|
|
862
|
|
Debt issuance costs
|
|
|
660
|
|
|
|
1,234
|
|
Interest limitation and carryforward
|
|
|
1,155
|
|
|
|
-
|
|
Accrued expenses and other liabilities
|
|
|
615
|
|
|
|
812
|
|
Total deferred tax assets
|
|
|
11,014
|
|
|
|
10,775
|
|
Less: valuation allowance
|
|
|
(9,619
|
)
|
|
|
(9,424
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
1,395
|
|
|
|
1,351
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,461
|
|
|
|
1,443
|
|
Basis differences in acquired intangibles
|
|
|
1,852
|
|
|
|
1,807
|
|
Total deferred tax liabilities
|
|
|
3,313
|
|
|
|
3,250
|
|
Deferred tax liability
|
|
$
|
(1,918
|
)
|
|
$
|
(1,899
|
)
|
|
|
|
|
|
|
|
|
|
During Fiscal 2018 and Fiscal 2017, the Company has federal net operating losses (“NOLs”) of $15,264 and $23,743 that begin to expire in 2029. As of November 15, the company had a change in ownership under Section 382 which limits the amount of useable NOLs going forward. As such, the company reduced the Federal NOL available by $6,447. As of December 29, 2018 and December 30, 2017, the Company has state operating losses of $34,130 and $30,332 that begin to expire in 2030, and foreign NOLs totaling $2,379 and $2,958 with an indefinite life. As of December 29, 2018 and December 30, 2017, the Company also has capital loss carryforward of $9,554 and $2,024 which, if unused, will begin to expire in 2019 and a general business credit carryforward of $248 and $228.
In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. We consider the level of historical taxable income, scheduled reversal of temporary differences, tax planning strategies, and projected future taxable income in determining whether a valuation allowance is warranted.
During Fiscal 2018, the Company maintained a valuation allowance against its U.S. deferred tax assets and certain foreign jurisdictions. The Company’s valuation allowance increased by $195 during Fiscal 2018. This increase was primarily attributable to the adjustment of certain deferred balances.
During 2018, we maintained our federal and state tax attributes for unrecognized tax benefits related primarily to the treatment of stock compensation and stock options. If recognized, $670 of the unrecognized tax benefits are likely to attract a full valuation allowance, thereby offsetting the favorable impact to the effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
Beginning balance
|
|
$
|
1,136
|
|
|
$
|
—
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
|
|
1,136
|
|
Reductions for tax positions of prior years
|
|
|
(466
|
)
|
|
|
—
|
|
Loss before provision for income taxes
|
|
$
|
670
|
|
|
$
|
1,136
|
|
|
|
|
|
|
|
|
|
|
It is reasonably possible that the amount of the unrecognized tax benefits with respect to our unrecognized tax positions will increase or decrease in the next 12 months. These changes may be the result of, among other things, method changes. However, quantification of an estimated range cannot be made at this time. The Company has accrued zero interest and penalties as of December 29, 2018 and December 30, 2017.
F-40
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and par values, unless otherwise indicated)
The Company, or one of its subsidiaries, files its tax returns in the U.S., United Kingdom, C
anada and certain state tax jurisdictions with varying statutes of limitations. The Company’s has no tax years under examination at this time. Additional years may be open to the extent attributes are being carried forward to an open year.
F-41