UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x | QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
For the quarterly period ended March 31, 2017 |
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number1-05707
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(Exact name of registrant as specified in its charter) |
Illinois | 36-6097429 | |
(State or other jurisdiction | (I.R.S. Employer |
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 | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | x |
Emerging Growth Company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 May 13, 201615, 2017 was 9,378,892.
GENERAL EMPLOYMENT ENTERPRISES,GEE GROUP INC.
Form 10-Q
For the Quarter Ended March 31, 20162017
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Condensed Consolidated Balance Sheets at March 31, | 4 | ||||
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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 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", "will" and "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's actual results to differ materially from those in the forward-looking statements include, without limitation, general business conditions, the demand for the Company'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'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's annual report on Form 10-K for the year ended September 30, 2015,2016, 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.
| 3 |
| Table of Contents |
PART I – FINANCIAL INFORMATION
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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) |
(In Thousands) |
|
| March 31, 2016 |
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| September 30, 2015 |
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ASSETS |
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CURRENT ASSETS: |
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Cash |
| $ | 2,916 |
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| $ | 5,932 |
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Accounts receivable, less allowances (March - $690; September - $524) |
|
| 10,954 |
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|
| 6,156 |
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Other current assets |
|
| 803 |
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|
| 942 |
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Total current assets |
|
| 14,673 |
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|
| 13,030 |
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Property and equipment, net |
|
| 698 |
|
|
| 706 |
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Other long-term assets |
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| 57 |
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|
| 22 |
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Goodwill |
|
| 18,193 |
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|
| 8,220 |
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Intangible assets, net |
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| 11,667 |
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|
| 4,896 |
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TOTAL ASSETS |
| $ | 45,288 |
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| $ | 26,874 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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CURRENT LIABILITIES: |
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Short-term debt |
| $ | 6,989 |
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| $ | 2,850 |
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Accounts payable |
|
| 1,803 |
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| 825 |
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Accrued compensation |
|
| 3,537 |
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|
| 2,687 |
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Other current liabilities |
|
| 430 |
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|
| 532 |
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Short-term portion of subordinated debt |
|
| 1,436 |
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| - |
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Contingent consideration |
|
| 3,719 |
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| 500 |
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Total current liabilities |
|
| 17,914 |
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|
| 7,394 |
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Deferred rent |
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| 286 |
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| 243 |
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Subordinated debt |
|
| 4,994 |
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| - |
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Other long-term liabilities |
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| 66 |
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|
| - |
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Total long-term liabilities |
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| 5,346 |
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| 243 |
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Commitments and contingencies |
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SHAREHOLDERS' EQUITY |
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Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - none |
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| - |
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| - |
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Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 9,256 |
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shares at March 31, 2016 and 8,833 shares at September 30, 2015 |
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| - |
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| - |
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Additional paid in capital |
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| 36,670 |
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| 33,492 |
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Accumulated deficit |
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| (14,642 | ) |
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| (14,255 | ) |
Total shareholders' equity |
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| 22,028 |
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|
| 19,237 |
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
| $ | 45,288 |
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| $ | 26,874 |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Three Months Ended Six Months Ended 2016 2015 2016 2015 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 INCOME (LOSS) FROM OPERATIONS Change in derivative liability Change in contingent consideration Interest expense Loss on extinguishment of debt INCOME (LOSS) BEFORE INCOME TAX PROVISION Provision for income tax NET INCOME (LOSS) PREFERRED STOCK DIVIDEND NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS BASIC INCOME (LOSS) PER SHARE WEIGHTED AVERAGE NUMBER OF SHARES - BASIC DILUTED INCOME (LOSS) PER SHARE WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED March 31, 2017 September 30, 2016 ASSETS CURRENT ASSETS: Cash Accounts receivable, less allowances (March and September - $191) Other current assets Total current assets Property and equipment, net Other long-term assets Goodwill Intangible assets, net TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt Accounts payable Accrued compensation Other current liabilities Short-term portion of subordinated debt Contingent consideration Total current liabilities Deferred rent Subordinated debt Other long-term liabilities Total long-term liabilities Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - none Preferred series A stock, 160 authorized; issued and outstanding - none Preferred series B stock, mandatorily convertible - 5,950 authorized; issued and outstanding - none - - Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 9,879 shares at March 31, 2017 and 9,379 shares at September 30, 2016, respectively Additional paid in capital Accumulated deficit ) Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
March 31,$ 19,607 $ 8,314 $ 35,606 $ 16,546 2,059 1,482 3,685 2,932 21,666 9,796 39,291 19,478 15,630 7,017 27,967 13,685 5,143 3,160 9,651 6,167 122 - 568 30 76 43 142 80 435 81 772 166 260 (505 ) 191 (650 ) - 796 - (2,319 ) 156 - 156 - (409 ) (126 ) (734 ) (273 ) - (210 ) - (210 ) $ 7 $ (45 ) $ (387 ) $ (3,452 ) - - - - $ 7 $ (45 ) $ (387 ) $ (3,452 ) - (37 ) - (37 ) 7 (82 ) (387 ) (3,489 ) 0.00 (0.03 ) (0.04 ) (1.28 ) 9,256 2,855 9,252 2,720 0.00 (0.03 ) (0.04 ) (1.28 ) 9,779 2,855 9,252 2,720 $ 1,562 $ 2,528 13,099 11,569 1,492 1,500 16,153 15,597 527 611 34 34 18,590 18,590 10,356 11,094 $ 45,660 $ 45,926 $ 7,142 $ 7,127 1,263 2,224 3,281 3,116 1,240 692 1,357 1,285 480 1,750 14,763 16,194 149 162 4,863 4,981 45 56 5,057 5,199 - - 39,000 37,615 (13,160 ) (13,082 25,840 24,533 $ 45,660 $ 45,926
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 4 |
| Table of Contents |
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CONDENSED CONSOLIDATED STATEMENTS OF | ||||
(In | ||||
Common Preferred Preferred Accumulated Total 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 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 expenese and warrants issued Issuance of Stock for acquisition of Agile Net loss Balance, September 30, 2015 Shares issued 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, March 31, 2016
StockAdditional
Paid In
Capital
Stock
Equity2,589 $ 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 - 392 - - - 392 328 2,197 - - - 2,197 - - - - (387 ) (387 ) 9,256 $ 36,670 - $ - $ (14,642 ) $ 22,028
Three Months Ended March 31, Six Months Ended March 31, 2017 2016 2017 2016 NET REVENUES: Contract staffing services Direct hire placement services NET REVENUES Cost of contract services GROSS PROFIT Selling, general and administrative expenses Acquisition, integration and restructuring expenses Depreciation expense Amortization of intangible assets INCOME FROM OPERATIONS Change in contingent consideration Interest expense INCOME (LOSS) BEFORE INCOME TAX PROVISION Provision for income tax NET INCOME (LOSS) NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS BASIC INCOME (LOSS) PER SHARE WEIGHTED AVERAGE NUMBER OF SHARES - BASIC DILUTED INCOME (LOSS) PER SHARE WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED $ 20,090 $ 19,607 $ 39,946 $ 35,606 1,459 2,059 2,609 3,685 21,549 21,666 42,555 39,291 15,894 15,630 31,457 27,967 5,655 6,036 11,098 11,324 4,811 5,143 9,306 9,651 77 122 100 568 71 76 150 142 369 435 738 772 327 260 804 191 - 156 - 156 (392 ) (409 ) (752 ) (734 ) (65 ) 7 52 (387 ) (64 ) - (130 ) - $ (129 ) $ 7 $ (78 ) $ (387 ) $ (129 ) $ 7 $ (78 ) $ (387 ) $ (0.01 ) $ 0.00 $ (0.01 ) $ (0.04 ) 9,384 9,256 9,382 9,252 $ (0.01 ) $ 0.00 $ (0.01 ) $ (0.04 ) 9,384 9,779 9,382 9,252
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 5 |
| Table of Contents |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) | |
(In Thousands) | |
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| Common Stock |
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| Additional |
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| Preferred |
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| Preferred |
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| Accumulated |
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| Total Shareholders' |
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|
| Shares |
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| In Capital |
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| Shares |
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| Stock |
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| Deficit |
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| Equity |
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Balance, September 30, 2015 |
|
| 8,833 |
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| $ | 33,492 |
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| - |
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| $ | - |
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| $ | (14,255 | ) |
| $ | 19,237 |
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Shares issued for JAX Legacy debt |
|
| 95 |
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|
| 589 |
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|
| - |
|
|
| - |
|
|
| - |
|
|
| 589 |
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Issuance of common stock for contingent consideration related to the acquisition of Access Data Consulting Corporation |
|
| 123 |
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|
| 544 |
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|
| - |
|
|
| - |
|
|
| - |
|
|
| 544 |
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Amortization of stock option expense |
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| - |
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| 793 |
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|
| - |
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|
| - |
|
|
| - |
|
|
| 793 |
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Issuance of common stock for acquisition of Access Data Consulting Corporation |
|
| 328 |
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| 2,197 |
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|
| - |
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|
| - |
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|
| - |
|
|
| 2,197 |
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Net income |
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| - |
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|
| - |
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|
| - |
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|
| - |
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| 1,173 |
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| 1,173 |
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Balance, September 30, 2016 |
|
| 9,379 |
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| $ | 37,615 |
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|
| - |
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| $ | - |
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| $ | (13,082 | ) |
| $ | 24,533 |
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Amortization of stock option expense |
|
| - |
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|
| 385 |
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|
| - |
|
|
| - |
|
|
| - |
|
|
| 385 |
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Exercise of stock warrants |
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| 500 |
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| 1,000 |
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| - |
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| - |
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| - |
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| 1,000 |
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Net loss |
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| - |
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| - |
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|
| - |
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|
| - |
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| (78 | ) |
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| (78 | ) |
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Balance, March 31, 2017 |
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| 9,879 |
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| $ | 39,000 |
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|
| - |
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| $ | - |
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| $ | (13,160 | ) |
| $ | 25,840 |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 6 |
| Table of Contents |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | ||||
(In Thousands) | ||||
Six Months Ended March 31, 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to cash (used in) provided by operating activities: Depreciation and amortization Stock option expense Provision for doubtful accounts Amortization of debt discount Change in contingent consideration Changes in operating assets and liabilities - Accounts receivable Accounts payable Accrued compensation Other current items, net Long-term liabilities Net cash (used in) provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment Acquisition payments Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from subordinated debt Payments on the debt related to acquisitions Proceeds from exercise of stock warrants Payments on capital lease Net proceeds from short-term debt Net cash (used in) 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 financing activities Stock paid for prepaid interest on subordinated note Stock paid for fees in connection with subordinated note Issuance of common stock for acquisition Note issued in connection with acquisition Earn-out liability, contingent consideration, and other liabilities incurred in connection with acquisition $ (78 ) $ (387 ) 888 914 385 392 - 46 107 107 - (156 ) (1,530 ) 242 (961 ) 522 165 (450 ) 756 (522 ) (13 ) (25 ) (281 ) 683 (66 ) (14 ) (470 ) (9,217 ) (536 ) (9,231 ) - 4,107 (1,153 ) (220 ) 1,000 - (11 ) (56 ) 15 1,701 (149 ) 5,532 (966 ) (3,016 ) 2,528 5,932 $ 1,562 $ 2,916 $ 656 $ 468 $ 130 $ - $ - $ 566 $ - $ 23 $ - $ 2,197 $ - $ 3,000 $ - $ 4,246
Six Months Ended 2016 2015 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 Amortization of debt discount Change in contingent consideration 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 Derivative liability Long-term liabilities Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment Acquisition payments, net of cash acquired Partial payment of earn-out Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt, net Proceeds from subordinated debt Proceeds from sale of preferred stock, net Payments on the debt 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 financing activities Conversion of note payable Issuance of shares for accrued board fees Stock paid for prepaid interest on subordinated note Stock paid for fees in connection with subordinated note Issuance of common stock for acquisition Note issued in connection with acquisition Earn-out liability, contingent consideration, and other liabilities incurred in connection with acquisition
March 31,$ (387 ) $ (3,452 ) 914 246 392 136 46 30 - 189 107 - (156 ) - - 2,319 - 210 242 (715 ) 522 (427 ) (450 ) (900 ) (522 ) 991 - (340 ) (25 ) - 683 (1,713 ) (14 ) (21 ) (9,217 ) - - (150 ) (9,231 ) (171 ) 1,701 669 4,107 - - 1,961 (220 ) - (56 ) (26 ) 5,532 2,604 (3,016 ) 720 5,932 168 $ 2,916 $ 888 $ 468 $ 183 $ - $ - $ - $ 2,350 $ - $ 69 $ 566 $ - $ 23 $ - $ 2,197 $ - $ 3,000 $ - $ 4,246 $ -
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 7 |
| Table of Contents |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Description of Business
General Employment Enterprises,GEE Group Inc. (the "Company", "us", "our" or "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 ofThrough 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.
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 six monthsix-month period ended March 31, 20162017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2016.2017. 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, 20152016 as filed on December 29, 2015.22, 2016.
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 equity 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'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.
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 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 ($566,000), 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 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 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
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 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 derivative 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'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 and were approximately $125,000 and $218,000 and $90,000 as offor the six-month period ended March 31, 20162017 and 20152016 respectively. Expected future falloffs and refunds are reflected in the consolidated balance sheet as a reduction of accounts receivable and were approximately $108,000 and $86,000$60,000 as of March 31, 20162017 and September 30, 20152016, respectively.
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Cost of Contract Staffing Services
The cost of contract services includes the wages and the related payroll taxes and employee benefits of the Company'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 March 31, 20162017 and September 30, 2015,2016, 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'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'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'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's review of accounts receivable, an allowance for doubtful accounts of approximately $690,000 and $524,000$191,000 is considered necessary as of March 31, 20162017 and September 30, 2015,2016, 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 six month periodssix-months ended March 31, 20162017 and 2015.2016.
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") in an orderly transaction between market participants at the measurement date.
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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'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'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 long-term liabilities represents their fair value based on level 3 inputs, as further discussed in note 8 and note 9.8. The Company'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" (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 agreementsEarnings 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. Common shareThere were approximately 1,038,602 and 619,700 of common stock equivalents of approximately 619,700 and 355,000 were excluded from the computation of diluted earnings per share for the six months ended March 31, 20162017 and 2015,2016, respectively, because their effect is anti-dilutive. Common share equivalents of approximately 677,600 was excluded from523,000 were included in the computation of diluted earnings per share for the quarterthree months ended March 31, 2015,2016. There were approximately 1,053,421 of common stock equivalents excluded for the three months ended March 31, 2017, because of thetheir effect is anti-dilutive.
Advertising Expenses
The majorityMost of the Company's advertising expense budget is used to support the Company's business. Most of the advertisements are in print or internet media, with expenses recorded as they are incurred. For the three and six months ended March 31, 20162017 and 2015,2016, included in selling, general and administrative expenses was advertising expense totaling approximately $216,000 and $504,000, and approximately $251,000 and $549,000, and approximately $143,000 and $350,000, respectively.
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.
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 six months ended March 31, 20162017 and 2015.2016.
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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") pricing model. For all employee stock options, we recognize expense over the requisite service period on an accelerated basis over the employee's requisite service period (generally the vesting period of the equity grant). The Company'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.
Upon the exercise of options, it is the Company's policy to issue new shares rather than utilizing treasury shares.
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.
Due to the issuance of convertible preferred shares related to the Scribe acquisition, 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 six months ended March 31, 20152016 to conform to the current year presentation. There is no effect on assets, liabilities, equity or net income.
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Segment Data
The Company hasprovides 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. These distinct services can be divided into two operating businessreportable segments, a) Contract staffingIndustrial Staffing Services and Professional Staffing Services. Selling, general and administrative expenses are not completely separately allocated among light industrial services and b) Direct hire placement. These operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations.professional staffing services. 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 SeptemberMay 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The new guidance requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The amended guidance also requires additional quantitative and qualitative disclosures. In March 2016, amended guidance was issued to clarify implementation guidance on principal versus agent consideration. In April 2016, an amendment provided clarifications on determining whether a promised license provides a customer with a right to use or a right to access an entity’s intellectual property. In May 2016, an amendment provided narrow scope improvements and practical expedients to reduce the potential diversity, cost and complexity of applying new revenue standard. These amendments, as well as the original guidance, are all effective for annual and interim periods beginning after December 15, 2017. The new standard will be effective for the Company beginning January 1, 2018 and the Company intends to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. The Company is in the process of evaluating the impact of adoption of this guidance on its financial statements.
In November 2015, the FASB issued ASU 2015-16 - Business Combinations,authoritative guidance which requires adjustmentschanges how deferred taxes are classified on a company's balance sheet. The new guidance eliminates the current requirement for companies to provisional amounts recordedpresent deferred tax liabilities and assets as current and noncurrent in business combinationsa classified balance sheet. Instead, companies will be required 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 2015-16classify all deferred tax assets and liabilities as noncurrent. The new guidance is effective for annual reporting periods beginning after December 15, 2015 and any interim periods within that period, and early2016. Early adoption is permitted. Wepermitted for all entities as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). If applied prospectively, entities are currently evaluating ASU 2015-16required to determine ifinclude a statement that prior periods were not retrospectively adjusted. If applied retrospectively, entities are also required to include quantitative information about the effects of the change on prior periods. Except for balance sheet classification requirements related to deferred tax assets and liabilities, the Company does not expect this guidance willto have a materialan effect on its financial statements. The Company is in the process of evaluating the impact of adoption of this guidance on ourits financial position, results of operations or cash flows.
In March 2016, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the potential impact of adopting ASU 2016-09 on its financial statements and related disclosures.
In February 2016, the FASB issued authoritative guidance which changes financial reporting as it relates to leasing transactions. Under the new guidance, lessees will be required to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. The new guidance is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted for all entities upon issuance. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is in the process of evaluating the impact of adoption of this guidance on its financial statements.
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In August 2016, the FASB issued authoritative guidance designed to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, including: i) contingent consideration payments made after a business combination; ii) proceeds from the settlement of insurance claims; and iii) proceeds from the settlement of corporate-owned life insurance policies. The new guidance is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company believes the adoption of this guidance will not have a material impact on its financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for the Company in the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2021. Early adoption is permitted The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements. 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's present or future financial statements.
4. Property and Equipment
Property and equipment, net consisted of the following:
(In thousands) |
| Useful Lives |
| March 31, |
| September 30, |
| |||||||||||||||
|
| Useful |
| March 31, |
| September 30, |
|
|
|
|
|
|
|
| ||||||||
(In thousands) |
| Lives |
|
| 2016 |
|
| 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 |
|
| 2,412 |
|
|
| 2,278 |
|
| 2 to 10 years |
| 2,580 |
| 2,514 |
| |||||
Total property and equipment, at cost |
|
|
| 3,859 |
| 3,725 |
|
|
|
| 4,027 |
| 3,961 |
| ||||||||
Accumulated depreciation and amortization |
|
|
|
| (3,161 | ) |
|
| (3,019 | ) |
|
|
|
| (3,500 | ) |
|
| (3,350 | ) | ||
Property and equipment, net |
|
|
| $ | 698 |
|
| $ | 706 |
|
|
|
| $ | 527 |
|
| $ | 611 |
| ||
Leasehold improvements are amortized over the term of the lease.
Depreciation expense for the three and six month periods ended March 31, 2017 and 2016 was approximately $71,000 and 2015 was$150,000, and approximately $76,000 and $142,000, and $43,000 and $80,000, respectively.
5. Goodwill and Intangible Assets
Goodwill
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5. Intangible Assets
As of March 31, 20162017
(In Thousands) |
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Customer Relationships |
| $ | 10,498 |
| $ | 2,092 |
| $ | 8,406 |
|
| $ | 10,758 |
| $ | 3,173 |
| $ | 7,585 |
| ||||
Trade Name |
| 2,453 |
| 172 |
| 2,281 |
|
| 2,429 |
| 405 |
| 2,024 |
| ||||||||||
Non-Compete Agreement |
|
| 1,078 |
|
|
| 98 |
|
|
| 980 |
| ||||||||||||
Non-Compete Agreements |
|
| 1,061 |
|
|
| 314 |
|
|
| 747 |
| ||||||||||||
|
| $ | 14,029 |
|
| $ | 2,362 |
|
| $ | 11,667 |
|
| $ | 14,248 |
|
| $ | 3,892 |
|
| $ | 10,356 |
|
As of September 30, 2015 2016
(In Thousands) |
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Cost |
| Accumulated Amortization |
| Net Book Value |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Customer Relationships |
| $ | 5,232 |
| $ | 1,557 |
| $ | 3,675 |
|
| $ | 10,758 |
| $ | 2,662 |
| $ | 8,096 |
| ||||
Trade Name |
| 1,057 |
| 56 |
| 1,001 |
|
| 2,429 |
| 285 |
| 2,144 |
| ||||||||||
Non-Compete Agreements |
|
| 225 |
|
|
| 5 |
|
|
| 220 |
|
|
| 1,061 |
|
|
| 207 |
|
|
| 854 |
|
|
| $ | 6,514 |
|
| $ | 1,618 |
|
| $ | 4,896 |
|
| $ | 14,248 |
|
| $ | 3,154 |
|
| $ | 11,094 |
|
The amortization expense attributable to the amortization of identifiable intangible assets was approximately $369,000 and $738,000 and $407,000 and $744,000 and $81,000 and $168,000 for the three and six months ended March 31, 20162017 and 2015,2016, respectively. In addition to amortization expense for intangible assets, the Company incurred amortization of deferred financing fees of $28,000 for the three and six months ended March 31, 2016.
The trade names are amortized on a straight – line basis over the estimated useful life of ten years. Customer relationships are amortized based on the future undiscounted cash flows or straight – line basis over estimated remaining useful lives of five to ten years. Non-compete agreements are amortized based on a straight-line basis over the term of the non-compete agreement, typically five years. Over the next five years and thereafter, annual amortization expense for these finite life intangible assets will total approximately $11,667,000,$10,356,000, as follows: fiscal 2016 - $1,517,000 fiscal 2017 - $1,474,000,$738,000, fiscal 2018 - $1,477,000,$1,481,000, fiscal 2019 - $1,482,000,$1,485,000, fiscal 2020 - $1,479,000$1,482,000, fiscal 2021 - $1,077,000 and thereafter - $4,238,000.$4,093,000.
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.
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6. Short-term Debt
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 provides 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 March 31, 2016 and 2015 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 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 CreditLoan Agreement from $6,000,000 to $10,000,000$10,000,000. On September 27, 2016, the Company entered into a ninth Amendment and adjustWaiver to the future covenantsLoan and Security Agreement with ACF. Pursuant to the Amendment, the Lender agreed (i) to decrease the annual Facility Fee (as defined in the Credit Agreement) payable by Borrower on the total Revolving Credit Limit (as defined in the Loan Agreement) to 0.75% , (ii) to allow the Borrower to make certain prepayments of amounts owed under the Amended Loan Agreement and the other loan documents on or prior to September 27, 2018, (iii) to amend the provision regarding liquidated damages payable by Borrower in the event of any early termination of the revolving credit line under the Amended Credit Agreement such that Borrower shall pay liquidated damages to Lender in an amount equal to the Revolving Credit Limit multiplied by (X) two percent (2.00%) if such prepayment, repayment, demand or acceleration occurs prior to September 28, 2017, and (Y) one percent (1.00%) if such prepayment, repayment, demand or acceleration occurs on or after September 28, 2017, (iv) to change the minimum EBITDA (as defined in the Amended Credit Agreement) thresholds required to be maintained by the Company as outlined below and update(v) to extend the overall document to reflect changesRevolving Credit Termination Date to the business. The Company has entered into other Amendments with ACF that did not materially changeearliest to occur of (a) September 27, 2018, (b) the date Lender terminates the Revolving Credit pursuant to the terms of the Note. AsAmended Credit Agreement, and (c) the date on which repayment of the dateRevolving Credit, or any portion thereof, becomes immediately due and payable pursuant to the terms of this report,the Amended Loan Agreement, (vi) to amend the definition of EBITDA and (vii) to change the Revolving Credit Rate to a fluctuating rate that, when annualized, is equal to the greatest of (A) the Prime Rate plus one and one half percent (1.50%), (B) the LIBOR Rate plus four and one half percent (4.50%), and (C) four and three quarters percent (4.75%). On January 20, 2017, the Company entered into a Tenth Amendment, Consent and Waiver to the Loan and Security Agreement. Pursuant to the Amendment, the Lender agreed (i) to consent to the Company’s execution and delivery of the Addendum and the consummation of the transactions contemplated by the Addendum, (ii) to allow the Company to pay the Earnout (as defined in the Paladin Agreement) Cash Payment to the Sellers, (iii) to allow the Company to issue the Subordinated Note to the Sellers and (iv) to amend the terms of the Loan Agreement to reflect the amended and restructured terms of the Earnouts. In connection with the execution and delivery of the Amendment, the Sellers and the Lender executed and delivered Amendment No. 1 dated January 20, 2017 to the Subordination Agreement between the Sellers and the Lender dated as of January 1, 2016.
Also in connection with the execution of the Amendment, the Borrowers, the Validity Party, the Guarantor, the Subordinated Creditors and the Lender executed and delivered a Reaffirmation Agreement effective as of January 20, 2017 (the “Reaffirmation Agreement”) pursuant to which, among other things, (i) the Borrowers reaffirmed their obligations to Lender under each of the Loan Documents (as defined in the Reaffirmation Agreement), (ii) the Validity Party (as defined in the Reaffirmation Agreement) reaffirmed his obligations under the Validity Agreement (as defined in the Reaffirmation Agreement) and each of the Loan Documents, (iii) the Guarantor (as defined in the Reaffirmation Agreement) reaffirmed his obligations under the Amended and Restated Guaranty Agreement dated on or about September 27, 2013 and each of the Loan Documents and (iv) each of the Subordinated Creditors (as defined in the Reaffirmation Agreement) reaffirmed its obligations under its respective Subordination Agreement (as defined in the Reaffirmation Agreement).
At March 31, 2017 and September 30, 2016, the interest rate was 4.75%, respectively.
At March 31, 2017, there was no availability on the line of credit as 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:
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Asprocess of March 31, 2016, the Company was in compliance with the EBITDA covenant and all other administrative covenants. At March 31, 2016, there was approximately $850,000 available on the line of credit.refinancing this loan. The interest expense related to the lines of credit for the three and six months ended March 31, 2017 and 2016 approximated $172,000 and 2015 approximated$337,000, and $182,000 and $291,000, and $122,000 and $201,000, respectively.
The Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”), and certain investment funds managed by MGG Investment Group LP (“MGG”), with an effective date of April 3, 2017.
Under the terms of the Credit Agreement, the Company may borrow up to $73,750,000 consisting of a four-year term loan in the principal amount of $48,750,000 and revolving loans in a maximum amount up to the lesser of (i) $25,000,000 or (ii) an amount determined pursuant to a borrowing base that is calculated based on the outstanding amount of the Company’s eligible accounts receivable, as described in the Credit Agreement. The loans under the Credit Agreement mature on March 31, 2021. The Company used approximately $7,631,000 of the proceeds to payoff the ACF FINCO I LP note. See subsequent event footnote for additional information.
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7. Accrued Compensation
Accrued Compensation includes accrued wages, the related payroll taxes, employee benefits of the Company's employees while they work on contract assignments, commissions earned and not yet paid and estimated commission payable.
8. Convertible Note Subordinated Debt
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 matured 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 (see Note 11).
In addition to the Note, the Company issued a warrant to purchase up to 2,371,875 shares of the Company's common stock. The warrant is exercisable at $0.25 per share, vests 6 months after the closing, and expires 5 years thereafter.
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 250,000 shares of the Company's common stock. Based on the closing stock price of $8.50 and $10.30 per common share, the 250,000 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 66,250 shares of the Company's common stock. Based on the closing stock price of $7.80 per common share, the 66,250 shares were valued at approximately $517,000.
Since the issuance in 2014, the Company received approximately $517,000 in net cash that was converted by Brio into 316,250 shares of the Company'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 during the year ended September 30, 2015.
9. Subordinated Debt
On 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 91,309approximately 91,000 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. 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. The Company paid fees of approximately $25,000 and 3,6363,000 shares of common stock to the Investor, valued at approximately $23,000. In addition, the Company had approximately $33,000 of legal fees related to the transaction. Total discount recorded at issuance was approximately $647,000. Total amortization of debt discount for the six months ended March 31, 20162017 was approximately $107,000.
On April 3, 2017, the Company and Jax amended and restated the Subordinated Note in its entirety in the form of the 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4,185,000. The 10% Note matures on October 3, 2021 (the “Maturity Date”). The 10% Note is convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share (subject to adjustment as provided in the 10% Note upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”).
On October 4, 2015, the Company issued to the sellers of Access Data Consulting Corporation (see note 11)10) a Promissory Note. 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 $57,303approximately $57,000 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 $27,963approximately $28,000 in principal and interest, (iv) on October 4, 2017 a balloon payment of principal of $1,202,405$1,202,000 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 Sellers of Access Data Consulting Corporation.
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Balance as of March 31, 2016: |
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JAX Legacy debt |
| $ | 4,185,000 |
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Access Data debt |
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| 2,780,000 |
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JAX Legacy debt discount |
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| (535,000 | ) |
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Total debt |
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| 6,430,000 |
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Short-term portion of debt |
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| (1,436,000 | ) |
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Long-term portion of debt |
| $ | 4,994,000 |
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On January 20, 2017, the Company entered into Addendum No. 1 (the “Addendum”) to the Stock Purchase Agreement dated as of January 1, 2016 (the “Paladin Agreement”) by and among the Company and Enoch S. Timothy and Dorothy Timothy (collectively, the “Sellers”). Pursuant to the terms of the Addendum, the Company and the Sellers agreed (a) that the conditions to the “Earnouts” (as defined in the Paladin Agreement) had been satisfied or waived and (b) that the amounts payable to the Sellers in connection with the Earnouts shall be amended and restructured as follows: (i) the Company paid $250,000 in cash to the Sellers prior to January 31, 2017 (the “Earnout Cash Payment”) and (ii) the Company shall issue to the Sellers a subordinated promissory note in the principal amount of $1,000,000 (the “Subordinated Note”), The Subordinated Note shall bear interest at the rate of 5.5% per annum. Interest on the Subordinated Note shall be payable monthly. The Subordinated Note shall have a term of three years and may be prepaid without penalty. The principal of and interest on the Subordinated Note may be paid, at the option of the Company, either in cash or in shares of common stock of the Company or in any combination of cash and common stock. The Sellers have agreed that all payments and obligations under the Subordinated Note shall be subordinate and junior in right of payment to any “Senior Indebtedness” (as defined in the Paladin Agreement) now or hereafter existing to “Senior Lenders” (current or future) (as defined in the Paladin Agreement).
Balance as of March 31, 2017: JAX Legacy debt Access Data debt Paladin debt JAX Legacy debt discount Total subordinated debt Short-term portion of subordinated debt Long-term portion of subordinated debt $ 4,185 1,357 1,000 (322 ) 6,220 (1,357 ) $ 4,863
Over the next four years, the payments of subordinated debt will total approximately $6,965,000$6,542,000 as follows: fiscal 2016 - $270,000 fiscal 2017 - $1,285,000,$113,000 fiscal 2018 - $1,225,000,$1,244,000, fiscal 20192020 - $1,000,000 and fiscal 2021 - $4,185,000.
10.9. Equity
On October 2, 2015, the Company issued 94,945approximately 95,000 shares of common stock to JAX Legacy related to the subordinated note. The stock was valued at approximately $589,000.
On October 4, 2015, the Company issued 327,869approximately 328,000 shares of common stock to 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 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. The Company hashad recorded a liability of approximately $500,000 in contingent consideration.
On April 4, 2016, the Company issued 122,581approximately 123,000 shares of common stock to the sellers of Access Data Consulting Corporation related to the guarantee.guarantee, discussed above. This was based on market value of the stock on April 4, 2016 being approximately $544,000 less than the $2,000,000 six month guaranteedguarantee provided in the Access Data Agreement and based on the closing stock price of $4.44 per common share. The Company accrued an additional expense of approximately $44,000 at
On March 31, 20162017, the Company issued approximately 500,000 shares of common stock to two related to the change in estimated contingent consideration.party warrant holders and received cash of $1,000,000.
Stock Options
The Company has recognized compensation expense in the amount of approximately $230,000$385,000 and $392,000 during the three and six months ended March 31, 2017 and 2016, respectively, related to the issuance of stock options. The Company has recognized compensation expense in the amount of approximately $191,000 and $230,000 during the three months ended March 31, 2017 and 2016, respectively, related to the issuance of stock options.
In September of 2015,During the Companysix month period ended March 31, 2017, there were options granted options to purchase 45,500 common40,000 shares of the Company'scommon stock at anwith a weighted average price of $6.70$4.72 per common share. The expenseThis estimated value was estimatedmade using the Black-Scholes option pricing model using anmodel. The average expected life (years) of 10 years, expectedthe options were 7, the estimated stock price volatility of 99%was 104% and a risk freethe risk-free interest rate ofwas 2.2%. The average faircalculated compensation value of stock options grantedthese grants was estimated to be $6.00 per share in fiscal 2016.
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11.
10. Acquisitions
ScribeAccess
On December 11, 2014, the Company entered into a Stock Exchange Agreement (the "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 Solutions, Inc. ("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") and the holders of a majority of the Company'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") from the Scribe Shareholders for 640,000 shares of Series A Preferred Stock (the "Preferred Stock") of the Company. In addition, the Company exchanged warrants to purchase up to 635,000 shares of the Company's common stock, for $2.00 per share, with a term of 10 years (the "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"), 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 635,000 warrants granted. The 640,000 preferred shares are valued at approximately $6,400,000, and the 635,000 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%.
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's estimate of fair value, which consist primarily of customer lists and trade name with an estimated life of ten years and goodwill.
(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 |
Goodwill and intangibles related to the acquisition of Scribe will not be deductible for tax purposes.
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 $3,507,000, which was the estimated fair value of the consideration paid by the 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 120,192 shares of common stock valued based on the closing price on July 31, 2015 of $7.20 per share and estimated cash of approximately $2,642,000 paid based on terms of the agreement.
The assets and liabilities of Agile were 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 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.
(in Thousands)
$ | 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 |
Goodwill and intangibles related to the acquisition of Agile will not be deductible for tax purposes.
Access
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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.Paladin
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.
(in Thousands)
$ | 3,597 | Assets Purchased | ||
1,659 | Liabilities Assumed | |||
1,938 | Net Assets Purchased | |||
15,568 | Purchase Price | |||
$ | 13,630 | Intangible Asset from Purchase |
Intangible asset detail
$ | 4,566 | Intangible asset customer list | ||
756 | Intangible asset trade name | |||
593 | Intangible asset non-compete agreement | |||
7,715 | Goodwill | |||
$ | 13,630 | 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.
Paladin
The consideration shall be paid as follows:
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$2,625,000.
The assets and liabilities of Paladin were recorded at their respective fair values as of the closing date of the Paladin Agreement, and the following table summarizes these values based on the estimated balance sheet at January 1, 2016.
The intangibles were recorded, based on the Company's estimate of fair value, which are expected to consist primarily of customer lists, trade name and a non-compete agreement with estimated lives of five to ten years and goodwill. Upon completion of an independent purchase price allocation and valuation, the allocation intangible assets will be adjusted accordingly.
$ | 2,460 | Assets Purchased | ||
3,693 | Liabilities Assumed | |||
(1,233) | Net Assets Purchased | |||
2,625 | Purchase Price | |||
$ | 3,858 | Intangible Asset from Purchase |
Intangible asset detail
$ | 700 | Intangible asset customer list | ||
640 | Intangible asset trade name | |||
260 | Intangible asset non-compete agreement | |||
2,258 | Goodwill | |||
$ | 3,858 | Intangible Asset from Purchase |
Consolidated pro-forma unaudited financial statements
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., Access Data Consulting Corporation and Paladin Consulting, Inc., after giving effect to the Company's acquisition as if the acquisitions occurred on October 1, 2014.2015.
The following unaudited pro forma information does not purport to present what the Company's actual results would have been had the acquisitions occurred on October 1, 2014,2015, 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 and six month ended March 31, 2015 and six months ended March 31, 2016 as if the acquisition occurred on October 1, 2014.2015. The pro forma results of operations for the six months ended March 31, 2016 only include Paladin, as all other acquisitions either occurred prior to October 1, 2015 or had an immaterial effect on pro forma balances.
the six months ended March 31, 2016 for the Paladin acquisition.
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(in Thousands, except per share data)
Pro Forma, unaudited |
| Three Months |
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Net sales |
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| 23,019 |
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| 44,076 |
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| 45,931 |
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Cost of sales |
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| 17,348 |
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| 31,863 |
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| 34,427 |
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Operating expenses |
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| 5,774 |
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| 11,985 |
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Net income (loss) |
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| 422 |
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| (530 | ) |
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| (2,668 | ) |
Basic income (loss) per common share |
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| 0.05 |
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Dilutive income (loss) per common share |
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Six Months Net sales Cost of sales Operating expenses Net loss Basic and dilutive loss per common share
Ended
March 31,
2016 $ 44,076 31,863 12,131 $ (470 ) $ (0.05 )
The Company's consolidated financial statements for the three and six months ended March 31, 20162017 include the actual results of Scribe Solutions Inc., Agile Resources, Inc., Access Data Consulting Corporation and Paladin Consulting, Inc. since the date of acquisition, respectively.all acquisitions.
Revenue and net income for each acquisition for the 3 months ended March 31, 2016 included in the statement of operations |
| Revenue |
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| Net Income |
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Scribe Solutions, Inc. |
| $ | 1,225 |
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| $ | 288 |
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Agile Resources, Inc. |
| $ | 3,283 |
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| $ | 391 |
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Access Data Consulting Corporation |
| $ | 4,718 |
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| $ | 324 |
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Paladin Consulting, Inc. |
| $ | 4,553 |
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| $ | 30 |
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Revenue and net income for each acquisition for the 6 months ended March 31, 2016 included in the statement of operations |
| Revenue |
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| Net Income |
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Scribe Solutions, Inc. |
| $ | 2,399 |
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| $ | 476 |
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Agile Resources, Inc. |
| $ | 5,889 |
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| $ | 481 |
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Access Data Consulting Corporation |
| $ | 9,454 |
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| $ | 721 |
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Paladin Consulting, Inc. |
| $ | 4,553 |
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| $ | 30 |
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12.11. 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 approximately $307,000 and $579,000 and $260,000 and $502,000 and $181,000 and $386,000 for the three and six month periods ended March 31, 20162017 and 2015,2016, respectively. As of March 31, 2016,2017, future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices, totaled approximately $2,465,000$2,357,000 as follows: fiscal 2016 - $422,000, fiscal 2017 - $753,000,$475,000, fiscal 2018 - $620,000,$844,000, fiscal 2019 - $460,000,$641,000, fiscal 2020 - $191,000$238,000 fiscal 2021 - $74,000 and thereafter - $19,000.
13.12. 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 professionalThese distinct services staffingcan be divided into two reportable segments, Industrial Staffing Services and light industrial staffing are classified as contract staffing services revenues in the statements of operations.Professional Staffing Services. Selling, general and administrative expenses are not completely separately allocated among light industrial services and professional services or industrial staffing services within the contract staffing services sector for internal reporting purposes.services.
Unallocated corporate expenses primarily include, corporate legal expenses, consulting expenses, corporate payroll, audit fees, corporate rent and facility costs, board fees and interest expense.
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| Three Months Ended |
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| Six Months Ended |
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|
| March 31, |
|
| March 31, |
| ||||||||||
(In Thousands) |
| 2016 |
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| 2015 |
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| 2016 |
|
| 2015 |
| ||||
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|
|
|
|
|
|
|
|
|
|
|
| ||||
Direct Hire Placement Services |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 2,059 |
|
| $ | 1,482 |
|
| $ | 3,685 |
|
| $ | 2,932 |
|
Placement services gross margin |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
Operating income (loss) |
| $ | 163 |
|
| $ | (216 | ) |
| $ | 231 |
|
| $ | (396 | ) |
Depreciation & amortization |
|
| 61 |
|
|
| 56 |
|
|
| 113 |
|
|
| 112 |
|
Accounts receivable – net |
|
| 701 |
|
|
| 754 |
|
|
| 701 |
|
|
| 754 |
|
Intangible asset |
|
| 50 |
|
|
| 168 |
|
|
| 50 |
|
|
| 168 |
|
Goodwill |
|
| 24 |
|
|
| 24 |
|
|
| 24 |
|
|
| 24 |
|
Total assets |
| $ | 3,490 |
|
| $ | 2,905 |
|
| $ | 3,490 |
|
| $ | 2,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Staffing Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial services revenue |
| $ | 4,874 |
|
| $ | 6,457 |
|
| $ | 10,874 |
|
| $ | 12,984 |
|
Professional services revenue |
|
| 14,733 |
|
|
| 1,857 |
|
|
| 24,732 |
|
|
| 3,562 |
|
Industrial services gross margin |
|
| 10.75 | % |
|
| 11.35 | % |
|
| 11.26 | % |
|
| 13.27 | % |
Professional services gross margin |
|
| 19.91 | % |
|
| 30.35 | % |
|
| 23.94 | % |
|
| 32.00 | % |
Operating income |
| $ | 895 |
|
| $ | 225 |
|
| $ | 1,775 |
|
| $ | 737 |
|
Depreciation and amortization |
|
| 450 |
|
|
| 74 |
|
|
| 801 |
|
|
| 134 |
|
Accounts receivable net – industrial services |
|
| 2,414 |
|
|
| 3,978 |
|
|
| 2,414 |
|
|
| 3,978 |
|
Accounts receivable net – professional services |
|
| 7,839 |
|
|
| 860 |
|
|
| 7,839 |
|
|
| 860 |
|
Intangible assets |
|
| 11,617 |
|
|
| 1,224 |
|
|
| 11,617 |
|
|
| 1,224 |
|
Goodwill |
|
| 18,168 |
|
|
| 1,082 |
|
|
| 18,168 |
|
|
| 1,082 |
|
Total assets |
| $ | 41,797 |
|
| $ | 7,205 |
|
| $ | 41,797 |
|
| $ | 7,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate administrative expenses |
| $ | 404 |
|
| $ | 168 |
|
| $ | 773 |
|
| $ | 485 |
|
Corporate facility expenses |
|
| 42 |
|
|
| 37 |
|
|
| 82 |
|
|
| 88 |
|
Stock compensation expense |
|
| 230 |
|
|
| 84 |
|
|
| 392 |
|
|
| 136 |
|
Board related expenses |
|
| 0 |
|
|
| 225 |
|
|
| 0 |
|
|
| 252 |
|
Acquisition, integration and restructuring expense |
|
| 122 |
|
|
| 0 |
|
|
| 568 |
|
|
| 30 |
|
Total unallocated expenses |
| $ | 798 |
|
| $ | 514 |
|
| $ | 1,815 |
|
| $ | 991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
| $ | 21,666 |
|
| $ | 9,796 |
|
| $ | 39,291 |
|
| $ | 19,478 |
|
Operating income (loss) |
|
| 260 |
|
|
| (505 | ) |
|
| 191 |
|
|
| (650 | ) |
Depreciation and amortization |
|
| 511 |
|
|
| 130 |
|
|
| 914 |
|
|
| 246 |
|
Total accounts receivable – net |
|
| 10,954 |
|
|
| 5,592 |
|
|
| 10,954 |
|
|
| 5,592 |
|
Intangible assets |
|
| 11,667 |
|
|
| 1,392 |
|
|
| 11,667 |
|
|
| 1,392 |
|
Goodwill |
|
| 18,192 |
|
|
| 1,106 |
|
|
| 18,192 |
|
|
| 1,106 |
|
Total assets |
| $ | 45,287 |
|
| $ | 10,110 |
|
| $ | 45,287 |
|
| $ | 10,110 |
|
| 19 |
| Table of Contents |
Three Months Ended Six Months Ended March 31, March 31, (In Thousands) 2017 2016 2017 2016 Industrial Staffing Services Industrial services revenue Industrial services gross margin Operating income (loss) Depreciation & amortization Accounts receivable – net Intangible assets Goodwill Total assets Professional Staffing Services Permanent placement revenue Placement services gross margin Professional services revenue Professional services gross margin Operating income Depreciation and amortization Accounts receivable – net Intangible assets Goodwill Total assets Unallocated Expenses Corporate administrative expenses Corporate facility expenses Stock option amortization expense Board related expenses Acquisition, integration and restructuring expenses Total unallocated expenses Consolidated Total revenue Operating income Depreciation and amortization Total accounts receivables – net Intangible assets Goodwill Total assets $ 6,125 $ 4,874 $ 12,106 $ 10,874 13.7 % 10.8 % 15.0 % 11.3 % $ 249 $ (27 ) $ 589 $ 40 68 87 141 138 3,644 2,116 3,644 2,116 800 1,014 800 1,014 1,084 1,084 1,084 1,084 $ 8,269 $ 6,629 $ 8,269 $ 6,629 $ 1,459 $ 2,059 $ 2,609 $ 3,685 100 % 100 % 100 % 100 % $ 13,965 $ 14,733 $ 27,840 $ 24,732 24.1 % 19.9 % 24.0 % 23.9 % $ 1,068 $ 1,118 $ 2,116 $ 2,254 372 424 747 776 9,455 8,839 9,455 8,838 9,556 10,653 9,556 10,653 17,506 17,108 17,506 17,109 $ 37,391 $ 38,659 $ 37,391 $ 38,659 $ 634 $ 429 $ 1,235 $ 1,041 69 50 143 102 191 230 385 392 19 0 38 0 77 122 100 568 $ 990 $ 831 $ 1,901 $ 2,103 $ 21,549 $ 21,666 $ 42,555 $ 39,291 327 260 804 191 440 511 888 914 13,099 10,954 13,099 10,954 10,356 11,667 10,356 11,667 18,590 18,193 18,590 18,193 $ 45,660 $ 45,288 $ 45,660 $ 45,288
13. Subsequent Events
The Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”), and certain investment funds managed by MGG Investment Group LP (“MGG”). All funds were distributed on April 3, 2017 (the “Closing Date”).
Under the terms of the Credit Agreement, the Company may borrow up to $73,750,000 consisting of a four-year term loan in the principal amount of $48,750,000 (“Term Loan”) and revolving loans (“Revolver”) in a maximum amount up to the lesser of (i) $25,000,000 or (ii) an amount determined pursuant to a borrowing base that is calculated based on the outstanding amount of the Company’s eligible accounts receivable, as described in the Credit Agreement. The loans under the Credit Agreement mature on March 31, 2021.
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Amounts borrowed under the Credit Agreement may be used by the Company to repay existing indebtedness, to partially fund capital expenditures, to fund a portion of the purchase price for the acquisition of all of the issued and outstanding stock of SNI Holdco Inc. pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement”) noted below, to provide for on-going working capital needs and general corporate needs, and to fund future acquisitions subject to certain customary conditions of the lenders. On the closing date of the Credit Agreement, the Company borrowed $56,226,316 which was used by the Company to repay existing indebtedness, to pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of all of the outstanding stock of SNI Holdco Inc.
The loans under the Credit Agreement will bear interest at rates at the Company’s option of LIBOR rate plus 10% or PNC’s floating base rate plus 9%. The Term Loans may consist of Domestic Rate Loans or LIBOR Rate Loans, or a combination thereof.
The Credit Agreement 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.
The Term Loans were advanced on the Closing Date and are, with respect to principal, payable as follows, subject to acceleration upon the occurrence of an Event of Default under the Credit Agreement or termination of the Credit Agreement and provided that all unpaid principal, accrued and unpaid interest and all unpaid fees and expenses shall be due and payable in full on March 31, 2021. Principal payments are required as follows: Fiscal year 2017 - $609,000, Fiscal year 2018 – $5,789,000, Fiscal year 2019 – $6,094,000, Fiscal year 2020 – $6,398,000 and Fiscal year 2021 - $29,860,000.
The Credit Agreement contains certain covenants including the following:
Fixed Charge Coverage Ratio. The Company shall cause to be maintained as of the last day of each fiscal quarter, a Fixed Charge Coverage Ratio for itself and its subsidiaries on a Consolidated Basis of not less the amount set forth in the Credit Agreement, which ranges from 1.10 to 1.0 to 1.40 to 1.0.
Minimum EBITDA. The Company shall cause to be maintained as of the last day of each fiscal quarter, EBITDA for itself and its subsidiaries on a Consolidated Basis of not less than the amount set forth in the Credit Agreement for each fiscal quarter specified therein, in each case, measured on a trailing four (4) quarter basis as set in the Credit Agreement, which ranges from $13,000,000 to $24,000,000 over the term of the Credit Agreement.
Senior Leverage Ratio. The Company shall cause to be maintained as of the last day of each fiscal quarter, a Senior Leverage Ratio for itself and its subsidiaries on a Consolidated Basis of not greater than the amount set forth in the Credit Agreement for each fiscal quarter, in each case, measured on a trailing four (4) quarter basis as set in the agreement, which ranges from 4.50 to 1.0 to 1.5 to 1.0 over the term of the Credit Agreement.
In addition to these financial covenants, the Credit Agreement includes other restrictive covenants. The Credit Agreement permits capital expenditures up to a certain level, and contains customary default and acceleration provisions. The Credit Agreement also restricts, above certain levels, acquisitions, incurrence of additional indebtedness, and payment of dividends.
At close, the Company used approximately $7,476,000 of the revolver in relations to the transaction and refinancing of the ACF FINCO I, LP loan.
In connection with this Credit Agreement, the Company agreed to pay an original discount fee of approximately $901,300, a closing fee for the term loan of approximately $75,000 and a closing fee for the revolving credit facility of approximately $500,000. In addition, the Company paid early termination fees of approximately $240,000 to ACF FINCO I, LP in connection with the refinancing of its indebtedness to ACF FINCO I, LP.
On April 3, 2017, the Company and Jax amended and restated the Subordinated Note in its entirety in the form of a 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4,185,000. The 10% Note matures on October 3, 2021 (the “Maturity Date”). The 10% Note is convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share (subject to adjustment as provided in the 10% Note upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”). All or any portion of the 10% Note may be redeemed by the Company for cash at any time on or after April 3, 2018 that the average daily VWAP of the Company’s Common Stock reported on the principal trading market for the Common Stock exceeds the then applicable Conversion Price for a period of 20 trading days. The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 10% Note being redeemed, plus accrued and unpaid interest thereon.
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| Table of Contents |
The Company entered into an Agreement and Plan of Merger dated as of March 31, 2017 (the “Merger Agreement”) by and among the Company, GEE Group Portfolio, Inc., a Delaware corporation and a wholly owned subsidiary of the Company, (the “GEE Portfolio”), SNI Holdco Inc., a Delaware corporation (“SNI Holdco”), Smith Holdings, LLC a Delaware limited liability company, Thrivent Financial for Lutherans, a Wisconsin corporation, organized as a fraternal benefits society (“Thrivent”), Madison Capital Funding, LLC, a Delaware limited liability company (“Madison”) and Ronald R. Smith, in his capacity as a stockholder (“Mr. Smith” and collectively with Smith Holdings, LLC, Thrivent and Madison, the “Principal Stockholders”) and Ronald R. Smith in his capacity as the representative of the SNIH Stockholders (“Stockholders’ Representative”). The Merger Agreement provided for the merger subject to the terms and conditions set forth in the Merger Agreement of SNI Holdco with and into GEE Portfolio pursuant to which GEE Portfolio would be the surviving corporation (the “Merger”). The Merger was consummated on April 3, 2017. As a result of the merger, GEE Portfolio became the owner of 100% of the outstanding capital stock of SNI Companies, Inc., a Delaware corporation and a wholly-owned subsidiary of SNI Holdco (“SNI Companies” and collectively with SNI Holdco, the “Acquired Companies”).
The aggregate consideration paid for the shares of SNI Holdco (the “Merger Consideration”) was $66.4 million.
Consideration was comprised of the following:
· | The Company paid an aggregate of $25,100,000 in cash to the SNIH Stockholders and others as they directed (the “Closing Cash Payment”). | |
· | Issuance of 9.5% Convertible Subordinated Notes. At the Closing, the Company issued and paid to certain SNIH Stockholders an aggregate of $12.5 million in aggregate principal amount of its 9.5% Convertible Subordinated Notes (the “9.5% Notes”). |
· | Issuance of Series B Convertible Preferred Stock. At the Closing, the Company agreed to issue to certain SNIH Stockholders upon receipt of duly executed letters of transmittal an aggregate of approximately 5,926,000 shares of its Series B Convertible Preferred Stock (with a value of $28,800,000 based on the average daily VWAP of the Common Stock for the 20 trading days immediately prior to the closing date of the Merger). |
Cash Payment to Former Senior Lender of the Company. At the Closing, the Company paid $7,630,697 to ACF FINCO, LLP, the Company’s former senior lender to repay in full the indebtedness owed by the Company to ACF FINCO, LLP as of the date of the Closing.
Cash Payment to Senior Lender of Acquired Companies. At the closing, the Company paid $20,220,710.88 to Monroe Capital, the senior lender to the Acquired Companies to repay in full the indebtedness owed by the Acquired Companies to Monroe Capital as of the date of the Closing.
The SNIH Stockholders have agreed to indemnify the Company with respect to the breach of the representations and warranties set forth in the Merger Agreement. The relative responsibility and Indemnification Ceiling of each SNIH Stockholder is determined as set forth in the Merger Agreement. In addition, the indemnification obligations of the SNIH Stockholders are subject to certain overall baskets, deductibles and ceilings as set forth in the Merger Agreement. The Company is entitled to seek ‘set off’ or ‘recoupment’ for indemnification with respect to a respective SNIH Stockholder’s 9.5% Notes or stock or other property, as may be owned by that SNIH Stockholder and held in escrow. $8.6 million in aggregate principal amount of the 9.5% Notes will be held in escrow by the Escrow Agent against which the Company may seek set-off in the event of certain indemnification obligations of the SNIH Stockholders. These 9.5% Notes will be released from escrow after a period of eighteen months if there are no outstanding claims for indemnification, but not if there are outstanding claims for indemnification.
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| Table of Contents |
The Company has agreed to prepare and file with the Securities and Exchange Commission a proxy statement for the purpose of convening a meeting of its stockholders to obtain Requisite Shareholder Approval (as defined below) to approve the conversion of shares of Series B Convertible Preferred Stock and 9.5% Notes into shares of Common Stock and the payment of interest on the 9.5% Notes in shares of Common Stock in excess of the Conversion Limit (as defined below).
The Company has agreed to provide the SNIH Stockholders with certain piggyback and demand registration rights with respect to the shares of Common Stock that are issuable upon the conversion of the Series B Convertible Preferred Stock and the 9.5% Notes.
The transactions contemplated by the Merger Agreement were unanimously approved by the board of directors of the Company and GEE Portfolio, by the Company as sole stockholder of GEE Portfolio and by each of the Acquired Companies.
The Company utilized $52,336,000 of the proceeds from its Credit Agreement to finance the Closing Cash Payment to the SNIH Stockholders as well as the other cash payments described above and made at the Closing.
SNI Companies, led by co-founder and current Chairman and CEO Ron Smith, is a premier provider of recruitment and staffing services specializing in administrative, finance, accounting, banking, technology, and legal professions. Through its Staffing Now®, Accounting Now®, SNI Technology®, SNI Financial®, Legal Now®, SNI Energy® and SNI Certes® divisions, SNI Companies delivers staffing solutions on a temporary/contract, temp/contract-to hire, full time and direct hire basis, across a wide range of disciplines and industries including finance, accounting, banking, technical, software, tax, human resources, legal, engineering, construction, manufacturing, natural resources, energy and administrative professional. SNI Companies has offices in Colorado, Connecticut, Washington DC, Georgia, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, New Jersey, Pennsylvania, Texas and Virginia.
The assets acquired primarily consist of accounts receivable, unbilled revenue, deposit, leases, customer contracts, fixed assets and other current assets. In addition, the purchase price for the Acquired Companies includes value derived from goodwill and the talented sales and recruiting personnel employed by the Acquired Companies.
On April 3, 2017, the Company and Thrivent entered into an Agreement which restricts Thrivent from converting all or any portion of its shares of Series B Convertible Preferred Stock to the extent that after giving effect to such conversion as set forth in a written election to GEE to convert the Preferred Stock, Thrivent (together with Thrivent’s Affiliates, and any other person or entity acting as a group together with Thrivent or any of Thrivent’s Affiliates), would beneficially own Common Stock in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of Thrivent’s Series B Convertible Preferred Stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation may be waived by Thrivent, upon not less than 61 days’ prior notice to the Company that Thrivent would like to waive the Beneficial Ownership Limitation with regard to any or all shares of Common Stock issuable upon conversion of the Series B Convertible Preferred Stock.
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On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the Merger Consideration an aggregate of $12.5 million in aggregate principal amount of its 9.5% Notes. The 9.5% Notes mature on October 3, 2021 (the “Maturity Date”). The 9.5% Notes are convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share (subject to adjustment as provided in the 9.5% Note upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”) ; provided, however, that unless and until such time as the Company has received Requisite Stockholder Approval the Company shall not be permitted to make any interest payment in shares of Common Stock to the extent that such issuance would cause the Company to exceed the Conversion Limit. Interest on the 9.5% Notes accrues at the rate of 9.5% per annum and shall be paid quarterly in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2017, on each conversion date with respect to the 9.5% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”). At the option of the Company, interest may be paid on an Interest Payment Date either in cash or in shares of Common Stock of the Company, which Common Stock shall be valued at the average daily VWAP of the Common Stock for the 20 trading days immediately prior to such Interest Payment Date provided, however, that unless and until such time as the Company has received Requisite Stockholder Approval the Company shall not be permitted to make any interest payment in shares of Common Stock to the extent that such issuance would cause the Company to exceed the Conversion Limit. For purposes of the 9.5% Notes and the Company’s Series B Convertible Preferred Stock, the term “Requisite Stockholder Approval” means approval by the stockholders of the Company in compliance with Section 712 of the NYSE MKT Company Guide and Regulation 14A under the Securities Exchange Act of 1934, as amended, of the issuance of shares of Common Stock that would constitute more than 19.99% of the Common Stock outstanding immediately prior to the closing date of the Merger (the “Conversion Limit”) upon (i) the conversion of the Company’s Series B Convertible Preferred Stock, and/or (ii) the conversion of the 9.5% Notes and/or (iii) the payment of interest on the 9.5% Notes in shares of Common Stock and/or (iv) any other issuance of Common Stock in connection with the issuance of the 9.5% Notes. All or any portion of the 9.5% Notes may be redeemed by the Company for cash at any time on or after April 3, 2018 that the average daily VWAP of the Company’s Common Stock reported on the principal trading market for the Common Stock exceeds the then applicable Conversion Price for a period of 20 trading days. The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 9.5% Notes being redeemed, plus accrued and unpaid interest thereon. Except as otherwise provided in the 9.5% Notes, the Company may not prepay any portion of the principal amount of any 9.5% Note without the prior written consent of the holder thereof. Any prepayments of the 9.5% Notes shall be made on a pro rata basis to all holders of 9.5% Notes based on the aggregate principal amount of 9.5% Notes held by such holders. The Company shall be required to prepay the 9.5% Notes together with accrued and unpaid interest thereon upon the consummation by the Company of any Change of Control. For purposes of the 9.5% Notes, a Change of Control of the Company shall mean any of the following: (A) the Company effects any sale of all or substantially all of its assets in one transaction or a series of related transactions or (B) the consummation of any transaction (including, without limitation, any merger or consolidation), the result of which is that any person or entity together with their affiliates, becomes the beneficial owner, directly or indirectly, of more than 50% of the Common Stock of the Company. Thrivent is restricted in its 9.5% Note from converting all or any portion of its 9.5% Note into shares of Common Stock to the extent that after giving effect to such conversion Thrivent (together with its affiliates and any other person or entity acting as a group together with the Thrivent or any of Thrivent’s affiliates) would beneficially own Common Stock in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of the Notes (the “Beneficial Ownership Limitation”) The Beneficial Ownership Limitation may be waived by Thrivent, upon not less than 61 days’ prior notice to the Company that Thrivent would like to waive the Beneficial Ownership Limitation with regard to any or all shares of Common Stock issuable upon conversion of its 9.5% Note. Each of the 9.5% Notes is subject to the right by the Company to the extent provided in the Merger Agreement, to set off any amounts payable to the holders of the 9.5% Notes against amounts owing by the SNIH Stockholders to the Company or the other Buyer Indemnified Parties. Each of the 9.5% Notes is subordinated in payment to the obligations of the Company to the lenders parties to the Credit Agreement pursuant to those certain Subordination and Intercreditor Agreements, each dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and each of the holders of the 9.5% Notes.
None of the 9.5% Notes issued to the SNIH Stockholders are registered under the Securities Act of 1933, as amended (the “Securities Act”). Each of the SNIH Stockholders who received 9.5% Notes is an accredited investor. The issuance of the 9.5% Notes to such SNIH Stockholders is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.
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On April 3, 2017, the Company agreed to issue to certain SNIH Stockholders upon receipt of duly executed letters of transmittal as part of the Merger Consideration, an aggregate of approximately 5,926,000 shares of its Series B Convertible Preferred Stock to certain of the SNIH Stockholders as part of the Merger Consideration. The Series B Convertible Preferred Stock has a liquidation preference equal to $4.86 per share and ranks senior to all “Junior Securities” (including the Company’s Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. In the event that the Company declares or pays a dividend or distribution on its Common Stock, whether such dividend or distribution is payable in cash, securities or other property, including the purchase or redemption by the Company or any of its subsidiaries of shares of Common Stock for cash, securities or property, the Company is required to simultaneously declare and pay a dividend on the Series B Convertible Preferred Stock on a pro rata basis with the Common Stock determined on an as-converted basis assuming all shares had been converted as of immediately prior to the record date of the applicable dividend or distribution. Except as set forth in the Resolution Establishing Series (as defined below) as may be required by Illinois law, the holders of the Series B Convertible Preferred Stock have no voting rights. Pursuant to the Resolution Establishing Series, without the prior written consent of holders of not less than a majority of the then total outstanding Shares of Series B Convertible Preferred Stock, voting separately as a single class, the Company shall not create, or authorize the creation of, any additional class or series of capital stock of the Company (or any security convertible into or exercisable for any class or series of capital stock of the Company) that ranks pari passu with or superior to the Series B Convertible Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting). Each share of Series B Convertible Preferred Stock shall be convertible at the option of the holder thereof into one share of Common Stock at an initial conversion price equal to $4.86 per share, each as subject to adjustment in the event of stock splits, stock combinations, capital reorganizations, reclassifications, consolidations, mergers or sales, as set forth in the Resolution Establishing Series: provided, however, that unless and until such time as the Company has received Requisite Stockholder Approval a holder of Shares of Series B Convertible Preferred Stock shall not be permitted to effect any conversion of any shares of Series B Preferred Stock to the extent that the shares of Common Stock issuable upon such conversion when taken together with the shares of Common Stock previously issued with respect to (i) prior conversions of shares of Series B Convertible Preferred Stock, and/or (ii) prior conversions of any 9.5% Notes and/or (iii) the payment of dividends on any 9.5% Notes in shares of Common Stock and/or (iv) otherwise in connection with the issuance of the 9.5% Notes would result in the issuance of shares of Common Stock that exceed the Conversion Limit.
None of the shares of Series B Preferred Stock issued to the SNIH Stockholders are registered under the Securities Act. Each of the SNIH Stockholders who received shares of Series B Preferred Stock is an accredited investor. The issuance of the shares of Series B Preferred Stock to such SNIH Stockholders is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.
On April 3, 2017, the Company filed a Statement of Resolution Establishing its Series B Convertible Preferred Stock with the State of Illinois. (the Resolution Establishing Series”). Pursuant to the Resolution Establishing Series, the Company designated 5,950,000 of its authorized preferred stock as “Series B Convertible Preferred Stock”, without par value.
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Item 2. Management’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 acquisitions of Agile Resources, Inc. a Georgia Corporation ("Agile"), Access Data Consulting Corporation, a Colorado corporation ("Access") and Paladin Consulting Inc., a Texas corporation ("Paladin"(“Paladin”) expanded our geographical footprint within the placement and contract staffing of information technology.
Our staffing services are provided through a network of twenty branch offices located in downtown or suburban areas of major U.S. cities in nineten states. We have one office located in each of Arizona, Colorado, Georgia, Indiana, Illinois and Massachusetts, two offices in each of California and Texas, and three offices in Florida 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 equity and 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 March 31, 20162017 Compared to the Three Months Ended March 31, 20152016
Results of Operations
Net Revenues
Consolidated net revenues are comprised of the following:
|
| Three Months Ended March 31, |
|
|
|
|
|
|
| |||||||
(In thousands) |
| 2016 |
|
| 2015 |
|
| $ change |
|
| % change |
| ||||
Direct Hire Placement Services |
| $ | 2,059 |
|
| $ | 1,482 |
|
| $ | 577 |
|
|
| 39 | % |
Professional Contract Services |
|
| 14,733 |
|
|
| 1,857 |
|
|
| 12,876 |
|
|
| 693 |
|
Industrial Contract Services |
|
| 4,874 |
|
|
| 6,457 |
|
|
| (1,583 | ) |
|
| (25 | ) |
Consolidated Net Revenues |
| $ | 21,666 |
|
| $ | 9,796 |
|
| $ | 11,870 |
|
|
| 121 | % |
Three Months Ended March 31, (In thousands) 2017 2016 $ change % change Direct hire placement services Professional contract services Industrial contract services Consolidated Net Revenues $ 1,459 $ 2,059 $ (600 ) (29 )% 13,965 14,733 (768 ) (5 ) 6,125 4,874 1,251 26 $ 21,549 $ 21,666 $ (117 ) (0.5 )%
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Consolidated net revenues increaseddecreased approximately $11,870$117,000 or 121%0.5% compared with the same period last year. The Company acquired Scribe as of April 1, 2015, Agile as of July 31, 2015, Access as of October 4, 2015,Direct hire placement services and Paladin as of January 1, 2016 which increased the professional contract services by approximately $1,225, $2,848, $4,422is down as the total number of recruiters and $4,240, respectively. The acquisitions of Agile, Access and Paladin increased direct hire placement service revenue by approximately $275, $147 and $66, respectively. With the recent capital raise and addition of executive management,sales professionals are down in the Company, has stabilized its sales force and is investinghowever management does expect to increase hiring in revenue growth.the following quarter. Industrial contract services were downincreased due to a management effort to replace certain customers lost in the loss of a client, subsequentprior year. Executive management has started to hire additional national sales force that can be serviced by the period ended March 31, 2015, with annual revenues of approximately two million dollars and due to certain non-profitable business that management eliminated. Management continues to take action to increase the number of experienced sales agents and recruiters to increase sales.expanded geographical service area.
Cost of Contract Services
Cost of services includes wages and related payroll taxes and employee benefits of the Company's employees while they work on contract assignments. Cost of contract services for the three-month period ended March 31, 20162017 increased by approximately 123%2% to approximately $15,630$15,894,000 compared with the prior period of approximately $7,017.$15,630,000 for the three-month period ended March 31, 2016. Cost of contract services, as a percentage of contract revenue, for the three monththree-month period ended March 31, 2016 stayed consistent2017 increased approximately 2% to 74% compared with the prior period of approximately 72%. The slight change in the contract revenue gross margin is related to several factors, including the addition of lower gross margin from the Paladin acquisition as of January 1, 2016, offset by higher professional serviceand Industrial contract revenue and the overall decrease in our workers compensation rates for the state of Ohio.services.
Gross Profit percentage by segment:
Gross Profit Margin % |
| Three Months 2016 |
|
| Three Months 2015 |
| ||
Direct hire placement services |
|
| 100 | % |
|
| 100 | % |
Industrial contract services |
|
| 10.75 | % |
|
| 11.35 | % |
Professional contract services |
|
| 19.91 | % |
|
| 30.35 | % |
Combined Gross Profit Margin % (1) |
|
| 27.86 | % |
|
| 28.37 | % |
Three Months Three Months Gross Profit Margin % March 31, March 31, Direct hire placement services Industrial contract services Professional contract services Combined Gross Profit Margin % (1) __________
Ended
Ended
2017
2016100 % 100 % 13.7 % 10.8 % 24.1 % 19.9 % 26.2 % 27.9 %
(1) Includes gross profit from direct hire placements, which all associated costs are recorded as selling, general and administrative expenses.
|
| Table of Contents |
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 Company's employment consultants and branch managers on permanent and temporary placements. | |
| 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. | |
| Occupancy costs, which includes office rent, | |
| 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. | |
|
|
The Company's largest selling, general and administrative expense is for compensation in the operating divisions. Most of the Company's sales agents and recruiters are paid on a commission basis and receive advances against future commissions. When commissions are earned, prior advances are applied against them and the sales agent or recruiter is paid the net amount. 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, plus commission accruals for billed but uncollected revenue.
Selling, general and administrative expenses for the three months ended March 31, 2016 increased2017 decreased by approximately $1,983$332,000 or 63%approximately 6% compared to the same period last year. The increase was primarily related to the generaldecrease in selling, general and administrative expenses was a result of Scribe, Agile, Access, Paladinmanagement’s effort to consolidate and create efficiencies within the additionalconsolidated companies.
Acquisition, Integration and Restructuring Charges
Acquisition, integration and restructuring charges, are legal expenses, travel expenses, finder’s 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 a recurring basis in normal operations, without acquisitions.
The acquisition, integration and restructuring expenses of approximately $122 incurred during the period.
Amortization Expense
Amortization expensecharges for the three months ended March 31, 2016, increased $354, or 437% compared with the same period last year, primarily as a result of the acquisitions and the related amortization of their identified intangible assets.
Change in Derivative Liability
Change in derivative liability for the three months ended March 31, 2016,2017, decreased to $0,by approximately $45,000 compared with the same period last year as a result of the Brio loan being fully convertedCompany continues to stock inevaluate potential acquisitions and perform due diligence, however no acquisitions were closed during the prior year.period.
Change in Contingent Consideration
At the time the Company makes an acquisition, the Company estimates contingent consideration, such as earn-outs or other guarantees that could affect the purchase price when the contingency is resolved. Contingent consideration is evaluated by management each quarter or when the contingency is resolved. The change in contingent consideration with respect to the Company's acquisitions was approximately $156 during the three months ended, March 31, 2016. The change is related to the known change of stock price at April 4, 2016 of $44 and the reduction of the expected earn-out payable to the former owners of Access of $200. The shares were issued on May 5, 2016.
Interest Expense
Interest expense for the three months ended March 31, 2016, increased $283, or 225% compared with the same period last year primarily as a result of the newly obtained long-term debt, the interest expense for acquisition payments and higher average borrowings related to the new acquisitions.
Taxes
Results of Operations – Six Months Ended March 31, 20162017 Compared to the Six Months Ended March 31, 20152016
Results of Operations
Net Revenues
Consolidated net revenues are comprised of the following:
|
| Six Months Ended March 31, |
|
|
|
|
|
|
| |||||||
(In thousands) |
| 2016 |
|
| 2015 |
|
| $ change |
|
| % change |
| ||||
Direct Hire Placement Services |
| $ | 3,685 |
|
| $ | 2,932 |
|
| $ | 753 |
|
|
| 26 | % |
Professional Contract Services |
|
| 24,732 |
|
|
| 3,562 |
|
|
| 21,170 |
|
|
| 594 |
|
Industrial Contract Services |
|
| 10,874 |
|
|
| 12,984 |
|
|
| (2,110 | ) |
|
| (16 | ) |
Consolidated Net Revenues |
| $ | 39,291 |
|
| $ | 19,478 |
|
| $ | 19,813 |
|
|
| 102 | % |
Six Months Ended March 31, (In thousands) 2017 2016 $ change % change Direct hire placement services Professional contract services Industrial contract services Consolidated Net Revenues $ 2,609 $ 3,685 $ (1,076 ) (29 )% 27,840 24,732 3,108 13 12,106 10,874 1,232 11 $ 42,555 $ 39,291 $ 3,264 8 %
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Consolidated net revenues increased approximately $19,813$3,264,000 or 102%8% compared with the same period last year. The Company acquired Scribe as of April 1, 2015, Agile as of July 31, 2015, Access as of October 4, 2015, and Paladin as of January 1, 2016, which increased the professional contract services by approximately $2,399, $5,390, $9,158 and $4,240, respectively. The acquisitions$4,429,000, however these gains were offset by overall lower professional contract revenue. Direct hire placement services have not been a focus of Agile, Access and Paladin increased direct hire revenue by approximately $339, $147 and $66, respectively. With the recent capital raise and addition of executiveacquired entities, however management does not believe that the Companydecrease in permanent placement services will continue. Executive management has stabilized its sales force, consolidated and expanded its sales strategy and is investing in revenue growth. Industrial contract services were down due to the loss of a client, subsequent to the period ended March 31, 2015, with annual revenues of approximately two million dollars and due to certain non-profitable business that management eliminated. Management continues to take action to increase the number of experienced sales agents and recruiters to increase sales.
Cost of Contract Services
Cost of services includes wages and related payroll taxes and employee benefits of the Company's employees while they work on contract assignments. Cost of contract services for the six monthsix-month period ended March 31, 20162017 increased by approximately 104%12% to approximately $27,967$31,457,000 compared with the prior period of approximately $13,685.$27,967,000 for the six-month period ended March 31, 2016. Cost of contract services, as a percentage of contract revenue, for the six monthsix-month period ended March 31, 20162017 increased approximately 1%3% to 71%approximately 74% compared with the prior period of approximately 70%71%. The change in the contract revenue gross margin is related to several factors, including the addition of lower gross margin from the Paladin acquisition as of January 1, 2016 offset by higher professional serviceand increase in Industrial contract revenue and the overall decrease in our workers compensation rates for the state of Ohio.services.
Gross Profit percentage by segment:
Gross Profit Margin % |
| Six Months 2016 |
|
| Six Months 2015 |
| ||
Direct hire placement services |
|
| 100 | % |
|
| 100 | % |
Industrial contract services |
|
| 11.3 | % |
|
| 13.3 | % |
Professional contract services |
|
| 23.9 | % |
|
| 32.0 | % |
Combined Gross Profit Margin % (1) |
|
| 28.8 | % |
|
| 29.7 | % |
Six Months Six Months Gross Profit Margin % March 31, March 31, Direct hire placement services Industrial contract services Professional contract services Combined Gross Profit Margin % (1) ____________
Ended
Ended
2017
2016100 % 100 % 15.0 % 11.3 % 24.0 % 23.9 % 26.1 % 28.8 %
(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 Company's employment consultants and branch managers on permanent and temporary placements. | |
| 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. | |
| Occupancy costs, which includes office rent, | |
| 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. |
| 29 | ||
| ||
|
The Company's largest selling, general and administrative expense is for compensation in the operating divisions. Most of the Company's employment consultantssales agents and recruiters are paid on a commission basis and receive advances against future commissions. When commissions are earned, prior advances are applied against them and the consultantsales agent or recruiter is paid the net amount. At that time, theThe 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.commissions, plus commission accruals for billed but uncollected revenue.
Selling, general and administrative expenses for the six months ended March 31, 2016 increased2017 decreased by approximately $3,484$345,000 or 56%4% compared to the same period last year. The increase was primarily related to the generaldecrease in selling, general and administrative expenses was a result of Scribe, Agile, Access, Paladinmanagement effort to consolidate and create efficiencies within the additionalconsolidated companies.
Acquisition, Integration and Restructuring Charges
Acquisition, integration and restructuring charges, are legal expenses, travel expenses, finder’s 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 a recurring basis in normal operations, without acquisitions.
The acquisition, integration and restructuring expenses of approximately $568 incurred during the period.
Amortization Expense
Amortization expensecharges for the six months ended March 31, 2016, increased $606, or 365% compared with the same period last year, primarily as a result of the acquisitions and the related amortization of their identified intangible assets.
Change in Derivative Liability
Change in Contingent Considerationperiod.
At the time the Company makes an acquisition, the Company estimates contingent consideration, such as earn-outs or other guarantees that could affect the purchase price when the contingency is resolved. Contingent consideration is evaluated by management each quarter or when the contingency is resolved. The change in contingent consideration with respect to the Company's acquisitions was approximately $156 during the six months ended, March 31, 2016. The change is related to the known change of stock price at April 4, 2016 of $44 and the reduction of the expected earn-out payable to the former owners of Access of $200. The shares were issued on May 5, 2016.
Interest Expense
Interest expense for the six months ended March 31, 2016, increased $461, or 169% compared with the same period last year primarily as a result of 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.
Liquidity and Capital Resources
The following table sets forth certain consolidated statements of cash flows data (in thousands):
|
| For the six months ended March 31, |
|
| For the six months ended March 31, |
| ||
Cash flows provided by (used in) operating activities |
| $ | 683 |
|
| $ | (1,713 | ) |
Cash flows used in investing activities |
| $ | (9,231 | ) |
| $ | (171 | ) |
Cash flows provided by financing activities |
| $ | 5,532 |
|
| $ | 2,604 |
|
For the six months ended March 31, 2017 For the six months ended March 31, 2016 Cash flows (used in) provided by operating activities Cash flows used in investing activities Cash flows (used in) provided by financing activities $ (281 ) $ 683 $ (536 ) $ (9,231 ) $ (149 ) $ 5,532
As of March 31, 2016,2017, the Company had cash and cash equivalents of approximately $2,916,$1,562,000, which was a decrease of approximately $3,016$966,000 from approximately $5,932$2,528,000 at September 30, 2015.2016. Working capital at March 31, 20162017 was approximately $(3,241),$1,390,000, as compared to negative working capital of approximately $5,636$(597,000) for September 30, 2015.2016. The cash has been used primarily innet loss for the acquisitions of several entities. Shareholders' equity atsix months ended March 31, 20162017, was approximately $22,028. At the Company's option, over $2,000 of its current liabilities related to the acquisitions can be paid in stock at market price, instead of cash.$(78,000).
Net cash used in and provided by and used in operating activities for the six months ended March 31, 20162017 and 20152016 was approximately $683$(281,000) and ($1,713),$683,000, respectively. The fluctuation is due to the significant increase in accounts receivable, decrease in accrued compensation and decrease in accounts payable for the six months ended March 31, 20162017 and offset by the reduction of accrued compensation and other current items. In addition to non-cash related expense for depreciation, amortization and stock compensation.
Net cash used in investing activities for the six months ended March 31, 20162017 and 20152016 was approximately ($9,231)536,000) and ($171)9,231,000), respectively. The primary use of cash was for payments to Access Sellers and the purchase of equipment for the six months ended March 31, 2017. The primary use of cash was for payments for acquisitions of Access and Paladin during the six months ended March 31, 2016.
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Net cash flowflows used in and provided by financing activities for the six months ended March 31, 20162017 was approximately $5,532$(149,000) compared to $2,604approximately $5,532,000 in the six months ended March 31, 2015.2016. Fluctuations in financing activities are attributable to the level of net borrowings of the secured revolving note and the proceeds of the subordinated debt.debt for the acquisitions. The Company received $1,000,000 related to the exercise of two related party warrants.
All of the Company's office facilities are leased. As of March 31, 2016,2017, future minimum lease payments under non-cancelable lease commitments having initial terms in excess ofmore than one year, including closed offices, totaled approximately $2,465.$2,357,000.
On January 8, 2015, the Company completed a securities offering with 18 individuals who collectively 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. 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,and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with approximately $1,000 used as working capitalPNC Bank, National Association (“PNC”), and the remaining $960 used for marketing, acquisitions, expansion and to further the operationscertain investment funds managed by MGG Investment Group LP (“MGG”), with an effective date 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.April 3, 2017.
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 of the Company's common stock, no par value (the "Common Stock"), at a price of $7.00 per share. Under the terms of the UnderwritingCredit Agreement, the Company granted the Representative an option, exercisable for 30 days, to purchasemay borrow up to $73,750,000 consisting of a four-year term loan in the principal amount of $48,750,000 and revolving loans in a maximum amount up to the lesser of (i) $25,000,000 or (ii) an additional 168,000 sharesamount determined pursuant to a borrowing base that is calculated based on the outstanding amount of Common Stock to cover over-allotments, if any.the Company’s eligible accounts receivable, as described in the Credit Agreement. The loans under the Credit Agreement mature on March 31, 2021.
The Company received net proceeds from this offering andAmounts borrowed under the overallotment, after deducting underwriting discounts and commissions and offering expenses payableCredit Agreement may be used by the Company of approximately $7.8 million and issued 1,246,000 common shares, this includes the Underwriters exerciseto repay existing indebtedness, to partially fund capital expenditures, to fund a portion of the over-allotment option.
The Company alsopurchase price for the acquisition of all of the issued warrantsand outstanding stock of SNI Holdco Inc. pursuant to that certain Agreement and Plan of Merger (the "Underwriter's Warrant"“Merger Agreement”) , to provide for on-going working capital needs and general corporate needs, and to fund future acquisitions subject to certain customary conditions of the Underwriters to purchase up to a total of 124,600 shares of Common Stock, at a price of $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 underlyinglenders. On the Underwriter's Warrant from theclosing date of the Underwriting Agreement.
On July 31, 2015,Credit Agreement, the Company entered into a Stock Purchase Agreement (the "Agile Agreement") with Tricia Dempsey. Pursuantborrowed $56,226,316.74 which was used by the Company to repay existing indebtedness, to pay fees and expenses relating to the termsCredit Agreement, and to pay a portion of the Agile Agreement on July 31, 2015purchase price for the Company acquired 100%acquisition of all of the outstanding stock of Agile Resources,SNI Holdco Inc., pursuant to the Merger Agreement.
The loans under the Credit Agreement will bear interest at rates at the Company’s option of LIBOR rate plus 10% or PNC’s floating base rate plus 9%. The Term Loans may consist of Domestic Rate Loans or LIBOR Rate Loans, or a Georgia corporation ("Agile")combination thereof.
The Credit Agreement 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.
The Term Loans were advanced on the Closing Date and are, with respect to principal, payable as follows, subject to acceleration upon the occurrence of an Event of Default under the Credit Agreement or termination of the Credit Agreement and provided that all unpaid principal, accrued and unpaid interest and all unpaid fees and expenses shall be due and payable in full on March 31, 2021. Principal payments are required as follows: Fiscal year 2017 - $609,000, Fiscal year 2018 – $5,789,000, Fiscal year 2019 – $6,094,000, Fiscal year 2020 – $6,398,000 and Fiscal year 2021 - $29,860,000.
The Credit Agreement contains certain covenants including the following:
Fixed Charge Coverage Ratio. The Company paid approximately $2,142shall cause to be maintained as of the last day of each fiscal quarter, a Fixed Charge Coverage Ratio for net assetsitself and its subsidiaries on a Consolidated Basis of not less the amount set forth in the Credit Agreement, which ranges from 1.10 to 1.0 to 1.40 to 1.0.
Minimum EBITDA. The Company shall cause to be maintained as of the last day of each fiscal quarter, EBITDA for itself and its subsidiaries on a Consolidated Basis of not less than the amount set forth in the Credit Agreement for each fiscal quarter specified therein, in each case, measured on a trailing four (4) quarter basis as set in the Credit Agreement, which ranges from $13,000,000 to $24,000,000 over the term of the Credit Agreement.
Senior Leverage Ratio. The Company shall cause to be maintained as of the last day of each fiscal quarter, a Senior Leverage Ratio for itself and its subsidiaries on a Consolidated Basis of not greater than the amount set forth in the Credit Agreement for each fiscal quarter, in each case, measured on a trailing four (4) quarter basis as set in the agreement, which ranges from 4.50 to 1.0 to 1.5 to 1.0 over the term of the Credit Agreement.
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In addition to these financial covenants, the Credit Agreement includes other restrictive covenants. The Credit Agreement permits capital expenditures up to a certain level, and contains customary default and acceleration provisions. The Credit Agreement also restricts, above certain levels, acquisitions, incurrence of additional indebtedness, and payment of dividends.
In connection with this Credit Agreement, the Company agreed to pay on original discount fee of approximately $92$901,300, a closing fee for the term loan of approximately $75,000 and expectsa closing fee for the revolving credit facility of approximately $500,000. In addition, the Company paid early termination fees of approximately $240,000 to pay an additional $500 duringACF FINCO I, LP in connection with the year ended September 30, 2016.refinancing of its indebtedness to ACF FINCO I, LP.
The Company believes that the borrowing availability under the new PNC Credit Agreement will be adequate to fund its working capital needs.
On October 2, 2015, the Company issued and sold a subordinated note in the aggregate principal amount of $4,185$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 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 ($566)566,000), was paid in advance on the issuance date of the Subordinated Note through the issuance to the Investor of 91,309approximately 91,000 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, 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,April 3, 2017, the Company enteredand Jax amended and restated the Subordinated Note in its entirety in the form of the 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4,185,000. The 10% Note matures on October 3, 2021 (the “Maturity Date”). The 10% Note is convertible into an eighth Amendment and Waivershares of the Company’s Common Stock at a conversion price equal to $5.83 per share (subject to adjustment as provided in the 10% Note upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”). The 10% Note is subordinated in payment to the Loanobligations of the Company to the lenders parties to the Credit Agreement, pursuant to a Subordination and Security Agreement with ACFIntercreditor Agreements, dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and Jax. The 10% Note issued to increase the maximum amount of revolving creditJax is not registered under the Amended Credit AgreementSecurities Act of 1933, as amended (the “Securities Act”). Jax is an accredited investor. The issuance of the 10% Note to Jax is exempt from $6,000 to $10,000.the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.
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.$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$57,000 in principal and interest, (ii) on October 4, 2016 a balloon payment of principal of $1,000,$1,000,000, (iii) for the next twelve months commencing on November 4, 2016 and ending on October 4, 2017, a monthly payment of $28$28,000 in principal and interest, (iv) on October 4, 2017 a balloon payment of principal of $1,202$1,202,000 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.Sellers of Access Data Consulting Corporation. The Company is current on all payments of this loan.
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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 equity offerings, issued debt and the availability under the ACF facility,PNC Credit Agreement, the Company will have sufficient liquidity for the next 12 months.
Off-Balance Sheet Arrangements
As of March 31, 2016,2017, 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.
Disclosure Controls and Procedures
As of March 31, 2016,2017, the Company's management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of the Company'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"). Based on that evaluation, the Company's principal executive officer and its principal financial officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2016.2017.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting or in any other factors that could significantly affect these controls, during the Company's second quarter ended March 31, 2016,2017, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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As of March 31, 2016,2017, there were no material legal proceedings pending against the Company.
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. |
None.Not required.
None.
Not Applicable
None.
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The following exhibits are filed as a part of Part I of this report:
No. | Description of Exhibit | |
101.INS | Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
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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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.
| |||
(Registrant) | |||
Date: May | By: | /s/ Derek Dewan | |
Derek Dewan | |||
Chief Executive Officer | |||
(Principal Executive Officer) | |||
By: | /s/ Andrew J. Norstrud | ||
Andrew J. Norstrud | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
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