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 |
For the quarterly period ended June 30, 2019For the quarterly period ended December 31, 2017
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-05707
GEE GROUP INC. (Exact name of registrant as specified in its charter)
Illinois | 36-6097429 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
184 Shuman Blvd.,7751 Belfort Parkway, Suite 420, Naperville, IL 60563150, Jacksonville, FL 32256
(Address of principal executive offices)
(630) 954-0400
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | JOB | NYSE American |
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 accelerated filer,” “accelerated filer” and “smaller reporting 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’s common stock as of February 14, 2018August 8, 2019 was 10,444,56712,538,411.
GEE GROUP INC.
Form 10-Q
For the Quarter Ended December 31, 2017June 30, 2019
3 |
4 | ||||
Condensed Consolidated Balance Sheets | 4 | |||
5 | ||||
6 | ||||
7 | ||||
| 8 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 28 | ||
| 40 | |||
| 40 |
| 41 | |||
| 41 | |||
| 41 | |||
| 41 | |||
| 41 | |||
| 41 | |||
| 42 | |||
| 43 |
2 |
Table of Contents |
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 reportAnnual Report on Form 10-K for the year ended September 30, 2017,2018, 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 |
PARTPart I – FINANCIAL-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.STATEMENTS (unaudited)
GEE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands)
|
|
|
| December 31, |
|
| September 30, |
| ||
|
|
|
| 2017 |
|
| 2017 |
| ||
|
|
|
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
|
| ||||
| CURRENT ASSETS: |
|
|
|
|
|
| |||
|
| Cash |
| $ | 3,480 |
|
| $ | 2,785 |
|
|
| Accounts receivable, less allowances (December - $1,659 and September - $1,712) |
|
| 22,669 |
|
|
| 23,178 |
|
|
| Other current assets |
|
| 1,399 |
|
|
| 3,014 |
|
|
| Total current assets |
|
| 27,548 |
|
|
| 28,977 |
|
|
| Property and equipment, net |
|
| 945 |
|
|
| 914 |
|
|
| Other long-term assets |
|
| 282 |
|
|
| 282 |
|
|
| Goodwill |
|
| 76,593 |
|
|
| 76,593 |
|
|
| Intangible assets, net |
|
| 33,653 |
|
|
| 35,049 |
|
| TOTAL ASSETS |
| $ | 139,021 |
|
| $ | 141,815 |
| |
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
| ||
| CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| |
|
| Revolving credit facility |
| $ | 10,000 |
|
| $ | 7,904 |
|
|
| Acquisition deposit for working capital guarantee |
|
| 1,500 |
|
|
| 1,500 |
|
|
| Accrued interest |
|
| 1,995 |
|
|
| 2,175 |
|
|
| Accounts payable |
|
| 2,073 |
|
|
| 3,243 |
|
|
| Accrued compensation |
|
| 6,127 |
|
|
| 7,394 |
|
|
| Other current liabilities |
|
| 223 |
|
|
| 515 |
|
|
| Short-term portion of subordinated debt |
|
| 1,013 |
|
|
| 1,225 |
|
|
| Short-term portion of term-note, net of discount |
|
| 3,987 |
|
|
| 3,433 |
|
|
| Total current liabilities |
|
| 26,918 |
|
|
| 27,389 |
|
|
| Deferred rent |
|
| 120 |
|
|
| 334 |
|
|
| Deferred taxes |
|
| 930 |
|
|
| 958 |
|
|
| Term-loan, net of debt discounts |
|
| 40,844 |
|
|
| 42,018 |
|
|
| Subordinated debt |
|
| 1,000 |
|
|
| 1,000 |
|
|
| Subordinated convertible debt |
|
| 16,685 |
|
|
| 16,685 |
|
|
| Other long-term liabilities |
|
| 31 |
|
|
| 35 |
|
|
| Total long-term liabilities |
|
| 59,610 |
|
|
| 61,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEZZANINE EQUITY |
|
|
|
|
|
|
|
| ||
| Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - 5,926 |
|
|
|
|
|
|
|
| |
|
| Preferred series A stock - 160 authorized; issued and outstanding - none |
|
| - |
|
|
| - |
|
|
| Preferred series B stock - 5,950 authorized; issued and outstanding - 5,926 |
|
|
|
|
|
|
|
|
|
| Liquidation value of the preferred series B stock is approximately $28,800 |
|
| 29,333 |
|
|
| 29,333 |
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
| ||
| Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 10,015 |
|
|
|
|
|
|
|
| |
|
| shares at December 31, 2017 and 9,879 shares at September 30, 2017, respectively |
|
| - |
|
|
| - |
|
| Additional paid in capital |
|
| 40,405 |
|
|
| 39,517 |
| |
| Accumulated deficit |
|
| (17,245 | ) |
|
| (15,454 | ) | |
|
| Total shareholders' equity |
|
| 23,160 |
|
|
| 24,063 |
|
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
| $ | 139,021 |
|
| $ | 141,815 |
|
June 30, 2019 September 30, 2018 ASSETS CURRENT ASSETS: Cash Accounts receivable, less allowances ($302 and $302, respectively) Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Other long-term assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued compensation Acquisition deposit for working capital guarantee Short-term portion of subordinated debt Short-term portion of term loan, net of discount Other current liabilities Total current liabilities Deferred taxes Revolving credit facility Term loan, net of discount Subordinated convertible debt (includes $1,195, net of discount, due to related parties) Other long-term liabilities Total long-term liabilities Commitments and contingencies MEZZANINE EQUITY Preferred stock; no par value; authorized - 20,000 shares - Preferred series A stock; authorized -160 shares; issued and outstanding - none Preferred series B stock; authorized - 5,950 shares; issued and outstanding - 5,566 and 5,816 at June 30, 2019 and September 30, 2018, respectively; liquidation value of the preferred series B stock is approximately $27,050 and $28,255 at June 30, 2019 and September 30, 2018, respectively Preferred series C stock; authorized - 3,000 shares; issued and outstanding - 20 and 0 at June 30, 2019 and September 30, 2018, respectively; liquidation value of the preferred series C stock is approximately $20 and $0 at June 30, 2019 and September 30, 2018, respectively Total mezzanine equity SHAREHOLDERS' EQUITY Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 12,054 shares at June 30, 2019 and 10,783 shares at September 30, 2018, respectively Additional paid in capital Accumulated deficit Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,163 $ 3,213 20,437 20,755 2,756 2,266 27,356 26,234 832 891 72,293 76,593 25,277 29,467 588 416 $ 126,346 $ 133,601 $ 9,100 $ 7,735 883 883 1,000 106 2,931 2,331 2,027 2,064 15,941 13,119 542 146 13,865 11,925 38,064 40,253 17,880 17,685 613 583 70,964 70,592 - - 27,551 28,788 20 - 27,571 28,788 - - 49,064 44,120 (37,194 ) (23,018 ) 11,870 21,102 $ 126,346 $ 133,601
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4 |
Table of Contents |
GEE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In Thousands, Except Per Share Data)Thousands)
|
| Three Months Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
|
|
|
|
|
| ||
NET REVENUES: |
|
|
|
|
|
| ||
Contract staffing services |
| $ | 39,461 |
|
| $ | 19,856 |
|
Direct hire placement services |
|
| 5,771 |
|
|
| 1,150 |
|
NET REVENUES |
|
| 45,232 |
|
|
| 21,006 |
|
|
|
|
|
|
|
|
|
|
Cost of contract services |
|
| 29,458 |
|
|
| 15,563 |
|
GROSS PROFIT |
|
| 15,774 |
|
|
| 5,443 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 12,766 |
|
|
| 4,495 |
|
Acquisition, integration and restructuring expenses |
|
| 40 |
|
|
| 23 |
|
Depreciation expense |
|
| 97 |
|
|
| 79 |
|
Amortization of intangible assets |
|
| 1,396 |
|
|
| 369 |
|
INCOME FROM OPERATIONS |
|
| 1,475 |
|
|
| 477 |
|
Interest expense |
|
| (3,294 | ) |
|
| (360 | ) |
INCOME (LOSS) BEFORE INCOME TAX PROVISION |
|
| (1,819 | ) |
|
| 117 |
|
Provision for income tax |
|
| 28 |
|
|
| (66 | ) |
NET INCOME (LOSS) |
| $ | (1,791 | ) |
| $ | 51 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS |
| $ | (1,791 | ) |
| $ | 51 |
|
|
|
|
|
|
|
|
|
|
BASIC INCOME (LOSS) PER SHARE |
| $ | (0.18 | ) |
| $ | 0.01 |
|
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC |
|
| 9,905 |
|
|
| 9,379 |
|
DILUTED INCOME (LOSS) PER SHARE |
| $ | (0.18 | ) |
| $ | 0.01 |
|
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED |
|
| 9,905 |
|
|
| 9,925 |
|
Three Months Ended Nine Months Ended June 30, June 30, 2019 2018 2019 2018 NET REVENUES: Contract staffing services Direct hire placement services NET REVENUES Cost of contract services GROSS PROFIT Selling, general and administrative expenses (including noncash stock-based compensation expense of $531 and $399, and $1,661 and $1,028 respectively) Acquisition, integration and restructuring expenses Depreciation expense Amortization of intangible assets Goodwill impairment charge INCOME (LOSS) FROM OPERATIONS Interest expense LOSS BEFORE INCOME TAX PROVISION Provision for income tax NET LOSS NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS BASIC AND DILUTED LOSS PER SHARE WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED $ 33,217 $ 33,879 $ 99,057 $ 107,860 4,884 6,388 13,764 17,496 38,101 40,267 112,821 125,356 24,521 25,546 74,093 81,235 13,580 14,721 38,728 44,121 10,995 12,111 31,547 35,839 564 514 2,990 1,712 89 92 269 287 1,396 1,409 4,189 4,199 4,300 - 4,300 - (3,764 ) 595 (4,567 ) 2,084 (3,176 ) (2,889 ) (9,209 ) (8,381 ) (6,940 ) (2,294 ) (13,776 ) (6,297 ) 106 407 (400 ) (259 ) $ (6,834 ) $ (1,887 ) $ (14,176 ) $ (6,556 ) $ (6,834 ) $ (1,887 ) $ (14,176 ) $ (6,556 ) $ (0.57 ) $ (0.18 ) $ (1.22 ) $ (0.64 ) 12,041 10,526 11,609 10,177
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5 |
Table of Contents |
GEE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY (unaudited)
(In Thousands)
|
|
|
|
|
|
|
|
|
| Total |
| |||||
|
| Common Stock |
|
| Additional Paid |
|
| Accumulated |
|
| Shareholders' |
| ||||
|
| Shares |
|
| In Capital |
|
| Deficit |
|
| Equity |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, September 30, 2016 |
|
| 9,379 |
|
| $ | 37,615 |
|
| $ | (13,082 | ) |
| $ | 24,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock option expense |
|
| - |
|
|
| 902 |
|
|
| - |
|
|
| 902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock warrants |
|
| 500 |
|
|
| 1,000 |
|
|
| - |
|
|
| 1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
|
| - |
|
|
| (2,372 | ) |
|
| (2,372 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017 |
|
| 9,879 |
|
|
| 39,517 |
|
|
| (15,454 | ) |
|
| 24,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock option expense |
|
| - |
|
|
| 293 |
|
|
| - |
|
|
| 293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for interest |
|
| 136 |
|
|
| 595 |
|
|
| - |
|
|
| 595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
|
| - |
|
|
| (1,791 | ) |
|
| (1,791 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017 |
|
| 10,015 |
|
| $ | 40,405 |
|
| $ | (17,245 | ) |
| $ | 23,160 |
|
Common Additional Total Stock Paid Accumulated Shareholders' Shares In Capital Deficit Equity Balance, September 30, 2018 Share-based compensation Issuance of stock for interest Conversion of preferred Series B to common stock Net loss Balance, December 31, 2018 Share-based compensation Issuance of stock for interest Net loss Balance, March 31, 2019 Share-based compensation Issuance of stock for interest Beneficial conversion features on subordinated debt Net loss Balance, June 30, 2019 10,783 $ 44,120 $ (23,018 ) $ 21,102 - 581 - 581 171 401 - 401 250 1,238 - 1,238 - - (3,452 ) (3,452 ) 11,204 $ 46,340 $ (26,470 ) $ 19,870 - 549 - 549 517 402 - 402 - - (3,890 ) (3,890 ) 11,721 $ 47,291 $ (30,360 ) $ 16,931 - 531 - 531 333 401 - 401 - 841 - 841 - - (6,834 ) (6,834 ) 12,054 $ 49,064 $ (37,194 ) $ 11,870
Common Additional Total Stock Paid Accumulated Shareholders' Shares In Capital Deficit Equity Balance, September 30, 2017 Share-based compensation Issuance of stock for interest Net loss Balance, December 31, 2017 Share-based compensation Issuance of stock for interest Conversion of preferred Series B to common stock Net loss Balance, March 31, 2018 Share-based compensation Issuance of stock for interest Net loss Balance, June 30, 2018 9,879 $ 39,517 $ (15,454 ) $ 24,063 - 293 - 293 136 595 - 595 - - (1,791 ) (1,791 ) 10,015 $ 40,405 $ (17,245 ) $ 23,160 - 336 - 336 321 999 - 999 110 545 - 545 - - (2,878 ) (2,878 ) 10,446 $ 42,285 $ (20,123 ) $ 22,162 - 399 - 399 163 401 - 401 - - (1,887 ) (1,887 ) 10,609 $ 43,085 $ (22,010 ) $ 21,075
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6 |
Table of Contents |
GEE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In Thousands)
|
| Three Months Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
|
|
|
|
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
| ||
Net (loss) income |
| $ | (1,791 | ) |
| $ | 51 |
|
Adjustments to reconcile (net loss) net income to cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,493 |
|
|
| 448 |
|
Stock option expense |
|
| 293 |
|
|
| 194 |
|
Provision for doubtful accounts |
|
| (53 | ) |
|
| - |
|
Amortization of debt discount and non cash extinguishment of debt |
|
| 192 |
|
|
| 54 |
|
Changes in operating assets and liabilities - |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 562 |
|
|
| (1,008 | ) |
Accrued interest |
|
| (178 | ) |
|
| - |
|
Accounts payable |
|
| (577 | ) |
|
| (666 | ) |
Accrued compensation |
|
| (1,267 | ) |
|
| (262 | ) |
Other current items, net |
|
| 1,295 |
|
|
| 476 |
|
Long-term liabilities |
|
| (218 | ) |
|
| 17 |
|
Net cash used in operating activities |
|
| (249 | ) |
|
| (696 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
| (128 | ) |
|
| (17 | ) |
Acquisition payments, net of cash acquired |
|
| - |
|
|
| (50 | ) |
Net cash used in investing activities |
|
| (128 | ) |
|
| (67 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Payments on the debt related to acquisitions |
|
| (212 | ) |
|
| (1,089 | ) |
Payments on senior debt |
|
| (812 | ) |
|
| - |
|
Payments on capital lease |
|
| - |
|
|
| (5 | ) |
Net proceeds from revolving credit |
|
| 2,096 |
|
|
| 1,522 |
|
Net cash provided by financing activities |
|
| 1,072 |
|
|
| 428 |
|
|
|
|
|
|
|
|
|
|
Net change in cash |
|
| 695 |
|
|
| (335 | ) |
|
|
|
|
|
|
|
|
|
Cash at beginning of period |
|
| 2,785 |
|
|
| 2,528 |
|
|
|
|
|
|
|
|
|
|
Cash at end of period |
| $ | 3,480 |
|
| $ | 2,193 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 2,699 |
|
| $ | 294 |
|
Cash paid for taxes |
| $ | - |
|
| $ | - |
|
Non-cash financing activities |
|
|
|
|
|
|
|
|
Stock paid for interest on subordinated notes |
| $ | 210 |
|
| $ | - |
|
Stock paid for fees in connection with subordinated note |
| $ | 385 |
|
| $ | - |
|
Nine Months Ended June 30, 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to cash (used in) provided by operating activities: Depreciation and amortization Goodwill impairment charge Stock Compensation expense Provision for doubtful accounts Deferred income taxes Amortization of debt discount Interest expense paid with common and preferred stock Changes in operating assets and liabilities: Accounts receivable Accrued interest Accounts payable Accrued compensation Other current items, net Long-term items, net Net cash (used in) provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Payment on term loan Payments on subordinated debt Payments on capital lease Net proceeds from revolving credit Net proceeds from subordinate note Net cash provided by (used in) 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 Series B Convertible Preferred Stock to common stock Beneficial conversion features on subordinated debt Issuance of stock for extinguishment of debt Acquisition of equipment with capital lease $ (14,176 ) $ (6,556 ) 4,458 4,486 4,300 - 1,661 1,028 - (815 ) 396 290 634 576 1,224 1,610 318 2,827 - 1,332 1,390 (1,213 ) (25 ) (2,206 ) (531 ) (594 ) (200 ) (67 ) (551 ) 698 (108 ) (224 ) (108 ) (224 ) (2,187 ) (2,112 ) (107 ) (806 ) (37 ) - 1,940 2,296 2,000 - 1,609 (622 ) 950 (148 ) 3,213 2,785 $ 4,163 $ 2,637 $ 7,373 $ 6,435 $ 75 $ - $ 1,238 $ 545 $ 841 $ - $ - $ 385 $ 102 $ -
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Description of Business
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 assistantindustrial staffing and placement services in and near several major U.S cities. We specialize in the placement of information technology, accounting, finance, office, engineering, medical and accountingmedical professionals for direct hire and contract staffing for our clients and provide temporary staffing services for our commercial clients.
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 footnotesnotes 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-monththree and nine-month period ended December 31, 2017June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.2019. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotesnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 20172018 as filed on December 28, 2017.27, 2018.
Liquidity
The Company has experienced significant net losses and negative cash flows from operations in the past. Management has implemented a strategy which includes 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.
After the close of business on March 31, 2017, the Company andfor 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 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.
On October 2, 2017, the Company, the other borrower entities and guarantor entities named therein (collectively, the “Loan Parties”), PNC, and certain investment funds managed by MGG (collectively the “Lenders”) entered into a First Amendment and Waiver (the “Amendment”) to the Revolving Credit, Term Loan and Security Agreement dated as of March 31, 2017 (the “Credit Agreement”) by and among the Loan Parties and the Lenders.
The Amendment, which was effective as of October 2, 2017, modified the required principal repayment schedule with respect to the Term Loans. The Amendment also modified the ability of the Loan Parties to repay or make other payments with respect to certain other loans that are subordinated in right of payment to the indebtedness under the Credit Agreement.
Pursuant to the Amendment the Lenders also waived any Event of Default arising out of the Loan Parties’ failure to deliver, on or before October 3, 2017, the materials satisfying the requirements of clauses (i) and (ii) of Section 5 of the Waiver to Revolving Credit, Term Loan and Security Agreement, dated as of August 14, 2017, as amended.
On November 14, 2017, the Company and its subsidiaries, as Borrowers, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto (together with each other Person joined thereto as a guarantor from time to time, collectively, the “Guarantors”, and each a “Guarantor”, and together with the Borrowers, collectively, the “Loan Parties” and each a “Loan Party”), certain lenders which now are or which thereafter become a party thereto that make Revolving Advances thereunder (together with their respective successors and assigns, collectively, the “Revolving Lenders” and each a “Revolving Lender”), the lenders which now are or which thereafter become a party thereto that made or acquire an interest in the Term Loans (together with their respective successors and assigns, collectively, the “Term Loan Lenders” and each a “Term Loan Lender”, and together with the Revolving Lenders, collectively, the “Lenders” and each a “Lender”), MGG, as administrative agent for the Lenders (together with its successors and assigns, in such capacity, the “Administrative Agent”), as collateral agent for the Lenders (together with its successors and assigns, in such capacity, the “Collateral Agent”), and as term loan agent (together with its successors and assigns, in such capacity, the “Term Loan Agent” and together with the Administrative Agent and the Collateral Agent, each an “Agent” and, collectively, the “Agents”), entered into a second amendment (the “Second Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”).
Pursuant to the Second Amendment the Borrowers agreed, among other things, to use commercially reasonable efforts to prepay, or cause to be prepaid, $10,000,000 in principal amount of Advances (as defined in the Credit Agreement) outstanding, which amount shall be applied to prepay the Term Loans in accordance with the applicable terms of the Credit Agreement. Any prepayment to the term loan is contingent upon a future financing, non-operational cash flow or excess cash flow as defined in the agreement. The Borrowers also agreed to amend (i) the applicable minimum Fixed Charge Coverage Ratios required to be maintained by the Company as set forth in the Second Amendment, (ii) the minimum EBITDA required to be maintained by the Company, as set forth in the Second Amendment and (iii) the maximum senior leverage ratios required to be maintained by the Company, as set forth in the Second Amendment. The Borrowers agreed to pay to the Administrative Agent for the account of the Revolving Lenders, an amendment fee of $364,140, in connection with their execution and delivery of the Second Amendment. Such fee is payable on the earlier of (a) Junemost recent fiscal year ended September 30, 2018, and (b) the first date on which all of the Obligations (as defined in the Credit Agreement) are paid in full in cash and the Total Commitment (as defined in the Credit Agreement) of the Lenders is terminated.
The loans under the credit agreement for the nine-month period commencing on the Amendment No. 2 Effective Date up to and including May 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.75 to 1.00, an amount equal to 9.75% for Advances consisting of Domestic Rate Loans and 10.75% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.75 to 1.00, an amount equal to 9.00% for Advances consisting of Domestic Rate Loans and 10.00% for Advances consisting of LIBOR Rate Loans.
The loans under the credit agreement for the period commencing onended June 1, 2018 up to and including August 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 4.00 to 1.00, an amount equal to 14.00% for Advances consisting of Domestic Rate Loans and 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 4.00 to 1.00, an amount equal to 9.75% for Advances consisting of Domestic Rate Loans and 10.75% for Advances consisting of LIBOR Rate Loans.
The loans under the credit agreement for the period commencing on September 1, 2018 through the remainder of the Term, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.50 to 1.00, an amount equal to 14.00% for Advances consisting of Domestic Rate Loans and 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.50 to 1.00, an amount equal to 9.00% for Advances consisting of Domestic Rate Loans and 10.00% for Advances consisting of LIBOR Rate Loans.
At December 31, 2017, approximately $8,000,000 of the Revolving Credit facility was fixed for a three-month period at an interest of approximately 11.3%.
At December 31, 2017, the Company had approximately $5,800,000 available on the Revolving Credit facility.
The Company was in compliance with the newly amended financial covenants of the loan for December 31, 2017, the first measurement date under the Amendment.
As of December 31, 2017,June 30, 2019, the Company had cash of approximately $3,480,000,$4.2 million, which was an increase of approximately $695,000$1.0 million from approximately $2,785,000$3.2 million at September 30, 2017.2018. Working capital at December 31, 2017June 30, 2019 was approximately $630,000,$11.4 million, as compared to working capital of approximately $1,588,000$13.1 million for September 30, 2017. The net loss for the three months ended December 31, 2017, was approximately $1,791,000.
At December 31, 2017 there was approximately $999,000 of accrued interest that was payable with the Company’s common stock.
On January 4, 2018, the Company issued approximately 41,000 shares of common stock to JAX Legacy related to the accrued interest of approximately $105,000 on the subordinated note.
On January 4, 2018, the Company issued approximately 280,602 shares of common stock to the SNI Sellers related to accrued interest of approximately $894,000 on the subordinated note.2018.
Management believeshas taken definitive actions to improve operations, reduce costs and improve profitability, and position the Company for future growth. In addition, the Company’s senior lenders have worked with management in providing amendments and waivers to the Company’s senior credit facilities as management works towards improving the Company’s operations and restructuring its current debt and equity capitalization.
Based on its current projections, management expects that the Company can meet its future cash flowdebt service requirements and comply with its financial covenants and other commitments, as amended, and will continue to seek reasonable assistance from operationsthe Company’s senior lenders, as necessary. However, the Company’s projections are based on assumptions and estimates about future performance and events, which are subject to change or other unforeseen conditions or uncertainties. As such, there can be no assurance that the availability underCompany will not fall into non-compliance with its loan covenants or that its Lenders will continue to provide waivers or amendments to the Revolving Credit Facility will have sufficient liquidity forCompany in the next 12 months.event of future non-compliance with debt covenants or other possible events of default that could happen in the future.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation.
Estimates and Assumptions
Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the unaudited condensed consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates. If differences were to occur in a subsequent period, the Company would recognize those differences when they became known. Significant matters requiring the use of estimates and assumptions include, but may not be limited to, deferred income tax valuation allowances, accounts receivable allowances, accounting for acquisitions, accounting for derivatives 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.
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Revenue Recognition
Revenues from contracts with customers are generated through the following services: direct hire placement services, temporary professional services staffing, and temporary light industrial staffing. Revenues are recognized when promised services are performed for customers, and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Our revenues are recorded net of variable consideration such as sales adjustments or allowances.
Direct hire placement service revenues from contracts with customers are recognized when applicantsemployment candidates accept offers of employment, less a provision for estimated losses duecredits or refunds to customers as the result of applicants not remaining employed for the entirety of the Company's guarantee period. Contractperiod (referred to as “falloffs”). The Company’s guarantee periods for permanently placed employees generally range from 60 to 90 days from the date of hire. Fees associated with candidate placement are generally calculated as a percentage of the new employee’s annual compensation. No fees for permanent placement services are charged to employment candidates.
Temporary staffing service revenues from contracts with customers are recognized whenin amounts for which the Company has a right to invoice, as the services are rendered.rendered by the Company’s temporary employees. The Company records temporary staffing revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company controls the specified service before that service is performed for a customer. The Company has the risk of identifying and hiring qualified employees, has the discretion to select the employees and establish their price, and bears the risk for services that are not fully paid for by customers.
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 $625,000$0.5 million and $90,000$0.6 million, and $1.9 million and $1.6 million for the three-month periodthree and nine-month periods ended December 31, 2017June 30, 2019 and 20162018, respectively. Expected future falloffs and refunds are reflected in the unaudited condensed consolidated balance sheet as a reduction of accounts receivable as described under Accounts Receivable, below.
See Note 13 for disaggregated revenues by segment.
Payment terms in our contracts vary by the type and were approximately $911,000 aslocation of December 31, 2017our customer and $997,000 as of September 30, 2017, respectively.the services offered. The terms between invoicing and when payments are due are not significant.
Cost of Contract Staffing Services
The cost of contract services includes the wages and the related payroll taxes, and employee benefits and certain other employee-related costs of the Company'sCompany’s contract service 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 December 31, 2017As of June 30, 2019 and September 30, 2017,2018, 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.
Accounts Receivable
The Company extends credit to its various customers based on evaluation of the customer'scustomer’s financial condition and ability to pay the Company in accordance with the payment terms. An allowance for placement fall-offs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company'sCompany’s guarantee period. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect management'smanagement’s estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers. The nature of the contract service business, where companies are dependent on employees for the production cycle allows for a relatively small accounts receivable allowance. Based on management's reviewAs of accounts receivable, aneach of June 30, 2019, and September 30, 2018, the allowance for doubtful accounts of approximately $1,659,000 is considered necessary as of December 31, 2017 and $1,712,000 at September 30, 2017, respectively.was $0.3 million. The Company charges off uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The reserveallowance also includes the $911,000 reserve for permanent placement falloffs considered necessaryof $0.2 million as of December 31, 2017June 30, 2019 and $997,000 as of September 30, 2017, respectively.2018.
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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 three-monthsnine-month period ended December 31, 2017June 30, 2019 and 2016.2018.
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 allowsIn 2019, the Company to first assess qualitative factors to determine whetherearly adopted ASU 2017-04, Intangibles — Goodwill and Other (Topic 350), Simplifying the existenceTest for Goodwill Impairment, which simplifies the subsequent measurement of eventsgoodwill by eliminating the second step from the quantitative goodwill impairment test. Under this guidance, annual or circumstances leads to a determination that itinterim goodwill impairment testing is more likely than not thatperformed by comparing the fair value of a reporting unit is less thanwith 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 becharge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to the extentexceed the carrying value of goodwill.
Due to a sustained decline in the market capitalization of our common stock during the third quarter of 2019, we performed an interim goodwill exceeds its impliedimpairment test in accordance with the provisions of ASU 2017-04. The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $4.3 million, which was recorded in the consolidated financial statements for the three and nine-month periods ended June 30, 2019. For purposes of performing this interim goodwill impairment assessment, management mainly considered recent trends in the Company’s stock price, estimated control or acquisition premium, and related matters, including other possible factors affecting the recent declines in the Company’s stock price and their effects on estimated fair value.value of the Company’s reporting units.
Fair Value Measurement
The Company follows the provisions of the accounting standardFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement”, which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price"“exit price”) in an orderly transaction between market participants at the measurement date.
The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use onof unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company'sCompany’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
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The fair value of the Company’s current assets and current liabilities approximate their carrying values due to their short-term nature. The carryingfair value disclosures of the Company’s long-term liabilities represents theirapproximates the fair value based on level 3 inputs.current yield for debt instruments with similar terms. The Company’s goodwill and other intangible assets are measured at fair value on a non-recurring basis using levelLevel 3 inputs, as discussed in Note 5.
Earnings and 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 and preferred stock 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 share equivalents of approximately 546,118 was included in the computation of diluted earnings per share for the three months ended December 31, 2016. There were approximately 10,274,000 and 475,100 of common stock equivalents, which are excluded for the three months ended December 31, 2017 and December 31, 2016, respectively because their effect is anti-dilutive.anti-dilutive, were 13.7 million and 12.4 million for the three and nine-month period ended June 30, 2019 and 10.5 million and 10.9 million for the three and nine-month period ended June 30, 2018, respectively.
Advertising Expenses
MostThe Company expenses the costs of the Company's advertising expense budget is used to support the Company's business. Most of the advertisements are in print orand internet media with expenses recordedadvertising and promotions as they are incurred. For the three months ended December 31, 2017incurred and 2016, includedreports these costs in selling, general and administrative expenses wasexpenses. For the three and nine-month periods ended June 30, 2019 and 2018, advertising expense totaling approximately $599,000totaled $0.6 and $288,000,$1.7 million each, respectively.
Intangible Assets
CustomerSeparately identifiable intangible assets held in the form of 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 recordsrecognizes 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 recognize and record any impairmentimpairments of long-lived assets used in operations, other than goodwill during the three monthsnine-month period ended December 31, 2017June 30, 2019 and 2016.2018.
Beneficial Conversion Feature
The Company evaluates embedded conversion features within a convertible instrument under ASC 815 Derivatives and Hedging to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require treatment under ASC 815, the instrument is evaluated under ASC 470-20 Debt with Conversion and Other Options for consideration of any beneficial feature.
The Company records a beneficial conversion feature (“BCF”) when the convertible instrument is issued with conversion features at fixed or adjustable rates that are below market value when issued. The BCF for convertible instruments is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible. If certain other securities are issued with the convertible security, the proceeds are allocated among the different components. The portion of the proceeds allocated to the convertible security is divided by the contractual number of the conversion shares to determine the effective conversion price, which is used to measure the BCF. The effective conversion price is used to compute the intrinsic value. The value of the BCF is limited to the basis that is initially allocated to the convertible security.
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The BCF for the convertible instrument is recorded as a reduction, or discount, to the carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized as interest or deemed dividends over the period from the date of the convertible instrument’s issuance to the earliest redemption date, provided that the convertible instrument is not currently redeemable but probable of becoming redeemable in the future.
Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with applicable accounting principles,FASB ASC 718, “Compensation-Stock Compensation”, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”("Black-Scholes") pricing model. For all employee stock options, we recognize expense over the requisite service period on an accelerated basis over the employee’semployee's requisite service period (generally the vesting period of the equity grant). The Company’sCompany's option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with applicable accounting principles.FASB ASC 718, “Compensation-Stock Compensation”. Such options are valued using the Black-Scholes option pricing model.
See Note 9 for the assumptions used to calculate the fair value of stock-based employee and non-employee compensation. Upon the exercise of options, it is the Company's policy to issue new shares rather than utilizing treasury shares.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
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We recognize and group interest and penalties, related to unrecognized tax benefits on theif any, with income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2017June 30, 2019 and September 30, 2017,2018, no material accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
Reclassification
Certain reclassifications have been made to the financial statements as of and for the three months ended December 31, 2016 to conform to the current year presentation. There is no effect on assets, liabilities, equity or net income.
Segment Data
The Company provides the following distinctive services: (a) direct hire placement services, and (b) temporary professional contract services staffing in the fields of information technology, engineering, medical, and accounting, and (c) temporary contract light industrial staffing. These distinctThe Company’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Selling, general and administrative expenses are not completely separatelyentirely allocated among light industrial servicesIndustrial and professional staffing services.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 thesethe Company’s operating segments.
3. Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace mostsuperseded the existing revenue recognition guidance inunder U.S. GAAP when it becomes effective.GAAP. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. This ASU permits the use of either the retrospective or cumulative effect transition method. The new standard is effective forwas adopted by the Company beginningunder the modified retrospective approach effective October 1, 2018. 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 authoritative guidance which changes how deferred taxes are classified onstandard did not have a company’s balance sheet. The new guidance eliminates the current requirement for companies to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, companies will be required to classify all deferred tax assets and liabilities as noncurrent. The new guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted 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 required to include 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 to have an effect on its financial statements. The adoption of this guidance had no material effectimpact on the Company as of December 31, 2017.Company’s financial statements.
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.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”)No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-09 simplifies several aspects of the2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor 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.largely unchanged. The adoption of this guidance had no effect on the Company as of December 31, 2017.
In August 2016, the FASB issued authoritative guidance designed to address diversity in how certain cash receipts and cash payments are presented and classifiedamendment 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 isASU are effective for the Company for fiscal years beginning after December 15, 2017,2018 and interim periods within those fiscal years. Early adoptionapplication is permitted in any interimfor all entities. ASU 2016-02 requires a modified retrospective approach for all eases existing at, or annual period. The Company believesentered into after, the adoptiondate of this guidance will not have a material impact on its financial statements.
initial application, with an option to elect to use certain transition relief. In January 2017,July 2018, the FASB issued ASU 2017-01, Business CombinationsNo. 2018-10, “Codification of Improvement to Topic 842 Leases.” The amendments in ASU 2018-10 clarify, correct or remove inconsistencies in the guidance provided under ASU 2016-02 related to sixteen specific issues identified. Also, in July 2018, the FASB issued ASU No. 2018-11 “Leases (Topic 805)842): ClarifyingTargeted Improvement” which now allows entities the Definitionoption of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior period under previous lease accounting guidance. The effective date and transition requirement for these two ASUs are the same as the effective date and transition requirement as ASU 2016-02. While the Company continues to assess all potential impacts of the standard, the Company currently believes the most significant impact relates to recording right-to-use assets and related operating lease liabilities on the condensed consolidated balance sheets.
In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a Business, which clarifies the definition ofgrantor acquires goods or services to be used or consumed in a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.grantor’s own operations by issuing share-based payment awards. The standard will be effective for the Company in the first quarter of 2019. Earlyfiscal year 2020, although early adoption is permitted.permitted (but no sooner than the adoption of Topic 606). The Company is currently evaluating the impacteffect the adoption 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 ASUhave 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.
Table of Contents |
4. Property and Equipment
Property and equipment, net consisted of the following:
|
| Useful Lives |
| December 31, 2017 |
|
| September 30, 2017 |
| ||
(In thousands) |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
| ||
Computer software |
| 5 years |
| $ | 1,447 |
|
| $ | 1,447 |
|
Office equipment, furniture and fixtures and leasehold improvements |
| 2 to 10 years |
|
| 3,371 |
|
|
| 3,243 |
|
Total property and equipment, at cost |
|
|
|
| 4,818 |
|
|
| 4,690 |
|
Accumulated depreciation and amortization |
|
|
|
| (3,873 | ) |
|
| (3,776 | ) |
Property and equipment, net |
|
|
| $ | 945 |
|
| $ | 914 |
|
June 30, 2019 September 30, 2018 (in thousands) Computer software Office equipment, furniture and fixtures and leasehold improvements Total property and equipment, at cost Accumulated depreciation and amortization Property and equipment, net Leasehold improvements are amortized over the term of the lease.$ 1,447 $ 1,447 3,549 3,356 4,996 4,803 (4,164 ) (3,912 ) $ 832 $ 891
Depreciation expense for the three- monththree and nine-month periods ended December 31, 2017June 30, 2019 and 20162018 was approximately $97,000$0.1 million and $79,000, respectively.$0.3 million each.
5. Goodwill and Intangible Assets
Goodwill
The following table setstables set forth activity in goodwill from September 2016 through December 31, 2017. See Note 12 for detailsthe costs, accumulated amortization and net book value of acquisitions that occurred during the year ended September 30, 2017. (in thousands)
Goodwill as of September 30, 2016 |
| $ | 18,590 |
|
Acquisition of SNI Companies |
|
| 58,003 |
|
Goodwill as of September 30, 2017 |
| $ | 76,593 |
|
Goodwill as of December 31, 2017 |
| $ | 76,593 |
|
During the three months ended December 31, 2017 and the year ended September 30, 2017 the Company did not record any impairment of goodwill.
Intangible Assets
As of December 31, 2017
(In Thousands) |
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||
|
|
|
|
|
|
|
|
|
| |||
Customer Relationships |
| $ | 29,070 |
|
| $ | 5,314 |
|
| $ | 23,756 |
|
Trade Name |
|
| 8,329 |
|
|
| 1,473 |
|
|
| 6,856 |
|
Non-Compete Agreements |
|
| 4,331 |
|
|
| 1,290 |
|
|
| 3,041 |
|
|
| $ | 41,730 |
|
| $ | 8,077 |
|
| $ | 33,653 |
|
As of September 30, 2017
(In Thousands) |
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||
|
|
|
|
|
|
|
|
|
| |||
Customer Relationships |
| $ | 29,070 |
|
| $ | 4,601 |
|
| $ | 24,469 |
|
Trade Name |
|
| 8,329 |
|
|
| 1,115 |
|
|
| 7,214 |
|
Non-Compete Agreements |
|
| 4,331 |
|
|
| 965 |
|
|
| 3,366 |
|
|
| $ | 41,730 |
|
| $ | 6,681 |
|
| $ | 35,049 |
|
The amortization expense attributable to the amortization ofCompany’s separately identifiable intangible assets was approximately $1,396,000as of June 30, 2019 and $369,000 for the three-months ended December 31, 2017September 30, 2018, and 2016, respectively.estimated future amortization expense.
June 30, 2019 September 30, 2018 (in thousands) Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value Customer relationships Trade name Non-Compete agreements Total $ 29,070 $ 9,605 $ 19,465 $ 29,070 $ 7,459 $ 21,611 8,329 3,604 4,725 8,329 2,537 5,792 4,331 3,244 1,087 4,331 2,267 2,064 $ 41,730 $ 16,453 $ 25,277 $ 41,730 $ 12,263 $ 29,467
Estimated Amortization Expense Remainder of Fiscal 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Thereafter $ 1,397 5,038 4,088 3,469 2,879 8,406 $ 25,277
The trade names are amortized on a straight – line basis over the estimated useful life of between five and ten years. CustomerIntangible assets that represent customer relationships are amortized based on the basis of estimated future undiscounted cash flows or using the 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,respective noncompete agreements, which are typically five years. Over the next five years and thereafter, annualin duration.
The intangible assets amortization expense was $1.4 million and $4.2 million for these finite life intangible assets will total approximately $33,653,000, as follows: fiscaleach three and nine-month periods ended June 30, 2019 and 2018, - $4,186,000, fiscal 2019 - $5,586,000, fiscal 2020 - $5,005,000, fiscal 2021 - $4,148,000, fiscal 2022 - $3,469,000 and thereafter - $11,259,000.respectively.
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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Table of Contents |
6. Revolving Credit Facility and Term Loan
Revolving Credit, Term Loan and Security Agreement
After the close of business on March 31, 2017, 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. AllMGG Investment Group LP ("MGG"). Initial funds were distributed on April 3, 2017 (the “Closing Date”). to repay existing indebtedness, pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of the SNI Companies.
Under the terms of the Credit Agreement, the Company may borrow up to $73,750,000$73.8 million consisting of a four-year term loan in the principal amount of $48,750,000$48.8 million and revolving loans in a maximum amount up to the lesser of (i) $25,000,000$25.0 million 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 Credit Agreement, as amended, contains certain financial covenants, which are required to be maintained as of the last day of each fiscal quarter, including the following:
Fixed Charge Coverage Ratio (“FCCR”). This is the ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Fixed Charges, each of which is as defined in the Credit Agreement, as amended. The minimum FCCR requirements are: 1.00 to 1.00 for the trailing two fiscal quarters ending March 31, 2019; 0.60 to 1.00 for the trailing three fiscal quarters ending June 30, 2019; 0.70 to 1.00 for the trailing four fiscal quarters ending September 30, 2019; 0.75 to 1.00 for the trailing four fiscal quarters ending December 31, 2019; 0.85 to 1.00 for the trailing four fiscal quarters ending March 31, 2020; and 1.00 to 1.00 for each of the trailing four fiscal quarterly periods ending thereafter.
Minimum EBITDA. Minimum EBITDA, which is determined on a consolidated basis and measured on a trailing four (4) quarter basis, as defined in the Credit Agreement, as amended, are: $13 million for the fiscal quarter ending March 31, 2019; $10 million for the fiscal quarter ending June 30, 2019; $10.0 million for the fiscal quarter ending September 30, 2019; $10.0 million for the fiscal quarter ending December 31, 2019; and $11.0 million for the fiscal quarter ending March 31, 2020, and each fiscal quarter thereafter.
Senior Leverage Ratio. This is the ratio of maximum Indebtedness, which is substantially comprised of consolidated senior indebtedness, to consolidated EBITDA, each of which is as defined under the Credit Agreement, as amended. The Senior Leverage Ratios are: 4.25 to 1.00 for the fiscal quarter ending March 31, 2019; 5.50 to 1.00 for the fiscal quarter ending June 30, 2019; 5.50 to 1.00 for the fiscal quarter ending September 30, 2019; 5.60 to 1.00 for the fiscal quarter ending December 31, 2019; and 5.00 to 1.00 for the fiscal quarter ended March 31, 2020, and for each fiscal quarter thereafter.
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.
On August 31, 2017, the Company entered into a Consent to Extension of Waiver to the Credit Agreement (the “Waiver”). Under the terms of the Waiver, the Lenders and the Agents agreed to extend to October 3, 2017 the deadline by which the Company must deliver updated financial information satisfactory to the lenders in order to amend the financial covenant levels, execute a fully executed amendment to the Credit Agreement, and any other terms and conditions required by the lenders in their sole discretion. Additionally, the Company paid a $0.07 million consent fee to the Agents for the pro rata benefit of the lenders, in connection with the Waiver. On August 31, 2017, an additional waiver to the Credit Agreement (“Additional Waiver”), pursuant to which the due date for the Company to deliver the subordination agreement and an amended subordinated note, executed by one of the Company’s subordinated lenders was extended from August 31, 2017 to October 3, 2017, also was obtained.
15 |
Table of Contents |
On October 2, 2017, the Company, the other borrower entities and guarantor entities named therein (collectively, the “Loan Parties”), PNC, and certain investment funds managed by MGG (collectively the (“Lenders”) entered into a First Amendment and Waiver (the “Amendment”“First Amendment”) to the Revolving Credit, Term Loan and Security Agreement dated as of March 31, 2017 (the “Credit Agreement”) by and among the Loan Parties, and the Lenders.
The First Amendment, which was effective as of October 2, 2017, modified the required principal repayment schedule with respect to the Term Loans. The Amendment also modified the ability of the Loan Parties to repay or make other payments with respect to certain other loans that are subordinated in right of payment to the indebtedness under the Credit Agreement.
Pursuant to the First Amendment the Lenders also waived any Event of Default arising out of the Loan Parties’ failure to deliver, on or before October 3, 2017, the materials satisfying the requirements of clauses (i) and (ii) of Section 5 of the Waiver to Revolving Credit, Term Loan and Security Agreement, dated as of August 14, 2017, as amended.
On November 14, 2017, the Company and its subsidiaries, as Borrowers, entered into a second amendment (the “Second Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Pursuant to the Second Amendment the Borrowers agreed, among other things, to use commercially reasonable efforts to prepay, or cause to be prepaid, $10,000,000$10.0 million in principal amount of Advances (as defined in the Credit Agreement) outstanding, which amount shall be applied to prepay the Term Loans in accordance with the applicable terms of the Credit Agreement. Any prepayment to the term loan is contingent upon a future financing, non-operational cash flow or excess cash flow as defined in the agreement. The BorrowersCompany also agreed to amend (i)certain amendments to the applicable minimum Fixed Charge Coverage Ratiosloan covenants required to be maintained by themaintained.
The Company as set forth in the Second Amendment, (ii) the minimum EBITA required to be maintained by the Company, as set forth in the Second Amendment and (iii) the maximum senior leverage ratios required to be maintained by the Company, as set forth in the Second Amendment. The Borrowers agreed to pay to the Administrative Agent for the account of the Revolving Lenders, an amendment fee of $364,140, in connection with their execution and delivery of the Second Amendment. Such fee is payable on the earlier of (a)did not meet its financial loan covenants at September 30, 2018 or at June 30, 2018 or March 31, 2018, previously. On May 15, 2018, the Company obtained a temporary waiver from its lenders for the missed financial covenants at March 31, 2018. On August 10, 2018, the Company and (b)its subsidiaries, as Borrowers, entered into a third amendment and waiver (the “Third Amendment and Waiver”) to the first date on which allCredit Agreement. Pursuant to the Third Amendment and Waiver, the Lenders agreed to modify the definition of the Obligations (as definedEBITDA in the Credit Agreement) are paid in full in cashAgreement to allow for the recognition and the Total Commitment (as defined inexclusion of certain additional acquisition, integration and restructuring expenses not previously specified and to provide a temporary waiver for any Defaults and Events of Default under the Credit Agreement)Agreement that have solely arisen by reason of the Lenders is terminated.
The loans underCompany failing to comply with the credit agreementfinancial covenants of the Credit Agreement for the period commencing on the Amendment No. 2 Effective Date up to and including May 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.75 to 1.00, an amount equal to 9.75% for Advances consisting of Domestic Rate Loans and 10.75% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.75 to 1.00, an amount equal to 9.00% for Advances consisting of Domestic Rate Loans and 10.00% for Advances consisting of LIBOR Rate Loans.ending June 30, 2018.
The loans underOn December 27, 2018, the credit agreement for the period commencing on June 1, 2018 upCompany and its subsidiaries, as Borrowers, entered into a fourth amendment and waiver (the “Fourth Amendment and Waiver”) to and including August 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 4.00 to 1.00, an amount equal to 14.00% for Advances consisting of Domestic Rate Loans and 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 4.00 to 1.00, an amount equal to 9.75% for Advances consisting of Domestic Rate Loans and 10.75% for Advances consisting of LIBOR Rate Loans.
The loans under the credit agreement for the period commencing on September 1, 2018 through the remainder of the Term, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.50 to 1.00, an amount equal to 14.00% for Advances consisting of Domestic Rate Loans and 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.50 to 1.00, an amount equal to 9.00% for Advances consisting of Domestic Rate Loans and 10.00% for Advances consisting of LIBOR Rate Loans.
At December 31, 2017, approximately $8,000,000 of the Revolving Credit, facilityTerm Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fourth Amendment and Waiver, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of September 30, 2018, and amendments to the financial covenants and to the remaining scheduled principal payments.
On May 15, 2019, the Company and its subsidiaries, as Borrowers, entered into a fifth amendment and waiver (the “Fifth Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fifth Amendment, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of March 31, 2019, and amendments to the financial covenants and to the remaining scheduled principal payments.
Management has taken definitive actions to improve operations, reduce costs and improve profitability, and position the Company for future growth. In addition, the Company’s senior lenders have worked with management in providing amendments and waivers to the Company’s senior credit facilities as management works towards improving the Company’s operations and restructuring its current debt and equity capitalization.
Based on its current projections, management expects that the Company can meet its future debt service requirements and comply with its financial covenants and other commitments, as amended, and will continue to seek reasonable assistance from the Company’s senior lenders, as necessary. However, the Company’s projections are based on assumptions and estimates about future performance and events, which are subject to change or other unforeseen conditions or uncertainties. As such, there can be no assurance that the Company will not fall into non-compliance with its loan covenants or that its Lenders will continue to provide waivers or amendments to the Company in the event of future non-compliance with debt covenants or other possible events of default that could happen in the future.
16 |
Table of Contents |
Revolving Credit Facility
As of June 30, 2019, the Company had $13.9 million in outstanding borrowings under the Revolving Credit Facility, of which approximately $12.7 million was fixed for a three-month period at an interest rate of approximately 11.3%17.41%, approximately $0.8 million was at an interest rate of approximately 17.43%, and the remainder was at an interest rate of approximately 19.50%.
At December 31, 2017,As of June 30, 2019, the Company had approximately $5,800,000$1.0 million available on the Revolving Credit facility.
The Revolving Credit Facility 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 Revolving Credit Facility has the same covenants as the Term-loan (See note 7).
7. Term-loan
After the close of business on March 31, 2017, the Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with PNC, and certain investment funds managed by 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 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.
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 dated March 31, 2017 (the “Merger Agreement”) (see note 12), 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 $48,750,000 from term-loans and borrowed approximately $7,476,316 from the Revolving Credit Facility for a total of $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. pursuant to the Merger Agreement.
On November 14, 2017, the Company and its subsidiaries, as Borrowers, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto (together with each other Person joined thereto as a guarantor from time to time, collectively, the “Guarantors”, and each a “Guarantor”, and together with the Borrowers, collectively, the “Loan Parties” and each a “Loan Party”), certain lenders which now are or which thereafter become a party thereto that make Revolving Advances thereunder (together with their respective successors and assigns, collectively, the “Revolving Lenders” and each a “Revolving Lender”), the lenders which now are or which thereafter become a party thereto that made or acquire an interest in the Term Loans (together with their respective successors and assigns, collectively, the “Term Loan Lenders” and each a “Term Loan Lender”, and together with the Revolving Lenders, collectively, the “Lenders” and each a “Lender”), MGG, as administrative agent for the Lenders (together with its successors and assigns, in such capacity, the “Administrative Agent”), as collateral agent for the Lenders (together with its successors and assigns, in such capacity, the “Collateral Agent”), and as term loan agent (together with its successors and assigns, in such capacity, the “Term Loan Agent” and together with the Administrative Agent and the Collateral Agent, each an “Agent” and, collectively, the “Agents”), entered into a second amendment (the “Second Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”).
Pursuant to the Second Amendment the Borrowers agreed, among other things, to use commercially reasonable efforts to prepay, or cause to be prepaid, $10,000,000 in principal amount of Advances (as defined in the Credit Agreement) outstanding, which amount shall be applied to prepay the Term Loans in accordance with the applicable terms of the Credit Agreement. Any prepayment to the term loan is contingent upon a future financing, non-operational cash flow or excess cash flow as defined in the agreement. The Borrowers also agreed to amend (i) the applicable minimum Fixed Charge Coverage Ratios required to be maintained by the Company as set forth in the Second Amendment, (ii) the minimum EBITA required to be maintained by the Company, as set forth in the Second Amendment and (iii) the maximum senior leverage ratios required to be maintained by the Company, as set forth in the Second Amendment. The Borrowers agreed to pay to the Administrative Agent for the account of the Revolving Lenders, an amendment fee of $364,140, in connection with their execution and delivery of the Second Amendment. Such fee is payable on the earlier of (a) June 30, 2018 and (b) the first date on which all of the Obligations (as defined in the Credit Agreement) are paid in full in cash and the Total Commitment (as defined in the Credit Agreement) of the Lenders is terminated.
The loansCompany had outstanding balances under the credit agreement for the period commencing on the Amendment No. 2 Effective Date up to and including May 31, 2018, (i) so longits Term Loan, as the Senior Leverage Ratio is equal to or greater than 3.75 to 1.00, an amount equal to 9.75% for Advances consisting of Domestic Rate Loans and 10.75% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.75 to 1.00, an amount equal to 9.00% for Advances consisting of Domestic Rate Loans and 10.00% for Advances consisting of LIBOR Rate Loans.follows:
The loans under the credit agreement for the period commencing on June 1, 2018 up to and including August 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 4.00 to 1.00, an amount equal to 14.00% for Advances consisting of Domestic Rate Loans and 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 4.00 to 1.00, an amount equal to 9.75% for Advances consisting of Domestic Rate Loans and 10.75% for Advances consisting of LIBOR Rate Loans.
The loans under the credit agreement for the period commencing on September 1, 2018 through the remainder of the Term, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.50 to 1.00, an amount equal to 14.00% for Advances consisting of Domestic Rate Loans and 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.50 to 1.00, an amount equal to 9.00% for Advances consisting of Domestic Rate Loans and 10.00% for Advances consisting of LIBOR Rate Loans.
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.
|
| June 30, 2019 |
|
| September 30, 2018 |
| ||
(in thousands) |
|
|
|
|
|
| ||
Term loan |
| $ | 42,405 |
|
| $ | 44,505 |
|
Unamortized debt discount |
|
| (1,410 | ) |
|
| (1,921 | ) |
Term loan, net of discount |
|
| 40,995 |
|
|
| 42,584 |
|
Short term portion of term loan, net of discount |
|
| 2,931 |
|
|
| 2,331 |
|
Long term portion of term loan, net of discount |
| $ | 38,064 |
|
| $ | 40,253 |
|
The Term Loans were advanced on the Closing Date and are, with respect to principal,Loan is 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: Remainder of Fiscal year 2018 – $3,636,000, Fiscal year 2019 – $7,728,000,$0.5 million, Fiscal year 2020 – $8,337,000$5.5 million and Fiscal year 2021 - $28,440,000.$36.4 million.
The Company shallalso is required to prepay the outstanding amount of the Term-loansTerm Loan in an amount equal to the Specified Excess Cash Flow Amount (as defined in the agreement) for the immediately preceding fiscal year, commencing with the fiscal year ending September 30, 2018, payable following the delivery to the Agents of the financial statements referred to in the Agreement for such fiscal year but in any event not later than one hundred five (105) days after the end of each such fiscal year (the “Excess Cash Flow Prepayment Date”); provided that (i) if the Specified Term-loan Prepayment Conditions shall not be satisfied on any Excess Cash Flow Prepayment Date, Borrowers shall (A) on the Excess Cash Flow Prepayment Date, pay such portion of the Specified Excess Cash Flow Amount then due for such period that2018. The Company does not cause Borrowers to breach the Specified Term Loan Prepayment Conditions, (B) on the date on which the next Borrowing Base Certificate is due to be delivered to Agents pursuant to the Agreement (the “Borrowing Base Reference Date”), pay the remaining portionowe any amount as of such Specified Excess Cash Flow Amount (or such portion thereof that does not cause Borrowers to breach the Specified Term Loan Prepayment Conditions) and (C) if any Specified Excess Cash Flow Amount for such period remains due and owing after payment of the amount described in preceding clause (ii), on the next Borrowing Base Reference Date and each Borrowing Base Reference Date thereafter, pay such portion of the unpaid Specified Excess Cash Flow Amount that does not cause Borrowers to breach the Specified Term Loan Prepayment Conditions until such Specified Excess Flow Amount then due for such period is paid in full, and (ii) the failure of the Borrowers to make a prepayment of all or any portion of the Specified Excess Cash Flow Amount pursuant the Agreement solely as a result of Borrowers’ failure to satisfy the Specified Term Loan Prepayment Conditions shall not constitute an Event of Default.June 30, 2019.
Interest
The amended 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 of 1.25 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 inloans under the Credit Agreement for each fiscal quarter specified therein, in each case, measuredthe period commencing on a trailing four (4) quarter basisthe Second Amendment Effective Date up to and including May 31, 2018, (i) so long as set in the Credit Agreement, which ranges from $11,000,000 to $14,000,000 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 notis equal to or greater than 3.75 to 1.00, an amount equal to prime plus 9.75% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.75% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.75 to 1.00, an amount set forthequal to prime plus 9.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.00% for Advances consisting of LIBOR Rate Loans.
Commencing on June 1, 2018 up to and including August 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 4.00 to 1.00, interest on the loans is payable in an amount equal to prime plus 14.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Credit AgreementSenior Leverage Ratio is less than 4.00 to 1.00, interest is payable in an amount equal to prime plus 9.75% for each fiscal quarter, in each case, measuredAdvances consisting of Domestic Rate Loans and LIBOR plus 10.75% for Advances consisting of LIBOR Rate Loans.
Commencing on a trailing four (4) quarter basis as set inSeptember 1, 2018 through the agreement, which ranges from 5.25 to 1.0 to 2.5 to 1.0 over the termremainder of the Credit Agreement.Term, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.50 to 1.00, interest on the loans is payable in an amount equal to prime plus 14.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.50 to 1.00, interest is payable in an amount equal to prime plus 9.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.00% for Advances consisting of LIBOR Rate Loans.
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.
The Company was in compliance with the non-financial covenants and with the newly amended financial covenants of the loan for December 31, 2017, the first measurement date under the Amendment.
Balance of: |
| December 31, 2017 |
|
| September 30, 2017 |
| ||
(In thousands) |
|
|
|
|
|
|
|
|
Term loan |
| $ | 47,328 |
|
| $ | 48,141 |
|
Unamortized debt discount |
|
| (2,497 | ) |
|
| (2,690 | ) |
|
|
| 44,831 |
|
|
| 45,451 |
|
Short term portion of term loan |
|
| (3,987 | ) |
|
| (3,433 | ) |
Term loan |
| $ | 40,844 |
|
| $ | 42,018 |
|
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As of June 30, 2019, the Company had $42.4 million in outstanding borrowings under the Term Loan Facility, of which approximately $36.1 million was at an interest of approximately 17.41%, and approximately $6.3 million was at an interest of approximately 17.40%.
Loan Fees and Amortization
In connection with the Credit Agreement, (the Revolving Credit Facility and the Term-loan), the Company agreed to pay an original discount fee of approximately $901,300,$0.9 million, a closing fee for the term loan of approximately $75,000,$0.1 million, a finder’s fee of approximately $1,597,000$1.6 million and a closing fee for the revolving credit facility of approximately $500,000.$0.5 million. The total of the loan fees paid is approximately $3,073,300.$3.1 million. The Company has recorded this asreported these direct loan-related costs in the form of a discount and reduction of the term-loanterm loan in the accompanying consolidated balance sheets and amortizedis amortizing them as interest expense over the term of the loans. DuringFor the periodnine months ended December 31, 2017,June 30, 2019 and June 30, 2018, the Company amortized approximately $192,000$0.6 million of the debt discount.discount each.
8.7. Accrued Compensation
Accrued Compensation, includeswhich is included in Accounts Payable and Accrued Compensation, is comprised of accrued wages, the related payroll taxes, employee benefits of the Company's employees, while they workincluding those working on contract assignments, commissions earned and not yet paid and estimated commissioncommissions and bonuses payable.
9.8. Subordinated Debt – Convertible and Non-Convertible
On October 2, 2015, theThe Company issuedhad outstanding balances under its Convertible and sold theNon-Convertible Subordinated Debt agreements, as follows:
June 30, September 30, 2019 2018 (in thousands) 10% Convertible Subordinated Note Amended and Restated Non-negotiable promissory note Subordinated Promissory Note 9.5% Convertible Subordinated Note 8% Convertible Subordinated Notes, due to related parties net Total subordinated debt, convertible and non-convertible Short term portion of subordinated debt, convertible and non-convertible Long term portion of subordinated debt, convertible and non-convertible $ 4,185 $ 4,185 - 106 1,000 1,000 12,500 12,500 1,195 - 18,880 17,791 (1,000 ) (106 ) $ 17,880 $ 17,685
10% Convertible Subordinated Note
The Company had a Subordinated Note payable to JAX Legacy – Investment 1, LLC (the “Jax”(“JAX Legacy”), “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$4.2 million, and which was scheduled to become due on October 2, 2018. The Company paid fees of approximately $25,000 and 3,000 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 year ended September 30, 2017 was approximately $107,000, and the remaining $322,000 was written off to loss on extinguishment of debt.
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On April 3, 2017, the Company and JaxJAX Legacy 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.$4.2 million. 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. 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. The Company agreed to issue to the investors in JaxJAX Legacy approximately 77,775 shares of common stock, at a value of approximately $385,000$0.4 million which was expensed as loss on the extinguishment of debt during the year ended September 30, 2017. On December 13,
Total discount recorded at issuance of the original JAX Legacy subordinated note payable was approximately $0.6 million. Total amortization of debt discount for the year ended September 30, 2017 was approximately $0.1 million, and the remaining $0.3 million was written off to loss on extinguishment of debt upon amendment and restatement resulting in the 10% Note.
The Company issued 135,655 shares of common stock for bothto JAX Legacy related to the conversion of the subordinated note and paid in kindthe interest through Septemberapproximately 87,172 and 276,232 for the three and nine-month period ended June 30, 2017.2019 and 42,500 and 219,155 for the three and nine-month period ended June 30, 2018, respectively. The stock was valued at approximately $0.1 million and $0.3 million for the three and nine-month period ended June 30, 2019 and $0.1 million and $0.3 million for the three and nine-month period ended June 30, 2018, respectively.
On October 4, 2015,July 3, 2019 the Company issued 132,659 shares of common stock to the sellersJax Legacy related to interest of Access Data Consulting Corporation a Promissory Note. Interest$0.1 million on the outstanding principal balance of the10% Note.
Amended and Restated Non-Negotiable PromissoryNote 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 approximately $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 approximately $28,000 in principal and interest, (iv) on October 4, 2017 a balloon payment of principal of $1,202,000 and (v) on October 4, 2017 any and all amounts of previously unpaid principal and accrued interest. The Credit Agreement requires this loan to be subordinated to PNC and MGG, however the sellers of Access Data Consulting Corporation have not agreed to the subordination.
On October 4, 2017, the Company executed an Amended and Restated Non-Negotiable Promissory Note in favor of William Daniel Dampier and Carol Lee Dampier (sellers of Access Data Consulting Corporation) in the amount of $1,202,405approximately $1.2 million (the “Note”). This Note amends and, as so amended, restates in its entirety and replaces that certain Subordinated Nonnegotiable Promissory Note dated October 4, 2015, issued by the Company to William Daniel Dampier and Carol Lee Dampier in the original principal amount of $3,000,000.$3.0 million. The Company agreed to pay William Daniel Dampier and Carol Lee Dampier 12 equal installments of approximately $107,675, commencing on November 4, 2017 and ending on October 4, 2018. The entire loan is classified as current and subordinate tonote was paid off during the senior debt.three months ended December 31, 2018.
Subordinated Promissory Note |
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 issueissued to the Sellers a subordinated promissory note in the principal amount of $1,000,000$1.0 million (the “Subordinated Note”), The Subordinated Note shall bearbears interest at the rate of 5.5% per annum. Interest on the Subordinated Note shall beis payable monthly principleand principal can only be paid in stock until the term-loanterm loan and Revolving Credit Facility are repaid. The Subordinated Note shall have a term of three yearsis due January 20, 2020 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).
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9.5% Convertible Subordinated Notes
On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the Merger Consideration (see note 12)acquisition of SNIH an aggregate of $12.5 million in aggregate principal amountthe form of its 9.5% Notes.Convertible Subordinated Notes (the “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. Interest on the 9.5% Notes accrues at the rate of 9.5% per annum and shall be paidis payable 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 based on the terms of the agreement, subject to certain limitations defined in the loan agreement. Each of the 9.5% Notes is subordinated in payment to the obligations of the Company under its Credit Agreement (see Note 6) pursuant to Subordination and Inter-creditor Agreements dated as of March 31, 2017 by and among the Company, the Credit Agreement lenders, and each of the holders of the 9.5% Notes.
Future minimum payments of all subordinated debt will total approximately as follows: fiscal 2019 - $0.0 million, fiscal 2020 - $1.0 million, fiscal 2021- $0.0 and fiscal 2022 - $18.7 million.
The Company issued shares of common stock to the SNI Sellers related to interest of $0.3 million on the 9.5% Notes approximately 246,156 and 744,606 for the three and nine-month period ended June 30, 2019 and 120,654 and 401,256 for the three and nine-month period ended June 30, 2018, respectively. The stock was valued at approximately $0.3 million and $0.9 million for the three and nine-month period ended June 30, 2019 and $0.3 million and $1.2 million for the three and nine-month period ended June 30, 2018, respectively.
On July 3, 2019 the Company issued approximately 351,181 shares of common stock to the SNI Sellers related to interest of $0.3 million on the 9.5% Notes.
8% Convertible Subordinated Notes to Related Parties
On May 15, 2019, the Company issued and sold to members of its executive management and Board of Directors (the “Investors”) $2.0 million in aggregate principal amount of its 8% Notes. The 8% Notes mature on October 3, 2021 (the “Maturity Date”). The 8% Notes are convertible into shares of the Company’s Series C 8% Cumulative Convertible Preferred Stock (“Series C Preferred Stock”) at a conversion price equal to $1.00 per share (subject to adjustment as provided in the 8% Notes upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”). Interest on the 8% Notes accrues at the rate of 8% per annum and shall be paid quarterly in non-cash payments-in-kind (“PIK”) in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2019, on each conversion date with respect to the 8% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”). Interest shall be paid on an Interest Payment Date in shares of Series C Preferred Stock of the Company, which Series C Preferred Stock shall be valued at its liquidation value. All or any portion of the 8% Notes may be redeemed by the Company for cash at any time. The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 8% Notes being redeemed, plus accrued and unpaid PIK interest thereon. The Company may, at its option, prepay any portion of the principal amount of the 8% Notes without the prior consent of the holders thereof; provided, however, that any prepayments of the 8% Notes shall be made on a pro rata basis to all holders of 8% Notes based on the aggregate principal amount of 8% Notes held by such holders. The Company shall be required to prepay the 8% Notes together with accrued and unpaid PIK interest thereon upon the consummation by the Company of any Change of Control. For purposes of the 8% 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. Each of the 8% Notes is subordinated in payment to the obligations of the Company to the lenders parties to that certain Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017, as amended, by and among the Company, the Company’s subsidiaries named as borrowers therein (collectively with the Company, the “Borrowers”), the senior lenders named therein and PNC Bank, National Association,MGG Investment Group LP, as administrative agent and collateral agent (the “Agent”) for the senior lenders (the “Senior Credit Agreement”), pursuant to those certain Subordination and Intercreditor Agreements, each dated as of March 31, 2017May 15, 2019 by and among the Company, the Borrowers, the Agent and each of the holders of the 9.5%8% 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.
Balance as of: |
| December 31, |
|
| September 30, |
| ||
(In thousands) |
|
|
|
|
|
| ||
JAX Legacy debt |
| $ | 4,185 |
|
| $ | 4,185 |
|
Access Data debt |
|
| 1,013 |
|
|
| 1,225 |
|
Paladin debt |
|
| 1,000 |
|
|
| 1,000 |
|
9.5% convertible debt |
|
| 12,500 |
|
|
| 12,500 |
|
|
|
|
|
|
|
|
|
|
Total subordinated debt, convertible and non-convertible |
|
| 18,698 |
|
|
| 18,910 |
|
|
|
|
|
|
|
|
|
|
Short-term portion of subordinated debt, convertible and non-convertible |
|
| (1,013 | ) |
|
| (1,225 | ) |
|
|
|
|
|
|
|
|
|
Long-term portion of subordinated debt, convertible and non-convertible |
| $ | 17,685 |
|
| $ | 17,685 |
|
Future minimum payments of subordinated debt will total approximately $18,698,000 as follows: fiscal 2018 - $1,013,000, fiscal 2019 - $0, fiscal 2020 - $1,000,000, fiscal 2021- $0 and fiscal 2022 - $16,685,000.
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10. Equity
On March 31, 2017,June 30, 2019 the Company issued approximately 500,00020,000 shares of common stock upon exerciseSeries C Preferred Stock to Investors related to interest of warrants by two officers and received cash of $1,000,000.$20,000 on the 8% Notes.
On November 27, 2017,The BCF for the Company issued approximately 135,655 shares of common stock8% Notes is recorded as a discount to JAX Legacy relatedtheir carrying value and is equal to the amendment and restatementfair value of the Subordinated Noteconversion feature. The discount will be amortized as interest over the period from the date of issuance to maturity. The total BCF recorded was approximately $0.8 million. For the nine months ended June 30, 2019 and the interest through October 4, 2017, of approximately $553,000.
On January 4,June 30, 2018, the Company issuedamortized approximately 41,000 shares$0.04 million and $0 of common stock to JAX Legacy related to the interest on the Subordinated Note through January 4, 2018, of approximately $105,000.debt discount, respectively.
On January 4, 2018, the Company issued approximately 280,602 shares of common stock to the SNI Sellers related to the accrued interest of approximately $894,000 on the Subordinated Note through January 4, 2018.9. Equity
On January 25, 2018, the Company issued approximately 110,083 shares of common stock to a SNI Sellers for the conversion of approximately 110,083 shares of series B preferred shares.
At December 31, 2017, there were exercisable options granted to purchase approximately 497,000On November 9, 2018 the Company issued 250,000 shares of common stock and exercisable warrants to purchasefor the conversion of approximately 497,000250,000 shares of common stock.Series B Convertible Preferred Stock, see Note 10.
WarrantsRestricted Stock
(Number of Warrants in Thousands) Number of Shares Exercise Price Expiration Outstanding at September 30, 2017 Warrants exercised Warrants granted Outstanding at December 31, 2017 During the nine months ended June 30, 2019 no restricted stock was granted or exercised. The restricted shares are to be earned over a three-year period and cliff vest at the end of the third year from the date of grant. Stock-based compensation expense attributable to restricted stock was $0.2 and $0.6 million, and $0.0 and $0.0 million for the three and nine months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, there was approximately $1.6 million of unrecognized compensation expense related to restricted stock outstanding. 497 $ 3.84 - - - - 497 $ 3.84
The weighted average exercise priceA summary of restricted stock activity is presented as follows:
Number of Shares | ||||
(in thousands) | ||||
Restricted stock outstanding as of September 30, 2018 | 1,100 | |||
Granted | - | |||
Exercised | - | |||
Restricted stock outstanding as of June 30, 2019 | 1,100 |
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Warrants
No warrants was $3.84 at December 31, 2017 and Septemberwere granted or exercised during the nine months ended June 30, 2017, with expiration dates ranging from February 7, 2020 to April 1, 2025.2019.
(in thousands) Number of Shares Weighted Average Exercise Price Per Share ($) Weighted Average Remaining Contractual Life Total Intrinsic Value of Warrants ($) Warrants outstanding as of September 30, 2018 Granted Exercised Forfeited Warrants outstanding as of December 31, 2018 Granted Exercised Forfeited Warrants outstanding as of March 31, 2019 Granted Exercised Forfeited Warrants outstanding as of June 30, 2019 Warrants exercisable as of September 30, 2018 Warrants exercisable as of June 30, 2019 497 3.84 2.87 67 - - - - (58 ) 2.00 439 4.09 2.48 - - - - - - 439 4.09 2.27 - - - - - - 439 4.09 2.05 - 497 3.84 2.87 67 439 4.09 2.05 -
Stock Options
As of June 30, 2019, there were stock options outstanding under the Company’s Second Amended and Restated 1997 Stock Option Plan and the Company’s Amended and Restated 2013 Incentive Stock Plan. Both plans were approved by the shareholders. The Company has recognizedplans granted specified numbers of options to non-employee directors, and they authorized the Compensation Committee of the Board of Directors to grant either incentive or non-statutory stock options to employees. Vesting periods are established by the Compensation Committee at the time of grant. All stock options outstanding as of June 30, 2019 and September 30, 2018 were non-statutory stock options, had exercise prices equal to the market price on the date of grant, and had expiration dates ten years from the date of grant.
Stock-based compensation expense in the amount of approximately $293,000attributable to stock options and $194,000 duringwarrants was $0.3 million and $1.0 million, and 0.4 million and $1.0 million for the three and nine months ended December 31, 2017June 30, 2019 and 2016, respectively, related to the issuance2018, respectively. As of stock options.
During the three-month period ended December 31, 2017, there were options granted to purchase 120,000 shares of common stock with a weighted average price of approximately $2.80 per common share. This estimated value was made using the Black-Scholes option pricing modelJune 30, 2019 and approximated $305,000. The stock options vest over a period between a one to a four-year period. The average expected life (years) of the options were 10 years, the estimated stock price volatility was 104% and the risk-free interest rate was 2.2%. At December 31, 2017,June 30, 2018, there was approximately $2,083,000$1.9 million of unamortized compensation.
At December 31, 2017, there were exercisableunrecognized compensation expense related to unvested stock options granted to purchase approximately 497,000 shares of common stockoutstanding each, and exercisable warrants to purchase approximately 375,000 shares of common stock.the weighted average vesting period for those options was 3.9 years.
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11. Income TaxA summary of stock option activity is as follows:
Number of Shares Weighted Average Exercise Price per share ($) Weighted Average Remaining Contractual Life (Years) Total Intrinsic Value of Options ($) (in thousands) Options outstanding as of September 30, 2018 Granted Forfeited/Expired Options outstanding as of December 31, 2018 Granted Exercised Forfeited/Expired Options outstanding as of March 31, 2019 Granted Exercised Forfeited/Expired Options outstanding as of June 30, 2019 Exercisable as of September 30, 2018 Exercisable as of June 30, 2019 We account1,578 3.76 7.53 142 394 1.91 (178 ) 3.89 1,794 3.34 8.58 - - - - - (48 ) 5.03 1,746 3.29 8.34 - - - - - (37 ) 4.23 1,709 3.27 8.06 - 512 5.08 7.30 1 686 4.25 6.76 -
The fair value of stock options granted was made using the Black-Scholes option pricing model and the following assumptions:
Nine Months Ended June 30, 2019 Weighted average fair value of options Weighted average risk-free interest rate Weighted average dividend yield Weighted average volatility factor Weighted average expected life (years) $ 1.75 3.03 % $ - 104 % 10
10. Mezzanine Equity
Series A Convertible Preferred Stock
On April 3, 2017, the Company filed a Statement of Resolution Establishing its Series A Preferred Stock with the State of Illinois. (the Resolution Establishing Series”). Pursuant to the Resolution Establishing Series, the Company designated 160,000 of its authorized preferred stock as Series A Preferred Stock. There are no shares issued and outstanding under this designation.
Series B Convertible Preferred Stock
On April 3, 2017, the Company issued an aggregate of approximately 5.9 million shares of no par value, Series B Convertible Preferred Stock to certain of the SNIH Stockholders as part of the SNIH acquisition. The no par value, 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.
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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 income taxescash, securities or property, the Company is required to simultaneously declare and pay a dividend on the no par value, 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 or as may be required by Illinois law, the holders of the no par value, 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 no par value, 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 no par value, 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 is 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, which is 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.
None of the shares of no par value, Series B Preferred Stock issued to the SNIH Stockholders are registered under the asset and liability method, which requiresSecurities Act. Each of the recognitionSNIH Stockholders who received shares of deferred tax assets and liabilities forSeries B Preferred Stock is an accredited investor. The issuance of the expected future tax consequencesshares of events that have been includedno par value, 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 financial statements. Under this method, we determine deferred tax assets and liabilitiesAct.
Based on the basisterms of the differences betweenSeries B Convertible Preferred Stock, if certain fundamental transactions were to occur, the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year inSeries B Convertible Preferred Stock would require redemption, which the differences are expected to reverse. The effect of a change in tax ratesprecludes permanent equity classification on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statementBalance Sheet.
During the nine months ended June 30, 2019 the Company issued 250,000 shares of operations. Ascommon stock for the conversion of approximately 250,000 shares of Series B Convertible Preferred Stock.
Series C Convertible Preferred Stock
On May 17, 2019, the Company filed a Statement of Resolution Establishing its Series C Preferred Stock with the State of Illinois. (the Resolution Establishing Series”). Pursuant to the Resolution Establishing Series, the Company designated 3,000,000 of its authorized preferred stock as “Series C 8% Cumulative Convertible Preferred Stock”, without par value. The Series C Preferred Stock has a Liquidation Value equal to $1.00 per share and ranks pari passu with the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) and 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. Holders of shares of Series C Preferred Stock are entitled to receive an annual non-cash (“PIK”) dividend of 8% of the Liquidation Value per share. Such dividend shall be payable quarterly on June 30, September 30, 2017,December 31 and March 31 of each year commencing on June 30, 2019, in preference to any dividend paid on or declared and set aside for the Series B Preferred Stock or any Junior Securities and shall be paid-in-kind in additional shares of Series C Preferred Stock. Except as set forth in the Resolution Establishing Series or as may be required by Illinois law, the holders of the Series C Preferred Stock have no accruedvoting 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 C 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 superior to the Series C Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting). Each share of Series C 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 $1.00 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.
On June 30, 2019 the Company issued approximately 20,000 shares of Series C Preferred Stock to Investors related to interest or penalties are includedof $20,000 on the related tax liability line in the consolidated balance sheet.8% Notes.
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11. Income Tax
The following table presents the provision for income taxes and our effective tax rate for the three and nine months ended December 31, 2017June 30, 2019 and 2016:2018:
|
| Three Months Ended, |
|
| Three Months Ended, June 30, |
| Nine Months Ended, June 30, |
| ||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||||||||||||
Provision for Income Taxes |
| (28 | ) |
| 66 |
|
| (106 | ) |
| (407 | ) |
| 400 |
| 259 |
| |||||||
Effective Tax Rate |
| 2 | % |
| 56 | % |
| 2 | % |
| 18 | % |
| -3% |
| -4% |
|
The effective income tax rate on operations is based upon the estimated income for the year, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.
Our effective tax rate for the three and nine months ended December 31, 2017June 30, 2019 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets. Other than the deferred tax liability relating to indefinite lived assets, the Company is maintaining a full valuation allowance against the remaining net DTA position.
The effective tax provisionrate for state income taxes andthe three months ended June 30, 2018 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets.
The effective tax rate for the nine months ended June 30, 2018 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets being offset by a discrete tax benefit recorded for the impact from the US Tax Reform. The tax provision for the threenine months ended December 31, 2017June 30, 2018 includes discrete tax benefit totaling $0.4 million relating to the US Tax Reform.
Our effective tax rate for the three months ended December 31, 2016Reform that was higher than the statutory rate primarily due to change in valuation allowance.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” ("US Tax Reform"). The US Tax Reform provides for significant changesrecorded in the U.S. Internal Revenue Code of 1986, as amended. Certain provisions of the US Tax Reform will be effective during our fiscal year ending September 30, 2018 with all provisions of the US Tax Reform effective as of the beginning of our fiscal year ending September 30, 2019. As the US Tax Reform was enacted after our year end of September 30, 2017, it had no impact on our fiscal 2017 financial results. The US Tax Reform contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.
Beginning on January 1, 2018, the US Tax Reform lowers the US corporate income tax rate to 21% from that date and beyond. We estimate that the revaluation of our US deferred tax assets and liabilities to the 21% corporate tax rate will reduce our net deferred tax liability by approximately $0.4 million and is reflected as a tax benefit in our results for the quarterperiod ending December 31, 2017.
Although we believe we have accounted for the parts of the US Tax Reform that will have the most significant impact on our financials, the ultimate impact of the US Tax Reform on our reported results in 2018 may differ from the estimates provided herein, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the US Tax Reform different from that presently contemplated.
12. Acquisitions
SNI
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, (“GEE Portfolio”), SNI Holdco Inc., a Delaware corporation (“SNIH”), 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”). 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 approximately $66,300,000.
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 SNI Companies, Inc., after giving effect to the Company’s acquisition as if the acquisition occurred on April 3, 2017.
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, 2016, nor is the financial information indicative of the results of future operations. The following table represents the unaudited consolidated pro forma results of operations for the three months ended December 31, 2016 as if the acquisition occurred on October 1, 2016. The pro forma results of operations for the three months ended December 31, 2016 only include SNI Companies, as all other acquisitions either occurred prior to October 1, 2016 or had an immaterial effect on pro forma balances. Operating expenses have been increased for the amortization expense associated with the estimated fair value adjustment as of each acquisition during the respective period for the expected definite lived intangible assets. Operating expenses have been increased for the amortization expense associated with the fair value adjustment of definite lived intangible assets of approximately $1,000,000 for the three months ended December 31, 2016 for the SNI acquisition.
(in Thousands, except per share data)
Pro Forma, unaudited |
| Three Months Ended December 31, 2016 |
| |
|
|
|
| |
Net sales |
| $ | 48,601 |
|
Cost of sales |
| $ | 31,324 |
|
Operating expenses |
| $ | 15,693 |
|
Net loss |
| $ | (364 | ) |
Basic income per common share |
| $ | 0.04 |
|
Dilutive income per common share |
| $ | 0.04 |
|
The proforma results of operations for the three months ended December 31, 2016, included approximately $27,595,000 of sales, and approximately $376,000 of net income, respectively of SNI Companies.
The Company's consolidated financial statements for the three months ended December 31, 2017 include the actual results of all acquisitions.
13. Commitments and Contingencies
LeaseLeases
The Company leases space for all of its branch offices, which are generally located either in downtown or suburban business centers, and for its corporate headquarters. Branch offices are generally leased over periods ranging from three to five years. The corporate office lease expires in 2018.2020. 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 $873,000$0.7 million and $272,000$2.2 million, and $0.9 million and $2.4 million for the three-monththree and nine-month periods ended December 31, 2017June 30, 2019 and 2016,2018, respectively.
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As of December 31, 2017,June 30, 2019 future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices totaled approximately $6,277,000are as follows: fiscal 2018 - $2,132,000, fiscal 2019 - $2,329,000, fiscal 2020 - $1,219,000, fiscal 2021 - $341,000 fiscal 2022 - $203,000 and thereafter - $53,000.
(in thousands) Remainder of Fiscal 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Thereafter Total Working Capital Deposit$ 490 1,569 1,038 977 769 872 $ 5,715
Litigation and Claims
The Company retained approximately $1,500,000 of the purchase price,and its subsidiaries are involved in cash, as a guarantee from the sellers of the SNI Companiesvarious litigation that would provide a minimum of $9,200,000 of working capital, as definedarises in the purchase agreement. Asordinary course of December 31, 2017,business. There are no pending significant legal proceedings to which the Company andis a party for which management believes the sellers ofultimate outcome would have a material adverse effect on the SNI Companies have not agreed to the provided working capital and the amount continues to be retained by the Company.Company’s financial position.
14.13. Segment Data
The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, accounting, finance, office, engineering, medical, and accounting,medical, and (c) temporary light industrial staffing. These distinctCompany’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Selling,Some selling, general and administrative expenses are not completely separatelyfully allocated among light industrial services and professional staffing services.
Unallocated Corporatecorporate expenses primarily include, certain executive compensation expenses and salaries, certain administrative salaries, corporate legal expenses, stock amortizationcompensation expenses, consulting expenses, audit fees, corporate rent and facility costs, board fees, acquisition, integration and restructuring expenses, and interest expense.
|
| Three Months Ended |
| |||||
|
| December 31, |
| |||||
(In Thousands) |
| 2017 |
|
| 2016 |
| ||
|
|
|
|
|
|
| ||
Industrial Staffing Services |
|
|
|
|
|
| ||
Industrial services revenue |
| $ | 5,872 |
|
| $ | 5,981 |
|
Industrial services gross margin |
|
| 15.6 | % |
|
| 16.4 | % |
Operating income |
| $ | 253 |
|
| $ | 340 |
|
Depreciation & amortization |
|
| 66 |
|
|
| 73 |
|
Accounts receivable – net |
|
| 3,521 |
|
|
| 3,497 |
|
Intangible assets |
|
| 637 |
|
|
| 854 |
|
Goodwill |
|
| 519 |
|
|
| 1,084 |
|
Total assets |
| $ | 4,177 |
|
| $ | 7,629 |
|
|
|
|
|
|
|
|
|
|
Professional Staffing Services |
|
|
|
|
|
|
|
|
Permanent placement revenue |
| $ | 5,771 |
|
| $ | 1,150 |
|
Placement services gross margin |
|
| 100 | % |
|
| 100 | % |
Professional services revenue |
| $ | 33,589 |
|
| $ | 13,875 |
|
Professional services gross margin |
|
| 27.0 | % |
|
| 23.9 | % |
Operating income |
| $ | 2,477 |
|
| $ | 1,048 |
|
Depreciation and amortization |
|
| 1,427 |
|
|
| 375 |
|
Accounts receivable – net |
|
| 19,148 |
|
|
| 9,080 |
|
Intangible assets |
|
| 33,016 |
|
|
| 9,871 |
|
Goodwill |
|
| 76,074 |
|
|
| 17,506 |
|
Total assets |
| $ | 134,844 |
|
| $ | 38,631 |
|
|
|
|
|
|
|
|
|
|
Unallocated Expenses |
|
|
|
|
|
|
|
|
Corporate administrative expenses |
| $ | 817 |
|
| $ | 601 |
|
Corporate facility expenses |
|
| 105 |
|
|
| 74 |
|
Stock option amortization expense |
|
| 293 |
|
|
| 194 |
|
Board related expenses |
|
| - |
|
|
| 19 |
|
Acquisition, integration and restructuring expenses |
|
| 40 |
|
|
| 23 |
|
Total unallocated expenses |
| $ | 1,255 |
|
| $ | 911 |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
Total revenue |
| $ | 45,232 |
|
| $ | 21,006 |
|
Operating income |
|
| 1,475 |
|
|
| 477 |
|
Depreciation and amortization |
|
| 1,493 |
|
|
| 448 |
|
Total accounts receivables – net |
|
| 22,669 |
|
|
| 12,577 |
|
Intangible assets |
|
| 33,653 |
|
|
| 10,725 |
|
Goodwill |
|
| 76,593 |
|
|
| 18,590 |
|
Total assets |
| $ | 139,021 |
|
| $ | 46,260 |
|
Table of Contents |
Three Months Ended Nine Months Ended June 30, June 30, (in thousands) 2019 2018 2019 2018 Industrial Staffing Services Industrial services revenue Industrial services gross margin Operating income 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 Compensation expense Acquisition, integration and restructuring expenses Total unallocated expenses Consolidated Total revenue Operating income (loss) Depreciation and amortization Total accounts receivables – net Intangible assets Goodwill Total assets $ 5,442 $ 5,166 $ 16,157 $ 16,165 26.8 % 16.4 % 22.5 % 17.6 % $ 1,572 $ 31 $ 1,908 $ 315 65 65 195 197 3,359 3,386 3,359 3,386 302 526 302 526 1,084 1,084 1,084 1,084 $ 4,745 $ 5,555 $ 4,745 $ 5,555 $ 4,884 $ 6,388 $ 13,764 $ 17,496 100 % 100 % 100 % 100 % $ 27,775 $ 28,713 $ 82,900 $ 91,695 26.1 % 26.1 % 25.7 % 25.9 % $ (3,333 ) $ 2,301 $ 975 $ 5,861 1,420 1,436 4,263 4,289 17,078 17,780 17,078 17,780 24,975 30,336 24,975 30,336 71,209 75,509 71,209 75,509 $ 121,601 $ 128,806 $ 121,601 $ 128,806 $ 829 $ 686 $ 2,542 $ 1,065 79 139 257 287 531 399 1,661 1,028 564 514 2,990 1,712 $ 2,003 $ 1,738 $ 7,450 $ 4,092 $ 38,101 $ 40,267 $ 112,821 $ 125,356 (3,764 ) 595 (4,567 ) 2,084 1,485 1,501 4,458 4,486 20,437 21,166 20,437 21,166 25,277 30,862 25,277 30,862 72,293 76,593 72,293 76,593 $ 126,346 $ 134,361 $ 126,346 $ 134,361
27 |
Table of Contents |
ITEMItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We specialize in the placement of information technology, engineering,accounting, finance, office, and accountingengineering professionals for direct hire and contract staffing for our clients, data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics and provide temporary staffing services for our light industrial clients. The acquisitions of Agile Resources, Inc., a Georgia corporation (“Agile”), Access Data Consulting Corporation, a Colorado corporation (“Access”), Paladin Consulting Inc., a Texas corporation (“Paladin”) and SNI Companies, Inc. a Delaware corporation (“SNI”) expanded our geographical footprint within the placement and contract staffing of information technology.technology, accounting, finance, office and engineering professionals.
The Company markets its services using the trade names General Employment Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc., Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies Inc.(including Staffing Now, Accounting Now, and Certes), Triad Personnel Services and Triad Staffing. As of December 31, 2017,June 30, 2019, we operated forty-fourthirty-four branch offices in downtown or suburban areas of major U.S. cities in sixteenacross thirteen states. We have one officeoffices located in each of Arizona, Connecticut, Georgia, Iowa, Maryland, Minnesota, Pennsylvania,New Jersey, Virginia, Washington DC, and Virginia, two offices in New Jersey, four offices in Colorado, Illinois, Massachusetts, Illinois and Texas, seven offices in Ohio and ten offices in Florida.
Management has implemented a strategy which includedincludes 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. The Company’s contract and placement services are principally provided under two operating divisions or segments: Professional Staffing Services and Industrial Staffing Services. We believe our current segments complement one another and position us for future growth.
Results of Operations –
Three Months Ended December 31, 2017June 30, 2019 Compared to the Three Months Ended December 31, 2016
Results of OperationsJune 30, 2018
Net Revenues
Consolidated net revenues are comprised of the following:
|
| Three Months Ended December 31, |
|
|
|
|
|
| Three Months |
|
|
|
|
| ||||||||||||||||||
(In thousands) |
| 2017 |
| 2016 |
| $ change |
| % change |
| |||||||||||||||||||||||
Direct hire placement services |
| $ | 5,771 |
| $ | 1,150 |
| $ | 4,621 |
| 402 | % | ||||||||||||||||||||
|
| Ended June 30, |
|
|
|
|
| |||||||||||||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||||||||||||||||||
Professional contract services |
| 33,589 |
| 13,875 |
| 19,714 |
| 142 |
|
| $ | 27,775 |
| $ | 28,713 |
| (938 | ) |
| (3 | ) | |||||||||||
Industrial contract services |
|
| 5,872 |
|
|
| 5,981 |
|
|
| (109 | ) |
|
| (2 | ) |
|
| 5,442 |
|
|
| 5,166 |
|
|
| 276 |
|
|
| 5 |
|
Consolidated Net Revenues |
| $ | 45,232 |
|
| $ | 21,006 |
|
| $ | 24,226 |
|
|
| 115 | % | ||||||||||||||||
Total professional and industrial contract services |
|
| 33,217 |
|
|
| 33,879 |
|
|
| (662 | ) |
|
| (2 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Direct hire placement services |
|
| 4,884 |
|
|
| 6,388 |
|
|
| (1,504 | ) |
|
| (24 | ) | ||||||||||||||||
Consolidated net revenues |
| $ | 38,101 |
|
| $ | 40,267 |
|
|
| (2,166 | ) |
|
| (5 | ) |
Consolidated net revenues increasedContract staffing services contributed $33.2 million or approximately $24,226,000 or 115% compared with the same period last year. The Company acquired SNI as87% of March 31, 2017, which increased theconsolidated revenue and direct hire placement services bycontributed $4.9 million, or approximately $4,315,000 and increased professional contract services by approximately $19,945,000. Direct hire placement services excluding SNI is down as the total number13%, of recruiters and sales professionals are down in the Company, however management does expect to increase hiring in the following quarter. Industrial contract services remained consistent with only a slight decrease duringconsolidated revenue for the three months ended December 31, 2017. Executive management has startedJune 30, 2019. This compares to contract staffing services revenue of $33.9 million, or approximately 84%, of consolidated revenue and direct hire additional national sales force that can be serviced byplacement revenue of $6.4 million, or approximately 16%, of consolidated revenue for the expanded geographical service area.three months ended June 30, 2018.
Table of Contents |
The overall decrease in contract staffing services revenues of $0.7 million, or 2%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 was primarily attributable to reductions in the temporary workforce requirements of a few key customers in the professional and industrial services divisions in the quarter ended June 30, 2019. In addition, the residual effects of office consolidations, office closures and other reductions in its core workforce that were undertaken by the Company beginning shortly after the SNI acquisition to maximize productivity, reduce overall field costs and improve profitability, contributed to the decrease.
Direct hire placement revenue for the three months ended June 30, 2019 decreased by $1.5 million over the three months ended June 30, 2018. The decrease in direct hire placement revenues also is attributable to the residual effects of office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability.
Cost of Contract Services
Cost of contract services includes wages and related payroll taxes and employee benefits of the Company's contract services employees, and certain other contract employee-related costs, while they workworking on contract assignments. Cost of contract services for the three-month periodthree months ended December 31, 2017 increasedJune 30, 2019 decreased by approximately 89%4% to approximately $29,458,000$24.5 million compared withto $25.5 million for the prior period of approximately $15,563,000.three months ended June 30, 2018. The increase includes approximately $14,245,000$1.0 million overall decrease in cost of contract services related to SNI. The Cost of contract services, as a percentage of contract revenue, for the three-month periodthree months ended December 31, 2017 decreased approximately 9%June 30, 2019 compared to 65% comparedthe three months ended June 30, 2018 was primarily attributable to and consistent with the prior period of approximately 74%. The changecorresponding declines in the contract revenue gross marginrevenues, which is related to several factors, including the increased permanent placement services from SNI, improved gross margins in industrial contract services and overall improved gross margins in the professional contract services. discussed further below.
Three Months Ended June 30, 2019 June 30, 2018 Professional contract services Industrial contract services Professional and industrial services combined Direct hire placement services Combined gross profit margin %(1) Gross Profit percentage by segment:26.1 % 26.1 % 26.8 % 16.4 % 26.2 % 24.6 % 100.0 % 100.0 % 35.6 % 36.6 %
|
| Three Months Ended |
|
| Three Months Ended |
| ||
Gross Profit Margin % |
| December 31, 2017 |
|
| December 31, 2016 |
| ||
Direct hire placement services |
|
| 100 | % |
|
| 100 | % |
Industrial contract services |
|
| 15.6 | % |
|
| 16.4 | % |
Professional contract services |
|
| 27.0 | % |
|
| 23.9 | % |
Combined Gross Profit Margin % (1) |
|
| 34.9 | % |
|
| 25.9 | % |
__________________________
(1)
(1) | Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses. |
The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the three months ended June 30, 2019 was approximately 35.6% as compared with approximately 36.6% for the three months ended June 30, 2018.
In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 26.1% for three months ended June 30, 2019, which is consistent with the three months ended June 30, 2018.
The Company’s industrial staffing services gross margin for the three months ended June 30, 2019 was approximately 26.8% versus approximately 16.4% for the three months ended June 30, 2018. The significant increase in industrial staffing services gross margin is due to an increase in the estimated amounts of return premiums the Company’s light industrial business is eligible to receive under the Ohio Bureau of Workers’ Compensation retrospectively-rated insurance program, which accounted for approximately $0.6 million of the increase in gross profits and 11.5 percentage points (1,150 basis points) of the increase in gross margin for the three months ended June 30, 2019, as compared with the gross margin for three months ended June 30, 2018.
29 |
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 |
|
| 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, depreciation and amortization, and other office operating expenses. |
|
| Recruitment advertising, which includes the cost of identifying job applicants. |
|
| Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes. |
The Company’s largestIn addition to depreciation and amortization, which are broken out and reported separately in the consolidated statement of operations from other selling, general and administrative expenseexpenses (SG&A), the Company separately reports SG&A expenses incurred that are related to acquisition, integration and restructuring activities. These include expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, and other costs incurred related to acquisitions, including associated legal and professional costs. Management believes reporting these expenses separately from other SG&A provides useful information considering the Company’s dual track growth strategy of internal (organic) growth and growth by acquisitions and when comparing and considering the Company’s operating results and activities with other entities.
The Company’s SG&A for the three months ended June 30, 2019, excluding depreciation, amortization and acquisition, integration and restructuring expenses, was $11.0 compared to $12.1 for the three months ended June 30, 2018. SG&A for the three months ended June 30, 2019, excluding depreciation, amortization and acquisition, integration and restructuring expenses, as a percentage of revenues was approximately 29% compared to 30% for the three months ended June 30, 2018. The decline in SG&A expenses is for compensationconsistent with the decline in revenue, while the operating divisions. Most1 percentage point (100 bps) decrease in SG&A as a percentage of revenue is a function of the Company’s sales agentsproportion of fixed expenses.
Acquisition, Integration 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. Restructuring Expenses
The Company recognizesclassifies and reports costs incurred related to acquisition, integration and restructuring activities separately from other SG&A within its operating expenses. These costs were $0.6 million and $0.5 million for the full amount as commissionthree months ended June 30, 2019 and 2018, respectively. These costs include mainly expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, costs incurred related to acquisitions and associated legal and professional costs.
Depreciation Expense
Depreciation expense and advancewas $0.1 for the three months ended June 30, 2019, which remained approximately level compared to the three months ended June 30, 2018.
Amortization Expense
Amortization expense is reduced bywas $1.4 for the amount recovered. Thus,three months ended June 30, 2019, which remained approximately level compared to 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.three months ended June 30, 2018.
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Selling, generalGoodwill Impairment Charge
In 2019, the Company early adopted ASU 2017-04, Intangibles — Goodwill and administrative expensesOther (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill.
Due to a sustained decline in the market capitalization of our common stock during the third quarter of 2019, we performed an interim goodwill impairment test in accordance with the provisions of ASU 2017-04. The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $4.3 million, which was recorded in the consolidated financial statements for the three months ended December 31, 2017 increased by approximately $8,271,000 or approximately 184% compared to the same period last year. The increase was primarily related to the inclusionJune 30, 2019. For purposes of selling, general and administrative expenses of SNI following the acquisition by the Company. Management continues efforts to reduce general and administrative expenses as the Company consolidates the back office and can capitalize onperforming this interim goodwill impairment assessment, management mainly considered recent trends in the Company’s growth.stock price, estimated control or acquisition premium, and related matters, including other possible factors affecting the recent declines in the Company’s stock price and their effects on estimated fair value of the Company’s reporting units.
Amortization ExpenseLoss from Operations
Amortization expenseAs the net result of the matters discussed regarding revenues and operating expenses above, income from operations decreased by approximately $4.4 million for the three months ended December 31, 2017, increased $1,027,000, or 278%June 30, 2019 compared withto the prior period, primarily as a result of the acquisition of SNI in April 2017 and the related amortization of their identified intangible assets.three months ended June 30, 2018.
Interest Expense
Interest expense for the three months ended December 31, 2017,June 30, 2019, increased by approximately $2,934,000$0.3 million or 815%10% compared to the three months ended June 30, 2018. The increase in interest expense is attributable to a scheduled increase in the required interest margin under the Company’s senior credit facilities of approximately 500 basis points (5%) annually, that began as of June 1, 2018.
Provision for Income Taxes
The Company recognized a tax provision benefit of approximately $0.1 million for the three months ended June 30, 2019. Our effective tax rate for the three months ended June 30, 2019 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets. Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a full valuation allowance against the remaining net DTA position.
The effective tax rate for the three months ended June 30, 2018 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets.
Net Loss
As the net result of the matters discussed regarding revenues and expenses above, the Company incurred net losses for the three months ended June 30, 2019 and 2018 of $6.8 million and $1.9 million, respectively.
The Company continues to pursue opportunities to selectively increase revenue producing headcount in key markets and industry verticals. The Company also seeks to organically grow its professional contract services revenue and direct hire placement revenue, including business from staff augmentation, permanent placement, statement of work (SOW) and other human resource solutions in the information technology, engineering, healthcare and finance and accounting higher margin staffing specialties. The Company’s strategic plans to achieve this goal involve setting aggressive new business growth targets, including initiatives to increase services to existing customers, increasing its numbers of revenue producing core professionals, including primarily, business development managers and recruiters, changes to compensation, commission and bonus plans to better incentivize producers, and frequent interaction with the field to monitor and motivate growth. The Company’s strategic plan contains both internal and acquisition growth objectives to increase revenue in the aforementioned higher margin and more profitable professional services sectors of staffing.
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Nine Months Ended June 30, 2019 Compared to the Nine Months Ended June 30, 2018
Net Revenues
Consolidated net revenues are comprised of the following:
Nine Months Ended June 30, (in thousands) 2019 2018 $ Change % Change Professional contract services Industrial contract services Total professional and industrial contract services Direct hire placement services Consolidated net revenues $ 82,900 $ 91,695 (8,795 ) (10 ) 16,157 16,165 (8 ) - 99,057 107,860 (8,803 ) (8 ) 13,764 17,496 (3,732 ) (21 ) $ 112,821 $ 125,356 (12,535 ) (10 )
Contract staffing services contributed $99.1 million or approximately 88% of consolidated revenue and direct hire placement services contributed $13.8 million, or approximately 12%, of consolidated revenue for the nine months ended June 30, 2019. This compares to contract staffing services revenue of $107.9 million, or approximately 86%, of consolidated revenue and direct hire placement revenue of $17.5 million, or approximately 14%, of consolidated revenue for the nine months ended June 30, 2018.
The overall decrease in contract staffing services revenue of $8.8 million, or 8%, for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 was primarily attributable to the decline in revenue is attributable to the residual effects of office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability. In addition, reductions in the temporary workforce requirements of a few key customers in the professional and industrial services divisions, and to a lesser extent, higher incidences of bad weather in mid-west and northeastern markets, an additional holiday workdays in the nine months ended June 30, 2019, as compared with the samenine months ended June 30, 2018.
Direct hire placement revenue for the nine months ended June 30, 2019 decreased by $3.7 million or 21% over the nine months ended June 30, 2018. The decrease in direct hire placement revenues also is attributable to the residual effects of office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability. In addition, management believes market speculation of an impending recession in the U.S economy during the first fiscal quarter of 2019 had a cooling effect on hiring, especially around the holiday season.
Cost of Contract Services
Cost of contract services includes wages and related payroll taxes and employee benefits of the Company's contract services employees, and certain other contract employee-related costs, while working on contract assignments. Cost of contract services for the nine months ended June 30, 2019 decreased by approximately 9% to $74.1 million compared to $81.2 million for the nine months ended June 30, 2018. The $7.1 million overall decrease in cost of contract services for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018 was primarily attributable to and consistent with the corresponding declines in revenues, which is discussed further below.
Gross Profit percentage by service:
Nine Months Ended June 30, 2019 June 30, 2018 Professional contract services Industrial contract services Professional and industrial services combined Direct hire placement services Combined gross profit margin %(1) 25.7 % 25.9 % 22.5 % 17.6 % 25.2 % 24.7 % 100.0 % 100.0 % 34.3 % 35.2 %
__________
(1) | Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses. |
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The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the nine months ended June 30, 2019 was approximately 34.3% versus approximately 35.2% for the nine months ended June 30, 2018. The change in the overall gross margin from the comparable prior nine months ended period last yearwas principally due to the greater reduction in direct hire placement services revenue proportionally and which have 100% gross margin than the reduction in contract professional services.
In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 25.7% for nine months ended June 30, 2019 compared to approximately 25.9% for the nine months ended June 30, 2018. The change in professional contract staffing services gross margin was primarily due to proportionally higher revenue from Vendor Management Systems (“VMS”), Managed Service Providers (“MSP”), Master Service Agreements (“MSA”) and other volume corporate accounts that occurred in the nine months ended June 30, 2019, all of which typically have lower gross margins. Other differences in the composition of revenues among the specialties served by the Company (information technology, engineering, healthcare, finance and accounting and others) also contributed to the change in the professional contract services gross profit and margin.
The Company’s industrial staffing services gross margin for the nine months ended June 30, 2019 was approximately 22.5% as compared with approximately 17.6% for the nine months ended June 30, 2018. The increase in gross margin for the nine months ended June 30, 2019 was principally due to increases in the estimated amounts of return premiums and experience refunds the Company’s light industrial business is eligible to receive under the Ohio Bureau of Workers’ Compensation retrospectively-rated insurance program, which accounted for approximately $1.3 million of the increase in gross profits and 8.2 percentage points (820 basis points) of the increase in gross margin for the nine months ended June 30, 2019, as compared with the gross margin for nine months ended June 30, 2018.
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, depreciation and amortization, and other office operating expenses. | |
¨ | Recruitment advertising, which includes the cost of identifying job applicants. | |
¨ | Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes. |
In addition to depreciation and amortization, which are broken out and reported separately in the consolidated statement of operations from other selling, general and administrative expenses (SG&A), the Company separately reports SG&A expenses incurred that are related to acquisition, integration and restructuring activities. These include expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, and other costs incurred related to acquisitions, including associated legal and professional costs. Management believes reporting these expenses separately from other SG&A provides useful information considering the Company’s dual track growth strategy of internal (organic) growth and growth by acquisitions and when comparing and considering the Company’s operating results and activities with other entities.
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The Company’s SG&A for the nine months ended June 30, 2019, excluding depreciation, amortization and acquisition, integration and restructuring expenses, decreased by approximately $4.3 million as compared to the nine months ended June 30, 2018. SG&A for the nine months ended June 30, 2019, excluding depreciation, amortization and acquisition, integration and restructuring expenses, as a percentage of revenue was approximately 28%, which is consistent with the nine months ended June 30, 2018. The decline in SG&A expenses is consistent with the decline in revenue, while the consistency as a percentage of revenue is a function of a reduction in SG&A expenses, including fixed expenses, attributable to the office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability.
Acquisition, Integration and Restructuring Expenses
The Company classifies and reports costs incurred related to acquisition, integration and restructuring activities separately from other SG&A within its operating expenses. These costs were $3.0 million and $1.7 for the nine months ended June 30, 2019 and 2018, respectively. These costs include mainly expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, costs incurred related to acquisitions and associated legal and professional costs. The increase in acquisition, integration and restructuring expenses for the nine months ended June 30, 2019 were primarily due to increases in acquisition-related activities and expenses.
Depreciation Expense
Depreciation expense was $0.3 for the nine months ended June 30, 2019, which remained approximately level compared to the nine months ended June 30, 2018.
Amortization Expense
Amortization expense was $4.2 million for the nine months ended June 30, 2019, remained approximately level compared to the nine months ended June 30, 2018.
Goodwill Impairment Charge
In 2019, the Company early adopted ASU 2017-04, Intangibles — Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill.
Due to a sustained decline in the market capitalization of our common stock during the third quarter of 2019, we performed an interim goodwill impairment test in accordance with the provisions of ASU 2017-04. The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $4.3 million, which was recorded in the consolidated financial statements for the nine months ended June 30, 2019. For purposes of performing this interim goodwill impairment assessment, management mainly considered recent trends in the Company’s stock price, estimated control or acquisition premium, and related matters, including other possible factors affecting the recent declines in the Company’s stock price and their effects on estimated fair value of the Company’s reporting units.
Loss from Operations
As the net result of the matters discussed regarding revenues and operating expenses above, income from operations decreased $6.7 million, to a loss of approximately $4.6 million for the nine months ended June 30, 2019 from income of approximately $2.1 million for the nine months ended June 30, 2018.
Interest Expense
Interest expense for the nine months ended June 30, 2019, increased by approximately $0.8 million or 9% compared to the nine months ended June 30, 2018. The increase in interest expense is attributable to a scheduled increase in the required interest margin under the Company’s senior credit facilities of approximately 500 basis points (5%) annually, that began as of June 1, 2018.
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Provision for Income Taxes
The Company recognized a tax expense of approximately $0.4 million for the nine months ended June 30, 2019. Our effective tax rate for the nine months ended June 30, 2019 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets. Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a full valuation allowance against the remaining net DTA position.
The effective tax rate for the nine months ended June 30, 2018 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets being offset by a discrete tax benefit recorded for the impact from the US Tax Reform. The tax provision for the nine months ended June 30, 2018 includes discrete tax benefit totaling $0.4 million relating to the US Tax Reform that was recorded in the period ending December 31, 2017.
Net Loss
As a result of the newly obtained long-term debt,matters discussed regarding revenues and expenses above, the interest expenseCompany incurred net losses for the nine months ended June 30, 2019 and 2018 of $14.2 million and $6.6 million, respectively.
The Company continues to pursue opportunities to selectively increase revenue producing headcount in key markets and industry verticals. The Company also seeks to organically grow its professional contract services revenue and direct hire placement revenue, including business from staff augmentation, permanent placement, statement of work (SOW) and other human resource solutions in the information technology, engineering, healthcare and finance and accounting higher margin staffing specialties. The Company’s strategic plans to achieve this goal involve setting aggressive new business growth targets, including initiatives to increase services to existing customers, increasing its numbers of revenue producing core professionals, including primarily, business development managers and recruiters, changes to compensation, commission and bonus plans to better incentivize producers, and frequent interaction with the field to monitor and motivate growth. The Company’s strategic plan contains both internal and acquisition paymentsgrowth objectives to increase revenue in the aforementioned higher margin and higher average borrowings related to the new acquisitions.more profitable professional services sectors of staffing.
Liquidity and Capital Resources
The following table sets forth certain consolidated statements of cash flows data (in thousands):data:
|
| For the three months ended December 31, 2017 |
|
| For the three months ended December 31, 2016 |
| ||
Cash flows used in operating activities |
| $ | (249 | ) |
| $ | (696 | ) |
Cash flows used in investing activities |
| $ | (128 | ) |
| $ | (67 | ) |
Cash flows provided by financing activities |
| $ | 1,072 |
|
| $ | 428 |
|
Nine Months Ended (in thousands) June 30, 2019 June 30, 2018 Cash flows provided by (used in) operating activities Cash flows used in investing activities Cash flows provided by (used in) financing activities $ (551 ) $ 698 $ (108 ) $ (224 ) $ 1,609 $ (622 )
As of December 31, 2017,June 30, 2019, the Company had cash$4.2 million of approximately $3,480,000,cash which was an increase of approximately $695,000$1.0 million from approximately $2,785,000 at$3.2 million as of September 30, 2017. Working capital at December 31, 2017 was approximately $630,000, as compared to2018. As of June 30, 2019, the Company had working capital of approximately $1,588,000 for$11.4 million compared to $13.1 million of working capital as of September 30, 2017. The net loss for the three months ended December 31, 2017, was approximately $1,791,000.
At December 31, 2017 there was approximately $999,000 of accrued interest that was payable with the Company’s common stock, which was settled in stock on January 9, 2018.
Net cash used inprovided by (used in) operating activities for the threenine months ended December 31, 2017June 30, 2019 and 20162018 was approximately $(249,000)$(0.6) and $(696,000),$0.7, respectively. The fluctuation is due tonegative operating cash flow in the significant lossfiscal nine months period ended June 30, 2019 corresponds with negative income from operations increaseand other net changes in accrued interest, increase in accounts payable, decrease in accrued compensation, account receivable and increase in other current assetsworking capital.
The primary uses of cash for investing activities were for the quarteracquisition of property and equipment in the nine months ended December 31, 2017June 30, 2019 and 2018.
Cash flow provided by financing activities for the nine months ended June 30, 2019 was primarily from the proceeds of the 8% Convertible Subordinated Notes issued in May 2019 and borrowings under the Company’s Revolving Credit Facility, offset by non-cash related expensepayments on the Company’s debt, principally its Term Loan. Cash flow used in financing activities for depreciation, amortization and stock compensation.the nine months ended June 30, 2018 was primarily from net borrowings on the Revolving Credit Facility offset by payments on the Company’s debt, principally its Term Loan.
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Net cash used in investing activitiesMinimum debt service payments (principal) for the three months ended December 31, 2017 and 2016 wastwelve-month period commencing after the close of business on June 30, 2019, are approximately $(128,000) and $(67,000), respectively. The primary use of cash was for acquisition of furniture and equipment for new offices.
Net cash flows provided by financing activities for$4.7 million. All the three months ended December 31, 2017 was approximately $1,072,000 compared to approximately $428,000 in the three months ended December 31, 2016. Fluctuations in financing activities are attributable to the net borrowings of the revolving credit facility, offset by payment of debt.
All of the Company'sCompany’s office facilities are leased. As of December 31, 2017, future minimumMinimum lease payments under non-cancelableall the Company’s lease agreements for the twelve-month period commencing after the close of business on June 30, 2019, are approximately $1.8 million.
In recent years, the Company has incurred significant net losses. Management has taken definitive actions to improve operations, reduce costs and improve profitability, and position the Company for future growth. In addition, the Company’s senior lenders have worked with management in providing amendments and waivers to the Company’s senior credit facilities as management works towards improving the Company’s operations and restructuring its current debt and equity capitalization.
Based on its current projections, management expects that the Company can meet its future debt service requirements and comply with its financial covenants and other commitments, having initial terms more than one year, including closed offices, totaled approximately $6,277,000.as amended, and will continue to seek reasonable assistance from the Company’s senior lenders, as necessary. However, the Company’s projections are based on assumptions and estimates about future performance and events, which are subject to change or other unforeseen conditions or uncertainties. As such, there can be no assurance that the Company will not fall into non-compliance with its loan covenants or that its Lenders will continue to provide waivers or amendments to the Company in the event of future non-compliance with debt covenants or other possible events of default that could happen in the future.
Revolving Credit Facility and Term Loan
On March 31, 2017, 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”). Initial funds were distributed on April 3, 2017, the closing date to repay the existing indebtedness, pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of the SNI Companies.
Under the terms of the Credit Agreement, the Company may borrow up to $73,750,000$73.8 million consisting of a four-year term loan in the principal amount of $48,750,000$48.8 million and revolving loans in a maximum amount up to the lesser of (i) $25,000,000$25.0 million 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.
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 dated March 31, 2017 (the “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 lenders. On the closing date of the Credit Agreement, the Company borrowed $48,750,000$48.8 million from term-loansterm loans and borrowed approximately $7,476,316$7.5 million from the Revolving Credit Facility for a total of $56,226,316$56.2 million, 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. pursuant to the Merger Agreement.
The loans Amounts borrowed under the Credit Agreement will bear interest at rates atalso may be used by the Company’s optionCompany to partially fund capital expenditures, provide for on-going working capital needs and general corporate needs, and to fund future acquisitions subject to certain customary conditions 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. At September 30, 2017 the interest rate was approximately 13%.lenders.
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 April 3, 2017 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 pursuant to the credit agreement, as amended, as follows: Fiscal year 2018 – $3,636,000, Fiscal year 2019 – $7,728,000, Fiscal year 2020 – $8,337,000 and Fiscal year 2021 - $28,440,000.
The Credit Agreement contains certain covenants includingapplicable to both 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 itselfRevolving Credit Facility and its subsidiaries on a Consolidated Basis of not less the amount set forth in the Credit Agreement, which is 1.25 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 $11,000,000 to $14,000,000 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 5.25 to 1.0 to 2.0 to 1.0 over the term of the Credit Agreement.
Term Loan. In addition to thesethe 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.
The Company did not meet its financial loan covenants at September 30, 2018 or at June 30, 2018 or March 31, 2018, previously. On May 15, 2018, the Company obtained a temporary waiver from its lenders for the missed financial covenants at March 31, 2018. On August 31, 2017,10, 2018, the Company and its subsidiaries, as Borrowers, entered into a Consentthird amendment and waiver (the “Third Amendment and Waiver”) to Extension of Waiverthe Credit Agreement. Pursuant to Revolving Credit, Term Loanthe Third Amendment and Security Agreement (the “Waiver”). Under the terms of the Waiver, the Lenders and the Agents agreed to extendmodify the definition of EBITDA in the Credit Agreement to October 3, 2017allow for the deadlinerecognition and exclusion of certain additional acquisition, integration and restructuring expenses not previously specified and to provide a temporary waiver for any Defaults and Events of Default under the Credit Agreement that have solely arisen by which the Borrowers must deliver to the Agents and the Lenders, (i) updated financial information and projectionsreason of the Loan Parties in form and substance satisfactoryCompany failing to the Agents and the Lenders to amendcomply with the financial covenant levels set forth in Section 6.5 to the Loan Agreement in a manner acceptable to the Agents and the Lenders in their sole discretion, and (ii) a fully executed amendment to the Loan Agreement that amends the financial covenant levels set forth in Section 6.5 of the Loan Agreement in a manner acceptable to the Agents and the Lenders and any other terms and conditions required by the Agents and the Lenders in their sole discretion. Additionally, the Borrowers paid a $73,500 consent fee to the Agents for the pro rata benefit of the Lenders, in connection with the Waiver.
In addition, on August 31, 2017, the Company received a waiver (“Additional Waiver”) made to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”), by and among the Company, the Loan Parties, Administrative Agent and the Term Loan Agent, pursuant to which the Administrative Agent agreed, and the Administrative Agent has been advised that the Term Loan Agent has agreed, that notwithstanding the terms of Section 6.17(d)covenants of the Credit Agreement the due date for the Borrowers to deliver to the Agents the Subordination Agreement (Dampier) (as defined in the Credit Agreement) and an amended Subordinated Note (Dampier) (as defined in the Credit Agreement), in each case duly executed by the Persons party thereto and in form and substance satisfactory to the Agents, shall be extended from August 31, 2017 to October 3, 2017.period ending June 30, 2018.
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On October 2, 2017,December 27, 2018, the Company the other borrower entities and guarantor entities named therein (collectively, the “Loan Parties”), PNC Bank, National Association (“PNC”), and certain investment funds managed by MGG Investment Group LP (“MGG”) (collectively the (“Lenders”)its subsidiaries, as Borrowers, entered into a Firstfourth amendment and waiver (the “Fourth Amendment and Waiver (the “Amendment”Waiver”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”) by. Under the Fourth Amendment and amongWaiver, the Loan Parties,Company and its Lenders negotiated and agreed to a temporary waiver for non-compliance with the Lenders.
The Amendment, which was effective as of October 2, 2017, modified the required principal repayment schedule with respect to the Term Loans. The Amendment also modified the ability of the Loan Parties to repay or make other payments with respect to certain other loans that are subordinated in right of payment to the indebtednessfinancial covenants under the Credit Agreement.
PursuantAgreement as of September 30, 2018, and amendments to the Amendmentfinancial covenants and to the Lenders also waived any Event of Default arising out of the Loan Parties’ failure to deliver, on or before October 3, 2017, the materials satisfying the requirements of clauses (i) and (ii) of Section 5 of the Waiver to Revolving Credit, Term Loan and Security Agreement, dated as of August 14, 2017, as amended.
On November 14, 2017,May 15, 2019, the Company and its subsidiaries, as Borrowers, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto (together with each other Person joined thereto as a guarantor from time to time, collectively, the “Guarantors”, and each a “Guarantor”, and together with the Borrowers, collectively, the “Loan Parties” and each a “Loan Party”), certain lenders which now are or which thereafter become a party thereto that make Revolving Advances thereunder (together with their respective successors and assigns, collectively, the “Revolving Lenders” and each a “Revolving Lender”), the lenders which now are or which thereafter become a party thereto that made or acquire an interest in the Term Loans (together with their respective successors and assigns, collectively, the “Term Loan Lenders” and each a “Term Loan Lender”, and together with the Revolving Lenders, collectively, the “Lenders” and each a “Lender”), MGG Investment Group LP (“MGG”), as administrative agent for the Lenders (together with its successors and assigns, in such capacity, the “Administrative Agent”), as collateral agent for the Lenders (together with its successors and assigns, in such capacity, the “Collateral Agent”), and as term loan agent (together with its successors and assigns, in such capacity, the “Term Loan Agent” and together with the Administrative Agent and the Collateral Agent, each an “Agent” and, collectively, the “Agents”), entered into a secondfifth amendment and waiver (the “Second“Fifth Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fifth Amendment, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of March 31, 2019, and amendments to the financial covenants and to the remaining scheduled principal payments.
Pursuant to the Second Amendment the Borrowers agreed, among other things, to use commercially reasonable efforts to prepay, or cause to be prepaid, $10,000,000 in principal amount of Advances (as defined in the Credit Agreement) outstanding, which amount shall be applied to prepay the Term Loans in accordance with the applicable terms of the Credit Agreement. Any prepayment to the term loan is contingent upon a future financing, non-operational cash flow or excess cash flow as defined in the agreement. The Borrowers also agreed to amend (i) the applicable minimum Fixed Charge Coverage Ratios required to be maintained by the Company as set forth in the Second Amendment, (ii) the minimum EBITDA required to be maintained by the Company, as set forth in the Second AmendmentSubordinated Debt – Convertible and (iii) the maximum senior leverage ratios required to be maintained by the Company, as set forth in the Second Amendment. The Borrowers agreed to pay to the Administrative Agent for the account of the Revolving Lenders, an amendment fee of $364,140, in connection with their execution and delivery of the Second Amendment. Such fee is payable on the earlier of (a) June 30, 2018 and (b) the first date on which all of the Obligations (as defined in the Credit Agreement) are paid in full in cash and the Total Commitment (as defined in the Credit Agreement) of the Lenders is terminated.
The Company believes that its current cash on hand and the borrowing availability under the new PNC Credit Agreement will be adequate to fund its working capital needs and provide sufficient cash for the next twelve months from the date of this report.Non-Convertible
On October 2, 2015, the Company issued and sold a Subordinated Note in the aggregate principal amount of $4,185,000 to JAX Legacy – Investment 1, LLC (“Jax”JAX”) pursuant to a Subscription Agreement dated October 2, 2015 between the Company and Jax. On April 3, 2017, the Company and JaxJAX 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”).2021. 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”). The 10% Note is subordinated in payment to the obligations of the Company to the lenderslending parties to the Credit Agreement, pursuant to a Subordination and IntercreditorInter-creditor Agreements, dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and Jax.JAX. The 10% Note issued to JaxJAX is not registered under the Securities Act of 1933, as amended (the “Securities Act”). JaxJAX is an accredited investor. The issuance of the 10% Note to JaxJAX 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 October 4, 2015, the Company issued to the sellers of Access Data Consulting Corporation 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 approximately $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 approximately $28,000 in principal and interest, (iv) on October 4, 2017 a balloon payment of principal of $1,202,000 and (v) on October 4, 2017 any and all amounts of previously unpaid principal and accrued interest. The Credit Agreement requires this loan to be subordinated to PNC and MGG, however the sellers of Access Data Consulting Corporation have not agreed to the subordination.
On October 4, 2017, the Company executed an Amended and Restated Non-Negotiable Promissory Note in favor of William Daniel Dampier and Carol Lee Dampier (sellers of Access Data Consulting Corporation) in the amount of $1,202,405 (the “Note”). This Note amends and, as so amended, restates in its entirety and replaces that certain Subordinated Nonnegotiable Promissory Note dated October 4, 2015, issued by the Company to William Daniel Dampier and Carol Lee Dampier in the original principal amount of $3,000,000. The Company agreed to pay William Daniel Dampier and Carol Lee Dampier 12 equal installments of $107,675, commencing on November 4, 2017 and ending on October 4, 2018.
On January 20, 2017, the Company entered into Addendum No. 1 (the “Addendum”) to the Paladin Agreement 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 shall pay $250,000 in cash to the Sellers on or 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). The Company has paid the $250,000 cash payment to the Sellers.
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On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the SNIH acquisition 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. 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 based on the terms of the agreement, subject to certain limitations defined in the loan agreement. Each of the 9.5% Notes is subordinated in payment to the obligations of the Company to the lending parties to the Credit Agreement, pursuant to those certain Subordination and Inter-creditor Agreements, each dated as of March 31, 2017 by and among the Company, the other borrowers under the Credit Agreement, the Agent under the Credit Agreement and each of the holders of the 9.5% Notes.
On May 15, 2019, the Company issued and sold to members of its executive management and Board of Directors (the “Investors”) $2.0 million in aggregate principal amount of its 8% Notes. The 8% Notes mature on October 3, 2021 (the “Maturity Date”). The 8% Notes are convertible into shares of the Company’s Series C 8% Cumulative Convertible Preferred Stock (“Series C Preferred Stock”) at a conversion price equal to $1.00 per share (subject to adjustment as provided in the 8% Notes upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”). Interest on the 8% Notes accrues at the rate of 8% per annum and shall be paid quarterly in non-cash payments-in-kind (“PIK”) in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2019, on each conversion date with respect to the 8% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”). Interest shall be paid on an Interest Payment Date in shares of Series C Preferred Stock of the Company, which Series C Preferred Stock shall be valued at its liquidation value. All or any portion of the 8% Notes may be redeemed by the Company for cash at any time. The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 8% Notes being redeemed, plus accrued and unpaid PIK interest thereon. The Company may, at its option, prepay any portion of the principal amount of the 8% Notes without the prior consent of the holders thereof; provided, however, that any prepayments of the 8% Notes shall be made on a pro rata basis to all holders of 8% Notes based on the aggregate principal amount of 8% Notes held by such holders. The Company shall be required to prepay the 8% Notes together with accrued and unpaid PIK interest thereon upon the consummation by the Company of any Change of Control. For purposes of the 8% 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. Each of the 8% Notes is subordinated in payment to the obligations of the Company to the lenders parties to that certain Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017, as amended, by and among the Company, the Company’s subsidiaries named as borrowers therein (collectively with the Company, the “Borrowers”), the senior lenders named therein and MGG Investment Group LP, as administrative agent and collateral agent (the “Agent”) for the senior lenders (the “Senior Credit Agreement”), pursuant to those certain Subordination and Intercreditor Agreements, each dated as of May 15, 2019 by and among the Company, the Borrowers, the Agent and each of the holders of the 8% Notes.
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Series B Convertible Preferred Stock
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,SNIH acquisition, an aggregate of approximately 5,926,000 shares of its Series B Convertible Preferred Stock as part of the Merger Consideration.Stock. 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. 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”). Except as set forth in the Resolution Establishing Series, 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 is 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.
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,During the nine months ended June 30, 2019, the Company issued and paid250,000 shares of common stock for the conversion of approximately 250,000 shares of Series B Convertible Preferred Stock.
Series C Convertible Preferred Stock
On May 17, 2019, the Company filed a Statement of Resolution Establishing its Series C Preferred Stock with the State of Illinois. (the Resolution Establishing Series”). Pursuant to certain SNIH Stockholders as part of the Merger Consideration (see note 10) an aggregate of $12.5 million in aggregate principal amountResolution Establishing Series, the Company designated 3,000,000 of its 9.5% Notes.authorized preferred stock as “Series C 8% Cumulative Convertible Preferred Stock”, without par value. The 9.5% Notes mature on October 3, 2021 (the “Maturity Date”Series C Preferred Stock has a Liquidation Value equal to $1.00 per share and ranks pari passu with the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”). The 9.5% Notes are convertible into shares of and 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. Holders of shares of Series C Preferred Stock at a conversion price equalshall be entitled to $5.83receive an annual non-cash (“PIK”) dividend of 8% of the Liquidation Value per share. Interest on the 9.5% Notes accrues at the rate of 9.5% per annum andSuch dividend shall be paidpayable quarterly in arrears on June 30, September 30, December 31 and March 31 beginningof each year commencing on June 30, 2017,2019, in preference to any dividend paid on each conversion dateor declared and set aside for the Series B Preferred Stock or any Junior Securities and shall be paid-in-kind in additional shares of Series C Preferred Stock. Except as set forth in the Resolution Establishing Series or as may be required by Illinois law, the holders of the Series C 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 C 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 superior to the Series C Preferred Stock in relative rights, preferences or privileges (including 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”)dividends, liquidation or voting). AtEach share of Series C Preferred Stock shall be convertible at the option of the Company, interest may be paid on an Interest Payment Date either in cash or in sharesholder thereof into one share of Common Stock at an initial conversion price equal to $1.00 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.
On June 30, 2019 the Company which Commonissued approximately 20,000 shares of Series C Preferred Stock shall be valued basedto Investors related to interest of $20,000 on the terms of the agreement, subject to certain limitations defined in the loan agreement. 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 other borrowers under the Credit Agreement, the Agent under the Credit Agreement and each of the holders of the 9.5%8% Notes.
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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 the availability under the Credit Agreement and its current cash, the Company will have sufficient liquidity for the next 12 months.
Off-Balance Sheet Arrangements
As of December 31, 2017,June 30, 2019, 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.
ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
ITEMItem 4. CONTROLS AND PROCEDURES.Controls and Procedures.
Disclosure Controls and Procedures
As of December 31, 2017,June 30, 2019, 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 December 31, 2017.June 30, 2019.
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 first quarterthree and nine months ended December 31, 2017,June 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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ITEMItem 1. LEGAL PROCEEDINGS.Legal Proceedings.
None.
ITEMItem 1A. RISK FACTORS. Risk Factors.
Not required.
ITEMItem 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Unregistered Sales of Equity Securities and Use of Proceeds.
Not required.
ITEMItem 3. DEFAULTS UPON SENIOR SECURITIES. Defaults Upon Senior Securities.
None.
ITEMItem 4. MINE SAFETY DISCLOSURES. Mine Safety Disclosures.
Not Applicable
ITEMItem 5. OTHER INFORMATION. Other Information.
None.
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The following exhibits are filed as a part of Part I of this report:
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| Description of Exhibit |
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101.INS |
| Instance Document |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
__________
* | Filed herewith. |
** | Furnished herewith. This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filings of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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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.
GEE GROUP INC. |
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(Registrant) |
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Date: | By: | /s/ Derek Dewan |
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| Derek Dewan |
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| Chief Executive Officer |
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| (Principal Executive Officer) |
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By: | /s/ |
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| Chief Financial Officer (Principal Financial and Accounting Officer) |
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