Attached files

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EX-32.2 - EX-32.2 - Staffing 360 Solutions, Inc.staf-ex322_10.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_12.htm
EX-31.1 - EX-31.1 - Staffing 360 Solutions, Inc.staf-ex311_11.htm
EX-3.14 - EX-3.14 - Staffing 360 Solutions, Inc.staf-ex314_289.htm
EX-3.13 - EX-3.13 - Staffing 360 Solutions, Inc.staf-ex313_288.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 April 1, 2017

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 2701

New York, New York 10022

(Address of principal executive offices) (Zip Code)

(646) 507-5710

(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

 

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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 May 15, 2017, there were 14,641,979 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 April 1, 2017 (unaudited) and December 31, 2016

 

3

 

 

Unaudited Condensed Consolidated Statements of Operations for the period January 1, 2017 to April 1, 2017 and December 27, 2015 to March 26, 2016

 

4

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the period January 1, 2017 to April 1, 2017 and December 27, 2015 to March 26, 2016

 

5

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the period January 1, 2017 to April 1, 2017 and December 27, 2015 to March 26, 2016

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2

 

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

 

19

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

Item 4

 

Controls and Procedures

 

30

 

 

 

 

 

 

 

PART II
OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

 

31

Item 1A

 

Risk Factors

 

31

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

Item 3

 

Defaults Upon Senior Securities

 

31

Item 4

 

Mine Safety Disclosures

 

31

Item 5

 

Other Information

 

31

Item 6

 

Exhibits

 

32

 

 

 

 

 

Signatures

 

 

 

34

 

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)

 

 

 

April 1,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

489

 

 

$

650

 

Accounts receivable, net

 

 

19,616

 

 

 

22,274

 

Prepaid expenses and other current assets

 

 

858

 

 

 

613

 

Total Current Assets

 

 

20,963

 

 

 

23,537

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

861

 

 

 

919

 

Identifiable intangible assets, net

 

 

8,467

 

 

 

9,149

 

Goodwill

 

 

15,779

 

 

 

15,779

 

Other assets

 

 

4,212

 

 

 

4,573

 

Total Assets

 

$

50,282

 

 

$

53,957

 

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

17,756

 

 

$

18,110

 

Current portion of debt, net

 

 

3,139

 

 

 

3,639

 

Accounts receivable financing

 

 

12,116

 

 

 

15,605

 

Other current liabilities

 

 

850

 

 

 

1,274

 

Total Current Liabilities

 

 

33,861

 

 

 

38,628

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

6,019

 

 

 

3,997

 

Other long-term liabilities

 

 

2,371

 

 

 

3,054

 

Total Liabilities

 

 

42,251

 

 

 

45,679

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Series D Preferred Stock, 5,000 shares designated, $10,000 stated value, 62 and 93

   shares issued and outstanding, respectively

 

 

407

 

 

 

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, as of April 1, 2017 and December 31, 2016

 

 

 

 

 

 

Series B Preferred Stock, 200,000 shares designated, $10.00 stated value, 0 shares issued

   and outstanding, as of April 1, 2017 and December 31, 2016

 

 

 

 

 

 

Series C Preferred Stock, 2,000,000 shares designated, $1.00 stated value, 0 shares issued

   and outstanding, as of April 1, 2017 and December 31, 2016

 

 

 

 

 

 

Common stock, $0.00001 par value, 40,000,000 and 20,000,000 shares authorized as of April 1,

   2017 and December 31, 2016, respectively; 13,901,995 and 9,139,795 shares issued and

   outstanding, as of April 1, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Additional paid in capital

 

 

58,142

 

 

 

54,658

 

Accumulated other comprehensive income

 

 

833

 

 

 

855

 

Accumulated deficit

 

 

(51,351

)

 

 

(47,847

)

Total Stockholders' Equity

 

 

7,624

 

 

 

7,666

 

Total Liabilities, Mezzanine Equity and Stockholders' Equity

 

$

50,282

 

 

$

53,957

 

 

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)

 

 

 

January 1, 2017 to April 1, 2017

 

 

December 27, 2015 to March 26, 2016

 

Revenue

 

$

40,712

 

 

$

43,160

 

 

 

 

 

 

 

 

 

 

Cost of Revenue, Excluding Depreciation and Amortization Stated Below

 

 

33,386

 

 

 

35,934

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

7,326

 

 

 

7,226

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative expenses, excluding

   depreciation and amortization stated below

 

 

7,627

 

 

 

7,530

 

Depreciation and amortization

 

 

760

 

 

 

839

 

Total Operating Expenses

 

 

8,387

 

 

 

8,369

 

 

 

 

 

 

 

 

 

 

Loss From Operations

 

 

(1,061

)

 

 

(1,143

)

 

 

 

 

 

 

 

 

 

Other Expenses:

 

 

 

 

 

 

 

 

Interest expense

 

 

(502

)

 

 

(600

)

Amortization of beneficial conversion feature

 

 

(184

)

 

 

(183

)

Amortization of debt discount and deferred financing costs

 

 

(335

)

 

 

(473

)

Debt extinguishment costs

 

 

(1,368

)

 

 

 

Other income (expense)

 

 

2

 

 

 

(22

)

Total Other Expenses

 

 

(2,387

)

 

 

(1,278

)

 

 

 

 

 

 

 

 

 

Loss Before Provision for Income Tax

 

 

(3,448

)

 

 

(2,421

)

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

(5

)

 

 

(301

)

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(3,453

)

 

 

(2,722

)

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interest

 

 

 

 

 

42

 

 

 

 

 

 

 

 

 

 

Net Loss Before Preferred Share Dividends

 

 

(3,453

)

 

 

(2,764

)

 

 

 

 

 

 

 

 

 

Dividends - Series A preferred stock

 

 

(50

)

 

 

(50

)

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Common Stock

 

$

(3,503

)

 

$

(2,814

)

 

 

 

 

 

 

 

 

 

Basic and Diluted Net Loss per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(0.28

)

 

$

(0.55

)

Net Loss Attributable to Common Stock

 

$

(0.29

)

 

$

(0.57

)

Weighted Average Shares Outstanding – Basic and Diluted

 

 

12,170,155

 

 

 

4,940,075

 

 

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)

 

 

 

January 1, 2017 to April 1, 2017

 

 

December 27, 2015 to March 26, 2016

 

Net Loss

 

$

(3,453

)

 

$

(2,722

)

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

(22

)

 

 

145

 

Comprehensive Loss

 

 

(3,475

)

 

 

(2,577

)

Comprehensive income attributable to non-controlling interest

 

 

 

 

 

42

 

Comprehensive Loss attributable to common stock

 

$

(3,475

)

 

$

(2,619

)

 

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)

 

 

 

January 1, 2017 to April 1, 2017

 

 

December 27, 2015 to March 26, 2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,453

)

 

$

(2,722

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

78

 

 

 

58

 

Amortization of identifiable intangible assets

 

 

682

 

 

 

781

 

Amortization of debt discount, deferred financing and beneficial conversion feature

 

 

519

 

 

 

656

 

Debt extinguishment costs

 

 

1,368

 

 

 

 

Stock based compensation

 

 

754

 

 

 

401

 

Interest paid in common stock

 

 

 

 

 

5

 

Modification expense

 

 

4

 

 

 

(14

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,658

 

 

 

764

 

Prepaid expenses and other current assets

 

 

(245

)

 

 

(296

)

Other assets

 

 

360

 

 

 

(280

)

Accounts payable and accrued expenses

 

 

(353

)

 

 

2,042

 

Other current liabilities

 

 

36

 

 

 

(10

)

Other long-term liabilities

 

 

5

 

 

 

339

 

Other, net

 

 

(10

)

 

 

76

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

2,403

 

 

 

1,800

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Posting of surety bond

 

 

 

 

 

(1,405

)

Payments made for earn-outs

 

 

(1,050

)

 

 

(29

)

Purchase of property and equipment

 

 

(20

)

 

 

(43

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(1,070

)

 

 

(1,477

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from convertible notes

 

 

 

 

 

578

 

Repayment of convertible notes

 

 

(3,485

)

 

 

(253

)

Proceeds from promissory notes

 

 

 

 

 

300

 

Repayment of promissory notes

 

 

(512

)

 

 

(475

)

Proceeds from term loan

 

 

7,400

 

 

 

500

 

Repayments of term loan

 

 

(564

)

 

 

(290

)

Repayment of bonds

 

 

 

 

 

(415

)

Repayments on accounts receivable financing, net

 

 

(3,489

)

 

 

(1,320

)

Third party financing costs

 

 

(842

)

 

 

(246

)

Proceeds from overadvance of accounts receivable financing

 

 

 

 

 

1,050

 

NET CASH USED IN FINANCING ACTIVITIES

 

 

(1,492

)

 

 

(571

)

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH

 

 

(159

)

 

 

(248

)

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash - Beginning of period

 

 

650

 

 

 

650

 

 

 

 

 

 

 

 

 

 

Cash - End of period

 

$

489

 

 

$

402

 

 

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, 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.

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

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

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.  

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

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the transition period ended December 31, 2016 and for the years ended May 31, 2016 and 2015, which are included in the Company’s December 31, 2016 Form 10-KT, as amended, filed with the United States Securities and Exchange Commission on April 12, 2017. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited consolidated financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the period ended April 1, 2017 are not necessarily indicative of results for the entire year ending December 30, 2017.

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis which implies the Company will continue to meet its obligations for the next 12 months as of the date these financial statements are issued.    

 

In July 2016, the Company received an unfavorable ruling in the matter of Staffing 360 Solutions, Inc. v. Former Officers of Staffing 360 Solutions, Inc., for which, as of the April 1, 2017, $1,649 has been accrued. The timing of payment for this loss is not yet known. It requires confirmation of the award by a Court, the date for which has not yet been set.

 

On January 26, 2017, the Company entered into a $7,400 financing transaction with Jackson Investment Group, LLC (“JIG”). The capital was used in part to pay short-term debt obligations. As of the date of these financial statements are issued, the Company has $4,619 associated with debt and other amortizing obligations, due in the next 12 months. The Company’s projected cash flows from operations include the assumption that the arbitration loss will be paid in the next 12 months, and are sufficient to address this and its other obligations in the normal course of business.

 

While management’s projected cash flows are forecasted to be sufficient to meet the Company’s obligations over the next 12 months, management believes it is prudent to continue its capital raising efforts in case its forecast is not achieved. 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.  

 

However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.  Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next 12 months or thereafter will not increase the need for the Company to raise additional capital on an immediate basis. In addition, the Company has received a letter of support from a significant shareholder pertaining to the arbitration loss, whereby the shareholder has agreed to provide funds to the Company sufficient to settle the arbitration loss in full, in return for consideration as may be agreed.

 

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)

 

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.

 

Change of Year End

 

On February 28, 2017, the Board of Directors of the Company (the “Board”) approved the change of the Company’s fiscal year end from May 31 to a 52-53 week year ending on the Saturday closest to the 31st of December. In a 52 week fiscal year, each of the Company’s quarterly periods will comprise 13 weeks. In a 53 week fiscal year, one quarter will consist of 14 weeks. On April 12, 2017, the Company filed a transition report on Form 10-KT, as amended, covering the transition period June 1, 2016 through December 31, 2016. Annual reports on Form 10-K covering 52-53 week years will be filed thereafter. This filing includes comparative unaudited condensed consolidated financial statements for the period January 1, 2017 to April 1, 2017 and December 27, 2015 to March 26, 2016.

 

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. Commencing in January 2017, the Company started paying down the Midcap Additional Term Loan and as such has $600 of the Midcap Additional Term Loan classified in Other current liabilities and remainder is classified in Other long term liabilities.

Income Taxes

 

The Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter. The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes and tax audit settlements. The effective income tax rate from continuing operations was 16.3% and 42.9% for the period ended April 1, 2017 and March 26, 2016, respectively.

Recent Accounting Pronouncements

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs”. The FASB is issuing this update to amend the amortization period for certain purchased callable debt securities held at a premium, the FASB is shortening the amortization period for the premium to the earliest call date. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of adopting this guidance.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment”. The amendments in this update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The guidance is effective for annual periods fiscal years beginning after December 15, 2019. The Company 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 January 2017, the FASB issued 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 March 2016, the FASB issued ASU 2016-09, “Stock Compensation”, 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 adoption of this standard had no material financial impact.

 

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, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, 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 September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement–Period Adjustments”. Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead

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)

 

require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for annual reporting periods beginning after December 15, 2015. The Adoption of this guidance had no material impact on the Company’s financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 supersedes the revenue recognition requirements of FASB ASC Topic 605, “Revenue Recognition” and most industry-specific guidance throughout the ASC, resulting in the creation of FASB ASC Topic 606, “Revenue from Contracts with Customers”. ASU 2014-09 requires entities to recognize revenue in a way that depicts 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 in exchange for those goods or services. This ASU provides alternative methods of adoption. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers, Deferral of the Effective Date”. ASU 2015-14 defers the effective date of 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. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers, Principal versus Agent Considerations” (Reporting Revenue Gross versus Net) clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing”, clarifying the implementation guidance on identifying performance obligations and licensing. The amendments in this ASU 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 effective date and transition requirements for ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements for ASU 2014-09. The Company is currently assessing the potential impact of adopting ASU 2014-09, ASU 2016-08 and ASU 2016-10 on its financial statements and related disclosures.

 

 

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 period ended April 1, 2017 and March 26, 2016, 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 April 1, 2017 and March 26, 2016 have been excluded from the per share computations, since their inclusion would be anti-dilutive:

 

 

 

April 1,

 

 

March 26,

 

 

 

2017

 

 

2016

 

Convertible bonds - Series A

 

 

 

 

 

17,651

 

Convertible bonds - Series B

 

 

5,587

 

 

 

74,772

 

Convertible promissory notes

 

 

920,688

 

 

 

893,221

 

Convertible preferred shares

 

 

3,464,191

 

 

 

316,191

 

Warrants

 

 

3,183,630

 

 

 

1,275,990

 

Options

 

 

627,300

 

 

 

322,000

 

Total

 

 

8,201,396

 

 

 

2,899,825

 

 

Convertible preferred shares include the Company’s Series D Preferred Stock which contains both a fixed and variable conversion feature that fluctuates with the Company’s stock price. In addition, other restrictions prevent the holders from converting all of the Series D Preferred Stock at the same time. As a result, it is difficult to estimate the exact amount of shares of common stock the Series D Preferred Stock could be converted into at any time. As a result, only the fixed portion of the conversion features are included in the

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)

 

amounts above. In April 2017, the Company entered into an agreement with holders of the Series D Preferred Stock to redeem the remaining 62 shares of Series D Preferred Stock and terminate all future conversion rights, in return for $1,500 in cash and 300,000 shares of common stock.

 

 

NOTE 4 – DEBT

 

 

 

April 1,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Bonds:

 

 

 

 

 

 

 

 

Bonds - Series B

 

$

50

 

 

$

50

 

 

 

 

 

 

 

 

 

 

Convertible Notes:

 

 

 

 

 

 

 

 

Non-interest Bearing Convertible Note (January 6, 2016)

 

 

 

 

 

359

 

Non-interest Bearing Convertible Note (September 16, 2017)

 

 

565

 

 

 

477

 

8% Convertible Note (July 8, 2015)

 

 

 

 

 

1,960

 

8% Convertible Note (February 8, 2016)

 

 

 

 

 

728

 

Lighthouse- Seller Note #1

 

 

1,749

 

 

 

1,874

 

Lighthouse - Seller Note #2

 

 

156

 

 

 

234

 

 

 

 

 

 

 

 

 

 

Promissory Notes:

 

 

 

 

 

 

 

 

Staffing (UK) - Seller Note

 

 

 

 

 

112

 

PeopleServe - Seller Note

 

 

132

 

 

 

329

 

 

 

 

 

 

 

 

 

 

Term Loans:

 

 

 

 

 

 

 

 

Jackson Investment Group Term Loan

 

 

7,400

 

 

 

 

Midcap Financial Trust - Term Loan

 

 

1,725

 

 

 

2,025

 

ABN AMRO - Term Loan

 

 

588

 

 

 

694

 

Sterling National Bank

 

 

120

 

 

 

168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Debt Discount and Deferred Financing Costs

 

 

(3,327

)

 

 

(1,374

)

 

 

 

 

 

 

 

 

 

Total Debt

 

 

9,158

 

 

 

7,636

 

 

 

 

 

 

 

 

 

 

Less: Current Portion, Net

 

 

(3,139

)

 

 

(3,639

)

 

 

 

 

 

 

 

 

 

Total Long-Term Debt, Net

 

$

6,019

 

 

$

3,997

 

 

Series B Bonds

In late April 2017, these bonds were paid in full.

 

Non-interest Bearing Convertible Note (January 6, 2016)

This note was paid in full in January 2017. 

 

Non-interest Bearing Convertible Note (September 16, 2017)

This note was due to mature in March 2017. In March 2017, the Company extended the note to September 2017 with a new maturity value of $565.

 

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)

 

8% Convertible Note (July 8, 2015) and 8% Convertible Note (February 8, 2016)

On January 3, 2017, the Company entered into an amendment agreement pursuant to which, the parties refinanced an aggregate amount of $2,688 of indebtedness and extended all amortization payments for the two 8% convertible notes dated July 8, 2015 and February 8, 2016 (collectively, the “Amendment”) to October 1, 2018, which was approximately 21 months from the date of the refinancing.

 

The Amendment had a new face value of $3,126, and an 8% interest rate, with no interest payments due until October 1, 2017, payable quarterly thereafter, and an overall term of 21 months with principal due at maturity. The Amendment was convertible into shares of common stock at a price of $3.00 per share at holder’s election, and the holder agreed to eliminate the 20% pre-payment penalty for an early redemption. In connection with the refinancing, the Company issued the holder 600,000 shares of common stock, valued at $498. The Amendment resulted in the extinguishment of the old notes of $2,688 and recording of the new debt and debt issue costs. The Company recorded a $870 loss upon extinguishment. On January 26, 2017, the Amendment was paid in full resulting a loss of $498.

 

Lighthouse Seller Note #1

During the period ended April 1, 2017 and March 26, 2016, the Company paid $125 and $125 in principal, respectively.

 

Lighthouse Seller Note #2

During the period ended April 1, 2017 and March 26, 2016, the Company paid $78 and $78 in principal, respectively.

Staffing (UK) – Sellers Note

The Company paid this note in full in January 2017.

PeopleSERVE – Sellers Note

During the period ended April 1, 2017 and March 26, 2016, the Company paid $197 and $197 in principal, respectively. 

 

Jackson Investment Group Term Loan

On January 26, 2017, the Company entered into a note and warrant purchase agreement with JIG for $7,400. Under the terms of this agreement, the Company issued to JIG 1,650,000 shares of common stock and a warrant to purchase up to 3,150,000 shares of common stock at an initial exercise price of $1.35 per share (the “Warrant”). The note accrues interest on the principal amount at a rate of 6% per annum and has a maturity date of July 25, 2018. No interest or principal is payable until maturity. At any time during the term of the note, upon notice to JIG, the Company may also, at its option, redeem all or some of the then outstanding principal amount of the note by paying to JIG an amount not less than $100 of the outstanding principal (and in multiples of $100), plus any accrued but unpaid interest and liquidated damages and other amounts due under the note. The note’s principal is not convertible into shares of common stock; however 50% of the accrued interest on the note may be converted into shares of common stock, at the sole election of JIG at maturity or upon prepayment by the Company, at a conversion price equal to $2.00 per share. On March 14, 2017, the Company and JIG amended the warrant to include a blocker preventing JIG from owning more than 19.99% of the Company’s shares outstanding as of January 26, 2017, until the such ownership is approved by the shareholders consistent with Nasdaq Rule 5635(b).

 

The warrant is exercisable beginning on July 25, 2017 for a term of four and a half (4.5) years thereafter. The exercise price is subject to anti-dilution protection, including protection in circumstances where common stock is issued pursuant to the terms of certain existing convertible securities, provided that the exercise price shall not be adjusted below a price that is less than the consolidated closing bid price of the common stock.

 

On April 5, 2017, the Company amended the note and warrant purchase agreement with JIG and entered into a second subordinated secured note with JIG for $1,650. Under the terms of this amended agreement, the Company issued to JIG 296,984 shares of common stock, with an additional 370,921 shares of common stock to be issued upon shareholder approval of the issuance of shares to JIG in excess of the 19.99% limit. Also on April 5, 2017, the Company amended the Warrant to allow JIG to purchase up to an additional

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)

 

825,463 shares of common stock, modified the initial exercise price of the Warrant to $1.00 per share and modified the conversion price of accrued interest on the note issued to JIG in January 2017 to $1.50. The Warrant was also amended to increase the amount of common stock issuable to JIG pursuant to the anti-dilution clause contained therein. The second note accrues interest on the principal amount at a rate of 6% per annum and has a maturity date of June 8, 2019; however, in the event the Company satisfies all of its outstanding obligations with Midcap Financial Trust, the maturity date will be adjusted to July 25, 2018. No interest or principal is payable on the second note until maturity. At any time during the term of the second note, upon notice to JIG, the Company may also, at its option, redeem all or some of the then outstanding principal amount of the note by paying to JIG an amount not less than $100 of the outstanding principal (and in multiples of $100), plus any accrued but unpaid interest and liquidated damages and other amounts due under the note. The second note’s principal is not convertible into shares of common stock; however, 50% of the accrued interest on the second note can be converted into shares of common stock, at the sole election of JIG at maturity or in the event of a prepayment by the Company, at a conversion price equal to $1.50 per share. The proceeds of this transaction were used to redeem the remaining shares and conversion rights of the Series D Preferred Stock.

Midcap Financial Trust – Term Loan

During the period ended April 1, 2017 and March 26, 2016, the Company paid $300 and $125 in principal, respectively.  

ABN AMRO Term Loan

During the period ended April 1, 2017 and March 26, 2016, the Company paid $116 and $135 in principal, respectively. Since payments on this term loan are in denominated GBP, the Company is subject to foreign exchange charges.   On March 29, 2017, Longbridge Recruitment 360 Limited and The JM Group each received a reservation of rights letter from ABN AMRO bank with respect to technical noncompliance with certain financial covenants contained in their financing documents with the bank. There was no financial impact of receiving this letter.

Sterling National Bank Promissory Note

During the period ended April 1, 2017 and March 26, 2016, the Company paid $48 and $40 in principal, respectively.

Non-interest Bearing Convertible Note - April 11, 2017

On April 11, 2017, the Company entered into a non-interest bearing convertible note for $477, whereby the Company received cash of $400. This note will mature in October 2017.

 

 

NOTE 5 – EQUITY

Common Stock

The Company issued 4,762,200 shares of common stock during the period ended April 1, 2017 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

 

 

1,673,000

 

 

$

1,052

 

 

$

0.56

 

 

$

0.76

 

JIG term loan

 

 

1,650,000

 

 

 

876

 

 

 

0.73

 

 

 

0.73

 

Employees

 

 

706,200

 

 

 

539

 

 

 

0.75

 

 

 

0.75

 

Extension of convertible notes

 

 

600,000

 

 

 

498

 

 

 

0.83

 

 

 

0.83

 

Board and Committee members

 

 

125,500

 

 

 

93

 

 

 

0.62

 

 

 

0.75

 

Consultants

 

 

7,500

 

 

 

6

 

 

 

0.70

 

 

 

0.75

 

 

 

 

4,762,200

 

 

$

3,064

 

 

 

 

 

 

 

 

 

The difference between the fair value of shares issued and the change in Additional Paid In Capital during the period results from the accounting for conversions of Series D Preferred Stock which uses a historical value versus the fair value of common stock issued on the date of conversion.

13


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)

 

As of December 31, 2016, the Company’s authorized common stock consists of 20,000,000 shares having par value of $0.00001. Effective January 26, 2017, after obtaining shareholder approval, the Company amended its Articles of Incorporation to increase the number of authorized shares of common stock from 20,000,000 shares to 40,000,000 shares. The Company had issued and outstanding 13,901,995 and 9,139,795 shares of common stock as of April 1, 2017 and December 31, 2016, respectively.

 

Subsequent to April 1, 2017 the Company issued 300,000 shares of common stock to the holders of the Series D Preferred Stock in connection with the redemption of such Series D Preferred Stock, and 296,984 shares of common stock in connection with the April 2017 amendments with JIG.

 

In May 2017, using its effective shelf registration on Form S-3 (No. 333-208910), the Company entered into an at-the-market offering agreement with Joseph Gunnar & Co., LLC to establish an at-the-market equity offering program pursuant to which they are able, with the Company’s authorization, to offer and sell up to $3 million of the Company’s common stock at prevailing market prices from time to time. As of the date these unaudited condensed consolidated financial statements are issued, the Company had sold 72,409 shares of common stock under this program.

 

Convertible Preferred Shares 

Series D Preferred Stock

During the period ended April 1, 2017, holders converted 31 shares of Series D Preferred Stock to 1,673,000 shares of common stock.

 

 

 

Shares

 

 

Balance

 

Face Value

 

 

211

 

 

$

2,110

 

Original Issue Discount

 

 

 

 

 

 

(110

)

Beneficial Conversion Feature

 

 

 

 

 

 

(615

)

Conversions

 

 

(118

)

 

 

(773

)

Balance, Net at December 31, 2016

 

 

93

 

 

 

612

 

Conversions

 

 

(31

)

 

 

(205

)

Ending Balance, Net at April 1, 2017

 

 

62

 

 

$

407

 

 

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 shares 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.

 

On April 5, 2017, the Company entered into an agreement with holders of the Series D Preferred shares to redeem the remaining 62 shares of Series D Preferred Stock and terminate all future conversion rights, in return for $1,500 in cash and 300,000 shares of common stock.

 

Warrants

On January 26, 2017, the Company issued the Warrant to JIG which entitled JIG to purchase up to 3,150,000 shares of common stock at an initial exercise price of $1.35 per share (subject to adjustment). The Warrant is exercisable beginning on July 25, 2017 for a term of four and a half (4.5) years thereafter. The exercise price is subject to anti-dilution protection, including protection in circumstances where common stock is issued pursuant to the terms of certain existing convertible securities, provided that the exercise price shall not be adjusted below a price that is less than the consolidated closing bid price of the common stock.

 

14


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)

 

Transactions involving the Company’s warrant issuances are summarized as follows:

 

 

 

Number of

shares

 

 

Weighted Average Price

Per Share

 

Oustanding at December 31, 2016

 

 

33,630

 

 

$

19.52

 

Issued

 

 

3,150,000

 

 

 

1.35

 

Exercised

 

 

 

 

 

 

Expired or cancelled

 

 

 

 

 

 

Outstanding at April 1, 2017

 

 

3,183,630

 

 

$

1.54

 

 

On April 5, 2017, the Company amended the Warrant and entered into a second subordinated secured note with JIG for $1,650. Under the terms of the amended Warrant, JIG may purchase up to an additional 825,463 shares of common stock at $1.00 per share. The Warrant was amended to increase the amount of common stock issuable to JIG pursuant to the anti-dilution clause contained therein, and to adjust the initial exercise price to $1.00 per share.

 

Stock Options

On October 25, 2016, our Board adopted the 2016 Omnibus Incentive Plan (the “2016 Plan”) to, among other things, attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. On January 26, 2017, our stockholders approved the 2016 Plan, pursuant to which 2,500,000 shares of the Company’s common stock will be reserved for issuance under stock and stock option awards. During the period ended April 1, 2017 the Company issued to employees and consultants, 838,300 shares and 313,500 options, with an exercise price of $1.35 per share to purchase shares of common stock, and therefore has 1,348,200 remaining under this plan. The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option pricing model. The Company used the following assumptions for determining the fair value of options granted under the Black-Scholes option pricing model:

 

Exercise price

 

$

1.35

 

Market price at date of grant

 

$

0.80

 

Volatility

 

 

108.72

%

Expected dividend rate

 

 

 

Expected term (years)

 

 

5

 

Risk-free interest rate

 

 

1.93

%

 

During the period ended April 1, 2017 and March 26, 2016, the Company recorded share based payment expense of $93 and $90, respectively, in connection with all options outstanding.

 

 

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 period ended April 1, 2017 and March 26, 2016, the Company paid $23 and $29, respectively, towards the earn-out liability. At April 1, 2017, the remaining balance was $1,298 of which approximately $105 is recorded in other current liabilities and $1,193 is recorded in other long-term liabilities.

 

Pursuant to the acquisition of The JM Group, the purchase price includes a cash payment to the shareholders for performance-based compensation of (a) £850 if the gross profit for the 12 month period ending on the anniversary date of the date of completion (the “Anniversary TTM Gross Profit”) is equal to 90% or more of the gross profit for the twelve months ending October 31, 2015 (the “Completion TTM Gross Profit”); or (b) if the Anniversary TTM Gross Profit is less than 90% of the Completion TTM Gross Profit, a sum equal to £850 multiplied by the Anniversary TTM Gross Profit/Completion TTM Gross Profit. The Company recorded the maximum contingent liability amount of £850 ($1,180). At December 31, 2016, the remaining balance was $1,026 and was recorded in other current liabilities. While unpaid, the balance accrued interest at 10.25% per annum. The balance was paid in full in January 2017.

15


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 

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

On May 22, 2014, NewCSI, Inc. (“NewCSI”), the former owners of Control Solutions International, filed a complaint in the United States District Court for the Western District of Texas, Austin Division, against the Company arising from the terms of the Stock Purchase Agreement dated August 14, 2013 between the Company and NewCSI. NewCSI claims that the Company breached a provision of the Stock Purchase Agreement (“SPA § 2.7”) that required the Company to calculate and pay to NewCSI 50% of certain “Deferred Tax Assets” within 90 days after December 31, 2013, subject to certain criteria. The Complaint sought payment of the amount allegedly owed under SPA § 2.7 and acceleration of earn-out payments provided for in the Stock Purchase Agreement of $1,400, less amounts paid to date, and attorneys’ fees. 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 as of December 31, 2014 totaling $429 (balance of $1,671 at December 31, 2014), should the Company or CSI “be unable, or admit in writing its inability, to pay its debts as they mature.” The Company responded denying the material allegations and interposing numerous affirmative defenses, including that the earn-out liability was fully expensed at the time of the acquisition and fully accrued for on the Company’s balance sheet as part of the purchase accounting at the time of the acquisition. 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 the Company had not complied with SPA § 2.7 and owed $154, but that NewCSI had not proven that the Company or CSI had become unable to pay debts as they came due. 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, the Company filed a Motion for Entry of Judgment as a Matter of Law seeking entry of judgment against NewCSI on the jury’s finding that the Company had not complied with SPA § 2.7, or, in the alternative, for a reduction of damages to $154 and to hold that NewCSI may not be awarded accelerated earn-out payments as that would result in an illegal penalty.

 

On October 21, 2015, judgment was entered in this action in favor of NewCSI and against the Company in the amount of $1,307, plus pre-judgment interest, post-judgment interest, and costs. On January 26, 2016, the District Court set the bond in respect of the NewCSI litigation at $1,384. The Company has filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit seeking reversal of the judgment and posted a supersedeas bond to stay the execution of the judgment pending appeal. On April 18, 2016, the Court granted the NewCSI shareholders’ request for payment of attorneys’ fees, but reserved judgment on the amount of fees to award pending the outcome of the Company’s appeal. As of January 2016, the NewCSI shareholders have claimed they have incurred $552 in attorney’s fees, which could increase during the pendency of the appeal. On November 3, 2016, oral arguments for the appeal were heard and now the Company is awaiting further instruction from the United States Court of Appeals for the Fifth Circuit.

 

We believe that the Company acted in a manner consistent with our contractual rights, and we intend to aggressively defend the Company against NewCSI. Nevertheless, there can be no assurance that the outcome of this litigation will be favorable to the Company.

Staffing 360 Solutions, Inc. v. Former Officers of Staffing 360 Solutions, Inc.

On November 13, 2015, in a separate proceeding, Staffing 360 initiated an arbitration before JAMS against three officers of Staffing 360, each a former Staffing 360 officer and employee.  In its demand for arbitration and statement of claim, Staffing 360 alleged that these individuals breached their employment agreements with Staffing 360 and the fiduciary duties each owed to the Company.  The three respondents responded with a counterclaim alleging wrongful termination and have moved to dismiss the arbitration, as well as moved for severance in relation to the remainder of their contracts. On July 20, 2016, the arbitrator decided in favor of both of the respondents’ motions.  Further on September 21, 2016 the arbitrator rendered the final award, which was set at $1,433. The Company is awaiting an order from the Court confirming the award. In addition, the Company has calculated interest and made a payment towards legal fees included in the final award amount. As of April 1, 2017, the balance is $1,649. This amount has already been fully accrued for and expensed.

16


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 7 – SEGMENTS

The Company’s operating segments, which are consistent with its reportable segments, are organized by geography in accordance with its internal management and reporting structure.

For the period ended April 1, 2017 and March 26, 2016, the Company generated revenue and gross profit by segment as follows:

 

 

 

January 1, 2017 to   April 1, 2017

 

 

December 27, 2015 to March 26, 2016

 

United States

 

$

34,011

 

 

$

35,024

 

United Kingdom

 

 

6,669

 

 

 

8,120

 

Canada

 

 

32

 

 

 

16

 

Total Revenue

 

$

40,712

 

 

$

43,160

 

 

 

 

 

 

 

 

 

 

United States

 

$

5,869

 

 

$

5,529

 

United Kingdom

 

 

1,447

 

 

 

1,691

 

Canada

 

 

10

 

 

 

6

 

Total Gross Profit

 

$

7,326

 

 

$

7,226

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses, excluding

   depreciation and amortization stated below

 

$

(7,627

)

 

$

(7,530

)

Depreciation and amortization

 

 

(760

)

 

 

(839

)

Interest expense

 

 

(502

)

 

 

(600

)

Amortization of beneficial conversion feature

 

 

(184

)

 

 

(183

)

Amortization of debt discount and deferred financing costs

 

 

(335

)

 

 

(473

)

Debt extinguishment costs

 

 

(1,368

)

 

 

 

Other income (expense)

 

 

2

 

 

 

(22

)

Loss Before Provision for Income Tax

 

$

(3,448

)

 

$

(2,421

)

 

As of April 1, 2017, and December 31, 2016, the Company has assets in the U.S., the U.K. and Canada as follows:

 

 

 

April 1,

 

 

December 31,

 

 

 

2017

 

 

2016

 

United States

 

$

40,960

 

 

$

44,990

 

United Kingdom

 

 

9,295

 

 

 

8,936

 

Canada

 

 

27

 

 

 

31

 

Total Assets

 

$

50,282

 

 

$

53,957

 

 

 

NOTE 8 – RELATED PARTY TRANSACTIONS

Consulting Fees – Related Party

Board and Committee Members

During the period ended April 1, 2017 and March 26, 2016, the Company incurred $13 and $13, respectively, in board of director fees to Dimitri Villard. During the period ended April 1, 2017 and March 26, 2016, Mr. Villard also received 1,500 and 1,500 shares of common stock valued at $1 and $6, respectively for his services as a board and committee member. During the period ended April 1, 2017, Mr. Villard received 40,000 shares valued at $30 as a bonus. The Company has $0 in accrued in accounts payable and accrued expenses – related parties account, as of April 1, 2017.

17


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)

 

During the period ended April 1, 2017 and March 26, 2016, the Company incurred $13 and $13, respectively, in board of director fees to Jeff Grout. During the period ended April 1, 2017 and March 26, 2016, Mr. Grout also received 1,500 and 1,500 shares of common stock valued at $1 and $6, respectively, for his service as a board and committee member. Mr. Grout also received 40,000 shares valued at $40 as a bonus during the period ended April 1, 2017. The Company has $0 balance in accrued in accounts payable and accrued expenses – related parties account as of April 1, 2017.

During the period ended April 1, 2017 and March 26, 2016, the Company incurred $13 and $13, respectively, in board of director fees to Nick Florio. During the period ended April 1, 2017 and March 26, 2016, Mr. Florio also received 2,500 and 1,250 shares of common stock valued at $2 and $5, respectively for his services as a board and committee member. In addition, during the period ended April 1, 2017, Mr. Florio received 40,000 shares valued at $30 as a bonus. At the request of Mr. Florio, all cash payments, common stock issuances and stock option issuances have been made in the name of Citrin Cooperman & Company, LLP.  The Company has $0 balance in accrued in accounts payable and accrued expenses – related parties account as of April 1, 2017.

 

 

NOTE 9 – SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

January 1, 2017

to April 1, 2017

 

 

December 27, 2015 to March 26, 2016

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

402

 

 

$

564

 

Income taxes

 

 

110

 

 

 

3