Business Model, Operating History, and Acquisitions
Staffing 360 Solutions, Inc. (NASDAQ:STAF) is a rapidly growing public company in the domestic staffing sector, executing a buy-integrate-build strategy through the acquisition of staffing organizations in the United States. The company’s targeted consolidation model is focused specifically on the accounting and finance, information technology (IT), engineering, administration (Professional), and light industrial (Commercial) disciplines.
Staffing 360 Solutions was incorporated in the state of Nevada on December 22, 2009, as Golden Fork Corporation. The company changed its name to Staffing 360 Solutions, Inc. on March 16, 2012, and reincorporated in Delaware on June 15, 2017. The company’s business model is based on finding and acquiring suitable, mature, profitable, operating, U.S.-based staffing companies. Their typical acquisition model involves paying consideration in the form of cash, stock, earn-outs and/or promissory notes. To date, Staffing 360 Solutions has completed 10 acquisitions since November 2013, as part of its consolidation strategy.
In February 2024, the company disposed of its UK operations to focus solely on the U.S. staffing market, which it believes will best serve the company. This strategic shift comes after a thorough review of the company’s business and current industry conditions by the Board of Directors.
Staffing 360 Solutions 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, and supporting more efficient and cost-effective service delivery for all brands. The company has a management team with significant operational and M&A experience, which provides the opportunity for significant organic growth, while plans to continue its business model of finding and acquiring suitable, mature, profitable, operating, U.S. based staffing companies.
Financials and Key Metrics
Staffing 360 Solutions reported annual revenue of $190.88 million in 2023, down from $184.88 million in 2022. The company’s net loss widened to $26.04 million in 2023 compared to a net loss of $16.99 million in 2022. Operating cash flow for 2023 was -$13.79 million, with free cash flow at -$11.99 million.
For the nine months ended September 28, 2024, the company reported revenue of $131.72 million, down 9.6% from $145.78 million in the prior-year period. Gross profit declined to $17.29 million, or 13.1% of revenue, compared to $22.18 million, or 15.2% of revenue, in the prior-year period. The company’s net loss for the nine-month period was $7.37 million.
In the most recent quarter ended September 28, 2024, Staffing 360 Solutions reported revenue of $46.10 million, a 6.9% decline compared to the prior year period. The company attributed this decline primarily to market softening in the current economic environment. Net loss for the quarter was $2.84 million, with operating cash flow of -$1.89 million and free cash flow of -$1.91 million.
As of September 28, 2024, Staffing 360 Solutions had a working capital deficit of $48.82 million and an accumulated deficit of $134.43 million. The company’s total debt, net of discounts and financing costs, stood at $19.63 million.
Liquidity
As of September 28, 2024, Staffing 360 Solutions reported cash of $1.50 million. The company has a $32.50 million revolving loan facility with MidCap Funding X Trust, with a maturity date of December 5, 2024. The company’s current ratio and quick ratio both stand at 0.32, indicating potential liquidity challenges. The debt-to-equity ratio is -1.34, reflecting the company’s significant leverage and negative equity position.
Segment Performance
Staffing 360 Solutions operates in two main business segments: Commercial Staffing and Professional Staffing.
For the three months ended September 28, 2024, the Commercial Staffing – US segment generated $19.17 million in revenue, down 19.1% year-over-year. Gross profit for this segment was $3.13 million, with a gross margin of 16.3%. For the nine months ended September 28, 2024, this segment generated $58.97 million in revenue, a decline of 17.1% compared to the same period in the prior year. Gross profit was $9.42 million, with a gross margin of 16.0%.
The Professional Staffing – US segment generated $26.93 million in revenue for the three months ended September 28, 2024, up 4.3% year-over-year. Gross profit was $3.04 million, with a gross margin of 11.3%. For the nine months ended September 28, 2024, this segment generated $72.75 million in revenue, down 2.6% from the same period in the prior year. Gross profit was $7.87 million, with a gross margin of 10.8%.
The decline in revenue and gross profit margins across both segments was primarily due to a challenging U.S. operating environment and increased competition. The Commercial Staffing segment experienced a more pronounced decline compared to the Professional Staffing segment.
Nasdaq Compliance and Going Concern
On June 20, 2024, Staffing 360 Solutions received a notification from Nasdaq stating that the company was no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the exchange. The company submitted a plan to regain compliance, but on August 13, 2024, the Nasdaq Staff determined to deny the company’s request for continued listing.
Staffing 360 Solutions requested an appeal, and on October 8, 2024, the Nasdaq Hearings Panel granted the company’s request to continue its listing, subject to certain milestones being met on November 1, 2024, and December 31, 2024.
The company’s condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. However, the company’s accumulated deficit of $134.43 million and working capital deficit of $48.82 million as of September 28, 2024 raise substantial doubt about its ability to continue as a going concern.
Staffing 360 Solutions is currently in discussions with its lenders to determine the best manner to settle its liabilities and is reviewing all strategic options to resolve the going concern qualification.
Recent Developments and Future Outlook
On November 1, 2024, Staffing 360 Solutions entered into a definitive merger agreement with Atlantic International Corp. (OTC:ATLN), under which Atlantic will acquire all outstanding shares of Staffing 360 common stock in a transaction valued at approximately $25 million. The transaction is expected to close within the next 90 days, subject to approval from Staffing 360 shareholders and other standard closing conditions.
Upon completion of the merger, Staffing 360 will operate as a wholly-owned subsidiary of Atlantic, and the combined company is expected to have annual revenue of approximately $620 million. The transaction is also expected to result in run-rate cost synergies and savings of approximately $10 million.
While Staffing 360 Solutions continues to face challenges related to its Nasdaq listing and going concern status, the proposed merger with Atlantic International Corp. presents an opportunity for the company to become part of a larger, more diversified human capital management and workforce solutions provider. The transaction, if completed, could potentially provide the resources and stability needed for Staffing 360 to execute its strategic initiatives and overcome its current operational and financial hurdles.
Risks and Uncertainties
Staffing 360 Solutions operates in a highly competitive and cyclical industry, which exposes the company to various risks, including:
Ongoing going concern risks: The company’s accumulated deficit, working capital deficit, and reliance on debt financing raise substantial doubt about its ability to continue as a going concern, which could limit its access to capital and financing.
Dependence on a limited number of large customers: A significant portion of the company’s revenue is derived from a limited number of large customers, which exposes it to concentration risk.
Regulatory and compliance challenges: The staffing industry is subject to various laws and regulations, and the company’s failure to comply with these requirements could result in fines, penalties, or other legal action.
Economic and industry cyclicality: The staffing industry is highly sensitive to economic conditions, and a prolonged economic downturn or industry-specific challenges could adversely affect the company’s financial performance.
Integration and execution risks associated with acquisitions: The company’s growth strategy relies on successful integration and execution of acquired staffing businesses, which poses integration and operational risks.
Liquidity challenges: With a current ratio and quick ratio of 0.32, the company may face difficulties in meeting its short-term obligations, which could impact its ability to continue operations and execute its business strategy.
High leverage: The negative debt-to-equity ratio of -1.34 indicates significant leverage and financial risk, which could limit the company’s flexibility in responding to market changes or pursuing growth opportunities.
Despite these challenges, Staffing 360 Solutions’ proposed merger with Atlantic International Corp. could potentially provide the resources and stability needed to overcome its current operational and financial hurdles, provided that the transaction is successfully completed.
Conclusion
Staffing 360 Solutions is a rapidly growing public company in the domestic staffing sector, executing a targeted buy-integrate-build strategy in the U.S. market. While the company has faced various operational and financial challenges, including declining revenues and profitability in its core segments, the proposed merger with Atlantic International Corp. presents an opportunity for Staffing 360 to become part of a larger, more diversified human capital management and workforce solutions provider.
The success of the merger, if completed, will be crucial in determining Staffing 360 Solutions’ ability to regain Nasdaq compliance, resolve its going concern status, and execute its strategic initiatives. The company’s focus on the U.S. market, following the disposal of its UK operations, may help streamline its operations and improve efficiency. However, the challenging operating environment and increased competition in the staffing industry continue to pose significant hurdles.
Investors should closely monitor the company’s progress in improving its liquidity position, managing its debt, and executing its growth strategy. The development of the proposed transaction with Atlantic International Corp. could have significant implications for Staffing 360’s future, potentially providing the financial stability and operational scale needed to overcome its current challenges and capitalize on opportunities in the U.S. staffing market.
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