Staffing 360 Solutions Inc (STAF)’s Fiscal Second Quarter 2015 Earnings Conference Call Transcript

Operator

Greetings ladies and gentlemen and welcome to the Staffing 360 Solutions’ Fiscal Second quarter 2015 Earnings conference call. At this time all participants are in a listen-only mode, a brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press *0 on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce Darren Minton, Executive Vice President of Staffing 360 Solutions. Mr. Minton you may begin.

Darren Minton – Executive Vice President

Thank you Jesse, and thank you to everyone who has joined us this morning for Staffing 360 Earnings conference call. I’m joined here today by Brendan Flood, Staffing 360’s Executive Chairman, Matt Briand, our Chief Executive Officer, and Jeff Mitchell, our Chief Financial Officer. The purpose of the call today is to discuss the financials for the fiscal second quarter ended November 30th, 2014, as well as provide an update regarding Staffing 360’s high-growth initiatives as part of our selective MNA strategy. At the conclusion of this call, we’ll be answering questions during a brief Q&A session. I also want to bring to your attention that a webcast and replay of this conference call is available by following the link contained at the bottom of the press release announcing this call, and is also available on Staffing 360’s website, which is www.staffing360solutions.com.

Now, before we get started, I’ll take a brief moment to read the Safe Harbor statement regarding today’s conference call. This conference call will contain forward-looking statements within the meaning of the US Federal Securities Laws concerning Staffing 360 Solutions, Inc. Forward-looking statements are subject to a number of significant risks and uncertainties and actual result may differ materially. Please refer to the company’s filings with the SEC, which contain and identify important risks and other factors that may cause Staffing 360’s actual results to differ from those contained in our forward-looking statements. All forward-looking statements are made as of today, January 21, 2015, and Staffing 360 Solutions expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call.

Now with that, I’d like to start the call with a few words from Staffing 360’s Executive Chairman, Brendan Flood. Brendan?

Brendan Flood – Executive Chairman

Thank you, Darren and welcome everybody to our Q2 2015 Earnings conference call. I will make some initial comments about our fiscal second quarter before handing over to Jess to add more [inaudible] numbers and the to Matt to add some commentary on our operations and recent events. After that I will give an update on some current initiatives and open the call to Q&A.

During the fiscal Q2 last year, we only had two acquisitions, Cyber 360 and Control Solutions International. Since then, we have completed three further transactions, [inaudible]National, Poolia UK and People Serve. This has fueled our expansion from approximately $2 million in revenue in Q2 2014 to $34 million in Q2 2015 and places us at over $130 million in revenue on current annualized basis.

Since this time last year, we have strengthened our management team and our board of directors. Not only has this improved our financial controls, reporting and compliance, it has also positioned us to up list to a senior exchange as soon as we meet all of the listings requirements. Obviously, we are very satisfied with the incredible growth over the past year and we believe that we are firmly on the path to achieving our stated objectives. You will hear about our pathway to profitability. We believe that our pathway to profitability is working and is delivering results. At this point I will hand the call over to Jeff for some clarity on the numbers. Jeff?

Jeff Mitchell – Chief Financial Officer

Thanks, Brendan and good morning to all you joining us on this call. As the CFO I’m going to dive right into the financial results and provide what I hope will be some interesting and useful commentary on what we’ve accomplished this quarter. Please be reminded that the company’s fiscal year end is May 31st so the second fiscal quarterly results we’re discussing today actually ended on November 30th of 2014.

We’re very pleased to report quarterly revenue of $33.9 million; this represents an increase of nearly $32 million over the prior year. Likewise the quarterly gross profit increased $6.1 million, an increase of $5.5 million. These significant increases and improvements in revenue and gross profit are a direct result of the acquisitions that were closed after November 30th of 2013.

The quarterly G&A expenses were $1.1 million, or approximately 2% of revenue, compared to $548,000 in the prior year. Salaries and wages ran $4.4 million or 12% of revenue compared to $446,000 in the prior year, which was 23%. The quarterly professional fees totaled $758,000 versus $615,000 for the prior year. It’s worthy to know that the SG&A and salary expenses have increased primarily to support the acquisitions and growth of the company over the past year. However, the professional fees increased largely to support ongoing capital raising, investor relations and closing costs associated with the acquisitions.

As mentioned in previous earnings calls, the company is aggressively pursuing a plan we refer to as the Pathway to Profitability. We are pleased to report that we’ve already made significant progress on this front. First we’ve form a committee to scrutinize all expenses with the clear objective of eliminating, reducing and managing these costs downward. Based on the committee’s recommendations, we’ve successfully cut cost and streamline corporate overheads through the cancelation of various ongoing employment and consultant agreements. We now believe our overall corporate cost run rate are in line with industry norms. While we are pleased to see these costs reducing as percentage revenue we know it remains plenty of room of improvement and we’re committed to our Pathway to Profitability and we’ll continue to search out additional savings.

The company reported a net loss of $8.8 million for the quarter, compared to a loss of 4.1 million in the prior year. It’s absolutely imperative that you understand that the net loss that year contained $7.9 million of noncash charges including a $5.2 million one-time only noncash restructuring charge that relates to our Pathway to Profitability. If you’d like to see additional color and detail regarding these charges I would call your attention to yesterday’s earning’s press release, this includes a detailed schedule reconciling the reporting net loss to positive adjusted EBITDA of approximately $572,000. These non-GAAP adjustments are clearly itemized in the press release and includes traditional EBITDA adjustments $5.7 million one-time restructuring charges, as well as various acquisitions, capital raising, non-cash and other non-recurring costs.

With the full impact of the acquisitions now assimilated, our quarterly revenue of $33.9 million now corresponds to our annual run rate of $130 million. However, please keep in mind that our Q3 results will likely show us sequential dip in revenue due to the seasonal effects of the winter weather in our revenue cycle. This seasonal impact is common throughout Staffing industry as well as many other businesses with operations in the North East. We’ve already facted into our annual budget and we still expect to report organic year over year improvements in Q3.

In conclusion, I want to reiterate that we are pleased with the tremendous revenue and gross margin growth. We are encouraged in reporting positive adjusted EBITDA earlier than forecasted and look forward to reporting in the very near future positive EBITDA. Going forward the company’s cash flow should continue to improve, EBITDA profitability will follow shortly there after and share price should begin to reflect our efforts and the company’s financial performance and opportunity With that said, it’s my pleasure to introduce Matt, our CEO, for further discussion about the company’s operations. Matt?

Matt Briand – Chief Executive Officer

Thank you, Jeff and good morning everyone. Now that the financials have been discussed, I will be focusing on some of the highlights of the quarter and recent developments as we continue to implement our acquisition strategy.

With our first five acquisitions under our belt, we now have more than 3,500 temporary employees on assignment to deploy around the United Stated and Europe. In addition, we have over 120 internal employees, plus our senior management team. We expect to expand these numbers even further as we continue to acquire additional Staffing companies that want to join the Staffing 360 journey.

Although our growth from $1 million to over $130 million revenue which been primarily achieved through acquisition, our business units are enhancing their growth organically as well. As a first example our most recent acquisition, People Serve, has grown their sales by more than 20% in the short span of 6 months since we acquired them. Needless to say, this is a major success for our company and although we can never say for certain that this growth rate will be going forward the initial outlook certainly goes well with our strategy and vision.

Speaking of our collective vision we recently demonstrated our deep faith in Staffing 360 when Brendan and I participated in the above market conversion of $3.3 million of our initial promissory notes and equity. As the largest [inaudible] of the initial acquisition, Brendan and I converted our debt into equity at one dollar per share, the same price at which many investors joined our company. We are clearly in this for the long haul and we believe Staffing 360 Solutions represents a significant opportunity for growth as we execute our Profit to Profitability.

On that note, we recently engaged in a New York based investment bank that specializes in financing small cap companies. As part of this new relationship, we plan to raise $4 million to fund our next acquisition, which is already gone through the diligence. At this stage capital raising is key to our buy and [inaudible] strategy so we expect to follow this raise with additional financing to support our growing pipeline of acquisition candidates.

As we move into our next reporting period, Staffing 360 is looking forward to a very bright future as we drive organic growth and continue to improve operations toward our stated goal of $300 million in annualized revenues. At this point, I would like to hand the call back to Brendan, who will provide some final remarks before we start the Q&A. Brendan?

Brendan Flood – Executive Chairman

Thank you, Matt. As you heard from Jeff, we have a number of costs that are directly related to the acquisition program, and we would expect these to continue while the acquisition program continues. As mentioned during our previous earnings call, our primary initiative is our Pathway to Profitability. We are fully committed to becoming profitable as soon as possible. And we are extremely pleased to report positive adjusted EBIDTA ahead of schedule. As mentioned in our previous calls also, our expectation was that we would move into profitability on an adjusted EBIDTA bases during fiscal 2015, which ends May 31st, 2015. So, to achieve this milestone two quarters early, is a significant achievement for us and is a testament to all of our staff and their operations.

You will notice the $5.7 million in charges we took this quarter, which helped expedite our positive adjusted EBIDTA, as just mention, more than $5.2 million was non-cash and non-recurring. Overall this restructuring charge, total cash out [inaudible] of about $450,000 across this calendar year, has reduced our cash out flow by $7.3 million over the next four years and by $5.3 million in the next 24 months alone.

Moving forward to profitability at a net income level will be driven by the timings of the acquisitions that we make and the one off cost incurred in completing these acquisitions. Our overall mission continues to be to acquire larger and increasingly more attractive companies with strong margins as we [inaudible] for profitability, we also aim to up list to a senior exchange. On this front we’ve recently our acquisition of [inaudible] and we believe that we are making progress.

We have responded to multiple rounds of questions and now that our latest quarterly financials have been released, we believe that we are in a stronger position than we have ever been. Obviously, we will continue to keep you appraised on our progress, as we get closer to an up listing, which will be a major benefit to our loyal chair holders and perspective investors alike. At this stage I would like to hand the call over to Q&A, after the Q&A we will provide some closing comments. Jesse?

Operator

Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question please press *1 on your telephone keypad. A confirmation tone will indicate your line’s in the question queue. You may press *2 if you’d like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you, our first question is coming from the line of Michael Williams, a private investor. Please proceed with your question.

Q: Congratulations everybody on the positive EBIDTA numbers. Just one comment, in terms of [inaudible]mentioned some [inaudible]due to the winter weather, do you have any expectations on how this will affect the financial first quarter perhaps on a regular basis?

Brendan Flood – Executive Chairman

Michael thanks for your congratulations, this is Brendan. You know, I’ve lived my entire life in the North East of the United States, I could probably give you a very detailed answer to that because we know that every single year, and the snow is going to come. On the positive bases for every million that we would lose in revenue we would only loose something like $160,000 of gross profit so as we move further down final the account, the impact of it is off set fairly materially.

I don’t see us losing any more than maybe a 10% sequential hit, so maybe we’ll be somewhere in the $30 to $31 million. We are not ready right now to give exact guidance on that but I think we’d be pretty comfortable with that, unless there’s something really weird that hasn’t happen for 34 years, that’s the kind of change we would see.

Operator

Thank you, and as a reminder ladies and gentlemen, if you would like to ask a question at this time, please press *1 on your telephone keypad. Please hold while we poll for any additional questions. Thank you, our next question is coming from the line of James Tusido with [inaudible].

Q: Hi, this is James. Quick question here, you mentioned hoping to up lift either the [inaudible] or NYSC, can you provide a little timing on that and what your expectations are on that venue?

Darren Minton – Executive Vice President

As far as exact timing, you know, we just don’t know if a little bit of a black box with NASDAQ or as Brendan mentioned, making progress on that front, I’ve responded to multiple rounds of questions and now that our latest quarterly financials are released, we’ll be reviewing that and that was one thing they wanted to wait on. So, we’ve definitely moved through different [inaudible]and we believe that we’ll be hopefully in this quarter but as far as exact timing on a specific week, we just don’t know.

Operator

Thank you, our next question is coming from the line Douglas Gas of [inaudible] Capital, please proceed with your question.

Q: Good morning, I understand that you finally reached the $130 million on your run rate, which is terrific, congratulations. What are your plans for getting to $300 million?

Brendan Flood – Executive Chairman

Thanks, Doug, this is Brendan again. We actually made no secret of the fact that we are a high growth company through acquisition, so we’re going to go from the $130 million with the organic growth that Matt outlined in his commentary. But our intention is to raise the funding to plug the gas through further acquisitions which we would help to do before the end of the financial year.

Q: Do you have acquisitions lined up to take you to that level?

Brendan Flood – Executive Chairman

Yes, we have a various group of pipeline, I think Matt mentioned that we have an acquisition that has already gone through due diligence, which once we raise the initial [inaudible] of our funding and we’ve reached $4 million we will close pretty well immediately. We are working with our investment bank in New York to raise the second and third [inaudible] which was from the acquisitions of the remainder of that $300 million and maybe go beyond that $300 million. So we do have a very robust pipeline, we have about 15 companies that we’re on active discussions with in various stages and I can tell you that as each of us look at the Staffing market in the United States and the Staffing market in he United Kingdom, there is an awful lot of high quality targets out there who are interested in talking to us, we get a lot more incoming phone calls now than we need to make outgoing ones.

Operator

Ladies and Gentlemen that marks the end of our question and answer session today, does anyone on the team have any additional concluding comments?

Brendan Flood – Executive Chairman

Thank you, Jesse. And thank you everyone for taking the time to join us today. I hope that what you’ve heard and what you’ve heard for the last few quarters will assure you and reassure you that Staffing 360 Solutions represents a tremendous opportunity for rapid growth in both the United States and around the world. As we continue to implement our high acquisition model, we remain committed to growth and revenue, growth and earnings and growth and shareholder value.

Jesse, that is the end of our call. Thank you all again.