NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Staffing
360 Solutions, Inc. (“we,” “us,” “our,” “Staffing 360,” or the “Company”)
was incorporated in the state of Nevada on December 22, 2009, as Golden Fork Corporation, which changed its name to Staffing 360 Solutions,
Inc., ticker symbol “STAF,” on March 16, 2012. On June 15, 2017, the Company reincorporated in the state of Delaware. 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.
Headway
Acquisition
On
April 18, 2022, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Headway Workforce Solutions
(“Headway”), and Chapel Hill Partners, LP, as the representatives of all the stockholders (collectively, the “Sellers”)
of Headway (the “Sellers’ Representative”), pursuant to which, among other things, we agreed to purchase all of the
issued and outstanding securities of Headway in exchange for (i) a cash payment of $14, and (ii) 9,000,000 shares of our Series H Convertible
Preferred Stock, with a value equal to the Closing Payment, as defined in the Stock Purchase Agreement (the “Headway Acquisition”).
On May 18, 2022, the Headway Acquisition closed. The purchase price in connection with the Headway Acquisition was approximately $9,000.
Pursuant to the Stock Purchase Agreement and in connection with the closing of the Headway Acquisition, on May 17, 2022, we filed a certificate
of designation with the Secretary of State of Delaware designating the rights, preferences and limitations of the Series H Convertible
Preferred Stock (the “Series H Preferred Stock”), par value $0.00001 per share.
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 GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Reverse
Stock Split
The
Company effected a one-for-ten reverse stock split on June 24, 2022 (the “Reverse Stock Split”). All share and per share
information in this quarterly report have been retroactively adjusted to reflect the Reverse Stock Split.
Liquidity
The
accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of
the Company to continue as a going concern. The accompanying financial statements have been prepared on a basis which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying
financial statements as of October 1, 2022, the Company has an accumulated deficit of $87,577 and a working
capital deficit of $13,761. At October 1, 2022, we had total gross debt of $18,361 (which includes redeemable Series H Preferred
Stock) and $1,753 of cash on hand. We have historically met our cash needs through a combination of cash flows from operating
activities, term loans, promissory notes, convertible notes, private placement offerings and sales of equity. Our cash requirements
are generally for operating activities and debt repayments. Subsequent to the nine months ended October 1, 2022, we have continued
to fund our operations and make required capital payments utilizing our available cash and, as of the date of this filing, we have
approximately $2,817 in available cash.
The
financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates
the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this
belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements
and that our credit facilities with our lenders will remain available to us.
Further,
our note issued to Jackson Investment Group, LLC (“Jackson”) includes certain financial customary covenants and the
Company has had instances of non-compliance. Management has historically been able to obtain from Jackson waivers of any
non-compliance and management expects to continue to be able to obtain necessary waivers in the event of future non-compliance;
however, there can be no assurance that the Company will be able to obtain such waivers, and should Jackson refuse to provide a
waiver in the future, the outstanding debt under the agreement could become due immediately, which exceeds our current cash
balance.
On
October 27, 2022, we entered into a Third Amended and Restated Note Purchase Agreement (the “Third Amended and Restated Note
Purchase Agreement”) with Jackson, which amended and restated the Amended Note Purchase Agreement (as defined herein), and
issued to Jackson the Third Amended and Restated Senior Secured 12% Promissory Note (the “Jackson Note”), with a
remaining outstanding principal balance of approximately $9.0 million. See Note 6. The debt represented by the Jackson Note
continues to be subject to a second lien secured by substantially all of the Company’s domestic subsidiaries’ assets as
well as a first lien secured by the UK subsidiaries shares owned by the Company pursuant to the Amended and Restated Security
Agreement with Jackson, dated September 15, 2017, as amended by the Omnibus Amendment and Reaffirmation Agreement, dated as of
October 27, 2022, to reflect certain of the terms as updated and amended by the Amended Note Purchase Agreement. We also have a
$25,000 revolving loan facility with MidCap Funding X Trust (“MidCap”). On October 27, 2022, we entered into Amendment No. 27 to the Credit and
Security Agreement with MidCap, which among others, extended the commitment expiry date from October
27, 2027 to September 6, 2024. See Note 14.
Going
Concern
The
accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going
concern. Historically, the Company has funded such payments either through cash flow from operations or the raising of capital through
additional debt or equity. If the Company is unable to obtain additional capital, such payments may not be made on time.
The
Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to the
COVID-19 pandemic raise substantial doubt about the Company’s ability to continue as a going concern.
COVID-19
The
novel Coronavirus disease 2019 (“COVID-19”) and its ongoing effects are continuing to impact worldwide economic
activity, and activity in the United States and the United Kingdom where our operations are based. The nature of work of the
contractors we support mostly are on the site of our clients. Given that the magnitude and duration of COVID-19’s impact on our business and operations remain uncertain,
the continued spread of COVID-19 (including the emergence and persistence of variants relating thereto) and the imposition of related
public health containment measures and travel and business restrictions could have a material adverse impact on our business, financial
condition, operating results, and cash flows. While expected to be temporary, prolonged workforce disruptions can negatively
impact sales in fiscal year 2022 and the Company’s overall liquidity.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
full impact of the COVID-19 pandemic and its ongoing effects continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude
that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively
monitoring the impact of the global situation on its financial condition, liquidity, operations, industry, and workforce. Given the daily
evolution of the COVID-19 pandemic, its ongoing effects and the global responses to curb its spread, the Company is not able to estimate the effects of the
COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2022.
The
Company’s negative working capital and liquidity position combined with the uncertainty generated by the economic reaction to
the COVID-19 pandemic and its ongoing effects contribute to the substantial doubt about the Company’s ability to continue as a
going concern.
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 the nine months ended October
1, 2022 and October 2, 2021 include the valuation of intangible assets, including goodwill, liabilities associated with testing long-lived
assets for impairment, contingent considerations, fair value of financial instruments and valuation reserves against deferred tax assets.
Goodwill
Goodwill
relates to amounts that arose in connection with various acquisitions and represents the difference between the purchase price and the
fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill
is not amortized, but it is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment
assessment include, but are not limited to, current economic and market conditions, a decline in the equity value of the business, a
significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational
performance of the business and an adverse action or assessment by a regulator.
In
accordance with ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, the Company is required
to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. During
the year ended January 1, 2022 the Company changed its annual measurement date from the last day of the fiscal year end to the first
day of the fiscal fourth quarter. A reporting unit is either the equivalent of, or one level below, an operating segment. The Company
early adopted the provisions in ASU 2017-04, which eliminates the second step of the goodwill impairment test. As a result, the Company’s
goodwill impairment tests include only one step, which is a comparison of the carrying value of each reporting unit to its fair value,
and any excess carrying value, up to the amount of goodwill allocated to that reporting unit, is impaired.
The
carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets
and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit
and the asset and liability is considered in the determination of the reporting unit fair value.
The
Company recognized an impairment with respect to its Staffing UK reporting unit of $3,104 during the quarter ended January 1,
2022. The impairment resulted from a continued decline in that reporting unit’s revenue which experienced significant and prolonged
declines as a result of the COVID-19 pandemic. To determine the impairment, the Company employed a combination of market approach (valuations
using comparable company multiples), income approach (discounted cash flow analysis) and prevailing market conditions to derive the fair
value of the reporting unit. Under ASU 2017-04, which the Company early adopted, the impairment amount represents the excess of the carrying
value over the fair value of the reporting unit.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue
can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine
the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when
or as the Company satisfies a performance obligation.
The
Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties
are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services
offered.
The
Company has primarily two main forms of revenue – temporary contractor revenue and permanent placement revenue. Temporary
contractor revenue is accounted for as a single performance obligation satisfied over time because the customer simultaneously
receives and consumes the benefits of the Company’s performance on an hourly or daily basis. The contracts stipulate weekly or
monthly billing, and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the
hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of
performance completed to date. Permanent placement revenue is recognized on the date the candidate’s full-time employment with
the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms,
typically 30 days. The contract with the customer stipulates a guarantee period whereby the customer may be refunded if the employee
is terminated within a short period of time, however this has historically been infrequent, and immaterial upon occurrence. As such,
the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has
transferred to the customer. Revenues for the three
months ended October 1, 2022 was comprised of $64,733 of temporary contractor revenue and $1,387 of permanent placement
revenues compared with $46,168 of temporary contractor revenue and $1,333 of
permanent placement revenues for the three months ended October 2, 2021, respectively. Revenue for the nine months ended October 1,
2022 was comprised of $170,698 of temporary contractor revenue and $4,368 permanent placement revenue, compared with $143,274 of
temporary contractor revenue and $3,708 permanent placement revenue for the nine months ended October 2, 2021. Refer to Note 11 for
further details on breakdown by segments.
Income
Taxes
The
Company’s provision for income taxes is based on the discrete method for the quarter applied to federal, state and foreign income.
On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any,
as compared with those forecasted at the beginning of the fiscal year and each interim period thereafter.
The
effective income tax rate was 5.43%, 1.48%, (1.87)% and 0.67% for the three and nine months ending October 1, 2022 and October 2, 2021,
respectively. The Company’s effective tax rate differs from the U.S. federal statutory rate of 21%, primarily due to changes in
valuation allowances in the U.S., which eliminates the effective tax rate on current year losses, offset by current state taxes and changes
to goodwill naked credit. The Company may have experienced an IRC Section 382 limitation during 2021, for which it is in process of conducting
an analysis to determine the tax consequences of such a limitation.
Foreign
Currency
The
Company recorded a non-cash foreign currency remeasurement loss of $315
and $219
for the three and nine months ended October 2, 2021, respectively, associated with its U.S dollar denominated intercompany
note. In 2022, the Company applied ASC 830-20-35-3 which states gains and losses on certain foreign currency transactions
should not be included in net income but should be reported in the same manner as translation adjustments.
Warrants
The
Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s
specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”).
The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability
pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether
the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment,
which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period
end date while the warrants are outstanding.
For
issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component
of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification,
the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter.
Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair
value of the warrants the Company has privately placed were estimated using a Black Scholes model. Refer to Note 8 for further details.
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments
by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial
conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will
account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will
reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within
the scope of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per
share and treasury stock method will be no longer available. ASU 2020-06 is applicable for fiscal years beginning after December 15,
2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company adopted this ASU in this
fiscal year. This standard did not have an impact on our financial statements.
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected
credit loss model for the impairment of financial assets measured at amortized cost basis. This ASU replaces the probable, incurred loss
model for those assets. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies
and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15,
2022, for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies
and not-for-profit entities. The Company is currently evaluating the impacts of this pronouncement and does not expect it to have a material
impact on the financial statements.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE
3 – EARNINGS (LOSS) PER COMMON SHARE
The
Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share (“ASC 260”), which requires
earnings per share for each class of stock (common stock and participating preferred stock) to be calculated using the two-class method.
The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders.
Under the two-class method, earnings for the reporting period are allocated between common shareholders and other security holders based
on their respective participation rights in undistributed earnings.
Basic
earnings per common share is computed by dividing income or loss available to common stockholders by the weighted average number of shares
of basic common stock outstanding. The Company’s Series F convertible preferred stock, which was convertible into shares of the
Company’s common stock at any time and from time to time from and after the issue date, and the Company’s Series F warrants,
were classified as participating securities in accordance with ASC 260. Net income allocated to the holders of Series F convertible preferred
stock and Series F warrants was calculated based on the shareholders’ proportionate share of weighted average shares of common
stock outstanding on an if-converted basis.
For
purposes of determining diluted earnings per common share, basic earnings per common share was further adjusted to include the effect
of potential dilutive common shares outstanding, including unvested restricted stock using the more dilutive of either the two-class
method or the treasury stock method, and Series G and G-1 Preferred Stock using the if-converted method. Stock options and warrants that
were out-of-the-money were not included in the denominator for the calculation diluted EPS. Under the two-class method of calculating
diluted earnings per share, net income is reallocated to common stock, the Series F Preferred stock, the Series F warrants, and all dilutive
securities based on the contractual participating rights of the security to share in the current earnings as if all of the earnings for
the period had been distributed. In the computation of diluted earnings per share, the if-converted method for the Series F Preferred
Stock resulted in a more dilutive earnings per share than the two-class method. As such, the if-converted method was utilized for the
calculation of diluted EPS.
On
June 24, 2022, the Company effected the Reverse Stock Split. As required in accordance with GAAP, all share and earnings
per share information in this Quarterly Report on Form 10-Q,
including those noted below have been retroactively adjusted to reflect the Reverse Stock Split.
The
following table sets forth the components used in the computation of basic and diluted income per share:
SCHEDULE
OF EARNINGS PER SHARE,BASIC AND DILUTED
| | |
October 1, 2022 | | |
October 2, 2021 | | |
October 1, 2022 | | |
October 2, 2021 | |
| | |
Three Months Ended | | |
Nine Months Ended | |
| | |
October 1, 2022 | | |
October 2, 2021 | | |
October 1, 2022 | | |
October 2, 2021 | |
| Numerator: | |
| | |
| | |
| | |
| |
| Net Income (Loss) | |
$ | 1,032 | | |
$ | 8,713 | | |
$ | (3,556 | ) | |
$ | 14,873 | |
| Less: Dividends paid to Series A preferred shareholders | |
| - | | |
| - | | |
| - | | |
| - | |
| Less: Dividends paid to Series E, E-1, G, G-1 preferred shareholders | |
| - | | |
| (83 | ) | |
| - | | |
| (795 | ) |
| Less: Deemed dividend | |
| - | | |
| - | | |
| - | | |
| (1,798 | ) |
| Less: Net income allocated to participating equity | |
| - | | |
| (1,077 | ) | |
| - | | |
| (1,763 | ) |
| Net Income (Loss) Attributable to Common Equity | |
$ | 1,032 | | |
$ | 7,553 | | |
$ | (3,556 | ) | |
$ | 10,517 | |
| Effect of dilutive securities: | |
| | | |
| | | |
| | | |
| | |
| Add: Dividends paid to Series E, E-1, G, G-1 preferred shareholders | |
| | | |
| 83 | | |
| | | |
| 795 | |
| Net income available to common and preferred shareholders for diluted earnings per share | |
| | | |
$ | 7,636 | | |
| | | |
$ | 11,312 | |
| | |
| | | |
| | | |
| | | |
| | |
| Denominator: | |
| | | |
| | | |
| | | |
| | |
| Weighted average basic common shares outstanding | |
| 2,401,961 | | |
| 1,079,050 | | |
| 1,980,398 | | |
| 737,729 | |
| Weighted average additional common shares outstanding if preferred shares converted to common shares (if dilutive) | |
| — | | |
| 25,433 | | |
| — | | |
| 103,775 | |
| Total weighted average common shares outstanding if preferred shares converted to common shares | |
| 2,401,961 | | |
| 1,104,483 | | |
| 1,980,398 | | |
| 841,064 | |
| Effect of dilutive securities: | |
| | | |
| — | | |
| | | |
| — | |
| Restricted shares | |
| | | |
| 3,426 | | |
| | | |
| 3,426 | |
| Weighted average diluted shares outstanding | |
| | | |
| 1,107,910 | | |
| | | |
| 8,44,929 | |
| | |
| | | |
| | | |
| | | |
| | |
| Earnings (loss) per common share: | |
| | | |
| | | |
| | | |
| | |
| Basic | |
$ | 0.43 | | |
$ | 7.00 | | |
$ | (1.80 | ) | |
$ | 14.26 | |
| Diluted | |
$ | 0.43 | | |
$ | 6.89 | | |
$ | (1.80 | ) | |
$ | 13.40 | |
NOTE
4 – ACCOUNTS RECEIVABLE FINANCING
Midcap
Funding X Trust
Prior
to September 15, 2017, certain U.S. subsidiaries of the Company were parties to a $25,000 revolving loan facility with MidCap, with the
option to increase the amount by an additional $25,000, with a maturity of April 8, 2019.
On
October 26, 2020, the Company entered into Amendment No. 17 to Credit and Security Agreement with MidCap, whereby, among other things,
MidCap agreed to extend the maturity date of our outstanding asset based revolving loan until September 1, 2022. In addition, the Company
also agreed to certain amendments to the financial covenants. On October 27, 2022, the Company entered into Amendment No. 27 with MidCap
(see Note 14).
The
facility provides events of default including: (i) failure to make payment of principal or interest on any MidCap loans when required,
(ii) failure to perform obligations under the facility and related documents, (iii) not paying its debts as such debts become due and
similar insolvency matters, and (iv) material adverse changes to the Company (subject to a 10-day notice and cure period.) Upon an event
of default, the Company’s obligations under the credit facility may, or in the event of insolvency or bankruptcy will automatically,
be accelerated. Upon the occurrence of any event of default, the facility will bear interest at a rate equal to the lesser of: (i) 3.0%
above the rate of interest applicable to such obligations immediately prior to the occurrence of the event of default; and (ii) the maximum
rate allowable under law.
Under
the terms of this agreement, the Company is subject to affirmative covenants which are customary for financings of this type, including
covenants to: (i) maintain good standing and governmental authorizations, (ii) provide certain information and notices to MidCap, (iii)
deliver monthly reports and quarterly financial statements to MidCap, (iv) maintain insurance, (v) discharge all taxes, (vi) protect
its intellectual property, and (vii) generally protect the collateral granted to MidCap. The Company is also subject to negative covenants
customary for financings of this type, including that it may not: (i) enter into a merger or consolidation or certain change of control
events, (ii) incur liens on the collateral, (iii) except for certain permitted acquisitions, acquire any significant assets other than
in the ordinary course of business, (iv) assume certain additional senior debt, or (v) amend any of its organizational documents.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
balance of the MidCap facility as of October 1, 2022 and January 1, 2022 was $11,612 and $13,405, respectively, and is included in Accounts
receivable financing on the Consolidated Balance Sheet.
White
Oak Commercial Finance, LLC
As
a result of the Headway Acquisition, the Company’s wholly owned Headway subsidiary, has a line of credit with White Oak
Commercial Finance, LLC (“White Oak”), that provided working capital and supports general corporate needs of Headway
(the “White Oak Agreement”). Under the terms of the White Oak Agreement, the line of credit matures in June 2024. White
Oak may terminate the Agreement at any time upon providing 30-days written notice. The White Oak Agreement is secured by all the
assets of Headway and is personally guaranteed up to $1,000 by a former member of management of Headway.
Under
the terms of the White Oak Agreement, the maximum borrowing capacity is $10,000,000. The borrowing base is defined as the sum of the
following: (a) 95% of the eligible ordinary receivables, as defined, and (b) the lessor of (i) $3,000,000 or (ii) 95% of the Company’s
outstanding eligible unbilled receivables, as defined, less the sum of the following: (c) 100% of the undrawn amount of all letters of
credit outstanding, (d) the special availability reserve, (e) the quarterly tax reserve and (f) the amount all other availability reserves
in effect as such time. The line of credit bears interest at LIBOR plus 5.00% with a floor of 7.00% (7.00% at December 31, 2021) on all
outstanding balances and 0.25% for any unused portion of the line of credit. At October 1, 2022, borrowings of $7,417, were outstanding
under the credit facility.
From
time to time, White Oak may cause letters of credit to be opened to be issued for Headway’s benefit. The aggregate face amount
of all letters of credit outstanding will become the letter of credit reserve, which reduces the borrowing base under the Agreement.
Under the terms of the agreement the letter of credit sub-line may not exceed $2,000,000. The Company is required to pay interest monthly
on the face amount of all letters of credit at a rate of LIBOR plus 6.25%. At October 1, 2022, there were $0 of standby letters of credit
that had been issued.
The
White Oak Agreement operates similarly to a factoring arrangement whereby Headway’s receivables are bought by White Oak. However,
receivables purchased by White Oak are required to be repurchased by Headway in the event the Company’s customer disputes the invoice
amount or if the receivable remains unpaid past a certain number of days from the invoice date. Due to the recourse provisions in the
arrangement, Headway accounts for transactions under the credit facility as secured borrowings.
As
of October 27, 2022, the White Oak Agreement was paid in full and terminated. See Note 14.
HSBC
Invoice Finance (UK) Ltd – New Facility
On
February 8, 2018, CBSbutler, 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 CBSbutler, Staffing 360 Solutions Limited and The JM Group (collectively, with CML, the “Borrowers”)
as “Connected Clients” as defined in the APD. In 2021, the subsidiaries were reorganized and are now Staffing 360 Solutions
Limited and Clement May. The new Connected Client APDs carry an aggregate Facility Limit of £20,000 across all Borrowers. The obligations
of the Borrowers are secured by a fixed charge and a floating charge on the Borrowers’ respective accounts receivable and are subject
to cross-company guarantees among the Borrowers. In addition, the secured borrowing line against unbilled receivables was increased to
£1,500 for a period of 90 days. In July 2019, the aggregate Facility Limit was extended to £22,500 across all Borrowers.
In January 2022, the secured borrowing line against unbilled receivables was terminated.
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. For the
nine months ended October 1, 2022 and October 2, 2021, the collection of UK factoring facility deferred purchase price totaled $4,683
and $5,234, respectively.
NOTE
5 – GOODWILL
The
following table provides a roll forward of goodwill:
SCHEDULE
OF GOODWILL
| | |
October
1, 2022 | | |
January
1, 2022 | |
| Beginning balance,
gross | |
$ | 23,828 | | |
$ | 31,591 | |
| Acquisition | |
| 5,974 | | |
| - | |
| Accumulated disposition | |
| - | | |
| (1,577 | ) |
| Accumulated impairment losses | |
| - | | |
| (6,073 | ) |
| Currency translation adjustment | |
| (2,106 | ) | |
| (113 | ) |
| Ending balance, net | |
$ | 27,696 | | |
$ | 23,828 | |
Goodwill
represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350, requires that
goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual
basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt.
During the fourth quarter of 2021 the Company identified a triggering event in response the COVID-19 pandemic. In accordance with ASC
350 the Company tested its goodwill for impairment and the Company recognized an impairment with respect to its Staffing UK reporting
unit of $3,104. The impairment resulted from a continued decline in that reporting unit’s revenue which experienced significant
and prolonged declines as a result of the COVID-19 pandemic. To determine the impairment, the Company employed a combination of market
approach (valuations using comparable company multiples), income approach (discounted cash flow analysis) and prevailing market conditions
to derive the fair value of the reporting unit. Under ASU 2017-04, which the Company early adopted, the impairment amount represents
the excess of the carrying value over the fair value of the reporting unit. On May 18, 2022, the Company closed on the acquisition of
Headway (see Note 10). The Company’s estimated value of the Goodwill is $5,974. The estimated value is preliminary and subject
to change.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE
6 – DEBT
SCHEDULE
OF DEBT
| | |
October 1, 2022 | | |
January 1, 2022 | |
| Jackson Investment Group - related party | |
$ | 9,016 | | |
$ | 8,949 | |
| Redeemable Series H Preferred Stock | |
| 9,000 | | |
| - | |
| HSBC Term Loan | |
| 345 | | |
| 809 | |
| Total Debt, Gross | |
| 18,361 | | |
| 9,758 | |
| Less: Debt Discount and Deferred Financing Costs, Net | |
| (660 | ) | |
| (256 | ) |
| Total Debt, Net | |
| 17,701 | | |
| 9,502 | |
| Less: Non-Current Portion | |
| (17,356 | ) | |
| (279 | ) |
| Total Current Debt, Net | |
$ | 345 | | |
$ | 9,223 | |
Jackson
Debt
On
September 15, 2017, the Company entered into a $40,000 note agreement with Jackson (the “2017 Jackson Note”). The proceeds
of the sale of the 2017 Jackson Note were used to repay the existing subordinated notes previously issued to Jackson pursuant to the
existing note purchase agreement in the aggregate principal amount of $11,165 and to fund a portion of the purchase price consideration
of the firstPRO Acquisition and the CBSbutler Acquisition and repay certain other outstanding indebtedness of the Company. The
maturity date for the amounts due under the 2017 Jackson Note was September 15, 2020. The 2017 Jackson Note will accrue interest at 12%
per annum, due quarterly on January 1, April 1, July 1 and October 1 in each year, with the first such payment due on January 1, 2018.
Interest on any overdue payment of principal or interest due under the 2017 Jackson Note will accrue at a rate per annum that is 5% in
excess of the rate of interest otherwise payable thereunder.
On
August 27, 2018, the 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 were
the same as the 2017 Jackson Note. From the proceeds of the additional investment, the Company paid a closing fee of $280 and legal fees
of $39 and issued 19,200 shares of the Company’s common stock as a closing commitment fee.
On
August 29, 2019, the Company entered into a Fourth Omnibus Amendment and Reaffirmation Agreement with Jackson, as lender, which, among
other things, amends that certain amended and restated note purchase agreement, dated as of September 15, 2017, as amended (the “Existing
Note Purchase Agreement”). Pursuant to the Existing Note Purchase Agreement, the Company agreed to issue and sell to Jackson that
certain 18% Senior Secured Note due December 31, 2019 in the aggregate principal amount of $2,538 (the “2019 Jackson Note”).
All accrued and unpaid interest on the outstanding principal balance of the 2019 Jackson Note was due and payable monthly on the first
day of each month, beginning on October 1, 2019. Pursuant to the terms of the 2019 Jackson Note, if the 2019 Jackson Note was not repaid
by December 31, 2019, the Company was required to issue 1,667 shares of its common stock to Jackson on a monthly basis until the 2019
Jackson Note is fully repaid, subject to certain exceptions to comply with Nasdaq listing standards. The Company booked additional expense
of $324 related to the issuances of 8,334 shares of common stock to Jackson in 2020. The Company paid the 2019 Jackson Note in full
on May 28, 2020.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
On
October 26, 2020, the Company, certain of its subsidiaries and Jackson entered into the Amended Note Purchase Agreement and the 2020
Jackson Note, which amended and restated the Existing Note Purchase Agreement. The Amended Note Purchase Agreement refinanced an aggregate
of approximately $35,700 of debt provided by Jackson, extending the maturity to September 30, 2022. In connection with the amendment
and restatement, the Company paid Jackson an amendment fee of $488. The Company accounted for the Amended Note Purchase Agreement as
a modification of the debt. Accordingly, fees totaling $488 paid to Jackson as well as the modification of 15,092 warrants from a strike
price of $99.60 to $60.00 and the extension of the warrant expiration date of January 26, 2024 to January 26, 2026, resulting in a fair
value adjustment of $126, were recorded as additional debt discount which will be amortized over the term of the 2020 Jackson Note using
the effective interest method. On October 27, 2022, the Company amended the existing 2020 Jackson Note. See Note 14.
Under
the terms of the Amended Note Purchase Agreement and the 2020 Jackson Note, the Company is required to pay interest on the debt at a
per annum rate of 12%. The interest is payable monthly in cash; provided that, the Company may elect to pay up to 50% of monthly interest
in-kind (“PIK Interest”) by adding such PIK Interest to the outstanding principal balance of the 2020 Jackson Note. For any
month that the Company elects to pay interest in-kind, the Company is required to pay Jackson a fee in shares of our common stock (“PIK
Fee Shares”) in an amount equal to $25 divided by the average closing price, as reported by The Nasdaq Capital Market (“Nasdaq”),
of such shares of common stock over the 5 trading days prior to the applicable monthly interest payment date. If such average market
price is less than $30.00 or is otherwise undeterminable because such shares of common stock are no longer publicly traded or the closing
price is no longer reported by Nasdaq, then the average closing price for these purposes shall be deemed to be $30.000, and if such average
closing price is greater than $210.00, then the average closing price for these purposes shall be deemed to be $210.00. For the period
of November 2020 through and including March 2021, each monthly interest amount due and payable was reduced by $166, and for the period
commencing April 2021 through and including September 2021, each monthly interest amount due and payable was increased by $166.
Under
the terms of the Amended Note Purchase Agreement, the Company was required to make a mandatory prepayment of the principal amount of
the 2020 Jackson Note of not less than $3,000 no later than January 31, 2021. Payments were made in December 2020 and January 2021 totaling
$3,029 in full satisfaction of the mandatory prepayment.
On
January 4, 2021, the Company used $1,558 in net proceeds from a securities purchase agreement dated December 30, 2020 and redeemed $1,168
of the 2020 Jackson Note with an outstanding principal amount of $33,878 and redeemed 390 shares of the Series E Convertible Preferred
Stock with an aggregate value of $390. Following the redemption of the portion of the 2020 Jackson Note and Series E Convertible Preferred
Stock, the 2020 Jackson Note balance was $32,710 and the Company had 10,690 shares of Series E Convertible Preferred Stock outstanding
with an aggregate stated value of $10,690.
On
February 5, 2021, the Company received the Limited Consent from Jackson, the sole holder of the Company’s outstanding shares of
Series E Convertible Preferred Stock, to use approximately (i) 75% of the net proceeds from the February 2021 Offering to redeem a portion
of the 2020 Jackson Note, which had an outstanding principal amount of $32,710 as of February 9, 2021, and (ii) 25% of the net proceeds
from the February 2021 Offering to redeem a portion of the Company’s Series E Convertible Preferred Stock. Pursuant to the Limited
Consent, upon closing of the February 2021 Offering, the Company paid $13,556 of the 2020 Jackson Note and redeemed 4,518 shares of the
Series E Convertible Preferred Stock.
On
April 21, 2021, the Company entered into the April 2021 Purchase Agreement. The net proceeds to the Company were approximately $4,200,
after deducting placement agent fees and estimate offering expenses payable by the Company. The Company used $3,200 of the net proceeds
to redeem a portion of the 2020 Jackson Note, which had an outstanding principal amount of $19,154 immediately prior to such redemption.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
On
July 20, 2021, the Company entered into the July 2021 Purchase Agreement. As the Company’s Series G Preferred Stock (as defined
below) was outstanding, it was required to use the proceeds of any sales of equity securities, including the common stock offered in
the July 2021 Offerings, exclusively to redeem any outstanding shares of Series G Preferred Stock, subject to certain limitations. The
Company received a waiver from Jackson, the sole holder of the outstanding shares of its Series G Preferred Stock, to pay accrued and
unpaid interest and prepay a portion of the outstanding principal balance of the 2020 Jackson Note and paid accrued and unpaid dividends
on the Series G-1 Convertible Preferred Stock upon conversion of such preferred stock into the New Note (as defined below). The net proceeds
to the Company from the July 2021 Offerings were approximately $6,760, after deducting placement agent fees and estimated offering expenses
payable by the Company. The Company used $5,000 of the net proceeds to redeem a portion of the 2020 Jackson Note, which had an outstanding
principal amount of approximately $21,700 immediately prior to such redemption.
On
July 21, 2021, the Company entered into a non-cash financing transaction whereby it exchanged its outstanding 6,172 shares of Series
G Convertible Preferred Stock (“Series G Preferred Stock”) and 1,561 shares of Series G-1 Convertible Preferred Stock for
senior indebtedness by entering into a new 12% Senior Secured Note, in aggregate principal amount of $7,733 (the “New Note”),
which amount represented all of the outstanding Series G Preferred Stock, totaling $6,172, and Series G-1 Convertible Preferred Stock,
totaling $1,561, held by Jackson as of July 21, 2021, under the Amended Note Purchase Agreement. The New Note was deemed issued pursuant
to the Amended Note Purchase Agreement.
Under
the terms of the New Note, the Company is required to pay interest on the New Note at a per annum rate of 12%, in cash only, accruing
from and after the date of the New Note and until the entire principal balance of the New Note shall have been repaid in full, and on
and at all times during which the “Default Rate” (as defined in the Amended Note Purchase Agreement) applies, to the extent
permitted by law, at a per annum rate of 17%. The entire outstanding principal balance of the New Note is due and payable in full on
September 30, 2022. Upon an Event of Default (as defined in the Amended Note Purchase Agreement), the principal of the New Note and all
accrued and unpaid interest thereon may be accelerated and declared or otherwise become due and payable in accordance with the terms
of the Amended Note Purchase Agreement.
On
August 5, 2021, the Company entered into the First August 2021 Purchase Agreement. The net proceeds to the Company from the First August
2021 Offerings were approximately $3,217, after deducting placement agent fees and offering expenses payable by the Company. The Company
used a portion of the net proceeds from the First August 2021 Offerings together with other cash on hand to redeem $3,281 of the 2020
Jackson Note, which had an outstanding principal amount of approximately $16,730 immediately prior to such redemption.
On
October 28, 2021, the Company entered into a securities purchase agreement (the “November 2021 Private Placement”). This
placement closed on November 2, 2021 and was announced on November 3, 2021. The net proceeds of the November 2021 Private Placement were
approximately $9.25 million. The Company used a portion of the net proceeds from the November 2021 Private Placement to redeem $4,500
of the 2020 Jackson Note, which had an outstanding principal amount of approximately $13,449 immediately prior to such redemption.
The
entire outstanding principal balance of the 2020 Jackson Note was due and payable on September 30, 2022. On October 27, 2022, the Company entered into the Third Amended and Restated
Note Purchase Agreement with Jackson, which amended and restated the Amended Note Purchase Agreement, dated October 26, 2020, as amended,
and issued to Jackson the Jackson Note, with a remaining outstanding principal balance of approximately $9.0 million (See Note 14).
Debt
Exchange Agreement
On
November 15, 2018, the Company, entered into a Debt Exchange Agreement with Jackson, pursuant to which, among other things, Jackson agreed
to exchange $13,000 (the “Exchange Amount”) of indebtedness of the Company held by Jackson in exchange for 13,000 shares
of Series E Preferred Stock, par value $0.00001 per share.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
Series E Preferred Stock ranked senior to the Company’s common stock and any other series or classes of preferred stock issued
or outstanding with respect to dividend rights and rights on liquidation, winding up and dissolution. Each share of Series E Preferred
Stock was initially convertible into 561 shares of common stock of the Company at any time after October 31, 2020 or the occurrence of
a Preferred Default (as defined in the Certificate of Designation for the Series E Preferred Stock (the “Series E Certificate of
Designation”)). A holder of Series E Preferred Stock was not required to pay any additional consideration in exchange for conversion
of such Series E Preferred Stock into the Company’s common stock. Series E Preferred Stock was redeemable by the Company at any
time at a price per share equal to the stated value ($10,000 per share) plus all accrued and unpaid dividends thereon.
The
Series E Preferred Stock carried quarterly dividend rights of (a) cash dividends accruing (i) at an annual rate per share equal to 12%
from the date of issuance and (ii) 17% after the occurrence of a Preferred Default, and (b) a dividend payable in shares of Series E-1
Convertible Preferred Stock (the “Series E-1 Convertible Preferred Stock” and, collectively with the Series E Convertible
Preferred Stock, the “Series E Preferred Stock”). The shares of Series E-1 Convertible Preferred Stock had all the same terms,
preferences and characteristics as the Series E Preferred Stock (including, without limitation, the right to receive cash dividends),
except (i) Series E-1 Convertible Preferred Stock were mandatorily redeemable by the Company within thirty (30) days after written demand
received from any holder at any time after the earlier of the occurrence of a Preferred Default or November 15, 2020, for a cash payment
equal to the Liquidation Value (as defined in the Series E Certificate of Designation) plus any accrued and unpaid dividends thereon,
(ii) each share of Series E-1 Convertible Preferred Stock was initially convertible into 11 shares of the Company’s common stock,
and (iii) Series E-1 Convertible Preferred Stock could be cancelled and extinguished by the Company if all shares of Series E Convertible
Preferred Stock are redeemed by the Company on or prior to October 31, 2020.
On
October 26, 2020, in connection with the entry into the Amended Note Purchase Agreement, the Company filed with the Secretary of State
of the State of Delaware the second Certificate of Amendment (the “Amendment”) to the Series E Certificate of Designation.
Under the amended terms, holders of Series E Preferred Stock were entitled to monthly cash dividends on Series E Preferred Stock at a
per annum rate of 12%. At the Company’s option, up to 50% of the cash dividend on the Series E Convertible Preferred Stock could
be paid in kind by adding such 50% portion to the outstanding liquidation value of the Series E Convertible Preferred Stock (the “PIK
Dividend Payment”), commencing on October 26, 2020 and ending on October 25, 2020. If the PIK Dividend Payment was elected, a holder
of Series E Preferred Stock was entitled to additional fee to be paid in shares of our common stock an amount equal to $10,000 divided
by the average closing price, as reported by Nasdaq of such shares of common stock over the 5 trading days prior to the applicable monthly
interest payment date. If such average market price was less than $35.00 or was otherwise undeterminable because such shares were no
longer publicly traded or the closing price was no longer reported by Nasdaq, then the average closing price for these purposes was to
be deemed to be $35.00, and if such average closing price were greater than $210.00 then the average closing price for these purposes
would be deemed to be $210.00. Dividends on the Series E-1 Convertible Preferred Stock could only be paid in cash. If the Company failed
to make dividend payments on the Series E Convertible Preferred Stock, it would be an event of default under the Amended Note Purchase
Agreement.
Under
the terms of the Amendment, shares of Series E-1 Convertible Preferred Stock were convertible into common stock at a conversion rate
equal to the liquidation value of each share of Series E-1 Convertible Preferred Stock divided by $60.00 per share commencing October
31, 2020. Each share of Series E-1 Convertible Preferred Stock had a liquidation value of $10,000 per share. The shares of Series E Convertible
Preferred Stock were also convertible into shares of common stock after October 31, 2022. The conversion rate for the Series E Convertible
Preferred Stock was equal to the liquidation value of each share of Series E Convertible Preferred Stock divided by $60.00 per share.
Each share of Series E Convertible Preferred Stock had a liquidation value of $10,000 per share. The Amendment resulted in the original
conversion price of $106.80 and $99.60 of the Series E Convertible Preferred Stock and E-1 Convertible Preferred Stock, respectively,
being reduced to $60.00 for both instruments.
The
Company accounted for the Amendment as a modification to the Series E Convertible Preferred Stock and Series E-1 Convertible Preferred
Stock. The change in fair value as a result of the modification amounted to $410 and was recognized as a deemed dividend as of the fiscal
year ended January 2, 2021. Further, the Company recognized a beneficial conversion feature (BCF) of $4,280 as a result of the decrease
in the conversion price to $60.00 in comparison to the Company’s stock price on the date of the Amendment. The BCF was recognized
as a deemed dividend. As the Company lacked retained earnings at the time of determination, the deemed dividend was recorded as a reduction
in additional paid-in capital resulting in a net impact to additional paid-in capital of $0.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Under
the terms of the Consent and the Series E Certificate of Designation, in consideration for Jackson’s consent to the firstPRO
Transaction, the Initial Payment was used to redeem a portion of the Series E Preferred Stock, and the Escrow Funds, subject to the forgiveness
of PPP Loan, were agreed to be used to redeem a portion of the Series E Preferred Stock. As this provision results in a contingent redemption
feature, approximately $2,100 of the Series E Preferred Stock was reclassified to mezzanine equity during the year ended January 1, 2022.
On July 22, 2021, after conversion of the Series G Preferred Stock to the New Note, the Company redeemed $2,080 of the 2020 Jackson Note
using the Escrow Funds.
Lastly,
under the terms of the Limited Consent and Waiver with Jackson dated February 5, 2021, it was agreed that to the extent that any of the
PPP Loans are forgiven after the February 2021 Offering, Jackson may convert the Series E Convertible Preferred Stock and Series E-1
Convertible Preferred Stock that remains outstanding into a secured note that is substantially similar to the 2020 Jackson Note. As this
provision results in a contingent redemption feature, approximately $4,100 of the Series E Preferred Stock was reclassified to mezzanine
equity. The Company assessed the fair value of the instrument just before and after this modification and recorded a deemed dividend
totaling $389 upon remeasurement of the Series E Preferred Stock.
Jackson
Waivers
On
February 5, 2021, the
Company entered into a Limited Consent and Waiver with Jackson whereby, among other things, Jackson agreed that we may use 75% of the
proceeds from the offering to redeem a portion of the 2020 Jackson Note, and 25% of the net proceeds from the offering to redeem a portion
of the Base Series E Preferred Stock notwithstanding certain provisions of the certificate of designation for the Base Series E Preferred
Stock that would have required the Company to use all the proceeds from the offering to redeem the Base Series E Preferred Stock.
In addition, the Company also agreed
in the Limited Consent and Waiver to additional limits on its ability to incur other indebtedness, including limits on advances under
our revolving loan facility with MidCap. The Company also agreed that to the extent that any of our PPP Loans are forgiven after the
offering, Jackson may convert the Base Series E Preferred Stock and Series E-1 Preferred Stock that remains outstanding into a secured
note that is substantially similar to the 2020 Jackson Note.
Series
G Preferred Stock – Related Party
On
May 6, 2021, the Company, entered into an Exchange Agreement with Jackson (the “Exchange Agreement”), pursuant to which,
among other things, Jackson agreed to exchange 6,172 shares of the Company’s Series E Convertible Preferred Stock and 1,493 shares
of the Series E-1 Preferred Stock for an equivalent number of shares of the Company’s newly issued Series G Convertible Preferred
Stock and Series G-1 Convertible Preferred Stock, respectively (collectively, the “Series G Preferred Stock” and the transaction,
the “Exchange”). The Series G Preferred Stock was subject to the same terms stated in the Limited Waiver, as defined herein
and described in Note 12.
The
Series G Preferred Stock ranked senior to each of the Company’s common stock, Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock, and any other classes and series of stock of the Company now or hereafter authorized,
issued or outstanding, which by their terms expressly provide that they are junior to the Series G Preferred Stock or which do not specify
their rank (which includes the Series F Convertible Preferred Stock). Each share of Series G Preferred Stock was initially convertible
into 1,000 shares of common stock at any time from and after, (i) with respect to the Series G Preferred Stock, the earlier of October
31, 2022 or the occurrence of a default and, (ii) with respect to the Series G-l Convertible Preferred Stock, October 31, 2020. A holder
of Series G Preferred Stock was not required to pay any additional consideration in exchange for conversion of the Series G Preferred
Stock into the Company’s common stock.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
Series G Preferred Stock carried monthly dividend rights of (a) cash dividends accruing (i) at an annual rate per share equal to 12%
from the date of issuance (plus any accrued dividends with respect to the Series E Preferred Stock unpaid as of the date of the Exchange)
and (ii) 17% after the occurrence of a default, and (b) a dividend payable in shares of Series G-1 Convertible Preferred Stock. The shares
of Series G-1 Convertible Preferred Stock had all the same terms, preferences and characteristics as the Series G Preferred Stock (including,
without limitation, the right to receive cash dividends), except Series G-1 Convertible Preferred Stock were mandatorily redeemable by
the Company within thirty (30) days after written demand received from any holder at any time after the earlier of the occurrence of
a Preferred Default or September 30, 2022, for a cash payment equal to the liquidation value plus any accrued and unpaid dividends thereon.
On
July 20, 2021, the Company entered into the July 2021 Purchase Agreement. As the Company’s Series G Preferred Stock was outstanding,
it was required to use the proceeds of any sales of equity securities, including the common stock offered in the July 2021 Registered
Direct Offering, exclusively to redeem any outstanding shares of Series G Preferred Stock, subject to certain limitations. The Company
received a waiver from Jackson, the sole holder of the outstanding shares of its Series G Preferred Stock, to pay accrued and unpaid
interest and prepay a portion of the outstanding principal balance of the 2020 Jackson Note, and paid accrued and unpaid dividends on
the Series G-1 Convertible Preferred Stock upon conversion of such preferred stock into the New Note. While under the terms of the Certificate
of Designation governing the Series G Preferred Stock and Series G-1 Preferred Stock, 6,172 shares and 1,561 shares of common
stock were issuable upon the conversion of Series G Preferred Stock and Series G-1 Preferred Stock, respectively, the shares of Series
G Preferred Stock and Series G-1 Convertible Preferred Stock were not converted to common stock and instead were converted on July 21,
2021 to debt. The terms of this note match the terms of the Amended Note Purchase Agreement from October 26, 2020.
As
of October 1, 2022, there were no shares of Series G or Series G-1 Convertible Preferred Stock outstanding.
HSBC
Loan
On
February 8, 2018, CBS Butler Holdings Limited (“CBS Butler”), Staffing 360 Solutions Limited and The JM Group, entered into
a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’
accounts receivable up to an aggregate amount of £11,500 across all three subsidiaries. The terms of the arrangement provide for
HSBC to fund 90% of the purchased accounts receivable upfront and, a secured borrowing line of 70% of unbilled receivables capped at
£1,000 (within the overall aggregate total facility of £11,500). The arrangement has an initial term of 12 months, with an
automatic rolling three-month extension and carries a service charge of 1.80%. 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. On April 20, 2020, the terms of the loan with HSBC were amended
such that no capital repayments would be required between April 2020 to September 2020, and only interest payments would be made during
such time. Since such time, capital repayments have resumed. On May 15, 2020, the Company entered into a three-year term loan with HSBC
in the UK for £1,000. As of October 1, 2022, the balance for the HSBC loan is $345.
Redeemable
Series H Preferred Stock
On
May 18, 2022, the Company entered into a stock purchase agreement with Headway. Consideration for the Purchase of 100% of Headway was
the issuance of an aggregate of 9,000,000 shares of Series H Preferred Stock.
Each share of Series H Preferred Stock shall have a par value of $0.00001 per share and a stated value equal to $1.00 and is convertible
at any time into an aggregate of 350,000 shares of common stock. This is determined by dividing the stated value of such share of Preferred
Stock by the conversion Price. The conversion price equals $25.714. Holders of Series H Preferred Stock are entitled to quarterly cash
dividends at a per annum rate of 12%. The shares of the Series H Preferred Stock may be redeemed by the Company through a cash payment
at a per share equal to the stated value, plus all accrued but unpaid dividends, at any time. On May 18, 2025, the Company shall
redeem all of the shares of the Series H Preferred Stock. The redemption price represents the number of shares of the Preferred Stock
(9,000,000), plus all accrued but unpaid dividends, multiplied by the Stated Value ($1). On May 18, 2022, the Company paid $14 towards
the Series H Preferred Stock balance. As of October 1, 2022 the redemption price was $9,000.
In
accordance with ASC 480-10-15-3, the agreement includes certain rights and options including: redemption, dividend, voting, and conversion
which have characteristics akin to liability and equity. The Series H Preferred Stock is redeemable and has a defined maturity date upon
the third anniversary of the original issue date. As such and based on the authoritative guidance, the Series H Preferred Stock meets
the definition of a debt instrument. The Company obtained a third-party valuation report to calculate the fair value of Series H Preferred
Stock. As of May 18, 2022, the fair value of the Redemption Price was calculated as $8,265 utilizing the CRR Binomial Lattice model.
The difference in fair value was $735 is accounted as a deferred financing charge and will be amortized over the life of the term. The
quarterly dividends will be reflected as interest expense.
NOTE
7 – LEASES
As
of October 1, 2022 and January 1, 2022, as a result of the adoption of ASC 842, we recorded a right of use (“ROU”) lease
asset of approximately $8,693 with a corresponding lease liability of approximately $9,487 and ROU of approximately $5,578 with a corresponding
lease liability of approximately $5,574, respectively, based on the present value of the minimum rental payments of such leases. The
Company’s finance leases are immaterial both individually and in the aggregate.
In
September 2021, the Company entered into a new lease agreement for an office lease in New York for a term of 8 years. This resulted in
increases to right of use assets and lease liabilities of $2,761. On May 18, 2022, the Company acquired Headway and assumed an office
lease in North Carolina for a remaining term of six years and eight months. This resulted in increases to right of use assets of $1,635
and lease liabilities of $1,829. In April 2022, the Company entered into a new lease agreement for an office lease in London, England
for a term of 10 years. This resulted in increases to right of use assets and lease liabilities of $2,048. In May 2022, the Company entered
into a new lease agreement for an office lease in Redhill, England for a term of 10 years. This resulted in increases to right of use
assets and lease liabilities of $1,555.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Quantitative
information regarding the Company’s leases for the three months ended October 1, 2022 is as follows:
SCHEDULE OF LEASE, COST
| Lease Cost | |
Classification | |
Fiscal 2022 | |
| Operating lease cost | |
SG&A Expenses | |
| 1,285 | |
| | |
| |
| | |
| Other information | |
| |
| | |
| Weighted average remaining lease term (years) | |
| |
| 6.27 | |
| Weighted average discount rate | |
| |
| 6.30 | % |
SCHEDULE OF OPERATING LEASE LIABILITY MATURITY
| Future Lease Payments | |
| |
| | |
| 2022 | |
| |
$ | 365 | |
| 2023 | |
| |
| 1,688 | |
| 2024 | |
| |
| 1,618 | |
| 2025 | |
| |
| 1,531 | |
| 2026 | |
| |
| 1,545 | |
| Thereafter | |
| |
| 5,546 | |
| Total | |
| |
$ | 12,293 | |
| Less: Imputed Interest | |
| |
| 2,806 | |
| Operating lease, liability | |
| |
$ | 9,487 | |
| | |
| |
| | |
| Leases - Current | |
| |
$ | 1,010 | |
| Leases - Non current | |
| |
$ | 8,477 | |
As
most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments. This methodology was deemed to yield a
measurement of the Right of Use Asset and associated lease liability that was appropriately stated in all material respects.
NOTE
8 – STOCKHOLDERS’ EQUITY
The
Company issued the following shares of common stock during the nine months ended October 1, 2022:
SCHEDULE
OF STOCKHOLDERS EQUITY
| | |
Number of Common Shares | | |
Fair Value
of Shares | | |
Fair Value at Issuance
(minimum and maximum | |
| Shares issued to/for: | |
Issued | | |
Issued | | |
per share) | |
| Equity raise | |
| 657,858 | | |
$ | 4,013 | | |
$ | 6.10 | | |
$ | 6.10 | |
| Board and committee members | |
| 2,000 | | |
| 17 | | |
| 7.40 | | |
| 9.65 | |
| Consultants | |
| 1,000 | | |
| 7 | | |
| 7.40 | | |
| 7.40 | |
| | |
| 660,858 | | |
$ | 4,037 | | |
| | | |
| | |
The
Company issued the following shares of common stock during the nine months ended October 2, 2021:
| | |
Number of Common
Shares | | |
Fair Value of Shares | | |
Fair Value at Issuance
(minimum and maximum | |
| Shares issued to/for: | |
Issued | | |
Issued | | |
per share) | |
| Equity raise | |
| 858,532 | | |
$ | 30,315 | | |
$ | 21.00 | | |
$ | 54.00 | |
| Conversion of Series F Preferred Stock | |
| 130,490 | | |
| 4107 | | |
| 31.50 | | |
| 31.50 | |
| Consultants | |
| 167 | | |
| 3 | | |
| 18.40 | | |
| 18.40 | |
| Conversion of Series A Preferred Stock | |
| 451 | | |
| - | | |
| - | | |
| - | |
| Employees | |
| 5,082 | | |
| 275 | | |
| 54.00 | | |
| 54.00 | |
| Board and Board committee members | |
| 94 | | |
| 5 | | |
| 51.60 | | |
| 51.60 | |
| Long Term Incentive Plan | |
| 2,584 | | |
| 133 | | |
| 51.60 | | |
| 51.60 | |
| | |
| 997,400 | | |
$ | 34,838 | | |
| | | |
| | |
Reverse
Stock Split
The
Company effected the Reverse Stock Split on June 24, 2022.
Increase
of Authorized Common Stock
On
December 27, 2021, the Company’s stockholders approved an amendment to the Amended and Restated Certificate of Incorporation of
the Company to effect an increase to its number of shares of authorized common stock, par value $0.00001 from 40,000,000 to 200,000,000.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Series
A Preferred Stock – Related Party
As
of both October 1, 2022 and October 2, 2021, the Company had $125
of dividends payable to the Series A Preferred
Stockholder.
Series
J Preferred Stock
On
May 3, 2022, the Company’s Board of Directors (the “Board”) declared a dividend of one one-thousandth of a share of
Series J Preferred Stock, par value $0.00001 per share (“Series J Preferred Stock”) for each outstanding share of common
stock to stockholders of record as of 5:00 p.m. Eastern Time on May 13, 2022. The outstanding shares of Series J Preferred Stock were
entitled to vote together with the outstanding shares of the Company’s common stock, as a single class, exclusively with respect
to a proposal giving the Board the authority, as it determines appropriate, to implement a reverse stock split within twelve months following
the approval of such proposal by the Company’s stockholders (the “Reverse Stock Split Proposal”), as well as any proposal
to adjourn any meeting of stockholders called for the purpose of voting on the Reverse Stock Split Proposal (the “Adjournment Proposal”).
The
Company held a special meeting of stockholders on June 23, 2022 (the “Special Meeting”) for the purpose of voting on a Reverse
Stock Split Proposal and an Adjournment Proposal. Each share of Series J Preferred Stock entitled the holder thereof to 1,000,000 votes
per share and each fraction of a share of Series J Preferred Stock had a ratable number of votes. Thus, each one-thousandth of a share
of Series J Preferred Stock entitled the holder thereof to 1,000 votes. All shares of Series J Preferred Stock that were not present
in person or by proxy at the Special Meeting as of immediately prior to the opening of the polls at such meeting (the “Initial
Redemption Time”) were automatically redeemed by the Company at the Initial Redemption Time before the vote without further action
on the part of the Company or the holder of shares of Series J Preferred Stock (the “Initial Redemption”). All shares that
were not redeemed pursuant to the Initial Redemption were redeemed automatically upon the approval by the Company’s stockholders
of the Reverse Stock Split Proposal at the Special Meeting (the “Subsequent Redemption”). As a result, no shares of Series
J Preferred Stock remain outstanding.
Under
the Certificate of Designations, each holder of Series J Preferred Stock was entitled to consideration in connection with the applicable
redemption of $0.0001 in cash for each ten whole shares of Series J Preferred Stock beneficially owned at the applicable redemption time.
The Company issued 17,618.3 shares of Series J Preferred Stock. Accordingly, the aggregate consideration due to the holders of Series
J Preferred Stock in connection with the redemptions is $0.1761 (minus amounts disregarded due to rounding each beneficial owner’s
holdings of Series J Preferred Stock down to the nearest integer multiple of ten for purposes of calculating the applicable redemption
price).
Restricted
Shares
The
Company has issued shares of restricted stock to employees and members of the Board under its 2015 Omnibus Incentive Plan, 2016 Omnibus
Incentive Plan, 2020 Omnibus Plan and 2021 Omnibus Inventive Plan. Under these plans, the shares are restricted for a period of three
years from issuance. As of Fiscal 2021, the Company has issued a total of 1,000 restricted shares of common stock to employees and Board
members that remain restricted. In accordance with ASC 718, Compensation – Stock Compensation, the Company recognizes stock-based
compensation from restricted stock based upon the fair value of the award at issuance over the vesting term on a straight-line basis.
The fair value of the award is calculated by multiplying the number of restricted shares by the Company’s stock price on the date
of issuance. The impact of forfeitures has historically been immaterial to the financial statements. The Company recorded compensation
expense associated with these restricted shares of $21, $5, $64 and $323, for the three and nine months ended October 1, 2022
and October 2, 2021, respectively. The table below is a roll forward of unvested restricted shares issued to employees and board of directors.
SCHEDULE
OF UNVESTED RESTRICTED SHARES ACTIVITY
| | |
| | |
Weighted | |
| | |
Restricted | | |
Average | |
| | |
Shares | | |
Price Per Share | |
| Balance at January 2, 2021 | |
| 1,030 | | |
$ | 75.00 | |
| Granted | |
| 19,115 | | |
| 29.20 | |
| Vested/adjustments | |
| (14,198 | ) | |
| 29.00 | |
| Balance at January 1, 2022 | |
| 5,947 | | |
| 50.00 | |
| Granted | |
| 2,000 | | |
| 8.55 | |
| Vested/adjustments | |
| (259 | ) | |
| 101.60 | |
| Balance at October 1, 2022 | |
| 7,688 | | |
| 36.64 | |
Warrants
In connection with the private placement
consummated in July 2022 (the “July 2022 Private Placement”), on July 7, 2022, the Company entered into warrant
amendment agreements (the “Warrant Amendment Agreements”) with each of the nine existing participating investors, which
amended warrants to purchase up to 657,858
shares of common stock (prior to amendment, the “Original Warrants”). The Original Warrants had exercise price that
ranged from $18.50
to $38.00
per share and expiration
dates that ranged from July 22, 2026 to November 1, 2026. The Warrant Amendment Agreements reduced the exercise price of the
Original Warrants to $5.85
per share and extended
the expiration date to January 7, 2028, the date that is five and one-half years following the closing of the July 2022 Private Placement. The Company calculated an incremental fair value of $837
by calculating the excess, of the fair value of the modified over the fair value of that instrument immediately before it is
modified. This increase in fair value was recorded in additional paid in capital.
Transactions
involving the Company’s warrant issuances are summarized as follows:
SCHEDULE OF WARRANTS ACTIVITY
| | |
| | |
Weighted | |
| | |
Number of | | |
Average | |
| | |
Shares | | |
Exercise Price | |
| Outstanding at January 2, 2021 | |
| 26,285 | | |
| 59.40 | |
| Issued | |
| 995,452 | | |
| 25.97 | |
| Exercised | |
| (49,242 | ) | |
| 0.0001 | |
| Expired or cancelled | |
| — | | |
| — | |
| Outstanding at January 1, 2022 | |
| 972,495 | | |
| 26.88 | |
| Issued | |
| 1,365,053 | | |
| 5.91 | |
| Exercised | |
| — | | |
| — | |
| Expired or cancelled | |
| (658,192 | ) | |
| 26.08 | |
| Outstanding at October 1, 2022 | |
| 1,679,356 | | |
| 10.21 | |
The
following table summarizes warrants outstanding as of October 1, 2022:
SCHEDULE OF WARRANTS OUTSTANDING
| | |
| | |
Weighted Average | | |
| |
| | |
Number | | |
Remaining | | |
Weighted | |
| | |
Outstanding | | |
Contractual | | |
Average | |
| Exercise Price | |
and Exercisable | | |
Life (years) | | |
Exercise price | |
| $5.80 - $3,750 | |
| 1,679,690 | | |
| 5.26 | | |
| 10.21 | |
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Stock
Options
A
summary of option activity during the nine months ended October 1, 2022 is presented below:
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY
| | |
| | |
Weighted | |
| | |
| | |
Average | |
| | |
Options | | |
Exercise Price | |
| Outstanding at January 2, 2021 | |
| 1,302 | | |
| 1,665.60 | |
| Granted | |
| — | | |
| — | |
| Exercised | |
| — | | |
| — | |
| Expired or cancelled | |
| — | | |
| — | |
| Outstanding at January 1, 2022 | |
| 1,302 | | |
| 1,665.60 | |
| Granted | |
| 50,000 | | |
| 7.80 | |
| Exercised | |
| — | | |
| — | |
| Expired or cancelled | |
| — | | |
| — | |
| Outstanding at October 1, 2022 | |
| 51,302 | | |
| 50.06 | |
The
Company recorded share-based payment expense of $17, $6, $54 and $19 for the three and nine months ended October 1, 2022 and October
2, 2021, respectively.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Headway
Earn-out Liability
Pursuant
to the Headway acquisition that closed on May 18, 2022, the purchase price includes an earnout payment totaling up to $4,450 of earn
out provision. Upon the attainment of certain trailing twelve month (“TTM”) EBITDA achievements the Company will pay to the
Headway seller a contingent payment in accordance with the following:
Adjusted
EBITDA of $0 or less than $0= no Contingent Payment
Adjusted
EBITDA of $500 x 2.5 multiple= $1,250 Contingent Payment
Adjusted
EBITDA of $1,000 x 2.5 multiple= $2,500 Contingent Payment
Adjusted
EBITDA of $1,800 x 2.5 multiple= $4,500 Contingent Payment
Adjusted
EBITDA of $2,000 or more x 2.5 multiple= $5,000 Contingent Payment
The
Company performed an analysis over the contingent payment and prepared a forecast to determine the likelihood of the Adjusted EBITDA
payout. The adjusted EBITDA TTM forecast, as of April 2023, is above the $2,000 threshold amount, such that the $5,000 was recorded as
consideration. The estimated value calculated in the forecast is preliminary and subject to change. A payment of $160 was made on May
18, 2022, the date of the Headway closing. In addition, $550 related to a retention bonus of certain Headway employees was recorded as
other current liabilities. The balance at October 1, 2022 is $4,290.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
Legal
Proceedings
Whitaker
v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.
On
December 5, 2019, former owner of Key Resources, Inc. (“KRI”), Pamela D. Whitaker (“Whitaker” or “Plaintiff”),
filed a complaint in Guilford County, North Carolina (the “North Carolina Action”) asserting claims for breach of contract
and declaratory judgment against Monroe Staffing Services LLC (“Monroe”) and the Company (collectively, the “Defendants”)
arising out of the alleged non-payment of certain earn-out payments and interest purportedly due under a Share Purchase Agreement pursuant
to which Whitaker sold all issued and outstanding shares in her staffing agency, KRI, to Monroe in August 2018. Whitaker sought $4,054
in alleged damages. As of October 1, 2022, the $4,054 is included with the Headway earnout as part of Earnout liabilities.
Defendants
removed the action to the Middle District of North Carolina on January 7, 2020, and Plaintiff moved to remand on February 4, 2020. Briefing
on the motion to remand concluded on February 24, 2020. Separately, Defendants moved to dismiss the action on January 14, 2020, based
on Plaintiff’s failure to state a claim, improper venue, and lack of personal jurisdiction as to defendant Staffing 360 Solutions,
Inc. Alternatively, Defendants sought a transfer of the action to the Southern District of New York, based on the plain language of the
Share Purchase Agreement’s forum selection clause. Briefing on Defendants’ motion to dismiss concluded on February 18, 2020.
On February 28, 2020, Plaintiff moved for leave to file an amended complaint. Defendants filed their opposition to the motion for leave
on March 19, 2020. Plaintiff thereafter filed a reply.
On
June 29, 2020, Magistrate Judge Joe L. Webster issued a Report and Recommendation on the pending motions, recommending that
Defendants’ motion to dismiss be granted with regard to Defendants’ request to transfer the matter to the Southern
District of New York, and denied in all other regards without prejudice to Defendants raising those arguments again in the new
forum. Magistrate Judge Webster also recommended that Plaintiff’s motion to remand be denied and motion to amend be left to
the discretion of the Southern District of New York.
Plaintiff
filed an objection to the Report and Recommendation on July 9, 2020. Defendants responded on July 23, 2020. On February 19, 2021, the
District Court issued a decision that reversed the Magistrate Judge’s Order. The District Court granted Plaintiff’s motion
to remand and denied Defendants’ motion to dismiss as moot. Defendants filed a Notice of Appeal to the Fourth Circuit on February
25, 2021, and filed their opening brief on April 21, 2021. Plaintiff filed her response brief on May 21, 2021, and Defendants replied
on June 11, 2021. Oral argument was held on March 9, 2022. On July 22, 2022, the Fourth Circuit issued a decision to vacate the District
Court’s decision and ordered the North Carolina District Court to transfer the North Carolina Action to the Southern District of
New York for adjudication there in accordance with the Share Purchase Agreement’s forum selection clause.
Monroe Staffing Services, LLC & Staffing 360
Solutions, Inc. v. Whitaker
Separately,
on February 26, 2020, the Company and Monroe filed an action against Whitaker in the United States District Court for the Southern District
of New York (Case No. 1:20-cv-01716) (the “New York Action”.) The New York Action concerns claims for breach of contract
and fraudulent inducement arising from various misrepresentations made by Whitaker to the Company and Monroe in advance of, and included
in, the share purchase agreement. The Company and Monroe are seeking damages in an amount to be determined at trial but in no event less
than $6,000. On April 28, 2020, Whitaker filed a motion to dismiss the New York Action on both procedural and substantive grounds. On
June 11, 2020, Monroe and the Company filed their opposition to Whitaker’s motion to dismiss. On July 9, 2020 Whitaker filed reply
papers in further support of the motion.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
On
October 13, 2020, the Court denied Whitaker’s motion to dismiss, in part, and granted the motion, in part. The Court rejected Whitaker’s
procedural arguments but granted the motion on substantive grounds. However, the Court ordered that Monroe and the Company may seek leave
to amend the complaint by letter application by December 1, 2020. Monroe and the Company filed a letter of motion for leave to amend
and a proposed Amended Complaint on December 1, 2020. On January 5, 2021, Whitaker filed an opposition to the letter motion. On January
25, 2021, Monroe and the Company filed a reply in further support of the letter motion. On March 9, 2021, the Court granted Monroe and
the Company’s motion for leave to amend, in part, and denied the motion, in part. The Court rejected Monroe and the Company’s
claim for fraudulent inducement but granted the motion for leave to amend their breach of contract claim. Monroe and the Company filed
their amended complaint on March 12, 2021.
On
April 9, 2021, Whitaker renewed her motion to dismiss on procedural grounds, requesting dismissal of the action or, in the
alternative, a stay of the proceeding pending adjudication on the merits of the North Carolina Action. On May 14, 2021, Monroe and
the Company filed an opposition to the motion to dismiss. On June 21, 2021, Whitaker filed a reply in further support of the motion.
The Court referred the case to Magistrate Judge Moses, who held oral argument on the motion on November 9, 2021. On March 8, 2022,
Magistrate Judge Barbara Moses stayed the action pending a decision by the Fourth Circuit on the appeal filed by Monroe and the
Company in The North Carolina Action.
In
light of the Fourth Circuit’s issuance of its July 22, 2022, decision and order transferring the North Carolina Action to the Southern
District of New York on August 1, 2022, the parties to the New York Action wrote to the Magistrate overseeing the matter to request a
conference to address, inter alia, the resumption of discovery in light of the Fourth Circuit’s Order issued on July 22, 2022.
On August 3, 2022, Magistrate Judge Moses lifted the stay previously imposed in the matter and ordered the parties to appear at a teleconference
held on August 16, 2022. At the teleconference, the parties agreed that the North Carolina Action would be dismissed following its transfer
to the Southern District of New York without prejudice to Whitaker’s right to assert the same causes of action, based on substantially
similar allegations, as counterclaims in the New York Action and that Whitaker would have until September 30, 2022, to do so. The Court
ordered the parties to submit a stipulation to this effect by August 23, 2022. Per the Court’s Order, on August 22, 2022, the parties
filed a stipulation and proposed order whereby the parties agreed that Whitaker would voluntarily dismiss the North Carolina Action,
and would reassert the causes of action set forth in the Proposed Amended Complaint filed in the North Carolina Action as counterclaims
in the New York Action; and set forth deadlines for the filing of Whitaker’s answer and counterclaims Plaintiffs’ response
to such counterclaims. The Court so-ordered that stipulation on August 23, 2022.
On September 30, 2022, Whitaker filed an answer and
counterclaims, including (1) a cause of action for breach of contract, which was substantially similar to Whitaker’s breach of contract
in the North Carolina Action (the “Breach of Contract Counterclaim”), and (2) a cause of action under New York and North Carolina
consumer protection statutes, asserting that that Plaintiffs exhibited a pattern and practice in the purchase of businesses similar to
KRI by which they allegedly, “endeavor[ ] to acquire the purchased company at a discount of the agreed-upon purchase price by making
an initial down payment, then reneging on payment of deferred compensation or earnouts and fabricating a pretextual reason for nonpayment
at the time the deferred compensation or earnouts become due” (the Consumer Protection Counterclaim”). For the Consumer Protection
Counterclaim, Defendant seeks to recover the full amount of the Earnout Payments ($4,054)—the very same damages sought by Defendant’s
Contract Counterclaim—as well as trebled damages pursuant to the North Carolina statute, and interest.
On October 12, 2022, the parties filed a joint pre-conference
statement pursuant to the court’s August 24, 2022, order scheduling an initial case management conference. Pursuant to that order,
on October 19, 2022, the Court held an initial case management conference. Later that day, the Court issued an initial case management
order which set forth relevant deadlines, including the close of fact discovery on April 21, 2023, and the close of all discovery (including
expert discovery) on July 19, 2023.
On November 11, 2022, Plaintiffs moved to dismiss the Consumer Protection
Counterclaim.
Monroe
and the Company intend to pursue their claims vigorously.
As
of the date of this filing, we are not aware of any other material legal proceedings to which we or any of our subsidiaries is a party
or to which any of our property is subject, other than as disclosed above.
NOTE
10 – ACQUISITION
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
April 18, 2022, the Company entered into a Stock Purchase Agreement with Headway Workforce Solutions, pursuant to which, among other
things, the Company agreed to purchase all of the issued and outstanding securities of Headway in exchange for (i) a cash payment of
$14, and (ii) 9,000,000 shares of our Series H Preferred Stock, with a value equal to the Closing Payment, as defined in
the Stock Purchase Agreement. On May 18, 2022, the Headway Acquisition closed.
The
purchase price in connection with the Headway Acquisition was $9,000, subject to adjustment as provided in the Stock Purchase
Agreement. Pursuant to certain covenants in the Stock Purchase Agreement, the Company may be subject to a Contingent Payment of up
to $4,450 based on the Adjusted EBITDA (such term as defined in the Stock Purchase Agreement) of Headway during the Contingent
Period (such term as defined in the Stock Purchase Agreement), subject to additional potential adjustments tied to customary purchase price adjustments described in the Stock
Purchase Agreement. The purpose of the acquisition was to expand the market share of the
Company’s primary business by providing future economic benefit of expanding services. The Company anticipates that the
acquisition will provide the Company the ability to integrate the business of Headway into the
Company’s existing temporary professional staffing business in the US within the expected timeframe which would enable the
Company to operate more effectively and efficiently and to create synergy hence lower costs of operations.
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of
their fair values on the acquisition date. The fair values assigned in the preliminary allocation of purchase price included in the table
below are based on information that was available as of the date of the acquisition and such amounts are considered preliminary and are
based on the information that was available as of the date of the acquisition. We were not able to complete our final purchase price
allocation based on the timing of the acquisition and our need to engage third party valuation specialists to assist with the valuation
of the contingent consideration as well as requiring additional time to further analyze the initial amounts recorded. The Company is
in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded
assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, establishment
of potential acquisition contingencies, and the determination of any residual amount that will be allocated to goodwill. As additional
information becomes available, the preliminary purchase price allocation may be revised during the remainder of the measurement period,
which will not exceed 12 months from the acquisition date. Any such revisions or changes may be material.
The
following table summarizes the preliminary allocation of the purchase price of the fair value of the assets acquired and liabilities
assumed at the date of the acquisition:
SCHEDULE OF BUSINESS ACQUISITION PURCHASE PRICE FAIR VALUE
| | |
| | |
| Current assets | |
$ | 10,833 | |
| Fixed assets | |
| 150 | |
| Other non-current assets | |
| 3,070 | |
| Intangible assets | |
| 5,800 | |
| Goodwill | |
| 5,974 | |
| Current liabilities | |
| (12,931 | ) |
| Other non-current liabilities | |
| (167 | ) |
| Consideration | |
$ | 12,729 | |
In
connection with the acquisition of Headway, the Company recorded $5,800 in intangible assets, based on its preliminary internal calculations.
The
Company recorded a total of $449 in third party expenses associated with consummating the Headway acquisition, 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 Headway had occurred as
of January 3, 2022 and January 1, 2021, respectively.
SCHEDULE OF UNAUDITED PRO FORMA
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three
Months Ended | | |
Nine
Months Ended | |
| | |
October
1, 2022 | | |
October
2, 2021 | | |
October
1, 2022 | | |
October
2, 2021 | |
| Revenues | |
$ | 66,120 | | |
$ | 73,492 | | |
$ | 244,609 | | |
$ | 224,072 | |
| Net
Income (Loss) from continuing operations | |
$ | 1,032 | | |
$ | 9,924 | | |
$ | (1,710 | ) | |
$ | 26,645 | |
NOTE
11 – SEGMENT INFORMATION
The
Company generated revenue and gross profit by segment as follows:
SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT
| | |
October 1, 2022 | | |
October 2, 2021 | | |
October 1, 2022 | | |
October 2, 2021 | |
| | |
Three Months Ended | | |
Nine Months Ended | |
| | |
October 1, 2022 | | |
October 2, 2021 | | |
October 1, 2022 | | |
October 2, 2021 | |
| Commercial Staffing - US | |
$ | 25,940 | | |
$ | 29,601 | | |
$ | 83,350 | | |
$ | 88,240 | |
| Professional Staffing - US | |
| 25,756 | | |
| 4,536 | | |
| 45,292 | | |
| 12,215 | |
| Professional Staffing - UK | |
| 14,424 | | |
| 13,364 | | |
| 46,424 | | |
| 46,527 | |
| Total Revenue | |
$ | 66,120 | | |
$ | 47,501 | | |
$ | 175,066 | | |
$ | 146,982 | |
| | |
| | | |
| | | |
| | | |
| | |
| Commercial Staffing - US | |
$ | 5,034 | | |
$ | 5,195 | | |
$ | 15,197 | | |
$ | 15,422 | |
| Professional Staffing - US | |
| 4,715 | | |
| 1,200 | | |
| 8,286 | | |
| 3,146 | |
| Professional Staffing - UK | |
| 2,576 | | |
| 3,229 | | |
| 7,874 | | |
| 8,090 | |
| Total Gross Profit | |
$ | 12,325 | | |
$ | 9,624 | | |
$ | 31,357 | | |
$ | 26,658 | |
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The
following table disaggregates revenues by segments:
| | |
Commercial Staffing - US | | |
Professional Staffing - US | | |
Professional Staffing - UK | | |
Total | |
| | |
Three Months Ended October 1, 2022 | | |
| |
| | |
Commercial Staffing - US | | |
Professional Staffing - US | | |
Professional Staffing - UK | | |
Total | |
| Permanent Revenue | |
$ | 128 | | |
$ | 245 | | |
$ | 1,013 | | |
$ | 1,386 | |
| Temporary Revenue | |
| 25,812 | | |
| 25,511 | | |
| 13,411 | | |
| 64,734 | |
| Total | |
$ | 25,940 | | |
$ | 25,756 | | |
$ | 14,424 | | |
$ | 66,120 | |
| | |
Commercial Staffing - US | | |
Professional Staffing - US | | |
Professional Staffing - UK | | |
Total | |
| | |
Three Months Ended October 2, 2021 | | |
| |
| | |
Commercial Staffing - US | | |
Professional Staffing - US | | |
Professional Staffing - UK | | |
Total | |
| Permanent Revenue | |
$ | 147 | | |
$ | 328 | | |
$ | 858 | | |
$ | 1,333 | |
| Temporary Revenue | |
| 29,454 | | |
| 4,208 | | |
| 12,506 | | |
| 46,168 | |
| Total | |
$ | 29,601 | | |
$ | 4,536 | | |
$ | 13,364 | | |
$ | 47,501 | |
| | |
Commercial Staffing - US | | |
Professional Staffing - US | | |
Professional Staffing - UK | | |
Total | |
| | |
Nine Months Ended October 1, 2022 | | |
| |
| | |
Commercial Staffing - US | | |
Professional Staffing - US | | |
Professional Staffing - UK | | |
Total | |
| Permanent Revenue | |
$ | 357 | | |
$ | 894 | | |
$ | 3,116 | | |
$ | 4,367 | |
| Temporary Revenue | |
| 82,993 | | |
| 44,398 | | |
| 43,308 | | |
| 170,699 | |
| Total | |
$ | 83,350 | | |
$ | 45,292 | | |
$ | 46,424 | | |
$ | 175,066 | |
| | |
Commercial Staffing - US | | |
Professional Staffing - US | | |
Professional Staffing - UK | | |
Total | |
| | |
Nine Months Ended October 2, 2021 | | |
| |
| | |
Commercial Staffing - US | | |
Professional Staffing - US | | |
Professional Staffing - UK | | |
Total | |
| Permanent Revenue | |
$ | 290 | | |
$ | 851 | | |
$ | 2,567 | | |
$ | 3,708 | |
| Temporary Revenue | |
| 87,950 | | |
| 11,364 | | |
| 43,960 | | |
| 143,274 | |
| Total | |
$ | 88,240 | | |
$ | 12,215 | | |
$ | 46,527 | | |
$ | 146,982 | |
| Total Revenue | |
$ | 88,240 | | |
$ | 12,215 | | |
$ | 46,527 | | |
$ | 146,982 | |
As
of October 1, 2022 and January 1, 2022, the Company has assets in the U.S. and the U.K. as follows:
| | |
October 1, 2022 | | |
January 1, 2022 | |
| United States | |
$ | 73,466 | | |
$ | 49,652 | |
| United Kingdom | |
| 22,108 | | |
| 24,038 | |
| Total Assets | |
$ | 95,574 | | |
$ | 73,690 | |
NOTE
12 – RELATED PARTY TRANSACTIONS
In
addition to the Series A Preferred Stock, the following are other related party transactions:
Board
and Committee Members
SCHEDULE OF RELATED PARTY TRANSACTIONS
| | |
Cash Compensation | | |
Shares Issued | | |
Value of Shares Issued | | |
Compensation Expense Recognized | |
| | |
Nine Months Ended October 1, 2022 | |
| | |
Cash Compensation | | |
Shares Issued | | |
Value of Shares Issued | | |
Compensation Expense Recognized | |
| Dimitri Villard | |
$ | 75 | | |
| 400 | | |
$ | 4 | | |
$ | 4 | |
| Jeff Grout | |
| 75 | | |
| 400 | | |
| 4 | | |
| 4 | |
| Nick Florio | |
| 75 | | |
| 400 | | |
| 4 | | |
| 4 | |
| Vincent Cebula | |
| 75 | | |
| 400 | | |
| 4 | | |
| 2 | |
| Alicia Barker | |
| - | | |
| 400 | | |
| 4 | | |
| 4 | |
| Board and committee member | |
$ | 300 | | |
| 2,000 | | |
$ | 20 | | |
$ | 18 | |
| | |
Cash Compensation | | |
Shares Issued | | |
Value of Shares Issued | | |
Compensation Expense Recognized | |
| | |
Nine Months Ended October 2, 2021 | |
| | |
Cash Compensation | | |
Shares Issued | | |
Value of Shares Issued | | |
Compensation Expense Recognized | |
| Dimitri Villard | |
| 63 | | |
| 24 | | |
| 1 | | |
| 2 | |
| Jeff Grout | |
| 63 | | |
| 24 | | |
| 1 | | |
| 2 | |
| Nick Florio | |
| 63 | | |
| 24 | | |
| 1 | | |
| 2 | |
| Vincent Cebula | |
| 17 | | |
| - | | |
| 1 | | |
| 2 | |
| Alicia Barker | |
| - | | |
| 24 | | |
| - | | |
| - | |
| | |
| 206 | | |
| 96 | | |
| 4 | | |
| 8 | |
STAFFING
360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE
13 – SUPPLEMENTAL CASH FLOW INFORMATION
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION
| | |
October 1, 2022 | | |
October 2, 2021 | |
| | |
Nine Months Ended | |
| | |
October 1, 2022 | | |
October 2, 2021 | |
| Cash paid for: | |
| | | |
| | |
| Interest | |
$ | 2,849 | | |
$ | 3,507 | |
| Income taxes | |
| 150 | | |
| 396 | |
| | |
| | | |
| | |
| Non-Cash Investing and Financing Activities: | |
| | | |
| | |
| Deferred purchase price of UK factoring facility | |
$ | 3,456 | | |
$ | 5,234 | |
| Redeemable Series H Preferred Stock, net | |
| 8,265 | | |
| — | |
| Debt discount | |
| 735 | | |
| — | |
| Earnout liability | |
| 4,450 | | |
| — | |
| Goodwill | |
| 5,974 | | |
| — | |
| Intangible assets | |
| 5,800 | | |
| — | |
| Warrant Modification | |
| 837 | | |
| — | |
| Dividends accrued to related parties | |
| — | | |
| 795 | |
| Deemed dividend | |
| — | | |
| 1,798 | |
| Acquisition of Right of Use Assets | |
| — | | |
| 2735 | |
| Conversion of Series E Preferred Stock – Related Party | |
| — | | |
| 6,172 | |
| Conversion of Series E-1 Preferred Stock – Related Party | |
| — | | |
| 1493 | |
| Conversion of Series G Preferred Stock – Related Party to debt | |
| — | | |
| 6,172 | |
| Conversion of Series G-1 Preferred Stock – Related Party to debt | |
| — | | |
| 1561 | |
NOTE
14 – SUBSEQUENT EVENTS
Note
Purchase Agreement with Jackson Investment Group, LLC
On
October 27, 2022, the Company entered into the Third Amended and Restated Note Purchase Agreement with Jackson, which amended and restated
the Amended Note Purchase Agreement, dated October 26, 2020, as amended, and issued to Jackson the Jackson Note, with a remaining outstanding principal balance of approximately $9.0 million.
Under
the terms of the Third Amended and Restated Note Purchase Agreement and Jackson Note, the Company is required to pay interest on the Jackson Note at a per
annum rate of 12% and in the event the Company has not repaid in cash at least 50% of the outstanding principal balance of the Jackson
Note by October 27, 2023, then interest on the outstanding principal balance of the Jackson Note shall continue to accrue at 16% per
annum of the outstanding principal balance of the Jackson Note until the Jackson Note is repaid in full. The Third Amended and Restated Note Purchase Agreement
also extends the maturity date of the Jackson Note from October 28, 2022 to October 14, 2024.
In
addition, pursuant to the terms of the Third Amended and Restated Note Purchase Agreement, until all principal interest and fees due pursuant to the Third Amended and Restated
Note Purchase Agreement and the Jackson Note are paid in full by the Company and are no longer outstanding, Jackson shall have a first
call over 50% of the net proceeds from all common stock equity raises the Company conducts, which shall be used to pay down any outstanding
obligations due pursuant to the Note Documents. The Jackson Note continues to be secured by substantially of the Company and its subsidiaries’
assets pursuant to the Amended and Restated Security Agreement with Jackson, dated September 15, 2017, as amended, and as further amended
by the Omnibus Agreement (as defined below) on October 27, 2022.
Omnibus
Amendment and Reaffirmation Agreement with Jackson
On
October 27, 2022, in connection with the Third Amended and Restated Note Purchase Agreement, the Company entered into an Omnibus Amendment and Reaffirmation
Agreement (the “Omnibus Agreement”) with Jackson, which, among other things, amends (i) the Amended and Restated Pledge Agreement,
dated as of September 15, 2017, as amended and (ii) the Amended and Restated Pledge Agreement, dated as of September 15, 2017, as amended,
to reflect certain of the terms as updated and amended by the Third Amended and Restated Note Purchase Agreement.
Amendment
to Warrant Agreement with Jackson
On
October 27, 2022, in connection with the entry into the Third Amended and Restated Note Purchase Agreement, the Company entered into
Amendment No. 4 (“Amendment No. 4”) to the Amended and Restated Warrant Agreement, dated April 25, 2018 (as amended prior to Amendment No. 4, the “Existing Warrant”), with Jackson.
Pursuant to the Existing Warrant and after giving effect to the 1-for-6 reverse stock split, effectuated by the Company on June 30,
2021 and the 1-for-10 reverse stock split, effectuated by the Company on June 23, 2022, Jackson was entitled to purchase 15,093
shares of common stock at an exercise price of $60.00 per share. Pursuant to Amendment No. 4, the exercise price of the Existing
Warrant was reduced to $3.06 per share and the term extended to January 26, 2028.
Amendment
to Credit and Security Agreement with MidCap
On
October 27, 2022, the Company entered into Amendment No. 27 and Joinder Agreement to the Credit and Security Agreement (“Amendment
No. 27”) with MidCap Funding IV Trust as successor by assignment to MidCap, dated April 8, 2015,
which amended the Credit and Security Agreement. Amendment
No. 27, among other things, (i) increases the revolving loan commitment amount from $25 million to $32.5 million (the “Loan”),
(ii) extends the commitment expiry date from October 27, 2022 to September 6, 2024, and (iii) modifies certain of the financial covenants.
Pursuant to Amendment No. 27, as long as no default or event of default under the Credit and Security Agreement as amended by Amendment
No. 27 exists, upon written request by the Company and with the prior written consent of the agent and lenders, the Loan may be increased
by up to $10 million in minimum amounts of $5 million tranches each, for an aggregate loan commitment amount of $42.5 million.
In
addition, Amendment No. 27 increases the applicable margin from 4.0% to 4.25%, with respect to the Loan (other than Letter of Credit
Liabilities (as defined in the Credit and Security Agreement)), and from 3.5% to 3.75% with respect to the Letter of Credit Liabilities.
Amendment No. 27 also replaces the interest rate benchmark from LIBOR to SOFR and provides that the Loan shall bear interest at the sum
of a term-based SOFR rate (plus a SOFR adjustment of 0.11448%) plus the Applicable Margin, subject to certain provisions for the replacement
of SOFR with an alternate benchmark in connection with SOFR no longer being provided by its administrator. Notwithstanding the foregoing,
the SOFR interest rate shall not be at any time less than 1.00%.
In
connection with Amendment No. 27, the Company paid to MidCap a modification fee of $135,000, after deducting certain credits and
fees paid in connection with previous amendments to the Credit and Security Agreement and certain waiver agreements, and agreed to
pay reasonable costs and fees of MidCap’s legal counsel in connection with Amendment No. 27. On October 27, 2022, the Company
drew down approximately $8 million on the Loan to pay off in full certain outstanding existing debt of Headway and its subsidiaries
with respect to White Oak, which were acquired in May 2022 pursuant to the Headway acquisition.
Amendment
to Intercreditor Agreement with Jackson and MidCap
On
October 27, 2022, in connection with the Third Amended and Restated Note Purchase Agreement, the Jackson Note and Amendment No. 27, the Company, Jackson
and MidCap entered into the Fifth Amendment to Intercreditor Agreement (the “Fifth Amendment”), which amended the Intercreditor
Agreement, dated September 15, 2017, by and between the Company, Jackson and MidCap, as amended. The Fifth Amendment, among other things,
permits the increase of the credit commitments under the Credit and Security Agreement as amended by Amendment No. 27 to $32.5 million.