UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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 ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files.) Yes ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | 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 November 13, 2024, shares of common stock, $ par value, were outstanding.
Form 10-Q Quarterly Report
INDEX
| 2 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share, per share and par values)
| As of | As of | |||||||
| September 28, 2024 | December 30, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Current assets held for sale | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Right of use asset | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued payroll taxes | ||||||||
| Accrued expenses - related party | ||||||||
| Current debt - related party, net | ||||||||
| Current portion of debt, net | ||||||||
| Earn out liabilities | ||||||||
| Accounts receivable financing | ||||||||
| Leases - current liabilities | ||||||||
| Other current liabilities | ||||||||
| Current liabilities held for sale | ||||||||
| Total Current Liabilities | ||||||||
| Leases - non current | ||||||||
| Other long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, $ par value, shares authorized; | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, as of September 28, 2024 and December 30, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
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, per share and per share values)
(UNAUDITED)
| THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
September 28, 2024 | September 30, 2023 | September 28, 2024 | September 30, 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of Revenue, excluding depreciation and amortization stated below | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Net Loss From Continuing Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Expenses: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of debt discount and deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (loss) income, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Discontinued Operations | ( | ) | ( | ) | ||||||||||||
| Loss Before Benefit from Income Tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision from Income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Attributable to Common Stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Operating Loss Attributable to Common Stockholders - Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Income (Loss) from Discontinued Operations Attributable to Common Stockholders - Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted Average Shares Outstanding – Basic | ||||||||||||||||
| Net Loss Attributable to Common Stockholders - Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Operating Loss Attributable to Common Stockholders - Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Income (Loss) from Discontinued Operations Attributable to Common Stockholders - Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted Average Shares Outstanding – Diluted | ||||||||||||||||
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)
| THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
September 28, 2024 | September 30, 2023 | September 28, 2024 | September 30, 2023 | |||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other Comprehensive Income (Loss) | ||||||||||||||||
| Foreign exchange translation adjustment | ||||||||||||||||
| Comprehensive Loss Attributable to the Company | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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 CHANGES IN STOCKHOLDERS’ DEFICIT
(All amounts in thousands, except share and par values)
(UNAUDITED)
| Shares | Par Value | Additional paid-in capital | Accumulated other comprehensive income | Accumulated Deficit | Total Deficit | |||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Balance, June 29, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||
| Employees, directors and consultants | ||||||||||||||||||||||||
| Warrants Exercised | ||||||||||||||||||||||||
| Stock Split Adjustment | ||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 28, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Shares | Par Value | Additional paid-in capital | Accumulated other comprehensive loss | Accumulated Deficit | Total Deficit | |||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Balance, December 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||
| Employees, directors and consultants | ||||||||||||||||||||||||
| Warrants Exercised | ||||||||||||||||||||||||
| Stock Split Adjustment | 104,702 | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 28, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(All amounts in thousands, except share and par values)
(UNAUDITED)
| Shares | Par Value | Additional paid in capital | Accumulated other comprehensive income | Accumulated Deficit | Total Equity | |||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Balance, July 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||
| Employees, directors and consultants | ||||||||||||||||||||||||
| Warrants Exercised | ||||||||||||||||||||||||
| Shares issued in connection with debt - related party | ||||||||||||||||||||||||
| Modification of Series H | — | |||||||||||||||||||||||
| Foreign currency translation loss | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Shares | Par Value | Additional paid in capital | Accumulated other comprehensive income (loss) | Accumulated Deficit | Total Equity | |||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Shares issued to/for: | ||||||||||||||||||||||||
| Employees, directors and consultants | ||||||||||||||||||||||||
| Sale of common stock and warrants | ||||||||||||||||||||||||
| Warrants Exercised | ||||||||||||||||||||||||
| Shares issued in connection with debt - related party | ||||||||||||||||||||||||
| Modification of Series H | — | |||||||||||||||||||||||
| Foreign currency translation gain | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(UNAUDITED)
| September 28, 2024 | September 30, 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount and deferred financing costs | ||||||||
| Bad debt expense | ||||||||
| Right of use assets depreciation | ||||||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets | ||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Accrued Payroll Taxes | ||||||||
| Accounts payable, related party | ||||||||
| Other current liabilities | ( | ) | ( | ) | ||||
| Other long-term liabilities | ( | ) | ||||||
| NET CASH (USED IN) PROVIDED BY CONTINUING OPERATING ACTIVITIES | ( | ) | ||||||
| Net cash used in discontinued operating activities: | ( | ) | ( | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| NET CASH USED IN CONTINUING INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| Net cash provided by discontinued investing activities | ||||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from related party note | ||||||||
| Repayment of term loans | ( | ) | ||||||
| Payment in kind | ||||||||
| Financing (repayments) on accounts receivable financing, net | ( | ) | ||||||
| Warrant inducement, net | ||||||||
| Proceeds from sale of common stock | ||||||||
| Third party financing costs, related party | ( | ) | ||||||
| Payments made on earnouts | ( | ) | ||||||
| NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES | ||||||||
| Net cash used in discontinued financing activities | ( | ) | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE TO (DECREASE IN) CASH | ( | ) | ||||||
| Effect of exchange rates on cash | ||||||||
| Cash - Beginning of period | ||||||||
| Cash - End of period | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 8 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share, par values and stated value per share)
(UNAUDITED)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Staffing 360 Solutions, Inc. (“we,” “us,” “our,” “Staffing 360,” or the “Company”) was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation, which changed its name to Staffing 360 Solutions, Inc., ticker symbol “STAF,” on March 16, 2012. On June 15, 2017, the Company reincorporated in the State of Delaware.
We are a public company in the domestic staffing sector. Our business model is based on finding and acquiring suitable, mature, profitable, operating, U.S.-based staffing companies. Our targeted consolidation model is focused specifically on the accounting and finance, information technology (“IT”), engineering, administration (“Professional”) and light industrial (“Commercial”) disciplines. Our typical acquisition model is based on paying consideration in the form of cash, stock, earn-outs and/or promissory notes. In furthering our business model, we are regularly in discussions and negotiations with various suitable, mature acquisition targets. To date, we have completed ten acquisitions since November 2013. In February 2024, the Company disposed of its UK operations. Accordingly, all of the figures, including share and per share information, except where specifically referenced, have been revised to reflect only the results of continuing operations.
The Company focuses on five strategic verticals that represent sub-segments of the staffing industry. These five strategic pillars, accounting & finance, information technology, engineering, administration, and commercial are the basis for the Company’s sales and revenue generation and its growth acquisition targets.
The
Headway business includes EOR (“Employer of Record”) service contracts. EOR projects are typically large volume,
long-term providing HR outsourcing of payroll and benefits for a contingent workforce. EOR projects, while priced with lower gross
margin percentages than traditional temporary staffing assignments, yield a comparable contribution because of lower costs to
deliver these services.
The Company has developed a centralized, sales and recruitment hub. The addition of Headway, with its single office, and nationwide coverage for operations, supports and accelerates the Company’s objective of driving efficiencies using technology, deemphasizing bricks and mortar, supporting more efficient and cost-effective service delivery for all Brands.
The Company has a management team with significant operational and M&A experience. The combination of this management experience and the increased opportunity for expansion of its core Brands with EOR services and nationwide expansion, provide for the opportunity of significant organic growth, while plans to continue its business model, finding and acquiring suitable, mature, profitable, operating, U.S. based staffing companies continues.
The Company effected a one-for-ten reverse stock split on June 25, 2024 (the “Reverse Stock Split”). All share and per share information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and related notes thereto, has, where applicable, been retroactively adjusted to reflect the Reverse Stock Split.
| 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 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. All amounts are in thousands, except share, per share and par values, unless otherwise indicated.
The accompanying 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 GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Liquidity
The
accompanying condensed consolidated financial statements do not include any adjustments or classifications that may result from the
possible inability of the Company to continue as a going concern. The accompanying condensed consolidated financial statements have
been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse
developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available
to us. As shown in the accompanying condensed consolidated financial statements as of the quarter ended September 28, 2024, the
Company has an accumulated deficit of $
Due to the timing of select liabilities coming due, we are in discussion with our lenders to determine the best manner to settle these liabilities.
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available to us.
Further, the notes issued to Jackson Investment Group LLC (“Jackson”) includes certain financial customary covenants and the Company is currently not in compliance. We are working with the lenders to bring the Company into compliance with these covenants.
The
entire outstanding principal balance of the Jackson Notes (as defined herein), which was $
| 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)
Going Concern
The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. Historically, the Company has funded such payments either through cash flow from operations or the raising of capital through additional debt or equity. If the Company is unable to obtain additional capital, such payments may not be made on time.
The Board of the Company is reviewing all of the strategic options open to it in determining how to resolve the Going Concern qualification and will update Stockholders as and when any material solution has been determined and ready to be acted upon. These solutions may include, but are not limited to, the restructuring of debt and raising of additional debt, management of expenditures, raising of additional equity, potential dispositions of assets, in addition to what has already happened in disposing of the UK operation to protect cash flows.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected. Significant estimates for the quarters ended September 28, 2024 and September 30, 2023 include the measurement of credit losses, valuation of intangible assets, including goodwill, borrowing rate consideration for right-of-use (“ROU”), liabilities associated with earn-out obligations, testing long-lived assets for impairment, valuation reserves against deferred tax assets and penalties in connection with outstanding payroll tax liabilities, stock based compensation and fair value of warrants and options.
| 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)
Goodwill
Goodwill relates to amounts that arose in connection with various acquisitions and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but it is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, a decline in the equity value of the business, a significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
| 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)
The
Company has primarily two main forms of revenue – temporary contractor revenue and permanent placement revenue. Temporary
contractor revenue is accounted for as a single performance obligation satisfied over time because the customer simultaneously
receives and consumes the benefits of the Company’s performance on an hourly or daily basis. The contracts stipulate weekly or
monthly billing, and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the
hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of
performance completed to date. Permanent placement revenue is recognized on the date the candidate’s full-time employment with
the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms,
typically 30 days. The contract with the customer stipulates a guarantee period whereby the customer may be refunded if the employee
is terminated within a short period of time, however this has historically been infrequent, and immaterial upon occurrence. As such,
the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has
transferred to the customer. Revenue for the three and nine months ended September 28, 2024 was comprised of $
Income Taxes
The Company utilizes Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company applies the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in the financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of the date of this filing, the Company is current on all corporate, federal and state tax returns. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax expense.
The
effective income tax rate was (
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
| 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)
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. Refer to Note 9 – Stockholders’ Deficit for further details.
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740), which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The new guidance requires consistent categorization and greater disaggregation of information in the rate reconciliation, as well as further disaggregation of income taxes paid. This change is effective for annual periods beginning after December 15, 2024. This change will apply on a prospective basis to annual financial statements for periods beginning after the effective date. However, retrospective application in all prior periods presented is permitted. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.
The Company utilizes the guidance per ASC 260, “Earnings per Share”. Basic earnings per share are calculated by dividing income/loss available to stockholders by the weighted average number of common stock shares outstanding during each period.
Diluted earnings per share are computed using the weighted average number of common stock shares and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents consist of shares of common stock issuable upon the conversion of preferred stock, convertible notes, unvested equity awards and the exercise of stock options and warrants (calculated using the modified treasury stock method). Such securities, shown below, presented on a common stock equivalent basis and outstanding as of September 28, 2024 and September 30, 2023 have not been included in the diluted earnings per share computations, as their inclusion would be anti-dilutive due to the Company’s net loss as of September 28, 2024 and September 30, 2023:
| September 28, 2024 | September 30, 2023 | |||||||
| Warrants | ||||||||
| Restricted shares – unvested | ||||||||
| Options | ||||||||
| Total | ||||||||
| 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)
NOTE 4 – ACCOUNTS RECEIVABLE FINANCING
Midcap Funding X Trust
Prior
to September 15, 2017, certain U.S. subsidiaries of the Company were party to a $
On October 26, 2020, the Company entered into Amendment No. 17 to that certain Credit and Security Agreement, dated April 8, 2017, by and among, the Company, as the parent, Monroe Staffing Services, LLC, a Delaware limited liability company, Faro Recruitment America, Inc., a New York corporation, Lighthouse Placement Services, Inc., a Massachusetts corporation, Staffing 360 Georgia, LLC, a Georgia limited liability company, and Key Resources, Inc., a North Carolina corporation, as borrowers (the “Credit Facility Borrowers”), MidCap Funding IV Trust as successor by assignment to MidCap (as agent for lenders), and other financial institutions or other entities from time to time parties thereto as lenders (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit and Security Agreement”) pursuant to which, among other things, the parties agreed to extend the maturity date of our outstanding asset based revolving loan until September 1, 2022. In addition, the Company also agreed to certain amendments to the financial covenants.
On
October 27, 2022, the Company and the Credit Facility Borrowers entered into Amendment No. 27 and Joinder Agreement to the Credit and
Security Agreement (“Amendment No. 27”) with MidCap Funding IV Trust as successor by assignment to MidCap and the lenders
party thereto. Amendment No. 27, among other things, (i) increases the revolving loan commitment amount from $
In
addition,
| 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)
The
facility provides events of default including: (i) failure to make payment of principal or interest on any Loans when required, (ii)
failure to perform obligations under the facility and related documents, (iii) not paying its debts as such debts become due and similar
insolvency matters, and (iv) material adverse changes in the financial condition of business prospectus of any Borrower (subject to a
10-day notice and cure period). Upon an event of default, the Company’s obligations under the credit facility may, or in the event
of insolvency or bankruptcy will automatically, be accelerated. At the election of agent or required lenders (or automatically in case
of bankruptcy or insolvency events of default), upon the occurrence of any event of default and for so long as it continues, the facility
will bear interest at a rate equal to the lesser of: (i)
Under the terms of this agreement, the Company is subject to affirmative covenants which are customary for financings of this type, including covenants to: (i) maintain good standing and governmental authorizations, (ii) provide certain information and notices to MidCap, (iii) deliver monthly reports and quarterly financial statements to MidCap, (iv) maintain insurance, (v) discharge all taxes, (vi) protect its intellectual property, and (vii) generally protect the collateral granted to MidCap. The Company is also subject to negative covenants customary for financings of this type, including that it may not: (i) enter into a merger or consolidation or certain change of control events, (ii) incur liens on the collateral, (iii) except for certain permitted acquisitions, acquire any significant assets other than in the ordinary course of business, (iv) assume certain additional senior debt, or (v) amend any of its organizational documents. The Company is currently not in compliance with certain affirmative covenants contained in its’ debt agreements. We are working with the lenders to bring the Company into compliance with these covenants.
On
August 30, 2023, the Company and the Credit Facility Borrowers entered into Amendment No. 28 to Credit and Security Agreement with MidCap
and the lenders party thereto (the “Lenders”). Amendment No. 28, among other things:
In
addition, pursuant Amendment No. 28, no later than five (5) business days following the receipt of any cash proceeds from any equity
issuance or other cash contribution from the Company’s equity holders, the Company shall prepay the revolving loans by an amount
equal to (i) the sum of $
In
connection with Amendment No. 28, the Company paid to MidCap (i) a modification fee of $
On August 30, 2023, in connection with that certain First Omnibus Amendment and Reaffirmation Agreement, by and among the Company, the guarantor parties thereto and Jackson (the “First Omnibus Amendment Agreement”) the 2023 Jackson Note (as defined herein) and Amendment No. 28, the Company, Jackson, the Lenders and MidCap entered into the Sixth Amendment to Intercreditor Agreement (the “Sixth Amendment”), which amended the Intercreditor Agreement, dated as of September 15, 2017 (as amended, restated, amended and restated, supplemented, or otherwise modified from time to time, the “Intercreditor Agreement”), by and between the Company, Jackson and MidCap. The Sixth Amendment, among other things, provides for (i) consent by the Lenders to the First Omnibus Amendment Agreement and (ii) consent by Jackson to Amendment No. 28.
In connection with the Second Omnibus Amendment and Reaffirmation Agreement to the Note Documents entered into by the Company and Jackson on September 18, 2024, the Credit Facility Borrowers entered into Amendment No. 30 to the Credit and Security Agreement (“Amendment No. 30”), effective as of September 18 2024, which such Amendment No. 30 extends the Commitment Expiry Date (as defined in the Credit and Security Agreement to December 5, 2024.
In addition, pursuant
to Amendment No. 30, in consideration for MidCap’s agreement to enter Amendment No. 30, the Credit Facility Borrowers have
agreed to pay MidCap a modification fee of $
| 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)
On
October 9, 2024, the Credit Facility Borrowers entered into Amendment No. 31 to the Credit and Security Agreement (“Amendment
No. 31”) with MidCap effective as of the same date,. Pursuant to Amendment No. 31, the definition of Additional Reserve Amount
(as defined in the Credit and Security Agreement) is amended and restated as follows: (i) from October 9, 2024, through November 14,
2024, the Additional Reserve Amount shall be $
Pursuant to Amendment No. 31, in consideration
for MidCap’s agreement to enter into Amendment No. 31, the Borrowers have agreed to pay to MidCap a modification fee of $
The
balance of the MidCap facility as of September 28, 2024 and December 30, 2023 was $
On October 18, 2024, the Company received a notice of default from MidCap. This notice reserves the Lender’s available rights and remedies under the Credit Agreement.
NOTE 5 – INTANGIBLE ASSETS
The following provides a breakdown of intangible assets as of:
| September 28, 2024 | ||||||||||||||||
| Tradenames | Non-Compete | Customer Relationship | Total | |||||||||||||
| Intangible assets, gross | $ | $ | $ | $ | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Intangible assets, net | $ | $ | $ | $ | ||||||||||||
| December 30, 2023 | ||||||||||||||||
| Tradenames | Non-Compete | Customer Relationship | Total | |||||||||||||
| Intangible assets, gross | $ | $ | $ | $ | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Intangible assets, net | $ | $ | $ | $ | ||||||||||||
| 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)
As of September 28, 2024, estimated annual amortization expense for each of the next five fiscal years is as follows:
| Fiscal quarter ended September | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
Amortization
of intangible assets for the three and nine months ended September 28, 2024 and September 30, 2023 was $
NOTE 6 – GOODWILL
The following table provides a roll forward of goodwill:
September 28, 2024 | December 30, 2023 | |||||||
| Beginning balance, gross | $ | $ | ||||||
| Acquisition | ||||||||
| Currency translation adjustment | ||||||||
| Ending balance, net | $ | $ | ||||||
Goodwill by reportable segment is as follows:
September 28, 2024 | December 30, 2023 | |||||||
| Professional Staffing - US | $ | $ | ||||||
| Commercial Staffing - US | ||||||||
| Ending balance, net | $ | $ | ||||||
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350, requires that goodwill be tested for impairment at the operating segment level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. ASC 280-10-50-11 states that operating segments often exhibit similar long-term financial performance if they have similar economic characteristics. During the quarter ended September 28, 2024, management concluded the Company has two operating segments for goodwill impairment analysis under ASC 350 such as commercial and professional. Accordingly, goodwill will no longer be tested at the unit level for the five reporting units and will be tested for impairment at the operating segment level.
| 18 |
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– DEBT
September 28, 2024 | December 30, 2023 | |||||||
| Jackson Investment Group - related party | $ | $ | ||||||
| Redeemable Series H Preferred Stock | ||||||||
| Total Debt, Gross | ||||||||
| Less: Debt Discount and Deferred Financing Costs, Net | ( | ) | ( | ) | ||||
| Total Debt, Net | ||||||||
| Less: Non-Current Portion - Related Party | ||||||||
| Less: Non-Current Portion | ||||||||
| Total Current Debt, Net | $ | $ | ||||||
Jackson Notes
On
August 30, 2023, the Company and the guarantor parties thereto (together with the Company, the “Obligors”) entered into that
certain First Omnibus Amendment and Reaffirmation Agreement to the Note Documents (the “First Omnibus Amendment Agreement”)
with Jackson, which First Omnibus Amendment Agreement, among other things: (i)
| 19 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
In
addition, pursuant to the terms of the Third A&R Agreement, as amended by the First Omnibus Amendment Agreement, until all principal
interest and fees due pursuant to the Third A&R Agreement and the Jackson Note are paid in full by the Company and are no longer
outstanding, Jackson shall have a first call over
On September 18, 2024,
the Company entered into a Second Omnibus Amendment and Reaffirmation Agreement to the Note Documents (the
“Amendment Agreement”) with Jackson and the guarantors party thereto, which such Amendment Agreement amount other
things:
Redeemable Series H Preferred Stock
On
May 18, 2022, the Company entered into a Headway purchase agreement with Headway (the “Headway Purchase Agreement”). Consideration
for the purchase of
In
accordance with ASC 480-10-15-3, the agreement includes certain rights and options including: redemption, dividend, voting, and conversion
which have characteristics akin to liability and equity. The Series H Preferred Stock is redeemable and has a defined maturity date upon
the third anniversary of the original issue date. As such and based on the authoritative guidance, the Series H Preferred Stock meets
the definition of a debt instrument. The Company obtained a third-party valuation report to calculate the fair value of Series H Preferred
Stock. As of May 18, 2022, the fair value of the Redemption Price was calculated as $
On July 31, 2023, the Company, Chapel Hill Partners, L.P. (“Chapel Hill”) and Jean-Pierre Sakey (“Sakey”) entered into an agreement in connection with the Headway Purchase Agreement.
Pursuant
to the agreement, if on or prior to September 30, 2023, the Company does not redeem the Series H Preferred Stock and remit the Contingent
Payment (as defined in the Headway Purchase Agreement), then the Company shall make the Contingent Payment in the amount of $
Pursuant to the Letter Agreement, the Company also had no obligation to pay the Preferred Dividend (as defined in the Certificate of Designation of Preferences, Rights and Limitations of Series H Convertible Preferred Stock, as amended) on June 30, 2023, September 30, 2023 and December 31, 2023.
| 20 |
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 8 – LEASES
As
of September 28, 2024 the Company recorded a right of use (“ROU”) lease asset of approximately $
In
January 2024, the Company entered into a new lease agreement for an office lease in Worcester, MA for a term of
Quantitative information regarding the Company’s leases for period ended September 28, 2024 is as follows:
| Lease Cost | Classification | September 28, 2024 | ||||
| Operating lease cost | SG&A Expenses | |||||
| Other information | ||||||
| Weighted average remaining lease term (years) | ||||||
| Weighted average discount rate | % | |||||
Future minimum lease payments under non-cancelable leases as of September 28, 2024, were as follows:
| Future Lease Payments | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
| Less: Imputed Interest | ||||
| $ | ||||
| Leases - Current | $ | |||
| Leases - Non current | $ | |||
As most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This methodology was deemed to yield a measurement of the ROU lease asset and associated lease liability that was appropriately stated in all material respects.
| 21 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 9– STOCKHOLDERS’ DEFICIT
The Company issued the following shares of common stock during the nine months ended September 28, 2024:
| Number of | Fair Value | Fair Value at Issuance | ||||||||||||||
| Common Shares | of Shares | (minimum and maximum | ||||||||||||||
| Shares issued to/for: | Issued | Issued | per share) | |||||||||||||
| Warrants Exercised | $ | $ | $ | |||||||||||||
| Board and committee members | $ | $ | ||||||||||||||
| $ | ||||||||||||||||
The Company issued the following shares of common stock during the nine-months ended September 30, 2023:
| Number of | Fair Value | Fair Value at Issuance | ||||||||||||||
| Common Shares | of Shares | (minimum and maximum | ||||||||||||||
| Shares issued to/for: | Issued | Issued | per share) | |||||||||||||
| Equity raise | $ | $ | $ | |||||||||||||
| Employees | $ | $ | ||||||||||||||
| Board and committee members | $ | $ | ||||||||||||||
| $ | ||||||||||||||||
Reverse Stock Split
On June 25, 2024, the Company effected the Reverse Stock Split. All share and per share information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and the notes thereto, has, where applicable, been retroactively adjusted to reflect the Reverse Stock Split.
Increase of Authorized Common Stock
On December 27, 2023, stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Charter”) to increase the number of authorized shares of common stock from to and to make a corresponding change to the number of authorized shares of capital stock. The number of shares of authorized Preferred Stock remained unchanged.
| 22 |
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)
February 2023 Public Offering
On
February 7, 2023, the Company entered into a securities purchase agreement (“February 2023 Purchase Agreement”) with an institutional,
accredited investor (the “Investor”) for the issuance and sale, in a best efforts public offering (the “February 2023
Offering”), of (i)
In
connection with the February 2023 Offering, the Investor entered into a warrant amendment agreement (the “February 2023 Warrant
Amendment Agreement”) with the Company to amend the exercise price of certain existing warrants to purchase up to an aggregate
of
The Company utilized the net proceeds from the February 2023 Offering for general working capital purposes.
H.C.
Wainwright & Co., LLC (“Wainwright”) acted as the Company’s exclusive placement agent in connection with the February
2023 Offering, pursuant to that certain engagement letter, dated as of January 4, 2023, as amended (the “Wainwright Engagement
Letter”), between the Company and Wainwright. Pursuant to the Wainwright Engagement Letter, the Company paid Wainwright (i) a cash
fee equal to
| 23 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The Units, the Pre-Funded Units, the shares of common stock included as part of the Units and Pre-Funded Units, the February 2023 Pre-Funded Warrants, the February 2023 Warrants, the shares of common stock issuable upon the exercise of the February 2023 Pre-Funded Warrants and the February 2023 Warrants, the February 2023 Placement Agent Warrants and the shares of common stock issuable upon the exercise thereof were offered by the Company pursuant to a Registration Statement on Form S-1, as amended (File No. 333-269308), initially filed on January 20, 2023 with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and declared effective on February 7, 2023.
Series A Preferred Stock – Related Party
As
of September 28, 2024 and September 30, 2023, the Company had $
Restricted Shares
The Company has issued shares of restricted stock to employees and members of the Board under its 2015 Omnibus Incentive Plan, 2016 Omnibus Incentive Plan, 2020 Omnibus Plan and 2021 Omnibus Inventive Plan. Under these plans, the shares are restricted for a period of three years from issuance. As of September 28, 2024, the Company has issued a total of restricted shares of common stock to employees and Board members that remain restricted. In accordance with ASC 718, Compensation – Stock Compensation, the Company recognizes stock-based compensation from restricted stock based upon the fair value of the award at issuance over the vesting term on a straight-line basis. The fair value of the award is calculated by multiplying the number of restricted shares by the Company’s stock price on the date of issuance. The impact of forfeitures has historically been immaterial to the financial statements. In the nine months ended September 28, 2024 and September 30, 2023, the Company recorded compensation expense associated with these restricted shares of $ and $, respectively. The table below is a rollforward of unvested restricted shares issued to employees and board of directors.
| Weighted | ||||||||
| Restricted | Average | |||||||
| Shares | Price Per Share | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested/adjustments | ( | ) | ||||||
| Outstanding at December 30, 2023 | ||||||||
| Granted | ||||||||
| Vested/adjustments | ( | ) | ||||||
| Outstanding at September 28, 2024 | $ | |||||||
Warrants
In
connection with the private placement consummated in July 2022 (the “July 2022 Private Placement”), on July 7, 2022, the
Company entered into warrant amendment agreements (the “Warrant Amendment Agreements”) with each of the nine existing participating
investors, which amended warrants to purchase up to
| 24 |
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
connection with the Third A&R Agreement, the Company (i) issued to Jackson five year warrants to purchase up to an aggregate of
shares of common stock at an exercise price of $
In
connection with the February 2023 Offering, the Company entered into the February 2023 Purchase
Agreement with the Investor for the issuance and sale, in a best efforts public offering, of (i)
On
September 1, 2023, the Company entered into an inducement offer letter agreement (the “Inducement Letter”) with a
certain holder (the “Holder”) of certain of its existing warrants to purchase up to an aggregate of
Pursuant
to the Inducement Letter, the Holder agreed to exercise for cash its Existing Warrants to purchase an aggregate of
The
closing of the transactions contemplated pursuant to the Inducement Letter occurred on September 6, 2023 (the “Closing Date”).
The Company received aggregate gross proceeds of approximately $
The
Company issued to Wainwright or its designees warrants (the “September 2023 Placement Agent Warrants”) to purchase up to
shares of common stock. The September 2023 Placement Agent Warrants have substantially the same terms as the September 2023 Warrants,
except that the September 2023 Placement Agent Warrants have an exercise price equal to $
On
September 8, 2024, the Company entered into a securities exchange agreement (the “Exchange Agreement”) with a certain institutional
investor (the “Holder”) pursuant to which the Company agreed to issue an aggregate of (i) shares of common stock and (ii) a pre-funded
warrant to purchase up to shares of common stock in exchange for a certain
outstanding warrant held by the Holder to purchase up to
| 25 |
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:
| Weighted | ||||||||
| Number of | Average | |||||||
| Shares | Exercise Price | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Issued | ||||||||
| Exercised | ( | ) | ||||||
| Expired or cancelled | ( | ) | ||||||
| Outstanding at December 30, 2023 | ||||||||
| Issued | ||||||||
| Exercised | ( | ) | ||||||
| Expired or cancelled | ( | ) | ||||||
| Outstanding at September 28, 2024 | $ | |||||||
| Weighted Average | ||||||||||||
| Number | Remaining | Weighted | ||||||||||
| Outstanding | Contractual | Average | ||||||||||
| Exercise Price | and Exercisable | Life (years) | Exercise price | |||||||||
| $ | $ | |||||||||||
Stock Options
| Weighted | ||||||||
| Average | ||||||||
| Options | Exercise Price | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired or cancelled | ||||||||
| Outstanding at December 30, 2023 | ||||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired or cancelled | ( | ) | ||||||
| Outstanding at September 28, 2024 | $ | |||||||
| 26 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The Company recorded share-based payment expense of $, $, $ and $ for the three and nine month periods ended September 28, 2024 and September 30, 2023, respectively.
Limited Duration Stockholder Rights Agreement
On September 27, 2023, the board of directors (the “Board”) of the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock and. 03889 Rights for each outstanding share of Series H Preferred Stock (collectively with the common stock, the “Voting Stock”). The dividend was paid on October 21, 2023 to the stockholders of record at the close of business on October 21, 2023 (the “Record Date”). Each Right initially entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $ per share, of the Company (the “Preferred Stock”) at a price of $ per one one-thousandth of a share of Preferred Stock (the “Purchase Price”), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement, dated as of October 1, 2023, as the same may be amended from time to time (the “Rights Agreement”), between the Company and Securities Transfer Corporation, as Rights Agent.
Until the close of business on the earlier of (i) 10 business days following the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) by the Company or an Acquiring Person (as defined below) that an Acquiring Person has become such, or such other date, as determined by the Board, on which a Person has become an Acquiring Person, or (ii) 10 business days (or such later date as may be determined by action of the Board prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date of the commencement of, or the first public announcement of an intention to commence, a tender or exchange offer the consummation of which would result in any person or group of affiliated or associated persons becoming an Acquiring Person (the earlier of such dates being called the “Distribution Date”), (x) the Rights will be evidenced by the certificates representing the Voting Stock registered in the names of the holders thereof (or by book entry shares in respect of such Voting Stock) and not by separate Right Certificates (as defined below), and (y) the Rights will be transferable only in connection with the transfer of Voting Stock.
Until the Distribution Date (or earlier expiration of the Rights), (i) new Voting Stock certificates issued after the Record Date upon transfer or new issuances of Voting Stock will contain a legend incorporating the terms of the Rights Agreement by reference, and (ii) the surrender for transfer of any certificates representing Voting Stock (or book entry shares of Voting Stock) outstanding as of the Record Date will also constitute the transfer of the Rights associated with the shares of Voting Stock represented thereby. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights (“Right Certificates”) will be mailed to holders of record of the Voting Stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights.
Except as otherwise provided in the Rights Agreement, the Rights are not exercisable until the Distribution Date. The Rights will expire on the earliest of (i) October 2, 2026 or such later date as may be established by the Board prior to the expiration of the Rights, (ii) the time at which the Rights are redeemed pursuant to the terms of the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company pursuant to an agreement of the type described in the Rights Agreement at which time the Rights are terminated, or (iv) the time at which such Rights are exchanged pursuant to the terms of the Rights Agreement.
| 27 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The Purchase Price payable, and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights is subject to adjustment from time to time, among others, (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe for or purchase Preferred Stock at a price, or securities convertible into Preferred Stock with a conversion price, less than the then-current market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in Preferred Stock) or of subscription rights or warrants (other than those referred to above).
The number of outstanding Rights is subject to adjustment in the event of a stock dividend on any class or series of Voting Stock payable in shares of a class or series of Voting Stock or subdivisions, consolidations or combinations of any class or series of Voting Stock occurring, in any such case, prior to the Distribution Date.
Shares
of Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Preferred Stock will be entitled, when,
as and if declared, to a minimum preferential quarterly dividend payment of the greater of
In the event of any merger, consolidation, combination or other transaction in which outstanding shares of common stock are converted or exchanged, each share of Preferred Stock will be entitled to receive 10,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of common stock is changed or exchanged.
| 28 |
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
the event that, after a Flip-In Event, the Company is acquired in a merger or other business combination transaction or
At
any time after a Flip-In Event and prior to the acquisition by an Acquiring Person of
With
certain exceptions,
At any time prior to a Flip-In Event, the Board may redeem all but not less than the then outstanding Rights at a price of $ per Right, subject to adjustment (the “Redemption Price”) payable, at the option of the Company, in cash, shares of common stock or such other form of consideration as the Board shall determine. The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
For so long as the Rights are then redeemable, the Company may, in its sole discretion, except with respect to the Redemption Price, supplement or amend any provision in the Rights Agreement without the approval of any holders of the Rights. After the Rights are no longer redeemable, the Company may, except with respect to the Redemption Price, supplement or amend the Rights Agreement without the approval of any holders of Rights, provided that no such supplement or amendment may adversely affect the interests of holders of the Rights, cause the Rights Agreement to become amendable contrary to the provisions of the Rights Agreement, or cause the Rights to again to become redeemable.
Until a Right is exercised or exchanged, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.
| 29 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Earn-out Liabilities
Pursuant
to the acquisition of KRI on August 27, 2018, the purchase price includes earnout consideration payable to the seller of $
On
March 9, 2024, a Settlement and Release Agreement was entered into by both parties. Under this agreement, which was entered into to avoid
costly court fees, the Company agreed to make a payment, in full and final settlement, of $
On October 9, 2024, the Company entered into
Amendment No. 1 to the Settlement and Release Agreement (“Amendment No.1”) to pay $
Pursuant
to the Headway Acquisition that closed on May 18, 2022, the purchase price includes an earnout payment totaling up to $
The
Company performed an analysis over the contingent payment and prepared a forecast to determine the likelihood of the Adjusted EBITDA
payout. The adjusted EBITDA TTM forecast, as of June 2024, is above the $
Legal Proceedings
Whitaker v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.
On
March 9, 2024, a Settlement and Release Agreement was entered into by both parties. Under this agreement, which was entered into to avoid
costly court fees, the Company agreed to make a payment, in full and final settlement, of $
On
October 9, 2024, the Company entered into Amendment No. 1 to the Settlement and Release Agreement to pay $
| 30 |
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 the date of this filing, we are not aware of any other material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, other than as disclosed above.
NOTE 11 – SEGMENT INFORMATION
The Company generated revenue and gross profit by segment as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2024 | September 30, 2023 | September 28, 2024 | September 30, 2023 | |||||||||||||
| Commercial Staffing - US | $ | $ | $ | $ | ||||||||||||
| Professional Staffing - US | ||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
| Commercial Staffing - US | $ | $ | $ | $ | ||||||||||||
| Professional Staffing - US | ||||||||||||||||
| Total Gross Profit | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative expenses | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense and amortization of debt discount and deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Discontinued Operations | ( | ) | ( | ) | ||||||||||||
| Other loss income, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss Before Provision for Income Tax | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 31 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
The following table disaggregates revenues by segments:
| Quarter Ended September 28, 2024 | ||||||||||||
Commercial Staffing - US | Professional Staffing - US | Total | ||||||||||
| Permanent Revenue | $ | $ | $ | |||||||||
| Temporary Revenue | ||||||||||||
| Total Revenue | $ | $ | $ | |||||||||
| Quarter Ended September 30, 2023 | ||||||||||||
| Commercial Staffing - US | Professional Staffing - US | Total | ||||||||||
| Permanent Revenue | $ | $ | $ | |||||||||
| Temporary Revenue | ||||||||||||
| Total Revenue | $ | $ | $ | |||||||||
| Nine Months Ended September 28, 2024 | ||||||||||||
| Commercial Staffing - US | Professional Staffing - US | Total | ||||||||||
| Permanent Revenue | $ | $ | $ | |||||||||
| Temporary Revenue | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||
| Commercial Staffing - US | Professional Staffing - US | Total | ||||||||||
| Permanent Revenue | $ | $ | $ | |||||||||
| Temporary Revenue | ||||||||||||
| Total | $ | $ | $ | |||||||||
| 32 |
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 12 – RELATED PARTY TRANSACTIONS
In addition to the shares of Series A Preferred Stock and notes and warrants issued to Jackson, the following are other related party transactions:
Board and Committee Members
| Nine Months Ended September 28, 2024 | ||||||||||||||||
Cash Compensation | Shares Issued | Value of Shares Issued | Compensation Expense Recognized | |||||||||||||
| Dimitri Villard | $ | $ | $ | |||||||||||||
| Nick Florio | ||||||||||||||||
| Vincent Cebula | ||||||||||||||||
| Alicia Barker | ||||||||||||||||
| Brendan Flood | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||
Cash Compensation | Shares Issued | Value of Shares Issued | Compensation Expense Recognized | |||||||||||||
| Dimitri Villard | $ | $ | $ | |||||||||||||
| Jeff Grout | ||||||||||||||||
| Nick Florio | ||||||||||||||||
| Vincent Cebula | ||||||||||||||||
| Alicia Barker | ||||||||||||||||
| Brendan Flood | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| Three Months Ended September 28, 2024 | ||||||||||||||||
Cash Compensation | Shares Issued | Value of Shares Issued | Compensation Expense Recognized | |||||||||||||
| Dimitri Villard | $ | $ | $ | |||||||||||||
| Nick Florio | ||||||||||||||||
| Vincent Cebula | ||||||||||||||||
| Alicia Barker | ||||||||||||||||
| Brendan Flood | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| Three Months Ended September 30, 2023 | ||||||||||||||||
Cash Compensation | Shares Issued | Value of Shares Issued | Compensation Expense Recognized | |||||||||||||
| Dimitri Villard | $ | $ | $ | |||||||||||||
| Jeff Grout | ||||||||||||||||
| Nick Florio | ||||||||||||||||
| Vincent Cebula | ||||||||||||||||
| Alicia Barker | ||||||||||||||||
| Brendan Flood | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 33 |
STAFFING 360 SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share, per share and stated value per share)
(UNAUDITED)
NOTE 13 – SUPPLEMENTAL CASH FLOW INFORMATION
| Nine Months Ended | ||||||||
| September 28, 2024 | September 30, 2023 | |||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Non-Cash Investing and Financing Activities: | ||||||||
| Redeemable Series H preferred stock, net | $ | |||||||
| Modification of Series H | $ | |||||||
| Debt discount -Series H | $ | $ | ||||||
| Debt discount -Related party note | $ | $ | ||||||
NOTE 14 - DISCONTINUED OPERATIONS
In
December 2023, given the recurring losses of Professional Staffing UK, management committed to a plan to sell the assets of Professional
Staffing UK. On January 6, 2024 Staffing 360 Solutions Limited, a UK Subsidiary, filed a Notice of Intent with the High Court of Justice
in the UK, stating the Company’s intention to appoint administrators to save the business from liquidation. Administrators were
appointed on January 18, 2024, and the business was transferred to new owners on February 12, 2024. A gain on the transfer of the UK
entity of $
| 34 |
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 15 – SUBSEQUENT EVENTS
Nasdaq Compliance
On
June 20, 2024, the Company received a letter from the Staff (the “Staff”) of the Nasdaq Stock Market LLC
(“Nasdaq”) pertaining to its non-compliance with Nasdaq Listing Rule 5550(b)(1), the requirement to maintain a minimum
stockholders’ equity of $
On October 8, 2024, the Company received a letter from the Panel indicating that the Panel determined to grant the Company’s request to continue its listing on Nasdaq, subject to certain milestones being met on November 1, 2024, and December 31, 2024.
Whittaker Settlement
On
October 9, 2024, the Company entered into Amendment No. 1 to pay $
Amendment No. 31 with MidCap
On
October 9, 2024, we entered into Amendment No. 31 to the Credit and Security Agreement with MidCap and the lenders party thereto from
time to time. Pursuant to Amendment No. 31, the definition of Additional Reserve Amount (as defined in the Credit and Security Agreement)
was amended and restated as follows: (i) from October 9, 2024, through November 14, 2024, the Additional Reserve Amount shall be $
Pursuant
to Amendment No. 31, in consideration for MidCap’s agreement to enter into Amendment No. 31, we agreed to pay to MidCap a modification
fee of $
Massachusetts Department of Revenue
On October 29, 2024, the Company
received notice from the Massachusetts Department of Revenue (“DOR”) that they have filed a lien against the Company for $
Internal Revenue Service
On October 1, 2024, the Company received notice from the Internal Revenue
Service (“IRS”) that they have filed a lien against the Company for $
Agreement and Plan of Merger
On November 1, 2024, the Company, Atlantic International Corp., a Delaware corporation (“Atlantic”) and A36 Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Atlantic (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Company, with Company surviving as a wholly owned subsidiary of the Atlantic (the “Merger”). Subject to the terms and conditions of the Merger Agreement, upon completion of the Merger, each share of the Company’s issued and outstanding common stock immediately prior to the effective time of the Merger, other than certain excluded shares and dissenting shares, will be canceled and converted into the right to receive a number of shares of validly issued, fully paid and nonassessable shares of common stock of Atlantic, par value of $per share (the “Atlantic Common Stock”), equal to the Exchange Ratio (as defined in the Merger Agreement), with any resulting fractional shares to be rounded to the nearest whole share.
| 35 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report. This section includes a number of forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect our current views with respect to future events and financial performance. All statements that address expectations or projections about the future, including, but not limited to, statements about our plans, strategies, adequacy of resources and future financial results (such as revenue, gross profit, operating profit, cash flow), are forward-looking statements. Some of the forward-looking statements can be identified by words like “anticipates,” “believes,” “expects,” “may,” “will,” “can,” “could,” “should,” “intends,” “project,” “predict,” “plans,” “estimates,” “goal,” “target,” “possible,” “potential,” “would,” “seek,” and similar references to future periods. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Important factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to: our ability to regain and maintain compliance with the Nasdaq Capital Market’s (“Nasdaq”) listing standards; our ability to continue as a going concern; negative outcome of pending and future claims and litigation; our ability to access the capital markets by pursuing additional debt and equity financing to fund our business plan and expenses on terms acceptable to us or at all; our ability to comply with our contractual covenants, including in respect of our debt; potential cost overruns and possible rejection of our business model and/or sales methods; weakness in general economic conditions and levels of capital spending by customers in the industries we serve; weakness or volatility in the financial and capital markets, which may result in the postponement or cancellation of our customers’ capital projects or the inability of our customers to pay our fees; delays or reductions in U.S. government spending; credit risks associated with our customers; competitive market pressures; the availability and cost of qualified labor; our level of success in attracting, training and retaining qualified management personnel and other staff employees; changes in tax laws and other government regulations, including the impact of health care reform laws and regulations; the possibility of incurring liability for our business activities, including, but not limited to, the activities of our temporary employees; our performance on customer contracts; and government policies, legislation or judicial decisions adverse to our businesses. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except as required by law. We recommend readers to carefully review the entirety of this Quarterly Report on Form 10-Q, including the risk factors set forth under the heading “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q and under the same or similar headings in the other reports and documents we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our Annual Reports on Form 10-K. Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Overview
We are incorporated in the state of Delaware. We are a rapidly growing public company in the domestic staffing sector. Our high-growth business model is based on finding and acquiring suitable, mature, profitable, operating, U.S. based staffing companies. Our targeted consolidation model is focused specifically on the accounting and finance, information technology (“IT”), engineering, administration (“Professional”) and light industrial (“Commercial”) disciplines.
Business Model, Operating History and Acquisitions
We are a high-growth domestic staffing company engaged in the acquisition of staffing companies. As part of our consolidation model, we pursue a broad spectrum of staffing companies supporting primarily the Professional and Commercial Business Streams. Our typical acquisition model is based on paying consideration in the form of cash, stock, earn-outs and/or promissory notes. In furthering our business model, we are regularly in discussions and negotiations with various suitable, mature acquisition targets. To date we have completed 10 acquisitions, since November 2013.
2024 Reverse Stock Split
On June 24, 2024, we filed an amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a one-for-ten reverse stock split (the “Reverse Stock Split”), effective as of 4:05 p.m. (New York time) on June 25, 2024. All share and per share information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and related notes thereto, has, where applicable, been retroactively adjusted to reflect the Reverse Stock Split.
| 36 |
Recent Developments
Agreement and Plan of Merger
On November 1, 2024, we, Atlantic International Corp., a Delaware corporation (“Atlantic”) and A36 Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Atlantic (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into us, with us surviving as a wholly owned subsidiary of the Atlantic (the “Merger”). Subject to the terms and conditions of the Merger Agreement, upon completion of the Merger, each share of our issued and outstanding common stock immediately prior to the effective time of the Merger, other than certain excluded shares and dissenting shares, will be canceled and converted into the right to receive a number of shares of validly issued, fully paid and nonassessable shares of common stock of Atlantic, par value of $0.00001 per share (the “Atlantic Common Stock”), equal to the Exchange Ratio (as defined in the Merger Agreement), with any resulting fractional shares to be rounded to the nearest whole share.
Second Omnibus Amendment and Reaffirmation Agreement to the Note Documents with Jackson Investment Group, LLC
On September 18, 2024, we entered into a Second Omnibus Amendment and Reaffirmation Agreement to the Note Documents (the “Amendment Agreement”) with Jackson Investment Group, LLC (“Jackson”) and the guarantors party thereto, which such Amendment Agreement, among other things: (i) extends the maturity date of that certain Third Amended and Restated Note and Warrant Purchase Agreement, by and between us and Jackson, dated as of October 27, 2022, as amended by the First Omnibus Amendment and Reaffirmation Agreement to the Note Documents, dated as of August 30, 2023, to the earlier of (a) January 13, 2025, or (b) the date of the acceleration of the maturity of any of the Notes (as defined below) and (ii) extends the maturity date of that certain (a) Third Amended and Restated 12% Senior Secured Note due October 14, 2024, dated as of October 27, 2022 (the “2022 Jackson Note”), and (b) 12% Senior Secured Promissory Note due October 14, 2024, dated as of August 30, 2023 (the “2023 Jackson Note”), to January 13, 2025.
Amendments to the Credit and Security Agreement and Limited Waiver with MidCap
Amendment No. 30 to the Credit and Security Agreement
In connection with the Amendment Agreement, we entered into Amendment No. 30 (“Amendment No. 30”) to the Credit and Security Agreement and Limited Waiver (as amended, the “Credit and Security Agreement”), effective as of September 18, 2024, by and among us and MidCap Funding IV Trust, as agent for the lenders (as successor by assignment to MidCap Funding X Trust, “MidCap”) and the lenders party thereto from time to time. Pursuant to Amendment No. 30, the Commitment Expiry Date (as defined in the Credit and Security Agreement) was extended to December 5, 2024. In addition, pursuant to Amendment No. 30, in consideration for MidCap’s agreement to enter into Amendment No. 30, we agreed to pay to MidCap a modification fee of $200,000 (the “Amendment No. 30 Modification Fee”), which such Modification Fee shall be non-refundable and fully earned as of September 5, 2024. The Amendment No. 30 Modification Fee shall constitute a portion of our obligations pursuant to the Credit and Security Agreement and shall be secured by all Collateral (as defined in the Credit and Security Agreement). If we satisfy the outstanding obligations pursuant to the Credit and Security Agreement in full prior to December 5, 2024, the Amendment No. 30 Modification Fee shall be waived by MidCap.
Amendment No. 31 to the Credit and Security Agreement
On October 9, 2024, we entered into Amendment No. 31 to the Credit and Security Agreement with MidCap and the lenders party thereto from time to time. Pursuant to Amendment No. 31, the definition of Additional Reserve Amount (as defined in the Credit and Security Agreement) was amended and restated as follows: (i) from October 9, 2024, through November 14, 2024, the Additional Reserve Amount shall be $960,000, (ii) from November 15, 2024, through November 21, 2024, the Additional Reserve Amount shall be $980,000, (iii) from November 22, 2024, through November 28, 2024, the Additional Reserve Amount shall be $1,000,000, and (iv) from November 29, 2024, through December 5, 2024, the Additional Reserve Amount shall be $1,020,000. Additionally, pursuant to Amendment No. 31, the definition of “Permitted Debt” is hereby amended by adding a new clause covering our debt obligations pursuant to that certain Settlement and Release Agreement, dated as of March 29, 2024, by and among us, Monroe and Pamela D. Whitaker, in the aggregate amount not to exceed $2,000,000 at any time.
Pursuant to Amendment No. 31, in consideration for MidCap’s agreement to enter into Amendment No. 31, we agreed to pay to MidCap a modification fee of $190,000 (the “Amendment No. 31 Modification Fee”), which such Amendment No. 31 Modification Fee shall be non-refundable and fully earned as of effective date of the Amendment No. 31. The Modification Fee shall constitute a portion of our obligations pursuant to the Credit and Security Agreement and shall be secured by all Collateral (as defined in the Credit and Security Agreement).
| 37 |
For the three months ended September 28, 2024 and September 30, 2023
Three Months Ended September 28, 2024 | % of Revenue | Three Months Ended September 30, 2023 | % of Revenue | Growth | ||||||||||||||||
| Revenue | $ | 46,098 | 100.0 | % | $ | 49,537 | 100.0 | % | -6.9 | % | ||||||||||
| Cost of revenue | 39,936 | 86.6 | % | 41,874 | 84.5 | % | -4.6 | % | ||||||||||||
| Gross profit | 6,162 | 13.4 | % | 7,663 | 15.5 | % | -19.6 | % | ||||||||||||
| Operating expenses | 7,470 | 16.2 | % | 9,154 | 18.5 | % | -18.4 | % | ||||||||||||
| Loss from operations | (1,308 | ) | -2.8 | % | (1,491 | ) | -3.0 | % | 12.3 | % | ||||||||||
| Interest Expense | (487 | ) | -1.1 | % | (1,197 | ) | -2.4 | % | -59.3 | % | ||||||||||
| Discontinued Operations | - | 0.0 | % | (1,190 | ) | -2.4 | % | -100.0 | % | |||||||||||
| Other (expenses) income | (998 | ) | -2.2 | % | (356 | ) | -0.7 | % | 180.1 | % | ||||||||||
| Provision for income taxes | (51 | ) | -0.1 | % | (21 | ) | 0.0 | % | 149.2 | % | ||||||||||
| Net loss | $ | (2,844 | ) | -6.2 | % | $ | (4,255 | ) | -8.6 | % | -33.2 | % | ||||||||
For the nine months ended September 28, 2024 and September 30, 2023
Nine Months Ended September 28, 2024 | % of Revenue | Nine Months Ended September 30, 2023 | % of Revenue | Growth | ||||||||||||||||
| Revenue | $ | 131,719 | 100.0 | % | $ | 145,776 | 100.0 | % | -9.6 | % | ||||||||||
| Cost of revenue | 114,432 | 86.9 | % | 123,600 | 84.8 | % | -7.4 | % | ||||||||||||
| Gross profit | 17,287 | 13.1 | % | 22,176 | 15.2 | % | -22.0 | % | ||||||||||||
| Operating expenses | 21,450 | 16.3 | % | 25,498 | 17.5 | % | -15.9 | % | ||||||||||||
| Loss from operations | (4,163 | ) | -3.2 | % | (3,322 | ) | -2.3 | % | 25.3 | % | ||||||||||
| Interest Expense | (2,954 | ) | -2.2 | % | (3,338 | ) | -2.3 | % | -11.5 | % | ||||||||||
| Discontinued Operations | 901 | 0.7 | % | (2,879 | ) | -2.0 | % | -131.3 | % | |||||||||||
| Other (expenses) income | (1,003 | ) | -0.8 | % | (383 | ) | -0.3 | % | 161.9 | % | ||||||||||
| Provision for income taxes | (151 | ) | -0.1 | % | (67 | ) | 0.0 | % | 125.4 | % | ||||||||||
| Net loss | $ | (7,370 | ) | -5.6 | % | $ | (9,989 | ) | -6.9 | % | -26.2 | % | ||||||||
Revenue
For the nine months ended September 28, 2024, revenue decreased by 9.6% to $131,719 as compared with $145,776 in revenue for the nine months ended September 30, 2023. The decline in revenue was more prevalent in Commercial Staffing as a result of a challenging U.S. operating environment. Commercial Staffing declined by 17.1% and Professional Staffing Business was down by 2.6%. In the Quarter-ended September 28, 2024, the Commercial Staffing business was down by 19.1% year-on-year with Professional Staffing up by 4.3%.
Revenue for the nine months ended September 28, 2024, was comprised of $130,922 of temporary contractor revenue and $797 of permanent placement revenue, compared with $144,864 and $913 of temporary contractor revenue and permanent placement revenue, respectively, for the nine months ended September 30, 2023.
| 38 |
Cost of revenue, Gross profit and Gross margin
Cost of revenue includes the variable cost of labor and various non-variable costs (e.g., workers’ compensation insurance) relating to employees (temporary and permanent) as well as sub-contractors and consultants. For the nine months ended September 28, 2024, cost of revenue was $114,432, a decrease of 7.4% from $123,600 for the nine months ended September 30, 2023, compared with a decline in revenue of 9.6%. Overall gross profit margin declined from 15.2% to 13.1% mainly driven by the proportion of the revenue driven by lower margin Employer of Record (EOR) being 38.6% in the nine months ended September 28, 2024 versus 32.1% in the nine months ended September 30, 2023.
Operating expenses
Total operating expenses for the nine months ended September 28, 2024, were $21,450, a decrease of 15.9% from $25,498 for the nine months ended September 30, 2023. The decrease in operating expenses was driven primarily by reductions in force put into effect in May 2023 and again in February 2024.
Other expenses, net
Total other income (expenses), net for the nine months ended September 28, 2024 were ($102), an increase of 96.9% from ($3,262) for the nine months ended September 30, 2023. The increase was driven by an income recognized for discontinued operations of $901 as of July 29, 2024 versus an expense of $2,879 as of September 30, 2023.
Amortization of debt discount and deferred financing costs for the nine months ended September 28, 2024 were $347, an increase of $27, compared with amortization of debt discount and deferred financing costs for the nine months ended September 30, 2023, which were $321. In addition, for the nine months ended September 28, 2024, we had other income of $127 compared with other loss of $63 for the nine months ended September 30, 2023.
Non-GAAP Measures
To supplement our condensed consolidated financial statements presented in accordance with GAAP, we also use non-GAAP financial measures and key performance indicators (“KPIs”) in addition to our GAAP results. We believe non-GAAP financial measures and KPIs may provide useful information for evaluating our cash operating performance, ability to service debt, compliance with debt covenants and measurement against competitors. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be comparable to similarly entitled measures reported by other companies.
| 39 |
We present the following non-GAAP financial measure and KPIs in this report:
Revenue and Gross Profit by Business Streams We use this KPI to measure our mix of Revenue and respective profitability between our two main lines of business due to their differing margins. For clarity, these lines of business are not our operating segments, as this information is not currently regularly reviewed by the chief operating decision maker to allocate capital and resources. Rather, we use this KPI to benchmark our business against the industry.
The following table details Revenue and Gross Profit by sector:
| Three Months Ended | ||||||||||||||||
| September 28, 2024 | Mix | September 30, 2023 | Mix | |||||||||||||
| Revenue | ||||||||||||||||
| Commercial Staffing - US | $ | 19,172 | 42 | % | $ | 23,714 | 48 | % | ||||||||
| Professional Staffing - US | 26,926 | 58 | % | 25,823 | 52 | % | ||||||||||
| Total Service Revenue | $ | 46,098 | $ | 49,537 | ||||||||||||
| Gross Profit | ||||||||||||||||
| Commercial Staffing - US | $ | 3,127 | 51 | % | $ | 5,185 | 68 | % | ||||||||
| Professional Staffing - US | 3,035 | 49 | % | 2,478 | 32 | % | ||||||||||
| Total Gross Profit | $ | 6,162 | $ | 7,663 | ||||||||||||
| Gross Margin | ||||||||||||||||
| Commercial Staffing - US | 16.3 | % | 21.9 | % | ||||||||||||
| Professional Staffing - US | 11.3 | % | 9.6 | % | ||||||||||||
| Total Gross Margin | 13.4 | % | 15.5 | % | ||||||||||||
| Nine Months Ended | ||||||||||||||||
| September 28, 2024 | Mix | September 30, 2023 | Mix | |||||||||||||
| Revenue | ||||||||||||||||
| Commercial Staffing - US | $ | 58,970 | 45 | % | $ | 71,106 | 49 | % | ||||||||
| Professional Staffing - US | 72,749 | 55 | % | 74,670 | 51 | % | ||||||||||
| Total Service Revenue | $ | 131,719 | $ | 145,776 | ||||||||||||
| Gross Profit | ||||||||||||||||
| Commercial Staffing - US | $ | 9,417 | 54 | % | $ | 13,294 | 60 | % | ||||||||
| Professional Staffing - US | 7,870 | 46 | % | 8,882 | 40 | % | ||||||||||
| Total Gross Profit | $ | 17,287 | $ | 22,176 | ||||||||||||
| Gross Margin | ||||||||||||||||
| Commercial Staffing - US | 16.0 | % | 18.7 | % | ||||||||||||
| Professional Staffing - US | 10.8 | % | 11.9 | % | ||||||||||||
| Total Gross Margin | 13.1 | % | 15.2 | % | ||||||||||||
Adjusted EBITDA. This measure is defined as net income (loss) attributable to common stock before: interest expense, benefit from income taxes; depreciation and amortization; acquisition, capital raising and other non-recurring expenses; other non-cash charges; impairment of goodwill; re-measurement gain on intercompany note; restructuring charges; other income (loss); and charges the Company considers to be non-recurring in nature such, as legal expenses associated with litigation, professional fees associated with potential and completed acquisitions. We use this measure because we believe it provides a more meaningful understanding of our profit and cash flow generation.
| 40 |
| Three Months Ended | Nine Months Ended | Trailing Twelve Months | ||||||||||||||||||||||
| September 28, 2024 | September 30, 2023 | September 28, 2024 | September 30, 2023 | September 28, 2024 | September 30, 2023 | |||||||||||||||||||
| Net loss | $ | (2,844 | ) | $ | (4,255 | ) | $ | (7,370 | ) | $ | (9,989 | ) | $ | (17,695 | ) | $ | (18,140 | ) | ||||||
| Interest expense | 487 | 1,197 | 2,954 | 3,338 | 4,625 | 3,497 | ||||||||||||||||||
| Expense (benefit) from income taxes | 51 | 21 | 151 | 67 | 382 | (178 | ) | |||||||||||||||||
| Depreciation and amortization | 561 | 632 | 1,774 | 1,708 | 2,427 | 3,660 | ||||||||||||||||||
| EBITDA | $ | (1,745 | ) | $ | (2,405 | ) | $ | (2,491 | ) | $ | (4,876 | ) | $ | (10,261 | ) | $ | (11,161 | ) | ||||||
| Acquisition, capital raising and other non-recurring expenses (1) | 1,267 | 646 | 2,832 | 2,260 | 3,420 | 7,782 | ||||||||||||||||||
| Other non-cash charges (2) | 56 | - | 418 | 73 | 110 | 922 | ||||||||||||||||||
| Discontinued Operations | - | 1,190 | (901 | ) | 2,879 | 7,535 | 9,341 | |||||||||||||||||
| Other loss (income) | 911 | 237 | 656 | 63 | 349 | (613 | ) | |||||||||||||||||
| Adjusted EBITDA | $ | 489 | $ | (332 | ) | $ | 514 | $ | 399 | $ | 1,153 | $ | 6,271 | |||||||||||
| Adjusted Gross Profit | $ | 23,639 | $ | 33,526 | ||||||||||||||||||||
| Adjusted EBITDA as percentage of Adjusted Gross Profit | 4.9 | % | 18.7 | % | ||||||||||||||||||||
| (1) | Acquisition, capital raising, and other non-recurring expenses primarily relate to capital raising expenses, acquisition and integration expenses, and legal expenses incurred in relation to matters outside the ordinary course of business. | |
| (2) | Other non-cash charges primarily relate to staff option and share compensation expense, expense for shares issued to directors for board services, and consideration paid for consulting services. |
Operating Leverage. This measure is calculated by dividing the growth in Adjusted EBITDA by the growth in adjusted gross profit, on a trailing 12-month basis. We use this KPI because we believe it provides a measure of our efficiency for converting incremental gross profit into Adjusted EBITDA.
| 41 |
| September 28, 2024 | September 30, 2023 | |||||||
| Gross Profit - TTM (Current Period) | $ | 23,639 | $ | 33,526 | ||||
| Gross Profit - TTM (Prior Period) | 33,526 | 32,793 | ||||||
| Gross Profit – Growth (Decline) | $ | (9,887 | ) | $ | 733 | |||
| Adjusted EBITDA - TTM (Current Period) | $ | 1,153 | $ | 6,271 | ||||
| Adjusted EBITDA - TTM (Prior Period) | 6,271 | 2,180 | ||||||
| Adjusted EBITDA – Growth (Decline) | $ | (5,118 | ) | $ | 4,091 | |||
| Operating Leverage | 51.8 | % | 558.2 | % | ||||
Leverage Ratio. Calculated as total debt, net, gross of any original issue discount, divided by pro forma adjusted EBITDA for the trailing 12-months. We use this KPI as an indicator of our ability to service debt prospectively.
| September 28, 2024 | December 30, 2023 | |||||||
| Total Term Debt, Net | $ | 19,629 | $ | 18,453 | ||||
| Addback: Total Debt Discount and Deferred Financing Costs | 187 | 663 | ||||||
| Total Debt | $ | 19,816 | $ | 19,116 | ||||
| TTM Adjusted EBITDA | $ | 1,153 | $ | 6,271 | ||||
| Pro Forma TTM Adjusted EBITDA | $ | 1,153 | $ | 6,271 | ||||
| Pro Forma Leverage Ratio | 17.19 | x | 3.05 | x | ||||
Operating Cash Flow Including Proceeds from Accounts Receivable Financing. Calculated as net cash (used in) provided by operating activities plus net proceeds from accounts receivable financing. Because much of our temporary payroll expense is paid weekly and in advance of clients remitting payment for invoices, operating cash flow is often weaker in staffing companies where revenue and accounts receivable are growing. Accounts receivable financing is essentially an advance on client remittances and is primarily used to fund temporary payroll. As such, we believe this measure is helpful to investors as an indicator of our underlying operating cash flow.
| Nine Months Ended | ||||||||
| September 28, 2024 | September 30, 2023 | |||||||
| Net cash flow (used in) provided by operating activities | $ | (549 | ) | $ | 672 | |||
| Financing (repayments) on accounts receivable financing, net | 2,140 | (2,239 | ) | |||||
| Net cash provided by (used in) operating activities including proceeds from accounts receivable financing | $ | 1,591 | $ | (1,567 | ) | |||
The leverage ratio and operating cash flow including proceeds from accounts receivable financing should be considered together with the information in the “Liquidity and Capital Resources” section, immediately below.
| 42 |
Liquidity, Going Concern and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Historically, we have funded our operations through term loans, promissory notes, bonds, convertible notes, private placement offerings and sales of equity.
Our primary uses of cash have been for debt repayments, repayment of deferred consideration from acquisitions, professional fees related to our operations and financial reporting requirements and for the payment of compensation, benefits and consulting fees. The following trends may occur as we continue to execute on our strategy:
| ● | An increase in working capital requirements to finance organic growth; | |
| ● | Addition of administrative and sales personnel as the business grows; | |
| ● | Increases in advertising, public relations and sales promotions for existing and new brands as we expand within existing markets or enter new markets; | |
| ● | A continuation of the costs associated with being a public company; and | |
| ● | Capital expenditures to add technologies. |
Our liquidity may be negatively impacted by the significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 as amended, and other rules implemented by the SEC. We expect all of these applicable rules and regulations could significantly increase our legal and financial compliance costs and increase the use of resources.
As of and for the quarter ended September 28, 2024, we had a working capital deficiency of $48,818, accumulated deficit of $134,426, and a net loss of $2,844.
The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplate continuation as a going concern. We have an unsecured payment due in the next 12 months associated with a historical acquisition and secured current debt arrangements representing approximately $19,816 which are in excess of cash and cash equivalents on hand, in addition to funding operational growth requirements. Historically, we have funded such payments either through cash flow from operations or the raising of capital through additional debt or equity. If we are unable to obtain additional capital, such payments may not be made on time. These factors raise substantial doubt as to our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments or classifications that may result from our possible inability to continue as a going concern.
In addition, as of September 28, 2024, we have numerous contractual lease obligations representing an aggregate of approximately $4,857 related to current lease agreements. We intend to fund the majority of these obligations through a combination of cash flow from operations, as well as capital raised through additional debt or equity.
The condensed consolidated financial statements and related notes hereto included in this Quarterly Report on Form 10-Q have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available to us.
| 43 |
Operating activities
For the nine months ended September 28, 2024, net cash used in continuing operating activities of $549 was primarily attributable to net loss of $7,370 an increase in accounts receivable of $1,744, a decrease in accounts payable of $1,552 and an increase in and accrued payroll costs of $6,049. The net cash used in all operating activities was impacted by $3,007 from discontinued operations to give a total cash used in operating activities of $3,556.
For the nine months ended September 30, 2023, net cash provided by continuing operating activities of $672 was primarily attributable to net loss of $9,989, increases in Other Assets of $7,403 and the impact of non-cash items of $3,869. A negative impact of $11,397 for discontinued operations brought the total cash used in operating activities to $10,725.
Investing activities
For the nine months ended September 28, 2024, net cash provided by investing activities totaled $1,993, primarily due to $2,046 related discontinued operations offset by $53 purchase of property and equipment.
For the nine months ended September 30, 2023, net cash provided by investing activities totaled $4,718, primarily due to $138 purchase of property and equipment and $4,856 related to discontinued operations.
Financing activities
For the nine months ended September 28, 2024, net cash provided by financing activities totaled $2,340, due to additional cash received of $2,140 on accounts receivable financing, net, conversion of dividends on Series H preferred stock to principal $700 offset by payments made on earnouts $500.
For the nine months ended September 30, 2023, net cash provided by financing activities totaled $4,677 primarily due to repayments of $3,139, net proceeds from the sale of common stock and a warrant inducement transaction of $4,433 and $2,292, respectively, third party financing costs of $633 and discontinued operations of $256.
Critical Accounting Policies and Estimates
Refer to the Annual Report on Form 10-K filed with the SEC on June 11, 2024 for the fiscal year ended December 30, 2023. There have been no changes to our critical accounting policies during the nine months ended June 30, 2024.
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740), which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The new guidance requires consistent categorization and greater disaggregation of information in the rate reconciliation, as well as further disaggregation of income taxes paid. This change is effective for annual periods beginning after December 15, 2024. This change will apply on a prospective basis to annual financial statements for periods beginning after the effective date. However, retrospective application in all prior periods presented is permitted. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.
| 44 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Exchange Act, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” as of the end of the period covered by this Quarterly Report on Form 10-Q.
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Based on that evaluation, we identified a material weakness related to the lack of a sufficient complement of competent finance personnel to appropriately account for, review and disclose the completeness and accuracy of transactions we entered into. Our management has also identified a material weakness in our internal control over our goodwill assessment relating to the lack of a sufficient process for determining the valuation of goodwill assets.
Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q (“Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective, due to the material weakness in our control environment and financial reporting process discussed above.
Management believes that the condensed consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition as of the Evaluation Date, and results of our operations and cash flows for the Evaluation Date, in conformity with GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the quarter ended September 28, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 45 |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Whitaker v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.
On March 9, 2024, a Settlement and Release Agreement was entered into by both parties. Under this agreement, which was entered into to avoid costly court fees, the Company agreed to make a payment, in full and final settlement, of $2 million plus interest across the following dates and amounts: $115 on May 1, 2024, $114 on June 1, 2024, $114 on September 30, 2024, $113 on August 1, 2024, $112 on September 1, 2024, and a final payment of $1,511 on October 1, 2024. There is a five-day cure period for each payment and there is a Confession of Judgement in favor of the defendant for the full amount of the original Earnout plus interest, in the event of non-compliance.
On October 9, 2024, we entered into Amendment No. 1 to the Settlement and Release Agreement (“Amendment No. 1) to pay $1,500 plus interest. We agreed to make payments on the following dates and in the following amounts: $511 on October 9, 2024, $107 on November 1, 2024, $107 on December 1, 2024, $106 on January 1, 2025, and a final payment of $705 on February 1, 2025. In accordance with Amendment No 1, payments were made on October 9, 2024 and November 1, 2024.
As of the date of this filing, we are not aware of any other material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, other than as disclosed above.
Item 1A. Risk Factors.
The following description of risk factors includes any material changes to risk factors associated with our business, financial condition and results of operations previously disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K filed with the SEC on June 11, 2024. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results, and stock price.
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Quarterly Report on Form 10-Q. The following information should be read in conjunction with the condensed consolidated financial statements and related notes thereto included in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
Risks Relating to our Common Stock
We may not meet the continued listing requirements of Nasdaq, which could result in a delisting of our common stock.
As previously reported, on June 20, 2024, we received a letter from the Staff of the Listing Qualifications Department of Nasdaq (the “Staff”) indicating that we were no longer in compliance with the minimum stockholders’ equity requirement (the “Minimum Stockholders’ Equity Requirement”) for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(b)(1), which such rule requires listed companies to maintain stockholders’ equity of at least $2,500,000 or meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.
| 46 |
On August 13, 2024, following the Staff’s review of our plan to regain compliance with the Minimum Stockholders’ Equity Requirement submitted on June 14, 2024, and on August 5, 2024, we received a letter (the “Notice”) indicating that the Staff determined to deny our request for continued listing on Nasdaq. Pursuant to the Notice, based on the preliminary nature of our plan, the Staff determined that we did not provide a definitive plan evidencing our ability to achieve near term compliance with the Minimum Stockholders’ Equity Requirement. We requested an appeal of the Staff’s determination, and a hearing before the Nasdaq Hearings Panel (the “Panel”) was held on October 3, 2024.
On October 8, 2024, we received a letter from the Nasdaq Hearings Panel (“Panel”) indicating that the Panel determined to grant our request to continue our listing on Nasdaq, subject to certain milestones being met on November 1, 2024, and December 31, 2024.
Although we expect to take actions intended to restore our compliance with the listing requirements, we can provide no assurance that any action taken by us would be successful. If Nasdaq delists our common stock from trading on its exchange for failure to meet Nasdaq’s listing standards for continued listing, an investor would likely find it significantly more difficult to dispose of or obtain our shares, and our ability to raise future capital through the sale of our shares or issue our shares as consideration in acquisitions could be severely limited. Additionally, we may not be able to list our common stock on another national securities exchange, which could result in our securities being quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There have been no unregistered sales of securities during the period covered by this Quarterly Report on Form 10-Q that have not been previously reported in a Current Report on Form 8-K. We have not made any purchases of our own securities during the time period covered by this Quarterly Report on Form 10-Q.
| 47 |
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| * | Filed herewith |
| ** | Furnished herewith |
| + | Certain of the schedules (and similar attachments) to this exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K under the Securities Act because they do not contain information material to an investment or voting decision and that information is not otherwise disclosed in the exhibit or the disclosure document. The registrant hereby agrees to furnish a copy of all omitted schedules (or similar attachments) to the SEC upon its request. |
| 48 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| STAFFING 360 SOLUTIONS, INC. | ||
| Date: November 15, 2024 | By: | /s/ Brendan Flood |
| Brendan Flood | ||
| Chairman and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 15, 2024 | By: | /s/ Melanie Grossman |
Melanie Grossman Senior Vice President, Corporate Controller | ||
| (Principal Accounting and Financial Officer) | ||
| 49 |