Staffing 360 Solutions(STAF) - 2022 Q4 - Annual Report

PART I Business Staffing 360 Solutions, Inc. is an international staffing company growing via U.S. and U.K. acquisitions, specializing in professional and commercial staffing - The company's high-growth business model centers on acquiring mature, profitable staffing companies in the U.S. and U.K., focusing on professional and commercial disciplines[14][16] Revenue Performance (Fiscal 2022 vs. 2021) | Fiscal Year | Revenue (in thousands) | | :--- | :--- | | 2022 | $244,917 | | 2021 | $197,770 | - The increase in revenue for Fiscal 2022 was primarily attributed to the acquisition of Headway Workforce Solutions, which closed on May 18, 2022[17][18] - The company operates as a temporary staffing firm but also provides permanent placements. It faces significant competition from a large number of firms, with key competitive factors being price and service reliability[20][37][38] - As of the report date, the company employs approximately 265 full-time internal staff and places over 6,000 individuals with its clients[40] Risk Factors The company faces substantial risks including recurring losses, high debt, and internal control weaknesses, raising significant doubt about its ability to continue as a going concern - The company has a history of substantial losses and a negative working capital position, which raises substantial doubt about its ability to continue as a going concern[45][48] - As of December 31, 2022, total gross debt was approximately $18.3 million. This debt level and its associated covenants could negatively impact financial condition and limit business growth[49][50][51] - Management has identified a material weakness in internal controls over financial reporting due to a lack of sufficient competent finance personnel and an inadequate process for goodwill assessment[46][117][120] - The company has previously received deficiency letters from Nasdaq regarding non-compliance with listing requirements, and failure to meet these standards in the future could result in delisting[95][96][99] - The business is exposed to risks from currency exchange rate fluctuations, particularly between the U.S. dollar and the British pound, which can adversely affect reported revenue[72] - The COVID-19 pandemic has adversely affected the business by impacting customer demand and the ability to deploy its workforce, and its ongoing effects remain a source of uncertainty[109][110][111] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[130] Properties The company leases all 17 of its office facilities, including its New York City headquarters, located across the U.S. and U.K. - The company's headquarters is a leased space of 6,960 square feet in New York, NY, with the lease expiring in 2029[132] - There are a total of 17 leased facilities in the U.S. (New York, Connecticut, Massachusetts, Rhode Island, North Carolina) and the U.K. (London, Redhill)[132] - All offices are operated from leased spaces ranging from approximately 1,200 to 10,000 square feet, with lease expirations from 2023 through 2029[133] Legal Proceedings The company is engaged in ongoing litigation with Pamela D. Whitaker concerning earn-out payments and a countersuit for breach of contract - The company is involved in a legal dispute with Pamela D. Whitaker, former owner of Key Resources, Inc. (KRI), over earn-out payments from an August 2018 acquisition[135] - Whitaker is seeking $4,054,395 in alleged damages for breach of contract related to non-payment of earn-outs[135] - The company and its subsidiary, Monroe, filed a countersuit against Whitaker for breach of contract and fraudulent inducement, seeking damages of no less than $6,000,000[139] - After a jurisdictional dispute, the Fourth Circuit ordered the case to be transferred to the Southern District of New York, where the actions have been consolidated and are currently pending[138][142] Mine Safety Disclosures This item is not applicable to the company - Not applicable[146] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "STAF", with dividends suspended and future payments restricted by debt agreements - The company's common stock trades on Nasdaq under the ticker symbol "STAF"[148] - As of May 18, 2023, there were approximately 504 shareholders of record[148] - Dividends were suspended after the first payment in February 2019. Future dividends are not guaranteed and are restricted by debt agreements, which limit payments to a maximum of $100,000 per fiscal quarter[150] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2022 revenue increased, but the company reported a significant net loss and faces substantial doubt about its ability to continue as a going concern due to various charges Fiscal 2022 vs. 2021 Results of Operations | Metric | Fiscal 2022 (in thousands) | Fiscal 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $244,917 | $197,770 | 23.8% | | Gross Profit | $42,769 | $33,867 | 26.3% | | Loss from Operations | ($13,457) | ($7,300) | 84.4% | | Net (Loss) Income | ($16,994) | $8,158 | -308.3% | - The $47.1 million revenue increase was driven by the Headway acquisition ($60.8M), partially offset by an organic revenue decline ($6.9M) and unfavorable foreign currency translation ($6.7M)[189] - Operating expenses increased by 36.6% to $56.2 million, which includes a $10.0 million impairment of goodwill charge in Fiscal 2022, compared to a $3.1 million impairment in Fiscal 2021[195] - The significant decrease in net income was primarily driven by the absence of the $19.6 million PPP forgiveness gain that was recognized in Fiscal 2021[196] Adjusted EBITDA (Non-GAAP) | Fiscal Year | Adjusted EBITDA (in thousands) | | :--- | :--- | | 2022 | $7,427 | | 2021 | $2,434 | - The company faces significant liquidity challenges, with a working capital deficit of $20.1 million and an accumulated deficit of $101.0 million as of December 31, 2022. These factors raise substantial doubt about its ability to continue as a going concern[209][210] Quantitative and Qualitative Disclosures About Market Risk This section is not required for smaller reporting companies - Not required for smaller reporting companies[231] Financial Statements and Supplementary Data The audited financial statements are presented, with the auditor's report expressing substantial doubt about the company's going concern ability due to recurring losses and capital deficiency - The independent auditor's report expresses substantial doubt about the Company's ability to continue as a going concern, citing recurring losses from operations and a net capital deficiency[236][252] - Critical Audit Matters identified by the auditor include the Goodwill Impairment Assessment, which involved significant management estimates, and the Estimation of Fair Value of Certain Acquired Assets in the Headway business combination[242][244][257] Key Balance Sheet Data (as of Dec 31, 2022) | Account | Amount (in thousands) | | :--- | :--- | | Total Assets | $81,659 | | Total Liabilities | $73,306 | | Total Stockholders' Equity | $8,353 | | Working Capital Deficit | ($20,050) | - The company recognized a goodwill impairment charge of $10.0 million during Fiscal 2022 related to its Staffing UK reporting unit, which experienced prolonged revenue declines post-COVID-19[265][355] - The acquisition of Headway on May 18, 2022, resulted in the recognition of $7.8 million in goodwill and $6.8 million in intangible assets (customer relationships and trade name)[355][381] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[556] Controls and Procedures Management concluded disclosure controls and procedures were ineffective as of December 31, 2022, due to material weaknesses in finance personnel and goodwill impairment evaluation - Management concluded that disclosure controls and procedures were ineffective as of December 31, 2022[559] - A material weakness was identified due to the lack of a sufficient complement of competent finance personnel to accurately account for, review, and disclose transactions[558][562] - A second material weakness was identified related to ineffective design and operating effectiveness over forecasts used in the annual goodwill impairment evaluation. This deficiency resulted in a $10 million impairment charge that was identified during the audit[563] - A remediation plan is in progress, which includes hiring additional employees and external consultants and implementing new policies and controls[564] Other Information The company reports no other information for this item - None[569] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not applicable[570] PART III Directors, Executive Officers and Corporate Governance The company's Board of Directors comprises six members, including four independent directors, with key executive officers and four standing committees - The Board of Directors is composed of six members: Brendan Flood, Dimitri Villard, Nicholas Florio, Vincent Cebula, Jeff Grout, and Alicia Barker[573][576] - Four of the six directors (Messrs. Villard, Florio, Cebula, and Grout) are determined to be independent under Nasdaq listing rules[586] - The Board has four standing committees: Audit, Nominating and Corporate Governance, Compensation and Human Resources, and Mergers and Acquisitions[588] - The company has adopted a code of ethics that applies to its executive officers, directors, and employees[606] Executive Compensation This section details Fiscal 2022 compensation for Named Executive Officers, comprising base salary, bonuses, and equity awards, along with non-employee director compensation - The Named Executive Officers for Fiscal 2022 were Brendan Flood (CEO), Alicia Barker (COO), and Joe Yelenic (SVP, Corporate Finance)[608][610] 2022 Summary Compensation Table for NEOs | Name and Principal Position | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Brendan Flood, Chairman & CEO | 503,000 | 300,000 | 30,192 | 327,669 | 29,345 | 1,190,206 | | Alicia Barker, COO | 275,018 | 217,513 | 34,206 | — | 28,385 | 555,122 | | Joe Yelenic, SVP, Corp. Finance | 200,000 | 99,000 | — | — | — | 299,000 | - Non-employee directors receive an annual cash retainer of $100,000 and quarterly restricted stock awards for their service[626][628] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of May 19, 2023, directors and executive officers beneficially owned 13.16% of common stock, with Jackson Investment Group holding 6.07% - As of May 19, 2023, there were 4,311,020 shares of common stock outstanding[630] Beneficial Ownership as of May 19, 2023 | Name of Beneficial Owner | Percent of Common Stock | | :--- | :--- | | Brendan Flood | 9.34% | | Directors and officers as a group (8 persons) | 13.16% | | Jackson Investment Group, LLC | 6.07% | - The company has several equity compensation plans, including the 2014, 2015, 2016, 2020, and 2021 Omnibus Incentive Plans, under which stock options and other awards are granted[497][498][501][670][671] Certain Relationships and Related Transactions, and Director Independence This section details the company's extensive financial relationship with Jackson Investment Group, LLC, a major lender and stockholder, involving numerous debt agreements - The Audit Committee is responsible for reviewing and approving all related party transactions[699] - The company has a significant and complex financial relationship with Jackson Investment Group, LLC, a greater than 5% stockholder, involving debt financing, warrants, and preferred stock[701] - On October 27, 2022, the company entered into a Third Amended and Restated Note Purchase Agreement with Jackson, extending the maturity date of its approximately $9.0 million note to October 14, 2024, and adjusting interest rate terms[710][711] - In connection with the October 2022 debt amendment, the company issued 100,000 shares of common stock and a warrant to purchase 24,332 shares to Jackson, and also reduced the exercise price on an existing warrant[711][714] Principal Accountant Fees and Services The company engaged Baker Tilly US, LLP as its new independent auditor on August 26, 2022, replacing BDO USA, LLP - The company changed its independent registered public accounting firm from BDO USA, LLP to Baker Tilly US, LLP on August 26, 2022[718] Principal Accountant Fees (in thousands) | Fee Type | Fiscal 2022 (Baker Tilly) | Fiscal 2022 (BDO) | Fiscal 2021 (BDO) | | :--- | :--- | :--- | :--- | | Audit Fees | $467 | $553 | $1,137 | | Audit-Related Fees | $41 | $0 | $0 | | Total | $508 | $553 | $1,137 | - All audit and non-audit services provided by the independent auditors were pre-approved by the Audit Committee[722] PART IV Exhibit and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, including consolidated financial statements and corporate documents - This section contains the index to the Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm[724] - A detailed list of exhibits is provided, including governance documents (Certificate of Incorporation, Bylaws), material contracts (debt agreements, acquisition agreements), and certifications required by the Sarbanes-Oxley Act[726] Form 10-K Summary This item is not applicable to the company - Not applicable[736]