STAFFING 360 SOLUTIONS, INC. 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 appearing elsewhere in this Quarterly Report on Form 10-Q. 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: 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; and 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 inU.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, including the "Risk Factors" in Item 1A of this Quarterly Report and the other reports and documents we file from time to time with theSecurities and Exchange Commission ("SEC"), particularly our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. 28 Overview We are incorporated in the state ofDelaware . As a rapidly growing public company in the international staffing sector, our high-growth business model is based on finding and acquiring suitable, mature, profitable, operating,U.S. andU.K. based staffing companies. Our targeted consolidation model is focused specifically on the Professional Business Stream and Commercial Business Stream disciplines. We effected a one-for-ten reverse stock split onJune 24, 2022 (the "Reverse Stock Split"). All share and per share information in the consolidated financial statements has been retroactively adjusted to reflect the Reverse Stock Split. Recent Developments COVID-19
InDecember 2019 , a strain of coronavirus ("COVID-19") was reported to have surfaced inWuhan, China , and has spread globally, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected countries. The COVID-19 pandemic and its ongoing effects are continuing to impact worldwide economic activity, and activity inthe United States and theUnited Kingdom where our operations are based. Much of the independent contractor work we provide to our clients is performed at the site of our clients. Given that the magnitude and duration of COVID-19's impact on our business and operations remain uncertain, the continued spread of COVID-19 (including the emergence and persistence of variants relating thereto) and the imposition of related public health containment measures and travel and business restrictions could have a material adverse impact on our business, financial condition, operating results, and cash flows. While expected to be temporary, prolonged workforce disruptions can negatively impact revenue in fiscal year 2022 and the Company's overall liquidity. While the ultimate economic impact brought by, and the duration of, the COVID-19 pandemic and its ongoing effects may be difficult to assess or predict, the pandemic has resulted in significant disruptions in general commercial activity and the global economy and caused financial market volatility and uncertainty in significant and unforeseen ways in the recent years. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital and on the market price of our common stock, and we may not be able to successfully raise needed capital. If we are unsuccessful in raising capital in the future, we may need to reduce activities, curtail, or cease operations. In addition, the continuation or worsening of the COVID-19 pandemic, its ongoing effects or an outbreak of other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition, and results of operations. 29
Nasdaq Bid Price Requirement
OnJune 3, 2020 , we received a letter from the Staff (the "Staff") of theNasdaq Stock Market ("Nasdaq") notifying us that we were no longer in compliance with the minimum stockholders' equity requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders' equity of at least$2,500 (the "Stockholders' Equity Requirement"). A hearing before theNasdaq Hearings Panel (the "Panel") was held onJanuary 21, 2021 , and we were granted an extension to regain compliance untilFebruary 28, 2021 , which was subsequently further extended toMay 31, 2021 . OnJune 28, 2021 , we received a letter from the Staff notifying us that the Panel determined that we had regained compliance with the Stockholders' Equity Requirement. The Panel also imposed a panel monitor (the "Panel Monitor") under Nasdaq Listing Rule 5815(d)(4)(A) for a period of one year from the date of theJune 28, 2021 letter, during which period we were expected to remain in compliance with all of Nasdaq's continued listing requirements. OnFebruary 23, 2022 , we received a letter from the Listing Qualifications of Nasdaq notifying us that we were no longer in compliance with Nasdaq Listing Rule 5550(a)(2) (the "Bid Price Requirement"), for continued listing on Nasdaq. Pursuant to the Panel Decision, we were not eligible for the 180-day bid price compliance period set forth in the Listing Rules. OnMarch 2, 2022 , we timely requested a hearing before the Panel, which was held onMarch 31, 2022 . OnApril 12, 2022 , we received a letter from Nasdaq notifying us that the Panel determined to grant our request for continued listing on Nasdaq, subject to the following: (i) on or aboutMay 2, 2022 , we would advise the Panel of the status of the proxy statement it plans to file to obtain shareholder approval for a reverse stock split, (ii) on or aboutMay 23, 2022 , we would advise the Panel on the status of the shareholder meeting we plan to hold to obtain approval of the reverse stock split, (iii) on or aboutMay 26, 2022 , we would affect a reverse stock split and (iv) on or before aboutJune 22, 2022 , we would demonstrate compliance with the Bid Price Requirement by evidencing a closing bid price above$1.00 per share for the previous ten consecutive trading sessions. On each ofApril 19, 2022 andMay 20, 2022 , we received letters from the Staff notifying us that as we had not yet filed our Form 10-K for the period endedJanuary 1, 2022 and our Form 10-Q for the period endedApril 2, 2022 , each such matter serving as an additional basis for delisting our securities from Nasdaq under Nasdaq Listing Rule 5810(c)(2)(A). On May 4, 2022 the Panel granted us an extension request untilJuly 11, 2022 to demonstrate compliance with the Bid Price Requirement.
OnJune 23, 2022 , we effected the Reverse Stock Split, onJune 24, 2022 , we filed our Annual Report on Form 10-K for the year endedJanuary 1, 2022 , and onJuly 14, 2022 , we filed our Quarterly Report on Form 10-Q for the period endedApril 2, 2022 . OnJuly 15, 2022 , we received a letter from the Staff informing the Company that it had regained compliance with the Rule and the subsequent delinquency concerns as described above. The letter additionally informed us that we are in compliance with the terms of the Panel Monitor. We are now in compliance with the listing requirements required for continued listing on Nasdaq. Accordingly, the Panel determined to continue the listing of our securities on Nasdaq and the matter is now closed. 30July 2022 Private Placement OnJuly 1, 2022 , we entered into a securities purchase agreement with certain institutional and accredited investors for the issuance and sale of a private placement of 657,858 shares of common stock or pre-funded warrants to purchase shares of common stock, and warrants (the "July 2022 Warrants") to purchase up to 657,858 shares of common stock, with an exercise price of$5.85 per share. TheJuly 2022 Warrants are exercisable immediately upon issuance and have a term of exercise equal to five and one-half years from the date of issuance. The combined purchase price for one share of common stock (or pre-funded warrant) and one associated warrant to purchase one share of common stock was$6.10 . In connection with the private placement, each investor entered into Warrant Amendment Agreements to amend the exercise prices of certain existing warrants to purchase up to an aggregate of 657,858 shares of our common stock that were previously issued to the investors, with exercise prices ranging from$18.50 to$38.00 per share and expiration dates ranging fromJuly 22, 2026 toNovember 1, 2026 . The Warrant Amendment Agreements became effective upon the closing of theJuly 2022 Private Placement and pursuant to the Warrant Amendment Agreements, the amended warrants have a reduced exercise price of$5.85 per share and expire five and one-half years following the closing of theJuly 2022 Private Placement.
We intend to use the net proceeds received from the private placement for general working capital purposes.
Business Model, Operating History and Acquisitions
We are a high-growth international staffing company engaged in the acquisition ofU.S. andU.K. based 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. SinceNovember 2013 , we have completed eleven acquisitions. 31
For the Nine Months Ended
Nine Months Nine Months
Ended Ended
October 1, October 2,
2022 % of Revenue 2021 % of Revenue Growth
Revenue $ 175,066 100.0 % $ 146,982 100.0 % 19.1 %
Cost of revenue 143,709 82.1 % 120,324 81.9 % 19.4 %
Gross profit 31,357 17.9 % 26,658 18.1 % 17.6 %
Operating expenses 32,556 18.6 % 27,933 19.0 % 16.6 %
Loss from operations (1,199 ) -0.7 % (1,275 ) -0.9 % -6.0 %
Other (expenses) income (2,292 ) -1.3 % 16,250 11.1 % -114.1 %
Benefit (Provision) for ) %
income taxes (65 0.0 % (102 ) -0.1 % -36.3
Net (loss) income $ (3,556 ) -2.0 % $ 14,873 10.1 % -123.9 %
Revenue
For the nine months ended
Revenue for the nine months endedOctober 1, 2022 was comprised of$170,699 of temporary contractor revenue and$4,367 of permanent placement revenue, compared with$143,274 of temporary contractor revenue and$3,708 of permanent placement revenue for the nine months endedOctober 2, 2021 , respectively.
Cost of revenue, Gross profit and Gross margin
Cost of revenue, excluding depreciation and amortization, 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 endedOctober 1, 2022 , cost of revenue was$143,709 , an increase of 19.4% from$120,324 for the nine months endedOctober 2, 2021 , compared with revenue growth of 19.1%. Of that$23,385 increase,$28,049 was attributable to the Headway acquisition offset by a$778 decline in associated costs of our operations and$3,886 of favorable foreign currency translation. Gross profit for the nine months endedOctober 1, 2022 was$31,357 , an increase of 17.9% from$26,658 for the nine months endedOctober 2, 2021 , representing gross margin of 17.9% and 18.1% for each period, respectively. The$4,699 increase was driven by$5,025 from the Headway acquisition and$468 of organic growth and partially offset by$794 of unfavorable foreign currency translation. 32 Operating expenses Total operating expenses for the nine months endedOctober 1, 2022 were$32,556 , an increase of 16.6% from$27,933 for the nine months endedOctober 2, 2021 . The increase of$4,623 was driven primarily by Headway operating expenses of$4,450 as well as higher non-recurring costs, legal costs, and other costs associated with acquisitions efforts. Other expenses Total other (expenses) income for the nine months endedOctober 1, 2022 were$(2,292) , a decrease of 114.1% from$16,250 in the nine months endedOctober 2, 2021 . The decrease was driven by the following: PPP forgiveness gain of$19,395 for the nine months endedOctober 2, 2021 compared to$0 for the nine months endedOctober 1, 2022 ,$3,030 interest expense and amortization of debt discount and deferred financing costs in the nine months endedOctober 1, 2022 , which includes interest expense and amortization of$299 from the Headway acquisition, compared with the nine months endedOctober 2, 2021 of$(3,432) , remeasuring our intercompany note for the nine months endedOctober 1, 2022 of$0 compared with losses from remeasuring our intercompany note in the nine months endedOctober 2, 2021 of$219 . In addition, for the nine months endedOctober 1, 2022 , we had other income of$738 compared to other income of$292 for the nine months endedOctober 2, 2021 .
For the Three Months Ended
Three Three
Months Months
Ended Ended
October 1, October 2,
2022 % of Revenue 2021 % of Revenue Growth
Revenue $ 66,120 100.0 % $ 47,501 100.0 % 39.2 %
Cost of revenue 53,795 81.4 % 37,877 79.7 % 42.0 %
Gross profit 12,325 18.6 % 9,624 20.3 % 28.1 %
Operating expenses 11,830 17.9 % 9,151 19.3 % 29.3 %
Loss from operations 495 0.7 % 473 1.0 % 4.7 %
Other (expenses) income 599 0.9 % 8,371 17.6 % -92.8 %
Benefit (expense) from
income taxes (62 ) -0.1 % (131 ) -0.3 % -52.7 %
Net (loss) income $ 1,032 1.6 % $ 8,713 18.3 % -88.2 %
Revenue
For the three months ended October 1, 2022 , revenue increased by 39.2% to
$66,120 as compared with $47,501 for the three months ended October 2, 2021 . Of
that $18,619 increase, $21,822 was attributable to the Headway acquisition which
was partially offset by a $770 decrease in the Company's other operations and
$2,433 of unfavorable foreign currency translation.
Revenue for the three months ended October 1, 2022 was comprised of $64,733 of
temporary contractor revenue and $1,387 of permanent placement revenue, compared
with $46,168 and $1,333 for the three months ended October 2, 2021 ,
respectively.
Cost of revenue, Gross profit and Gross margin
Cost of revenue, excluding depreciation and amortization, 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 three months endedOctober 1, 2022 , cost of revenue was$53,795 , an increase of 42.0% from$37,877 in the three months endedOctober 2, 2021 , compared with revenue growth of 39.2%. Of that$15,918 increase,$18,129 was attributable to the Headway acquisition which was partially offset by a$209 decline in associated costs of the Company's other operations and$2,002 of favorable foreign currency translation. Gross profit for the three months endedOctober 1, 2022 was$12,325 , an increase of 28.1% from$9,624 for the three months endedOctober 2, 2021 , representing gross margin of 18.6% and 20.3% for each period, respectively. The increase of$2,701 was driven by$3,693 from the Headway acquisition and partially offset by$564 of loss from our other operations and$428 of unfavorable foreign currency translation. 33 Operating expenses Total operating expenses for the three months endedOctober 1, 2022 were$11,830 , an increase of 29.3% from$9,151 for the three months endedOctober 2, 2021 . The increase of$2,679 was driven primarily by Headway operating expenses of$2,856 which was offset by a reduction in non-recurring costs, legal, and other costs associated with acquisitions efforts. Other expenses
Total other expenses for the three months endedOctober 1, 2022 was$410 , a decrease of 92.8% from other income of$8,371 in the three months endedOctober 2, 2021 . The decrease was driven by the following: PPP forgiveness gain of$9,504 for the three months endedOctober 2, 2021 compared to$0 for the three months endedOctober 1, 2022 ,$1,127 interest expense and amortization of debt discount and deferred financing costs in the three months endedOctober 1, 2022 , which includes interest expense and amortization of$187 from the Headway acquisition, compared with the three months endedOctober 2, 2021 of$1,006 , gain from remeasuring our intercompany note in the three months endedOctober 1, 2022 of$1,009 compared with loss from remeasuring our intercompany note in the three months endedOctober 2, 2021 of$315 . In addition, in the three months endedOctober 1, 2022 , we had other income of$717 compared with other loss of$188 for the three months endedOctober 2, 2021 . Non-GAAP Measures
To supplement our 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.
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 Gross Profit between its 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 us against the industry.
The following table details Revenue and Gross Profit by sector:
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
2022 Mix 2021 Mix 2022 Mix 2021 Mix
Revenue
Commercial Staffing - US
$ 47,501 $ 175,066 $ 146,982 Gross Profit Commercial Staffing - US$ 5,034 41 %$ 5,195 54 %$ 15,197 48 %$ 15,422 58 % Professional Staffing - US 4,715 38 % 1,200 12 % 8,286 26 % 3,146 12 % Professional Staffing - UK 2,576 21 % 3,229 34 % 7,874 25 % 8,090 30 % Total Gross Profit$ 12,325 $ 9,624 $ 31,357 $ 26,658 Gross Margin Commercial Staffing - US 19.4 % 17.6 % 18.2 % 17.5 % Professional Staffing - US 18.3 % 26.5 % 18.3 % 25.8 % Professional Staffing - UK 17.9 % 24.2 % 17.0 % 17.4 % Total Gross Margin 18.6 % 20.3 % 17.9 % 18.1 % 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; gain from sale of business; PPP Forgiveness Gain; other income; and charges we consider to be non-recurring in nature such as legal expenses associated with litigation, professional fees associated potential and completed acquisitions. We use this measure because we believe it provides a more meaningful understanding of our profit and cash
flow
generation.
34
Three Months Ended Nine Months Ended Trailing Twelve Months
October 1, October 2, October 1, October 2, October 1, October 2,
2022 2021 2022 2021 2022 2021
Net loss $ 1,032 $ 8,713 $ (3,556 ) $ 14,873 $ (10,200 ) $ 12,632
Interest expense 891 814 2,512 3,068 3,301 4,506
(Benefit) expense from income
taxes 62 131 65 102 (392 ) 247
Depreciation and amortization 1,023 880 2,658 2,486 3,289 3,330
EBITDA $ 3,008 $ 10,538 $
1,679
Acquisition, capital raising and other non-recurring expenses (1) 1,788 321 4,375 2,802 4,847 5,024 Other non-cash charges (2) 7 8 32 344 253 450 Impairment of Goodwill - - - - 3,104 - Re-measurement gain on intercompany note (1,009 ) 315 - 219 - (712 ) Deferred consideration settlement - - - - - 41 PPP Forgiveness Gain - (9,504 ) - (19,609 ) - (19,609 ) Gain on sale of business - - - - - 95 Other (income) loss (717 ) (188 ) (738 ) (292 ) (412 ) (296 ) Adjusted EBITDA$ 3,077 $ 1,490 $ 5,348 $ 3,993 $ 3,719 $ 5,708 Adjusted EBITDA of Divested Business (3) $ -$ 101
Pro Forma Adjusted EBITDA (4)$ 3,719 $ 5,809 Adjusted Gross Profit (5)$ 35,866 $ 34,945 Adjusted EBITDA as percentage of Adjusted Gross Profit 10.4 % 16.6 %
(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. Due to government mandated restrictions, the Company had
to temporarily close some of its offices and, due to social distancing
restrictions, could not make full use of these facilities for significant
periods of time during 2021.
(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.
(3) Adjusted EBITDA of Divested Business for the period prior to the divestment
date.
(4) Pro Forma Adjusted EBITDA excludes the Adjusted EBITDA of Divested Business
for the period prior to the divestment date.
(5) Adjusted Gross Profit excludes gross profit of business divested in
September 2020 , for the period prior to divestment date.
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.
35
October 1, 2022 October 2, 2021 Gross Profit - TTM (Current Period) $ 35,866 $ 34,945 Gross Profit - TTM (Prior Period)
34,945 32,479
Gross Profit - Growth (Decline) $ 921 $
2,466
Adjusted EBITDA - TTM (Current Period) $ 3,719 $
5,708
Adjusted EBITDA - TTM (Prior Period) 5,708
5,442
Adjusted EBITDA - Growth (Decline) $ (1,989 ) $
266
Operating Leverage -216.0 % 10.8 %
Leverage Ratio Calculated as Total Debt, Net, gross of any Original Issue
Discount (includes Redeemable Series H Preferred Stock), 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.
October 1, 2022 October 2, 2021
Total Term Debt, Net $ 17,701 $ 14,357
Addback: Total Debt Discount and Deferred Financing Costs 660 235
Total Debt $ 18,361 $ 14,592
TTM Adjusted EBITDA $ 3,759 $ 5,708
Pro Forma TTM Adjusted EBITDA $ 3,759 $ 5,809
Pro Forma Leverage Ratio 4.88 x 2.5 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.
On February 8, 2018 , CBS Butler Holdings Limited ("CBS Butler"), Staffing 360
Solutions Limited and The JM Group , entered into a new arrangement with HSBC
Invoice Finance (UK) Ltd ("HSBC") which provides for HSBC to purchase the
subsidiaries' accounts receivable up to an aggregate amount of £11,500 across
all three subsidiaries. The terms of the arrangement provide for HSBC to fund
90% of the purchased accounts receivable upfront and a secured borrowing line of
70% of unbilled receivables capped at £1,000 (within the overall aggregate total
facility of £11,500). The arrangement has an initial term of 12 months, with an
automatic rolling three-month extension and carries a service charge of 1.80%.
Under ASU 2016-16, "Statement of Cash Flows (Topic 230, Classification of
Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues
Task Force ), the upfront portion of the sale of accounts receivable is
classified within operating activities, while the deferred purchase price
portion (or beneficial interest), once collected, is classified within investing
activities. On April 20, 2020 , the terms of the loan with HSBC were amended
whereby no capital repayments will be made between April 2020 to September 2020 ,
and only interest payments will be made during this time. On May 15, 2020 , we
entered into a three-year term loan with HSBC in the UK for £1,000.
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