Attached files

file filename
EX-32.2 - EX-32.2 - Staffing 360 Solutions, Inc.staf-ex322_8.htm
EX-32.1 - EX-32.1 - Staffing 360 Solutions, Inc.staf-ex321_7.htm
EX-31.2 - EX-31.2 - Staffing 360 Solutions, Inc.staf-ex312_9.htm
EX-31.1 - EX-31.1 - Staffing 360 Solutions, Inc.staf-ex311_6.htm
EX-10.2 - EX-10.2 - Staffing 360 Solutions, Inc.staf-ex102_474.htm
EX-3.2 - EX-3.2 - Staffing 360 Solutions, Inc.staf-ex32_475.htm
EX-3.1 - EX-3.1 - Staffing 360 Solutions, Inc.staf-ex31_476.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2016

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission File Number: 001-37575

 

STAFFING 360 SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

 

NEVADA

 

68-0680859

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

641 Lexington Avenue

Suite 1526

New York, New York 10022

(Address of principal executive offices) (Zip Code)

(212) 634-6411

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

Accelerated Filer

 

 

 

 

 

Non-Accelerated Filer

  (Do not check if a smaller reporting company)

Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of January 12, 2017, there were 9,739,795 outstanding common stock shares, par value $0.00001 per share, of the issuer.

 

 

 

 

 


 

Form 10-Q Quarterly Report

INDEX

 

 

 

PART I
FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1

 

Financial Statements

 

3

 

 

Condensed Consolidated Balance Sheets as of November 30, 2016 (unaudited) and May 31, 2016

 

3

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months ended November 30, 2016 and 2015 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months ended November 30, 2016 and 2015 (unaudited)

 

5

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended November 30, 2016 and 2015 (unaudited)

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

Item 4

 

Controls and Procedures

 

28

 

 

 

 

 

 

 

PART II
OTHER INFORMATION

 

 

Item 1

 

Legal Proceedings

 

29

Item 1A

 

Risk Factors

 

30

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

Item 3

 

Defaults Upon Senior Securities

 

31

Item 4

 

Mine Safety Disclosures

 

31

Item 5

 

Other Information

 

31

Item 6

 

Exhibits

 

32

 

 

 

 

 

Signatures

 

 

 

33

 

 

2


 

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(All amounts in thousands, except share, par values and stated values)

 

 

 

November 30,

 

 

May 31,

 

 

 

2016

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,235

 

 

$

1,969

 

Accounts receivable, net

 

 

23,844

 

 

 

20,378

 

Prepaid expenses and other current assets

 

 

680

 

 

 

1,012

 

Total Current Assets

 

 

25,759

 

 

 

23,359

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

938

 

 

 

880

 

Intangible assets, net

 

 

9,377

 

 

 

10,741

 

Goodwill

 

 

15,680

 

 

 

14,833

 

Other assets

 

 

4,511

 

 

 

3,946

 

Total Assets

 

$

56,265

 

 

$

53,759

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

18,575

 

 

$

17,595

 

Current portion of debt, net

 

 

3,716

 

 

 

6,097

 

Accounts receivable financing

 

 

16,665

 

 

 

14,729

 

Other current liabilities

 

 

1,270

 

 

 

1,497

 

Total Current Liabilities

 

 

40,226

 

 

 

39,918

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

3,947

 

 

 

3,186

 

Other long-term liabilities

 

 

3,071

 

 

 

3,143

 

Total Liabilities

 

 

47,244

 

 

 

46,247

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Series D Preferred Stock, 5,000 shares designated, $10,000 stated value, 93 and 0 shares

   issued and outstanding, respectively

 

 

612

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Staffing 360 Solutions, Inc. Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value, 20,000,000 shares authorized;

 

 

 

 

 

 

 

 

Series A Preferred Stock, 1,663,008 shares designated, $10.00 stated value, 1,663,008  shares issued and outstanding

 

 

 

 

 

 

Series B Preferred Stock, 200,000 shares designated, $10.00 stated value, 0 and 133,000 shares issued and outstanding, respectively

 

 

 

 

 

 

Series C Preferred Stock, 2,000,000 shares designated, $1.00 stated value, 0 and 175,439 shares issued and outstanding, respectively

 

 

 

 

 

 

Common stock, $0.00001 par value, 20,000,000 shares authorized; 9,115,545 and 6,306,744

   shares issued and outstanding, respectively

 

 

 

 

 

 

Additional paid in capital

 

 

54,589

 

 

 

51,474

 

Accumulated other comprehensive income

 

 

761

 

 

 

159

 

Accumulated deficit

 

 

(46,941

)

 

 

(44,121

)

Total Stockholders' Equity

 

 

8,409

 

 

 

7,512

 

Total Liabilities and Stockholders' Equity

 

$

56,265

 

 

$

53,759

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

3


 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(All amounts in thousands, except share and per share values)

(UNAUDITED)

 

 

 

For the Three Months Ended November 30,

 

 

For the Six Months Ended November 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

47,137

 

 

$

41,350

 

 

$

94,887

 

 

$

77,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue, Excluding Depreciation and Amortization

   Stated Below

 

 

39,040

 

 

 

33,880

 

 

 

78,301

 

 

 

63,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

8,097

 

 

 

7,470

 

 

 

16,586

 

 

 

13,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses, excluding

   depreciation and amortization stated below

 

 

7,405

 

 

 

8,334

 

 

 

15,090

 

 

 

14,492

 

Depreciation and amortization

 

 

761

 

 

 

800

 

 

 

1,519

 

 

 

1,537

 

Total Operating Expenses

 

 

8,166

 

 

 

9,134

 

 

 

16,609

 

 

 

16,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss From Operations

 

 

(69

)

 

 

(1,664

)

 

 

(23

)

 

 

(2,238

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(553

)

 

 

(755

)

 

 

(1,196

)

 

 

(1,281

)

Amortization of beneficial conversion feature

 

 

(184

)

 

 

(193

)

 

 

(369

)

 

 

(366

)

Amortization of debt discount and deferred financing costs

 

 

(424

)

 

 

(568

)

 

 

(833

)

 

 

(982

)

Other expense

 

 

(168

)

 

 

(40

)

 

 

(202

)

 

 

(10

)

Total Other Expenses

 

 

(1,329

)

 

 

(1,556

)

 

 

(2,600

)

 

 

(2,639

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss Before (Provision) Benefit for Income Tax

 

 

(1,398

)

 

 

(3,220

)

 

 

(2,623

)

 

 

(4,877

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Provision) Benefit for income taxes

 

 

(28

)

 

 

42

 

 

 

(97

)

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(1,426

)

 

 

(3,178

)

 

 

(2,720

)

 

 

(4,870

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to non-controlling interest

 

 

 

 

 

206

 

 

 

 

 

 

221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Before Preferred Share Dividends

 

 

(1,426

)

 

 

(3,384

)

 

 

(2,720

)

 

 

(5,091

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends - Series A preferred stock

 

 

(50

)

 

 

(50

)

 

 

(100

)

 

 

(100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Common Stock

 

$

(1,476

)

 

$

(3,434

)

 

$

(2,820

)

 

$

(5,191

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Net Loss per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(0.16

)

 

$

(0.68

)

 

$

(0.34

)

 

$

(1.06

)

Net Loss Attributable to Common Stock

 

$

(0.17

)

 

$

(0.73

)

 

$

(0.36

)

 

$

(1.13

)

Weighted Average Shares Outstanding – Basic and Diluted

 

 

8,789,725

 

 

 

4,706,554

 

 

 

7,930,032

 

 

 

4,599,032

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

4


 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(All amounts in thousands)

(UNAUDITED)

 

 

 

For the Three Months Ended November 30,

 

 

For the Six Months Ended November 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Loss

 

$

(1,426

)

 

$

(3,178

)

 

$

(2,720

)

 

$

(4,870

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation

 

 

197

 

 

 

80

 

 

 

602

 

 

 

77

 

Comprehensive Loss

 

 

(1,229

)

 

 

(3,098

)

 

 

(2,118

)

 

 

(4,793

)

Comprehensive Loss attributable to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss attributable to common stock

 

$

(1,229

)

 

$

(3,098

)

 

$

(2,118

)

 

$

(4,793

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

5


 

STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(All amounts in thousands)

(UNAUDITED)

 

 

 

For the Six Months Ended November 30,

 

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,720

)

 

$

(4,870

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

155

 

 

 

109

 

Write-off of property and equipment

 

 

 

 

 

49

 

Amortization of intangible assets

 

 

1,364

 

 

 

1,428

 

Amortization of debt discount and beneficial conversion feature

 

 

1,202

 

 

 

1,348

 

Stock based compensation

 

 

344

 

 

 

1,611

 

Loss (gain) on settlement of debt

 

 

169

 

 

 

(36

)

Interest paid in stock

 

 

2

 

 

 

31

 

Other, net

 

 

(89

)

 

 

149

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,466

)

 

 

(469

)

Prepaid expenses and other current assets

 

 

332

 

 

 

74

 

Other assets

 

 

(565

)

 

 

(391

)

Accounts payable and accrued expenses

 

 

980

 

 

 

852

 

Other current liabilities

 

 

(188

)

 

 

(46

)

Other long-term liabilities

 

 

(53

)

 

 

42

 

Other, net

 

 

487

 

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

 

 

(2,046

)

 

 

(119

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

 

 

 

(3,654

)

Acquisition - payments made to seller

 

 

(849

)

 

 

(83

)

Payments made for earn-outs

 

 

(69

)

 

 

(86

)

Purchase of property and equipment

 

 

(213

)

 

 

(98

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(1,131

)

 

 

(3,921

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Third-party financing costs

 

 

 

 

 

(1,115

)

Proceeds from convertible notes

 

 

400

 

 

 

4,279

 

Repayment of convertible notes

 

 

(1,386

)

 

 

(275

)

Proceeds from promissory notes

 

 

273

 

 

 

1,555

 

Repayment of promissory notes

 

 

(995

)

 

 

(1,052

)

Repayment of bonds

 

 

(5

)

 

 

(100

)

Proceeds from accounts receivable financing

 

 

2,800

 

 

 

1,772

 

Repayment of accounts receivable financing overadvance

 

 

(863

)

 

 

 

Proceeds from sale of equity

 

 

2,495

 

 

 

 

Financing cost associated with private placements

 

 

(274

)

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

2,445

 

 

 

5,064

 

 

 

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH

 

 

(732

)

 

 

1,024

 

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

 

(2

)

 

 

(2

)

 

 

 

 

 

 

 

 

 

Cash - Beginning of period

 

 

1,969

 

 

 

19

 

 

 

 

 

 

 

 

 

 

Cash - End of period

 

$

1,235

 

 

$

1,041

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

6


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 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Staffing 360 Solutions, Inc. (“we,” “us,” “our,” “Staffing 360,” or the “Company”) was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation (“Golden Fork”), which changed its name to Staffing 360 Solutions, Inc., ticker symbol “STAF”, on March 16, 2012.

The Company effected a one-for-ten reverse stock split on September 17, 2015. Following the reverse split, the Company’s issued and outstanding shares of Common Stock decreased from 45,732,674 to 4,573,360. All share and per share information in these condensed consolidated financial statements have been retroactively adjusted to reflect this reverse stock split.

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year.  As of November 30, 2016, the Company had a working capital deficiency of $(14,467), an accumulated deficit of $(46,941), for the six months ended November 30, 2016 a net loss of $(2,720), and, as of the date these unaudited condensed consolidated financial statements are issued, the Company has approximately $5,342 associated with debt and other amortizing obligations, due in the next 12 months. The Company’s projected cash flows from operations for the same period are not sufficient to address these obligations in the normal course of business. As a result, the Company will need to seek additional funding through capital raises to meet these short term obligations.

Management’s plan to continue as a going concern includes raising capital in the form of debt or equity, increased gross profit from organic revenue growth and managing and reducing operating and overhead costs. In addition, the Company has the ability to raise additional capital through private investments. In November of 2016, the Company engaged Source Capital Group, Inc. (‘Source Capital’) to act as a placement agent to conduct a general solicitation private placement offering solely to accredited investors under Rule 506(c) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act. The Company is still in discussions with Source Capital regarding funding through private placement. The private placement expires on January 31, 2017.

Management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon the management’s ability to successfully secure additional sources of financing and increased profitable operations. Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for the Company to raise additional capital on an immediate basis. However, based upon an evaluation of the Company’s continued growth trajectory, past success in raising capital and meetings its obligations as well as its plans for raising capital discussed above, management believes that the Company is a going concern.

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

These condensed consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”), expressed in U.S. dollars.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. As described below, the Company consolidates PeopleSERVE PRS, Inc. (“PRS”), an entity of which it previously owned 49%, since the Company was deemed to be the primary beneficiary of this entity. All inter-company transactions have been eliminated. On April 29, 2016, the Company acquired the remaining 51% for $101. All inter-company transactions have been eliminated.

Interim Financial Statements

These unaudited condensed consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with the GAAP.

7


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)

 

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended May 31, 2016 and 2015, respectively, which are included in the Company’s May 31, 2016 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on August 29, 2016. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited consolidated financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the three and six months ended November 30, 2016 are not necessarily indicative of results for the entire year ending May 31, 2017.

Reclassifications

Certain reclassifications have been made to conform the prior period data to the current presentations. In accordance with ASU 2015-03, “Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs”, debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the debt liability, consistent with the presentation of a debt discount. These reclassifications had no impact on reported results of operations.

 

The Company has reclassified the Midcap Additional Term Loan from Long-term debt to Other long-term liabilities, as this represents the long term portion of funds received from the Accounts receivable financing facility. These reclassifications had no impact on reported results of operations.

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash”. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.

 

In April 2016, the FASB issued ASU 2016 – 10 “Revenue from Contract with Customers: identifying Performance Obligations and Licensing”. The amendments in this Update clarify the two following aspects (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to reduce the degree of judgement necessary to comply with Topic 606. This guidance has no effective date as yet. The Company is currently evaluating the impact of adopting this guidance.

In March 2016, the FASB issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting this guidance.

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)

 

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842).  This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less.  All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the impact of adopting this guidance.

In January 2016, the FASB issued ASU 2016-01, which amends the guidance relating to the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

 

In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)”. The amendments in this ASU defer the effective date of ASU 2014-09 “Revenue From Contracts With Customers (Topic 606)”. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.

 

NOTE 3 – LOSS PER COMMON SHARE

 

The Company utilizes the guidance per ASC 260, “Earnings per Share”.  Basic earnings per share are calculated by dividing income available to stockholders by the weighted average number of common stock shares outstanding during each period. Our Series A preferred stock holders receive certain dividends or dividend equivalents that are considered participating securities and our earnings (loss) per share is computed using the two-class method. For the three and six months ended November 30, 2016 and 2015, pursuant to the two-class method, as a result of the net loss, losses were not allocated to the participating securities.

Diluted earnings per share are computed using the weighted average number of common stock shares and dilutive common share equivalents outstanding during the period. Dilutive common stock share equivalents consist of common shares issuable upon the conversion of preferred stock, convertible notes and the exercise of stock options and warrants (calculated using the modified treasury stock method).  Such securities, shown below, presented on a common share equivalent basis and outstanding as of November 30, 2016 and 2015 have been excluded from the per share computations, since their inclusion would be anti-dilutive:

 

 

 

November 30,

 

 

 

2016

 

 

2015

 

Convertible bonds - Series A

 

 

 

 

 

17,500

 

Convertible bonds - Series B

 

 

5,401

 

 

 

89,062

 

Convertible promissory notes

 

 

1,227,416

 

 

 

895,159

 

Convertible preferred shares

 

 

592,191

 

 

 

216,191

 

Warrants

 

 

83,764

 

 

 

1,637,903

 

Options

 

 

319,500

 

 

 

330,000

 

Total

 

 

2,228,272

 

 

 

3,185,815

 

 

 

 

9


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 4 DEBT

 

 

 

November 30,

 

 

May 31,

 

 

 

2016

 

 

2016

 

Bonds:

 

 

 

 

 

 

 

 

Bonds - Series B

 

$

50

 

 

$

55

 

 

 

 

 

 

 

 

 

 

Convertible Notes:

 

 

 

 

 

 

 

 

Non-interest bearing convertible note (January 6, 2016)

 

 

359

 

 

 

359

 

Non-interest bearing convertible note (September 10, 2016)

 

 

477

 

 

 

 

8% Convertible Note (July 8, 2015)

 

 

1,960

 

 

 

3,920

 

8% Convertible Note (February 8, 2016)

 

 

728

 

 

 

728

 

Lighthouse- Seller Note #1

 

 

1,874

 

 

 

2,124

 

Lighthouse - Seller Note #2

 

 

234

 

 

 

390

 

 

 

 

 

 

 

 

 

 

Promissory Notes:

 

 

 

 

 

 

 

 

Sterling National Bank

 

 

184

 

 

 

272

 

Staffing (UK) - Seller Note

 

 

116

 

 

 

144

 

PeopleServe - Seller Note

 

 

395

 

 

 

789

 

Midcap Financial Trust - Term Loan

 

 

2,125

 

 

 

2,375

 

ABN AMRO - Term Loan

 

 

741

 

 

 

821

 

 

 

 

 

 

 

 

 

 

Less Debt Discount and Deferred Financing Costs

 

 

(1,580

)

 

 

(2,694

)

 

 

 

 

 

 

 

 

 

Total Debt

 

 

7,663

 

 

 

9,283

 

 

 

 

 

 

 

 

 

 

Less: Current Portion, Net

 

 

(3,716

)

 

 

(6,097

)

 

 

 

 

 

 

 

 

 

Total Long-Term Debt, Net

 

$

3,947

 

 

$

3,186

 

Bonds – Series B: On September 30, 2016, the Company amended two Series B bonds totaling $50. The holders received a total of 1,250 common stock shares. In addition, the bonds were extended for six months and will mature on March 31, 2017. For the three and six months ended November 30, 2016, the Company paid $0 and $5 in principal, respectively. For the three and six months ended November 30, 2015, the Company paid $0 and $100, in principal, respectively.

 

Non-interest bearing convertible note (January 6, 2016): On July 8, 2016, the Company paid $59 in the form of an extension fee to extend the term for an additional six months.

 

Non-interest bearing convertible note (September 10, 2016): On September 10, 2016, the Company entered into a non interest bearing convertible note for $477, whereby the Company received cash of $400. This note matures in March 2017.

8% Convertible Note (July 8, 2015): During the three and six months ended November 30, 2016, the Company paid cash of $0 and $980 in principal, respectively. During the three months ended November 30, 2016, the Company converted $980 into 890,910 shares of Common Stock. As of the November 30, 2016, all shares had been issued.

On January 3, 2017, the Company entered into an agreement to extend the maturities of the 8% Convertible Note (July 8, 2015) and 8% Convertible Note (February 8, 2016). Under the terms of the extension, the notes will now mature on October 1, 2018 in the amount of $3,126, with 8% interest, first payable on October 1, 2017 and payable quarterly thereafter. The Company also modified the conversion price reducing it from $10.00 per share to $3.00 per share.

Lighthouse Seller Note #1: During the three and six months ended November 30, 2016, the Company paid $125 and $250 in principal, respectively. During the three and six months ended November 30, 2015, the Company paid $0 and $125 in principal, respectively.

10


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)

 

Lighthouse Seller Note #2: During the three and six months ended November 30, 2016, the Company paid $78 and $156 in principal, respectively. During the three and six months ended November 30, 2015, the Company paid $0 and $78 in principal, respectively.

Sterling National Bank Promissory Note: During the three and six months ended November 30, 2016, the Company paid $45 and $88 in principal, respectively. During the three and six months ended November 30, 2015, the Company paid $0 and $52 in principal, respectively.

Staffing (UK) – Sellers Note: During the three and six months ended November 30, 2016, the Company paid $14 and $28 in principal, respectively. During the three and six months ended November 30, 2015, the Company paid $14 and $28 in principal, respectively.

PeopleSERVE – Sellers Note: During the three and six months ended November 30, 2016, the Company paid $197 and $395 in principal, respectively. During the three and six months ended November 30, 2015, the Company paid $197 and $394 in principal, respectively.

Midcap Financial Trust – Term Loan: During the three and six months ended November 30, 2016, the Company paid $175 and $250 in principal, respectively. During the three and six months ended November 30, 2015, the Company paid $188 and $375 in principal, respectively.

ABN AMRO Term Loan: In June 2016, Company borrowed an additional $273. All terms of the original loan remain unchanged. During the three and six months ended November 30, 2016, the Company paid $117 and $234 in principal, respectively.    

In November of 2016, the Company engaged Source Capital Group, Inc. to act as a placement agent to conduct a general solicitation private placement offering solely to accredited investors under Rule 506(c) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act. The Company is still in discussions with Source Capital regarding funding through this private placement offering. The private placement expires on January 31, 2017. In connection with the private placement, the Company filed certificates of designation for Series E-1 and E-2 preferred shares. No shares have been issued and in January 2017, the Company had the certificates of designation withdrawn.

 

 

NOTE 5 – EQUITY

Common Stock

The Company issued 2,808,801 common shares during the six months ended November 30, 2016 as summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued to/for:

 

Number of common shares issued

 

 

Fair Value of shares issued

 

 

Fair Value at Issuance           (per share)

 

Conversion of Series D preferred Stock

 

 

1,340,960

 

 

$

2,157

 

 

$

1.31

 

 

$

1.74

 

Conversion of debt

 

 

890,910

 

 

 

1,149

 

 

 

1.29

 

 

 

1.29

 

Private placements

 

 

210,645

 

 

 

426

 

 

 

2.35

 

 

 

2.35

 

Conversion of Series C preferred stock

 

 

175,439

 

 

 

332

 

 

 

1.89

 

 

 

1.89

 

Conversion of Series B preferred stock

 

 

133,000

 

 

 

198

 

 

 

1.49

 

 

 

1.49

 

Consultants

 

 

38,297

 

 

 

66

 

 

 

1.56

 

 

 

1.96

 

Employees

 

 

9,800

 

 

 

38

 

 

 

0.69

 

 

 

1.59

 

Board and Committee members

 

 

8,500

 

 

 

15

 

 

 

1.59

 

 

 

1.99

 

Shares issued for extension of Convertible Bonds

 

 

1,250

 

 

 

2

 

 

 

1.36

 

 

 

1.36

 

 

 

 

2,808,801

 

 

$

4,383

 

 

 

 

 

 

 

 

 

 

The Company’s authorized common stock consists of 20,000,000 shares having par value of $0.00001. The Company had issued and outstanding 9,115,545 and 6,306,744 common stock shares as of November 30, 2016 and May 31, 2016, respectively. During the three months ended November 30, 2016, the Company converted $980 into 890,910 shares of Common Stock.

11


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 January 3, 2017, the Company entered into an agreement to extend the maturities of the 8% Convertible Note (July 8, 2015) and 8% Convertible Note (February 8, 2016). Under the terms of the extension, the notes will now mature on October 1, 2018 in the amount of $3,126, with 8% interest, first payable on October 1, 2017 and payable quarterly thereafter. The Company also modified the conversion price reducing it from $10.00 per share to $3.00 per share.   .

 

On September 27, 2016, the Board of Directors recommended that 790,000 shares of Common Stock, to be issued to management, directors and employees be submitted to shareholders for approval at the next shareholder meeting. These shares were issued erroneously. The Company processed the retraction of these shares in October 2016.

 

Convertible Preferred Shares

Series B Preferred Stock 

On July 8, 2016, holders of Series B Preferred Stock elected to convert all 133,000 shares to 133,000 shares of Common Stock.

The Company had issued and outstanding 0 and 133,000 shares of Series B Preferred Stock, as of November 30, 2016 and May 31, 2016, respectively.

Series C Preferred Stock

On June 16, 2016, the Company filed an Amendment to the Certificate of Designation for the Series C Preferred Stock, par value $0.00001 per share. The Amendment increased the number of Series C Preferred Stock from 500,000 to 2,000,000 shares authorized.

On June 24, 2016, holders of Series C Preferred Stock elected to convert all 175,439 shares to 175,439 shares of Common Stock.

The Company had issued and outstanding 0 and 175,439 shares of Series C Preferred Stock as of November 30, 2016 and May 31, 2016, respectively.

Series D Preferred Stock

On June 24, 2016, the Company entered into a Securities Purchase Agreement with certain purchasers pursuant to which the Company sold to the purchasers 211 shares of the Company’s Series D Preferred Stock at a face value of $10,000 (whole dollars) per share of Series D Preferred, and Original Issue Discount of 5% and a conversion price into common stock of $2.50 per share, for aggregate proceeds of approximately $2,000 before placement fees and estimated offering expenses. The offering of the Series D Preferred Stock was made under the Company’s Shelf Registration.

During the six months ended November 30, 2016, holders of this series converted 118 shares of Series D Preferred Stock to 1,340,960 shares of Common Stock.

 

 

 

Shares

 

 

Balance

 

Face Value

 

 

211

 

 

$

2,110

 

Original Issue Discount

 

 

 

 

 

 

(110

)

Beneficial Conversion Feature

 

 

 

 

 

 

(615

)

Beginning Balance, Net

 

 

 

 

 

 

1,385

 

Conversions

 

 

(118

)

 

 

(773

)

Ending Balance, Net

 

 

93

 

 

$

612

 

 

Due to the contingent nature of the cash redemption feature of the Series D Preferred Stock, the Company has classified the shares as temporary equity on the condensed consolidated balance sheet. In addition, at the commitment date these were issued, the Company determined that a beneficial conversion feature (“BCF”) existed in the amount of $615, which was recorded within Additional Paid-In Capital on the condensed consolidated balance sheet.

12


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 September 22, 2016, the Company and Discover Growth Fund agreed that a Trigger Event, as defined in the Stock Purchase Agreement between Staffing 360 Solutions, Inc. and Discover Growth Fund dated June 24, 2016, filed as an exhibit to our Current Report on Form 8-K on June 27, 2016 (the “Series D Purchase Agreement”), had occurred as of September 22, 2016.  A Trigger Event gives the holders of the Series D Preferred Stock certain additional rights and removes certain restrictions in respect of the Series D Preferred Stock, as set forth in the Series D Purchase Agreement. Discover Growth Fund has agreed not to submit any additional conversion notices until the Company obtains stockholder approval for the transaction, so long as such approval is obtained by January 31, 2017.  The Company intends to seek stockholder approval for the transaction at its annual shareholder meeting in January 2017.

 

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Earn-out Liabilities and Stock Value Guarantees

Pursuant to the acquisition of Control Solutions International, Inc. (“CSI”), the purchase price includes monthly cash payments to the former owners and shareholders of CSI for performance-based compensation equal to 20% of CSI’s consolidated gross profit from the date of closing through the end of the sixteenth quarter following the date of closing not to exceed a total of $2,100. During the six months ended November 30, 2016 and the fiscal year ended May 31, 2016, the Company paid $69 and $160, respectively, towards the earn-out liability. At November 30, 2016 the remaining balance was $1,330 of which approximately $138 is recorded in other current liabilities and $1,192 is recorded in other long-term liabilities.

Legal Proceedings 

NewCSI, Inc. vs. Staffing 360 Solutions, Inc.

On May 22, 2014, NewCSI, the former owners of Control Solutions International, filed a complaint in the United States District Court for the Western District of Texas, Austin Division, against the Company arising from the terms of the CSI Stock Purchase Agreement dated August 14, 2013.  NewCSI claims that the Company breached a provision of the CSI Stock Purchase Agreement (“SPA § 2.7”) that required the Company to calculate and pay to NewCSI 50% of certain “Deferred Tax Assets” within 90 days after December 31, 2013.  The Complaint sought payment of the amount allegedly owed under SPA § 2.7 and acceleration of earn-out payments provided for in the CSI Stock Purchase Agreement of $1,400, less amounts paid to date, and attorneys’ fees.  The Company responded denying the material allegations and interposing numerous affirmative defenses. On October 8, 2014, NewCSI filed a Motion of Summary Judgment (the “Motion”). On March 30, 2015, a Magistrate Judge of the District Court issued a Report and Recommendation that the District Court deny the Motion.  The Recommendation became a final decision on April 13, 2015.

On December 31, 2014, NewCSI filed an amended complaint to which NewCSI added an additional count asserting an “Adjustment Event” had occurred requiring an acceleration of earn-out payments provided for in the CSI Stock Purchase Agreement of $2,100, less amounts paid to date ($1,671 at December 31, 2014), should Staffing 360 or CSI “be unable, or admit in writing its inability, to pay its debts as they mature.”  The Company responded denying the material allegations and interposing numerous affirmative defenses, including that the earn-out liability was fully expensed at the time of the acquisition and fully accrued for on the Company’s balance sheet as part of the purchase accounting at the time of the acquisition.  The final pretrial conference in this matter was held April 22, 2015.  A jury was selected on May 14, 2015, and the trial was held May 18-20, 2015.  On May 20, 2015, the jury rendered a verdict, finding that Staffing 360 had not complied with SPA § 2.7 and owed $154, but that NewCSI had not proven that Staffing 360 or CSI had become unable to pay debts as they came due.  The Court had held that it was not a question for the jury to decide if damages for breach of SPA § 2.7 should include accelerated earn-out payments.

On June 3, 2015, NewCSI filed a Motion for Entry of Judgment as Matter of Law seeking entry of a judgment in the amount of $154, plus accelerated earn-out payments in the amount of $1,152, plus statutory interest.  NewCSI did not challenge the jury verdict on the ability to pay issue.  Also on June 3, 2015, Staffing 360 filed a Motion for Entry of Judgment as a Matter of Law seeking entry of judgment against NewCSI on the jury’s finding that Staffing 360 had not complied with SPA § 2.7, or, in the alternative, for a reduction of damages to $54 and to hold that NewCSI may not be awarded accelerated earn-out payments as that would result in an illegal penalty.

On October 21, 2015, judgment was entered in this action in favor of NewCSI and against the Company in the amount of $1,307, plus pre-judgment interest, post-judgment interest, and costs.

On January 26, 2016, the District Court set the bond in respect of the NewCSI litigation at $1,384. The Company has filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit seeking reversal of the judgment and posted a supersedeas bond to

13


STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in thousands, except share, p