UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x | QUARTERLY REPORT UNDER SECTION 13 |
For the quarterly period ended June 30,December 31, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-05707
GENERAL EMPLOYMENT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
GENERAL EMPLOYMENT ENTERPRISES, INC. |
(Exact name of registrant as specified in its charter) |
Illinois | 36-6097429 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
184 Shuman Blvd., Suite 420, Naperville, IL 60563
(Address of principal executive offices)
(630) 954-0400
(Registrant’sRegistrant's telephone number, including area code)
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| Accelerated filer |
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Non-accelerated filer |
| Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the registrant’sregistrant's common stock as of August 14, 2015February 16, 2016 was 88,913,252. 9,256,311.
GENERAL EMPLOYMENT ENTERPRISES, INC.
Form 10-Q
For the Quarter Ended June 30,December 31, 2015
INDEX
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS |
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PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements (unaudited) |
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Condensed Consolidated Balance Sheets at |
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Condensed Consolidated Statements of Operations for the three |
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Condensed Consolidated Statements of |
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Condensed Consolidated Statements of Cash Flows for the |
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Notes to Condensed Consolidated Financial Statements |
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Item 2. |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. | Controls and Procedures |
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
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Item 1A. | Risk Factors |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities |
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Item 4. | Mine Safety Disclosures |
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Item 5. | Other Information |
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Item 6. | Exhibits |
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Signatures |
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
As a matter of policy, the Company does not provide forecasts of future financial performance. The statements made in this quarterly report on Form 10-Q Quarterly Report which are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements often contain or are prefaced by words such as “believe”"believe", “will”"will" and “expect.”"expect." These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. As a result of a number of factors, our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause the Company’sCompany's actual results to differ materially from those in the forward-looking statements include, without limitation, general business conditions, the demand for the Company’sCompany's services, competitive market pressures, the ability of the Company to attract and retain qualified personnel for regular full-time placement and contract assignments, the possibility of incurring liability for the Company’sCompany's business activities, including the activities of its contract employees and events affecting its contract employees on client premises, and the ability to attract and retain qualified corporate and branch management, as well as those risks discussed in the Company’sCompany's annual report on Form 10-K for the year ended September 30, 2014,2015, and in other documents which we file with the Securities and Exchange Commission. Any forward-looking statements speak only as of the date on which they are made, and the Company is under no obligation to (and expressly disclaims any such obligation to) and does not intend to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands)
December 31, September 30, 2015 2015 ASSETS CURRENT ASSETS: Cash Accounts receivable, less allowances (December - $570; September - $524) Other current assets Total current assets Property and equipment, net Other long-term assets Goodwill Intangible assets, net TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt Accounts payable Accrued compensation Other current liabilities Short-term portion of subordinated debt Contingent consideration Total current liabilities Deferred rent Subordinated debt Total long-term liabilities Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - none Common stock, no par value; authorized - 200,000 shares; issued and outstanding - 9,256 - - Additional paid in capital Accumulated deficit Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,610 $ 5,932 8,829 6,156 793 942 14,232 13,030 675 706 47 22 15,906 8,220 10,474 4,896 $ 41,334 $ 26,874 $ 4,245 $ 2,850 2,010 825 2,392 2,687 1,121 532 1,490 - 3,000 500 14,258 7,394 250 - 5,035 243 5,285 243 - -
shares at December 31, 2015 and 8,833 shares at September 30, 201536,440 33,492 (14,649 ) (14,255 ) 21,791 19,237 $ 41,334 $ 26,874
June 30, September 30, 2015 2014 ASSETS CURRENT ASSETS: Cash and cash equivalents Accounts receivable, less allowances (June - $435; September - $395) Other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt Accounts payable Accrued compensation Convertible note payable - current portion, net of discount Derivative liability Other current liabilities Total current liabilities Convertible note payable, net of discount Other long-term liabilities Total long-term liabilities Commitments and contingencies SHAREHOLDERS' EQUITY Convertible Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - 829 shares at June 30, 2015 and none at September 30, 2014 8,118 - Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 32,058 shares at June 30, 2015 and 25,899 shares at September 30, 2014 Additional paid in capital Accumulated deficit Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,113 $ 168 5,625 4,907 503 1,650 7,241 6,725 414 453 6,396 1,106 3,469 1,560 $ 17,520 $ 9,844 $ 3,197 $ 2,711 547 910 1,448 2,633 - 35 - 131 540 1,214 5,732 7,634 - 132 - 13 - 145 - - 16,597 11,658 (12,927 ) (9,593 ) 11,788 2,065 $ 17,520 $ 9,844
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GENERAL EMPLOYMENT ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended 2015 2014 NET REVENUES: Contract staffing services Direct hire placement services NET REVENUES Cost of contract services Selling, general and administrative expenses Acquisition, integration and restructuring expense Depreciation expense Amortization of intangible assets LOSS FROM OPERATIONS Loss on change in derivative liability Interest expense LOSS BEFORE INCOME TAX PROVISION Provision for income tax NET LOSS BASIC & DILUTED LOSS PER SHARE WEIGHTED AVERAGE NUMBER OF SHARES - BASIC & DILUTED
December 31, $ 15,999 $ 8,232 1,626 1,450 17,625 9,682 12,337 6,668 4,508 3,007 446 30 66 37 337 85 (69 ) (145 ) - (3,115 ) (325 ) (147 ) $ (394 ) $ (3,407 ) - - $ (394 ) $ (3,407 ) (0.04 ) (1.32 ) 9,247 2,590
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
Common Stock Additional Paid Preferred Stock Preferred Accumulated Total Shareholders' Shares In Capital Shares Stock Deficit Equity Balance, September 30, 2014 Proceeds from sale of preferred, net of fees Issuance of preferred shares for acquisition of Scribe Conversion of note payable Issuance of stock for board of directors Issuance of warrant for Scribe acquisition (see note 11) Exercise of stock options Issuance of stock for the exercise of warrants and options, cashless Issuance of stock for conversion of preferred stock (including accrued dividends) Stock compensation expense Issuance of stock, net of expense and warrants issued Issuance of stock for acquisition of Agile Net loss Balance, September 30, 2015 �� Shares isssued for JAX Legacy debt (see note 9) Amortization of stock option expense Issuance of stock for acquisition of Access Data Consulting Corporation Net loss Balance, December 31, 2015 2,589 $ 11,658 - $ - $ (9,593 ) $ 2,065 - - 200 1,961 - 1,961 - - 640 6,265 - 6,265 317 2,867 - - - 2,867 35 258 - - - 258 - 1,330 - - - 1,330 62 194 - - - 194 149 - - - - - 4,315 8,226 (840 ) (8,226 ) - - - 340 - - - 340 1,246 7,754 - - - 7,754 120 865 - - - 865 - - - - (4,662 ) (4,662 ) 8,833 $ 33,492 - $ - $ (14,255 ) $ 19,237 95 589 - - - 589 - 162 - - - 162 328 2,197 - - - 2,197 - - - - (394 ) (394 ) 9,256 $ 36,440 - $ - $ (14,649 ) $ 21,791
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended June 30, Nine Months Ended June 30, 2015 2014 2015 2014 NET REVENUES: Contract staffing services Direct hire placement services NET REVENUES Cost of contract services Selling, general and administrative expenses Amortization of intangible assets INCOME (LOSS) FROM OPERATIONS Change in fair value of derivative liability Interest expense Loss on extinguishment of debt INCOME (LOSS) BEFORE INCOME TAX PROVISION Provision for income tax NET INCOME (LOSS) PREFERRED STOCK DIVIDENED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS BASIC LOSS PER SHARE DILUTED LOSS PER SHARE WEIGHTED AVERAGE NUMBER OF SHARES - BASIC WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED $ 9,502 $ 8,184 $ 26,048 $ 25,111 1,948 1,739 4,880 5,253 11,450 9,923 30,928 30,364 7,803 6,970 21,488 21,295 3,301 3,416 9,578 10,115 139 81 305 244 207 (544 ) (443 ) (1,290 ) 68 - (2,251 ) - 133 90 406 298 (24 ) - (234 ) - $ 118 $ (634 ) $ (3,334 ) $ (1,588 ) - - - - $ 118 $ (634 ) $ (3,334 ) $ (1,588 ) (170 ) - (207 ) - $ (52 ) $ (634 ) $ (3,541 ) $ (1,588 ) (0.00 ) (0.02 ) (0.13 ) (0.07 ) (0.00 ) (0.02 ) (0.13 ) (0.07 ) 30,985 25,720 28,303 23,845 30,985 25,720 28,303 23,845
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
GENERAL EMPLOYMENT ENTERPRISES, INC.
Total Shareholders' Common Stock Additional Paid Preferred Stock Preferred Accumulated Shares In Capital Shares Stock Deficit Equity Balance, September 30, 2013 $ Stock compensation expense Issuance of warrants related to debt Issuance of common stock, net Stock issued for services Net loss Balance, September 30, 2014 Issuance of preferred stock, net of fees Conversion of note payable Issuance of stock for board of directors Issuance of warrant for Scribe acquisition (see note 10) Exercise of stock options Issuance of stock for warrants and options, cashless Issuance of stock for conversion of preferred stock (including accrued dividends) Stock compensation expense Net loss Balance, June 30, 2015 22,799 $ 10,851 - - $ (8,238 ) $ 2,613 - 98 - - - 98 - 219 - - - 219 3,000 470 - - - 470 100 20 - - - 20 - - - - (1,355 ) (1,355 ) 25,899 $ 11,658 $ - $ (9,593 ) $ 2,065 840 8,226 - 8,226 3,163 2,867 - - - 2,867 344 258 - - - 258 - 1,330 - - - 1,330 615 194 - - - 194 1,494 - - - - - 543 108 (11 ) (108 ) - - - 182 - - - 182 - - - - (3,334 ) (3,334 ) 32,058 $ 16,597 829 $ 8,118 $ (12,927 ) $ 11,788
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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GENERAL EMPLOYMENT ENTERPRISES, INC.
Nine Months Ended June 30, 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization Stock compensation expense Provision for doubtful accounts Stock issued for services Loss on abandonement of fixed assets Change in fair value of derivative liability Loss on extinguishment of debt Changes in operating assets and liabilities - Accounts receivable Accounts payable Accrued compensation Other current items, net Other assets Long-term liabilities Net cash used in operating activities - Continuing Operations Net cash used in operating activities - Discontinued Operations Net cash used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment Partial payment of earn-out Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt, net Proceeds from sale of preferred stock, net Payments on capital lease Proceeds from sale of common stock Net cash provided by (used in) financing activities Net change in cash - Continuing Operations Net change in cash - Discontinued Operations Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest Cash paid for taxes Issuance of preferred shares for acquisition Non-cash financing activities Conversion of note payable Issuance of shares for accrued board fees Conversion of preferred stock $ (3,334 ) $ (1,588 ) 415 364 182 90 40 45 189 20 - 44 2,120 - 234 - (758 ) 624 (363 ) 432 (1,185 ) 225 950 (188 ) - (32 ) - (87 ) (1,510 ) (51 ) - (21 ) (1,510 ) (72 ) (71 ) (110 ) (59 ) (88 ) (130 ) (198 ) 486 (468 ) 1,961 - (56 ) (62 ) 194 505 2,585 (25 ) 945 (274 ) - (21 ) 168 361 $ 1,113 $ 66 $ 248 $ 210 $ - $ 24 $ (135 ) $ - $ 2,867 $ - $ 69 $ - $ 108 $ -
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Three Months Ended December 31, 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization Stock compensation expense Provision for doubtful accounts Amortization of debt discount Change in derivative liability Changes in operating assets and liabilities - Accounts receivable Accounts payable Accrued compensation Other current items, net Long-term liabilities Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment Acquisition payments Partial payment of earn-out Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt, net Proceeds from issuance of subordinated debt Payments on the debt issued related to acquisitions Payments on capital lease Net cash provided by financing activities Net change in cash Cash at beginning of period Cash at end of period SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest Cash paid for taxes Non-cash disclosures: Stock paid for prepaid interest on subordinated note Stock paid for fees in conection with subordinated note Issuance of common stock for acquisition Note payable issued in connection with acquisition Earn-out liability, contingent consideration, and other liabilities incurred in connection with acquisition $ (394 ) $ (3,407 ) 403 122 162 52 46 30 74 - - 3,115 148 (252 ) 920 127 (886 ) (1,071 ) (388 ) 434 40 - 125 (850 ) (4 ) (15 ) (6,845 ) - - (75 ) (6,849 ) (90 ) 1,395 1,216 4,107 - (87 ) - (13 ) (13 ) 5,402 1,203 (1,322 ) 263 5,932 168 $ 4,610 $ 431 $ 220 $ 95 $ - $ - $ 566 $ - $ 23 $ - $ 2,197 $ - $ 3,000 $ - $ 3,313 $ -
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Description of Business
General Employment Enterprises, Inc. (the “Company”"Company", “us”"us", “our”"our" or “we”"we") was incorporated in the State of Illinois in 1962 and is the successor to employment offices doing business since 1893. We are a provider of permanent and temporary professional, industrial and physician assistant staffing and placement services in and near several major U.S cities. We specialize in the placement of information technology, engineering, medical and accounting professionals for direct hire and contract staffing for our clients, and provide temporary staffing services for our commercial clients. As a result of our acquisition of Scribe Solutions in April 2015, we now also offer data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics. There is currently a growing need for medical scribes due to the rise in EMR being utilized for billing and documentation of health care services and the meaningful use requirements that are part of the Affordable Care Act.
2. Significant Accounting Policies and Estimates
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine month period ended June 30,December 31, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2015.2016. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 20142015 as filed on December 22, 2014. 29, 2015.
Liquidity
The Company has experienced significant losses and negative cash flows from operations in the past. Management has implemented a strategy which included cost reduction efforts, consolidation of certain back office activities to gain efficiencies as well as identifying strategic acquisitions, financed primarily through the issuance of preferred and common stock and convertible debt, to improve the overall profitability and cash flows of the Company.
In 2013, the Company entered into a three year revolving credit agreement with ACF Finco I LP (formerly Keltic) to provide working capital financing. The agreement allows ACF Finco I LP to advance the Company funds based on a percentage of eligible invoices. Management believes with current cash flow from operations, the preferred offeringequity offerings below and the availability under the ACF Finco I LP loan agreement, the Company will have sufficient liquidity for the next 12 months.
On January 8, 2015, the Company completed a Securities offering with 18 individuals who collectively have purchased a total of 200,000 shares of Preferred Stock from the Company for a total purchase price of $2,000,000. The Company netted approximately $1,960,000, with approximately $1,000,000 to be used as working capital and the remaining $1,000,000 for marketing, acquisitions, expansion and to further the operations of the Company. The Preferred Stock was designated by the Company on December 15, 2014 through the filing of a Certificate of Designation of Series A Convertible Preferred Stock with the Illinois Secretary of State. Each share of Preferred Stock is initially convertible, at the election of the holder, into 50 shares of the Company’sCompany's Common Stock. The foregoing conversion ratio is subject to standard adjustment mechanisms, as set forth in the Designation. All of the series A Convertible Preferred Stock have been converted into common shares.
On July 22, 2015, the Company entered into an underwriting agreement (the "Underwriting Agreement") with Roth Capital Partners, LLC (the "Representative"), as the representative of the several underwriters identified therein (collectively, the "Underwriters"), pursuant to which the Company agreed to offer and sell up to 1,120,000 shares subsequentof the Company's common stock, no par value (the "Common Stock"), at a price of $7.00 per share. Under the terms of the Underwriting Agreement, the Company has granted the Representative an option, exercisable for 30 days, to June 30, 2015. purchase up to an additional 168,000 shares of Common Stock to cover over-allotments, if any.
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The Company received net proceeds from this offering, after deducting underwriting discounts and commissions and offering expenses payable by the Company of approximately $7.8 million and issued 1,246,000 common shares, this includes the Underwriters exercise of the over-allotment option.
The offering was made pursuant to the Company's effective registration statements on Form S-3 (File No. 333- 204080), as amended and supplemented filed with the Securities and Exchange Commission (the "SEC").
The Company also issued warrants (the "Underwriter's Warrant") to the Underwriters to purchase up to a total of 124,600 shares of Common Stock, at a price of $8.40 per common share and are exercisable for five years. The Underwriter's Warrant has a seven-year piggyback registration right with respect to shares of common stock underlying the Underwriter's Warrant from the date of the Underwriting Agreement.
On August 7, 2014,October 2, 2015, the Company issued and sold a Convertiblesubordinated note in the aggregate principal amount of $4,185,000 (the "Subordinated Note") to JAX Legacy – Investment 1, LLC (the "Investor") pursuant to a Subscription Agreement dated October 2, 2015 between the Company and the Investor (the "Subscription Agreement"). The Subordinated Note is due on October 2, 2018 (the “Note”"Maturity Date") with an. Interest on the Subordinated Note is payable as follows: (i) 10% interest per annum on the outstanding principal balance of the Subordinated Note shall be payable quarterly in arrears, in cash, on each December 30th, March 30th, June 30th, and September 30th, until the Maturity Date and (ii) 4% interest per annum until the Maturity Date on the original principal balance of $632,500 to Brio Capital Master Fund LTD (“Brio”)the Subordinated Note ($502,200), for a purchase price of $550,000. The Note matureswas paid in advance on February 6, 2016, and is payable in thirteen monthly installments of $48,654, commencing in the sixth month post-closing. Brio had the right, however not the obligation, six months after closing, to convert all or any partissuance date of the outstandingSubordinated Note intothrough the Company’sissuance to the Investor of 91,309 shares of the Company's common stock (the "Interest Shares"). The Company may prepay the principal and interest under the Subordinated Note at an initial conversion priceany time, without penalty, provided, however, the Interest Shares shall be deemed paid in full and earned upon the issuance of $0.20 per share. Asthe Subordinated Note. The Subordinated Note is subordinated in payment to the obligations of June 30,the Company to ACF FINCO I LLP pursuant to the terms and provisions of a Subordination and Intercreditor Agreement dated October 2, 2015 Brio has convertedbetween, ACF FINCO I LLP and the entire noteInvestor. In connection with the issuance of the Subordinated Note the Company and the Investor entered into 3,162,500a Registration Rights Agreement dated October 2, 2015 (the "Registration Rights Agreement") whereby the Company granted to the Investor certain piggyback registration rights with respect to the shares of Company common stock issued or issuable as interest payments under the Subordinated Note, and any shares of Company common stock issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, shares of common stock. stock of the Company issued or issuable as interest payments under the Subordinated Note.
On October 4, 2015 the Company issued to the Sellers of Access Data Consulting Corporation a Sellers' Promissory Note for $3,000,000 (see note 11). Interest on the outstanding principal balance of the Sellers' Promissory Note is payable at the rate of 5.5% per annum. The principal and interest amount of the Sellers' Promissory Note is payable as follows: (i) for the first twelve months commencing on November 4, 2015 and ending on October 4, 2016, a monthly payment of $57,303 in principal and interest, (ii) on October 4, 2016 a balloon payment of principal of $1,000,000, (iii) for the next twelve months commencing on November 4, 2016 and ending on October 4, 2017, a monthly payment of $27,963 in principal and interest, (iv) on October 4, 2017 a balloon payment of principal of $1,202,405 and (v) on October 4, 2017 any and all amounts of previously unpaid principal and accrued interest. The Sellers' Promissory Note is subordinated in payment to the obligations of the Company to ACF FINCO I LLP pursuant to the terms and provisions of a Subordination and Intercreditor Agreement dated October 5, 2015 between ACF FINCO I LLP and the Sellers.
Principles of Consolidation
The condensed unaudited condensed consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions are eliminated in consolidation.
Reverse Stock Split
On October 9, 2015, the Company filed a certificate of change to our amended and restated articles of incorporation with the Secretary of the State of Illinois in order to effectuate a reverse stock split of our issued and outstanding common stock on a 1-for-10 basis (the "Reverse Stock Split"); and increased the total number of authorized shares of Common Stock of the Company from 20,000,000, post Reverse Stock Split, to 200,000,000.
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The Reverse Stock Split became effective with the FINRA as of the open of business on October 9, 2015. As a result of the Reverse Stock Split, every 10 shares of the Company's pre-Reverse Split common stock was combined and reclassified into one share of the Company's common stock. No fractional shares of common stock were issued as a result of the Reverse Split.
Throughout the condensed consolidated financial statements, each instance that refers to a number of shares of the Company's common stock, refers to the number of shares of common stock after giving effect to the Reverse Stock Split, unless otherwise indicated.
Estimates and Assumptions
Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the condensed consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates. If differences were to occur in a subsequent period, the Company would recognize those differences when they became known. Significant matters requiring the use of estimates and assumptions include, but may not be limited to, deferred income tax valuation allowances, accounts receivable allowances, accounting for acquisitions, accounting for derivativesderivative liabilities and evaluation of impairment. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.
Revenue Recognition
Direct hire placement service revenues are recognized when applicants accept offers of employment, less a provision for estimated losses due to applicants not remaining employed for the Company’sCompany's guarantee period. Contract staffing service revenues are recognized when services are rendered.
Falloffs and refunds during the period are reflected in the unaudited condensed consolidated statements of operations as a reduction of placement service revenues.revenues and were approximately $139,000 and $133,000 as of December 31, 2015 and 2014 respectively. Expected future falloffs and refunds are reflected in the unaudited condensed consolidated balance sheet as a reduction of accounts receivable and were approximately $130,000$108,000 and $113,000$86,000 as of June 30,December 31, 2015 and September 30, 20142015 respectively.
Cost of Contract Staffing Services
The cost of contract services includes the wages and the related payroll taxes and employee benefits of the Company’sCompany's employees while they work on contract assignments.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. At June 30,December 31, 2015 and September 30, 2014,2015, there were no cash equivalents. The Company maintains deposits in financial institutions in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. Beginning in 2013, insurance coverage reverted to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may from time to time exceed federally insured limits.
Accounts Receivable
The Company extends credit to its various customers based on evaluation of the customer’scustomer's financial condition and ability to pay the Company in accordance with the payment terms. An allowance for placement fall-offs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company’sCompany's guarantee period. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect management’smanagement's estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers. The nature of the contract service business, where companies are dependent on employees for the production cycle allows for a small accounts receivable allowance. Based on management’smanagement's review of accounts receivable, an allowance for doubtful accounts of approximately $435,000$570,000 and $395,000$524,000 is considered necessary as of June 30,December 31, 2015 and September 30, 2014,2015, respectively. The Company charges uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense is calculated on a straight-line basis over estimated useful lives of five years for computer equipment and two to ten years for office equipment, furniture and fixtures. The Company capitalizes computer software purchased or developed for internal use and amortizes it over an estimated useful life of five years. The carrying value of property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that it may not be recoverable. If the carrying amount of an asset group is greater than its estimated future undiscounted cash flows, the carrying value is written down to the estimated fair value. There was no impairment of property and equipment for the ninethree month periods ended June 30,December 31, 2015 and 2014.
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets acquired in the various acquisitions. The Company assesses goodwill for impairment at least annually. Testing goodwill for impairment allows the Company to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that this threshold is not met, then performing the two-step impairment test is unnecessary. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds its implied fair value.
Fair Value Measurement
The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”"exit price") in an orderly transaction between market participants at the measurement date.
The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’sCompany's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The fair value of the Company’sCompany's current assets and current liabilities, excluding the derivative liability, approximate their carrying values due to their short term nature. The carrying value of the Company’s derivative liability is measured atCompany's long-term liabilities represents their fair value on a recurring basis based on level 3 inputs, as further discussed in note 8.8 and note 9. The Company’sCompany's goodwill and other intangible assets are measured at fair value on a non-recurring basis using level 3 inputs.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposure to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 “"Derivative and Hedging”Hedging" (ASC 815) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether fair value of warrants issued is required to be classified as equity or as a derivative liability.
Intangible Assets
Customer lists, non-compete agreements, customer relationships, management agreements and trade names were recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives ranging from two to ten years using both accelerated and straight-line methods.
Loss per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. ThereCommon share equivalents of approximately 716,000 and 342,000 were approximately 52,522,000 and 20,820,000excluded from the computation of common stock equivalents for three and nine months ended June 30, 2015, respectively. There were no common stock equivalentsdiluted earnings per share for the threequarters ended December 31, 2015 and nine months ended June 30, 2014, respectively. respectively, because their effect is anti-dilutive.
Advertising Expenses
The majority of the Company’sCompany's advertising expense budget is used to support the Company’sCompany's business. Most of the advertisements are in print or internet media, with expenses recorded as they are incurred. For the three and nine months ended June 30,December 31, 2015 and 2014, included in selling, general and administrative expenses was advertising expense totaling approximately $164,000$298,000 and $514,000, and approximately $177,000 and $549,000,$207,000, respectively.
Impairment of Long-lived Assets
The Company records an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. The Company did not record any impairment during the ninethree months ended June 30,December 31, 2015 and 2014.
Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with applicable accounting principles, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”("Black-Scholes") pricing model. For all employee stock options, we recognize expense over the requisite service period on an accelerated basis over the employee’semployee's requisite service period (generally the vesting period of the equity grant). The Company’sCompany's option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with applicable accounting principles. Such options are valued using the Black-Scholes option pricing model. There were no stock options granted during the nine month period ended June 30, 2015.
| 12 |
Income Taxes
We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized.
Due to the private sale of shares of common stock to LEED HR during fiscal 2012 and the resulting change in control, the Company may be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results.
Reclassification
Certain reclassifications have been made to the financial statements as of and for the three and nine months ended June 30,December 31, 2014 to conform to the current year presentation.
Segment Data
The Company has two operating business segments a) Contract staffing services, (including our newly acquired Scribe Solutions, Inc. business, see note 10), and b) Direct hire placement. These operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including type of business, type of employee, length of employment and revenue recognition are considered in determining these operating segments.
3. Recent Accounting Pronouncements
In September 2015, the FASB issued ASU 2015-16 - Business Combinations, which requires adjustments to provisional amounts recorded in business combinations to be recognized in the reporting period in which they are identified either separately on the face of the income statement or in the notes to the financial statements. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015 and any interim periods within that period, and early adoption is permitted. We are currently evaluating ASU 2015-16 to determine if this guidance will have a material impact on our financial position, results of operations or cash flows.
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. We are currently evaluating ASU 2015-17 to determine if this guidance will have a material impact on our financial position, results of operations or cash flows.
No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’sCompany's present or future financial statements.
4. Property and Equipment
Property and equipment, net consisted of the following:
| Useful |
| June 30, |
| September 30, |
|
| Useful |
| December 31, |
| September 30, |
| |||||||
(In thousands) |
| Lives |
| 2015 |
|
| 2014 |
|
| Lives |
| 2015 |
|
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Computer software |
| 5 years |
| $ | 1,447 |
| $ | 1,447 |
|
| 5 years |
| $ | 1,447 |
| $ | 1,447 |
| ||
Office equipment, furniture and fixtures and leasehold improvements |
| 2 to 10 years |
|
| 1,429 |
|
|
| 1,413 |
|
| 2 to 10 years |
|
| 2,313 |
|
|
| 2,278 |
|
Total property and equipment, at cost |
|
|
| 2,876 |
| 2,860 |
|
|
|
| 3,760 |
| 3,725 |
| ||||||
Accumulated depreciation and amortization |
|
|
|
| (2,462 | ) |
|
| (2,407 | ) |
|
|
|
| (3,085 | ) |
|
| (3,019 | ) |
Property and equipment, net |
|
|
| $ | 414 |
|
| $ | 453 |
|
|
|
| $ | 675 |
| $ | 706 |
| |
Leasehold improvements are amortized over the term of the lease.
Depreciation expense for the three and nine month periods ended June 30,December 31, 2015 and 2014 was approximately $32,000$66,000 and $110,000, and $38,000 and $120,000,$37,000, respectively.
5. Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets acquired from various acquisitions. Goodwill is not amortized. The Company performs a goodwill impairment test annually, by reporting unit, in the fourth quarter of the fiscal year, or whenever potential impairment triggers occur. Should the two-step process be necessary, the first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value including goodwill. In applying a fair-value-based test, estimates are made of the expected future cash flows to be derived from the reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future margins, capital needs, economic trends and other factors. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds its implied fair value. There was no impairment recorded during the three and nine month periods ended June 30,December 31, 2015 and 2014.
Intangible Assets
As of June 30,December 31, 2015
(In Thousands) Cost Accumulated Amortization Net Book Value Customer Relationships Trade Name $ 4,160 $ 1,422 $ 2,738 763 32 731 $ 4,923 $ 1,454 $ 3,469
As of September 30, 2014
(In Thousands) |
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||||||||||||||
( In Thousands) |
| Cost |
|
| Accumulated Amortization |
|
| Net Book |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Customer Relationships |
| $ | 2,690 |
| $ | 1,137 |
| $ | 1,553 |
|
| $ | 9,798 |
| $ | 1,805 |
| $ | 7,993 |
| ||||
Trade Name |
|
| 17 |
|
|
| 10 |
|
|
| 7 |
|
| 1,813 |
| 102 |
| 1,711 |
| |||||
Non-compete Agreement |
|
| 818 |
|
|
| 48 |
|
|
| 770 |
| ||||||||||||
|
|
|
|
|
|
|
| $ | 12,429 |
| $ | 1,955 |
| $ | 10,474 |
| ||||||||
| $ | 2,707 |
| $ | 1,147 |
| $ | 1,560 |
| |||||||||||||||
As of September 30, 2015
(In Thousands) Cost Accumulated Amortization Net Book Customer Relationships Trade Name Non-compete Agreement
Value $ 5,232 $ 1,557 $ 3,675 1,057 56 1,001 225 5 220 $ 6,514 $ 1,618 $ 4,896
Amortization expense was approximately $139,000$337,000 and $305,000$85,000 for the three and nine months ended June 30,December 31, 2015 respectively and was approximately $81,000 and $244,000 for the three and nine months ended June 30, 2014, respectively.
The trade names are amortized on a straight – line basis over the estimated useful life of five to ten years. Customer relationships are amortized based on the future undiscounted cash flows or straight – line basis over estimated remaining useful lives of three to ten years or on a straight – line basis over five to ten years. Non-compete agreements are amortized based on a straight-line basis over the term of the non-compete agreement. Over the next five years and thereafter, annual amortization expense for these finite life intangible assets will betotal approximately $541,000 through 2020. $10,474,000, as follows: fiscal 2016 - $1,378,000 fiscal 2017 - $1,272,000, fiscal 2018 - $1,275,000, fiscal 2019 - $1,279,000, fiscal 2020 - $1,267,000 and thereafter - $4,003,000.
Long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company regularly evaluates whether events and circumstances have occurred that indicate possible impairment and relies on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether the assets are recoverable.
6. Short-term Debt
On September 27, 2013, the Company (“Borrower”("Borrower") entered into agreements with ACF FINCO I LP (successor-in-interest to Keltic Financial Partners II, LP) (“ACF”("ACF") (“Lender”("Lender"), that provideprovides the Company with long term financing through a six million dollar ($6,000,000) secured revolving note (the “Note”"Note"). The Note has a term of three years and has no amortization prior to maturity. The interest rate for the Note is a fluctuating rate that, when annualized, is equal to the greatest of (A) the Prime Rate plus three and one quarter percent (3.25%), (B) the LIBOR Rate plus six and one quarter percent (6.25%), and (C) six and one half percent (6.50%), with the interest paid on a monthly basis. At June 30,December 31, 2015 and 2014 the interest rate was 6.5%. Loan advances pursuant to the Note are based on the accounts receivable balance and other assets. The Company incurred certain cash expense and commitment fees related to obtaining the agreement of approximately $170,000, which has been paid. The Note is secured by all of the Company’sCompany's property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title or interests. On April 21, 2014,January 1, 2016 the Company entered into the Firstan eighth Amendment and Waiver to the Loan and Security Agreement with ACF to adjustincrease the covenants. On December 3, 2014,maximum amount of revolving credit under the Company entered into a Second AmendmentAmended Credit Agreement from $6,000,000 to $10,000,000 and Waiver to the Loan and Security Agreement with ACF. On April 1, 2015 the Company entered into a third Amendment and Waiver to the Loan and Security Agreement with ACF to adjust the future covenants as outlined below and update the overall document to reflect changes to the business. The Company has entered into other Amendments with ACF that did not materially change the terms of the Note. As of the date of this report, the Company was in compliance with all such covenants or had received waivers related thereto.
The Company has several administrative covenants and the following financial covenant:
The Company must maintain the following EBITDA:
(a) The three (3) consecutive calendar month period ending on December 31, 2014, to be a negative number exceeding negative Two Hundred Fifty Thousand and 00/100 Dollars ($250,000);
(b) The six (6) consecutive calendar month period ending on March 31, 2015, to be a negative number exceeding negative Five Hundred Thousand and 00/100 Dollars ($500,000);
(c) The nine (9) consecutive calendar month period ending on June 30, 2015, to be a negative number exceeding negative Four Hundred Sixteen Thousand and 00/100 Dollars ($416,000);
(d) The twelve (12) consecutive calendar month period ending on September 30, 2015, to be a negative number exceeding negative Two Hundred Forty Thousand Five Hundred and 00/100 Dollars ($240,500); and
(e) For any period commencing on or after October 1, 2015, no less than such amounts as are established by Lender for such period in Lender’s permitted discretion based on the annual financial projections including such period delivered by Borrower.
The Company must maintain the following EBITDA:
| (a) | The three (3) consecutive calendar month period ending on December 31, 2015, to be a number greater than negative Two Hundred Twenty Five Thousand and 00/100 Dollars (-$225,000.00); | |
| (b) | The six (6) consecutive calendar month period ending on March 31, 2016, to be no less than Nine Hundred Thirty Two Thousand Eight Hundred and 00/100 Dollars ($932,800.00); | |
| (c) | The nine (9) consecutive calendar month period ending on June 30, 2016, to be no less than Two Million Sixty Five Thousand and 00/100 Dollars ($2,065,000.00); | |
| (d) | The twelve (12) consecutive calendar month period ending on September 30, 2016, to be no less than Three Million Two Hundred Forty One Thousand and 00/100 Dollars ($3,241,000.00); and | |
| (e) | For any period commencing on or after October 1, 2016, no less than such amounts as are established by Lender for such period in Lender's permitted discretion based on the annual financial projections including such period delivered by Borrower. |
As of June 30,December 31, 2015, the Company was in compliance with the EBITDA covenant and all other administrative covenants. At June 30,December 31, 2015, there was approximately $783,000$1,200,000 available on the line of credit. The interest expense related to the lines of credit for the three and nine months ended June 30,December 31, 2015 and 2014 approximated $99,000$109,000 and $300,000, and $69,000 and $210,000,$79,000, respectively.
7. Accrued Compensation
Accrued Compensation includes accrued wages, the related payroll taxes, employee benefits of the Company’sCompany's employees while they work on contract assignments, commissions earned and not yet paid and estimated commission payable.
In connection with the completion of the sale of shares of common stock to PSQ in fiscal year 2009, the Company’s then Chairman, Chief Executive Officer and President (the “former CEO”) retired from those positions and his employment agreement with the Company was replaced by a consulting agreement. On January 31, 2013, he retired from all positions with the Company, however he continued to receive his monthly payments required under his consulting agreement. As of June 30, 2015, the liability has been fully paid.
8. Convertible Note
On August 7, 2014, the Company issued a Convertible Note (the “Note”"Note") with an original principal balance of $632,500 to Brio Capital Master Fund LTD (“Brio”("Brio"), for a purchase price of $550,000. The Note matures on February 6, 2016, and is payable in thirteen monthly installments of $48,654, commencing in the sixth month post-closing. Brio hadhas the right, however not the obligation, six months after closing, to convert all or any part of the outstanding Note into the Company’sCompany's common stock at an initial conversion price of $0.20 per share. After six months from closing, the conversion price hadwill have a one-time reset to the lower of $0.20 or 90% of the average of the 3 lowest closing prices for the previous 10 trading days, subject to a floor of $0.14 per share. The Company was allowed tocan force conversion if the Company’sCompany's common stock trades at 250% greater than the conversion price for 20 consecutive trading days (see Note 9)10).
In addition to the Note, the Company issued a warrant to purchase up to 2,371,875 shares of the Company’sCompany's common stock. The warrant is exercisable at $0.25 per share, vests 6 months after the closing, and expires 5 years thereafter.
The Note contained an embedded conversion feature requiring bifurcation and liability treatment. The Company accounted for this conversion feature and the detachable warrants by allocating the proceeds from issuance of the convertible notes to the conversion feature and the warrants. These were based on a relative fair value and the conversion feature was valued by a third party. party using a binomial pricing model with the following assumptions: Volatility - 130.00%; Risk-Free Rate - 0.29%; Conversion Price Floor - $0.14; Conversion Price Cap - $0.20.
To recognize the fair value of the warrants, the Company discounted the note and increased additional paid in capital. The fair value of the conversion feature was approximately $178,000 at inception, the Company discounted the note and created a derivative liability, which is evaluated each quarter and adjusted for any change in value.
During the second quarter of fiscal year 2015, Brio converted $500,000 of its outstanding loan in two tranches into 2,500,000250,000 shares of the Company’sCompany's common stock. Based on the closing stock price of $0.85$8.50 and $1.03$10.30 per common share, the 2,500,000250,000 shares were valued at approximately $2,350,000 and the Company has recognized a loss on the extinguishment of debt of approximately $210,000. Included in the loss in extinguishment was the fair value of the derivative liability at the date of conversion.
During the third quarter of fiscal year 2015, Brio converted the remaining $132,500 of its outstanding loan into 662,50066,250 shares of the Company’sCompany's common stock. Based on the closing stock price of $0.78$7.80 per common share, the 662,50066,250 shares have converted intowere valued at approximately $517,000 of equity and the Company has recognized a gain on the conversion on the derivative liability of approximately $68,000 and a loss on extinguishment of debt of approximately $24,000 during the quarter ended June 30, 2015. $517,000.
Since the issuance in 2014, the Company received approximately $517,000 in net cash that was converted by Brio into 3,162,500316,250 shares of the Company’sCompany's common stock. Related to this transaction the Company recorded approximately $2,867,000 in equity (including 219,000 in warrants valued in 2014), $2,204,000 in a derivative loss, $234,000 extinguishment of debt, and interest expense of approximately $115,500 overduring the past 12 months. year ended September 30, 2015.
9. Equity Subordinated Notes
On March 31, 2014,October 2, 2015, the Company issued and sold the Subordinated Note to JAX Legacy – Investment 1, LLC (the "Investor") pursuant to a Subscription Agreement dated October 2, 2015 between the Company and the Investor (the "Subscription Agreement") in the amount of $4,185,000. The Subordinated Note is due on October 2, 2018 (the "Maturity Date"). Interest on the Subordinated Note is payable as follows: (i) 10% interest per annum on the outstanding principal balance of the Subordinated Note shall be payable quarterly in arrears, in cash, on each December 30th, March 30th, June 30th, and September 30th, until the Maturity Date and (ii) 4% interest per annum until the Maturity Date on the original principal balance of the Subordinated Note, was paid in advance on the issuance date of the Subordinated Note through the issuance to the Investor of 91,309 shares of the Company's common stock (the "Interest Shares") valued at approximately $566,000. The Company may prepay the principal and interest under the Subordinated Note at any time, without penalty, provided, however, the Interest Shares shall be deemed paid in full and earned upon the issuance of the Subordinated Note. A copy of the Subordinated Note is attached hereto as Exhibit 4.2. The Subordinated Note is subordinated in payment to the obligations of the Company to ACF FINCO I LLP pursuant to the terms and provisions of a Subordination and Intercreditor Agreement dated October 2, 2015 between, ACF FINCO I LLP and the Investor. In connection with the issuance of the Subordinated Note the Company and the Investor entered into a Securities PurchaseRegistration Rights Agreement dated October 2, 2015 (the “SPA”"Registration Rights Agreement") whereby the Company granted to the Investor certain piggyback registration rights with Aracle SPF I, LLC (“Aracle”) pursuantrespect to which Araclethe shares of Company common stock issued or issuable as interest payments under the Subordinated Note, and another subscribed investors had the rightany shares of Company common stock issued as a dividend or other distribution with respect to, acquire up to 12 units (the “Units”),or in exchange for $50,000 per Unit, with each Unit consistingor in replacement of, 250,000 shares of common stock (the “Shares”) of the Company issued or issuable as interest payments under the Subordinated Note. The Company paid fees of approximately $25,000 and 125,000 common stock purchase warrants (the “Warrants”). The Warrants were exercisable 6 months after issuance, had a term of 4 years, and had an exercise price of $0.25 per warrant share. The SPA contained standard representations, warranties, and covenants. In addition, the SPA contained a price adjustment mechanism that requires the Company, with certain exceptions, to issue additional3,636 shares of common stock to the investor in the eventInvestor, valued at approximately $23,000. In addition, the Company within 12 monthshad approximately $33,000 of the initial closing under the SPA, issue certain equity securities at a price per share less than $0.20, provided, however, as long as the Company was listed on the NYSE MKT the total number of shares issuable under the foregoing adjustment provision may not exceed 19.9% of the Company’s outstanding shares of common stock on March 30, 2014. Further, in the event the Company was delisted from the NYSE MKT while Aracle owns at least 51% of the Shares issued to it under the SPA, the Company would be required to issue an additional 3,000,000 shares to Aracle, and the 12 month price adjustment period shall be extended to 36 months.
Concurrently with entering into the SPA, the Company and Aracle conducted an initial closing thereunder, in which Aracle purchased 9.5 Units for $475,000. The Company incurred certain expenseslegal fees related to the SPAtransaction. Total discount recorded at issuance was approximately $647,000. Total amortization of debt discount for the three months ended December 31, 2015 was approximately $88,000, which were paid from the proceeds. $74,000.
On April 16, 2014, the Company, Aracle and a second institutional investor (both companies referred to as “Investors”), entered into certain Securities Purchase Agreements (“SPA”) pursuant to which the Investors purchased 2.5 Units for $125,000. The Company incurred certain expenses related to the SPA of approximately $7,250, which were paid from the proceeds of this closing.
Warrants to purchase up to 1,500,000 shares of common stock at $0.25 per share were issued related to this Securities Purchase Agreement. The Company issued 1,224,149 shares of common stock related to the cashless exercise of the warrants. There are no warrants remaining related to the SPA signed with Aracle.
On January 8,October 4, 2015, the Company completedissued to the Sellers of Access Data Consulting Corporation (see note 11) a Securities offering with 18 individuals who collectively have purchased a total of 200,000 shares of Preferred Stock from the Company for a total purchase price of $2,000,000. The Company netted approximately $1,960,000, with approximately $1,000,000 to be used as working capital and the remaining $1,000,000 for marketing, acquisitions, expansion and to further the operations of the Company. Each share of Preferred Stock is initially convertible, at the election of the holder, into 50 shares of the Company’s Common Stock.
In addition dividends were payable in kind at the Company’s option at a rate of eight percent (8%) annually. Payments of annual dividends have not been declared by the Company’s Board of DirectorsPromissory Note. Interest on the outstanding Series A shares becauseprincipal balance of losses sustained by the Company. See note 10Promissory Note is payable at the rate of 5.5% per annum. The principal and interest amount of the Promissory Note is payable as follows: (i) for additional preferred shares issued relatedthe first twelve months commencing on November 4, 2015 and ending on October 4, 2016, a monthly payment of $57,303 in principal and interest, (ii) on October 4, 2016 a balloon payment of principal of $1,000,000, (iii) for the next twelve months commencing on November 4, 2016 and ending on October 4, 2017, a monthly payment of $27,963 in principal and interest, (iv) on October 4, 2017 a balloon payment of principal of $1,202,405 and (v) on October 4, 2017 any and all amounts of previously unpaid principal and accrued interest. The Promissory Note is subordinated in payment to the Scribe acquisition. Asobligations of August 14,the Company to ACF FINCO I LLP pursuant to the terms and provisions of a Subordination and Intercreditor Agreement dated October 5, 2015 there were no preferred dividends in arrears as all Series A preferred sharesbetween ACF FINCO I LLP and the accrued dividends have been converted into common stock. Sellers of Access Data Consulting Corporation.
Balance as of December 31, 2015: JAX Legacy debt $ 4,185,000 Access Data debt 2,913,000 JAX Legacy debt discount (573,000 ) Total debt 6,525,000 Short-term portion of debt (1,490,000 ) Long-term portion of debt $ 5,035,000
Over the next four years, the payments of debt will total approximately $7,098,000 as follows: fiscal 2016 - $536,000 fiscal 2017 - $1,262,000, fiscal 2018 - $1,115,000, fiscal 2019 - $4,185,000.
During the nine months ended June 30,10. Equity
On October 2, 2015, the Company issued 615,00094,945 shares of common stock to employees or former directors of the Company who exercised their stock options. Approximately $194,000 was receivedJAX Legacy related to the exercise of these options. subordinated note. The stock was valued at approximately $589,000.
DuringOn October 4, 2015, the nine months ended June 30, 2015 a total of 5,542,951Company issued 327,869 shares of common stock were issued, however no cash was received for these issuances.
1,224,119to the Sellers of Access Data Consulting Corporation. The Company also agreed if the closing price of the Company's common stock on the trading day immediately preceding the day on which the Issued Shares are first freely salable under Rule 144 (the "Rule 144 Date") is less than 90% of the Issue Price, then the Company shall make a one-time adjustment and shall promptly pay to the Sellers, in stock in the form of additional shares of common stock were issued related to several cashless warrant conversions.
344,021 shares of common stock were issued to the Board of Directors for services. A portion of these were issued by the Company to settle approximately $69,000 of accrued board fees from December 31, 2014.
268,592 shares of common stock were issued to employees of the Company who exercised their stock optionsat the market value on a cashless basis.
Brio converted $632,500 of its outstanding loan into 3,162,500 sharesthe Rule 144 Date, the difference between the aggregate value of the Company’s common stock. BasedIssued Shares at the Issue Price and the aggregate value of the Issued Shares at the closing price on the closing stock pricesRule 144 Date. The Company has recorded a liability of $0.85, $1.03 and $0.78 per common share, the shares were valued at approximately $2,866,750.
543,719 shares of common stock were issued related to the conversion of 10,500 shares of Series A Preferred stock. $500,000 in contingent consideration.
Stock Options
The Company has recognized compensation expense in the amount of approximately $47,000$162,000 during the three and nine monthsquarter ended June 30,December 31, 2015, related to the issuance of stock options.
During the three months ended December 31, 2015 the Company granted options to purchase 45,500 common shares of the Company's stock at an average price of $6.70 per common share. The expense was estimated using Black-Scholes option pricing model using an average expected life of 10 years, expected stock volatility of 99% and a risk free rate of 2.2%. The average fair value of stock options granted was estimated to be $6.00 per share in fiscal 2016.
Subsequent to December 31, 2015, the Company granted stock options to purchase up to 61,000 of the Company's common stock, at an average price of $5.13 per common share.
10. Acquisition11. Acquisitions
Scribe
On December 11, 2014, the Company entered into a Stock Exchange Agreement (the “SCRIBE Agreement”"SCRIBE Agreement") with Brittany M. Dewan as Trustee of the Derek E. Dewan Irrevocable Living Trust II dated the 27th of July, 2010, Brittany M. Dewan, individually, Allison Dewan, individually, Mary Menze, individually, and Alex Stuckey, individually (collectively, the “Scribe Shareholders”"Scribe Shareholders"). Scribe Solutions, Inc. (“Scribe”("Scribe") provides data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics. The transaction was unanimously approved by written consent of the board of directors of the Company (the “Board”"Board") and the holders of a majority of the Company’sCompany's outstanding stock. The Scribe transaction closed on April 1, 2015. Pursuant to the terms of the SCRIBE Agreement the Company acquired 100% of the outstanding stock of Scribe Solutions Inc., (“Scribe”("Scribe") from the Scribe Shareholders for 640,000 shares of Series A Preferred Stock (the “Preferred Stock”"Preferred Stock") of the Company. In addition, the Company exchanged warrants to purchase up to 6,350,000635,000 shares of the Company’sCompany's common stock, for $0.20$2.00 per share, with a term of 10 years (the “Warrants”"Warrants"), for Scribe warrants held by three individuals. The issuances of Preferred Stock and Warrants by the Company was effected in reliance on the exemptions from registration afforded by Section 4(a)(2) of the Securities Act of 1933, (the “Securities Act”"Securities Act"), and Rule 506 of Regulation D promulgated thereunder.
Under the purchase method of accounting, the transaction was valued for accounting purposes at an estimated $7.7 million, which was the estimated fair value of the Company at the date of acquisition. The estimate was based on the consideration paid of 640,000 preferred shares and the 6,350,000635,000 warrants granted. The 640,000 preferred shares are valued at approximately $6,400,000, and the 6,350,000635,000 warrants are valued at approximately $1,330,000. The Black-Scholes option pricing model was used to value the warrants based upon an expected stock price volatility of 253.7%, a 10 year expected life of the warrant and a risk free interest rate of approximately 1.6%.
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The assets and liabilities of Scribe were recorded at their respective fair values as of the closing date of the Scribe Agreement, and the following table summarizes these values based on the balance sheet at April 1, 2015, the closing date.
The intangibles were recorded, based on the Company’sCompany's estimate of fair value, which are expected to consist primarily of customer lists and trade name with an estimated life of ten years and goodwill. Upon completion of an independent purchase price allocation and valuation, the allocation intangible assets were adjusted accordingly.
(in Thousands)
$ | 676 | Assets Purchased | ||
452 | Liabilities Assumed | |||
224 | Net Assets Purchased | |||
7,730 | Purchase Price | |||
$ | 7,506 | Intangible Asset from Purchase |
The primary intangible assets acquired have been identified as the customer list, trade name and goodwill and have been allocated as follows:
$ | 1,470 | Customer list | ||
746 | Trade name | |||
5,290 | Goodwill | |||
$ | 7,506 |
The following unaudited pro forma combined financial information is based on the historical financial statements of the CompanyGoodwill and Scribe, after giving effect to the Company’s acquisition of Scribe.
The following unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisition occurred on October 1, 2013, nor is the financial information indicative of the results of future operations. The following table represents the unaudited consolidated pro forma results of operations for the nine months ended June 30, 2015 and 2014 and the three months ended June 30, 2014 as if the acquisition occurred on October 1, 2013. Operating expenses have been increased for the amortization expense associated with the estimated fair value adjustment as of April 1, 2015 of expected definite lived intangible assets.
Pro Forma Nine Months Ended June 30, 2015 Nine Months Ended June 30, 2014 Three Months Ended June 30, 2014 Net sales Cost of sales Operating expenses Net loss Basic and dilutive income per common share $ 33,100 $ 33,126 $ 10,859 22,748 23,177 7,567 10,658 11,175 3,780 $ (3,197 ) $ (1,524 ) $ (578 ) $ (0.11 ) $ (0.06 ) $ (0.02 )
The Company’s consolidated financial statements for the three months ended June 30, 2015 include the actual results of the Scribe acquisition since the date of April 1, 2015.
11. Commitments and Contingencies
On April 22, 2013, the Company finalized an Amendment to the Asset Purchase Agreement by and among DMCC Staffing, LLC, an Ohio limited liability company, RFFG of Cleveland, LLC an Ohio limited liability company (each a “Seller” and together, “Sellers”), the Company, and Triad Personnel Services, Inc., an Illinois corporation and wholly owned subsidiary of the Company.
The Company agreed to pay Sellers additional cash consideration of between $550,000 and $650,000 depending on the length of payments and 1,100,000 shares of common stock, in full satisfaction of all amounts owed to Seller,intangibles related to the Asset Purchase Agreement. The Company issued 1,100,000 sharesacquisition of common stock on July 2, 2013, which was valued at approximately $330,000. The Company elected to pay the amount over two years. To date, the Company paid $375,000 of the cash consideration noted above. The Company has approximately $75,000, which is included in other current liabilities on the condensed consolidated balance sheet at June 30, 2015,Scribe will not be deductible for the liability. There was approximately $6,000 and $27,000 of interest recorded for the three and nine month periods ended June 30, 2015 and approximately $16,000 and $62,000 of interest recorded for the three and nine month periods ended June 30, 2014, respectively. As of August 14, 2015 the debt related to this asset purchase agreement has been fully paid. tax purposes.
During 2013, the Company sold vehicles with a value of approximately $225,000 and leased them back under a 30 month agreement at an interest rate of approximately 23%. At June 30, 2015, approximately $27,000 is included in other current liabilities related to this transaction.
LeaseAgile
The Company leases space for all of its branch offices, which are located either in downtown or suburban business centers, and for its corporate headquarters. Branch offices are generally leased over periods from three to five years. The corporate office lease expires in 2018. The leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities.
Rent expense was approximately $192,000 and $578,000 and $236,000 and $715,000 for the three and nine month periods ended June 30, 2015 and 2014, respectively. As of June 30, 2015, future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices, totaled approximately $702,000, as follows: fiscal 2015 - $98,000, fiscal 2016 - $323,000, fiscal 2017 - $164,000, fiscal 2018 - $90,000 and thereafter - $27,000.
12. Segment Data
The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, engineering, medical, and accounting, and (c) temporary light industrial staffing. Intersegment net service revenues are not significant. Revenues generated from the temporary professional services staffing and light industrial staffing are classified as contract staffing services revenues in the statements of operations. Selling, general and administrative expenses are not separately allocated among professional services or industrial staffing services within the contract staffing services sector for internal reporting purposes.
Unallocated corporate expenses primarily include, corporate legal expenses, consulting expenses, corporate payroll, audit fees, corporate rent and facility costs, board fees and interest expense.
Three Months Ended Nine Months Ended June 30, June 30, (In Thousands) 2015 2014 2015 2014 Direct Hire Placement Services Revenue – net Placement services gross margin Operating income (loss) Depreciation & amortization Accounts receivable – net Intangible assets – net Goodwill Total assets Contract Staffing Services Industrial services revenue – net Professional services revenue – net Industrial services gross margin Professional services gross margin Operating income (loss) Depreciation and amortization Accounts receivable net – industrial services Accounts receivable net – professional services Intangible assets – net Goodwill Total assets Unallocated Expenses Corporate administrative expenses Corporate facility expenses Board related expenses Total unallocated expenses Consolidated Revenue –net Operating income (loss) Depreciation and amortization Total accounts receivable – net Intangible assets – net Goodwill Assets from continuing operations Assets from discontinued operations Total assets $ 1,948 $ 1,739 $ 4,880 $ 5,253 100 % 100 % 100 % 100 % 87 (246 ) (309 ) 182 47 55 157 164 660 910 660 910 139 257 139 257 24 24 24 24 10,532 4,052 10,532 4,052 6,897 6,208 19,881 19,295 2,605 1,976 6,167 5,816 12.06 % 9.90 % 12.85 % 10.40 % 34.28 % 29.60 % 32.93 % 31.00 % $ 266 $ 65 $ 1,003 $ (81 ) 124 64 258 200 3,584 4,227 3,584 4,227 1,381 891 1,381 891 3,330 1,383 3,330 1,383 6,372 1,083 6,372 1,083 6,988 5,978 6,988 5,978 $ 96 $ 272 $ 761 $ 1,057 50 72 138 272 - 19 238 62 $ 146 $ 363 $ 1,137 $ 1,391 $ 11,450 $ 9,923 $ 30,928 $ 30,364 207 (544 ) (443 ) (1,290 ) 171 119 415 364 5,625 6,028 5,625 6,028 3,469 1,640 3,469 1,640 6,396 1,106 6,396 1,106 17,520 10,030 17,520 10,030 0 229 0 229 $ 17,520 $ 10,259 $ 17,520 $ 10,259
13. Subsequent Events
After June 30, 2015, 829,500 shares of Series A preferred stock and the accumulated interest converted into 43,210,673 shares of common stock. As of August 14, 2015 there were no outstanding shares of preferred stock.
On July 22, 2015, the Company entered into an underwriting agreement (the "Underwriting Agreement") with Roth Capital Partners, LLC (the "Representative"), as the representative of the several underwriters identified therein (collectively, the "Underwriters"), pursuant to which the Company agreed to offer and sell up to 11,200,000 shares of the Company's common stock, no par value (the "Common Stock"), at a price of $0.70 per share. Under the terms of the Underwriting Agreement, the Company has granted the Representative an option, exercisable for 30 days, to purchase up to an additional 1,680,000 shares of Common Stock to cover over-allotments, if any.
The Company received net proceeds from this offering, after deducting underwriting discounts and commissions and offering expenses payable by the Company of approximately $7.8 million and issued 12,460,000 common shares, this includes the Underwriters exercise of the over-allotment option.
The offering was made pursuant to the Company's effective registration statements on Form S-3 (File No. 333- 204080), as amended and supplemented filed with the Securities and Exchange Commission (the "SEC").
The Company also issued warrants (the "Underwriter's Warrant") to the Underwriters to purchase up to a total of 1,246,000 shares of Common Stock, at a price of $0.84 per common share and are exercisable for five years. The Underwriter's Warrant has a seven-year piggyback registration right with respect to shares of common stock underlying the Underwriter's Warrant from the date of the Underwriting Agreement.
On July 31, 2015 the Company entered into a Stock Purchase Agreement (the "Agile Agreement") with Tricia Dempsey ("Seller"). Pursuant to the terms of the Agile Agreement on July 31, 2015 the Company acquired 100% of the outstanding stock of Agile Resources, Inc., a Georgia corporation ("Agile").
Agile was founded by Seller in 2003 and provides innovative IT staffing solutions and IT consulting services ranging from legacy platforms to emerging technologies to a diversified client base across many industry verticals. Agile has a sophisticated recruiting and delivery engine and utilizes state-of-the-art technology to deliver top talent with a rapid time to market. Agile delivers CIO advisory services and IT project support resources in the areas of application architecture and delivery, enterprise operations, information lifecycle management and project management all with flexible delivery options. The staffing alternatives include the provision of contract IT professionals, contract-to-permanent and permanent placement in addition to providing IT solutions for project work including statement-of-work (SOW) engagements on a time-and-materials (T&M) basis. Agile's IT staffing solutions include providing professionals with expertise in the areas of .net, share-point, enterprise resource planning (ERP), software engineering, database support (Microsoft SQL, Oracle, Sybase & Informix), legacy systems support, data analytics, cloud migration, big data, cyber-security, health IT, network and help-desk support and mobile applications.
Under the purchase method of accounting, the transaction was valued for accounting purposes at an estimated $3,865,000,$3,507,000, which was the estimated fair value of the consideration paid by the Company.Company, after it was determined post closing that the net working capital was only approximately $92,000. The estimate was based on the consideration paid of 1,201,923120,192 shares of common stock valued based on the closing price on July 31, 2015 of $0.72$7.20 per share and estimated cash of approximately $3,000,000$2,642,000 paid based on terms of the agreement.
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The assets and liabilities of Agile will bewere recorded at their respective fair values as of the closing date of the Agile Agreement, and the following table summarizes these values based on the estimated balance sheet at August 1, 2015, the closing date.2015.
The intangibles will bewere recorded, based on the Company’sCompany's estimate of fair value, which are expected to consist primarily of customer lists with an estimated life of five to ten years and goodwill. Upon completion of an independent purchase price allocation and valuation, the allocation intangible assets will bewere adjusted accordingly.
1,450 Assets Purchased 1,000 Liabilities Assumed 450 Net Assets Purchased 3,865 Purchase Price 3,415 Intangible Asset from Purchase $ $
$ 1,571 Assets Purchased 1,479 Liabilities Assumed 92 Net Assets Purchased 3,507 Purchase Price $ 3,415 Intangible Asset from Purchase
Intangible asset detail
$ 1,071 Intangible asset customer list 295 Intangible asset trade name 225 Intangible asset non-compete agreement 1,824 Goodwill $ 3,415 Intangible Asset from Purchase
Under the 338(h)(10) election, all goodwill and intangibles related to the acquisition of Agile will be fully deductible for tax purposes.
Access
On October 4, 2015, General Employment Enterprises, Inc. (the "Company") entered into a Stock Purchase Agreement (the "Access Data Agreement") with William Daniel Dampier and Carol Lee Dampier (collectively, the "Sellers"). Pursuant to the terms of the Access Data Agreement the Company acquired on October 4, 2015, 100% of the outstanding stock of Access Data Consulting Corporation., a Colorado corporation ("Access Data"), for a purchase price (the "Purchase Price") equal to $13,000,000 plus or minus the NWC Adjustment Amount (as defined below) plus up to $2 million of an "earnout".
The consideration shall be paid as follows:
· | Cash Payment to Sellers. At the closing, the Company paid to Sellers $7,000,000 in cash (the "Closing Cash Payment"). | |
· | Working Capital Reserve Fund. In addition to the Closing Cash Payment to Sellers, the Company shall pay to Sellers an additional $1,000,000 (the "Working Capital Holdback"), plus or minus the NWC Adjustment Amount, in cash within twenty (20) days after the completion of an audit of Access Data's financial information from its most recent fiscal year end to the closing date, but in any event not later than ninety (90) days after the closing date. The estimated working capital was approximately $1,813,000 and the Company has accrued $813,000 in accrued liabilities. As of February 15, 2016 the Company had paid $700,000 related to this liability. | |
· | Purchase Price Adjustment – Working Capital. The Purchase Price will be adjusted (positively or negatively) based upon the difference in the book value of the "Closing Working Capital" as compared to the "Benchmark Working Capital" of $2 million (such difference to be called the "NWC Adjustment Amount"). If the NWC Adjustment Amount is positive the Purchase Price will be increased by the NWC Adjustment Amount. If the NWC Adjustment Amount is negative, the Purchase Price will be decreased by the NWC Adjustment Amount. If the Purchase Price increases then the Company will pay to the Sellers the sum of the increase plus the Working Capital Holdback within twenty (20) days of a final determination. If the Purchase Price decreases then Sellers will pay the amount of the decrease to the Company within twenty (20) days of a final determination, which first shall be funded from the Working Capital Holdback held by the Company (which shall be credited to the Sellers). If the amount of the Purchase Price decrease exceeds the Working Capital Holdback then the Sellers will pay the difference to the Company within twenty (20) days of a final determination. If the Working Capital Holdback exceeds the payment due from the Sellers then the remaining balance of those funds after the payment to the Company shall be paid to the Sellers. |
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· | Sellers' Promissory Notes At the closing, the Company delivered to the Sellers a Subordinated Nonnegotiable Promissory Note (the "Sellers' Promissory Note") executed by the Company in the aggregate principal amount of $3 million. The Sellers' Promissory Note is secured by the certain collateral of the Company pursuant to a Security Agreement dated as of October 4, 2015 by and among the Company and the Sellers (the "Security Agreement"). | |
· | Earnout Payment. Up to an additional $2,000,000 (the "Earnout") may be paid by the Company to the Sellers with respect to the fiscal year ended September 30, 2016, subject to the satisfaction of certain earnout provisions contained in the Access Data Agreement. Any earnout payment to be paid by the Company shall be paid 50% in the form of cash and 50% in the form of shares of Company common stock. | |
· | Payment of Shares of Company Common Stock. Two Million Dollars ($2,000,000) of the Purchase Price will be paid in issued shares of common stock of the Company. The number of shares of common stock payable to the Sellers will be 327,869 shares at $6.10 per share (the "Issue Price"); provided however, that if, during such twenty (20) day trading period, the Company pays a dividend in, splits, combines into a smaller number of shares, or issues by reclassification any additional shares of its common stock (a "Stock Event"), then the closing prices used in the above calculation shall be appropriately adjusted to provide the Sellers the same economic effect as contemplated by this Agreement prior to such action. This stock was valued at approximately $2,197,000 based on the closing price of $6.70 on October 5, 2015. If the closing price of the shares of the Company's common stock on the trading day immediately preceding the day on which the Issued Shares are first freely salable under Rule 144 (the "Rule 144 Date") is less than 90% of the Issue Price, then the Company shall make a one-time adjustment and shall promptly pay to the Sellers, in stock in the form of additional shares of common stock of the Company at the market value on the Rule 144 Date, the difference between the aggregate value of the Issued Shares at the Issue Price and the aggregate value of the Issued Shares at the closing price on the Rule 144 Date. A contingent liability of $500,000 was recorded in contingent consideration related to this potential adjustment in shares issued. |
On October 4, 2015 the Company issued to the Sellers the Sellers' Promissory Note. Interest on the outstanding principal balance of the Sellers' Promissory Note is payable at the rate of 5.5% per annum. The principal and interest amount of the Sellers' Promissory Note is payable as follows: (i) for the first twelve months commencing on November 4, 2015 and ending on October 4, 2016, a monthly payment of $57,303 in principal and interest, (ii) on October 4, 2016 a balloon payment of principal of $1,000,000, (iii) for the next twelve months commencing on November 4, 2016 and ending on October 4, 2017, a monthly payment of $27,963 in principal and interest, (iv) on October 4, 2017 a balloon payment of principal of $1,202,405 and (v) on October 4, 2017 any and all amounts of previously unpaid principal and accrued interest. The Sellers' Promissory Note is subordinated in payment to the obligations of the Company to ACF FINCO I LLP pursuant to the terms and provisions of a Subordination and Intercreditor Agreement dated October 5, 2015 between ACF FINCO I LLP and the Sellers.
The intangibles were recorded, based on the Company's estimate of fair value, which consist primarily of customer lists with an estimated life of five to ten years and goodwill. Upon completion of an independent purchase price allocation and valuation, the allocation intangible assets were adjusted accordingly.
(in Thousands)
$ 3,568 Assets Purchased 1,659 Liabilities Assumed 1,909 Net Assets Purchased 15,510 Purchase Price $ 13,601 Intangible Asset from Purchase
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Intangible asset detail
$ 4,566 Intangible asset customer list 756 Intangible asset trade name 593 Intangible asset non-compete agreement 7,686 Goodwill $ 13,601 Intangible Asset from Purchase
Under the 338(h)(10) election, all goodwill and intangibles related to the acquisition of Access will be fully deductible for tax purposes.
The following unaudited pro forma combined financial information is based on the historical financial statements of the Company and Scribe Solutions Inc., Agile Resources, Inc. and Access Data Consulting Corporation, after giving effect to the Company's acquisition.
The following unaudited pro forma information does not purport to present what the Company's actual results would have been had the acquisition occurred on October 1, 2014, nor is the financial information indicative of the results of future operations. The following table represents the unaudited consolidated pro forma results of operations for the three months ended December 31, 2015 and 2014 as if the acquisition occurred on October 1, 2014. Operating expenses have been increased for the amortization expense associated with the estimated fair value adjustment as of each acquisition during the respective period for the expected definite lived intangible assets. Operating expenses have been increased for the amortization expense associated with the fair value adjustment of definite lived intangible assets of approximately $1,055,000 per year for all three acquisitions.
(in Thousands, except per share data)
Pro Forma, unaudited Three Months Net sales Cost of sales Operating expenses Net loss Basic and dilutive income per common share
Ended
December 31,
2014 $ 17,734 12,007 5,317 $ (2,854 ) $ (0.32 )
The Company's consolidated financial statements for the three months ended December 31, 2015 include the actual results of the Scribe Solutions Inc., Agile Resources, Inc., and Access Data Consulting Corporation since the date of acquisition, respectively.
Revenue and net income for each acquisition for the 3 months ended December 31, 2015 included in the statement of operations Revenue Net Income Scribe Solutions, Inc. Agile Resources, Inc. Access Data Consulting Corporation $ 1,174 $ 188 $ 2,606 $ 90 $ 4,736 $ 397
12. Commitments and Contingencies
Lease
The Company leases space for all of its branch offices, which are located either in downtown or suburban business centers, and for its corporate headquarters. Branch offices are generally leased over periods from three to five years. The corporate office lease expires in 2018. The leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities.
Rent expense was $242,000 and $205,000 for the three month periods ended December 31, 2015 and 2014, respectively. As of December 31, 2015, future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices, totaled approximately $1,819,000 as follows: fiscal 2016 - $459,000, fiscal 2017 - $467,000, fiscal 2018 - $401,000, fiscal 2019 - $346,000, fiscal 2020 - $146,000 and thereafter - $0.
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13. Segment Data
The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, engineering, medical, and accounting, and (c) temporary light industrial staffing. Intersegment net service revenues are not significant. Revenues generated from the temporary professional services staffing and light industrial staffing are classified as contract staffing services revenues in the statements of operations. Selling, general and administrative expenses are not separately allocated among professional services or industrial staffing services within the contract staffing services sector for internal reporting purposes.
Unallocated corporate expenses primarily include, corporate legal expenses, consulting expenses, corporate payroll, audit fees, corporate rent and facility costs, board fees and interest expense.
Three Months Ended December 31, (In Thousands) 2015 2014 Direct Hire Placement Services Revenue Placement services gross margin Operating (loss) income Depreciation & amortization Accounts receivable – net Intangible assets Goodwill Total assets $ 1,626 $ 1,450 100 % 100 % 470 (33 ) 52 56 604 609 79 198 24 24 1,914 2,436
Contract Staffing Services Industrial services revenue Professional services revenue Industrial services gross margin Professional services gross margin Operating income Depreciation and amortization Accounts receivable net – industrial services Accounts receivable net – professional services Intangible assets Goodwill Total assets Unallocated Expenses Corporate administrative expenses Corporate facility expenses Board related expenses Acquisition, integration and restructuring expense Interest expense Total unallocated expenses Consolidated Total revenue Operating loss Depreciation and amortization Total accounts receivable – net Intangible assets Goodwill Total assets 6,000 6,527 9,999 1,705 11.67 % 15.17 % 29.62 % 33.67 % 880 512 351 66 2,896 3,757 5,329 763 10,395 1,277 15,882 1,082 39,430 7,185 599 369 49 51 - 27 446 30 325 147 1,419 624 17,625 9,682 (69 ) (145 ) 403 122 8,829 5,129 10,474 1,475 15,906 1,106 $ 41,334 $ 9,621
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14. Subsequent Events
As of January 1, 2016 the Company entered into a Stock Purchase Agreement (the "Palladin Agreement") with Enoch S. Timothy and Dorothy Timothy (collectively, the "Sellers"). Pursuant to the terms of the Palladin Agreement the Company acquired on January 1, 2016, 100% of the outstanding stock of Palladin Consulting Inc., a Texas corporation ("Palladin"), for a purchase price (the "Purchase Price") equal to $1,750,000, minus the Circle Lending Loan Amount (as defined below) plus up to $1,000,000 in contingent promissory notes, minus the NWC Reduction Amount (as defined below) (if any) plus up to $1,250,000 of "earnouts".
The consideration shall be paid as follows:
· | Cash Payment to Sellers. At the closing, the Company paid to the Sellers $1,750,000 in cash minus the Circle Lending Loan Amount (defined in the Palladin Agreement as the outstanding amount owed by Palladin to Circle Lending, L.P. (or Funding Circle USA, Inc., or Victory Park Capital Advisors, or FC Marketplace, LLC, or an affiliate) ), which the Sellers represented to the Company was $77,823). | |
· | Contingent Promissory Notes. Up to an additional $1,000,000 of the Purchase Price shall subsequently be paid by the Company to the Sellers in the form of contingent Promissory Notes (the "Promissory Notes") if (i) the final determination of the Revenue (as defined in the Palladin Agreement) for the period beginning on January 1, 2016 and ending on December 31, 2016 (the "Earnout Period") exceeds $15,000,000 and (ii) Adjusted EBITDA (as defined in the Palladin Agreement) for the Earnout Period, exceeds $500,000. The principal amount of the Promissory Notes is subject to reduction by the NWC Reduction Amount (as defined below). | |
· | NWC Reduction Amount. The Sellers have agreed to pay to the Company the amount by which the Net Working Capital of Palladin (defined as Palladin's Current Assets, determined in accordance with GAAP minus Palladin's Current Liabilities, determined in accordance with GAAP) is a negative number. The Purchase Price shall be reduced dollar for dollar for each dollar by which the Net Working Capital is a negative amount (i.e., less than $0). The amount by which the Net Working Capital is less than $0 is the "NWC Reduction Amount." The reduction shall first be applied to reduce the $1,000,000 portion of the Purchase Price that is the Contingent Promissory Notes. If the reduction exceeds $1,000,000, then that excess shall be immediately paid by the Sellers via a wire transfer of the applicable dollar amount to the Company. | |
· | Earnout Payment. Up to an additional $750,000 of the Purchase Price (the "Earnout") will subsequently be paid by the Company to Sellers with respect to the Earnout Period, in accordance with and subject to the terms and conditions in the Palladin Agreement. Any Earnout payment made by the Company, shall, at the option of the Company, be paid (i) in shares of common stock of the Company or (ii) in immediately available funds. Certain "Retention Bonuses" (as defined in the Palladin Agreement) paid to employees of Palladin on or before February 1, 2017, but not exceeding $275,000 in the aggregate will reduce the Earnout payment. |
· | Additional Stock Earnout Payment. Up to an additional $500,000 of the Purchase Price (the "Additional Earnout") will subsequently be paid by the Company to Sellers in accordance with and subject to the terms and conditions in the Palladin Agreement. Any such Additional Earnout payment shall be paid in shares of common stock of the Company. | |
· | Subordinated Deferred Payment Rights. Notwithstanding the above, the Sellers have agreed that the Earnout Payment and Additional Stock Earnout Payment shall be subordinate and junior in right of payment to any "Senior Indebtedness" (as defined in the Palladin Agreement) now or hereafter existing to "Senior Lenders" (current or future) (as defined in the Palladin Agreement). |
The transaction has been unanimously approved by the board of directors of the Company and by the Sellers.
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Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We specialize in the placement of information technology, engineering, and accounting professionals for direct hire and contract staffing for our clients, and provide temporary staffing services for our light industrial clients. As a result of our acquisition of Scribe Solutions, Inc. ("Scribe") in April 2015, we now also offer data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics. There is currently a growing need for medical scribes due to the rise in EMR being utilized for billing and documentation of health care services and the meaningful use requirements that are part of the Affordable Care Act. The acquisition of Agile Resources, Inc. a Georgia Corporation ("Agile") and Access Data Consulting Corporation, a Colorado corporation ("Access") expanded our geographical footprint within the placement and contract staffing of information technology.
Our staffing services are provided through a network of eighteentwenty branch offices located in downtown or suburban areas of major U.S. cities in nine states. We have one office located in each of Arizona, Colorado, Georgia, Indiana, Massachusetts, North Carolina and Texas, two offices in each of California, Florida and Illinois and seven offices in Ohio.
Management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of common stockequity and convertible debt, to improve the overall profitability and cash flows of the Company. We believe our current segments complement one another and position us for future growth.
Results of Operations – Three Months Ended June 30,December 31, 2015 Compared to the Three Months Ended June 30,December 31, 2014
Results of Operations
Net Revenues
Consolidated net revenues are comprised of the following:
Three Months Ended December 31, (In thousands) 2015 2014 $ change % change Direct Hire Placement Services Professional Contract Services Industrial Contract Services Consolidated Net Revenues $ 1,626 $ 1,450 $ 176 12 % 9,999 1,705 8,294 486 6,000 6,527 (527 ) (8 ) $ 17,625 $ 9,682 $ 7,943 82 %
Three Months Ended June 30, (In thousands) 2015 2014 $ change % change Direct hire placement services Professional contract services Industrial contract services Consolidated net revenues $ 1,948 $ 1,739 $ 209 12 % 2,605 1,976 629 32 6,897 6,208 689 11 $ 11,450 $ 9,923 $ 1,527 15 %
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Consolidated net revenues increased approximately $1,527,000$7,943,000 or 15%82% compared with the same period last year. The Company acquired Scribe as of April 1, 2015, Agile as of July 31, 2015, and Access as of October 4, 2015 which increased the Professional Contract Servicesprofessional contract services by approximately $998,000, with$1,174,000, $2,542,000, and $4,736,000, respectively. The acquisition of Agile increased direct hire revenue by approximately $64,000. With the recent capital raise and addition of executive management, the Company has stabilized its sales force and is investing in revenue growth. Overall the professional services division continues to have less experienced recruiters working during the periodquarter ended June 30,December 31, 2015 compared to the prior year.quarter ended December 31, 2014. In addition, industrial contract services was down due to the loss of a client, subsequent to the quarter ended December 31, 2014, with annual revenues of approximately two million dollars. Management has taken significantcontinues to take action during the course of the year to increase the number of experienced recruiters and improve the profitability of both divisions.
Cost of Contract Services
Cost of services includes wages and the related payroll taxes and employee benefits of the Company’sCompany's employees while they work on contract assignments. Cost of contract services for the three month period ended June 30,December 31, 2015 increased by approximately 12%85% to approximately $7,803,000$12,337,000 compared with the prior period of approximately $6,970,000.$6,668,000. Cost of contract services, as a percentage of contract revenue, for the three month period ended June 30,December 31, 2015 decreasedincreased approximately 2%1% to 68%70% compared with the prior period of approximately 70%69%. The change in the contract revenue gross margin is related to several factors, including the significant increaseOhio workers compensation rebate received in placement services2014, offset by higher professional service contract revenue and athe overall decrease in our workers compensation rates for the state of Ohio, as the rate was decreased by approximately 25% as of July 1, 2014.
Gross Profit percentage by segment:
Three Months Three Months Gross Profit Margin % December 31, December 31, Direct hire placement services Industrial contract services Professional contract services Combined Gross Profit Margin % (1)
Ended
Ended
2015
2014100 % 100 % 11.7 % 15.2 % 29.6 % 33.7 % 30.0 % 31.1 %
Three Months Ended Three Months Ended Gross Profit Margin % June 30, 2015 June 30, 2014 Direct hire placement services Professional contract services Industrial contract services Combined Gross Profit Margin % (1) 100 % 100 % 34.28 % 29.6 % 12.06 % 9.9 % 31.85 % 29.8 %
(1) Includes gross profit from direct hire placements, which all associated costs are recorded as selling, general and administrative expenses.
| (1) | Includes gross profit from direct hire placements, which all associated costs are recorded as selling, general and administrative expenses. |
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
· | Compensation and benefits in the operating divisions, which includes salaries, wages and commissions earned by the |
· | Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions. |
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· | Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses. |
· | Recruitment advertising, which includes the cost of identifying job applicants. |
· | Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes. | |
· | Acquisition, integration and restructuring charges, are legal expenses, travel expenses, finders fees, severance agreements and other expenses that the Company has expensed as incurred and related to various transactions the Company has or expects to execute. The Company expects to have these expenses each quarter while we continue our growth strategy, however these expenses would not necessarily be incurred by the Company on recurring basis in normal operations, without acquisitions. |
The Company’sCompany's largest selling, general and administrative expense is for compensation in the operating divisions. Most of the Company’sCompany's employment consultants are paid on a commission basis and receive advances against future commissions. When commissions are earned, prior advances are applied against them and the consultant is paid the net amount. At that time, the Company recognizes the full amount as commission expense, and advance expense is reduced by the amount recovered. Thus, the Company’sCompany's advance expense represents the net amount of advances paid, less amounts applied against commissions.
Selling, general and administrative expenses for the three months ended June 30,December 31, 2015 decreasedincreased by approximately $115,000$1,501,000 or 3%50% compared to the same period last year. The decreaseincrease was primarily related to management’s efforts to reduce coststhe general selling, general and eliminate unnecessary expenses. Overalladministrative expenses are expected to stabilizeof Scribe, Agile, Access and the additional acquisition, integration and restructuring expenses of approximately $446,000 incurred during the fiscal year 2015 and slightly decrease as the Company is able to capitalize on the consolidation of the acquisitions. quarter.
Interest Expense
Interest expense for the three months ended June 30,December 31, 2015, increased $43,000,$178,000, or 48%121% compared with the same period last year primarily as a result of a change in lender,the newly obtained long-term debt, the interest expense for acquisition payments and higher average borrowings.
Taxes
There were no credits for income taxes as a result of the pretax losses incurred during the periods because there was not sufficient assurance that future tax benefits would be realized.
Results of Operations – Nine Months Ended June 30, 2015 Compared to the Nine Months Ended June 30, 2014
Results of Operations
Net Revenues
Consolidated net revenues are comprised of the following:
Nine Months Ended June 30, (In thousands) 2015 2014 $ change % change Direct hire placement services Professional contract services Industrial contract services Consolidated net revenues $ 4,880 $ 5,253 $ (373 ) (7 )% 6,167 5,816 351 6 19,881 19,295 586 3 $ 30,928 $ 30,364 $ 564 2 %
Consolidated net revenues increased approximately $564,000 or 2% compared with the same period last year. The Company acquired Scribe as of April 1, 2015, which increased the professional contract services by approximately $998,000. In addition, the industrial contract division has increased its revenue from several new customers added in the past nine months and investments in marketing. Overall the professional services division had less experienced recruiters working during the period ended June 30, 2015 compared to the prior year, which resulted in the overall decrease in professional revenue, excluding the revenue from the acquisition. Management has taken significant action during the course of the year to increase the number of experienced recruiters and improve the profitability of both divisions.
Cost of Contract Services
Cost of services includes wages and the related payroll taxes and employee benefits of the Company’s employees while they work on contract assignments. Cost of contract services for the nine month period ended June 30, 2015 increased by approximately 1% to approximately $21,488,000 compared with the prior period of approximately $21,295,000. Cost of contract services, as a percentage of contract revenue, for the nine month period ended June 30, 2015 decreased approximately 1% to 69% compared with the prior period of approximately 70%. The change in the gross margin is related to several factors, including the significant decrease in placement services revenue. The overall increase in costs of contract services was the result of the increase in contract revenue and the acquisition of Scribe. In addition, there was a significant decrease in our workers compensation rates for the state of Ohio, as the rate was decreased by approximately 25% as of July 1, 2014.
Gross Profit percentage by segment:
Nine Months Ended Nine Months Ended Gross Profit Margin % June 30, 2015 June 30, 2014 Direct hire placement services Professional contract services Industrial contract services Combined Gross Profit Margin % (2) 100 % 100 % 32.93 % 31.0 % 12.85 % 10.4 % 30.52 % 29.9 %
(2) Includes gross profit from direct hire placements, which all associated costs are recorded as selling, general and administrative expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
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The Company’s largest selling, general and administrative expense is for compensation in the operating divisions. Most of the Company’s employment consultants are paid on a commission basis and receive advances against future commissions. When commissions are earned, prior advances are applied against them and the consultant is paid the net amount. At that time, the Company recognizes the full amount as commission expense, and advance expense is reduced by the amount recovered. Thus, the Company’s advance expense represents the net amount of advances paid, less amounts applied against commissions.
Selling, general and administrative expenses for the nine months ended June 30, 2015 decreased by approximately $537,000 or 5% compared to the same period last year. The decrease was primarily related to management’s efforts to reduce costs and eliminate unnecessary expenses. Overall expenses are expected to stabilize during the fiscal year 2015 and slightly decrease as the Company is able to capitalize on the consolidation of the acquisitions.
Interest Expense
Interest expense for the nine months ended June 30, 2015, increased $108,000, or 36% compared with the same period last year primarily as a result of a change in lender, the interest expense for acquisition payments and higher average borrowings.
Taxes
There were no credits for income taxes as a result of the pretax losses incurred during the periods because there was not sufficient assurance that future tax benefits would be realized.
Liquidity and Capital Resources
The following table sets forth certain consolidated statements of cash flows data (in thousands):
For the nine months ended June 30, 2015 For the nine months ended June 30, 2014 Cash flows used in operating activities Cash flows used in investing activities Cash flows provided by (used in) financing activities For the three For the three Cash flows provided by (used in) operating activities Cash flows used in investing activities Cash flows provided by financing activities $ (1,510 ) $ (72 ) $ (130 ) $ (198 ) $ 2,585 $ (25 )
months ended
December 31,
2015
months ended
December 31,
2014$ 125 $ (850 ) $ (6,849 ) $ (90 ) $ 5,402 $ 1,203
As of June 30,December 31, 2015, the Company had cash and cash equivalents of approximately $1,113,000,$4,610,000, which was an increasea decrease of approximately $945,000$1,322,000 from approximately $168,000$5,932,000 at September 30, 2014.2015. Working capital at June 30,December 31, 2015 was approximately $1,509,000,$(26,000), as compared to negative net working capital of approximately $909,000$5,636,000 for September 30, 2014. Shareholders’2015. The cash has been used primarily in the acquisitions of several entities. Shareholders' equity at June 30,December 31, 2015 was approximately $11,788,000. $21,791,000.
Net cash provided by and used in operating activities for the ninethree months ended June 30,December 31, 2015 and 2014 was ($1,510,000)approximately $125,000 and ($72,000)850,000), respectively. The fluctuation is due to the significant increase in accounts payable for the three months ended December 31, 2015. In addition to changes in account receivable, acceleration ofaccrued expenses, accounts payable payments to avoid additional late fee expenses, net losses and payments of certain compensation related accruals.
Net cash used in investing activities for the ninethree months ended June 30,December 31, 2015 and 2014 was $(130,000)approximately ($6,849,000) and ($198,000)90,000), respectively. These uses related primarily toThe primary use of cash was for the acquisition payments and purchasing of fixed assets. Access.
Net cash flow provided by (used in) financing activities for the ninethree months ended June 30,December 31, 2015 was $2,585,000approximately $5,402,000 compared to ($25,000)$1,203,000 in the ninethree months ended June 30,December 31, 2014. Fluctuations in financing activities are attributable to the level of borrowings and financing.the proceeds of a promissory note.
All of the Company’sCompany's office facilities are leased. As of June 30,December 31, 2015, future minimum lease payments under non-cancelable lease commitments having initial terms in excess of one year, including closed offices, totaled approximately $702,000.$1,819,000.
On April 22, 2013, the Company finalized an Amendment to the Asset Purchase Agreement by and among DMCC Staffing, LLC, an Ohio limited liability company, RFFG of Cleveland, LLC an Ohio limited liability company (each a “Seller” and together, “Sellers”), the Company, and Triad Personnel Services, Inc., an Illinois corporation and wholly owned subsidiary of the Company.
The Company agreed to pay the Sellers additional cash consideration of between $550,000 and $650,000 depending on the length of payment terms and 1,100,000 shares of common stock, in full satisfaction of all amounts owed to Seller, related to the Asset Purchase Agreement. The Company issued 1,100,000 shares of common stock on July 2, 2013, which was valued at approximately $330,000. During the year ended September 30, 2013, the Company paid $200,000 of the cash consideration noted above. The Company accrued $350,000 at September 30, 2013, for the balance of the liability, and elected to pay the remaining amount over two years. The total payments over the two years will be approximately $450,000 with the additional $100,000 to be recorded as interest expense. During the year ended September 30, 2014, the Company paid approximately $225,000 to the Sellers, $150,000 of principle and approximately $75,000 of interest. The Company has approximately $75,000 accrued at June 30, 2015 related to the remaining liability. As of August 14, 2015 the entire liability has been fully repaid.
On September 27, 2013, the Company (“Borrower”) entered into agreements with ACF FINCO I LP (successor-in-interest to Keltic Financial Partners II, LP) (“ACF”) (“Lender”), that provide the Company with long term financing through a six million dollar ($6,000,000) secured revolving note (the “Note”). The Note has a term of three years and has no amortization prior to maturity. The interest rate for the Note is a fluctuating rate that, when annualized, is equal to the greatest of (A) the Prime Rate plus three and one quarter percent (3.25%), (B) the LIBOR Rate plus six and one quarter percent (6.25%), and (C) six and one half percent (6.50%), with the interest paid on a monthly basis. At June 30, 2015 and 2014 the interest rate was 6.5%. Loan advances pursuant to the Note are based on the accounts receivable balance and other assets. The Company incurred certain cash expense and commitment fees related to obtaining the agreement of approximately $170,000, which has been paid. The Note is secured by all of the Company’s property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title or interests. On April 21, 2014, the Company entered into the First Amendment and Waiver to the Loan and Security Agreement with ACF to adjust the covenants. On December 3, 2014, the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with ACF. On April 1, 2015 the Company entered into a third Amendment and Waiver to the Loan and Security Agreement with ACF to adjust the future covenants as outlined below and update the overall document to reflect changes to the business. As of the date of this report, the Company was in compliance with all such covenants or had received waivers related thereto.
The Company has several administrative covenants and the following financial covenant:
The Company must maintain the following EBITDA:
(a) The three (3) consecutive calendar month period ending on December 31, 2014, to be a negative number exceeding negative Two Hundred Fifty Thousand and 00/100 Dollars ($250,000);
(b) The six (6) consecutive calendar month period ending on March 31, 2015, to be a negative number exceeding negative Five Hundred Thousand and 00/100 Dollars ($500,000);
(c) The nine (9) consecutive calendar month period ending on June 30, 2015, to be a negative number exceeding negative Four Hundred Sixteen Thousand and 00/100 Dollars ($416,000);
(d) The twelve (12) consecutive calendar month period ending on September 30, 2015, to be a negative number exceeding negative Two Hundred Forty Thousand Five Hundred and 00/100 Dollars ($240,500); and
(e) For any period commencing on or after October 1, 2015, no less than such amounts as are established by Lender for such period in Lender’s permitted discretion based on the annual financial projections including such period delivered by Borrower.
As of June 30, 2015, the Company was in compliance with the EBITDA covenant and all other administrative covenants. At June 30, 2015, there was approximately $783,000 available on the line of credit. The interest expense related to the lines of credit for the three and nine months ended June 30, 2015 and 2014 approximated $99,000 and $300,000, and $69,000 and $210,000, respectively.
On March 31, 2014, the Company entered into a Securities Purchase Agreement (the “SPA”) with Aracle SPF I, LLC (“Aracle”) pursuant to which Aracle has the right to acquire up to 12 units (the “Units”), for $50,000 per Unit, with each Unit consisting of 250,000 shares of common stock of the Company and 125,000 common stock purchase warrants. The warrants are exercisable 6 months after issuance, have a term of 4 years, and have an exercise price of $0.25 per warrant share. In addition, the SPA contains a price adjustment mechanism that requires the Company, with certain exceptions, to issue additional shares of common stock to the investor in the event the Company, within 12 months of the initial closing under the SPA, issues certain equity securities at a price per share less than $0.20, provided, however, as long as the Company is listed on the NYSE MKT the total number of shares issuable under the foregoing adjustment provision may not exceed 19.9% of the Company’s outstanding shares of common stock on March 30, 2014. Further, in the event the Company is delisted from the NYSE MKT while Aracle owns at least 51% of the shares issued to it under the SPA, the Company shall issue an additional 3,000,000 shares to Aracle, and the 12 month price adjustment period shall be extended to 36 months. The warrants do not include any price protection clause.
Concurrent with the execution of the SPA, the Company and Aracle conducted an initial closing thereunder, in which Aracle purchased 9.5 Units for $475,000.
On April 16, 2014, the Company, Aracle and a second institutional investor entered into certain Securities Purchase Agreements (“SPA”) pursuant to which the investors purchased 2.5 Units for $125,000.
The Company incurred certain expenses related to the SPA’s and the closings thereunder of approximately $130,000, which were paid from the proceeds for net proceeds of approximately $470,000.
On August 7, 2014, the Company issued a Convertible Note (the “Note”) with an original principal balance of $632,500 to Brio Capital Master Fund LTD (“Brio”), for a purchase price of $550,000. The Note matures on February 6, 2016, and is payable in thirteen monthly installments of $48,654, commencing in the sixth month post-closing. Brio has the right, however not the obligation, six months after closing, to convert all or any part of the outstanding Note into the Company’s common stock at an initial conversion price of $0.20 per share. After six months from closing, the conversion price will have a one-time reset to the lower of $0.20 or 90% of the average of the 3 lowest closing prices for the previous 10 trading days, subject to a floor of $0.14 per share. The Company can force conversion if the Company’s common stock trades at 250% greater than the conversion price for 20 consecutive trading days.
During the nine months ended, June 30, 2015, Brio converted $632,500 of its outstanding loan into 3,162,500 shares of the Company’s common stock. Based on the closing stock prices of $0.85, $1.03 and $0.78 per common share, the 3,162,500 shares were valued at approximately $2,867,000 and the Company has recognized a loss on the extinguishment of debt of approximately $235,000. Included in the loss in extinguishment was the fair value of the derivative liability at the date of conversion.
On January 8, 2015, the Company completed a Securitiessecurities offering with 18 individuals who collectively have purchased a total of 200,000 shares of Preferred Stock ("Series A Preferred Stock") from the Company for a total purchase price of $2,000,000. Each share of Series A Preferred stock was initially convertible, at the election of the holder, into 5 shares of the Company's common stock. The Company netted approximately $1,960,000, with approximately $1,000,000 to be used as working capital and the remaining $1,000,000$960,000 used for marketing, acquisitions, expansion and to further the operations of the Company. All shares of Series A Preferred Stock issued to the aforementioned individuals were converted into common stock prior to September 30, 2015.
On July 22, 2015, the Company entered into an underwriting agreement (the "Underwriting Agreement") with Roth Capital Partners, LLC (the "Representative"), as the representative of the several underwriters identified therein (collectively, the "Underwriters"), pursuant to which the Company agreed to offer and sell up to 11,200,0001,120,000 shares of the Company's common stock, no par value (the "Common Stock"), at a price of $0.70$7.00 per share. Under the terms of the Underwriting Agreement, the Company has granted the Representative an option, exercisable for 30 days, to purchase up to an additional 1,680,000168,000 shares of Common Stock to cover over-allotments, if any.
The Company received net proceeds from this offering and the overallotment, after deducting underwriting discounts and commissions and offering expenses payable by the Company of approximately $7.8 million and issued 12,460,0001,246,000 common shares, this includes the Underwriters exercise of the over-allotment option.
The Company also issued warrants (the "Underwriter's Warrant") to the Underwriters to purchase up to a total of 1,246,000124,600 shares of Common Stock, at a price of $0.83$8.30 per common share and are exercisable for five years. The Underwriter's Warrant has a seven-year piggyback registration right with respect to shares of common stock underlying the Underwriter's Warrant from the date of the Underwriting Agreement.
On July 31, 2015 the Company entered into a Stock Purchase Agreement (the "Agile Agreement") with Tricia Dempsey. Pursuant to the terms of the Agile Agreement on July 31, 2015 the Company acquired 100% of the outstanding stock of Agile Resources, Inc., a Georgia corporation ("Agile"). The Company paid approximately $2,142,000 for net assets of approximately $92,000 and expects to pay an additional $500,000 during the year ended September 30, 2016.
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On October 2, 2015, the Company issued and sold a subordinated note in the aggregate principal amount of $4,185,000 (the "Subordinated Note") to JAX Legacy – Investment 1, LLC (the "Investor") pursuant to a Subscription Agreement dated October 2, 2015 between the Company and the Investor (the "Subscription Agreement"). The Subordinated Note is due on October 2, 2018 (the "Maturity Date"). Interest on the Subordinated Note is payable as follows: (i) 10% interest per annum on the outstanding principal balance of the Subordinated Note shall be payable quarterly in arrears, in cash, on each December 30th, March 30th, June 30th, and September 30th, until the Maturity Date and (ii) 4% interest per annum until the Maturity Date on the original principal balance of the Subordinated Note ($502,200), was paid in advance on the issuance date of the Subordinated Note through the issuance to the Investor of 91,309 shares of the Company's common stock (the "Interest Shares"). The Company may prepay the principal and interest under the Subordinated Note at any time, without penalty, provided, however, the Interest Shares shall be deemed paid in full and earned upon the issuance of the Subordinated Note. The Subordinated Note is subordinated in payment to the obligations of the Company to ACF FINCO I LLP pursuant to the terms and provisions of a Subordination and Intercreditor Agreement dated October 2, 2015 between, ACF FINCO I LLP and the Investor. In connection with the issuance of the Subordinated Note the Company and the Investor entered into a Registration Rights Agreement dated October 2, 2015 (the "Registration Rights Agreement") whereby the Company granted to the Investor certain piggyback registration rights with respect to the shares of Company common stock issued or issuable as interest payments under the Subordinated Note, and any shares of Company common stock issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, shares of common stock of the Company issued or issuable as interest payments under the Subordinated Note. On January 1, 2016 the Company entered into an eighth Amendment and Waiver to the Loan and Security Agreement with ACF to increase the maximum amount of revolving credit under the Amended Credit Agreement from $6,000,000 to $10,000,000.
On October 4, 2015 the Company issued to the former owners of Access Data Consulting Corporation a Promissory Note in the principal amount of $3,000,000. Interest on the outstanding principal balance of the Promissory Note is payable at the rate of 5.5% per annum. The principal and interest amount of the Promissory Note is payable as follows: (i) for the first twelve months commencing on November 4, 2015 and ending on October 4, 2016, a monthly payment of $57,303.49 in principal and interest, (ii) on October 4, 2016 a balloon payment of principal of $1,000,000, (iii) for the next twelve months commencing on November 4, 2016 and ending on October 4, 2017, a monthly payment of $27,963.72 in principal and interest, (iv) on October 4, 2017 a balloon payment of principal of $1,202,405.54 and (v) on October 4, 2017 any and all amounts of previously unpaid principal and accrued interest. The Promissory Note is subordinated in payment to the obligations of the Company to ACF FINCO I LLP pursuant to the terms and provisions of a Subordination and Intercreditor Agreement dated October 5, 2015 between ACF FINCO I LLP and the former owners.
In recent years, the Company has incurred significant losses and negative cash flows from operations. Management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of common stock, to improve the overall profitability and cash flows of the Company. Management believes with current cash flow from operations, the preferred offeringequity offerings, issued debt and the availability under the ACF facility, the Company will have sufficient liquidity for the next 12 months.
Off-Balance Sheet Arrangements
As of June 30,December 31, 2015, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
As of June 30,December 31, 2015, the Company’sCompany's management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of the Company’sCompany's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act”Act"). Based on that evaluation, the Company’sCompany's principal executive officer and its principal financial officer concluded that the Company’sCompany's disclosure controls and procedures were effective as of June 30,December 31, 2015.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’sCompany's internal control over financial reporting or in any other factors that could significantly affect these controls, during the Company’s thirdCompany's first quarter ended June 30,December 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting.
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PART II – OTHER INFORMATION.
Item 1. Legal Proceedings.
As of June 30,December 31, 2015, there were no material legal proceedings pending against the Company.
Item 1A. Risk Factors.
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the nine months ended June 30, 2015, theThe Company issued 615,000 shares of common stock to employees or former directors of the Company who exercised their stock options. Approximately $194,000 was received related to the exercise of these options.
During the nine months ended June 30, 2015 a total of 5,542,951 shares of common stock were issued, however no cash was received for these issuances.
1,224,119 shares of common stock were issued related to several cashless warrant conversions.
344,021 shares of common stock were issued to the Board of Directors for services. A portion of these were issued by the Company to settle approximately $69,000 of accrued board fees from December 31, 2014.
268,592 shares of common stock were issued to employees of the Company who exercised their stock optionshas previously reported this information on a cashless basis.current report on Form 8-K dated October 2, 2016.
Brio converted $632,500 of its outstanding loan into 3,162,500 shares of the Company’s common stock. Based on the closing stock prices of $0.85, $1.03 and $0.78 per common share, the shares were valued at approximately $2,866,750.
543,719 shares of common stock were issued related to the conversion of 10,500 shares of Series A Preferred stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable
Item 5. Other Information.
None.
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Item 6. Exhibits.Exhibits
The following exhibits are filed as a part of Part I of this report:
No. | Description of Exhibit | ||
| |||
| Form of Contingent Promissory Note issuable by General Employment Enterprises, Inc. to Enoch S. Timothy and Dorothy Timothy. Filed as Exhibit 4.1 to the current report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2016 and incorporated herein by reference. | ||
10.1 | Stock Purchase Agreement dated as of January 1, 2016 by and among General Employment Enterprises, Inc., Enoch S. Timothy and Dorothy Timothy. Filed as Exhibit 4.1 to the current report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2016 and incorporated herein by reference. | ||
10.2 | Eighth Amendment, Consent and Waiver dated as of January 1, 2016 to the Loan and Security Agreement dated September 27, 2013 by and among the Company, the Borrowers named therein, Access Data, Paladin and ACF FINCO I LP, as Lender. Filed as Exhibit 10.1 to the current report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2016 and incorporated herein by reference. | ||
10.3 | Form of Amended and Restated Revolving Credit Note dated as of January 1, 2016. Filed as Exhibit 10.2 to the current report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2016 and incorporated herein by reference. | ||
31.1 |
| Certifications of the principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. | |
| |||
|
| Certifications of the principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. | |
| |||
|
| Certifications of the principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act and Section 1350 of Title 18 of the United States Code. | |
| |||
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| Certifications of the principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act and Section 1350 of Title 18 of the United States Code. | |
99.1 | Amended and Restated Audit Committee Charter | ||
| |||
101.INS |
| Instance Document | |
| |||
101.SCH |
| XBRL Taxonomy Extension Schema Document | |
| |||
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document | |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document | |
| |||
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document | |
| |||
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements 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.
GENERAL EMPLOYMENT ENTERPRISES, INC. | |||
(Registrant) |
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|
| ||
| By: | /s/ Derek Dewan |
|
| Derek Dewan |
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| Chief Executive Officer | ||
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|
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By: | /s/ Andrew J. Norstrud |
| |
| Andrew J. Norstrud |
| |
| Chief Financial Officer
|
| |
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